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1999

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https://www.sec.gov/Archives/edgar/data/37748/0000892569-99-000674.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, HEp+QmjQlq3BCfjUSr+fYk7sOE7jVMPmuDZh/EVnIJSK4x5pM+RanfVr/cc2opWx eaBf62MZ2HBBVO4KkvrQxw== <SEC-DOCUMENT>0000892569-99-000674.txt : 19990318 <SEC-HEADER>0000892569-99-000674.hdr.sgml : 19990318 ACCESSION NUMBER: 0000892569-99-000674 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990317 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: SEC FILE NUMBER: 001-07775 FILM NUMBER: 99567326 BUSINESS ADDRESS: STREET 1: 3353 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 THE PERIOD ENDED JANUARY 31, 1999 <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, 1999 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) 3353 Michelson Drive, Irvine, CA 92698 - -------------------------------------------------------------------------------- (Address of principal executive offices) (949) 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, 1999 there were 75,791,463 shares of common stock outstanding. <PAGE> 2 FLUOR CORPORATION FORM 10-Q JANUARY 31, 1999 <TABLE> <CAPTION> TABLE OF CONTENTS PAGE - ------------------------------------------------------------------------------------ <S> <C> <C> Part I: Financial Information Condensed Consolidated Statement of Earnings for the Three Months Ended January 31, 1999 and 1998 ....................................... 2 Condensed Consolidated Balance Sheet at January 31, 1999 and October 31, 1998....................................................... 3 Condensed Consolidated Statement of Cash Flows for the Three Months Ended January 31, 1999 and 1998 ................................ 5 Notes to Condensed Consolidated Financial Statements................... 6 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 9 Changes in Backlog .................................................... 15 Part II: Other Information ..................................................... 16 Signatures ..................................................................... 17 </TABLE> 1 <PAGE> 3 PART I: FINANCIAL INFORMATION FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EARNINGS Three Months Ended January 31, 1999 and 1998 UNAUDITED <TABLE> <CAPTION> In thousands, except per share amounts 1999 1998 - ---------------------------------------------------------------------------------------- <S> <C> <C> REVENUES $ 3,384,065 $ 3,399,019 COSTS AND EXPENSES Cost of revenues 3,291,204 3,309,279 Corporate administrative and general expense 9,558 448 Interest expense 13,004 9,422 Interest income (4,600) (4,588) ----------- ----------- Total Costs and Expenses 3,309,166 3,314,561 EARNINGS BEFORE INCOME TAXES 74,899 84,458 INCOME TAX EXPENSE 23,818 29,645 ----------- ----------- NET EARNINGS $ 51,081 $ 54,813 =========== =========== EARNINGS PER SHARE BASIC $ .68 $ .66 =========== =========== DILUTED $ .68 $ .66 =========== =========== DIVIDENDS PER COMMON SHARE $ .20 $ .20 =========== =========== SHARES USED TO CALCULATE BASIC EARNINGS PER SHARE 75,119 82,575 =========== =========== DILUTED EARNINGS PER SHARE 75,633 82,636 =========== =========== </TABLE> See Accompanying Notes. 2 <PAGE> 4 FLUOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, 1999 and October 31, 1998 UNAUDITED <TABLE> <CAPTION> January 31, October 31, $ in thousands 1999 1998* - -------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 308,248 $ 340,544 Accounts and notes receivable 871,732 959,416 Contract work in progress 620,422 596,983 Deferred taxes 77,746 81,155 Inventory and other current assets 340,947 262,753 Net assets held for sale -- 36,300 ---------- ---------- Total current assets 2,219,095 2,277,151 ---------- ---------- Property, Plant and Equipment (net of accumulated depreciation, depletion and amortization of $1,180,185 and $1,132,923, respectively) 2,175,380 2,147,308 Investments and goodwill, net 271,024 276,653 Other 352,451 318,096 ========== ========== $5,017,950 $5,019,208 ========== ========== </TABLE> (Continued On Next Page) * Amounts at October 31, 1998 have been derived from audited financial statements. 3 <PAGE> 5 FLUOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, 1999 and October 31, 1998 UNAUDITED <TABLE> <CAPTION> January 31, October 31, $ in thousands 1999 1998* - ----------------------------------------------------------------------------------------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Trade accounts and notes payable $ 945,558 $ 972,096 Commercial paper and loan notes 378,164 428,458 Advance billings on contracts 608,446 546,816 Accrued salaries, wages and benefit plans 282,968 324,412 Other accrued liabilities 235,249 223,596 Current portion of long-term debt 16 176 ----------- ----------- Total current liabilities 2,450,401 2,495,554 ----------- ----------- Long-term debt due after one year 300,000 300,428 Deferred taxes 99,379 105,515 Other noncurrent liabilities 602,494 592,102 Contingencies and Commitments Shareholders' Equity Capital stock Preferred - authorized 20,000,000 shares without par value; none issued Common - authorized 150,000,000 shares of $.625 par value; issued and outstanding - 75,791,659 shares and 75,572,537 shares, respectively 47,370 47,233 Additional capital 207,955 199,077 Retained earnings 1,367,765 1,331,843 Unamortized executive stock plan expense (27,729) (22,633) Accumulated other comprehensive income: Cumulative translation adjustment (29,685) (29,911) ----------- ----------- Total shareholders' equity 1,565,676 1,525,609 ----------- ----------- $ 5,017,950 $ 5,019,208 =========== =========== </TABLE> See Accompanying Notes. * Amounts at October 31, 1998 have been derived from audited financial statements. 4 <PAGE> 6 FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended January 31, 1999 and 1998 UNAUDITED <TABLE> <CAPTION> $ in thousands 1999 1998 - ------------------------------------------------------------------------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 51,081 $ 54,813 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation, depletion and amortization 77,917 69,663 Deferred taxes 469 (8,052) Changes in operating assets and liabilities, excluding effects of businesses acquired (51,277) 24,187 Other, net (27,997) 19,527 --------- --------- Cash provided by operating activities 50,193 160,138 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (135,057) (100,656) Proceeds from sale of subsidiary 36,300 -- Proceeds from sale of property, plant and equipment 42,272 12,942 Proceeds from sales/maturities of marketable securities -- 10,089 Investments, net (4,502) (5,454) Other, net (4,629) (6,773) --------- --------- Cash utilized by investing activities (65,616) (89,852) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term borrowings (41,135) (11,185) Proceeds from issuance of notes payable to affiliate 38,500 -- Cash dividends paid (15,159) (16,694) Stock options exercised 1,854 61 Purchases of common stock -- (35,204) Other, net (933) (1,175) --------- --------- Cash utilized by financing activities (16,873) (64,197) --------- --------- (Decrease) increase in cash and cash equivalents (32,296) 6,089 Cash and cash equivalents at beginning of period 340,544 299,324 --------- --------- Cash and cash equivalents at end of period $ 308,248 $ 305,413 ========= ========= </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, 1998 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, 1999 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, 1999 and its consolidated results of operations and cash flows for the three months ended January 31, 1999 and 1998. Certain 1998 amounts have been reclassified to conform with the 1999 presentation. (2) Inventories comprise the following: <TABLE> <CAPTION> January 31, October 31, $ in thousands 1999 1998 ----------------------------------------------------------- <S> <C> <C> Equipment for sale/rental $128,125 $ 94,179 Coal 72,388 52,628 Supplies and other 52,707 51,838 -------- -------- $253,220 $198,645 ======== ======== </TABLE> 6 <PAGE> 8 FLUOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED (3) Effective November 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement has no impact on the Company's net earnings or shareholders' equity. SFAS No. 130 requires foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The components of comprehensive income, net of related tax, are as follows: <TABLE> <CAPTION> Three months ended January 31, ------------------------ 1999 1998 (in thousands) -------- -------- <S> <C> <C> Net earnings $ 51,081 $ 54,813 Foreign currency translation adjustment 226 (7,707) -------- -------- Comprehensive income $ 51,307 $ 47,106 ======== ======== </TABLE> (4) Cash paid for interest was $3.5 million and $3.8 million for the three month periods ended January 31, 1999 and 1998, respectively. Income tax payments, net of receipts, were $21.5 million during the three month period ended January 31, 1999. Income tax receipts, net of payments, were $15.6 million for the first quarter of 1998, reflecting the receipt of a $30 million tax refund on January 30, 1998. (5) During the fourth quarter of 1998, the Company entered into a forward purchase contract for 1,850,000 shares of its common stock at a price of $49 per share. The contract matures in October 1999 and gives the Company the ultimate choice of settlement option, either physical settlement or net share settlement. This contract effectively incorporates and extends a number of prior contracts originally entered into during the third quarter of 1998 as part of the Company's then ongoing share repurchase program. As of January 31, 1999, the contract settlement cost per share exceeded the current market price per share by $11.67. 7 <PAGE> 9 Although the ultimate choice of settlement option resides with the Company, if the average three-day closing price (as defined in the contract) of the Company's common stock falls to $30 per share or lower, the holder of the contract has the right to require the Company to file a shelf registration statement with the Securities and Exchange Commission for the issuance of shares necessary to settle the contract. In addition, if the average three-day closing price (as defined in the contract) of the Company's common stock falls to $25 per share or lower, the holder of the contract has the right to require the Company to immediately settle the contract, either by physical settlement or net share settlement. The average closing price for the Company's common stock for the three days ended March 16, 1999 was $29.67 per share. (6) On March 9, 1999, the company announced a new strategic direction, including a reorganization of its current operating units and administrative functions. A one-time, pre-tax charge of $130 million will be taken in the Company's second quarter for the implementation of the reorganization. The charge will be primarily for personnel and facilities costs. See "Recent Events" in Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the March 9 announcement. 8 <PAGE> 10 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, 1998 annual report on Form 10-K. For purposes of reviewing this document "operating profit" is calculated as revenues less cost of revenues excluding: corporate administrative and general expense; interest expense; interest income; domestic and foreign income taxes; gain or loss on discontinued operations; the cumulative effect of a change in accounting principles; and certain other miscellaneous non-operating income and expense items which are immaterial. FORWARD-LOOKING INFORMATION Estimates or projections of the Company's future results, including estimated and projected operating profits and earnings for the Company and its Engineering and Construction and Coal segments, projected reductions in overhead expenses, and estimates of new contract awards are forward-looking. Statements regarding industry and competitive trends are also forward looking. Such forward looking statements reflect current analysis of existing information. Caution must be exercised in relying on forward looking statements. Due to known and unknown risks, actual results may differ materially from expected or projected results. Factors potentially contributing to such differences include, among others: o Cost overruns on contracts and other contract performance risk o The uncertain timing of awards and revenues under contracts o Project financing risk, credit risk, risks associated with government funding of contracts o Market conditions impacting realization of investments o Conditions affecting the domestic and international coal market, including competition in the global market for steel and weather conditions o Global economic and political conditions o Unforeseen impediments to the Company's access to capital markets o Year 2000 readiness o Unforeseen impediments to the realization of the Company's strategic initiatives Additional information concerning these and other factors can be found in press releases as well as the Company's public periodic filings with the Securities and Exchange Commission, including the discussion under the heading "Item 1. Business - Other Matters - Fluor Business Risks" in the Company's Form 10-K filed January 22, 1999. These filings are available publicly and upon request from Fluor's Investor Relations Department: (949) 975-3909. The Company disclaims any intent or obligation to update its forward-looking statements. 9 <PAGE> 11 RECENT EVENTS On March 9, 1999, the Company announced various initiatives to respond to deteriorating business environments in its two principal business segments and to strategically position the Company for profitability, growth and the creation of shareholder value long term. The Company plans to consolidate its Fluor Daniel organizational structure by closing 15 offices and eliminating 5,000 positions by the end of 1999. A one-time, pre-tax charge of $130 million will be recorded in the Company's 1999 second quarter for the implementation of these actions, primarily for personnel and facilities costs. The Company anticipates the reduction in overhead resulting from these actions will total $160 million annually. Looking forward, the increasingly challenging business conditions will likely reduce the Company's new awards for the year to approximately $6 billion. Further, the Company's coal segment is experiencing price and volume deterioration and expects to report 1999 operating profit approximately 13 percent below 1998 levels. Reflecting the lower earnings from the coal business, the one-time charge discussed above and other non-accruable expenses associated with strategic actions, the Company anticipates reporting 1999 net earnings from continuing operations of $107 million, or $1.42 per share. RESULTS OF OPERATIONS Revenues for the three month period ended January 31, 1999 decreased slightly compared with the same period of 1998. Net earnings for the three month period ended January 31, 1999 were $51.1 million compared with $54.8 million for the same period of 1998. The decrease in net earnings was primarily due to higher interest expense and higher corporate administrative and general expense, which were only partially offset by increases in operating profit for both the Engineering and Construction and Coal segments and a lower effective tax rate. ENGINEERING AND CONSTRUCTION Revenues for the Engineering and Construction segment were essentially unchanged for the three month period ended January 31, 1999 compared with the same period of 1998, reflecting higher revenues from the segment's Diversified Services Group, offset by lower work performed in the core engineering, procurement, and construction (EPC) business. Operating profit for the three months ended January 31, 1999 increased 7 percent to $57.1 million, compared with $53.4 million during the same period of 1998. Operating margins for EPC work improved slightly during the quarter, primarily due to the Company's continuing emphasis on improving margins through selectivity in new projects. Operating margins for the Diversified Services Group, which contributed $14 million to first quarter results in 1999 and $17 million in 1998, were down as a result of competitive market conditions. 10 <PAGE> 12 New awards for the three months ended January 31, 1999 were $1.7 billion compared with $2.6 billion for the three months ended January 31, 1998. Approximately 59 percent of first quarter 1999 new awards were for projects located outside the United States. There were no project awards in excess of $350 million in the first quarter of 1999. The decrease in 1999 new awards as compared to 1998 reflects a continued trend by clients to defer capital spending on new projects as well as greater project selectivity by the Company. Furthermore, given the ongoing weak global economic conditions and volatility in capital markets, new awards may continue to decline for the remainder of 1999 and into 2000. The following table sets forth backlog for each of the Engineering and Construction business groups: <TABLE> <CAPTION> January 31, October 31, January 31, $ in millions 1999 1998 1998 - ------------------------------------------------------------------------------ <S> <C> <C> <C> Process $ 4,712 $ 5,345 $ 6,563 Industrial 3,966 4,761 4,677 Power/Government 1,114 1,272 1,630 Diversified Services 1,273 1,267 1,148 ------- ------- ------- Total backlog $11,065 $12,645 $14,018 ======= ======= ======= U.S. $ 5,058 $ 5,911 $ 5,761 Outside U.S. 6,007 6,734 8,257 ------- ------- ------- Total backlog $11,065 $12,645 $14,018 ======= ======= ======= </TABLE> The decrease in total backlog is consistent with the slowing trends in new awards. Approximately 54 percent of the Company's backlog is for projects located outside of the United States. Due to the nature of the projects the Company pursues and those included in backlog, the Company has not experienced any significant disruption in ongoing project execution related to turmoil in the global financial markets. Payments owed the company related to one project in Indonesia, which had been temporarily delayed due to financial turmoil in the region, have been received and the outstanding account balance has been substantially reduced. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, deferrals, and revised project scope and cost, both upward and downward. COAL Revenues decreased 6 percent for the three month period ended January 31, 1999 compared with the same period in 1998. The decrease was primarily due to lower sales volume of metallurgical coal, partially offset by an increase in steam coal volume. The metallurgical coal market is being adversely affected by steel exports from Asia and Russia into American markets. Such exports have reduced demand for steel produced in the U.S. and thereby reduced U.S. demand for metallurgical coal, which is used in steel production. Additionally, the market for steam coal, 11 <PAGE> 13 which is used to fire electric generating plants, is softening as a result of mild weather conditions and the low price of oil, which offers a lower cost alternative to steam coal. These market conditions are placing growing pressure on both the sales volume and pricing outlook for 1999. Operating profit for the three months ended January 31, 1999 was $38.7 million compared with $36.7 million for the same period in 1998. Gross profit and operating profit increased slightly during the three months ended January 31, 1999 as compared with 1998, primarily due to the decrease in production costs for both metallurgical and steam coal. OTHER Interest expense for the three months ended January 31, 1999 increased compared with the same period of 1998 primarily due to an increase in commercial paper and loan notes used to fund the company's 1997-1998 share repurchase program. Corporate administrative and general expense in the first quarter ended January 31, 1999 was higher compared with the same period in 1998 due primarily to a credit in 1998 of approximately $10 million related to a long-term incentive compensation plan. The Company accrues for certain long-term incentive awards whose ultimate cost is dependent on attainment of various performance targets set by the Organization and Compensation Committee (the "Committee") of the Board of Directors. Under the long-term incentive compensation plan referred to above, the performance target expired, without amendment or extension by the Committee, on December 31, 1997. The Company's effective tax rate decreased approximately 3 percentage points for the three month period ended January 31, 1999 as compared with the same period of 1998. The tax rate for the first quarter of 1998 reflects a higher level of expense items which did not receive full tax benefit. FINANCIAL POSITION AND LIQUIDITY At January 31, 1999, the Company had cash and cash equivalents of $308.2 million and a long-term debt to total capital ratio of 16.1 percent. At January 31, 1998, the Company had cash and cash equivalents of $305.4 million and a long-term debt to total capital ratio of 14.7 percent. Cash flow generated from operating activities was $50.2 million during the three month period ended January 31, 1999, compared with $160.1 million during the same period in 1998. The decrease in cash generated from operating activities is primarily due to an increase in inventories for both the Diversified Services Group (equipment for sale/rental) and the Coal segment. Inventories of equipment for sale/rental are increasing primarily due to a slowing market resulting from increased competition. The increase in coal inventories is in part due to a reduction in sales volume. Cash flow in 1998 was positively impacted by the receipt of a $30 million tax refund on January 30, 1998. Financing activities during the first quarter of 1999 included capital expenditures of $135.1 million, including $90.3 million for Massey Coal. Capital expenditures, net of proceeds from the sale of property, plant, and equipment, were slightly higher in 1999 than the comparable period in 12 <PAGE> 14 1998, primarily in the Coal segment. The Company also completed the sale of its ownership interest in Fluor Daniel GTI, Inc. during the quarter and received proceeds totaling $36.3 million. Investing activities during the first quarter of 1999 included a reduction in commercial paper and loan notes of $55.0 million offset by the issuance of $38.5 million in notes payable to an affiliate and other miscellaneous short-term borrowings. Dividends during the first quarter were $15.2 million ($.20 per share) as compared with $16.7 million ($.20 per share) in 1998. The decrease in the dividends paid is due to a lower number of shares outstanding as a result of the Company's recently completed share repurchase program. Under this program, during the first quarter of 1998 the Company repurchased 942,400 shares of its common stock for a total of $35.2 million. The Company has on hand and access to sufficient sources of funds to meet its anticipated operating needs. Significant short- and long-term lines of credit are maintained with banks which, along with cash on hand, provide adequate operating liquidity. Liquidity is also provided by the Company's commercial paper and loan note program. During January 1999, the Company filed a shelf registration statement with the Securities and Exchange Commission for the sale of up to $500 million in debt securities. The Company intends to use the proceeds from the debt offerings under the shelf registration primarily to pay down short-term debt incurred to fund the Company's share repurchase program. Proceeds also may be used for general corporate purposes, which may include working capital requirements and capital expenditures. FINANCIAL INSTRUMENTS During the fourth quarter of 1998, the Company entered into a forward purchase contract for 1,850,000 shares of its common stock at a price of $49 per share. The contract matures in October 1999 and gives the Company the ultimate choice of settlement option, either physical settlement or net share settlement. This contract effectively incorporates and extends a number of prior contracts originally entered into during the third quarter of 1998 as part of the Company's then ongoing share repurchase program. As of January 31, 1999, the contract settlement cost per share exceeded the current market price per share by $11.67. Although the ultimate choice of settlement option resides with the Company, if the average three-day closing price (as defined in the contract) of the Company's common stock falls to $30 per share or lower, the holder of the contract has the right to require the Company to file a shelf registration statement with the Securities and Exchange Commission for the issuance of shares necessary to settle the contract. In addition, if the average three-day closing price (as defined in the contract) of the Company's common stock falls to $25 per share or lower, the holder of the contract has the right to require the Company to immediately settle the contract, either by physical settlement or net share settlement. The average closing price for the Company's common stock for the three days ended March 16, 1999 was $29.67 per share. The Company utilizes forward exchange contracts to hedge foreign currency transactions entered into in the ordinary course of business and not to engage in currency speculation. At January 31, 1999 and October 31, 1998, the Company had forward foreign exchange contracts of less than one year duration, to exchange principally Australian Dollars, Korean Won, Dutch Guilders and German Marks for U.S. dollars. In addition, the Company has a forward currency contract to exchange U.S. dollars for British pounds sterling to hedge annual lease commitments which expire in 1999. The total gross notional amount of these contracts at January 31, 1999 and October 31, 1998 was $67 million and $106 million, respectively. Forward contracts to purchase foreign currency represented $56 million and $102 million and forward contracts to sell foreign currency represented $11 million and $4 million, at January 31, 1999 and October 31, 1998, respectively. THE YEAR 2000 ISSUE - READINESS DISCLOSURE - UPDATE The Year 2000 issue is the result of computer systems and other equipment with processors that use only two digits to identify a year rather than four. If not corrected, many computer applications and date sensitive equipment could fail or create erroneous results before, during and after the Year 2000. The Company utilizes information technology ("IT") systems such as computer networking systems and non-IT devices which may contain embedded circuits such as building security equipment. The Year 2000 issue could affect the systems, transaction processing, computer applications and devices used by the Company to operate and monitor all major aspects of its business, including financial systems, marketing services, proprietary engineering and procurement systems, technical reference databases and facilities operating systems. Both IT systems and non-IT devices are subject to potential failure due to the Year 2000 issue. The Company has developed and implemented a plan to achieve year 2000 readiness (the "Y2K Program"). The Company has implemented its Y2K Program through teams located at the Company's operating units throughout the world. Senior corporate staff oversee and coordinate such implementation efforts. Progress reports on the Y2K Program are presented regularly to the Company's senior management and periodically to the Audit Committee of the Company's Board of Directors. The Audit Committee reviews the Company's Year 2000 processes and procedures to assess the appropriateness of its risk analysis process and results. The Company has divided systems potentially affected by the Year 2000 issue into the following broad categories: o Business Systems, including general ledger, accounting , human resources and other ancillary business systems software that runs on mainframe computers and various servers and is used throughout the Company's facilities; o Hardware, Network and Operating Systems, including mainframe computers running Business Systems and other applications software, servers for local area networks and wide area networks, hubs, routers, switches, and various operating systems located on servers and personal computers; o Engineering Systems, including engineering applications running primarily on personal computers and local area networks; o Major Site Specific Systems, including software and hardware which is not shared throughout the Company's facilities but is used at the Department of Energy's Hanford and Fernald Project Sites and at specific coal facilities and processing plants of the Company; o Other Site Specific Systems, including hardware and software used by the Company at other project sites; o Customer Systems, including equipment and software provided by the Company to its customers; and o Other Non-Mission Critical Systems, including, for the most part, applications software for specific disciplines or projects. In each category (excluding Other Non-Mission Critical Systems), the Company has identified and assigned priority to certain mission critical systems. The Company defines mission critical systems as those that might have a significant adverse effect in one or more of the following areas: safety, environmental, legal or financial exposure and Company credibility and image. In relation to existing systems, the Company's Y2K Program has been implemented in the following three phases: (1) identification and assessment of Year 2000 problems requiring systems modifications or replacements; (2) the remediation or replacement and testing of systems having Year 2000 problems ; and (3) development of contingency and business continuity plans to mitigate the effect of any system or equipment failure. The timeframe for each phase of the Y2K Program, without respect to distinctions between mission critical systems and non-mission critical systems, are represented in the following table: PHASES OF THE PROJECT START DATE END DATE Identification and assessment of IT and non-IT systems Early 1996 December 31, 1998 Remediation or replacement and testing Late 1996 October 31, 1999 Contingency planning Late 1998 Ongoing into 2000 With respect to systems that are being acquired by the Company for its own account or the account of customers, the Company uses standard compliance processes to certify Year 2000 compliance. The Company maintains relationships with thousands of suppliers, some of whom supply software, hardware and systems that must be assessed for Year 2000 compliance. The Company has identified approximately 2,000 critical suppliers. The Company requires that all suppliers certify and, where appropriate, guarantee that the systems and equipment they provide to the Company for its own account and the account of its customers are Year 2000 compliant. In addition to requiring such certifications, the Company has also established a procedure for reviewing Year 2000 compliance by critical suppliers. Actions include the review of remediation and testing of specific equipment, review of suppliers' corporate Year 2000 progress and confirmation of electronic exchange formats. Where appropriate, the Company may follow up its review of supplier information with on-site visits. Where a supplier does not, or cannot, satisfy the Company's Year 2000 requirements, the Company seeks alternate suppliers, subject to customer requirements and contract specifications. Given the number of suppliers utilized by the Company, compliance assessment is ongoing. Although initial reviews indicate that Year 2000 compliance by the Company's suppliers should not have a material adverse affect on the Company's operations, there can be no assurance that suppliers will resolve all Year 2000 issues in their systems and equipment in a timely manner. Generally, the Company has substantially completed phase 1 (identification and assessment) and phase 2 (remediation or replacement and testing) with respect to all of its Business Systems, except for certain field accounting software and certain systems used by the Company's equipment operations, as to which remediation is scheduled to be complete by the end of August 1999. At this time, the Company believes its mainframe system is Year 2000 ready. The Company is using an automated tool to test servers and approximately 18,000 personal computers with standard connections to servers. Approximately 60% of those computers have been tested, and approximately 75% of the personal computers tested (or approximately 38% of the total) have been found to be Year 2000 compliant. Approximately 25% of the computers tested require upgrading and are being upgraded. Remaining hardware, including personal computers that are not connected to servers, is predominately located at project sites or smaller offices. Such hardware is not likely to be mission critical and is being assessed through manual procedures. The Company is migrating its personal computers to new operating systems (Windows 95 and Windows NT), which migration is expected to address Year 2000 problems in various operating systems that are being replaced. All upgrades and remediation are expected to be complete by August 1999. With respect to Engineering Systems, the Company plans to retire approximately 40% of its engineering applications software to streamline its operations, reduce support costs and avoid costs of Year 2000 remediation. The cost of such software, to the extent originally capitalized, has been fully amortized and the Company does not expect any significant write off as the result of such retirement. The remediation of remaining applications software is largely being addressed via upgrades. At this time, approximately 66% of the engineering applications software that will remain in use has been upgraded. With respect the remaining engineering applications, remediation and testing are proceeding in accordance with the schedule and are generally expected to be complete by June 1999. The assessment of mission critical Major Site Specific Systems is substantially complete. Remediation or replacement and testing of approximately 85% of the systems and equipment the Company has identified at the Department of Energy's projects has been completed. The remaining remediation at such sites is scheduled to be complete in April 1999. The assessment of site specific control systems used at the Company's coal plants is substantially complete. Approximately 37% of those systems are Year 2000 ready, remediation of the remaining systems is expected to be complete by October 1999. Other Site Specific Systems have been assessed. The Company has identified approximately 330 applications falling in this category. Approximately 140 will be retired, and approximately 150 of those systems that will remain in use are Year 2000 ready. The balance are scheduled to be remediated by June 1999. With respect to Customer Systems and current customer projects generally, the Company is making evaluations to determine whether or not any action is required to ensure Year 2000 readiness. At any time, the Company may have approximately 2,000 ongoing customer projects. The Company has screened those projects where it has ongoing warranty or performance obligations for Year 2000 issues and has targeted approximately 900 projects for additional Year 2000 assessments. Based on those assessments, the Company has determined that Year 2000 issues do not impact approximately 70% of the projects targeted for such assessments. At those projects where Year 2000 problems have been identified, the Company has typically not provided its own warranties but has passed through to its customers the warranties provided by its suppliers. Accordingly, the Company is contacting suppliers of the systems affected by Year 2000 issues and monitoring their remediation efforts. The Company relies directly and indirectly on external systems utilized by its suppliers and on equipment and materials provided by those suppliers and used for the Company's business. As discussed above, the Company has implemented a procedure for reviewing Year 2000 compliance by its suppliers. With respect to systems and equipment previously provided to clients, the Company does not control the upgrades, additions and/or changes made by its clients, or by others for its clients to those systems and equipment. Accordingly, the Company does not provide any assurances, nor current information about Year 2000 capabilities, nor potential Year 2000 problems, with respect to past projects. Each project is performed under an agreement with the Company's client. Those agreements specifically outline the extent of the Company's obligations and warranties and the limitations that may apply. Other Non-Mission Critical Systems are comprised, for the most part, of approximately 600 specific applications software programs. Such software is not critical to the Company's operations and is being reviewed and remediated in accordance with the schedule. The Company has investments in various joint ventures and is monitoring the Year 2000 efforts of such joint ventures. Based on available information, the Company believes, that with a few exceptions, business systems used in such joint ventures are Year 2000 ready. The Company uses both internal and external resources in its Y2K Program. The Company estimates that, from 1996 to date, it has spent approximately $8.7 million to $9.7 million on the Year 2000 issue. It anticipates spending an additional $4.9 million to $6.2 million in the next year and running into the first quarter of 2000. This estimate of additional spending was derived utilizing numerous assumptions, including the assumption that the Company has already identified its most significant Year 2000 issues and that plans of its third party suppliers will be fulfilled in a timely manner without cost to the Company. These costs are the Company's best estimate given other systems initiatives that were ongoing irrespective of the Year 2000 Program (such as the migration to Windows NT and related hardware upgrades). However, there can be no guarantee that these assumptions are accurate, and actual results could differ materially from those anticipated. The Company estimates that 45% of the total costs incurred in the Y2K Program have been and will be incurred to remediate systems (including software upgrades); the remaining 55% will be incurred to replace problem systems and equipment. In addition to the direct costs of the Y2K Program, the Company has accelerated its program of replacing out-of-date personal computers and operating systems. Such computers may or may not be Year 2000 compliant, and the Company does not track their costs as costs incurred to obtain Year 2000 compliance. The implementation of such program was accelerated, however, in response to Year 2000 concerns. This replacement program will continue into October 1999. The Y2K Program has been funded under the Company's general IT and operating budgets. In 1998, Y2K Program costs were estimated to have been 15% of the IT budget. The Year 2000 expenditures have been and will continue to be expensed and deducted from income when incurred, except for costs incurred to acquire new software developed or obtained to replace old software which may capitalized and amortized under generally accepted accounting principles. No significant internal systems projects are being deferred due to the Year 2000 program efforts. The Company is developing contingency plans to address the Year 2000 issues that may pose a significant risk to its ongoing operations and existing projects. Such plans will include the implementation of alternate procedures to compensate for any system and equipment malfunctions or deficiencies with the Company's internal systems and equipment, with systems and equipment utilized at the Company's project sites and with systems and equipment provided to clients. During the remediation phase of the internal business systems, the Company has been and will be evaluating potential failures and attempt to develop responses in a timely manner. However, there can be no assurance that any contingency plans implemented by the Company would be adequate to meet the Company's needs without materially impacting its operations, that any such plan would be successful or that the Company's results of operations would not be materially and adversely affected by the delays and inefficiencies inherent in conducting operations in an alternative manner. The Company's Y2K Program is subject to a variety of risks and uncertainties some of which are beyond the Company's control. Those risks and uncertainties include, but are not limited to, the availability of qualified computer personnel, the Year 2000 readiness of third parties and the Year 2000 compliance of systems and equipment provided by suppliers. The Company believes that its most reasonably likely worst case Year 2000 scenarios would relate to problems with the systems of third parties, rather than with the Company's internal systems. In this regard, the Company believes that risks are greatest in the area of utilities. Each of the Company's locations relies on local private and governmental suppliers for electricity, water, sewer, telecommunication and other basic utility services. If the supply of such necessary utilities were to fail at any location, the Company's operations at that location, whether consisting of engineering, design or construction activities, maintenance services or coal mining and processing, would essentially be shut down or disrupted until such utilities were restored. Depending on the location, the Company could suffer delays in performing contracts and in otherwise fulfilling its commitments. Such delays could materially adversely impact the Company's receipt of payments due from customers upon its tender of contract deliverables or upon achievement of contract milestones. At facilities located in developing countries, the risk of sustained infrastructure failures is accentuated by the lack of transparency in government and private enterprises and general constraints on infrastructure spending. The Company is working to assess its exposure to utility providers and other infrastructure risks. The Company believes that the geographical dispersion of the Company's facilities mitigates the risk that infrastructure failures in any locale will result in the simultaneous closure of, or sustained suspension of operations at, multiple Company facilities. Consequently, to the extent practical, the Company expects to mitigate any interruption in its business operations in one locale by shifting the performance of the constrained activity to a functioning office or facility. There may be instances, however, where the activity cannot be performed elsewhere or on a timely basis given the disruption caused by the Year 2000 problems in any locale. In such instances, the Company will assess the relevant provisions of its contracts and, where it deems appropriate, work with its customers to resolve performance and schedule delays and any resulting financial consequences on a mutually satisfactory basis to the extent possible under then prevailing circumstances. Contingency plans are being developed to address issues related to third parties that are not considered to be making sufficient progress in becoming Year 2000 ready in a timely manner. Due to the large number of variables involved with estimating resultant lost revenues should there be a third party failure, the Company cannot provide an estimate of damage if any of the scenarios were to occur. No assurance can be given that the Company will achieve Year 2000 readiness. Further, there is the possibility that significant litigation may occur due to business and equipment failures caused by the Year 2000 issue. It is uncertain whether, or to what extent, the Company may be affected by such litigation. The failure of the Company, its clients (including governmental agencies), suppliers of computer systems and equipment, joint venture partners and other third parties upon whom the Company relies, to achieve Year 2000 readiness could materially and adversely affect the Company's results from operations. EURO CONVERSION - UPDATE Given the nature and size of the Company's European operations, the Company does not perceive the conversion to the Euro as a significant risk area. The Company's businesses operate under long-term contracts, typically denominated in U.S. Dollars, as compared to more traditional retail or manufacturing environments. If required, the Company is currently able to bid, price and 13 <PAGE> 15 negotiate contracts using the Euro. The Company's treasury function is also capable of operating with the Euro. Specifically, the Company is able to: establish bank accounts; obtain financing; obtain bank guarantees or letters of credit; trade foreign currency; and hedge transactions. The Company's ongoing Euro conversion effort will be primarily concentrated in the systems area. Conversion to the Euro impacts the Company's subsidiaries in The Netherlands, Germany and Belgium. All subsidiaries use a standard accounting system and all reside in the same database. The Company's conversion plan is to maintain the legacy database for historical reference and to create a new database with the Euro as the base currency. The new Euro-based database is anticipated to be available by June 1, 1999, with testing complete by the end of July 1999. Full conversion is anticipated to completed by the start of fiscal year 2000. The Company has not incurred and it does not expect to incur any significant costs from the continued conversion to the Euro, including any currency risk, which could significantly affect the Company's business, financial condition and results of operations. The Company has not experienced any significant operational disruptions to date and does not currently expect the continued conversion to the Euro to cause any significant operational disruptions. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 will be adopted by the Company in 1999. As discussed elsewhere in this Form 10-Q, the Company is undertaking a complete reorganization of its current operating units and administrative functions. Although management has not completed its review of SFAS No. 131 in light of the new organizational structure, management anticipates that under the new standard the number of its identifiable segments will increase over that currently being reported. In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards for recording derivatives in interim and annual financial statements. This statement is effective for the Company's fiscal year 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new statement will have a significant impact on the results of operations or the financial position of the Company. 14 <PAGE> 16 FLUOR CORPORATION CHANGES IN BACKLOG Three Months Ended January 31, 1999 and 1998 UNAUDITED <TABLE> <CAPTION> $ in millions 1999 1998 - ----------------------------------------------------------------------- <S> <C> <C> Backlog - beginning of period $12,645.3 $14,370.0 New awards 1,700.9 2,602.1 Adjustments and cancellations, net (391.5) 2.6 Work Performed (2,890.2) (2,956.6) --------- --------- Backlog - end of period $11,064.5 $14,018.1 ========= ========= </TABLE> 15 <PAGE> 17 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 27 Financial Data Schedule. (b) Reports on Form 8-K. Current Report on Form 8-K filed December 9, 1998 -- Restated Bylaws (as amended December 9, 1998) of Fluor Corporation 16 <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. FLUOR CORPORATION (Registrant) Date: March 17, 1999 /s/ J.O. Rollans -------------- ------------------------------------- J.O. Rollans, Senior Vice President and Chief Financial Officer /s/ V.L. Prechtl ------------------------------------- V.L. Prechtl, Vice President and Controller 17 <PAGE> 19 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> OCT-31-1999 <PERIOD-START> NOV-01-1998 <PERIOD-END> JAN-31-1999 <CASH> 308,248 <SECURITIES> 0 <RECEIVABLES> 871,732 <ALLOWANCES> 0 <INVENTORY> 253,220 <CURRENT-ASSETS> 2,219,095 <PP&E> 3,355,565 <DEPRECIATION> 1,180,185 <TOTAL-ASSETS> 5,017,950 <CURRENT-LIABILITIES> 2,450,401 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 47,370 <OTHER-SE> 1,518,306 <TOTAL-LIABILITY-AND-EQUITY> 5,017,950 <SALES> 0 <TOTAL-REVENUES> 3,384,065 <CGS> 0 <TOTAL-COSTS> 3,291,204 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 13,004 <INCOME-PRETAX> 74,899 <INCOME-TAX> 23,818 <INCOME-CONTINUING> 51,081 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 51,081 <EPS-PRIMARY> 0.68 <EPS-DILUTED> 0.68 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

MSFT

https://www.sec.gov/Archives/edgar/data/789019/0001032210-99-000191.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, SwJGd7nTI5pvHn/MsRWTcXCnuc4X74ETOmUEyezTZFr43qrW/UGRTutr4I78N/c6 o3u0BhDnOOSlN6NvIbtCUQ== <SEC-DOCUMENT>0001032210-99-000191.txt : 19990215 <SEC-HEADER>0001032210-99-000191.hdr.sgml : 19990215 ACCESSION NUMBER: 0001032210-99-000191 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 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: SEC FILE NUMBER: 000-14278 FILM NUMBER: 99537709 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 12/31/1998 <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 December 31, 1998 [ ] 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: (425) 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 29, 1999 was 2,523,459,482. ================================================================================ <PAGE> MICROSOFT CORPORATION FORM 10-Q For the Quarter Ended December 31, 1998 INDEX <TABLE> <CAPTION> Part I. Financial Information Item 1. Financial Statements Page ---- <S> <C> a) Income Statements for the Three and Six Months Ended December 31, 1997 and 1998...... 1 b) Balance Sheets as of June 30, 1998 and December 31, 1998.......................... 2 c) Cash Flows Statements for the Six Months Ended December 31, 1997 and 1998................ 3 d) Stockholders' Equity Statements for the Three and Six Months Ended December 31, 1997 and 1998...... 4 e) Notes to Financial Statements...................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 9 Part II. Other Information Item 1. Legal Proceedings...................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders.................... 13 Item 6. Exhibits and Reports on Form 8-K....................................... 13 Signature............................................................................... 14 </TABLE> <PAGE> 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 Dec. 31 Dec. 31 1997 1998 1997 1998 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue $3,585 $4,938 $6,715 $8,891 Operating expenses: Cost of revenue 313 433 566 740 Research and development 627 667 1,194 1,278 Acquired in-process technology 0 0 296 0 Sales and marketing 876 940 1,664 1,770 General and administrative 106 149 201 248 Other expenses 50 35 121 59 - --------------------------------------------------------------------------------------------------------- Total operating expenses 1,972 2,224 4,042 4,095 - --------------------------------------------------------------------------------------------------------- Operating income 1,613 2,714 2,673 4,796 Investment income 157 337 299 598 Gain on sale 0 0 0 160 - --------------------------------------------------------------------------------------------------------- Income before income taxes 1,770 3,051 2,972 5,554 Provision for income taxes 637 1,068 1,176 1,888 - --------------------------------------------------------------------------------------------------------- Net income $1,133 $1,983 $1,796 $3,666 - --------------------------------------------------------------------------------------------------------- Earnings per share (1): Basic $ 0.47 $ 0.79 $ 0.74 $ 1.47 - --------------------------------------------------------------------------------------------------------- Diluted $ 0.42 $ 0.73 $ 0.67 $ 1.35 - --------------------------------------------------------------------------------------------------------- (1) Earnings per share amounts for the three and six months ended December 31, 1997 have been restated to reflect a two-for-one stock split in February 1998. See accompanying notes. - --------------------------------------------------------------------------------------------------------- </TABLE> 1 <PAGE> MICROSOFT CORPORATION Balance Sheets (In millions) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- June 30 Dec. 31 1998 1998 (1) - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Assets Current assets: Cash and short-term investments $13,927 $19,237 Accounts receivable 1,460 2,029 Other 502 543 - ------------------------------------------------------------------------------------------------------------ Total current assets 15,889 21,809 Property and equipment 1,505 1,495 Equity investments 4,703 6,262 Other assets 260 483 - ------------------------------------------------------------------------------------------------------------ Total assets $22,357 $30,049 - ------------------------------------------------------------------------------------------------------------ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 759 $ 989 Accrued compensation 359 392 Income taxes payable 915 1,642 Unearned revenue 2,888 3,552 Other 809 896 - ------------------------------------------------------------------------------------------------------------ Total current liabilities 5,730 7,471 - ------------------------------------------------------------------------------------------------------------ Commitments and contingencies Stockholders' equity: Convertible preferred stock - shares authorized 100; outstanding 13 980 980 Common stock and paid-in capital - shares authorized 4,000; outstanding 2,470 and 2,510 8,025 10,443 Retained earnings 7,622 11,155 - ------------------------------------------------------------------------------------------------------------ Total stockholders' equity 16,627 22,578 - ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $22,357 $30,049 - ------------------------------------------------------------------------------------------------------------ </TABLE> (1) Unaudited See accompanying notes. - --------------------------------------------------------------------------- 2 <PAGE> MICROSOFT CORPORATION Cash Flows Statements (In millions)(Unaudited) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- Six Months Ended Dec. 31 1997 1998 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> Operations Net income $ 1,796 $ 3,666 Depreciation and amortization 497 356 Write-off of acquired in-process technology 296 0 Gain on sale 0 (160) Unearned revenue 1,254 2,371 Recognition of unearned revenue from prior periods (634) (1,707) Other current liabilities 297 719 Accounts receivable (129) (486) Other current assets (33) (24) - ------------------------------------------------------------------------------------------------------ Net cash from operations 3,344 4,735 - ------------------------------------------------------------------------------------------------------ Financing Common stock issued 328 614 Common stock repurchased (1,596) (772) Put warrant proceeds 325 355 Preferred stock dividends (14) (14) Stock option income tax benefits 407 1,218 - ------------------------------------------------------------------------------------------------------ Net cash from (used for) financing (550) 1,401 - ------------------------------------------------------------------------------------------------------ Investments Additions to property and equipment (268) (241) Cash portion of WebTV purchase price (190) 0 Cash proceeds from sale of Softimage 0 79 Equity investments and other (1,164) (765) Short-term investments (2,263) (2,993) - ------------------------------------------------------------------------------------------------------ Net cash used for investments (3,885) (3,920) - ------------------------------------------------------------------------------------------------------ Net change in cash and equivalents (1,091) 2,216 Effect of exchange rates on cash and equivalents (33) 58 Cash and equivalents, beginning of period 3,706 3,839 - ------------------------------------------------------------------------------------------------------ Cash and equivalents, end of period 2,582 6,113 Short-term investments, end of period 7,523 13,124 - ------------------------------------------------------------------------------------------------------ Cash and short-term investments, end of period $10,105 $19,237 - ------------------------------------------------------------------------------------------------------ See accompanying notes. - ------------------------------------------------------------------------------------------------------ </TABLE> 3 <PAGE> MICROSOFT CORPORATION Stockholders' Equity Statements (In millions)(Unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended Dec. 31 Dec. 31 1997 1998 1997 1998 - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Convertible preferred stock Balance $ 980 $ 980 $ 980 $ 980 - --------------------------------------------------------------------------------------------------- Common stock and paid-in capital Balance, beginning of period 5,630 9,161 4,509 8,025 Common stock issued 100 536 626 870 Common stock repurchased (41) (11) (91) (25) Structured repurchases price differential 162 0 328 0 Proceeds from sale of put warrants 45 130 325 355 Stock option income tax benefits 208 627 407 1,218 - --------------------------------------------------------------------------------------------------- Balance, end of period 6,104 10,443 6,104 10,443 - --------------------------------------------------------------------------------------------------- Retained earnings Balance, beginning of period 4,854 8,983 5,288 7,622 - --------------------------------------------------------------------------------------------------- Net income 1,133 1,983 1,796 3,666 Net unrealized investments gains 74 390 130 540 Translation adjustments and other 10 63 (107) 106 - --------------------------------------------------------------------------------------------------- Comprehensive income 1,217 2,436 1,819 4,312 Preferred stock dividends (7) (7) (14) (14) Common stock repurchased (804) (257) (1,833) (765) - --------------------------------------------------------------------------------------------------- Balance, end of period 5,260 11,155 5,260 11,155 - --------------------------------------------------------------------------------------------------- Total stockholders' equity $12,344 $22,578 $12,344 $22,578 - --------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes. - -------------------------------------------------------------------------------- 4 <PAGE> 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, cash flows, and stockholders' equity 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, revenue, 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 1998 Form 10-K. Stock Splits In February 1998, 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. On January 25, 1999, the Company announced that its Board of Directors approved a two-for-one stock split effective March 29, 1999 for shareholders of record March 12, 1999. The stock split is subject to shareholder approval of an amendment to the Company's articles of incorporation to increase the Company's authorized common stock. Share and per share amounts have not been restated for the upcoming stock split. Earnings Per Share Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding preferred shares using the "if-converted" method, assumed net-share settlement of common stock structured repurchases, and outstanding stock options using the "treasury stock" method. The components of basic and diluted earnings per share were as follows: Earnings Per Share (In millions, except earnings per share) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended Dec. 31 Dec. 31 1997 1998 1997 1998 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net income (A) $1,133 $1,983 $1,796 $3,666 Preferred stock dividends (7) (7) (14) (14) - ---------------------------------------------------------------------------------------------------- Net income available for common shareholders (B) $1,126 $1,976 $1,782 $3,652 - ---------------------------------------------------------------------------------------------------- Average outstanding shares of common stock (C) 2,421 2,499 2,416 2,489 Dilutive effect of: Common stock under structured repurchases 0 11 0 10 Preferred stock 19 10 19 11 Employee stock options 227 210 231 214 - ---------------------------------------------------------------------------------------------------- Common stock and common stock equivalents (D) 2,667 2,730 2,666 2,724 - ---------------------------------------------------------------------------------------------------- Earnings per share: Basic (B/C) $ 0.47 $ 0.79 $ 0.74 $ 1.47 - ---------------------------------------------------------------------------------------------------- Diluted (A/D) $ 0.42 $ 0.73 $ 0.67 $ 1.35 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- </TABLE> 5 <PAGE> Unearned Revenue A portion of Microsoft's revenue is earned ratably over the product life cycle or, in the case of subscriptions, over the period of the license agreement. End-users receive certain elements of the Company's platform products over a period of time. These elements include browser and other Internet technologies, telephone support, Internet-based technical support, service releases, and new device drivers. Consequently, Microsoft recognizes the fair value of these elements, currently approximately 20% of Windows 98 and Windows 95 desktop operating systems OEM revenue and approximately 35% of retail version revenue, over the product's life cycle. Approximately 20% of Windows NT Workstation and Windows NT Server revenue is also recognized ratably. Product life cycles are currently estimated at two years. The Company also sells subscriptions to platforms products via maintenance and certain organizational license agreements. At December 31, 1998, platform products unearned revenue was $1.89 billion. Likewise, end-users of the Company's applications products receive elements over time, including telephone support, new Internet technologies, and service releases. The fair value of these elements, which is currently approximately 20% of Office 97 applications revenue, is recognized ratably over the estimated 18- month product life cycle. The Company also sells subscriptions to applications and tools products, including maintenance and certain organizational license programs. Unearned revenue associated with applications and tools products totaled $1.57 billion at December 31, 1998. Unearned revenue associated with other miscellaneous programs totaled $93 million at December 31, 1998. Stockholders' Equity Microsoft repurchases its common stock in the open market to provide shares for issuance to employees under stock option and stock purchase plans. During the first half of fiscal 1999, the Company repurchased 7.8 million shares of Microsoft common stock in the open market. In addition, the Company has executed structured repurchases with an independent third party. Under these arrangements, a portion of the purchase price will be paid in the next five or six years and determined based upon the price of Microsoft common stock at that time. The timing and method of payment (net-share or cash) is at the discretion of the Company. The differential between the cash paid and the price of Microsoft common stock on the date of the agreement is reflected in common stock and paid-in capital. During fiscal 1998, 21 million shares were purchased under these arrangements. To enhance its stock repurchase program, Microsoft sells 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, and permit a net-share settlement at the Company's option. On December 31, 1998, 75 million warrants were outstanding. The outstanding put warrants expire between June 1999 and December 2001 and have strike prices ranging from $87 to $99 per share. During 1996, Microsoft issued 12.5 million shares of 2.75% convertible exchangeable principal-protected preferred stock. Dividends are payable quarterly in arrears. Preferred shareholders have preference over common stockholders in dividends and liquidation rights. 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 were used to repurchase common shares. Acquisitions In November 1998, Microsoft acquired LinkExchange, Inc., a leading provider of online marketing services to web site owners and small and medium-sized businesses. Microsoft paid $265 million in stock. The Company did not record an in-process technology write-off in connection with the purchase of LinkExchange. In August 1997, Microsoft acquired WebTV Networks, Inc., an online service that enables consumers to experience the Internet through their televisions via set- top terminals based on proprietary technologies. Microsoft paid $425 million in stock and cash. The Company recorded an in-process technologies write-off of $296 million in the first quarter of 1998. Sale of Softimage In August 1998, the Company sold a wholly-owned subsidiary, Softimage, Inc. to Avid Technology, Inc. Microsoft received cash of $79 million and securities valued at $85 million. A pretax gain of $160 million was recognized in the first quarter of 1999. As part of a transitional service agreement, Microsoft agreed to make certain development tools and management systems available to Avid for use in the Softimage business. - -------------------------------------------------------------------------------- 6 <PAGE> Contingencies On October 7, 1997, Sun Microsystems, Inc. brought suit against Microsoft in the U.S. District Court for the Northern District of California. Sun's Complaint alleges several claims against Microsoft, all related to the parties' relationship under a March 11, 1996 Technology License and Distribution Agreement (Agreement) concerning certain Java programming language technology. The Complaint seeks: a preliminary and permanent injunction against Microsoft distributing certain products with the Java Compatibility logo, and against distributing Internet Explorer 4.0 unless certain alleged obligations are met; an order compelling Microsoft to perform certain alleged obligations; an accounting; termination of the Agreement; and an award of damages, including compensatory, exemplary and punitive damages, and liquidated damages of $35 million for the alleged source code disclosure. On March 24, 1998, the court entered an order enjoining Microsoft from using the Java Compatibility logo on Internet Explorer 4.0 and the Microsoft Software Developers Kit for Java 2.0. Microsoft has taken steps to fully comply with the order. On May 12, 1998, Sun filed companion motions seeking a preliminary injunction based on allegations of copyright infringement and unfair competition. Sun requested an order enjoining Microsoft from distributing any Java-based technology in any operating system, browser, or developers tools, including Windows 98, Internet Explorer 4.0 software, and the Visual J++(TM) 6.0 development system for Java, unless and until Microsoft includes with each such product an implementation of the Java run-time environment that passes Sun's compatibility test suite or an operable implementation of Sun's current Java run-time environment. Hearings on these motions were held in September 1998. On November 17, 1998, the court entered an order granting Sun's request for a preliminary injunction, holding that Sun had established a likelihood of success on its copyright infringement claims because Microsoft's use of Sun's technology in its products was beyond the scope of the parties' license agreement. The court ordered Microsoft to make certain changes in its products that include Sun's Java Technology and to make certain changes in its Java software development tools. The court also enjoined Microsoft from entering into any licensing agreements that were conditioned on exclusive use of Microsoft's Java Virtual Machine. Microsoft appealed that ruling to the 9th Circuit on December 16, 1998. In the interim, Microsoft is complying with the ruling and has not sought a stay of the injunction pending appeal. On December 18, 1998, Microsoft filed a motion requesting an extension of the 90-day compliance period for certain Microsoft products, which was granted in part in January 1999. Microsoft filed a motion on February 5, 1999, seeking clarification of the court's order that Microsoft would not be prevented from engaging in independent development of Java technology under the order. On January 22, 1999, Microsoft and Sun filed a series of summary judgment motions regarding the interpretation of the contract and other issues. The hearing date for those motions is March 12, 1999. On October 20, 1997, the Antitrust Division of the U.S. Department of Justice (DOJ) filed a Petition for An Order To Show Cause in United States District Court for the District of Columbia. In its petition, the DOJ contends that Microsoft has violated a 1994 consent decree by including Internet Explorer technology in Windows 95, and by preventing OEMs from removing Internet Explorer functionality from versions of Windows 95 the OEMs are licensed to install on computer systems they sell. On December 11, 1997, the district court entered two orders. In the first order, Judge Thomas Penfield Jackson denied the DOJ's contempt petition, and dismissed the DOJ's request for relief concerning Microsoft's non-disclosure agreements because the DOJ had failed to present evidence that the agreements had interfered with any DOJ investigation. In addition, however, the court ruled that there were disputed issues of fact regarding Microsoft's violation of the consent decree, and concluded that the DOJ was likely to prevail on its claim that a violation had occurred. The court entered a preliminary injunction sua sponte requiring Microsoft not to condition the licensing of Windows 95 or - ---------- any successor desktop operating system on a computer manufacturer also licensing any Microsoft browser software, including Internet Explorer 3.0 or 4.0. In the second order, the court appointed Harvard Law Professor Lawrence Lessig as a special master, to whom the court delegated the authority to conduct discovery, take evidence, and make proposed findings of fact and conclusions of law on all issues in the case by May 31, 1998. Microsoft immediately appealed the preliminary injunction to the District of Columbia Circuit Court of Appeals. On May 5, 1998, Microsoft also sought a stay of the District Court's injunction insofar as it applied to Windows 98. On May 12, 1998, the Court of Appeals granted Microsoft's request for a stay. The Court of Appeals issued an opinion on Microsoft's appeal on June 23, 1998. It unanimously reversed the trial court, both as to the entry of the - -------------------------------------------------------------------------------- 7 <PAGE> injunction and the reference to the special master. The opinion both cited procedural errors in the issuance of the injunction and errors of substantive law in the interpretation of the consent decree. The court remanded the case to Judge Jackson for further proceedings consistent with the Court's opinion. There has been no further action in that case since the Court of Appeals' decision. Although the Court of Appeals could have reversed the district court solely on procedural grounds, it chose to address at length the central issue in both the consent decree case and in the new Sherman Act case brought by the DOJ and 20 state Attorneys General: whether Microsoft is unlawfully "tying" a "separate product" known as Microsoft Internet Explorer to the Windows operating system. Two members of the Court rejected the DOJ's main argument that Internet Explorer constitutes a separate product because Microsoft treats it separately in some circumstances. (One judge dissented in part from the reasoning in this part of the opinion.) The Court's discussion of antitrust tying law, although made in the context of the consent decree case, clearly provides guidance on many of the issues raised in the new Sherman Act case. On May 18, 1998, the DOJ and a group of 20 state Attorneys General filed two antitrust cases against Microsoft in the U.S. District Court for the District of Columbia. The DOJ complaint alleges violations of Sections 1 and 2 of the Sherman Act. The DOJ complaint seeks declaratory relief as to the violations it asserts and preliminary and permanent injunctive relief regarding: the inclusion of Internet browsing software (or other software products) as part of Windows; the terms of agreements regarding non-Microsoft Internet browsing software (or other software products); taking or threatening "action adverse" in consequence of a person's failure to license or distribute Microsoft Internet browsing software (or other software product) or distributing competing products or cooperating with the government; and restrictions on the screens, boot-up sequence, or functions of Microsoft's operating system products. The state Attorneys General allege largely the same claims, and various pendent state claims. The states seek declaratory relief, and preliminary and permanent injunctive relief similar to that sought by the DOJ, together with statutory penalties under the state law claims. The foregoing description is qualified in its entirety by reference to the full text of the complaints and other papers on file in those actions, case numbers 98-1232 and 98-1233. On May 22, 1998, Judge Jackson consolidated the two actions. The judge granted Microsoft's motion for summary judgment as to the states' monopoly leverage claim, and permitted the remaining claims to proceed to trial. Trial began on October 19, 1998. Microsoft believes the claims are without merit and is defending against them vigorously. In other ongoing investigations, the DOJ and several state Attorneys General have requested information from Microsoft concerning various issues. Caldera, Inc. filed a lawsuit against Microsoft in July 1996. It alleges Sherman Act violations relating to Microsoft licensing practices of MS-DOS and Windows in the late 80's and early 90's essentially the same complaints that resulted in the 1994 consent decree. Caldera claims to own the rights of Novell, Inc. and Digital Research Inc. relating to DR-DOS and Novell DOS products. It also asserts a claim that Windows 95 is a technological tie of Windows and MS-DOS. Microsoft has filed nine motions for summary judgment seeking dismissal of Caldera's claims. Those motions are scheduled for hearings in April and May 1999. Trial is scheduled for June 1999. Microsoft is vigorously defending the case. 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. - -------------------------------------------------------------------------------- 8 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Microsoft develops, manufactures, licenses, and supports a wide range of software products, including scalable operating systems for intelligent devices, 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's interactive efforts include entertainment and information software programs; the MSN(TM) network of Internet products and services; and alliances with companies involved with other forms of digital interactivity. Microsoft also sells personal computer input devices and books, and researches and develops advanced technologies for future software products. Revenue Revenue of $4.94 billion in the December quarter of fiscal 1999 increased 38% over the second quarter of fiscal 1998. On a year to date basis, revenue in the first half of fiscal 1999 totaled $8.89 billion, an increase of 32% over the first two quarters of fiscal 1998. Revenue growth reflected the continued adoption of Microsoft(R) Windows(R) 32-bit operating systems and Microsoft Office. Organizational licensing increased substantially, particularly toward the end of the period, coinciding with the end of budget years for the Information Technology (IT) departments of many companies and governmental units. This surge of IT spending on PCs, desktop applications, and server and server applications appears to have been based on pre-Year 2000 "lockdowns" (i.e. customer decisions to refrain from further software purchases until completion of necessary Year 2000 remediation efforts). Software license volume 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 programs to integrated product suites. Average revenue per license from original equipment manufacturer (OEM) licenses and organizational license programs 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 and BackOffice, are less than the sum of the prices for the individual programs included in these suites when such programs are licensed separately. An increased percentage of products and programs included elements that were billed but unearned and recognized ratably, such as certain platforms and applications programs, maintenance, and other subscription models. See accompanying notes to financial statements. Product Groups Platforms product revenue grew 50% to $2.32 billion in the second quarter. Revenue of $4.25 billion for the first half of fiscal 1999 grew 44% over the first half of fiscal 1998. Windows units licensed through the OEM channel, particularly Windows NT(R) Workstation, increased strongly over the prior year. Organizational licenses of these desktop platforms also contributed to the growth. Retail versions of Windows 98, which was released in June 1998, contributed to growth, particularly in the first quarter. Windows NT Server revenue was quite healthy. Windows CE and WebTV(TM) service continued to show strong revenue growth, although small in amount. Applications and Tools product revenue increased 27% to $2.15 billion in the December quarter. Revenue for the first two quarters of $3.86 billion grew 24% compared to the comparable period of the prior year. Desktop applications revenue growth was strong, led by Microsoft Office integrated suites, including the Standard, Professional, and Small Business Editions. The primary programs in Microsoft Office are the word processor Microsoft Word, Microsoft Excel spreadsheet, and Microsoft PowerPoint(R) presentation graphics program. Various versions of Office, which are available for Windows and Macintosh operating systems, also include Microsoft Access database management program, Microsoft Outlook(TM) messaging and collaboration client, or other programs. Server applications revenue, principally Microsoft Exchange Server and Microsoft SQL Server(TM), increased strongly over the comparable periods of the prior year. The Visual Studio(R) 6.0 development system, an integrated set of software development tools, was recently released, leading to hearty tools revenue growth. Interactive Media and Other revenue was $467 million in the December quarter, up 36% from the comparable quarter of fiscal 1998. Revenue from hardware products increased smartly, particularly joysticks and gamepads. Learning and entertainment software revenue was strong, including Microsoft Encarta(R) reference titles, Flight Simulator games, and the Age of Empires(R) game. Revenue from Microsoft Press was relatively flat and online services revenue rose substantially, but from a small base. Interactive Media and Other revenue of $783 million grew 18% over the first half of the prior year. In the first quarter, revenue from Microsoft Press; hardware; and learning and entertainment software was relatively flat compared to the prior year. - -------------------------------------------------------------------------------- 9 <PAGE> Sales Channels Microsoft distributes its products primarily through OEM licenses, organizational licenses, and retail packaged products. OEM channel revenue represents license fees from original equipment manufacturers who pre-install Microsoft products, primarily on PCs. Microsoft has three major geographic sales and marketing organizations: the South Pacific and Americas Region; the Europe, Middle East, and Africa Region; and the Asia Region. Sales of organizational licenses and packaged products in these channels are primarily to distributors and resellers. Second quarter revenue from OEMs of $1.80 billion represented an increase of 48% over the comparable quarter of fiscal 1998. OEM revenue of $3.16 billion in the first half of fiscal 1999 increased 44% over the first half of fiscal 1998. Robust PC shipment growth, particularly in the second quarter, coupled with an increased penetration of higher value 32-bit operating systems drove the OEM revenue increase over the prior year. For the December quarter, revenue in the South Pacific and Americas Region increased 34% to $1.57 billion. Revenue for the first two quarters of fiscal 1999 also grew 32% to $3.01 billion. These high growth rates reflected strong licensing of many products, including Microsoft Office, Windows NT Server, Windows NT Workstation, Windows 98, and server applications. In addition to steady growth in the U.S., revenue increased strongly in Brazil. In the Europe, Middle East, and Africa Region, second quarter revenue of $1.20 billion was up 37% compared to the second quarter of fiscal 1998. For the first two quarters of fiscal 1999, revenue in the region totaled $2.04 billion, an increase of 31% over the prior year. Organizational licensing of Microsoft Office, Windows NT Server, Windows NT Workstation, and server applications grew strongly when compared to the prior year. Revenue growth continued to be solid in the United Kingdom, France, and Germany, and was particularly high in Sweden. Revenue in the Asia Region in the December quarter of $373 million increased 14% from the second quarter of the prior year. Revenue increased in Hong Kong, China, and India, but was flat in Japan and Southeast Asia due to economic issues and weak currencies. On a year to date basis, revenue in the Asia Region was $680 million, flat with the comparable period of the prior year. Revenue in the September quarter decreased 11% from the first quarter of the prior year. Revenue was flat in Japan and decreased in Southeast Asia due to economic issues and weak currencies. As discussed below, the strengthening U.S. dollar negatively impacted translated revenue compared to the prior year, particularly in Japan. Translated international revenue is affected by foreign exchange rates. The impact of foreign exchange rates on second quarter revenue was nominal, as weaknesses in Japanese, Australian, and Southeast Asian currencies versus the U.S. dollar were offset by the relative strength of European currencies. Had the rates from the prior year been in effect in the first quarter, international revenue billed in local currencies would have been $100 million higher, due to weaknesses in currencies versus the U.S. dollar. Certain manufacturing, selling, distribution, and support costs are disbursed in local currencies, and a portion of international revenue is hedged, thus offsetting a portion of the translation exposure. Operating Expenses, Nonoperating Items, and Income Taxes Cost of revenue as a percent of revenue was 8.8% in the second quarter, similar to the percent of revenue the prior year. On a year to date basis, the percentage was 8.3%, which also was similar to the percentage the prior year. The trend in mix shift to higher-margin OEM and organizational licenses was offset by greater volumes of lower-margin interactive media products and certain manufacturing costs, including costs of the WebTV service. Research and development expenses in the second quarter increased 6% over the prior year to $667 million. For the first two quarters, research and development expenses were $1.28 billion, up 7% over the comparable period of the prior year. These increases were driven primarily by higher development headcount-related costs, offset by lower third-party development costs. In August 1997, the Company acquired WebTV Networks, Inc., an online service that enables consumers to experience the Internet through their televisions via set-top terminals. Microsoft paid $425 million in stock and cash for WebTV. Fiscal 1998 results reflect a one-time write-off of in-process technologies under development by WebTV of $296 million. Sales and marketing expenses were $940 million in the December quarter, which represented 19.0% of revenue, compared to 24.4% in the second quarter of the prior year. On a year to date basis, sales and marketing expenses were $1.77 billion, which represented 19.9% of revenue, down from 24.8% of revenue for the first two quarters of fiscal 1998. Expenses as a percent of revenue decreased due to lower relative sales expenses, marketing, and support costs. - -------------------------------------------------------------------------------- 10 <PAGE> General and administrative costs were $149 million in the second quarter compared to $106 million in the December quarter of the prior year. First half general and administrative costs were $248 million, up 23% from $201 million the prior year. The increases were due, in part, to higher legal costs. Other expenses include primarily the recognition of Microsoft's share of joint venture activities, including DreamWorks Interactive and the MSNBC cable and online news services. Second quarter investment income increased to $337 million from $157 million in the second quarter of the prior year. Year to date investment income totaled $598 million in fiscal 1999, compared to $299 million the prior year. The increases were due to the larger investment portfolio generated by cash from operations, coupled with realized gains of $70 million from the sale of certain bond and equity securities in the second quarter. In August 1998, Microsoft sold its Softimage subsidiary to Avid Technology, Inc. A pretax gain of $160 million was recorded in the first quarter of fiscal 1999. Excluding the tax impact of the gain on the sale of Softimage, the effective tax rate for fiscal 1999 was 35%, less than the higher effective rate in fiscal 1998 due to a legislative clarification of the foreign sales corporation rules as they apply to software and the nondeductible write-off of WebTV in-process technologies. Financial Condition Microsoft's cash and short-term investment portfolio totaled $19.24 billion at December 31, 1998. 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 also invests in equity securities, including financial investments and strategic technology companies in many areas. Microsoft has no material long-term debt and has $100 million of standby multicurrency lines of credit to support foreign currency hedging and cash management. Stockholders' equity at December 31, 1998 was $22.58 billion. Microsoft will continue to invest in sales, marketing, and product support infrastructure. Additionally, research and development activities will include investments in existing and advanced areas of technology, including using cash to acquire technology and to fund ventures and other strategic opportunities. Additions to property and equipment will continue, including new facilities and computer systems for research and development, sales and marketing, support, and administrative staff. Commitments for constructing new buildings were $330 million on December 31, 1998. Cash will also be used to repurchase common stock to provide shares for employee stock option and purchase plans. The buyback program has not kept pace with employee stock option grants or exercises. Beginning in fiscal 1990, Microsoft has repurchased 355 million common shares while 853 million shares were issued under the Company's employee stock option and purchase plans. The market value of all outstanding stock options was $60 billion as of December 31, 1998. Microsoft enhances its repurchase program by selling put warrants. During December 1996, Microsoft issued 12.5 million shares of 2.75% convertible preferred stock. Net proceeds of $980 million were used to repurchase common shares. Management believes existing cash and short-term investments together with funds generated from operations will be sufficient to meet operating requirements for the next 12 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. Microsoft has not paid cash dividends on its common stock. The preferred stock pays $2.196 per annum per share. - -------------------------------------------------------------------------------- 11 <PAGE> Year 2000 The Year 2000 presents concerns for business and consumer computing. Aside from the well-known problems with the use of certain 2-digit date formats as the year changes from 1999 to 2000, the Year 2000 is a special case leap year, and dates such as 9/9/99 were used by certain organizations for special functions. The problem exists for many kinds of software and hardware, including mainframes, mini-computers, PCs, and embedded systems. Microsoft offers a broad range of information resources and software updates to help customers plan and implement Year 2000 remediation programs. Current information about the Company's products and business and technical issues is available at the Microsoft Year 2000 Readiness Disclosure and Resource Center web site (www.microsoft.com/year2000). Information on the web site will help -------------------------- customers evaluate the impact of the Year 2000 on Microsoft products used in their computing environments. The Company is continuing to test its products and classify its tested products into the following categories of compliance: "compliant," "compliant with minor issues," and "not compliant." Most of the products tested are either "compliant" or "compliant with minor issues," as defined. Microsoft's policy is to make future and current versions of its core products Year 2000 "compliant," although the status of certain current versions will remain at "compliant with minor issues." For non-compliant products, Microsoft is providing recommendations as to how an organization may address possible Year 2000 issues regarding that product. Microsoft is issuing software updates (at no additional charge) for most, but not all, known issues. Not all products will be tested. Information on the Company's web site is provided to customers for the sole purpose of assisting in planning for the transition to the Year 2000. Such information is the most currently available concerning the behavior of the Company's products and is provided "as is" without warranty of any kind. However, variability of definitions of "compliance" with the Year 2000 and of different combinations of software, firmware, and hardware will likely lead to lawsuits against the Company. The outcome of such lawsuits and the impact on the Company are not estimable at this time. The Year 2000 issue also affects the Company's internal systems, including information technology (IT) and non-IT systems. Microsoft is assessing the readiness of its systems for handling the Year 2000, and has started the remediation and certification process. Contingency plans are being developed in parallel with the testing and remediation efforts. Microsoft is evaluating its third-party distribution and supply chain to understand their ability to continue providing services and products through the change to the year 2000. Microsoft is monitoring and working directly with key vendors, product manufacturers, distributors, and direct resellers to avoid any business interruptions in the year 2000. For critical third parties with known issues, contingency plans will be developed. The Company is also reviewing its facilities and infrastructure. Remediation efforts are under way and certain contingency plans are in development. While Year 2000 issues present a potential risk to Microsoft's internal systems, distribution and supply chain, and facilities, the Company is minimizing risk with a worldwide effort. Microsoft is performing an extensive assessment and is in the process of testing and remediating mission critical components. The current plan is to have the majority of these components resolved by June 1999, with the remaining components resolved by September 1999. Management currently believes that all critical systems will be ready by the Year 2000 and that the cost to address the issues is not material. Resolving Year 2000 issues is a worldwide phenomenon that will likely absorb a substantial portion of IT budgets and attention in the near term. Certain industry analysts believe the Year 2000 issue will accelerate the trend toward distributed PC-based systems from mainframe systems. Others believe a majority of IT financial resources will be devoted to fixing older mainframe software in lieu of funding purchases of PC software or transitions to systems based on software such as that sold by Microsoft. The impact of the Year 2000 on future Microsoft revenue is difficult to discern but is a risk to be considered in evaluating future growth of the Company. - -------------------------------------------------------------------------------- 12 <PAGE> 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 11, 1998, the following proposal was adopted by the margins indicated: To elect a Board of Directors to hold office until their successors are elected and qualified. <TABLE> <CAPTION> Number of Shares For Withheld <S> <C> <C> William H. Gates 2,218,609,523 6,111,854 Paul G. Allen 2,218,316,854 6,404,523 Jill E. Barad 2,218,588,564 6,132,813 Richard A. Hackborn 2,218,701,351 6,020,026 David F. Marquardt 2,218,622,951 6,098,426 William G. Reed, Jr. 2,218,358,703 6,362,674 Jon A. Shirley 2,218,532,388 6,188,989 </TABLE> Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 27. Financial Data Schedule (B) Reports on Form 8-K Microsoft filed no reports on Form 8-K during the quarter ended December 31, 1998. Items 2, 3, and 5 are not applicable and have been omitted. - -------------------------------------------------------------------------------- 13 <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. Microsoft Corporation Date: February 12, 1999 By: /s/ Gregory B. Maffei ----------------------- Gregory B. Maffei, Vice President, Finance; Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) - -------------------------------------------------------------------------------- 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <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 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1999 <PERIOD-START> JUL-01-1998 <PERIOD-END> DEC-31-1998 <CASH> 19,237 <SECURITIES> 0 <RECEIVABLES> 2,029 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 21,809 <PP&E> 3,307 <DEPRECIATION> 1,812 <TOTAL-ASSETS> 30,049 <CURRENT-LIABILITIES> 7,471 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 980 <COMMON> 10,443 <OTHER-SE> 11,155 <TOTAL-LIABILITY-AND-EQUITY> 30,049 <SALES> 8,891 <TOTAL-REVENUES> 8,891 <CGS> 740 <TOTAL-COSTS> 740 <OTHER-EXPENSES> 3,355 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 5,554 <INCOME-TAX> 1,888 <INCOME-CONTINUING> 3,666 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 3,666 <EPS-PRIMARY> 1.47 <EPS-DILUTED> 1.35 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

MU

https://www.sec.gov/Archives/edgar/data/723125/0001012870-99-000101.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, Wno3roUhZaa2tuMVKahjpgcsHqtbU+Bv1GeSrZDKyWw8Kf6/EqQKV63zo+972L4O VqJHjX1Evf3bmr5lWeXdjA== <SEC-DOCUMENT>0001012870-99-000101.txt : 19990114 <SEC-HEADER>0001012870-99-000101.hdr.sgml : 19990114 ACCESSION NUMBER: 0001012870-99-000101 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981203 FILED AS OF DATE: 19990113 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: SEC FILE NUMBER: 001-10658 FILM NUMBER: 99505696 BUSINESS ADDRESS: STREET 1: 8000 S FEDERAL WAY STREET 2: PO BOX 6 CITY: BOISE STATE: ID ZIP: 83716-9632 BUSINESS PHONE: 2083684000 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR PERIOD ENDED DECEMBER 3, 1998 <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 December 3, 1998 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 83716-9632 (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 January 5, 1999, was 247,656,782. <PAGE> Part I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- MICRON TECHNOLOGY, INC. Consolidated Balance Sheets (Dollars in millions, except for par value data) December 3, September 3, As of 1998 1998 - -------------------------------------------------------------------------------- (Unaudited) ASSETS Cash and equivalents $ 767.7 $ 558.8 Liquid investments 1,157.1 90.8 Receivables 481.6 489.5 Inventories 360.4 291.6 Prepaid expenses 15.7 8.5 Deferred income taxes 67.2 61.7 -------- -------- Total current assets 2,849.7 1,500.9 Product and process technology, net 219.6 84.9 Property, plant and equipment, net 3,602.3 3,035.3 Other assets 116.0 82.4 -------- -------- Total assets $6,787.6 $4,703.5 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 627.8 $ 460.7 Short-term debt 11.1 10.1 Deferred income 6.2 7.5 Equipment purchase contracts 113.2 168.8 Current portion of long-term debt 103.4 98.6 -------- -------- Total current liabilities 861.7 745.7 Long-term debt 1,597.6 758.8 Deferred income taxes 264.5 284.2 Non-current product and process technology 12.0 11.3 Other liabilities 57.7 50.1 -------- -------- Total liabilities 2,793.5 1,850.1 -------- -------- Minority interests 157.9 152.1 Commitments and contingencies Common stock, $0.10 par value, authorized 1.0 billion shares, issued and outstanding 247.3 million and 217.1 million shares, respectively 24.7 21.7 Additional capital 1,743.6 565.4 Retained earnings 2,068.1 2,114.3 Accumulated other comprehensive loss (0.2) (0.1) -------- -------- Total shareholders' equity 3,836.2 2,701.3 -------- -------- Total liabilities and shareholders' equity $6,787.6 $4,703.5 ======== ======== Certain fiscal 1998 amounts have been restated as a result of a pooling-of-interests merger. 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) December 3, November 27, For the quarter ended 1998 1997 - -------------------------------------------------------------------------------- Net sales $ 793.6 $ 957.3 ------- ------- Costs and expenses: Cost of goods sold 677.7 747.1 Selling, general and administrative 103.0 126.0 Research and development 67.7 67.2 Other operating expense 7.8 4.6 ------- ------- Total costs and expenses 856.2 944.9 ------- ------- Operating income (loss) (62.6) 12.4 Loss on sale of investments (0.1) -- Gain on issuance of subsidiary stock, net 1.1 0.1 Interest expense, net (7.9) (1.3) ------- ------- Income (loss) before income taxes and minority interests (69.5) 11.2 Income tax benefit (provision) 27.6 (4.5) Minority interests in net income (4.3) (0.2) ------- ------- Net income (loss) $ (46.2) $ 6.5 ======= ======= Earnings (loss) per share: Basic $ (0.19) $ 0.03 Diluted (0.19) 0.03 Number of shares used in per share calculations: Basic 245.7 214.7 Diluted 245.7 217.8 Certain fiscal 1998 amounts have been restated as a result of a pooling-of- interests merger. See accompanying notes to consolidated financial statements. 2 <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Cash Flows (Dollars in millions) (Unaudited) December 3, November 27, For the quarter ended 1998 1997 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (46.2) $ 6.5 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 189.5 136.3 Change in assets and liabilities, net of effects of acquisition Decrease in receivables 112.3 22.3 Increase in inventories (36.4) (27.2) Increase in accounts payable and accrued expenses, net of plant and equipment purchases 65.8 59.1 Other (29.4) (14.9) --------- --------- Net cash provided by operating activities 255.6 182.1 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (117.5) (187.9) Purchase of available-for-sale and held-to-maturity securities (1,273.5) (362.0) Proceeds from sales and maturities of securities 211.5 151.5 Other (1.5) (12.4) --------- --------- Net cash used for investing activities (1,181.0) (410.8) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Cash received in conjunction with acquisition 681.1 -- Proceeds from issuance of stock rights 500.0 -- Proceeds from issuance of debt 34.0 11.4 Repayments of debt (28.3) (49.7) Proceeds from issuance of common stock 19.1 0.1 Payments on equipment purchase contracts (73.9) (12.9) Other 2.3 2.7 --------- --------- Net cash provided by (used for) financing activities 1,134.3 (48.4) --------- --------- Net increase (decrease) in cash and equivalents 208.9 (277.1) Cash and equivalents at beginning of period 558.8 619.5 --------- --------- $ 767.7 $ 342.4 Cash and equivalents at end of period ========= ========= SUPPLEMENTAL DISCLOSURES Interest paid $ (6.9) $ (6.8) Income taxes refunded (paid), net 183.2 (3.3) Noncash investing and financing activities: Equipment acquisitions on contracts payable and capital leases 18.3 24.6 Cash received in conjunction with acquisition: Fair value of assets acquired $ 949.3 $ -- Liabilities assumed (138.0) -- Debt issued (836.0) -- Stock issued (656.4) -- --------- --------- $ 681.1 $ -- ========= ========= Certain fiscal 1998 amounts have been restated as a result of a pooling-of- interests merger. See accompanying notes to consolidated financial statements 3 <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" or "MTI"), and their consolidated results of operations and cash flows. The Company has restated its prior period financial statements, as a result of the merger with Rendition, Inc. ("Rendition") which was accounted for as a pooling-of-interests. These unaudited interim financial statements for the quarter ended December 3, 1998, should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Form 10-K for the year ended September 3, 1998. 2. Supplemental balance sheet information December 3, September 3, 1998 1998 - -------------------------------------------------------------------------------- Receivables - -------------------------------------------------------------------------------- Trade receivables $ 404.2 $ 294.4 Income taxes receivable 46.5 191.9 Allowance for returns and discounts (15.3) (11.9) Allowance for doubtful accounts (6.1) (6.5) Other receivables 52.3 21.6 --------- --------- $ 481.6 $ 489.5 ========= ========= Inventories - -------------------------------------------------------------------------------- Finished goods $ 121.9 $ 93.3 Work in progress 189.1 139.6 Raw materials and supplies 49.4 58.7 --------- --------- $ 360.4 $ 291.6 ========= ========= Product and process technology - -------------------------------------------------------------------------------- Product and process technology, at cost $ 304.5 $ 161.7 Less accumulated amortization (84.9) (76.8) --------- --------- $ 219.6 $ 84.9 ========= ========= Property, plant and equipment - -------------------------------------------------------------------------------- Land $ 42.4 $ 34.8 Buildings 1,111.2 915.5 Equipment 3,529.2 3,025.7 Construction in progress 722.1 704.6 --------- --------- 5,404.9 4,680.6 Less accumulated depreciation and amortization (1,802.6) (1,645.3) --------- --------- $ 3,602.3 $ 3,035.3 ========= ========= As of December 3, 1998, property, plant and equipment included unamortized costs of $706.7 million for the Company's semiconductor memory manufacturing facility in Lehi, Utah, of which $646.0 million has not been 4 <PAGE> Notes to Consolidated Financial Statements, continued placed in service and is not being depreciated. Timing of the completion of the remainder of the Lehi production facilities is dependent upon market conditions. Market conditions which the Company expects to evaluate include, but are not limited to, worldwide market supply and demand of semiconductor products and the Company's operations, cash flows and alternative uses of capital. The Company continues to evaluate the carrying value of the facility and as of December 3, 1998, it was determined to have no impairment. Depreciation expense was $181.1 million and $129.5 million for the first quarter of 1999 and 1998, respectively. December 3, September 3, 1998 1998 - -------------------------------------------------------------------------------- Accounts payable and accrued expenses - -------------------------------------------------------------------------------- Accounts payable $ 312.4 $ 235.6 Salaries, wages and benefits 116.0 85.6 Product and process technology payable 68.9 46.4 Taxes payable other than income 49.2 44.5 Interest payable 24.3 7.7 Other 57.0 40.9 ---------- ---------- $ 627.8 $ 460.7 ========== ========== Debt - -------------------------------------------------------------------------------- Convertible Notes payable, due October 2005, with an effective yield-to-maturity of 8.4%, net of unamortized discount of $70.8 million $ 669.2 $ -- Convertible Subordinated Notes payable, due July 2004, interest rate of 7% 500.0 500.0 Subordinated Notes payable, due October 2005, with an effective yield-to-maturity of 10.6%, net of unamortized discount of $41.4 million 168.6 -- Notes payable in periodic installments through July 2015, weighted average interest rate of 7.39% and 7.38%, respectively 325.5 315.2 Capitalized lease obligations payable in monthly installments through August 2004, weighted average interest rate of 7.59% and 7.61%, respectively 39.7 42.2 --------- ---------- 1,701.0 857.4 Less current portion (103.4) (98.6) --------- ---------- $ 1,597.6 $ 758.8 ========= ========== The convertible notes due October 2005 (the "Convertible Notes") with a yield-to-maturity of 8.4% have a face value of $740 million, a stated interest rate of 6.5% and are convertible into shares of the Company's common stock at $60 per share. The notes are not subject to redemption prior to October 2000 and are redeemable from that date through October 2002 only if the common stock price is at least $78.00 for a specified trading period. The Convertible Notes have not been registered with the Securities and Exchange Commission, however the holder has 5 <PAGE> Notes to Consolidated Financial Statements, continued registration rights which begin April 1999. (See "Acquisition"). The subordinated notes due October 2005 with a yield-to-maturity of 10.6% have a face value of $210 million and a stated interest rate of 6.5%. The 7% convertible subordinated notes due July 2004 are convertible into shares of the Company's common stock at $67.44 per share. The notes are not subject to redemption prior to July 1999 and are redeemable from that date through July 2001 only if the common stock price is at least $87.67 for a specified trading period. The notes were offered under a $1 billion shelf registration statement pursuant to which the Company may issue from time to time up to $500 million of additional debt or equity securities. The Company has a $400 million revolving credit agreement which expires May 2000. The interest rate on borrowed funds is based on various pricing options at the time of borrowing. The agreement contains certain restrictive covenants pertaining to the Company's semiconductor operations, including a maximum debt to equity covenant. As of December 3, 1998, MTI had no borrowings outstanding under the agreement. Micron Electronics, Inc., an approximately 63% owned subsidiary of the Company ("MEI"), has a $100 million unsecured credit facility expiring in June 2001 and an additional unsecured revolving credit facility expiring in June 1999 providing for borrowings of up to 1.5 billion Japanese yen (US $12.6 million at December 3, 1998). Under the credit facilities, MEI is subject to certain financial and other covenants including certain financial ratios and limitations on the amount of dividends paid by MEI. As of December 3, 1998, MEI was eligible to borrow the full amount under its credit agreements and had aggregate borrowings of approximately $9.3 million outstanding under its credit agreements. 3. Income taxes The effective tax rate approximated 40% for the first quarter of 1999 and 1998. The effective tax rate primarily reflects the statutory corporate income tax rate and the net effect of state taxation. Taxes on earnings of domestic subsidiaries not consolidated for tax purposes may cause the effective tax rate to vary significantly from period to period. 4. Earnings (loss) per share Basic earnings per share is calculated using the average number of common shares outstanding. Diluted earnings per share is computed on the basis of the average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock method" and convertible debentures using the "if-converted" method. December 3, November 27, For the quarter ended 1998 1997 - -------------------------------------------------------------------------------- Net income (loss) available for common shareholders, Basic and Diluted $ (46.2) $ 6.5 ========= ========= Weighted average common stock outstanding -- Basic 245.7 214.7 Net effect of dilutive stock options -- 3.1 --------- --------- Weighted average common stock and common stock equivalents -- Diluted 245.7 217.8 ========= ========= Basic earnings (loss) per share $ (0.19) $ 0.03 ========= ========= Diluted earnings (loss) per share $ (0.19) $ 0.03 ========= ========= 6 <PAGE> Notes to Consolidated Financial Statements, continued Earnings per share computations exclude stock options and potential shares for convertible debentures to the extent that their effect would have been antidilutive. 5. Comprehensive Income The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," as of the first quarter of 1999. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components, however it has no impact on the Company's net income or shareholders' equity. The components of comprehensive income are as follows: December 3, November 27, For the quarter ended 1998 1997 - -------------------------------------------------------------------------------- Net income (loss) $ (46.2) $ 6.5 Foreign currency translation adjustments (0.2) (0.1) -------- -------- Total comprehensive income $ (46.4) $ 6.4 ======== ======== 6. Acquisition On September 30, 1998, the Company completed its acquisition (the "Acquisition") of substantially all of the memory operations of Texas Instruments, Inc. ("TI") for a net purchase price of approximately $832.8 million. The Acquisition was consummated through the issuance of debt and equity securities. In connection with the transaction, the Company issued 28.9 million shares of MTI common stock, $740 million principal amount of Convertible Notes and $210 million principal amount of Subordinated Notes. In addition to TI's net memory assets, the Company received $681.1 million in cash. The Acquisition was accounted for as a business combination using the purchase method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The Company and TI also entered into a ten-year, royalty-free, life-of-patents, patent cross license that commenced on January 1, 1999. The Company will make royalty payments to TI under a prior cross license agreement for operations through December 31, 1998. The following unaudited pro forma information presents the consolidated results of operations of the Company as if the Acquisition had taken place at the beginning of each period presented. December 3, November 27, For the quarter ended 1998 1997 - -------------------------------------------------------------------------------- Net sales $ 848.9 $1,211.2 Net loss (63.4) (18.5) Basic loss per share (0.23) (0.08) Diluted loss per share (0.23) (0.08) These pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the Acquisition occurred on the dates indicated, or which may result in the future. 7 <PAGE> Notes to Consolidated Financial Statements, continued 7. Merger On September 14, 1998, the Company completed its merger with Rendition. The Company issued approximately 3.6 million shares of Common Stock in exchange for all of the outstanding stock of Rendition. The merger qualified as a tax-free exchange and was accounted for as a business combination using the "pooling-of- interests" method. Accordingly, the Company's financial statements have been restated to include the results of Rendition for all periods presented. The following table presents a reconciliation of net sales and net income (loss) as previously reported by the Company for the quarter ended November 27, 1997 to those presented in the accompanying consolidated financial statements. MTI Rendition Combined - ------------------------------------------------------------------------------- Net sales $ 954.6 $ 2.7 $ 957.3 Net income (loss) $ 9.5 $ (3.0) $ 6.5 8. Equity investment On October 19, 1998, the Company issued to Intel Corporation ("Intel") approximately 15.8 million stock rights exchangeable into non-voting Class A Common Stock (upon MTI shareholder approval of such class of stock) or into common stock of the Company for a purchase price of $500 million. The Rights at the time of issuance represented approximately 6% of the Company's outstanding common stock. The Rights (or Class A Common Stock) will automatically be exchanged for (or converted into) the Company's common stock upon a transfer to a holder other than Intel or a 90% owned subsidiary of Intel. The Company has agreed to seek shareholder approval to amend its Certificate of Incorporation to create the non-voting Class A Common Stock at the Company's next Annual Meeting of Shareholders. In the event the Company's shareholders approve the amendment, the Rights will be automatically exchanged for Class A Common Stock upon the filing in Delaware of the amended Certificate of Incorporation. In the event the Company's shareholders do not approve the amendment, the Rights will remain exchangeable into the Company's common stock. In order to exchange the Rights for the Company's common stock, Intel would be required to provide the Company with written evidence of compliance with the Hart-Scott-Rodino Act ("HSR") filing requirements or that no HSR filings are required. The MTI stock to be issued to Intel has not been registered under the Securities Act of 1933, as amended, and is therefore subject to certain restrictions on resale. The Company and Intel entered into a securities rights and restrictions agreement which provides Intel with certain registration rights and places certain restrictions on Intel's voting rights and other activities with respect to the shares of MTI Class A Common Stock or common stock. Intel's registration rights begin in April 1999. Intel also has the right to designate a nominee acceptable to the Company to the Company's Board of Directors. Proceeds from the issuance of these stock rights are reflected in "Additional Capital" in the Company's balance sheet dated as of December 3, 1998. In consideration for Intel's investment, the Company has agreed to commit to the development of direct Rambus DRAM ("RDRAM") and to certain production and capital expenditure milestones and to make available to Intel a certain percentage of its semiconductor memory output over a five-year period, subject to certain limitations. The exchange ratio of the Rights and conversion ratio of the Class A Common Stock is subject to adjustment under certain formulae at the election of Intel in the event the Company fails to meet the production or capital expenditure milestones. No adjustment will occur to the exchange ratio or conversion ratio under such formulae (i) unless the price of the Company's common stock for a twenty day period ending two days prior to such milestone dates is lower than $31.625 (the market price of the Company's common stock at the time of investment), or (ii) if the Company achieves the production and capital expenditure milestones. In addition, if an adjustment occurs, in no event will the Company be obligated to issue more than: (a) a number of additional shares of Class A Common Stock or common stock having a value exceeding $150 million, or (b) a number of additional shares exceeding the number of Rights originally issued. 8 <PAGE> Notes to Consolidated Financial Statements, continued 9. Joint ventures In connection with the Acquisition, the Company acquired a 30% ownership in the TECH Singapore Semiconductor Pte. Ltd. ("TECH") and a 25% ownership in the KTI Semiconductor Limited ("KTI") joint ventures (collectively, the "JVs"), each of which operates wafer fabrication facilities for the manufacture of DRAM products. TECH, which operates in Singapore, is a joint venture between the Company, the Singapore Economic Development Board, Canon Inc., and Hewlett- Packard Company. KTI, which operates in Japan, is a joint venture between the Company and Kobe Steel, Ltd. The Company has rights and obligations to purchase 100% of the JVs' production meeting the Company's specifications at pricing determined quarterly which generally results in discounts from the Company's average worldwide selling prices. Certain partners of the JVs have product purchase rights with the Company. The Company charges a fee to the joint ventures for its estimated costs to transfer product and manufacturing process technology to the joint ventures. The Company accounts for its investments in these JVs under the equity method. Product purchases from the JVs aggregated $46.1 million in the first quarter of 1999. The Company performed assembly/test services for the JVs totaling $12.9 million for the first quarter of 1999. Receivables from and payables to the JVs were $11.8 million and $27.6 million, respectively, as of December 3, 1998. 10. Commitments and contingencies As of December 3, 1998, the Company had commitments of approximately $423.9 million for equipment purchases and $18.5 million for the construction of buildings. The Company has from time to time received, and may in the future receive, communications alleging that its products or its processes 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 alleged 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 a 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. 9 <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 (including statements regarding future operating results, future capital expenditures and facility expansion, new product introductions, technological developments, acquisitions and the effect thereof and industry trends) 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 include, but are not limited to, those identified in "Certain Factors." This discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended September 3, 1998. All period references are to the Company's fiscal periods ended December 3, 1998, September 3, 1998, or November 27, 1997, unless otherwise indicated. All per share amounts are presented on a diluted basis unless otherwise stated. All 1998 financial data of the Company has been restated to include the results of operations of Rendition, Inc., which was merged with the Company on September 11, 1998. OVERVIEW - -------- Micron Technology, Inc. and its subsidiaries are hereinafter referred to collectively as the "Company" or "MTI." The Company designs, develops, manufactures and markets semiconductor memory products, primarily DRAM, and through its approximately 63% owned subsidiary, Micron Electronics, Inc. ("MEI"), develops, markets, manufactures and supports PC systems. The semiconductor industry in general, and the DRAM market in particular, experienced severe price declines in recent years. Per megabit prices declined approximately 60% in 1998 following a 75% decline in fiscal 1997 and a 45% decline in fiscal 1996. These extreme market conditions have had an adverse effect on the Company's results of operations. Although the Company experienced an 18% increase in per megabit average selling prices for the first quarter of 1999 as compared to the fourth quarter of 1998, the Company is unable to predict whether such improved pricing is indicative of future periods. On September 30, 1998, the Company completed the acquisition (the "Acquisition") of substantially all of the semiconductor memory operations of Texas Instruments, Inc. ("TI"). The Company's results of operations for the first quarter of 1999 reflect two months for the acquired operations. On October 19, 1998, the Company also issued to Intel Corporation ("Intel") approximately 15.8 million stock rights (the "Rights") exchangeable into non- voting Class A Common Stock (upon MTI shareholder approval of such class of stock) or into common stock of the Company for an aggregate amount of $500 million. (See "Significant Transactions") RESULTS OF OPERATIONS - --------------------- Net loss for the first quarter of 1999 was $46 million, or $0.19 per share, on net sales of $794 million. For the first quarter of 1998 net income was $7 million, or $0.03 per share, on net sales of $957 million. For the fourth quarter of 1998, net loss was $93 million, or $0.43 per share, on net sales of $692 million. NET SALES First Quarter ---------------------------------- 1999 1998 ---------------------------------- Net sales % Net sales % --------- ------ --------- ------ Semiconductor memory products $ 409.5 51.6 $ 440.1 46.0 PC systems 352.1 44.4 445.1 46.5 Other 32.0 4.0 72.1 7.5 --------- ------ --------- ------ Total net sales $ 793.6 100.0 $ 957.3 100.0 ========= ====== ========= ====== Net sales of "Semiconductor memory products" include sales of $10.3 million and $12.4 million in the first quarters of 1999 and 1998, respectively, of sales of MTI semiconductor memory products incorporated in MEI PC products. "Other " net sales for the first quarter of 1999 include revenue of $18.6 million for test and assembly services performed by the Company. "Other" net sales for the first quarter of 1998 include revenue of approximately $61 million from MEI's contract manufacturing subsidiary, which was sold in February 1998. 10 <PAGE> Net sales of semiconductor memory products for the first quarter of 1999 decreased by 7% as compared to the first quarter of 1998, principally due to a 52% decline in average selling price per megabit of memory, partially offset by an 89% increase in megabits shipped. This increase in megabits shipped was due to production increases principally resulting from shifts in the Company's mix of semiconductor memory products to higher average density products, ongoing transitions to successive reduced die size ("shrink") versions of existing memory products and additional output from the acquired operations. The Company's principal memory product in the first quarter of 1999 was the 64 Meg DRAM, which comprised approximately 65% of the net sales of semiconductor memory products. Approximately 87% of the 64 Meg DRAM sales were synchronous DRAM ("SDRAM") products. Net sales of semiconductor memory products increased by 10% in the first quarter of 1999 as compared to the fourth quarter of 1998 principally due to an approximate 18% increase in average selling price per megabit of memory sold, partially offset by a 10% decline in megabits shipped. During the first quarter of 1999 prices for the Company's 16 Meg DRAM product increased significantly as that device reached the end of its product life cycle and customers sought lifetime-buy arrangements. The average selling price for the 64 Meg SDRAM increased 8% in the first quarter of 1999 as compared to the fourth quarter of 1998. The decrease in megabits shipped was primarily due to backend production constraints associated with the Company's rapid transition to the .21u shrink version of its 64 Meg DRAM product. The effects of these constraints were partially offset by the additional sales of semiconductor memory products arising from the Company's newly acquired operations. These constraints are expected to be resolved in the second quarter of 1999. Net sales of PC systems were lower in the first quarter of 1999 compared to the first quarter of 1998 primarily as a result of an 18% decline in average selling prices which was partially offset by a 2% increase in unit sales. In addition during the first quarter of 1998, the Company disposed of excess PC component inventories, which also contributed to the comparative decline. Net sales of PC systems for the first quarter of 1999 were 20% higher than for the fourth quarter of 1998 primarily as a result of a 21% increase in unit sales, which was partially offset by a 5% decrease in average selling prices. GROSS MARGIN First Quarter ------------------------------------- 1999 % Change 1998 ------------------------------------- Gross margin $ 115.9 (44.9)% $ 210.2 as a % of net sales 14.6% 22.0% The Company's gross margin percentage was lower for the first quarter of 1999 compared to the first quarter of 1998 principally due to lower gross margin percentages on sales of the Company's semiconductor memory products which resulted primarily from a severe decline in average sales prices per megabit. The Company's gross margin percentage on sales of semiconductor memory products for the first quarter of 1999 was 9%, compared to 32% for the first quarter of 1998. The decrease in gross margin percentage on sales of semiconductor memory products for the first quarter of 1999 compared to the first quarter of 1998 was primarily the result of the 52% decline in average selling prices, and to a lesser extent, the inclusion of two months of results for the acquired operations which have higher per-unit manufacturing costs. These factors were partially offset by decreases in per megabit manufacturing costs during the same period. Comparative decreases in per megabit manufacturing costs were achieved primarily through shifts in the Company's mix of semiconductor memory products to higher average density products and transitions to shrink versions of existing products. The Company's gross margin percentage for the fourth quarter of 1998 was 6%. The gross margin percentage on sales of semiconductor memory products for the fourth quarter of 1998 was negative 10%. The increase in gross margin percentage for semiconductor memory products sold in the first quarter of 1999 as compared to the fourth quarter of 1998 was primarily the result of the 18% increase in average selling prices per megabit of memory. The Company's cost per megabit of semiconductor memory sold remained unchanged comparing the first quarter of 1999 with the fourth quarter of 1998 as cost improvements achieved by the Company's Boise operations were offset by higher costs per megabit incurred at the acquired operations. 11 <PAGE> In connection with the Acquisition, the Company acquired the right and obligation to purchase 100% of the production output of two joint ventures, TECH Semiconductor Singapore Pte. Ltd. ("TECH") and KTI Semiconductor Limited ("KTI"), which meets the Company's specifications. The Company purchases assembled and tested components from the joint ventures at prices determined quarterly, which generally results in discounts from the Company's worldwide average sales prices. These discounts are higher than gross margins realized by the Company in recent periods on similar products manufactured in the Company's wholly-owned facilities, but are lower than gross margins historically realized in periods of relatively constrained supply. At any future reporting period, gross margins for semiconductor memory products resulting from the Company's purchase of joint venture products may positively or negatively impact gross margins depending on the then existing relationship of average selling prices to the Company's cost per unit sold for product manufactured in its wholly-owned facilities. The Company's PC gross margins in the first quarter of 1999 were 15%, compared to 13% in the first quarter of 1998 and 22% in the fourth quarter of 1998. PC gross margins in the first quarter of 1998 were adversely affected by significant losses recognized from disposition of excess PC component inventories. PC gross margins in the fourth quarter of 1998 were favorably affected by revisions of estimates for certain product and process technology costs. In addition, the Company experienced intense price pressure on its PC products resulting in a lower gross margin provided by such products in the first quarter of 1999 when compared to the fourth quarter of 1998. PC gross margins in the first quarter of 1999 were also affected by a more aggressive pricing strategy, particularly on notebook products. The Company expects to continue experiencing significant pressure on its gross margins on sales of its PC systems, particularly for desktop and notebook products, as a result of intense competition in the PC industry and consumer expectations of more powerful PC systems at lower prices. SELLING, GENERAL AND ADMINISTRATIVE First Quarter ------------------------------------- 1999 % Change 1998 ------------------------------------- Selling, general and administrative $ 103.0 (18.3)% $ 126.0 as a % of net sales 13.0% 13.2% Selling, general and administrative expenses were lower in the first quarter of 1999 as compared to the first quarter of 1998 primarily as a result of enhanced operational efficiencies and cost reductions at MEI and the sale of 90% of MEI's interest in its contract manufacturing subsidiary in fiscal 1998. Selling, general and administrative expenses for the first quarter of 1999 include approximately $7 million in expense associated with the acquired semiconductor operations. Selling, general and administrative expenses for the first quarter of 1998 reflect a $6 million contribution to a university in support of engineering education. Selling, general and administrative expenses for the first quarter of 1999 increased by 3% as compared to the fourth quarter of 1998, primarily due to increased costs associated with the acquired semiconductor operations. This increase in selling, general and administrative expenses over the immediately preceding quarter was partially offset by a decrease in expense associated with the Company's PC operations. RESEARCH AND DEVELOPMENT First Quarter ------------------------------------- 1999 % Change 1998 ------------------------------------- Research and development $ 67.7 (0.7)% $ 67.2 as a % of net sales 8.5% 7.0% Research and development expenses relating to the Company's semiconductor memory operations, which constitute substantially all of the Company's research and development expenses, vary primarily with the number of wafers processed, personnel costs, and the cost of advanced equipment dedicated to new product and process development. Research and development efforts are focused on advanced process technology, which is the primary determinant in transitioning to next generation products. Application of advanced process technology currently is concentrated on shrink versions of the Company's 64 Meg SDRAM and development of the Company's 128 Meg SDRAM and direct Rambus DRAM ("RDRAM"), Double Data Rate ("DDR"), SyncLink DRAM ("SLDRAM"), 12 <PAGE> Flash and SRAM memory products. Other research and development efforts are currently devoted to the design and development of RIC, flat panel displays, graphics accelerator products and PC systems. Research and development expenses in the first quarter of 1999 include additional costs of resources obtained in the Acquisition being utilized to broaden the Company's range of DRAM product offerings. The expansion of product offerings is considered necessary to support the customer base associated with the Company's anticipated increased market share. The Company completed its transition from .25u to .21u at its Boise site in the fourth quarter of calendar 1998 and expects the transition from .21u to .18u to occur at its Boise site in calendar 1999. The Company anticipates that process technology will move to .15u line widths in the next few years as needed for the development of future generation semiconductor products. Transitions to smaller line widths at the acquired operations are expected to lag behind transitions at the Boise site as process development will be conducted primarily in Boise. INCOME TAXES The effective tax rate approximated 40% for the first quarter of 1999 and 1998. The effective tax rate primarily reflects the statutory corporate income tax rate and the net effect of state taxation. Taxes on earnings of domestic subsidiaries not consolidated for tax purposes may cause the effective tax rate to vary significantly from period to period. RECENTLY ISSUED ACCOUNTING STANDARDS Recently issued accounting standards include Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about Segments of an Enterprise and Related Information," issued by the FASB in June 1997, Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," issued by the AICPA in March 1998 and SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," issued by the FASB in June 1998. SFAS No. 131 will require the Company to provide additional disclosures for its year end 1999. The Company is currently evaluating the impact of SOP 98-1, required by year end 2000 and SFAS No. 133, which is required for the first quarter of 2000. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- As of December 3, 1998, the Company had cash and liquid investments totaling $1,925 million, representing an increase of $1,275 million during the first quarter of 1999. In the first quarter of 1999 the Company received $681 million in conjunction with the Acquisition and $500 million from the sale of stock rights. The Company's other principal source of liquidity during the first quarter of 1999 was net cash flow from operations of $256 million. The principal uses of funds during the first quarter of 1999 were $118 million for property, plant and equipment expenditures and $102 million for repayments of equipment contracts and long-term debt. The Company believes that in order to transition the acquired operations to the Company's product and process technology, develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, it must continue to invest in manufacturing technology, facilities and capital equipment, research and development, and product and process technology. The Company currently estimates it will spend approximately $1 billion in 1999 for purchases of equipment and construction and improvement of buildings. As of December 3, 1998, the Company had entered into contracts extending into 2000 for approximately $424 million for equipment purchases and approximately $18 million for the construction of facilities. The Company has an aggregate of $513 million in revolving credit agreements, including a $400 million agreement expiring in May 2000 which contains certain restrictive covenants pertaining to the Company's semiconductor memory operations, including a maximum total debt to equity ratio. As of December 3, 1998, the Company was in compliance with all covenants under the facilities and had borrowings totaling approximately $9 13 <PAGE> million outstanding under the agreements. There can be no assurance that the Company will continue to be able to meet the terms of the covenants and conditions in the agreements, borrow under the agreements or negotiate satisfactory successor agreements. As of December 3, 1998, approximately $370 million of the Company's consolidated cash and liquid investments were held by MEI. Cash generated by MEI is not readily available or anticipated to be available to finance operations or other expenditures of MTI's semiconductor memory operations. SIGNIFICANT TRANSACTIONS - ------------------------ ACQUISITION On September 30, 1998, the Company completed its acquisition of substantially all of TI's memory operations. The Acquisition was consummated through the issuance of debt and equity securities. TI received 28.9 million shares of MTI common stock, $740 million principal amount of Convertible Notes and $210 million principal amount of Subordinated Notes. In addition to TI's net memory assets, the Company received $681 million in cash. The Company and TI also entered into a ten-year, royalty-free, life-of-patents, patent cross license that commenced on January 1, 1999. The MTI common stock and Convertible Notes issued in the transaction have not been registered under the Securities Act of 1933, as amended, and are therefore subject to certain restrictions on resale. The Company and TI entered into a securities rights and restrictions agreement as part of the transaction which provides TI with certain registration rights and places certain restrictions on TI's voting rights and other activities with respect to shares of MTI common stock. TI's registration rights begin in April 1999. The Convertible Notes and the Subordinated Notes issued in the transaction bear interest at the rate of 6.5% and have a term of seven years. The Convertible Notes are convertible into 12.3 million shares of MTI common stock at a conversion price of $60 per share. The Convertible Notes are not subject to redemption prior to October 2000 and are redeemable from that date through October 2002 only if the common stock price is at least $78.00 for a specified trading period. The Subordinated Notes are subordinated to the Convertible Notes, the Company's outstanding 7% Convertible Subordinated Notes due July, 2004, and substantially all of the Company's other indebtedness. The assets acquired by the Company in the Acquisition include a wafer fabrication operation in Avezzano, Italy, an assembly/test operation in Singapore, and a wafer fabrication facility in Richardson, Texas. TI closed the Richardson memory manufacturing operation in June 1998. Also included in the Acquisition was TI's interest in two joint ventures and TI's rights and obligations to purchase 100% of the joint venture production meeting the Company's specifications. TECH in Singapore is owned by TI, Canon, Inc., Hewlett-Packard Singapore (Private) Limited, a subsidiary of Hewlett Packard Company, and EDB Investments Pte. Ltd., which is controlled by the Economic Development Board of the Singapore government; and KTI in Japan is owned by TI and Kobe Steel, Ltd. MTI acquired a 30% interest in TECH and a 25% interest in KTI. The Company filed Form 8-K/A on October 16, 1998, which incorporates historical and pro forma financial information with respect to the Acquisition. Pro forma financial information is also included in the notes to the financial statements in this Form 10-Q. Although the Company believes the Acquisition further leverages its technology, the Company anticipates that the Acquisition will continue to have a near term adverse impact upon the Company's results of operations and cash flows. The Company has begun to transfer its product and process technology into the acquired operations (primarily the wholly-owned fabrication facilities in Avezzano, Italy and the joint-venture facilities, KTI and TECH) and expects the transfer to be substantially complete in the next nine to twelve months. Output of the Company's semiconductor memory products will increase directly as a result of the manufacturing capacity obtained in the Acquisition and should increase further as a result of the transfer of the Company's product and process technology to the acquired operations. Until the Company is able to complete the transfer of its product and process technology into the acquired operations, the Company expects that the per unit costs associated with products manufactured at the acquired operations will continue to significantly exceed the per unit costs of products manufactured at the Company's Boise, Idaho facility, resulting in a near-term adverse impact on the Company's gross margin percentage. The ten-year, royalty-free, life-of-patents, patent cross license entered into with TI will result in a reduction in the Company's royalty expenses beginning January, 1999. 14 <PAGE> EQUITY INVESTMENT On October 19, 1998, the Company issued to Intel approximately 15.8 million Rights exchangeable into non-voting Class A Common Stock (upon MTI shareholder approval of such class of stock) or into common stock of the Company for a purchase price of $500 million. The Rights at the time of issuance represented approximately 6% of the Company's outstanding common stock. The Rights (or Class A Common Stock) will automatically be exchanged for (or converted into) the Company's common stock upon a transfer to a holder other than Intel or a 90% owned subsidiary of Intel. The Company has agreed to seek shareholder approval to amend its Certificate of Incorporation to create the non-voting Class A Common Stock at the Company's next Annual Meeting of Shareholders. In the event the Company's shareholders approve the amendment, the Rights will be automatically exchanged for Class A Common Stock upon the filing in Delaware of the amended Certificate of Incorporation. In the event the Company's shareholders do not approve the amendment, the Rights will remain exchangeable into the Company's common stock. In order to exchange the Rights for the Company's common stock, Intel would be required to provide the Company with written evidence of compliance with the Hart-Scott-Rodino Act ("HSR") filing requirements or that no HSR filings are required. The MTI tock to be issued to Intel has not been registered under the Securities Act of 1933, as amended, and is therefore subject to certain restrictions on resale. The Company and Intel entered into a securities rights and restrictions agreement which provides Intel with certain registration rights and places certain restrictions on Intel's voting rights and other activities with respect to the shares of MTI Class A Common Stock or common stock. Intel's registration rights begin in April 1999. Intel also has the right to designate a director nominee, acceptable to the Company, to the Company's Board of Directors. In consideration for Intel's investment, the Company has agreed to commit to the development of RDRAM and to certain production and capital expenditure milestones and to make available to Intel a certain percentage of its semiconductor memory output over a five-year period, subject to certain limitations. The exchange ratio of the Rights and conversion ratio of the Class A Common Stock is subject to adjustment under certain formulae at the election of Intel in the event MTI fails to meet the production or capital expenditure milestones. No adjustment will occur to the exchange ratio or conversion ratio under such formulae (i) unless the price of the Company's common stock for a twenty day period ending two days prior to such milestone dates is lower than $31.625 (the market price of the Company's common stock at the time of investment), or (ii) if the Company achieves the production and capital expenditure milestones. In addition, if an adjustment occurs, in no event will the Company be obligated to issue more than: (a) a number of additional shares of Class A Common Stock or common stock having a value exceeding $150 million, or (b) a number of additional shares exceeding the number of Rights originally issued. YEAR 2000 - --------- Like many other companies, the Year 2000 computer issue creates risks for the Company. If internal systems do not correctly recognize and process date information beyond the year 1999, the Company's operations could be adversely impacted as a result of system failures and business process interruption. The Company has been addressing the Year 2000 computer issue with a plan that began in early 1996. To manage its Year 2000 program, the Company has divided its efforts into the primary program areas of: (i) information technology ("IT"), which includes computer and network hardware, operating systems, purchased development tools, third-party and internally developed software, files and databases, end-user extracts and electronic interfaces; (ii) manufacturing and facilitation equipment; and (iii) external dependencies, which include relationships with suppliers and customers. The Company is following four general steps for each of these program areas: "Ownership," wherein each department manager is responsible for assigning ownership for the various Year 2000 issues to be tested; "Identification" of systems and equipment and the collection of Year 2000 data in a centralized place to track results of compliance testing and subsequent remediation; "Compliance Testing," which includes the determination of the specific test routine to be performed on the software or equipment and determination of year 2000 compliance for the item being tested; and "Remediation," which involves implementation of corrective action, verification of successful implementation, finalization of, and, if need be, execution of, contingency plans. 15 <PAGE> As of December 3, 1998, the Ownership and Identification steps were essentially complete for all three program areas: IT, manufacturing equipment and external dependencies. The Compliance Testing and Remediation steps are substantially complete for the IT area at the Boise site and the Company is evaluating the status of the IT areas for the acquired operations. Compliance Testing of manufacturing and facilitation equipment is over fifty percent complete. Remediation efforts for equipment thus tested is in excess of sixty percent complete. The Company is currently in the process of assessing embedded technology associated with its PC systems manufacturing equipment and expects the evaluation to be complete in the first calendar quarter 1999. The Company is currently working with suppliers of products and services to determine and monitor their level of compliance and Compliance Testing. Year 2000 readiness of significant customers is also being assessed. The Company's evaluation of Year 2000 compliance as it relates to the Company's external dependencies is expected to be complete by the second calendar quarter of 1999. The cost of addressing the Company's Year 2000 issues is expected to be immaterial. The Company is executing its Year 2000 readiness plan solely through its employees. Year 2000 Compliance Testing and reprogramming is being done in conjunction with other ongoing maintenance and reprogramming efforts. With respect to Remediation, the Company has commenced work on various types of contingency plans to address potential problem areas with internal systems and with suppliers and other third parties. Internally, each software and hardware system has been assigned to on-call personnel who are responsible for bringing the system back on line in the event of a failure. Externally, the Company's Year 2000 plan includes identification of alternate sources for providers of goods and services. The Company expects its contingency plans to be complete by the second calendar quarter of 1999. 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 September 3, 1998, 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 semiconductor industry has a history of declining average sales prices as products mature. Long-term average decreases in sales prices for semiconductor memory products approximate 30% on an annualized basis; however, significant fluctuations from this rate have occurred from time to time, including in recent periods. 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. Growth in worldwide supply has outpaced growth in worldwide demand in recent periods, resulting in a significant decrease in average selling prices for the Company's semiconductor memory products. The semiconductor industry in general, and the DRAM market in particular, has experienced a particularly severe downturn. While per megabit prices increased in the first quarter of 1999 as compared to the fourth quarter of 1998, per megabit prices declined approximately 60% in 1998 following a 75% decline in 1997 and a 45% decline in 1996. The increase in per megabit pricing for the first quarter of 1999 may not be indicative of pricing in future periods. In the event that average selling prices decline at a faster rate than the rate 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. Future consolidation by competitors in the semiconductor memory industry may place the Company at a disadvantage in competing with competitors that have greater capital resources. Competitors are also aggressively seeking improved yields, smaller die size and fewer mask levels in their product designs. These improvements could result in a significant increase in worldwide capacity leading to further downward pressure on prices. 16 <PAGE> Approximately 72% of the Company's sales of semiconductor memory products during the first quarter of 1999 were directly into the PC or peripheral markets. DRAMs are the most widely used semiconductor memory component in most PC systems. Should the rate of growth of sales of PC systems or the rate of growth in the amount of memory per PC system decrease, the growth rate for sales of 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. On September 30, 1998, the Company acquired substantially all of TI's memory operations. The integration and successful operation of the acquired operations is dependent upon a number of factors, including, but not limited to, the Company's ability to transfer its product and process technology in a timely and cost-effective manner into the wholly-owned acquired fabrication facilities in Avezzano, Italy and joint venture facilities in Singapore (TECH ) and Japan (KTI). The Company expects the transfer of its product and process technology into these fabrication facilities to be substantially complete by the end of calendar 1999; however, there can be no assurance that the Company will be able to meet this timeline. Until such time as the Company is able to complete the transfer of its product and process technology into the acquired fabrication facilities, it is expected that the per unit costs associated with the products manufactured at the acquired fabrication facilities will continue to significantly exceed the per unit costs of products manufactured at the Company's Boise, Idaho, facility. As a result, it is expected that the Acquisition will continue to have a near term adverse effect on the Company's results of operations and cash flows. As the semiconductor industry transitions to higher bandwidth products including RDRAM, DDR and SLDRAM, the Company may encounter difficulties in achieving the semiconductor manufacturing efficiencies that it has historically achieved. The Company's productivity levels, die per wafer yields, and in particular, backend equipment requirements may be affected by a transition to higher bandwidth products. There can be no assurance that the Company will successfully transition to these products or that it will be able to achieve its historical rate of cost per megabit reductions. As a result of the Acquisition, the Company has substantially increased its share of the worldwide DRAM market and its production capacity, and as a result, the Company's results of operations are further subject to fluctuations in pricing for semiconductor memory products. In addition, if the Company is successful in the transfer of its product and process technology into the acquired facilities, the amount of worldwide semiconductor memory capacity could increase, resulting in further downward pricing pressure on the Company's semiconductor memory products. The Acquisition is expected to continue to have a significant effect on the Company's future results of operations and cash flows, including, but not limited to: a negative impact on gross margin in the near term due in part to significantly higher per unit manufacturing costs at the acquired operations; costs related to the assimilation of the acquired operations; increased research and development expense associated with the Company's efforts to broaden its range of DRAM product offerings; increased interest expense associated with the Convertible Notes and Subordinated Notes issued in the transaction and increased capital spending relating to the wholly-owned acquired operations in Avezzano, Italy and Singapore. The Company has limited experience in integrating or operating geographically dispersed manufacturing facilities. It is expected that the integration and operation of the acquired facilities will place strains on the Company's management and information systems resources. Failure by the Company to effectively manage the integration of the acquired facilities could have a material adverse effect on the Company's results of operations. In connection with the Acquisition, the Company and TI entered into a transition services agreement requiring TI to provide certain services and support to the Company for specified periods following the Acquisition. Among other items, TI is to provide information technology, finance and accounting, human resources, equipment maintenance, facilities and purchasing services under the services agreement. The successful integration and operation of the acquired facilities is partially dependent upon the continued successful provision of services by TI under the services agreement. There can be no assurance that the services and support called for under the services agreement will be provided in a manner sufficient to meet anticipated requirements. The failure to obtain sufficient 17 <PAGE> services and support could impair the Company's ability to successfully integrate the acquired facilities and could have a material adverse affect on the Company's results of operations. In accordance with the transition services agreement, the Company will rely in part on TI computer networks and information technology services with respect to certain of the acquired operations. During this period and beyond, the Company will also be utilizing software obtained or licensed from TI to conduct specific portions of the business. Dependency upon TI systems will span calendar years 1999 and 2000, during which period Year 2000 issues may arise. If unforeseen difficulties are encountered in ending the Company's reliance upon TI's software, hardware or services or in segregating the companies' information technology operations or with Year 2000 issues, the Company's results of operations could be materially adversely affected. International sales comprised approximately 27% of the Company's net sales in the first quarter of 1999 and 20% in 1998. The Company expects international sales to continue to increase in 1999 as a result of the Acquisition. In addition, the Company has significantly expanded its international operations as a result of the Acquisition. International sales and operations are subject to a variety of risks, including those arising from currency fluctuations, export duties, changes to import and export regulations, possible restrictions on the transfer of funds, employee turnover, labor unrest, longer payment cycles, greater difficulty in collecting accounts receivable, the burdens and costs of compliance with a variety of foreign laws and, in certain parts of the world, political instability. While to date these factors have not had a significant adverse impact on the Company's results of operations, there can be no assurance that there will not be such an impact in the future. In connection with the Acquisition, the Company acquired the rights and obligations to purchase 100% of the production output of the TECH joint venture in Singapore and the KTI joint venture in Japan. The Company purchases assembled and tested components meeting the Company's specifications at prices determined quarterly, which generally results in discounts from the Company's worldwide average sales prices. These discounts are currently higher than gross margins realized by the Company in recent periods on similar products manufactured in the Company's wholly-owned facilities, but are lower than gross margins historically realized in periods of relatively constrained supply. At any future reporting period, gross margins for semiconductor memory products resulting from the Company's right to purchase joint venture products may positively or negatively impact gross margins depending on the then existing relationship of average selling prices to the Company's cost per unit sold for product manufactured in its wholly-owned facilities. The Company's operating results are significantly impacted by the operating results of its consolidated subsidiaries, particularly MEI. MEI's past operating results have been, and its future operating results may be, subject to seasonality and other fluctuations, on a quarterly and an annual basis, as a result of a wide variety of factors, including, but not limited to, industry competition, the Company's ability to accurately forecast demand and selling prices for its PC products, fluctuating market pricing for PCs and semiconductor memory products, seasonal government purchasing cycles, inventory obsolescence, the Company's ability to effectively manage inventory levels, changes in product mix, manufacturing and production constraints, fluctuating component costs, the effects of product reviews and industry awards, critical component availability, seasonal cycles common in the PC industry, the timing of new product introductions by the Company and its competitors and global market and economic conditions. Changing circumstances, including but not limited to, changes in the Company's core operations, uses of capital, strategic objectives 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 per unit costs by reducing the die size of existing products. The result of such efforts has generally led to significant increases in megabit production. There can be no assurance that the Company will be able to maintain or approximate increases in megabit production at a level approaching that experienced in recent years 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 latest shrink versions of existing devices or new generation devices to commercial volumes. The semiconductor memory industry is characterized by frequent product introductions and enhancements. 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 18 <PAGE> to ramp such products at acceptable rates to acceptable yields, of which there can be no assurance. In addition, there can be no assurance that the Company will be able to continue to reduce its per unit manufacturing costs at the rate historically achieved by the Company. Historically, the Company has reinvested substantially all cash flow from semiconductor memory operations in capacity expansion and enhancement 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. If for any extended period of time 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. Cash generated by MEI is not readily available or anticipated to be available to finance the Company's semiconductor operations. The Company has an aggregate of $513 million in revolving credit agreements, including a $400 million agreement expiring in May 2000, which contains certain restrictive covenants pertaining to the Company's semiconductor memory operations, including a maximum total debt to equity ratio. 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 facilities. There can be no assurance that, if needed, 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 could 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. Completion of the Company's semiconductor manufacturing facility in Lehi, Utah was suspended in February 1996, as a result of the decline in average selling prices for semiconductor memory products. As of December 3, 1998, the Company had invested approximately $707 million in the Lehi facility. Timing of completion of the remainder of the Lehi production facilities is dependent upon market conditions. Market conditions which the Company expects to evaluate include, but are not limited to, worldwide market supply and demand of semiconductor products and the Company's operations, cash flows and alternative uses of capital. There can be no assurance that the Company will be able to fund the completion of the Lehi manufacturing facility. The failure by the Company to complete the facility would likely result in the Company being required to write off all or a portion of the facility's cost, which could have a material adverse effect on the Company's business and results of operations. In addition, in the event that market conditions improve, there can be no assurance that the Company can commence manufacturing at the Lehi facility in a timely, cost effective manner that enables it to take advantage of the improved market conditions. 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 its products or its processes may infringe 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. The Company is unable to predict whether these license agreements can be obtained or renewed on terms acceptable to the Company. Adverse determinations that the Company's manufacturing processes or products have infringed on the product or process rights held by others could subject the Company to significant liabilities to 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. The Company is dependent upon a limited number of key management and technical personnel. In addition, the Company's future success will depend in part upon its ability to attract and retain highly qualified personnel, particularly as the Company engages in worldwide operations and adds different product types to its product line, which will require parallel design efforts and significantly increase the need for highly skilled technical personnel. The Company competes for such personnel with other companies, academic institutions, government entities and other organizations. The Company has experienced, and expects to continue to experience, increased recruitment of its existing personnel by other employers. The Company's ability to retain key acquired personnel will be a critical factor in the Company's ability to successfully integrate the acquired operations. There can be no assurance that the 19 <PAGE> Company will be successful in hiring or retaining qualified personnel. Any loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on the Company's business and results of operations. 20 <PAGE> ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- Substantially all of the Company's liquid investments and long-term debt are at fixed interest rates, and therefore the fair value of these instruments is affected by changes in market interest rates. However, substantially all of the Company's liquid investments mature within one year. As a result, the Company believes that the market risk arising from its holdings of financial instruments is minimal. The Company's results of operations and financial position for the first quarter of 1999 reflect a higher volume of foreign currency transactions and account balances than in previous periods related to the foreign operations obtained through the Acquisition. As of December 3, 1998 the Company held aggregate cash and receivables in foreign currency valued at approximately US $13 million and aggregate foreign currency payables valued at approximately US $61 (including long-term liabilities denominated in Italian lira valued at approximately US $21 million). Foreign currency receivables and payables are comprised primarily of Italian lira, Singapore dollars and Japanese yen. The Company is currently evaluating its risk management policy regarding foreign currency exposure. 21 <PAGE> PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. - --------------------------------------------------- TEXAS INSTRUMENTS INCORPORATED On September 30, 1998, the Company completed its acquisition of substantially all of TI's memory operations. The Acquisition was consummated through the issuance of debt and equity securities. TI received 28.9 million shares of Common Stock, $740 million principal amount of Convertible Notes and $210 million principal amount of Subordinated Notes. In addition to TI's net memory assets, the Company received $681 million in cash. The Company and TI also entered into a ten-year, royalty-free, life-of-patents, patent cross license that commenced on January 1, 1999. The Common Stock and Convertible Notes issued in the transaction were issued pursuant to a Section 4(2), exemption under the Securities Act of 1933, as amended ("the Act"), and are therefore subject to certain restrictions on resale. The Company and TI entered into a securities rights and restrictions agreement as part of the transaction which provides TI with certain registration rights and places certain restrictions on TI's voting rights and other activities with respect to shares of Common Stock. TI's registration rights begin in April 1999. The Convertible Notes and the Subordinated Notes issued in the transaction bear interest at the rate of 6.5% and have a term of seven years. The Convertible Notes are convertible into 12.3 million shares of Common Stock at a conversion price of $60 per share. The Convertible Notes are not subject to redemption prior to October 2000 and are redeemable from that date through October 2002 only if the Common Stock price is at least $78.00 for a specified trading period. Conversion Terms A holder of a Convertible Note has the right, at the holder's option, to convert the Convertible Note into shares of Common Stock at any time on or prior to the close of business on the maturity date, unless previously redeemed or repurchased, at the Conversion Rate, subject to adjustment as described below. The Conversion Rate is subject to adjustment in certain events, including, without duplication: (a) dividends (and other distributions) payable in Common Stock on shares of Common Stock, (b) the issuance to all holders of Common Stock of rights, options or warrants entitling them to subscribe for or purchase Common Stock at less than the then current market price of such Common Stock (determined as provided in the Indenture for the Convertible Notes) as of the record date for shareholders entitled to receive such rights, options or warrants (provided that the Conversion Rate will be readjusted to the extent any such rights, options or warrants are not exercised prior to the expiration thereof), (c) subdivisions, combinations and reclassifications of Common Stock, (d) distributions to all holders of Common Stock of evidences of indebtedness of the Company, shares of capital stock, cash or assets (including securities (but excluding those dividends, rights, options, warrants and distributions referred to above) dividends, and distributions paid exclusively in cash), (e) distributions consisting exclusively of cash (excluding any cash portion of distributions referred to in (d) above) to all holders of Common Stock in an aggregate amount that, combined together with (i) other such all-cash distributions made within the preceding 12 months in respect of which no adjustment has been made and (ii) any cash and the fair market value of other considerations payable in respect of any tender offer by the Company or any of its subsidiaries for Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 12.5% of the Company's market capitalization (for this purpose being the product of the current market price per share of the Common Stock on the record date for such distribution times the number of shares of Common Stock outstanding) on such date, and (f) the successful completion of a tender offer made by the Company or any of its subsidiaries for Common Stock which involves an aggregate consideration that, together with (i) any cash and other consideration payable in a tender offer by the Company or any of its subsidiaries for Common Stock expiring within the 12 months preceding the expiration of such tender offer in respect of which no adjustment has been made and (ii) the aggregate amount of any such all-cash distributions referred to in (e) above to all holders of Common Stock within the 12 months preceding the expiration 22 <PAGE> of such tender offer in respect of which no adjustments have been made, exceeds 12.5% of the Company's market capitalization on the expiration of such tender offer. In case of any consolidation or merger of the Company with or into another person or any merger of another person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of the Common Stock), or in case of any sale, transfer or lease of all or substantially all of the assets of the Company, each Convertible Note then outstanding will, without the consent of the holder of any Convertible Note, become convertible only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale, transfer or lease by a holder of the number of shares of Common Stock into which such Convertible Note was convertible immediately prior thereto (assuming such holder of Common Stock failed to exercise any rights of election and that such Convertible Note was then convertible). INTEL CORPORATION On October 19, 1998, the Company issued to Intel Corporation ("Intel") 15,810,277 stock rights ("Rights") exchangeable into non-voting Class A Common Stock (upon shareholder approval of such class of stock), or if shareholder approval is not obtained, into Common Stock of the Company, for a purchase price of $500 million. The Rights at the time of issuance represented approximately 6% of the Company's outstanding Common Stock. The Company agreed with Intel to seek shareholder approval of an amendment to its Certificate of Incorporation to provide for the authorization of Class A Common Stock. The Class A Common Stock (or Rights, if shareholder approval is not obtained) will automatically be converted into (or exchanged for) the Company's Common Stock upon a transfer by Intel to a holder other than one of its 90% or more owned subsidiaries. In consideration for Intel's investment, in addition to proceeds received, the Company has agreed to certain goals for the development and production of direct Rambus DRAM ("RDRAM") products and to certain related capital expenditures and to make available to Intel a portion of its semiconductor memory output over a five-year period, subject to certain limitations. The Company and Intel entered into a securities rights and restrictions agreement which provides Intel with certain registration rights and places certain restrictions on Intel's voting rights and other activities with respect to the shares of Class A Common Stock (or Common Stock). Intel's registration rights begin in April 1999. Intel also has the right to designate a nominee to the Company's Board of Directors, provided such nominee is acceptable to the Company. The Rights were issued pursuant to a Section 4(2) exemption under the Act. Conversion Terms of the Rights and Class A Common Stock The Class A Common Stock, if approved by the Company's shareholders, will be, and the Rights are convertible into shares of Common Stock at a conversion ratio of one-to-one, subject to adjustment upon the occurrence of certain events or circumstances as summarized. An amount equal to the fair market value of one share of Common Stock, as determined in good faith by the Board of Directors, will be paid in lieu of any fractional shares. In the event the Class A Common Stock or the Rights are transferred to a person other than Intel or a 90% owned subsidiary of Intel, each share of Class A Common Stock or each Right will automatically convert into shares of Common Stock at the applicable conversion ratio. The conversion ratio is subject to adjustment in the event of any subdivision (by stock split, stock dividend or otherwise) of the Common Stock or any combination of the Rights or Class A Common Stock (by reverse stock split or otherwise) or any combination of the Common Stock (by reverse stock split or otherwise) or any subdivision of the Rights or Class A Common Stock (by stock split, stock dividend or otherwise). In addition, the conversion ratio is subject to special adjustments, in accordance with certain specified formulas, in the event the Company fails to meet certain agreed upon capital expenditure goals or RDRAM production goals and the average price of the Company's Common Stock at the time of adjustment is lower than Intel's original price. These goals are subject to adjustment under certain circumstances. The Company may elect to pay cash in an amount equal to the value of the additional shares issuable as a result of a special adjustment in lieu of such special adjustment. The special conversion rate adjustments will be limited to the extent required to ensure (1) that the value of additional shares of Common Stock and other securities or property and any related payments (including any cash payments in lieu of special adjustments), together with any shares of Common Stock and other securities or property and any related payments as a result of the special conversion rate adjustments with respect to the Rights, does not exceed a maximum aggregate adjustment amount of $150 million (with the value of such additional shares, securities 23 <PAGE> and property measured as set forth in the Amendment); and (2) that the aggregate number of shares of Common Stock issued or issuable upon conversion of Class A Common Stock (or exercise of the Rights) does not exceed the lesser of (i) 19.9% of the shares of Common Stock outstanding on the closing date of the issuance of the Rights and (ii) 31,620,554 shares of Common Stock. No special conversion rate adjustments will occur if (i) the Company achieves the production and capital expenditure goals or (ii) the average price of the Company's Common Stock is higher than $31.625 (the market price of the Company's Common Stock at the time of the investment) for the twenty day period ending two days prior to the goal achievement date. The conversion rights are also subject to adjustment in the event of any reorganization, reclassification or change of shares of the Common Stock (other than a change in par value or from par value to no par value as a result of a subdivision or combination), or any consolidation of the Company with one or more corporations or a merger of the Company with another corporation (other than a consolidation or merger in which the Company is the resulting or surviving corporation and which does not result in any reclassification or change of outstanding shares of Common Stock). 24 <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 ------ ---------------------- 3.7 Bylaws, as amended 10.139 Purchase Agreement dated September 30, 1998 between the Company and KTI Semiconductor Limited 10.140 Purchase Agreement dated September 30, 1998 between the Company and TECH Semiconductor Singapore Pte. Ltd. 27 Financial Data Schedule (b) The registrant filed the following reports on Form 8-K or Form 8-K/A during the fiscal quarter ended December 3, 1998: Form Date Item ---- ---- ---- 8-K October 7, 1998 Item 5, Other Events 8-K October 14, 1998 Item 2, Acquisition or Disposition of Assets Item 7, Financial Statements 8-K/A October 16, 1998 Item 7(a), Financial Statements of Business Acquired MMP Business of Texas Instruments Incorporated Item 7(b), Pro Forma Financial Information Unaudited Pro Forma Combined Financial Statements, Micron/MMP Combined Company 25 <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: January 13, 1999 /s/ Wilbur G. Stover, Jr. ------------------------- Wilbur G. Stover, Jr., Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 26 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.7 <SEQUENCE>2 <DESCRIPTION>BYLAWS OF MICRON TECHNOLOGY, INC. <TEXT> <PAGE> EXHIBIT 3.7 BYLAWS OF MICRON TECHNOLOGY, INC. ARTICLE I OFFICES SECTION 1. The registered office shall be 100 West Tenth Street, in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. All meetings of the stockholders shall be held at the principal office of the corporation in the City of Boise, State of Idaho, or at such other place either within or without the State of Delaware as shall be designated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2. Annual meetings of stockholders shall be held on such day and such hour as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such meeting, the stockholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. SECTION 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. SECTION 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Board of Directors, the Chairman of the Board, the president, or by the holders of shares entitled to cast not less than twenty percent (20%) of the votes at the meeting. Such request shall state the purpose or purposes of the proposed meeting. SECTION 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. <PAGE> SECTION 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. SECTION 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty 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 stockholder of record entitled to vote at the meeting. SECTION 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of the question. SECTION 10. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, regardless of class, but no proxy shall be voted on or after three years from its date, unless the proxy provides for a longer period. Vote may be viva voice or by ballot; provided, however, that elections for directors must be by ballot upon demand by a shareholder at the meeting and before the voting begins. At all elections of directors of the corporation each stockholder having voting power shall be entitled to exercise the right of cumulative voting as provided in the Certificate of Incorporation. SECTION 11. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, of a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS SECTION 1. The authorized number of directors of the corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. SECTION 2. The directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of the shareholders held for that purpose. All directors shall hold office until the expiration of the term for which elected and until their respective successors are elected, except in the case of death, resignation or removal of any director. A director need not be a shareholder. SECTION 3. 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 late 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. <PAGE> SECTION 4. The entire Board of Directors or any individual director may be removed from office, prior to the expiration of their or his term of office only in the manner and within the limitations provided by the General Corporation Law of Delaware. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. SECTION 5. A vacancy in the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail at any annual or special meeting of shareholders at which any director or directors are elected to elect the full authorized number of directors to be voted for at that meeting. Vacancies in the Board of Directors 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. Each director so elected shall hold office until the expiration of the term for which he was elected and until his successor is elected at an annual or a special meeting of the shareholders, or until his death, resignation or removal. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. SECTION 6. The business of the corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or these Bylaws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS SECTION 7. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. SECTION 8. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. SECTION 9. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. SECTION 10. Special meetings of the Board may be called by the president on two days' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the Chairman of the Board or two directors. SECTION 11. At all meetings of the Board a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. <PAGE> SECTION 12. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 13. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS SECTION 14. The Board of Directors may, by resolution passed by a majority of the authorized number of directors, appoint an executive committee consisting of two or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The executive committee, to the extent provided in the resolution of the Board of Directors and subject to any limitation by statute, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but it shall not have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, it shall not have the power or authority to declare a dividend or to authorize the issuance of stock. SECTION 15. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate such other committees, each consisting of 2 or more directors, as it may from time to time deem advisable to perform such general or special duties as may from time to time be delegated to any such committee by the Board of Directors, subject to the limitations imposed by statute or by the Certificate of Incorporation or by these Bylaws. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. COMPENSATION OF DIRECTORS SECTION 17. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance of each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV NOTICES SECTION 1. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. <PAGE> SECTION 2. Whenever any notice is required to be given under the provisions of the Delaware statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS SECTION 1. The officers of the corporation shall be chosen by the Board of Directors, and shall be a president, a vice-president, a secretary, and a treasurer. The Board of Directors may also choose additional vice-presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. SECTION 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, one or more vice-presidents, a secretary and a treasurer. SECTION 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. SECTION 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. SECTION 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. THE CHAIRMAN OF THE BOARD SECTION 6. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. THE PRESIDENT SECTION 7. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and in the absence of the Chairman of the Board or if there be none, at all meetings of the Board of Directors. He shall be ex officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or by these Bylaws. SECTION 8. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. <PAGE> THE VICE-PRESIDENTS SECTION 9. In the absence of the president or in the event of his inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. SECRETARY AND ASSISTANT SECRETARY SECTION 10. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be placed. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. SECTION 11. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS SECTION 12. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. SECTION 13. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. SECTION 14. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. SECTION 15. If the assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. <PAGE> ARTICLE VI CERTIFICATE OF STOCK SECTION 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the chairman or vice chairman of the Board of Directors, or the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face of back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 2. 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 have 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 he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES SECTION 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issues by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit to that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum 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, stolen or destroyed. TRANSFER OF STOCK SECTION 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation 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 upon its books. FIXING RECORD DATE SECTION 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, 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 change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any such other action. A <PAGE> determination of shareholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS SECTION 6. 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 and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, 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 the laws of Delaware. SECTION 7. The accounting books and records, and minutes of proceedings of the shareholders and the Board of Directors and committees of the Board shall be open to inspection upon written demand made upon the corporation by any shareholder or the holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to his interest as a shareholder, or as the holder of such voting trust certificate. The record of shareholders shall also be open to inspection by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. Such inspection may be made in person or by an agent or attorney, and shall include the right to copy and to make extracts. ARTICLE VII GENERAL PROVISIONS DIVIDENDS SECTION 1. Dividends upon the capital stock of the corporation, subject to the provision of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 2. Before payment of any dividend, there may be set aside out of funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS SECTION 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR SECTION 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL SECTION 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. <PAGE> INDEMNIFICATION SECTION 6. The corporation shall indemnify its officers, directors, employees and agents to the extent permitted by the General Corporation Law of Delaware. ARTICLE VIII AMENDMENTS SECTION 1. These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the stockholders or by the Board of Directors at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the Certificate of Incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal Bylaws. I, Nancy A. Stanger, the secretary of Micron Technology, Inc., a Delaware corporation, hereby certify: The foregoing bylaws, comprising 14 pages, were adopted as the bylaws of Micron Technology on May 21, 1984. DATED: May 25, 1984 Nancy A. Stanger Nancy A. Stanger SEAL <PAGE> CERTIFICATE OF FIRST AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. We, the undersigned, being the President and Secretary, respectively, of MICRON TECHNOLOGY, INC., a corporation organized and existing under the laws of the State of Delaware, do hereby certify that a meeting of the Board of Directors of this Corporation was held on December 17, 1984 and an amendment to the Bylaws of MICRON TECHNOLOGY, INC. was unanimously adopted. The amendment adopted was pursuant to a Resolution reading as follows: RESOLVED: The Board hereby approves that the second paragraph of Article II Section 10 of the Bylaws of the Company be amended to read as follows: "At all elections of directors of the corporation each stockholder having voting power shall be entitled to exercise the right of cumulative voting as provided in the Certificate of Incorporation. However, no stockholder shall be entitled to cumulate votes for a candidate or candidates unless such candidate's name or candidate's names have been placed in nomination prior to the voting and a stockholder has given notice at the meeting prior to the voting of the stockholder's intention to cumulate votes. If any stockholder has given such notice, all stockholders may cumulate their votes for candidates in nomination." IN WITNESS WHEREOF, we have hereunto set our hands and the seal of the Corporation this 5th day of July, 1985. MICRON TECHNOLOGY, INC. BY: Joseph L. Parkinson Joseph L. Parkinson, President (SEAL) BY: Cathy L. Smith Cathy L. Smith, Secretary STATE OF IDAHO ) ) ss. County of Ada ) On this 5th day of July, 1985, before me, the undersigned, personally appeared JOSEPH L. PARKINSON and CATHY L. SMITH, known to me to be the President and Secretary, respectively, of MICRON TECHNOLOGY, INC., the corporation that executed the instrument or the persons who executed the instrument on behalf of said corporation, and acknowledged to me that such corporation executed the same. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal in said County the day and year first above written. Jill L. Henson Notary Public for Idaho Residing at Boise <PAGE> CERTIFICATE OF SECOND AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on March 3, 1986: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of said corporation effective as of the 3rd day of March, 1986. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE THIRD AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on November 24, 1986: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 24th day of November, 1986. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF FOURTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on September 28, 1987: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 28th day of September, 1987. Cathy L. Smith Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF FIFTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on March 28, 1988: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 28th day of March, 1988. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF SIXTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on October 3, 1988: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 17th day of October, 1988. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF SEVENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on September 25, 1989: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 28th day September, 1989. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF EIGHTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on October 30, 1989: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 30th day of October, 1989. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF NINTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on August 27, 1990: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 27th day of August, 1990. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF TENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on September 24, 1990: RESOLVED: Article III, Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 24th day of September, 1990. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF ELEVENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on July 27, 1992: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 27th day of July, 1992. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF TWELFTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc. a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on May 23, 1994: RESOLVED: Article III, Section I of the Bylaws of this corporation are hereby amended to read as follows: SECTION I. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section I may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 23rd day of May, 1994. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF THIRTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc. a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on September 1, 1994: RESOLVED: Article III, Section I of the Bylaws of this corporation are hereby amended to read as follows: SECTION I. The authorized number of directors of the Corporation shall be eleven. The number of directors provided in this Section I may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 1st day of September, 1994. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF FOURTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc. a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on October 27, 1994: RESOLVED: Article III, Section I of the Bylaws of this corporation are hereby amended to read as follows: SECTION I. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section I may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 27th day of October, 1994. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF FIFTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on February 5, 1996: RESOLVED, that pursuant to Article VIII, Section 1 of the Company s Bylaws, the Board hereby amends Article V, Section 1 of the Bylaws to read in its entirety as follows: The officers of the corporation shall be chosen by the Board of Directors, and shall be a president or chief executive officer, a secretary, and a treasurer. The Board of Directors may also choose additional officers, including a president, vice president(s), and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 7th day of February, 1996. Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF SIXTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on September 30, 1996: RESOLVED, that Article II, Section 10 of the Bylaws of this Company be amended to read as follows: SECTION 10. At all elections of directors of the corporation each stockholder having voting power shall be entitled to exercise the right of cumulative voting as provided in the Certificate of Incorporation. However, no stockholder shall be entitled to cumulate votes for a candidate or candidates unless such candidate's name or candidates' names have been placed in nomination prior to the voting and a stockholder has given written notice to Secretary of the corporation of the stockholder's intention to cumulate votes at least 15 days prior to the date of the meeting. If any stockholder has given such notice, all stockholders may cumulate their votes for candidates in nomination. RESOLVED FURTHER, that Article II of the Bylaws of this Company be amended to add Section 12, which will read in its entirety as follows: SECTION 12. Advance Notice of Stockholder Nominees and Stockholder Business (a) To be properly brought before an annual meeting or special meeting, nominations for the election of directors or other business must be (i) specified in the notice of 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 stockholder. (b) For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive office of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder 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 conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the securities Exchange Act of 1934, as amended (the "Exchange Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders' meeting, stockholders must provide notice as required by the regulations promulgated under the Exchange Act. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 12. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 12, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. <PAGE> (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) 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 stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). 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 in accordance with the provisions of paragraph (b) of this Section 12. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is 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 the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 12. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws; and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. RESOLVED FURTHER, that Article III, Section 1 of the Bylaws of this Company be amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be seven. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 30th day of September, 1996. /s/ Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF SEVENTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on June 30, 1997: RESOLVED, that Article III, Section 1 of the Bylaws of this Company be amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affix the corporate seal of said corporation effective as of the 30th day of June, 1997. /s/ Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF EIGHTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on April 14, 1998: RESOLVED, that Article III, Section 1 of the Bylaws of this Company be amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affix the corporate seal of said corporation effective as of the 20th day of July, 1998. /s/ Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF NINETEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on November 23, 1998: RESOLVED, that Article III, Section 1 of the Bylaws of this Company be amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affix the corporate seal of said corporation effective as of the 23rd day of November, 1998. /s/ Jan R. Reimer Assistant Secretary (SEAL) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.139 <SEQUENCE>3 <DESCRIPTION>PURCHASE AGREEMENT DATED SEPTEMBER 30, 1998 <TEXT> <PAGE> Exhibit 10.139 PURCHASE AGREEMENT This Purchase Agreement (the "Agreement") is made this 30th day of September, 1998, by and between Micron Technology, Inc., a Delaware, U.S.A. corporation, with its principal place of business at 8000 South Federal Way, Boise, Idaho 83716-9632, U.S.A. ("Micron"), and KTI Semiconductor Limited, a Japanese corporation, with its headquarters located at 302-2, Hirano-cho, Nishiwaki, Hyogo Prefecture, 677-0063, Japan ("KTI"). Micron and KTI are hereinafter sometimes individually referred to as a "Party" and collectively as the "Parties". In consideration of the mutual promises and covenants contained herein, the Parties, intending to be legally bound, agree as follows: 1. PURPOSE 1.1 This Agreement implements certain provisions of the Shareholders' Agreement dated March 19, 1990, among KTI's shareholders and ratified, joined in and accepted by KTI on May 22, 1990, and amended September 28, 1990 by Amendment #1, amended November 5, 1992 by Amendment #2, amended effective as of June 7, 1993 by Amendment #3, amended July 14, 1993 by Amendment #4, amended December 15, 1993 by Amendment #5, amended March 24, 1994 by Amendment #6, amended June 27, 1994 by Amendment #7, amended effective as of November 1, 1995 by Amendment #8, amended effective as of November 1, 1996 by Amendment #9, amended effective as of January 1, 1998 by Amendment #10, amended March 26, 1998 by Amendment #11, amended June 23, 1998 by Amendment #12, and amended [September 30, 1998] by Amendment #13 to Shareholders' Agreement (as so amended, and as hereafter amended or otherwise modified from time to time, the "Shareholders' Agreement") for the purchase by Micron, and the sale by KTI to Micron, of those Products (as defined in the Shareholders' Agreement) which are more specifically set forth in Attachment 1 which is incorporated herein by this reference (hereinafter "Products"). 2. PURCHASE ORDERS 2.1 Purchase orders issued by Micron and/or its affiliates (hereinafter individually or collectively ("Micron")) under this Agreement are for administrative, payment and accounting purposes. The terms and conditions of any purchase order so issued which purports to alter, amend or extend provisions or terms of manufacture, sale and delivery of Products as agreed to by Micron, KOBE and KTI in the Shareholders' Agreement and Annexes thereto shall have no force or effect. <PAGE> 3. PRODUCTS 3.1 KTI agrees to sell to Micron or its designated Affiliate (as that term is defined in the Shareholders Agreement) and Micron or its designated Affiliate agrees to purchase, KTI's entire output (i.e., one hundred percent (100%), of the finished Products subject to the terms, conditions and obligations set forth in the Shareholders' Agreement and the Annexes thereto, including this Agreement. Such terms, conditions and obligations include without limitation SECTIONS 8 (WORK SPECIFICATIONS), 9 (QUALITY INSPECTION, TESTING AND CUSTOMER SERVICE), and 10 (MANUFACTURING CHANGES) of the Technical Assistance Agreement dated as of September 30, 1998 between Micron, Kobe Steel Ltd., a Japanese corporation, with its headquarters located at 3-18, Wakinohama 1-Chrome, Chuyou-Ku, Kobe, Japan, and KTI (as hereafter amended or otherwise modified from time to time, the "Technical Assistance Agreement"). Nothing in this Agreement shall be construed to limit Micron's right or the right of Micron's affiliates to purchase any semiconductor devices similar to the Products from any source other than KTI 4. TERM 4.1 This Agreement shall be effective as of the Acquisition Closing Date (as defined in Amendment #13 to the Shareholders' Agreement) and shall continue in effect throughout the Term of the Shareholders' Agreement (as defined therein), unless earlier terminated or modified by mutual agreement in writing by Micron and KTI. 5. PRICING AND PAYMENT TERMS 5.1 KTI shall sell the Products to Micron in accordance with the pricing formula provided in Annex A to the Shareholders' Agreement. KTI shall invoice Micron for Products sold to Micron on a monthly basis in accordance with Section 18.6 of the Shareholders' Agreement and such Annex. 5.2 Place of shipment and payment terms are as specified in Sections 18.5, 18.6 and 18.7 of the Shareholders' Agreement. 6. DELIVERY 6.1 The delivery dates indicated by Micron on its purchase orders for the Products are important elements of shipment and receiving of Products. KTI agrees to take all reasonable efforts so that the Products shall be delivered to Micron's designated delivery point on the dates set forth in the applicable purchase order(s) accepted by KTI, unless the Parties agree otherwise in writing. In the event that any Products are not shipped in accordance with such delivery dates, KTI agrees to ship via air freight (or as directed by Micron) and to pay for all extra costs. -2- <PAGE> 6.2 Failure of KTI to meet agreed upon delivery shall be considered a breach of contract. Furthermore, KTI agrees to pay to Micron any penalty and damages imposed upon or incurred by Micron for failure of KTI to deliver any of the Products on such delivery dates. 6.3 In addition to the packing and shipping instructions in Paragraph 11 below, the Products shall be packaged in accordance with commercially accepted standards, or to applicable Micron specifications, to ensure safe arrival at Micron's designated delivery point. 7. KTI'S WARRANTIES AND REPRESENTATIONS 7.1 KTI warrants and represents to Micron that the Products will conform to the Specifications and shall be fit for their intended purpose and use and shall be free from any defects in material and workmanship for a period of two (2) years from the date of each shipment from KTI of the Products, provided that said period may be renegotiated for a longer period of time to conform to the industry standard current at the time of renegotiation. KTI's failure to take corrective actions for the next production lots after written notification of the problem(s) is provided to KTI may be considered by Micron to be a material breach of this Agreement. 7.2 In the event Micron determines that the Products are defective in workmanship or otherwise in breach of the warranty set forth in Paragraph 7.1, Micron shall notify KTI immediately in writing of the defect, and KTI shall promptly, at Micron's option, either repair or replace any defective Products at no cost to Micron, or credit to Micron's account Micron's purchase price and all reasonable out of pocket shipping costs incurred with respect to the return of the defective Products; provided, however, in the event such defect is directly attributable to a material error in the Technical Information transmitted by Micron to KTI under the Technical Assistance Agreement, then Micron agrees that during the two (2) year warranty period Micron will indemnify KTI for all direct manufacturing and material costs associated with the repair or replacement of the defective Products manufactured for Micron. MICRON SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL DAMAGES, COSTS OR LOSSES WITH RESPECT TO BUSINESS INTERRUPTION. A Return Material Authorization ("RMA") form previously issued by KTI must accompany any such returned Products. 7.3 Following receipt of each shipment, Micron shall perform an incoming test on each shipment of the Products shipped hereunder. In the event that such Products fail to conform to the Specifications as evidenced by the Micron incoming inspection, Micron shall have the right to return, after confirmation of failures, such Products to KTI for rework or replacement at no cost to Micron. Micron has the right to recommend corrective action to address any such variances from Specifications. Such return shipment shall be made by Micron F.O.B. the destination from which they were originally shipped by KTI. -3- <PAGE> 7.4 If the Products fail Micron's incoming inspection tests at the shipping destination as designated on the Micron purchase order, Micron may so advise KTI in writing and receive, at Micron's option, prompt replacement of the Products or credit in that amount against pending or future Micron orders for the Products. 7.5 Except as provided in Section 20.5 of the Shareholders' Agreement, KTI will hold Micron harmless from and indemnify Micron against all claims made by third parties arising out of the operations of KTI or the Products manufactured by KTI, including all acts or omissions by KTI's personnel (whether or not such personnel are direct employees of KTI or have been obtained from one of the parties to the Shareholders' Agreement on a seconding or contractual basis). 7.6 The warranties in the Shareholders' Agreement and its Annexes, including this agreement, are stated in lieu of all other warranties, express, statutory, or implied, and neither assume nor authorize any other person to assume for the parties any other liabilities in connection with the manufacture or sale of said Products. The warranties shall not apply to any of such Products which have been repaired or altered, except as authorized by KTI, or which shall be subjected to misuse, negligence, accident, or abuse. 7.7 The terms "Specifications," "Technical Information," and "Products" as used herein shall have the same definitions as in the Technical Assistance Agreement. 8. FORCE MAJEURE 8.1 Should any Party be prevented from performing its contractual obligations under this Agreement due to the cause or causes of force majeure such as acts of God, acts of war (declared or undeclared), fire, storm, floods, typhoon or other severe weather conditions, serious earthquake, strikes, boycotts, legal restraints, government or like interference, accidental damage to equipment, as well as any other cause outside the control of that Party, that Party shall not be liable to the other for any delay or failure of performance caused by any of the above events. 8.2 The Party prevented from performing by the causes identified in Paragraph 8.1 shall notify the other Party of the occurrence of any of the above events in writing by cable or telex within the shortest possible time. 8.3 Should the delay caused by any of the above events continue for more than ninety (90) days, the Parties shall settle the problem of further performance of this Agreement through friendly negotiations as soon as possible. In the event that the Parties cannot meet to negotiate or cannot reach agreement, the Agreement may be terminated by prior written notice of one Party to the other Party. -4- <PAGE> 9. RETURN MATERIAL AUTHORIZATION 9.1 Defective material shall be returned freight collect to KTI. Replacement material shall be sent freight prepaid from KTI, which shall absorb the burden of premium transportation when defect or replacement material places critical time or delivery schedule constraints on Micron. 9.2 KTI agrees to provide as soon as reasonably possible, but not exceeding five (5) work days, RMAs as contemplated by Paragraph 7.2 herein. 10. OVERSHIPMENTS 10.1 KTI shall ship only the quantity(ies) specified in purchase orders placed under this Agreement. However, any deviation caused by conditions of loading, shipping, packing or allowances in manufacturing processes may be accepted by Micron according to the overshipment allowance indicated on the face of Micron purchase orders. If no allowance is shown, no percentage overshipment is allowed. Micron reserves the right to return any overshipment in excess of the allowance at KTI's expense. 11. PACKING AND SHIPPING INSTRUCTIONS 11.1 KTI will properly pack and describe shipments in accordance with Micron specifications and applicable carrier regulations. Shipment will be made at the lowest possible freight charges. Micron may assist KTI by providing freight classifications or classifying material. KTI will insure or declare value on shipments except on parcel post, unless Micron specifies otherwise. On shipments where value is declared, KTI will ship prepaid insured for fifty U.S. dollars (US $50.00) to facilitate tracing. If shipping by air carrier, KTI will ship freight prepaid. KTI shall consolidate the air and surface shipments on single bills of lading insofar as possible so as to avoid premium freight costs unless instructed otherwise by Micron. 11.2 In case any shipment does not correspond to normal practice in the industry (e.g., require special handling shipment or air ride suspension, or air shipment over five hundred (500) pounds, or over one hundred twenty (120) inches long or wide or over fifty-six (56) cubic feet, etc.), KTI agrees to notify Micron's appropriate traffic department seventy-two (72) hours prior to shipment for special shipping instructions. 11.3 Each box, crate or carton will show Micron's full street address and purchase order number regardless of how shipped. On air carrier shipments, a packing list shall accompany each container and shall describe the contents of such container. On all other shipments, KTI will provide a packing list to accompany each shipment, referencing the appropriate purchase order number. The bill of lading also will reference the purchase order number. -5- <PAGE> 11.4 KTI is responsible for packing shipments correctly based on the carrier/mode utilized. Charges for packing and crating shall be deemed part of the purchase price and no additional charges will be made therefor unless specifically requested by Micron on the purchase order. KTI agrees to ship via the carrier specified by Micron. 12. NOTICE OF LABOR DISPUTE 12.1 Whenever any actual or potential labor dispute delays or threatens to delay the timely performance of any purchase order issued hereunder, KTI shall immediately give notice thereof to Micron. 13. APPLICABLE LAW 13.1 This Agreement and any purchase order issued hereunder shall not be governed by the United Nations Convention on the International Sale of Goods; rather this Agreement and any purchase order issued hereunder shall be governed by, construed and enforced in accordance with the laws of the State of New York, U.S.A. The Parties hereby submit to the exclusive jurisdiction of the Federal Courts of the United States of America and specifically the U.S. District Court for the Southern District of New York. 13.2 For the purpose of any proceeding before the Federal Courts, the Parties hereby appoint the respective persons set out below as their agents for service of process in New York: Micron: CT Corporation System KTI: c/o Kobe Steel USA Inc. 1633 Broadway 535 Madison Avenue New York, NY 10019 New York, NY 10022 USA USA 14. MISCELLANEOUS 14.1 All notices and formal communications required or permitted to be given hereunder shall be served on each Party in writing, via facsimile transmission, registered letter, telex or prepaid cable and shall be valid and sufficient when served on a Party at the following address: If to KTI: if to Micron: President KTI Semiconductor Limited General Counsel 302-2 Micron Technology, Inc. Hirano-cho, Nishiwaki 8000 South Federal Way Hyogo Prefecture, 677-0063, Japan Boise, Idaho 83716-9632 -6- <PAGE> 14.2 Except as required by law, for governmental approval or as may be reasonably required for the operation of KTI, the parties shall not, without the prior written consent of the other, disclose to any third party, other than the Parties to the Shareholders' Agreement either the existence or contents of this Agreement, or any information of a proprietary nature which it obtains or which becomes available to it as the result of this Agreement or of the operations of KTI. 14.3 KTI agrees to comply with all applicable export control laws and to obtain all export licenses required for performance of its obligations hereunder. 14.4 Micron may assign this Agreement or any obligation hereunder to any Affiliate (as that term is defined in the Shareholders' Agreement) of Micron upon written notice to KTI. In such event, Micron shall be the controlling Party of such assignee and shall guarantee the obligations of such assignee under this Agreement. KTI shall not assign or transfer this Agreement or any portion hereof, or subcontract any obligation hereunder, without the prior written consent of Micron. Any such attempted assignment, transfer or subcontract by KTI shall be void. 14.5 The headings of the Paragraphs of this Agreement are for reference purposes only and shall not be deemed to affect in any way the meaning or interpretation of the Paragraphs to which they refer. 14.6 The failure on the part of any Party to exercise or enforce any rights conferred on it hereunder shall not be deemed to constitute a waiver of any rights or operate to bar the exercise or enforcement of any such right at any time or times thereafter. 14.7 This Agreement may be executed in one or more counterparts, each of which shall be enforceable against the Parties executing such counterparts, and all of which together shall constitute one instrument. 14.8 This Agreement may not be modified, except with the written consent of the Parties. 14.9 If any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction or as a result of future legislative action, such holding or action shall be strictly construed and, subject to applicable law, shall not affect the validity or effect of any other provisions hereof. [Remainder of Page Intentionally Left Blank] -7- <PAGE> IN WITNESS WHEREOF, the Parties have signed and dated this Purchase Agreement in the space provided below. KTI SEMICONDUCTOR LIMITED MICRON TECHNOLOGY, INC. By: _________________________ By: _________________________ Name: _________________________ Name: _________________________ Title:_________________________ Title:_________________________ Date: _________________________ Date: _________________________ -8- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.140 <SEQUENCE>4 <DESCRIPTION>PURCHASE AGREEMENT DATED OCTOBER 1, 1998 <TEXT> <PAGE> Exhibit 10.140 PURCHASE AGREEMENT ------------------ This Purchase Agreement (the "Agreement") is made, as of October 1, 1998, by and among Micron Technology, Inc., a Delaware, U.S.A. corporation, with its principal place of business at 8000 South Federal Way, Boise, Idaho 83716-9632, U.S.A. ("MICRON"), and TECH Semiconductor Singapore Pte. Ltd., a Republic of Singapore corporation, with its principal place of business at No. 1 Woodlands Industrial Park D, Street 1, Singapore 738799 ("TECH") (hereinafter individually a "Party" and collectively the "Parties"). In consideration of the mutual promises and covenants contained herein, the parties, intending to be legally bound, agree as follows: 1. PURPOSE ------- 1.1 This Agreement implements certain provisions of the Shareholders' Agreement dated April 11, 1991, amended effective as of May 31, 1991, by Waiver to Shareholders' Agreement, amended effective as of April 11, 1991 and July 22, 1991, by Amendment Agreement No. 1, amended effective as of February 15, 1993 by Amendment Agreement No. 2, amended as of August 4, 1995 by Amendment Agreement No. 3, and amended as of October 1, 1998 by Amendment Agreement No. 4 by and among MICRON, TECH, the Singapore Economic Development Board (the "EDB"), EDB Investments Pte. Ltd., a corporation established under the laws of Singapore ("EDBI"), Canon Inc., a corporation of Japan ("CANON"), Hewlett-Packard Company ("HP"), a Delaware, U.S.A., corporation, and Hewlett-Packard Singapore (Private) Limited, a corporation established under the laws of the Republic of Singapore ("HPSG") (as amended, the "SHAREHOLDERS' AGREEMENT"), for the purchase by MICRON, and the sale by TECH to MICRON of PRODUCTS. Capitalized terms used herein, but not otherwise defined herein, shall have the meanings ascribed to them in the SHAREHOLDERS' AGREEMENT. 2. PURCHASE ORDERS --------------- 2.1 Purchase orders issued by MICRON under this Agreement are for administrative, payment and accounting purposes. The terms and conditions of any purchase order so issued which purports to alter, amend or extend provisions or terms of manufacture, sale and delivery of PRODUCTS as agreed to by MICRON, EDB, EDBI, HP, HPSG and CANON and TECH in the SHAREHOLDERS' AGREEMENT and Annexes thereto shall have no force or effect. 3. PRODUCTS -------- 3.1 TECH agrees to sell to MICRON and/or MICRON's affiliates (individually or collectively), and MICRON, or its designee, agrees to purchase, TECH's entire output (i.e., one hundred percent (100%)) of the finished PRODUCTS and subject to the terms, conditions and obligations set forth in the SHAREHOLDERS' AGREEMENT and the Annexes thereto, including this -1- <PAGE> Agreement. Nothing in this Agreement shall be construed to limit MICRON's right or the right of MICRON's affiliates to purchase products from any source other than TECH. 4. TERM ---- 4.1 This Agreement shall be effective as of the ACQUISITION CLOSING DATE and shall continue in effect throughout the TERM of the SHAREHOLDERS' AGREEMENT. 5. PRICING AND PAYMENT TERMS ------------------------- 5.1 TECH shall sell PRODUCTS to MICRON in accordance with the pricing formula provided in Annex A to the SHAREHOLDERS' AGREEMENT. TECH shall invoice MICRON for PRODUCTS sold to MICRON on a monthly basis in accordance with Article 17.6 of the SHAREHOLDERS' AGREEMENT and said Annex A. 5.2 Place of shipment and payment terms are as specified in Articles 17.5, 17.6 and 17.7 of the SHAREHOLDERS' AGREEMENT. 6. DELIVERY -------- 6.1 The delivery dates indicated by MICRON on its purchase orders for PRODUCTS are important elements of shipment and receiving of PRODUCTS. TECH agrees to accept any MICRON purchase order, provided that such purchase order: (i) does not exceed TECH's then current capacity, (ii) reasonably reflects MICRON's forecasts as described under Article 17.2 of the SHAREHOLDERS' AGREEMENT, and (iii) does not require delivery within a lead time which is commercially unreasonable. TECH agrees to take all reasonable efforts so that the PRODUCTS shall be delivered to MICRON's designated delivery point on the dates set forth in any purchase order(s), accepted by TECH. In the event that any PRODUCTS are not shipped in accordance with such delivery dates, TECH agrees to ship via air freight (or as directed by MICRON) and to pay for all extra costs; provided, however, that such failure to timely ship is not due to any direct act or omission of MICRON (including without limitation any MICRON employee or agent). 6.2 Material failure to meet agreed upon delivery shall be considered a breach of this Agreement; provided, however, MICRON shall not be entitled to damage and/or specific performance for any such breach where said breach is the direct result of any act of MICRON, its employees or agents. TECH shall not be liable for any penalty or incidental or consequential damages imposed upon or incurred by MICRON as a result of failure of TECH to deliver PRODUCTS on such delivery dates. 6.3 In addition to the packing and shipping instructions in Paragraph 11 below, the PRODUCTS shall be packaged in accordance with commercially accepted standards, or to applicable MICRON specifications, to ensure safe arrival at MICRON's designated delivery point. -2- <PAGE> 7. TECH'S WARRANTIES AND REPRESENTATIONS ------------------------------------- 7.1 TECH warrants and represents to MICRON that the PRODUCTS will conform to the SPECIFICATIONS and shall be free from any defects in material and workmanship for a period of fifteen (15) months from the date of shipment from TECH of the PRODUCTS, provided that said period may be renegotiated for a longer period of time to conform to the industry standard current at the time of renegotiation. 7.2 In the event MICRON determines within the 15-month period specified in Paragraph 7.01 above that the PRODUCTS are in breach of the warranty set forth in Paragraph 7.01, MICRON shall notify TECH immediately in writing of the defect, and TECH shall promptly, at MICRON's option, either repair or replace any defective PRODUCTS at no cost to MICRON, or credit to MICRON's account MICRON's purchase price and all reasonable costs incurred with respect to the return of the defective PRODUCTS. A Return Material Authorization ("RMA") form previously issued by TECH must accompany any such returned PRODUCTS. MICRON has the right to recommend corrective action to address variances from the SPECIFICATIONS. Such return shipment shall be made by MICRON, F.O.B. the destination from which they were originally shipped to TECH. 7.3 Except as provided in Articles 19.6 and 19.7 of the SHAREHOLDERS' AGREEMENT, and subject to Paragraph 7.04 below, TECH will hold MICRON harmless from and indemnify it against all claims made by third parties arising out of the operations of TECH or the PRODUCTS manufactured by TECH, including all acts or omissions by TECH's personnel (whether or not such personnel are direct employees of TECH or have been obtained from one of the parties to the SHAREHOLDERS' AGREEMENT on a seconding or contractual basis); provided, however, that liability for such claims is not due to any direct act or omission of MICRON (including without limitation any MICRON employee or agent). 7.4 (a) THE WARRANTIES IN THE SHAREHOLDERS' AGREEMENT AND ITS ANNEXES, INCLUDING THIS AGREEMENT, ARE EXCLUSIVE AND STATED IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESS, STATUTORY, OR IMPLIED, AND NEITHER ASSUME NOR AUTHORIZE ANY OTHER PERSON TO ASSUME FOR THE PARTIES ANY OTHER LIABILITIES IN CONNECTION WITH THE MANUFACTURE OR SALE OF THE PRODUCTS. THE WARRANTIES SHALL NOT APPLY TO ANY OF THE PRODUCTS WHICH HAVE BEEN REPAIRED OR ALTERED, EXCEPT AS AUTHORIZED BY TECH, OR WHICH SHALL BE SUBJECTED TO MISUSE, NEGLIGENCE, ACCIDENT OR ABUSE. (b) The remedies provided in this Agreement are MICRON's sole and exclusive remedies for breach of TECH's warranties herein. Except as explicitly provided herein, TECH shall not be liable for any direct damages therefor. IN NO EVENT (INCLUDING CLAIMS UNDER RIGHTS OF INDEMNIFICATION) SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES. -3- <PAGE> (c) The limitation of liability for direct damages described in the previous paragraph shall not apply in the event that any PRODUCTS sold to MICRON under this Agreement are determined by a court of competent jurisdiction to be defective and to have directly caused property damage or bodily injury or death, provided that MICRON provides TECH with a right to participate with MICRON, at TECH's cost, in the defense of the associated action. 7.5 The terms "SPECIFICATIONS," "TECHNICAL INFORMATION" and "PRODUCTS" as used herein shall have the same definitions as in the SHAREHOLDERS' AGREEMENT, and TECHNICAL ASSISTANCE AGREEMENT. 8. FORCE MAJEURE ------------- 8.1 Should any Party be prevented from performing its contractual obligations under this Agreement due to the cause or causes of force majeure such as acts of war (declared or undeclared), fire, storm, floods, typhoon or other severe weather conditions, serious earthquake, legal restraints, government or like interference, judicial action, accidental damage to equipment, as well as any other cause outside the control of that Party, that Party shall not be liable to the other Party for any delay or failure of performance caused by any of the above events. "Force Majeure" shall include the failure to obtain such license(s) and other approvals, including export licenses, as are required by United States law or other applicable law for the equipment, technical information, software, technology and PRODUCTS to be provided pursuant to the terms of this Agreement. 8.2 The Party prevented from performing by the causes identified in Paragraph 8.01 shall notify the other Party of the occurrence of any of the above events in writing by cable or telex within the shortest possible time. 8.3 Should the delay caused by any of the above events continue for more than ninety (90) days, the Parties shall settle the problem of further performance of this Agreement through friendly negotiations as soon as possible with the objective of restructuring the relationship between them such that the effects of such delay are minimized. If the Parties cannot agree on a mutually acceptable solution within six (6) months of any Party's request for such negotiations, any Party may terminate this Agreement by prior written notice to the other Party. 9. RETURN MATERIAL AUTHORIZATION ----------------------------- 9.1 Defective material shall be returned freight collect to TECH. Replacement material shall be sent freight prepaid from TECH, which shall absorb the burden of premium transportation when defect or replacement material places critical time or delivery schedule constraints on MICRON. 9.2 TECH agrees to provide as soon as reasonably possible, but not exceeding five (5) work days, RMAs as contemplated by Paragraph 7.02. -4- <PAGE> 10. OVERSHIPMENTS ------------- 10.1 TECH shall ship only the quantity(ies) specified in purchase orders placed under this Agreement. However, any deviation caused by conditions of loading, shipping, packing or allowances in manufacturing processes may be accepted by MICRON according to the overshipment allowance indicated on the face of MICRON purchase orders. If no allowance is shown, no percentage overshipment is allowed. MICRON reserves the right to return any overshipment in excess of the allowance at TECH's expense. 11. PACKING AND SHIPPING INSTRUCTIONS --------------------------------- 11.1 TECH will properly pack and describe shipments in accordance with MICRON specifications and applicable carrier regulations. Shipments will be made at the lowest possible freight charges. MICRON may assist TECH by providing freight classifications or classifying material. TECH will insure or declare value on shipments except on parcel post, unless MICRON specifies otherwise. On shipment where value is declared, TECH will ship prepaid insured for a minimum of the equivalent of fifty U.S. dollars (U.S. $50.00) to facilitate tracing. If shipping by air carrier, TECH will ship freight prepaid. TECH shall consolidate the air and surface shipments on single bills of lading insofar as possible so as to avoid premium freight costs unless instructed otherwise by MICRON. 11.2 In case any shipment does not correspond to normal practice in the industry (e.g., require special handling shipments or air ride suspension, or air shipment over five hundred (500) pounds, or over one hundred twenty (120) inches long or wide or over fifty-six (56) cubic feet, etc.), TECH agrees to notify MICRON's appropriate traffic department seventy-two (72) hours prior to shipment for special shipping instructions. 11.3 Each box, crate or carton will show MICRON's full street address and purchase order number regardless of how shipped. On air carrier shipments, a packing list shall accompany each container and shall describe the contents of such container. On all other shipments, TECH will provide a packing list to accompany each shipment, referencing the appropriate purchase order number. The bill of lading also will reference the purchase order number. 11.4 TECH is responsible for packing shipments correctly based on the carrier/mode utilized. Charges for packing and crating shall be deemed part of the purchase price and no additional charges will be made therefor unless specifically requested by MICRON on the purchase order. TECH agrees to ship via the carrier specified by MICRON. 12. NOTICE OF LABOR DISPUTE ----------------------- 12.1 Whenever any actual or potential labor dispute delays or threatens to delay the timely performance of any purchase order issued hereunder, TECH shall immediately give notice thereof to MICRON. -5- <PAGE> 13. APPLICABLE LAW -------------- 13.1 During the INVESTMENT PERIOD, this Agreement shall be governed by and construed in accordance with the laws of the Republic of Singapore, except that the validity, scope, interpretation or infringement of MICRON intellectual property rights (including, without limitation, MICRON patents, copyrights, maskwork rights and trade secrets) shall be governed by the laws of Idaho, U.S.A., applicable to contracts made and fully performed within Idaho. In this Section 13.00, the "INVESTMENT PERIOD" shall mean such time as EDB and/or any EDB SUBSIDIARY owns at least ten percent (10%) of the issued ordinary share capital of TECH. 13.2 Subject to Paragraph 13.01 alone, this Agreement shall be governed by and construed in accordance with the laws of Idaho, U.S.A., applicable to contracts made and fully performed within Idaho. 13.3 For purposes of any litigation relating to this Agreement, the Parties consent to the exclusive jurisdiction of the courts of the Republic of Singapore and Idaho. 14. TERMINATION ----------- 14.1 If TI (including its successors and assigns and any person subrogated to the rights of TI) shall exercise any remedy under the Reimbursement Agreement or the Guarantor Security Documents (as defined in the Reimbursement Agreement), or if any of the Collateral Agent (as defined in the Credit Agreement), the Agent (as defined in the Credit Agreement) or any other financial institution party thereto (including any of their successors or assigns or any person subrogated to the rights of any such party) shall exercise any remedy under the Credit Agreement or the related loan or collateral documents, in each case other than one or more Permitted Remedies (as defined below) or upon proceedings being commenced or pursued by or against TECH (other than by MICRON or any of its affiliates) for its bankruptcy, winding-up, dissolution, administration or re-organization (other than any such proceeding of a frivolous or vexatious nature discharged within thirty (30) days) or upon the appointment by any person (other than MICRON or any of its affiliates) of a receiver, administrator, trustee, judicial manager or similar officer over TECH or all or a substantial portion of TECH's business, revenues or assets (any such proceedings or appointment, an "Insolvency Event"), then in any such event at the option of MICRON (other than an Insolvency Event, in which case automatically): (A) MICRON's obligations and TECH's rights under the SHAREHOLDERS' AGREEMENT (but subject to the survival of the Articles referred to in Article 21.4 thereof, excluding Article 21.1 (which Article 21.1 shall specifically not survive in such instances as set forth in Article 21.5 thereof)) shall immediately and with no further action on the part of any PARTY thereto terminate; (B) TECH shall immediately and with no further action on the part of any PARTY thereto terminate its manufacture of PRODUCTS and any other use of MICRON TECHNICAL INFORMATION (as defined in the TECHNICAL ASSISTANCE AGREEMENT) or MICRON A/T TECHNICAL INFORMATION; (C) without limiting the generality of the -6- <PAGE> foregoing, the provisions of Article 21.1 of the SHAREHOLDERS' AGREEMENT shall not apply and no license shall be granted to TECH thereunder or otherwise; (D) TECH shall immediately destroy or return to MICRON as instructed by MICRON in the exercise of its sole discretion, destroy all TECHNICAL DATA (as defined in the TECHNICAL ASSISTANCE AGREEMENT) then in its possession and any mask sets furnished to TECH pursuant to Section 4.04 of the Technical Assistance Agreement or any other agreement or understanding; and (E) neither TECH nor any other person shall thereafter have any claim against or right to any MICRON PATENT (as defined in the TECHNICAL ASSISTANCE AGREEMENT), MICRON COPYRIGHT (as defined in the TECHNICAL ASSISTANCE AGREEMENT), MICRON MASKWORK RIGHT (as defined in the TECHNICAL ASSISTANCE AGREEMENT) or any other tangible or intangible right or asset of MICRON. Following the receipt of a Default Notice (as defined in the letter agreement by TI in favor of MICRON dated October 1, 1998), the shareholders of TECH shall enter into good faith discussions for a period of thirty (30) days in an effort to determine an appropriate course of action for TECH. During such period, unless an Insolvency Event shall have occurred prior to the termination of such thirty (30) day period, MICRON shall refrain from exercising its termination rights pursuant to this section. "Permitted Remedies" shall mean the Bank Permitted Remedies or the TI Permitted Remedies. The "Bank Permitted Remedies" shall be any remedy against the Borrower that does not result in the cancellation or unavailability of all or any part of the commitments under the Credit Agreement (it being understood that the unavailability of commitments under the Credit Agreement due to TECH's inability to meet conditions precedent or make representations or warranties shall not in and of itself constitute a "remedy" for purposes of this section). The "TI Permitted Remedies" shall be (i) sending of any notice or the demanding of any payment by TECH owed under the Reimbursement Agreement or pursuant to Section 5.01(a)(III) of the Reimbursement Agreement, (ii) making of any payment or prepayment by TI to the Agent, the Security Agent or any other financial institution party to the Credit Agreement pursuant to the terms of the Guarantee (as defined in the Reimbursement Agreement), (iii) delivering a statutory demand under Singapore law, (iv) commencing and participating in legal proceedings for the sole purpose of obtaining a monetary judgment and obtaining such a judgment, (v) pursuing, or suffering to exist, remedies under Section 5.01(c) of the Reimbursement Agreement, or (vi) enforcing remedies against operating and deposit accounts, so long as the sum of TECH's total unrestricted cash and cash equivalents plus the aggregate of all Available Revolving Commitments (as defined in the Credit Agreement) then available to TECH under the Credit Agreement is not less than $50.0 million after giving effect to such remedies. 15. MISCELLANEOUS ------------- 15.1 For purposes of any litigation in the Republic of Singapore, or appeals arising out of such litigation, the Parties hereby appoint the respective persons set forth below as their agents for service of process in Singapore: -7- <PAGE> TECH: TECH Semiconductor Singapore Pte. Ltd. No. 1 Woodlands Industrial Park D Street 1 Singapore 738799 Attention: President MICRON: Micron Semiconductor Asia Pte. Ltd. 990 Bendemeer Road Singapore 339942 Attention: Site Manager With copy to: Micron Technology, Inc. 8000 South Federal Way Boise, Idaho 83716-9632 U.S.A. Attention: General Counsel For purposes of any litigation in the courts in Idaho, or appeals arising out of such litigation, the Parties hereby appoint the respective persons set forth below as their agents for service of process: TECH: General Counsel Micron Technology, Inc. 8000 South Federal Way Boise, Idaho 83716-9632 U.S.A. MICRON: General Counsel Micron Technology, Inc. 8000 South Federal Way Boise, Idaho 83716-9632 U.S.A. With copy to: Site Manager Micron Semiconductor Asia Pte. Ltd. 990 Bendemeer Road Singapore 339942 15.2 Except as required by law, for governmental approval or as may be reasonably required for the operation of TECH, no Party shall, without the prior written consent of the other Party, disclose (i) to any third party other than Texas Instruments, Inc., its affiliates, any financial institution that is a party to the Credit Facility or lending to TECH thereunder, the PARTIES to the SHAREHOLDERS' AGREEMENT, and their affiliates either the terms or conditions of this -8- <PAGE> Agreement, or (ii) to any third party any information of a proprietary nature which it obtains or which becomes available to it as the result of this Agreement or of the operations of TECH. 15.3 TECH agrees to comply with all applicable export control laws and to obtain all export licenses required for performance of its obligations hereunder. 15.4 MICRON may assign this Agreement or any obligation hereunder to any subsidiary of MICRON upon written notice to TECH. In such event, MICRON shall be the controlling party of such assignee and shall guarantee the obligations of such assignee under this Agreement. TECH shall not assign or transfer this Agreement or any portion hereof, or subcontract any obligation hereunder, without the prior written consent of MICRON. Any such attempted assignment, transfer or subcontract by TECH shall be void. 15.5 The headings of the paragraphs of this Agreement are for reference purposes only and shall not be deemed to affect in any way the meaning or interpretation of the Paragraphs to which they refer. 15.6 The failure on the part of any Party to exercise or enforce any rights conferred on it hereunder shall not be deemed to constitute a waiver of any rights or operate to bar the exercise or enforcement of any such right at any time or times thereafter. 15.7 This Agreement may not be modified, except as permitted under Article 7.11(c) of the SHAREHOLDERS' AGREEMENT and with written consent of the Parties. 15.8 This Agreement may be executed in one or more counterparts, each of which shall be enforceable against the Parties executing such counterparts, and all of which together shall constitute one instrument. 15.9 All notices , requests, demands, and other communications under this Agreement shall be in writing and shall be delivered personally (including by courier) or sent by registered or certified mail (postage prepaid) or given by facsimile transmission (with confirmation in writing) to the parties at the following addresses (or to such address as a party may have specified by notice given to the other pursuant to this provision) and shall be deemed given when so received: If to MICRON: Site Manager Micron Semiconductor Asia Pte. Ltd. 990 Bendemeer Road Singapore 339942 With copy to: General Counsel Micron Technology, Inc. 8000 South Federal Way Boise, Idaho 83716-9632 -9- <PAGE> If to TECH: President TECH Semiconductor Singapore Pte. Ltd. No. 1 Woodlands Industrial Park D Street 1 Singapore 738799 Fax: (65) 365-2016 and, to the extent required by Singapore law, on each member of TECH's Board of Directors at their address of record. All such notices, requests, demands, and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request, demand or other communication shall be deemed not to have been received until the next succeeding business day in the place of receipt. 15.10 All correspondence relating to this Agreement shall be in English. 15.11 This Agreement is written and executed in English. No translation of this Agreement into any other language shall have any force or effect in the interpretation of the construction of this Agreement in determination of the intent of the Parties hereto. 15.12 If any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction or as a result of future legislative action, such holding or action shall be strictly construed and, subject to applicable law, shall not affect the validity or effect of any other provisions hereof. [The remainder of this page is intentionally left blank. Signatures appear on the following page.] -10- <PAGE> IN WITNESS WHEREOF, the Parties have signed and dated this Purchase Agreement in the space provided below. TECH SEMICONDUCTOR SINGAPORE MICRON TECHNOLOGY, INC. PTE. LTD. By:_________________________________ By:__________________________________ Name:_______________________________ Name:________________________________ Title:______________________________ Title:_______________________________ Date:_______________________________ Date:________________________________ -11- </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 ACCOMPANYING FINANCIAL STATEMENTS 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> SEP-02-1999 <PERIOD-END> DEC-03-1998 <CASH> 768 <SECURITIES> 1157 <RECEIVABLES> 503 <ALLOWANCES> (21) <INVENTORY> 360 <CURRENT-ASSETS> 2850 <PP&E> 5405 <DEPRECIATION> (1803) <TOTAL-ASSETS> 6788 <CURRENT-LIABILITIES> 862 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 25 <OTHER-SE> 3811 <TOTAL-LIABILITY-AND-EQUITY> 6788 <SALES> 794 <TOTAL-REVENUES> 794 <CGS> 678 <TOTAL-COSTS> 856 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> (8) <INCOME-PRETAX> (74) <INCOME-TAX> (28) <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (46) <EPS-PRIMARY> (0.19) <EPS-DILUTED> (0.19) </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

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https://www.sec.gov/Archives/edgar/data/808450/0000808450-99-000001.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, Me3U3fz4LAZSc0ZhEeGGW8ROUphWDYPl8FDHmKgVYrJNLXXq85rHFKKZxVVNlkJI y5L73DxvtipKo38k+8rVjA== <SEC-DOCUMENT>0000808450-99-000001.txt : 19990315 <SEC-HEADER>0000808450-99-000001.hdr.sgml : 19990315 ACCESSION NUMBER: 0000808450-99-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990312 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: SEC FILE NUMBER: 001-09618 FILM NUMBER: 99564200 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362000 MAIL ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DRIVE 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> 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, 1999 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 NAVISTAR INTERNATIONAL CORPORATION ---------------------------------- (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 February 28, 1999, the number of shares outstanding of the registrant's common stock was 66,149,583. - 1 - <PAGE> 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, 1999 and 1998........... 3 Statement of Financial Condition -- January 31, 1999, October 31, 1998 and January 31, 1998 4 Statement of Cash Flow -- Three Months Ended January 31, 1999 and 1998........... 5 Notes to Financial Statements.............................. 6 Supplemental Financial Information......................... 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........... 10 Part II. Other Information: Item 1. Legal Proceedings............................... 15 Item 6. Exhibits and Reports on Form 8-K................ 15 Signature ................................................ 16 - 2 - <PAGE> PART I - FINANCIAL INFORMATION ------------------------------ 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 ------------------------- 1999 1998 ------ ------ Sales and revenues Sales of manufactured products ................ $1,837 $1,672 Finance and insurance revenue ................. 62 45 Other income .................................. 25 10 ------ ------ Total sales and revenues .................... 1,924 1,727 ------ ------ Costs and expenses Cost of products and services sold ............ 1,544 1,454 Postretirement benefits ....................... 49 45 Engineering and research expense .............. 58 35 Marketing and administrative expense .......... 126 98 Interest expense .............................. 32 17 Other expenses ................................ 16 17 ------ ------ Total costs and expenses .................... 1,825 1,666 ------ ------ Income before income taxes ................ 99 61 Income tax expense ........................ 38 23 ------ ------ Net income .................................... 61 38 Less dividends on Series G preferred stock .... - 7 ------ ------ Net income applicable to common stock ......... $ 61 $ 31 ====== ====== Earnings per share Basic .................................... $ .92 $ .43 Diluted .................................. $ .91 $ .42 Average shares outstanding (millions) Basic .................................... 66.4 71.6 Diluted .................................. 67.1 72.5 See Notes to Financial Statements. - 3 - <PAGE> STATEMENT OF FINANCIAL CONDITION (Unaudited) - ------------------------------------------------------------------------------- Millions of dollars - ------------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries ------------------------------------------- January 31 October 31 January 31 1999 1998 1998 ---------- ---------- ---------- ASSETS - ----------------------------------- Cash and cash equivalents ......... $ 477 $ 440 $ 188 Marketable securities ............. 270 624 361 ------ ------ ------ 747 1,064 549 Receivables, net .................. 2,051 2,146 1,543 Inventories ....................... 560 505 524 Property, net of accumulated depreciation and amortization of $1,024, $976 and $907 ........ 1,134 1,106 896 Investments and other assets ...... 253 246 294 Intangible pension assets ......... 199 199 212 Deferred tax asset, net .......... 876 912 911 ------ ------ ------ Total assets ...................... $5,820 $6,178 $4,929 ====== ====== ====== LIABILITIES AND SHAREOWNERS' EQUITY - ----------------------------------- Liabilities Accounts payable, principally trade $1,106 $1,273 $1,033 Debt: Manufacturing operations .... 472 450 125 Financial services operations 1,520 1,672 1,020 Postretirement benefits liability . 945 934 893 Other liabilities ................. 957 1,080 885 ------ ------ ------ Total liabilities ............. 5,000 5,409 3,956 ------ ------ ------ Commitments and contingencies Shareowners' equity Series G convertible preferred Stock ........................... $ - $ - $ 240 Series D convertible junior preference stock ................ 4 4 4 Common stock (75.3, 75.3 and 55.4 million shares issued) ..... 2,140 2,139 1,748 Class B Common stock (19.9 million shares issued at January 31, 1998) - - 388 Common stock held in treasury, at cost ......................... (214) (214) (136) Retained earnings (deficit) ....... (770) (829) (1,077) Accumulated other comprehensive loss .............. (340) (331) (194) ------ ------ ------ Total shareowners' equity ..... 820 769 973 ------ ------ ------ Total liabilities $5,820 $6,178 $4,929 and shareowners' equity ......... ====== ====== ====== See Notes to Financial Statements. - 4 - <PAGE> STATEMENT OF CASH FLOW (Unaudited) - ------------------------------------------------------------------------------ For the Three Months Ended January 31 (Millions of dollars) - ------------------------------------------------------------------------------ Navistar International Corporation and Consolidated Subsidiaries ------------------------- 1999 1998 ------ ------ Cash flow from operations Net income ................................. $ 61 $ 38 Adjustments to reconcile net income to cash used in operations: Depreciation and amortization ............ 49 39 Deferred income taxes .................... 39 23 Postretirement benefits funding in excess of expense ............................. 7 (294) Other, net ............................... (14) (35) Change in operating assets and liabilities: Receivables .............................. (116) (7) Inventories .............................. (63) (31) Prepaid and other current assets ......... (11) (4) Accounts payable ......................... (166) (60) Other liabilities ........................ (114) (1) ------ ------ Cash used in operations .................... (328) (332) ------ ------ Cash flow from investment programs Purchase of retail notes and lease receivables .............................. (316) (237) Collections/sales of retail notes and lease receivables ................... 518 485 Purchase of marketable securities .......... (127) (129) Sales or maturities of marketable securities ............................... 481 128 Capital expenditures ....................... (48) (60) Property and equipment leased to others .... (23) (41) Other investment programs, net ............. (10) 7 ------ ------ Cash provided by investment programs ....... 475 153 ------ ------ Cash flow from financing activities Issuance of debt ........................... 48 48 Principal payments on debt ................. (92) (24) Net decrease in notes and debt outstanding under bank revolving credit facility and asset-backed and other commercial paper programs ........................... (86) (211) Mexican credit facility .................... 20 35 Repurchase of common stock ................. - (83) Dividends paid ............................. - (7) ------ ------ Cash used in financing activities .......... (110) (242) ------ ------ Cash and cash equivalents Increase (decrease) during the period .... 37 (421) At beginning of the year ................. 440 609 ------ ------ Cash and cash equivalents at end of the period ..................... $ 477 $ 188 ====== ====== See Notes to Financial Statements. - 5 - <PAGE> 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" or "Navistar" refers to Navistar International Corporation and its consolidated subsidiaries. The consolidated financial statements include the results of the company'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 1998 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 1998 amounts have been reclassified to conform with the presentation used in the 1999 financial statements. Note B. Supplemental Cash Flow Information Consolidated interest payments during the first three months of 1999 and 1998 were $31 million and $25 million, respectively. Consolidated tax payments made during the first three months of both 1999 and 1998 were not material. 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. - 6 - <PAGE> 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 1999 1998 1998 - ----------------------------------------------------------------------------- Finished products......... $ 278 $ 223 $ 271 Work in process........... 85 69 109 Raw materials and supplies 197 213 144 -------- -------- -------- Total inventories......... $ 560 $ 505 $ 524 ======== ======== ======== Note E. Financial Instruments The company purchases collateralized mortgage obligations (CMOs) that have predetermined fixed-principal payment patterns which are relatively certain. At January 31, 1999, these instruments totaled $86 million and the unrecognized gain was not material. At quarter end, $37 million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In November 1998, Navistar Financial Corporation (NFC) sold fixed rate retail receivables on a variable rate basis. For the protection of investors, NFC issued an interest rate cap. Under the terms of the agreement, NFC will make payments if interest rates exceed certain levels. The notional amount of the cap amortizes based on the expected outstanding principal balance of the sold retail receivables. As of January 31, 1999 the notional amount was $517 million and the interest rate cap had a fair value of $1.8 million. At January 31, 1999, NFC held forward treasury locks with notional amounts of $100 million in anticipation of a May 1999 sale of retail receivables. The unrealized gain on these forward treasury locks was not material. In addition, the company held Canadian dollar forward contracts with notional amounts of $95 million and other derivative contracts with notional amounts of $11 million. The unrealized net loss on these contracts was not material. Note F. New Accounting Pronouncements Effective November 1, 1998, Navistar adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components. Financial statements for prior periods have been reclassified as required by this statement. Navistar's total comprehensive income was as follows: Three Months Ended January 31 ------------------------------ Millions of dollars 1999 1998 - -------------------------------------- -------- -------- Net income............................ $ 61 $ 38 Other comprehensive income (loss)..... (9) 1 -------- -------- Total comprehensive income....... $ 52 $ 39 ======== ======== - 7 - <PAGE> Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note G. Earnings Per Share Earnings per share was computed as follows: For The Three Months Ended January 31 ------------------------------- 1999 1998 -------- --------- Millions of dollars, except share and per share data - -------------------------------------- Net income............................ $ 61 $ 38 Less dividends on Series G Preferred stock......... - 7 -------- -------- Net income applicable to common stock (Basic and Diluted)................. $ 61 $ 31 ======== ======== Average shares outstanding (millions) Basic............................ 66.4 71.6 Dilutive effect of options outstanding and other dilutive securities......... .7 .9 -------- -------- Diluted.......................... 67.1 72.5 ======== ======== Earnings per share Basic............................ $ .92 $ .43 Diluted.......................... $ .91 $ .42 Unexercised employee stock options to purchase .3 million and .7 million shares of Navistar common stock during the three months ended January 31, 1999 and 1998, respectively, were not included in the computation of diluted shares outstanding because the exercise prices were greater than the average market price of Navistar common stock. Additionally, the diluted calculation excludes the effects of the conversion of the Series G preferred stock as such conversion would produce anti-dilutive results. Note H. Subsequent Events Effective February 1, 1999, the functional currency for the company's Mexican subsidiaries changed from the U.S. dollar to the Mexican peso because Mexico is no longer considered a highly inflationary economy. While management does not expect the change in functional currency to have a material impact on the company's financial position, results of operations or cash flows, the ultimate impact of this change is dependent upon the volume of U.S. dollar denominated transactions, changes in exchange rates and the extent to which currency risk may be hedged. In March 1999, the company announced that it had finalized a joint venture with a Brazilian diesel engine producer to manufacture diesel engines in South America. - 8 - <PAGE> Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) 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 1999 1998 - ------------------------------------------------ -------- -------- Sales of manufactured products.................. $ 1,837 $ 1,672 Other income.................................... 19 10 -------- -------- Total sales and revenues........................ 1,856 1,682 -------- -------- Cost of products sold........................... 1,534 1,448 Postretirement benefits......................... 49 45 Engineering and research expense................ 58 35 Marketing and administrative expense............ 115 89 Other expenses.................................. 35 27 -------- -------- Total costs and expenses........................ 1,791 1,644 -------- -------- Income before income taxes Manufacturing operations...................... 65 38 Financial services operations................. 34 23 -------- -------- Income before income taxes.................. 99 61 Income tax expense.......................... 38 23 -------- -------- Net income...................................... $ 61 $ 38 ======== ======== January 31 ----------------------- 1999 1998 -------- -------- Selected Statement of Financial Condition and Cash Flow Data - ------------------------------------------------ Cash, cash equivalents and marketable securities..................... $ 593 $ 387 Total assets.................................... 4,132 3,742 Total liabilities............................... 3,312 2,769 Capital expenditures............................ (48) (60) Depreciation and amortization................... 38 32 Change in operating assets and liabilities...... (301) (101) Cash used in operations......................... (173) (308) Cash provided by (used in) investment programs.. 191 (54) Cash provided by (used in) financing activities. 22 (56) - 9 - <PAGE> 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 $61 million, or $0.91 per diluted common share, for the first quarter ended January 31, 1999 primarily reflecting higher sales of manufactured products. Net income was $38 million, or $.42 per diluted common share, for the same period last year. The company's manufacturing operations reported income before income taxes of $65 million compared with pretax income of $38 million in the first quarter of 1998 reflecting higher sales of trucks and diesel engines. The financial services operations' pretax income for the first three months of 1999 increased $11 million to $34 million primarily reflecting a legal settlement in favor of the company's insurance subsidiary. Sales and Revenues. First quarter 1999 industry retail sales of Class 5 through 8 trucks totaled 102,800 units, an increase of 20% from 1998. Class 8 heavy truck sales of 62,200 units during the first quarter of 1999 were 19% higher than the 1998 level of 52,400 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, increased 22% to 40,700 units. Industry sales of school buses, which accounted for 14% of the medium truck market increased 5%. Sales and revenues for the first quarter of 1999 totaled $1,924 million, 11% higher than the $1,727 million reported for the comparable quarter in 1998. Sales of trucks, mid-range diesel engines and service parts for the first quarter of 1999 totaled $1,837 million compared with $1,672 million reported for the same period in 1998. Although the company's retail deliveries in the combined United States and Canadian Class 5 through 8 truck market increased 5%, the company's market share for the first quarter of 1999 decreased to 25.5% from the 29.1% market share reported in 1998. (Sources: American Automobile Manufacturers Association, Canadian Vehicle Manufacturers Association and R.L. Polk & Company.) The company's market share was constrained by the fact that continued industry demand for heavy trucks outstripped capacity as well as by timing of retail shipments associated with school bus and medium truck orders. Shipments of mid-range diesel engines by the company to other original equipment manufacturers during the first quarter of 1999 totaled 58,100 units, a 36% increase from the same period of 1998. Higher shipments to Ford Motor Company 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 $194 million in the first quarter of 1999 were 5% higher than the prior year's level. - 10 - <PAGE> Finance and insurance revenue increased $17 million to $62 million primarily due to higher retail financing activity and a higher level of wholesale financing activity. The increase in other income is primarily due to a legal settlement in favor of the company's insurance subsidiary. Costs and expenses. Manufacturing gross margin was 16.5% of sales for the first quarter of 1999 compared with 13.4% for the same period in 1998. The increase in gross margin is primarily due to lower unit costs and improved pricing. Consolidated engineering and research expense increased $23 million from first quarter 1999 to $58 million, reflecting the company's continuing investment in its next generation vehicle (NGV) and next generation diesel (NGD) programs. Consolidated marketing and administrative expense increased to $126 million in 1999 from $98 million in the first quarter of 1998 principally reflecting investment in the company's integrated truck strategy which includes expanding internationally and improving operational excellence. 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 the company's dealers and retail customers by the financial services operations. The company's current debt ratings have made bank borrowings and sales of finance receivables the most economic sources of funding for the company. Insurance operations are self-funded. Cash used in operations during the first quarter of 1999 totaled $328 million, primarily from a change in operating assets and liabilities of $470 million. This change includes a $114 million decrease in other liabilities due to the payment of the company's profit sharing and performance incentive awards for fiscal 1998 and a $166 million decrease in accounts payable due to cyclically lower production within the first quarter. This change also includes an increase in accounts receivable of $116 million primarily due to the increase in wholesale note and account acquisitions over liquidations of $74 million and a repurchase of $60 million in notes from the 1990 Dealer Note Trust. Investment programs provided $475 million in cash reflecting a net decrease in retail notes and lease receivables of $202 million and a net decrease in marketable securities of $354 million. Other investment activities used $23 million for property and equipment leased to others and $48 million to fund capital expenditures principally for the NGV and NGD programs, to increase mid-range diesel engine capacity and for product improvements. - 11 - <PAGE> Financing activities used cash to reduce notes and debt outstanding under the bank revolving credit facility and asset-backed and other commercial paper programs by $86 million and to reduce long-term debt primarily at Navistar Financial Corporation (NFC) by a net $44 million. These cash outflows were offset by $20 million of additional borrowings under the Mexican credit facility. Through the asset-backed markets, NFC has been able to fund fixed rate retail note receivables at rates offered to companies with investment grade ratings. During the first quarter, NFC sold $545 million of retail notes through Navistar Financial Retail Receivables Corporation (NFRRC) to a multi-seller asset-backed commercial paper conduit sponsored by a major financial institution. At January 31, 1999, the remaining shelf registration available to NFRRC for the public issuance of asset-backed securities was $2,972 million. At January 31, 1999, Navistar Financial Securities Corporation (NFSC), a wholly-owned subsidiary of NFC, had a revolving wholesale note trust that provides for the funding of $639 million of eligible wholesale notes. During the next two months $39 million will amortize and the commitment will be $600 million. At January 31, 1999, available funding under the bank revolving credit facility and the asset-backed commercial paper program was $219 million, of which $15 million provided funding backup for the outstanding short-term debt. The remaining $204 million, when combined with unrestricted cash and cash equivalents, made $214 million available to fund the general business purposes of NFC. The company purchases collateralized mortgage obligations (CMOs) that have predetermined fixed-principal payment patterns which are relatively certain. At January 31, 1999, these instruments totaled $86 million and the unrecognized gain was not material. At quarter end, $37 million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In November 1998, NFC sold fixed rate retail receivables on a variable rate basis. For the protection of investors, NFC issued an interest rate cap. Under the terms of the agreement, NFC will make payments if interest rates exceed certain levels. The notional amount of the cap amortizes based on the expected outstanding principal balance of the sold retail receivables. As of January 31, 1999 the notional amount was $517 million and the interest rate cap had a fair value of $1.8 million. At January 31, 1999, NFC held forward treasury locks with notional amounts of $100 million in anticipation of a May 1999 sale of retail receivables. The unrealized gain on these forward treasury locks was not material. In addition, the company held Canadian dollar forward contracts with notional amounts of $95 million and other derivative contracts with notional amounts of $11 million. The unrealized net loss on these contracts was not material. - 12 - <PAGE> Cash flow from the company's manufacturing and financial services operations is currently sufficient to cover planned investment in the business. The company had outstanding capital commitments of $166 million at January 31, 1999, primarily for the NGV and NGD programs, and for increased manufacturing capacity at the Indianapolis engine plant. 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 and capital expenditures. Management 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. Year 2000 As of February 28, 1999, the company estimates that it was approximately 83% complete with the conversion or compliance checking of its internal systems including significant applications. The company performed integrated testing of major systems in December 1998 with additional testing planned for July 1999. Navistar currently anticipates that the modifications and testing process of all significant applications will be substantially complete by August 1999, which is prior to any anticipated impact on its operating systems. With regard to the supplier portion of the project, the company is currently assessing the Year 2000 readiness of production and service parts suppliers through a supplier survey process designed by an automotive industry trade association, the Automotive Industry Action Group (AIAG). Suppliers have been asked to respond to a compliance questionnaire. Responses to these questionnaires have been received from approximately 45% of these suppliers. Based on these responses, the company believes that the majority of these suppliers are making acceptable progress toward Year 2000 readiness. The supplier assurance process is expected to be substantially complete by April 1999 and contingency plans will be developed for critical suppliers not assuring compliance. Audits of select suppliers are planned to continue through July 1999. The company's total cost of the Year 2000 project, which will be funded through operating cash flows, is estimated to be $34 million, including $24 million of estimated expense and $10 million of capital expenditures. Approximately $16 million has been expensed and approximately $5 million has been capitalized through January 31, 1999. The remaining costs are estimated to be incurred through fiscal year 2000. As part of its continuous assessment process, the company will develop contingency plans as necessary. These plans could include, but are not limited to, material banking, use of alternate suppliers and development of alternate means to process dealer orders. The company plans to identify all critical processes by April 1999 and plans to complete detailed contingency planning by December 1999. - 13 - <PAGE> The costs of the Year 2000 project and the dates on which the company believes it will complete the Year 2000 modifications and testing are based on management's best estimates, which have been derived utilizing numerous assumptions regarding future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those currently anticipated. Examples of factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, and the ability to locate and correct all relevant computer codes and embedded technology, as well as other similar uncertainties. In addition, there can be no guarantee that the systems or products of other entities, including the company's independent dealers, on which the company relies will be converted on a timely basis, or that a failure to convert by another company, or a conversion that is incompatible with the company's systems, would not have a material adverse effect on the company. Navistar is using its best efforts to ensure that the Year 2000 impact on its critical systems and processes will not affect its supply of product, quality or service. However, in the event that the company is unable to complete its remedial actions described above and is unable to implement adequate contingency plans in the event problems arise, there could be a material adverse effect on the company's business, financial position or results of operations. Business Environment Sales of Class 5 through 8 trucks have been 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. Reflecting the stability of the general economy, demand for new trucks remained strong during the first quarter of 1999. Although truck order receipts for the first quarter of 1999 decreased from the previous year's first quarter, the company's order backlog increased to 65,700 units at January 31, 1999, from 60,500 units at January 31, 1998. Historically, retail deliveries have been impacted by the rate at which new truck orders are received. Therefore, the company continually evaluates order receipts and backlog throughout the year and will balance production with demand as appropriate. Effective February 1, 1999, the functional currency for the company's Mexican subsidiaries changed from the U.S. dollar to the Mexican peso because Mexico is no longer considered a highly inflationary economy. While management does not expect the change in functional currency to have a material impact on the company's financial position, results of operations or cash flows, the ultimate impact of this change is dependent upon the volume of U.S. dollar denominated transactions, changes in exchange rates and the extent to which currency risk may be hedged. In March 1999, the company announced that it had finalized a joint venture with a Brazilian diesel engine producer to manufacture diesel engines in South America. - 14 - <PAGE> 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 December 22, 1998, Commission File No. 1-9618. Item 6. Exhibits and Reports on Form 8-K 10-Q Page --------- (a) Exhibits: 3. Articles of Incorporation and By-Laws. E-1 4. Instruments Defining the Rights of Security Holders, Including Indentures E-2 10. Material Contracts E-4 (b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months ended January 31, 1999. - 15 - <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. NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant) /s/ Mark T. Schwetschenau - -------------------------- Mark T. Schwetschenau Vice President and Controller (Principal Accounting Officer) March 12, 1999 - 16 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>2 <TEXT> <PAGE> EXHIBIT 3 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- ARTICLES OF INCORPORATION AND BY-LAWS The following documents of Navistar International Corporation are incorporated herein by reference: 3.1 Restated Certificate of Incorporation of Navistar International Corporation effective July 1, 1993, filed as Exhibit 3.2 to Form 10-K dated October 31, 1993, which was filed on January 27, 1994, Commission File No. 1-9618, and amended as of May 4, 1998. 3.2 The By-Laws of Navistar International Corporation effective April 14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K dated October 31, 1995, which was filed on January 26, 1996, on Commission File No. 1-9618. E-1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4 <SEQUENCE>3 <TEXT> <PAGE> EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES The following instruments of Navistar International Corporation and its principal subsidiary Navistar International Transportation Corp. and its principal subsidiary Navistar Financial Corporation defining the rights of security holders are incorporated herein by reference. 4.1 Indenture, dated as of November 15, 1993, between Navistar Financial Corporation and Bank of America, Illinois formerly known as Continental Bank, National Association, as Trustee, for 8 7/8% Senior Subordinated Notes due 1998 for $100,000,000. Filed on Registration No. 33-50541. 4.2 Indenture, dated as of May 30, 1997, by and between Navistar Financial Corporation and The Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes due 2002 for $100,000,000. Filed on Registration No. 333-30167. 4.3 $125,000,000, Credit Agreement dated as of November 26, 1997, as amended by Amendment No. 1 dated as of February 4, 1998, and as amended by Amendment No. 2 dated as of July 10, 1998, among Navistar International Corporation Mexico, S.A. de C.V., Navistar International Corporation, certain banks, certain Co-Arranger banks, Bank of Montreal, as Paying Agent, and Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero, as Peso Agent and Collateral Agent. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b) (4) (iii). 4.4 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, for 7% Senior Notes due 2003 for $100,000,000. Filed on Registration No. 333-47063. 4.5 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, for 8% Senior Subordinated Notes due 2008 for $250,000,000. Filed on Registration No. 333-47063. 4.6 $160,000,000 Mexican pesos, Credit Agreement dated as of May 26, 1998 by and between Arrendadora Financiera Navistar S.A., de C.V., and Banco Nacional de Mexico, S.A. de C.V. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.7 $6,000,000, Credit Agreement dated as of May 26, 1998 by and between Arrendadora Financiera Navistar S.A. de C.V., and Banco Nacional de Mexico, S.A. de C.V. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). E-2 <PAGE> EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.8 $20,000,000 Revolving Credit Agreement dated as of June 5, 1998 by and between Servicios Financieros Navistar, S.A. de C.V. and The First National Bank of Chicago. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.9 $20,000,000 Revolving Credit Agreement dated as of June 5, 1998 by and between Arrendadora Financiera Navistar, S.A. de C.V. and The First National Bank of Chicago. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). ====== Instruments defining the rights of holders of other unregistered long-term debt of Navistar and its subsidiaries have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. E-3 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>4 <TEXT> <PAGE> EXHIBIT 10 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- MATERIAL CONTRACTS The following documents of Navistar International Corporation and its affiliate Navistar Financial Corporation are incorporated herein by reference. 10.19 Transfer and Administration Agreement dated as of November 13, 1998, between Navistar Financial Corporation, as Servicer, and Navistar Financial Retail Receivables Corporation, as Transferor, Park Avenue Receivables Corporation, as Purchaser, and The Chase Manhattan Bank, as Funding Agent and APA Bank. Filed on Form 8-K dated December 18, 1998. Commission File No. 33-50291. E-4 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-1999 <PERIOD-END> JAN-31-1999 <CASH> 477 <SECURITIES> 270 <RECEIVABLES> 2084 <ALLOWANCES> 33 <INVENTORY> 560 <CURRENT-ASSETS> 0<F1> <PP&E> 2158 <DEPRECIATION> 1024 <TOTAL-ASSETS> 5820 <CURRENT-LIABILITIES> 0<F1> <BONDS> 1992 <PREFERRED-MANDATORY> 0 <PREFERRED> 4 <COMMON> 2140 <OTHER-SE> (1324) <TOTAL-LIABILITY-AND-EQUITY> 5820 <SALES> 1837 <TOTAL-REVENUES> 1924 <CGS> 1544 <TOTAL-COSTS> 1825 <OTHER-EXPENSES> 49 <LOSS-PROVISION> 5 <INTEREST-EXPENSE> 32 <INCOME-PRETAX> 99 <INCOME-TAX> 38 <INCOME-CONTINUING> 61 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 61 <EPS-PRIMARY> .92<F2> <EPS-DILUTED> .91 <FN> <F1>The company has addopted an unclassified presentation in the Statement of Financial Condition. <F2>Amount represents Basic Earnings Per Share. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

NKE

https://www.sec.gov/Archives/edgar/data/320187/0000320187-99-000002.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, H+fweOZ5IDto0tWmVHIfUjGTAsUMYCGiF5SuaF5ac5ontPj/Qig8+m3vkQLmUoDc xDxSee4LIc8Vb4HCfU7gZw== <SEC-DOCUMENT>0000320187-99-000002.txt : 19990115 <SEC-HEADER>0000320187-99-000002.hdr.sgml : 19990115 ACCESSION NUMBER: 0000320187-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990114 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: SEC FILE NUMBER: 001-10635 FILM NUMBER: 99506582 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, 1998 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, 1998 were: _________________ Class A 101,317,408 Class B 181,258,964 ----------- 282,576,372 =========== PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements NIKE, Inc. CONDENSED CONSOLIDATED BALANCE SHEET Nov. 30, May 31, 1998 1998 ________ _______ (in millions) ASSETS Current assets: Cash and equivalents $ 254.6 $ 108.6 Accounts receivable 1,511.2 1,674.4 Inventories (Note 4) 1,197.7 1,396.6 Deferred income taxes 175.0 156.8 Prepaid expenses 161.0 196.2 ________ ________ Total current assets 3,299.5 3,532.6 Property, plant and equipment 1,967.6 1,819.6 Less accumulated depreciation 736.8 666.5 ________ ________ 1,230.8 1,153.1 Identifiable intangible assets and goodwill 435.5 435.8 Deferred income taxes and other assets 284.1 275.9 ________ ________ $5,249.9 $5,397.4 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1.3 $ 1.6 Notes payable 431.6 480.2 Accounts payable 429.9 584.6 Accrued liabilities 678.5 608.5 Income taxes payable 31.4 28.9 ________ ________ Total current liabilities 1,572.7 1,703.8 Long-term debt 389.1 379.4 Deferred income taxes and other liabilities 52.3 52.3 Commitments and contingencies (Note 6) -- -- Redeemable Preferred Stock 0.3 0.3 Shareholders' equity: Common Stock at stated value: Class A convertible-101.3 and 101.5 shares outstanding 0.2 0.2 Class B-181.2 and 185.5 shares outstanding 2.6 2.7 Capital in excess of stated value 272.3 262.5 Accumulated other comprehensive income (55.9) (47.2) Retained earnings 3,016.3 3,043.4 ________ ________ 3,235.5 3,261.6 ________ ________ $5,249.9 $5,397.4 ======== ======== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENT OF INCOME <S> <C> <C> <C> <C> Three Months Ended Six Months Ended November 30, November 30, __________________ __________________ 1998 1997 1998 1997 ____ ____ ____ ____ (in millions, except per share data) Revenues $1,913.0 $2,255.3 $4,417.9 $5,021 4 _________ _________ _________ _________ Costs and expenses: Cost of sales 1,229.6 1,409.5 2,792.3 3,075.0 Selling and administrative 531.9 593.1 1,184.5 1,252.0 Interest 10.1 17.1 24.3 34.0 Other expense 27.6 6.3 32.1 19.5 ________ ________ _________ _________ 1,799.2 2,026.0 4,033.2 4,380.5 ________ ________ _________ _________ Income before income taxes 113.8 229.3 384.7 640.9 Income taxes 44.9 88.2 151.9 246.7 ________ ________ _________ _________ Net income $ 68.9 $ 141.1 $ 232.8 $ 394.2 ========= ========= ========== ========== Basic earnings per common share $ 0.24 $ 0.49 $ 0.82 $ 1.36 (Note 3) ========= ========= ========== ========== Diluted earnings per common share $ 0.24 $ 0.48 $ 0.80 $ 1.33 (Note 3) ========= ========= ========== ========== Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.22 ========= ========= ========== ========== </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended November 30, _________________ 1998 1997 ____ ____ (in millions) Cash provided (used) by operations: Net income $232.8 $394.2 Income charges (credits) not affecting cash: Depreciation 102.0 88.1 Deferred income taxes (18.4) (8.8) Amortization and other 16.8 15.2 Changes in other working capital components 337.9 (199.6) _______ _______ Cash provided by operations 671.1 289.1 _______ _______ Cash provided (used) by investing activities: Additions to property, plant and equipment (173.6) (242.0) Disposals of property, plant and equipment 11.7 5.4 Increase in other assets (26.7) (50.8) Decrease in other liabilities (6.4) (10.7) _______ _______ Cash used by investing activities (195.0) (298.1) _______ _______ Cash provided (used) by financing activities: Additions to long-term debt - 101.3 Reductions in long-term debt including current portion (.9) (1.1) Decrease in notes payable (48.6) (311.5) Proceeds from exercise of options 9.3 17.8 Repurchase of stock (194.0) (33.2) Dividends - common and preferred (68.6) (58.0) _______ ______ Cash used by financing activities (302.8) (284.7) _______ _______ Effect of exchange rate changes on cash (27.3) (12.0) Net increase (decrease) in cash and equivalents 146.0 (305.7) Cash and equivalents, May 31, 1998 and 1997 108.6 445.4 _______ _______ Cash and equivalents, November 30, 1998 and 1997 $254.6 $139.7 ======= ======= 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 six (6) months ended November 30, 1998 are not necessarily indicative of results to be expected for the entire year. Year 2000 costs: Costs associated with the Company's efforts around Year 2000 issues are expensed as incurred, unless they relate to the purchase of hardware and software, and software development, in which case they are capitalized. Capitalized software and hardware costs are depreciated from three to five years. NOTE 2 - Comprehensive Income: __________________ In the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is generally defined as all changes in shareholders' equity except those resulting from investments by and distributions to shareholders. Comprehensive income, net of taxes, is as follows: Three Months Ended Six Months Ended November 30, November 30, __________________ _________________ 1998 1997 1998 1997 ____ ____ ____ ____ (in millions) Net Income $ 68.9 $141.1 $232.8 $394.2 Change in Cumulative Translation Adjustment (3.6) (18.2) (8.7) (26.9) _______ _______ _______ _______ Total Comprehensive Income $ 65.3 $122.9 224.1 367.3 ======= ======= ======= ======= NOTE 3 - Net income per common share: ___________________________ SFAS 128, "Earnings per Share," replaces primary and fully diluted earnings per share with basic and diluted earnings per share. Under the new requirements, the dilutive effect of stock options is excluded from the calculation of basic earnings per share. Diluted earnings per share is calculated similarly to fully diluted earnings per share as required under APB 15. SFAS 128 became effective for the Company's fiscal 1998 financial statements. All prior period earnings per share data presented have been restated to conform to the provisions of this statement. The following represents a reconciliation from basic earnings per share to diluted earnings per share: Three Months Ended Six Months Ended November 30, November 30, __________________ _________________ 1998 1997 1998 1997 ____ ____ ____ ____ (in millions, except per share data) Determination of shares: Average common shares outstanding 283.0 290.3 284.9 290.1 Assumed conversion of stock options 4.7 6.4 4.9 7.0 ______ ______ ______ ______ Diluted average common shares outstanding 287.7 296.7 289.8 297.1 ====== ====== ====== ====== Basic earnings per common share $ 0.24 $ 0.49 $ 0.82 $ 1.36 ====== ====== ====== ====== Diluted earnings per common share $ 0.24 $ 0.48 $ 0.80 $ 1.33 ====== ====== ====== ====== NOTE 4 - Inventories: ___________ Inventories by major classification are as follows: Nov. 30, May 31, 1998 1998 ________ ________ (in millions) Finished goods $1,127.5 $1,303.8 Work-in-progress 38.7 34.7 Raw materials 31.5 58.1 ________ ________ $1,197.7 $1,396.6 ======== ======== NOTE 5 - Restructuring charges: ______________________ 1998 Charge During the fourth quarter of fiscal 1998 the Company recorded a restructuring charge of $129.9 million as a result of certain of the Company's actions to better align its cost structure with expected revenue growth rates. The restructuring activities (shown below in tabular format) primarily related to: 1) the elimination of job responsibilities company-wide, resulting in costs to sever employees and related asset write-downs and lease abandonments related to the affected employees; 2) the relocation of, and elimination of, certain job responsibilities of the Asia Pacific headquarters in Hong Kong, resulting in reduction in workforce, lease abandonments and other costs of downsizing the Hong Kong headquarters; 3) the downsizing of the Company's Japan distribution center, resulting in the write-down of assets no longer in use; 4) the cancellation of certain non-strategic long-term endorsement contracts, resulting in one-time termination fees; and 5) the decision to exit certain manufacturing operations of the Bauer subsidiary, resulting in the reduction in manufacturing related jobs, the write-down of assets no longer in use and the estimated loss on divestiture of certain manufacturing plants. No increases to the 1998 restructing charge were made during the first six months of fiscal 1999. A total of $6.7 million of the restructing accrual was not required due to changes in estimates related to severance payments, asset valuation and lease commitments. This amount is included in "other expense" on the income statement. 1999 Charge In the second quarter of fiscal 1999, an additional $18.7 million restructuring charge was recorded due to further cost realignment programs in the Company's Asia Pacific region. The charge (detailed below in tabular format) was for costs of severing employees, including severance packages, lease abandonments and the write down of assets no longer in use. The charge is included in other expense on the income statement. As of November 30, 1998, there were a total of 1,208 employees terminated in the original plan announced in the fourth quarter of fiscal 1998, with 1,168 having left the Company as of that date. An additional 237 employees were terminated in the plan announced during the current quarter, with 138 having left the Company as of November 30, 1998. Detail of the 1998 restructuring charge is as follows: <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> (in millions) 4th QTR FY98 DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE CASH CHARGE BALANCE AT BALANCE AT 5/31/98 11/30/98 ___________________________________________________________________________________________________________ ELIMINATION OF JOB RESPONSIBILITES COMPANY- WIDE $(49.8) $18.8 $(31.0) $24.1 $(6.9) Severance packages cash (29.1) 9.0 (20.1) 17.7 (2.4) Lease cancellations & commitments cash (10.8) 0.2 (10.6) 6.1 (4.5) Write-down of assets non-cash (9.6) 9.6 - - - Other cash (0.3) - (0.3) 0.3 - ___________________________________________________________________________________________________________ DOWNSIZING THE ASIA PACIFIC HEADQUARTERS IN HONG KONG $(13.1) 5.4 $(7.7) $3.3 $(4.4) Severance packages cash (4.6) 2.3 (2.3) 1.0 (1.3) Lease cancellations & commitments cash (5.5) 0.1 (5.4) 2.3 (3.1) Write-down of assets non-cash (3.0) 3.0 - - - ____________________________________________________________________________________________________________ DOWNSIZING THE JAPAN DISTRIBUTION CENTER $(31.6) $25.4 $(6.2) $4.7 $(1.5) Write-off of assets non-cash (12.5) 12.5 - - - Software development costs cash/non (19.1) 12.9 (6.2) 4.7 (1.5) cash ____________________________________________________________________________________________________________ CANCELLATION OF ENDORSEMENT CONTRACTS cash $(5.6) $0.6 $(5.0) $4.1 $(0.9) ____________________________________________________________________________________________________________ EXITING CERTAIN MANUFACTURING OPERATIONS AT BAUER $(22.7) $19.9 $(2.8) $0.2 $(2.6) Write-down of assets non-cash (14.7) 14.7 - - - Divestiture of manufacturing facilities non-cash (5.2) 5.2 - - - Lease cancellations & commitments cash (1.6) - (1.6) 0.1 (1.5) Severance packages cash (1.2) - (1.2) 0.1 (1.1) ____________________________________________________________________________________________________________ OTHER $(7.1) 2.4 $(4.7) $2.7 $(2.0) Cash cash (0.6) - (0.6) 0.1 (0.5) Non-cash non-cash (6.5) 2.4 (4.1) 2.6 (1.5) ____________________________________________________________________________________________________________ Effect of foreign currency translation - $1.8 $1.8 $(0.9) $0.9 ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ TOTAL $(129.9) $74.3 $(55.6) $38.2 $(17.4) ____________________________________________________________________________________________________________ </TABLE> Detail of the 1999 restructuring charge is as follows: <TABLE> <CAPTION> <S> <C> <C> <C> <C> (in millions) 2nd QTR FY99 DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE CASH CHARGE BALANCE AT 11/30/98 _____________________________________________________________________________________ ELIMINATION OF JOB RESPONSIBILITES $(18.7) $ 5.9 $(12.8) Severance packages cash (8.7) 0.6 (8.1) Lease cancellations & commitments cash (2.3) - (2.3) Write-down of assets non-cash (5.5) 5.0 (0.5) Other cash/non- (2.2) 0.3 (1.9) cash _____________________________________________________________________________________ <Table/> NOTE 6 - 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 for the second quarter of fiscal year 1999 was $68.9 million, a 51% decrease compared to the $141.1 million in the prior year's second quarter. Year-to-date net income decreased 41% to $232.8 million. Results for both the quarter and year-to-date were driven by lower revenues, lower gross margin percentages and higher selling and administrative expenses as a percentage of revenues. In addition, the quarter also includes an $18.7 million restructuring charge, discussed further below. Consolidated revenues decreased 15%, or $342.3 million for the quarter, and 12%, or $603.5 million year-to-date. U.S. brand revenues declined $175.2 million, or 14% for the quarter, with a 15% decrease in footwear and a 13% decrease in apparel revenues. Year-to-date U.S. revenues decreased 12%, with a 14% drop in footwear and a 9% decrease in apparel. Sales in the U.S. are being affected by a difficult selling environment at retail, particularly in athletic apparel. Three of the largest apparel categories, Men's Athletic, Team Sports, and Accessories decreased 30%, 17% and 34%, respectively, for the quarter. In addition, the uncertainty surrounding the National Basketball Association's season has slowed the momentum beginning to be seen in the footwear basketball category. U.S. Basketball footwear revenue was down 24% in the quarter (31% year-to-date). However, Brand Jordan was up 23% in the quarter (45% year-to- date). The decline in overall footwear revenues for the quarter was a result of a 17% decrease in pairs sold and a 1% increase in average selling price. The major categories of running and crosstraining increased 9% and decreased 40%, respectively, for the quarter. Year-to-date, running decreased 3% while crosstraining was down 34%. Total revenues in Europe were up 9%, or $37.3 million for the quarter. For the year, revenues increased 11%. Had the dollar remained constant, revenues would have increased 1% and 6% for the quarter and year-to-date, respectively. The revenue increase was driven by growth in apparel, as footwear revenues were down. Of the major countries within the region, the United Kingdom and France, increased 9%, in constant dollars, for the quarter, while Spain and Italy, decreased 7% and 5%, respectively. The Asia Pacific region remains affected by the general economic crisis in the area. Revenues decreased 46% for the quarter and 47% year-to-date. Had the dollar remained constant, revenues would have decreased 38% for both the quarter and year-to-date. Footwear and apparel revenues were down 56% and 33%, respectively, for the quarter. Revenues in Japan declined 53% (49% on a constant dollar basis) for the quarter and 53% for the year (47% on a constant dollar basis). The Americas region, which includes Canada, Mexico, South America and South Africa, decreased 16% for the quarter and 13% year-to-date, compared to last year. Had the dollar remained constant, revenues would have decreased 9% and 7% for the quarter and year-to-date, respectively, primarily due to the strengthening of the dollar in Canada. Other Brands, which includes Bauer NIKE Hockey, Cole Haan, Sports Specialties, and NIKE IHM (which includes what was formally Tetra Plastics), decreased 12% for the quarter and less than 1% year-to-date. The breakdown of revenues follows: Three Months Ended Six Months Ended November 30, November 30, ___________________ ________________ % % 1998 1997 change 1998 1997 change ______ ______ _______ ______ ______ ________ (in millions) U.S.A. REGION FOOTWEAR $665.9 $787.6 -15% $1,583.3 $1,843.7 -14% APPAREL 365.0 418.3 -13% 770.2 843.5 -9% EQUIPMENT AND OTHER 17.5 17.7 -1% 42.8 36.7 17% _______ _______ _______ _______ TOTAL U.S.A. 1,048.4 1,223.6 -14% 2,396.3 2,723.9 -12% EUROPE REGION FOOTWEAR 199.3 245.6 -19% 553.4 629.6 -12% APPAREL 217.7 143.0 52% 528.5 361.3 46% EQUIPMENT AND OTHER 16.8 7.9 113% 32.7 15.4 112% _______ _______ _______ _______ TOTAL EUROPE 433.8 396.5 9% 1,114.6 1,006.3 11% ASIA PACIFIC REGION FOOTWEAR 90.7 208.4 -56% 197.1 472.5 -58% APPAREL 101.4 151.7 -33% 180.7 254.7 -29% EQUIPMENT AND OTHER 4.8 2.6 85% 10.5 3.0 250% _______ _______ _______ _______ TOTAL ASIA PACIFIC 196.9 362.7 -46% 388.3 730.2 -47% AMERICAS REGION FOOTWEAR 73.7 91.2 -19% 176.3 212.7 -17% APPAREL 42.5 50.7 -16% 89.5 96.3 -7% EQUIPMENT AND OTHER 3.5 1.3 169% 6.5 4.6 41% _______ _______ _______ _______ TOTAL AMERICAS 119.7 143.2 -16% 272.3 313.6 -13% _______ _______ _______ _______ TOTAL NIKE BRAND 1,798.8 2,126.0 -15% 4,171.5 4,774.0 -13% OTHER & OTHER BRANDS 114.2 129.3 -12% 246.4 247.4 -0% _______ _______ _______ _______ TOTAL REVENUES $1,913.0 $2,255.3 -15% $4,417.9 $5,021.4 -12% ======== ======== ======== ========= The Company's gross margin percentage for the second quarter was 35.7%, down from 37.5% in the prior year. On a year-to-date basis, margins fell 200 basis points to 36.8%. Margins continue to be adversely affected by continued efforts to liquidate the Company's closeout inventories around the world, particularly apparel. Additionally, increased levels of research and development spending on reduced levels of comparative revenues, further reduced margins. Selling and administrative expenses have decreased 10% from last year's second quarter and 5% year-to-date, however are up as a percentage of revenues, to 27.8% for the quarter (compared to 26.3%) and 26.8% for the year (compared to 24.9%). Sports marketing and advertising reductions accounted for more than 50% of the reduction for the quarter, and wage related expenses fell 4%. Spending levels continue to reflect management's efforts to control expenditures. Interest expense has decreased for both the quarter and year-to-date, compared to last year, as less short term debt has been needed to finance lower levels of inventories and accounts receivable. Other expense has increased over the prior year, mainly due to the $18.7 million restructuring charge taken in the second quarter (discussed further below). Offsetting this charge was a $6.7 million reversal of fiscal 1998's restructuring charge and reduced foreign currency transaction losses. Worldwide futures and advance orders for NIKE brand athletic footwear and apparel scheduled for delivery from December 1998 through April 1999 totaled $3.8 billion, 10% lower than such orders for the same period last year. These orders and the percentage change in these orders are not necessarily indicative of the change in revenues which the Company will experience for subsequent periods. This is due to potential shifts in the mix of advance orders in relation to at once orders and varying cancellation rates. Finally exchange rate fluctuations will also cause differences in the comparisons. During the fourth quarter of fiscal 1998, the Company recorded a restructuring charge of $129.9 million as a result of certain of the Company's actions to better align its overall cost structure and organization with planned revenue levels. The restructuring activities (shown below in tabular format) primarily related to: 1) the elimination of job responsibilities company-wide, resulting in costs to sever employees and related asset write-downs and lease abandonments related to the affected employees; 2) the relocation of, and elimination of, certain job responsibilities of the Asia Pacific headquarters in Hong Kong, resulting in reduction in workforce, lease abandonments and other costs of downsizing the Hong Kong headquarters; 3) the downsizing of the Company's Japan distribution center, resulting in the write-down of assets no longer in use; 4) the cancellation of certain non-strategic long-term endorsement contracts, resulting in one-time termination fees; and 5) the decision to exit certain manufacturing operations of the Bauer subsidiary, resulting in the reduction in manufacturing related jobs, the write-down of assets no longer in use and the estimated loss on divestiture of certain manufacturing plants. No increases to the 1998 restructuring charge were made during the first six months of fiscal 1999. A total of $6.7 million of the restructuring accrual was not required due to changes in estimates related to severance payments, asset valuations and lease commitments. This amount is included in "other expense" on the income statement. In the second quarter of fiscal 1999, an additional $18.7 million restructuring charge was recorded due to further cost realignment programs in the Company's Asia Pacific region. The charge (detailed below in tabular format) was for costs of severing employees, including severance packages, lease abandonments and the write down of assets no longer in use. The charge is included in "other expense" on the income statement. As of November 30, 1998, there were a total of 1,208 employees terminated in the original plan announced in the fourth quarter of fiscal 1998, with 1,168 having left the Company as of that date. An additional 237 employees were terminated in the plan announced during the current quarter, with 138 having left the Company as of November 30, 1998. Detail of the 1998 restructuring charge is as follows: </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> (in millions) 4th QTR FY98 DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE CASH CHARGE BALANCE AT BALANCE AT 5/31/98 11/30/98 ___________________________________________________________________________________________________________ ELIMINATION OF JOB RESPONSIBILITES COMPANY- WIDE $(49.8) $18.8 $(31.0) $24.1 $(6.9) Severance packages cash (29.1) 9.0 (20.1) 17.7 (2.4) Lease cancellations & commitments cash (10.8) 0.2 (10.6) 6.1 (4.5) Write-down of assets non-cash (9.6) 9.6 - - - Other cash (0.3) - (0.3) 0.3 - ___________________________________________________________________________________________________________ DOWNSIZING THE ASIA PACIFIC HEADQUARTERS IN HONG KONG $(13.1) 5.4 $(7.7) $3.3 $(4.4) Severance packages cash (4.6) 2.3 (2.3) 1.0 (1.3) Lease cancellations & commitments cash (5.5) 0.1 (5.4) 2.3 (3.1) Write-down of assets non-cash (3.0) 3.0 - - - ____________________________________________________________________________________________________________ DOWNSIZING THE JAPAN DISTRIBUTION CENTER $(31.6) $25.4 $(6.2) $4.7 $(1.5) Write-off of assets non-cash (12.5) 12.5 - - - Software development costs cash/non (19.1) 12.9 (6.2) 4.7 (1.5) cash ____________________________________________________________________________________________________________ CANCELLATION OF ENDORSEMENT CONTRACTS cash $(5.6) $0.6 $(5.0) $4.1 $(0.9) ____________________________________________________________________________________________________________ EXITING CERTAIN MANUFACTURING OPERATIONS AT BAUER $(22.7) $19.9 $(2.8) $0.2 $(2.6) Write-down of assets non-cash (14.7) 14.7 - - - Divestiture of manufacturing facilities non-cash (5.2) 5.2 - - - Lease cancellations & commitments cash (1.6) - (1.6) 0.1 (1.5) Severance packages cash (1.2) - (1.2) 0.1 (1.1) ____________________________________________________________________________________________________________ OTHER $(7.1) 2.4 $(4.7) $2.7 $(2.0) Cash cash (0.6) - (0.6) 0.1 (0.5) Non-cash non-cash (6.5) 2.4 (4.1) 2.6 (1.5) ____________________________________________________________________________________________________________ Effect of foreign currency translation - $1.8 $1.8 $(0.9) $0.9 ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ TOTAL $(129.9) $74.3 $(55.6) $38.2 $(17.4) ____________________________________________________________________________________________________________ </TABLE> Detail of the 1999 restructuring charge is as follows: <TABLE> <CAPTION> <S> <C> <C> <C> <C> (in millions) 2nd QTR FY99 DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE CASH CHARGE BALANCE AT 11/30/98 _____________________________________________________________________________________ _____________________________________________________________________________________ ELIMINATION OF JOB RESPONSIBILITES $(18.7) $ 5.9 $(12.8) Severance packages cash (8.7) 0.6 (8.1) Lease cancellations & commitments cash (2.3) - (2.3) Write-down of assets non-cash (5.5) 5.0 (0.5) Other cash/non- (2.2) 0.3 (1.9) cash _____________________________________________________________________________________ <Table/> In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (June 1, 2000 for the Company). This statement will require the Company to recognize all derivatives on the balance sheet at fair value. Changes in the fair value of derivatives will be recorded in current earnings or other comprehensive income, depending on the intended use of the derivative and the resulting designation. The ineffective portion of all hedges will be recognized in current-period earnings. Management of the Company has not yet determined the impact that the adoption of FAS 133 will have on the Company's results from operations or its financial position. Year 2000 issue _______________ The year 2000 issue is the result of computer programs using two digits rather than four to define the applicable year. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations leading to disruptions in the Company's activities and operations (the "year 2000" or "Y2K" issue). If the Company or its significant suppliers or customers fail to make necessary modifications, conversions, and contingency plans on a timely basis, the year 2000 issue could have a material adverse effect on NIKE's business, operations, cash flow, and financial condition. However, the effect cannot be quantified at this time because NIKE cannot accurately estimate the magnitude, duration, or ultimate impact of noncompliance by third parties that have no direct relationship to NIKE. The Company believes that its competitors face a similar risk. Although not quantifiable, the disclosure below is intended to summarize NIKE's actions to minimize that risk. In May 1997, the Company established a corporate-wide project team to identify non-compliant software and complete the corrections or plans required to mitigate the year 2000 issue. NIKE has identified three categories of software and systems that require attention: (1) information technology ("IT") systems, such as mainframes, PCs, networks, and production control system, (2) non-IT systems, such as equipment, machinery, climate control, and security systems, which may contain microcontrollers with embedded technology, and (3) partner (supplier and customer) IT and non-IT systems. The Company intends to fix or replace non-compliant IT and non-IT software and systems through the following project phases: (1) inventory systems, (2) assess risks and impact, (3) prioritize projects, (4) fix, replace, or develop contingency plans for non-compliant systems, (5) test and on-going quality control, and (6) audit results. Currently, our remediation projects are at different phases of completion. Remediation and testing activities are underway or have been completed on all of the Company's critical business applications. NIKE engages the services of independent consultants to analyze and develop testing standards, quality assurance, and contingency plans. NIKE's internal auditing department audits the process and remediation testing, and NIKE has consulted with external independent consultants to evaluate and audit those results. Recently, NIKE's Y2K project team completed a mid-project review of all projects not yet completed. The result was the consolidation of several projects, the elimination of redundant projects, and the identification of several additional projects that need to be addressed. To date, NIKE has identified 148 major internal I.T. remediation projects worldwide. That number may increase slightly if anticipated "gaps" in remediation are identified later. As of December 31, 1998, 77 of the projects have been completed (including testing). Of the remaining projects, approximately 50 percent are in final test and implementation phases. The Company has already completed remediation on most of its critical business information systems. The Company is also assessing the compliance of its major customers and suppliers. NIKE has relationships with certain significant suppliers and customers in most of the locations in which it operates. The level of preparedness of significant suppliers and customers can very greatly from country to country. These relationships are material to many local operations and, in the aggregate, are material to the Company. NIKE relies on suppliers to timely deliver a broad range of goods and services worldwide, including raw materials, footwear, apparel, accessories, equipment, advertising, transportation services, banking services, telecommunications and utilities. Moreover, NIKE's suppliers rely on countless other suppliers, over which NIKE may have little or no influence regarding year 2000 compliance. NIKE believes that suppliers and customers presents the area of greatest risk to the Company in part because of the Company's limited ability to influence actions of third parties, and in part because of the Company's inability to estimate the level and impact of noncompliance of third parties throughout the extended supply chain. NIKE is sending surveys to and conducting formal communications with its significant suppliers and customers to determine the extent to which it may be affected by those third parties' Y2K preparedness plans. Some of NIKE's significant suppliers and customers have not responded to inquiries from NIKE, have refused to respond for liability reasons, or have not responded with sufficient detail for NIKE to determine (a) whether the supplier or customer is or timely will be Y2K compliant, or (b) if any noncompliance will have a material adverse effect on NIKE's business or financial condition. In the absence of adequate responses and disclosures, NIKE is attempting to make independent assessments of significant vendors and customers. However, a compliance failure by a major supplier or customer, or one of their suppliers or customers, could have a material adverse effect on NIKE's business or financial condition. The size of that effect cannot be quantified at this time because of variables such as the type and importance of the non-responding suppliers and customers, the unknown level and duration of noncompliance of suppliers and customers (and their suppliers and customers), the possible effect on NIKE's operations, and NIKE's ability to respond. Thus, there can be no assurance that there will not be a material adverse effect on the Company if third party governmental or business entities do not convert or replace their systems in a timely manner and in a way that is compatible with the Company's systems. As a result, in some cases NIKE will develop contingency plans that assume some estimated level of noncompliance by, or business disruption to, suppliers and customers. The Company is currently developing those contingency plans, with the goal of completing them by mid-1999 for significant suppliers and customers determined to be at high risk of noncompliance or business disruption. The contingency plans are being developed on a case-by-case basis, and may include booking orders and producing products before anticipated business disruptions, manual intervention, or finding alternative suppliers. Even so, judgments regarding contingency plans - such as how to develop them and to what extent - are themselves subject to many variables and uncertainties. There can be no assurance that NIKE will correctly anticipate the level, impact or duration of noncompliance by suppliers and customers that provide inadequate information. As a result, there is no certainty that its contingency plans will be sufficient to mitigate the impact of noncompliance by suppliers and customers, and some material adverse effect to NIKE may result from one or more third parties regardless of defensive contingency plans. Costs related to the year 2000 issue are funded through operating cash flows. Through the second quarter of fiscal 1999, the Company expended approximately $31 million in remediation efforts, including the cost of new software, modifying the applicable code of existing software, and internal costs. Approximately $7 million of these expenditures was for new hardware and software, and has been capitalized. The remainder has been expensed as incurred. The Company currently estimates that total costs related to the year 2000 issue will be composed of approximately $45 to $50 million in external expenses, $20 to $25 million in internal costs, and $40 to $45 million in replacement projects that are not Y2K-related but have some Y2K remediation benefits. Approximately $10 million of these expenses will be capitalized. (Previously the Company did not report internal costs or unrelated replacement projects.) The Company presently believes that the total cost of achieving year 2000 compliant systems is not expected to be material to NIKE's financial condition, liquidity, or results of operations. Estimates of time, cost, and risk estimates are based on currently available information. Developments that could affect estimates include, but are not limited to, the availability and cost of trained personnel; the ability to locate and correct all relevant computer code and systems; cooperation and remediation success of the Company's suppliers and customers (and their suppliers and customers); and the ability to correctly anticipate risks and implement suitable contingency plans in the event of system failures at NIKE or its suppliers and customers (and their suppliers and customers). The above section, even if incorporated by reference into other documents or disclosures, is a Year 2000 Readiness Disclosure as defined under the Year 2000 Information and Readiness Disclosure Act of 1998. Liquidity and Capital Resources The Company's financial position remained strong at November 30, 1998. Compared to May 31, 1998 shareholder's equity remained consistent at $3.2 billion. Working capital decreased 6% to $1.7 billion and the current ratio was 2.10:1 at November 30, 1998 compared to 2.07:1 at May 31, 1998. Cash provided by operations increased $382 million compared to the first six months of last year. Working capital changes were the main reason for the increase, primarily the decrease in accounts receivable, due to lower revenue, and the decrease in inventory levels. Consolidated inventory levels at November 30, 1998 were 17% lower than last November and 14% lower than May 31, 1998. Closeout levels in footwear inventory continued to fall to more normal levels in all regions. In apparel, the Company was able to reduce closeout levels in every region except Europe. The advancement of the Company's retail strategy around the world has helped sell through of closeout product. During the second quarter the Company added 13 new outlet locations: 6 in the U.S., 4 in Europe and one each in Japan, Australia and Canada. The total outlet store count is 95 globally, with 64 of those in the U.S. Additions to property, plant and equipment for the first half of fiscal 1999 were $173.6 million, mainly due to the expansion of the U.S. headquarters, retail locations and customer service distribution facilities. Outside of the U.S., the majority of the expenditures were related to the Company's customer service distribution center in Europe and retail expansion in all regions. In the previous year, expenditures were higher due to increased NIKETOWN expenditures in the U.S. and more activity surrounding the European customer service facility. Management believes that significant funds generated by operations, together with access to sufficient sources of funds, will adequately meet its anticipated operating, global infrastructure expansion and capital needs. The Company maintains significant short and long-term lines of credit with banks, which, along with cash on hand, provide adequate operating liquidity. Liquidity is also provided by the Company's commercial paper program, under which there was $167.8 million outstanding at November 30, 1998. Dividends per share of common stock for the second quarter of fiscal 1999 remained at $.12 per share, the same level as the previous year. As of November 30, 1998, the Company purchased a total of 6.4 million shares of NIKE's Class B common stock for $252 million in the open market since the $1 billion share repurchase program was approved in December 1997. During the first half of fiscal 1999, the Company purchased a total of 5.2 million shares for $198 million. Funding has, and is expected to continue to, come from operating cash flow in conjunction with short-term borrowings. The timing and the amount of shares purchased will be dictated by working capital needs and stock market conditions. Special Note Regarding Forward-Looking Statements and Reports Analyst Reports Certain written and oral statements made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the Securities and Exchange Commission, press releases, conferences, or otherwise, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("the Act"). Forward- looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "will be," "will continue," "will result," or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among others, the following: international, national and local general economic and market conditions (including the current Asian economic problems); the size and growth of the overall athletic footwear, apparel, and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel, and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for NIKE products; the size, timing and mix of purchases of NIKE's products; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance "futures" orders may not be indicative of future revenues due to the changing mix of futures and at-once orders; the ability of NIKE to sustain, manage or forecast its growth and inventories; new product development and introduction; the ability to secure and protect trademarks, patents, and other intellectual property; performance and reliability of products; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors; business disruptions; disruptions due to Year 2000 noncompliance by NIKE, its suppliers or customers (or their suppliers or customers); increased costs of freight and transportation to meet delivery deadlines; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, import duties, tariffs, quotas and political and economic instability; changes in government regulations; liability and other claims asserted against NIKE; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports. The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely impact NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on NIKE's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward- looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. 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, 1998. 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 fiscal quarter ended August 31, 1995). 3.2 Third Restated Bylaws, as amended (incorporated by reference from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal 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). 4.3 Form of Indenture between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference from Exhibit 4.01 to Amendment No. 1 to Registration Statement No. 333-15953 filed by the Company on November 26, 1996). 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 (incorporated by reference from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended 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 22, 1997).* 10.6 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).* 10.7 NIKE, Inc. Long-Term Incentive Plan (incorporated by reference from the Company's definitive proxy statement filed in connection with its annual meeting of shareholders held on September 22, 1997).* 10.8 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).* 12.1 Computation of Ratio of Earnings to Charges. 27 Financial Data Schedule. * Management contract or compensatory plan or arrangement. 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 E. Harold ________________________ Robert E. Harold Interim Chief Financial Officer DATED: January 14, 1999 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12.1 <SEQUENCE>2 <TEXT> NIKE, INC. COMPUTATION OF RATIO OF EARNINGS TO CHARGES Six Months Ended November 30, __________________ 1998 1997 ____ ____ (in millions) Net income $232.8 $394.2 Income taxes 151.9 246.7 ______ ______ Income before income taxes 384.7 640.9 ______ _____ Add fixed charges Interest expense (A) 27.5 34.9 Interest component of leases (B) 20.9 21.9 ______ ______ Total fixed charges 48.4 56.8 ______ ______ Earnings before income taxes and fixed charges (C) 429.9 $696.9 ====== ====== Ratio of earnings to total fixed charges 8.88 12.27 ====== ====== (A) Interest expense includes 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>3 <DESCRIPTION>ART. 5 FDS FOR 1ST QUARTER 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NOVEMBER 30, 1998 FORM 10-Q 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> MAY-31-1999 <PERIOD-END> NOV-30-1998 <CASH> 255 <SECURITIES> 0 <RECEIVABLES> 1,511 <ALLOWANCES> 73 <INVENTORY> 1,198 <CURRENT-ASSETS> 3,300 <PP&E> 1,968 <DEPRECIATION> 737 <TOTAL-ASSETS> 5,250 <CURRENT-LIABILITIES> 1,573 <BONDS> 389 <COMMON> 3 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 3,232 <TOTAL-LIABILITY-AND-EQUITY> 5,250 <SALES> 4,418 <TOTAL-REVENUES> 4,418 <CGS> 2,792 <TOTAL-COSTS> 2,792 <OTHER-EXPENSES> 1,210 <LOSS-PROVISION> 7 <INTEREST-EXPENSE> 24 <INCOME-PRETAX> 385 <INCOME-TAX> 152 <INCOME-CONTINUING> 233 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 233 <EPS-PRIMARY> .82 <EPS-DILUTED> .80 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

NOVL

https://www.sec.gov/Archives/edgar/data/758004/0000758004-99-000016.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, GkygtXPNXKESoc4+x4U9uyYFzmED54ONkG9zBNz8G6Zvyu/ikfRD8cXcJwHBUus1 n2Zn4kyX/WxB95/UaRioqA== <SEC-DOCUMENT>0000758004-99-000016.txt : 19990319 <SEC-HEADER>0000758004-99-000016.hdr.sgml : 19990319 ACCESSION NUMBER: 0000758004-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990317 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: SEC FILE NUMBER: 000-13351 FILM NUMBER: 99567482 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, 1999 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.) 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 26, 1999 there were 336,468,842 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. 31, Dollars in thousands, except per share data 1999 1998 - ------------------------------------------------------------------------------ ASSETS Current assets Cash and short-term investments $ 1,015,422 $ 1,007,167 Receivables, less allowances ($40,913 - January; $47,921 - October) 206,227 246,577 Inventories 2,737 3,562 Prepaid expenses 63,189 63,165 Deferred and refundable income taxes 79,839 95,343 Other current assets 39,514 19,886 - ----------------------------------------------------------------------------- Total current assets 1,406,928 1,435,700 Property, plant and equipment, ne 341,172 346,196 Long-term investments 156,842 114,815 Other assets 25,729 27,401 - ------------------------------------------------------------------------------ Total assets $ 1,930,671 $ 1,924,112 ============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 73,644 $ 77,987 Accrued compensation 52,948 52,348 Accrued marketing liabilities 17,527 16,383 Other accrued liabilities 58,938 62,206 Income taxes payable 61,158 64,057 Deferred revenue 137,421 141,714 - ----------------------------------------------------------------------------- Total current liabilities 401,636 414,695 Minority interests 15,933 15,919 Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 335,944,700 shares-January 337,592,460 shares-October 33,594 33,759 Additional paid-in capital 164,859 200,897 Retained earnings 1,319,235 1,290,337 Unearned stock compensation (5,695) (5,396) Cumulative translation adjustment (1,877) (1,753) Unrealized gain/(loss) on investments 2,986 (24,346) - ----------------------------------------------------------------------------- Total shareholders' equity 1,513,102 1,493,498 - ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,930,671 $ 1,924,112 ============================================================================= See notes to consolidated unaudited condensed financial statements. Page 2 </TABLE> </PAGE> <PAGE> <TABLE> NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME <S> <C> <C> Fiscal Quarter Ended Amounts in thousands, Jan. 31, Jan. 31, except per share data 1999 1998 - ----------------------------------------------------------------------------- Net sales $285,806 $252,042 Cost of sales 64,120 57,087 - ----------------------------------------------------------------------------- Gross profit 221,686 194,955 Operating expenses Sales and marketing 105,337 104,211 Product development 54,005 60,238 General and administrative 25,994 25,574 - ----------------------------------------------------------------------------- Total operating expenses 185,336 190,023 Income from operations 36,350 4,932 Other income (expense) Investment income 9,763 14,399 Other, net (5,977) 244 - ----------------------------------------------------------------------------- Other income, net 3,786 14,643 - ----------------------------------------------------------------------------- Income before taxes 40,136 19,575 Income taxes 11,238 5,481 - ----------------------------------------------------------------------------- Net income $ 28,898 $ 14,094 ============================================================================= Weighted average shares outstanding Basic 337,441 351,031 Diluted 351,522 352,971 ============================================================================= Net income per share Basic $ 0.09 $ 0.04 Diluted $ 0.08 $ 0.04 ============================================================================= See notes to consolidated unaudited condensed financial statements. PAGE 3 </TABLE> </PAGE> <PAGE> <TABLE> NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS <S> <C> <C> Fiscal Quarter Ended Jan. 31, Jan. 31, Amounts in thousands 1999 1998 - ----------------------------------------------------------------------------- Cash flows from operating activities Net income $ 28,898 $ 14,094 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 16,940 19,889 Stock plans income tax benefits 13,347 132 Decrease in receivables 40,350 13,692 Decrease (increase) in inventories 825 1,478 (Increase) decrease in prepaid expenses (24) (8,520) Decrease (increase) in deferred and refundable income taxes 15,499 14,378 (Increase) in other current assets (19,628) (4,373) (Decrease) in current liabilities, net (13,059) (11,613) - ----------------------------------------------------------------------------- Net cash provided from operating activities 83,148 39,157 - ----------------------------------------------------------------------------- Cash flows from financing activities Issuance of common stock, net 27,293 1,424 Repurchase of common stock (76,843) -- - ----------------------------------------------------------------------------- Net cash provided (used) from financing activities (49,550) 1,424 - ----------------------------------------------------------------------------- Cash flows from investing activities Expenditures for property, plant and equipment (12,215) (8,694) Purchases of short-term investments (643,484) (484,596) Maturities of short-term investments 492,629 342,605 Sales of short-term investments 146,379 145,517 Other (40,460) (9,804) ---------------------------------------------------------------------------- Net cash (used) by investing activities (57,151) (14,972) - ------------------------------------------------------------------------------ Total increase in cash and cash equivalents $ (23,553) $ 25,609 Cash and cash equivalents - beginning of period 177,083 208,543 - ------------------------------------------------------------------------------ Cash and cash equivalents - end of period 153,530 234,152 Short-term investments - end of period 861,892 810,992 - ------------------------------------------------------------------------------ Cash and short-term investments - end of period $ 1,015,422 $1,045,144 ============================================================================== See note to consolidated unaudited condensed financial statements. Page 4 </TABLE> </PAGE> <PAGE> <TABLE> 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 1998 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. Certain reclassifications, none of which affected net income, have been made to the prior years amounts in order to conform to the current year's presentation. B. 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. Fair market values are based on quoted market pries where available; if quoted market prices are not available, then fair market values are based on quoted market prices of comparable instruments. Municipal securities included in short-term investments have contractual maturities from 1-5 years. Money market preferreds have contractual maturities of less than 180 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. <S> <C> <C> <C> <C> The following is a summary of cash and short-term investments, all of which are considered available-for-sale. Gross Gross Fair Market Cost at Unrealized Unrealized Value at (Dollars in thousands) Jan. 31, 1999 Gains Losses Jan. 31, 1999 - ------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 114,254 $ -- $ -- $ 114,254 Repurchase agreements 3,719 -- -- 3,719 Taxable money market fund 21,557 -- -- 21,557 Municipal securities 14,000 -- -- 14,000 - ------------------------------------------------------------------------------ Cash and cash equivalents $ 153,530 $ -- $ -- $ 153,530 - ------------------------------------------------------------------------------ Short-term investments Municipal securities $ 437,518 $ 8,908 $ -- $ 446,426 Money market preferreds 202,703 -- (3) 202,700 Mutual funds 116,578 -- -- 116,578 Equity securities 100,229 37,245 (41,286) 96,188 - ------------------------------------------------------------------------------ Short-term investments $ 857,028 $ 46,153 $ (41,289) $ 861,892 - ------------------------------------------------------------------------------ Cash and short-term investments $1,010,558 $ 46,153 $ (41,289) $1,015,422 - ------------------------------------------------------------------------------ PAGE 5 </TABLE> </PAGE> <PAGE> <TABLE> <S> <C> <C> <C> <C> Gross Gross Fair Market Cost at Unrealized Unrealized Value at (Dollars in thousands) Oct. 31, 1998 Gains Losses Oct. 31, 1998 - ------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 98,444 $ -- $ -- $ 98,444 Repurchase agreements 8,092 -- -- 8,092 Money market fund 55,957 -- -- 55,957 Municipal securities 14,590 -- -- 14,590 - ------------------------------------------------------------------------------ Cash and cash equivalents $ 177,083 $ -- $ -- $ 177,083 - ------------------------------------------------------------------------------ Short-term investments Municipal securities $ 448,195 $ 8,027 $ -- $ 456,222 Money market mutual funds 95,631 -- -- 95,631 Money market preferreds 181,719 -- (19) 181,700 Mutual funds 15,340 -- -- 15,340 Equity securities 128,837 30,159 (77,805) 81,191 - ------------------------------------------------------------------------------ Short-term investments $ 869,722 $38,186 $(77,824) $ 830,084 - ------------------------------------------------------------------------------ Cash and short-term investments $ 1,046,805 $38,186 $ (77,824) $ 1,007,167 - ------------------------------------------------------------------------------ During the first quarter of fiscal 1999 the Company had realized gains of $13 million on the sale of securities compared to realized gains of $3 million in the first quarter of fiscal 1998, while realizing losses on sales of securities of $15 million in the first quarter of fiscal 1999 and $1 million in the first quarter of fiscal 1998. C. Income Taxes The Company's estimated effective tax rate for the first quarter of fiscal 1999 was 28.0%, the same as in the first quarter of fiscal 1998. The Company paid cash amounts for income taxes of $2 million and $1 million, in the first quarter of fiscal 1999 and 1998, respectively. D. 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, 1999 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $5 million line of credit with another bank which is not subject to a loan agreement. At January 31, 1999 standby letters of credit of approximately $1 million were outstanding under this line of credit. In fiscal 1997, the Company entered into agreements to lease buildings being constructed on land owned by the Company in San Jose, California and in Provo, Utah. The lessor has committed to fund up to $272 million for construction of the buildings. The leases are for a period of seven years and can be renewed for two additional five year periods, subject to the approval of the lender and the Company, at the sole discretion of each party. Rent obligations will commence upon the Company's occupation of the buildings in fiscal 1999 for San Jose and fiscal 2000 for Provo. Annual rent under each agreement is determined by taking the portion of the committed amount actually utilized and associated capitalized interest accrued during the construction period and multiplying this amount by the secured interest rate. If the Company does not purchase the buildings, or arrange for the sale of the buildings, at the end of the lease, the Company will guarantee the lessor no more than 85% of the residual value of the buildings. The guaranteed residual value at January 31, 1999, was approximately $218 million. In addition, the agreement calls for the Company to maintain a specific level of restricted cash to serve as collateral for the leases and maintain compliance with certain financial covenants. The value of restricted cash held as collateral at January 31, 1999 was approximately $135 million, and is included in long-term investments. Page 6 </TABLE> </PAGE> <PAGE> In 1993, a suit was filed due to a failed contract against a company that Novell subsequently acquired. The plaintiff obtained a jury verdict against the acquired company in 1996. Novell does not believe that the resolution of this legal matter will have a material adverse effect on its financial position, results of operations, or cash flows. In February 1998, a suit was filed against Novell and certain of its officers and directors, alleging violation of federal securities laws. The lawsuit was brought as a purported class action on behalf of purchasers of Novell common stock from November 1, 1996 through April 22, 1997. The case is in its preliminary stages. Novell believes that the case is without merit, and intends to vigorously defend against the allegations. While there can be no assurance as to the ultimate disposition of the case, Novell does not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows. 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. E. Put Warrants In connection with the Company's stock repurchase program, the Company sold put warrants on 15 million shares of its common stock during the third quarter of fiscal 1998, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. The put warrants are exercisable only at maturity, expire at various dates through July 1999, and can only be settled in shares. Additionally, during the third quarter of fiscal 1998, the Company purchased call options on 10 million shares of its common stock, giving the Company the right to purchase shares of Novell common stock at contractually specified prices. The call options are exercisable only at maturity and expire at various dates through July 1999. The premiums received from the sale of the put warrants offset in full the cost of the call options. In the first quarter of fiscal 1999, the Company settled 6 million of its put warrant obligations and exercised 4 million call options to purchase 4 million shares of Novell common stock in connection with the Company's stock purchase program. F. International Sales The Company operates in one business segment and markets internationally both directly to end users and through distributors who sell to dealers and end users. For the fiscal quarters ended January 31, 1999 and January 31, 1998, sales to international customers were approximately $130 million and $109 million, respectively. In the first quarters of fiscal 1999 and fiscal 1998, 72% and 65%, 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 1999 and 15% of revenue in the first quarter of fiscal 1998, no customer accounted for more than 10% of revenue in any period. </PAGE> <PAGE> <TABLE> <S> <C> <C> G. Net Income Per Share Q1 Q1 Amounts in thousands, except per share data 1999 1998 - ----------------------------------------------------------------------------- Basic net income per share computation Net income $ 28,898 $ 14,094 - ------------------------------------------------------------------------------ Weighted average shares outstanding 337,441 351,031 - ------------------------------------------------------------------------------ Basic net income per share $.09 $.04 ============================================================================== Diluted net income per share computation Net income $ 28,898 $ 14,094 - ------------------------------------------------------------------------------ Weighted average shares outstanding 337,441 351,031 Incremental shares attributable to exercise of outstanding options (treasury stock method) 14,081 1,940 - ------------------------------------------------------------------------------ Total 351,522 352,971 - ------------------------------------------------------------------------------ Diluted net income per share $ .08 $ .04 ============================================================================ H. Comprehensive Income In the first quarter of 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and displaying of comprehensive income. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, unearned stock compensation and cumulative translation adjustments, which prior to adoption were only reported separately in shareholders equity, to be included in comprehensive income. The components of comprehensive income, net of tax, for the three months ended January 31, 1999 and January 31, 1998 were as follows: <C> <C> Q1 Q1 Dollars in thousands 1999 1998 - ----------------------------------------------------------------------------- Net income $ 28,898 $ 14,094 Unrealized gain/(loss) on investments 27,332 (10,412) Unearned stock compensation (184) 515 Cumulative translation adjustment (76) 70 - ------------------------------------------------------------------------------ Comprehensive income $ 55,970 $ 4,267 ============================================================================== Page 8 </TABLE> </PAGE> <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Novell is the leading provider of network software enabled by directory services. Novell Internet solutions make networks more manageable and secure, and reduce the total cost of ownership for organizations of every kind and size. Novell worldwide channel, developer, education and technical support programs are the most extensive in the network computing industry. Results of Operations Net Sales Q1 Q1 1999 Change 1998 - ------------------------------------------------------------------------------ Net sales (millions) $286 13% $252 ============================================================================== Novell's product lines can be categorized into three areas, all within the software industry. They are server platforms; network infrastructure and applications; and service, training, consulting and other. While revenue increased from the first quarter of 1998 to the first quarter of 1999, analysis of the individual product categories characterizes the changes that have occurred. The server platforms product line includes directory-enabled NetWare (NetWare 4 and NetWare 5) and NetWare 3. Server platforms revenue increased by $18 million or 12% in the first quarter of 1999 compared to the first quarter of 1998. Directory-enabled NetWare increased $20 million or 16% following the release of NetWare 5, while NetWare 3 revenue decreased $2 million or 10% from the first quarter 1998 compared to the first quarter of fiscal 1997. The network infrastructure and applications product line includes NetWare for SAA host connectivity products, BorderManager, NDS integration and high availability service products. Collaboration and management products such as GroupWise, ManageWise, and Z.E.N.works are also included in this product line. The product line had revenue of $75 million in the first quarter of 1999 compared to $68 million in the first quarter of 1998. This 11% increase was driven by new product revenue from Z.E.N.works, as well as strong growth in BorderManager, ManageWise and GroupWise. These increases were somewhat offset by a decrease in Tuxedo royalties, which ended in the fourth quarter of fiscal 1998. Service, training, consulting, and other includes revenue from customer service, training products and courses, consulting for network solutions, UNIX royalties, and other. These revenues were $45 million and $36 million in the first quarter of 1999 and 1998, respectively. The increase was a result of new consulting revenue, as well as growth in service and training revenue. UNIX royalties decreased by $2 million and represented only 2% of total revenue in the first quarter of 1999 compared to the first quarter of 1998. International sales represented 45% of total sales in the first quarter of 1999 compared to 43% in the first quarter of 1998. This change is a result of a 9% increase in domestic revenues compared to a 19% increase in international revenues in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998. Gross Profit Q1 Q1 1999 Change 1998 - ----------------------------------------------------------------------------- Gross profit (millions) $222 14% $195 Percentage of net sales 78% 77% ============================================================================== The gross margin percentage increased slightly in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 due to lower material costs and a decrease in expenses associated with training and education programs both as a percentage of net sales and in absolute dollars. Somewhat offsetting these reductions was an increase in service related expenses. Page 9 </PAGE> <PAGE> <TABLE> <S> <C> <C> <C> Operating Expenses Q1 Q1 1999 Change 1998 - ----------------------------------------------------------------------------- Sales and marketing (millions) $105 -1% $104 Percentage of net sales 37% 41% - ------------------------------------------------------------------------------ Product development (millions) $54 -10% $60 Percentage of net sales 19% 24% - ------------------------------------------------------------------------------ General and administrative (millions) $26 -- $26 Percentage of net sales 9% 10% - ------------------------------------------------------------------------------ Total operating expenses (millions) $185 -3% $190 Percentage of net sales 65% 75% ============================================================================= Sales and marketing expenses increased slightly by $1 million in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 but decreased as a percentage of net sales. Lower international selling expenses were partially offset by higher 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 decreased by $6 million in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 and decreased as a percentage of net sales due to a more productive product development organization focused on delivering new products consistent with its strategy. General and administrative expenses remained flat at $26 million in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998, while decreasing as a percentage of net sales due to a higher revenue base. <C> <C> <C> Q1 Q1 1999 Change 1998 - ------------------------------------------------------------------------------ Employees 4,642 -- 4,638 Annualized revenue per employee (000's) $249 16% $214 ============================================================================== <C> <C> <C> Other Income, Net Q1 Q1 1999 Change 1998 - ------------------------------------------------------------------------------ Other income, net (millions) $4 -73% $15 Percentage of net sales 1% 6% ============================================================================== The primary component of other income, net is investment income, which was $10 million in the first quarter of fiscal 1999 compared to $14 million in the first quarter of fiscal 1998. The decrease in the first quarter of 1999 compared to the first quarter in 1998 is the result of net realized capital losses as the Company disposed of certain equity securities. In the first quarter of 1999, in addition to investment income, the Company had losses on the disposal of fixed assets, the accrual for certain legal matters and the write-off of certain long-term investments. Income Taxes <C> <C> <C> Q1 Q1 1999 Change 1998 - ------------------------------------------------------------------------------ Income taxes (millions) $11 120% $5 Percentage of net sales 4% 2% Effective tax rate 28% 28% ============================================================================= The effective tax rate for fiscal 1999 is estimated to be 28%, the same as fiscal 1998. Page 10 </TABLE> </PAGE> <PAGE> <TABLE> Net Income and Net Income Per Share <S> <C> <C> <C> Q1 Q1 1999 Change 1998 - ----------------------------------------------------------------------------- Net income (millions) $29 107% $14 Percentage of net sales 10% 6% Net income per share - basic $.09 125% $.04 Net income per share - diluted $.08 100% $.04 ============================================================================== <C> <C> <C> Liquidity and Capital Resources Q1 Q4 1999 Change 1998 - ------------------------------------------------------------------------------ Cash and short-term investments (millions) $1,015 1% $1,007 Percentage of total assets 53% 52% ============================================================================== Cash and short-term investments increased to $1,015 million at January 31, 1999 from $1,007 million at October 31, 1998. The major reason for this increase was the $83 million provided by operating activities, the $27 million from the issuance of common stock, offset by the $77 million of cash used for repurchase of common stock, the $12 million used for expenditures on property, plant and equipment, and the $13 million used by other investing activities. The investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds which incur 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. The Company's investment portfolio includes securities with gross unrealized gains of $5 million as of January 31, 1999. Certain securities with material unrealized losses are Corel common stock, which was obtained in March 1996 upon the Company's sale of its personal productivity applications product line and SCO common stock, which was obtained in December 1995 upon the sale of the Company's UnixWare product line. It is the Company's intention to continue to dispose of such shares over the coming periods. The Company's principal source of liquidity has been from operations. At January 31, 1999, 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, product development and flexibility in a dynamic and competitive operating environment. During the first fiscal quarter of 1999, 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. The Company believes that 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 1999 are anticipated to be approximately $45 million, but could be reduced if the growth of the Company is less than presently anticipated. In June 1998, the Company announced its intent to repurchase and retire up to 10 percent, or approximately 35 million shares, of Novell common stock over the next twelve months. During the first quarter of 1999, the Company repurchased and retired approximately 5 million shares at a cost of approximately $77 million. During fiscal 1998, the Company repurchased and retired approximately 21 million shares at a cost of approximately $245 million. 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 at reasonable prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; market fluctuations of investment securities; and litigation. Page 11 </TABLE> </PAGE> <PAGE> In the past, many information technology products were designed with two digit year codes that did not recognize century and millennium fields. As a result, these hardware and software products may not function or may give incorrect results beginning in the year 2000. The year 2000 issue is faced by substantially every company in the computer industry, as well as every company which relies on computer systems. The Company has created a company-wide Year 2000 team to identify and resolve Year 2000 issues associated either with the Company's internal systems or the products and services sold by the company. As part of this effort, the Company is communicating with its main suppliers of technology products and services regarding the Year 2000 status of such products or services. The Company has identified and is testing its main internal systems and expects to complete testing by mid 1999. In 1999 the Company expects to complete implementation of any needed year 2000-related modifications to its information systems. The Company is also currently assessing its internal non-information technology systems, and expects to complete testing and any needed modifications to these systems in 1999. The Company's total cost relating to these activities has not been and is not expected to be material to the Company's financial position, results of operations, or cash flows. The Company believes that necessary modifications will be made on a timely basis. However, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of such modifications, or that the Company s suppliers will adequately prepare for the year 2000 issue. It is possible that any such delays, increased costs, or supplier failures could have a material adverse impact on the Company's operations and financial results, by, for example, impacting the Company's ability to deliver products or services to its customers. The Company has begun contingency planning and expects to finalized in mid-1999 its main assessment of and contingency planning for potential operational or performance problems related to year 2000-related issues with its information systems. The Company's year 2000 effort has included testing products currently or recently on the Company's price list for year 2000 issues. Generally, for products that were identified as needing updates to address year 2000 issues, the Company has prepared or is preparing updates, or has removed or is removing the product from its price list. Some of the Company's customers are using product versions that the Company will not support for year 2000 issues; the Company is encouraging these customers to migrate to current product versions that are year 2000 ready. For third party products which the Company distributes with its products, the Company has sought information from the product manufacturers regarding the products year 2000 readiness status. Customers who use the third-party products are directed to the product manufacturer for detailed year 2000 status information. On its year 2000 web site at www.novell.com/year2000/, the Company provides information regarding which of its products are year 2000 ready and other general information related to the Company's year 2000 efforts. The Company's total costs relating to these activities has not been and is not expected to be material to the Company's financial position or results of operations. The Company believes its current products, with any applicable updates, are well-prepared for year 2000 date issues, and the Company plans to support these products for date issues that may arise related to the year 2000. However, there can be no guarantee that one or more current Company products do not contain year 2000 date issues that may result in material costs to the Company. Because it is in the business of selling software products, the Company's risk of being subjected to lawsuits relating to year 2000 issues with its software products is likely to be greater than that of companies in other industries. Because computer systems may involve different hardware, firmware and software components from different manufacturers, it may be difficult to determine which component in a computer system may cause a year 2000 issue. As a result, the Company may be subjected to year 2000-related lawsuits independent of whether its products and services are year 2000 ready. The outcomes of any such lawsuits and the impact on the Company cannot be determined at this time. 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, such as those discussed above, as well as risks described in detail in the Company's fiscal 1998 report on Form 10-K. Page 12 </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 D 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, 1999. ____________________________ *Filed herewith. Page 13 </PAGE> <PAGE> <TABLE> 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. <S> <C> Novell, Inc. ------------- (Registrant) Date: March 17, 1999 /s/ Dr. Eric Schmidt --------------------------- Dr. Eric Schmidt Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: March 17, 1999 /s/ Dennis R. Raney ---------------------------- Dennis R. Raney Chief Financial Officer (Principal Financial Officer) Date: March 17, 1999 /s/ Ron Foster ---------------------------- Ron Foster Vice President and Corporate Controller (Principal Accounting Officer) Page 14 </TABLE> </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-31-1999 <PERIOD-END> JAN-31-1999 <CASH> 153,530 <SECURITIES> 861,892 <RECEIVABLES> 206,227 <ALLOWANCES> (40,913) <INVENTORY> 2,737 <CURRENT-ASSETS> 1,406,928 <PP&E> 702,287 <DEPRECIATION> (361,115) <TOTAL-ASSETS> 1,930,671 <CURRENT-LIABILITIES> 401,636 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 33,594 <OTHER-SE> 1,479,508 <TOTAL-LIABILITY-AND-EQUITY> 1,930,671 <SALES> 285,806 <TOTAL-REVENUES> 285,806 <CGS> 64,120 <TOTAL-COSTS> 64,120 <OTHER-EXPENSES> 185,336 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 40,136 <INCOME-TAX> 11,238 <INCOME-CONTINUING> 28,898 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 28,898 <EPS-PRIMARY> .09 <EPS-DILUTED> .08 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

OKE

https://www.sec.gov/Archives/edgar/data/1039684/0000950134-99-000162.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, R6cK2xNEgf7/h2i+swo6wYcHSNu/VvgdHRlIFTefZ0V5+cObpJpFTDUFcUEcr8sp OAstJU56E9HqitegzccZ0g== <SEC-DOCUMENT>0000950134-99-000162.txt : 19990114 <SEC-HEADER>0000950134-99-000162.hdr.sgml : 19990114 ACCESSION NUMBER: 0000950134-99-000162 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONEOK INC /NEW/ CENTRAL INDEX KEY: 0001039684 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 731520922 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13643 FILM NUMBER: 99505382 BUSINESS ADDRESS: STREET 1: 100 WEST 5TH ST CITY: TULSA STATE: OK ZIP: 74103 BUSINESS PHONE: 9185887000 MAIL ADDRESS: STREET 1: 100 WEST 5TH ST CITY: TULSA STATE: OK ZIP: 74103 FORMER COMPANY: FORMER CONFORMED NAME: WAI INC DATE OF NAME CHANGE: 19970519 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR QUARTER ENDED NOVEMBER 30, 1998 <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 November 30, 1998. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______ to _______ Commission file number 001-13643 ONEOK, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1520922 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 100 WEST FIFTH STREET, TULSA, OK 74103 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (918) 588-7000 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 On November 30, 1998, the Company had 31,534,287 shares of common stock outstanding. <PAGE> 2 ONEOK, INC. QUARTERLY REPORT ON FORM 10-Q <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE NO. <S> <C> Consolidated Condensed Statements of Income - Three Months Ended November 30, 1998 and 1997 3 Consolidated Condensed Balance Sheets - November 30, 1998, and August 31, 1998 4 Consolidated Condensed Statements of Cash Flows - Three Months Ended November 30, 1998 and 1997 5 Notes to Consolidated Condensed Financial Statements 6 - 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 15 Quantitative and Qualitative Disclosures about Market Risk 16 PART II - OTHER INFORMATION 17 - 19 </TABLE> 2 <PAGE> 3 PART 1 - FINANCIAL INFORMATION ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended November 30, (Thousands of Dollars, except per share amounts) 1998 1997 - ---------------------------------------------------- --------------------------- <S> <C> <C> OPERATING REVENUES Regulated $186,242 $118,637 Nonregulated 201,229 195,523 -------- -------- Total Operating Revenues 387,471 314,160 -------- -------- OPERATING EXPENSES Cost of gas 239,836 209,273 Operations and maintenance 72,131 53,762 Depreciation, depletion, and amortization 31,138 17,194 General taxes 9,374 5,445 Income taxes 9,387 7,438 -------- -------- Total Operating Expenses 361,866 293,112 -------- -------- Income before interest 25,605 21,048 Interest 11,355 8,528 -------- -------- NET INCOME 14,250 12,520 Preferred Stock Dividends 9,324 0 -------- -------- Income Available for Common Stock $ 4,926 $ 12,520 ======== ======== Earnings Per Share of Common Stock - Basic $ 0.16 $ 0.44 ======== ======== Earnings Per Share of Common Stock - Diluted $ 0.16 $ 0.43 ======== ======== Dividends Per Share of Common Stock $ 0.31 $ 0.30 ======== ======== </TABLE> See accompanying notes to consolidated condensed financial statements. 3 <PAGE> 4 ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> NOVEMBER 30, August 31, (Thousands of Dollars) 1998 1998 - ------------------------------------------------------------ ------------ ---------- <S> <C> <C> ASSETS Property $2,592,911 $2,601,930 Accumulated depreciation, depletion, & amortization 926,029 915,769 ---------- ---------- Total property 1,666,882 1,686,161 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 40 86 Accounts and notes receivable 216,837 177,649 Inventories 173,142 138,380 Other current assets 14,339 21,958 ---------- ---------- Total current assets 404,358 338,073 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS: Regulatory assets, net 226,166 229,543 Goodwill 82,651 77,422 Other 116,098 91,288 ---------- ---------- Total deferred charges and other assets 424,915 398,253 ---------- ---------- TOTAL ASSETS $2,496,155 $2,422,487 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY COMMON SHAREHOLDER'S EQUITY: Common stock: $0.01 par value; authorized 100,000,000 shares; issued and outstanding 31,534,287 shares at November 30, 1998 and 31,576,287 shares at August 31, 1998 $ 315 $ 316 Premium on capital stock 328,138 329,425 Retained earnings 265,959 270,808 ---------- ---------- Total common shareholders' equity 594,412 600,549 Convertible Preferred Stock: $0.01 par value, Series A authorized 100,000,000 shares; issued and outstanding 19,946,448 shares at November 30, 1998, and August 31, 1998 199 199 Convertible Preferred Stock: $0.01 par value; Series B authorized 30,000,000 shares; issued and outstanding 125,826 shares at November 30, 1998, and 83,826 shares at August 31, 1998 1 1 Premium on Preferred Stock 569,409 568,122 ---------- ---------- Total shareholders' equity 1,164,021 1,168,871 ---------- ---------- LONG-TERM DEBT, EXCLUDING CURRENT PORTION 512,355 312,355 CURRENT LIABILITIES: Long-term debt 16,909 16,909 Notes payable 68,000 212,000 Accounts payable 154,642 136,601 Accrued taxes 33,810 16,829 Accrued interest 8,051 7,814 Other 57,054 70,660 ---------- ---------- Total current liabilities 338,466 460,813 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes 310,072 313,955 Other deferred credits 171,241 166,493 ---------- ---------- Total deferred credits and other liabilities 481,313 480,448 ---------- ---------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $2,496,155 $2,422,487 ========== ========== </TABLE> See accompanying notes to consolidated condensed financial statements. 4 <PAGE> 5 ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three Months Ended November 30, (Thousands of Dollars) 1998 1997 - ------------------------------------------------------------ --------- --------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 14,250 $ 12,520 Depreciation, depletion, and amortization 31,138 17,513 Deferred income taxes (3,883) (159) Changes in assets and liabilities (71,081) (50,252) --------- --------- Cash used by operating activities (29,576) (20,378) --------- --------- INVESTING ACTIVITIES Capital expenditures, net of salvage (29,371) (26,207) Proceeds from sale of assets 22,000 -- Other -- 928 --------- --------- Cash used in investing activities (7,371) (25,279) --------- --------- FINANCING ACTIVITIES Issuance (payment) of notes payable, net (144,000) 50,199 Issuance of debt 200,000 -- Issuance of common stock -- 2,404 Dividends paid (19,099) (8,428) --------- --------- Cash provided by financing activities 36,901 44,175 --------- --------- Change in cash and cash equivalents (46) (1,482) Cash and cash equivalents at beginning of period 86 14,377 --------- --------- Cash and cash equivalents at end of period $ 40 $ 12,895 ========= ========= </TABLE> See accompanying notes to consolidated condensed financial statements. 5 <PAGE> 6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM REPORTING. The interim consolidated condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Due to the seasonal nature of the business, the results of operations for the three months ended November 30, 1998, are not necessarily indicative of the results that may be expected for the year ending August 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended August 31, 1998. B. SIGNIFICANT EVENTS On December 14, 1998, the Company announced a definitive merger agreement with Southwest Gas Corporation (Southwest). The agreement provides for the Company to pay $28.50 per share for Southwest common stock outstanding, valuing Southwest at approximately $1.8 billion, including assumed debt. The addition of 1.2 million customers to the Company's existing 1.4 million customers will create the largest stand-alone gas distribution company in the United States serving customers in Arizona, Nevada and California as well as Oklahoma and Kansas. Terms of the agreement call for three Southwest Gas directors to be elected to the Company's Board of Directors. The merger, to be accounted for by the purchase method, is expected to close during the fall of 1999 subject to approvals by Southwest shareholders, state regulators in Arizona, California and Nevada and the Federal Energy Regulatory Commission. Also in December 1998, the Company announced a strategic alliance with Magnum Hunter Resources, Inc. (Magnum). The alliance seeks to maximize natural gas production and development opportunities for both companies. The Company will purchase $50 million of Magnum convertible preferred stock initially becoming a 31 percent equity owner. Additionally, the Company has agreed to participate with Magnum in a pending acquisition of reserves and a gathering system. The participation is limited to $9 million of the proposed $36 million aggregate purchase price and gives the Company the right to participate on a nonpromotive basis in future acquisitions. ONEOK Resources signed two reserve acquisition agreements on November 20, 1998, which are expected to close in the second quarter. Both transactions are primarily natural gas reserves located in Oklahoma. A cash for stock agreement with a purchase price of $28.5 million, subject to certain adjustments, includes over 500 producing wells, significant behind pipe reserves and development drilling opportunities located in the Anadarko Basin of Oklahoma. Estimated reserves could exceed 32 Bcfe. A second acquisition of 118 producing gas and oil properties located in Beckham and Roger Mills Counties in Oklahoma has estimated reserves that could exceed 43 Bcfe. This acquisition has a cash purchase price of $25.5 million, subject to certain adjustments. These transactions and the Magnum alliance are consistent with the Company's strategy to acquire additional gas reserves in its primary areas of operation which in turn add value to all of the Company's operations. On November 4, 1998, the Company consummated an agreement with Duke Energy Field Services to sell certain nonstrategic assets of the Company. The assets sold include a gas treating plant located in Oklahoma, a gas processing plant located in Kansas, gas and oil reserves and a gas processing plant located in Louisiana, and half of the Company's interest in the Sycamore Gas Gathering System located in Oklahoma. 6 <PAGE> 7 On November 26, 1997, the Company acquired substantially all of the natural gas assets of Western Resources, Inc. For accounting purposes, the acquisition became effective November 30, 1997. The table of unaudited pro forma information for the three months ended November 30, 1997, presents a summary of consolidated results of operation of the Company as if the acquisition had occurred at the beginning of fiscal year 1997. The results do not necessarily reflect the results which would have been obtained if the acquisition had actually occurred on the date indicated or the results which may be expected in the future. <TABLE> <CAPTION> Three Months Ended (Thousands of Dollars, November 30, except per share amounts) 1998 1997 (ACTUAL) (Pro Forma) - --------------------------------------------------- --------- --------- <S> <C> <C> Total operating revenues $387,471 $507,202 Income before interest and income taxes $ 25,605 $ 23,884 Net income $ 14,250 $ 14,317 Preferred stock dividends $ 9,324 $ 8,975 Income available for common stock $ 4,926 $ 5,342 Earnings per share of common stock - basic $ 0.16 $ 0.17 Earnings per share of common stock - diluted $ 0.16 $ 0.17 -------- -------- </TABLE> On December 18, 1998, the Oklahoma Corporation Commission filed an application to initiate a proceeding to review the Company's rates, charges, and services for the regulated operation in Oklahoma. The application contemplates a test year ending November 30, 1998. C. REGULATORY ASSETS The table is a summary of regulatory assets, net of amortization, at November 30, 1998, and August 31, 1998. <TABLE> <CAPTION> NOV. 30, Aug. 31, (Thousands of Dollars) 1998 1998 - --------------------------------------------------- --------- --------- <S> <C> <C> Recoupable take-or-pay $ 89,679 $ 90,708 Pension costs 24,017 25,061 Postretirement costs other than pension 60,699 59,963 Income taxes 25,863 26,447 Transition costs 18,330 18,447 Other 7,578 8,917 -------- -------- Regulatory assets, net $226,166 $229,543 ======== ======== </TABLE> D. Supplemental Cash Flow Information The table is supplemental information relative to the Company's cash flows for the three months ended November 30, 1998 and 1997. <TABLE> <CAPTION> Three Months Ended November 30, (Thousands of Dollars) 1998 1997 - --------------------------------------------------- --------- --------- <S> <C> <C> Cash paid during the period for: Interest $ 11,118 $ 8,945 Income taxes $ 2,500 $ 2,307 Noncash transactions: Gas received as payment in kind $ 61 $ 59 Acquisition of assets & liabilities Plant, property, & equipment -- $ 709,310 Current assets -- $ 232,288 Deferred debits -- $ 31,928 Current liabilities -- ($ 24,189) Debt assumed -- ($152,115) Deferred credits -- ($ 54,805) Deferred income taxes -- ($ 90,527) Stock -- ($651,890) ========= ========= </TABLE> 7 <PAGE> 8 E. EARNINGS PER SHARE INFORMATION The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), during the second quarter of fiscal 1998. All prior periods have been restated. SFAS 128 replaces the "primary earnings per share" ("primary EPS") and "fully diluted earnings per share" ("fully diluted EPS") with "basic earnings per share" ("basic EPS") and "diluted earnings per share" ("diluted EPS"). Unlike the calculation of primary EPS which includes, in its denominator, "common stock equivalents", basic EPS is calculated using only the actual weighted average shares outstanding during the relevant periods. The following is a required reconciliation of the numerators and denominators of the basic and diluted EPS computations. <TABLE> <CAPTION> Three Months Ended November 30, 1998 Per Share (In Thousands except per share amounts) Income Shares Amount - --------------------------------------- ------- ------- ---------- <S> <C> <C> <C> BASIC EPS Income available to common stockholders $4,926 31,535 $0.16 ===== EFFECT OF DILUTIVE SECURITIES Options - 43 Convertible preferred stock - - DILUTED EPS Net income + assumed conversions $4,926 31,578 $0.16 ===== </TABLE> Preferred stock is convertible to common stock under certain conditions. The total preferred shares at November 30, 1998, are 20,072,274 which are convertible into common stock. <TABLE> <CAPTION> Three Months Ended November 30, 1997 Per Share (In Thousands except per share amounts) Income Shares Amount - --------------------------------------- ------- ------- ---------- <S> <C> <C> <C> BASIC EPS Income available to common stockholders $12,520 28,268 $0.44 ===== EFFECT OF DILUTIVE SECURITIES Options - 1,096 Convertible preferred stock - - DILUTED EPS Net income + assumed conversions $12,520 29,364 $0.43 ===== </TABLE> F. ENVIRONMENTAL In connection with the Western transaction, the Company acquired 12 manufactured gas sites located in Kansas which may contain coal tar and other potentially harmful materials that are classified as hazardous material. Hazardous materials are subject to control or remediation under various environmental laws and regulations. A consent agreement with the Kansas Department of Health and Environment (KDHE) presently governs all future work at these sites. The terms of the consent agreement allow the Company to investigate these sites and set remediation priorities based upon the results of the investigations and risk analysis. The prioritized sites will be investigated over a ten year period. At November 30, 1998, the costs of the investigations and risk analysis have been minimal. Limited information is available about the sites and no testing has been performed. Management's best estimate of the cost of remediation ranges from $100 thousand to $10 million per site based on a limited comparison of costs incurred to remediate comparable sites. These estimates do not give effect to potential insurance recoveries, recoveries through rates or from third parties. The KCC has permitted others to recover their remediation costs through rates. It should be noted that additional information and testing could result in costs significantly below or in excess of the amounts estimated above. To the extent that such remediation costs are not recovered, the costs could be material to the Company's results of operations and cash flows depending on the degree of remediation required and number of years over which the remediation must be completed. 8 <PAGE> 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q contains statements concerning Company expectations or predictions of the future that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are intended to be covered by the safe harbor provision of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are based on management's beliefs and assumptions based on information currently available. It is important to note that actual results of Company earnings could differ materially from those projected in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: (i) the effects of weather and other natural phenomena; (ii) increased competition from other energy suppliers as well as alternative forms of energy; (iii) the capital intensive nature of the Company's business; (iv) economic climate and growth in the geographic areas in which the Company does business; (v) the uncertainty of gas and oil reserve estimates; (vi) the timing and extent of changes in commodity prices for natural gas, electricity, and crude oil; (vii) the nature and projected profitability of potential projects and other investments available to the Company; (viii) conditions of capital markets and equity markets; (ix) Year 2000 issues, and (x) the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance and authorized rates. Accordingly, while the Company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in Company documents, the words "anticipate", "expect", "projection", "goal", or similar words are intended to identify forward-looking statements. The Company does not have any intention or obligation to update forward-looking statements after they distribute this 10-Q even if new information, future events or other circumstances have made them incorrect or misleading. A. RESULTS OF OPERATIONS ONEOK, Inc. provides natural gas and related products and services to its customers through regulated and nonregulated segments. The regulated business unit provides natural gas distribution and transmission services for about three-fourths of Oklahoma and two-thirds of Kansas. The Company serves approximately 1.4 million customers in Oklahoma and Kansas. The nonregulated business unit is primarily involved in the marketing, gathering and processing, and production of natural gas and natural gas liquids. CONSOLIDATED OPERATIONS The Company continues to seek opportunities to strengthen its competitive edge and position itself to be a leader in the industry. On December 14, 1998, the Company announced a definitive merger agreement with Southwest Gas Corporation (Southwest). The transaction will add 1.2 million customers to the existing 1.4 million customers and will create the largest stand-alone gas distribution company in the United States. The Company will be the primary gas distribution company in Arizona and Nevada, two of the country's fastest growing states, as well as in Oklahoma and Kansas. The Company will also have a presence in California. The merger is expected to close during the fall of 1999 subject to approvals by Southwest shareholders, state regulators in Arizona, California and Nevada and the Federal Energy Regulatory Commission. Also in December, the Company announced a strategic alliance with Magnum Hunter Resources, Inc. (Magnum). The alliance seeks to maximize natural gas production and development opportunities for both companies. The Company will purchase $50 million of Magnum convertible preferred stock initially becoming a 31 percent equity owner. Additionally, the Company has agreed to participate with Magnum in a pending acquisition of reserves and a gathering system. The participation is limited to $9 million of the proposed $36 million aggregate purchase price and gives the Company the right to participate on a nonpromotive basis in future acquisitions. 9 <PAGE> 10 ONEOK Resources completed two reserve acquisition agreements on November 20, 1998. Both transactions are primarily natural gas reserves located in Oklahoma. A cash for stock agreement with a purchase price of $28.5 million, subject to certain adjustments, includes over 500 producing wells, significant behind pipe reserves and development drilling opportunities located in the Anadarko Basin of Oklahoma. Estimated reserves could exceed 32 Bcfe. A second acquisition of 118 producing gas and oil properties located in Beckham and Roger Mills Counties in Oklahoma has estimated reserves that could exceed 43 Bcfe. This acquisition has a cash purchase price of $25.5 million, subject to certain adjustments. These transactions and the Magnum alliance are consistent with the Company's strategy to acquire additional gas reserves in its primary areas of operation which in turn add value to all of the Company's operations. Certain nonstrategic assets in the nonregulated operations in Oklahoma, Kansas, and Louisiana were sold during the quarter. These assets included a gas treating plant, two gas processing plants, oil and gas reserves and half of the Company's interest in the Sycamore Gas Gathering System. The Company just completed twelve months of operation of the gas assets acquired through the strategic alliance with Western Resources, Inc. (Western). This alliance allowed the Company to extend its regulated operations into the state of Kansas and serve two-thirds of that state. Net income for the first quarter of fiscal 1999 exceeded that for the same quarter one year ago. Income available for common stockholders decreased due to the preferred stock dividends of $9 million in the first quarter of fiscal 1999. For the same period one year ago, there were no preferred stock dividends. The preferred stock upon which the dividends were accrued is the convertible preferred stock, series A and B, which has been issued to Western as part of the strategic alliance with Western. To a significant degree, the preferred dividends negatively affect earnings from the acquisition in the first and fourth quarters of the year due to the weather related fluctuations of the gas operations acquired. During those quarters, the dividend requirement exceeds income before interest and income taxes. <TABLE> <CAPTION> Three Months Ended November 30, (Thousands of dollars) 1998 1997 - --------------------------------------------------- -------- -------- <S> <C> <C> FINANCIAL RESULTS Operating revenues - regulated $186,242 $118,637 Operating revenues - nonregulated 201,229 195,523 -------- -------- Total operating revenues 387,471 314,160 Operating costs 321,341 268,480 Depreciation, depletion and amortization 31,138 17,194 -------- -------- Income before interest and income taxes $ 34,992 $ 28,486 ======== ======== </TABLE> [GRAPH] 10 <PAGE> 11 Year 2000. The Company is currently addressing the effect of Year 2000 (Y2K) issues on its information systems and operations. The Y2K issue arose because many computer systems and application software (IT applications), and plant and equipment (Embedded Technology) were constructed using an abbreviated date field which eliminates the first two digits of the year, assuming that these two digits would always be "19". On January 1, 2000, these systems may incorrectly recognize the date as January 1, 1900. Some IT applications and Embedded Technology may incorrectly process critical financial and operating information or stop processing altogether. The Company recognized this potential problem and began rewriting and remediating its existing IT applications and Embedded Technology. The Company's mainframe software is approximately 75 percent compliant with all other systems being 90 percent compliant. The Company estimates that approximately 75 percent of Embedded Technology, which the Company deems significant to their operations, is Year 2000 compliant. Remediated programs are being tested prior to being declared compliant. The estimated completion date of this program is April 1999, provided that the Company is able to retain, or replace if required, such key personnel as are necessary for the conversion of its remaining programs and applications. The primary business risk associated with Y2K is the Company's ability to continue to transport and distribute gas to its customers without interruption. In the event the Company and/or its suppliers and vendors are unable to remediate the Y2K problem prior to January 1, 2000, operations of the Company could be significantly impacted. In order to mitigate this risk, the Company is developing a contingency plan to continue operations through manual intervention and other procedures should it become necessary to do so. Such procedures may include back-up power supply for its critical pipeline and storage operations and, if necessary, curtailment of supply. The Company's significant storage capacity could be used to supplement system supply in the event its suppliers cannot make deliveries. The Company expects to complete its operational contingency plan by the end of fiscal 1999. The Company is assessing operational risks related to suppliers and vendors with whom they conduct business. Based on this assessment, the Company is in the process of contacting their suppliers and vendors, deemed to be strategic to its operations, concerning Y2K compliance. The Company plans to test such third party compliance to the extent deemed reasonable and necessary to determine compliance. There can be no assurance that the Company's systems or the systems of other companies on which the Company relies, will be converted in a timely manner or that any such failure to convert would not have a material adverse effect on the Company. The Company has spent approximately $1 million to prepare their systems for Y2K compliance and expects remaining costs to be approximately $1 million. REGULATED OPERATIONS The regulated business unit provides natural gas distribution, transportation, gas supply, and storage services in Oklahoma and Kansas. The Company's operations in Oklahoma are conducted through Oklahoma Natural Gas Company Division, ONEOK Gas Transportation Company Division and three wholly-owned subsidiaries, ONEOK Gas Transportation, L.L.C., ONG Transmission Company, and ONEOK Sayre Storage Company, which together form an integrated intrastate natural gas distribution and transmission business which serves residential, commercial, and industrial customers in about 75 percent of the state of Oklahoma. These companies will be collectively referred to herein as Oklahoma Natural Gas (ONG). The Company's operations in Kansas are conducted through Kansas Gas Service Company Division (Kansas Gas Service) and Mid Continent Market Center (MCMC), a wholly-owned transportation company. These companies will be collectively referred to as KGS. KGS's regulated gas 11 <PAGE> 12 operations are primarily engaged in distribution and intrastate gas transportation, as well as gas wheeling, parking, balancing and storage services. Kansas Gas Service serves residential, commercial, and industrial customers in about 67 percent of Kansas. Kansas Gas Service also conducts regulated gas distribution operations in northeastern Oklahoma. ONG is subject to regulatory oversight by the Oklahoma Corporation Commission (OCC). KGS is subject to regulatory oversight by the Kansas Corporation Commission (KCC) and the OCC. <TABLE> <CAPTION> {GRAPH] Three Months Ended November 30, (Thousands of Dollars) 1998 1997 - ------------------------------ -------- -------- <S> <C> <C> FINANCIAL RESULTS Gas Sales $164,570 $106,365 Cost of Gas 89,183 57,435 -------- -------- Gross margins on gas sales 75,387 48,930 PCL, ECT, and transportation margins 20,787 8,192 Other revenues 8,448 4,901 -------- -------- Net revenues 104,622 62,023 Operating expenses 66,168 32,112 Depreciation, depletion and amortization 21,813 13,295 -------- -------- Income before interest and income taxes $ 16,641 $ 16,616 ======== ======== </TABLE> Net revenues, operating expenses, and depreciation, depletion and amortization were higher this quarter than the same quarter one year ago primarily due to inclusion of KGS's operations this quarter. However, unseasonably warm weather, which was not temperature-adjusted in Kansas, reduced the expected increase in gross margins on gas sales. While the number of customers increased by 651,094, the volumes delivered increased by only 7,779 Mmcf. Other revenue increased primarily due to increased storage revenue. On a pro forma basis, assuming the Western acquisition had occurred at September 1, 1997, net revenues and operating expenses would have been $109 million and $67 million, respectively, for the three months ended November 30, 1997. <TABLE> <CAPTION> Three Months Ended November 30, 1998 1997 ------ ------ <S> <C> <C> Gross Margin per Mcf OKLAHOMA Residential $ 4.18 $ 3.50 Commercial $ 2.87 $ 2.28 Industrial $ 1.19 $ 1.04 Pipeline capacity leases $ 0.23 $ 0.18 KANSAS Residential $ 3.36 -- Commercial $ 2.23 -- Industrial $ 1.99 -- End-use customer transportation $ 0.43 -- ======== ======== </TABLE> <TABLE> <CAPTION> Three Months Ended November 30, 1998 1997 ------ ------ <S> <C> <C> Number of customers 1,401,198 750,104 Capital expenditures (thousands) $ 27,969 $ 20,977 Identifiable assets (thousands) $2,036,485 $1,939,168 ========== ========== </TABLE> <TABLE> <CAPTION> Three Months Ended November 30, 1998 1997 ------ ------ <S> <C> <C> Volumes (MMcf) Gas sales Residential 13,843 11,358 Commercial 5,668 5,253 Industrial 1,127 1,681 PCL and ECT 46,298 40,865 ------ ------ Total 66,936 59,157 ====== ====== </TABLE> 12 <PAGE> 13 Nonregulated Operations The Company's nonregulated operations are involved in the marketing, gathering and processing, and production of natural gas and natural gas liquids. The gas marketing subsidiary conducts its activities in 17 states. The Company's interest in gas liquids extraction plants and its producing properties are concentrated principally in Oklahoma and New Mexico. The strategic alliance with Western increased the Company's interest to 42 percent in a New Mexico plant with a gross capacity of 220 Mmcf per day. The Company also operates its headquarters office building and a parking garage. The Company adheres to a prudent risk management strategy of hedging fixed price or location differential transactions using natural gas contracts or other derivative agreements to offset potential price risk exposure. <TABLE> <CAPTION> Three Months Ended November 30, (Thousands of Dollars) 1998 1997 - -------------------------------------------------- ---- ---- <S> <C> <C> FINANCIAL RESULTS COMBINED NONREGULATED OPERATIONS Gas Sales $168,395 $167,330 Cost of Gas 163,980 165,655 -------- -------- Gross margins on gas sales 4,415 1,675 Gas and oil production 13,166 8,322 Gas processing, net 3,694 9,326 Other 15,698 5,090 -------- -------- Net revenues 36,973 24,413 Operating expenses 10,152 8,644 Depreciation, depletion and amortization 8,470 3,899 -------- -------- Income before interest and income taxes $ 18,351 $ 11,870 ======== ======== </TABLE> <TABLE> <CAPTION> Three Months Ended November 30, 1998 1997 ---- ---- COMBINED NONREGULATED NATURAL GAS OPERATIONS <S> <C> <C> Natural gas volumes (MMcf) Marketing 86,556 57,477 Natural gas production 5,714 3,173 Residue gas 1,333 1,478 ------ ------ Total natural gas volumes 93,603 62,128 ------ ------ Less intersegment sales Marketing 2,387 2,886 Natural gas production 1,825 1,127 Residue gas 1,333 492 ------ ------ Total intersegment sales 5,545 4,505 ------ ------ Net Natural gas volumes 88,058 57,623 ====== ====== </TABLE> MARKETING <TABLE> <CAPTION> Three Months Ended November 30, (Thousands of Dollars) 1998 1997 - -------------------------------------------------- ---- ---- <S> <C> <C> Natural gas sales $168,395 $167,330 Cost of Gas 163,980 165,655 -------- -------- Gross margins on gas sales 4,415 1,675 Other 2,026 2,441 -------- -------- Operating revenues 6,441 4,116 Operating costs, net 1,807 947 Depreciation, depletion and amortization 45 129 -------- -------- Income before interest and income taxes $ 4,589 $ 3,040 ======== ======== </TABLE> <TABLE> <CAPTION> Three Months Ended November 30, 1998 1997 ---- ---- OPERATING INFORMATION <S> <C> <C> Natural gas volumes (MMcf) 86,556 57,477 Capital expenditures (thousands) $ 600 -- Identifiable assets (thousands $138,599 $164,993 -------- -------- </TABLE> The Company's marketing operation purchases and markets natural gas, primarily in the mid-continent area of the United States. The Company continues to focus on daily trading rather than on low margin baseload trading. The alliance with Western has increased gas sales volumes by adding a retail customer base to the previous wholesale base. Gas sales revenue remained flat despite increased volumes due to the decrease in the sales rate per Mcf. The Company has been granted a rate schedule by the Federal Energy Regulatory Commission (FERC) to trade electricity at market-based wholesale rates. An exchange agreement to trade natural gas for electricity has been finalized, and the Company is in the process of establishing other agreements. 13 <PAGE> 14 <TABLE> <CAPTION> GATHERING AND PROCESSING Three Months Ended November 30, (Thousands of dollars) 1998 1997 - -------------------------------------------------- ---- ---- <S> <C> <C> Gas processing, net $ 3,556 $ 8,821 Other 6,870 24 ------- ------- Operating revenues 10,426 8,845 Operating costs, net 1,931 1,683 Depreciation, depletion and amortization 516 566 ------- ------- Income before interest and income taxes $ 7,979 $ 6,596 ======= ======= </TABLE> <TABLE> <CAPTION> Three Months Ended November 30, 1998 1997 ---- ---- <S> <C> <C> OPERATING INFORMATION Residue gas (MMcf) 1,333 1,478 Natural gas liquids (MGal) 29,548 58,616 Average NGL's price (MGal) $ 0.227 $ 0.342 Capital expenditures (thousands) $ 3,620 $ 1,017 Identifiable assets (thousands) $54,260 $58,025 ------- ------- </TABLE> The Company's sale of its interest in eleven gas processing plants in the second quarter of fiscal 1998 eliminated its interest in "fuel and shrink" plants which are subject to volatile swings in profitability. The reduction in natural gas liquids volumes for this quarter compared to one year ago was primarily due to the sale of these properties. Revenue from gas processing sales also decreased due to the average price per gallon decreasing from 34.2 cents in the first quarter of fiscal 1998 to 22.7 cents in the first quarter of fiscal 1999. Certain nonstrategic assets sold included a gas processing plant and one-half of the Company's interest in a gas gathering system. Other revenue for the first quarter of fiscal 1999 included the gain on the sale of these assets. PRODUCTION <TABLE> <CAPTION> Three Months Ended November 30, (Thousands of Dollars) 1998 1997 - -------------------------------------------------- ---- ---- <S> <C> <C> Natural gas sales $11,812 $ 6,997 Oil sales 1,354 1,325 Liquids and residue 138 505 Other 118 378 ------- ------- Operating revenues 13,422 9,205 Operating costs, net 3,847 3,460 Depreciation, depletion and amortization 7,637 3,110 ------- ------- Income before interest and income taxes $ 1,938 $ 2,635 ======= ======= </TABLE> <TABLE> <CAPTION> Three Months Ended November 30, 1998 1997 ---- ---- <S> <C> <C> Proved reserves Gas (MMcf) 175,048 84,125 Oil (MBbls) 3,273 2,076 -------- -------- Production Gas (MMcf) 5,714 3,173 Oil (MBbls) 105 70 -------- -------- Average price Gas (Mcf) $ 2.07 $ 2.21 Oil (Bbls) $ 12.94 $ 18.93 -------- -------- Capital expenditures (thousands) $ 3,620 $ 3,633 Identifiable assets (thousands $242,028 $102,583 -------- -------- </TABLE> Gas volumes sold increased this quarter compared to the same quarter one year ago while gas prices decreased. Acquisitions during fiscal 1998 were the primary reason for the increases in volumes. Accordingly, operating costs and depreciation, depletion, and amortization also increased over the same quarter one year ago due to an increased number of wells. FINANCIAL FLEXIBILITY AND LIQUIDITY The Company's capitalization structure is 66 percent equity and 34 percent debt (including short-term debt) at November 30, 1998, and November 30, 1997. During the first quarter of fiscal 1999, the Company filed a shelf registration for $400 million in new long-term debt. The Company issued $200 million in debt under this shelf registration and used the proceeds for general corporate purposes including repayment of short-term debt. In November, 1998, the 14 <PAGE> 15 Company made tender offers on $125 million of 9.70 percent long-term debt and $75 million of 9.75 percent long-term debt with the purpose of reducing overall interest expense. In December, 1998, all but $22 million of this debt was redeemed and replaced with short-term debt at a lower interest rate. It is expected that this short-term debt will be converted to long-term debt during fiscal 1999. The $18.5 million premium associated with the redemption will be amortized over the life of the new notes. Cash provided by operating activities remains strong and continues as the primary source for meeting day-to-day cash requirements. However, due to seasonal fluctuations and additional capital requirements, the Company will continue to periodically access funds through short-term credit agreements and, if necessary, through long-term borrowings. OPERATING CASH FLOWS Operating cash flows for the three months ended November 30, 1998, as compared to the same period one year ago are lower due to changes in accounts receivables and payables and increases in inventories. INVESTING CASH FLOWS Capital expenditures for the three months ended November 30, 1998 and 1997 are as follows: [GRAPH] (MILLIONS OF DOLLARS) 1998 1997 - --------------------- ----- ----- Non-regulated $10.3 $ 4.6 Processing 3.6 1.0 Production 3.7 3.6 Other 3.0 - ----- ----- Regulated $27.9 $20.4 ===== ===== FINANCING CASH FLOW At November 30, 1998, $529 million of long-term debt was outstanding. As of that date, the Company could have issued $800 million of additional long-term debt under the most restrictive provisions contained in its various borrowing agreements. The Company believes that internally generated funds and access to financial markets will be sufficient to meet its normal debt service, dividend requirements, and capital expenditures. LIQUIDITY The regulated segment continues to face competitive pressure to serve the substantial market represented by its large volume customers. The loss of a substantial portion of that load, without recoupment of the revenues from that loss, could have a materially adverse effect on the Company's financial condition. However, rates are structured to reduce the Company's risk in serving its large volume customers. In response to the rules issued by the OCC in January 1998 which would require the Company to competitively bid transmission service into its distribution system, the Company filed a plan on April 1, 1998, for upstream unbundling. The OCC rejected the plan and issued an interim order outlining how the Company was to proceed with upstream unbundling. The ultimate outcome of these proceedings and their impact, if any, on future earnings and cash flow cannot be predicted at this time. 15 <PAGE> 16 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK RISK MANAGEMENT - The Company, substantially through its nonregulated segments, is exposed to market risk in the normal course of its business operations to the impact of market fluctuations in the price of natural gas and oil. Market risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in commodity energy prices. The Company's primary exposure arises from fixed price purchase or sale agreements which extend for periods of up to 48 months, gas in storage inventories utilitized by the gas marketing operation, and anticipated sales of oil and gas production. To a lesser extent, the Company is exposed to risk of changing prices or the cost of intervening transportation resulting from purchasing gas at one location and selling it at another (hereinafter referred to as basis risk). To minimize the risk from market fluctuations in the price of natural gas and oil, the Company uses commodity derivative instruments such as future contracts, swaps and options to hedge existing or anticipated purchase and sale agreements, existing physical gas in storage, and basis risk. None of these derivatives are held for speculative purposes. The Company adheres to policies and procedures which limit its exposure to market risk from open positions and monitors its exposure to market risk. The results of the Company's derivative hedging activities continue to meet its stated objective. All of the Company's long-term debt is fixed-rate and, therefore, does not expose the Company to the risk of earnings or cash flow loss due to changes in market interest rates. Kansas Gas Service uses derivative instruments to hedge the cost of anticipated gas purchases during the winter heating months to protect its customers from upward volatility in the market price of natural gas. The gain or loss resulting from such derivatives is combined with the physical cost of gas and recovered from the customer through the gas purchase clause in rates. The Company has no market risk associated with such activities and, accordingly, these derivatives have been omitted from the value-at-risk disclosures below. VALUE-AT-RISK DISCLOSURE OF MARKET RISK - The estimation of potential losses that could arise from changes in market conditions is typically accomplished through the use of statistical models that seek to predict risk of loss based on historical price and volatility patterns. The value-at-risk (VAR) measurement used by the Company is based on J.P. Morgan's RiskMetrics(TM) model, which measures recent volatility and correlation in the price of natural gas and oil, pulls through current price levels and net deltas, and applies estimates made by management regarding the time required to liquidate positions and the degree of confidence placed in the accuracy of the volatility and correlation estimates. The Company's VAR calculation presents a comprehensive market risk disclosure by combining its commodity derivative portfolio used to hedge price and basis risk together with the current portfolio of firm physical purchase and sale contracts and nonregulated gas-in-storage inventory. At November 30, 1998, the Company's estimated potential one-day favorable or unfavorable impact on future earnings, as measured by the VAR, using a 95 percent confidence level, diversified correlation and assuming three days to liquidate positions is immaterial. The Company's calculated VAR exposure represents an estimate of potential losses that would be recognized for its portfolio of derivative financial instruments and firm physical contracts and nonregulated gas-in-storage assuming hypothetical movements in future market rates and are not necessarily indicative of actual results that may occur. It does not represent the maximum possible loss nor any expected loss that may occur, because actual future gains and losses will differ from those estimated, based on actual fluctuations in the market rates, operating exposures, and the timing thereof, and changes in the Company's portfolio of derivative financial instruments and firm physical contracts. 16 <PAGE> 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS APPLICATION OF ERNEST G. JOHNSON, DIRECTOR OF THE PUBLIC UTILITY DIVISION, OKLAHOMA CORPORATION COMMISSION, TO CONDUCT A FINANCIAL REVIEW OF THE BOOKS AND RECORDS OF OKLAHOMA NATURAL GAS COMPANY, Cause PUD No. 980000570, before the Oklahoma Corporation Commission. On October 13, 1998, the Public Utility Division ("PUD") of the Oklahoma Corporation Commission ("Commission") filed an application requesting that the Commission direct the PUD Staff to conduct a financial review of the Company for the year ending August 31, 1998. The Application also requested that after the Staff has completed its review, the Commission schedule a hearing to consider the appropriate treatment of the issues, and to enter an order which establishes the appropriate remedy, which may include the initiation of a case for determination as to the appropriate levels of rates and charges. The Attorney General has entered an appearance in the case. An Administrative Law Judge, on November 5, 1998, granted the motion to intervene of the Oklahoma Industrial Energy Consumers and on December 3, 1998, granted the motions to intervene of Transok, L.L.C. and Enogex, Inc.. JOINT APPLICATION OF OKLAHOMA NATURAL GAS COMPANY, A DIVISION OF ONEOK, INC., ONEOK GAS TRANSPORTATION COMPANY, A DIVISION OF ONEOK, INC., AND KANSAS GAS SERVICE COMPANY, A DIVISION OF ONEOK, INC., FOR APPROVAL OF THEIR UNBUNDLING PLAN FOR NATURAL GAS SERVICES UPSTREAM OF THE CITY GATES OR AGGREGATION POINTS, Cause PUD No. 980000177, before the Oklahoma Corporation Commission. On October 5, 1998, the Oklahoma Supreme Court determined that the Interim Order was an appealable order and denied the motions to dismiss the appeal. In respect to the Amended Interim Order, on October 22, 1998, the Oklahoma Supreme Court issued an order directing that the motion to dismiss the appeal filed by the Commission be withdrawn as moot and that the Company's motion to dismiss the petition was held in abeyance until the decision stage of the appeal. IN THE MATTER OF COMMISSIONER BOB ANTHONY'S INSPECTION OF THE BOOKS AND RECORDS OF ANY PUBLIC SERVICE CORPORATION AND EXAMINATION, UNDER OATH, OF ANY OFFICER, AGENT OR EMPLOYEE OF SUCH, IN RELATION TO THE BUSINESS AND AFFAIRS OF ARKANSAS LOUISIANA GAS COMPANY, A DIVISION OF NORAM ENERGY CORP., AND OKLAHOMA NATURAL GAS COMPANY, A DIVISION OF ONEOK INC., PURSUANT TO OKLAHOMA CONSTITUTION ARTICLE 9, SECTIONS 18, 28, AND 34, Cause No. PUD 960000039 and Related Dockets (PUD 86-85, 96-100, 16-186), Oklahoma Corporation Commission. On December 15, 1998, the Commission entered its Order denying the motion of ONG to dismiss the Application of Michael Edward McAdams and John Powell Walder for Relief for Improper and Excessive Costs, Cause No. PUD 98000188, seeking a review of the gas purchase agreement between ONG and Dynamic Energy Resources. The Application was remanded to the Administrative Law Judge for purposes of conducting a full evidentiary hearing on the merits and preparing a report to the Commission. APPLICATION OF ERNEST G. JOHNSON, DIRECTOR OF THE PUBLIC UTILITY DIVISION OF THE OKLAHOMA CORPORATION COMMISSION, TO REVIEW THE RATES, CHARGES, SERVICES AND SERVICE TERMS OF OKLAHOMA NATURAL GAS COMPANY, A DIVISION OF ONEOK, AND ALL AFFILIATED COMPANIES AND ANY AFFILIATE OR NONAFFILIATE TRANSACTION RELEVANT TO SUCH INQUIRY, Cause PUD No. 980000683, Oklahoma Corporation Commission. On December 18, 1998, the Director of the Commission's Public Utility Division filed an application on behalf of the Commission Staff to initiate a proceeding to review Oklahoma Natural's rates, charges, and services, and any relevant affiliate and non-affiliate transactions, and to establish rates upon completion of such review. The Application contemplates a test year ending November 30, 1998. Staff also requested that Oklahoma Natural be required to prepare and file by March 31, 1999, all testimonies, schedules, and supporting documentation needed to complete Staff's review. 17 <PAGE> 18 UNITED STATES OF AMERICA, EX REL. JACK GRYNBERG V. ALASKA PIPELINE CO., ET AL., (INCLUDING ONEOK, INC.), No. 95-725, in the United States District Court for the District of Columbia. On October 6, 1998, the United States Court of Appeals for the District of Columbia issued an order granting the motion for summary affirmance filed by several of the Appellees, including the Combined Defendants of which the Company is a member, affirming the holding of the District Court that the Court did not have personal jurisdiction over all of the named defendants and that Grynberg has no basis to join the defendants in the same lawsuit. Grynberg can file a motion for rehearing with the Court of Appeals on or before January 14, 1999 or file a petition for writ of certiorari with the United States Supreme Court on or before February 28, 1999. ITEM 5. OTHER INFORMATION INCORPORATED BY REFERENCE. Agreement and Plan of Merger between ONEOK, Inc., Oasis Acquisition Corporation, and Southwest Gas Corporation, dated December 14, 1998. (Incorporated by reference from Exhibit 99.6 of Form 8-K Current Report, dated December 16, 1998.) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND 8-KA (b) REPORTS September 24, 1998 - Filed prospectus and preliminary prospectus supplement relating to Series Senior Insured Quarterly Notes due September 30, 2028. October 2, 1998 - Amended 8-K filed on September 24, 1998 December 16, 1998 - Agreement and Plan of Merger between ONEOK, Inc., Oasis Acquisition Corporation, and Southwest Gas Corporation. 18 <PAGE> 19 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 12th day of January 1999. ONEOK, Inc. Registrant By: J. D. Neal --------------------------------- J. D. Neal Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) 19 <PAGE> 20 Exhibit Index <TABLE> <CAPTION> Exhibit 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 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE 1999 FISCAL YEAR'S FIRST QUARTER ENDED NOVEMBER 30, 1998, AND THE CONSOLIDATED BALANCE SHEET AT AUGUST 31, 1998, FOR ONEOK, INC. AND SUBSIDIARIES 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-31-1998 <PERIOD-START> SEP-01-1998 <PERIOD-END> NOV-30-1998 <CASH> 40 <SECURITIES> 0 <RECEIVABLES> 216,837 <ALLOWANCES> 0 <INVENTORY> 173,142 <CURRENT-ASSETS> 404,358 <PP&E> 2,592,911 <DEPRECIATION> 926,029 <TOTAL-ASSETS> 2,496,155 <CURRENT-LIABILITIES> 338,466 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 200 <COMMON> 328,453 <OTHER-SE> 265,959 <TOTAL-LIABILITY-AND-EQUITY> 2,496,155 <SALES> 0 <TOTAL-REVENUES> 387,471 <CGS> 0 <TOTAL-COSTS> 239,836 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 11,355 <INCOME-PRETAX> 23,636 <INCOME-TAX> 9,387 <INCOME-CONTINUING> 14,250 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 14,250 <EPS-PRIMARY> 0.16 <EPS-DILUTED> 0.16 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

PAYX

https://www.sec.gov/Archives/edgar/data/723531/0000723531-99-000002.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, PYUGy4uV1QJa/niOR3I10Widb1etZ8ql5RTnyN9jagnLybZ8NnWHy7fo6o9HcXNL 5/glr5h6Ilv6+2gSRIFEVA== <SEC-DOCUMENT>0000723531-99-000002.txt : 19990318 <SEC-HEADER>0000723531-99-000002.hdr.sgml : 19990318 ACCESSION NUMBER: 0000723531-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYCHEX INC CENTRAL INDEX KEY: 0000723531 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 161124166 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11330 FILM NUMBER: 99566652 BUSINESS ADDRESS: STREET 1: 911 PANORAMA TRAIL S CITY: ROCHESTER STATE: NY ZIP: 14625-0397 BUSINESS PHONE: 7163856666 MAIL ADDRESS: STREET 1: 911 PANORAMA TRAIL SOUTH CITY: ROCHESTER STATE: NY ZIP: 14625-0397 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <TEXT> 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 FEBRUARY 28, 1999 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 0-11330 PAYCHEX, INC. (Exact name of registrant as specified in its charter) DELAWARE 16-1124166 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 911 PANORAMA TRAIL SOUTH, ROCHESTER, NEW YORK 14625-0397 (Address of principal executive offices) (Zip Code) (716) 385-6666 (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 (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 163,965,059 Shares - ---------------------------- -------------------------------- CLASS OUTSTANDING AT FEBRUARY 28, 1999 <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAYCHEX, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts) For the three months For the nine months ended February 28, ended February 28, 1999 1998 1999 1998 Service revenues: Payroll $144,257 $122,239 $403,274 $335,632 HRS-PEO 14,166 9,634 37,386 26,361 ------- ------- ------- ------- Total service revenues 158,423 131,873 440,660 361,993 PEO direct costs billed (A) 148,292 139,482 429,823 363,166 ------- ------- ------- ------- Total revenue 306,715 271,355 870,483 725,159 PEO direct costs (A) 148,292 139,482 429,823 363,166 Operating costs 40,989 35,347 113,737 97,544 Selling, general and administrative expenses 68,941 61,674 191,791 166,668 ------- ------- ------- ------- Operating income 48,493 34,852 135,132 97,781 Investment income 3,073 2,349 9,040 6,828 ------- ------- ------- ------- Income before income taxes 51,566 37,201 144,172 104,609 Income taxes 15,366 10,825 42,963 30,441 ------ ------- ------- ------- Net income $ 36,200 $ 26,376 $101,209 $ 74,168 ======= ======= ======= ======= Basic earnings per share $ .22 $ .16 $ .62 $ .46 ======= ======= ======= ======= Diluted earnings per share $ .22 $ .16 $ .61 $ .45 ======= ======= ======= ======= Weighted-average common shares outstanding 163,795 163,079 163,541 162,959 ======= ======= ======= ======= Weighted-average shares assuming dilution 165,956 164,990 165,789 164,642 ======= ======= ======= ======= Cash dividends per common share $ .09 $ .06 $ .24 $ .16 ======= ======= ======= ======= - ------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. (A) Wages and payroll taxes of PEO worksite employees and their related benefit premiums and claims. <PAGE> PAYCHEX, INC. CONSOLIDATED BALANCE SHEETS (In thousands) February 28, May 31, 1999 1998 (UNAUDITED) (AUDITED) ASSETS Current assets: Cash and cash equivalents $ 54,565 $ 35,571 Investments 264,894 214,967 Interest receivable 14,525 13,227 Accounts receivable 59,296 54,596 Deferred income taxes 949 1,525 Prepaid expenses and other current assets 5,986 4,391 --------- --------- Current assets before ENS investments 400,215 324,277 Electronic Network Services investments 1,478,086 1,154,501 --------- --------- Total current assets 1,878,301 1,478,778 Property and equipment - net 67,904 64,698 Deferred income taxes 1,301 517 Other assets 12,826 5,794 --------- --------- Total assets $1,960,332 $1,549,787 ========= ========= LIABILITIES Current liabilities: Accounts payable $ 8,171 $ 10,496 Accrued compensation and related items 31,878 33,649 Deferred revenue 5,876 4,443 Accrued income taxes 7,965 2,628 Other current liabilities 19,483 13,960 --------- --------- Current liabilities before ENS client deposits 73,373 65,176 Electronic Network Services client deposits 1,471,233 1,150,484 --------- --------- Total current liabilities 1,544,606 1,215,660 Other long-term liabilities 5,096 4,520 --------- --------- Total liabilities 1,549,702 1,220,180 STOCKHOLDERS' EQUITY Common stock, $.01 par value, authorized 300,000 shares Issued: 163,965/February 28, 1999 and 163,188/May 31, 1998 1,640 1,632 Additional paid-in capital 62,336 46,463 Retained earnings 340,036 278,107 Accumulated other comprehensive income 6,618 3,405 --------- --------- Total stockholders' equity 410,630 329,607 --------- --------- Total liabilities and stockholders' equity $1,960,332 $1,549,787 ========= ========= - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. <PAGE> PAYCHEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) For the nine months ended February 28, 1999 1998 OPERATING ACTIVITIES Net income $101,209 $ 74,168 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization on depreciable and intangible assets 16,206 13,646 Amortization of premiums and discounts on available-for sale securities 7,557 6,013 Provision for deferred income taxes (2,058) (2,256) Provision for bad debts 1,363 1,523 Net realized gains on sales of available-for-sale securities (2,813) (414) Changes in operating assets and liabilities: Interest receivable (1,298) (1,052) Accounts receivable (6,063) (7,289) Prepaid expenses and other current assets (1,595) (2,490) Accounts payable and other current liabilities 17,670 20,319 Net change in other assets and liabilities (1,496) 1,237 ------- ------- Net cash provided by operating activities 128,682 103,405 INVESTING ACTIVITIES Purchases of available-for-sale securities (571,285) (315,672) Proceeds from sales of available-for-sale securities 352,013 134,060 Proceeds from maturities of available-for-sale securities 31,135 4,914 Net change in Electronic Network Services money market securities and other cash equivalents (184,548) (367,796) Net change in Electronic Network Services client deposits 320,749 456,632 Purchases of property and equipment, net of disposals (18,482) (21,764) Purchases of other assets (3,418) (388) ------- ------- Net cash used in investing activities (73,836) (110,014) FINANCING ACTIVITIES Proceeds from exercise of stock options 3,428 1,575 Dividends paid (39,280) (26,081) Other - (26) ------- ------- Net cash used in financing activities (35,852) (24,532) ------- ------- Increase/(decrease) in Cash and cash equivalents 18,994 (31,141) Cash and cash equivalents, beginning of period 35,571 50,213 ------- ------- Cash and cash equivalents, end of period $ 54,565 $ 19,072 ======= ======= - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. <PAGE> PAYCHEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FEBRUARY 28, 1999 A) The accompanying unaudited Consolidated Financial Statements of Paychex, Inc., and its wholly-owned subsidiaries 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, the Consolidated Financial Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the information furnished herein reflects all adjustments (consisting of items of a normal recurring nature) which are necessary for a fair presentation of the results for the interim period. Operating results for the nine months ended February 28, 1999, are not necessarily indicative of the results that may be expected for the full year ended May 31, 1999. There is no significant seasonality to the Company's business. However, during the third fiscal quarter, the number of new payroll segment clients and new PEO worksite employees tends to be higher than the rest of the fiscal year. Consequently, greater sales commission expenses are reported in the third quarter. The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Footnotes presented in the Company's Annual Report on Form 10-K for the year ended May 31, 1998. Certain amounts from the prior year are reclassified to conform to fiscal 1999 presentations. B) Basic earnings per share, diluted earnings per share, cash dividends per common share, weighted-average common shares outstanding, weighted-average shares assuming dilution and all other applicable information for the three months and nine months ended February 28, 1998, have been adjusted to reflect a three-for-two stock split effected in the form of 50% stock dividends to holders of record on May 8, 1998, and distributed on May 22, 1998. For the three months and nine months ended February 28, 1999, stock options were exercised for 347,000 shares and 777,000 shares, respectively, of the Company's common stock. <PAGE> C) Investments and ENS investments: Investments and ENS investments consist of various governmental securities, investment grade municipal securities, money market securities and other cash equivalents. February 28, May 31, 1999 1998 (In thousands) (UNAUDITED) (AUDITED) ---------------------- --------------------- COST FAIR VALUE COST FAIR VALUE Type of issue Money market securities and other cash equivalents $ 899,489 $ 899,489 $ 714,941 $ 714,941 Available-for-sale securities: General obligation municipal bonds 280,609 283,831 212,222 213,940 Pre-Refunded municipal bonds 298,725 302,966 236,151 238,462 Revenue municipal bonds 251,977 254,907 199,545 200,850 Other securities 21 69 21 65 --------- --------- --------- --------- Total available-for-sale securities 831,332 841,773 647,939 653,317 Other 1,424 1,718 1,210 1,210 --------- --------- --------- --------- Total Investments and ENS investments $1,732,245 $1,742,980 $1,364,090 $1,369,468 ========= ========= ========= ========= Classification of investments on Consolidated Balance Sheets: Investments $ 261,012 $ 264,894 $ 213,606 $ 214,967 ENS investments 1,471,233 1,478,086 1,150,484 1,154,501 --------- --------- --------- --------- $1,732,245 $1,742,980 $1,364,090 $1,369,468 ========= ========= ========= ========= D) Property and equipment - net: February 28, May 31, 1999 1998 (In thousands) (UNAUDITED) (AUDITED) Land and improvements $ 2,815 $ 2,815 Buildings and improvements 26,642 24,914 Data processing equipment and software 70,284 64,247 Furniture, fixtures and equipment 58,991 52,752 Leasehold improvements 8,847 7,323 ------- ------- 167,579 152,051 Less accumulated depreciation and amortization 99,675 87,353 ------- ------- $ 67,904 $ 64,698 ======= ======= <PAGE> E) Segment Information: Effective May 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement requires the Company to report segment financial information consistent with the presentation made to the Company's management for decision-making purposes. Prior year segment disclosures have been restated to be consistent. The Company has two business segments: Payroll and Human Resource Services-Professional Employer Organization (HRS-PEO). The Payroll segment is engaged in the preparation of payroll checks, internal accounting records, all federal, state and local payroll tax returns, and collection and remittance of payroll obligations for small- to medium-sized businesses. The HRS-PEO segment specializes in providing small- and medium-sized businesses with cost-effective outsourcing solutions for their employee benefits. HRS-PEO products include 401(k) plan recordkeeping services, section 125 plans, workers' compensation, group benefits, and state unemployment insurance services, employee handbooks and management services. As an outsourcing solution, HRS-PEO relieves the business owner of human resource administration, employment regulatory compliance, workers' compensation coverage, health care and other employee-related responsibilities. Consistent with PEO industry practice, HRS-PEO revenue includes all amounts billed to clients for the services provided. Corporate expenses are primarily related to the Information Technology, Organizational Development, Finance, Marketing and Senior Management functions of the Company. For the three months For the nine months ended February 28, ended February 28, (In thousands) 1999 1998 1999 1998 Total revenue: Payroll $144,257 $122,239 $403,274 $335,632 HRS-PEO revenue: Service revenue 14,166 9,634 37,386 26,361 PEO direct costs billed (A) 148,292 139,482 429,823 363,166 ------- ------- ------- ------- Total HRS-PEO revenue 162,458 149,116 467,209 389,527 ------- ------- ------- ------- Total revenue 306,715 271,355 870,483 725,159 PEO direct costs (A) 148,292 139,482 429,823 363,166 ------- ------- ------- ------- Total revenue less PEO direct costs 158,423 131,873 440,660 361,993 ======= ======= ======= ======= Operating income: Payroll 60,993 48,094 171,556 133,558 HRS-PEO 3,236 496 8,422 2,694 ------- ------- ------- ------- Total operating income 64,229 48,590 179,978 136,252 Corporate expenses 15,736 13,738 44,846 38,471 Investment income 3,073 2,349 9,040 6,828 ------- ------- ------- ------- Income before income taxes $ 51,566 $ 37,201 $144,172 $104,609 ======= ======= ======= ======= Investment revenue included in Payroll revenue $ 14,775 $ 12,469 $ 38,535 $ 30,805 ======= ======= ======= ======= (A) Wages and payroll taxes of PEO worksite employees and their related benefit premiums and claims. <PAGE> F) Comprehensive income: Comprehensive income is comprised of two components: net income and other comprehensive income. Comprehensive income includes all changes in equity during a period except those resulting from transactions with owners of the Company. The unrealized gains and losses, net of applicable taxes, related to available-for-sale securities is the only component reported in Accumulated other comprehensive income in the Consolidated Balance Sheets for the Company. Comprehensive income, net of related tax effects, is as follows: For the three months For the nine months ended February 28, ended February 28, (In thousands) 1999 1998 1999 1998 Net income $36,200 $26,376 $101,209 $74,168 Unrealized gains on securities, net of reclassification adjustments 253 1,625 3,213 3,879 ------ ------ ------- ------ Total comprehensive income $36,453 $28,001 $104,422 $78,047 ====== ====== ======= ====== <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis reviews the Company's operating results for the three months and nine months ended February 28, 1999 (fiscal 1999) and 1998 (fiscal 1998), and its financial condition at February 28, 1999. The focus of this review is on the underlying business reasons for significant changes and trends affecting revenues, net income and financial condition. This review should be read in conjunction with the accompanying February 28, 1999 Consolidated Financial Statements, and the related Notes to Consolidated Financial Statements contained in this Form 10-Q. Forward-looking statements in this Management's Discussion and Analysis are qualified by the cautionary statement in Exhibit 99, contained in this Form 10-Q. Results of Operations (In thousands, except per share amounts) For the three months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Service revenues $ 158,423 +20.1% $ 131,873 Operating income $ 48,493 +39.1% $ 34,852 Income before income taxes $ 51,566 +38.6% $ 37,201 Net income $ 36,200 +37.2% $ 26,376 Basic earnings per share $ .22 +37.5% $ .16 Diluted earnings per share $ .22 +37.5% $ .16 =============================================================================== For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Service revenues $ 440,660 +21.7% $ 361,993 Operating income $ 135,132 +38.2% $ 97,781 Income before income taxes $ 144,172 +37.8% $ 104,609 Net income $ 101,209 +36.5% $ 74,168 Basic earnings per share $ .62 +34.8% $ .46 Diluted earnings per share $ .61 +35.6% $ .45 =============================================================================== The Company's ability to continually grow its client base, increase the utilization of ancillary services and decrease operating expenses as a percent of service revenues, resulted in record service revenues and net income for the three months and nine months ended February 28, 1999. <PAGE> Payroll segment: (In thousands) For the three months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Service revenue $ 144,257 +18.0% $ 122,239 Investment revenue included in Payroll service revenue $ 14,775 +18.5% $ 12,469 Operating income $ 60,993 +26.8% $ 48,094 =============================================================================== For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Service revenue $ 403,274 +20.2% $ 335,632 Investment revenue included in Payroll service revenue $ 38,535 +25.1% $ 30,805 Operating income $ 171,556 +28.5% $ 133,558 =============================================================================== Client statistics at February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Payroll clients 316.9 +10.6% 286.6 Taxpay clients 246.7 +16.3% 212.2 Direct Deposit clients 130.1 +34.1% 97.0 Check Signing clients 38.1 +19.8% 31.8 =============================================================================== Revenues: Service revenues include Payroll, Taxpay and Direct Deposit service fees and investment revenue. Investment revenue is earned during the period between collecting client funds and remitting the funds to the applicable tax authorities for Taxpay clients and client employees for Direct Deposit clients. Investment revenue also includes net realized gains and losses from the sale of available-for-sale securities. The increases in service revenue are primarily related to the growth of the Payroll client base, including improvement in client retention, and increased utilization of ancillary services such as Taxpay, Direct Deposit and Check Signing by both new and existing clients. At February 28, 1999, approximately 78% of Payroll clients utilize the Taxpay service. Client utilization of this product is expected to mature within the next several years within a range of 82% to 87%. Client utilization of Direct Deposit was approximately 41% at February 28, 1999, and is expected to provide growth opportunities for the remainder of fiscal 1999 and beyond. Full-year fiscal 1999's percentage growth in Payroll service revenue is expected to be slightly less than 20%, as compared to fiscal 1998's growth of 23%. The anticipated decrease in revenue growth reflects the impact of lower interest rates and the maturing of Taxpay. Additional discussion on interest rates and related risk is included in the Liquidity and Capital Resources section under the caption "Investments and ENS investments". Operating income: Operating income increased as a result of continued growth of the client base, increased utilization of ancillary services, and leveraging of the segment's operating expense base. <PAGE> HRS-PEO segment: (In thousands) For the three months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Service revenue $ 14,166 + 47.0% $ 9,634 Operating income $ 3,236 +552.4% $ 496 =============================================================================== For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Service revenue $ 37,386 + 41.8% $ 26,361 Operating income $ 8,422 +212.6% $ 2,694 =============================================================================== Client statistics at February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- 401(k) clients 9.1 + 75.0% 5.2 401(k) client funds managed externally (in millions) $ 610.7 +102.0% $ 302.3 Section 125 clients 19.3 + 30.4% 14.8 PEO worksite employees 16.9 - 7.1% 18.2 =============================================================================== Revenues: The increases in service revenue are primarily related to the benefits of developing and growing a recurring revenue stream from 401(k) plan recordkeeping clients. Operating income: The increases in HRS-PEO operating income are related to gains in the service revenue and continued benefits from the February 1998 consolidation of the PEO administrative functions in Rochester, New York, which impacted prior year results. During the first half of fiscal 1999, the segment increased its 401(k) plan recordkeeping sales force by approximately 50 individuals to facilitate the goal of attaining more than 10,000 clients by the end of fiscal 1999. The decline in the number of worksite employees is primarily due to the loss of two large PEO clients during the month of November. The loss of these clients is not expected to have a material impact on full-year results. Quarter-over-quarter percentage increases in HRS-PEO service revenue and operating income will vary significantly throughout the year, and any one particular quarter's results may not be indicative of expected full-year results. Full-year fiscal 1999's HRS-PEO service revenue and operating income are anticipated to grow at a rate higher than the Payroll segment's. <PAGE> Corporate expenses: (In thousands) For the three months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Corporate expenses $15,736 +14.5% $13,738 =============================================================================== For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Corporate expenses $44,846 +16.6% $38,471 =============================================================================== Corporate expenses are primarily related to the Information Technology, Organizational Development, Finance, Marketing and Senior Management functions of the Company. The period increases are primarily due to additional employees necessary to support the continued growth of the Company's business segments, and from increased national marketing efforts, commenced in the latter part of the third quarter of fiscal 1998. Investment income: (In thousands) For the three months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Investment income $ 3,073 +30.8% $ 2,349 =============================================================================== For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Investment income $ 9,040 +32.4% $ 6,828 =============================================================================== Investment income earned from the Company's Investments, which does not include the investment revenue earned from ENS investments, has grown mainly as a result of increases in total cash and investment balances generated from continual gains in operating cash flows. Investment income for full-year fiscal 1999, subject to changes in market rates of interest, is expected to grow at a rate lower than net income growth. Income taxes: (In thousands) For the three months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Income taxes $15,366 +41.9% $10,825 Effective income tax rate 29.8% + .7 29.1% =============================================================================== For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Income taxes $42,963 +41.1% $30,441 Effective income tax rate 29.8% + .7 29.1% =============================================================================== The increases in the effective income tax rate are due to the growth in taxable income exceeding the growth in tax-exempt income, which is derived primarily from Taxpay and Direct Deposit products that provide investment revenue. <PAGE> Liquidity and Capital Resources Operating cash flows: (In thousands) For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Operating cash flows $ 128,682 +24.4% $ 103,405 =============================================================================== The increase in operating cash flows resulted primarily from the consistent achievement of record net income. Projected operating cash flows are expected to adequately support normal business operations and forecasted growth, purchases of property and equipment and dividend payments. Furthermore, at February 28, 1999, the Company had $319.5 million in available cash and investments and $297.5 million of available, uncommitted and unsecured lines of credit. Investments and ENS investments: Investments and ENS investments consist of short-term funds and available-for-sale investments which are described in Note C of the Notes to the Consolidated Financial Statements. Investments have increased due to the investment of cash provided by operating activities less purchases of property and equipment and dividend payments. The amount of ENS investments varies significantly based upon the timing of collecting client funds, and remitting the funds to the applicable tax authorities for Taxpay clients and client employees for Direct Deposit clients. As of February 28, 1999, the Company had approximately $899.5 million invested in money market securities and other cash equivalents with an average maturity of less than 30 days, and approximately $841.8 million invested in available-for-sale securities with an average duration of 2.6 years. As of February 28, 1999, the market value of the available-for-sale securities exceeded their cost basis by $10.4 million compared to $5.4 million at the end of May 1998. Interest rate risk - The Company's available-for-sale securities are exposed to market risk from changes in interest rates, as rate volatility will cause fluctuations in the market value of held investments. Increases in interest rates normally decrease the market value of the available-for-sale securities, while decreases in interest rates increase the market value of the available-for-sale securities. In addition, the Company's available-for-sale securities and short-term funds are exposed to earnings risk from changes in interest rates, as rate volatility will cause fluctuations in the earnings potential of future investments. Increases in interest rates quickly increase earnings from short-term funds, and over time increase earnings from available-for-sale securities. Earnings from the available-for-sale securities do not reflect changes in rates until the investments are sold or mature, and the proceeds are reinvested at current rates. Decreases in interest rates have the opposite earnings affect on the available-for-sale securities and short-term funds. During the quarter ended November 30, 1998, the federal funds rate was reduced by 75 basis points to 4.75%. The earnings impact of these rate reductions is not precisely quantifiable because many factors influence the return on the Company's investments. These factors include, among others, daily interest rate changes, the proportional mix of taxable and tax-exempt investments, and changes in tax-exempt and taxable investment rates are not synchronized, nor do they change simultaneously. Subject to the aforementioned factors, a 25 basis point change normally affects the Company's tax-exempt interest rates by approximately 17 basis points. <PAGE> Credit risk - The Company is exposed to credit risk in connection with these investments through the possible inability of the borrowers to meet the terms of the bonds. The Company attempts to limit credit risk by investing primarily in AAA and AA rated securities, A-1 rated short-term securities and limiting amounts that can be invested in any single instrument. At February 28, 1999, approximately 97% of the available-for-sale securities held an AA rating or better, and all short-term securities classified as cash equivalents held an A-1 or equivalent rating. Purchases of property and equipment: (In thousands) For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Purchases of property & equipment $ 18,490 -15.7% $ 21,936 =============================================================================== Purchases of property and equipment in fiscal 1999 are expected to approximate $30 million. Proceeds from stock options: (In thousands) For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Proceeds from stock options $ 3,428 +117.7% $ 1,575 =============================================================================== The increase in proceeds from stock options reflects the exercise of 777,000 shares in fiscal 1999 versus 339,000 shares in fiscal 1998. On May 3, 1999, approximately 500,000 incentive stock options will vest for approximately 2,500 employees, with a weighted-average exercise price of $25.35 per share. The number of grants to be exercised as a result of this vesting is not determinable; however, the shares represent .3% of the total shares outstanding at February 28, 1999, and less than one day's average trading volume in the Company's common stock. Cash dividends and stock splits: (In thousands, except per share amounts) For the nine months ended February 28, 1999 Change 1998 - ------------------------------------------------------------------------------- Cash dividends $ 39,280 +50.6% $ 26,081 Cash dividends per common share $ .24 +50.0% $ .16 =============================================================================== On October 1, 1998, the Company's Board of Directors declared a 50% increase in the Company's quarterly dividend from $.06 per share to $.09 per share. During the quarter ended February 28, 1999, the Company's Board of Directors declared a dividend which was paid February 15, 1999, to shareholders of record on February 1, 1999. The Company distributed a three-for-two stock split effected and distributed in the form of a 50% stock dividend on outstanding shares in May 1998. All financial information within this Form 10-Q has been adjusted for this stock split. OTHER Year 2000 readiness disclosure: The Company is actively pursuing resolution of year 2000 issues. The year 2000 problem originated with the advent of computers, when dates were stored without century indicators, in an effort to reduce the need for expensive storage space used for input, output and storage media. In order to process and calculate dates correctly, internal computer systems must be changed to handle the year 2000 and beyond. Year 2000 efforts extend past the Company's internal computer systems and require coordination with clients, vendors, government entities, financial institutions and other third parties to understand their plans for making systems and related interfaces compliant. In response to year 2000 issues, the Company initiated a program to manage progress in year 2000 compliance efforts. The managers of the Company's year 2000 compliance program report directly to the Vice President of Information Technology and provide regular reports to the Company's Senior Management and the Board of Directors. The majority of internal mission-critical systems were year 2000 compliant by the end of calendar year 1998. The remainder of internal mission-critical systems are expected to be completed near the end of the first quarter of calendar year 1999. Processes and procedures are in place to ensure the following: all future internal development and testing follows year 2000 development and testing standards, all projects undertaken in the interim deliver year 2000 compliant solutions, all future third-party hardware and software acquisitions are year 2000 compliant, and all commercial third-party service providers are being queried regarding their year 2000 compliance plans. In addition, the Company is actively working with all government agency partners to determine their year 2000 compliance plans, and has begun making year 2000 changes based on their mandates. The remainder of calendar year 1999 will be used to assess and address year 2000 issues for desktop computers and software, complete interface testing with external agencies and partners, enhance existing normal business contingency plans to address any identified year 2000 issues, and to react to yet unknown changes dictated by third parties, such as government agencies, hardware and software vendors, financial institutions, or utility companies. Third-party interface testing and resolution of year 2000 issues with external agencies and partners is dependent upon those third parties completing their own year 2000 remediation efforts. The Company expects minimal business disruption will occur as a result of year 2000 issues for systems that the Company directly controls. The Company is in the process of enhancing existing normal business contingency plans to address any identified year 2000 issues based on actual testing experience with third parties and assessment of outside risks. There can be no assurance that there will not be an adverse effect on the Company if third parties, such as government agencies, hardware and software vendors, financial institutions or utility companies, do not convert their systems in a timely manner and in a way that is compatible with the Company's systems. However, management believes that ongoing communication with and assessment of these third parties will minimize these risks. The Company currently anticipates expenditures for year 2000 efforts to approximate $5 million, with approximately seventy percent spent through February 28, 1999. The cost of the project and the date on which the Company plans to complete the year 2000 modifications are based on management's best estimates. These estimates were derived from internal assessments and assumptions of future events. The estimates may be adversely affected by the continued availability of personnel and system resources, as well as the failure of third-party vendors, service providers, and agencies to properly address year 2000 issues. There is no guarantee that these estimates will be achieved, and actual results could differ significantly from those anticipated. <PAGE> PART II. OTHER INFORMATION ITEM 5: OTHER INFORMATION The text portion on the Company's press release dated March 17, 1999, regarding its financial results for the three months and nine months ended February 28, 1999, is attached. The related Consolidated Financial Statements are contained in PART I. FINANCIAL INFORMATION of this Form 10-Q. FOR IMMEDIATE RELEASE John M. Morphy, Chief Financial Officer Paychex, Inc. 716-383-3406 or Jan Shuler 716-383-3406 Paychex, Inc. Access Paychex, Inc. News Releases and SEC Form 10-Q at http://www.paychex.com/paychex/finance/finance.html PAYCHEX, INC. REPORTS RECORD THIRD QUARTER RESULTS ROCHESTER, NY, March 17, 1999 -- Paychex, Inc. (NASDAQ: PAYX) today announced record net income of $36.2 million or $.22 diluted earnings per share for the third quarter ended February 28, 1999, a 37% increase over net income of $26.4 million or $.16 diluted earnings per share for the same period last year. Total service revenues were $158.4 million, an increase of 20% over $131.9 million for the same period last year. For the nine months ended February 28, 1999, net income increased 36% to $101.2 million or $.61 diluted earnings per share as compared to net income of $74.2 million or $.45 diluted earnings per share for the same period last year. Total service revenues were $440.7 million, an increase of 22% over $362.0 million for the same period last year. PAYROLL SEGMENT For the quarter ended February 28, 1999, operating income from Payroll services increased 27% to $61.0 million from $48.1 million for the same period last year. Payroll service revenue was $144.3 million, an increase of 18% over $122.2 million for the same period last year. For the nine months ended February 28, 1999, operating income from Payroll services increased 28% to $171.6 million from $133.6 million for the same period last year. Payroll service revenue was $403.3 million, an increase of 20% over $335.6 million for the same period last year. The increases in revenues and operating income were the result of an 11% year-over-year increase in the Company's payroll client base, and the continued year-over-year growth of the Taxpay and Direct Deposit products. Paychex currently services 316,900 payroll clients, with 246,700 utilizing Taxpay, the Company's tax filing and payment feature, 130,100 taking advantage of the Company's Direct Deposit product, and 38,100 using the Company's Check Signing option. HRS-PEO SEGMENT For the quarter ended February 28, 1999, operating income for the HRS-PEO segment increased to $3.2 million from $.5 million for the same period last year. HRS-PEO service revenue was $14.2 million, an increase of 47% over $9.6 million for the same period last year. For the nine months ended February 28, 1999, operating income for the HRS-PEO segment increased to $8.4 million from $2.7 million for the same period last year. HRS-PEO service revenue was $37.4 million, an increase of 42% over $26.4 million for the same period last year. <PAGE> The increases in service revenue for the quarter and nine months are primarily related to higher revenues from 401(k) plan recordkeeping clients. The increases in operating income for the quarter and nine months are due to service revenue gains, and continued benefits from the February 1998 consolidation of the PEO administrative functions in Rochester, NY, which impacted prior year results. As of February 28, 1999, the segment had 9,100 401(k) plan recordkeeping clients and 16,900 PEO worksite employees. The number of worksite employees represents a 7% decline over a year ago, and is primarily due to the loss of two large PEO clients during November 1998. The loss of these clients is not expected to have a material impact on full-year results. CORPORATE EXPENSES Corporate expenses are primarily related to the Information Technology, Organizational Development, Finance, Marketing and Senior Management functions of the Company. For the quarter ended February 28, 1999, expenses increased 15% from $13.7 million to $15.7 million. For the nine months ended February 28, 1999, expenses increased 17% from $38.5 million to $44.8 million. The period increases are primarily due to additional employees required to support the continued growth of the Company's business segments, and from increased national marketing efforts, commenced in the latter part of the third quarter of fiscal 1998. B. Thomas Golisano, Chairman, President, and Chief Executive Officer of Paychex said, "Payroll client growth, increased utilization of ancillary services, and leveraging of the operating expense base continue to drive the excellent financial results experienced in the third quarter and for the first nine months of fiscal 1999. We continue to be pleased with the future growth prospects of core payroll services, direct deposit, major market payroll services, 401(k) recordkeeping and our workers' compensation offerings." <PAGE> ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 27 - "Financial Data Schedule" is filed electronically. Exhibit 99 - "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. (b) Reports on Form 8-K: - There were no reports filed on Form 8-K during the three month period ended February 28, 1999. 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. PAYCHEX, INC. Date: March 17, 1999 /s/ B. Thomas Golisano ----------------------- B. Thomas Golisano Chairman, President and Chief Executive Officer Date: March 17, 1999 /s/ John M. Morphy ----------------------- John M. Morphy Vice President, Chief Financial Officer and Secretary </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FEBRUARY 28, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES TO CONSOLIDATED FOR FINANCIAL STATEMENTS OF PAYCHEX, INC., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. ON MAY 22, 1998, PAYCHEX, INC., DISTRIBUTED A THREE-FOR-TWO STOCK SPLIT EFFECTED IN THE FORM OF A 50% STOCK DIVIDEND TO STOCKHOLDERS OF RECORD AS OF MAY 8, 1998. THEREFORE, ALL APPLICABLE AMOUNTS FOR THE PRIOR YEAR INCLUDED IN THIS SCHEDULE AFFECTED BY THE STOCK SPLIT HAVE BEEN ADJUSTED. </LEGEND> <RESTATED> <CIK> 0000723531 <NAME> PAYCHEX, INC. <MULTIPLIER> 1,000 <S> <C> <C> <PERIOD-TYPE> 9-MOS 9-MOS <FISCAL-YEAR-END> MAY-31-1999 MAY-31-1998 <PERIOD-START> JUN-01-1998 JUN-01-1997 <PERIOD-END> FEB-28-1999 FEB-28-1998 <CASH> 54,565 19,072 <SECURITIES> 1,742,980 1,574,422 <RECEIVABLES> 73,821 62,807 <ALLOWANCES> 0 0 <INVENTORY> 0 0 <CURRENT-ASSETS> 1,878,301 1,663,375 <PP&E> 167,579 146,505 <DEPRECIATION> 99,675 83,410 <TOTAL-ASSETS> 1,960,332 1,733,146 <CURRENT-LIABILITIES> 1,544,606 1,416,902 <BONDS> 0 0 <PREFERRED-MANDATORY> 0 0 <PREFERRED> 0 0 <COMMON> 1,640 1,087 <OTHER-SE> 408,990 310,092 <TOTAL-LIABILITY-AND-EQUITY> 1,960,332 1,733,146 <SALES> 0 0 <TOTAL-REVENUES> 870,483 725,159 <CGS> 0 0 <TOTAL-COSTS> 543,560 460,710 <OTHER-EXPENSES> 0 0 <LOSS-PROVISION> 0 0 <INTEREST-EXPENSE> 0 0 <INCOME-PRETAX> 144,172 104,609 <INCOME-TAX> 42,963 30,441 <INCOME-CONTINUING> 101,209 74,168 <DISCONTINUED> 0 0 <EXTRAORDINARY> 0 0 <CHANGES> 0 0 <NET-INCOME> 101,209 74,168 <EPS-PRIMARY> .62 .46 <EPS-DILUTED> .61 .45 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>3 <TEXT> EXHIBIT 99: "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain written and oral statements made by the Company's management may constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by such words and phrases as "expects" and "could be." Because they are forward-looking, they should be evaluated in light of important risk factors. These risk factors include general market conditions, including demand for the Company's products and services, competition and price levels; changes in the laws regulating collection and payment of payroll taxes, professional employer organizations, and employee benefits, including 401(k) plans, workers' compensation, state unemployment, and section 125 plans; delays in the development and marketing of new products and services; the possibility of catastrophic events that could impact the Company's operating facilities, computer technology and communication systems, including Year 2000 issues; and changes in short- and long-term interest rates and the credit rating of cash, cash equivalents, and securities held in the Company's investment portfolios. </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

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https://www.sec.gov/Archives/edgar/data/80424/0000080424-99-000002.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, WJrNs0E9OBpNitLK0Piq3N/EZqJOuo1Kdsh+3/EZAxKwiVKCEZgOJ+LOvFgCO6nV lUfNmgjn5EIUdHsOywEf8Q== <SEC-DOCUMENT>0000080424-99-000002.txt : 19990208 <SEC-HEADER>0000080424-99-000002.hdr.sgml : 19990208 ACCESSION NUMBER: 0000080424-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990205 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: SEC FILE NUMBER: 001-00434 FILM NUMBER: 99521991 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 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1998 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 1,327,749,063 shares of Common Stock outstanding as of January 22, 1999. 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, 1998 and 1997, the Consolidated Balance Sheets as of December 31, 1998 and June 30, 1998, and the Consolidated Statements of Cash Flows for the six months ended December 31, 1998 and 1997 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 periods 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. THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS <TABLE> <CAPTION> Amounts in Millions Except Per Share Amounts Three Months Ended Six Months Ended December 31 December 31 1998 1997 1998 1997 ------- ------ ------- ------- <S> <C> <C> <C> <C> NET SALES $ 9,934 $ 9,641 $19,444 $18,996 Cost of products sold 5,375 5,322 10,557 10,530 Marketing, research, and administrative expenses 2,722 2,631 5,176 5,039 ------- ------- ------- ------- OPERATING INCOME 1,837 1,688 3,711 3,427 Interest expense 166 141 323 262 Other income, net 60 47 110 98 ------- ------- ------- ------- EARNINGS BEFORE INCOME TAXES 1,731 1,594 3,498 3,263 Income taxes 589 548 1,189 1,130 ------- ------- ------- ------- NET EARNINGS $ 1,142 $ 1,046 $ 2,309 $ 2,133 ======= ======= ======= ======= PER COMMON SHARE: Basic net earnings $ 0.84 $ 0.76 $ 1.70 $ 1.55 Diluted net earnings $ 0.78 $ 0.71 $ 1.58 $ 1.44 Dividends $ 0.285 $ 0.253 $ 0.570 $ 0.506 AVERAGE COMMON SHARES OUTSTANDING 1,330.1 1,346.0 </TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> Amounts in Millions December 31 June 30 ASSETS 1998 1998 ------ ----------- --------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 2,094 $ 1,549 Investment securities 702 857 Accounts receivable 3,284 2,781 Inventories Materials and supplies 1,237 1,225 Work in process 391 343 Finished products 1,799 1,716 Deferred income taxes 768 595 Prepaid expenses and other current assets 1,711 1,511 --------- --------- TOTAL CURRENT ASSETS 11,986 10,577 PROPERTY, PLANT AND EQUIPMENT 21,544 20,152 LESS ACCUMULATED DEPRECIATION 8,705 7,972 --------- --------- TOTAL PROPERTY, PLANT AND EQUIPMENT 12,839 12,180 GOODWILL AND OTHER INTANGIBLE ASSETS 7,123 7,011 OTHER NON-CURRENT ASSETS 1,203 1,198 --------- --------- TOTAL ASSETS $ 33,151 $ 30,966 ========= ========= <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ <S> <C> <C> CURRENT LIABILITIES Accounts payable and accrued liabilities $ 7,371 $ 6,969 Debt due within one year 2,965 2,281 --------- --------- TOTAL CURRENT LIABILITIES 10,336 9,250 LONG-TERM DEBT 6,408 5,765 DEFERRED INCOME TAXES 660 428 OTHER NON-CURRENT LIABILITIES 2,922 3,287 --------- --------- TOTAL LIABILITIES 20,326 18,730 SHAREHOLDERS' EQUITY Preferred stock 1,803 1,821 Common stock-shares outstanding - Dec 31 1,326.4 1,326 June 30 1,337.4 1,337 Additional paid-in capital 1,061 907 Reserve for ESOP debt retirement (1,611) (1,616) Accumulated comprehensive income (1,117) (1,357) Retained earnings 11,363 11,144 --------- --------- TOTAL SHAREHOLDERS' EQUITY 12,825 12,236 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,151 $ 30,966 ========= ========= </TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Amounts in Millions Six Months Ended December 31 1998 1997 ------------ ------------ <S> <C> <C> CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 1,549 $ 2,350 OPERATING ACTIVITIES Net earnings 2,309 2,133 Depreciation and amortization 841 774 Deferred income taxes 58 51 Change in: Accounts receivable (441) (215) Inventories (69) (212) Accounts Payables and Accruals 207 (395) Other Operating Assets & Liabilities (651) (270) Other (269) (31) ------------ ------------ TOTAL OPERATING ACTIVITIES 1,985 1,835 ------------ ------------ INVESTING ACTIVITIES Capital expenditures (1,130) (1,071) Proceeds from asset sales and retirements 436 141 Acquisitions (107) (2,379) Change in investment securities 173 (257) ------------ ------------ TOTAL INVESTING ACTIVITIES (628) (3,566) ------------ ------------ FINANCING ACTIVITIES Dividends to shareholders (814) (732) Change in short-term debt 631 2,004 Additions to long-term debt 842 503 Reduction of long-term debt (264) (110) Proceeds from stock options 85 54 Purchase of treasury shares (1,292) (960) ------------ ------------ TOTAL FINANCING ACTIVITIES (812) 759 ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 0 (73) ------------ ------------ CHANGE IN CASH AND CASH EQUIVALENTS 545 (1,045) ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,094 $ 1,305 ============ ============ </TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts in Millions 1. Comprehensive Income - Total comprehensive income is comprised primarily of net earnings, net currency translation gains and losses, and net unrealized gains and losses on securities. Total comprehensive income for the three months ended December 31, 1998 and 1997 was $1,295 and $734, respectively. For the six months ended December 31, 1998 and 1997, total comprehensive income was $2,549 and $1,649 respectively. 2. Segment Information <TABLE> <CAPTION> Three Months Europe, Ended North Middle East Latin December 31 America and Africa Asia America Corporate Total ------------- ------------- ------------- ------------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> Net Sales 1998 $ 4,927 $ 3,131 $ 949 $ 741 $ 186 $ 9,934 1997 4,832 3,044 906 689 170 9,641 Earnings Before Income Taxes 1998 1,148 493 126 110 (146) 1,731 1997 1,035 432 124 102 (99) 1,594 Net Earnings 1998 752 324 85 88 (107) 1,142 1997 670 290 84 81 (79) 1,046 <CAPTION> Six Months Europe, Ended North Middle East Latin December 31 America and Africa Asia America Corporate Total ------------- ------------- ------------- ------------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> Net Sales 1998 $ 9,679 $ 6,252 $ 1,759 $ 1,415 $ 339 $ 19,444 1997 9,514 6,041 1,782 1,285 374 18,996 Earnings Before Income Taxes 1998 2,329 1,019 266 206 (322) 3,498 1997 2,092 909 252 182 (172) 3,263 Net Earnings 1998 1,498 671 181 162 (203) 2,309 1997 1,342 610 169 143 (131) 2,133 </TABLE> Item 2. Management Discussion and Analysis RESULTS OF OPERATIONS - --------------------- Basic net earnings for the three months ended December 31, 1998 were $ .84 per share, an 11 percent increase over the same quarter of the prior year. Worldwide net earnings for the quarter were $1.14 billion, a nine percent increase. The difference between the earnings per share and the net earnings increases was primarily due to the Company's share repurchase program. Worldwide net sales for the quarter were $9.9 billion, a three percent increase over the same quarter of the prior year. Weaker currencies, primarily in Asia and Latin America, reduced sales by one percent. Unit volume was flat, with the difference in sales and volume growth caused by favorable pricing and mix effects. Basic net earnings for the six months ended December 31, 1998 were $1.70 per share, a 10 percent increase versus a year ago. Net earnings for the same period were $2.31 billion, an eight percent increase over the prior year. Worldwide sales for the six-month period grew two percent to $19.4 billion, ahead of flat unit volume, due largely to favorable pricing impacts. Unfavorable exchange rates reduced sales by two percent year-to-date. Gross margin was 45.9 percent for the quarter ended December 31, 1998 compared to 44.8 percent in the same quarter of the prior year and 43.3 percent for the full fiscal year ended June 30, 1998. Gross margin was positively impacted this quarter by improved pricing, product mix, and lower manufacturing expenses. Operating margin was 18.5 percent for the quarter compared to 17.5 percent in the same quarter a year ago and 16.3 percent for the prior fiscal year. The improvement in operating margin reflected pricing-driven improvements in gross margin, which were partially offset by higher marketing, research and administrative expenditures behind product innovations, and the negative impact of unfavorable exchange rates. NORTH AMERICA - ------------- Net sales in North America for the quarter ended December 31, 1998 were up two percent versus the same quarter in the prior year on a one percent unit volume increase. Sales growth was primarily driven by improved pricing in Laundry and Cleaning, Beauty Care, and Paper. The region achieved a 12 percent net earnings increase due primarily to pricing and cost improvements. The pace of the business in North America is improving, with volume up three percent excluding the sale of Duncan Hines. The Region's overall unit volume improvement was driven by Laundry and Cleaning, which enjoyed continued success from improved market shares across all laundry brands and from the launch of Febreze in the fabric care category, and Paper, behind additional tissue capacity. In addition, strong coffee results partially offset unit volume losses resulting from the prior year divestiture of Duncan Hines in the Food and Beverage business. For the six months ended December 31, 1998, net sales were up two percent on flat unit volume. Net earnings increased 12 percent. EUROPE, MIDDLE EAST, AND AFRICA - ------------------------------- Net sales for Europe, Middle East, and Africa for the three months ended December 31, 1998 increased three percent over the same quarter in the prior year on a four percent decline in unit volume. Sales outpaced volume behind improved pricing, primarily in laundry and paper products, and favorable exchange effects in Western Europe. The Region's results were negatively impacted by the economic crisis and currency devaluation in Russia. Despite the impact of Russia and Central and Eastern Europe, the Region's net earnings grew 12 percent, primarily behind improved pricing. Volume softness was largely attributable to the economic crisis in Russia and continued competitive pressures in laundry & cleaning, primarily related to laundry tablet initiatives in Western Europe. However, a number of new brand expansions in the Region are beginning to produce positive results. Food & beverage achieved considerable volume gains behind the strength of Pringles, as well as the successful launch of Sunny Delight in the United Kingdom. In paper, Bounty continues to exceed objectives in Germany and has now assumed market leadership. For the six months ended December 31, 1998, sales were up three percent while unit volume declined three percent. Net earnings increased 10 percent. ASIA - ---- Net sales in Asia for the three months ended December 31, 1998 increased five percent versus the same quarter of the prior year, on five percent unit volume growth, as positive pricing offset the effects of unfavorable exchange rates. Net earnings increased two percent versus the same quarter last year, as sales increases were partially offset by increased investment in new initiatives and economic conditions in the ASEAN region. The region grew volume behind the strengthening of the business in Japan and China and the prior year acquisition of the Ssangyong Paper Company in Korea. Importantly, Japan was able to build market share in a difficult economy through laundry and cleaning initiatives and Pringles. China's unit volume grew behind the national expansion of Vidal Sassoon, improved Whisper Ultra, and advance buying in anticipation of a consumption tax increase. Volume in the remainder of Asia continues to be negatively impacted by the recession and market contraction. For the six months ended December 31, 1998, sales decreased one percent and unit volume increased four percent. Sales did not keep pace with unit volume growth due to the effects of unfavorable exchange rates. Net earnings increased seven percent. LATIN AMERICA - ------------- Latin America net sales for the three months ended December 31, 1998 were up seven percent versus the same quarter of the prior year, on five percent unit volume growth, as improved pricing more than offset the effects of unfavorable exchange rates. Earnings for the Region were up nine percent, as the improvement in sales and pricing exceeded the investment in product upgrades and new initiatives. Unit volume growth for the quarter was led by the strengthening of the business in Mexico and the prior year buy-out of a paper joint venture in Chile and Argentina. For the six months ended December 31, 1998, sales increased 10 percent on a nine percent increase in unit volume. Net earnings increased 14 percent. FINANCIAL CONDITION - ------------------- Total debt increased $1.3 billion since June 30, 1998. The incremental debt was used primarily to finance the previously announced share repurchase program. YEAR 2000 UPDATE - ---------------- As outlined in the 10-K for the year ended June 30, 1998, the Company has developed plans to address the possible exposures related to the impact on its computer systems of the Year 2000. These plans have not changed materially in terms of scope or estimated costs to complete, and are progressing according to previously identified time schedules. Implementation of required changes to critical systems is expected to be completed during fiscal 1999. Testing and certification of critical systems, which includes review of documented remediation work and test results by technical experts, key users, and a central project team, is expected to be successfully completed by December 31, 1999. Critical systems compliance has progressed as follows: % of Applications Year 2000 Compliant ------------------------------------- Actual Planned December 1998 June 1999 ------------- --------- Critical plant-based manufacturing, operating, and control systems 95% 100% All other critical systems 97% 100% Incremental costs, which include contractor costs to modify existing systems and costs of internal resources dedicated to achieving Year 2000 compliance, are charged to expense as incurred. Costs are expected to total approximately $100 million, of which 60% has been spent to date. 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 the Company's 8-K filed on October 15, 1997) (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) (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 no Current Reports on Form 8-K during the quarter ended December 31, 1998 and through the date of this report. 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 D. R. WALKER - -------------------------------------- D. R. Walker Vice President and Comptroller (Principal Accounting Officer) Date: February 5, 1999 EXHIBIT INDEX Exhibit No. Page No. (3-1) Amended Articles of Incorporation (Incorporated by reference to the Company's 8-K filed on October 15, 1997) (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) (11) Computation of Earnings per Share 11 (12) Computation of Ratio of Earnings to Fixed Charges 12 (27) Financial Data Schedule 13 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> EXHIBIT (11) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Computation of Earnings Per Share Amounts in Millions Except Per Share Amounts <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1998 1997 1998 1997 ------- ------- ------- ------- <S> <C> <C> <C> <C> BASIC NET EARNINGS PER SHARE Net earnings $ 1,142 $ 1,046 $ 2,309 $ 2,133 Deduct preferred stock dividends 29 26 54 52 ------- ------- ------- ------- Net earnings applicable to common stock $ 1,113 $ 1,020 $ 2,255 $ 2,081 ======= ======= ======= ======= Average number of common shares outstanding 1,330.1 1,346.0 1,330.1 1,346.0 ======= ======= ======= ======= Basic net earnings per share $ 0.84 $ 0.76 $ 1.70 $ 1.55 ======= ======= ======= ======= DILUTED NET EARNINGS PER SHARE Net earnings $ 1,142 $ 1,046 $ 2,309 $ 2,133 Deduct differential - preferred vs. common dividends 6 6 11 13 ------- ------- ------- ------- Net earnings applicable to common stock $ 1,136 $ 1,040 $ 2,298 $ 2,120 ======= ======= ======= ======= Average number of common shares outstanding 1,330.1 1,346.0 1,330.1 1,346.0 Add potential effect of: Exercise of options 23.5 24.0 23.5 24.0 Conversion of preferred stock 97.8 100.3 97.8 100.3 ------- ------- ------- ------- Average number of common shares outstanding, assuming dilution 1,451.4 1,470.3 1,451.4 1,470.3 ======= ======= ======= ======= Diluted earnings per share $ 0.78 $ 0.71 $ 1.58 $ 1.44 ======= ======= ======= ======= </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <TEXT> EXHIBIT (12) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ------------------------------------------------- Millions of Dollars <TABLE> <CAPTION> Six Months Ended Years Ended June 30 December 31 ----------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1997 1998 ------- ------- ------- ------- ------- ------- ------- <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 $ 3,307 $ 4,022 $ 4,695 $ 5,274 $ 5,704 $ 3,304 $ 3,524 Fixed charges, excluding capitalized interest 569 571 576 534 639 312 370 ------- ------- ------- ------- ------- ------- ------- TOTAL EARNINGS, AS DEFINED $ 3,876 $ 4,593 $ 5,271 $ 5,808 $ 6,343 $ 3,616 $ 3,894 ======= ======= ======= ======= ======= ======= ======= FIXED CHARGES, AS DEFINED Interest expense including capitalized interest $ 501 $ 511 $ 493 $ 457 $ 548 $ 262 $ 323 1/3 of rental expense 87 83 92 77 91 50 47 ------- ------- ------- ------- ------- ------- ------- TOTAL FIXED CHARGES, AS DEFINED $ 588 $ 594 $ 585 $ 534 $ 639 $ 312 $ 370 ======= ======= ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 6.6 7.7 9.0 10.9 9.9 11.6 10.5 </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, 1998 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-30-1999 <PERIOD-START> JUL-1-1998 <PERIOD-END> DEC-31-1998 <EXCHANGE-RATE> 1 <CASH> 2,094 <SECURITIES> 702 <RECEIVABLES> 3,284 <ALLOWANCES> 0 <INVENTORY> 3,427 <CURRENT-ASSETS> 11,986 <PP&E> 21,544 <DEPRECIATION> 8,705 <TOTAL-ASSETS> 33,151 <CURRENT-LIABILITIES> 10,336 <BONDS> 6,408 <PREFERRED-MANDATORY> 0 <PREFERRED> 1,803 <COMMON> 1,326 <OTHER-SE> 9,696 <TOTAL-LIABILITY-AND-EQUITY> 33,151 <SALES> 19,444 <TOTAL-REVENUES> 19,444 <CGS> 10,557 <TOTAL-COSTS> 5,176 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 323 <INCOME-PRETAX> 3,498 <INCOME-TAX> 1,189 <INCOME-CONTINUING> 2,309 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 2,309 <EPS-PRIMARY> 1.70 <EPS-DILUTED> 1.58 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

PGL

https://www.sec.gov/Archives/edgar/data/77385/0000077385-99-000002.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, GVtqwnx9/NhLwvFwpjHJvw8P6hCmkssgn0NmjLurTx9uwQ1hVUsTbAUfyFylu8bm OgUX6ByMH6k/e3+Cz2bwoQ== <SEC-DOCUMENT>0000077385-99-000002.txt : 19990212 <SEC-HEADER>0000077385-99-000002.hdr.sgml : 19990212 ACCESSION NUMBER: 0000077385-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990211 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: SEC FILE NUMBER: 001-05540 FILM NUMBER: 99531326 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 UNITED STATES 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, 1998 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: 35,481,303 shares of Common Stock, without par value, outstanding at January 31, 1999. <TABLE> <CAPTION> Part I. FINANCIAL INFORMATION Item 1. Financial Statements Peoples Energy Corporation CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, 1998 1997 1998 1997 (Thousands, except per-share amounts) <S> <C> <C> <C> <C> OPERATING REVENUES $313,535 $385,165 $1,066,772 $1,271,484 OPERATING EXPENSES: Cost of energy sold 144,693 198,023 473,652 624,811 Operation and maintenance 66,044 60,627 250,746 243,506 Depreciation, depletion and amortization 20,447 18,879 78,763 74,502 Taxes, other than income taxes 34,937 40,542 124,492 143,742 Total Operating Expenses 266,121 318,071 927,653 1,086,561 OPERATING INCOME 47,414 67,094 139,119 184,923 OTHER INCOME AND (DEDUCTIONS) (9,497) (9,158) (34,590) (33,064) EARNINGS BEFORE INCOME TAXES 37,917 57,936 104,529 151,859 INCOME TAXES 14,547 22,393 37,279 55,402 NET INCOME $ 23,370 $ 35,543 $ 67,250 $ 96,457 Average Shares of Common Stock Outstanding 35,457 35,133 35,338 35,043 Basic Earnings Per Share of Common Stock $ 0.66 $ 1.01 $ 1.90 $ 2.75 Diluted Earnings Per Share of Common Stock $ 0.66 $ 1.01 $ 1.90 $ 2.75 Dividends Declared Per Share $ 0.48 $ 0.47 $ 1.92 $ 1.88 The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> <TABLE> <CAPTION> Peoples Energy Corporation CONSOLIDATED BALANCE SHEETS December 31, December 31, 1998 September 30, 1997 (Unaudited) 1998 (Unaudited) (Thousands of Dollars) PROPERTIES AND OTHER ASSETS <S> <C> <C> <C> CAPITAL INVESTMENTS: Property, plant and equipment, at original cost $ 2,247,544 $ 2,209,957 $ 2,131,306 Less - Accumulated depreciation, depletion and amortization 780,357 763,296 726,278 Net property, plant and equipment 1,467,187 1,446,661 1,405,028 Other investments 56,619 45,150 16,301 Total Capital Investments - Net 1,523,806 1,491,811 1,421,329 CURRENT ASSETS: Cash and cash equivalents 13,239 10,622 44,073 Trust fund (See Note 4A) 25,693 - - Temporary cash investments 1,091 4,393 900 Receivables - Customers, net of allowance for uncollectible accounts of $22,476, $23,395, and $26,929, respectively 84,714 54,091 130,650 Other 38,131 27,662 30,714 Accrued unbilled revenues 82,171 23,477 80,615 Materials and supplies, at average cost 17,975 18,246 20,845 Gas in storage, at last-in, first-out cost 60,785 90,790 73,652 Gas costs recoverable through rate adjustments 2,261 4,462 6,584 Regulatory assets of subsidiaries 7,507 7,858 7,356 Prepayments 77,856 71,114 49,352 Total Current Assets 411,423 312,715 444,741 OTHER ASSETS: Non-current regulatory assets of subsidiaries 58,265 76,564 37,245 Deferred charges 23,990 23,410 21,612 Total Other Assets 82,255 99,974 58,857 Total Properties and Other Assets $ 2,017,484 $ 1,904,500 $ 1,924,927 The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> <TABLE> Peoples Energy Corporation CONSOLIDATED BALANCE SHEETS December 31, December 31, 1998 September 30, 1997 (Unaudited) 1998 (Unaudited) (Thousands of Dollars) CAPITALIZATION AND LIABILITIES <S> <C> <C> <C> CAPITALIZATION: Common Stockholders' Equity: Common stock, without par value - Authorized 60,000,000 shares Outstanding 35,481,279, 35,401,992, and 35,161,215 shares, respectively $ 296,603 $ 293,691 $ 284,745 Retained earnings 455,382 449,059 456,023 Accumulated other comprehensive income (1,389) (1,389) (2,357) Total Common Stockholders' Equity 750,596 741,361 738,411 Long-term debt of subsidiaries, exclusive of sinking fund payments and maturities due within one year 521,734 516,604 527,004 Total Capitalization 1,272,330 1,257,965 1,265,415 CURRENT LIABILITIES: Interim loans of subsidiaries 32,540 8,900 45,406 Accounts payable 156,722 123,383 152,381 Dividends payable on common stock 17,031 16,977 16,526 Customer gas service and credit deposits 64,738 48,942 46,421 Sinking fund payments, and redemptions, due within one year - Long-term debt of subsidiaries 24,905 10,400 - Accrued taxes 53,338 24,983 52,621 Gas sales revenue refundable through rate adjustments 771 11,028 - Accrued interest 7,089 10,821 7,151 Temporary LIFO liquidation credit - - 1,855 Total Current Liabilities 357,134 255,434 322,361 DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes - primarily accelerated depreciation 269,590 270,730 254,927 Investment tax credits being amortized over the average lives of related property 32,239 32,387 33,559 Other 86,191 87,984 48,665 Total Deferred Credits and Other Liabilities 388,020 391,101 337,151 Total Capitalization and Liabilities $2,017,484 $ 1,904,500 $1,924,927 The Notes to Consolidated Financial Statements are an integral part of these statements. </TABLE> Peoples Energy Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended December 31, 1998 1997 (Thousands of Dollars) Operating Activities: Net Income $23,370 $35,543 Adjustments to reconcile net income to net cash: Depreciation, depletion, and amortization 20,447 18,879 Deferred income taxes and investment tax credits - net (1,921) 4,856 Change in deferred credits and other liabilities (1,159) 877 Change in deferred charges 16,315 (2,555) Change in current assets and liabilities: Receivables - net (41,091) (49,892) Accrued unbilled revenues (58,694) (57,873) Materials and supplies 271 (1,459) Gas in storage 30,005 4,191 Gas costs recoverable 2,201 (1,420) Regulatory assets 351 8,502 Prepayments (6,742) (6,451) Accounts payable 33,339 2,416 Customer gas service and credit deposits 15,796 1,035 Accrued taxes 28,355 31,976 Gas sales revenue refundable (10,256) (14,894) Accrued interest (3,733) (3,649) Temporary LIFO liquidation credit - 1,856 Net Cash Provided by (Used in) Operating Activities 46,854 (28,062) Investing Activities: Capital expenditures of subsidiaries - construction (18,755) (20,257) Other assets (20,781) (5) Other capital investments (11,503) (7) Other temporary cash investments 3,301 15,000 Net Cash Used in Investing Activities (47,738) (5,269) Financing Activities: Issuance of long-term debt 30,035 - Trust fund (25,693) - Interim loans of subsidiaries - net 23,640 57,691 Retirement of long-term debt of subsidiaries (10,400) - Dividends paid on common stock (16,993) (16,483) Proceeds from issuance of common stock 2,912 2,898 Net Cash Provided by Financing Activities 3,501 44,106 Net Increase in Cash and Cash Equivalents 2,617 10,775 Cash and Cash Equivalents at Beginning of Period 10,622 33,298 Cash and Cash Equivalents at End of Period $13,239 $44,073 The Notes to Consolidated Financial Statements are an integral part of these statements. 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 Energy Services Corporation, Peoples Energy Resources Corp., Peoples Energy Ventures 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. Significant intercompany balances and transactions have been eliminated. Investments and partnerships for which the Company's subsidiaries have at least a 20% interest but less than a majority ownership are accounted for under the equity method. 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, 1998. 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 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. 2B 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. Income taxes and interest paid were as follows: For the three months ended December 31, 1998 1997 (Thousands) Income taxes paid $ 65 $31 Interest paid 13,545 13,138 2C Recovery of Gas 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). For each gas utility, the Commission conducts annual proceedings regarding 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 1997 and 1998, are currently pending before the Commission. 2D Oil and Gas Exploration and Production Properties For oil and gas activities, the Company follows the full-cost method of accounting as prescribed by the SEC. Under the full- cost method, all costs directly associated with the acquisition, exploration and development activities are capitalized, with the principal limitation that such amounts not exceed the present value of estimated future net revenues to be derived from the production of proved oil and gas reserves (the full-cost ceiling). If net capitalized costs exceed the full-cost ceiling at the end of any quarter, a permanent impairment of the assets is required to be charged to earnings in that quarter. Such a charge would have no effect on the Company's cash flow. At December 31, 1998, there was no such charge to income. 2E Accounting Standards On October 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes the standards for reporting and display of comprehensive income and its components in a full set of financial statements. The statement requires that all items that are required to be recognized as components of comprehensive income be reported in a financial statement with equal prominence as the other financial statements. (See Note 6.) In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. Changes in the fair value of derivatives shall be recognized in the current period earnings, unless specific hedge accounting criteria are met. If an entity qualifies for hedge accounting, the derivative's gains and losses will offset the related results of the hedged item in the current period's income statement. SFAS No. 133 requires that formal documentation be maintained and that the effectiveness of the hedge be assessed quarterly. The Company expects to designate its derivative instruments as fair value hedges. The statement must be adopted no later then the Company's fiscal year 2000. The Company does not expect the adoption of this standard to have a material effect on its financial condition or results of operations. 2F Hedging Activities The Company has a formal risk management policy that establishes monitoring and controlling procedures for the execution, recording and reporting of derivative financial instruments. The intent of the policy is to utilize risk management trading solely to minimize risk, and not for any speculative purpose. The Company may use interest rate swaps, forward rate transactions, commodity futures contracts, options and swaps to hedge the impact of interest rate, price and/or volume fluctuations related to its business activities, including price risk related to the geographic location of the commodity (basis risk). The Company accounts for all derivative transactions through hedge accounting. All derivatives are designated as fair value hedges. Realized gains or losses from derivative instruments (through maturity or termination of the hedge) are deferred until the underlying hedged item is sold or matures. If the Company determines that any portion of the underlying hedged item will not be purchased or sold, the unmatched portion of the instrument is marked to market and any gain or loss is recognized in the Consolidated Statement of Income. Recognized gains or losses are recorded on the Consolidated Statement of Income with the underlying hedged item. As of December 31, 1998 the Company had open derivative financial instruments representing hedges of natural gas production of 2.8 Bcf. At December 31, 1998, the Company had deferred losses of $230,000 on the Consolidated Balance Sheet. 3. ENVIRONMENTAL MATTERS 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). The utility subsidiaries are accruing and deferring the costs they incur for environmental activities 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, 1998, the total of the costs deferred by the subsidiaries was $42.2 million. This amount includes the utilities' best estimate of the costs of investigating and remediating the Manufactured Gas Sites. The estimate is based upon a comprehensive review by the utilities and their outside consultants of potential costs associated with conducting investigative and remedial actions at the Manufactured Gas Sites as well as the likelihood of whether such actions will be necessary. While each subsidiary intends to seek contribution from other entities for the costs incurred at the sites, the full extent of such contribution 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, among other things, 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 five of the 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. In November 1998, the utilities reached a settlement agreement with one of the insurance carriers. The costs deferred at December 31, 1998, have been reduced by the proceeds of the settlement. At this time, management cannot determine the timing and extent of the subsidiaries' recovery of costs from the other insurance carriers. Accordingly, the costs deferred at December 31, 1998 have not been reduced to reflect recoveries from other insurance carriers. The Company believes that the costs incurred by Peoples Gas and by North Shore Gas for environmental activities relating to former manufactured gas operations are recoverable 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 the financial position or results of operations of the utilities. 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, 1998, the subsidiaries had recovered $14.7 million of such costs through rates. 4. LONG-TERM DEBT A. Issuance of Bonds On December 18, 1998, the Illinois Development Finance Authority issued $30,035,000 aggregate principal amount of 5.00% Gas Supply Revenue Bonds, Series 1998, which were collateralized by an equal amount of North Shore Gas' 30-year first mortgage bonds, Series M. On January 19, 1999, a portion of the proceeds deposited with the trustee was used to redeem $24,905,000 of previously issued gas supply revenue bonds. The remaining proceeds will be used for the payment of issuance costs and to fund certain construction expenditures. B. Interest-Rate Adjustments The rate of interest on the $27.0 million principal amount of the City of Chicago 1993 Series B Bonds, which are secured by the equal principal amount of Peoples Gas' Adjustable-Rate First and Refunding 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, 1998, have been remarketed. The interest rate on the Series B Bonds will be 3.20 percent for the period December 1, 1998, through November 30, 1999. 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 three year line of credit with The Northern Trust Company, which has since been extended to January 31, 2001. C. Bonds Redeemed On October 1, 1998, Peoples Gas redeemed, from general corporate funds, $10.4 million aggregate principal amount of the City of Joliet 1984 Series C Bonds, which were secured by Peoples Gas' Adjustable-Rate First and Refunding Mortgage Bonds, Series W. 5. EARNINGS PER SHARE Shares used to compute diluted earnings per share are as follows: Average Common Stock Shares (in thousands) Three Months 12-Months Ended Ended December 31, 1998 1997 1998 1997 As reported 35,457 35,133 35,338 35,043 shares Effects of 20 24 19 24 options Diluted shares 35,477 35,157 35,357 35,067 Options for which the average stock price is lower than the grant price are considered antidilutive and, therefore, are not included in the calculation of diluted earnings per share. 6. COMPREHENSIVE INCOME The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," in fiscal 1999. This statement requires the reporting of comprehensive income in addition to net income. Comprehensive income is the total of net income and all other nonowner changes in equity (other comprehensive income). Comprehensive income includes net income plus the effect of the additional pension liability not yet recognized as net periodic pension cost. The Company has reported accumulated other comprehensive income in the Company's Consolidated Balance Sheet. Comprehensive income for the three and twelve months ended December 31, 1998 and 1997 is as follows: Three Months Ended 12 Months Ended December 31, December 31, 1998 1997 1998 1997 Net income $23,370 $35,543 $67,250 $96,457 Other comprehensive income Minimum pension liability - - 1,604 (2,645) Income tax (expense)/benefit - - (636) 1,049 Other comprehensive income, net of tax - - 968 (1,596) Comprehensive Income $23,370 $35,543 $68,218 $94,861 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Net Income Net income decreased $12.2 million, to $23.4 million, and $29.2 million, to $67.3 million, for the three- and 12-month periods ended December 31, 1998, respectively, due to weather that was warmer in the current periods. <TABLE> <CAPTION> A summary of variations affecting income between periods is presented below, with explanations of significant differences following: Three Months Ended 12 Months Ended December 31, 1998 December 31, 1998 Over the Prior Period Over the Prior Period (Thousands of dollars) Amount Percent Amount Percent <S> <C> <C> <C> <C> Operating revenues $ (71,630) (18.6) $ (204,712) (16.1) Cost of energy sold (53,330) (26.9) (151,159) (24.2) Operation and maintenance expenses 5,417 8.9 7,240 3.0 Depreciation, depeletion and amortization expense 1,568 8.3 4,261 5.7 Taxes, other than income taxes (5,605) (13.8) (19,250) (13.4) Other income and deductions (339) 3.7 (1,526) 4.6 Income taxes (7,846) (35.0) (18,123) (32.7) Net income $ (12,173) (34.2) $ (29,207) (30.3) </TABLE> 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 2C of the Notes to Consolidated Financial Statements.) The utilities' tariffs also provide for dollar-for- dollar recovery of the cost of revenue taxes and certain other charges imposed by the State of Illinois and various municipalities. Operating revenues decreased $71.6 million, to $313.5 million, and $204.7 million, to $1.1 billion, for the current three- and 12- month periods, respectively, due to weather that was warmer in the current periods and to lower unit costs of gas in the current periods. Partially offsetting these negative effects were increased revenues from the Company's diversified energy businesses. Cost of Energy Sold Cost of energy sold decreased $53.3 million, to $144.7 million, and $151.2 million, to $473.7 million, for the current three- and 12-month periods ended December 31, 1998, respectively, due to reduced sales resulting from warmer weather in the current periods and lower unit costs of gas in the current periods. Operation and Maintenance Expenses Operation and maintenance expenses increased $5.4 million, to $66.0 million, for the current three-month period, due primarily to a reduction in pension credits and to increases in the costs of outside professional services. Partially offsetting these increases were reductions in the provision for uncollectible accounts and in the cost of group insurance. Operation and maintenance expenses increased $7.2 million, to $250.7 million, for the current 12-month period, due principally to a reduction in pension credits. Other increases affecting the period were higher costs for outside professional services and increased advertising expense. Offsetting these effects were a decrease in the provision for uncollectible accounts and decreases in other operation and maintenance expenses. Depreciation, Depletion and Amortization Expense Depreciation, depletion and amortization expense increased $1.6 million, to $20.4 million, and $4.3 million, to $78.8 million, for the current three- and 12-month periods, respectively, due mainly to depreciable property additions and depletion expense attributable to new oil and gas operations. Taxes, Other Than Income Taxes Taxes, other than income taxes, decreased $5.6 million, to $34.9 million and $19.3 million, to $124.5 million, for the current three- and 12-month periods, respectively, primarily as a result of the decrease in revenue taxes associated with the decline in operating revenues attributable to the warmer weather and to lower unit costs of gas experienced during the current periods. Partially offsetting this decrease in taxes was the increase in other taxes in the current periods due to the new Supplemental Low Income Energy Assistance Charge and Renewable Energy Resource and Coal Technology Assessment Charge which became effective on January 1, 1998. Other Income and Deductions Other income and deductions increased $339,000 and $1.5 million, for the current three- and 12-month periods, respectively, due primarily to decreases in interest income and increases in interest on commercial paper and on budget plan balances, partially offset by increases in the allowance for funds used during construction. Income Taxes Income taxes decreased $7.8 million, to $14.5 million, and $18.1 million, to $37.3 million, for the current three- and 12- month periods, respectively, due primarily to lower pre-tax income. Partially offsetting the decline in income taxes in the current 12-month period was the effect of a prior period accrual adjustment. Other Matters Accounting Standards. In October 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income."(See Notes 2E and 6 of the Notes to Consolidated Financial Statements.) Fixed Gas Charge Filing. On October 26, 1998, Peoples Gas and North Shore Gas made filings with the Commission under which the price for natural gas would be set at a fixed level for at least the next five years. By eliminating the monthly price fluctuations, Peoples Gas and North Shore Gas could shield customers from price increases, although gas bills would still reflect customers' increased usage during colder weather. As Peoples Gas and North Shore Gas would assume and manage this risk, they would have an opportunity to earn a profit on this initiative. Investment in Diversified Energy Businesses. The Company has a financial goal to derive 25% of its earnings from diversified energy businesses by the end of 2002. In accordance with this goal, Peoples Energy Production, a subsidiary of Peoples Energy Ventures, as of December 31, 1998, had invested $2.8 million in EnerVest Energy Partners and an additional $17.1 million to acquire a portfolio of oil and gas properties in the U.S. Peoples Energy Resources entered into a commitment with Dominion Energy, Inc. to develop and operate a jointly-owned 600 megawatt electric generating peaking facility. The total estimated cost of the project is $206 million and the facility is scheduled begin operation in June 1999. As of December 31, 1998, Peoples Energy Resources had invested $27.5 million in the project. Additionally, Peoples Energy Resources, through its subsidiary, Peoples Natural Gas Liquids, acquired $9.3 million in plant assets. Peoples Natural Gas Liquids owns and operates a plant that gasifies natural gas liquids to support the sale of peaking services to area natural gas utilities and marketers. Peoples Energy Services expanded its gas marketing customer base by buying the contract portfolios of various marketers. It also increased the number of its customers by participating in gas utility pilot programs and by improving its direct sales efforts. <TABLE> <CAPTION> Operating Statistics. The following table represents margin components: Three Months Ended Twelve Months Ended December 31, December 31, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues: (thousands) Utility Gas Sales Residential $200,821 $268,722 $ 712,287 $ 918,796 Commercial 25,298 38,008 99,456 140,846 Industrial 4,502 7,371 18,078 28,045 230,621 314,101 829,821 1,087,687 Utility Transportation Residential 11,176 10,848 36,162 36,206 Commercial 13,891 14,813 46,634 47,678 Industrial 7,061 7,996 26,337 29,625 Contract Pooling 3,746 3,485 9,632 18,790 Other 249 433 574 433 36,123 37,575 119,339 132,732 Other Utility Revenues 4,976 4,884 15,825 15,390 Diversified Energy Revenues 41,815 28,605 101,787 35,675 Total Operating Revenues 313,535 385,165 1,066,772 1,271,484 Less- Cost of Energy Sold 144,693 198,023 473,652 624,811 Gross Margin $168,842 $187,142 $ 593,120 $ 646,673 Deliveries (MDth): Utility Gas Sales Residential 33,230 41,857 110,579 138,028 Commercial 4,649 6,442 17,707 23,767 Industrial 966 1,354 3,727 5,147 38,845 49,653 132,013 166,942 Utility Transportation (a) Residential 7,587 8,156 24,285 27,252 Commercial 11,665 12,641 38,823 40,408 Industrial 9,822 10,568 39,289 37,993 29,074 31,365 102,397 105,653 Total Utility Gas Sales and Transportation 67,919 81,018 234,410 272,595 (a) Volumes associated with contract pooling revenues are included in their respective customer classes. </TABLE> LIQUIDITY AND CAPITAL RESOURCES Bonds Issued. On December 18, 1998, the Illinois Development Finance Authority issued $30,035,000 aggregate principal amount of 5.00% Gas Supply Revenue Bonds, Series 1998, which were collateralized by an equal amount of North Shore Gas' 30-year first mortgage bonds, Series M. On January 19, 1999, a portion of the proceeds was used to redeem $24,905,000 of previously issued gas supply revenue bonds. The remaining proceeds will be used for the payment of issuance costs and to fund certain construction expenditures. (See Note 4A of the Notes to Consolidated Financial Statements.) Bonds Redeemed. On October 1, 1998, Peoples Gas redeemed, from general corporate funds, $10.4 million aggregate principal amount of the City of Joliet 1984 Series C Bonds, which were secured by Peoples Gas' Adjustable-Rate First and Refunding Mortgage Bonds, Series W. (See Note 4C 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 3 of the Notes to Consolidated Financial Statements.) Credit Lines. The Company has lines of credit totaling $170.0 million. At December 31, 1998, the Company had unused credit available of $147.3 million. The utility subsidiaries have lines of credit totaling $119.0 million. At December 31, 1998, the utility subsidiaries had unused credit available from banks of $86.4 million. Interest Coverage. The fixed charges coverage ratios for Peoples Gas for the 12-months ended December 31, 1998, and for fiscal 1998 and 1997 were 3.61, 4.15, and 5.01, respectively. The corresponding coverage ratios for North Shore Gas for the same periods were 4.68, 5.07, and 5.74, respectively. Dividends. On February 3, 1999, the Directors of the Company voted to increase the regular quarterly dividend on the Company's common stock to 49 cents per share from the 48 cents per share previously in effect. The annualized dividend rate now amounts to $1.96 per share. Year 2000. The Company began its efforts to assess the Year 2000 compliance of its mainframe computer systems in March 1996. The Company has since developed a comprehensive Year 2000 readiness plan that incorporates all of its information technology systems, including computer hardware and software, and its embedded systems equipment, including telecommunications equipment. The plan also includes a review by the Company of the Year 2000 compliance efforts of its key suppliers and customers and Year 2000 contingency planning. The Company-wide Year 2000 effort includes the Company's wholly owned subsidiaries, as well as various joint ventures. For all internal information technology systems developed by the Company, Year 2000 compliance efforts proceed through the following phases: inventory, assessment, remediation, testing, and implementation. Rather than completing each phase for all systems prior to proceeding to the next phase, the Company progresses through all phases on a system-by-system basis, gradually implementing each fully-compliant system. The Year 2000 compliance phases utilize a combination of consultants and employees of the Company's subsidiaries. Once a fully-tested application has been implemented, Company employees follow established procedures to maintain the compliance of the implemented systems. The Company also has retained a quality assurance expert to ensure that any subsequent modifications to the application do not impact its compliant status. As of December 31, 1998, 21 of the Company's 38 mainframe applications have been fully remediated, tested and implemented, one is in the testing phase, and eight have been (or are in the process of being) eliminated. The eight remaining mainframe applications are scheduled to be replaced by the Company's new mainframe customer information system and are not expected to be remediated. Additionally, all mainframe system modules have been remediated and are now in the testing phase. Many of the Company's non-mainframe applications, spreadsheets and interfaces have also reached the implementation stage, and most others are in the remediation phase. The Company expects to implement all critical internal systems (other than the customer information system to be used by Peoples Gas and North Shore Gas) and all non- critical internal systems by April 30, 1999; and complete installation and testing of the customer information system by the end of fiscal year 1999. As part of its Year 2000 Project, the Company has also contacted the vendors of its licensed or purchased hardware and software to determine the Year 2000 compliance status of their products. As of December 31, 1998, the Company has received responses from 88% of the vendors and is in the process of replacing, upgrading or eliminating non-compliant vendor products as appropriate. The Company also plans to have certain products, such as its desktop computer inventory, compliant-tested in order to minimize the risks associated with reliance on vendor representations. The Company has completed an inventory of all equipment containing embedded systems, including telecommunications equipment and facilities. It has also contracted with a consultant that has significant utility and engineering expertise to assist with the embedded systems efforts. The Company has assessed the Year 2000 compliance status of its embedded systems, and it is beginning to test, repair or replace any critical equipment identified as not Year 2000 compliant. The Company's timetable for implementing compliant equipment will depend on the availability of compliant equipment. The Company currently has a written conceptual contingency plan to address risks to the Company created by the Company's or third parties' systems and embedded technology that are not Year 2000 compliant. It has engaged the consultant referenced above to assist in developing detailed and comprehensive business continuity and contingency plans to address possible failures in the area of embedded systems equipment. The Company expects to complete its contingency plans for information technology and embedded systems, including critical third party disruptions, by April 1999, and such plans will be maintained and adjusted as necessary on an ongoing basis. The Company has contacted key suppliers to determine their Year 2000 compliance efforts. It has received written assurances from many key suppliers that they are making the necessary Year 2000 efforts, and it is in the process of following up with other key suppliers that did not respond to written inquiries. The Company is also contacting certain of its larger customers to determine their year 2000 readiness. Essential elements of the Company's business are dependent on certain key third parties (for example, pipeline suppliers, banks, electric utilities and telecommunication companies). A material failure by any such key third party could significantly disrupt the Company's business. The Company is in the process of detailing and finalizing contingency plans to address potential disruptions that may be caused by third parties. The Company currently estimates that it will incur expenses of approximately $1.0 million through fiscal Year 1999 to complete its Year 2000 compliance efforts, in addition to the $4.6 million already incurred through December 31, 1998. This estimate does not include costs to repair or replace critical embedded systems equipment that is non-compliant, which has yet to be determined. Management does not expect the cost of the Company's Year 2000 compliance efforts to have a material adverse impact on the financial position or results of operations of the Company. Market Risk Management. The Company uses market risk sensitive financial instruments, including futures, forward contracts, and derivatives such as swaps and options, to manage its exposure to certain commodity price risks in its operations. These risks occur because of the changing prices of natural gas, crude oil, ethane, and propane. The Company's policy for risk management activities stipulates that such financial instruments are only to be used for hedging purposes. (See Note 2F of the Notes to Consolidated Financial Statements.) The Company monitors and controls derivative positions using a mark-to-market analysis. A sensitivity analysis has been prepared to estimate the Company's price exposure to the market risk of its natural gas commodity financial instruments. As of December 31, 1998, a 10% adverse movement in current prices would have reduced future earnings before income taxes by approximately $504,000. The Company's utility subsidiaries are not currently exposed to market risk caused by changes in commodity prices. This is due to current Illinois rate regulation, which allows for all reasonably incurred costs of natural gas to be recovered from the utilities' customers through the operation of the utilities' Gas Charges. However, in order to minimize the impact on customers of severe price spikes in gas supply costs, the Company did initiate a gas supply price protection financial trading strategy. Any gains or losses from financial trades are offset by related physical purchases. In connection with the Company's diversified energy subsidiaries, investments are subject to a thorough analysis of related market risk and an acceptable plan for each investment is formulated to manage this risk. After a risk management program for the investment is approved, both operating unit and senior Company management are kept apprised of any remaining market risk through daily mark-to-market reports. Peoples Energy Production has working interests in natural gas and crude oil producing properties. Using swaps and futures, approximately two-thirds of calendar years 1999 and 2000's production is hedged, thereby removing market risk on that portion of the output. Price movements in natural gas and crude oil swaps and futures are highly correlated to any price changes in the underlying physical commodities. Therefore, a loss in the market value of the hedged commodity would be substantially offset by an equal gain in value resulting from the financial transaction. As of December 31, 1998, the exposure from non- hedged production was immaterial to the consolidated financial statements. Peoples Energy Resources and Peoples Energy Services sell fixed price and capped price products. Both companies reduce risk through the use of fixed price supplier contracts and storage assets. As of December 31, 1998, exposure from these activities was not material. The Company is also exposed to credit risk when a hedging transaction counter party or supplier defaults on a contract to pay for or deliver product at an agreed-upon price. To mitigate this risk, the Company has established procedures to determine and monitor the creditworthiness of counter parties. Transactions are executed only with counter parties having strong credit ratings. Controls are also in place to limit dollar exposure and transaction term based upon creditworthiness. The Company does not expect any of the counter parties to fail to meet their contractual obligations with these controls in place. The Company's utility subsidiaries utilize long-term debt as a primary source of capital. Both variable and fixed rate debt instruments are utilized. The variable interest rate on the debt adjusts to reflect current market conditions annually on December 1. Subject to certain restrictions on optional redemptions, the fixed rate debt instruments can be refinanced at lower interest rates if the Company deems it to be economical. (See Note 4 of the Notes to Consolidated Financial Statements.) Forward-Looking Information. Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") contains statements that may be considered forward- looking, such as the statement of the Company's financial goal regarding non-utility earnings, the effect of weather on net income, cash position and coverage ratios, the insignificant effect on income arising from changes in revenue from customers' gas purchases from entities other than the utility subsidiaries, environmental matters, and the discussion concerning year 2000 compliant information systems. These statements speak of the Company's plans, goals, beliefs, or expectations, refer to estimates or use similar terms. Actual results could differ materially, because the realization of those results is subject to many uncertainties including: " The future health of the U.S. and Illinois economies. " The timing and extent of changes in energy commodity prices and interest rates. " Litigation concerning North Shore's liability for CERCLA response costs relating to a former mineral processing site in Denver, Colorado. " Regulatory developments in the U.S., Illinois and other states where the Company has investments. " Changes in the nature of the Company's competition resulting from industry consolidation, legislative change, regulatory change and other factors, as well as action taken by particular competitors. " The Company's success in identifying non-utility investments on financially acceptable terms and generating earnings from those investments in a reasonable time. " The ability of various vendors and others with whom the Company electronically interacts to complete year 2000 systems modification efforts on a timely basis and in a manner that allows them to continue normal business transactions with the Company without disruption. Some of these uncertainties that may affect future results are discussed in more detail in the sections of "Item 1 - Business" of the Annual Report on Form 10-K captioned "Competition," "Sales and Rates," "State Legislation and Regulation," "Federal Legislation and Regulation," "Environmental Matters," and "Current Gas Supply." All forward-looking statements included in this MD&A are based upon information presently available, and the Company assumes no obligation to update any forward-looking statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Quantitative and qualitative disclosures about market risk are reported under "Management's Discussion and Analysis of Results of Operations and Financial Condition - Market Risk Management," and Note 2F of the Notes to Consolidated Financial Statements. PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note 3 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) Firm Gas Transportation Agreement Under Rate Schedule FT-A or FT-G between Peoples Gas and Midwestern Gas Trasmission Company, dated November 1, 1998. 10(b) Firm Gas Transportation Agreement Under Rate Schedule FT-A or FT-G between North Shore Gas and Midwestern Gas Trasmission Company, dated November 1, 1998. 10(c) Rate Schedule QNT Quick Notice Transportation Service Agreement Between Peoples Gas and Trunkline Gas Company, dated November 1, 1998. 10(d) Severance Agreemnt Betweeen the Company and James M. Luebbers dated as of November 1, 1998. 10(e) Severance Agreemnt Betweeen the Company and Donald M. Field dated as of November 1, 1998. 27 Financial Data Schedule b. Reports on Form 8-K filed during the quarter ended December 31, 1998 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 11, 1999 By: /s/ J. M. LUEBBERS (Date) J. M. Luebbers Vice President and Controller (Same as above) Principal Accounting Officer </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

PH

https://www.sec.gov/Archives/edgar/data/76334/0000076334-99-000005.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, MYcBSHuW09GHPTWKia7RFcHV2qZQ+FVXAowlQJFvd4b5wYFwAdq0fFCBE0kOSjQH ETKyT8l14p/lWrz9l78rOw== <SEC-DOCUMENT>0000076334-99-000005.txt : 19990215 <SEC-HEADER>0000076334-99-000005.hdr.sgml : 19990215 ACCESSION NUMBER: 0000076334-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 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: SEC FILE NUMBER: 001-04982 FILM NUMBER: 99533688 BUSINESS ADDRESS: STREET 1: 6035 PARKLAND BOULEVARD CITY: CLEVELAND STATE: OH ZIP: 44124-4141 BUSINESS PHONE: 2168963000 MAIL ADDRESS: STREET 1: 6035 PARKLAND BOULEVARD CITY: CLEVELAND STATE: OH ZIP: 44124-4141 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________ Commission File number 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) 6035 Parkland Blvd., Cleveland, Ohio 44124-4141 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 896-3000 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, 1998 108,473,704 <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, ______________________ _______________________ 1998 1997 1998 1997 __________ __________ __________ __________ <S> <C> <C> <C> <C> Net sales $1,199,021 $1,114,948 $2,417,745 $2,198,117 Cost of sales 943,167 862,209 1,890,474 1,689,348 _________ __________ __________ _________ Gross profit 255,854 252,739 527,271 508,769 Selling, general and administrative expenses 141,370 132,961 275,528 258,236 __________ __________ __________ _________ Income from operations 114,484 119,778 251,743 250,533 Other income (deductions): Interest expense (17,341) (13,082) (33,416) (23,519) Interest and other income, net (333) 3,868 (406) 4,885 __________ _________ _________ _________ (17,674) (9,214) (33,822) (18,634) __________ _________ _________ _________ Income before income taxes 96,810 110,564 217,921 231,899 Income taxes 33,278 39,250 76,272 82,324 __________ _________ _________ _________ Net income $ 63,532 $ 71,314 $ 141,649 $ 149,575 ========== ========== ========== ========= Earnings per share - Basic $ .59 $ .64 $ 1.30 $ 1.34 Earnings per share - Diluted $ .58 $ .63 $ 1.29 $ 1.33 Cash dividends per common share $ .15 $ .15 $ .30 $ .30 See accompanying notes to consolidated financial statements. </TABLE> -2- <PAGE> <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in thousands) (Unaudited) December 31, June 30, 1998 1998 __________ __________ <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 39,940 $ 30,488 Accounts receivable, net 661,261 699,179 Inventories: Finished products 506,290 416,034 Work in process 361,907 392,880 Raw materials 143,526 135,357 __________ __________ 1,011,723 944,271 Prepaid expenses 20,628 22,035 Deferred income taxes 87,567 84,102 __________ __________ Total current assets 1,821,119 1,780,075 Plant and equipment 2,487,666 2,345,109 Less accumulated depreciation 1,296,372 1,209,884 __________ __________ 1,191,294 1,135,225 Other assets 708,939 609,521 __________ __________ Total assets $3,721,352 $3,524,821 ========== ========== LIABILITIES Current liabilities: Notes payable $ 350,604 $ 265,485 Accounts payable, trade 282,166 338,249 Accrued liabilities 290,818 350,662 Accrued domestic and foreign taxes 26,266 34,374 __________ __________ Total current liabilities 949,854 988,770 Long-term debt 634,203 512,943 Pensions and other postretirement benefits 280,415 265,675 Deferred income taxes 38,055 29,739 Other liabilities 49,078 44,244 __________ __________ Total liabilities 1,951,605 1,841,371 SHAREHOLDERS' EQUITY Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued - - Common stock, $.50 par value; authorized 600,000,000 shares; issued 111,812,025 shares at December 31 and June 30 55,906 55,906 Additional capital 137,102 139,726 Retained earnings 1,740,265 1,631,316 Accumulated other comprehensive income (35,335) (60,026) __________ __________ 1,897,938 1,766,922 Common stock in treasury at cost; 3,338,321 shares at December 31 and 1,938,762 shares at June 30 (128,191) (83,472) __________ __________ Total shareholders' equity 1,769,747 1,683,450 __________ __________ Total liabilities and shareholders' equity $3,721,352 $3,524,821 ========== ========== See accompanying notes to consolidated financial statements. </TABLE> -3- <PAGE> <TABLE> <CAPTION> PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (Unaudited) Six Months Ended December 31, _____________________ 1998 1997 ________ ________ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $141,649 $149,575 Adjustments to reconcile net income to net cash provided by operations: Depreciation 85,636 79,906 Amortization 19,146 13,079 Deferred income taxes (4,454) (16,111) Foreign currency transaction (gain) loss (3,752) 1,171 Loss (gain) on sale of plant and equipment 794 (766) Changes in assets and liabilities: Accounts receivable, net 68,054 30,376 Inventories (39,916) (84,278) Prepaid expenses 5,430 2,008 Other assets (15,381) (20,674) Accounts payable, trade (69,408) (20,106) Accrued payrolls and other compensation (58,234) (21,347) Accrued domestic and foreign taxes (5,990) (6,135) Other accrued liabilities (15,494) 8,220 Pensions and other postretirement benefits 10,116 5,418 Other liabilities 4,649 6,602 ________ ________ Net cash provided by operating activities 122,845 126,938 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions (excluding cash of $2,609 in 1998) (89,865) (143,546) Capital expenditures (114,650) (112,000) Proceeds from sale of plant and equipment 2,364 2,983 Other 1,045 (3,053) ________ ________ Net cash used in investing activities (201,106) (255,616) CASH FLOWS FROM FINANCING ACTIVITIES Payments for common share activity (47,863) (44,732) Proceeds from notes payable, net 75,569 132,021 Proceeds from long-term borrowings 206,621 50,086 Payments of long-term borrowings (115,895) (6,213) Dividends (32,700) (33,407) ________ ________ Net cash provided by financing activities 85,732 97,755 Effect of exchange rate changes on cash 1,981 (1,393) ________ ________ Net increase (decrease) in cash and cash equivalents 9,452 (32,316) Cash and cash equivalents at beginning of year 30,488 68,997 ________ ________ Cash and cash equivalents at end of period $ 39,940 $ 36,681 ======== ======== See accompanying notes to consolidated financial statements. </TABLE> -4- <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 a significant portion of 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 made directly 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, _______________________ ______________________ 1998 1997 1998 1997 __________ __________ _________ __________ <S> <C> <C> <C> <C> Net sales, including intersegment sales Industrial: North America $ 609,074 $ 595,442 $1,235,963 $1,180,941 International 312,144 280,926 622,514 545,324 Aerospace 278,232 239,071 560,210 472,625 Intersegment sales (429) (491) (942) (773) __________ __________ _________ __________ Total $1,199,021 $1,114,948 $2,417,745 $2,198,117 ========== ========== ========== ========== Income from operations before corporate general and administrative expenses Industrial: North America $ 65,310 $ 82,781 $ 144,898 $ 172,463 International 22,178 18,691 47,935 38,842 Aerospace 41,822 35,405 86,185 72,321 __________ __________ _________ __________ Total 129,310 136,877 279,018 283,626 Corporate general and administrative expenses 14,826 17,099 27,275 33,093 __________ __________ _________ __________ Income from operations $ 114,484 $ 119,778 $ 251,743 $ 250,533 ========== ========== ========== ========== See accompanying notes to consolidated financial statements. </TABLE> -5- <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, 1998, the results of operations for the three and six months ended December 31, 1998 and 1997 and cash flows for the six months then ended. 2. Earnings per share The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and six months ended December 31, 1998 and 1997. Three Months Ended Six Months Ended December 31, December 31, _______________________ ________________________ 1998 1997 1998 1997 __________ ___________ ___________ __________ Numerator: Net income applicable to common shares $ 63,532 $71,314 $ 141,649 $149,575 Denominator: Basic - weighted average common shares 108,541,603 111,128,438 108,953,828 111,365,904 Increase in weighted average from dilutive effect of exercise of stock options 880,609 1,052,499 821,286 952,230 __________ ___________ ___________ __________ Diluted - weighted average common shares, assuming exercise of stock options 109,422,212 112,180,937 109,775,114 112,318,134 =========== =========== =========== =========== Basic earnings per share $ .59 $ .64 $ 1.30 $ 1.34 Diluted earnings per share $ .58 $ .63 $ 1.29 $ 1.33 3. Stock repurchase program The Board of Directors has approved a program to repurchase the Company's common stock on the open market, at prevailing prices. The repurchase will primarily be funded from operating cash flows and the shares will initially be held as treasury stock. During the three-month period ended December 31, 1998 the Company purchased 540,000 shares of its common stock at an average price of $35.155 per share. Year-to-date the Company has purchased 1,500,000 shares at an average price of $32.459 per share. - 6 - <PAGE> 4. Comprehensive income On July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes new standards for reporting comprehensive income and its components. The Company's only item of other comprehensive income is foreign currency translation adjustments recorded in shareholders' equity. Comprehensive income for the three and six months ended December 31, 1998 and 1997 is as follows: Three Months Ended Six Months Ended December 31, December 31, __________________ _____________________ 1998 1997 1998 1997 ________ ________ _________ _________ Net income $ 65,532 $ 71,314 $ 141,649 $ 149,575 Foreign currency Translation adjustments (508) (18,981) 24,691 (22,836) ________ ________ _________ _________ Comprehensive income $ 65,024 $ 52,333 $ 166,340 $ 126,739 ======== ======== ========= ========= 5. Acquisitions In July 1998 the Company acquired the stock of B.A.G. Acquisition Ltd., the parent company of Veriflo Corporation, located in Richmond, California and Carson City, Nevada. Veriflo, with calendar year 1997 revenues of $65 million, manufactures high-purity regulators and valves for precision gas delivery. In August 1998 the Company acquired Fluid Power Systems of Lincolnshire, Illinois, a manufacturer of hydraulic valves and electrohydrualic systems and controls. Fluid Power Systems, with estimated calendar year 1998 revenues of $42 million, serves the construction, aerial reach and agricultural markets. Total purchase price for these businesses was approximately $85.2 million in cash. Both acquisitions are being 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 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND COMPARABLE PERIODS ENDED DECEMBER 31, 1997 CONSOLIDATED STATEMENT OF INCOME Net sales increased 7.5 percent for the second quarter of fiscal 1999 and 10.0 percent for the six-month period ended December 31, 1998. Without acquisitions, the increases would have been 4.0 percent and 5.5 percent, respectively. Excluding acquisitions, these increases primarily result from the continuing strength of the Aerospace operations. Income from operations was $114.5 million for the current second quarter and $251.7 million for the current six months, a decrease of 4.4 percent for the quarter and an increase of .5 percent for the six months. As a percent of sales, Income from operations declined to 9.5 percent from 10.7 percent for the quarter and to 10.4 percent from 11.4 percent for the six months. Cost of sales as a percent of sales increased to 78.7 percent from 77.3 percent for the quarter and to 78.2 percent from 76.9 percent for the six months. The declining margins are the result of lower volume and a change in product mix in the Industrial North American operations. Selling, general and administrative expenses, as a percent of sales, declined slightly, improving to 11.8 percent of sales from 11.9 percent for the quarter and to 11.4 percent from 11.7 percent for the six months. The slight improvement in selling, general and administrative expenses is the result of lower incentive compensation. Interest expense increased $4.3 million for the quarter ended December 31, 1998, from the same period ended December 31, 1997, due to increased borrowings related to acquisitions completed in the last 12 months. Interest expense for the current six months increased $9.9 million compared to the same period in the prior year. Interest and other income for both the prior-year quarter and six months included $3.3 million in income related to the relocation of the corporate headquarters. Net income declined 10.9 percent for the quarter, and 5.3 percent for the half, as compared to the prior year. As a percent of sales, Net income declined to 5.3 percent from 6.4 percent for the quarter and to 5.9 percent from 6.8 percent for the six months. Backlog was $1.61 billion at December 31, 1998 compared to $1.64 billion in the prior year and at June 30, 1998. The flat level of backlog reflects the slowing of orders as many customers adjust to the current economic environment. -8- <PAGE> RESULTS BY BUSINESS SEGMENT 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 2.3 % 4.7 % Industrial International 11.1 % 14.2 % Total Industrial 5.1 % 7.7 % Without the effect of currency-rate changes, International sales would have increased 10.4 percent for the quarter, but the increase remains at 14.2 percent for the six months. Without the effect of acquisitions completed within the past 12 months, the changes in Net sales would have been: Period ending December 31, Three Months Six Months Industrial North America (.9) % .8 % Industrial International 3.7 % 4.7 % Total Industrial .6 % 2.0 % Operating income for the Industrial segment was down 13.8 percent for the quarter and 8.7 percent for the six months. Industrial North America Operating income decreased 21.1 percent for the quarter and 16.0 percent for the six months while Industrial International results increased 18.7 percent for the quarter and 23.4 percent for the six months. Without acquisitions, total Industrial Segment Operating income would have decreased 12.8 percent for the quarter and 8.9 percent for the six months. As a percent of sales, Industrial North American Operating income decreased to 10.7 percent from 13.9 percent for the quarter and to 11.7 percent from 14.6 percent for the six months. Industrial International Operating income increased to 7.1 percent from 6.7 percent for the quarter and to 7.7 percent from 7.1 percent for the six months. Order demand has been declining for many of the North American Industrial operations, especially those supporting the agricultural equipment, semiconductor manufacturing, factory automation and construction equipment industries. Margins for the second quarter and first six months of fiscal 1999 were adversely affected by lower volume (resulting in the under- absorption of fixed costs), a change in product mix (with a greater percentage of sales being made in lower margin businesses) and the operating impact of integrating recent acquisitions. Higher volume in Europe provided the revenue growth in the Industrial International operations and, along with a more favorable product mix, helped improve profitability. Total Industrial Segment backlog increased 1.5 percent compared to December 31, 1997 and decreased .1 percent since June 30, 1998. Without acquisitions, backlog would have decreased 1.8 percent compared to December 31, 1997 and 3.9 percent since June 30, 1998. The decline in backlog is due to declining order rates being experienced in most of the Industrial Segment markets. Management anticipates most Industrial North American markets to remain soft for the balance of the fiscal year resulting in slight revenue growth and increased pressure on margins due to the underabsorption of fixed costs. For the second half of the year, business conditions for the European operations are expected to be consistent with the conditions experienced in the first half but uncertainty surrounds the second half business conditions in Latin America, especially Brazil. AEROSPACE - Aerospace Net sales were up 16.4 percent for the quarter and 18.5 percent for the six months. Continuing strong commercial aircraft activity accounted for much of the sales growth. -9- <PAGE> Operating income for the Aerospace Segment increased 18.1 percent for the quarter and 19.2 percent for the six-month period. As a percent of sales, Operating income increased to 15.0 percent from 14.8 percent for the quarter and to 15.4 percent from 15.3 percent for the six-month period. The increase in the margins was the result of the sales growth. Backlog for the Aerospace Segment decreased 2.9 percent from December 31, 1997 and 3.0 percent since June 30, 1998. The decline in backlog reflects a slowdown in order rates. A change to heavier OEM volume in future product mix could also result in lower margins. BALANCE SHEET Working capital increased to $871.3 million at December 31, 1998 from $791.3 million at June 30, 1998 with the ratio of current assets to current liabilities increasing to 1.9 to 1. The increase was primarily due to an increase in Inventories and decreases in Accounts payable, trade and Accrued liabilities, partially offset by a decrease in Accounts receivable and an increase in Notes payable. Accounts receivable were lower on December 31, 1998 than on June 30, 1998 primarily due to the holiday induced lower level of sales in the month of December. Days sales outstanding have increased to 49 days at December 31, 1998 from 46 days at June 30, 1998. Inventories increased since June 30, 1998 primarily as a result of acquisitions within the Industrial segment. Accounts payable, trade decreased $56.1 million since June 30, 1998 with the reduction occurring consistently throughout the operations. A portion of the decrease was the result of lower production in the month of December. Accrued liabilities decreased $59.8 million since June 30, 1998 primarily as a result of lower incentive compensation accruals occurring throughout most of the operations. The debt to debt-equity ratio increased to 35.8 percent at December 31, 1998 from 31.6 percent at June 30, 1998 as a result of increases in Notes payable and Long-term debt, both of which were utilized to finance recent acquisitions. STATEMENT OF CASH FLOWS Net cash provided by operating activities was $122.8 million for the six months ended December 31, 1998, as compared to $126.9 million for the same six months of 1997. Net income for fiscal 1999 included non-cash Depreciation and Amortization expenses of $104.8 million as compared to $93.0 million in fiscal 1998. Net income also included a net foreign currency transaction gain of $3.8 million in fiscal 1999 as compared to a net loss of $1.2 million in fiscal 1998. Activity within the working capital items - Accounts receivable, Inventories, Accounts payable, Accrued payrolls and Prepaid expenses - used cash of $94.1 million in fiscal 1999 compared to using cash of $93.3 million in fiscal 1998. Other accrued liabilities used cash of $15.5 million in the current year compared to providing cash of $8.2 million in the prior year and deferred income taxes used cash of $4.5 million in fiscal 1999 versus using cash of $16.1 million in fiscal 1998. Net cash used in investing activities declined to $201.1 million for fiscal 1999 compared to $255.6 million for fiscal 1998 primarily due to a reduction in the amount spent on acquisitions. Financing activities provided cash of $85.7 million for the six months ended December 31, 1998 compared to providing cash of $97.8 million for the same period in 1997. The change resulted primarily from net debt borrowings providing cash of $166.3 million in fiscal 1999 compared to $175.9 million in the prior year. -10- <PAGE> QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company enters into forward exchange contracts and cross-currency swap agreements to reduce its exposure to fluctuations in related foreign currencies. These contracts are with major financial institutions and the risk of loss is considered remote. The Company does not hold or issue derivative financial instruments for trading purposes. In addition, the Company's foreign locations, in the ordinary course of business, enter into financial guarantees through financial institutions which enable customers to be reimbursed in the event of nonperformance by the Company. The total value of open contracts and any risk to the Company as a result of these arrangements is not material to the Company's financial position, liquidity or results of operations. YEAR 2000 CONSIDERATONS The Company has taken action to assure that its computerized products and systems and all external interfaces are Year 2000 compliant. These actions are part of a formal information technology initiative which the Company began several years ago. As a result, none of the Company's significant information technology projects have been delayed due to the year 2000 issue. The Company expects to have all internal standard application systems, including all information systems plus any equipment or embedded systems which may be impacted, compliant by July 1999 by modifying present systems, installing new systems and monitoring third-party interfaces. The cost for these actions is not material to the Company's results of operations. The Company will continue to reassess the need for alternative actions based on its progress towards being year 2000 compliant by July 1999 but at this time anticipates that no such actions will be required. In addition, the Company contacted its key suppliers, customers, distributors and financial service providers regarding their Year 2000 status. Follow-up inquiries and audits with such key third parties will be conducted as warranted. The Company expects assurance that key third parties are year 2000 compliant by July 1999. If it is determined that any key third party may not be year 2000 compliant on a timely basis, the Company will execute a contingency plan that has been developed to ensure its operations are not affected by such key third party's year 2000 noncompliance. While management does not expect that the consequences of any failure of the Company or any key third party to be fully compliant by 2000 would significantly affect the financial position, liquidity, or results of operations of the Company, there can be no assurance that any such failure to be fully compliant by 2000 would not have an adverse impact on the Company. EURO PREPARATIONS The Company has completed an upgrade of its systems to accommodate the Euro currency. The cost of this upgrade was immaterial to the Company's financial results. Although difficult to predict, any competitive implications and any impact on existing financial instruments are expected to be immaterial to the Company's results of operations, financial position or liquidity. FORWARD-LOOKING STATEMENTS This Report on Form 10-Q and other written reports and oral statements made from time to time by the Company may contain "forward-looking statements", all of which are subject to risks and uncertainties. All statements which address operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements relating to growth, operating margin performance, earnings per share or statements expressing general opinions about future operating results, are forward-looking statements. -11- <PAGE> These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside the Company's control, that could cause actual results to differ materially from such statements. Such factors include: * continuity of business relationships with and purchases by major customers, including among others, orders and delivery schedules for aircraft components, * ability of suppliers to provide materials as needed, * uncertainties surrounding timing, successful completion or integration of acquisitions, * competitive pressure on sales and pricing, * increases in material and other production costs which cannot be recovered in product pricing, * uncertainties surrounding the year 2000 issues and the new Euro currency, * difficulties in introducing new products and entering new markets, and * uncertainties surrounding the global economy and global market conditions, including among others, the economy of the Asia Pacific and Latin America regions and the potential devaluation of currencies. Any forward-looking statements are based on known events and circumstances at the time. The Company undertakes no obligation to update or publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of the filing of this Form 10-Q. -12- <PAGE> PARKER-HANNIFIN CORPORATION PART II - OTHER INFORMATION Item 2. Change in Securities and Use of Proceeds. _______ _________________________________________ During the quarter ended December 31, 1998, in reliance upon Section 4(2) of the Securities Act of 1933, as amended, the Registrant issued the following shares of Common Stock, $.50 par value: (a) 8,151 shares valued at $35.47 per share to four Directors of the Registrant in lieu of fees pursuant to the Registrant's Non-Employee Directors Stock Plan; and (b) 4,280 shares valued at $46.76 per share to Dynamic Valves,Inc. as the final installment of the purchase price in the acquisition of substantially all of its assets. Item 6. Exhibits and Reports on Form 8-K. ______ _________________________________ (a) The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K: 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 and Chief Financial Officer Date: February 12, 1999 - 13 - <PAGE> EXHIBIT INDEX Exhibit No. Description of Exhibit ___________ ______________________ 27 Financial Data Schedule - 14 - <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <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, 1998 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-30-1999 <PERIOD-END> DEC-31-1998 <CASH> 39,940 <SECURITIES> 0 <RECEIVABLES> 611,392 <ALLOWANCES> 10,452 <INVENTORY> 1,011,723 <CURRENT-ASSETS> 1,821,119 <PP&E> 2,487,666 <DEPRECIATION> 1,296,372 <TOTAL-ASSETS> 3,721,352 <CURRENT-LIABILITIES> 949,854 <BONDS> 639,838 <COMMON> 55,906 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,713,841 <TOTAL-LIABILITY-AND-EQUITY> 3,721,352 <SALES> 2,417,745 <TOTAL-REVENUES> 2,417,745 <CGS> 1,890,474 <TOTAL-COSTS> 1,890,474 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 584 <INTEREST-EXPENSE> 33,416 <INCOME-PRETAX> 217,921 <INCOME-TAX> 76,272 <INCOME-CONTINUING> 141,649 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 141,649 <EPS-PRIMARY> 1.30 <EPS-DILUTED> 1.29 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

PTC

https://www.sec.gov/Archives/edgar/data/857005/0000927016-99-000505.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, H3tqnNwnJ52RVpQMbWNQ1Ohtyjq3xHWaX8wqqSI2KHpaZKOa8B1WTHaX6fy0RZ6J LvYK0+i6I9zZpQW6N7pxdQ== <SEC-DOCUMENT>0000927016-99-000505.txt : 19990211 <SEC-HEADER>0000927016-99-000505.hdr.sgml : 19990211 ACCESSION NUMBER: 0000927016-99-000505 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAMETRIC TECHNOLOGY CORP CENTRAL INDEX KEY: 0000857005 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042866152 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18059 FILM NUMBER: 99528824 BUSINESS ADDRESS: STREET 1: 128 TECHNOLOGY DR CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 7813985000 MAIL ADDRESS: STREET 1: 128 TECHNOLOGY CORP CITY: WALTHAM STATE: MA ZIP: 02154 </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 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: January 2, 1999 Commission File Number: 0-18059 ---------------- Parametric Technology Corporation (Exact name of registrant as specified in its charter) Massachusetts 04-2866152 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 128 TECHNOLOGY DRIVE, WALTHAM, MA 02453 (Address of principal executive offices, including zip code) (781) 398-5000 (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 [_] There were 267,378,673 shares of our common stock outstanding on January 2, 1999. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- <PAGE> PARAMETRIC TECHNOLOGY CORPORATION INDEX TO FORM 10-Q For the Quarter Ended January 2, 1999 <TABLE> <CAPTION> Page Number ------ <C> <S> <C> Cover.................................................................. i Index.................................................................. ii PART I--FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 and January 2, 1999............................................... 1 Consolidated Statements of Income for the three months ended January 3, 1998 and January 2, 1999........................... 2 Consolidated Statements of Cash Flows for the three months ended January 3, 1998 and January 2, 1999..................... 3 Notes to the Consolidated Financial Statements................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14 PART II--OTHER INFORMATION Item 1. Legal Proceedings............................................. 14 Item 2. Changes in Securities and Use of Proceeds..................... 14 Item 5. Other Information............................................. 14 Item 6. Exhibits and Reports on Form 8-K.............................. 15 Signature.............................................................. 15 </TABLE> <PAGE> PART I--FINANCIAL INFORMATION PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> September 30, January 2, 1998 1999 ------------- ----------- ASSETS <S> <C> <C> Current assets: Cash and cash equivalents......................... $ 205,971 $ 196,804 Short-term investments............................ 131,405 133,650 Accounts receivable, net.......................... 189,275 195,740 Other current assets.............................. 67,130 76,653 ----------- ----------- Total current assets............................ 593,781 602,847 Marketable investments.............................. 88,807 69,642 Property and equipment, net......................... 62,241 64,375 Other assets........................................ 88,011 123,980 ----------- ----------- Total assets.................................... $ 832,840 $ 860,844 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 34,520 $ 33,009 Accrued expenses.................................. 92,742 74,739 Accrued compensation and severance................ 81,856 73,747 Deferred revenue.................................. 145,376 153,150 Income taxes...................................... 65,048 82,233 ----------- ----------- Total current liabilities....................... 419,542 416,878 Other liabilities................................... 54,081 52,760 Deferred income taxes............................... 31,780 31,788 Stockholders' equity: Preferred stock, $0.01 par value; 5,000 shares au- thorized; none issued............................ -- -- Common stock, $0.01 par value; 350,000 shares au- thorized; 272,277 shares issued for both periods.................... 2,723 2,723 Additional paid-in capital........................ 1,528,647 1,535,459 Treasury stock, at cost, 4,135 and 4,898 shares... (43,134) (66,949) Accumulated deficit............................... (1,157,628) (1,111,380) Accumulated other comprehensive loss (Note 4)..... (3,171) (435) ----------- ----------- Total stockholders' equity...................... 327,437 359,418 ----------- ----------- Total liabilities and stockholders' equity...... $ 832,840 $ 860,844 =========== =========== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 1 <PAGE> PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) <TABLE> <CAPTION> Three months ended ---------------------- January 3, January 2, 1998 1999 ---------- ---------- <S> <C> <C> Revenue: License................................................ $ 158,258 $ 136,080 Service................................................ 100,610 114,037 --------- --------- Total revenue...................................... 258,868 250,117 --------- --------- Cost of revenue: License................................................ 4,803 4,489 Service................................................ 36,603 42,122 --------- --------- Total cost of revenue.............................. 41,406 46,611 --------- --------- Gross profit............................................. 217,462 203,506 --------- --------- Operating expenses: Sales and marketing.................................... 96,206 96,112 Research and development............................... 25,279 29,173 General and administrative............................. 15,454 16,564 Amortization of intangible assets...................... 395 1,731 Acquisition and nonrecurring charges (Note 2).......... -- 13,829 --------- --------- Total operating expenses........................... 137,334 157,409 --------- --------- Operating income......................................... 80,128 46,097 Other income (expense), net.............................. (5,878) 1,944 --------- --------- Income before income taxes............................... 74,250 48,041 Provision for income taxes............................... 32,117 18,050 --------- --------- Net income............................................... $ 42,133 $ 29,991 ========= ========= Earning per share (Note 3): Basic.................................................. $ 0.16 $ 0.11 Diluted................................................ $ 0.15 $ 0.11 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 2 <PAGE> PARAMETRIC TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> Three months ended -------------------- January January 3, 1998 2, 1999 --------- --------- <S> <C> <C> Cash flows from operating activities: Net income............................................. $ 42,133 $ 29,991 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization........................ 6,864 12,283 Deferred income taxes................................ 1,020 -- Charge for purchased in-process research and development......................................... -- 10,600 Changes in assets and liabilities which provided (used) cash, net of effects of purchased businesses: Accounts receivable................................ (4,834) (8,291) Accounts payable and accrued expenses.............. 861 (18,997) Accrued compensation and severance................. (15,067) (8,218) Deferred revenue................................... 8,854 7,208 Income taxes....................................... 7,760 17,193 Other current assets............................... (20,710) (4,099) Other noncurrent assets and liabilities............ 9,585 (6,823) --------- --------- Net cash provided by operating activities................ 36,466 30,847 --------- --------- Cash flows from investing activities: Additions to property and equipment.................... (5,652) (8,536) Changes in other assets................................ 302 (2,440) Purchases of investments............................... (89,556) (11,705) Proceeds from sales and maturities of investments...... 128,572 24,993 --------- --------- Net cash provided by investing activities................ 33,666 2,312 --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock................. 13,377 4,493 Purchases of treasury stock............................ -- (49,963) Repayment of long-term obligations..................... (11) -- --------- --------- Net cash provided (used) by financing activities......... 13,366 (45,470) --------- --------- Elimination of net cash activity of acquired company for the three months ended December 31, 1997................ 11,567 -- Effect of exchange rate changes on cash ................. (1,685) 3,144 --------- --------- Net increase (decrease) in cash and cash equivalents..... 93,380 (9,167) Cash and cash equivalents, beginning of period........... 168,609 205,971 --------- --------- Cash and cash equivalents, end of period................. $ 261,989 $ 196,804 ========= ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 3 <PAGE> PARAMETRIC TECHNOLOGY CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Parametric Technology Corporation and its wholly owned subsidiaries and have been prepared by us in accordance with generally accepted accounting principles. Our fiscal year end is September 30. Certain reclassifications have been made to the prior year's statements to conform with the fiscal 1999 presentation. The year end consolidated balance sheet was derived from our audited financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of our financial position, results of operations, and cash flows at the dates and for the periods indicated. While we believe that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 1998. The results of operations for the three month period ended January 2, 1999 are not necessarily indicative of the results expected for the remainder of the fiscal year. The results of operations and cash flows for the three month period ended January 3, 1998 have been restated to reflect the merger with Computervision Corporation in January 1998, which was accounted for as a pooling of interests. 2. ACQUISITION AND NONRECURRING CHARGES InPart. In October 1998, we acquired all of the outstanding stock of InPart Design, Inc. (InPart) by issuing 2.0 million shares of our common stock. In addition, we reserved 386,000 shares of common stock for outstanding InPart options assumed. Based upon certain conditions, we may be obligated to issue additional shares in September 1999. InPart is the developer of DesignSuiteTM, a Web-based repository of 3D mechanical component data, as well as the developer of enterprise software applications focused on Web-based component and supplier management. The acquisition was accounted for as a purchase. Accordingly, we allocated the purchase price of $38.8 million to the assets acquired and liabilities assumed based on our estimates of fair value. The fair values assigned to intangible assets acquired consisted of purchased in- process research and development (R&D), developed technology, customer lists, an assembled workforce, and trade names. The values assigned included $741,000 for net liabilities assumed, $10.6 million for purchased in-process R&D, $4.1 million for developed technology, $1.1 million for customer lists, $200,000 for an assembled workforce, and $300,000 for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $22.5 million. The operating results of InPart have been included in our results of operations from the date of acquisition. Our purchase of InPart did not require the presentation of pro forma information. In the opinion of management, the purchased in-process R&D had not yet reached technological feasibility and had no alternative future use. Accordingly, we recorded a nonrecurring charge of $10.6 million during the first quarter of 1999. This charge was not deductible for income taxes. The value assigned to purchased in-process R&D, which was calculated pursuant to the Securities and Exchange Commission's recent guidance regarding in-process R&D allocations, was determined by identifying research projects for which technological feasibility had not been established. The value was determined by estimating the stage of completion of the purchased in-process R&D, estimating the resulting net cash flows from the products developed, and discounting the net cash flows back to their present value. The discount rate used included a factor that took into account the uncertainty surrounding the successful development of the purchased in-process technology. If these projects are not successfully developed, future revenue and profitability may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. Sales Force Reorganization. During the first quarter of 1999, we reorganized our sales force to provide a more focused approach to the unique product and service requirements of our customers. In connection with this 4 <PAGE> PARAMETRIC TECHNOLOGY CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) action, we incurred a restructuring charge of $3.2 million for the severance and termination benefits of approximately 170 people who had been terminated during the first quarter of 1999 in accordance with management's plan. Of the $3.2 million charge, $2.6 million was paid during the quarter. As of January 2, 1999, the remaining $645,000 was included in accrued compensation. We expect to pay the remaining amount during the second quarter of 1999. 3. EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options using the "treasury stock" method and other dilutive potential shares. The following table presents the calculation for both basic and diluted EPS: <TABLE> <CAPTION> Three months ended --------------------- January 3, January 2, 1998 1999 ---------- ---------- (in thousands, except per share data) <S> <C> <C> Net income......................................... $42,133 $29,991 ======= ======= Weighted average shares outstanding................ 267,344 268,429 Dilutive effect of employee stock options.......... 7,692 4,933 Contingently issuable shares related to InPart acquisition....................................... -- 418 ------- ------- Diluted shares outstanding......................... 275,036 273,780 ======= ======= Basic EPS.......................................... $ 0.16 $ 0.11 Diluted EPS........................................ $ 0.15 $ 0.11 </TABLE> Options to purchase 14.5 million shares for the three months ended January 3, 1998 and 17.9 million shares for the three months ended January 2, 1999 were outstanding but were excluded from the computations of diluted shares outstanding because the price of the options was greater than the average market price of the common stock for the period reported. 4. COMPREHENSIVE INCOME Effective October 1, 1998, we adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires presentation of the components of comprehensive income, including unrealized gains and losses on investments, foreign currency translation adjustments, and minimum pension liability adjustments. Our total comprehensive income is as follows: <TABLE> <CAPTION> Three months ended --------------------- January 3, January 2, 1998 1999 ---------- ---------- (in thousands) <S> <C> <C> Comprehensive income: Net income........................................ $ 42,133 $ 29,991 Other comprehensive income (loss): Foreign currency translation adjustments.......... (1,485) 2,420 Unrealized gain on investments.................... 129 316 -------- -------- Total comprehensive income.......................... $ 40,777 $ 32,727 ======== ======== </TABLE> 5 <PAGE> PARAMETRIC TECHNOLOGY CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which requires the reporting of operating segments, major customers, and geographic financial information. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosure about Pensions and Other Postretirement Benefits, which enhances the disclosure requirements for pensions and other postretirement benefits. We will adopt SFAS No. 131 and SFAS No. 132 in our fiscal year ending September 30, 1999. We anticipate that the adoption of these statements will not have a material effect on our financial condition or results of operations. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, Software Revenue Recognition, which provides guidance on applying generally accepted accounting principles on recognizing revenue in software transactions. We adopted SOP 97-2 during the quarter ended January 2, 1999. The adoption of this statement did not have a material effect on our revenue recognition policies or on our results of operations. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires that all derivative instruments be recorded on the balance sheet at their fair values. Changes in the fair value of derivatives are recorded in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. We will adopt SFAS No. 133 for our fiscal year ending September 30, 2000. We anticipate that the adoption of this statement will not have a material effect on our financial condition or results of operations. 6. SUBSEQUENT EVENT In January 1999, we announced our offer to acquire all of the outstanding capital shares of Division Group plc (Division) for approximately $46 million in cash or stock. Division, headquartered in Bristol, England, and San Diego, California, is a leading developer of product data visualization, simulation, and integration tools. We expect to complete the acquisition in our second quarter, subject to satisfaction of certain conditions including regulatory approvals and acceptance by holders of 90% of the Division shares, which condition may be waived by us if the offer is accepted by holders of a majority of Division shares. At February 1, 1999, we had purchased 22% of the Division shares and had commitments for acceptance for an additional 37% of the Division shares. The acquisition will be accounted for as a purchase. We anticipate that a portion of the purchase price will be allocated to purchased in-process R&D. 6 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company Parametric Technology Corporation develops, markets, and supports a comprehensive suite of integrated product development and information management software. Our mechanical design automation product family automates product development, from conceptual design through production. Our enterprise information management solutions accelerate the flow of product data from engineering to other critical areas of an enterprise. Our solutions are complemented by the strength and experience of our professional services organization, which provides training, consulting, and support to customers worldwide. Forward-Looking Statement This Quarterly Report on Form 10-Q contains forward-looking statements that describe our anticipated financial results and growth based on our plans and assumptions. Important information about the basis for these plans and assumptions and certain factors that may cause our actual results to differ materially from these statements are discussed below and additional factors are contained in Important Risk Factors Affecting Results included in Management's Discussion and Analysis of Financial Condition and Results of Operations which is filed as part of Exhibit 13.1 to our 1998 Annual Report on Form 10-K and is incorporated herein by reference. Results of Operations The following is an overview of our results of operations: . Total revenue was $258.9 million for the first quarter of 1998 and $250.1 million for the first quarter of 1999. . Our year-over-year first quarter revenue declined 3%, reflecting a 14% decrease in software license revenue offset by a 13% increase in service revenue. . Excluding acquisition and nonrecurring charges, our net income increased 1% to $42.7 million for the first quarter of 1999. 7 <PAGE> The following table shows certain consolidated financial data as a percentage of our total revenue for the first quarter of 1998 and 1999. <TABLE> <CAPTION> Three months ended --------------------- January 3, January 2, 1998 1999 ---------- ---------- <S> <C> <C> Total revenue...................................... 100% 100% --- --- Cost of revenue: License.......................................... 2 2 Service.......................................... 14 17 --- --- Total cost of revenue.............................. 16 19 --- --- Gross profit....................................... 84 81 --- --- Operating expenses: Sales and marketing.............................. 37 38 Research and development......................... 10 12 General and administrative....................... 6 7 Amortization of intangible assets................ -- 1 Acquisition and nonrecurring charges............. -- 5 --- --- Total operating expenses........................... 53 63 --- --- Operating income................................... 31 18 --- --- Other income (expense), net........................ (2) 1 --- --- Income before income taxes......................... 29 19 Provision for income taxes......................... 13 7 --- --- Net income......................................... 16% 12% === === Excluding acquisition and nonrecurring charges: Operating income................................. 31% 24% Net income....................................... 16% 17% </TABLE> REVENUE. We derived our revenue primarily from software used in the mechanical segment of the computer-aided design, manufacturing, and engineering industry. License revenue decreased 14% for the first quarter of 1999 compared to the first quarter of 1998. Among other factors, this decrease is attributable to the implementation of our sales force reorganization during the first quarter of 1999, which reduced sales productivity during the quarter, and to weaker than anticipated results in the Asia/Pacific region, particularly Japan. In addition, the average price of our software in the first quarter of 1999 decreased from the comparable 1998 period due primarily to our repricing and repackaging initiative announced in August 1998. Product unit sales increased 7% during the same period. 8 <PAGE> Our service revenue is derived from the sale of software maintenance contracts and the performance of training and consulting services, and has a lower gross profit margin than license revenue. Service revenue increased 13% for the first quarter of 1999 compared to the first quarter of 1998. This increase is primarily the result of growth in our installed customer base and increased training and consulting services performed for these customers. We expect service revenue to continue to increase in both absolute dollars and as a percentage of total revenue for the remainder of 1999. [bar chart depicting Revenue by Type: Q1 98: License - $158.3 million; Service - $100.6 million Q1 99: License - $136.1 million; Service - $114.0 million] We derived 55% and 54% of our total revenue from sales to international customers for the first quarter of 1998 and 1999, respectively. Our 1999 first quarter revenue in both North America and Europe remained relatively flat compared to the first quarter of 1998 while revenue in the Asia/Pacific region decreased 20%, due in part to the weakness in capital spending in that region. [bar chart depicting Revenue by Geography: U.S. Q1 98 - $115.6 million; Q1 99 - $116.0 million Europe Q1 98 - $98.6 million; Q1 99 - $98.6 million Asia/Pacific Q1 98 - $44.7 million; Q1 99 - $35.5 million] We remain cautious in our overall outlook for the remainder of 1999 because the impact of our various strategic initiatives, designed to provide a foundation for future growth, is uncertain. These initiatives include the repricing and repackaging of our core Pro/ENGINEER(R) product line that we undertook in the fourth quarter of 1998 and the following initiatives implemented in the first quarter of 1999: our sales force reorganization, which included our appointment of Rand A Technology Corporation as our exclusive distributor to small businesses in 9 <PAGE> the U.S. and Europe; and our Windchill pilot program, which is designed to allow customers to use the Windchill technology on a test basis at a reduced price in order to promote market awareness in the enterprise information management industry. We anticipate that total revenue will remain relatively flat for the next quarter and look for growth to begin during the second half of 1999. However, the level of total revenue will be affected by the success of the initiatives outlined above, together with the factors discussed under Important Risk Factors Affecting Results included in Exhibit 13.1 to our 1998 Annual Report on Form 10-K. COST OF REVENUE. Our cost of license revenue consists of costs associated with reproducing and distributing software and documentation, royalties, and the amortization of capitalized computer software costs. Cost of license revenue as a percent of total revenue was 2% for the first quarter of 1998 and 1999. Our cost of service revenue includes costs associated with training and consulting personnel, such as salaries and related costs and travel, and costs related to software maintenance, including costs incurred for customer support personnel and the release of maintenance updates. The increase in our costs of service revenue resulted primarily from growth in the staffing necessary to generate and support increased worldwide service revenue and provide ongoing quality customer support to our installed base. We anticipate continued growth in both service revenue and staffing necessary to support its growth. SALES AND MARKETING. Our sales and marketing expenses primarily include salaries, sales commissions, travel, and facility costs. These costs were flat for the first quarter of 1998 compared to the first quarter of 1999, principally due to the sales force reorganization. Total sales and marketing employees were 2,398 at January 3, 1998, 2,440 at September 30, 1998 and 2,180 at January 2, 1999. We expect our worldwide sales and marketing organization for the remainder of 1999 to remain at or below the September 30, 1998 level due to the sales force reorganization. RESEARCH AND DEVELOPMENT. Our research and development expenses consist principally of salaries and benefits, expenses associated with product translations, costs of computer equipment used in software development, and facility expenses. Compared to the first quarter of 1998, research and development expenses increased 16% in the first quarter of 1999. This increase is primarily attributable to our continued investment in the Windchill product line and our InPart acquisition in the first quarter of 1999. We expect our investment in research and development to increase in absolute dollars in 1999. GENERAL AND ADMINISTRATIVE. Our general and administrative expenses include costs of our corporate, finance, information technology, human resources, and administrative functions. These costs increased 7% in the first quarter of 1999 compared to the first quarter of 1998 primarily due to an increase in costs incurred related to Year 2000 compliance. 10 <PAGE> AMORTIZATION OF INTANGIBLE ASSETS. These costs include the amortization of assets acquired related to operating expenses, including goodwill, customer lists, assembled work force, and trade names. The increased amortization of $1.3 million resulted from our acquisitions of InPart and ICEM in the past year. [bar chart depicting Operating expenses: Sales and Marketing: Q1 98-$96.2 million; Q1 99-$96.1 million Research and Development: Q1 98-$25.3 million; Q1 99-$29.2 million General and Administrative: Q1 98-$15.5 million; Q1 99-$16.6 million Amortization of Intangible Assets Q1 98-$0.4 million; Q1 99-$1.7 million Acquisition and Nonrecurring Charges Q1 98- 0 ; Q1 99-$13.8 million] ACQUISITION AND NONRECURRING CHARGES. InPart. In October 1998, we acquired all of the outstanding stock of InPart Design, Inc. (InPart) by issuing 2.0 million shares of our common stock. In addition, we reserved 386,000 shares of our common stock for outstanding InPart options assumed. InPart is the developer of DesignSuite TM, a Web-based repository of 3D mechanical component data, as well as the developer of enterprise software applications focused on Web-based component and supplier management. The acquisition was accounted for as a purchase. Accordingly, we allocated the purchase price of $38.8 million to the assets acquired and liabilities assumed based on our estimates of fair value. The fair value assigned to intangible assets acquired consisted of purchased in-process research and development (R&D), developed technology, customer lists, an assembled workforce, and trade names. The values assigned included $741,000 for net liabilities assumed, $10.6 million for purchased in- process R&D, $4.1 million for developed technology, $1.1 million for customer lists, $200,000 for an assembled workforce, and $300,000 for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $22.5 million. The operating results of InPart have been included in our results of operations from the date of acquisition. In the opinion of management, the purchased in-process R&D had not yet reached technological feasibility and had no alternative future use. Accordingly, we recorded a nonrecurring charge of $10.6 million during the first quarter of 1999. This charge was not deductible for income taxes. The value assigned to purchased in-process R&D, which was calculated pursuant to the Securities and Exchange Commission's (SEC) recent guidance regarding in-process R&D allocations, was determined by identifying research projects for which technological feasibility had not been established. The value was determined by estimating the stage of completion of the purchased in-process R&D, estimating the resulting net cash flows from the products developed, and discounting the net cash flows back to their present value. The estimates were based on the following major assumptions: . Aggregate revenue was estimated to begin late in 1999 and to grow at a compound rate of 70%. . Cost of revenue for the purchased in-process technology, expressed as a percentage of revenue, was estimated to decline from 22% to 11%. These percentages were based on InPart's average historical cost of revenue and reflect future economies of scale. 11 <PAGE> . Selling, general, and administrative expenses, as a percentage of revenue, were estimated to be 99% in 1999, reflecting an initial investment in the marketing of the in-process technology, and declining to 40% thereafter. These amounts were based on industry average historical selling, general and administrative costs. The net cash flows also considered net working capital requirements and capital spending needs related to the purchased in-process technology. The 28% rate used to discount net cash flows for the purchased in-process technology to its present value was based on the weighted average cost of capital and took into account the uncertainty surrounding the successful development of the purchased in-process technology. If these projects are not successfully developed, future revenue and profitability may be adversely affected and the value of other intangible assets acquired may become impaired Sales Force Reorganization. During the first quarter of 1999, we reorganized our sales force to provide a more focused approach to the unique product and service requirements of our customers. In connection with this action, we incurred a restructuring charge of $3.2 million for the severance and termination benefits of approximately 170 people who had been terminated during the first quarter of 1999 in accordance with management's plans. Of the $3.2 million charge, $2.6 million was paid during the quarter. As of January 2, 1999, the remaining $645,000 was included in accrued compensation. We expect to pay the remaining amount during the second quarter of 1999. OTHER INCOME (EXPENSE). Our other income (expense) includes interest income, interest expense, costs of hedging contracts, the gain or loss from the translation of results for subsidiaries for which the U.S. dollar is the functional currency, and other charges incurred in connection with financing customer contracts. For the first quarter of 1998, we reported other expense of $5.9 million compared to other income of $1.9 million for the first quarter of 1999. The change is primarily due to the elimination of interest expense on debt that was paid in the second quarter of 1998. INCOME TAXES. Our effective tax rate for the first quarter of 1998 was 43% compared with 38% for the corresponding period in 1999. The difference between our effective tax rate and the statutory federal income tax rate of 35% was due primarily to the charge for purchased in-process R&D in the first quarter of 1999 and losses of Computervision in the first quarter of 1998, neither of which were deductible for tax purposes. EMPLOYEES. The number of worldwide employees was 4,721 at January 3, 1998 compared with 4,911 at September 30, 1998 and 4,803 at January 2, 1999. The increase over the prior year was a result of growth in our services organization and in the research and development group, primarily through acquisitions. The decrease from year end is primarily the result of the sales force reorganization during the first quarter of 1999. Liquidity and Capital Resources Our operating activities, the proceeds from our issuance of stock under stock plans, and existing cash and investments provided sufficient resources to fund fluctuations in our employee base, capital assets needs, stock repurchases, acquisitions, and financing needs, in the first quarter of 1998 and 1999. As of January 2, 1999, cash and investments totaled $400.1 million, down from $426.2 million at September 30, 1998. The primary reason for the decrease in cash and investments during the quarter ending January 2, 1999 was the purchase of $50 million of treasury stock, partially offset by net cash provided by operating activities. Our investment portfolio is diversified among security types, industries, and individual issuers. Our investments are generally liquid and investment grade. The portfolio is primarily invested in short-term securities to minimize interest rate risk and to facilitate rapid deployment in the event of immediate cash needs. Cash generated from operating activities was $36.5 million in the first quarter of 1998, compared to $30.8 million for the first quarter of 1999, net of cash expenditures for nonrecurring charges of $13.0 million in the first quarter of 1999. 12 <PAGE> In the first quarter of 1998 and 1999, we acquired $5.7 million and $8.5 million, respectively, of capital equipment consisting principally of computer equipment, software, and office equipment. We generated net cash from financing activities during the first quarter of 1998 of $13.4 million from the issuance of common stock under our stock plans. We used net cash for financing activities during the first quarter of 1999 to purchase $50.0 million of treasury stock, offset by $4.5 million of proceeds from the issuance of common stock under our stock plans. Through January 2, 1999 we had repurchased 8.0 million of the 20.0 million shares authorized by the Board of Directors to be repurchased. In January 1999, we announced our offer to acquire all of the outstanding capital shares of Division Group plc (Division) for approximately $46 million in cash or stock. Division, headquartered in Bristol, England, and San Diego, California, is a leading developer of product data visualization simulation, and integration tools. We expect to complete the acquisition in our second quarter, subject to satisfaction of certain conditions including regulatory approvals and acceptance by holders of 90% of the Division shares, which condition may be waived by us if the offer is accepted by holders of a majority of the Division shares. At February 1, 1999 we had purchased 22% of the Division shares and had commitments for acceptance for an additional 37% of the Division shares. The acquisition will be accounted for as a purchase. We anticipate that a portion of the purchase price will be allocated to purchased in-process R&D. We believe that existing cash and short-term investments together with cash generated from operations and the issuance of common stock under our stock plans will be sufficient to meet our requirements for working capital, capital expenditures, and financing, including the proposed Division acquisition, through at least September 30, 1999. New Accounting Pronouncements In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. See Note 5 to the unaudited consolidated financial statements included herein. Year 2000 Computer Systems Compliance Concerns have been widely expressed regarding the inability of certain computer programs to process date information beyond the year 1999. These concerns focus on the impact of the Year 2000 problem on business operations and the potential costs associated with identifying and addressing the problem. We are continuing to implement our Year 2000 readiness program according to the plan described in Management's Discussion and Analysis of Financial Condition and Results of Operations included as part of Exhibit 13.1 to our 1998 Annual Report on Form 10-K and incorporated herein by reference. During the first quarter of 1999 we incurred costs of $1.0 million for our Year 2000 compliance program and we estimate that another $2.0 to $5.0 million will be required for our compliance effort. Euro Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the euro making the euro their common legal currency. The legacy currencies are scheduled to remain legal tender in the participating countries as denominations of the euro between January 1, 1999 and January 1, 2002 (the Transition Period). We are currently evaluating the business implications of full conversion to the euro. At this time, we do not believe that the conversion to the euro will have a material impact on our business during the Transition Period. 13 <PAGE> ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Other than as disclosed in this report on Form 10-Q, there have been no significant changes in our market risk exposure as described in Management's Discussion and Analysis of Financial Condition and Results of Operations included as part of Exhibit 13.1 to our 1998 Annual Report on Form 10-K and incorporated herein by reference. PART II-- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Certain class action lawsuits were filed in the fourth quarter of fiscal 1998 against us and certain of our current and former officers and directors in the U.S. District Court in Massachusetts claiming violations of the federal securities laws based on alleged misrepresentations regarding our anticipated revenue and earnings for the third quarter of fiscal 1998. These actions seek unspecified damages. We believe the claims are without merit, and we intend to defend them vigorously. We cannot predict the ultimate resolution of these actions at this time, however, there can be no assurance that the litigation will not have a material adverse impact on our financial condition or results of operations. We are also subject to various legal proceedings and claims that arise in the ordinary course of business. We currently believe that resolving these matters will not have a material adverse impact on our financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On October 2, 1998, in connection with our acquisition of InPart Design, Inc., we issued 2.0 million shares of our common stock to the stockholders of InPart in exchange for all of their outstanding common stock. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 because it did not involve a public offering. ITEM 5. OTHER INFORMATION On January 21, 1999, we announced our intention to offer cash or stock valued at approximately $46 million to acquire all of the outstanding capital shares of Division Group plc (Division). We made our formal offer through our wholly owned subsidiary in the United Kingdom on January 28, 1999. We are not making the offer in the United States. Division is a leading developer of product data visualization, simulation and integration tools. It is headquartered in Bristol, England, and San Diego, California. We expect to complete the acquisition in our second quarter, subject to satisfaction of certain conditions including regulatory approvals and acceptance by holders of 90% of the Division shares, which condition may be waived by us if the offer is accepted by holders of a majority of the Division shares. At February 1, 1999, we had purchased 22% of the Division shares and had commitments for acceptances for an additional 37% of the Division shares. This acquisition will be accounted for as a purchase. We anticipate that a portion of the purchase price will be allocated to purchased in-process research and development. 14 <PAGE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <C> <S> 27.1* Financial Data Schedule for the period ended January 2, 1999. 99.1 Annual Report to Stockholders for the fiscal year ended September 30, 1998 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated in this Quarterly Report on Form 10-Q) (Exhibit 13.1 to our 1998 Annual Report on Form 10-K). </TABLE> - -------- * Indicates document filed herewith. For our documents incorporated by reference, references are to File No. 0- 18059. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ending January 2, 1999. 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 hereunto duly authorized. PARAMETRIC TECHNOLOGY CORPORATION /s/ Edwin J. Gillis By___________________________________ Edwin J. Gillis Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: February 9, 1999 15 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN THE QUARTERLY REPORT FOR THE QUARTER ENDED JANUARY 2, 1999, 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-30-1999 <PERIOD-END> JAN-02-1999 <CASH> 196,804 <SECURITIES> 133,650 <RECEIVABLES> 202,520 <ALLOWANCES> 6,780 <INVENTORY> 0 <CURRENT-ASSETS> 602,847 <PP&E> 142,105 <DEPRECIATION> 77,730 <TOTAL-ASSETS> 860,844 <CURRENT-LIABILITIES> 416,878 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 2,723 <OTHER-SE> 356,695 <TOTAL-LIABILITY-AND-EQUITY> 860,844 <SALES> 136,080 <TOTAL-REVENUES> 250,117 <CGS> 4,489 <TOTAL-COSTS> 46,611 <OTHER-EXPENSES> 157,409 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 48,041 <INCOME-TAX> 18,050 <INCOME-CONTINUING> 29,991 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 29,991 <EPS-PRIMARY> 0.11 <EPS-DILUTED> 0.11 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

RAD

https://www.sec.gov/Archives/edgar/data/84129/0000893220-99-000015.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, DUQAJBqaL7B7vU7+OfT3wVKT0x0c+1x054AeiSWFTNs1Ann6RMpPKm6zdZHhP3C4 3NovKaOY6MAYB3W7xb0H5Q== <SEC-DOCUMENT>0000893220-99-000015.txt : 19990113 <SEC-HEADER>0000893220-99-000015.hdr.sgml : 19990113 ACCESSION NUMBER: 0000893220-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981128 FILED AS OF DATE: 19990112 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: 0302 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05742 FILM NUMBER: 99505175 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>FORM 10-Q - RITE AID CORPORATION <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 28, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From To ----- ----- COMMISSION FILE NUMBER 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, CAMP HILL, PENNSYLVANIA 17011 ------------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (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. [x] YES [ ] NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The registrant had 258,745,913 shares of its $1.00 par value Common Stock outstanding as of December 26, 1998. <PAGE> 2 RITE AID CORPORATION INDEX <TABLE> <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheets November 28, 1998 and February 28, 1998 2 Condensed Consolidated Statements of Income Thirteen Weeks Ended November 28, 1998 and November 29, 1997 3 Condensed Consolidated Statements of Income Thirty-Nine Weeks Ended November 28, 1998 and November 29, 1997 4 Condensed Consolidated Statements of Cash Flows Thirty-Nine Weeks Ended November 28, 1998 and November 29, 1997 5 Notes to Condensed Consolidated Financial Statements 6 Independent Auditors' Review Report 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13 </TABLE> 1 <PAGE> 3 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <TABLE> <CAPTION> Nov. 28, 1998 Feb. 28, 1998 ------------- ------------- (Unaudited) <S> <C> <C> CURRENT ASSETS Cash $97,815 $90,968 Accounts and notes receivable 204,110 165,429 Inventories 3,074,972 3,061,211 Prepaid expenses and other current assets 84,743 60,700 ------ ------ TOTAL CURRENT ASSETS 3,461,640 3,378,308 --------- --------- Property, plant and equipment, at cost 3,551,100 3,061,160 Accumulated depreciation 885,809 890,011 ------- ------- PROPERTY, PLANT AND EQUIPMENT, NET 2,665,291 2,171,149 --------- --------- Intangible assets 1,931,821 1,967,306 --------- --------- Other assets 200,453 138,583 ------- ------- TOTAL ASSETS $8,259,205 $7,655,346 ========== ========== CURRENT LIABILITIES Short-term debt and current maturities of long-term debt $188,430 $47,516 Accounts payable 874,843 1,183,892 Other current liabilities 448,756 539,523 ------- ------- TOTAL CURRENT LIABILITIES 1,512,029 1,770,931 --------- --------- Long-term debt and capital lease obligations, less current maturities 3,228,860 2,551,418 Other noncurrent liabilities 593,114 416,533 STOCKHOLDERS' EQUITY Preferred stock, par value $1 per share - - Common stock, par value $1 per share 258,731 258,215 Additional paid-in capital 1,352,091 1,345,131 Retained earnings 1,315,167 1,313,905 Accumulated other comprehensive income (787) (787) ----- ----- TOTAL STOCKHOLDERS' EQUITY 2,925,202 2,916,464 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,259,205 $7,655,346 ========== ========== </TABLE> See accompanying independent auditors' review report and notes to condensed consolidated financial statements. 2 <PAGE> 4 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- 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 Nov. 28, 1998 Nov. 29, 1997 ------------- ------------- <S> <C> <C> Sales $3,122,930 $2,885,666 Costs and expenses: Costs of goods sold including occupancy costs 2,292,725 2,115,739 Selling, general and administrative expenses 640,517 613,424 Interest expense 44,927 42,779 ------ ------ 2,978,169 2,771,942 --------- --------- Income before income taxes 144,761 113,724 Income taxes 57,904 45,830 ------ ------ Net income $86,857 $67,894 ======= ======= Basic earnings per share $.34 $.27 ==== ==== Diluted earnings per share $.33 $.26 ==== ==== Cash dividends paid per common share $.1075 $.10 ====== ==== Basic weighted average shares 258,532,000 253,042,000 =========== =========== Diluted weighted average shares 283,711,000 263,888,000 =========== =========== </TABLE> See accompanying independent auditors' review report and notes to condensed consolidated financial statements. 3 <PAGE> 5 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- 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 Nov. 28, 1998 Nov. 29, 1997 ------------- ------------ <S> <C> <C> Sales $9,166,640 $8,184,466 Costs and expenses: Costs of goods sold including occupancy costs 6,721,164 5,964,079 Selling, general and administrative expenses 1,911,382 1,769,497 Interest expense 128,155 121,329 Store closing and other costs 264,204 - ------- --------- 9,024,905 7,854,905 --------- --------- Income before income taxes 141,735 329,561 Income taxes 56,694 132,813 ------ ------- Net income $85,041 $196,748 ======= ======== Basic earnings per share $.33 $.79 ==== ==== Diluted earnings per share $.32 $.77 ==== ==== Cash dividends paid per common share $.3225 $.30 ====== ==== Basic weighted average shares 258,404,000 248,202,000 =========== =========== Diluted weighted average shares 265,465,000 262,984,000 =========== =========== </TABLE> See accompanying independent auditors' review report and notes to condensed consolidated financial statements. 4 <PAGE> 6 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- ITEM 1. FINANCIAL STATEMENTS: (CONTINUED) RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (UNAUDITED) <TABLE> <CAPTION> 39 Weeks Ended 39 Weeks Ended Nov. 28, 1998 Nov. 29, 1997 ------------- ------------- <S> <C> <C> OPERATING ACTIVITIES Income before income taxes $141,735 $329,561 Depreciation and amortization 211,747 203,316 Store closing and other costs 289,678 - Changes in operating assets and liabilities (616,335) (43,624) --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 26,825 489,253 ------ ------- INVESTING ACTIVITIES Purchase of property, plant and equipment (675,391) (338,459) Purchases of businesses, net of cash acquired - (330,425) Other investing activities (80,481) 18,653 -------- ------ NET CASH USED IN INVESTING ACTIVITIES (755,872) (650,231) --------- --------- FINANCING ACTIVITIES Proceeds from bond issuance 202,844 641,293 Net proceeds (repayment) of commercial paper borrowings 646,961 (286,500) Dividends paid (83,779) (74,849) Other financing activities (30,132) (42,794) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 735,894 237,150 ------- ------- INCREASE IN CASH 6,847 76,172 CASH AT BEGINNING OF PERIOD 90,968 7,042 ------ ----- CASH AT END OF PERIOD $97,815 $83,214 ======= ======= </TABLE> See accompanying independent auditors' review report and notes to condensed consolidated financial statements. 5 <PAGE> 7 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- 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 registrant's annual report has not been included in this report; 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 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 thirteen and thirty-nine week periods ended November 28, 1998 and November 29, 1997, are not necessarily indicative of the results to be expected for the full year. NOTE 2 -- EARNINGS PER SHARE The registrant determines earnings per share in accordance with the provisions of Statements of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share". SFAS No. 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. SFAS No. 128 requires restatement of all prior-period earnings per share data presented. Following is a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation: <TABLE> <CAPTION> 13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended Amounts in thousands Nov. 28, 1998 Nov. 29, 1997 Nov. 28, 1998 Nov. 29, 1997 - -------------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net income $86,857 $67,894 $85,041 $196,748 Interest expense assuming dilution (a) 5,392 800 - 5,281 ----- --- ----- ----- Net income assuming dilution $92,249 $68,694 $85,041 $202,029 ======= ======= ======= ======== Basic weighted average shares 258,532 253,042 258,404 248,202 Employee stock options assuming dilution 7,192 6,192 7,061 5,402 Convertible debt assuming dilution (a) 17,987 4,654 - 9,380 ------ ----- ----- ----- Diluted weighted average shares 283,711 263,888 265,465 262,984 ======= ======= ======= ======= </TABLE> (a) For the thirteen weeks ended November 29, 1997 and the thirty-nine weeks ended November 28, 1998 and November 29, 1997, the registrant did not assume conversion of its 5.25% convertible securities because their effect on earnings per share was anti-dilutive. All share and per share data for the thirteen and thirty-nine weeks ended November 29, 1997, have been restated to reflect a two-for-one stock split distributed to shareholders on February 2, 1998. 6 <PAGE> 8 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- ITEM 1. FINANCIAL STATEMENTS: (CONTINUED) RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS The registrant adopted SFAS No. 130 "Reporting Comprehensive Income" during the quarter ended May 30, 1998. SFAS No. 130 establishes standards for reporting and display of comprehensive income. Comprehensive income was $85.0 million and $196.7 million for the thirty-nine weeks ended November 28, 1998 and November 29, 1997, respectively. The Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in June of 1997. The objective of SFAS No. 131 is to provide information about the different types of business activities in which an enterprise engages and the different economic environments in which it operates. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." SFAS No. 132 revises the disclosure requirements for pensions and other postretirement benefit plans. This statement, however, does not change any of the measurement or recognition provisions required under previous guidance. Both statements are effective for fiscal years beginning after December 15, 1997. The registrant is in the process of determining what impact, if any, these pronouncements will have on its financial statements. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance concerning recognition and measurement of costs associated with developing or acquiring computer software for internal use. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 provides guidance concerning the costs of start-up activities. Initial application of this SOP should be reported as the cumulative effect of a change in accounting principle as described in Accounting Principles Board Opinion No. 20, "Accounting Changes." Both statements are effective for financial statements for fiscal years beginning after December 15, 1998. The registrant does not believe that adoption of SOP 98-1 and SOP 98-5 will have a material impact on its consolidated financial statements. NOTE 4 -- STORE CLOSING AND OTHER COSTS During the quarter ended August 29, 1998, the registrant recorded pre-tax charges of $289.7 million for the closing of 379 stores to be completed by February 27, 1999, and other charges. These charges principally relate to a strategic exit plan that includes vacating certain markets, closing bantam East Coast stores and consolidating certain other store locations. Costs associated with the disposal of inventory, including the use of liquidators, were $25.5 million and are included as a component of cost of goods sold. The remaining charge to income of $264.2 million consisted of the following: (i) $144.8 million for the present value of noncancellable lease payments and related contractual obligations; (ii) $94.2 million for impairment losses associated with land, buildings, fixtures and leasehold improvements, prescription files, lease acquisition costs and goodwill; and (iii) $25.2 million for other costs including expenses associated with previously closed stores. The remaining accrued liability for noncancellable lease payments and related contractual obligations was $133.9 million as of November 28, 1998. Revenues generated by the 379 stores were $306.5 million for the thirty-nine weeks ended November 28, 1998 compared to $511.2 million in the same period last year. For the thirty-nine weeks ended November 28, 1998 these stores had operating losses of $12.6 million compared to operating losses of $15.6 million last year. During the thirty-nine weeks ended November 28, 1998 the registrant closed 293 stores. NOTE 5 -- COMMITMENTS AND CONTINGENCIES The registrant had outstanding letters of credit as of November 28, 1998 and November 29, 1997. In addition, the registrant 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 without merit or are of such nature or involve such amounts as would not have a material effect on the financial statements of the registrant if decided adversely. The registrant, regardless of insurance coverage, does not believe it has a material, estimable, and probable liability in regard to these claims and lawsuits. 7 <PAGE> 9 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- ITEM 1. FINANCIAL STATEMENTS: (CONTINUED) RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 -- REMARKETABLE SECURITIES On September 22, 1998, the registrant issued $200 million of remarketable securities due October 1, 2013. The remarketable securities bear interest at a rate of 6% from September 22, 1998 until October 1, 2003 (the remarketing date). Interest is payable semi-annually on April 1 and October 1 of each year commencing April 1, 1999. Finance costs are being amortized over the period until the remarketing date. The remarketable securities are subject to mandatory tender on the remarketing date. NOTE 7 - PCS ACQUISITION On November 17, 1998, the registrant announced that a definitive agreement had been reached to acquire the equity of Eli Lilly and Company's PCS Health Systems pharmacy benefits management subsidiary. Rite Aid will pay Lilly approximately $1.5 billion. The PCS acquisition will be accounted for using the purchase method of accounting for business combinations. On December 24, 1998, the registrant announced that the waiting period under the Hart Scott Rodino Anti-Trust Improvement Act had expired. The acquisition of PCS is expected to close on January 22, 1999. NOTE 8 -- SUBSEQUENT EVENTS On December 15, 1998, the registrant issued securities aggregating $700 million. The securities included $200 million, 5.50% fixed-rate senior notes due December 15, 2000, $200 million, 6.00% fixed-rate senior notes due December 15, 2005, $150 million, 6.125% fixed-rate senior notes due December 15, 2008 and $150 million, 6.875% fixed-rate senior notes due December 15, 2028. Interest is payable semi-annually December 15 and June 15 of each year, beginning June 15, 1999. Finance costs for each issue are being amortized over the period until the maturity date. The net proceeds from the securities were used to repay commercial paper previously issued by the registrant. In December 1998, the registrant completed sale and leaseback transactions of certain store properties that resulted in proceeds of approximately $140.0 million that were used to repay commercial paper previously issued by the registrant. 8 <PAGE> 10 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- ITEM 1. FINANCIAL STATEMENTS: (CONTINUED) INDEPENDENT AUDITORS' REVIEW REPORT The Board of Directors and Shareholders Rite Aid Corporation We have reviewed the condensed consolidated balance sheet of Rite Aid Corporation and subsidiaries as of November 28, 1998, and the related condensed consolidated statements of income for the thirty-nine and thirteen week periods ended November 28, 1998 and November 29, 1997, and the condensed consolidated statements of cash flows for the thirty-nine week periods ended November 28, 1998 and November 29, 1997. These condensed consolidated 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 February 28, 1998, 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 14, 1998, 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 February 28, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG LLP Harrisburg, Pennsylvania January 12, 1999 9 <PAGE> 11 ---------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Sales for the thirteen-week and thirty-nine week periods ended November 28, 1998 were $3,122.9 million and $9,166.6 million, respectively, representing increases of 8.2% and 12.0% over the same periods from the previous year. Same-store sales for the quarter ended November 28, 1998, increased 8.3% over the prior-year quarter reflecting a 15.3% increase in pharmacy comparable sales and a 0.8% increase in front end same-unit sales, which are all non-pharmacy sales. Same-store sales for the 39 weeks ended November 28, 1998, rose 7.4%, consisting of a 14.5% pharmacy same-store sales increase, and a 0.1% increase in front end same-unit sales. Sales and operating results for the acquired Harco, Inc., and K&B Incorporated drugstores are included since their August 27, 1997 acquisition date. Accordingly, the registrant operated these stores for thirteen of the thirty-nine weeks ended November 29, 1997. Prescription sales accounted for 56.3% of drugstore sales for the quarter, compared to 51.4% last year. Third party prescription sales, which represent prescription sales that are paid by a person or entity other than the recipient of the prescribed pharmaceutical and are generally subject to negotiated reimbursement rates in conjunction with a pharmacy benefit plan, were 86.0% of pharmacy sales for the quarter compared to 83.4% last year. Prescription sales for the first thirty-nine weeks of fiscal 1999 were 54.5% of drugstore sales compared to 50.6% for the same period last year. During the quarter the registrant opened 52 drugstores, closed 123 outlets and enlarged or relocated 144 units. Stores in operation at the end of the quarter totaled 3,827. As a percentage of sales, cost of goods sold including occupancy costs were 73.4% for the thirteen-week period ended November 28, 1998, compared to 73.3% for the same period in the previous year. For the year-to-date period, cost of goods sold were 73.3% of sales compared to 72.9%. The current year-to-date period includes $25.5 million in costs associated with writing down inventory during the quarter ended August 29, 1998. The registrant continues to experience a mix shift between prescription and front-end sales and consequently, a decline in overall gross margins resulted for the thirteen and thirty-nine week periods ended November 28, 1998, because prescription gross margins are lower than front-end gross margins. Front-end sales to total sales declined to 45.5% of sales for the thirty-nine weeks ended November 28, 1998 compared to 49.4% in the prior year. In addition, pharmacy gross profit margins declined as a result of the increase in third party sales to total prescription sales and prescription inflation. Year-to-date, third party sales as a percent of pharmacy sales were 85.2% versus 83.3% last year. The company uses the LIFO inventory method that requires interim estimates of annual inflation rates. Accordingly, costs of goods sold included a LIFO provision of $4.1 million for the quarter and $18.2 million for the thirty-nine weeks ended November 28, 1998, compared to $2.7 million and $15.0 million, respectively for the same periods last year. The LIFO method of valuing inventory had the effect of reducing net income $ .01 per diluted share for the thirteen-week periods ended November 28, 1998 and November 29, 1997. Year-to-date, LIFO charges reduced net income $ .04 per diluted share this year compared to $ .03 per diluted share last year. Selling, general and administrative expenses were $640.5 million or 20.5% of sales for the quarter, compared to $613.4 million or 21.3% of sales for the comparable period last year. Excluding store closing and other costs recorded during the second quarter and shown separately on the income statement, selling, general and administrative expenses were $1,911.4 million or 20.9% of sales for the thirty-nine weeks ended November 28, 1998, compared to $1,769.5 million or 21.6% for the same period last year. The favorable decline in the current year operating expense ratio resulted from strong East Coast same-store sales that creates expense leverage and operating efficiencies achieved in West Coast stores. In addition, the prior year's operating expenses included costs from integration activities and duplicative back-office functions associated with acquisitions that contributed to an unfavorable increase in the operating expense to sales ratio a year ago. During the quarter ended August 29, 1998, the registrant recorded pre-tax charges of $289.7 million for the closing of 379 stores to be completed by February 27, 1999, and other charges. These charges principally relate to a strategic exit plan that includes vacating certain markets, closing bantam East Coast stores and consolidating certain other store locations. The strategic exit plan will allow the registrant to accelerate the pace of opening its successful larger prototype store design. As discussed above, costs associated with the disposal of inventory, including the use of liquidators, were $25.5 million and are included as a component of cost of goods sold. The remaining charge to income of $264.2 million, consisted of the following: (i) $144.8 million for the present value of noncancellable lease payments and related contractual obligations; (ii) $94.2 million for impairment losses associated with land, buildings, fixtures, leasehold improvements, prescription files, lease acquisition costs and goodwill; and (iii) $25.2 million for other costs including expenses associated with previously closed stores. The remaining accrued liability for noncancellable lease payments and related contractual obligations was $133.9 million as of November 28, 1998. Revenues generated by the 379 stores were $306.5 million for the thirty-nine weeks ended November 28, 1998 compared to $511.2 million in the same period last year. For the thirty-nine weeks ended November 28, 1998 these stores had operating losses of $12.6 million compared to operating losses of $15.6 million last year. During the thirty-nine weeks ended November 28, 1998 the registrant closed 293 stores. The registrant believes that closing these stores will enhance future results of operations, liquidity and capital resources. 10 <PAGE> 12 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (CONTINUED) Interest expenses were $44.9 million for the thirteen-week period and $128.2 million for the thirty-nine week period this year compared to $42.8 million and $121.3 million for the respective periods last year. The increase in interest expense resulted from additional borrowings for the registrant's store development and acquisition programs coupled with greater inventory levels. The weighted average interest rates on the company's commercial paper were approximately 5.7% for the quarter and year-to-date periods ended November 28, 1998 and November 29, 1997, respectively. Income taxes were $57.9 million for the thirteen-week period and $56.7 million for the thirty-nine week period ended November 28, 1998 compared to $45.8 million for the quarter and $132.8 million for the thirty-nine week period ended November 29, 1997. The effective income tax rate was 40.0% for the quarter and thirty-nine week periods ended November 28, 1998 compared to an effective rate of 40.3% for the same periods a year earlier. Depreciation and amortization expenses were $67.1 million for the quarter and $211.7 million for the thirty-nine week periods ended November 28, 1998 compared to $75.2 million and $203.3 million for the comparable periods last year. Net income for the quarter was $86.9 million compared to $67.9 million for the third quarter a year earlier. Year-to-date, net income was $85.0 million versus net income of $196.7 million last year. The current year-to-date amount reflects pre-tax charges totaling $289.7 million including $25.5 million for inventory related write-downs and $264.2 million for store closing and other costs and losses from asset impairments related to the registrant's strategic exit plan. Working capital was $1.9 billion at November 28, 1998, compared to $1.6 billion at February 28, 1998, and the current ratios were 2.3:1 and 1.9:1, respectively. Operating activities provided cash of $26.8 million for the thirty-nine weeks ended November 28, 1998 compared to $489.3 million for the same period last year. Capital expenditures for property, plant and equipment were $675.4 million in connection with the registrant's store construction, renovation and relocation programs. Included in capital expenditures was approximately $140.0 million related to sale and leaseback transactions of certain store properties that were completed in December 1998. Proceeds from these transactions were used to repay commercial paper borrowings. Cash was also used for dividend payments of $83.8 million. Total debt to total capitalization was 53.9% as of November 28, 1998, compared to 47.1% at February 28, 1998. The registrant has a $1 billion revolving credit commitment to provide additional borrowing capacity and support its commercial paper program as of November 28, 1998. On November 17, 1998, the registrant announced that a definitive agreement had been reached to acquire the equity of Eli Lilly and Company's PCS Health Systems pharmacy benefits management subsidiary for approximately $1.5 billion. The PCS acquisition will be accounted for using the purchase method of accounting for business combinations. On December 24, 1998, the registrant announced that the waiting period under the Hart Scott Rodino Anti-Trust Improvement Act had expired. The acquisition of PCS is expected to close on January 22, 1999. The registrant has in place commitments for a $1.3 billion credit facility through a syndicate of banks to support interim bridge financing to close the transaction. The registrant expects to initially fund the transactions with proceeds received from the issuance of commercial paper. Thereafter, the registrant intends to refinance the commercial paper borrowings with proceeds from offerings of the registrant's common stock and equity-linked securities. On December 15, 1998, the registrant issued securities aggregating $700 million. The securities included $200 million, 5.50% fixed-rate senior notes due December 15, 2000, $200 million, 6.00% fixed-rate senior notes due December 15, 2005, $150 million, 6.125% fixed-rate senior notes due December 15, 2008 and $150 million, 6.875% fixed-rate senior notes due December 15, 2028. Interest is payable semi-annually December 15 and June 15 of each year, beginning June 15, 1999. Finance costs for each issue are being amortized over the period until the maturity date. The net proceeds from the securities were used to repay commercial paper previously issued by the registrant. On September 22, 1998, the registrant issued $200 million of remarketable securities due October 1, 2013. The remarketable securities bear interest at a rate of 6% from September 22, 1998 until October 1, 2003 (the remarketing date). Interest is payable semi-annually on April 1 and October 1 of each year commencing April 1, 1999. Finance costs are being amortized over the period until the remarketing date. The remarketable securities are subject to mandatory tender on the remarketing date. The registrant began in 1996, a comprehensive project to convert its information technology ("IT") and non-information technology ("non-IT") systems to be Year 2000 (Y2K) date compliant. The Y2K issue creates risk for the registrant from unforeseen problems in its own computer systems and from that of the systems of other companies and governmental agencies on which the company's operations rely. The registrant has developed a Y2K remediation plan to assess the compliance of its IT and non-IT systems, as well as consideration of the remediation efforts of its key customers, vendors, 11 <PAGE> 13 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (CONTINUED) suppliers, financial institutions and governmental agencies (collectively referred to as "business partners") to identify the nature and potential impact of issues presented by the Y2K problem on operating activities. The remediation process includes creating an inventory of systems subject to the Y2K problem and assessing the scope of the problem as it relates to those systems; remediating Y2K problems; testing the systems following remediation; and using the systems for a period of time following remediation. To date, the registrant has completed the initial assessment phase of all its IT systems, giving highest priority to those systems that are considered critical to the company's operations. Of these systems, approximately 35% have been remediated, tested and determined compliant or have been replaced or retired. An additional 36% have been remediated and are in the testing phase. The remaining 29% are in various stages of remediation activity. Currently, the registrant anticipates that all critical IT systems will be compliant by June of 1999 and all other systems by November of 1999. To date, the registrant has compiled a comprehensive inventory of its non-IT systems, which includes those systems containing embedded chip technology commonly found in buildings and equipment connected with a building's infrastructure. The registrant is currently in the assessment and research phase and 59% of the systems have been determined compliant. The remaining 41% have either been determined non-compliant or have not been assessed. As the assessment and research phase is completed, non-compliant systems will either be replaced or repaired as applicable. Currently, the registrant anticipates that all non-IT systems will be compliant by June of 1999. The registrant is also assessing the potential risks associated with key business partners and their own Y2K compliance programs through continuing communications, Y2K questionnaires and on-site visits. Although there can be no assurance that the registrant will not be adversely affected, the registrant will continue to monitor the progress of its business partners throughout 1999. The registrant is also in the process of developing contingency plans in order to minimize the risks associated with those partners who will not be Y2K compliant, including assessing the need to locate alternative vendors or service providers. The impact on business operations from the failure to comply with Y2K requirements by the registrant or by any of its business partners could be material to the registrant's future results of operations, liquidity and capital resources. The most reasonably likely worst case scenario includes, but is not limited to, disruption of store operations, the inability to communicate with key vendors, service providers, customers and financial institutions, as well as pharmacy system or point-of-sale failure. Although there can be no assurance that the registrant will correctly identify and resolve all Y2K related issues, remediation efforts are progressing in accordance with established timetables. Additionally, contingency plans in the event of non-compliant systems are in various stages of development, and include, but are not limited to, off-line prescription fill, off-line point-of-sale mode or paper processing at the stores and other manual processing where computer systems have failed or are not reliable. The various contingency plans under development would be utilized in the event that operations are adversely affected by the Y2K problem, despite the registrant's best efforts or due to events outside of the registrant's control. Total estimated Y2K remediation costs of $12 million will be funded through operating cash flows and expensed in the period incurred, of which, approximately $4.2 million has been incurred through November 28, 1998. Total Y2K remediation costs are based upon management's best estimate and are subject to change as additional information becomes available. Certain statements contained herein and elsewhere in this Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address activities or events that the registrant expects will or may occur in the future. The registrant cautions that a number of important factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether written or oral, made by or on behalf of the registrant. Such factors include, but are not limited to, competitive pricing pressures, third party prescription reimbursement levels, continued consolidation of the drugstore industry, consumer preferences, regulatory changes governing pharmacy practices, general economic conditions, inflation, merchandise supply constraints, interest rate movements, access to capital, availability of real estate, construction and start-up of drugstore and distribution center facilities, and the effects of technological difficulties including remediation of Year 2000 compliance issues. Consequently, all of the forward-looking statements made are qualified by these and other factors, risks and uncertainties. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the registrant with the Securities and Exchange Commission. 12 <PAGE> 14 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The registrants major market risk exposure is changing interest rates. Exposure to market risk for changes in interest rates relates primarily to long-term debt obligations. The registrant primarily enters into debt obligations to support general corporate purposes including capital expenditures and working capital needs. The registrant's policy is to manage interest rates through the use of a combination of commercial paper and fixed rate long-term debt obligations. The registrant has no negative cash flow exposure due to rate changes for fixed rate long-term debt obligations. All long-term obligations are nontrading. There have been no material changes to market risk disclosures as reported in the registrant's Form 10-K for the fiscal year ended February 28, 1998. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits The following are filed as exhibits to Part I of this Form 10-Q: Exhibit 11. Statements re computations of per share earnings Exhibit 12. Statements re computations of ratios of earnings to fixed charges Exhibit 15. Copy of letter from independent accountants' regarding unaudited interim financial information Exhibit 27. Financial Data Schedule for the quarter ended November 28, 1998 (EDGAR Filing Only) Exhibit 27.1 Restated Financial Data Schedule for the quarter ended November 29, 1997 (EDGAR Filing Only) The following is filed as an exhibit to Part II of this Form 10-Q: None (b) Reports on Form 8-K On November 18, 1998 the registrant filed Form 8-K with the Securities and Exchange Commission. The Form 8-K contained Item 5 -- Other Information as follows: On November 17, 1998, Rite Aid Corporation (the "registrant") and Eli Lilly and Company ("Lilly") announced that they had entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which the registrant has agreed to acquire (the "PCS Acquisition") all of the outstanding capital stock of PCS Holding Corporation ("PCS"), a wholly owned subsidiary of Lilly. Filed as exhibits to Form 8-K dated November 18, 1998 were the following items: Stock Purchase Agreement, dated as of November 17, 1998, between the registrant and Lilly Press Release, dated November 17, 1998 Statements issued by the registrant about the PCS acquisition. 13 <PAGE> 15 ----------------------------------------------- RITE AID CORPORATION FORM 10-Q FOR THE THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 ----------------------------------------------- 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 12, 1999 /s/ Frank Bergonzi - -------------------------------- ------------------------------ Frank Bergonzi Executive Vice President, Chief Financial Officer 14 <PAGE> 16 EXHIBIT INDEX <TABLE> <CAPTION> <S> <C> EXHIBIT NO. DESCRIPTION ITEM 11 STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS. ITEM 12 STATEMENTS RE COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES. ITEM 15 COPY OF LETTER FROM INDEPENDENT ACCOUNTANTS' REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION. ITEM 27 FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED NOVEMBER 28, 1998 (EDGAR FILING ONLY). ITEM 27.1 RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTER ENDED NOVEMBER 29, 1997 (EDGAR FILING ONLY). </TABLE> 15 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>STATEMENTS RE COMPUTATIONS OF PER SHARE EARNINGS <TEXT> <PAGE> 1 EXHIBIT 11 RITE AID CORPORATION AND SUBSIDIARIES STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS THIRTEEN WEEKS ENDED NOVEMBER 28, 1998 AND NOVEMBER 29, 1997 (In Thousands Except Per Share Amounts) <TABLE> <CAPTION> November 28, 1998 November 29, 1997 ----------------- ----------------- <S> <C> <C> Net income $86,857 $67,894 ======= ======= Basic weighted average shares 258,532,000 253,042,000 =========== =========== Basic earnings per share $.34 $.27 ==== ==== Numerator for diluted earnings per share: Net income $86,857 $67,894 Effect of dilutive securities: 6.75% zero coupon convertible subordinated notes (a) - 800 5.25% convertible subordinated notes (a) (b) 5,392 - ----- ----- Net income assuming dilution $92,249 $68,694 ======= ======= Denominator for diluted earnings per share: Basic weighted average shares 258,532,000 253,042,000 Effect of dilutive securities: Employee stock options 7,192,000 6,192,000 6.75% zero coupon convertible subordinated notes - 4,654,000 5.25% convertible subordinated notes (b) 17,987,000 - ---------- ------ Dilutive potential common shares 25,179,000 10,846,000 ---------- ---------- Diluted weighted average shares 283,711,000 263,888,000 =========== =========== Diluted earnings per share: $.33 $.26 ==== ==== </TABLE> (a) Shown net of income taxes that were calculated at the registrant's effective tax rate. (b) For the thirteen weeks ended November 29, 1997, the registrant did not assume conversion of its 5.25% convertible securities because their effect on earnings per share was anti-dilutive. <PAGE> 2 EXHIBIT 11 RITE AID CORPORATION AND SUBSIDIARIES STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS THIRTY-NINE WEEKS ENDED NOVEMBER 28, 1998 AND NOVEMBER 29, 1997 (In Thousands Except Per Share Amounts) <TABLE> <CAPTION> November 28, 1998 November 29, 1997 ----------------- ----------------- <S> <C> <C> Net income $85,041 $196,748 ======= ======== Basic weighted average shares 258,404,000 248,202,000 =========== =========== Basic earnings per share $.33 $.79 ==== ==== Numerator for diluted earnings per share: Net income $85,041 $196,748 Effect of dilutive securities: 6.75% zero coupon convertible subordinated notes (a) - 5,281 5.25% convertible subordinated notes (a) (b) - - ----- ------ Net income assuming dilution $85,041 $202,029 ======= ======== Denominator for diluted earnings per share: Basic weighted average shares 258,404,000 248,202,000 Effect of dilutive securities: Employee stock options 7,061,000 5,402,000 6.75% zero coupon convertible subordinated notes - 9,380,000 5.25% convertible subordinated notes (b) - - ------- ------- Dilutive potential common shares 7,061,000 14,782,000 --------- ---------- Diluted weighted average shares 265,465,000 262,984,000 =========== =========== Diluted earnings per share: $.32 $.77 ==== ==== </TABLE> (a) Shown net of income taxes that were calculated at the registrant's effective tax rate. (b) For the thirty-nine weeks ended November 28, 1998 and November 29, 1997, the registrant did not assume conversion of its 5.25% convertible securities because their effect on earnings per share was anti-dilutive. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <DESCRIPTION>STATEMENTS/COMPUTATIONS OF RATIOS OF EARNINGS <TEXT> <PAGE> 1 EXHIBIT 12 RITE AID CORPORATION AND SUBSIDIARIES STATEMENTS RE COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES THIRTY-NINE WEEKS ENDED NOVEMBER 28, 1998 AND YEARS ENDED FEBRUARY 28, 1998, MARCH 1, 1997, MARCH 2, 1996, MARCH 4, 1995, AND FEBRUARY 26, 1994 (Dollar Amounts in Thousands) <TABLE> <CAPTION> 39 Weeks Year Year Year Year Year Ended Ended Ended Ended Ended Ended Nov. 28, Feb. 28, March 1, March 2, March 4, Feb. 26, 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> Fixed Charges Interest expense $128,155 $159,752 $96,473 $68,341 $42,300 $28,683 Interest portion (1) of net rental expense 102,300 111,943 66,067 52,080 40,424 40,427 ------- ------- ------ ------ ------ ------ Fixed charges before capitalized interest 230,455 271,695 162,540 120,421 82,724 69,110 Capitalized interest 6,020 3,834 1,897 1,948 373 217 ----- ----- ----- ----- --- --- Total fixed charges $236,475 $275,529 $164,437 $122,369 $83,097 $69,327 ======== ======== ======== ======== ======= ======= Earnings Income before extraordinary loss and income taxes $141,735 $530,041 $258,927 $256,202 $231,464 $45,670 Fixed charges before capitalized interest 230,455 271,695 162,540 120,421 82,724 69,110 ------- ------- ------- ------- ------ ------ Total adjusted earnings $372,190 $801,736 $421,467 $376,623 $314,188 $114,780 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.57 2.91 2.56 3.08 3.78 1.66 ==== ==== ==== ==== ==== ==== </TABLE> (1) The interest portion of the net rental expense is estimated to be equal to one-third of the minimum rental expense for the period. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>4 <DESCRIPTION>COPY OF LETER FROM INDEPENDENT ACCOUNTANTS' <TEXT> <PAGE> 1 EXHIBIT 15 COPY OF LETTER FROM INDEPENDENT ACCOUNTANTS' REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION Rite Aid Corporation Camp Hill, Pennsylvania Ladies and Gentlemen: Re: Registration Statements No. 333-08071; No. 333-21207; No. 333-39699; No. 333-66901 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated January 12, 1999 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered 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 LLP Harrisburg, Pennsylvania January 12, 1999 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <DESCRIPTION>FINANCIAL DATA SCHEDULE (11/28/98) <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED NOVEMBER 28, 1998, 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-27-1999 <PERIOD-END> NOV-28-1998 <CASH> 97,815 <SECURITIES> 0 <RECEIVABLES> 215,557 <ALLOWANCES> 11,447 <INVENTORY> 3,074,972 <CURRENT-ASSETS> 3,461,640 <PP&E> 3,551,100 <DEPRECIATION> 885,809 <TOTAL-ASSETS> 8,259,205 <CURRENT-LIABILITIES> 1,512,029 <BONDS> 3,228,860 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 258,731 <OTHER-SE> 2,666,471 <TOTAL-LIABILITY-AND-EQUITY> 8,259,205 <SALES> 9,166,640 <TOTAL-REVENUES> 9,166,640 <CGS> 6,721,164 <TOTAL-COSTS> 6,721,164 <OTHER-EXPENSES> 264,204 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 128,155 <INCOME-PRETAX> 141,735 <INCOME-TAX> 56,694 <INCOME-CONTINUING> 85,041 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 85,041 <EPS-PRIMARY> .33 <EPS-DILUTED> .32 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>6 <DESCRIPTION>FINANCIAL DATA SCHEDULE (11/29/97) <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED NOVEMBER 29, 1997, 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-28-1998 <PERIOD-END> NOV-29-1997 <CASH> 83,214 <SECURITIES> 0 <RECEIVABLES> 138,004 <ALLOWANCES> 10,622 <INVENTORY> 2,844,040 <CURRENT-ASSETS> 3,121,555 <PP&E> 2,959,411 <DEPRECIATION> 872,157 <TOTAL-ASSETS> 7,278,755 <CURRENT-LIABILITIES> 1,524,619 <BONDS> 2,482,250 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 135,394 <OTHER-SE> 2,681,698 <TOTAL-LIABILITY-AND-EQUITY> 7,278,755 <SALES> 8,184,466 <TOTAL-REVENUES> 8,184,466 <CGS> 5,964,079 <TOTAL-COSTS> 5,964,079 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 121,329 <INCOME-PRETAX> 329,561 <INCOME-TAX> 132,813 <INCOME-CONTINUING> 196,748 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 196,748 <EPS-PRIMARY> .79 <EPS-DILUTED> .77 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

ROK

https://www.sec.gov/Archives/edgar/data/1024478/0000893838-99-000021.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, TxNSacFkFk6Oyb53s576gVFIzCkqF6zezQXRrufzHpYEX7Sdw31IOggLUyqw8if7 3DUMNUB3gxQXHOVvVIbwhQ== <SEC-DOCUMENT>0000893838-99-000021.txt : 19990215 <SEC-HEADER>0000893838-99-000021.hdr.sgml : 19990215 ACCESSION NUMBER: 0000893838-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKWELL INTERNATIONAL CORP CENTRAL INDEX KEY: 0001024478 STANDARD INDUSTRIAL CLASSIFICATION: 3670 IRS NUMBER: 251797617 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12383 FILM NUMBER: 99527595 BUSINESS ADDRESS: STREET 1: 600 ANTON BLVD STE 700 CITY: COSTA MESA STATE: CA ZIP: 92626-7147 BUSINESS PHONE: 7144244200 MAIL ADDRESS: STREET 1: 600 ANTON BLVD STE 700 CITY: COSTA MESA STATE: CA ZIP: 92626-7147 FORMER COMPANY: FORMER CONFORMED NAME: NEW ROCKWELL INTERNATIONAL CORP DATE OF NAME CHANGE: 19961009 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 <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, 1998 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.) 600 Anton Boulevard, Suite 700, P.O. Box 5090, Costa Mesa, CA 92628-5090 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (714) 424-4565 (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 189,766,417 shares of registrant's Common Stock, $1.00 par value, were outstanding on January 31, 1999. <PAGE> ROCKWELL INTERNATIONAL CORPORATION INDEX Page No. PART I. FINANCIAL INFORMATION: Item 1. Consolidated Financial Statements: Condensed Consolidated Balance Sheet-- December 31, 1998 and September 30, 1998....... 2 Consolidated Statement of Operations-- Three Months Ended December 31, 1998 and 1997.. 3 Consolidated Statement of Cash Flows-- Three Months Ended December 31, 1998 and 1997.. 4 Notes to Consolidated Financial Statements..... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 15 PART II. OTHER INFORMATION: Item 1. Legal Proceedings.............................. 16 Item 2. Changes in Securities and Use of Proceeds...... 16 Item 5. Other Information.............................. 16 Item 6. Exhibits and Report on Form 8-K................ 17 <PAGE> PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements ROCKWELL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In millions) (Unaudited) <TABLE> <CAPTION> December 31 September 30 1998 1998 ASSETS <S> <C> <C> Current assets: Cash........................................... $ 195 $ 103 Receivables (less allowance for doubtful accounts: December 31, 1998, $53; September 30, 1998, $51)..................... 1,136 1,223 Inventories, net............................... 1,352 1,313 Deferred income taxes.......................... 314 258 Other current assets........................... 233 213 Net assets of Semiconductor Systems............ - 986 Total current assets................... 3,230 4,096 Property, net..................................... 1,518 1,535 Intangible assets, net............................ 1,333 1,330 Other assets...................................... 237 209 TOTAL.................... $ 6,318 $ 7,170 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt................................ $ 331 $ 156 Accounts payable............................... 680 733 Compensation and benefits...................... 440 547 Income taxes payable........................... 67 19 Other current liabilities...................... 510 528 Total current liabilities.............. 2,028 1,983 Long-term debt.................................... 910 908 Retirement benefits............................... 711 718 Other liabilities................................. 301 316 Total liabilities............. 3,950 3,925 Shareowners' equity: Common Stock (shares issued: 216.4)............ 216 216 Additional paid-in capital..................... 927 923 Retained earnings.............................. 2,840 3,697 Accumulated other comprehensive loss........... (134) (135) Common Stock in treasury, at cost (shares held: December 31, 1998, 26.6; September 30, 1998, 25.8).................... (1,481) (1,456) Total shareowners' equity..... 2,368 3,245 TOTAL.................... $ 6,318 $ 7,170 </TABLE> See Notes to Consolidated Financial Statements. <PAGE> ROCKWELL INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (In millions, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended December 31 1998 1997 <S> <C> <C> Revenues: Sales............................................... $ 1,608 $ 1,602 Other income, net................................... 46 20 Total revenues.................................... 1,654 1,622 Costs and expenses: Cost of sales....................................... 1,135 1,116 Selling, general, and administrative................ 291 302 Purchased research and development.................. - 103 Interest............................................ 19 4 Total costs and expenses.......................... 1,445 1,525 Income from continuing operations before income taxes...................... 209 97 Income tax provision.................................. (75) (37) INCOME FROM CONTINUING OPERATIONS BEFORE ACCOUNTING CHANGE............................ 134 60 (Loss) income from discontinued operations............ (20) 29 Cumulative effect of accounting change................ - (17) NET INCOME............................................ $ 114 $ 72 Basic earnings per share: Continuing operations before accounting change...... $ 0.71 $ 0.29 Discontinued operations............................. (0.11) 0.15 Cumulative effect of accounting change.............. - (0.09) Net income.......................................... $ 0.60 $ 0.35 Diluted earnings per share: Continuing operations before accounting change...... $ 0.70 $ 0.29 Discontinued operations............................. (0.11) 0.15 Cumulative effect of accounting change.............. - (0.09) Net income.......................................... $ 0.59 $ 0.35 Cash dividends per share.............................. $ 0.255 $ 0.255 Weighted average outstanding shares: Basic.............................................. 189.9 204.8 Diluted (includes effect of stock options)......... 192.2 207.8 </TABLE> See Notes to Consolidated Financial Statements. <PAGE> ROCKWELL INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (In millions) (Unaudited) <TABLE> <CAPTION> Three Months Ended December 31 1998 1997 <S> <C> <C> CONTINUING OPERATIONS: Operating Activities: Income from continuing operations before accounting change............................................. $ 134 $ 60 Adjustments to income from continuing operations before accounting change to arrive at cash provided by operating activities: Depreciation...................................... 53 52 Amortization of intangible assets................. 15 23 Deferred income taxes............................. (96) (40) Pension expense, net of contributions............. 13 7 Purchased research and development................ - 103 Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign currency adjustments: Receivables................................... 85 19 Inventories................................... (36) (48) Accounts payable.............................. (59) (66) Income taxes payable.......................... 129 45 Compensation and benefits..................... (109) (53) Other assets and liabilities.................. (75) 41 Cash Provided by Operating Activities...... 54 143 Investing Activities: Property additions.................................... (55) (59) Acquisitions of businesses, net of cash acquired...... (46) (158) Proceeds from disposition of property and businesses.. 92 13 Cash Used for Investing Activities......... (9) (204) Financing Activities: Net increase in debt.................................. 180 283 Purchases of treasury stock........................... (56) (239) Cash dividends........................................ (48) (52) Reissuances of common stock........................... 18 8 Cash Provided by Financing Activities...... 94 - CASH PROVIDED BY (USED FOR) CONTINUING OPERATIONS..... 139 (61) Cash Used for Discontinued Operations................. (47) (39) INCREASE (DECREASE) IN CASH........................... 92 (100) CASH AT BEGINNING OF PERIOD........................... 103 269 CASH AT END OF PERIOD................................. $ 195 $ 169 </TABLE> See Notes to Consolidated Financial Statements. <PAGE> ROCKWELL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management of Rockwell International Corporation (the Company or Rockwell), the unaudited consolidated 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, 1998. The results of operations for the three-month period ended December 31, 1998 are not necessarily indicative of the results for the full year. Certain prior year amounts have been reclassified to conform with the current presentation. 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. Rockwell adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), at the beginning of 1999. SFAS 130 establishes standards for the reporting and presentation of comprehensive income (loss) and its components in financial statements. The adoption of this statement had no impact on the Company's net income or shareowners' equity. SFAS 130 requires certain equity adjustments to be reported as components of comprehensive income. The amounts set forth as accumulated other comprehensive loss in the accompanying balance sheet is primarily comprised of deferred foreign currency translation adjustments. Prior year financial statements have been reclassified to conform with the requirements of SFAS 130. The reconciliation of net income to comprehensive income is as follows (in millions): Three Months Ended December 31 1998 1997 Net income...................................... $ 114 $ 72 Other comprehensive income (loss): Net foreign currency translation adjustment... 1 (24) Comprehensive income............................ $ 115 $ 48 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is effective for fiscal year 2000, but earlier adoption is permitted. SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. For derivatives that are hedges, changes in the fair value of derivatives will be offset by the changes in the fair value of the hedged assets, liabilities or firm commitments. The Company believes the impact of adopting this standard will not be material to its results of operations or equity. Effective October 1, 1997, Rockwell changed its method of accounting for certain general and administrative costs related to government contracts to expense these costs as incurred. Under the previous accounting method, these costs were included in inventory. The amount of general and administrative costs included in inventory as of October 1, 1997, was $27 million ($17 million after-tax or $0.09 per share) and is presented as the cumulative effect of an accounting change in the consolidated statement of operations for the three months ended December 31, 1997. <PAGE> ROCKWELL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Discontinued operations relate to the Company's former Semiconductor Systems business (Semiconductor Systems). On December 31, 1998, the Company completed the spin-off of Semiconductor Systems into an independent, separately traded, publicly-held company by distributing all of the outstanding shares of Conexant Systems, Inc. (Conexant) to the Company's shareowners on the basis of one share of Conexant Common Stock for every two shares of Company Common Stock owned. The net assets of Conexant as of December 31, 1998 of approximately $910 million were recorded as a decrease to shareowners' equity. Prior to the spin-off, Conexant distributed to Rockwell its wafer fabrication facilities in Colorado Springs, Colorado with a net book value of $21 million and a related deferred tax asset of $48 million. Also, prior to the spin-off, Rockwell paid $64 million into an escrow account to be used to satisfy Conexant's obligation with respect to a litigation matter (see Note 11). The following table summarizes the results of Semiconductor Systems (in millions): Three Months Ended December 31 1998 1997 Revenues......................................... $ 289 $ 377 (Loss) income before income taxes................ (29) 41 Net (loss) income................................ (20) 29 Rockwell accrued for Conexant's estimated first quarter 1999 operating loss and costs related to the spin-off in 1998. The additional loss recorded in the first quarter of 1999 relates principally to Rockwell's decision to record a further writedown of the wafer fabrication facilities in Colorado Springs and for related costs of disposal. 3. In the third quarter of 1998, the Company recorded special charges of $597 million ($508 million after tax, or $2.57 per share) in connection with asset impairments and the implementation of the comprehensive restructuring program. These charges, including the effects of adjustments through December 31, 1998, included $118 million for severance and other employee separation costs associated with a worldwide workforce reduction of approximately 3,200 employees and $80 million related to facility closures and consolidations and exiting non-strategic businesses and product lines. These actions are expected to be substantially complete by the end of 1999. Total cash expenditures in connection with these actions are expected to approximate $195 million. The Company spent approximately $41 million through December 31, 1998, of which $27 million related to severance and other employee separation costs, and expects to spend an additional $101 million through the end of calendar 1999, which is recorded in current liabilities. As a result of actions taken through December 31, 1998, the workforce was reduced by approximately 1,450 employees. Revenues of businesses and product lines which are being exited were $19 million and $58 million for the quarters ended December 31, 1998 and 1997, respectively. The net operating loss related to these businesses and product lines is not material. <PAGE> ROCKWELL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. In October 1998, the Company sold its railroad electronics business at a gain of $36 million. In November 1998, the Company acquired Anorad Corporation, a manufacturer of linear motor equipment, for $45 million. The acquisition has been accounted for as a purchase as of December 31, 1998. Assets acquired and liabilities assumed have been recorded at estimated fair values determined by the Company's management based on information currently available. In December 1997, the Company acquired the in-flight entertainment business of Hughes-Avicom International, Inc. (Passenger Systems). The acquisition has been accounted for as a purchase as of December 31, 1997, and the Company has recorded a charge of $103 million ($63 million after-tax) for purchased research and development. The remaining assets acquired and liabilities assumed have been recorded at estimated fair values determined by the Company's management. The results of Passenger Systems have been included in the consolidated statement of operations since the date of acquisition. 5. Inventories, net of reserves, are summarized as follows (in millions): December 31 September 30 1998 1998 Finished goods................................ $ 395 $ 385 Work in process............................... 454 459 Raw materials, parts, and supplies............ 491 456 Total....................................... 1,340 1,300 Adjustment to the carrying value of certain inventories to a LIFO basis......... 12 13 Inventories................................. $ 1,352 $ 1,313 6. Intangible assets, net of accumulated amortization, are summarized as follows (in millions): December 31 September 30 1998 1998 Goodwill...................................... $ 853 $ 846 Trademarks, patents, product technology, and other intangibles....................... 480 484 Intangible assets........................... $ 1,333 $ 1,330 7. Short-term debt consisted of the following (in millions): December 31 September 30 1998 1998 Commercial paper.............................. $ 300 $ 90 Short-term foreign bank borrowings............ 29 64 Current portion of long-term debt............. 2 2 Short-term debt............................. $ 331 $ 156 At December 31, 1998, the Company had $1.0 billion of unsecured credit facilities with various banks to support commercial paper borrowings. There were no significant commitment fees or compensating balance requirements under these facilities. Short-term credit facilities available to foreign subsidiaries amounted to $285 million at both December 31, 1998 and September 30, 1998 and consist of arrangements for which there were no significant commitment fees. <PAGE> ROCKWELL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Other current liabilities are summarized as follows (in millions): December 31 September 30 1998 1998 Contract reserves and advance payments........ $ 188 $ 207 Product warranty costs........................ 120 117 Taxes other than income taxes................. 46 44 Interest...................................... 26 16 Other......................................... 130 144 Other current liabilities................... $ 510 $ 528 9. Long-term debt consisted of the following (in millions): December 31 September 30 1998 1998 6.8% notes, payable in 2003................... $ 150 $ 150 6.15% notes, payable in 2008.................. 350 350 6.70% debentures, payable in 2028............. 250 250 5.20% debentures, payable in 2098............. 200 200 Other obligations............................. 20 18 Less unamortized discount..................... (58) (58) Total....................................... 912 910 Less current portion.......................... (2) (2) Long-term debt.............................. $ 910 $ 908 10. Retirement benefit liabilities consisted of the following (in millions): December 31 September 30 1998 1998 Retirement medical costs................... $ 659 $ 668 Pension costs.............................. 118 116 Total.................................... 777 784 Amount classified as current liability..... (66) (66) Retirement benefits...................... $ 711 $ 718 11. Various 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, intellectual property, safety and health, environmental and employment matters. Rockwell has indemnified The Boeing Company for certain government contract and environmental matters related to operations of its former aerospace and defense business for periods prior to its divestiture. 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 consolidated financial statements. <PAGE> ROCKWELL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In connection with the Semiconductor Systems spin-off, Conexant assumed all contingent liabilities related to its business, including environmental and intellectual property matters. In September 1995, Celeritas Technologies, Ltd. filed suit against the Company 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 Semiconductor Systems. In July 1997, the court entered a judgment awarding damages of $57 million, plus interest. On July 20, 1998, the U.S. Court of Appeals for the Federal Circuit affirmed the trial court's judgment based on breach of contract. In January 1999, the U.S. Supreme Court denied Rockwell's petition for certiorari. Prior to the spin- off, Rockwell paid $64 million into an escrow account which will be used to satisfy Conexant's obligation with respect to this matter. <PAGE> ROCKWELL INTERNATIONAL CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The contributions to sales and results of operations by business segment of the Company for the first quarter of 1999 and 1998 are presented below (in millions). Three Months Ended December 31 1998 1997 Sales Automation......................................... $ 1,045 $ 1,139 Avionics & Communications.......................... 563 463 Total sales.......................................... $ 1,608 $ 1,602 Operating earnings Automation......................................... $ 143 $ 144 Avionics & Communications.......................... 123 75 Purchased research and development................. - (103) Operating earnings................................. 266 116 General corporate - net.............................. (38) (15) Interest expense..................................... (19) (4) Provision for income taxes........................... (75) (37) INCOME FROM CONTINUING OPERATIONS BEFORE ACCOUNTING CHANGE............................................. 134 60 (Loss) income from discontinued operations........... (20) 29 Cumulative effect of accounting change............... - (17) NET INCOME........................................... $ 114 $ 72 Purchased research and development relates to the acquisition of an Avionics & Communications business in 1998. Effective October 1, 1997, Rockwell changed its method of accounting for certain general and administrative costs related to government contracts. This change relates to the Avionics & Communications business segment. 1999 First Quarter Compared to 1998 First Quarter First quarter 1999 sales of $1.6 billion were about the same as last year's sales. Automation's sales were down approximately $90 million primarily due to slow North American market activity across most industry sectors, particularly in forest products, metals and oil and gas. The decrease also reflects the elimination of sales of Kato Engineering, which was sold in the third quarter of 1998. Avionics & Communications' sales increased $100 million primarily due to the inclusion of $60 million of sales from the passenger systems business, which was acquired in December 1997, and strong increases posted by both air transport systems and business and regional systems as a result of higher customer service revenue and increased production of business and regional aircraft. Also contributing to the improvement was strong sales growth at our Electronic Commerce business driven by increased demand for Spectrum automatic call distribution systems. Income from continuing operations in the first quarter of 1999 was $134 million, or 70 cents per share, versus first quarter 1998 income from continuing operations of $123 million, or 59 cents per share (before an acquisition-related charge). The nine percent increase was due to strong performance at our Avionics & Communications businesses and Automation's ability to offset the impact of lower sales with improved operating efficiencies. The improved results include about $40 million of pre-tax savings due to lower operating costs from the restructuring program announced in June 1998. Including an after-tax charge of $63 million for purchased research and development relating to the passenger systems acquisition, first quarter 1998 income from continuing operations was $60 million, or 29 cents per share. <PAGE> ROCKWELL INTERNATIONAL CORPORATION Automation's earnings of $143 million for the first quarter of 1999 were about the same as last year's first quarter earnings of $144 million. Lower operating costs of $30 million resulting from the Company's restructuring program and performance improvements at our motors business offset the impact of the sales decline and a $9 million charge related to consolidation of the power systems business. Automation's return on sales improved to 13.7 percent from 1998's first quarter return on sales of 12.6 percent. Avionics & Communications operating earnings were $123 million, a 64 percent increase over 1998 first quarter earnings of $75 million (excluding an acquisition-related charge of $103 million). In addition to earnings increases generated from increased sales for both Rockwell Collins and Electronic Commerce, operating earnings include a gain on the sale of the railroad electronics business of approximately $36 million and a charge of $10 million principally related to the consolidation of certain government systems activities. Excluding these items, return on sales improved to 17.2 percent in the first quarter, compared to 16.2 percent in the comparable period a year ago. Corporate expenses increased to $38 million in the first quarter of 1999, from $15 million in the first quarter of 1998. First quarter 1999 corporate expenses include a charge of $15 million for certain costs, principally facility-related costs incurred in connection with the decision to relocate the corporate office. Additional costs are expected to be incurred in 1999 as the corporate functions relocate. Corporate expenses in 1998 included approximately $8 million of additional proceeds resulting from the favorable resolution of a divestiture matter. Rockwell continues to expect earnings per share from continuing operations in 1999 in the $2.90 to $3.00 range, including costs of relocating the corporate offices. We expect to achieve this level of performance with strong growth at Rockwell Collins and cost reductions and operating efficiencies generated by our restructuring program. Discontinued Operations: The spin-off of the Company's former Semiconductor Systems business, Conexant Systems, Inc., was completed on December 31, 1998. The loss from discontinued operations for the first quarter of fiscal 1999 includes a $20 million pre-tax charge due to Rockwell's recent decision to record a further writedown of Conexant's former wafer fabrication facilities in Colorado Springs, Colorado. Rockwell retained these facilities as part of the spin-off. The first quarter net loss also includes a charge for costs related to the disposal of these facilities. In addition, Rockwell accrued for Conexant's estimated 1999 first quarter operating loss and costs related to the spin-off in fiscal 1998. <PAGE> ROCKWELL INTERNATIONAL CORPORATION FINANCIAL CONDITION The major uses of cash for the first quarter of 1999 were the $64 million payment related to a litigation matter, the common stock repurchase program, property additions, cash dividends paid to shareowners and the acquisition of Anorad Corporation. The Company spent approximately $56 million in the first quarter in connection with its stock repurchase program. At December 31, 1998, the Company had approximately $109 million remaining on its current $500 million stock repurchase program. The Company is not currently repurchasing stock and no decision has been made regarding the resumption of stock repurchases. In November 1998, the Company completed the acquisition of Anorad Corporation, a manufacturer of linear motor-based precision positioning equipment, for $45 million. A major source of cash for the first three months of 1999 was from the sale of the Company's railroad electronics business to Westinghouse Air Brake Company for approximately $80 million in cash. Future significant uses of cash, which are expected to be funded by cash generated by operating activities and commercial paper borrowings, are expected to include property additions, cash payments made in connection with the Company's restructuring program, dividends to shareowners and acquisitions. 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 on pages 37 and 38 in Note 17 of the Notes to Consolidated Financial Statements in Item 8, Consolidated Financial Statements and Supplementary Data of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. Management believes that at December 31, 1998, there has been no material change to this information. YEAR 2000 READINESS DISCLOSURE The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Computer equipment, software and other devices with embedded technology that are time- sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to manufacture products, acquire or ship inventory, process transactions, send invoices, or engage in other normal business activities. The inability of business processes to function correctly in 2000 could have serious adverse effects on companies and entities throughout the world. <PAGE> ROCKWELL INTERNATIONAL CORPORATION The Company has developed plans to address issues related to the impact of the Year 2000 in five major areas: products, business systems (computer systems that handle business processes), infrastructure (servers, desktop computers, networks, telecommunication systems and software), manufacturing systems (computer systems used in the manufacturing process) and suppliers. Each of the five areas are undergoing the following process to ensure readiness for the Year 2000. First, in the inventory phase, all resources are inventoried to identify those that have any type of software or hardware Year 2000 issues. Second, in the assessment phase, all inventoried items are assessed to confirm that a Year 2000-related issue is present and the extent of remediation required. Third, in the strategy phase, a remediation strategy is created to ensure substantial completion of upgrades for critical systems by the middle of calendar 1999. Fourth, in the conversion/upgrade phase, upgrades are performed on all items identified in the inventory and assess- ment phases. Finally, in the testing phase, all upgraded items are tested to verify Year 2000 readiness. The Company has completed the inventory phase for all five areas and has substantially completed the assessment and strategy phases for all five areas. At December 31, 1998, the Company was approximate- ly 75 percent complete in the conversion/upgrade phase for each of the five areas and was substantially complete with the final testing for situations where the Company has completed the conversion/upgrade phase. The Company, utilizing both internal and external resources to address the Year 2000 issue, expects to be substantially complete with this project by the middle of calendar 1999. The current estimate of total project costs is approximately $42 million, which includes the cost of purchasing certain hardware and software. Purchased hardware and software will be capitalized in accordance with normal policy. Approximately two-thirds of the total cost relates to the use of internal resources (primarily salary costs), and about 70 percent of the total project cost had been spent through December 31, 1998, with substantially all ofthe remainder to be spent during 1999. The Company has enlisted the services of industry consultants and outside contractors to assist with its Year 2000 identification, assessment, remediation and testing efforts. The costs of the Company's Year 2000 identi- fication, assessment, remediation and testing efforts and the dates on which the Company believes it will complete such efforts are based upon manage- ment's estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, and other factors. Notwithstanding this com- prehensive program to make a smooth transition, there can be no assurance that these estimates will prove to be accurate and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to identify, assess, remediate and test all relevant computer codes and embedded technology. Moreover, the Company could be adversely impacted by the Year 2000 issues faced by major distributors, customers, vendors, governments and financial service organizations with which the Company interacts. The Company believes its greatest uncertainties are in the manufacturing and supplier areas, due to the number of equipment and materials suppliers involved and their various stages of readiness for Year 2000. In particular, the Company is dependent on equipment manufacturers to supply the upgrades required to remediate Year 2000 issues in the manufacturing systems area and suppliers to upgrade their systems to ensure an uninterrupted supply of materials. A Year 2000 failure by a significant equipment or materials supplier could result in the temporary slowdown of production by the Company, the duration of which the Company cannot reasonably estimate. As a result, the Company's contingency planning centers heavily on the supplier and manufacturing systems areas. For the top five to 10 percent of its critical materials and manufacturing suppliers, the Company will conduct on-site reviews and intends to monitor specific Year 2000 milestones to ensure compliance. The Company is in the process of identifying specific Year 2000 compliance target dates for all critical materials suppliers. In the event a supplier does not meet established compliance milestones, which begin as early as April 1999, the Company will implement contingency plans that include alternate sourcing and stockpiling of materials. <PAGE> ROCKWELL INTERNATIONAL CORPORATION Part of the Company's initial assessment phase included a detailed Year 2000 questionnaire sent to all critical materials and manufacturing suppliers. This questionnaire included questions on products, services, internal operating systems and the supplier's own supply chain. As of December 31, 1998, the Company has received responses from approximately 60 percent of those questioned. The Company is following up the questionnaires, where necessary, to ensure Year 2000 compliance. The varying definitions of "compliance with Year 2000" and the array of products and services sold by the Company, both today and in the past, may lead to claims whose impact on the Company is not currently estimable. The Company has product and general liability insurance policies which provide coverage in the event of certain product failures. The Company has not, however, purchased Year 2000 specific insurance because, in management's view, the cost is prohibitive and likely of little value. Of course, in many cases, the Company contractually limits or disclaims consequential damages in the Company's sales contracts. No assurance can be given that the aggregate cost of defending and resolving such claims will not materially adversely affect the Company's results of operations. Although some of the Company's agreements with manufacturers and others from whom it purchases products contain provisions requiring such parties to indemnify the Company under certain circumstances, there can be no assurance that such indemnifi- cation arrangements will cover all of the Company's liabilities and costs related to claims by third parties related to the Year 2000 issue. Business operations are also dependent on the Year 2000 readiness of infrastructure suppliers in areas such as utilities, communications, transportation and other services. In this environment, there will likely be instances of failure that could cause disruptions in business processes. The likelihood and effects of failures in infrastructure systems and in the supply chain cannot be estimated. However, with respect to operations under its direct control, management does not expect, in view of its Year 2000 readiness efforts and the diversity of its suppliers and customers, that occurrences of Year 2000 failures will have a material adverse effect on the financial position or results of operations of the Company. <PAGE> ROCKWELL INTERNATIONAL CORPORATION Item 3. Quantitative And Qualitative Disclosures About Market Risk The Company's financial instruments include cash, equity securities, short- and long-term debt, and foreign currency forward exchange contracts. At December 31, 1998, 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 in the ordinary course of business to protect itself from adverse currency rate fluctuations on both firm and anticipated foreign currency transactions. These contracts are generally for terms of less than one year. Gains or losses relating to hedging firm commitments are deferred and included in the measurement of the foreign currency transaction subject to the hedge and gains or losses relating to anticipated transactions are recognized currently. The Company's foreign currency forward exchange contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. The notional amount of all the Company's outstanding foreign currency forward exchange contracts by country is as follows (in millions): December 31 September 30 1998 1998 United Kingdom (Pound Sterling)................... $136 $151 Canada (Dollar)................................... 86 110 Switzerland (Franc)............................... 81 78 Germany (Deutsche Mark)........................... 70 80 Australia (Dollar)................................ 37 39 Italy (Lira)...................................... 26 32 Japan (Yen)....................................... 21 42 France (Franc).................................... 10 13 Other countries................................... 31 33 $ 495 $ 578 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. Based on the Company's overall currency exchange rate exposure at December 31, 1998, a 10 percent change in currency rates would not have had a material effect on the financial position, results of operations, or cash flows of the Company. <PAGE> ROCKWELL INTERNATIONAL CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings On September 27, 1995, Celeritas Technologies, Ltd. filed a suit against the Company in the U.S. District Court for the 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 Semiconductor Systems in 1995 and 1996. The court entered judgment against the Company in January 1997 and, in ruling on post-trial motions in July 1997, entered a revised judgment awarding damages of $57 million, plus interest. On July 20, 1998, the U.S. Court of Appeals for the Federal Circuit reversed the holding of the trial court based on patent infringement and found Celeritas' patent invalid but affirmed the trial court holding based on breach of contract. The Company's petition for a rehearing (and rehearing en banc) and a motion to certify the contract issue to the California Supreme Court were denied in September 1998. The Company's petition for certiorari to the United States Supreme Court filed on November 23, 1998 was denied in January 1999. Prior to the spin-off of Conexant, the Company paid $64 million into an escrow account which will be used to satisfy Conexant's obligation with respect to this matter. Item 2. Changes in Securities and Use of Proceeds On October 1, 1998, the Company issued 267, 331, 54 and 317 shares of restricted stock, respectively, to the following directors of the Company: George L. Argyros, Richard M. Bressler, William H. Gray, III and John D. Nichols. These shares were issued pursuant to deferral elections made in accordance with the Directors Stock Plan in partial or full payment for retainer fees otherwise payable in cash. The issuance of all such shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. 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 page 3 of the Company's Annual Report on Form 10-K for year ended September 30, 1998, which is incorporated herein by reference. <PAGE> ROCKWELL INTERNATIONAL CORPORATION PART II. OTHER INFORMATION (Continued) Cautionary Statement This Quarterly Report contains statements (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 economic and political changes in international markets where the Company competes, such as currency exchange rates, inflation rates, recession, foreign ownership restrictions and other external factors over which the Company has no control; domestic and foreign government spending, budgetary and trade policies; demand for and market acceptance of new and existing products; successful development of advanced technologies; competitive product and pricing pressures; timely completion of Year 2000 software modifications by the Company, its key suppliers and customers, and governments; implementation of restructuring actions in accordance with management's plans; and the uncertainties of litigation, 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. These forward- looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Item 6. Exhibits and Report on Form 8-K (a) Exhibits: Exhibit 10.1 - Distribution Agreement dated as of December 31, 1998 by and between the Company and Conexant Systems, Inc., filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated January 12, 1999, is incorporated herein by reference. Exhibit 10.2 - Amended and Restated Employee Matters Agreement dated as of December 31, 1998 by and between the Company and Conexant Systems, Inc., filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated January 12, 1999, is incorporated herein by reference. Exhibit 10.3 - Tax Allocation Agreement dated as of December 31, 1998 by and between the Company and Conexant Systems, Inc., filed as Exhibit 2.3 to the Company's Current Report on Form 8-K dated January 12, 1999, is incorporated herein by reference. <PAGE> ROCKWELL INTERNATIONAL CORPORATION PART II. OTHER INFORMATION (Continued) Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges for the Three Months Ended December 31, 1998 Exhibit 27 - Financial Data Schedule (b) Report on Form 8-K: The Company filed a current report on Form 8-K dated January 12, 1999 in respect of the completion on December 31, 1998 of the spin-off of its Semiconductor Systems business to holders of shares of Common Stock, par value $1 per share, of the Company by means of distribution to such holders of all outstanding shares of Common Stock, par value $1 per share (including the preferred share purchase rights associated with such Common Stock) of Conexant (Items 2 and 7(c)). Conexant began operations as an independent, separately traded, publicly-held company on January 1, 1999. <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. ROCKWELL INTERNATIONAL CORPORATION (Registrant) Date February 10, 1999 By W. E. Sanders W. E. Sanders Vice President and Controller (Principal Accounting Officer) Date February 10, 1999 By W. J. Calise, Jr. W. J. Calise, Jr. Senior Vice President, General Counsel and Secretary </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF RATION OF EARNINGS TO FIXED ASSETS <TEXT> ROCKWELL INTERNATIONAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES THREE MONTHS ENDED DECEMBER 31, 1998 (In millions, except ratio) EARNINGS AVAILABLE FOR FIXED CHARGES: Income from continuing operations before income taxes............. $ 209 Less undistributed income of affiliates.......................... (1) ------ 208 ------ Add fixed charges included in earnings: Interest expense............................................... 19 Interest element of rentals................................... 13 ------ 32 ------ Total earnings available for fixed charges........................ $ 240 ====== FIXED CHARGES: Fixed charges included in earnings................................ $ 32 Capitalized interest............................................. 1 ------ Total fixed charges........................................... $ 33 ====== RATIO OF EARNINGS TO FIXED CHARGES (1)............................... 7.3 (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>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1998 CONDENSED CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND NOTES TO FINANCIAL STATEMENTS 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> SEP-30-1998 <PERIOD-END> DEC-31-1998 <CASH> 195 <SECURITIES> 0 <RECEIVABLES> 1136 <ALLOWANCES> 53 <INVENTORY> 1352 <CURRENT-ASSETS> 3230 <PP&E> 1518 <DEPRECIATION> 0 <TOTAL-ASSETS> 6318 <CURRENT-LIABILITIES> 2028 <BONDS> 910 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 216 <OTHER-SE> 2152 <TOTAL-LIABILITY-AND-EQUITY> 6318 <SALES> 1608 <TOTAL-REVENUES> 1654 <CGS> 1135 <TOTAL-COSTS> 1445 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 19 <INCOME-PRETAX> 209 <INCOME-TAX> (75) <INCOME-CONTINUING> 134 <DISCONTINUED> (20) <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 114 <EPS-PRIMARY> 0.60 <EPS-DILUTED> 0.59 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

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https://www.sec.gov/Archives/edgar/data/87777/0000931763-99-000503.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, M5l+Ugijhs9Q5A/+QOvnparizDys0oEKCZJStUFbYM0ABOBLDMDJYd9CTBiYIMCE dMj1hq9g8qdi2pLq40fH6A== <SEC-DOCUMENT>0000931763-99-000503.txt : 19990217 <SEC-HEADER>0000931763-99-000503.hdr.sgml : 19990217 ACCESSION NUMBER: 0000931763-99-000503 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990101 FILED AS OF DATE: 19990216 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: SEC FILE NUMBER: 001-05517 FILM NUMBER: 99542464 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>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 January 1, 1999 --------------- 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 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 29, 1999, SCIENTIFIC-ATLANTA, INC. HAD OUTSTANDING 75,491,737 SHARES OF COMMON STOCK. 1 of 14 <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 ----------------------- ------------------------- January 1, December 26, January 1, December 26, 1999 1997 1999 1997 ---------- ------------ ---------- ------------ <S> <C> <C> <C> <C> SALES $310,747 $294,524 $568,225 $589,025 -------- -------- -------- -------- COSTS AND EXPENSES Cost of sales 222,925 208,507 410,034 412,780 Sales and administrative 42,883 39,187 81,672 80,286 Research and development 29,762 26,651 59,053 53,401 Interest expense 355 154 522 269 Interest income (1,837) (1,234) (3,939) (2,335) Other (income) expense, net (10,753) 71 (27,949) (114) -------- -------- -------- -------- Total costs and expenses 283,335 273,336 519,393 544,287 -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES 27,412 21,188 48,832 44,738 PROVISION (BENEFIT) FOR INCOME TAXES Current 28,199 6,045 21,712 13,016 Deferred (19,975) 311 (7,062) 405 ------- -------- -------- -------- NET EARNINGS $ 19,188 $ 14,832 $ 34,182 $ 31,317 ======== ======== ======== ======== EARNINGS PER COMMON SHARE BASIC $ 0.25 $ 0.19 $ 0.44 $ 0.40 ======== ======== ======== ======== DILUTED $ 0.25 $ 0.19 $ 0.44 $ 0.40 ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC 75,274 78,885 77,245 78,567 ======== ======== ======== ======== DILUTED 76,031 80,149 78,340 80,038 ======== ======== ======== ======== DIVIDENDS PER SHARE PAID $ 0.015 $ 0.015 $ 0.03 $ 0.03 ======== ======== ======== ======== </TABLE> SEE ACCOMPANYING NOTES 2 of 14 <PAGE> SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) <TABLE> <CAPTION> In Thousands -------------------------- January 1, June 26, 1999 1998 -------- --------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $139,177 $175,392 Marketable securities 59,133 95,947 Receivables, less allowance for doubtful accounts of $9,916,000 at January 1 and $10,052,000 at June 26 289,338 254,419 Inventories 196,515 159,545 Deferred income taxes 25,264 18,062 Other current assets 21,298 13,133 -------- -------- TOTAL CURRENT ASSETS 730,725 716,498 -------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost Land and improvements 21,488 20,621 Buildings and improvements 40,096 37,316 Machinery and equipment 213,467 193,894 -------- -------- 275,051 251,831 Less-Accumulated depreciation and amortization 109,040 91,804 -------- -------- 166,011 160,027 -------- -------- COST IN EXCESS OF NET ASSETS ACQUIRED 8,349 8,825 -------- -------- OTHER ASSETS 59,675 54,792 -------- -------- TOTAL ASSETS $964,760 $940,142 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 680 $ 726 Accounts payable 122,259 103,629 Accrued liabilities 150,055 139,011 Income taxes currently payable 27,220 15,302 -------- -------- TOTAL CURRENT LIABILITIES 300,214 258,668 -------- -------- LONG-TERM DEBT, less current maturities 794 983 -------- -------- OTHER LIABILITIES 55,188 48,495 -------- -------- STOCKHOLDERS' EQUITY Preferred stock, authorized 50,000,000 shares; no shares issued -- -- Common stock, $0.50 par value, authorized 350,000,000 shares; issued 79,616,712 shares at January 1 and 79,207,004 shares at June 26 39,808 39,604 Additional paid-in capital 201,309 195,446 Retained earnings 431,544 399,678 Accumulated other comprehensive income (loss) 1,590 (204) -------- -------- 674,251 634,524 Less - Treasury stock, at cost (4,667,736 shares at January 1 and 122,418 shares at June 26) 65,687 2,528 -------- -------- 608,564 631,996 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $964,760 $940,142 ======== ======== </TABLE> SEE ACCOMPANYING NOTES 3 of 14 <PAGE> SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Six Months Ended -------------------------------- January 1, December 26, 1999 1997 ---------- ------------ <S> <C> <C> NET CASH USED BY OPERATING ACTIVITIES $(11,367) $(14,508) -------- -------- INVESTING ACTIVITIES: Proceed from the sale of marketable securities 64,450 -- Purchases of property, plant, and equipment (27,701) (19,270) Proceeds from the sale of a business unit -- 8,059 Other 214 25 -------- -------- Net cash (used) provided by investing activities 36,963 (11,186) -------- -------- FINANCING ACTIVITIES: Principal payments on long-term debt (235) (338) Dividends paid (2,316) (2,360) Issuance of common stock 5,968 10,403 Treasury shares acquired (65,228) -- -------- -------- Net cash provided (used) by financing activities (61,811) 7,705 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (36,215) (17,989) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 175,392 107,143 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $139,177 $ 89,154 ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid $ 495 $ 242 ======== ======== Income taxes paid, net $ 8,697 $ 15,662 ======== ======== </TABLE> SEE ACCOMPANYING NOTES 4 of 14 <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 company's 1998 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. The company's fiscal year ends on the Friday closest to June 30 of each year. Fiscal 1999 includes fifty-three weeks. The quarter and six months ended January 1, 1999 include fourteen weeks and twenty-seven weeks, respectively. C. Basic earnings per share were computed based on the weighted average number of shares outstanding. Diluted earnings per share were computed based on the weighted average number of dilutive shares of common stock outstanding. See Exhibit 11. D. Other (income) expense for the quarter ended January 1, 1999 included a $20,375 gain from the adjustment of the company's investment in Broadcom Corporation (Broadcom) to market value as required by generally accepted accounting principles, a $10,880 loss on the sale of one million shares of the company's investment in Broadcom, and a gain of $6,250 from the cancellation of a contract under which the company was obligated to supply equipment which, upon resale, the company had estimated losses would be incurred. In addition, during the quarter ended January 1, 1999, the company decided to dispose of a business unit, Control Systems, which produces devices to monitor and manage utility service usage, because the business unit did not fit with the company's core strategy. The company recorded a charge of $6,225 to adjust the carrying value of the assets to be sold to net realizable value, to adjust the estimated profitability on certain contracts to allow the purchaser to achieve reasonable margins, to provide for indemnification to the purchaser and to provide for other miscellaneous expenses associated with the sale. Other (income) expense for the six months ended January 1, 1999 also included a $18,000 gain from the adjustment of the company's investment in Broadcom to market in the first quarter of the fiscal year. Management is not currently able to estimate the amount to be realized from the ultimate sale of the company's remaining investment in Broadcom. Other (income) expense for the three and six months ended January 1, 1999 and December 26, 1997 also 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 for the three and six months ended December 26, 1997. <TABLE> <CAPTION> E. Inventories consist of the following: January 1, June 26, 1999 1998 ---------- ---------- <S> <C> <C> <C> Raw materials and work-in-process $131,713 $113,703 Finished goods 64,802 45,842 -------- -------- Total inventory $196,515 $159,545 ======== ======== </TABLE> E. During the six months ended January 1, 1999, the company acquired 4,648,000 shares of its common stock for $65,228 and acquired an additional 75,880 shares from the payment in stock rather than cash by employees of tax withholdings on restricted stock which vested and cancellation of unvested, restricted stock. During the six months ended December 26, 1997, the company obtained 70,496 shares of its common stock, primarily from the cancellation of unvested, restricted stock grants. The company re-issues these shares under the company's stock option plans, 401(k) plan, employee stock purchase plan and other stock-based employee compensation arrangements. 5 of 14 <PAGE> NOTES: (Amounts in thousands, except share data) G. The company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" in fiscal 1999. SFAS No. 130 requires the reporting of a measure of all changes in equity of an entity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. Other comprehensive income (loss) for each period presented includes only foreign currency translation adjustments. The calculation of comprehensive income is as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended --------------------------- -------------------------- January 1, December 26, January 1, December 26, 1999 1997 1999 1997 ------------ ------------ ----------- ------------ <S> <C> <C> <C> <C> Net earnings $ 19,188 $ 14,832 $ 34,182 $ 31,317 Other comprehensive income(loss) 881 (735) 1,794 (270) --------- --------- -------- --------- Comprehensive income $ 20,069 $ 14,097 $ 35,976 $ 31,047 ========= ========= ======== ========= </TABLE> H. Income taxes paid of $15,662 in the six months ended December 26, 1997 included approximately $5,800 of payments in connection with the filing of amended federal income tax returns. 6 of 14 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - ------------------- Scientific-Atlanta had stockholders' equity of $608.6 million and cash on hand was $139.2 million at January 1, 1999. Cash decreased $36.2 million from June 26, 1998 as expenditures for the acquisition of shares of the company's common stock, increases in inventory levels and accounts receivable and expenditures for equipment exceeded proceeds from the sale of marketable securities and cash generated from earnings, increases in payables and the issuance of common stock. The current ratio was 2.4:1 at January 1, 1999, down slightly from 2.8:1 at June 26, 1998. At January 1, 1999. total debt was $1.5 million or less than one percent of total capital invested. 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 January 1, 1999, were $310.7 million, up 6 percent over the prior year. Strong North American sales growth in Transmission Network Systems' and Subscriber Systems' products and services were offset in part by declines in international sales in all businesses. The growth in Transmission Network Systems was driven by the North American rebuild cycle. The significant increase in sales of digital products was the primary factor in the year-to-year increase in Subscriber Systems. Satellite sales declined in fiscal 1999 as this sector, which relies significantly on international markets, continues to be impacted by the weak economic situations in Eastern Europe and the Asia Pacific region. International sales were 23 percent of total sales in the quarter ended January 1, 1999 as compared to 41 percent of total sales last year. Sales for the six months ended January 1, 1999 were $568.2 million, down 4 percent from the prior year. The negative impact of weak economic conditions in the Asia Pacific, Eastern Europe and Latin American regions on the international sales of each sector more than offset the strong growth in North American sales of Transmission Network Systems' and Subscriber Systems' products described in the preceding paragraph. International sales were 23 percent of total sales in the six months ended January 1, 1999 as compared to 40 percent of total sales last year. The company previously announced that it planned to have production quantities of the new Prisma(TM) Digital Transport product available in the second quarter of fiscal 1999, but the availability of such production was delayed until the third quarter of fiscal 1999. As anticipated and announced previously, sales of analog set-tops declined in response to the introduction of two-way digital technology. The company expected a decline in analog sales as cable operators establish the ideal mix of analog and digital services in each cable system. However, the company had a book to bill ratio greater than one in both the analog and digital businesses for the six months ended January 1, 1999. Sales of digital products in the six months ended January 1, 1999 increased more than the anticipated reduction in analog sales. Gross margins were 28.3 percent and 27.8 percent for the three and six months ended January 1, 1999, 0.9 percentage points and 2.1 percentage points lower than the comparable periods of the prior year. Margins on digital set- tops, which were lower than the company average, and the under-utilization of satellite manufacturing capacity offset gains from higher volumes of Transmission Network Systems' and Subscriber Systems' products and cost reductions from the transfer of RF (radio frequency) production to Juarez, Mexico from Norcross, Georgia. 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. Increases in operating expenses relative to last year are due in part to the fact that the three and six months ended January 1, 1999 included fourteen and twenty-seven weeks, respectively, as compared to the normal thirteen and twenty-six week periods in the prior year. 7 of 14 <PAGE> Research and development expenses were $29.8 million and $59.1 million for the three and six months ended January 1, 1999, respectively, or 10 percent of sales, reflecting the company's continued investment in research and development programs to support new product initiatives, particularly digital products. The company capitalized software development costs of $0.8 million and $1.4 million during the three and six months ended January 1, 1999, respectively. During the three and six months ended December 26, 1997, the company capitalized software development costs of $0.4 million and $1.4 million and non-recurring engineering costs of $3.2 million and $6.2 million, respectively. Research and development spending, including capitalized software development costs and non-recurring engineering, was approximately $30 million in each of the three month periods ended January 1, 1999 and December 26, 1997 and $61 million in each of the six month periods ended January 1, 1999 and December 26, 1997. Sales and administrative expenses increased year-over-year due in part to the additional week in the quarter and six month period in fiscal 1999 as compared to fiscal 1998. Sales and marketing expenses also increased in 1999 due to increased marketing efforts related to digital video products and Prisma Digital Transport products. Higher professional fees related to previously announced patent litigation and expenses related to the previously announced re- sizing of the Satellite businesses were the primary factors in the increase in administrative expenses in the second quarter of fiscal 1999 as compared to the prior year. Excluding the additional week in the six month period ended January 1, 1999, administrative expenses were down as compared to the prior year due to lower spending on consulting and professional services and reductions from sold or discontinued businesses. Other (income) expense for the quarter ended January 1, 1999 included a $20.4 million gain from the adjustment of the company's investment in Broadcom to market value as required by generally accepted accounting principles, a $10.9 million loss on the sale of one million shares of the company's investment in Broadcom, and a gain of $6.2 million from the cancellation of a contract under which the company was obligated to supply equipment which, upon resale, the company had estimated losses would be incurred. In addition, during the quarter ended January 1, 1999, the company decided to dispose of a business unit, Control Systems, which produces devices to monitor and manage utility service usage, because the business unit did not fit with the company's core strategy. The company recorded a charge of $6.2 million to adjust the carrying value of the assets to be sold to net realizable value, to adjust the estimated profitability on certain contracts to allow the purchaser to achieve reasonable margins, to provide for indemnification to the purchaser and to provide for other miscellaneous expenses associated with the sale. Other (income) expense for the six months ended January 1, 1999 also included a $18.0 million gain from the adjustment of the company's investment in Broadcom to market in the first quarter of the fiscal year. Management is not currently able to estimate the amount to be realized from the ultimate sale of the company's remaining investment in Broadcom. Other (income) expense for the three and six months ended January 1, 1999 and December 26, 1997 also 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 for the three and six months ended December 26, 1997. The company's effective income tax rate was 30 percent for the quarter and six months, unchanged from the prior year. Net earnings for the three months ended January 1, 1999 were $19.2 million, up $4.4 million over the prior year. An after-tax gain of $6.6 million from the company's investment in Broadcom and higher sales volume year-over-year were offset in part by higher operating expenses. Net earnings for the six months ended January 1, 1999 were $34.2 million, up $2.9 million over the prior year. Lower sales volume, lower gross margin rates and increased operating expenses more than offset an after-tax gain of $19.2 million from the company's investment in Broadcom. YEAR 2000 - --------- The company, like most other major companies, is currently addressing a universal problem commonly referred to as "Year 2000 Compliance," which relates to the ability of computer programs and systems to properly recognize and process date sensitive information before and after January 1, 2000. The following discussion is based on information currently available to the company. The company has analyzed and continues to analyze its internal information technology ("IT") systems ("IT systems") to identify any computer programs that are not Year 2000 compliant and implement any changes required to make such systems Year 2000 compliant. The company believes that its critical IT systems currently are 8 of 14 <PAGE> capable of functioning without substantial Year 2000 Compliance problems. Of the non-critical, but important, IT systems that are not currently Year 2000 Compliant, the company believes such IT systems will be Year 2000 compliant in a time frame that will avoid any material adverse effect on the company. Also, the company does not believe that the expenditures related to replacing or upgrading any of its IT systems to make them Year 2000 compliant will have a material adverse effect on the financial condition of the company. The company has identified only two IT systems (E-mail and electronic calendar) that must be replaced due to Year 2000 concerns, and the company already had plans to replace these IT systems with one system providing increased functionality. The company has evaluated its critical equipment and critical systems that contain embedded software, such as microcontrollers ("Non-IT systems"), and the company believes that all of its critical Non-IT systems are capable of functioning without substantial Year 2000 Compliance problems. The company plans to test its IT systems and Non-IT systems, commencing in the first calendar quarter of 1999. Certain products currently sold by the company contain computer programs that perform date functions or date calculations. The company has evaluated most of its products and is continuing to evaluate its other products, and, based on its investigation to date, the company believes that the products it currently sells (except the System Manager product currently being sold with the recently- developed System Release 4.5 software) are Year 2000 compliant, provided that they are upgraded to include all recommended engineering changes. However, the company's products are often used by its customers in systems that contain third party products or products supplied by the company in prior years, such as the System Manager products. Therefore, even though the company's current products may be Year 2000 compliant, the failure of such third party products or historical company-supplied products to be Year 2000 compliant, or to properly interface with the company's current products, may result in a system failure. Certain products that the company no longer offers for sale are not Year 2000 compliant, and the company has no plans to upgrade them. However, the company does have a plan for helping its customers upgrade their System Manager products and related components to System Release 4.6 software which is currently available for purchase. Such System Release 4.6 software is expected to remedy the Year 2000 problems of System Manager products historically sold by the company to its customers. Because some customers may be using obsolete versions of the System Manager products, they may also need to purchase equipment to solve their Year 2000 problems. A customer's failure to upgrade its System Manager products and related equipment to System Release 4.6 software and related equipment may result in such customer having critical Year 2000 problems. Under certain limited circumstances, the company may incur expense to help remedy such customer's critical Year 2000 failure. The company is investigating each of its significant vendors, suppliers, financial service organizations, service providers and customers to confirm that the company's operations will not be materially adversely affected by the failure of any such third party to have Year 2000 compliant computer programs. Regardless of the responses that the company receives from such third parties, the company is establishing contingency plans to reduce the company's exposure resulting from the non-compliance of third parties. First, the company plans to build inventories of critical and/or important components prior to January 1, 2000, and thereby decrease the company's dependence on suppliers that are not Year 2000 compliant. Second, the company plans to send hard copies of "Schedules of Ordered Products and Delivery Dates" to its major customers, commencing in the third calendar quarter of 1999. Such Schedules should enable customers to accept ordered products after January 1, 2000, even if their internal computer systems are not operating properly. The company expects the costs related to remediating Year 2000 issues not to be material. All of such expenditures are included in the budgets of the various departments of the company tasked with various aspects of the Year 2000 project. No IT projects have been deferred due to IT's Year 2000 efforts. The company has approached the Year 2000 project in phases. Phase I of the project involved identification of all software used or sold by the company, identification of all significant vendors, and establishment of a senior management committee (composed of the General Counsel, the Chief Financial Officer 9 of 14 <PAGE> and the Chairman of the Corporate Operating Committee) to oversee the project. Phase I was completed in the second calendar quarter of 1998. Phase II of the project involves (a) evaluation of each significant vendor and evaluation of major customers through letters and questionnaires (b) communication with customers concerning any products currently or recently sold by the company that have Year 2000 issues, and (c) evaluating the company's most reasonably likely worst case Year 2000 scenarios and contingency planning related thereto. Phase II is in process and most of the tasks described in subparagraphs (a) and (b) above have been completed; Phase II is expected to be completed in the second calendar quarter of 1999. Phase III involves testing of the company's IT systems and Non-IT systems to confirm Year 2000 compliance and/or discover any overlooked Year 2000 problems. Phase III is under way and is expected to be completed in the second calendar quarter of 1999. Last, Phase IV involves implementation of the company's contingency plans. Such plans are expected to be implemented in the third calendar quarter of 1999. The company does not currently believe that any of the foregoing will have a material adverse effect on its financial condition or its results of operations. However, the process of evaluating the company's products and third party products and systems is ongoing. Although not expected, failures of critical suppliers, critical customers, critical IT systems, critical Non-IT systems, or products sold by the company (including any delay in the deployment of System Releases 4.5 and 4.6) could have a material adverse effect on the company's financial condition or results of operations. As widely publicized, Year 2000 Compliance has many issues and aspects, not all of which the company is able to accurately forecast or predict. There is no way to assure that Year 2000 Compliance will not have adverse effects on the company, some of which could be material. Many of the company's statements related to Year 2000 are forward-looking statements and actual results could differ materially from those anticipated above. The company is relying on the investigations and statements of many employees, consultants and third parties in making the above forward-looking statements and such investigations or statements may not be accurate. 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. Prisma is a trademark of Scientific-Atlanta, Inc. ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - ------- --------------------------------------------------------- The company enters into foreign exchange forward contracts to hedge certain firm commitments and assets denominated in currencies other than the U.S. dollar, primarily Japanese yen. These contracts are for periods consistent with the exposure being hedged and generally have maturities of one year or less. To qualify as a hedge, the item to be hedged must expose the company to inventory pricing or asset devaluation risk and the related contract must reduce that exposure and be designated by the company as a hedge. Gains and losses on foreign exchange forward contracts, including cost of the contracts, are deferred and recognized in income in the same period as the hedged transactions. The company's foreign exchange forward contracts do not subject the company's results of operations to risk due to exchange rate fluctuations because gains and losses on these contracts generally offset losses and gains on the exposure being hedged. The company does not enter into any foreign exchange forward contracts for speculative trading purposes. If a foreign exchange forward contract did not meet the criteria for a hedge, the company would recognize unrealized gains and losses as they occur. 10 of 14 <PAGE> Firmly committed purchase exposure and related derivative contracts through December 31, 1999 are as follows: <TABLE> <CAPTION> Japanese Canadian Yen Dollar ---------- -------- (In thousands, except per dollar amounts) <S> <C> <C> Firmly committed purchase contracts 6,471,000 4,070 Notional amount of forward exchange contracts 5,467,000 4,070 Average contract amount (Foreign currency/ United States dollar) 123.03 1.524 </TABLE> The company has no derivative exposure beyond December 31, 1999. 11 of 14 <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 11, 1998. (b) Election of directors: <TABLE> <CAPTION> Votes For Withhold Authority ----------- ------------------ <S> <C> <C> James F. McDonald 66,046,136 831,403 David W. Dorman 66,044,762 832,777 </TABLE> Marion H.Antonini, William E.Kassling, Mylle Bell Mangum, David L McLaughlin, James V. Napier and Sam Nunn continue as directors. Wilbur King and Alonzo L. McDonald retired from the Board of Directors effective November 11, 1998. (c)(i) Approval of the Amended Non-Employee Directors Stock Option Plan <TABLE> <CAPTION> Votes For Votes Against Abstain --------- ------------- ------- <S> <C> <C> 62,954,781 3,340,723 582,035 </TABLE> (ii) Ratification of the selection of Arthur Andersen LLP as independent auditors <TABLE> <CAPTION> Votes For Votes Against Abstain -------- ------------- ------- <S> <C> <C> 66,430,340 177,651 269,548 </TABLE> Item 6 Exhibits and Reports on Form 8-K - ------ -------------------------------- (a) Exhibits. Exhibit No. Description ----------- ----------- 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 January 1, 1999. Date: February 16, 1999 /s/ Wallace G. Haislip ----------------- ---------------------- Wallace G. Haislip Senior Vice President - Finance Chief Financial Officer and Treasurer (Principal Financial Officer and duly authorized signatory of the Registrant) 12 of 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <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 THREE MONTHS ENDED JANUARY 1, 1999 DECEMBER 26, 1997 ------------------------------ --------------------------- PER SHARE PER SHARE EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT --------- ------ --------- -------- ------ --------- <S> <C> <C> <C> <C> <C> <C> BASIC EARNINGS PER COMMON SHARE Earnings from continuing operations available to common stockholders $ 19,188 75,274 $ 0.25 $ 14,832 78,885 $ 0.19 EFFECT OF DILUTIVE SECURITIES Options -- 757 -- -- 1,264 -- ------ ------ ------ ------ ------ ------ DILUTED EARNINGS PER COMMON SHARE Earnings from continuing operations available to common stockholders and assumed conversions $ 19,188 76,031 $ 0.25 $ 14,832 80,149 $ 0.19 ====== ====== ====== ====== ====== ====== </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED SIX MONTHS ENDED JANUARY 1, 1999 DECEMBER 26, 1997 ------------------------------ --------------------------- PER SHARE PER SHARE EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT --------- ------ --------- -------- ------ --------- <S> <C> <C> <C> <C> <C> <C> BASIC EARNINGS PER COMMON SHARE Earnings from continuing operations available to common stockholders $ 34,182 77,245 $ 0.44 $ 31,317 78,567 $ 0.40 EFFECT OF DILUTIVE SECURITIES Options -- 1,095 -- -- 1,471 -- ------ ------ ------ ------ ------ ------ DILUTED EARNINGS PER COMMON SHARE Earnings from continuing operations available to common stockholders and assumed conversions $ 34,182 78,340 $ 0.44 $ 31,317 80,038 $ 0.40 ====== ====== ====== ====== ====== ====== </TABLE> The following information pertains to options to purchase shares of common stock which were not included in the computation of Diluted Earnings per Common Share because the options' exercise price was greater than the average market price of the common shares: <TABLE> <CAPTION> January 1, 1999 December 26, 1997 --------------- ----------------- <S> <C> <C> Number of options outstanding 4,944 3,341 Weighted average exercise price $22.473 $22.371 </TABLE> 13 of 14 </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 10-Q FOR THE QUARTER ENDED JANUARY 1, 1999, 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-02-1999 <PERIOD-START> JUN-27-1998 <PERIOD-END> JAN-01-1999 <CASH> 139,177 <SECURITIES> 59,133 <RECEIVABLES> 299,254 <ALLOWANCES> 9,916 <INVENTORY> 196,515 <CURRENT-ASSETS> 730,725 <PP&E> 275,051 <DEPRECIATION> 109,040 <TOTAL-ASSETS> 964,760 <CURRENT-LIABILITIES> 300,214 <BONDS> 794 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 39,808 <OTHER-SE> 568,756 <TOTAL-LIABILITY-AND-EQUITY> 964,760 <SALES> 568,225 <TOTAL-REVENUES> 568,225 <CGS> 410,034 <TOTAL-COSTS> 410,034 <OTHER-EXPENSES> 59,053 <LOSS-PROVISION> (56) <INTEREST-EXPENSE> 522 <INCOME-PRETAX> 48,832 <INCOME-TAX> 14,650 <INCOME-CONTINUING> 34,182 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 34,182 <EPS-PRIMARY> 0.44 <EPS-DILUTED> 0.44 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>4 <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 (including, but not limited to, the continued weak economic conditions in the Asia Pacific region and the Latin America region); 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 development and/or deployment of new products, including digital set-top products and the applications to be used on such digital set-top products; 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 as both competitors and customers; reliance on software programs used by the company or its suppliers containing problems related to computations that must be made in 1999, 2000, and beyond ("Year 2000 Problems") and Year 2000 Problems that may exist in products currently or historically sold to customers of the company; 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. 14 of 14 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

SLR

https://www.sec.gov/Archives/edgar/data/835541/0000835541-99-000002.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, OCg2F5cPC63dw6QSwnM1mjFXTvE8SvWpeDWVd9zNlcqrjwHzW2JhDIyC3doKa+yz v/A1VCkudwyJPKV93Mn17A== <SEC-DOCUMENT>0000835541-99-000002.txt : 19990111 <SEC-HEADER>0000835541-99-000002.hdr.sgml : 19990111 ACCESSION NUMBER: 0000835541-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981127 FILED AS OF DATE: 19990108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLECTRON CORP CENTRAL INDEX KEY: 0000835541 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 942447045 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11098 FILM NUMBER: 99503407 BUSINESS ADDRESS: STREET 1: 847 GIBRALTAR DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089578500 MAIL ADDRESS: STREET 1: 847 GIBRALTAR DR CITY: MILPITAS STATE: CA ZIP: 95035 </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 NOVEMBER 27, 1998. __ 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 1-11098 SOLECTRON CORPORATION (Exact Name of Registrant as specified in its Charter) Delaware 94-2447045 (State or other jurisdiction (IRS Employer of Incorporation or Organization) Identification Number) 777 Gibraltar Drive, Milpitas, California 95035 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (408) 957-8500 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 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At December 31, 1998, 118,961,232 shares of Common Stock of the Registrant were outstanding. <PAGE> SOLECTRON CORPORATION INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at November 30, 1998 and August 31, 1998 3 Condensed Consolidated Statements of Income for for the three months ended November 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 1998 and 1997 5 - 6 Notes to Condensed Consolidated Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 27 Item 3. Quantitative and Qualitative Disclosures About 27 Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Changes in Securities 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28 Signature 29 2 <PAGE> ITEM 1. FINANCIAL STATEMENTS SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In millions) November 30, August 31, 1998 1998 ASSETS ----------- ----------- Current assets: Cash, cash equivalents and short-term investments $ 194.8 $ 308.8 Accounts receivable, net 872.2 670.2 Inventories 901.1 788.5 Prepaid expenses and other current assets 138.3 120.0 ---------- ---------- Total current assets 2,106.4 1,887.5 Net property and equipment 531.6 448.0 Other assets 74.7 75.0 ---------- ---------- Total assets $ 2,712.7 $ 2,410.5 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 11.2 $ - Accounts payable 844.2 666.5 Accrued employee compensation 64.8 72.1 Accrued expenses 56.2 34.9 Other current liabilities 71.0 67.3 ---------- ---------- Total current liabilities 1,047.4 840.8 Long-term debt 387.8 385.5 Other long-term liabilities 4.5 2.9 ---------- ---------- Total liabilities 1,439.7 1,229.2 ---------- ---------- Commitments Stockholders' equity: Common stock 0.1 0.1 Additional paid-in capital 536.4 510.8 Retained earnings 741.3 677.4 Accumulated other comprehensive income - cumulative translation adjustment (4.8) (7.0) ---------- ---------- Total stockholders' equity 1,273.0 1,181.3 ---------- ---------- Total liabilities and stockholders' equity $ 2,712.7 $ 2,410.5 ========== ========== See accompanying notes to condensed consolidated financial statements. 3 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share data) Three Months Ended November 30, ----------------------- 1998 1997 ---------- ---------- Net sales $ 1,945.6 $ 1,136.8 Cost of sales 1,769.7 1,013.1 ---------- ---------- Gross profit 175.9 123.7 Operating expenses: Selling, general and administrative 70.8 51.9 Research and development 7.9 4.4 ---------- ---------- Operating income 97.2 67.4 Interest income 4.4 6.6 Interest expense (5.5) (6.5) ---------- ---------- Income before income taxes 96.1 67.5 Income tax expense 32.2 22.6 ---------- --------- Net income $ 63.9 $ 44.9 ========== ========= Net income per share: Basic $ 0.54 0.39 ========== ========= Diluted $ 0.52 0.38 ========== ========= Shares used to compute net income per share: Basic 118.4 114.8 ========== ========= Diluted 128.7 126.0 ========== ========== See accompanying notes to condensed consolidated financial statements. 4 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Three Months Ended November 30, ----------------------- 1998 1997 ---------- ---------- Cash flows from operating activities: Net income $ 63.9 $ 44.9 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 40.6 32.6 Other 0.6 5.3 Changes in operating assets and liabilities: Accounts receivable (201.7) (98.4) Inventories (99.2) (92.3) Prepaid expenses and other current assets (18.2) 21.0 Accounts payable 177.6 94.8 Accrued expenses and other current liabilities 17.7 (0.1) ---------- --------- Net cash (used in) provided by operating activities (18.7) 7.8 ---------- --------- Cash flows from investing activities: Sales and maturities of short-term investments 56.4 278.6 Purchases of short-term investments (9.7) (319.7) Acquisition of manufacturing location (24.6) - Capital expenditures (118.8) (88.5) Proceeds from sale of property and equipment 5.0 - Other 0.3 (0.8) ---------- --------- Net cash used in investing activities (91.4) (130.4) ---------- --------- (continued on next page) 5 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In millions) Three Months Ended November 30, ------------------------ 1998 1997 ---------- ---------- Cash flows from financing activities: Net proceeds from bank lines of credit 11.2 - Repayments of long-term debt - (0.9) Net proceeds from sale of common stock 25.6 10.9 Other 3.9 - ---------- ---------- Net cash provided by financing activities 40.7 10.0 ---------- ---------- Effect of exchange rate changes on cash and cash equivalents 2.2 1.4 ---------- --------- Net decrease in cash and cash equivalents (67.2) (111.2) Cash and cash equivalents at beginning of period 225.2 225.1 ---------- ---------- Cash and cash equivalents at end of period $ 158.0 $ 113.9 ========== ========== SUPPLEMENTAL DISCLOSURES Cash paid during the period: Income taxes $ 32.2 $ 19.4 Interest $ 12.6 $ - See accompanying notes to condensed consolidated financial statements. 6 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Basis of Presentation The accompanying unaudited condensed consolidated balance sheets as of November 30, 1998 and August 31, 1998, the unaudited condensed consolidated statements of income for the three months ended November 30, 1998 and 1997, and the unaudited condensed consolidated statements of cash flows for the three months ended November 30, 1998 and 1997 have been prepared on substantially the same basis as the annual consolidated financial statements. Management believes the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position, operating results and cash flows for the periods presented. The results of operations for the three months ended November 30, 1998 are not necessarily indicative of results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 1998 included in the Company's Annual Report to Stockholders. For clarity of presentation, the Company has indicated its first fiscal quarters as ending on November 30, and its fiscal year as ending on August 31, whereas in fact, the Company's first quarter of fiscal 1999 ended on November 27, 1998, its first quarter of fiscal 1998 ended on November 28, 1997 and its 1998 fiscal year ended on August 28, 1998. NOTE 2 - Inventories Inventories consisted of (in millions): November 30, August 31, 1998 1998 ----------- ----------- Raw materials $ 635.0 $ 577.8 Work-in-process 266.1 210.7 ----------- ----------- Total $ 901.1 $ 788.5 =========== =========== NOTE 3 - Net Income Per Share Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," replaced the previously reported primary and fully diluted net income per share with basic and diluted net income per share. Basic net income per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of common shares plus dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of stock options that are computed using the treasury stock method and shares issuable upon conversion of the Company's outstanding convertible notes. Net income per share amounts for the three months ended November 30, 1997 have been restated to conform to the requirements of SFAS No. 128. The following table sets forth the computation of basic and diluted net income per share for the three months ended November 30, 1998 and 1997. 7 <PAGE> Three Months Ended November 30, ----------------------- 1998 1997 ---------- ---------- (in millions, except per share data) Net income - basic $ 63.9 $ 44.9 Interest expense from convertible subordinated notes, net of taxes 2.4 2.4 ---------- ---------- Net income - diluted $ 66.3 $ 47.3 ========== ========== Weighted average shares - basic 118.4 114.8 Common stock equivalents - stock options 3.5 4.4 Common shares issuable upon assumed conversion of convertible subordinated notes 6.8 6.8 ---------- ---------- Weighted average shares - diluted 128.7 126.0 ========== ========== Net income per share - basic $ 0.54 $ 0.39 ========== ========== Net income per share - diluted $ 0.52 $ 0.38 ========== ========== For the first quarter ended November 30, 1998, options to purchase 244,000 shares of common stock with exercise prices greater than the average fair market value of the Company's stock for the period of $53.53 were not included in the calculation because the effect would have been antidilutive. For the first quarter ended November 30, 1997, options to purchase 1.2 million shares of common stock with exercise prices greater than the average fair market value of the Company's stock for the period of $41.40 were not included in the calculation because the effect would have been antidilutive. NOTE 4 - Asset Securitization Arrangement The Company has entered into an asset securitization arrangement with a bank under which it may sell up to $120 million of eligible accounts receivable. During December 1998, the Company sold a portion of its eligible accounts receivable under the arrangement for $50 million in cash. As a result, the Company has a remaining $70 million under the securitization arrangement. The arrangement which expires in August 1999 is subject to certain financial covenants and management representations. 8 <PAGE> NOTE 5 - Commitments The Company leases various facilities under operating lease agreements. The facility leases expire at various dates through 2006. Substantially all leases require the Company to pay property taxes, insurance and normal maintenance costs. Payments under certain leases are periodically adjusted based on LIBOR rates. The leases for certain of the Company's facilities in Milpitas and San Jose, California, and Everett, Washington, provide the Company with the option at the end of each of the leases of either acquiring the property at its original cost or arranging for the property to be acquired. The Company is contingently liable under a first loss clause for a decline in market value of these leased facilities totaling up to $93.1 million in the event the Company does not purchase the properties at the ends of the lease terms. The Company must also maintain compliance with financial covenants similar to its credit facilities. During fiscal 1998, the Company entered into an arrangement with a third-party leasing company under which certain of the Company's fixed assets with a carrying value of approximately $31.3 million were sold to the leasing company and leased back. The Company is accounting for these transactions as operating leases. Future minimum payments related to lease obligations, including the $93.1 million contingent liability discussed above, are $39.5 million, $29.8 million, $20.9 million, $65.1 million and $44.9 million in each of the years in the five-year period ending August 31, 2003 and an aggregate $2.6 million for periods after that date. NOTE 6 - Acquisition of Mitsubishi Assets On October 1, 1998, the Company acquired the wireless telephone manufacturing assets of Mitsubishi Consumer Electronics America, Inc.'s (MCEA) Cellular Mobile Telephone (CMT) division in Braselton, Georgia. MCEA is a subsidiary of Mitsubishi Electric Corporation (Mitsubishi). The acquisition has been accounted for as a purchase of assets, and the purchase price of approximately $25 million has been allocated to the assets acquired based on their relative fair values at the date of acquisition. Under the terms of the agreement, the Company will provide MCEA-CMT with a full range of manufacturing services for five years, including New Product Introduction management, printed circuit board assembly and full systems assembly for MCEA's branded and private-label cellular products sold within North America. Additionally, Solectron hired approximately 400 MCEA-CMT manufacturing and support associates. NOTE 7 - Pending Acquisition of IBM Assets in Texas On January 6, 1999, the Company announced that it had signed agreements with IBM to acquire IBM's Electronic Card Assembly and Test (ECAT) manufacturing assets in Austin, Texas. Under the terms of the agreements, Solectron will provide fully integrated printed circuit board (PCB) assembly manufacturing services to IBM for the next three years. This includes physical design, early prototyping, new product launch, PCB assembly and test, volume production, end-of-life support, field return services and life-cycle management for all IBM motherboards used in their mobile products manufactured worldwide. The Company will also hire approximately 1,300 IBM design, test, and manufacturing associates. In addition, Solectron has signed agreements governing intellectual property rights and global supply for PCB assembly for motherboards used in IBM's mobile products manufactured worldwide. The transaction is expected to be completed by the end of the Company's 9 <PAGE> second fiscal quarter of 1999. Completionof the transaction is subject to applicable government approvals and various conditions of closing. NOTE 8 - Newly Adopted Accounting Pronouncements Effective in the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income," which requires the Company to report and display certain information related to comprehensive income. Comprehensive income includes net income and other comprehensive income. Other comprehensive income is classified separately into foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. Solectron's other comprehensive income is comprised solely of foreign currency translation adjustments. The components of comprehensive income were as follows: Three Months Ended November 30, ----------------------- 1998 1997 ---------- ---------- (in millions) Net income $ 63.9 $ 44.9 Other comprehensive income - foreign currency translation adjustments 2.2 4.5 ---------- ---------- Comprehensive income $ 66.1 $ 49.4 ========== ========== The foreign currency translation adjustments are not currently adjusted for income taxes since they relate to investments which are permanent in nature. Effective in the first quarter of fiscal 1999, the Company adopted the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and for determining when specific costs should be capitalized and when they should be expensed. The impact of adopting SOP 98-1 was not significant to the Company's results of operations or financial position. 10 <PAGE> ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute forward-looking statements which involve risks and uncertainties. Solectron's actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including those factors set forth under "Trends and Uncertainties" below. General Solectron's net sales are derived from sales to electronics systems original equipment manufacturers (OEMs). The majority of Solectron's customers compete in the networking, data and voice communications, workstation, personal computer and computer peripheral segments of the electronics industry. The Company provides integrated solutions that span the entire product life cycle from pre-production planning and design, to manufacturing, distribution and end-of-life product service and support. Solectron offers its customers competitive outsourcing advantages such as access to advanced manufacturing technologies, shortened time-to-market, reduced cost of production and more effective asset utilization. A discussion of some of the potential fluctuations in operating results is included under "Trends and Uncertainties." The Company has manufacturing operations in locations throughout the world, including North America, Europe, Asia/Pacific and Latin America. Solectron also has its Asia/Pacific headquarters office in Taipei, Taiwan and program offices located in Japan and Israel. The Company's subsidiaries, Force Computers and Fine Pitch Technologies, are both headquartered in San Jose, California. Force's European headquarters and a significant portion of its operations are located in Munich, Germany. In addition to its headquarters' locations, Force has sales support offices in various locations in the United States and internationally. During 1997, the Company established a strategic, global manufacturing partnership with Ericsson Telecom AB's Business Area Infocom Systems (Ericsson). The Company established a New Product Introduction center in Sweden, and production from certain Ericsson plants worldwide was transferred to Solectron manufacturing sites around the world. In October 1997, Solectron acquired certain assets, primarily equipment and inventory, of Ericsson's printed circuit board assembly operation located in Sao Paulo, Brazil. In addition, Solectron's subsidiary, Solectron Brasil Ltda., hired approximately 370 associates formerly employed by Ericsson Telecomunicacoes S.A. in Brazil. In April 1998, the Company acquired NCR Corporation's (NCR) manufacturing assets in three cities for a purchase price of approximately $91 million. The acquisition was accounted for as a purchase of assets and the purchase price was allocated to the assets acquired based on the relative fair values of the assets at the date of acquisition. Under the terms of the agreement, NCR will outsource the manufacturing of certain computer components to Solectron for at least five years. Solectron also hired approximately 1,200 NCR manufacturing and related support associates. In June 1998, the Company acquired International Business Machines Corporation's (IBM) Electronic Card Assembly and Test (ECAT) 11 <PAGE> manufacturing assets in Charlotte, North Carolina and non-exclusive rights to certain IBM intellectual property for a purchase price of approximately $96 million. The acquisition was accounted for as a purchase of assets and the purchase price was allocated to the assets acquired, including the intellectual property rights, based on their relative fair values at the date of acquisition. Under the terms of the agreement, Solectron hired approximately 700 IBM manufacturing and related support associates and the Company will provide printed circuit board assembly services to IBM in North America for the next three years. In addition, IBM has made available to Solectron 115 patents and 51 disclosures (collectively the intellectual property rights) covering a wide spectrum of technologies and capabilities. IBM will also provide to Solectron failure analysis and characterization tools for process development and manufacturing, including fault detection and isolation. In October 1998, the Company acquired the wireless telephone manufacturing assets of Mitsubishi Consumer Electronics America, Inc.'s (MCEA) Cellular Mobile Telephone (CMT) division in Braselton, Georgia. MCEA is a subsidiary of Mitsubishi Electric Corporation (Mitsubishi). The acquisition was accounted for as a purchase of assets and the purchase price of approximately $25 million was allocated to the acquired assets based on their relative fair values at the date of acquisition. Under the terms of the agreement, the Company will provide MCEA-CMT with a full range of manufacturing services for five years, including New Product Introduction management, printed circuit board assembly and full systems assembly for MCEA's branded and private-label cellular products sold within North America. In addition, Solectron hired approximately 400 MCEA-CMT manufacturing and support associates. Also in October 1998, the Company signed a definitive agreement with Ingram Micro Inc. under which the two companies entered into a strategic alliance to provide global build-to-order and configure-to-order assembly services for personal computers, servers and related products in the United States, Canada, Europe, Asia and Latin America. The alliance will be managed by both companies under a joint management matrix that will include a sales and marketing staff, program management, materials management, information technology resources and test and process engineers and will, in most part, utilize existing facilities, systems and personnel. The companies expect that shipments to customers will begin in early calendar 1999. On January 6, 1999, the Company announced that it had signed agreements with IBM to acquire IBM's Electronic Card Assembly and Test (ECAT) manufacturing assets in Austin, Texas. Under the terms of the agreements, Solectron will provide fully integrated printed circuit board (PCB) assembly manufacturing services to IBM for the next three years. This includes physical design, early prototyping, new product launch, PCB assembly and test, volume production, end-of-life support, field return services and life-cycle management for all IBM motherboards used in their mobile products manufactured worldwide. The Company will also hire approximately 1,300 IBM design, test, and manufacturing associates. In addition, Solectron has signed agreements governing intellectual property rights and global supply for PCB assembly for motherboards used in IBM's mobile products manufactured worldwide. The transaction is expected to be completed by the end of the Company's second fiscal quarter of 1999. Completion of the transaction is subject to applicable government approvals and various conditions of closing. 12 <PAGE> Results of Operations The electronics industry is subject to rapid technological change, product obsolescence and price competition. These and other factors affecting the electronics industry, or any of Solectron's major customers in particular, could have an adverse material effect on Solectron's results of operations. See "Trends and Uncertainties -- Potential Fluctuations in Operating Results" and "Competition" for further discussion of potential fluctuations in operating results. The following table sets forth, for the periods indicated, certain items in the Consolidated Statements of Income as a percentage of net sales. The financial information and the discussion below should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Three Months Ended November 30, ------------------ 1998 1997 ----- ----- Net sales 100.0% 100.0% Cost of sales 91.0 89.1 ----- ----- Gross profit 9.0 10.9 Operating expenses: Selling, general and administrative 3.6 4.6 Research and development 0.4 0.4 ----- ----- Operating income 5.0 5.9 Net interest income (expense) (0.1) - ----- ----- Income before income taxes 4.9 5.9 Income taxes 1.6 2.0 ----- ----- Net income 3.3% 3.9% ===== ===== Net Sales Net sales for the first quarter of fiscal 1999 grew to $1.9 billion, an increase of 71.1% over the same period in fiscal 1998. The sales growth was primarily attributable to significant increases in sales volume from both existing and new customers worldwide, as well as the acquisitions made during fiscal 1998 including Ericsson, NCR, and IBM. In addition, the recent acquisition of Mitsubishi in October contributed $22.5 million in net sales for this quarter. In the Americas, the new site in Mexico and newly acquired sites from NCR and IBM were the largest contributors to the strong growth in the fiscal 1999 period as compared to the fiscal 1998 period. The sales growth at the Texas site was particularly strong as a result of start-up and new programs. The net sales increase at the Milpitas, California site was offset partially by the planned transfer of personal computer printed circuit board programs and computer peripherals systems assembly programs to Mexico and networking business to Penang which resulted from management's action to improve global load balancing and specific product program transitioning. Sales in all of the Company's European and Asian operations increased in fiscal 1999 over the same period of fiscal 1998, principally as a result of core business growth and new accounts. In particular, the sales growth at the Penang site was 13 <PAGE> significant due primarily to improved demand from personal computer customers and networking business transferred in from California. The growth at the Scotland site was strong primarily due to increased demand from its telecommunications customers. Although the Company does not currently anticipate any future decline in sales, to lessen the potential impact of any possible future declines related to customers within any particular region or market segment, the Company is committed to seeking diversification of its customer base among many countries, market segments and product lines within market segments. Hewlett-Packard Company (HP) was Solectron's largest customer in the first quarters of both fiscal 1999 and 1998, accounting for 12.2% and 15.5%, respectively, of consolidated net sales in those periods. Additionally, Sun Microsystems, Inc. accounted for 10.0% of net sales in the first quarter of fiscal 1998. No other customer accounted for more than 10% of net sales during any of the periods presented. Solectron's top ten customers accounted for 71.7% and 67.3% of consolidated net sales in the first three months of fiscal 1999 and 1998, respectively. Solectron is still dependent upon continued revenues from HP and the rest of its top ten customers and there can be no guarantee that these or any other customers will not increase or decrease as a percentage of consolidated net sales either individually or as a group. Consequently, any material decrease in sales to these or other customers could have an adverse material effect on Solectron's results of operations. In the first quarter of fiscal 1999, international locations contributed 39.2% of consolidated net sales compared to 33.6% in the same period of fiscal 1998. In addition to the sales growth factors for Europe and Asia noted above, the Company's international sales also benefited from the growth of the sites in Mexico and Brazil added during the first quarter of fiscal 1998 and the acquisition of the Ireland site from NCR in April 1998. As a result of Solectron's international sales and facilities, Solectron's operations are subject to risks of doing business abroad. While to date these dynamics have not had an adverse material effect on Solectron's results of operations, there can be no assurance that there will not be such an impact in the future. See "Trends and Uncertainties -- International Operations" for a further discussion of potential fluctuations in operating results associated with the risks of doing business abroad. Solectron's operations in Milpitas, California contributed a substantial portion of Solectron's net sales and operating income during the first quarters of fiscal 1999 and fiscal 1998. Although management has been undertaking deliberate actions to achieve improved global load balancing by transferring certain projects from the Milpitas site to other sites worldwide, the performance of the Milpitas operation is expected to continue as a significant factor in the overall financial performance of Solectron. Any adverse material change to the customer base, product mix, efficiency, or other attributes of this site could have an adverse material effect on Solectron's consolidated results of operations. Solectron believes that its ability to continue to achieve growth will depend upon growth in sales to existing customers for their current and future product generations, successful marketing to new customers and future geographic expansion. Customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of delayed, canceled or reduced orders with new business cannot be assured. In addition, there can be no assurance that any of Solectron's current customers will continue to utilize Solectron's services. Because of 14 <PAGE> these factors, there can be no assurance that Solectron's historical revenue growth rate will continue. See "Trends and Uncertainties" for a discussion of certain factors affecting the management of growth, geographic expansion and potential fluctuations in sales and results of operations. Gross Profit The gross margin percentage declined to 9.0% for the fiscal 1999 period from 10.9% for the first quarter of fiscal 1998. The decrease was primarily attributable to a shift toward higher volume projects and systems build projects which typically yield lower margins. Also, gross margins of the newly acquired NCR operations are lower than the overall average margins of the rest of the Company primarily due to the fact that the majority of its net sales are derived from systems integration activities, which normally generate lower gross margins than printed circuit board assembly. In addition, there was a somewhat seasonal shift in product mix toward the lower margin personal computer products. After the calendar year end, the personal computer industry typically reassesses demand based on inventory levels that may cause the Company's product mix to shift away from personal computers to other industry segments in the second quarter. For the foreseeable future, Solectron's gross margin is expected to depend primarily on product mix, production efficiencies, utilization of manufacturing capacity, start-up and integration costs of new and acquired businesses, the percentage of sales derived from systems build projects, pricing within the electronics industry and the cost structure at individual sites. Over time, gross margins at the individual sites and for the Company as a whole may continue to fluctuate. The Company anticipates that a larger percentage of its sales may be derived from systems build projects in future periods. Systems build projects typically have lower gross margin percentages than printed circuit board assembly projects. Increases in systems build business, additional costs associated with new projects and price erosion within the electronics industry could adversely affect the Company's gross margin. Additionally, changes in product mix could cause the Company's gross margin to fluctuate. Also, while the availability of raw materials appears adequate to meet the Company's current revenue projections for the foreseeable future, component availability is still subject to lead time and other constraints that could possibly limit the Company's revenue growth. Because of these factors and others discussed under "Trends and Uncertainties" below, there can be no assurance that the Company's gross margin will not fluctuate or decrease in future periods. Selling, General and Administrative Expenses In absolute dollars, selling, general and administrative (SG&A) expenses increased 36.4% in the first quarter of fiscal 1999 over the same period of fiscal 1998. The increase in fiscal 1999 period was primarily due to investment in infrastructure such as personnel and related departmental expenses at all manufacturing locations as well as continuing investment in information systems to support the increased size and complexity of the Company's business. As a percentage of net sales, SG&A expenses were 3.6% and 4.6% in the fiscal 1999 and fiscal 1998 periods, respectively. The primary reason for the fiscal 1999 decrease in SG&A expenses as a percentage of net sales is the significant increase in the sales base offset partially by the costs associated with investments in starting up new sites and investments in the Company's information systems. The Company anticipates SG&A expenses will continue to increase in terms of absolute dollars in the future, and may possibly increase as a 15 <PAGE> percentage of revenue, as the Company continues to build the infrastructure necessary to support its current and prospective business. Research and Development Expenses With the exception of its Force Computers operation, the Company's research and development (R&D) activities have been focused primarily on the development of prototype and engineering design capabilities, fine pitch interconnecting technologies (which include ball-grid array, tape-automated bonding, multichip modules, chip-on-flex, chip-on-board and flip chip), high reliability environmental stress test technology and the implementation of environmentally friendly assembly processes, such as VOC-free and no-clean. Force's R&D efforts are concentrated on new product development and improvement of product designs through improvements in functionality and the use of microprocessors in embedded applications. Research and development expenses, in absolute dollars and as a percentage of net sales, respectively, were $7.9 million and 0.4% in the first quarter of fiscal 1999 and $4.4 million and 0.4% in the fiscal 1998 period. The increase in R&D expenses in the fiscal 1999 period compared to fiscal 1998 period was primarily due to increased R&D effort at Force and new R&D projects initiated at the Malaysia sites. The Company expects that R&D expenses will increase in absolute dollars in the future and may increase as a percentage of net sales as Force continues to invest in its R&D efforts and additional R&D projects are undertaken at certain Asian sites. Net Interest Income (Expense) Net interest expense was $1.1 million for the first three months of fiscal 1999 compared to net interest income of $0.1 million in the same period of fiscal 1998. The net interest expense in the fiscal 1999 period resulted from the Company's interest expense on long-term debt, which is approximately $6.2 million per quarter, not fully offset by the reduction of interest income earned on undeployed cash and investments and the capitalization of interest expense. The reduction of interest income reflects deployment of cash and short-term investments to fund the acquisitions from NCR, IBM-ECAT and MCEA's CMT division as well as to meet working capital requirements. In the first quarter of fiscal 1999, the Company capitalized approximately $1.4 million of interest expense related to the costs of computer software developed for internal use and the facility construction projects at the California and Brazil sites. Solectron expects to utilize more of the undeployed cash during fiscal 1999 in order to fund anticipated future growth. See "Trends and Uncertainties -- Management of Growth," and "Potential Fluctuations in Operating Results." Income Taxes Income taxes increased to $32.2 million in the first quarter of fiscal 1999 from $22.6 million in the fiscal 1998 period primarily due to increased income before income taxes. Solectron's effective income tax rate was 33.5% in the fiscal 1999 and 1998 periods. In general, the effective income tax rate is largely a function of the balance between income from domestic and international operations. Solectron's international operations, taken as a whole, have been taxed at a lower rate than in the United States, primarily due to the tax holiday granted to the Company's Malaysia sites. The Malaysian tax holiday is effective through January 31, 2002, subject to certain conditions. The Company has also been granted various tax holidays in 16 <PAGE> China, which are effective for various termsand are subject to certain conditions. Liquidity and Capital Resources Working capital was $1.1 billion at November 30, 1998 compared to $1.0 billion at the end of fiscal 1998. During the same period, cash, cash equivalents and short-term investments decreased to $194.8 million from $308.8 million which reflects funding for required investments in working capital and capital expenditures to support sales growth. In addition, the Company used approximately $24.6 million for its acquisition of the wireless telephone manufacturing assets of MCEA's CMT division during the first quarter of fiscal 1999. As Solectron continues to grow, it is expected that the Company will require greater amounts of working capital to support its operations. The Company believes that its current level of working capital and the Company's available credit facilities will provide adequate working capital for the foreseeable future. However, the Company may need to raise additional funds to finance more rapid expansion, including establishing new locations or financing additional acquisitions. There can be no assurance that such funds, if needed, will be available on terms acceptable to the Company or at all. Inventory levels fluctuate directly with the volume of the Company's manufacturing. Changes or significant fluctuations in product market demands can cause fluctuations in inventory levels which may result in changes in levels of inventory turns and liquidity. Historically, the Company has been able to manage its inventory levels with regard to these fluctuations. However, should material fluctuations occur in product demand, the Company could experience slower turns and reduced liquidity. In the first quarter of fiscal 1999, the Company invested approximately $119 million in capital expenditures. A large portion of these expenditures related to the purchase of new equipment, primarily surface mount assembly and test equipment, to meet current and expected production levels, as well as to replace or upgrade older equipment which was retired or sold. Significant expenditures were also made for the acquisition of land and buildings for the Company's manufacturing sites, principally in Brazil, Mexico, and Texas. The Company expects total capital expenditures in fiscal 1999 to be in the range of $275 million to $325 million. In addition to working capital as of November 30, 1998, which includes cash and cash equivalents of $158.0 million and short-term investments of $36.8 million, the Company has available a $100 million unsecured multicurrency revolving credit facility and a $70 million asset securitization arrangement. Both of these facilities are subject to financial covenants. The Company also has approximately $93 million in unused foreign credit facilities available. "Year 2000" Issues The Company is aware of and is addressing the issues associated with the programming code in existing computer systems as the year 2000 approaches. The Year 2000 problem is pervasive and complex, as many computer systems, manufacturing equipment and industrial control systems will be affected in some way by the rollover of the two-digit year value to 00. Systems that do not properly recognize such dates could generate erroneous information or cause a system to fail. The Year 2000 issue creates risk for the Company from unforeseen problems in its own systems 17 <PAGE> and from third parties with whom the Company deals on business transactions worldwide. Failures of the Company's and/or third parties' computer systems, manufacturing equipment and industrial control systems would have an adverse material impact on the Company's ability to conduct its business. The Company has formed a worldwide task force and has implemented a comprehensive program to analyze the Company's internal systems as well as all external systems (such as vendor, customer, banking systems, etc.) upon which the Company is dependent, to identify and evaluate any potential Year 2000 issues. This task force meets regularly and tracks progress against the program, modifying it as needed to help ensure timely completion. The Company is committed to achieving Year 2000 compliance; however, because a significant portion of the problem is external to the Company and therefore outside of its direct control, there can be no assurances that the Company will be fully or even significantly Year 2000 compliant at the critical juncture. In addition, as full testing of Year 2000 functionality must occur in a simulated environment, the Company will not be able to test full system Year 2000 interfaces and capabilities prior to the Year 2000. As of November 30, 1998, the Company had completed an inventory of internal systems, hardware, software, manufacturing equipment and embedded chips in industrial control instruments. Each of these items was identified as mission critical, mission essential, mission impaired or mission non-critical. The Company is in the process of prioritizing and evaluating mission critical and mission essential items, identifying fixes and resources as appropriate, and performing and testing corrective measures. While the Company believes that its evaluation has been comprehensive, there can be no assurance that all systems critical to Year 2000 compliance have been identified, or that the corrective actions identified will be completed on time. As of November 30, 1998, the Company had inventoried every key supplier of goods and services to the Company, and considered the potential impact on the Company and its customers of Year 2000 compliance by these suppliers. The Company also mailed surveys to many of these key suppliers, and is in the process of evaluating responses and sending follow-up letters. The Company plans to disqualify potentially non-compliant sources, look for alternative sources and re-qualify new suppliers to help mediate potential business disruptions. The Company is also involved with various geographic Year 2000 consortiums worldwide, with the intent to leverage contacts and information for commonly used suppliers and services such as utility companies. In addition, the Company is in the process of reviewing EDI linkages and data transmission for its customers and suppliers. While the Company believes that it will be able to qualify alternative suppliers as needed, until all supplier and customer survey responses have been received and evaluated, the Company can not fully evaluate the extent of potential problems and the costs associated with corrective actions. The Company estimates the cost to complete its current compliance program to be in the range of $28 million to $42 million. Of this amount, approximately $7 million is associated with the replacement of capital equipment, of which approximately half is being purchased to replace non-compliant systems that would not otherwise have been replaced at this time. The variability in these estimates depends largely on the response from the Company's suppliers and the extent to which supplier re-qualification is needed. Cost estimates will also be re-evaluated as the status of the overall compliance program is updated. There can be no assurance that actual costs will not be materially 18 <PAGE> higher than currently anticipated. A significant portion of these costs is not likely to be incremental costs to the Company, but rather will represent the redeployment of existing information technology resources. Certain other information technology projects have been delayed due to the focus on Year 2000 issues. The potential costs of the redeployment of personnel and delays in implementing other projects is not known but could be substantial. The total amount spent on the compliance program this fiscal year through November 30, 1998 was $5 million, of which $3 million pertained to the payroll costs of personnel involved in the program and costs of outside consultants, and $2 million principally pertained to the replacement of capital equipment. Prior to fiscal 1999, costs of software and hardware applications incurred for Year 2000 compliance were not material and related payroll costs for the Company's information systems group were not tracked separately. Although the Company has identified general contingency plans, such as the replacement and re-qualification of suppliers, the stockpiling of supplies and purchase of generators, a formal contingency plan will not be established until at least the third quarter of fiscal 1999 when the evaluation of suppliers is expected to be completed. The Company is unable to determine what effect the failure of systems because of Year 2000 issues by the Company or its suppliers or customers would have, but any significant failures could have an adverse material effect on the Company's results of operations and financial condition. Trends and Uncertainties Customer Concentration; Dependence on the Electronics Industry In the first quarter of fiscal 1999 and for the full years of fiscal 1998, 1997 and 1996, the Company's ten largest customers accounted for as much as 71.7% of consolidated net sales. The Company is dependent upon continued revenues from its top ten customers. Any material delay, cancellation or reduction of orders from these or other significant customers could have an adverse material effect on the Company's results of operations. During the first quarter of fiscal 1999, HP accounted for 12.2% of net sales compared to 15.5% during the same period of fiscal 1998. During fiscal 1998, HP, Cisco and Sun accounted for 13.9%, 10.7% and 10.5%, respectively, of net sales, compared to 13.5% for HP and less than 10% for each of Cisco and Sun during fiscal 1997. There can be no assurance that the Company will continue to do business with HP, Cisco, Sun or any other customers. The percentage of the Company's sales to its major customers may fluctuate from period to period. Significant reductions in sales to any of these customers would have an adverse material effect on the Company's results of operations. The Company has long-term contracts (generally for terms of three to five years) with Ericsson, NCR, IBM and Mitsubishi under which these customers have committed to source production of certain products and components from the Company. However, these commitments to source production do not include firm volume purchase commitments. In addition, the Company has no firm long-term volume purchase commitments from its other customers, and over the past few years has experienced reduced lead times in customer orders. Also, customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of canceled, delayed or reduced contracts with new business cannot be assured. These risks are increased because a majority of the Company's sales are to customers in the electronics industry, which is subject to rapid technological change and product obsolescence. The factors affecting the electronics industry in 19 <PAGE> general, or any of the Company's major customers in particular, could have an adverse material effect on the Company's results of operations. There can be no assurance that sales to customers within any particular market segment will not experience decreases which could have an adverse material effect on the Company's sales. Management of Growth; Geographic Expansion The Company has experienced substantial growth over the last five fiscal years, with net sales increasing from $1.5 billion in fiscal 1994 to $5.3 billion in fiscal year 1998. Additionally, Solectron reported record sales of $1.9 billion for the first quarter of fiscal 1999. In recent years, the Company has acquired or established facilities in many locations. In the first quarter of fiscal 1998, the Company announced the opening of its Asia/Pacific headquarters office in Taipei, Taiwan, began operations in Guadalajara, Mexico, and as further discussed in "Partnership with Ericsson and Related Transactions," established a manufacturing facility near Sao Paulo, Brazil and opened a New Product Introduction center in Sweden. In April 1998, the Company announced plans to open a manufacturing facility in Timisoara, Romania, and in May 1998, announced the establishment of a program office in Israel. In addition, in April, June and October 1998, the Company completed its acquisitions of certain manufacturing assets from NCR, IBM and Mitsubishi, respectively. (See "Acquisition of NCR, IBM and Mitsubishi Assets.") In October 1998, the Company signed a definitive agreement with Ingram Micro, Inc. under which the two companies entered into a strategic alliance. (See "Alliance with Ingram Micro.") In the first quarter of fiscal 1999, the Company announced plans to build new manufacturing facilities in Romania and Suwanee, Georgia. On January 6, 1999, announced that it had signed agreements with IBM to acquire IBM's Electronic Card Assembly and Test (ECAT) manufacturing assets in Austin, Texas. (See "Pending Acquisition of IBM Assets in Texas.") During fiscal 1997, the Company announced the establishment of new manufacturing facilities in Suzhou, China; began operations at its manufacturing facility near Boston, Massachusetts; and in November 1996, acquired Force Computers Inc., which has operations in California and Germany. The Company continually evaluates growth and acquisition opportunities and may pursue additional opportunities over time. There can be no assurance that the Company's historical revenue growth will continue or that the Company will successfully manage the facilities in China, Mexico, Brazil and Romania, the partnership with and acquisitions from Ericsson, the acquisitions from NCR, IBM and Mitsubishi, the alliance with Ingram Micro or any other businesses or assets it may acquire in the future. As the Company manages its existing operations and expands geographically, it may experience certain inefficiencies as it integrates new operations and manages geographically dispersed operations. In addition, the Company's results of operations could be adversely affected if its new facilities do not achieve growth sufficient to offset increased expenditures associated with geographic expansion. The Company's expenses and working capital requirements will continue to increase as the new facilities become fully operational. Should the Company increase its expenditures in anticipation of a future level of sales that does not materialize, its profitability would be adversely affected. On occasion, customers may require rapid increases in production that can place an excessive burden on the Company's resources. 20 <PAGE> Partnership with Ericsson and Related Transactions During 1997, the Company established a strategic, global manufacturing partnership with Ericsson Telecom AB's Business Area Infocom Systems. The Company established a New Product Introduction center in Sweden, and production from certain Ericsson plants worldwide was transferred to Solectron manufacturing sites around the world. In October 1997, Solectron acquired certain assets, primarily equipment and inventory, of Ericsson's printed circuit board assembly operation located in Brazil. In addition, Solectron's subsidiary, Solectron Brasil Ltda., hired approximately 370 associates formerly employed by Ericsson Telecomunicacoes S.A. in Brazil. Under the terms of the agreement, Ericsson contracted for Solectron's services from Solectron Brasil Ltda. through September 1999. Thereafter, Solectron will bear the risk of filling the manufacturing capacity at the site with renewed business from Ericsson and new business from other customers. The transactions with Ericsson entail a number of risks, including successfully managing the integration of the operations, retention of key associates, integrating purchasing operations and information systems, managing an increasingly larger and more geographically disparate business and renewing the Ericsson business or replacing it with new business after expiration of the Ericsson commitment. In addition, the completion of the transactions with Ericsson has increased Solectron's expenses and working capital requirements and there is no assurance that Solectron will achieve sufficient revenue to offset the increased expenses. There can be no assurance that Solectron will successfully manage the risks of these transactions. Acquisitions of NCR, IBM and Mitsubishi Assets On April 27, 1998, the Company acquired NCR's manufacturing assets in three cities, two in the United States and one in Ireland, for a purchase price of approximately $91 million. As part of the transaction, Solectron hired approximately 1,200 NCR manufacturing and related support associates currently employed at these locations. Under the terms of the agreement, NCR will outsource the manufacturing of certain computer, computer peripheral and server components to Solectron for at least five years. Thereafter, Solectron will bear the risk of filling the manufacturing capacity at the sites with renewed business from NCR and new business from other customers. On June 1, 1998, the Company acquired IBM's ECAT manufacturing assets in Charlotte, North Carolina and non-exclusive rights to certain IBM intellectual property for a purchase price of approximately $96 million. Under the terms of the agreement, Solectron hired approximately 700 IBM manufacturing and related support associates and the Company will provide printed circuit board assembly services to IBM in North America for the next three years. In addition, IBM has made available to Solectron 115 patents and 51 disclosures (collectively the intellectual property rights) covering a wide spectrum of technologies and capabilities. IBM will also provide to Solectron failure analysis and characterization tools for process development and manufacturing, including fault detection and isolation. On October 1, 1998, the Company acquired the wireless telephone manufacturing assets of Mitsubishi Consumer Electronics America, Inc.'s (MCEA) Cellular Mobile Telephone (CMT) division in Braselton, Georgia. MCEA is a subsidiary of Mitsubishi Electric Corporation (Mitsubishi). The purchase price was approximately $25 million. Under the terms of the agreement, the Company will provide MCEA-CMT with a full range of 21 <PAGE> manufacturing services for five years, including New Product Introduction management, printed circuit board assembly and full systems assembly for MCEA's branded and private-label cellular products sold within North America. In addition, Solectron hired approximately 400 MCEA-CMT manufacturing and support associates. The transactions with NCR, IBM and Mitsubishi entail a number of risks, including successfully managing the integration of the operations, retention of key associates, integrating purchasing operations and information systems, managing an increasingly larger and more geographically disparate business, obtaining customers other than NCR, IBM and Mitsubishi for these facilities and renewing each of the NCR, IBM and Mitsubishi business or replacing it with new business after expiration of NCR's, IBM's and Mitsubishi's respective commitments. In addition, the transactions with NCR, IBM and Mitsubishi will increase Solectron's expenses and working capital requirements and there is no assurance that Solectron will achieve sufficient revenue to offset the increased expenses. There can be no assurance that Solectron will successfully manage the risks of these transactions. Pending Acquisition of IBM Assets in Texas On January 6, 1999, the Company announced that it had signed agreements with IBM to acquire IBM's Electronic Card Assembly and Test (ECAT) manufacturing assets in Austin, Texas. Under the terms of the agreements, Solectron will provide fully integrated printed circuit board (PCB) assembly manufacturing services to IBM for the next three years. This includes physical design, early prototyping, new product launch, PCB assembly and test, volume production, end-of-life support, field return services and life-cycle management for all IBM motherboards used in their mobile products manufactured worldwide. The Company will also hire approximately 1,300 IBM design, test, and manufacturing associates. In addition, Solectron has signed agreements governing intellectual property rights and global supply for PCB assembly for motherboards used in IBM's mobile products manufactured worldwide. The transaction is expected to be completed by the end of the Company's second fiscal quarter of 1999. Completion of the transaction is subject to applicable government approvals and various conditions of closing. Alliance with Ingram Micro On October 1, 1998, the Company announced that it signed a definitive agreement with Ingram Micro Inc. under which the two companies entered into a strategic alliance to provide global build-to-order and configure-to-order assembly services for personal computers, servers and related products in the United States, Canada, Europe, Asia and Latin America. The alliance will be managed by both companies under a joint management matrix that will include a sales and marketing staff, program management, materials management, information technology resources and test and process engineers and will, in most part, utilize existing facilities, systems and personnel. The alliance with Ingram Micro entails a number of risks, including successfully establishing the joint management matrix for the alliance, retention of key associates, integrating purchasing operations and information systems and obtaining customers for the services to be provided by the alliance. In addition, the alliance with Ingram Micro will increase Solectron's expenses and working capital requirements and there is no assurance that Solectron will achieve sufficient revenue to offset the increased expenses. There can be no assurance that Solectron 22 <PAGE> will successfully manage the risks of this alliance or that the terms of the alliance will be finalized. International Operations As a result of its international sales and facilities, the Company's operations are subject to risks of doing business abroad, including but not limited to, fluctuations in the value of currency, export duties, changes to import and export regulations (including quotas), possible restrictions on the transfer of funds, associate turnover, labor unrest, longer payment cycles, greater difficulty in collecting accounts receivable, the burdens and costs of compliance with a variety of foreign laws and in certain parts of the world, political instability. In addition, the Company has operations in several locations that are considered to have highly inflationary economies or volatile currencies, including Mexico, Brazil, China and Romania. While to date these factors have not had an adverse material impact on the Company's results of operations, there can be no assurance that there will not be such an impact in the future. Southeast Asia and Latin America are currently experiencing currency, economic and political instability. To date, the Company's operations have not experienced significant adverse effects from this instability. However, to the extent the Company's worldwide customers sell the products manufactured by Solectron into the Southeast Asia and Latin America markets, the customers' sales may be adversely affected, which could decrease demand for the Company's manufacturing services. The Company cannot predict whether such a decrease in demand will materialize and if it does, whether it will have an adverse material effect on the Company's results of operations. The Malaysian government recently adopted currency exchange controls, including controls on ringgit held outside Malaysia, and established a fixed exchange rate for the ringgit against the U.S. dollar. The Company does not hold ringgit outside of Malaysia and therefore will not be affected by these controls. The fixed exchange rate, when applied to local expenses denominated in ringgit, will result in higher expenses when translated to U.S. dollars. However, such local expenses represent a small percentage of the Company's total costs and therefore the Company's results of operations will not be significantly affected in the near future. The long term impact of such controls is not predictable due to dynamic economic conditions that also affect or are affected by other regional or global economies. The Company has been granted a tax holiday for its Malaysia sites which is effective through January 31, 2002, subject to certain conditions. The Company has also been granted various tax holidays in China. These tax holidays are effective for various terms and are subject to certain conditions. There is no assurance that the current tax holidays will not be terminated or modified or that any future tax holidays that the Company may seek will be granted. If the current tax holidays are terminated or modified or if additional tax holidays are not granted in the future, the Company's effective income tax rate would likely increase. Foreign Exchange Rate Sensitivity The Company does not use derivative financial instruments for speculative purposes. The Company's policy is to hedge its foreign currency denominated transactions in a manner that substantially offsets the effects of changes in foreign currency exchange rates. The Company 23 <PAGE> uses foreign currency borrowings and foreign currency forward contracts to hedge the currency risks of transactions denominated in foreign currencies. Gains and losses on these foreign currency hedges are generally offset by corresponding losses and gains on the underlying transaction. At November 30, 1998, approximately 88% of its derivative instruments mature in three months or less. There were no material deferred gains or losses at November 30, 1998, and the Company does not hold or issue foreign exchange contracts for trading purposes. In addition, the Company's international operations in some instances act as a natural hedge because both operating expenses and a portion of sales are denominated in local currency. In these instances, although an unfavorable change in the exchange rate of a foreign currency against the U.S. dollar will result in lower sales when translated to U.S. dollars, operating expenses will also be lower in these circumstances. However, because less than 10% of net sales are denominated in currencies other than the U.S. dollar, the Company does not believe its total exposure to be significant. Euro Conversion Issues Effective January 1, 1999, 11 of the 15 member countries of the European Union (the participating countries) established fixed conversion rates between their existing sovereign currencies and the euro. For three years after the introduction of the euro, the participating countries can perform financial transactions in either the euro or their original local currencies. This will result in a fixed exchange rate among the participating countries, whereas the euro (and the participating countries' currencies in tandem) will continue to float freely against the U.S. dollar and other currencies of non-participating countries. The Company has a task force which is constantly evaluating the effects of the euro conversion on the Company. Solectron does not believe that significant modifications of its information technology systems are needed in order to handle euro transactions and reporting, and the Company is in the process of evaluating its tax positions and all outstanding contracts in currencies of the participating countries to determine the effects, if any, of the euro conversion. The Company does not expect the euro conversion to have a significant impact on its derivatives as the Company has already modified its hedging policies to take the euro conversion into account. While the Company currently believes that the effects of the conversion do not have a significant adverse material effect on the Company's business and operations, there can be no assurances that such conversion will not have an adverse material effect on the Company's results of operations and financial position due to competitive and other factors that may be affected by the conversion that cannot be predicted by the Company. Availability of Components A substantial portion of the Company's net sales is derived from turnkey manufacturing in which the Company provides both materials procurement and assembly. In turnkey manufacturing, the Company potentially bears the risk of component price increases, which could adversely affect the Company's gross profit margins. At various times there have been shortages of components in the electronics industry. If significant shortages of components should occur, the Company may be forced to delay manufacturing and shipments, which could have an adverse material effect on the Company's results of operations. 24 <PAGE> Potential Fluctuations in Operating Results The Company's operating results are affected by a number of factors, including the mix of turnkey and consignment projects, the mix of printed circuit board assembly and systems build projects, capacity utilization, price competition, the degree of automation that can be used in the assembly process, the efficiencies that can be achieved by the Company in managing inventories and fixed assets, the timing of orders from major customers, fluctuations in demand for customer products, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, and increased costs and shortages of components or labor. Turnkey manufacturing currently represents a substantial portion of Solectron's sales. Turnkey projects, in which Solectron procures some or all of the components necessary for production, typically generate higher net sales and higher gross profits with lower gross margin percentages than consignment projects due to the inclusion in Solectron's operating results of sales and costs associated with the purchase and sale of components. Solectron assembles products with varying degrees of material content, which may cause Solectron's gross margin to fluctuate. In addition, the degree of start-up costs and inefficiencies associated with new sites and new customer projects may affect Solectron's gross margin. All of these factors can cause fluctuations in the Company's operating results. Interest Rate Sensitivity The primary objective of the Company's investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, the Company maintains its portfolio of cash-equivalents and short-term investments in a variety of securities, including both government and corporate obligations, certificates of deposit and money market funds. As of November 30, 1998, approximately 85% of the Company's portfolio mature in less than 6 months. Because the Company's investments are diversified and of relatively short maturity, a hypothetical 10% increase in interest rates would not have a material effect on the Company's financial position. The Company has entered into an interest rate swap transaction under which Solectron pays a fixed rate of interest hedging against the variable interest rates charged by the lessor for the facility lease at Milpitas, California. The interest rate swap expires in the year of 2002 which coincides with the maturity date of the lease term. As the Company intends to hold the interest rate swap until the maturity date, the Company is not subject to market risk. In fact, such interest rate swap has fixed the interest rate for the facility lease reducing interest rate risk. The Company's debt instruments are subject to fixed interest rates and, in the case of the convertible notes, to fixed conversion ratios into the Company's common stock. In addition, the amount of principal to be repaid at maturity is also fixed. Therefore, the Company is not subject to market risk from its debt instruments. Competition The electronics manufacturing services industry is comprised of a large number of companies, several of which have achieved substantial market share. The Company also faces competition from current and prospective customers that evaluate Solectron's capabilities against the merits of manufacturing products internally. Solectron competes with different 25 <PAGE> companies depending on the type of service or geographic area. Certain competitors may have greater manufacturing, financial, research and development and marketing resources than the Company. The Company believes that the primary bases of competition in its targeted markets are manufacturing technology, quality, responsiveness, the provision of value-added services and price. To be competitive, the Company must provide technologically advanced manufacturing services, high product quality levels, flexible delivery schedules and reliable delivery of finished products on a timely and price competitive basis. The Company currently may be at a competitive disadvantage as to price when compared to manufacturers with lower cost structures, particularly with respect to manufacturers with established facilities where labor costs are lower. Intellectual Property Protection The Company's ability to compete may be affected by its ability to protect its proprietary information. The Company holds a limited number of U.S. patents related to the process and equipment used in its surface mount technology. The Company's subsidiary, Force Computers, also holds a number of patents related to VME technology. The Company believes these patents are valuable. However, there can be no assurance that these patents will provide meaningful protection for the Company's manufacturing process and equipment innovations or Force's technology. There can be no assurance that third parties will not assert infringement claims against the Company or its customers in the future, either against the patents the Company holds itself or against the IBM patents and other intellectual property rights that the Company has the right to practice. In the event a third party does assert an infringement claim, the Company may be required to expend significant resources to develop a non-infringing manufacturing process or technology or to obtain licenses to the manufacturing process or technology that is the subject of litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available on commercially acceptable terms, if at all. In addition, such litigation could be lengthy and costly and could have an adverse material effect on the Company's financial condition regardless of the outcome of such litigation. Environmental Compliance The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present and future regulations could subject it to future liabilities or the suspension of production. In addition, such regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. Dependence on Key Personnel and Skilled Associates The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical associates. The loss of services of certain key personnel could have an adverse material effect on the Company. The Company's business also depends upon its ability to continue to attract and retain senior managers and skilled associates. Failure to do so could adversely affect the Company's operations. 26 <PAGE> Possible Volatility of Market Price of Common Stock The trading price of the common stock is subject to significant fluctuations in response to variations in quarterly operating results, general conditions in the electronics industry and other factors. In addition, the stock market is subject to price and volume fluctuations that affect the market price for many high technology companies in particular, and that often are unrelated to operating performance. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Management's Discussion and Analysis of Financial Condition and Results of Operations "Trends and Uncertainties -- Interest Rate Sensitivity" and "-- Foreign Exchange Rate Sensitivity." 27 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES Part II. OTHER INFORMATION 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 27.1 Financial Data Schedule - Three Months Ended November 27, 1998 27.2 Restated Financial Data Schedule - Three Months Ended November 28, 1997 (b) Reports on Form 8-K None 28 <PAGE> SOLECTRON CORPORATION 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. SOLECTRON CORPORATION (Registrant) Date: January 8, 1999 By: /s/ Susan Wang ---------------------- Susan S. Wang Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 29 <PAGE> EXHIBIT INDEX Exhibit Number Document - -------------- -------- 27.1 Financial Data Schedule - Three Months Ended November 27, 1998 27.2 Restated Financial Data Schedule - Three Months Ended November 28, 1997 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE - 11/27/98 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <CIK> 0000835541 <NAME> SOLECTRON CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> AUG-27-1999 <PERIOD-END> NOV-27-1998 <CASH> 158,037 <SECURITIES> 36,776 <RECEIVABLES> 876,535 <ALLOWANCES> 4,361 <INVENTORY> 901,163 <CURRENT-ASSETS> 2,106,429 <PP&E> 971,354 <DEPRECIATION> 439,739 <TOTAL-ASSETS> 2,712,764 <CURRENT-LIABILITIES> 1,047,368 <BONDS> 387,836 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 118 <OTHER-SE> 1,272,926 <TOTAL-LIABILITY-AND-EQUITY> 2,712,764 <SALES> 1,945,643 <TOTAL-REVENUES> 1,945,643 <CGS> 1,769,745 <TOTAL-COSTS> 1,769,745 <OTHER-EXPENSES> 78,990 <LOSS-PROVISION> (280) <INTEREST-EXPENSE> 5,541 <INCOME-PRETAX> 96,128 <INCOME-TAX> 32,203 <INCOME-CONTINUING> 63,925 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 63,925 <EPS-PRIMARY> 0.54 <EPS-DILUTED> 0.52 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.2 <SEQUENCE>3 <DESCRIPTION>RESTATED FINANCIAL DATA SCHEDULE - 11/28/97 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <RESTATED> <CIK> 0000835541 <NAME> SOLECTRON CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> AUG-28-1998 <PERIOD-END> NOV-28-1997 <CASH> 113,947 <SECURITIES> 298,945 <RECEIVABLES> 523,406 <ALLOWANCES> 3,913 <INVENTORY> 590,058 <CURRENT-ASSETS> 1,581,652 <PP&E> 729,939 <DEPRECIATION> 351,740 <TOTAL-ASSETS> 2,010,024 <CURRENT-LIABILITIES> 640,330 <BONDS> 386,785 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 115 <OTHER-SE> 979,284 <TOTAL-LIABILITY-AND-EQUITY> 2,010,024 <SALES> 1,136,820 <TOTAL-REVENUES> 1,136,820 <CGS> 1,013,061 <TOTAL-COSTS> 1,013,061 <OTHER-EXPENSES> 56,457 <LOSS-PROVISION> (136) <INTEREST-EXPENSE> 6,513 <INCOME-PRETAX> 67,502 <INCOME-TAX> 22,614 <INCOME-CONTINUING> 44,888 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 44,888 <EPS-PRIMARY> 0.39 <EPS-DILUTED> 0.38 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

SVU

https://www.sec.gov/Archives/edgar/data/95521/0001045969-99-000006.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, Jmam5oLJTxAMUpTtZlhsrq9DZbPBI3V4ovexKJDODFL3Du5QegmcNh8vPphYHvAU fvOpnfYDD9pqBcjRnjEhzQ== <SEC-DOCUMENT>0001045969-99-000006.txt : 19990111 <SEC-HEADER>0001045969-99-000006.hdr.sgml : 19990111 ACCESSION NUMBER: 0001045969-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981205 FILED AS OF DATE: 19990108 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: 0222 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05418 FILM NUMBER: 99502886 BUSINESS ADDRESS: STREET 1: 11840 VALLEY VIEW RD STREET 2: NULL 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 5, 1998. [ ] 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 incorporation or organization) Identification No.) 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 January 2, 1999 is as follows: Title of Each Class Shares Outstanding ------------------- ------------------ Common Shares 120,066,711 <PAGE> PART I - FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Item 1: Financial Statements - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS - -------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - -------------------------------------------------------------------------------- (In thousands, except per share data) <TABLE> <CAPTION> Third Quarter (12 weeks) ended Dec 5, 1998 % of sales Nov 29, 1997 % of sales - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 4,079,696 100.00% $ 4,004,565 100.00% Costs and expenses: Cost of sales 3,665,933 89.86 3,600,773 89.92 Selling and administrative expenses 312,668 7.66 306,827 7.66 Amortization of goodwill 4,875 0.12 4,568 0.11 Interest Interest expense 28,749 0.70 29,859 0.75 Interest income 5,872 0.14 4,778 0.12 ------------------------------------------------------ Interest expense, net 22,877 0.56 25,081 0.63 ------------------------------------------------------ Total costs and expenses 4,006,353 98.20 3,937,249 98.32 ------------------------------------------------------ Earnings before income taxes 73,343 1.80 67,316 1.68 Provision for income taxes Current 26,327 25,939 Deferred 1,756 1,128 ------------------------------------------------------ Income tax expense 28,083 0.69 27,067 0.67 ------------------------------------------------------ Net earnings $ 45,260 1.11% $ 40,249 1.01% ====================================================== Net earnings per common share - basic $ .38 $ .33 Net earnings per common share - diluted $ .37 $ .33 Weighted average number of common shares outstanding Basic 120,191 120,422 Diluted 121,861 121,742 Dividends declared per common share $ .1325 $ .1300 </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. 2 <PAGE> CONSOLIDATED STATEMENTS OF EARNINGS - -------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - -------------------------------------------------------------------------------- (In thousands, except per share data) <TABLE> <CAPTION> Year-to-date (40 weeks) Ended ------------------------------------------------------- Dec 5, 1998 % of sales Nov 29, 1997 % of sales - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 13,219,590 100.00% $12,903,880 100.00% Costs and expenses: Cost of sales 11,884,239 89.90 11,605,673 89.94 Selling and administrative expenses 1,014,846 7.68 990,778 7.67 Amortization of goodwill 15,970 0.12 15,162 0.12 Interest Interest expense 94,345 0.71 101,026 0.78 Interest income 16,162 0.12 13,808 0.10 ------------------------------------------------------- Interest expense, net 78,183 0.59 87,218 0.68 ------------------------------------------------------- Total costs and expenses 12,993,238 98.29 12,698,831 98.41 ------------------------------------------------------- Earnings before equity in earnings of ShopKo and income taxes 226,352 1.71 205,049 1.59 Equity in earnings and gain on sale of ShopKo - - 93,364 0.72 ------------------------------------------------------- Earnings before income taxes 226,352 1.71 298,413 2.31 Provision for income taxes Current 83,826 113,326 Deferred 5,568 5,957 ------------------------------------------------------- Income tax expense 89,394 0.67 119,283 0.92 ------------------------------------------------------- Net earnings $ 136,958 1.04% $ 179,130 1.39% ======================================================= Net earnings per common share - basic $ 1.14 $ 1.41 Net earnings per common share - diluted $ 1.12 $ 1.40 Weighted average number of common shares outstanding Basic 120,509 126,944 Diluted 122,069 128,022 Dividends declared per common share $ .3950 $ .3850 </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. 3 <PAGE> CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ SUPERVALU INC. and Subsidiaries Third Quarter as of Fiscal Year End - ------------------------------------------------------------------------------------ (In thousands) December 5, February 28, Assets 1998 1998 - ------------------------------------------------------------------------------------ <S> <C> <C> Current Assets Cash and cash equivalents $ 6,264 $ 6,100 Receivables, less allowance for losses of $15,557 at December 5, 1998 and $13,415 at February 28, 1998 451,975 410,741 Inventories 1,283,196 1,115,529 Other current assets 75,363 79,690 ----------------------------- Total current assets 1,816,798 1,612,060 Long-term notes receivable 138,051 178,692 Property, plant and equipment, net 1,671,428 1,589,601 Goodwill 503,302 498,438 Other assets 227,772 214,219 ----------------------------- Total assets $4,357,351 $4,093,010 ============================= Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------ Current Liabilities Notes payable $ 289,458 $ 149,002 Accounts payable 1,070,811 924,371 Current debt and obligations under capital leases 233,162 179,594 Other current liabilities 208,110 204,193 ----------------------------- Total current liabilities 1,801,541 1,457,160 Long-term debt and obligations under captial leases 1,109,135 1,260,728 Other liabilities and deferred income taxes 177,273 173,217 Total stockholders' equity 1,269,402 1,201,905 ----------------------------- Total liabilities and stockholders' equity $4,357,351 $4,093,010 ============================= All data subject to year-end audit. See notes to consolidated financial statements. </TABLE> 4 <PAGE> CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - -------------------------------------------------------------------------------- (In thousands, except per share data) <TABLE> <CAPTION> 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 22, 1997 $5,908 $150,670 $ 99 $ (231,871) $1,382,617 $1,307,423 Net earnings - - - - 230,757 230,757 Sales of common stock under option plans - - (4,123) 51,623 - 47,500 Cash dividends declared on common stock - $.515 per share - - - - (63,678) (63,678) Compensation under employee incentive plans - - 6,951 11,289 - 18,240 Purchase of shares for treasury - - - (338,337) - (338,337) - ---------------------------------------------------------------------------------------------------------------------- Balances at February 28,1998 5,908 150,670 2,927 (507,296) 1,549,696 1,201,905 Net earnings - - - - 136,958 136,958 Sales of common stock under option plans - - (5,801) 28,270 - 22,469 Cash dividends declared on common stock - $.395 per share - - - - (48,119) (48,119) Compensation under employee incentive plans - - 1,077 4,492 - 5,569 Treasury shares exchanged for acquisition - - 1,918 2,167 - 4,085 Purchase of shares for treasury - - - (53,465) - (53,465) - ---------------------------------------------------------------------------------------------------------------------- Balances at December 5, 1998 $5,908 $150,670 $ 121 $ (525,832) $1,638,535 $1,269,402 ====================================================================================================================== </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. 5 <PAGE> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - -------------------------------------------------------------------------------- (In thousands) - -------------------------------------------------------------------------------- Year-to-date (40 weeks ended) - -------------------------------------------------------------------------------- December 5, November 29, 1998 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Net cash provided by operating activities $ 243,985 $ 179,571 - ------------------------------------------------------------------------------- Cash flows from investing activities Proceeds from sale of ShopKo stock -- 305,153 Additions to long-term notes receivable (40,454) (58,650) Proceeds received on long-term notes receivable 92,325 27,040 Proceeds from sale of property, plant and equipment 55,017 66,971 Purchase of property, plant and equipment (194,669) (163,344) Business acquisition, net of cash acquired (37,438) (23,523) Other cash used in investing activities (18,511) (31,424) - ------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (143,730) 122,223 - ------------------------------------------------------------------------------- Cash flows from financing activities Net increase in checks outstanding, net of deposits 39,042 70,576 Net increase of short-term notes payable 140,456 59,827 Proceeds from issuance of long-term debt 83,500 -- Repayment of long-term debt (258,483) (74,631) Dividends paid (48,099) (49,507) Payments for purchase of treasury stock (53,465) (288,819) Other cash provided by (used in) financing activities (3,042) 13,847 - ------------------------------------------------------------------------------- Net cash used in financing activities (100,091) (268,707) - ------------------------------------------------------------------------------- Net increase in cash and cash equivalents 164 33,087 Cash and cash equivalents at beginning of year 6,100 6,539 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of third quarter $ 6,264 $ 39,626 =============================================================================== Supplemental Information: Pretax LIFO income (expense) $ 1,729 $ (3,394) Pretax depreciation and amortization $ 174,837 $ 174,844 All data subject to year-end audit. See notes to consolidated financial statements. 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 1998 annual report of SUPERVALU INC. ("SUPERVALU" or the "company"). Stock Split - ----------- On July 1, 1998 the company announced a two-for-one stock split, to be effected in the form of a 100 percent stock dividend for shareholders of record on July 20, 1998. All share and per share data have been adjusted to reflect the stock dividend. 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 condensed consolidated financial position of the company and its subsidiaries at December 5, 1998 and November 29, 1997 and the results of the company's operations and condensed cash flows for the periods then ended. These interim results are not necessarily indicative of the results of the fiscal years as a whole. 7 <PAGE> Item 2: Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations ------------- Results of Operations - --------------------- RESULTS FOR THE QUARTER: The company reported sales of $4.1 billion, net earnings of $45.3 million, basic earnings per share of $.38 and diluted earnings per share of $.37. Last year's sales were $4.0 billion, net earnings were $40.2 million and basic and diluted earnings per share were $.33. The following table sets forth net sales by segment: Net Sales by Segment - ------------------------------------------------------------------------------ (In thousands) Third Quarter (12 weeks) - ------------------------------------------------------------------------------ December 5, 1998 November 29, 1997 - ------------------------------------------------------------------------------ Net Sales % of Total Net Sales % of Total - ------------------------------------------------------------------------------ Food distribution $3,638,591 89.2 % $3,561,766 88.9 % Retail food 1,158,982 28.4 1,101,428 27.5 Less: Eliminations (717,877) (17.6) (658,629) (16.4) - ------------------------------------------------------------------------------ Total net sales $4,079,696 100.0 % $4,004,565 100.0 % ============================================================================== Net sales Net sales increased 1.9 percent compared to last year, positively impacted by a 2.2 percent increase in food distribution sales and a 5.2 percent increase in retail food sales. Sales gains were achieved despite the low inflationary environment. Food distribution continued to achieve sales increases by adding net new independent customers and stores, and also benefited from strengths in owned retail stores. Retail food sales increased over last year primarily due to new store openings and acquisitions over the past twelve months. Same-store sales increased 0.3 percent, which were impacted by cannibalization and competitive activity. The 5.2 percent increase in retail food sales was achieved despite the closing or sale of underperfoming stores in the prior year. Gross profit Gross profit as a percentage of net sales was 10.1 percent, even with last year. Food distribution and retail food gross profit as a percent of net sales were consistent with last year. Selling and administrative expenses Selling and administrative expenses were 7.8 percent of net sales, even with last year. Food distribution and retail food selling and administrative expenses as a percent of net sales were consistent with last year. 8 <PAGE> Operating earnings The company's operating earnings (earnings before interest and income taxes) increased 4.1 percent to $96.2 million compared with $92.4 million last year. Operating earnings before depreciation and amortization increased to $148.9 million compared with $144.6 million last year, a 2.9 percent increase. Food distribution operating earnings were $75.2 million compared to $76.6 million last year. Results for food distribution were impacted by costs associated with the startup of the new regional distribution facility in the Midwest. Retail food operating earnings increased 33.5 percent to $28.5 million from $21.3 million last year. The increase in retail food operating earnings was due to the sales increase and selling and administrative expense controls. Interest expense and income Interest expense decreased to $28.7 million compared with $29.9 million last year, reflecting lower average interest rates and borrowings. Interest income increased to $5.9 million compared with $4.8 million last year, primarily due to increased retailer financing. Income taxes The effective tax rate decreased to 38.3 percent compared with 40.2 percent last year reflecting an adjustment to the company's forecasted annual effective tax rate to 39.5 percent. Net earnings Net earnings were $45.3 million or $.38 per share - basic ($.37 per share - diluted) compared with last year's net earnings of $40.2 million or $.33 per share - basic and diluted. Weighted average shares - diluted increased slightly to 121.9 million compared with last year's 121.7 million. YEAR-TO-DATE RESULTS: The following table sets forth net sales by segment: Net Sales by Segment - ------------------------------------------------------------------------------ (In thousands) Year-to-Date (40 weeks) - ------------------------------------------------------------------------------ December 5, 1998 November 29, 1997 - ------------------------------------------------------------------------------ Net Sales % of Total Net Sales % of Total - ------------------------------------------------------------------------------ Food distribution $11,697,580 88.5 % $11,396,050 88.3 % Retail food 3,711,984 28.1 3,547,526 27.5 Less: Eliminations (2,189,974) (16.6) (2,039,696) (15.8) - ------------------------------------------------------------------------------ Total net sales $13,219,590 100.0 % $12,903,880 100.0 % ============================================================================== Net sales Net sales increased 2.4 percent compared to last year, positively impacted by a 2.6 percent increase in food distribution sales and a 4.6 percent increase in retail food sales. Sales gains were achieved despite the low inflationary environment. Food distribution continued to achieve sales increases by adding net new independent customers and stores, and also benefited from strengths in owned retail stores. Retail food sales increased over last year primarily due to new store openings over the past twelve months and an increase in same store sales of 1.5 percent. The 9 <PAGE> 4.6 percent increase in retail food sales was achieved despite the closing or sale of underperforming stores in the prior year. Gross profit Gross profit as a percentage of net sales was 10.1 percent, even with last year. Food distribution and retail food gross profit as a percent of net sales were consistent with last year. Selling and administrative expenses Selling and administrative expenses were 7.8 percent of net sales, even with last year. Food distribution and retail food selling and administrative expenses as a percent of net sales were consistent with last year. Operating earnings The company's operating earnings (earnings before interest, equity in earnings and gain on sale of ShopKo Stores, Inc. ("Shopko") and income taxes) increased to $304.5 million compared with $292.3 million last year. Operating earnings before depreciation and amortization increased to $479.4 million compared with $467.1 million last year, a 2.6 percent increase. Food distribution operating earnings increased 0.7 percent to $235.5 million from $233.8 million. Retail food operating earnings increased 17.8 percent to $91.7 million from $77.8 million. The increase in retail food operating earnings was due to the strong same store sales performance and selling and administrative expense controls. Interest expense and income Interest expense decreased to $94.3 million compared with $101.0 million last year, reflecting lower average interest rates and borrowings. Interest income increased to $16.2 million compared with $13.8 million last year, primarily due to increased retailer financing. Equity in earnings and gain on sale of ShopKo During the second quarter of last year, the company exited its remaining 46 percent investment in ShopKo. The transaction resulted in a pretax gain of $90.0 million or $.42 per share last year. Due to the sale, there was no equity in earnings recorded in the current year compared with $3.3 million or $.03 per share last year. Net earnings Net earnings were $137.0 million or $1.14 per share - basic ($1.12 per share - diluted) compared with last year's net earnings of $179.1 million or $1.41 per share - basic ($1.40 per share - diluted). Excluding ShopKo, last year's net earnings would have been $122.1 million or $.96 per share - basic ($.95 per share - diluted). Weighted average shares - diluted declined to 122.1 million compared with last year's 128.0 million primarily due to the repurchase of 13.8 million shares in the second quarter of last year, with proceeds from the ShopKo transaction. 10 <PAGE> Liquidity and Capital Resources - ------------------------------- Internally generated funds from operations continued to be the major source of liquidity and capital growth. Cash provided from operations year-to-date was $244.0 million compared with $179.6 million last year. Cash provided from operations and a net increase in short term notes payable of $140.5 million were primarily used to repay long-term debt of $258.5 million and finance capital expenditures of $194.7 million. In the third quarter, $60 million of notes receivable were sold and the proceeds were used to reduce short-term notes payable. 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 $159 million of additional debt securities. During the year the company issued $83.5 million of bonds under the existing "shelf registration". The bonds issued had average coupon rates of 6.6 percent with seven and eight year maturities. A $400 million revolving credit agreement, with rates tied to LIBOR plus .180 to .275 percent, also is in place and expires in October 2002. The revolving credit agreement is available for general corporate purposes and to support the company's commercial paper program. There were no drawings on the revolving credit agreement during the year. Total commercial paper outstanding as of the end of the third quarter was $263 million. Maturities of debt will depend on management's views with respect to the relative attractiveness of interest rates at the time of issuance. Year 2000 - --------- General SUPERVALU's company wide Year 2000 Project ("Project") is proceeding on schedule. The Project is addressing the issue of application systems, information technology (IT) systems and technologies which include embedded systems being able to distinguish between the year 1900 and the year 2000. In 1996, the company began establishing processes for evaluating and managing the risks associated with the Project. The Project is divided into six components. These components include program management, communications, application conversions and technology upgrades, contingency planning, quality assurance and external entities. The company is using both internal and external resources to implement the Project. The work to complete the Project is expected to be completed by mid to late 1999. The company has relationships with a significant number of key business partners. The company has initiated formal communications with its key business partners and has initiated formal contingency planning processes to mitigate the risk to the company if the business partners are not prepared for the year 2000. This is planned to be completed by mid 1999. There can be no guarantee that the business partners will successfully and timely reprogram or replace and test all of their own computer hardware, software and process control systems. While the failure of a single business partner to achieve year 2000 compliance should not have a material adverse effect on the company's results of operations, the failure of several key business partners could have such an effect. 11 <PAGE> Costs The total costs associated with required modifications to become Year 2000 compliant is not expected to be material to the company's financial position. The company has incurred costs to date of $18.7 million. Estimated costs for the remainder of work is $7.6 million for a total projected Project cost of $26.3 million. Risks While the effort to assess and correct the company's Year 2000 issues are expected to be complete prior to related forecasted failure horizons, the company is taking specific measures to assess risks and develop specific contingency plans. A formal process is being developed to assess business critical functions and create action plans which will describe the communications, operations and IT activities that will be conducted if the contingency plan must be executed. The costs of the Project and the completion dates are based on management's best estimates, which were derived from assumptions of future events including the availability of resources, key business partner modification plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could vary due to uncertainties. The company's Year 2000 efforts are ongoing and its overall Project will continue to evolve as new information becomes available. The failure to correct a material Year 2000 problem could result in an interruption in certain normal business activities and operations. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third parties on whom the company relies, the company is unable to determine at this time whether the consequences of Year 2000 failures will have a material adverse impact on the company's results of operation but the company believes that, with the implementation of new business systems and completion of the Project as scheduled, the possibility of significant interruptions of normal operations should be reduced. 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 to the company's Annual Report on Form 10-K for the fiscal year ended February 28, 1998 and under the caption "Year 2000" in this Form 10-Q; 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: (11) Computation of Earnings Per Common Share. (27) Financial Data Schedule. (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 8, 1999 By: /s/ Pamela K. Knous ---------------------------------- Pamela K. Knous Executive Vice President, Chief Financial Officer (Authorized officer of Registrant) 13 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER COMMON SHARE <TEXT> <PAGE> Exhibit 11 SUPERVALU INC. Computation of Earnings per Common Share (unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- Third Quarter Ended Year-to-date Ended (In thousands, except per share amounts) Dec. 5, 1998 Nov. 29, 1997 Dec. 5, 1998 Nov. 29, 1997 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Earnings per share - basic Income available to common shareholders $ 45,260 $ 40,249 $136,958 $179,130 Weighted average shares outstanding 120,191 120,422 120,509 126,944 Earnings per share - basic $.38 $.33 $1.14 $1.41 Earnings per share - diluted Income available to common shareholders $ 45,260 $ 40,249 $136,958 $179,130 Weighted average shares outstanding 120,191 120,422 120,509 126,944 Dilutive impact of options outstanding 1,670 1,320 1,560 1,078 -------- -------- -------- -------- Weighted average shares and potential dilutive shares outstanding 121,861 121,742 122,069 128,022 Earnings per share - dilutive $.37 $.33 $1.12 $1.40 - ------------------------------------------------------------------------------------------------------------- </TABLE> Basic earnings per share is calculated using income available to common shareholders divided by the weighted average of common shares outstanding during the period. Diluted earnings per share is similar to basic earnings per share except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, such as options, had been issued. </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 5, 1998 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE 40 WEEKS ENDED DECEMBER 5, 1998 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-27-1999 <PERIOD-START> MAR-01-1998 <PERIOD-END> DEC-05-1998 <CASH> 6,264 <SECURITIES> 0 <RECEIVABLES> 467,532 <ALLOWANCES> (15,557) <INVENTORY> 1,283,196 <CURRENT-ASSETS> 1,816,798 <PP&E> 2,876,434 <DEPRECIATION> (1,205,006) <TOTAL-ASSETS> 4,357,351 <CURRENT-LIABILITIES> 1,801,541 <BONDS> 1,109,135 <PREFERRED-MANDATORY> 0 <PREFERRED> 5,908 <COMMON> 150,670 <OTHER-SE> 1,112,824 <TOTAL-LIABILITY-AND-EQUITY> 4,357,351 <SALES> 13,219,590 <TOTAL-REVENUES> 13,219,590 <CGS> 11,884,239 <TOTAL-COSTS> 11,884,239 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 5,342 <INTEREST-EXPENSE> 94,345 <INCOME-PRETAX> 226,352 <INCOME-TAX> 89,394 <INCOME-CONTINUING> 136,958 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 136,958 <EPS-PRIMARY> 1.14 <EPS-DILUTED> 1.12 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

SYY

https://www.sec.gov/Archives/edgar/data/96021/0000096021-99-000003.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, RVNGSZzeu0FhaGIySZHjqzgiB+DR+AsbOIO9yXcjIskiyjuT7hnmoCp0uQBVlZuX KexYQUhRDiCm810CTrgClg== <SEC-DOCUMENT>0000096021-99-000003.txt : 19990208 <SEC-HEADER>0000096021-99-000003.hdr.sgml : 19990208 ACCESSION NUMBER: 0000096021-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981226 FILED AS OF DATE: 19990205 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: SEC FILE NUMBER: 001-06544 FILM NUMBER: 99522027 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 18 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 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 [ ] 332,929,393 shares of common stock were outstanding as of January 22, 1999. 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 27, 1998, consolidated balance sheet which was taken from the audited financial statements included in the Company's Fiscal 1998 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 1998 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. 3 <TABLE> SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data) <CAPTION> Dec. 26, June 27, Dec. 27, 1998 1998 1997 ---------- --------- ----------- (Unaudited) (Audited) (Unaudited) ASSETS ---------- <S> <C> <C> <C> Current assets Cash $ 109,246 $ 110,288 $ 99,824 Accounts and notes receivable, less allowances of $35,539, $20,081 and $29,843 1,310,972 1,215,610 1,195,930 Inventories 888,088 790,501 810,192 Deferred taxes 34,757 37,073 27,738 Prepaid expenses 27,934 26,595 24,198 ---------- ---------- ---------- Total current assets 2,370,997 2,180,067 2,157,882 Plant and equipment at cost, less depreciation 1,196,871 1,151,054 1,097,718 Goodwill and intangibles, less amortization 306,931 307,959 243,496 Other assets 156,330 141,109 131,427 ---------- ---------- ---------- Total other assets 463,261 449,068 374,923 ---------- ---------- ---------- Total assets $4,031,129 $3,780,189 $3,630,523 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Notes payable $ 10,812 $ 42,333 $ 24,912 Accounts payable 1,001,364 849,159 900,433 Accrued expenses 279,951 292,255 235,755 Accrued income taxes 5,274 25,523 10,968 Current maturities of long-term debt 115,387 114,920 15,289 ---------- --------- ---------- Total current liabilities 1,412,788 1,324,190 1,187,357 Long-term debt 975,496 867,017 829,152 Deferred taxes 224,548 232,193 218,152 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 382,587,450, 382,587,450 and 191,293,725 shares 382,587 382,587 191,294 Paid-in capital 1,524 --- 30,842 Retained earnings 1,909,068 1,796,488 1,855,697 ---------- ---------- ---------- 2,293,179 2,179,075 2,077,833 Less cost of treasury stock, 49,271,826, 47,578,288 and 20,999,811 shares 874,882 822,286 681,971 ---------- ---------- ---------- Total shareholders' equity 1,418,297 1,356,789 1,395,862 ---------- ---------- ---------- Total liabilities and shareholders' equity $4,031,129 $3,780,189 $3,630,523 ========== ========== ========== <FN> Note: The June 27, 1998 balance sheet has been taken from the audited financial statements at that date. Share information has been adjusted for the 2-for-1 stock split on March 20, 1998. 4 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. 26, Dec. 27, Dec. 26, Dec. 27, 1998 1997 1998 1997 ------------ ------------ ------------ -------------- <S> <C> <C> <C> <C> Sales $ 8,439,305 $ 7,614,340 $ 4,246,675 $ 3,786,096 Costs and expenses Cost of sales 6,895,541 6,213,796 3,469,496 3,082,913 Operating expenses 1,224,711 1,104,921 616,899 551,889 Interest expense 35,328 27,640 18,397 14,500 Other, net 415 (425) 245 (303) ------------ ----------- ------------ ------------ Total costs and expenses 8,155,995 7,345,932 4,105,037 3,648,999 ------------ ----------- ------------ ------------ Earnings before income taxes 283,310 268,408 141,638 137,097 Income taxes 110,491 104,679 55,239 53,468 ------------ ------------ ------------ ------------ Earnings before cumulative effect of accounting change 172,819 163,729 86,399 83,629 Cumulative effect of accounting change --- (28,053) --- (28,053) ____________ ____________ ____________ ____________ Net earnings $ 172,819 $ 135,676 $ 86,399 $ 55,576 ============ ============ ============ ============ Earnings before accounting change: Basic earnings per share $ 0.52 $ 0.48 $ 0.26 $ 0.24 ============ ============ ============ ============ Diluted earnings per share $ 0.51 $ 0.47 $ 0.26 $ 0.24 ============ ============ ============ ============ Cumulative effect of accounting change: Basic earnings per share $ --- $ (0.08) $ --- $ (0.08) ============ ============ ============ ============ Diluted earnings per share $ --- $ (0.08) $ --- $ (0.08) ============ ============ ============ ============ Net earnings: Basic earnings per share $ 0.52 $ 0.40 $ 0.26 $ 0.16 ============ ============ ============ ============ Diluted earnings per share $ 0.51 $ 0.39 $ 0.26 $ 0.16 ============ ============ ============ ============ Average shares outstanding 334,367,309 342,635,724 333,885,574 341,586,846 ============ ============ ============ ============ Diluted average shares outstanding 338,039,496 345,142,436 337,894,965 344,559,666 ============ ============ ============ ============ Dividends paid per common share $ 0.18 $ 0.16 $ 0.09 $ 0.08 ============ ============ ============ ============ Note: All share information has been adjusted for the 2-for-1 stock split on March 20, 1998. 5 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS - (Unaudited) (In Thousands) 26- Week Period Ended ------------------------ Dec. 26, Dec. 27, 1998 1997 -------- --------- Operating activities: Net earnings $ 172,819 $ 135,676 Add non-cash items: Cumulative effect of accounting change --- 28,053 Depreciation and amortization 98,093 87,569 Deferred tax (benefit) (5,329) (19,783) Provision for losses on accounts receivable 11,893 9,732 Additional investment in certain assets and liabilities: (Increase) in receivables (107,255) (140,660) (Increase) in inventories (97,587) (76,410) (Increase) in prepaid expenses (1,339) (2,769) Increase in accounts payable 152,205 72,840 (Decrease) in accrued expenses (12,304) (5,173) (Decrease) in accrued income taxes (20,249) (6,773) (Increase) decrease in other assets (21,063) 1,481 -------- -------- Net cash provided by operating activities 169,884 83,783 -------- -------- Investing activities: Additions to plant and equipment (147,589) (121,042) Sales and retirements of plant and equipment 10,549 3,492 -------- -------- Net cash used for investing activities (137,040) (117,550) -------- -------- Financing activities: Bank and commercial paper (repayments) borrowings (142,366) 155,457 Other debt borrowings 219,791 724 Common stock reissued from treasury 22,175 20,863 Treasury stock purchases (73,247) (109,622) Dividends paid (60,239) (51,527) -------- -------- Net cash (used for) provided by financing activities (33,886) 15,895 -------- -------- Net (decrease) in cash (1,042) (17,872) Cash at beginning of period 110,288 117,696 -------- -------- Cash at end of period $ 109,246 $ 99,824 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 29,331 $ 27,263 Income taxes 130,244 112,294 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 12 of the Company's Fiscal 1998 Annual Report on Form 10-K remains applicable, other than the common stock repurchase program described below. All share information has been adjusted for the 2-for-1 stock split on March 20, 1998. In Fiscal 1992, the Company began a common stock repurchase program which continued into the first quarter of Fiscal 1999, resulting in the repurchase of 72,000,000 shares of common stock. The Board of Directors authorized the repurchase of an additional 8,000,000 shares in September, 1998. Under this latest authorization, 2,617,100 shares were purchased through January 22, 1999. Results of Operations --------------------- Sales increased 10.8% during the 26 weeks and 12.2% in the second quarter of Fiscal 1999 over comparable periods of the prior year. Cost of sales also increased 11.0% during the 26 weeks and 12.5% in the second quarter of Fiscal 1999 which is in line with the sales increases. Real sales growth for the 26 weeks of Fiscal 1999 of about 7.4% resulted primarily from volume growth and was over two points higher than the same period last year, after adjusting for a 1.4% increase due to acquisitions and an increase due to food cost inflation of about 2%, due primarily to higher cost of dairy and poultry products. Real growth for the quarter was 8.8%, after adjusting 1.3% for acquisitions and 2.2% for food cost inflation. Operating expenses for the periods presented remained approximately the same as a percent of sales. Interest expense in the current period increased over the prior period due to increased borrowings. Income taxes for the periods presented reflect an effective rate of 39%. 7 Pretax earnings and net earnings increased about 6% for the 26 weeks and 3% for the quarter before the accounting change in the same periods of the previous year. The increases were due to the factors discussed above as well as the Company's continued efforts to increase sales to the Company's higher margin territorial street customers. Basic and diluted earnings per share increased 8.3% and 8.5%, respectively, for the 26 weeks and 8.3% and 8.3%, respectively, for the quarter before the accounting change in the same periods of the previous year. The increases were caused by the factors discussed above, along with the decrease in average shares outstanding for the periods presented, reflecting purchases of shares made through the Company's share repurchase program. A reconciliation of basic and diluted earnings per share follows on the next page. For the period ended December 27, 1997, the Company recorded a one-time, after-tax, non-cash charge of $28 million to comply with a new consensus ruling by the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF Issue No. 97-13), requiring reengineering costs associated with computer system development to be expensed as they are incurred. Prior to this change, the Company had capitalized business process reengineering costs incurred in connection with its SYSCO Uniform Systems information systems redevelopment project in accordance with generally accepted accounting principles. 8 The following table sets forth the computation of basic and diluted earnings per share: 26-Week Period Ended 13-Week Period Ended ============================== =============================== Dec. 26, Dec. 27, Dec. 26, Dec. 27, 1998 1997 1998 1997 ============= ============= ============= ============== <S> <C> <C> <C> <C> Numerator: Numerator for basic earnings per share--income available to common shareholders $ 172,819,000 $ 135,676,000 $ 86,420,000 $ 55,576,000 Effect of dilutive securities - - - - - - - - - - - - ------------- ------------- ------------- -------------- Numerator for diluted earnings per share -- income available to common shareholders $ 172,819,000 $ 135,676,000 $ 86,420,000 $ 55,576,000 ============= ============= ============= ============== Denominator: Denominator for basic earnings per share -- weighted-average shares 334,367,309 342,635,724 333,885,574 341,586,846 Effect of dilutive securities: Employee and director stock options 3,672,187 2,506,712 4,009,391 2,972,820 ------------- ------------- ------------- -------------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 338,039,496 345,142,436 337,894,965 344,559,666 ============= ============= ============= ============== Basic earnings per share $ 0.52 $ 0.40 $ 0.26 $ 0.16 ============= ============= ============= ============== Diluted earnings per share $ 0.51 $ 0.39 $ 0.26 $ 0.16 ============= ============= ============= ============== 9 Year 2000 --------- In recent years, SYSCO has been replacing and enhancing its information systems to gain operational efficiencies. In addition, a company-wide program has been underway to prepare its information systems and applications for the year 2000. SYSCO has completed a comprehensive assessment of the impact of the year 2000 on all of its information systems and applications. SYSCO expects to make the necessary revisions or upgrades to its systems to render it year 2000 compliant. Attention is also being focused on compliance attainment efforts of, and key interfaces with, suppliers and customers. SYSCO could potentially experience disruptions to some aspects of its various activities and operations as a result of non-compliant systems utilized by SYSCO or unrelated third parties. Contingency plans are therefore under development to mitigate the extent of any such potential disruption to business operations. Based on preliminary information, the costs to the Company of addressing potential year 2000 issues are not expected to have a material adverse impact on SYSCO's consolidated results of operations or financial position. There can be no assurance that the efforts or the contingency plans related to the Company's systems, or those of other entities relied upon, will be successful or that any failure to convert, upgrade or appropriately plan for contingencies would not have a material adverse effect on SYSCO. -------------- Statements made herein regarding continuation of the share repurchase program and potential year 2000 costs are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They are based on current expectations and actual results may differ materially. Share repurchases could be affected by market prices of the Company's stock as well as management's decision to utilize its capital for other purposes. Potential year 2000 costs could be affected by conditions in the economy, the industry and internal factors that may alter planned results. Futhermore, potential year 2000 costs and compliance efforts could be affected by the ability of SYSCO's suppliers and customers to effectively address year 2000 issues. 10 PART II. OTHER INFORMATION --------------------------- Item 3. Quantitative and Qualitative Disclosures about Market Risks SYSCO does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the company to significant market risk. SYSCO's exposure to market risk for changes in interest rates relates primarily to its long-term obligations. At December 26, 1998 the Company had outstanding $183,953,000 of commercial paper with maturities through December 30, 1998. The Company's remaining long-term debt obligations of $791,543,000 were primarily at fixed rates of interest. SYSCO has no significant cash flow exposure due to interest rate changes for long-term debt obligations. Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on November 6, 1998 ("1998 Annual Meeting"). At the 1998 Annual Meeting the following persons were elected to serve as directors of the Company for three year terms: Gordon M. Bethune, Colin G. Campbell, Frank A. Godchaux III, Frank H. Richardson and John F. Woodhouse. The terms of the following persons as directors of the Company continued after the 1998 Annual Meeting: John W. Anderson, Charles H. Cotros, Judith B. Craven, Jonathan Golden, Bill M. Lindig, Richard G. Merrill, Richard J. Schnieders, Phyllis S. Sewell, Arthur J. Swenka and Thomas B. Walker. At the 1998 Annual Meeting, the stockholders voted upon the election of directors as noted above, and on the approval of the SYSCO Corporation Non-Employee Directors Stock Plan. 11 The results of such vote were as follows: Number of Votes Cast ------------------------------------------------------- Withheld and Broker Matter Voted Upon For Against Abstained Non-votes ----------------- ----------- ---------- ------------ --------- Election as Director: Gordon M. Bethune 290,424,891 N/A 4,342,512 None Colin G. Campbell 291,743,686 N/A 3,023,717 None Frank A. Godchaux III 291,373,252 N/A 3,394,151 None Frank H. Richardson 291,571,298 N/A 3,196,105 None John F. Woodhouse 291,772,113 N/A 2,995,290 None Approval of the Sysco Corporation Non-Employee Directors Stock Plan 280,140,811 14,626,592 N/A None Item 5. Other Information None 12 PART II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 3(a) Restated Certificate of Incorporation incorporated by reference to Form 10-K for the year ended June 28, 1997. 3(b) Bylaws, as amended, incorporated by reference to Form 10-K for the year ended July 2, 1994. 3(c) Amended Certificate of Designation, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(a) Seventh Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997 incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(b) Sysco Corporation Note Agreement dated as of June 1, 1989 incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(c) Indenture, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Registration Statement on Form S-3 (File No. 33-60023). 4(d) First Supplemental Indenture, dated as of June 27, 1995, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(e) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(f) Third Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 28, 1997. 13 4(g) Fourth Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(h) Fifth Supplemental Indenture, dated as of July 27, 1998 between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 27, 1998. 10(a) Sysco Corporation Non-Employee Directors Stock Plan incorporated by reference to Appendix A of the Company's definitive Proxy Statement filed with the Securities and Exchange Commission September 25, 1998. 15 Letter from Arthur Andersen LLP dated February 5, 1999, 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. 14 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 and Chief Financial Officer Date: February 5, 1999 15 EXHIBIT INDEX ---------------------- SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - ----- ----------------------------------------- ------------- 3(a) Restated Certificate of Incorporation incorporated by reference to Form 10-K for the year ended June 28, 1997. 3(b) Bylaws, as amended, incorporated by reference to Form 10-K for the year ended July 2, 1994. 3(c) Amended Certificate of Designation, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(a) Seventh Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997 incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(b) Sysco Corporation Note Agreement dated as of June 1, 1989 incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(c) Indenture, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Registration Statement on Form S-3 (File No. 33-60023). 4(d) First Supplemental Indenture, dated as of June 27, 1995, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 16 4(e) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(f) Third Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(g) Fourth Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(h) Fifth Supplemental Indenture, dated as of July 27, 1998 between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 27, 1998. 10(a) Sysco Corporation Non-Employee Directors Stock Plan incorporated by reference to Appendix A of the Company's definitive Proxy Statement filed with the Securities and Exchange Commission September 25, 1998. 15 Letter from Arthur Andersen LLP dated February 5, 1999, re unaudited financial statements. 17 27 Sysco Corporation and its Consolidated Subsidiaries Financial Data Schedule 18 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>2 <DESCRIPTION>AA LETTER <TEXT> <PAGE> 17 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 26, 1998, and the related consolidated results of operations for the twenty-six and thirteen week periods then ended and consolidated cash flows for the twenty-six week period 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, 1999 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>ART. 5 FDS FOR 1ST 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> 3-MOS <FISCAL-YEAR-END> JUL-03-1999 <PERIOD-END> DEC-26-1998 <CASH> 109,246 <SECURITIES> 0 <RECEIVABLES> 1,346,511 <ALLOWANCES> (35,539) <INVENTORY> 888,088 <CURRENT-ASSETS> 2,370,997 <PP&E> 2,243,757 <DEPRECIATION> (1,046,886) <TOTAL-ASSETS> 4,031,129 <CURRENT-LIABILITIES> 1,412,788 <BONDS> 975,496 <COMMON> 382,587 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 1,035,710 <TOTAL-LIABILITY-AND-EQUITY> 4,031,129 <SALES> 8,439,305 <TOTAL-REVENUES> 8,439,305 <CGS> 6,895,541 <TOTAL-COSTS> 8,155,995 <OTHER-EXPENSES> 415 <LOSS-PROVISION> 11,893 <INTEREST-EXPENSE> 35,328 <INCOME-PRETAX> 283,310 <INCOME-TAX> 110,491 <INCOME-CONTINUING> 172,819 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 172,819 <EPS-PRIMARY> 0.52 <EPS-DILUTED> 0.51 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

TEK

https://www.sec.gov/Archives/edgar/data/96879/0000893877-99-000008.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, O5U8iY9ot8tSe64GkqPMOiu4AObUQoeZpxfPypKVOpTUkpV5dqwbS5rz0r3nicXm /7wfWN8zIe+ENRAsHB0vMw== <SEC-DOCUMENT>0000893877-99-000008.txt : 19990113 <SEC-HEADER>0000893877-99-000008.hdr.sgml : 19990113 ACCESSION NUMBER: 0000893877-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981128 FILED AS OF DATE: 19990112 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: SEC FILE NUMBER: 001-04837 FILM NUMBER: 99504973 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>QUARTERLY REPORT <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 quarter ended November 28, 1998 or, [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to ________________. Commission File Number 1-4837 TEKTRONIX, INC. (Exact name of registrant as specified in its charter) OREGON 93-0343990 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 26600 SW 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 26, 1998 THERE WERE 46,842,471 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. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets - 2 November 28, 1998 and May 30, 1998 Condensed Consolidated Statements of Operations - 3 for the Quarter ended November 28, 1998 and the Quarter ended November 29, 1997 for the Two Quarters ended November 28, 1998 and the Two Quarters ended November 29, 1997 Condensed Consolidated Statements of Cash Flows - 4 for the Two Quarters ended November 28, 1998 and the Two Quarters ended November 29, 1997 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations PART II. OTHER INFORMATION 16 SIGNATURE 16 1 <PAGE> PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) Nov. 28, May 30, (In thousands) 1998 1998 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 53,678 $ 120,541 Accounts receivable - net 252,008 346,342 Inventories 241,100 214,347 Other current assets 123,116 67,432 -------------- -------------- Total current assets 669,902 748,662 Property, plant and equipment - net 428,510 425,153 Deferred tax assets 43,869 25,102 Other long-term assets 157,503 177,893 -------------- -------------- Total assets $ 1,299,784 $ 1,376,810 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt $ 71,898 $ 5,442 Accounts payable 222,117 209,411 Accrued compensation 142,575 119,842 Deferred revenue 23,928 15,102 -------------- -------------- Total current liabilities 460,518 349,797 Long-term debt 150,972 150,681 Other long-term liabilities 88,234 91,391 Shareholders' equity: Common stock 137,922 223,527 Retained earnings 430,487 532,679 Accumulated other comprehensive income 31,651 28,735 -------------- -------------- Total shareholders' equity 600,060 784,941 -------------- -------------- Total liabilities and shareholders' equity $ 1,299,784 $ 1,376,810 ============== ============== The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE> 2 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Quarter ended Two quarters ended Nov. 28, Nov. 29, Nov. 28, Nov. 29, (In thousands except for per share amounts) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 432,164 $ 529,046 $ 851,143 $1,010,320 Cost of sales 293,111 337,051 540,622 617,052 ---------- ---------- ---------- ---------- Gross profit 139,053 191,995 310,521 393,268 Research and development expenses 57,389 50,214 108,561 96,429 Selling, general and administrative expenses 122,612 134,532 242,270 251,440 Equity in business ventures' earnings (loss) (1,182) 297 (9,180) 464 Non-recurring charges 81,488 40,478 81,488 40,478 ---------- ---------- ---------- ---------- Operating income (loss) (123,618) (32,932) (130,978) 5,385 Other income (expense) - net (2,662) 1,265 (2,160) 2,822 ---------- ---------- ---------- ---------- Earnings (loss) before taxes (126,280) (31,667) (133,138) 8,207 Income tax expense (benefit) (40,409) (10,450) (42,604) 2,708 ---------- ---------- ---------- ---------- Net earnings (loss) $ (85,871) $ (21,217) $ (90,534) $ 5,499 ========== ========== ========== ========== Basic earnings (loss) per share $ (1.82) $ (0.42) $ (1.87) $ 0.11 Diluted earnings (loss) per share (1.82) (0.42) (1.87) 0.11 Dividends per share 0.12 0.12 0.24 0.24 Average shares outstanding - basic 47,077 50,546 48,414 50,429 Average shares outstanding - diluted 47,077 50,546 48,414 51,474 The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE> 3 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Two quarters ended Nov. 28, Nov. 29, (In thousands) 1998 1997 - --------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ (90,534) $ 5,499 Adjustments to reconcile net earnings (loss) to cash provided by operating activities: Depreciation and amortization expense 38,832 33,680 Inventory write-down related to restructuring 27,760 38,482 Non-recurring charges 92,774 40,478 Gains on sale of investments (6,465) (12,319) Equity in business ventures' (earnings) loss 9,180 (464) Changes in operating assets and liabilities: Accounts receivable 94,334 38,693 Inventories (54,513) (21,321) Other current assets (55,684) (13,342) Accounts payable (3,863) 6,937 Accrued compensation (35,966) (11,170) Other-net (5,792) (19,197) ---------- ---------- Net cash provided by operating activities 10,063 85,956 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment (55,645) (58,833) Acquisition of business -- (46,600) Proceeds from sale of fixed assets 273 5,000 Proceeds from sale of investments 8,929 14,416 ---------- ---------- Net cash used in investing activities (46,443) (86,017) CASH FLOWS FROM FINANCING ACTIVITIES Net change in short-term debt 66,279 233 Issuance of long-term debt -- 83 Repayment of long-term debt (511) (656) Issuance of common stock 931 19,425 Repurchase of common stock (85,524) (13,437) Dividends (11,658) (11,081) ---------- ---------- Net cash used in financing activities (30,483) (5,433) ---------- ---------- Net Decrease in cash and cash equivalents (66,863) (5,494) Cash and cash equivalents at beginning of year 120,541 142,726 ---------- ---------- Cash and cash equivalents at end of year $ 53,678 $ 137,232 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS Income taxes paid - net $ 9,805 $ 12,772 Interest paid 7,266 6,541 The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE> 4 <PAGE> 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 years 1999 and 1998 are 52 weeks. ACQUISITION On September 30, 1997, the Company acquired Siemens' Communications Test Equipment GmbH (CTE), a wholly owned subsidiary of Siemens AG based in Berlin, Germany, for approximately $46.6 million in cash, including direct acquisition costs. The transaction was accounted for by the purchase method of accounting, and accordingly, the results of operations of CTE have been included in the Company's financial statements since the date of acquisition. Pro forma comparative results of operations are not presented because they are immaterial relative to the Company's results of operations. The purchase price was allocated as follows: (In thousands) - -------------------------------------------------------------------------------- Fair value of identified net assets acquired $ 6,600 Acquired in-process research and development 17,000 Identified intangibles 23,000 ---------- $ 46,600 ========== Acquired in-process research and development of $17.0 million was expensed during the second quarter of fiscal year 1998 (see "Non-recurring Charges" below). The identified intangibles include $18.0 million of completed technology and $5.0 million of workforce-in-place and are being amortized on a straight-line basis over 15 years. NON-RECURRING CHARGES In the second quarter of fiscal year 1999, the Company announced and began to implement a series of actions intended to align worldwide operations with current market conditions and to improve the profitability of its operations. These actions include a net reduction of approximately 10% of the Company's worldwide workforce, the exit of certain facilities and the streamlining of product and service offerings. The Company recorded pre-tax charges of $120.5 million to account for these actions, including restructuring charges of $109.2 million and other non-recurring charges of $11.3 million for related actions. The Company expects approximately $69.0 million of cash to be used in connection with these actions, primarily for severance and lease cancellation fees. Management expects approximately $45.0 million of this to be paid out by the end of fiscal year 1999, with the remainder to be paid out in fiscal year 2000. In the second quarter of fiscal year 1998, the Company announced and began to implement a restructuring plan designed to return the Video and Networking Division business to profitable growth, and recorded a pre-tax provision of $60.0 million to account for these actions. In addition, the Company expensed $17.0 million for the acquisition of in-process research and development and $2.0 million in severance costs associated with the acquisition of CTE. As of November 28, 1998, the implementation of this plan was substantially complete. 5 <PAGE> Non-recurring charges consisted of: <TABLE> <CAPTION> Quarter and two quarters ended Location of Charge in the Nov. 28, Nov. 29, (In thousands) Statements of Operations 1998 1997 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Severance and benefits Non-recurring charges $ 54,680 $ 14,933 Inventory write-offs Cost of sales 27,760 38,482 Asset write-offs and impairments Non-recurring charges 17,397 2,406 Lease buy-outs and abandonment of facilities Non-recurring charges 9,411 4,139 Sales returns and allowances Net sales 6,464 -- Commitment for enhancements related Research and development to discontinued products expenses 4,019 -- Bad debt expense related to Selling, general and discontinued products administrative expenses 803 -- In-process research and development acquired in the purchase of CTE Non-recurring charges -- 17,000 Severance costs associated with the purchase of CTE Non-recurring charges -- 2,000 --------- --------- $ 120,534 $ 78,960 ========= ========= </TABLE> The non-recurring charges incurred during the quarter ended November 28, 1998 affected the Company's financial position in the following manner: <TABLE> <CAPTION> Equipment Payables Accrued and other and other (In thousands) compensation Inventories assets liabilities - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Original charges $ 54,680 $ 27,760 $ 18,200 $ 19,894 Activity for the quarter ended November 28, 1998: Cash paid out 3,811 -- -- 1,686 Non-cash disposals or write-offs -- 27,760 17,397 -- ---------- ---------- ---------- ---------- Balance November 28, 1998 $ 50,869 $ 0 $ 803 $ 18,208 ========== ========== ========== ========== </TABLE> The original charge of $54.7 million in accrued compensation reflects headcount reductions of 1,371 employees worldwide. Approximately 350 employees were terminated during the second quarter. Severance of $3.8 million was paid to approximately 100 of these employees while the remaining 250 employees will be paid severance in the third quarter. STOCK OPTION PLANS The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the board of directors on June 17, 1998 and approved by the shareholders on September 24, 1998. There are 4,000,000 Common Shares reserved for the 1998 Plan. The purpose of the 1998 plan is to enhance the ability of the Company to attract and retain key employees and to provide an incentive for such employees to exert their best efforts on its behalf. The Organization and Compensation Committee of the board of directors of the Company administers the plan, and participants include employees of the Company or its subsidiaries who are selected by the Committee. 6 <PAGE> INVENTORIES Inventories consisted of: <TABLE> <CAPTION> Nov. 28, May 30, (In thousands) 1998 1998 - -------------------------------------------------------------------------------- <S> <C> <C> Materials and work in process $ 81,842 $ 76,289 Finished goods 159,258 138,058 ---------- ---------- Inventories $ 241,100 $ 214,347 ========== ========== </TABLE> PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of: <TABLE> <CAPTION> Nov. 28, May 30, (In thousands) 1998 1998 - -------------------------------------------------------------------------------- <S> <C> <C> Land $ 5,983 $ 5,932 Buildings 229,218 217,036 Machinery and equipment 595,240 594,677 ---------- ---------- 830,441 817,645 Accumulated depreciation and amortization (401,931) (392,492) ---------- ---------- Property, plant and equipment - net $ 428,510 $ 425,153 ========== ========== </TABLE> DEBT The Company amended its credit agreement with Morgan Guaranty Trust Company of New York, as agent, effective November 28, 1998, to exclude certain charges from covenant calculations. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," as of the first quarter of fiscal year 1999. SFAS No. 130 establishes new rules for the reporting of comprehensive income and its components, but has no impact on the Company's net earnings or total shareholders' equity. Comprehensive loss and its components, net of tax, was as follows: <TABLE> <CAPTION> Quarter ended Two quarters ended Nov. 28, Nov. 29, Nov. 28, Nov. 29, (In thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net earnings (loss) $ (85,871) $ (21,217) $ (90,534) $ 5,499 Other comprehensive income (loss): Currency translation adjustment 14,733 650 11,242 (75) Unrealized loss on available-for-sale securities (340) (4,320) (4,446) (6,971) Reclassification adjustment for realized gains included in net income (1,415) (3,391) (3,879) (7,391) ---------- ---------- ---------- ---------- Comprehensive loss $ (72,893) $ (28,278) $ (87,617) $ (8,938) ========== ========== ========== ========== </TABLE> 7 <PAGE> INCOME TAXES The provision for (benefit from) income taxes consisted of: <TABLE> <CAPTION> Quarter ended Two quarters ended Nov. 28, Nov. 29, Nov. 28, Nov. 29, (In thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> United States $ (41,056) $ (2,078) $ (48,835) $ 765 State (5,026) (679) (6,399) 32 Foreign 5,673 (7,693) 12,630 1,911 ---------- ---------- ---------- ---------- Income taxes $ (40,409) $ (10,450) $ (42,604) $ 2,708 ========== ========== ========== ========== </TABLE> The provision for income taxes was calculated at estimated annual effective rates of 32% and 33%, respectively, for the quarter and two quarters ended November 28, 1998, and November 29, 1997. FUTURE ACCOUNTING CHANGES In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. The new disclosures will first be presented in the Company's annual report for the fiscal year ending May 1999. Information presented for earlier years will be restated for comparative purposes. Adoption of this statement may result in additional disclosures but will have no impact on the Company's consolidated financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new statement will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The new statement is effective for fiscal year 2001, but early adoption is permitted. Management has not yet completed an evaluation of the effect this standard will have on the Company's consolidated financial statements. 8 <PAGE> Item 2. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations ----------------------------------- RESULTS OF OPERATIONS 13 Weeks Ended November 28, 1998 vs. 13 Weeks Ended November 29, 1997 The Company recognized a net loss of $85.9 million, or $1.82 per share, during the second quarter of fiscal year 1999. Results for the quarter reflect pre-tax charges of $120.5 million ($82.0 million after taxes, or $1.74 per share), including restructuring charges of $109.2 million and other non-recurring charges of $11.3 million for related actions. These charges resulted from the Company's announcement and implementation of a series of actions intended to align worldwide operations with current market conditions and to improve the profitability of its operations. The Company expects that, when fully implemented, these actions will reduce ongoing annual costs by approximately $70.0 million. The actions include a net reduction of approximately 10% of the Company's worldwide workforce, the exit of certain facilities and the streamlining of product and service offerings. The non-recurring charges include a $6.5 million charge to sales for expected returns of discontinued products and $27.7 million in charges to cost of sales for the write-off of excess inventory resulting from discontinuation of product lines and consolidation of service centers. These two charges resulted in a decrease in gross profit of $34.2 million. Also included in the non-recurring charges are $4.0 million in research and development expense to complete customer committed software upgrades in discontinued product lines, $0.8 million in charges to bad debt expense for doubtful accounts with balances related to discontinued products, $54.7 million in severance expense related to employee separation, $9.4 million in charges to facilities for lease cancellation fees and $17.4 million in charges to long-term assets associated with discontinued product lines. Excluding the charges, the second quarter net loss would have been $3.9 million, or $.08 per share. Results for the second quarter of fiscal year 1998 reflect non-recurring charges of $79.0 million, including a $38.5 million charge to cost of sales. See "Non-recurring Charges" in the Notes to Condensed Consolidated Financial Statements. Sales for the second quarter of 1999 were $432.2 million after the non-recurring charge to sales of $6.5 million. Excluding the charge, sales were $438.7 million, down 17% or $90.3 million from sales for the same period in 1998. Sales were down in all geographies except Europe, which posted modest increases over 1998. Japan was the hardest hit region with a decrease in sales of 52% or $17.9 million from the second quarter of 1998. Orders were down approximately 2% overall for the second quarter of 1999. The Pacific, excluding Japan, experienced the largest percentage decrease in orders, down 27% or $16.7 million, while Europe experienced the only increase, up 32% or $43.2 million. Sales and orders grew strongly in the second quarter of 1998, making the decrease in 1999 more pronounced. Sales increased sequentially over the first quarter of 1999 by $19.7 million, excluding non-recurring charges. Orders increased $88.1 million during this same period. Measurement sales for the second quarter of 1999 were $205.1 million, down 17% or $42.6 million from sales of $247.7 million in the second quarter of 1998. Orders for the quarter were $200.3 million, down 13% or $30.2 million from $230.5 million in 1998. Most of the decline was in general purpose equipment such as oscilloscopes and logic analyzers. The decline reflected the effects of the Asian economic crisis, including its effects on other regions of the world, and continued softness in the semiconductor industry. Although measurement business sales decreased by $1.4 million during the second quarter of 1999 as compared to the first quarter, orders increased by $20.5 million during the same period. 9 <PAGE> Color Printing and Imaging sales were $159.3 million, down 14% or $26.3 million from $185.6 million during the same period in 1998, primarily due to a decrease in the sales price of its printers. Sales were weak in all regions, particularly in Japan. The color printing and imaging industry has experienced recent price erosion due to increased competition. In response to these market conditions, the Company developed four new printer products priced competitively. These products were announced during the second quarter, but they were not shippable until the end of the second quarter and into the third quarter. The Company took aggressive pricing and discounting actions to move inventory of their older products, including units in the distribution channel. The market responded positively to these pricing actions as is evidenced by a 6% increase in unit sales over the same period in 1998 despite the anticipation of new, lower priced products. Orders for the quarter were $214.7 million overall, up 25% or $42.7 million over the second quarter of 1998, indicating positive market response to the newly introduced printer products. The products were particularly well received in Europe, with orders increasing 58% or $33.0 million. Video and Networking sales were $67.9 million, down 29% or $27.8 million from sales of $95.7 million in 1998. Orders were also down 26%, or $23.1 million compared to the second quarter of 1998. The decline was realized across nearly all geographies and product lines. Sales to the broadcast industry were particularly weak. The industry continues to delay studio equipment purchases as it commits its resources to the acquisition of outdoor transmission equipment. The broadcast industry also continues to experience market softness as advertising revenues remain flat. These conditions primarily affected sales of digital storage and Grass Valley products. Sales in the network displays business decreased significantly as compared to the second quarter of 1998, due mainly to announcement of the Company's decision to divest itself of this business. Sales of Lightworks products also decreased due to announcement of the Company's decision to exit the non-linear digital editing business. The business realized an operating loss for the quarter. Video and Networking sales increased $10.8 million sequentially over the first quarter of 1999, while orders increased $9.3 million. The Company's gross profit decreased 28% or $52.9 million from the second quarter of 1998 to $139.1 million as a result of declining sales. The decline in sales was generated by a decrease in sales in Measurement and Video and Networking, as well as by a decrease in Color Printing and Imaging sales price per unit. As a percentage of net sales, gross profit decreased from 36.3% to 32.2%. Excluding non-recurring charges, gross profit decreased 25% or $57.2 million, and gross profit as a percentage of sales decreased from 43.6% to 39.5%. Operating expenses decreased by $4.7 million from the second quarter of 1998 due to a decrease in selling, general and administrative expenses offset in part by an increase in research and development expenses. Selling, general and administrative expenses were $122.6 million for the quarter, including non-recurring charges of $0.8 million, a decrease of 9% or $11.9 million from the same period in 1998. This decrease was a result of actions taken by the Company to remove unnecessary expenses from the cost structure. Research and development expenses increased 14% or $7.2 million to $57.4 million due to non-recurring charges of $4.0 million and costs incurred in the development of new products introduced during the second quarter of 1999. Income taxes decreased significantly from benefit of $10.5 million for the second quarter of 1998 to benefit of $40.4 million for the current quarter as a result of decreased earnings before taxes, including the income tax benefit realized relating to the non-recurring charges recorded this quarter. The estimated annual effective rates used to calculate income taxes were 32% in 1999 and 33% in 1998. 10 <PAGE> RESULTS OF OPERATIONS Two Quarters Ended November 28, 1998 vs. Two Quarters Ended November 29, 1997 The Company recognized a net loss of $90.5 million, or $1.87 per share, during the first half of fiscal year 1999. Results for the first two quarters reflect non-recurring charges of $120.5 million ($82.0 million after taxes, or $1.69 per share) as discussed above. Results for the first half of fiscal year 1998 reflect non-recurring charges of $79.0 million, including a $38.5 million charge to cost of sales. See "Non-recurring Charges" in the Notes to Condensed Consolidated Financial Statements. Sales for the first two quarters of 1999 were $851.1 million after the non-recurring charge to sales of $6.5 million. Excluding the charge, sales were $857.6 million, down 15% or $152.7 million from sales for the same period in 1998. Sales were down in all geographies except Europe, which posted modest increases over 1998. Japan was the hardest hit region with a decrease in sales of 52%, or $37.8 million from the first half of 1998. Orders were down approximately 8% overall for the first half of 1999. Japan experienced the largest decrease in orders, down 40% or $23.5 million, while Europe experienced the only increase, up 16% or $39.3 million. Sales and orders grew strongly in the first half of 1998, making the decrease in 1999 more pronounced. Measurement sales for the first half of 1999 were $411.6 million, down 13% or $63.8 million from sales of $475.4 million in the first half of 1998. Orders for the two quarters were $380.1 million, down 14% or $59.5 million from $439.6 million in 1998. Most of the decline was in general purpose equipment such as oscilloscopes and logic analyzers, as well as wireless communication test equipment. The decline reflected the effects of the Asian economic crisis, including its effects on other regions of the world, and continued softness in the semiconductor industry. Telecommunications test equipment sales increased compared to the first half of 1998 because of the additional sales from CTE, the business acquired from Siemens AG during the second quarter of 1998. Color Printing and Imaging sales were $314.6 million, down 8% or $26.7 million from $341.3 million during the same period in 1998, due to a decrease in sales price of its printers and a decrease in unit sales as a result of cautionary capital spending. Sales were strong in the U.S. but generally weak elsewhere in the world, particularly in Asia. The color printing and imaging industry has experienced recent price erosion due to increased competition. In response to these market conditions, the Company developed four new printer products priced competitively. These products were announced during the second quarter, but they were not shippable until the end of the second quarter and into the third quarter. The Company took aggressive pricing and discounting actions to move inventory of their older products, including units in the distribution channel. Orders year to date were $371.1 million overall, up 16% or $50.2 million over 1998, indicating positive market response to the newly introduced printer products. The products were particularly well received in Europe, with orders increasing 32% or $32.7 million. 11 <PAGE> Video and Networking sales were $124.9 million, down 36% or $68.7 million from sales of $193.6 million in 1998. Orders were also down 34%, or $65.0 million compared to the first half of 1998. The decline was realized across all geographies and nearly all product lines. Sales to the broadcast industry were particularly weak. The industry continues to delay studio equipment purchases as it commits its resources to the acquisition of outdoor transmission equipment. The broadcast industry also continues to experience market softness as advertising revenues remain flat. These conditions primarily affected sales of digital storage and Grass Valley products. Sales in the network displays business decreased significantly as compared to the first half of 1998, due mainly to announcement of the Company's decision to divest itself of this business. Sales of Lightworks products also decreased due to announcement of the Company's decision to exit the non-linear digital editing business. The Company's gross profit decreased 21% or $82.8 million from 1998 to $310.5 million as a result of declining sales. The decline in sales was generated by a decrease in sales in Measurement and Video and Networking, as well as by a decrease in Color Printing and Imaging sales price per unit. As a percentage of net sales, gross profit decreased from 38.9% to 36.5%. Excluding non-recurring charges, gross profit decreased 20% or $87.1 million, and gross profit as a percentage of sales decreased from 42.7% to 40.2%. Operating expenses increased by $3.0 million over the first half of 1998 due to an increase in research and development expenses, partly offset by a decrease in selling, general and administrative expenses. Research and development expenses increased by $12.1 million to $108.6 million due to non-recurring charges of $4.0 million and costs incurred in the development of new products introduced during the second quarter of 1999. Selling, general and administrative expenses were $242.3 million for the two quarters, including non-recurring charges of $0.8 million, a decrease of 4% or $9.2 million from the same period in 1998. This decrease was a result of actions taken by the Company to remove unnecessary expenses from the cost structure. Income taxes decreased significantly from expense of $2.7 million for the first half of 1998 to benefit of $42.6 million for the first half of 1999 as a result of decreased earnings before taxes, including the income tax benefit realized relating to the non-recurring charges recorded this quarter. The estimated annual effective rates used to calculate income taxes were 32% in 1999 and 33% in 1998. FINANCIAL CONDITION The Company's financial condition continues to be strong. At November 28, 1998, the Company had $53.7 million of cash and cash equivalents, and bank credit facilities totaling $463.4 million, of which $255.1 million was unused. Unused facilities include $156.1 million in lines of credit and $99.0 million under revolving credit agreements with United States and foreign banks. The Company amended its credit agreement with Morgan Guaranty Trust Company of New York, as agent, effective November 28, 1998, to exclude certain charges from covenant calculations. 12 <PAGE> The Company realized a decrease in working capital of $189.5 million from the end of 1998. Current assets decreased $78.8 million during the two quarters, with cash and cash equivalents decreasing $66.8 million, accounts receivable decreasing $94.3 million, inventory increasing $26.8 million, and other current assets increasing $55.7 million. Cash and cash equivalents decreased mainly due to the repurchase of approximately 3.6 million common shares for $85.5 million and capital expenditures of $55.6 million. Accounts receivable decreased since the end of 1998 due to a general decrease in sales during the period as well as a high volume of sales during the last few weeks of 1998. Inventory increased as a result of the ramp-up of components and finished goods relating to new printer products introduced at the end of the second quarter. Other current assets increased primarily from an increase in net current tax benefits due to payments related to taxes on 1998 earnings and the benefit related to the net loss realized in the prior two quarters. Current liabilities increased $110.7 million during the first half of 1999, with an increase in short-term debt of $66.5 million, an increase in accrued compensation of $22.7 million, and an increase in accounts payable of $12.7 million. Short-term debt increased as the Company utilized credit facilities to finance a portion of cash requirements during the year, including $85.5 million for the repurchase of common shares. Accrued compensation increased mainly due to the planned separation of employees as part of the reorganization of the Company, while accounts payable increased as a result of current liabilities associated with non-recurring charges as well as the Company's ability to negotiate more favorable payment terms from a major supplier. Other long-term assets decreased $20.4 million from the sale of investments, a slight decline in the market values of remaining investments held for sale, and the recognition of losses on investments accounted for under the equity method. The unrealized holding losses on the Company's investment portfolio are not material. Shareholders' equity decreased by $184.9 million from the end of 1998 due to the loss of $90.5 million, dividends paid of $11.7 million, a net decrease of $85.6 million in paid in capital, including issuance, repurchase and forfeiture of common shares, an $8.3 million decrease in unrealized holding gains and an $11.2 million increase in the accumulated currency translation adjustment. The decrease in unrealized holding gains resulted principally from the sale of assets. The Company expects to require approximately $69.0 million of cash to be used in connection with severance, lease cancellation fees, and other non-recurring charges. Management expects approximately $45.0 million of this to be paid out by the end of 1999, with the remainder paid out in fiscal year 2000. YEAR 2000 UPDATE General Tektronix, Inc.'s Year 2000 Program ("Program") is proceeding as planned. The Program is addressing the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000. To improve access to business information through common, integrated computing systems across the Company, Tektronix began a worldwide business systems replacement program with an enterprise system that uses programs primarily from Oracle Corporation ("Oracle"). The new enterprise system is expected to make substantially all of the Company's business computer systems Year 2000 compliant and is scheduled for completion by the third quarter of 1999. Implementation of the Oracle programs is on schedule and was approximately 95% complete as of December 1998. Any remaining business software programs are expected to be made Year 2000 compliant, including those supplied by vendors, or they will be retired. Other information technology projects have not been delayed due to the implementation of the Year 2000 Program. 13 <PAGE> Program Tektronix' Program is divided into three major sections: (1) infrastructure (information, logistics and other technology used in the Company's business, including hardware and software, which is sometimes referred to as "IT"); (2) products (hardware and software products delivered to customers); and (3) external suppliers and providers (vendors, manufacturers and suppliers to the Company). The general phases common to all sections are: (1) identification and prioritization of various systems through an extensive inventory of all items used throughout the Company including customer products and services and material third party manufacturers, suppliers and vendors; (2) remediation of material systems through replacement or updates; (3) testing, including sending, receiving and processing of various information types to ensure ongoing functionality, integrity and accuracy; and (4) contingency planning to establish alternate solutions for any material systems determined not to be Year 2000 compliant. Material items are those believed by the Company to have a risk involving the safety of individuals or that may cause damage to property or the environment, or affect the continuation of business activities or materially affect revenues. By the end of January 1999, the identification and prioritization phase of the Program will have been completed. The Company is performing the remediation and testing phases of the Program. This phase is on schedule and the Company estimates that approximately 60% of the planned activities related to the three major sections have been completed at November 28, 1998. The testing phase is ongoing as hardware or system software is remediated, upgraded or replaced. Remediation and testing of internal systems is expected to be completed by May 1999. Contingency planning is in process for all three sections and is also scheduled for completion by the end of fiscal year 1999. Costs While an estimate of costs is underway, the total costs associated with required modifications to become Year 2000 compliant, as well as the total cost of the Year 2000 Program, are not expected to be material to the Company's financial position or operating results. Risks The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Year 2000 Program is expected to significantly reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its material third party suppliers. The Company believes that, with the implementation of new business systems and completion of the Program as scheduled, the possibility of significant interruptions of normal operations should be reduced. The above contains forward-looking statements including, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions, and adequate resources that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that forward-looking statements contained in the Year 2000 Update should be read in conjunction with the Company's disclosures under the heading: "Forward-looking Statements." 14 <PAGE> FORWARD-LOOKING STATEMENTS Statements and information included in this Form 10-Q that relate to the Company's goals, strategies and expectations as to future results and events are based on the Company's current expectations. They constitute forward-looking statements subject to a number of risk factors that could cause actual results to differ materially from those currently expected or desired. As with many high technology companies, risk 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: worldwide economic and business conditions in the electronics industry, including the continuing effects of the Asian economic crisis on demand for the Company's products; competitive factors, including pricing pressures, technological developments and new products offered by competitors; changes in product and sales mix, 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 Securities and Exchange Commission reports and in 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 operational issues the Company faces in executing its strategy in Video and Networking; the Company's ability to successfully implement its strategic direction and restructuring actions, including reducing its expenditures; the effects of year 2000 compliance issues; the timely introduction of new products scheduled during the Company's year, which could be affected by engineering or other development program slippages, the ability to ramp up production or to develop effective sales channels; the customers' acceptance of and demand for new products; and changes in the regulatory environment affecting the transition to high-definition television within the time frame anticipated by the Company. Forward-looking statements in this report speak only as of the date made. The Company undertakes no obligation to publicly release the result of any revisions to these forward looking statements which may be made to reflect subsequent events or circumstances or to reflect the occurrence of unanticipated events. 15 <PAGE> PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits (27) (i.1) Financial Data Schedule. (b) No reports on Form 8-K have been filed 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. January 11, 1999 TEKTRONIX, INC. By CARL W. NEUN -------------------------------------- Carl W. Neun Senior Vice President and Chief Financial Officer 16 </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-29-1999 <PERIOD-END> NOV-28-1998 <CASH> 53,678 <SECURITIES> 0 <RECEIVABLES> 252,008<F1> <ALLOWANCES> 0 <INVENTORY> 241,100 <CURRENT-ASSETS> 669,902 <PP&E> 830,441 <DEPRECIATION> 401,931 <TOTAL-ASSETS> 1,299,784 <CURRENT-LIABILITIES> 460,518 <BONDS> 150,972 <COMMON> 137,922 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 462,138<F2> <TOTAL-LIABILITY-AND-EQUITY> 1,299,784 <SALES> 851,143 <TOTAL-REVENUES> 851,143 <CGS> 540,622 <TOTAL-COSTS> 540,622 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> (133,138) <INCOME-TAX> (42,604) <INCOME-CONTINUING> (90,534) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (90,534) <EPS-PRIMARY> (1.87) <EPS-DILUTED> (1.87) <FN> <F1> Amount represents net accounts receivable. <F2> Amount includes retained earnings and other comprehensive income. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

1999

0QTR1

THC

https://www.sec.gov/Archives/edgar/data/70318/0001047469-99-001181.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, LPnOj3tOB+GqrQPLucuK+fyFZus/2Z1x2cXrK+tGKhaq9opk6vkQ/WLwqcfXi2S5 0KbqHb2zuJ7oIEjzJ0lOzQ== <SEC-DOCUMENT>0001047469-99-001181.txt : 19990115 <SEC-HEADER>0001047469-99-001181.hdr.sgml : 19990115 ACCESSION NUMBER: 0001047469-99-001181 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990114 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: SEC FILE NUMBER: 001-07293 FILM NUMBER: 99506396 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, 1998. OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ....... TO ....... . COMMISSION FILE NUMBER 1-7293 - -------------------------------------------------------------------------------- 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, 1998 THERE WERE 310,141,816 SHARES OF $0.075 PAR VALUE COMMON STOCK OUTSTANDING. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> TENET HEALTHCARE CORPORATION INDEX <TABLE> <CAPTION> PAGE ---------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets - May 31, 1998 and November 30, 1998................................................ 2 Condensed Consolidated Statements of Income - Three Months and Six Months Ended November 30, 1997 and 1998.................................................... 4 Condensed Consolidated Statements of Comprehensive Income - Six Months Ended November 30, 1997 and 1998............................................................. 5 Condensed Consolidated Statements of Cash Flows - Six Months Ended November 30, 1997 and 1998..................................... 6 Notes to Condensed Consolidated Financial Statements........................................................... 7 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.............................................................. 20 </TABLE> - ------------ Note: Item 3 of Part I and 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, 1998 1998 ----------- ----------- <S> <C> <C> (DOLLAR AMOUNTS IN MILLIONS) ASSETS Current assets: Cash and cash equivalents ........................................ $ 23 $ 32 Short-term investments in debt securities ........................ 132 139 Accounts receivable, less allowance for doubtful accounts ($191 at May 31 and $203 at November 30) ..................... 1,742 2,044 Inventories of supplies, at cost ................................. 214 237 Deferred income taxes ............................................ 275 233 Other current assets ............................................. 504 398 ----------- ----------- Total current assets ........................... 2,890 3,083 ----------- ----------- Investments and other assets ......................................... 515 567 Property and equipment, at cost ...................................... 7,779 8,373 Less accumulated depreciation and amortization ................... 1,765 1,951 Net property and equipment ....................................... 6,014 6,422 ----------- ----------- Intangible assets, at cost less accumulated amortization ($327 at May 31 and $381 at November 30) ......................... 3,414 3,557 ----------- ----------- $12,833 $13,629 ----------- ----------- ----------- ----------- </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, 1998 1998 ----------- ----------- <S> <C> <C> (DOLLAR AMOUNTS IN MILLIONS) LIABILITIES AND SHAREHOLDERS' EQUITY' Current liabilities: Current portion of long-term debt ................................ $ 10 $ 10 Accounts payable ................................................. 657 554 Accrued employee compensation and benefits ....................... 355 344 Accrued interest payable ......................................... 106 163 Reserves related to discontinued operations, merger, facility consolidation and impairment charges ......................... 189 138 Other current liabilities ........................................ 450 611 ----------- ----------- Total current liabilities .................................... 1,767 1,820 ----------- ----------- Long-term debt, net of current portion .............................. 5,829 6,309 Other long-term liabilities and minority interests .................. 1,256 1,201 Deferred income taxes ............................................... 423 435 Shareholders' equity: Common stock, $0.075 par value; authorized 700,000,000 shares; 313,044,417 shares issued at May 31 and 313,816,696 shares issued at November 30 ................................. 23 24 Other shareholders' equity ....................................... 3,605 3,910 Less common stock in treasury, at cost, 3,754,891 shares at May 31 and November 30 ....................................... (70) (70) ----------- ----------- Total shareholders' equity .............................. 3,558 3,864 ----------- ----------- $ 12,833 $ 13,629 ----------- ----------- ----------- ----------- </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, 1997 AND 1998 <TABLE> <CAPTION> THREE MONTHS SIX MONTHS --------------------- --------------------- 1997 1998 1997 1998 --------- --------- --------- --------- <S> <C> <C> <C> <C> (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND SHARE AMOUNTS) Net operating revenues . . . . . . . . . . . . . . $ 2,429 $ 2,563 $ 4,760 $ 5,116 --------- --------- --------- --------- Operating expenses: Salaries and benefits. . . . . . . . . . . . . . 1,007 1,039 1,973 2,057 Supplies . . . . . . . . . . . . . . . . . . . . 330 351 651 701 Provision for doubtful accounts. . . . . . . . . 136 184 284 343 Other operating expenses . . . . . . . . . . . . 512 538 998 1,099 Depreciation . . . . . . . . . . . . . . . . . . 87 102 168 198 Amortization . . . . . . . . . . . . . . . . . . 27 32 51 63 --------- --------- --------- --------- Operating income . . . . . . . . . . . . . . . . . 330 317 635 655 --------- --------- --------- --------- Interest expense, net of capitalized portion. . . . . . . . . . . . . . . . . . . . . . (118) (119) (230) (238) Investment earnings. . . . . . . . . . . . . . . . 6 6 12 13 Minority interests in income of consolidated subsidiaries. . . . . . . . . . . . (7) (1) (13) (5) Gain from change in value of indexed debt . . . . . . . . . . . . . . . . . . . . . . 18 - 18 - --------- --------- --------- --------- Income before income taxes . . . . . . . . . . . . 229 203 422 425 Taxes on income. . . . . . . . . . . . . . . . . . (91) (78) (168) (163) Net income . . . . . . . . . . . . . . . . . . . . $ 138 $ 125 $ 254 $ 262 --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted earnings per share . . . . . . . $ 0.44 $ 0.40 $ 0.82 $ 0.84 Weighted average shares and share equivalents outstanding - diluted (in thousands) . . . . . . . . . . . . . . . . . 310,920 313,935 310,294 313,799 </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 COMPREHENSIVE INCOME SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1998 <TABLE> <CAPTION> 1997 1998 -------- -------- <S> <C> <C> (IN MILLIONS) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 254 $ 262 Other comprehensive income (loss): Foreign currency translation adjustments. . . . . . . . . . . - 12 Unrealized net holding gains (losses) arising during period on securities held as available for sale . . . . . . . . . (115) 28 -------- -------- Other comprehensive income (loss) before income taxes . . . . (115) 40 Income tax benefit (expense) related to items of other comprehensive income . . . . . . . . . . . . . . . . . . . 44 (15) -------- -------- Other comprehensive income (loss) . . . . . . . . . . . . . . (71) 25 -------- -------- Comprehensive income . . . . . . . . . . . . . . . . . . . . . . $ 183 $ 287 -------- -------- -------- -------- </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, 1997 AND 1998 <TABLE> <CAPTION> 1997 1998 ------- ------- <S> <C> <C> (IN MILLIONS) NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . $ 12 $ 297 Cash flows from investing activities: Purchases of property and equipment. . . . . . . . . . . . . . . . . . . (215) (241) Purchases of new businesses, net of cash acquired. . . . . . . . . . . . (381) (446) Proceeds from sales of facilities and other assets . . . . . . . . . . . 57 4 Other items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) (64) ------- ------- Net cash used in investing activities . . . . . . . . . . . . . . . . (562) (747) ------- ------- Cash flows from financing activities: Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . 1,386 2,118 Payments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . (889) (1,667) Other items, primarily issuances of common stock . . . . . . . . . . . . 32 8 ------- ------- Net cash provided by financing activities . . . . . . . . . . . . . . 529 459 ------- ------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . (21) 9 Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 35 23 ------- ------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 14 $ 32 ------- ------- ------- ------- Supplemental disclosures: Interest paid, net of amounts capitalized. . . . . . . . . . . . . . . . $ 201 $ 177 Income taxes paid (net of refunds received). . . . . . . . . . . . . . . 12 (30) Fair value of common stock issued for purchase of new business . . . . . 9 - Fair value of common stock tendered for note receivable. . . . . . . . . 16 - </TABLE> 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 (UNAUDITED) 1. The financial information furnished herein is unaudited; however, in the opinion of management, the information reflects all adjustments that are necessary to fairly state the financial position of Tenet Healthcare Corporation (together with its subsidiaries, "Tenet" or the "Company"), the results of its operations and its cash flows for the interim periods indicated. All the adjustments are of a normal recurring nature. 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 that would substantially duplicate the disclosure contained in the Company's most recent annual report to security holders have been omitted. 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. Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including levels of occupancy, interest rates, acquisitions, disposals, revenue allowance and discount fluctuations, the timing of price changes, unusual or non-recurring items and fluctuations in quarterly tax rates. These same considerations apply to all year-to-year comparisons. 2. During the six months ended November 30, 1998, Tenet acquired nine general hospitals, approximately 150 physician practices and certain other related businesses in transactions accounted for as purchases. The Company also sold one general hospital, closed another and combined the operations of two. The results of operations of the acquired businesses, which are not material, have been included in the Company's consolidated statements of income and cash flows from the dates of acquisition. The operations of the sold and closed businesses were also not material. In December 1998, the Company acquired a 99-bed hospital ( 49 acute-care beds and 50 skilled-nursing beds) in Southern California in a transaction accounted for as a purchase. 3. There have been no material changes to the description of professional and general liability insurance set forth in Note 9A or significant legal proceedings set forth in Note 9B of Notes to Consolidated Financial Statements of Tenet for its fiscal year ended May 31, 1998. 4. During the six-months ended November 30, 1998, the Company made cash payments of approximately $20 million against the Company's reserves for discontinued operations and other non-recurring charges and further reduced those reserves by approximately $45 million for asset write-offs and other non-cash transactions as facilities were closed, sold or converted to alternate uses. The reserve balances are included in the Company's balance sheets at May 31, 1998 and November 30, 1998 as reserves related to discontinued operations, merger, facility consolidation and impairment charges and as other long-term liabilities. 7 <PAGE> 5. The following is a reconciliation of the numerators and the denominators of the Company's basic and diluted earnings per share computations for the three months and six months ended November 30, 1997 and 1998. Income is expressed in millions and weighted average shares are expressed in thousands: <TABLE> <CAPTION> 1997 1998 ---------------------------------------- ----------------------------------------- WEIGHTED WEIGHTED INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE THREE MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT - ---------------------------------- ----------- -------------- --------- ----------- -------------- --------- <S> <C> <C> <C> <C> <C> <C> Income before extraordinary item $ 138 $ 125 Basic earnings per share: Income available to common shareholders . . . . . . . $ 138 305,499 $ 0.44 $ 125 309,803 $ 0.40 --------- --------- --------- --------- Effect of dilutive stock options and warrants. . . . . . . . . . . - 5,421 - 4,132 ----------- -------------- ----------- -------------- Dilutive earnings per share Income available to common shareholders . . . . . . . $ 138 310,920 $ 0.44 $ 125 313,935 $ 0.40 ----------- -------------- --------- ----------- -------------- --------- ----------- -------------- --------- ----------- -------------- --------- </TABLE> Outstanding options to purchase 47,100 and 7,797,209 shares of common stock were not included in the computation of earnings per share for the three-month periods ended November 30, 1997 and 1998, respectively, because the options' excercise prices were greater than the average market price of the common stock. <TABLE> <CAPTION> 1997 1998 ---------------------------------------- ----------------------------------------- WEIGHTED WEIGHTED INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE SIX MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT - ---------------------------------- ----------- -------------- --------- ----------- -------------- --------- <S> <C> <C> <C> <C> <C> <C> Income before extraordinary item $ 254 $ 262 Basic earnings per share: Income available to common shareholders . . . . . . . $ 254 304,884 $0.82 $ 262 309,602 $ 0.84 --------- --------- --------- --------- Effect of dilutive stock options and warrants. . . . . . . . . . . - 5,410 - 4,197 ----------- -------------- ----------- -------------- Dilutive earnings per share Income available to common shareholders. . . . . . . . . $ 254 310,294 $0.82 $ 262 313,799 $ 0.84 ----------- -------------- --------- ----------- -------------- --------- ----------- -------------- --------- ----------- -------------- --------- </TABLE> Outstanding options to purchase 47,100 and 7,800,784 shares of common stock were not included in the computation of earnings per share for the six-month periods ended November 30, 1997 and 1998, respectively, because the options' excercise prices were greater than the average market price of the common stock. 8 <PAGE> 6. The following table sets forth the tax effects allocated to each component of other comprehensive income for the six months ended November 30, 1997 and 1998: <TABLE> <CAPTION> 1997 1998 --------------------------------- --------------------------------- BEFORE- TAX NET-OF- BEFORE- TAX NET-OF- TAX (EXPENSE) TAX TAX (EXPENSE) TAX AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT -------- ---------- -------- -------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> (IN MILLIONS) Foreign currency translation adjustment $ - $ - $ - $ 12 $ (5) $ 7 Unrealized holding gains (losses) on securities (115) 44 (71) 28 (10) 18 -------- ---------- -------- -------- ---------- -------- Other comprehensive income (loss) $ (115) $ 44 $ (71) $ 40 $ (15) $ 25 -------- ---------- -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- -------- </TABLE> The following table sets forth the accumulated other comprehensive income balances, by component, as of November 30, 1997 and 1998: <TABLE> <CAPTION> 1997 1998 ---------------------------------------------- -------------------------------------------- UNREALIZED ACCUMULATED UNREALIZED ACCUMULATED FOREIGN GAINS OTHER FOREIGN GAINS OTHER CURRENCY (LOSSES) ON COMPREHENSIVE CURRENCY (LOSSES) ON COMPREHENSIVE ITEMS SECURITIES INCOME (LOSS) ITEMS SECURITIES INCOME -------- ----------- ------------- -------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> (IN MILLIONS) Beginning balance $ - $ 28 $ 28 - $ 50 $ 50 Current-period change - (71) (71) 7 18 25 -------- ----------- ------------- -------- ----------- ------------- Ending balance $ - $ (43) $ (43) $ 7 $ 68 $ 75 -------- ----------- ------------- -------- ----------- ------------- -------- ----------- ------------- -------- ----------- ------------- </TABLE> 7. On December 7, 1998, the Company's Board of Directors adopted a new stockholder rights plan to replace a similar plan upon its expiration on December 22, 1998. The rights generally will be exercisable ten business days after a person or group acquires beneficial ownership of, or commences a tender offer or exchange offer that would result in such person or group beneficially owning, 15 percent or more of Tenet's common stock. 9 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The healthcare industry continues to undergo tremendous change, driven primarily by (1) cost-containment pressures by government payors, managed care providers and others, and (2) technological advances that require increased capital expenditures. In addition to the above, the Company has also experienced a significant shift in net patient revenues away from traditional Medicare and indemnity payors to managed care. To address these changes, Tenet has implemented various cost-control programs and overhead-reduction plans and continues to create and enhance its integrated healthcare delivery systems. Income before income taxes was $229 million in the quarter ended November 30, 1997 and $203 million in the quarter ended November 30, 1998. For the six-month periods ended November 30, 1997 and 1998, income before income taxes was $422 million and $425 million, respectively. The 1997 figures include a gain from changes in indexed debt recorded in the November 1997 quarter. The gain amounted to $11 million after tax, or $0.03 per share. The following is a summary of operations for the three months ended November 30, 1997 and 1998: <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, ---------------------------------------------------------- 1997 1998 1997 1998 ------- ------- ------ ------ (DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals ............ $ 2,198 $ 2,340 90.5% 91.3% Other domestic operations ............. 231 223 9.5% 8.7% ------- ------- ------ ------ Net operating revenues .................... 2,429 2,563 100.0% 100.0% ------- ------- ------ ------ Operating expenses: Salaries and benefits ................. (1,007) (1,039) 41.5% 40.5% Supplies .............................. (330) (351) 13.6% 13.7% Provision for doubtful accounts ....... (136) (184) 5.6% 7.2% Other operating expenses .............. (512) (538) 21.0% 21.0% Depreciation .......................... (87) (102) 3.6% 4.0% Amortization .......................... (27) (32) 1.1% 1.2% ------- ------- ------ ------ Operating income .......................... $ 330 $ 317 13.6% 12.4% ------- ------- ------ ------ ------- ------- ------ ------ </TABLE> 10 <PAGE> <TABLE> <CAPTION> SIX MONTHS ENDED NOVEMBER 30, ----------------------------------------------------- 1997 1998 1997 1998 ------- ------- ------ ------ (DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals ......... $ 4,321 $ 4,653 90.8% 91.0% Other domestic operations .......... 439 463 9.2% 9.0% ------- ------- ------ ------ Net operating revenues ................. 4,760 5,116 100.0% 100.0% ------- ------- ------ ------ Operating expenses: Salaries and benefits .............. (1,973) (2,057) 41.5% 40.2% Supplies ........................... (651) (701) 13.7% 13.7% Provision for doubtful accounts .... (284) (343) 6.0% 6.7% Other operating expenses ........... (998) (1,099) 20.9% 21.5% Depreciation ....................... (168) (198) 3.5% 3.9% Amortization ....................... (51) (63) 1.1% 1.2% ------- ------- ------ ------ Operating income ....................... $ 635 $ 655 13.3% 12.8% ------- ------- ------ ------ ------- ------- ------ ------ </TABLE> Net operating revenues of other domestic operations in the table above consist primarily of revenues from: (i) physician practices, (ii) rehabilitation hospitals, long-term care facilities, psychiatric and specialty 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 managed care and indemnity products; and (v) equity in the earnings of unconsolidated affiliates. 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 1997 1998 (DECREASE) 1997 1998 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Number of hospitals (at end of period)... 129 128 (1) * 129 128 (1) * Licensed beds (at end of period)......... 28,715 30,410 5.9% 28,715 30,410 5.9% Net inpatient revenues (in millions)..... $ 1,402 $ 1,538 9.7% $ 2,752 $ 3,012 9.4% Net outpatient revenues (in millions).... $ 748 $ 755 0.9% $ 1,474 $ 1,541 4.5% Admissions............................... 213,270 221,499 3.9% 418,842 440,666 5.2% Equivalent admissions.................... 327,578 322,035 (1.7)% 617,411 644,834 4.4% Average length of stay (days)............ 5.2 5.1 (0.1) * 5.1 5.1 - Patient days............................. 1,099,812 1,136,595 3.3% 2,154,251 2,249,910 4.4% Equivalent patient days.................. 1,661,469 1,638,011 (1.4)% 3,148,109 3,262,052 3.6% Net inpatient revenue per patient day.... $ 1,275 $ 1,353 6.1% $ 1,277 $ 1,339 4.9% Net inpatient revenue per admission...... $ 6,574 $ 6,944 5.6% $ 6,570 $ 6,835 4.0% Utilization of licensed beds............. 42.5% 43.8% 1.3% * 41.6% 43.5% 1.9% * Outpatient visits........................ 2,642,893 2,326,712 (12.0)% 5,294,737 4,747,340 (10.3)% </TABLE> * The change is the difference between 1997 and 1998 amounts shown. 11 <PAGE> 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 1997 1998 (DECREASE) 1997 1998 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Average licensed beds.................... 25,893 25,682 (0.8)% 26,019 25,779 (0.9)% Patient days............................. 1,051,539 1,054,024 0.2% 2,055,933 2,075,431 0.9% Net inpatient revenue per patient day.... $ 1,265 $ $1,308 3.4% $ $1,283 $ 1,317 2.7% Admissions............................... 204,590 207,347 1.3% 401,334 411,221 2.5% Net inpatient revenue per admission...... $ 6,504 $ $6,649 2.2% $ $6,570 $ 6,646 1.2% Outpatient visits........................ 2,510,131 2,180,856 (13.1)% 5,038,038 4,401,859 (12.6)% Average length of stay (days)............ 5.1 5.1 - 5.1 5.0 (0.1) * </TABLE> * The change is the difference between 1997 and 1998 amounts shown. Changes in Medicare payments mandated by the Balanced Budget Act of 1997 (the "1997 Act"), which became effective October 1, 1997, as well as certain proposed changes to various states' Medicaid programs, have reduced and will continue to reduce revenues and earnings significantly as these changes are phased in over the next two years. The most significant changes have been phased in by October 1, 1998. The Medicare program accounted for approximately 37.8% of the net patient revenues of the Company's domestic general hospitals for the quarter ended November 30, 1997 and 33.8% for the current quarter. For the six-month periods ended November 30, 1997 and 1998, the percentages were 38.0% and 34.5%. The Company continues to experience increases in inpatient acuity and intensity of services as less intensive services shift from an inpatient to an outpatient basis or to alternative healthcare delivery services because of technological and pharmaceutical improvements and continued pressures by payors to reduce admissions and lengths of stay. In spite of the historical shifts from inpatient to outpatient services, the Company experienced a 12.0% decline in the number of outpatient visits during the quarter ended November 30, 1998 compared to the year-ago quarter and a 10.3% decline for the corresponding six-month periods. In response to the changes in Medicare payments to home health agencies mandated by the 1997 Act, the Company has consolidated certain home health agencies, closed others and begun to increase the number of higher intensity home visits, which resulted in fewer total home health care visits. Excluding home health care visits for both periods, outpatient visits increased approximately 5.6% over the year-ago quarter. For the six- month periods, the increase was approximately 7.3%. Pressures to control healthcare costs and a shift from traditional Medicare after the 1997 Act was enacted have resulted in an increase in the number of patients whose healthcare coverage is provided under managed care plans. The percentage of net patient revenues of the Company's domestic general hospitals attributable to managed care increased from approximately 32.8% for the three months ended November 30, 1997 to approximately 37.0% for the current quarter. For the corresponding six-month periods managed care increased from 32.5% to 36.4%. The Company anticipates that its managed care business will continue to 12 <PAGE> increase in the future. The Company generally receives lower payments per patient from managed care payors than it does from traditional indemnity insurers. In certain instances, the Company also is assuming a greater share of risk by entering into capitated arrangements with managed care payors and employers. Under capitation, the Company receives a certain amount for each person enrolled in a plan and assumes the risks and rewards of meeting the healthcare needs of those persons so enrolled. The Company purchases insurance to cover a portion of the cost of meeting the healthcare needs of those covered. Approximately 5.6% of the Company's revenues were derived from capitated arrangements in the quarter ended November 30, 1998. To address the effect of reduced payments for services, while continuing to provide quality care to patients, the Company has implemented strategies to reduce inefficiencies, create synergies, obtain additional business and control costs. Such strategies include hospital cost-control programs and overhead reduction plans and the formation and enhancement of integrated healthcare delivery systems. Further consolidations or implementation of additional cost-control programs may be undertaken in the future to offset the reduced payments under the 1997 Act and the shift from traditional Medicare to managed care. The Company may incur severance and other special charges as these cost-control programs are implemented. Net operating revenues from the Company's other domestic operations were $231 million for the three months ended November 30, 1997, compared to $223 million for the current quarter. For the six-month periods ended November 30, 1997 and 1998, net operating revenues from other domestic operations were $439 million and $463 million, respectively. The increase for the six months relates primarily to growth in the first quarter of fiscal 1999 of its physician practices, essentially all of which were acquired as part of hospital acquisitions, offset in the second quarter by the effects of November 1997 sales of one specialty and two rehabilitation hospitals. Salaries and benefits expense as a percentage of net operating revenues was 41.5% in the quarter ended November 30, 1997 and 40.5% in the current quarter. Salaries and benefits expense as a percentage of net operating revenues for the prior and current six-month periods were 41.5% and 40.2%. This decrease is primarily the result of continuing cost control measures and the outsourcing of certain hospital services. Supplies expense as a percentage of net operating revenues was 13.6% in the quarter ended November 30, 1997 and 13.7% in the current quarter. Supplies expense as a percentage of net operating revenues for both the prior and current six-month periods was 13.7%. The slight overall increase in the quarter primarily was due to higher supplies expenses at recently acquired facilities. The Company continues to focus on reducing supplies expense through incorporating acquired facilities into the Company's existing group-purchasing program and by developing and expanding various programs designed to improve the purchasing and utilization of supplies. The provision for doubtful accounts as a percentage of net operating revenues was 5.6% in the quarter ended November 30, 1997, and 7.2% in the current quarter. The provision for doubtful accounts as a percentage of net operating revenues for the prior and current six-month periods was 6.0% and 6.7%, respectively. Management believes the rise in bad debts is attributable to a number of factors, including (a) the continuing shift of business from traditional Medicare, which has no associated bad debts, to managed 13 <PAGE> care, (b) a rise in the volume of care provided to uninsured patients in certain of the Company's hospitals, and (c) conversions of patient accounting systems at hospitals acquired over the past two years. Although management is unable to quantify the effect of each factor, management believes that, to the extent that the Company continues to experience a fundamental shift in its payor mix, this expense is likely to remain at higher levels than in past years. The Company is taking a series of actions to mitigate these recent increases in bad debt expense. Since a hospital's emergency room is a major source of uncompensated care, the Company is developing a best practices model for processing emergency room patients. The Company is strengthening its medical eligibility programs, as well as its business office and related operations, including admitting, medical records and coding, and the recruitment, training and compensation of business office staff. In certain markets, the Company is placing employees on-site at managed care claims processing centers to expedite payment. In certain circumstances, the Company also is obtaining advance payments from managed care payors who have claims processing or system problems. Other operating expenses as a percentage of net operating revenues were 21.0% for both the prior and current quarters ended November 30, 1997 and 1998. For the prior and current six-month periods, the percentages were 20.9% and 21.5%, respectively. The increase in the six-month period was due primarily to increases in medical and other professional fees, including new consolidated laboratory fees. These new fees are offset by reductions in salaries and benefits, as certain of the Company's general hospitals consolidated and outsourced laboratory and other services. Depreciation and amortization expense as a percentage of net operating revenues was 4.7% in the quarter ended November 30, 1997, and 5.2% in the current quarter. Depreciation and amortization expense as a percentage of net operating revenues for the prior and current six-month periods was 4.6% and 5.1%, respectively. The increase is due to hospital acquisitions and capital expenditures. Interest expense, net of capitalized interest, was $118 million in the quarter ended November 30, 1997 and $119 million in the current quarter. For the prior and current six-month periods, it was $230 million and $238 million, respectively. The increase is primarily due to increased borrowings for acquisitions offset by the effect of interest rate reductions during these periods. Taxes on income as a percentage of income before income taxes were 39.7% for the three months ended November 30, 1997 and 38.4% in the current quarter. The decrease in the tax rate is primarily due to the utilization of certain operating loss carryforwards, and, to a lesser extent, the reduced impact of non-deductible goodwill amortization and certain benefits from charitable contributions. The Company currently expects its tax rate for the year ended May 31, 1999 to be approximately 38.5%. On November 10, 1998, subsidiaries of the Company purchased eight general hospitals with 2,484 licensed beds and certain other assets in the Philadelphia, Pennsylvania area from the Allegheny Health Education and Research Foundation. The purchase price was approximately $360 million (including the effect of certain working capital and other adjustments) which the Company borrowed under its existing bank credit facility. Based on information presently available and management's assumptions as to future performance, the Company expects this acquisition to be dilutive to its earnings per share in fiscal 1999 by approximately $0.15 per share. 14 <PAGE> LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity for the six months ended November 30, 1998 was derived primarily from borrowings under the Company's unsecured revolving bank credit agreement (the "Credit Agreement") and net cash provided by operating activities. Net cash provided by operating activities for the six months ended November 30, 1997 was $244 million before expenditures of $232 million for discontinued operations, merger, facility consolidation and impairment charges. The expenditures in 1997 include the settlement of significant litigation relating to the Company's discontinued psychiatric business. Net cash provided by operating activities for the six months ended November 30, 1998 was $317 million before net expenditures of $20 million for discontinued operations, merger, facility consolidation and impairment charges. Management believes that future cash provided by recurring operating activities, the availability of credit under the Credit Agreement, the sale of assets and, depending on capital market conditions and to the extent permitted by the restrictive covenants of the Credit Agreement and the indentures governing the Company's senior and senior subordinated notes, other borrowings or the sale of equity securities should be adequate to meet known debt service requirements and to finance planned capital expenditures, acquisitions and other presently known operating needs over the next three years. Proceeds from borrowings under the Credit Agreement were $2.1 billion during the six months ended November 30, 1998 compared to $1.4 billion in the prior year period. Loan repayments under the Credit Agreement were $1.6 billion in the current six-month period compared to $889 million in the period ended November 30, 1997. Cash payments for property and equipment were $241 million in the six months ended November 30, 1998, compared to $215 million in the prior six-month period. The Company expects to spend approximately $500 million to $600 million annually on capital expenditures, before any significant acquisitions of facilities and other healthcare operations and before an estimated $256 million in remaining commitments to fund the construction of two new hospitals over the next three years. Such capital expenditures primarily relate to the development of integrated healthcare systems 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. Purchases of new businesses, net of cash acquired, were $446 million in the six months ended November 30, 1998 and $381 million for the six months ended November 30, 1997. These acquisitions were financed substantially by borrowings under the Credit Agreement. The Company does not expect its acquisition activity to continue at these levels. The Credit Agreement and the indentures governing the Company's senior and 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 other borrowings, liens, investments, the sale of all or substantially all assets and prepayment of subordinated debt, a prohibition against the Company declaring or paying a dividend or purchasing its common stock, unless its senior 15 <PAGE> 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., and covenants regarding maintenance of specified levels of net worth, debt ratios and fixed charge coverages. Current debt ratings on the Company's senior debt securities are BB+ by Standard and Poors and Ba1 by Moody's. The Company is in compliance with its loan covenants. The Company's strategy continues to include the prudent development of integrated healthcare delivery systems, including the acquisition of general hospitals and related ancillary healthcare businesses or joining with others to develop integrated healthcare delivery systems. All or portions of this development may be financed by net cash provided by operating activities, the availability of credit under the Credit Agreement, the sale of assets and, depending on capital market conditions and to the extent permitted by the restrictive covenants of the Credit Agreement and the indentures governing the Company's senior and senior subordinated notes, other borrowings or the sale of equity securities. The Company's unused borrowing capacity under the Credit Agreement was $585 million as of January 8, 1999. The full availability of any unused borrowing capacity may become limited by covenants in the Credit Agreement after May 31, 1999. BUSINESS OUTLOOK 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 continues 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 pressure, as well as the shift in patient mix to managed care, are expected to continue. The continuing 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 payment rates by both private and government payors. Because of national, state and private industry efforts to reform healthcare delivery and payment systems, the healthcare industry as a whole faces increased uncertainty. The Company is unable to predict whether any other healthcare legislation at the federal and/or state level will be passed in the future and what action it may take in response to such legislation, but it continues to monitor all proposed legislation and analyze its potential impact in order to formulate the Company's future business strategies. THE YEAR 2000 ISSUE The Company's Annual Report on Form 10-K for its fiscal year ended May 31, 1998 (the "1998 10-K"), contains a complete description of the Company's Year 2000 compliance program. The Securities and Exchange Commission (the "SEC") recently published additional guidance for what companies should include in their disclosures concerning the Year 2000. In order to comply with that guidance, the Company is supplementing the description of its Year 2000 compliance program reported in the 1998 10-K and in its Quarterly Report on Form 10-Q/A for the quarterly period ended August 31, 1998. 16 <PAGE> The Company remains on track with its six-phase program described in the 1998 10-K. The first phase of the program, conducting an inventory of systems and programs that may be affected by the Year 2000 issue, has been substantially completed for both its information technology systems ("IT Systems") and for its non-IT Systems such as bio-medical equipment ("Non-IT Items"). The second phase, assessment of how the Year 2000 issues may affect each piece of equipment and system, has been substantially completed for the IT Systems and is expected to be substantially completed for the Non-IT Items by the end of January 1999. Phases three through six (planning corrections of any problems discovered, executing the plans developed, testing the corrections and implementing the corrections) have already commenced and will run concurrently through the fall of calendar 1999 for both IT-Systems and Non-IT Items. The costs the Company has incurred to date in connection with its Year 2000 compliance program amount to approximately $18 million. Although the Company has not yet completed its evaluation of the full scope of the Year 2000 issues facing its systems and programs, based on the information currently available, the Company estimates that its total cost for addressing all Year 2000 issues will be approximately $70 million. This estimate includes approximately $20 million of costs associated with capital projects that would have been undertaken notwithstanding the Year 2000 compliance program but the timing of which was accelerated by one to three years in light of the program. The Company cautions that its estimate is based on the information available to the Company at this time. As noted above, the Company has not yet completed its evaluation of the full scope of its Year 2000 issues and its estimate of the costs it may incur may change as it receives more complete information. Although the total cost of the Company's Year 2000 compliance program is presently not expected to have a material adverse effect on its operations, liquidity or financial condition, many factors, such as the number of pieces of equipment and systems with Year 2000 issues, the availability and cost of various solutions to any Year 2000 issues and the cost of replacing equipment or systems that cannot be brought into compliance or with respect to which it is more cost-effective in the long run to replace or take out of service, are not fully known at this time and could have an aggregate material impact on the Company's estimate. The Company will receive additional information concerning these and other matters as it completes each phase of its Year 2000 compliance program. The Company is continuing to develop contingency plans to address any Year 2000 issues that do arise. As part of its Year 2000 compliance program, the Company is in the process of evaluating every IT System and Non-IT Item in each of its offices, hospitals and other facilities. Since any piece of equipment that is not Year 2000 compliant will be made compliant, replaced or taken out of service, the Company does not expect the Year 2000 Issues to have an adverse impact on patient care. Furthermore, the Company has developed or is developing a back-up plan for each piece of critical equipment in case it unexpectedly fails. Many of those contingency plans already are in place since contingency plans already are required in order for a hospital to obtain and retain its license. The Company's contingency plans also include plans to address third parties' Year 2000 issues that may arise. Examples include (i) making certain that each hospital's back-up power generator is operational if there is a power failure, (ii) if the Company does not receive assurance that delivery of key medical supplies will not be interrupted by Year 2000 issues, the Company will identify reliable alternative sources for those supplies or will 17 <PAGE> stockpile those supplies, and (iii) if regular payments from a principal payor might be adversely affected by Year 2000 issues, the Company will negotiate an alternative payment system. The SEC's recent guidance for Year 2000 disclosure also calls on companies to describe their most likely worst case Year 2000 scenarios. While one can imagine a scenario in which medical equipment fails as a result of a Year 2000 problem, which could lead to serious injury or death, the Company does not believe that such a scenario is likely to occur. As noted above, since any piece of equipment that is not Year 2000 compliant will be made compliant, replaced or taken out of service, the Company does not expect the Year 2000 issues to have an adverse impact on patient care. Furthermore, there will be a back-up plan for each piece of critical equipment in case it unexpectedly fails. The most likely worst case scenario is that the Company will have to replace or take out of service some of its existing equipment and add additional staff and/or reassign existing staff during the time period leading up to and immediately following December 31, 1999, in order to address any Year 2000 issues that unexpectedly arise. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "will," "may," "might," and words of similar import, and statements regarding business strategy and plans constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company's or the healthcare industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally, and in the regions in which the Company operates; industry capacity; demographic changes; existing laws and government regulations and changes in, or the failure to comply with, laws and governmental regulations; legislative proposals for healthcare reform; the ability to enter into managed care provider arrangements on acceptable terms; shifts from traditional Medicare payment arrangements to Medicare managed care programs, including capitated Medicare managed care programs; shifts from fee-for-service payment to capitated and other risk-based payment systems; changes in Medicare and Medicaid payments levels; liability and other claims asserted against the Company; competition; the loss of any significant customers; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, healthcare; changes in business strategy or development plans; the ability to attract and retain qualified personnel, including physicians and nurses; the Company's significant indebtedness; the availability of suitable acquisition opportunities and the length of time it takes to accomplish acquisitions; the Company's ability to integrate new businesses with its existing operations; the availability and terms of capital to fund the expansion of the Company's business, including the acquisition of additional facilities; the impact of Year 2000 issues; and other factors referenced in the Company's 1998 10-K, its other periodic reports or herein. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Tenet disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 18 <PAGE> PART II. OTHER INFORMATION Item 1. Legal Proceedings Material Developments in Previously Reported Legal Proceedings: There have been no material developments in the legal proceedings described in the Company's Annual Report on Form 10-K for its fiscal year ended May 31, 1998. Items 2, 3 and 5 are not applicable. Item 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of shareholders was held on October 7, 1998. The shareholders elected all of the Company's nominees for director. The shareholders approved the shareholder proposal regarding declassification of the Board of Directors and ratified the selection of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ended May 31, 1999. (KPMG Peat Marwick LLP subsequently changed its name to KPMG LLP.) The shareholders did not approve the shareholder proposal regarding Year 2000 disclosures. The votes were as follows: <TABLE> <CAPTION> 1. Election of Directors For Withheld --- -------- <S> <C> <C> Sanford Cloud, Jr. 280,777,781 2,196,674 Maurice J. DeWald 280,839,442 2,135,013 Raymond A. Hay 280,785,946 2,188,509 </TABLE> 2. Shareholder proposal regarding Year 2000 disclosures: <TABLE> <S> <C> For: 22,590,574 Against: 231,194,413 Abstaining: 5,063,660 </TABLE> 3. Shareholder proposal regarding declassification of the Company's Board of Directors: <TABLE> <S> <C> For: 187,596,345 Against: 69,771,022 Abstaining: 1,481,280 </TABLE> 4. Ratification of selection of KPMG Peat Marwick LLP: <TABLE> <S> <C> For: 278,215,579 Against: 4,617,678 Abstaining: 141,196 </TABLE> 19 <PAGE> PART II. OTHER INFORMATION (CONT.) Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. (3) Shareholder Rights Plan, adopted December 7, 1998 (incorporated by reference from the Company's Form 8-K filed with the Securities and Exchange Commission on December 11, 1998). (27.1) Financial Data Schedule for the six months ended November 30, 1998 (included only in the EDGAR filing). (b) Reports on Form 8-K (i) Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 24, 1998. (ii) Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 11, 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TENET HEALTHCARE CORPORATION (Registrant) Date: January 14, 1999 /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) 20 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AT NOVEMBER 30, 1998 AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 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-31-1999 <PERIOD-END> NOV-30-1998 <CASH> 32,000 <SECURITIES> 139,000 <RECEIVABLES> 2,247,000 <ALLOWANCES> 203,000 <INVENTORY> 237,000 <CURRENT-ASSETS> 3,083,000 <PP&E> 8,373,000 <DEPRECIATION> 1,951,000 <TOTAL-ASSETS> 13,629,000 <CURRENT-LIABILITIES> 1,820,000 <BONDS> 6,309,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 24,000 <OTHER-SE> 3,840,000 <TOTAL-LIABILITY-AND-EQUITY> 13,629,000 <SALES> 0 <TOTAL-REVENUES> 5,116,000 <CGS> 0 <TOTAL-COSTS> 4,118,000 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 343,000 <INTEREST-EXPENSE> 238,000 <INCOME-PRETAX> 425,000 <INCOME-TAX> 163,000 <INCOME-CONTINUING> 262,000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 262,000 <EPS-PRIMARY> 0.84 <EPS-DILUTED> 0.84 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

AAPL

https://www.sec.gov/Archives/edgar/data/320193/0000912057-00-003201.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, PJdP/npkav3suYiD6c8MTZTZo16T2NcOaNFsjIhd6czeu5soEXLpJhp5KCrC/V9z Rl9KsmhIc4WO44PDXOkBEQ== <SEC-DOCUMENT>0000912057-00-003201.txt : 20000203 <SEC-HEADER>0000912057-00-003201.hdr.sgml : 20000203 ACCESSION NUMBER: 0000912057-00-003201 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000201 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: SEC FILE NUMBER: 000-10030 FILM NUMBER: 518560 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 <DESCRIPTION>10-Q <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 1, 2000 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________. Commission file number 0-10030 ----------- APPLE COMPUTER, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ----------- CALIFORNIA 942404110 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 1 Infinite Loop Cupertino, California 95014 (ADDRESS OF PRINCIPAL EXECUTIVE 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 --- --- 161,661,155 shares of Common Stock Issued and Outstanding as of January 21, 2000 <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in millions, except share and per share amounts) <TABLE> <CAPTION> Three Months Ended ------------------ January 1, 2000 December 26, 1998 --------------- ----------------- <S> <C> <C> Net sales......................................... $2,343 $1,710 Cost of sales..................................... 1,736 1,228 ------ ------ Gross margin................................... 607 482 ------ ------ Operating expenses: Research and development....................... 90 76 Selling, general, and administrative........... 319 279 Special charges: Restructuring costs....................... 8 -- Executive bonus........................... 90 -- ------ ------ Total operating expenses........... 507 355 ------ ------ Operating income ................................. 100 127 Gains from sales of investment.................... 134 32 Interest and other income, net.................... 40 10 ------ ------ Total interest and other income, net........... 174 42 ------ ------ Income before provision for income taxes.......... 274 169 Provision for income taxes........................ 91 17 ------ ------ Net income........................................ $183 $152 ====== ====== Earnings per common share: Basic....................................... $1.14 $1.12 Diluted..................................... $1.03 $0.95 Shares used in computing earnings per share (in thousands): Basic....................................... 161,039 135,270 Diluted..................................... 178,417 172,062 </TABLE> See accompanying notes to condensed consolidated financial statements. 2 <PAGE> APPLE COMPUTER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions, except share amounts) ASSETS <TABLE> <CAPTION> January 1, 2000 September 25,1999 --------------- ----------------- <S> <C> <C> Current assets: Cash and cash equivalents............................................... $1,586 $1,326 Short-term investments.................................................. 2,074 1,900 Accounts receivable, less allowances of $66 and $68, respectively....... 892 681 Inventories............................................................. 15 20 Deferred tax assets..................................................... 131 143 Other current assets.................................................... 211 215 ------ ------ Total current assets............................................... 4,909 4,285 Property, plant and equipment, net......................................... 318 318 Non-current debt and equity investments.................................... 2,140 345 Other assets............................................................... 219 213 ------ ------ Total assets....................................................... $7,586 $5,161 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................................ $1,174 $812 Accrued expenses........................................................ 791 737 ------ ------ Total current liabilities.......................................... 1,965 1,549 Long-term debt............................................................. 300 300 Deferred tax liabilities................................................... 907 208 ------ ------ Total liabilities.................................................. 3,172 2,057 ------ ------ 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; 161,224,400 and 160,799,061 shares issued and outstanding, respectively............. 1,345 1,349 Retained earnings....................................................... 1,682 1,499 Accumulated other comprehensive income.................................. 1,237 106 ------ ------ Total shareholders' equity......................................... 4,414 3,104 ------ ------ Total liabilities and shareholders' equity......................... $7,586 $5,161 ====== ====== </TABLE> See accompanying notes to condensed consolidated financial statements. 3 <PAGE> APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) <TABLE> <CAPTION> Three Months Ended ------------------ January 1, 2000 December 26, 1998 --------------- ----------------- <S> <C> <C> Cash and cash equivalents, beginning of the period.............................. $1,326 $1,481 ------ ------ Operating: Net income...................................................................... 183 152 Adjustments to reconcile net income to cash generated by operating activities: Depreciation and amortization................................................ 20 23 Provision for deferred income taxes.......................................... 64 10 Gains from sales of investment.............................................. (134) (32) (Gain)/Loss on sale of property, plant, and equipment....................... 3 (1) Changes in operating assets and liabilities: Accounts receivable.......................................................... (211) 42 Inventories.................................................................. 5 53 Other current assets......................................................... 4 (2) Other assets................................................................. 3 14 Accounts payable............................................................. 362 (64) Other current liabilities.................................................... 74 28 ------ ------ Cash generated by operating activities.................................... 373 223 ------ ------ Investing: Purchase of short-term investments.............................................. (693) (1,135) Proceeds from sales and maturities of short-term investments.................... 519 597 Purchase of property, plant, and equipment...................................... (38) (5) Proceeds from sales of investment............................................... 136 37 Other........................................................................... (13) 20 ------ ------ Cash used for investing activities........................................ (89) (486) ------ ------ Financing: Proceeds from issuance of common stock.......................................... 17 3 Cash used for repurchase of common stock........................................ (41) -- ------ ------ Cash generated (used) by financing activities............................. (24) 3 ------ ------ Total cash generated (used)..................................................... 260 (260) ------ ------ Cash and cash equivalents, end of the period.................................... $1,586 $1,221 ====== ====== Supplemental cash flow disclosures: Cash paid for interest....................................................... $ -- $ 20 Cash paid (received) for income taxes, net................................... $ 8 $ (7) </TABLE> See accompanying notes to condensed consolidated financial statements. 4 <PAGE> APPLE COMPUTER, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS Interim information is unaudited; however, in the opinion of the Company's management, all adjustments of a normal recurring nature necessary for a fair statement of interim periods presented have been included. The results for interim periods are not necessarily indicative of results to be expected for the entire year. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto for the fiscal year ended September 25, 1999, included in its Annual Report on Form 10-K for the year ended September 25, 1999 (the 1999 Form 10-K). Approximately every six years, the Company reports a 53-week fiscal year to align its fiscal quarters with calendar quarters by adding a week to its first fiscal quarter. Consequently, an additional week was added to the first quarter of fiscal 2000. NOTE 2 - EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional common shares that would have been outstanding if 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 and per share amounts): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED -------------------------- 1/1/00 12/26/98 ------ -------- <S> <C> <C> Numerator (in millions): Numerator for basic earnings per share -- net income $183 $152 Interest expense on convertible debt -- 11 ------- ------- Numerator for diluted earnings per share -- adjusted net income $183 $163 ------- ------- Denominator: Denominator for basic earnings per share -- weighted-average shares outstanding 161,039 135,270 Effect of dilutive securities: Convertible preferred stock 9,091 9,091 Dilutive options 8,287 5,059 Convertible debt -- 22,642 ------- ------- Dilutive potential common shares 17,378 36,792 ------- ------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 178,417 172,062 ======= ======= Basic earnings per share $1.14 $1.12 ======= ======= Diluted earnings per share $1.03 $0.95 ======= ======= </TABLE> 5 <PAGE> Options to purchase approximately 7.4 million and 85,000 shares of common stock were outstanding at the end of the first quarters of fiscal 2000 and fiscal 1999, respectively, that were not included in the computation of diluted earnings per share for these quarters because the options' exercise price was greater than the average market price of the Company's common stock during those periods and, therefore, the effect would be antidilutive. During the first quarter of fiscal 1999, the Company had outstanding $661 million of unsecured convertible subordinated debentures (the Debentures) which were convertible by their holders into approximately 22.6 million shares of common stock at a conversion price of $29.205 per share. The weighted average common shares represented by the Debentures upon conversion were included in the computation of diluted earnings per share for the three month period ended December 26, 1998, using the if-converted method. On April 14, 1999, the Company called for redemption of the Debentures. As a result, debenture holders converted virtually all of the outstanding debentures to 22.6 million shares of the Company's common stock in fiscal 1999. For additional disclosures regarding the Debentures, see the 1999 Form 10-K. NOTE 3 - CONSOLIDATED FINANCIAL STATEMENT DETAILS (IN MILLIONS) <TABLE> <CAPTION> INVENTORIES 1/1/00 9/25/99 ------ ------- <S> <C> <C> Purchased parts............................................ $ 5 $ 4 Work in process............................................ -- 3 Finished goods............................................. 10 13 ------ ------- Total inventories.......................................... $ 15 $ 20 ------ ------- ------ ------- PROPERTY, PLANT, AND EQUIPMENT 1/1/00 9/25/99 ------ ------- Land and buildings......................................... $ 324 $ 323 Machinery and equipment.................................... 209 220 Office furniture and equipment............................. 61 61 Leasehold improvements..................................... 131 125 Accumulated depreciation and amortization.................. (407) (411) ------ ------- Net property, plant, and equipment......................... $ 318 $ 318 ------ ------- ------ ------- ACCRUED EXPENSES 1/1/00 9/25/99 ------ ------- Accrued compensation and employee benefits................. $ 187 $ 84 Accrued marketing and distribution......................... 168 170 Accrued warranty and related costs......................... 105 105 Other current liabilities.................................. 331 378 ------ ------- Total accrued expenses..................................... $ 791 $ 737 ------ ------- ------ ------- INTEREST AND OTHER INCOME (EXPENSE) THREE MONTHS ENDED ----------------------- 1/1/00 12/26/98 ------ -------- Interest income............................................ $ 47 $ 32 Interest expense........................................... (5) (16) Other income (expense), net................................ (2) (6) ------ -------- Interest and other income (expense), net................... $ 40 $ 10 ------ -------- ------ -------- </TABLE> 6 <PAGE> NOTE 4 - NON-CURRENT DEBT AND EQUITY INVESTMENTS The Company holds significant investments in ARM Holdings plc (ARM), Samsung Electronics Co., Ltd (Samsung), and Akamai Technologies, Inc. (Akamai). These investments are reflected in the consolidated balance sheets as non-current debt and equity investments and have been categorized as available-for-sale requiring that they be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. The Company believes it is likely there will be significant fluctuations in the fair value of these investments in the future. ARM is a publicly held company in the United Kingdom involved in the design and licensing of high performance microprocessors and related technology. As of September 25, 1999, the Company held approximately 16 million shares of ARM stock with a fair value of $226 million. During the first quarter of 2000, the Company sold approximately 5.2 million shares of ARM stock for net proceeds of approximately $136 million and a gain before taxes of $134 million. As of January 1, 2000, the Company holds 10.9 million shares of ARM stock with a fair value of $693 million. During the first quarter of fiscal 1999, the Company sold approximately 2.9 million shares of ARM stock for net proceeds of approximately $37 million and a gain before taxes of $32 million. During the fourth quarter of 1999, the Company invested $100 million in Samsung to assist in the further expansion of Samsung's TFT-LCD flat-panel display production capacity. The investment, in the form of three year unsecured bonds, is convertible into approximately 550,000 shares of Samsung common stock beginning in June 2000. The bonds carry an annual coupon rate of 2% and pay a total yield to maturity of 5% if redeemed at their maturity. The fair value of the Company's investment in Samsung is approximately $100 million as of January 1, 2000. In June 1999, the Company invested $12.5 million in Akamai, a global Internet content delivery service. The investment was in the form of convertible preferred stock that converted into 4.1 million shares of Akamai common stock (adjusted for subsequent stock splits) at the time of Akamai's initial public offering in October 1999. The Company is restricted from selling more than 25% of its shares within one year after the date of the closing of the public offering of Akamai's stock. Beginning in the first quarter of fiscal 2000, the Company categorized its shares in Akamai as available-for-sale. As of January 1, 2000, the Company's investment in Akamai has a fair value of $1.347 billion. NOTE 5 - SHAREHOLDER'S EQUITY During the first quarter of fiscal 2000, the Company granted employees options to purchase approximately 8.2 million shares of common stock at a weighted-average exercise price of $92.94. On January 12, 2000, the Company's Board of Directors granted the Company's Chief Executive Officer options under the Company's 1998 Executive Officer Stock Plan to purchase 10 million shares of common stock at an exercise price of $87.1875 per share, the then fair value of the underlying common stock. A summary of the Company's stock option activity and related information for the first quarter of fiscal 2000, adjusted to reflect the grant of 10 million options to the Company's Chief Executive Officer on January 12, 2000, follows (option amounts are presented in thousands): <TABLE> <CAPTION> NUMBER OF WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE --------- ---------------- <S> <C> <C> Options outstanding - beginning of quarter ....... 18,404 $ 26.39 Granted (as adjusted) ......................... 18,224 $ 89.78 Exercised ..................................... (925) $ 19.48 Forfeited ..................................... (482) $ 42.83 ------ Options outstanding - end of quarter (as adjusted) 35,221 $ 59.14 ====== Options exercisable - end of quarter (as adjusted) 8,067 $ 60.63 </TABLE> 7 <PAGE> In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. During the first quarter of 2000, the company repurchased 500,000 shares of its common stock at a cost of approximately $41 million. Since inception of the stock repurchase plan, the Company has repurchased a total of 1.75 million shares of its common stock at a total cost of $116 million. NOTE 6 - COMPREHENSIVE INCOME Comprehensive income is comprised of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The Company's other comprehensive income is comprised of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency and from unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale. See Note 4 regarding unrealized gains on available-for-sale securities. The components of comprehensive income, net of tax, are as follows (in millions): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED -------------------------- 1/1/00 12/26/98 ------ -------- <S> <C> <C> Net income................................ $ 183 $ 152 Other comprehensive income: Change in accumulated translation adjustment........................ (1) 12 Unrealized gains on investments, net of taxes.......................... 1,233 113 Reclassification adjustment for gains included in net income............ (101) -- ------ -------- Total comprehensive income................ $1,314 $ 277 ------ -------- ------ -------- </TABLE> NOTE 7 - SPECIAL CHARGES RESTRUCTURING ACTIONS During the first quarter of fiscal 2000, the Company initiated restructuring actions resulting in recognition of an $8 million restructuring charge. This charge was comprised of $3 million for the write-off of various operating assets and $5 million for severance payments to approximately 95 employees associated with consolidation of various domestic and international sales and marketing functions. Of the $5 million accrued for severance, $1 million had been spent by January 1, 2000, and the remainder is expected to be spent over the following two quarters. During the fourth quarter of 1999, the Company initiated restructuring actions resulting in a charge to operations of $21 million comprised of $11 million for contract cancellation charges associated with the closure of the Company's outsourced data center, $9.2 million of which had been spent by the end of the first quarter of fiscal 2000, and $10 million for contract cancellation charges related to supply and development agreements previously discontinued, all of which had been spent by the end of the first quarter of fiscal 2000. EXECUTIVE BONUS In December 1999, the Company's Board of Directors approved a special executive bonus for past services for the Company's Chief Executive Officer in the form of an aircraft with a total cost to the company of approximately $90 million, the majority of which is not tax deductible. Approximately half of the total charge is the cost of the aircraft. The other half represents all other costs and taxes associated with the purchase. 8 <PAGE> NOTE 8 - SEGMENT INFORMATION AND GEOGRAPHIC DATA The Company manages its business primarily on a geographic basis. The Company's reportable segments are comprised of the Americas, Europe, and Japan. The Americas segment includes both North and South America. The European segment includes European countries as well as the Middle East and Africa. Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, Filemaker, Inc.. Each reportable operating segment provides similar products and services, and the accounting policies of the various segments are the same as those described in the 1999 Form 10-K. The Company evaluates the performance of its operating segments based on net sales and operating income. Operating income for each segment includes revenue, cost of sales, and operating expenses directly attributable to the segment. Net sales are based on the location of the customers. Operating income for each segment excludes other income and expense and certain expenses that are managed outside the reportable segment. Costs excluded from segment operating income include various corporate expenses, income taxes, and nonrecurring charges for purchased in-process research and development, restructuring, and acquisition related costs. Corporate expenses include research and development, manufacturing expenses not included in segment cost of sales, corporate marketing expenses, and other separately managed general and administrative expenses. The Company does not include intercompany transfers between segments for management reporting purposes. Summary information by segment follows (in millions): <TABLE> <CAPTION> THREE MONTHS ENDED ------------------ 1/1/00 12/26/98 ------ -------- <S> <C> <C> Americas: Net Sales ................. $1,189 $ 960 Operating Income........... $ 166 $ 121 Europe: Net Sales.................. $ 626 $ 452 Operating Income........... $ 114 $ 63 Japan: Net Sales.................. $ 412 $ 192 Operating Income........... $ 114 $ 27 Other Segments: Net Sales.................. $ 116 $ 106 Operating Income........... $ 25 $ 19 </TABLE> A reconciliation of the Company's segment operating income to the condensed consolidated financial statements follows (in millions): <TABLE> <CAPTION> 1/1/00 12/26/98 ------ -------- <S> <C> <C> Segment Operating Income...... 419 230 Corporate Expenses, net....... 221 103 Restructuring Costs........... 8 -- Executive Bonus............... 90 -- ------ ------ Total Operating Income..... $ 100 $ 127 ====== ====== </TABLE> 9 <PAGE> Information regarding net sales by product is as follows (in millions): <TABLE> <CAPTION> 1/1/00 12/26/98 ------ -------- <S> <C> <C> Power Macintosh............................... $ 707 $ 611 PowerBook..................................... 212 257 iMac.......................................... 795 574 ibook ........................................ 351 -- Software, Service, and Other Net Sales........ 278 268 ------ -------- Total Net Sales............................ $2,343 $ 1,710 ------ -------- ------ -------- </TABLE> NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which provides guidance on accounting for the costs of computer software intended for internal use. The adoption of SOP 98-1 did not have a material impact on the Company's consolidated results of operations or financial position during the quarter ended January 1, 2000. In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133," was issued. The statement defers the effective date of SFAS No. 133 until the first quarter of fiscal 2001. Although the Company continues to review the effect of the implementation of SFAS No. 133, the Company does not currently believe its adoption will have a material impact on its financial position or overall trends in results of operations and does not believe adoption will result in significant changes to its financial risk management practices. However, the impact of adoption of SFAS No. 133 on the Company's results of operations is dependent upon the fair values of the Company's derivatives and related financial instruments at the date of adoption. NOTE 10 - CONTINGENCIES The Company is subject to various legal proceedings and claims that are discussed in detail in the 1999 Form 10-K. The Company is also subject to certain other legal proceedings and claims which have arisen in the ordinary course of business and which have not been fully adjudicated. The results of legal proceedings cannot be predicted with certainty; however, in the opinion of management, the Company does not have a potential liability related to any legal proceedings and claims that would have a material adverse effect on its financial condition or results of operations. The Internal Revenue Service (IRS) has proposed federal income tax deficiencies for the years 1984 through 1991, and the Company has made certain prepayments thereon. The Company contested the proposed deficiencies by filing petitions with the United States Tax Court, and most of the issues in dispute have now been resolved. On June 30, 1997, the IRS proposed income tax adjustments for the years 1992 through 1994. Although most of the issues for these years have been resolved, certain issues still remain in dispute and are being contested by the Company. Management believes adequate provision has been made for any adjustments that may result from tax examinations. 10 <PAGE> NOTE 11 - SUBSEQUENT EVENTS EARTHLINK On January 4, 2000, the Company agreed to invest $200 million in EarthLink Network, Inc. (EarthLink), an Internet service provider. The investment is in EarthLink's Series C Convertible Preferred Stock, which is convertible by the Company after January 4, 2001, into approximately 4.4 million shares of EarthLink common stock (subject to appropriate adjustment for stock splits, dividends, and other similar adjustments). Apple will also receive a seat on Earthlink's Board of Directors. Concurrent with this investment, Earthlink and the Company entered into a multi-year agreement to deliver ISP service to Macintosh users in the United States. Under the terms of the agreement, the Company will profit from each new Mac customer that subscribes to EarthLink's ISP service, and EarthLink will become the default ISP in Apple's Internet Setup Software included with all Macintosh computers sold in the United States. 11 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS SECTION AND OTHER PARTS OF THIS FORM 10-Q CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION" BELOW. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE 1999 FORM 10-K AND 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. RESULTS OF OPERATIONS Tabular information (dollars in millions, except per share amounts): <TABLE> <CAPTION> ------------------------------------------------------------------- FIRST FIRST FIRST FOURTH QUARTER QUARTER CHANGE QUARTER QUARTER CHANGE 2000 1999 2000 1999 ------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net sales ......................... $2,343 $1,710 37% $2,343 $1,336 75% Macintosh CPU unit sales (in thousands) .............. 1,377 944 46% 1,377 772 78% Gross margin ...................... $ 607 $ 482 26% $ 607 $ 384 58% Percentage of net sales ........ 25.9% 28.2% 25.9% 28.7% Research and development .......... $ 90 $ 76 18% $ 90 $ 82 10% Percentage of net sales ........ 4% 4% 4% 6% Selling, general and administrative .................... $ 319 $ 279 14% $ 319 $ 235 36% Percentage of net sales ........ 14% 16% 14% 18% Special Charges ................... $ 98 $-- NM $ 98 $-- NM Gains from sales of investment .... $ 134 $ 32 319% $ 134 $ 42 219% Interest and other income, net .... $ 40 $ 10 300% $ 40 $ 34 18% Provision for income taxes ........ $ 91 $ 17 435% $ 91 $ 14 550% Effective tax rate ............. 33% 10% 33% 11% Net income ........................ $ 183 $ 152 20% $ 183 $ 111 65% Basic earnings per share .......... $ 1.14 $ 1.12 2% $ 1.14 $ 0.69 65% Diluted earnings per share ........ $ 1.03 $ 0.95 8% $ 1.03 $ 0.63 63% </TABLE> NM: Not Meaningful 12 <PAGE> NET SALES Net sales for geographic operating segments and Macintosh unit sales by geographic segment and by product follow (net sales in millions and Macintosh unit sales in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED -------------------- YR-TO-YR -------------------- SEQUENTIAL 1/1/00 12/26/98 CHANGE 1/1/00 9/25/99 CHANGE ------ -------- ------ ------ ------- ------ <S> <C> <C> <C> <C> <C> <C> Americas net sales ................. $1,189 $ 960 24% $1,189 $ 899 32% Europe net sales ................... $ 626 $ 452 38% $ 626 $ 200 213% Japan net sales .................... $ 412 $ 192 115% $ 412 $ 135 205% Asia Pacific net sales ............. $ 77 $ 75 3% $ 77 $ 68 13% Americas Macintosh unit sales ...... 708 525 35% 708 557 27% Europe Macintosh unit sales ........ 389 252 54% 389 102 281% Japan Macintosh unit sales ......... 235 119 97% 235 74 218% Asia Pacific Macintosh unit sales... 45 48 (6%) 45 39 15% ------ ------ ------ ------ Total Macintosh unit sales .... 1,377 944 46% 1,377 772 78% ====== ====== ====== ====== Power Macintosh unit sales ......... 355 326 9% 355 223 59% PowerBook unit sales ............... 84 99 (15%) 84 98 (14%) iMac unit sales .................... 702 519 35% 702 445 58% iBook unit sales ................... 236 -- -- 236 6 3,833% ------ ------ ------ ------ Total Macintosh unit sales .... 1,377 944 46% 1,377 772 78% ====== ====== ====== ====== </TABLE> Net sales increased $633 million or 37% to $2.343 billion in the first quarter of 2000 compared to the same quarter in 1999. The primary source of this growth was an overall 46% increase in Macintosh unit sales, which was reflective of strong unit growth in the Company's three largest geographic operating segments. Unit shipments during the first quarter of 2000 also increased compared to the same period in fiscal 1999 because it was the first full quarter during which iBook, the Company's new education and consumer oriented portable computer, was shipping in volume. Offsetting the rise in unit shipments was a decline in the average revenue per Macintosh system, a function of total net sales generated by hardware shipments and total Macintosh CPU unit sales, which fell 6% to $1,673 during the first quarter of 2000 from $1,776 in 1998. The decline during the current quarter in the average revenue per Macintosh system is primarily attributable to the shift in the Company's unit mix toward lower-priced consumer and education products such that iMac and iBook units comprised 68% of total Macintosh unit sales during the first quarter of fiscal 2000 versus 55% during the first quarter of 1999. Net sales increased sequentially during the first quarter of 2000 compared to the fourth quarter of 1999 by $1.007 billion or 75%. Similarly, Macintosh unit sales increased 78% during the first quarter of 2000 compared to the fourth quarter of 1999. The sequential increase in both net sales and unit sales is attributable to the increase in sales during to the holiday season consistent with the Company's normal seasonal pattern and strong market acceptance of the Company's recent consumer and education oriented iMac and iBook products. Also, net sales during the fourth quarter of 1999 were negatively impacted by lower than planned deliveries of PowerPC G4 processors from Motorola and production interruptions at vendors supplying PowerBooks and iBooks experienced during the last week of the fourth quarter of 1999 as a result of the earthquake in Taiwan on September 20, 1999. The shortage of G4 processors reduced net sales by approximately $200 million during the fourth quarter of 1999. 13 <PAGE> SEGMENT OPERATING PERFORMANCE The Company manages its business primarily on a geographic basis. The Company's reportable geographic segments include the Americas, Europe, and Japan. The Americas segment includes both North and South America. The European segment includes European countries as well as the Middle East and Africa. The Japan segment includes only Japan. Each geographic operating segment provides similar hardware and software products and similar services. Further information regarding the Company's operating segments may be found in this Form 10-Q in the Notes to Condensed Consolidated Financial Statements at Note 8, "Segment Information and Geographic Data." AMERICAS Net sales in the Americas segment during the first quarter of fiscal 2000 increased $229 million or 24% compared to the same period in 1999. Macintosh unit sales in the Americas increased 35% on a year-over-year basis, reflecting strong growth in iMac unit sales and unit sales of the recently introduced iBook. During the first quarter of fiscal years 2000 and 1999, the Americas segment represented approximately 51% and 56% of the Company's total net sales, respectively. The results experienced by this segment in the first quarter of fiscal 2000 versus the same quarter in 1999 reflect the Company's overall results characterized by strong growth in sales of the Company's consumer and education oriented products and moderate growth of the Company's professional oriented products, partially offset by a decline in the average revenue per Macintosh system. EUROPE Net sales in the Europe segment increased $174 million or 38% during the first quarter of 2000 as compared to the same quarter in 1999, while the segment's Macintosh unit sales increased 54%. Like the Americas segment, Europe's results in the first quarter of fiscal 2000 as compared to 1999 are indicative of strong growth in Macintosh unit sales, particularly iMac and iBook, offset by a decline in the average revenue per Macintosh system. JAPAN Sales in Japan rose 115% or $220 million during the first quarter of 2000 as compared to the same quarter in 1999. This increase was due to a 97% increase in unit shipments in Japan during the first quarter of 2000 as compared to the same quarter in 1999 and reflects strong growth in unit sales in Japan across the Company's entire product line. GROSS MARGIN Gross margin for the first quarter of 2000 was 25.9% compared to 28.2% for the same quarter in 1999 and 28.7% for the fourth quarter of 1999. Gross margin during the first quarter of 2000 was negatively impacted by three primary factors. First, component costs were higher during the first quarter of 2000 compared to previous quarters. Costs for DRAM was especially high as a result of worldwide shortages through much of the first quarter of fiscal 2000. Second, the Company incurred substantially higher air freight costs during the first quarter of 2000 compared to both the fourth and first quarters of 1999 in order to get recently introduced products into the sales channel in time for the holiday selling season. Third, the Company's overall product mix shifted towards lower-priced, lower margin consumer products. Net sales of iMac and iBook accounted for 49% of net sales in the first quarter 2000, and only 34% of net sales in the same quarter in 1999. There can be no assurance targeted gross margin levels will be achieved or current margins on existing individual products will be maintained. In general, gross margins and margins on individual products will remain under significant downward pressure due to a variety of factors, including continued industry wide global pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of raw material and outside manufacturing services, and potential changes to the Company's product mix, including higher unit sales of consumer products with lower average selling prices and lower gross margins. In response to these downward pressures, the Company expects it will continue to take pricing actions with respect to its products. Gross margins could also be affected by the Company's ability to effectively manage quality problems and warranty costs and to stimulate demand for certain of its products. The Company's operating strategy and pricing take into account anticipated changes in foreign currency exchange rates over time; however, the Company's results of operations can be significantly affected in the short term by fluctuations in exchange rates. 14 <PAGE> OPERATING EXPENSES Selling, general and administrative expenses, excluding special charges, increased $40 million or 14% during the first quarter of 2000 as compared to the same period in 1999. However, expressed as a percent of net sales, selling, general and administrative expenses fell to 13.6% during the first quarter of 2000 compared to 16.3% during the same quarter in 1999. The absolute increase in selling, general and administrative expenses during the first quarter is the result of higher variable selling and marketing expenses resulting from the year-over-year 37% increase in net sales and due to higher discretionary spending on marketing and advertising in 2000 as compared to 1999. Expenditures for research and development increased 18% between the first quarter of fiscal 2000 and the same quarter in 1999 primarily as a result of increased spending in 2000 to support multiple new product manufacturing ramps and increased research and development headcount. During the first quarter of fiscal 2000, the Company initiated restructuring actions resulting in recognition of an $8 million restructuring charge. This charge was comprised of $3 million for the write-off of various operating assets and $5 million for employee termination benefits associated with consolidation of various domestic and international sales and marketing functions. In December 1999, the Company's Board of Directors approved a special executive bonus for the Company's Chief Executive Officer for past services in the form of an aircraft with a total cost to the company of approximately $90 million, the majority of which is not tax deductible. Approximately half of the total charge is the cost of the aircraft. The other half represents all other costs and taxes associated with the purchase. TOTAL INTEREST AND OTHER INCOME, NET Interest and other income and expense (net) increased $30 million or 300% to $40 million during the first quarter of fiscal 2000 compared to the same quarter in 1999. This increase is primarily attributable to two factors. First, the Company's cash, cash equivalents, and short-term investments were higher by approximately $1.1 billion or 42% at the end of the first quarter of fiscal 2000 versus the same balances at the end the first quarter of fiscal 1999. This resulted in a $15 million or 47% increase in interest income between the first quarter of 2000 and the first quarter of 1999. Second, interest expense declined $11 million or 69% during the first quarter of fiscal 2000 compared to the same quarter in 1999 as the result of conversion to common stock of the Company's convertible subordinated debentures during the third quarter of fiscal 1999. During the first quarter of 2000, the Company sold approximately 5.2 million shares of ARM stock for net proceeds of approximately $136 million and a gain before taxes of $134 million. During the first quarter of fiscal 1999, the Company sold approximately 2.9 million shares of ARM stock for net proceeds of approximately $37 million and a gain before taxes of $32 million. PROVISION FOR INCOME TAXES As of January 1, 2000, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $569 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 January 1, 2000, a valuation allowance of $53 million was recorded against the deferred tax asset for the benefits of tax losses that may not be realized. The valuation allowance primarily relates to the operating loss carryforwards acquired from NeXT and to tax benefits in certain foreign jurisdictions. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. 15 <PAGE> The Company's effective tax rate for the three months ended January 1, 2000, was approximately 33% and includes the effect of the special executive bonus accrued during the quarter. The effective tax rate during the first quarter of 2000 without this charge was approximately 25%. This effective rate is less than the statutory federal income tax rate of 35% due primarily to the reversal of a portion of the previously established valuation allowance for tax loss and credit carryforwards and certain undistributed foreign earnings for which no U.S. taxes were provided. THE COMPANY CURRENTLY BELIEVES THAT ITS EFFECTIVE TAX RATE FOR THE REMAINDER OF FISCAL 2000 WILL BE APPROXIMATELY 25%. THE COMPANY ANTICIPATES THAT ITS EFFECTIVE TAX RATE WILL INCREASE IN FISCAL 2001. THE FOREGOING-STATEMENTS ARE FORWARD LOOKING. THE COMPANY'S ACTUAL RESULTS COULD DIFFER BECAUSE OF SEVERAL FACTORS, INCLUDING THOSE SET FORTH BELOW IN THE SUBSECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION." ADDITIONALLY, THE ACTUAL FUTURE TAX RATE WILL BE SIGNIFICANTLY IMPACTED BY THE AMOUNT OF AND JURISDICTION IN WHICH THE COMPANY'S FOREIGN PROFITS ARE EARNED. LIQUIDITY AND CAPITAL RESOURCES The following table presents selected financial information and statistics for each of the fiscal quarters ending on the dates indicated (dollars in millions): <TABLE> <CAPTION> 1/1/00 9/25/99 12/26/98 ------ ------- -------- <S> <C> <C> <C> Cash, cash equivalents, and short-term investments $3,660 $3,226 $2,578 Accounts receivable, net ......................... $ 892 $ 681 $ 913 Inventory ........................................ $ 15 $ 20 $ 25 Working capital .................................. $2,944 $2,736 $2,383 Non-current debt and equity investments .......... $2,140 $ 345 $ 197 Long-term debt ................................... $ 300 $ 300 $ 954 Days sales in accounts receivable (a) ............ 37 46 49 Days of supply in inventory (b) .................. 1 2 2 Days payables outstanding (c) .................... 66 77 51 Operating cash flow (quarterly) .................. $ 373 $ 218 $ 223 </TABLE> (a) Based on ending net trade receivables and most recent quarterly net sales for each period (b) Based on ending inventory and most recent quarterly cost of sales for each period (c) Based on ending accounts payable and most recent quarterly cost of sales adjusted for the change in inventory As of January 1, 2000, the Company had approximately $3.7 billion in cash, cash equivalents, and short-term investments, an increase of $434 million over the same balances at the end of fiscal 1999. For the first quarter of fiscal 2000, the Company's primary source of cash was $373 million in cash flows from operating activities. Cash generated by operations was primarily from net income of $183 million and a combined increase in accounts payable and other current liabilities of $436 million partially offset by an increase in accounts receivable of $211 million. In addition to operating cash flow, other significant cash flow items during the first quarter of fiscal 2000 included net purchases of short-term investments of $174 million, $41 million utilized for the repurchase of common stock, and cash proceeds from the sale of ARM stock of $136 million. In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. During the first quarter of fiscal 2000, the Company repurchased 500,000 shares at a cost of $41 million. Since inception of the repurchase plan, the Company has repurchased 1.75 million shares at a cost of $116 million. On November 18, 1999, the Company entered into a $100 million revolving credit agreement with Bank of America. Loans under the agreement pay interest at LIBOR plus 1%, and the Company is required to pay a commitment fee of 0.2% of the unused portion of the credit facility. No advances have been made against this credit facility. This revolving credit agreement is intended to provide the Company with an additional source of short-term liquidity. 16 <PAGE> The Company believes its balances of cash, cash equivalents, short-term investments, and available credit facilities will be sufficient to meet its cash requirements over the next twelve months, including any cash that may be utilized by its stock repurchase plan. However, given the Company's current non-investment grade debt ratings, if the Company should need to obtain short-term borrowings, there can no assurance such borrowings could be obtained at favorable rates. The inability to obtain such borrowings at favorable rates could materially adversely affect the Company's results of operations, financial condition, and liquidity. OTHER INVESTMENTS The Company holds significant investments in ARM, Samsung, and Akamai. These investments are reflected in the consolidated balances sheets as non-current debt and equity investments and have been categorized as available-for-sale requiring that they be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. As of January 1, 2000, the estimated fair value of these investments is $2.14 billion. The Company believes it is likely there will be significant fluctuations in the fair value of these investments in the future. Additional information regarding these investment may be found in this Form 10-Q in the Notes to Condensed Consolidated Financial Statements at Note 4, "Non-Current Debt and Equity Investments." YEAR 2000 COMPLIANCE THE INFORMATION PRESENTED BELOW RELATED TO YEAR 2000 (Y2K) COMPLIANCE CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS FORM 10-Q REGARDING Y2K COMPLIANCE. The Year 2000 (Y2K) issue is the result of certain computer hardware, operating system software and software application programs having been developed using two digits rather than four to define a year. These problems could result in the failure of major systems or miscalculations, which could have a material impact on companies through business interruption or shutdown, financial loss, damage to reputation, and legal liability to third parties. The Company's worldwide Y2K strategic plan (Y2K Plan) was described in the Company's 1999 Form 10-K. This plan was substantially completed prior to the end of the first quarter of fiscal 2000. Through January of 2000, the Company's total incremental external spending over the life of its Y2K plan was approximately $10 million. The Company's business operations are heavily dependent on third party corporate service vendors, materials suppliers, outsourced operations partners, distributors and others. Through January of 2000, the Company's key third party suppliers and service providers have not reported any significant Y2K compliance problems, and the Company's financial results have not been negatively impacted by Y2K failures of third parties. However, because the Company's continued Y2K compliance in calendar 2000 is in part dependent on the continued Y2K compliance of third parties, there can be no assurance that the Company's efforts alone have resolved all Y2K issues or that key third parties will not experience Y2K compliance failures as calendar year 2000 progresses. Through January of 2000, the Company experienced a limited number of minor malfunctions in its information technology (IT) systems as the result of the date change. None of these failures had a material impact on the Company's financial performance. The Company believes it could experience additional minor malfunctions of its IT systems and Non-IT business systems not previously detected but that these additional malfunctions will not have a material impact on the Company's results of operations or financial condition. As discussed above, the Company's continued Y2K compliance in calendar 2000 is in part dependent on the continued Y2K compliance of third parties. 17 <PAGE> FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION The Company operates in a rapidly changing environment that involves a number of uncertainties, some of which are beyond the Company's control. In addition to the uncertainties described elsewhere in this report, there are many factors that will affect the Company's future results and business, which may cause the actual results to differ from those currently expected. The Company's future operating results and financial condition are dependent upon the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet dynamic customer demand patterns. Inherent in this process are a number of factors that the Company must successfully manage in order to achieve favorable future operating results and a favorable financial condition. Potential risks and uncertainties that could affect the Company's future operating results and financial condition include, among other things, continued competitive pressures in the marketplace and the effect of any reaction by the Company to such competitive pressures, including pricing actions by the Company; risks associated with international operations, including economic and labor conditions, regional economic problems, political instability, tax laws, and currency fluctuations; increasing dependence on third-parties for manufacturing and other outsourced functions such as logistics; the availability of key components on terms acceptable to the Company; the continued availability of certain components and services essential to the Company's business currently obtained by the Company from sole or limited sources, including PowerPC RISC microprocessors developed by and obtained from IBM and Motorola and the final assembly of certain of the Company's products; the Company's ability to supply products in certain categories; the Company's ability to supply products free of latent defects or other faults; the Company's ability to make timely delivery to the marketplace of technological innovations, including its ability to continue to make timely delivery of planned enhancements to the current Mac OS and timely delivery of future versions of the Mac OS; the availability of third-party software for particular applications; the Company's ability to attract, motivate and retain key employees; the effect of previously undetected Y2K compliance issues; managing the continuing impact of the European Union's transition to the Euro as its common legal currency; and the Company's ability to retain the operational and cost benefits derived from its recently completed restructuring program. For a discussion of these and other factors affecting the Company's future results and financial condition, see "Item 7 -- Management's Discussion and Analysis -- Factors That May Affect Future Results and Financial Condition" in the Company's 1999 Form 10-K. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK THE INFORMATION PRESENTED BELOW REGARDING MARKET RISK CONTAINS FORWARD LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS FORM 10-Q REGARDING MARKET RISK. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE 1999 FORM 10-K AND THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investments and long-term debt obligations and related derivative financial instruments. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company's general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents; investments with maturities between three and twelve months are considered to be short-term investments. As of January 1, 2000, substantially all of the Company's investments have maturities less than 12 months. During the last two years, the Company has entered into interest rate derivative transactions, including interest rate swaps and floors, with financial institutions in order to better match the Company's floating-rate interest income on its cash equivalents and short-term investments with its fixed-rate interest expense on its long-term debt, and/or to diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. The Company may also enter into interest rate contracts that are intended to reduce the cost of the interest rate risk management program. The Company does not hold or transact in such financial instruments for purposes other than risk management. 18 <PAGE> Overall, the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect the Company's net sales and gross margins as expressed in U.S. dollars. The Company enters into foreign exchange forward and option contracts with financial institutions primarily to protect against currency exchange risks associated with existing assets and liabilities, certain firmly committed transactions, and probable but not firmly committed transactions. The Company's foreign exchange risk management policy requires it to hedge a majority of its existing material foreign exchange transaction exposures. However, the Company may not hedge certain foreign exchange transaction exposures that are immaterial either in terms of their minimal U.S. dollar value or in terms of the related currency's historically high correlation with the U.S. dollar. Foreign exchange forward contracts are carried at fair value in other current liabilities. The premium costs of purchased foreign exchange option contracts are recorded in other current assets and marked to market through earnings. To ensure the adequacy and effectiveness of the Company's foreign exchange and interest rate hedge positions, as well as to monitor the risks and opportunities of the nonhedge portfolios, the Company continually monitors its foreign exchange forward and option positions, and its interest rate swap, option and floor positions both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures, respectively, from both an accounting and an economic perspective. However, given the effective horizons of the Company's risk management activities and the anticipatory nature of the exposures intended to hedge, there can be no assurance the aforementioned programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either foreign exchange or interest rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company's operating results and financial position. For a complete description of the Company's interest rate and foreign currency related market risks, see the discussion in Part II, Item 7A of the Company's 1999 Form 10-K. There has not been a material change in the Company's exposure to interest rate and foreign currency risks since the date of the 1999 Form 10-K. 19 <PAGE> PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is subject to various legal proceedings and claims which are discussed in the 1999 Form 10-K. The Company is also subject to certain other legal proceedings and claims which have arisen in the ordinary course of business and which have not been fully adjudicated. The results of legal proceedings cannot be predicted with certainty; however, in the opinion of management, the Company does not have a potential liability related to any legal proceedings and claims that would have a material adverse effect on its financial condition or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit Number Description - ------ ----------- 27 Financial Data Schedule. (b) REPORTS ON FORM 8-K None 20 <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 January 31, 2000 21 <PAGE> INDEX TO EXHIBITS Exhibit Index Number Description Page - ------ ----------- ---- 27 Financial Data Schedule. 23 22 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>EX-27 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-2000 <PERIOD-END> JAN-01-2000 <CASH> 1,586 <SECURITIES> 2,074 <RECEIVABLES> 958 <ALLOWANCES> 66 <INVENTORY> 15 <CURRENT-ASSETS> 4,909 <PP&E> 725 <DEPRECIATION> 407 <TOTAL-ASSETS> 7,586 <CURRENT-LIABILITIES> 1,965 <BONDS> 300 <PREFERRED-MANDATORY> 0 <PREFERRED> 150 <COMMON> 1,345 <OTHER-SE> 1,237 <TOTAL-LIABILITY-AND-EQUITY> 7,586 <SALES> 2,343 <TOTAL-REVENUES> 2,343 <CGS> 1,736 <TOTAL-COSTS> 1,736 <OTHER-EXPENSES> 507 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 5 <INCOME-PRETAX> 274 <INCOME-TAX> 91 <INCOME-CONTINUING> 183 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 183 <EPS-BASIC> 1.14 <EPS-DILUTED> 1.03 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

ADCT

https://www.sec.gov/Archives/edgar/data/61478/000091205700011998/0000912057-00-011998-d1.html

<HTML> <HEAD> <TITLE> Prepared by MERRILL CORPORATION www.edgaradvantage.com </TITLE> </HEAD> <BODY BGCOLOR="#FFFFFF" LINK=BLUE VLINK=PURPLE> <FONT SIZE=3 ><A HREF="#00STP1656_1">QuickLinks</A></FONT> <font size=3> -- Click here to rapidly navigate through this document</font> <HR NOSHADE> <HR NOSHADE> <BR> <P ALIGN="CENTER"><FONT SIZE=5><B>SECURITIES AND EXCHANGE COMMISSION<BR></B></FONT><FONT SIZE=2><B>Washington, D.C. 20549</B></FONT></P> <HR NOSHADE WIDTH="120"> <BR> <P ALIGN="CENTER"><FONT SIZE=5><B>FORM 10-Q</B></FONT></P> <P><FONT SIZE=2><B>(Mark One)</B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="101%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="9%" ALIGN="CENTER"><FONT SIZE=2>&nbsp;<BR></FONT> <FONT SIZE=3>/x/</FONT></TD> <TD WIDTH="91%"><FONT SIZE=3>&nbsp;<BR></FONT> <FONT SIZE=3><B>QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2><B>For the quarterly period ended January 31, 2000</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>OR</B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="101%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="9%" ALIGN="CENTER"><FONT SIZE=3>/&nbsp;/</FONT></TD> <TD WIDTH="91%"><FONT SIZE=3><B>TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2><B>For the transition period from N/A to N/A</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>Commission file number 0-1424</B></FONT></P> <HR NOSHADE WIDTH="120"> <P ALIGN="CENTER"><FONT SIZE=5><B>ADC Telecommunications, Inc.<BR></B></FONT></P> <HR NOSHADE WIDTH="372"> <P ALIGN="CENTER"><BR><FONT SIZE=2>(Exact name of registrant as specified in its charter)</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="72%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="49%" ALIGN="CENTER"><FONT SIZE=2><B>Minnesota</B></FONT><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="49%" ALIGN="CENTER"><FONT SIZE=2><B>41-0743912</B></FONT><HR NOSHADE></TD> </TR> <TR VALIGN="BOTTOM"> <TD WIDTH="49%" ALIGN="CENTER"><FONT SIZE=2>(State or other jurisdiction<BR> of incorporation or organization)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="49%" ALIGN="CENTER"><FONT SIZE=2>(I.R.S. Employer Identification No.)</FONT></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2><B>12501 Whitewater Drive, Minnetonka, MN 55343</B></FONT><BR></P> <HR NOSHADE WIDTH="372"> <P ALIGN="CENTER"><FONT SIZE=2><BR> (Address of principal executive offices) (Zip code)</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>(612) 938-8080</B></FONT><BR></P> <HR NOSHADE WIDTH="372"> <P ALIGN="CENTER"><FONT SIZE=2><BR> (Registrant's telephone number, including area code)</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>N/A</B></FONT><BR></P> <HR NOSHADE WIDTH="372"> <P ALIGN="CENTER"><FONT SIZE=2><BR> (Former name, former address and former fiscal year, if changed since last report)</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;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.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>YES&nbsp;<U>&nbsp;&nbsp;X&nbsp;&nbsp;</U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NO<U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>APPLICABLE ONLY TO CORPORATE ISSUERS:</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>Common stock, $.20 par value: 305,747,343 of March&nbsp;13, 2000</FONT></P> <HR NOSHADE> <HR NOSHADE> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=1,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=128284,FOLIO=blank,FILE='DISK012:[00STP6.00STP1656]BE1656A.;7',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=2> </FONT></H2> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="de1656_part_i._financial_information"> </A></FONT> <FONT SIZE=2><B>PART I. FINANCIAL INFORMATION </B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="de1656_item_1._financial_statements"> </A></FONT> <FONT SIZE=2><B>ITEM 1. FINANCIAL STATEMENTS </B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>ADC TELECOMMUNICATIONS,&nbsp;INC. AND SUBSIDIARIES</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>CONSOLIDATED BALANCE SHEETS&#151;UNAUDITED</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>(In thousands)</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>ASSETS</B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="85%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="68%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="14%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>January 31,<BR> 2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="14%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>October 31,<BR> 1999</B></FONT><HR NOSHADE></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>CURRENT ASSETS:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Cash and cash equivalents</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>164,661</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>143,523</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Short-term investments</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>199,654</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>150,493</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Accounts receivable</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>439,574</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>436,751</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Inventories</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>281,438</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>243,882</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Prepaid income taxes and other assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>52,085</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>54,789</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Total current assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>1,137,412</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>1,029,438</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>PROPERTY AND EQUIPMENT, net</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>343,277</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>312,066</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>OTHER ASSETS, principally goodwill</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>333,830</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>331,025</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>1,814,519</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>1,672,529</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="100%" COLSPAN=7 ALIGN="CENTER"><FONT SIZE=2>&nbsp;<BR></FONT> <FONT SIZE=2><B>LIABILITIES AND SHAREOWNERS' INVESTMENT</B></FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>CURRENT LIABILITIES:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Accounts payable</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>103,291</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>119,212</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Accrued liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>216,088</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>216,671</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Accrued income taxes</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>73,971</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>41,919</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Notes payable and current maturities of long-term debt</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>12,048</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>35,152</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Total current liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>405,398</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>412,954</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>LONG-TERM DEBT, less current maturities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>13,116</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>11,024</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>Total liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>418,514</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>423,978</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>SHAREOWNERS' INVESTMENT</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>(303,372 and 300,346 shares outstanding, respectively)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>1,396,005</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>1,248,551</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>1,814,519</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="12%" ALIGN="RIGHT"><FONT SIZE=2>1,672,529</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="68%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2>See accompanying notes to consolidated financial statements.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>2</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=2,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=151641,FOLIO=2,FILE='DISK012:[00STP6.00STP1656]DE1656A.;7',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <P ALIGN="CENTER"><FONT SIZE=2><B>ADC TELECOMMUNICATIONS,&nbsp;INC. AND SUBSIDIARIES</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>CONSOLIDATED STATEMENTS OF INCOME&#151;UNAUDITED</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>(In thousands, except earnings per share)</B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="85%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="71%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="26%" COLSPAN=5 ALIGN="CENTER"><FONT SIZE=1><B>Three Months Ended January&nbsp;31,</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="71%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="12%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="12%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>NET SALES</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>544,634</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>404,294</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>COST OF PRODUCT SOLD</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>283,057</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>212,310</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>GROSS PROFIT</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>261,577</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>191,984</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>EXPENSES:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>Research and development</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>57,950</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>45,744</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>Selling and administration</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>113,965</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>84,227</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>Goodwill amortization</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>5,567</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>5,097</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>Non-recurring charges</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&#151;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>60,327</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>Total expenses</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>177,482</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>195,395</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>OPERATING INCOME (LOSS)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>84,095</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(3,411</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>OTHER INCOME (EXPENSE), NET:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>Interest</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>2,195</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>370</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>Other</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(944</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(1,208</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>INCOME (LOSS) BEFORE INCOME TAXES</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>85,346</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(4,249</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>PROVISION FOR INCOME TAXES</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>29,018</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>5,433</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>NET INCOME (LOSS)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>56,328</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(9,682</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>AVERAGE COMMON SHARES OUTSTANDING (BASIC)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>302,120</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>298,212</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>EARNINGS (LOSS) PER SHARE (BASIC)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>0.19</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(0.03</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>AVERAGE COMMON SHARES OUTSTANDING (DILUTED)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>314,518</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>298,212</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>EARNINGS (LOSS) PER SHARE (DILUTED)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>0.18</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(0.03</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2>See accompanying notes to consolidated financial statements.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>3</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=2,SEQ=3,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=359578,FOLIO=3,FILE='DISK012:[00STP6.00STP1656]DE1656B.;5',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <P ALIGN="CENTER"><FONT SIZE=2><B>ADC TELECOMMUNICATIONS,&nbsp;INC. AND SUBSIDIARIES</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>CONSOLIDATED STATEMENTS OF CASH FLOWS&#151;UNAUDITED</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>(In thousands)</B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="85%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="70%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="27%" COLSPAN=5 ALIGN="CENTER"><FONT SIZE=1><B>Three Months Ended January&nbsp;31,</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="70%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="12%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="13%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>OPERATING ACTIVITIES:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Net income (loss)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>56,328</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(9,682</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Adjustments to reconcile net income to net cash from operating activities&#151;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Non-recurring charges</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&#151;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>60,327</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Depreciation and amortization</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>27,416</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>23,062</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Other</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>902</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>1,639</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Changes in assets and liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Accounts receivable</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>1,776</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>46,651</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Inventories</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(32,937</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(5,766</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Prepaid income taxes and other assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(4,824</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>2,210</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Accounts payable</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(18,589</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(2,667</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Accrued liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>11,510</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(3,762</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Total cash from operating activities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>41,582</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>112,012</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>INVESTMENT ACTIVITIES:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Acquisitions</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(17,963</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(192,422</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Property and equipment additions, net</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(46,785</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(20,194</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Marketable securities and short-term investments</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>23,639</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>9,029</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Long-term investments</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>5,417</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(4,795</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Total cash used for investment activities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(35,692</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(208,382</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>FINANCING ACTIVITIES:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Increase/(decrease) in debt</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(26,368</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>107</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Common stock issued</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>42,657</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>13,244</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>Total cash from financing activities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>16,289</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>13,351</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>EFFECT OF EXCHANGE RATE CHANGES ON CASH</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(1,041</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(811</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>21,138</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(83,830</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>EFFECT OF CONFORMING YEAR END OF ACQUIRED COMPANY</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&#151;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(11,035</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>CASH AND CASH EQUIVALENTS, beginning of period</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>143,523</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>328,032</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>CASH AND CASH EQUIVALENTS, end of period</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>164,661</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>233,167</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="70%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2>See accompanying notes to consolidated financial statements.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>4</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=4,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=285837,FOLIO=4,FILE='DISK012:[00STP6.00STP1656]DG1656A.;5',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <P ALIGN="CENTER"><FONT SIZE=2><B>ADC TELECOMMUNICATIONS,&nbsp;INC. AND SUBSIDIARIES</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>SUPPLEMENTAL FINANCIAL INFORMATION&#151;UNAUDITED</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>(In thousands, except earnings per share)</B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="92%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="47%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1st<BR> Quarter<BR> 2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>4th<BR> Quarter<BR> 1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>3rd<BR> Quarter<BR> 1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>2nd<BR> Quarter<BR> 1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>NET SALES</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>544,634</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>582,465</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>483,597</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>456,591</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>COST OF PRODUCT SOLD</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>283,057</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>302,964</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>254,243</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>240,465</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>GROSS PROFIT</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>261,577</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>279,501</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>229,354</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>216,126</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>EXPENSES:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>Research and development</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>57,950</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>54,075</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>45,703</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>47,350</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>Selling and administration</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>113,965</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>112,296</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>99,229</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>94,440</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>Goodwill amortization</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>5,567</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>6,141</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>5,541</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>5,470</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>Non-recurring charges</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>&#151;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>30,400</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>58,250</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>&#151;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>Total expenses</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>177,482</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>202,912</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>208,723</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>147,260</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>OPERATING INCOME</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>84,095</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>76,589</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>20,631</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>68,866</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>OTHER INCOME (EXPENSE), NET:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>Interest</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>2,195</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>2,079</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>1,656</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>671</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>Other</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(944</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(3,311</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(1,546</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(1,000</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>INCOME BEFORE INCOME TAXES</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>85,346</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>75,357</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>20,741</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>68,537</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>PROVISION FOR INCOME TAXES</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>29,018</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>34,214</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>9,857</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>23,244</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>NET INCOME</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>56,328</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>41,143</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>10,884</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>45,293</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>AVERAGE COMMON SHARES OUTSTANDING (BASIC)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>302,120</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>300,966</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>299,316</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>298,290</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>EARNINGS PER SHARE (BASIC)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0.19</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0.14</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0.04</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0.15</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>AVERAGE COMMON SHARES OUTSTANDING (DILUTED)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>314,518</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>307,412</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>307,588</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>306,698</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="47%"><FONT SIZE=2>EARNINGS PER SHARE (DILUTED)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0.18</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0.13</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0.04</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0.15</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="47%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2>See accompanying notes to consolidated financial statements.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>5</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=2,SEQ=5,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=100446,FOLIO=5,FILE='DISK012:[00STP6.00STP1656]DG1656B.;2',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <P ALIGN="CENTER"><FONT SIZE=2><B>ADC TELECOMMUNICATIONS,&nbsp;INC. AND SUBSIDIARIES</B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS&#151;UNAUDITED</B></FONT></P> <P><FONT SIZE=2><B>Note&nbsp;1 Basis of Presentation</B></FONT><FONT SIZE=2>:</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;All historical financial information has been restated to reflect the acquisition of Saville Systems PLC ("Saville") which was completed in the fourth quarter of fiscal year 1999 and accounted for as a pooling of interests.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Earnings per share amounts, stock options and shares outstanding have been restated to reflect the Company's 2-for-1 stock split effected in the form of a stock dividend issued on February&nbsp;15, 2000.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The interim information furnished in this report is unaudited but reflects all adjustments which are necessary, in the opinion of management, for a fair statement of the results for the interim periods. The operating results for the quarter ended January&nbsp;31, 2000 are not necessarily indicative of the operating results to be expected for the full fiscal year. These statements should be read in conjunction with ADC's most recent Annual Report on Form&nbsp;10-K.</FONT></P> <P><FONT SIZE=2><B>Note&nbsp;2 Inventories:</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Inventories include material, labor and overhead and are stated at the lower of first-in, first-out cost or market. Inventories consisted of (in thousands):</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="63%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="62%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="3%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="16%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>January 31, 2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="3%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="16%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>October 31, 1999</B></FONT><HR NOSHADE></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>Purchased materials and Manufactured products</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>252,362</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>217,021</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>Work-in-process</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>29,076</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>26,861</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>281,438</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>243,882</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2><B>Note&nbsp;3 Non-recurring Charges:</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The non-recurring charges of $60.3&nbsp;million during the quarter ended January&nbsp;31, 1999 represent restructuring charges of $30.0&nbsp;million and the write-off of purchased in-process research and development charges of $30.3&nbsp;million from the acquisitions of Teledata Communications&nbsp;Ltd., Hadax Electronics,&nbsp;Inc. and Phasor Electronics, GmbH.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In November&nbsp;1998, ADC's management approved a restructuring plan, which included initiatives to integrate the software operations of the former Wireless Systems Group with the newly formed Integrated Solutions Group, consolidate unproductive and duplicative facilities, reposition certain products and dispose of product lines that no longer fit ADC's current focus and growth strategy. Total accrued restructuring costs of $30.0&nbsp;million were charged to operations in the first quarter of fiscal 1999 related to these initiatives. These restructuring charges included employee termination costs and other incremental costs incurred as a direct result of the restructuring plan. The restructuring plan was completed by October&nbsp;31, 1999.</FONT></P> <P><FONT SIZE=2><B>Note&nbsp;4 Acquisitions:</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC completed the acquisition of NVision, Inc. during the first quarter of fiscal 2000. The purchase price of $19.7&nbsp;million consisted of cash and stock options valued at approximately $2.7&nbsp;million. The results of operations and the estimated fair value of the assets acquired and liabilities assumed are included in ADC's financial statements from the date of acquisition. Proforma results of operations have not been presented because the effects of the acquisition were not considered material. The purchase price was allocated to the assets acquired and liabilities assumed based on ADC's estimates of fair value. The fair value of approximately $14&nbsp;million, assigned to intangible assets acquired consists of existing technology, assembled work force, non-competition agreements, agency</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>6</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=6,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=532241,FOLIO=6,FILE='DISK012:[00STP6.00STP1656]DI1656A.;14',USER='CDUSTIN',CD='15-MAR-2000;23:33 --> <P><FONT SIZE=2>relationships, customer accounts and other less significant intangible assets. Amounts allocated to goodwill and other intangibles are amortized on a straight-line basis over a period not exceeding ten years.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC also completed the acquisition of Comtec Electr&oacute;nica S.R.L. during the first quarter of fiscal 2000.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;23, 2000, ADC and PairGain Technologies,&nbsp;Inc. ("PairGain") announced the signing of a definitive agreement providing for a merger (the "Merger") in which PairGain will become a wholly owned subsidiary of ADC. PairGain is a leader in the design, manufacture, marketing and sale of digital subscriber line (DSL) networking systems. Through the Merger, which is structured as a tax-free reorganization for U.S. federal income tax purposes, ADC will issue 0.43 of a share of its common stock for each share of common stock of PairGain. The Merger is intended to be accounted for as a pooling of interests, and is subject to certain conditions, including PairGain stockholder approval and receipt of required regulatory approvals.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In connection with and as a condition of the Merger, PairGain also has granted ADC an option to purchase up to 19.9% of PairGain's common stock exercisable in certain circumstances, including certain events causing termination of the agreement providing for the Merger. Additionally, ADC entered into voting agreements with various individuals, each solely in his capacity as a stockholder of PairGain, who have agreed to vote all shares of PairGain common stock owned or controlled by them in favor of the Merger.</FONT></P> <P><FONT SIZE=2><B>Note&nbsp;5 Comprehensive Income:</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The following table presents the calculation of comprehensive income as required by SFAS No.&nbsp;130. Comprehensive income has no impact on ADC's net income, balance sheet, or shareowners' equity. The components of comprehensive income are as follows (in thousands):</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="71%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="64%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="31%" COLSPAN=5 ALIGN="CENTER"><FONT SIZE=1><B>Three Months Ended January&nbsp;31,</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="64%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="14%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="5%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="12%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Net income (loss)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>56,328</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(9,682</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Changes in cumulative translation adjustments</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>(821</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>1,566</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Unrealized gain from securities classified as available for sale (Common shares of Efficient Networks)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>45,845</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>&#151;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Comprehensive income (loss)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>101,352</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(8,116</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;During the third quarter of fiscal 1999, Efficient Networks, Inc., in which ADC owns a minority interest, completed an initial public offering of its common stock, which caused a valuation adjustment in ADC's investment. At January&nbsp;31, 2000, ADC owned shares of Efficient Networks common stock and carried the investment at a market value of $164.8&nbsp;million.</FONT></P> <P><FONT SIZE=2><B>Note&nbsp;6 Earnings Per Share:</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Basic earnings per common share was calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>7</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=2,SEQ=7,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=825316,FOLIO=7,FILE='DISK012:[00STP6.00STP1656]DI1656A.;14',USER='CDUSTIN',CD='15-MAR-2000;23:33 --> <P><FONT SIZE=2>been issued. The following table reconciles the number of shares utilized in the earnings per share calculations for the periods ended January&nbsp;31, 2000 and 1999 (in thousands, except earnings per share).</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="72%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="62%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="34%" COLSPAN=5 ALIGN="CENTER"><FONT SIZE=1><B>Three Months Ended January&nbsp;31,</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="62%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="14%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="5%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="14%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>Net income (loss)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>56,328</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>(9,682</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>Earnings (loss) per common share (basic)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>0.19</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>(0.03</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>Earnings (loss) per common share (diluted)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>0.18</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>(0.03</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>Weighted average common shares outstanding (basic)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>302,120</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>298,212</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>Effect of dilutive securities&#151;stock options</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>12,398</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>0</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="62%"><FONT SIZE=2>Weighted average common shares outstanding (diluted)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>314,518</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>298,212</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2><B>Note&nbsp;7 Segment Reporting:</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Beginning with fiscal 1999, ADC adopted SFAS No.&nbsp;131, "Disclosures about Segments of an Enterprise and Related Information." This standard requires ADC to disclose selected financial data by operating segment, defined as a component with business activity resulting in revenue and expense that has separate financial information evaluated regularly by ADC's chief operating decision maker in determining resource allocation and assessing performance. ADC has identified three reportable segments based on the internal organization structure, management of operations and performance evaluation: Broadband Connectivity, Broadband Access and Transport, and Integrated Solutions. Segment detail is summarized as follows:</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>Segment Information (In Thousands)</B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="32%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="13%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Broadband<BR> Connectivity</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Broadband<BR> Access and<BR> Transport</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="10%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Integrated<BR> Solutions</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Unallocated<BR> Items</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="12%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Consolidated</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="32%"><FONT SIZE=2>Three months ended January 31, 2000:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="32%"><FONT SIZE=2>External Sales</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>267,029</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>169,495</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>107,799</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>311</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>544,634</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="32%"><FONT SIZE=2>Operating Income (Loss)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>108,902</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(12,677</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>12,286</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(24,416</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>84,095</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="32%"><FONT SIZE=2>&nbsp;<BR> Three months ended January 31, 1999:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="9%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="32%"><FONT SIZE=2>External Sales</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>175,196</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>139,650</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>89,447</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>1</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>404,294</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="32%"><FONT SIZE=2>Operating Income (Loss)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>63,647</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(3,495</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>7,606</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(71,169</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(3,411</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2>8</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=3,SEQ=8,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=810384,FOLIO=8,FILE='DISK012:[00STP6.00STP1656]DI1656A.;14',USER='CDUSTIN',CD='15-MAR-2000;23:33 --> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=2> </FONT></H2> <BR> <P><FONT SIZE=2><A NAME="dk1656_item_2._management_s_discussio__ite03663"> </A></FONT> <FONT SIZE=2><B>ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS </B></FONT></P> <P><FONT SIZE=2><I>OVERVIEW</I></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC Telecommunications,&nbsp;Inc. ("ADC") offers a broad range of network equipment, software and integration services for broadband, multiservice networks that deliver Internet/data, video and voice communications over telephone, cable television, Internet, broadcast, wireless and enterprise networks. ADC's broadband, multiservice network solutions enable local access, high-speed transmission and software management of communications services from service providers to consumers and businesses over fiber-optic, copper, coaxial and wireless media.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Telephone companies, cable television operators, Internet/data service providers, wireless service providers and other communications service providers are building the broadband infrastructure required to offer high-speed Internet access and data, video, telephony and other interactive multimedia services to residential and business customers. Broader network bandwidths are continually required for these services, and ADC's product offerings and development efforts are focused on increasing the speed and efficiency of communications networks from the service providers' offices through the network equipment that connects to end users' residences and businesses.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC offers network equipment, software and integration services within the following three product groups: Broadband Connectivity, Broadband Access and Transport, and Integrated Solutions.</FONT></P> <P><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;BROADBAND CONNECTIVITY</I></FONT><FONT SIZE=2> products include broadband connection and access devices for copper, coaxial, fiber-optic, wireless and broadcast communications networks. The group also supplies fiber-optic and wireless components. These products are used globally in telephone, cable television, Internet, wireless, enterprise and broadcast communications networks. Broadband Connectivity products provide the physical contact points for connecting different communications system components and gaining access to communications system circuits for the purpose of installing, testing, monitoring, accessing, managing, reconfiguring, splitting and multiplexing such circuits within the central office and the "last mile/kilometer" portion of communications networks. Fiber-optic components include connectors, isolators, circulators, collimators, couplers, splitters, dense wavelength division multiplexing (DWDM) devices and pump lasers. Wireless components include coverage enhancement products, tower top amplifiers and RF filters. Broadband Connectivity products are sold to local and long-distance telephone companies, cable television operators, wireless service providers, new competitive service providers, broadcasters, enterprises, governments, system integrators and communications equipment manufacturers and distributors.</FONT></P> <P><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;BROADBAND ACCESS AND TRANSPORT</I></FONT><FONT SIZE=2> products include access and transport systems that deliver broadband, multiservice communications to residences and businesses over copper, coaxial, fiber-optic and wireless networks. These products are used globally to deliver Internet/data, video and voice services to residential and business customers. Generally, these products are aimed at upgrading service providers' networks to broadband capabilities, while also introducing new service delivery functionality and cost effectiveness into the networks. Broadband Access and Transport products are sold to local and long-distance telephone companies, cable television operators, wireless service providers, new competitive service providers, broadcasters, enterprises, governments and communications equipment distributors.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The group's transport systems operate between central offices and in the "last mile/kilometer" portion of communications networks and include Soneplex&reg;, Cellworx&reg;, Axity&#153;, Homeworx&#153;, Optiworx&#153;, DV6000&#153; and BroadAccess&#153; systems. The Soneplex system delivers T1-based services over copper or fiber facilities. As the industry's first global ATM Virtual Path transport element, the Cellworx system offers bandwidth-efficient, multiservice delivery of Internet/data, video and voice services, allocates only the bandwidth needed per service type and extends communications services over fiber-optic and copper (using xDSL technologies) facilities to businesses and residences. The Axity broadband wireless system delivers high-speed Internet/data, video and voice services. The Homeworx</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>9</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=9,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=314122,FOLIO=9,FILE='DISK012:[00STP6.00STP1656]DK1656A.;4',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <P><FONT SIZE=2>system enables cable television operators to transport high-speed digital signals for two-way Internet/data, video and voice services. ADC also provides the Optiworx family of fiber-optic transmitter and node products, along with coaxial amplifiers that cable television operators use to upgrade their networks to broader bandwidths for digital Internet/data, video, and voice services. The DV6000 system transmits a variety of signal types using a high-speed, uncompressed digital format over fiber facilities, and is used in the long haul portions of cable television, broadcast and interactive video networks, including distance learning, government and campus networks. The BroadAccess digital loop carrier system is used to deliver Internet/data and voice services.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The group's access systems include both customer located devices (which are part of the service provider's network) and customer premise devices (which are owned by the service provider's business customer) that can work alone or in conjunction with one of ADC's transport systems or with other vendors' transport systems. These devices include data service units (DSUs), channel service units (CSUs), T1/E1 multiplexers, T3/E3 multiplexers, integrated access devices (offering a wide variety of Internet/data, video and voice interfaces), MPEG video products and ATM access concentrators.</FONT></P> <P><FONT SIZE=2><I>&nbsp;&nbsp;&nbsp;&nbsp;INTEGRATED SOLUTIONS</I></FONT><FONT SIZE=2> products and services consist of systems integration services, operations support systems (OSS) software and enhanced services/intelligent network software that positions service providers to deliver broadband, multiservice communications over wireline and wireless networks. Systems integration services are used to design, equip and build communications networks and OSS applications that deliver Internet/data, video and voice services to residences and businesses. OSS software includes the Saville Systems&reg; line of communications billing and customer care software and the Metrica&reg; line of network performance and service level assurance software. Enhanced services/ intelligent network software includes the NewNet&reg; line of Signaling System 7 (SS7), intelligent network, wireless messaging and provisioning, Communications Assistance to Law Enforcement Act (CALEA) and Internet applications software. Integrated Solutions products and services are sold to local and long-distance telephone companies, cable television operators, wireless service providers, new competitive service providers and communications equipment manufacturers.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Historically, ADC's principal product offerings generally consisted of copper-based and fiber-optic-based products designed to address the needs of its customers for transmission and connectivity on traditional communications networks. With the growth of multimedia applications and the related development of enhanced Internet/data, video and voice services, ADC's more recent product offerings and research and development efforts have increasingly focused on emerging technologies and network equipment, software and integration service offerings for broadband communications applications. The market for broadband communications network equipment, software and integration services is evolving and rapidly changing. ADC's growth is dependent in part on its ability to successfully develop and commercially introduce new products in each of its product groups and is also dependent on the growth of the market. The growth in the market for such broadband communications products and services is dependent on a number of factors, including the amount of capital expenditures by communications service providers, regulatory and legal developments, changes to capital expenditure rates by communications service providers (which could result from the ongoing consolidation of customers in the market as well as the addition of new customer entrants to the market) and end-user demands for integrated Internet/data, video, voice and other communications services. There can be no assurance that ADC's new or enhanced products and services will meet with market acceptance or be profitable.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC's operating results may fluctuate significantly from quarter to quarter due to several factors. ADC is growing through acquisition and expansion, and results of operations described in this report may not be indicative of results to be achieved in future periods. ADC's expense levels are based in part on management's expectations of future revenues. Although management has and will continue to take measures to adjust expense levels, if revenue levels in a particular period fluctuate, operating results may be adversely affected. In addition, ADC's results of operations are subject to seasonal factors. ADC historically has experienced a stronger demand for its products in the fourth fiscal quarter, primarily as a result of customer budget cycles and ADC's fiscal year-end incentives, and has</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>10</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=2,SEQ=10,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=217774,FOLIO=10,FILE='DISK012:[00STP6.00STP1656]DK1656B.;5',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <P><FONT SIZE=2>experienced a weaker demand for its products in the first fiscal quarter, primarily as a result of the number of holidays in late November, December and early January and a general industry slowdown during that period. There can be no assurance that these historical seasonal trends will continue in the future.</FONT></P> <P><FONT SIZE=2><I>RESULTS OF OPERATIONS</I></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The percentage relationships to net sales of certain income and expense items for the quarters ended January&nbsp;31, 2000 and 1999 and the percentage changes in these income and expense items between periods are contained in the following table:</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="70%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="57%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%" ROWSPAN=2><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="21%" COLSPAN=3 ROWSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Percentage of Net Sales for the Three Months Ended January&nbsp;31</B></FONT><HR NOSHADE></TH> <TH WIDTH="5%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="13%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="57%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="5%" ROWSPAN=2><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="13%" ROWSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Percentage<BR> Increase<BR> (Decrease)<BR> Between<BR> Periods</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="57%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="8%" ALIGN="CENTER"><FONT SIZE=1><B>2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="5%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="8%" ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Net Sales</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>100.0</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>%</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>100.0</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>%</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>34.7</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>%</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Cost of Product Sold</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(52.0</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(52.5</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>33.3</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Gross Profit</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>48.0</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>47.5</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>36.2</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Expenses:</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>Research and development</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(10.6</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(11.3</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>26.7</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>Selling and administration</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(20.9</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(20.9</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>35.3</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>Goodwill amortization</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(1.1</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(1.3</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>9.2</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>Non-recurring charges</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>&#151;</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(14.9</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&#151;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Operating Income (Loss)</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>15.4</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(0.9</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>N/A</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Other Income (Expense), Net:</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>Interest</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>0.4</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>0.1</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>493.2</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>Other</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(0.2</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(0.3</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>(21.9</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Income (Loss) Before Income Taxes</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>15.6</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(1.1</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>N/A</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Provision for Income Taxes</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(5.3</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(1.3</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>434.1</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2><B>Net Income (Loss)</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>10.3</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>%</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>(2.4</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>)%</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>N/A</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="57%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Net Sales:</B></FONT><FONT SIZE=2>&nbsp;&nbsp;The following table sets forth ADC's net sales for the quarters ended January&nbsp;31, 2000 and 1999 for each of ADC's functional product groups described above:</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="75%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="40%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="56%" COLSPAN=9 ALIGN="CENTER"><FONT SIZE=1><B>Three Months Ended January&nbsp;31 ($&nbsp;in Thousands)</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="40%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%" ROWSPAN=2><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="26%" COLSPAN=4 ROWSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>2000</B></FONT><HR NOSHADE></TH> <TH WIDTH="5%" ROWSPAN=2><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="26%" COLSPAN=4 ROWSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="40%" ROWSPAN=2 ALIGN="LEFT"><FONT SIZE=1><B>Product Group<BR></B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="14%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Net Sales</B></FONT><HR NOSHADE></TH> <TH WIDTH="4%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="8%" ALIGN="CENTER"><FONT SIZE=1><B>%</B></FONT><HR NOSHADE></TH> <TH WIDTH="5%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="14%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>Net Sales</B></FONT><HR NOSHADE></TH> <TH WIDTH="4%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="8%" ALIGN="CENTER"><FONT SIZE=1><B>%</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="40%"><FONT SIZE=2><B>Broadband Connectivity</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>267,340</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>49.1</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>%</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>175,196</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>43.3</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>%</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="40%"><FONT SIZE=2><B>Broadband Access and Transport</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>169,495</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>31.1</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>139,650</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>34.5</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="40%"><FONT SIZE=2><B>Integrated Solutions</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>107,799</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>19.8</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>89,448</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>22.2</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="40%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="40%"><FONT SIZE=2><B>Total</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>544,634</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>100.0</FONT></TD> <TD WIDTH="5%"><FONT SIZE=2>%</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="11%" ALIGN="RIGHT"><FONT SIZE=2>404,294</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>100.0</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>%</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="40%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Net sales for the quarter ended January&nbsp;31, 2000 were $544.6&nbsp;million, a $140.3&nbsp;million or 34.7% increase over the comparable 1999 quarter. These increases reflected growth in all product groups. Revenue contributions from companies acquired in the first quarter of 2000 were $2.6&nbsp;million. International revenues comprised approximately 21.1% and 26.2% of ADC's sales for the quarters ended January&nbsp;31, 2000 and 1999, respectively.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>11</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=3,SEQ=11,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=691975,FOLIO=11,FILE='DISK012:[00STP6.00STP1656]DK1656B.;5',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=2> </FONT></H2> <BR> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;During the quarter ended January&nbsp;31, 2000, net sales of Broadband Connectivity products rose by 52.6%. This growth reflects continued strong global demand for ADC's fiber-and copper-connectivity systems and optical components. Sales were made to a broad range of Internet/data, video and voice service providers&#151;incumbent and new entrants&#151;around the globe. Strong worldwide growth in broadband connectivity systems continues as a result of growth in Internet/data traffic and digital services, which is creating demand for broader bandwidth connections, and entrance of new service providers, which is creating demand for connectivity to new and existing communication networks. Broadband Connectivity's sales have grown to represent approximately 49.1% of ADC's net sales. ADC expects that future sales of Broadband Connectivity products will continue to account for a substantial portion of its net sales.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;During the quarter ended January&nbsp;31, 2000, net sales of Broadband Access and Transport products rose by 20.2%. The growth is primarily the result of sales growth of major product systems&#151;telephone transport and access systems, cable television systems, and broadband wireless systems.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;During the quarter ended January&nbsp;31, 2000, Integrated Solutions net sales increased 19.1%. Both systems integration services and software systems contributed to sales growth. The growth resulted from a broad range of wireline and wireless service providers that are building or upgrading networks that offer integrated Internet/data, video and voice services.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Gross Profit:</B></FONT><FONT SIZE=2>&nbsp;&nbsp;During the quarters ended January&nbsp;31, 2000 and 1999, gross profit percentages were 48.0% and 47.5%, respectively. The increase was the result of increased sales volume and changes in product mix within the Broadband Connectivity group. ADC anticipates that its future gross profit percentage will continue to be affected by many factors, including product mix, the timing of new product introductions and manufacturing volume.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Operating Expenses:</B></FONT><FONT SIZE=2>&nbsp;&nbsp;Operating expenses for the quarters ended January&nbsp;31, 2000 and 1999 were $177.5&nbsp;million and $195.4&nbsp;million (including non-recurring charges of $60.3&nbsp;million in the first quarter of 1999), respectively. The 1999 non-recurring charges represent the write-off of purchased in-process research and development costs resulting from the acquisitions of Teledata Communications, Hadax Electronics, and Phasor Electronics, along with costs for strategic restructuring of the product line previously referred to as Wireless Systems Group. See Note&nbsp;3 to the Unaudited Consolidated Financial Statements concerning restructuring costs and the write-off of purchased in-process research and development costs. Operating expenses, before non-recurring charges, for the quarters ended January&nbsp;31, 2000 and 1999 were $177.5&nbsp;million and $135.1&nbsp;million, representing 32.6% and 33.4% of net sales, respectively. The increase in absolute dollars of operating expenses, before non-recurring charges, was due primarily to costs associated with acquired companies and expanded operations necessary to support higher revenue levels.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Research and development expenses were $58.0&nbsp;million for the quarter ended January&nbsp;31, 2000, representing a 26.7% increase compared to $45.7&nbsp;million for the quarter ended January&nbsp;31, 1999. The increase reflects the activities from acquired companies plus substantial product development and introduction efforts in all functional product groups. ADC believes that, given the rapidly changing technology and competitive environment in the communications equipment industry, continued commitment to product development efforts will be required for ADC to remain competitive. Accordingly, ADC intends to continue to allocate substantial resources to product development for each of the product groups. However, ADC recognizes the need to balance the cost of product development with expense control and remains committed to carefully managing the rate of increase of such expenses.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Selling and administration expenses were $114.0&nbsp;million for the quarter ended January&nbsp;31, 2000, representing a 35.4% increase compared to $84.2&nbsp;million for the quarter ended January&nbsp;31, 1999. This increase primarily reflects the activities of acquired companies, incentives associated with selling activities and additional personnel related to expanded operations.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>12</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=12,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=210040,FOLIO=12,FILE='DISK012:[00STP6.00STP1656]DM1656A.;6',USER='CDUSTIN',CD='15-MAR-2000;23:37 --> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Several of ADC's acquisitions have been accounted for as purchase transactions in which the initial purchase prices exceeded the fair value of the acquired assets. As a result of ADC's acquisition activity, goodwill amortization increased to $5.6&nbsp;million in the quarter ended January&nbsp;31, 2000 compared to $5.1&nbsp;million in the quarter ended January&nbsp;31, 1999.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Other Income (Expense), Net:</B></FONT><FONT SIZE=2>&nbsp;&nbsp;For the quarters ended January&nbsp;31, 2000 and 1999, the net interest income (expense) category represented net interest income on cash and cash equivalents. See "Liquidity and Capital Resources" below for a discussion of cash levels.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Other expense primarily represented the gain or loss on foreign exchange transactions, the sale of fixed assets and ADC's share of the net operating results of its investments in other companies accounted for on an equity basis.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Income Taxes:</B></FONT><FONT SIZE=2>&nbsp;&nbsp;The effective income tax rate for the quarter ended January&nbsp;31, 1999 was significantly affected by non-tax deductible purchased in-process research and development charges. These expenses are associated with the acquisitions made during the quarter. In addition, a higher marginal rate of 37% was applied to restructuring expenses. Excluding the impact of purchased in-process research and development and the higher rate used for restructuring charges, the effective income tax rate was 34% for the quarters ended January&nbsp;31, 2000 and 1999.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Net Income:</B></FONT><FONT SIZE=2>&nbsp;&nbsp;ADC reported net income of $56.3&nbsp;million (or $0.18 per diluted share) for the quarter ended January&nbsp;31, 2000, compared to a net loss of $9.7&nbsp;million (or $0.03 per diluted share) for the quarter ended January&nbsp;31, 1999. See Note&nbsp;3 to the Unaudited Consolidated Financial Statements. Before the non-recurring charges of $47.3&nbsp;million, net of tax, net income for the quarter ended January&nbsp;31, 1999 was $37.6&nbsp;million (or $0.12 per diluted share).</FONT></P> <P><FONT SIZE=2><B>LIQUIDITY AND CAPITAL RESOURCES</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Cash and cash equivalents, primarily short-term investments in commercial paper with maturities of less than 90&nbsp;days, and other short-term investments increased $70.3&nbsp;million and decreased $101.4&nbsp;million during the quarters ended January&nbsp;31, 2000 and 1999, respectively. The major elements of the 2000 change included $41.6&nbsp;million provided by operations and $42.7&nbsp;million from issuance of common stock to employees pursuant to ADC's stock option and employee stock purchase plans. The major elements of the 1999 change were the use of cash for acquisitions offset by $112.0&nbsp;million provided by operations plus approximately $40&nbsp;million cash that was obtained in the Teledata acquisition.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC believes that current cash on hand, cash generated from operating activities, and available credit facilities will be adequate to fund its working capital requirements and planned capital expenditures for the duration of the fiscal year. However, ADC may find it necessary to seek additional sources of financing to support its capital needs, for additional working capital, potential investments or acquisitions or otherwise.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;During the third quarter of fiscal 1999, Efficient Networks completed an initial public offering of its common stock, which caused a valuation adjustment in ADC's investment in that company. At January&nbsp;31, 2000, ADC carried its investment at a market value of $164.8&nbsp;million.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Subsequent to ADC's 1999&nbsp;fiscal year-end, Siara Systems, Inc., in which ADC had an approximate 7.3% ownership interest, agreed to be acquired by Redback Networks,&nbsp;Inc. in a stock-for-stock transaction valued at approximately $4.3&nbsp;billion at the time of the announcement. ADC's initial equity investment in Siara Systems was $3.5&nbsp;million. The acquisition of Siara Systems by Redback Networks was consummated on March&nbsp;8, 2000. As a result, ADC's investment will be reflected on ADC's balance sheet at the market value of its shares received in the transaction.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;At January&nbsp;31, 2000 and October&nbsp;31, 1999, ADC had approximately $25.1&nbsp;million and $46.2&nbsp;million of debt outstanding, respectively. At January&nbsp;31, 2000, ADC had a $340&nbsp;million five-year credit facility which is available for general corporate purposes, of which none was outstanding, at an interest rate</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>13</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=2,SEQ=13,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=433557,FOLIO=13,FILE='DISK012:[00STP6.00STP1656]DM1656A.;6',USER='CDUSTIN',CD='15-MAR-2000;23:37 --> <P><FONT SIZE=2>equal to the commercial paper interest rate plus 25 basis points. The remaining debt of $5.0&nbsp;million was from acquired companies.</FONT></P> <P><FONT SIZE=2><I>YEAR 2000 MATTERS</I></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC completed the transition from calendar year 1999 to 2000 with no significant impact to ADC's operations. ADC will continue to evaluate year 2000 related exposures at its suppliers and customers. ADC will also continue to monitor its systems, facilities and products to ensure that no year 2000 problems occur over the next few months. ADC's costs associated with year 2000 compliance to date have been within budgeted amounts. ADC has not identified any non-compliant products or systems, and there have not been any material costs incurred with respect to remediation. ADC believes that it is unlikely to experience a material adverse impact on its financial condition or results of operations due to year 2000 compliance issues.</FONT></P> <P><FONT SIZE=2><I>EURO CONVERSION</I></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;On January&nbsp;1, 1999, several member countries of the European Union established fixed conversion rates and adopted the Euro as their new common legal currency. Beginning on such date, the Euro began trading on currency exchanges while the legacy currencies remain legal tender in the participating countries for a transition period between January&nbsp;1, 1999 and January&nbsp;1, 2002.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;During the transition period, parties can elect to pay for goods and services and transact business using either the Euro or a legacy currency. Between January&nbsp;1, 2002 and July&nbsp;1, 2002, the participating countries will introduce Euro hard currency and withdraw all legacy currencies.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The Euro conversion may affect cross-border competition by creating cross-border price transparency. ADC is assessing its pricing and marketing strategy in order to ensure that ADC remains competitive in a broader European market. ADC is also modifying its information technology systems to permit transactions to take place in both the legacy currencies and the Euro and provide for the eventual elimination of the legacy currencies. In addition, ADC is reviewing whether certain existing contracts will need to be modified. ADC's currency risks and risk management for operations in participating countries may be reduced as the legacy currencies are converted to the Euro. ADC will continue to evaluate issues involving introduction of the Euro. Based on current information and assessments, ADC does not expect that the Euro conversion will have a material adverse effect on its business, results of operations or financial condition.</FONT></P> <P><FONT SIZE=2><B>Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995.</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of Section&nbsp;27A of the Securities Act of 1933, as amended, and Section&nbsp;21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent ADC's expectations or believes concerning future events, including the following: any statements regarding future sales, profit percentages and other results of operations, any statements regarding the continuation of historical trends, any statements regarding the sufficiency of ADC's cash balances and cash generated from operating and financing activities for ADC's future liquidity and capital resource needs, any statements regarding the effect of regulatory changes and any statements regarding the future of the communications equipment industry or ADC's business. ADC cautions that any forward-looking statements made by ADC in this Form&nbsp;10-Q or in other announcements made by ADC are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitations, the factors set forth on Exhibit&nbsp;99-a to ADC's Form&nbsp;10-K for the fiscal year ended October&nbsp;31, 1999, which is filed with the Securities and Exchange Commission.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>14</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=3,SEQ=14,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=19911,FOLIO=14,FILE='DISK012:[00STP6.00STP1656]DM1656B.;6',USER='CDUSTIN',CD='15-MAR-2000;23:37 --> <BR> <BR> <P><FONT SIZE=2><A NAME="dm1656_item_3._quantitative_and_quali__ite02633"> </A></FONT> <FONT SIZE=2><B>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK </B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC is exposed to market risk from changes in foreign exchange rates. To mitigate the risk from these exposures, ADC has instituted a balance sheet hedging program. The objective of the program is to protect the net monetary assets and liabilities of ADC from fluctuations due to movements in foreign exchange rates. This program operates in markets where hedging costs are beneficial. Exposures to currencies in which hedging instruments are unavailable, or the costs prohibitive, are minimized through managing operating activities and net asset positions. The majority of hedging instruments utilized are forward contracts with maturities of less than one year. Foreign exchange contracts reduce ADC's overall exposure to exchange rate movements, since gains and losses on these contracts offset losses and gains on the underlying exposure. ADC's policy prohibits the use of derivative financial instruments for trading and other speculative purposes.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;ADC owns approximately 1.8&nbsp;million shares of Efficient Networks common stock. With Efficient Network's public offering in July 1999 and subsequent changes to the fair value of Efficient Network's stock, ADC has recorded an $159.8&nbsp;million unrealized gain, $100.6&nbsp;million net of income tax effects, in shareowners' investment as of January&nbsp;31, 2000. Assuming an immediate decrease of 20% in Efficient Network's stock price, the hypothetical reduction in shareowners' investment to these holdings is estimated to be $20.1&nbsp;million (net of income tax effects), or 1.4% of total shareowners investment at January&nbsp;31, 2000.</FONT></P> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="dm1656_part_ii._other_information"> </A></FONT> <FONT SIZE=2><B>PART II. OTHER INFORMATION </B></FONT></P> <P><FONT SIZE=2><A NAME="dm1656_item_1._legal_proceedings"> </A></FONT> <FONT SIZE=2><B>ITEM 1.&nbsp;&nbsp;LEGAL PROCEEDINGS </B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;None.</FONT></P> <BR> <P><FONT SIZE=2><A NAME="dm1656_item_2._changes_in_securities"> </A></FONT> <FONT SIZE=2><B>ITEM 2.&nbsp;&nbsp;CHANGES IN SECURITIES </B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;None.</FONT></P> <BR> <P><FONT SIZE=2><A NAME="dm1656_item_3._defaults_upon_senior_securities"> </A></FONT> <FONT SIZE=2><B>ITEM 3.&nbsp;&nbsp;DEFAULTS UPON SENIOR SECURITIES </B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;None.</FONT></P> <BR> <P><FONT SIZE=2><A NAME="dm1656_item_4._submission_of_m__dm102408"> </A></FONT> <FONT SIZE=2><B>ITEM 4.&nbsp;&nbsp;SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS </B></FONT></P> <UL> <DL compact> <DT><FONT SIZE=2>a.</FONT></DT><DD><FONT SIZE=2>An annual meeting of the shareowners was held on February&nbsp;22, 2000. Proxies for the meeting were solicited pursuant to Regulation&nbsp;14 under the Securities and Exchange Act of 1934. There was no solicitation in opposition to the management's nominees for director as listed in the proxy statement and all such nominees were elected. <BR><BR></FONT></DD><DT><FONT SIZE=2>b.</FONT></DT><DD><FONT SIZE=2>At the annual meeting, John&nbsp;A. Blanchard III, William&nbsp;J. Cadogan, B.&nbsp;Kristine Johnson and Jean-Pierre Rosso were elected as directors for terms expiring at the annual meeting of shareowners in 2003. John&nbsp;J. Boyle III and Charles&nbsp;D. Yost were elected as directors for terms expiring at the annual meeting of shareowners in 2001. John&nbsp;W. Sidgmore was elected as a director for a term expiring at the annual meeting of shareowners of 2002. James&nbsp;C. Castle, Ph.D., Alan&nbsp;E. Ross and John&nbsp;D. Wunsch continued as directors after the annual meeting.</FONT></DD></DL> </UL> <P ALIGN="CENTER"><FONT SIZE=2>15</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=4,SEQ=15,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=417219,FOLIO=15,FILE='DISK012:[00STP6.00STP1656]DM1656B.;6',USER='CDUSTIN',CD='15-MAR-2000;23:37 --> <UL> <UL> </UL> </UL> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=2> </FONT></H2> <BR> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The following table shows the vote totals with respect to the election of the seven directors.</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="70%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="63%" ALIGN="LEFT"><FONT SIZE=1><B>Name<BR></B></FONT><HR NOSHADE></TH> <TH WIDTH="3%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="17%" ALIGN="CENTER"><FONT SIZE=1><B>Votes<BR> For</B></FONT><HR NOSHADE></TH> <TH WIDTH="3%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="14%" ALIGN="CENTER"><FONT SIZE=1><B>Authority<BR> Withheld</B></FONT><HR NOSHADE></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="63%"><FONT SIZE=2>John A. Blanchard, III</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="17%" ALIGN="RIGHT"><FONT SIZE=2>133,364,469</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" ALIGN="RIGHT"><FONT SIZE=2>659,228</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="63%"><FONT SIZE=2>John J. Boyle, III</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="17%" ALIGN="RIGHT"><FONT SIZE=2>133,355,567</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" ALIGN="RIGHT"><FONT SIZE=2>668,130</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="63%"><FONT SIZE=2>William J. Cadogan</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="17%" ALIGN="RIGHT"><FONT SIZE=2>133,309,835</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" ALIGN="RIGHT"><FONT SIZE=2>713,862</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="63%"><FONT SIZE=2>B. Kristine Johnson</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="17%" ALIGN="RIGHT"><FONT SIZE=2>133,376,502</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" ALIGN="RIGHT"><FONT SIZE=2>647,195</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="63%"><FONT SIZE=2>Jean-Pierre Rosso</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="17%" ALIGN="RIGHT"><FONT SIZE=2>133,358,044</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" ALIGN="RIGHT"><FONT SIZE=2>665,653</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="63%"><FONT SIZE=2>John W. Sidgmore</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="17%" ALIGN="RIGHT"><FONT SIZE=2>133,353,030</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" ALIGN="RIGHT"><FONT SIZE=2>670,667</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="63%"><FONT SIZE=2>Charles D. Yost</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="17%" ALIGN="RIGHT"><FONT SIZE=2>132,649,107</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="14%" ALIGN="RIGHT"><FONT SIZE=2>1,374,590</FONT></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In addition to the election of directors, the shareowners also approved an amendment to ADC's 1991 Stock Incentive Plan to increase the number of shares available for issuance pursuant to awards thereunder.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The following table shows the vote totals with respect to the 1991 Stock Incentive Plan:</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="53%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="76%"><FONT SIZE=2>Votes For:</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="21%" ALIGN="RIGHT"><FONT SIZE=2>87,987,829</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="76%"><FONT SIZE=2>Votes Against:</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="21%" ALIGN="RIGHT"><FONT SIZE=2>45,471,494</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="76%"><FONT SIZE=2>Abstentions:</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="21%" ALIGN="RIGHT"><FONT SIZE=2>564,374</FONT></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;15, 2000 ADC effected a 2-for-1 stock split in the form of a 100% stock dividend. As proxies for the annual meeting were mailed before the stock split was effected, all share numbers are reflected above on a pre-split basis.</FONT></P> <P><FONT SIZE=2><A NAME="do1656_item_5._other_information"> </A></FONT> <FONT SIZE=2><B>ITEM 5.&nbsp;&nbsp;OTHER INFORMATION </B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Thomas E. Holloran announced his retirement as a director of ADC at the annual meeting of shareowners held on February&nbsp;22, 2000.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Alan E. Ross resigned as a director of ADC on March&nbsp;8, 2000.</FONT></P> <BR> <P><FONT SIZE=2><A NAME="do1656_item_6._exhibits_and_reports_on_form_8-k"> </A></FONT> <FONT SIZE=2><B>ITEM 6.&nbsp;&nbsp;EXHIBITS AND REPORTS ON FORM 8-K </B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="78%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>a.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>Exhibits</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;4-a</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>Form of certificate for shares of Common Stock of ADC Telecommunications,&nbsp;Inc. (Incorporated by reference to Exhibit&nbsp;4-a to ADC's Form&nbsp;10-Q for the quarter ended January&nbsp;31, 1996.)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;4-b</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>Restated Articles of Incorporation of ADC Telecommunications,&nbsp;Inc., as amended prior to January&nbsp;20, 2000. (Incorporated by reference to Exhibit&nbsp;4.1 to ADC's Registration Statement on Form&nbsp;S-3 dated April&nbsp;15, 1997.)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;4-c</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>Restated Bylaws of ADC Telecommunications,&nbsp;Inc., as amended. (Incorporated by reference to Exhibit&nbsp;4.2 to ADC's Registration Statement on Form&nbsp;S-3 dated April&nbsp;15, 1997.)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;4-d</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>Second Amended and Restated Rights Agreement, amended and restated as of November&nbsp;28, 1995, between ADC Telecommunications,&nbsp;Inc. and Norwest Bank Minnesota, N.A. (amending and restating the Rights Agreement dated as of September&nbsp;23, 1986, as amended and restated as of August&nbsp;16, 1989), which includes as Exhibit&nbsp;A thereto the form of Right Certificate. (Incorporated by reference to Exhibit&nbsp;4 to ADC's Form&nbsp;8-K dated December &nbsp;11, 1995.)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;4-e</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>Amendment to Second Amended and Restated Rights Agreement dated as of October&nbsp;6, 1999. (Incorporated by reference to Exhibit 4-c to ADC's Form 10-K for the fiscal year ended October&nbsp;31, 1999.)</FONT></TD> </TR> </TABLE> <!-- insert table folio --> <P ALIGN="CENTER"><FONT SIZE=2>16</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=16,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=565470,FOLIO=16,FILE='DISK012:[00STP6.00STP1656]DO1656A.;18',USER='HVANHEE',CD='16-MAR-2000;13:03 --> <!-- end of table folio --> <TABLE WIDTH="78%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;4-f</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>Articles of Amendment to Restated Articles of Incorporation of ADC Telecommunications,&nbsp;Inc. dated January&nbsp;20, 2000. (Incorporated by reference to Exhibit 4.6 to ADC's Registration Statement on Form S-8 dated March&nbsp;14, 2000.)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>10-a</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>ADC Telecommunications,&nbsp;Inc. 1991 Stock Incentive Plan (as amended and restated through February&nbsp;22, 2000).</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>27-a</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>Financial Data Schedule for the quarter ended January&nbsp;31, 2000.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>27-b</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>Financial Data Schedule for the quarter ended January&nbsp;31, 1999.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR> b.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="89%" COLSPAN=2><FONT SIZE=2>&nbsp;<BR> Reports on Form&nbsp;8-K</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>&nbsp;<BR> Current Report on Form&nbsp;8-K dated January&nbsp;13, 2000 filed on January&nbsp;18, 2000 in connection with the ADC's press release dated January&nbsp;13, 2000 announcing a 2-for-1 stock split in the form of a 100% stock dividend.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="80%"><FONT SIZE=2>&nbsp;<BR> Current Report on Form&nbsp;8-K dated February&nbsp;22, 2000 filed on February&nbsp;28, 2000 in connection with the execution of an agreement dated February&nbsp;22, 2000 among ADC, a wholly-owned subsidiary of ADC and PairGain Technologies, &nbsp;Inc. ("PairGain") pursuant to which ADC has agreed, subject to certain conditions, to acquire all of the issued and outstanding capital stock of PairGain.</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2>17</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=2,SEQ=17,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=765179,FOLIO=17,FILE='DISK012:[00STP6.00STP1656]DO1656A.;18',USER='HVANHEE',CD='16-MAR-2000;13:03 --> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=2> </FONT></H2> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="dq1656_signatures"> </A></FONT> <FONT SIZE=2><B>SIGNATURES </B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;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.</FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="100%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="36%"><FONT SIZE=2>Dated: March 16, 2000</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="62%" COLSPAN=2><FONT SIZE=2>ADC TELECOMMUNICATIONS,&nbsp;INC.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="36%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="3%"><FONT SIZE=2>&nbsp;<BR></FONT> <FONT SIZE=2>By:</FONT></TD> <TD WIDTH="59%" ALIGN="CENTER"><FONT SIZE=2>&nbsp;<BR> /s/&nbsp;</FONT><FONT SIZE=2>ROBERT E. SWITZ</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> Robert E. Switz<BR></FONT> <FONT SIZE=2><I>Senior Vice President, Chief Financial Officer<BR> (Principal Financial Officer,<BR> Duly Authorized Officer)</I></FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2>18</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=18,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=897263,FOLIO=18,FILE='DISK012:[00STP6.00STP1656]DQ1656A.;6',USER='MSPASOJ',CD='15-MAR-2000;12:37 --> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <BR> <P ALIGN="CENTER"><FONT SIZE=2><B>ADC TELECOMMUNICATIONS,&nbsp;INC.<BR> EXHIBIT INDEX TO FORM 10-Q<BR> FOR THE QUARTER ENDED JANUARY 31, 2000</B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="76%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="9%" ALIGN="CENTER"><FONT SIZE=1><B>Exhibit No.</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="82%" ALIGN="CENTER"><FONT SIZE=1><B>Description</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="4%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>4-a</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>Form of certificate for shares of Common Stock of ADC Telecommunications, Inc. (Incorporated by reference to Exhibit&nbsp;4-a to ADC's Form 10-Q for the quarter ended January&nbsp;31, 1996.)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>4-b</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>Restated Articles of Incorporation of ADC Telecommunications, Inc., as amended prior to January&nbsp;20, 2000. (Incorporated by reference to Exhibit&nbsp;4.1 to ADC's Registration Statement on Form S-3 dated April&nbsp;15, 1997.)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>4-c</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>Restated Bylaws of ADC Telecommunications, Inc., as amended. (Incorporated by reference to Exhibit&nbsp;4.2 to ADC's Registration Statement on Form S-3 dated April&nbsp;15, 1997.)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>4-d</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>Second Amended and Restated Rights Agreement, amended and restated as of November&nbsp;28, 1995, between ADC Telecommunications, Inc. and Norwest Bank Minnesota, N.A. (amending and restating the Rights Agreement dated as of September&nbsp;23, 1986, as amended and restated as of August&nbsp;16, 1989), which includes as Exhibit&nbsp;A thereto the form of Right Certificate. (Incorporated by reference to Exhibit&nbsp;4 to ADC's Form 8-K dated December&nbsp;11, 1995.) </FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>4-e</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>Amendment to Second Amended and Restated Rights Agreement dated as of October&nbsp;6, 1999. (Incorporated by reference to Exhibit 4-c to ADC's Form 10-K for the fiscal year ended October&nbsp;31, 1999.)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>4-f</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>Articles of Amendment to Restated Articles of Incorporation of ADC Telecommunications, Inc. dated January&nbsp;20, 2000. (Incorporated by reference to Exhibit 4.6 to ADC's Registration Statement on Form S-8 dated March &nbsp;14, 2000.)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>10-a</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>ADC Telecommunications, Inc. 1991 Stock Incentive Plan (as amended and restated through February&nbsp;22, 2000).</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>27-a</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>Financial Data Schedule for the quarter ended January&nbsp;31, 2000.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%"><FONT SIZE=2>27-b</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="82%"><FONT SIZE=2>Financial Data Schedule for the quarter ended January&nbsp;31, 1999.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="4%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2>19</FONT></P> <P><FONT SIZE=2><HR NOSHADE></FONT></P> <!-- ZEQ.=1,SEQ=19,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1",CHK=1024091,FOLIO=19,FILE='DISK012:[00STP6.00STP1656]DS1656A.;13',USER='HVANHEE',CD='16-MAR-2000;13:03 --> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <BR> <H2><FONT SIZE=2><A NAME="00STP1656_1">QuickLinks</A></FONT></H2> <!-- TOC_BEGIN --> <FONT SIZE=2><A HREF="#de1656_part_i._financial_information">PART I. FINANCIAL INFORMATION</A></FONT><BR> <UL> <FONT SIZE=2><A HREF="#de1656_item_1._financial_statements">ITEM 1. FINANCIAL STATEMENTS</A></FONT><BR> </UL> <!-- TOC_END --> <!-- TOC_BEGIN --> <UL> <FONT SIZE=2><A HREF="#dk1656_item_2._management_s_discussio__ite03663">ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</A></FONT><BR> </UL> <!-- TOC_END --> <!-- TOC_BEGIN --> <UL> <FONT SIZE=2><A HREF="#dm1656_item_3._quantitative_and_quali__ite02633">ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</A></FONT><BR> </UL> <FONT SIZE=2><A HREF="#dm1656_part_ii._other_information">PART II. OTHER INFORMATION</A></FONT><BR> <UL> <FONT SIZE=2><A HREF="#dm1656_item_1._legal_proceedings">ITEM 1. LEGAL PROCEEDINGS</A></FONT><BR> <FONT SIZE=2><A HREF="#dm1656_item_2._changes_in_securities">ITEM 2. CHANGES IN SECURITIES</A></FONT><BR> <FONT SIZE=2><A HREF="#dm1656_item_3._defaults_upon_senior_securities">ITEM 3. DEFAULTS UPON SENIOR SECURITIES</A></FONT><BR> <FONT SIZE=2><A HREF="#dm1656_item_4._submission_of_m__dm102408">ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</A></FONT><BR> </UL> <!-- TOC_END --> <!-- TOC_BEGIN --> <UL> <FONT SIZE=2><A HREF="#do1656_item_5._other_information">ITEM 5. OTHER INFORMATION</A></FONT><BR> <FONT SIZE=2><A HREF="#do1656_item_6._exhibits_and_reports_on_form_8-k">ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</A></FONT><BR> </UL> <!-- TOC_END --> <!-- TOC_BEGIN --> <FONT SIZE=2><A HREF="#dq1656_signatures">SIGNATURES</A></FONT><BR> <!-- TOC_END --> <!-- SEQ=,FILE='QUICKLINK',USER=HVANHEE,SEQ=,EFW="2006930",CP="ADC TELECOMMUNICATIONS, INC.",DN="1" --> </BODY> </HTML>

2000

0QTR1

ADI

https://www.sec.gov/Archives/edgar/data/6281/0000950135-00-001363.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, TSl5U7ziuTaYiYpefnOM81wN7qEwtfjBiaGAIpiRmUB3iCxn2VrE6HgR8ACMGQhN F6mGwIm83C2KyEJIzloOow== <SEC-DOCUMENT>0000950135-00-001363.txt : 20000314 <SEC-HEADER>0000950135-00-001363.hdr.sgml : 20000314 ACCESSION NUMBER: 0000950135-00-001363 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANALOG DEVICES INC CENTRAL INDEX KEY: 0000006281 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 042348234 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07819 FILM NUMBER: 567753 BUSINESS ADDRESS: STREET 1: ONE TECHNOLOGY WAY CITY: NORWOOD STATE: MA ZIP: 02062 BUSINESS PHONE: 7183294700 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>ANALOG DEVICES <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 29, 2000 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. 1-7819 ANALOG DEVICES, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2348234 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE TECHNOLOGY WAY, NORWOOD, MA 02062-9106 (Address of principal executive offices) (Zip Code) (781) 329-4700 (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 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 February 28, 2000 was 176,908,583 shares of Common Stock. ================================================================================ <PAGE> 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (thousands except per share amounts) <TABLE> <CAPTION> Three Months Ended ------------------ January 29, 2000 January 30, 1999 ---------------- ---------------- <S> <C> <C> Net sales $ 490,277 $ 300,500 Cost of sales 225,087 162,805 ----------- ----------- Gross margin 265,190 137,695 Operating expenses: Research and development 83,012 52,584 Selling, marketing, general and administrative 64,524 46,181 ----------- ----------- Operating income 117,654 38,930 Equity in loss of WaferTech -- 1,149 Nonoperating (income) expense, net (9,411) 420 ----------- ----------- Income before income taxes 127,065 37,361 Provision for income taxes 34,058 7,467 ----------- ----------- Net income $ 93,007 $ 29,894 =========== =========== Shares used to compute earnings per share - basic 174,676 159,572 =========== =========== Shares used to compute earnings per share - diluted 187,229 176,857 =========== =========== Earnings per share - basic $0.53 $0.19 =========== =========== Earnings per share - diluted $0.50 $0.18 =========== =========== </TABLE> See accompanying notes. 2 <PAGE> 3 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (thousands) <TABLE> <CAPTION> Assets January 29, 2000 October 30, 1999 January 30, 1999 ---------------- ---------------- ---------------- <S> <C> <C> <C> Cash and cash equivalents $ 409,516 $ 355,891 $ 332,403 Short-term investments 485,706 406,553 129,670 Accounts receivable, net 301,972 267,127 213,727 Inventories: Raw materials 13,176 13,735 24,964 Work in process 157,655 150,427 148,897 Finished goods 79,353 84,774 96,475 ------------ ------------ ------------ 250,184 248,936 270,336 Deferred tax assets 99,300 89,780 98,000 Prepaid expenses 12,283 10,823 14,638 ------------ ------------ ------------ Total current assets 1,558,961 1,379,110 1,058,774 ------------ ------------ ------------ Property, plant and equipment, at cost: Land and buildings 171,977 166,130 159,617 Machinery and equipment 1,116,344 1,088,939 1,043,087 Office equipment 76,355 74,530 71,033 Leasehold improvements 110,953 108,530 103,989 ------------ ------------ ------------ 1,475,629 1,438,129 1,377,726 Less accumulated depreciation and amortization 826,844 795,323 696,475 ------------ ------------ ------------ Net property, plant and equipment 648,785 642,806 681,251 ------------ ------------ ------------ Investments 199,070 119,301 88,511 Intangible assets, net 35,337 30,563 15,115 Other assets 47,180 46,574 50,902 ------------ ------------ ------------ Total other assets 281,587 196,438 154,528 ------------ ------------ ------------ $ 2,489,333 $ 2,218,354 $ 1,894,553 ============ ============ ============ </TABLE> See accompanying notes. 3 <PAGE> 4 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (thousands) <TABLE> <CAPTION> Liabilities and Stockholders' Equity January 29, 2000 October 30, 1999 January 30, 1999 ---------------- ---------------- ---------------- <S> <C> <C> <C> Short-term borrowings and current portion of long-term debt $ 84,810 $ 82,344 $ 2,333 Obligations under capital leases 14,089 14,717 14,386 Accounts payable 125,027 103,368 58,000 Deferred income on shipments to distributors 113,523 100,788 101,797 Income taxes payable 106,319 66,761 57,373 Accrued liabilities 121,864 111,285 79,369 ------------ ------------ ------------ Total current liabilities 565,632 479,263 313,258 ------------ ------------ ------------ Long-term debt - - 309,871 Non-current obligations under capital leases 13,218 16,214 27,150 Deferred income taxes 62,600 40,002 33,000 Other non-current liabilities 101,538 66,844 45,119 ------------ ------------ ------------ Total non-current liabilities 177,356 123,060 415,140 ------------ ------------ ------------ Commitments and Contingencies Stockholders' equity: Preferred stock, $1.00 par value, 471,934 shares authorized, none outstanding -- -- -- Common stock, $.16 2/3 par value, 600,000,000 shares authorized, 179,361,743 shares issued (178,049,189 in October 1999 and 164,684,927 in January 1999) 29,893 29,675 27,448 Capital in excess of par value 538,274 523,106 254,788 Retained earnings 1,203,818 1,110,811 944,265 Accumulated other comprehensive income 38,488 12,209 7,397 ------------ ------------ ------------ 1,810,473 1,675,801 1,233,898 Less 3,213,403 shares in treasury, at cost (3,161,774 in October 1999 and 3,763,903 in January 1999) 64,128 59,770 67,743 ------------ ------------ ------------ Total stockholders' equity 1,746,345 1,616,031 1,166,155 ------------ ------------ ------------ $ 2,489,333 $ 2,218,354 $ 1,894,553 ============ ============ ============ </TABLE> See accompanying notes. 4 <PAGE> 5 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (thousands) <TABLE> <CAPTION> Three Months Ended ------------------ January 29, 2000 January 30, 1999 ---------------- ---------------- OPERATIONS Cash flows from operations: <S> <C> <C> Net income $ 93,007 $ 29,894 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 35,872 35,156 Equity in loss of WaferTech, net of dividends -- 1,149 Deferred income taxes (10,011) 1,335 Other non-cash expense 440 1,165 Changes in operating assets and liabilities 45,199 (10,342) ----------- ----------- Total adjustments 71,500 28,463 ----------- ----------- Net cash provided by operations 164,507 58,357 ----------- ----------- INVESTMENTS Cash flows from investments: Purchase of short-term investments available for sale (207,486) (110,659) Maturities of short-term investments available for sale 128,333 22,564 Payments for acquisitions, net of cash acquired (1,176) -- Change in long-term investments 348 105,601 Additions to property, plant and equipment, net (40,677) (12,293) (Increase) decrease in other assets (1,713) 2,403 ----------- ----------- Net cash (used for) provided by investments (122,371) 7,616 ----------- ----------- FINANCING ACTIVITIES Cash flows from financing activities: Proceeds from employee stock plans 9,981 4,820 Payments on capital lease obligations (3,622) (3,503) Net increase in variable rate borrowings 2,488 2,030 ----------- ----------- Net cash provided by financing activities 8,847 3,347 ----------- ----------- Effect of exchange rate changes on cash 2,642 (248) ----------- ----------- Net increase in cash and cash equivalents 53,625 69,072 Cash and cash equivalents at beginning of period 355,891 263,331 ----------- ----------- Cash and cash equivalents at end of period $ 409,516 $ 332,403 =========== =========== </TABLE> See accompanying notes. 5 <PAGE> 6 Analog Devices, Inc. Notes to Condensed Consolidated Financial Statements For the three months ended January 29, 2000 (all tabular amounts in thousands except per share amounts) Note 1 - In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for this interim period and should be read in conjunction with the Company's Annual Report to Stockholders on Form 10-K for the fiscal year ended October 30, 1999 (1999 Annual Report). Note 2 - Certain amounts reported in the previous year have been reclassified to conform to the 2000 presentation. Note 3 - Additional Cash Flow Statement Information During the first quarter of fiscal 2000, the Company's non-cash investing activities consisted of approximately $46 million of unrealized gains on available-for-sale securities. Note 4 - Comprehensive Income Total comprehensive income, i.e., net income plus available-for-sale securities valuation adjustments and currency translation adjustments to stockholders' equity, for the first quarters of fiscal 2000 and fiscal 1999 was $119 million and $31 million, respectively. Note 5 - Earnings Per Share Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of future issues of common stock relating to stock option programs and convertible debt financing. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the period. The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended ------------------ January 29, 2000 January 30, 1999 ---------------- ---------------- Basic: <S> <C> <C> Net income $ 93,007 $ 29,894 ========== ========== Weighted shares outstanding 174,676 159,572 ========== ========== Earnings per share $0.53 $0.19 ========== ========== Diluted: Net income $ 93,007 $ 29,894 Interest related to convertible subordinated notes, net of tax -- 1,425 ---------- ---------- Earnings available for common stock $ 93,007 $ 31,319 ========== ========== Weighted shares outstanding 174,676 159,572 Assumed exercise of common stock equivalents 12,553 6,307 Assumed conversion of subordinated notes -- 10,978 ---------- ---------- Weighted average common and common equivalent shares 187,229 176,857 ========== ========== Earnings per share $0.50 $0.18 ========== ========== </TABLE> 6 <PAGE> 7 Note 6 - Investments During the first quarter of fiscal 1999 Analog Devices Inc., (the Company), completed the sale of approximately 78% of its equity ownership in WaferTech, LLC, its joint venture with Taiwan Semiconductor Manufacturing Company and other investors. As a result of this sale, the Company's equity ownership in WaferTech was reduced from 18% to 4%. The Company sold 78% of its investment to other WaferTech partners and received $105 million in cash, which was equal to the carrying value of the 14% equity ownership at October 31, 1998. Note 7 - Convertible Debt As of March 11, 1999 the Company had converted $229,967,000 of the $230 million principal amount of its 3 1/2% Convertible Subordinated Notes (Notes) due 2000 into an aggregate of 10,983,163 shares of the Company's common stock, and the remaining Notes were redeemed by a cash payment of $33,000. This conversion did not have an impact on diluted earnings per share. Note 8 - Acquisitions During the second quarter of fiscal 1999, the Company acquired two DSP tools companies, White Mountain DSP, Inc. of Nashua, New Hampshire and Edinburgh Portable Compilers Limited, of Edinburgh, Scotland. The total cost of these acquisitions was approximately $21 million in cash and $2 million in common stock of the Company, with additional contingent cash consideration up to a maximum of $10 million (to be accounted for as additional goodwill) payable if the acquired companies achieve certain revenue and operational objectives. As of January 29, 2000, approximately $3 million of contingent consideration had been paid. These acquisitions were accounted for as purchases. The excess of the purchase price over the fair value of assets acquired was allocated to existing technology, workforce in place, and tradenames, which are being amortized over periods ranging from six to ten years and goodwill which is being amortized on the straight-line basis over ten years. In connection with these acquisitions, the Company recorded a charge of $5.1 million for the write-off of in-process research and development. Note 9 - Segment Information The Company operates in two segments: the design, manufacture and marketing of a broad range of integrated circuits, which comprises approximately 97% of the Company's revenue, and the design, manufacture and marketing of a range of assembled products, which accounts for the remaining 3% of the Company's revenue. Effectively, the Company operates in one reportable segment. Note 10 - New Accounting Standard Effective October 31, 1999, the Company adopted Statement of Position 98-1, (SOP 98-1), "Accounting for the Cost of Computer Software Developed for or Obtained for Internal Use." The adoption of SOP 98-1 did not have a material impact on the results of operations or financial position. Note 11 - Subsequent Event On February 15, 2000, the Company's Board of Directors approved a 2-for-1 split of the Company's common stock. Stockholders will receive one additional share for every share held on the record date of February 28, 2000. The split will take effect on March 15, 2000, and accordingly has not been reflected in the accompanying condensed consolidated financial statements. 7 <PAGE> 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management Analysis for the fiscal year ended October 30, 1999, contained in the Company's 1999 Annual Report. The following discussion and analysis may contain forward-looking statements. Such statements are subject to certain risks and uncertainties, including those discussed below or in the Company's 1999 Annual Report, which could cause actual results to differ materially from the Company's expectations. Readers are cautioned not to place undue reliance on any forward-looking statements, as they reflect management's analysis only as of the date hereof. The Company undertakes no obligation to release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Results of Operations Net sales for the first quarter of fiscal 2000 were $490 million, an increase of $190 million, or 63%, over the first quarter of fiscal 1999. Analog IC product sales grew by 58% and DSP IC product sales grew by 87% over the same quarter last year. Sales to OEM customers increased 72% over the first quarter of fiscal 1999. Sales into the distribution channel increased 50% over the same quarter last year. Sales increased in all end-markets with particularly strong growth in communications and computing markets. Sales increases in these markets were driven by growth in demand for high-speed access to the Internet and wireless communications as well as increased demand for the Company's power management and imaging products. Sales increased in all geographic regions with the largest increases occurring in North America and Europe. International sales for the first quarter of fiscal 2000 were 56% of sales compared with 53% of sales in the same period of fiscal 1999. The gross margin for the first quarter of fiscal 2000 was 54.1%, an improvement of 830 basis points from the 45.8% gross margin realized in the first quarter of fiscal 1999. The improvement in gross margin was primarily due to the favorable effect of fixed costs allocated across a higher sales base and improved manufacturing efficiencies at the Company's fabrication, assembly and test facilities. Research and development (R&D) expenses were $83 million for the three months ended January 29, 2000 compared to $53 million for the corresponding period of fiscal 1999. As a percentage of sales, R&D spending decreased during the first quarter of fiscal 2000 to 16.9%, down from 17.5% in the first quarter of fiscal 1999. The percentage decline came about despite increases in absolute dollar terms of investments in communications products to respond to opportunities in expanding markets. The Company believes that a continued commitment to research and development is essential in order to further exploit existing product offerings and to provide innovative new product offerings. As a result, the Company expects to continue to make significant R&D investments in the future. Selling, marketing, general and administrative (SMG&A) expenses for the first quarter of fiscal 2000 were $65 million, an increase of $19 million from the $46 million reported for the first quarter of fiscal 1999. As a percentage of sales, SMG&A decreased from 15.4% for the first quarter of fiscal 1999 to 13.2% for the first quarter of fiscal 2000 as a result of continued spending constraints partially offset by provisions for increased bonus payments due to improved operating results. The combination of higher sales, higher gross margins and a reduction in operating expense ratios provided strong operating leverage which improved the operating margin to 24% of sales, compared to 13% in the first quarter of fiscal 1999. The effective income tax rate increased to 27% for the first quarter of fiscal 2000 from 20% for the first quarter of fiscal 1999 primarily due to a shift in the mix of worldwide profits. Liquidity and Capital Resources At January 29, 2000, cash, cash equivalents and short-term investments totaled $895 million, an increase of $133 million from the fourth quarter of 1999 and $433 million from the first quarter of fiscal 1999. The increase in cash, cash equivalents and short-term investments was primarily due to operating cash inflows of $165 million, partially offset by increased capital expenditures. 8 <PAGE> 9 Accounts receivable totaled $302 million at the end of the first quarter of fiscal 2000, an increase of $35 million from the fourth quarter of fiscal 1999 and $88 million from the first quarter of fiscal 1999 due to higher sales levels. The Company's days sales outstanding improved from 65 days at January 30, 1999 to 56 days at January 29, 2000. Inventories of $250 million at January 29, 2000 were relatively flat compared to the fourth quarter of fiscal 1999 and $20 million lower than the end of the first quarter of fiscal 1999. The decrease in year over year inventory levels is due to increased levels of demand in the first quarter of fiscal 2000. During the first quarter of fiscal 1999 the Company completed the sale of approximately 78% of its equity ownership in WaferTech, LLC, its joint venture with Taiwan Semiconductor Manufacturing Company (TSMC) and other investors. As a result of this sale, the Company's equity ownership in WaferTech was reduced from 18% to 4%. The Company sold 78% of its investment to other WaferTech partners and received $105 million in cash, which was equal to the carrying value of the 14% equity ownership at October 31, 1998. Net additions to property, plant and equipment of $41 million for the first quarter of fiscal 2000 were funded with a combination of cash on hand and cash generated from operations. Capital spending in the first quarter of fiscal 2000 increased significantly over the $12 million spent in the first quarter of fiscal 1999, and was primarily attributable to the expansion of manufacturing capability to meet current sales growth. The Company currently expects that total capital expenditures for fiscal 2000 will be between $250 million and $275 million. At January 29, 2000, the Company's principal sources of liquidity were $895 million of cash and cash equivalents and short-term investments. In addition, the Company has various lines of credit both in the U.S. and overseas, including a $60 million credit facility in the U.S., which expires in October 2000, all of which were substantially unused at January 29, 2000. The Company believes that its existing sources of liquidity and cash expected to be generated from future operations, together with current and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures and research and development efforts for the foreseeable future. Factors That May Affect Future Results The Company's future operating results are difficult to predict and may be affected by a number of factors including the timing of new product announcements or introductions by the Company and its competitors, competitive pricing pressures, fluctuations in manufacturing yields, adequate availability of wafers and manufacturing capacity, changes in product mix and economic conditions in the United States and international markets. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns at various times. The Company's business is subject to rapid technological changes and there can be no assurance, depending on the mix of future business, that products stocked in inventory will not be rendered obsolete before they are shipped by the Company. As a result of these and other factors, there can be no assurance that the Company will not experience material fluctuations in future operating results on a quarterly or annual basis. The Company's success depends in part on its continued ability to develop and market new products. There can be no assurance that the Company will be able to develop and introduce new products in a timely manner or that such products, if developed, will achieve market acceptance. In addition, the Company's growth is dependent on its continued ability to penetrate new markets where the Company has limited experience and competition is intense. There can be no assurance that the markets being served by the Company will grow in the future; that the Company's existing and new products will meet the requirements of such markets; that the Company's products will achieve customer acceptance in such markets; that competitors will not force prices to an unacceptably low level or take market share from the Company; or that the Company can achieve or maintain profits in these markets. Also, some of the Company's customers in these markets are less well established which could subject the Company to increased credit risk. 9 <PAGE> 10 The semiconductor industry is intensely competitive. Certain of the Company's competitors have greater technical, marketing, manufacturing and financial resources than the Company. The Company's competitors also include emerging companies attempting to sell products to specialized markets such as those served by the Company. Competitors of the Company have, in some cases, developed and marketed products having similar design and functionality as the Company's products. There can be no assurance that the Company will be able to compete successfully in the future against existing or new competitors or that the Company's operating results will not be adversely affected by increased price competition. The cyclical nature of the industry has resulted in sustained or short-term periods when demand for the Company's products has increased or decreased rapidly. The semiconductor industry and the Company have experienced a period of rapid increases in demand during fiscal 1999 and the first quarter of fiscal 2000. The Company has increased its manufacturing capacity over the past three years through both expansion of its production facilities and increased access to third-party foundries. However, the Company cannot be sure that it will not encounter unanticipated production problems at either its own facilities or at third-party foundries, or that the increased capacity will be sufficient to satisfy demand for its products. The Company relies, and plans to continue to rely, on assembly and test subcontractors and on third-party wafer fabricators to supply most of its wafers that can be manufactured using industry-standard digital processes. Such reliance involves several risks, including reduced control over delivery schedules, manufacturing yields and costs. In addition, the Company's capacity additions resulted in a significant increase in operating expenses. If revenue levels are not sufficient to offset these additional expense levels, the Company's future operating results could be adversely affected. In addition, asset values could be impaired if the additional capacity is underutilized for an extended period of time. Also, noncompliance with "take or pay" covenants in certain of its supply agreements could adversely impact operating results. The Company believes that other semiconductor manufacturers have expanded their production capacity over the past several years, and there can be no assurance that the expansion by the Company and its competitors will not lead to overcapacity in the Company's target markets, which could lead to price erosion that would adversely affect the Company's operating results. In addition, the Company and many companies in the semiconductor industry, rely on internal manufacturing capacity located in California and Taiwan as well as wafer fabrication foundries in Taiwan and other subcontractors in geologically unstable locations around the world. Such reliance involves risks associated with the impact of earthquakes on the Company and the semiconductor industry including temporary loss of capacity, availability and cost of key raw materials and equipment, and availability of key services including transport. In the first quarter of fiscal 2000, 56% of the Company's revenues were derived from customers in international markets. The Company has manufacturing facilities outside the U.S. in Ireland, the Philippines and Taiwan. The Company also has a supply agreement that includes "take or pay" covenants with a supplier located in Southeast Asia (SEA) and as part of this arrangement, the Company has $18 million on deposit as well as a $73 million investment in the common stock of the supplier. In addition to being exposed to the ongoing economic cycles in the semiconductor industry, the Company is also subject to the economic and political risks inherent in international operations, including the risks associated with the ongoing uncertainties in many developing economies around the world. These risks include air transportation disruptions, expropriation, currency controls and changes in currency exchange rates, tax and tariff rates and freight rates. Although the Company engages in certain hedging transactions to reduce its exposure to currency exchange rate fluctuations, there can be no assurance that the Company's competitive position will not be adversely affected by changes in the exchange rate of the U.S. dollar against other currencies. The semiconductor industry is characterized by frequent claims and litigation involving patent and other intellectual property rights. The Company has from time to time received, and may in the future receive, claims from third parties asserting that the Company's products or processes infringe their patents or other intellectual property rights. In the event a third party makes a valid intellectual property claim and a license is not available on commercially reasonable terms, the Company's operating results could be materially and adversely affected. Litigation may be necessary to enforce patents or other intellectual property rights of the Company or to defend the Company against claims of infringement, and such litigation can be costly and divert the attention of key personnel. See the Company's 1999 Annual Report for information concerning certain pending litigation involving the Company. An adverse outcome in such litigation may, in certain cases, have a material adverse effect on the Company's consolidated financial position or on its consolidated results of operations or cash flows in the period in which the litigation is resolved. 10 <PAGE> 11 Because of these and other factors, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the trading price of the Company's common stock may be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, general conditions in the semiconductor industry, changes in earnings estimates and recommendations by analysts or other events. Year 2000 Over the past several years the Company made significant investments in new manufacturing, financial and operating hardware and software. These investments were made to support the growth of its operations; however, the by-product of this effort was that the Company had Year 2000 compliant hardware and software running on many of its major platforms. The Company established a task force to evaluate the remaining systems and equipment and upgrade or replace systems that were not Year 2000 compliant. The cost of this effort, which commenced at the beginning of fiscal 1998 and continued through fiscal 1999, was approximately $10 million. The Company's computer systems and equipment did not experience any significant disruptions as a result of the advent of the Year 2000. However, there may be latent problems that surface at key dates or events in the future. The Company has not experienced, and does not anticipate, any significant problems related to the transition to the Year 2000. Furthermore, the Company does not anticipate any significant expenditure in the future related to Year 2000 compliance. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated herein by reference to the "Management Analysis" set forth on pages 1 through 7 of the 1999 Annual Report to Shareholders. 11 <PAGE> 12 PART II - OTHER INFORMATION ANALOG DEVICES, INC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See Exhibit Index. (b) Report on Form 8-K Form 8-K/A, dated November 19, 1999, reporting Amendment No. 1 to a Rights Agreement between the Company and BankBoston, N.A., as Rights Agent. Items 1, 2, 3, 4 and 5 of PART II are not applicable and have been omitted. 12 <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. ANALOG DEVICES, INC. -------------------- (Registrant) Date: March 13, 2000 By: /s/ Jerald G. Fishman --------------------------------- Jerald G. Fishman President and Chief Executive Officer (Principal Executive Officer) Date: March 13, 2000 By: /s/ Joseph E. McDonough --------------------------------- Joseph E. McDonough Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 13 <PAGE> 14 EXHIBIT INDEX ANALOG DEVICES, INC. Item 27 Financial Data Schedule 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-28-2000 <PERIOD-START> OCT-31-1999 <PERIOD-END> JAN-29-2000 <EXCHANGE-RATE> 1 <CASH> 409,516 <SECURITIES> 485,706 <RECEIVABLES> 301,972<F1> <ALLOWANCES> 0 <INVENTORY> 250,184 <CURRENT-ASSETS> 1,558,961 <PP&E> 1,475,629 <DEPRECIATION> 826,844 <TOTAL-ASSETS> 2,489,333 <CURRENT-LIABILITIES> 565,632 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 29,893 <OTHER-SE> 1,716,452 <TOTAL-LIABILITY-AND-EQUITY> 2,489,333 <SALES> 490,277 <TOTAL-REVENUES> 490,277 <CGS> 225,087 <TOTAL-COSTS> 225,087 <OTHER-EXPENSES> 147,536 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 1,030 <INCOME-PRETAX> 127,065 <INCOME-TAX> 34,058 <INCOME-CONTINUING> 93,007 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 93,007 <EPS-BASIC> .53 <EPS-DILUTED> .50 <FN> <F1>ASSET VALUE REPRESENTS NET AMOUNT. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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https://www.sec.gov/Archives/edgar/data/7084/0000007084-00-000006.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, OkFVVVTSKIhIHzHq4Xw6loMV1zKiFWvahO8fAM6PY+qiHYP4iYOI77id5WTAubpg xDkpYlFmcbDrTdw0QUKZOA== <SEC-DOCUMENT>0000007084-00-000006.txt : 20000214 <SEC-HEADER>0000007084-00-000006.hdr.sgml : 20000214 ACCESSION NUMBER: 0000007084-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: 536167 BUSINESS ADDRESS: STREET 1: 4666 FARIES PKWY CITY: DECATUR STATE: IL ZIP: 62526 BUSINESS PHONE: 2174244798 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10Q FOR PERIOD ENDING 12/31/1999 <TEXT> 25 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, 1999 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 - 607,167,224 shares (January 31, 2000) 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, 1999 1998 ---------------------- --- (In thousands, except per share amounts) <S> <C> <C> Net sales and other operating income $3,420,34 6 $3,911,5 39 Cost of products sold and other operating 3,014,073 costs 3,490,20 9 _________ ________ _ Gross Profit 406,273 421,330 Selling, general and administrative 199,476 expenses 182,246 _________ ________ _ Earnings From Operations 206,797 239,084 Other expense (53,534) (69,191) _________ ________ _ Earnings Before Income Taxes and Extraordinary Loss 153,263 169,893 Income taxes 51,343 59,459 _________ ________ _ Earnings Before Extraordinary 101,920 Loss 110,434 Extraordinary loss, net of tax, on debt - repurchase (15,324) _________ ________ _ Net Earnings $ 101,9 $ 95,11 20 0 ========= ========= Average number of shares outstanding 608,772 623,259 Basic and diluted earnings per common share Before extraordinary loss $.17 $.1 7 Extraordinary loss on debt - (.0 repurchase 2) ____ ____ After Extraordinary Loss $.17 $.1 5 ==== ==== Dividends per common share $.05 $.04 8 </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, 1999 1998 ---------------------- --- (In thousands, except per share amounts) <S> <C> <C> Net sales and other operating income $6,641,32 6 $7,712,9 60 Cost of products sold and other operating 5,962,733 costs 6,997,99 4 _________ ________ _ Gross Profit 678,593 714,966 Selling, general and administrative 370,211 expenses 349,062 _________ ________ _ Earnings From Operations 308,382 365,904 Other expense (100,433) (17,607) _________ ________ _ Earnings Before Income Taxes and Extraordinary Loss 207,949 348,297 Income taxes 69,662 121,008 _________ ________ _ Earnings Before Extraordinary 138,287 Loss 227,289 Extraordinary loss, net of tax, on debt - repurchase (15,324) _________ ________ _ Net Earnings $ 138,2 $ 211,96 87 5 ========= ========= Average number of shares outstanding 609,990 625,141 Basic and diluted earnings per common share Before extraordinary loss $.23 $.3 6 Extraordinary loss on debt - (.0 repurchase 2) ____ ____ After Extraordinary Loss $.23 $.3 4 ==== ==== Dividends per common share $.098 $.09 4 </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, 1999 1999 ------------------------ ----- (In thousands) <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 571,561 $ 681,378 Marketable securities 420,764 222,191 Receivables 2,236,800 1,922,163 Inventories 3,066,596 2,732,694 Prepaid expenses 204,041 231,162 ___________ ___________ Total Current Assets 6,499,762 5,789,588 Investments and Other Assets Investments in and advances to 1,733,347 1,484,980 affiliates Long-term marketable securities 685,814 779,916 Other assets 475,972 408,236 ___________ ___________ 2,895,133 2,673,132 Property, Plant and Equipment Land 167,816 163,607 Buildings 2,083,288 1,949,211 Machinery and equipment 8,640,358 8,384,865 Construction in progress 520,516 675,870 Less allowances for depreciation (5,895,607) (5,606,392) ___________ ___________ 5,516,371 5,567,161 ___________ ___________ $14,911,266 $14,029,881 =========== =========== </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, 1999 1999 ------------------------ ---- (In thousands) <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt $1,621,002 $1,241,369 Accounts payable 2,450,301 2,004,396 Accrued expenses 632,223 567,593 Current maturities of long-term debt 30,464 26,907 __________ __________ Total Current Liabilities 4,733,990 3,840,265 Long-term Debt 3,273,176 3,191,883 Deferred Credits Income taxes 586,425 619,752 Other 138,584 137,341 __________ __________ 725,009 757,093 Shareholders' Equity Common stock 5,018,320 5,081,320 Reinvested earnings 1,497,648 1,419,321 Accumulated other comprehensive income (336,877) (260,001) (loss) __________ __________ 6,179,091 6,240,640 __________ __________ $14,911,266 $14,029,881 ========== ========== </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, 1999 1998 ------------------------- ----- (In thousands) <S> <C> <C> Operating Activities Net earnings $ 138,287 $ 211,965 Adjustments to reconcile to net cash provided by operations Depreciation and amortization 302,677 285,517 Deferred income taxes 9,416 25,757 Amortization of long-term debt discount 20,980 17,535 (Gain) loss on marketable securities transactions (12,677) (101,674) Extraordinary loss on debt repurchase - 15,324 Other 64,977 99,455 Changes in operating assets and liabilities Receivables (325,538) 134,012 Inventories (338,151) (448,298) Prepaid expenses 27,192 (8,065) Accounts payable and accrued expenses 502,527 294,532 ________ ________ Total Operating Activities 389,690 526,060 Investing Activities Purchases of property, plant and equipment (255,055) (359,797) Net assets of businesses acquired (6,670) (60,316) Investments in and advances to affiliates, (241,983) (91,378) net Purchases of marketable securities (595,620) (377,995) Proceeds from sales of marketable 396,943 774,179 securities Increase in other assets (50,000) - ________ ________ Total Investing Activities (752,385) (115,307) Financing Activities Long-term debt borrowings 103,548 83,020 Long-term debt payments (43,874) (65,509) Net borrowings (payments) under line of credit 378,050 (103,848) agreements Purchases of treasury stock (124,911) (137,445) Cash dividends and other (59,935) (56,939) ________ ________ Total Financing Activities 252,878 (280,721) ________ ________ Increase (Decrease) in Cash and Cash (109,817) 130,032 Equivalents Cash and Cash Equivalents Beginning of 681,378 346,325 Period ________ ________ Cash and Cash Equivalents End of Period $ 571,561 $ 476,357 ======== ======== </TABLE> See notes to consolidated financial statements. 6 PAGE 7 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1.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 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, 1999 are not necessarily indicative of the results that may be expected for the year ending June 30, 2000. 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, 1999. Note 2.New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities." This statement, which is required to be adopted for annual periods beginning after June 15, 2000, establishes standards for recognition and measurement of derivatives and hedging activities. The Company has not yet determined the financial statement impact of SFAS 133. Note 3. Per Share Data All references to share and per share information have been adjusted for the 5 percent stock dividend paid September 20, 1999. Note 4.Comprehensive Income (Loss) Comprehensive income (loss) was $(5) million and $171 million for the quarter ended December 31, 1999 and 1998, respectively. Comprehensive income was $61 million and $188 million for the six months ended December 31, 1999 and 1998, respectively. 7 PAGE 8 ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) <TABLE> <CAPTION> Note 5. Other Expense Three Months Ended Six Months Ended December 31, December 31, 1999 1998 1999 1998 (In thousands) (In thousands) <S> <C> <C> <C> <C> Investment income $ 31,237 $ 27,274 $ 62,084 $ 56,411 Interest expense (99,519) (84,512) (184,958) (164,539) Net gain on marketable 6,685 1,972 12,677 101,685 securities transactions Equity in earnings (losses) of 5,634 (15,032) 5,474 (11,190) affiliates Other 2,429 1,107 4,290 26 _______ _______ _______ _______ $(53,534 $(69,191 $(100,43 $ ) ) 3) (17,607) ======= ======= ======= ======= </TABLE> Note 6.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 in fiscal 1997, the Company paid the United States fines 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. The federal grand juries in the Northern Districts of Illinois (lysine) and Georgia (high fructose corn syrup) have been closed. 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, sodium gluconate, monosodium glutamate and high fructose corn syrup. These actions and proceedings generally involve claims for unspecified compensatory damages, fines, costs, expenses and unspecified relief. The Company intends 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 $21 million in fiscal 1999, $48 million in fiscal 1998 and $200 million in fiscal 1997 to cover the fines, litigation settlements related to the federal lysine class action, federal securities class action, the federal citric class action, the federal sodium gluconate class action, and certain state actions filed by indirect purchasers of lysine, certain actions filed by parties that opted out of the class action 8 PAGE 9 settlements, certain other proceedings and the related costs and expenses associated with the litigation described above. 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. 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 Ended Six Months Ended December 31, December 31, 1999 1998 1999 1998 (in millions) (in millions) <S> <C> <C> <C> <C> Oilseed products $1,873 $2,314 $3,700 $4,639 Corn products 520 475 980 988 Wheat and other milled 359 353 720 714 products Other products and 668 770 services 1,241 1,372 _____ _____ _____ _____ $3,420 $3,912 $6,641 $7,713 ===== ===== ===== ===== </TABLE> Net sales and other operating income decreased 13 percent to $3.4 billion for the quarter and decreased 14 percent to $6.6 billion for the six months due principally to decreases in average selling prices of 12 percent and 15 percent, respectively. Sales of oilseed products decreased 19 percent to $1.9 billion for the quarter and decreased 20 percent to $3.7 billion for the six months due primarily to lower average selling prices reflecting the lower cost of raw materials. In addition, sales volumes of oilseed products decreased for both the quarter and six months due to weak demand from Asia for both protein meals and vegetable oils. Sales of corn products increased 9 percent for the quarter due principally to an increase in sales volume of the Company's fuel alcohol as there was good demand from existing sales markets and expansion into new markets. Corn products sales for the quarter also increased due to higher average selling prices of the Company's amino acid products. Sales of corn products decreased 1 percent for the six months due principally to decreases in sales volumes of the Company's sweetener, amino acid and citric acid products as excess industry production capacities resulted in difficult market conditions. These decreases were partially offset by increased sales volumes of the Company's alcohol products and higher average selling prices of the Company's sweetener products. Sales of wheat and other milled products increased 2 percent to $359 million for the quarter and increased 1 percent to $720 million for the six months as sales attributable to recently acquired operations more than offset slight decreases in average selling prices. The decreases in sales of other products and services for both the quarter and six months were due principally to decreased sales volumes of the Company's cocoa and formula feed products and to lower average selling prices of cocoa products. These decreases were partially offset by increased grain merchandising revenues. 10 PAGE 11 Cost of products sold and other operating costs decreased $476 million to $3 billion for the quarter and decreased $1 billion to $6 billion for the six months due primarily to lower average raw material costs arising from an abundant world-wide supply of agricultural commodities and, to a lesser extent, lower sales volumes. Gross profit decreased $15 million to $406 million for the quarter and decreased $36 million to $679 million for the six months due principally to selling price declines exceeding declines in lower average raw material costs and, to a lesser extent, lower volumes of products sold. These decreases were partially offset by gross profit attributable to increased grain merchandising margins. Selling, general and administrative expenses increased $17 million for the quarter to $199 million and increased $21 million for the six months to $370 million due primarily to increased salary-related costs associated with facility closures and consolidations, increased bad debt expense and expenses attributable to recently acquired operations. These increases were partially offset by decreased advertising expenses. Other expense decreased $16 million for the quarter to $54 million due principally to increased equity in earnings of unconsolidated affiliates resulting primarily from higher valuations of the Company's private equity funds. This increase was partially offset by increased interest expense due to higher average borrowing levels. Other expense increased $83 million for the six months to $100 million due principally to decreased gains on marketable securities transactions. The decrease in income taxes for the quarter and six months resulted primarily from lower pretax earnings. The Company's effective income tax rate for the quarter was 33.5% compared to an effective rate of approximately 35% for the comparable periods of a year ago. During the second quarter of fiscal 1999, the Company incurred an extraordinary charge, net of tax, of $15 million resulting from the repurchase of a portion of its outstanding 7% debentures due may 2011. Liquidity and Capital Resources At December 31, 1999, the Company continued to show substantial liquidity with working capital of $1.8 billion. Capital resources remained strong as reflected in the Company's net worth of $6.2 billion. The Company's ratio of long-term debt to total capital at December 31, 1999 was approximately 32%. As described in Note 6 to the unaudited consolidated financial statements, various grand juries 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. In connection with an agreement with the DOJ in fiscal 1997, the Company paid the United States fines 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 described in Note 6 to the unaudited consolidated financial statements, the Company has settled certain civil federal class action suits involving lysine, citric acid, 11 PAGE 12 sodium gluconate, and securities, and certain state actions filed by indirect purchasers of lysine. The Company has made provisions of $21 million in fiscal 1999, $48 million in fiscal 1998 and $200 million in fiscal 1997 to cover the fines, 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, certain other proceedings and the related costs and expenses associated with the litigation described above. 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. Year 2000 Issues The Company satisfactorily completed its year 2000 readiness work. Since entering the year 2000, the Company has not experienced any major disruptions to its business nor is it aware of any significant year 2000-related disruptions impacting its customers or suppliers. The Company will continue to monitor its critical systems over the next several months but does not anticipate any significant impacts due to year 2000 exposures from its internal systems or from the activities of its suppliers and customers. Costs incurred to achieve year 2000 readiness were not material. Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes during the quarter ended December 31, 1999. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS ENVIRONMENTAL MATTERS In 1993, the State of Illinois Environmental Protection Agency ("Illinois EPA") brought administrative enforcement proceedings arising out of the Company's alleged failure to obtain proper permits for certain pollution control equipment at one of the Company's processing facilities in Illinois. The Company and Illinois EPA executed an agreement which is currently before the Illinois Pollution Control Board for approval. However, in June 1999,the United States Environmental Protection Agency (U.S. EPA)issued a Notice of Violations involving some of the matters covered under the pending State settlement and in January 2000 the United States Department of Justice ("DOJ") issued a Notice of Proposed Civil Enforcement Action against the Company regarding these same matters. Further, in 1998, the Illinois EPA filed an administrative enforcement proceeding arising out of certain alleged permit exceedances relating to the same facility. Also in 1998, the Company voluntarily reported to the Illinois EPA certain other permit exceedances and in 1999 Illinois EPA issued a Notice of Violation relating to those exceedances from another process at that same facility. The Company understands that all pending and threatened enforcement actions at the facility will be consolidated into two proceedings, one to be brought by the State which will subsume the settlement presently pending before the Board and another to be brought by the Department of Justice. Also in 1998, the State 12 PAGE 13 of Illinois filed a civil administrative action alleging violations of the Illinois Environmental Protection Act, and regulations promulgated thereunder, arising from a one time release of denatured ethanol at one of its Illinois distribution facilities. In January 2000 U.S. EPA issued a Notice of Violation to the Company for another Illinois facility regarding alleged emissions violations and the failure to obtain proper permits for various equipment at that facility. In management's opinion the settlements and the remaining proceedings, all seeking compliance with applicable environmental permits and regulations, will not, either individually or in the aggregate, have a material adverse affect on the Company's financial condition or results of operations. The Company is involved in approximately 30 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 affect on the Company's financial condition or results of operations. LITIGATION REGARDING ALLEGED ANTICOMPETITIVE PRACTICES The Company is currently a defendant in various lawsuits related to alleged anticompetitive practices by the Company as described in more detail below. The Company intends to vigorously defend the actions unless they can be settled on terms deemed acceptable to the parties. GOVERNMENTAL INVESTIGATIONS Federal grand juries in the Northern Districts of Illinois, California and Georgia, under the direction of the 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 in fiscal 1997, the Company paid the United States fines 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 federal grand juries in the Northern Districts of Illinois (lysine) and Georgia (high fructose corn syrup) have been closed. The Company has received notice that certain foreign governmental entities were commencing investigations to determine whether anticompetitive practices occurred in their jurisdictions. Except for the investigations being conducted by the Commission of the European Communities and the Mexican Federal Competition Commission as described below, all such matters have been resolved as previously reported. In June 1997, the Company and several of its European subsidiaries were notified that the Commission of the European Communities had initiated an investigation as to possible anticompetitive practices in the amino acid markets, in particular the lysine market, in the European Union. On October 29, 1998, the Commission of the European Communities initiated formal proceedings against the Company and others and adopted a Statement of Objections. The reply of the Company was filed on February 1, 1999 and the hearing was held on March 1, 1999. On August 8, 1999, the Commission of the 13 PAGE 14 European Communities adopted a supplementary Statement of Objections expanding the period of involvement as to certain other companies. 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 in the European Union. In November 1998, a European subsidiary of 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 sodium gluconate market in the European Union. On February 11, 1999 a Mexican subsidiary of the Company was notified that the Mexican Federal Competition Commission had initiated an investigation as to possible anticompetitive practices in the citric acid market in Mexico. The ultimate outcome and materiality of the proceedings of the Commission of the European Communities 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 currently appealing certain discovery rulings to the United States Court of Appeals for the Seventh Circuit. 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. This action was transferred for pretrial proceedings to the United States District Court for the Central District of Illinois. 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 14 PAGE 15 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). 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. The parties are in the midst of discovery in the coordinated action. 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-three putative class action antitrust suits involving the sale of lysine. Except for the actions specifically described below, all such suits have been settled, dismissed or withdrawn. CANADIAN ACTIONS. The Company, along with other companies, has been named as a defendant in one putative class action antitrust suit filed in Ontario Court (General Division) in which the plaintiffs allege the defendants 15 PAGE 16 reached agreements with one another as to the price at which each of them would sell lysine to customers in Ontario and as to the total volume of lysine that each company would supply in Ontario in violation of Sections 45 (1)(c) and 61(1)(b)of the Competition Act. The putative class is comprised of certain indirect purchasers in Ontario during the period from June 1, 1992 to June 27, 1995. The plaintiffs seek C$25 million for violations of the Competition Act, C$10 million in punitive, exemplary and aggravated damages, interest and costs of the action. This action was served upon the Company on June 11, 1999 and is encaptioned Rein Minnema and Minnema Farms Ltd. v. Archer-Daniels-Midland Company, et al., Court File No. G23495- 99. The Company, along with other companies, has been named as a respondent in a motion seeking authorization to institute a class action filed in Superior Court in the Province of Quebec, District of Montreal, in which the applicants allege the respondents conspired, combined, agreed or arranged to prevent or lessen, unduly, competition with respect to the sale of lysine in Canada in violation of Section 45(1)(c) of the Competition Act. The putative class is comprised of certain indirect purchases in Quebec after June, 1992. The applicants seek at least C$4,460,000, costs of investigation, attorneys' fees and interest. This motion is encaptioned Option Consommateurs, et al v. Archer-Daniels-Midland Company, et al., Court No. 500-06-000089-991. STATE ACTION. The Company has been named as a defendant, along with other companies, in one putative class action antitrust suit alleging 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 seeking an injunction against continued alleged illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in this action comprises certain indirect purchasers of lysine in the State of Alabama during certain periods in the 1990s. This 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. On March 13, 1998, the court denied plaintiff's motion for class certification. Subsequently, the plaintiff amended his complaint to add approximately 300 individual plaintiffs. CITRIC ACID ACTIONS The Company, along with other companies, had been named as a defendant in fourteen putative class action antitrust suits and two non-class action antitrust suits involving the sale of citric acid. Except for the action specifically described below, all such suits have been settled or dismissed. CITRIC CANADIAN ACTIONS. The Company, along with other companies, has been named as a defendant in two actions filed pursuant to the Class Proceedings Act, 1992, in which the plaintiffs allege that the defendants violated the Competition Act with respect to the sale of citric acid in Canada. One of these actions was filed in the Superior Court of Justice, in Newmarket, Ontario, and encaptioned Ashworth v. Archer-Daniels-Midland Company , et al., Court file No. 53510/99. The putative class is comprised of certain indirect purchasers in Ontario during the period from July 1, 1991 to June 27, 1995. The plaintiffs in this action seek general damages in the amount of C$30 million and punitive and exemplary damages in the amount of C$30 16 PAGE 17 million, interest, costs and fees. The other action was filed in the Superior Court of Justice in London, Ontario, and encaptioned Fairlee Fruit Juice Limited v. Archer-Daniels- Midland Company, et al., Court File No. 32562/99. The plaintiffs in this action seek general damages in the amount of C$300 million, punitive and exemplary damages in the amount of C$20 million, interest, costs and fees. The Company, along with other companies, has been named as a respondent in a motion seeking authorization to institute a class action filed in Superior Court in the Province of Quebec, District of Montreal, in which the applicants allege the respondents comprised, combined, agreed or arranged to prevent or lessen, unduly, competition with respect to the sale of citric acid in Canada in violation of Section 45(1)(c) of the Competition Act. The putative class in comprised of certain indirect purchasers in Quebec since July, 1991. The applicants seek C$3,115,000, the costs of investigation, attorneys' fees and interest. This motion is encaptioned Option Consommateurs, et al. v. Archer- Daniels-Midland-Company, et al., Court No.500-06-000094-991. HIGH FRUCTOSE CORN SYRUP/CITRIC ACID STATE CLASS ACTIONS The Company, along with other companies, has been named as a defendant in five 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. As noted in prior filings, the Company accepted a settlement agreement with counsel for the citric acid plaintiff class. This settlement received final court approval and the case was dismissed on September 30, 1998. 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 17 PAGE 18 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 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. On November 13, 1998, plaintiff's motion for class certification was granted. 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. Plaintiff's motion for class certification is currently pending. 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 18 PAGE 19 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. MONOSODIUM GLUTAMATE ACTIONS The Company, along with other companies, has been named as a defendant in eight putative class action antitrust suits involving the sale of monosodium glutamate and/or other food flavor enhancers. FEDERAL ACTIONS. Six 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 price of monosodium glutamate, disodium inosinate and disodium guanylate, 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 monosodium glutamate, disodium inosinate and/or disodium guanylate during certain periods in the 1990's to the present. The Company has never produced or sold disodium inosinate or disodium guanylate. One such action was filed on October 27, 1999 in the United States District Court for the Northern District of California and is encaptioned Thorp, Inc. v. Archer-Daniels-Midland Company, et al., NoC99 4752 (VRW). The second action was filed on October 27, 1999 in the United States District Court for the Northern District of California and is encaptioned Premium Ingredients, Ltd. v. Archer-Daniels- Midland Co., et al., No. C 99 4742(MJJ). The third action was filed on October 28, 1999 in the United States District Court for the Northern District of California and is encaptioned Felbro Food Products v. Archer-Daniels-Midland Company, et al., No.C99 4761(MJJ). The fourth action was filed on November 17, 1999 in the United States District Court for the Northern District of California and is encaptioned First Spice Mixing Co., Inc. v. Archer Daniels Midland Co., et al., No. C 99 4977 (PJH). The fifth action was filed on November 23, 1999 in the United States District Court for the District of New Jersey and is encaptioned Diversified Foods and Seasonings, Inc. v. Archer Daniels Midland Co., Inc. et al., No. 99 CV 5501. The sixth action was filed on December 16, 1999 in the United States District Court for the Eastern District of New York and is encaptioned M. Phil Yen, Inc. v. Ajinomoto Co. Inc., et al., No. 99 Div 06514 (EK). Various motions have been filed with the Judicial Panel on Multidistrict Litigation requesting that these actions be consolidated and coordinated for pretrial discovery, and argument on these motions was held on January 29, 2000. 19 PAGE 20 STATE ACTION. The Company, along with at least one other company, also has been named as a defendant in two putative class action antitrust suits filed in California state court involving the sale of monosodium glutamate and/or other food flavor enhancers. These actions allege violations of California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the price of monosodium glutamate and/or other food flavor enhancers, and seek treble damages of an unspecified amount, restitution, attorneys' fees and costs, and other unspecified relief. The putative class in this action comprises certain indirect purchasers of monosodium glutamate and/or other food flavor enhancers in the State of California during certain periods in the 1990's. The first action originally was filed on June 25, 1999 in the Superior Court of San Francisco County and in encaptioned Fu's Garden Restaurant v. Archer-Daniels-Midland Company, et al., Civil Action No. 304471. The second action was filed on January 14, 2000 in the Superior Court of San Francisco County and is encaptioned JMN Restaurant Management, Inc. v. Ajinomoto Co., Inc., et al., Civil Action No. 309236. OTHER The Company has made provisions to cover certain legal proceedings and related costs and expenses as described in the notes to the unaudited consolidated financial statements and management's discussion of operations and financial condition. 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 unaudited consolidated financial statements. Item 4. Submission of matters to a vote of Security Holders: The Annual Meeting of Shareholders was held on October 21, 1999. 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 506,391,046 14,457,198 G. O. Coan 509,452,163 11,396,081 G. A. Andreas 507,354,809 13,493,435 J. K. Vanier 508,947,907 11,900,337 A. Young 509,089,375 11,758,869 R. Burt 509,461,058 11,387,186 O. G. Webb 509,497,556 11,350,688 F. Ross Johnson 508,406,457 12,441,787 R. S. Strauss 508,621,359 12,226,885 M. B. Mulroney 507,877,002 12,971,242 J. R. Block 509,321,281 11,526,963 M. H. Carter 509,553,356 11,294,888 D. J. Mimran 509,398,384 11,449,860 20 PAGE 21 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, 2000 was ratified as follows: For 514,035,168 Against 4,670,138 Abstain 2,142,938 The Incentive Compensation Plan was approved as follows: For 473,801,869 Against 41,414,588 Abstain 5,631,787 The Stockholder's Proposal relative to cumulative voting was defeated as follows: For 153,732,154 Against 279,422,076 Abstain 14,499,457 21 PAGE 22 The Stockholder's Proposal relative to a post-meeting report was defeated as follows: For 22,992,506 Against 415,794,287 Abstain 8,866,894 The Stockholder's Proposal relative to confidential voting was defeated as follows: For 205,054,406 Against 233,445,036 Abstain 9,154,245 Item 6. Exhibits and Reports on Form 8-K a)Exhibits (3)(i) Articles of Incorporation Composite Certificate of Incorporation, as amended, filed on September 22, 1999 as Exhibit (3)(i) to Form 10K for the year ended June 30, 1999, is incorporated herein by reference. (3)(ii)Bylaws, as amended and restated, filed on May 14, 1999 as Exhibit (3)(ii) to Form 10Q for the quarter ended March 31, 1999, are incorporated herein by reference. (27) Financial Data Schedules b)A Form 8-K was not filed during the quarter ended December 31, 1999. 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 11, 2000 22 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>1Q FINANCIAL DATA FOR PERIOD ENDING 12/31/1999 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-2000 <PERIOD-START> JUL-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 571,561 <SECURITIES> 420,764 <RECEIVABLES> 2,236,800 <ALLOWANCES> 0 <INVENTORY> 3,066,596 <CURRENT-ASSETS> 6,499,762 <PP&E> 11,411,978 <DEPRECIATION> 5,895,607 <TOTAL-ASSETS> 14,911,266 <CURRENT-LIABILITIES> 4,733,990 <BONDS> 3,272,176 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 5,018,320 <OTHER-SE> 1,160,771 <TOTAL-LIABILITY-AND-EQUITY> 14,911,266 <SALES> 6,641,326 <TOTAL-REVENUES> 6,641,326 <CGS> 5,962,733 <TOTAL-COSTS> 5,962,733 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 184,958 <INCOME-PRETAX> 207,949 <INCOME-TAX> 69,662 <INCOME-CONTINUING> 138,287 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 138,287 <EPS-BASIC> .23 <EPS-DILUTED> .23 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

ADP

https://www.sec.gov/Archives/edgar/data/8670/0000008670-00-000006.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, Sli+LswVv2W04up5z29CiIHbTDaob3Tfn/ppETmuXwUWmx/IYXzheXlR1cOUrfaX o/NGDgEzUyzvdqdhVBYb/A== <SEC-DOCUMENT>0000008670-00-000006.txt : 20000214 <SEC-HEADER>0000008670-00-000006.hdr.sgml : 20000214 ACCESSION NUMBER: 0000008670-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000208 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: SEC FILE NUMBER: 001-05397 FILM NUMBER: 526150 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 <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, 1999 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 (973) 974-5000 -------------- 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, 2000 there were 630,265,028 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, ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues, other than PEO $1,444,725 $1,273,986 $2,751,663 $2,482,417 PEO revenues (net of pass-through costs of $515,507, $430,965, $982,618 and $817,202, respectively) 47,761 36,210 91,918 72,905 ---------- ---------- ---------- ---------- Total revenues 1,492,486 1,310,196 2,843,581 2,555,322 ---------- ---------- ---------- ---------- Operating expenses 613,778 560,794 1,164,868 1,114,102 General, administrative and selling expenses 395,094 314,773 800,085 644,362 Depreciation and amortization 67,547 68,813 133,181 138,475 Systems development and programming costs 109,225 105,722 212,880 206,793 Interest expense 3,642 5,652 7,177 11,373 ---------- ---------- ---------- ---------- 1,189,286 1,055,754 2,318,191 2,115,105 ---------- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 303,200 254,442 525,390 440,217 Provision for income taxes 103,700 100,465 179,690 160,816 ---------- ---------- ---------- ---------- NET EARNINGS $ 199,500 $ 153,977 $ 345,700 $ 279,401 ========== ========== ========== ========== BASIC EARNINGS PER SHARE $ .32 $ 0.25 $ .55 $ 0.46 ========== ========== ========== ========== DILUTED EARNINGS PER SHARE $ .31 $ 0.24 $ .54 $ 0.44 ========== ========== ========== ========== Dividends per share $ 0.0875 $ 0.07625 $ 0.16375 $ 0.1425 ========== ========== ========== ========== See notes to consolidated statements. <PAGE> Form 10Q CONSOLIDATED BALANCE SHEETS --------------------------- (IN THOUSANDS) December 31, June 30, Assets 1999 1999 - - ------ ----------- ---------- Cash and cash equivalents $ 1,099,549 $ 861,280 Short-term marketable securities 430,171 231,214 Accounts receivable 877,127 860,836 Other current assets 243,852 240,927 ----------- ---------- Total current assets 2,650,699 2,194,257 Long-term marketable securities 951,286 1,076,546 Long-term receivables 234,324 213,413 Land and buildings 405,289 400,189 Data processing equipment 570,586 550,757 Furniture, leaseholds and other 455,798 449,862 ----------- ---------- 1,431,673 1,400,808 Less accumulated depreciation (871,845) (821,514) ----------- ---------- 559,828 579,294 Other assets 279,580 228,936 Intangibles 1,457,119 1,532,374 ----------- ---------- $ 6,132,836 $5,824,820 =========== ========== Liabilities and Shareholders' Equity - - ------------------------------------ Notes payable $ 50,446 $ 66,952 Accounts payable 124,667 130,456 Accrued expenses & other current liabilities 987,469 952,326 Income taxes 114,894 136,659 ----------- ---------- Total current liabilities 1,277,476 1,286,393 Long-term debt 140,791 145,765 Other liabilities 157,063 132,081 Deferred income taxes 134,083 138,236 Deferred revenue 100,914 114,404 Shareholders' equity: Common stock 63,145 62,858 Capital in excess of par value 450,507 421,333 Retained earnings 4,092,238 3,848,421 Treasury stock (86,993) (189,204) Accumulated other comprehensive income (196,388) (135,467) ----------- ---------- 4,322,509 4,007,941 ----------- ---------- $ 6,132,836 $5,824,820 =========== ========== See notes to consolidated statements. <PAGE> Form 10Q CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS ----------------------------------------------- (IN THOUSANDS) Six Months Ended December 31, 1999 1998 ---------- --------- Cash Flows From Operating Activities: - - ------------------------------------- Net earnings $ 345,700 $ 279,401 Expenses not requiring outlay of cash 126,125 158,353 Changes in operating net assets (8,240) (58,246) ---------- ---------- Net cash flows from operating activities 463,585 379,508 ---------- --------- Cash Flows From Investing Activities: - - ------------------------------------- Purchase of marketable securities (369,864) (209,492) Proceeds from sale of marketable securities 283,497 145,462 Capital expenditures (59,490) (83,534) Additions to intangibles (28,771) (35,243) Net(acquisitions)dispositions of businesses 3,109 17,671 Other (11,176) 8,773 ---------- --------- Net cash flows used in investing activities (182,695) (156,363) ---------- --------- Cash Flows From Financing Activities: - - ------------------------------------- Proceeds from issuance of notes payable 3,130 118,237 Proceeds from issuance of common stock 75,529 48,939 Repurchases of common stock - (85,364) Dividends paid (102,381) (86,727) Repayments of debt (18,899) (267,869) ---------- --------- Net cash flows used in financing activities (42,621) (272,784) ---------- --------- Net change in cash and cash equivalents 238,269 (49,639) Cash and cash equivalents, at beginning of period 861,280 763,063 ---------- --------- Cash and cash equivalents, at end of period $1,099,549 $ 713,424 ========== ========= 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. 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, 1999. Note A - The results of operations for the six months ended December 31, 1999 may not be indicative of the results to be expected for the year ending June 30, 2000. Note B - The calculation of basic and diluted earnings per share is as follows: (In thousands, except EPS) Periods ended December 31, 1999 ---------------------------------------------------- Three month period Six month period ------------------------- ------------------------ Income Shares EPS Income Shares EPS ------ ------ --- ------ ------ --- Basic EPS $199,500 625,665 $ 0.32 $345,700 625,031 $ 0.55 Effect of zero coupon subordinated notes 737 4,585 1,490 4,665 Effect of stock options - 15,408 - 14,557 ------------------------- ------------------------ Diluted EPS $200,237 645,658 $ 0.31 $347,190 644,253 $ 0.54 ========================= ======================== Periods ended December 31, 1998 ---------------------------------------------------- Three month period Six month period ------------------------- ------------------------ Income Shares EPS Income Shares EPS ------ ------ --- ------ ------ --- Basic EPS $153,977 611,978 $0.25 $279,401 612,230 $0.46 Effect of zero coupon subordinated notes 929 6,147 1,998 6,638 Effect of stock options - 15,495 - 15,228 ------------------------- ------------------------ Diluted EPS $154,906 633,620 $0.24 $281,399 634,096 $0.44 ========================= ======================== <PAGE> Form 10Q Note C - Comprehensive income is as follows: (In thousands) Three months ended Six months ended December 31 December 31 1999 1998 1999 1998 ---- ---- ---- ---- Net earnings $199,500 $153,977 $345,700 $279,401 Other comprehensive income: Foreign currency translation adjustments (28,276) 25,182 (56,127) 58,055 Unrealized gains (losses) on securities 4,720 (107) (4,794) (2,043) -------- -------- -------- -------- Comprehensive income $175,944 $179,052 $284,779 $335,413 ======== ======== ======== ======== Note D - Interim financial data by segment: ADP evaluates performance of its business units based on recurring operating results before interest, income taxes and foreign currency gains and losses. Certain revenues and expenses are charged to business units at a standard rate for management and motivation reasons. Other costs are recorded based on management responsibility. As a result, various income and expense items, including non-recurring gains and losses, are recorded at the corporate level and certain shared costs are not allocated. Goodwill amortization is charged to business units at an accelerated rate to act as a surrogate for the cost of capital for acquisitions. Revenues on invested client funds are credited to Employer Services at a standard rate of 6%. Prior year's business unit results have been restated to reflect the current year's foreign exchange standard rates. Results of the Company's three largest business units, Employer Services, Brokerage Services and Dealer Services are shown below. Three months ended December 31, --------------------------------------- (In millions) Employer Brokerage Dealer Services Services Services ---------- ----------- ----------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Revenues $ 873 $ 794 $ 314 $ 220 $ 191 $ 183 Pretax earnings $ 181 $ 145 $ 63 $ 37 $ 32 $ 29 Six months ended December 31, ----------------------------------------- Employer Brokerage Dealer Services Services Services ------------ ------------ ----------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Revenues $1,682 $1,514 $ 572 $ 471 $ 378 $ 362 Pretax earnings $ 328 $ 256 $ 117 $ 67 $ 62 $ 53 <PAGE> Form 10Q MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OPERATING RESULTS Revenues and earnings again reached record levels during the quarter ended December 31, 1999. Revenues and revenue growth by ADP's major business units are shown below: Revenues ---------------------------------- 3 Months Ended 6 Months Ended December 31, December 31, ------------- ------------- 1999 1998 1999 1998 ------ ------ ------ ------ ($ in millions) Employer Services $ 873 $ 794 $1,682 $1,514 Brokerage Services 314 220 572 471 Dealer Services 191 183 378 362 Other 114 113 212 208 ------ ------ ------ ------ $1,492 $1,310 $2,844 $2,555 ====== ====== ====== ====== Revenue Growth ---------------------------------- 3 Months Ended 6 Months Ended December 31, December 31, -------------- -------------- 1999 1998 1999 1998 ----- ----- ----- ----- Employer Services 10% 15% 11% 17% Brokerage Services 43 (5) 21 4 Dealer Services 4 7 4 8 Other 1 24 1 25 ----- ---- ----- ---- 14% 11% 11% 14% ===== ==== ===== ==== Consolidated revenues for the quarter grew 14% from last year to $1.5 billion aided by a single large company mailing in our Brokerage Investor Communications business. Without the $35 million of revenue from the distribution, revenue growth would have been 11%. Revenue growth in Brokerage Services was 43%. Without the large mailing in the Investor Communications business, Brokerage Services grew 27%. Employer Services revenue growth, impacted by prior year dispositions, was 10%. Revenue growth in Dealer Services was 4%. Margins in the quarter increased primarily from the impact of prior year dispositions and increased operating efficiencies in each of our core businesses. Margins also benefited from increasing interest rates. The primary components of "Other" revenues are claims services, interest income, foreign exchange differences, and miscellaneous processing services. In addition, "Other" revenues have been reduced to adjust for differences between actual interest income and income credited to Employer Services at a standard rate of 6%. The prior year's business unit results have been restated to reflect the current year's budgeted foreign exchange rates. <PAGE> Form 10Q The quarter ended December 31, 1998 includes a pretax gain of approximately $22 million included in selling, general and administrative expenses, a provision for income taxes of approximately $25 million, and a net loss of approximately $3 million resulting from the sale of the Brokerage Services "front office" market data business. The quarter ended December 31, 1998 also includes approximately $21 million of transaction costs and other non-recurring adjustments, included in selling, general and administrative expenses ($14 million after tax) recorded by Vincam prior to the March 1999 pooling transaction. Pretax earnings for the quarter increased 19% from last year. Excluding the impact of several prior year, non-recurring transactions pretax earnings increased 20%. Net earnings for the quarter increased 30% to $200 million. Excluding the impact of several prior year, non-recurring transactions, net earnings increased 17% on a higher effective tax rate. The effective tax rate of 34.2% increased from 32.5% in the comparable quarter last year, adjusted for the prior year non-recurring transactions. The increase in the effective tax rate is primarily a result of the greater weighting of taxable versus non-taxable earnings. Diluted earnings per share grew 29% to $0.31 from $0.24 last year. Excluding the prior year non-recurring transactions, diluted earnings per share increased 15% from $0.27 last year. For the full year, we expect revenue growth of about 10% and diluted earnings per share growth of about 15% above the $1.13 reported prior to non-recurring items in fiscal 1999. We have accelerated $25 million of investments to benefit future years that were not originally planned in fiscal 2000. The investments, primarily new business and Internet related, will be expensed in the current fiscal 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, 1999, the Company had cash and marketable securities of $2.5 billion. Shareholders' equity was $4.3 billion and the ratio of long-term debt to equity was 3%. Capital expenditures for fiscal 2000 are expected to approximate $200 million, compared to $178 million in fiscal 1999. The Company's investment portfolio for corporate and client funds consists primarily of fixed income securities subject to interest rate risk, including reinvestment risk. The Company has historically had the ability to hold these investments until maturity and, therefore, interest rate risk has not had an adverse impact on income or cash flows. <PAGE> Form 10Q OTHER MATTERS The majority of the Company's services involve computer processing and, as a result, the Company has worked for several years addressing both internal and third-party Year 2000 compliance issues. As of the date of this report, the Company is not aware of any material issues that have arisen as a result of Year 2000. This report contains "forward-looking statements" based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ from those expressed. Factors that could cause differences include: ADP's success in obtaining, retaining and selling additional services to clients; the pricing of products and services; overall economic trends, including interest rate and foreign currency trends; impact of Year 2000; stock market activity; auto sales and related industry changes; employment levels; changes in technology; availability of skilled technical associates and the impact of new acquisitions. 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 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of the Stockholders was held on November 9, 1999. The following members were elected to the Company's Board of Directors to hold office for the ensuing year. Nominee In Favor Opposed Abstained Not voted - - ------- -------- ------- --------- --------- Gary C. Butler 519,729,332 145,756 3,164,786 105,503,700 Joseph A. Califano, Jr. 518,772,709 1,102,379 4,121,409 104,547,077 Leon G. Cooperman 519,792,050 83,038 3,102,068 105,566,418 George H. Heilmeier 519,729,687 145,401 3,164,431 105,504,055 Ann Dibble Jordan 519,593,673 281,415 3,300,445 105,368,041 Harvey M. Krueger 517,610,203 2,264,885 5,283,915 103,384,571 Frederic V. Malek 519,519,371 355,717 3,374,747 105,293,739 Henry Taub 519,412,108 462,980 3,482,010 105,186,476 Laurence A. Tisch 518,948,264 926,824 3,945,854 104,722,632 Arthur F. Weinbach 519,781,080 94,008 3,113,038 105,555,448 Josh S. Weston 519,437,766 437,322 3,456,352 105,212,134 The result of the voting on the following additional item was as follows: (a) To approve the Company's 2000 Key Employees' Stock Option Plan, and to authorize the issuance of up to 14,750,000 shares of the Common Stock of the Company for acquisition upon the exercise of options that may be granted to employees under such plan. The votes of the stockholders on this ratification were as follows: In Favor Opposed Abstained Not voted -------- ------- --------- --------- 491,074,240 28,730,134 3,068,347 105,670,853 <PAGE> Form 10Q (b) To ratify the appointment of Deloitte & Touche LLP to serve as the Company's independent certified public accountants for the fiscal year begun on July 1, 1999. The votes of the stockholders on this ratification were as follows: In Favor Opposed Abstained Not voted -------- ------- --------- --------- 520,694,342 648,191 1,508,017 105,693,024 Item 6. Exhibits and Reports on Form 10Q (a) Exhibit Number Exhibit ------ ------- 27.1 Financial Data Schedule <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 7, 2000 /s/ Richard J. Haviland ------------------------ Richard J. Haviland Chief Financial Officer (Principal Financial Officer) ----------------------------- (Title) </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-30-1999 <PERIOD-START> JUL-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 1,099,549 <SECURITIES> 430,171 <RECEIVABLES> 925,702 <ALLOWANCES> 48,575 <INVENTORY> 45,325 <CURRENT-ASSETS> 2,650,699 <PP&E> 1,431,673 <DEPRECIATION> 871,845 <TOTAL-ASSETS> 6,132,836 <CURRENT-LIABILITIES> 1,277,476 <BONDS> 140,791 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 63,173 <OTHER-SE> 4,259,336 <TOTAL-LIABILITY-AND-EQUITY> 6,132,836 <SALES> 0 <TOTAL-REVENUES> 2,843,581 <CGS> 0 <TOTAL-COSTS> 2,300,251 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 10,763 <INTEREST-EXPENSE> 7,177 <INCOME-PRETAX> 525,390 <INCOME-TAX> 179,690 <INCOME-CONTINUING> 345,700 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 345,700 <EPS-BASIC> .55 <EPS-DILUTED> .54 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

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https://www.sec.gov/Archives/edgar/data/6951/000000695100000001/0000006951-00-000001-d1.html

<HTML> <head> <TITLE>10Q doc</TITLE> </head> <body bgcolor=white> <DIV align=left> <HR align=left SIZE=2 width="100%"> </DIV> <DIV align=left> <HR align=left SIZE=2 width="100%"> </DIV> <p align="center"><font size="4"><strong>UNITED STATES</br> SECURITIES AND EXCHANGE COMMISSION</br> Washington, D.C. 20549</strong></font></p> <HR align=center SIZE=2 width="25%"> <p align="center"><font size="5"><strong>FORM 10-Q</strong></center></font></p> <HR align=center SIZE=2 width="25%"> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<i>(MARK ONE)</i> <p align="center"><font size="4"><strong> [X]&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 </strong></font></p> <p align="center"><font size="3" color="FF0000"><strong> For the quarterly period ended <u><strong>January 30, 2000</strong></u> or </strong></font></p> <br> <p align="center"><font size="4"><strong> [&nbsp;&nbsp;]&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 </strong></font></p> <p align="center"><font size="3"><strong> For the transition period from ________to _________ </strong></font></p> <p align="center"><font size="3"><strong> Commission file number&nbsp;&nbsp;&nbsp; <u>0-6920</u> </strong></font></p> <p align="center"><font size="6" color="#0000FF"><strong> APPLIED MATERIALS, INC. </strong></font></br> <font size="2"> <i>(Exact name of registrant as specified in its charter)</i> </font></p> <P>&nbsp; <TABLE COLS=2 WIDTH="100%" > <TR> <TD> <font size="3"><strong> <CENTER><u>Delaware</u></CENTER> </font></strong> </TD> <TD> <font size="3"><strong> <CENTER><u>94-1655526</u></CENTER> </font></strong> </TD> </TR> <TR> <TD> <font size="2"> <CENTER>&nbsp;<i>(State or other jurisdiction of incorporation or organization)&nbsp;</i></CENTER> </font> </TD> <TD> <font size="2"> <CENTER><i>(I.R.S. Employer Identification Number)</i></CENTER> </font> </TD> </TR> </TABLE> <BR> <p align="center"><font size="3"><strong> 3050 Bowers Avenue<br> <u>Santa Clara, California &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;95054-3299 </strong></font></u><br> <font size="2"> <i> (Address of principal executive offices, including zip code)</i> </font></p> <p align="center"><font size="3"><strong><u> (408) 727-5555 </strong></font></u><br> <font size="2"> <i> (Registrant's telephone number, including area code)</i> </font></p> <DIV align=left> <HR align=left SIZE=2 width="100%"> </DIV> <DIV align=left> <HR align=left SIZE=2 width="100%"> </DIV> <p>&nbsp;&nbsp;&nbsp; <font size="3"> 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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [&nbsp;&nbsp;].</p> <p> Number of shares outstanding of the issuer's common stock as of January 30, 2000: 386,486,616 <DIV align=left> <HR align=left SIZE=2 width="100%"> </DIV> <DIV align=left> <HR align=left SIZE=2 width="100%"> </DIV> <br> <br> <br> <br> <br> <br> <br> <br> <br> </strong></p> <p align="center"><strong> APPLIED MATERIALS, INC.<br> FORM 10-Q<br> INDEX </strong></p> <p align="center"><strong> PART I. FINANCIAL INFORMATION </strong></p> <p>Item 1. Financial Statements: <BLOCKQUOTE> <p><A HREF="#ops"> Consolidated Statements of Operations for the three months ended January 31, 1999 and January 30, 2000</A> <p><A HREF="#bs"> Consolidated Condensed Balance Sheets as of October 31, 1999 and January 30, 2000</A> <p><A HREF="#flows"> Consolidated Condensed Statements of Cash Flows for the three months ended January 31, 1999 and January 30, 2000</A> <p><A HREF="#notes"> Notes to Consolidated Condensed Financial Statements</A> </BLOCKQUOTE> <p><A HREF="#item2"> <p>Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations <BLOCKQUOTE> <p><A HREF="#results"> Results of Operations</A> <p><A HREF="#liquid"> Financial Condition, Liquidity and Capital Resources</A> <p><A HREF="#risks"> Trends, Risks and Uncertainties</A> </BLOCKQUOTE> <A HREF="#Item3"> <p>Item 3. Quantitative and Qualitative Disclosures about Market Risk</A> <p align="center"><strong> PART II. OTHER INFORMATION </strong></p></A> <A HREF="#legal"> <p>Item 1: Legal Proceedings <A HREF="#EFC"> <p>Item 5: Other Information <A HREF="#exhibit"> <p>Item 6: Exhibits and Reports on Form 8-K <p align="left"> <A HREF="#sign"> Signatures</A> </p> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <p align="center"><strong> PART I. FINANCIAL INFORMATION</strong></p> <p><strong>Item 1. Financial Statements</strong></p> <br> <br> <HR WIDTH="85%"> <br> <br> <A NAME="ops"></A> <p align="center"><strong> APPLIED MATERIALS, INC. </strong><br> <strong> CONSOLIDATED STATEMENTS OF OPERATIONS<br> <i> (UNAUDITED)</i> </strong> <pre> Three Months Ended -------------------------- (In thousands, except per January 31, January 30, share amounts) 1999 2000 ----------------------------------- ----------- ----------- Net sales.......................... $742,477 $1,666,957 Cost of products sold.............. 421,374 831,544 ----------- ----------- Gross margin....................... 321,103 835,413 Operating expenses: Research, development and engineering................... 141,207 208,421 Marketing and selling........... 70,733 97,166 General and administrative...... 61,594 85,950 Non-recurring items............. 5,000 -- ----------- ----------- Income from operations............. 42,569 443,876 Non-recurring income............... 20,000 -- Interest expense................... 11,470 12,119 Interest income.................... 25,546 37,484 ----------- ----------- Income from continuing operations before taxes and equity in net income of joint venture......... 76,645 469,241 Provision for income taxes......... 23,760 140,772 ----------- ----------- Income from continuing operations before equity in net income of joint venture................ 52,885 328,469 Equity in net income of joint venture................... 3,457 -- ----------- ----------- Income from continuing operations.. 56,342 328,469 Provision for discontinuance of joint venture................... (3,457) -- ----------- ----------- Net income......................... $52,885 $328,469 =========== =========== Earnings per share: Basic - continuing operations... $0.15 $0.85 Basic - discontinued operations. (0.01) -- ----------- ----------- Total basic................... $0.14 $0.85 Diluted - continuing operations. $0.15 $0.80 Diluted - discontinued operations (0.01) -- ----------- ----------- Total diluted................. $0.14 $0.80 Weighted average number of shares: Basic........................... 370,530 384,992 Diluted......................... 388,233 409,817 </pre> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; See accompanying notes to consolidated condensed financial statements. <br> <br> <HR WIDTH="85%"> <br> <br> <A NAME="bs"></A> <p align="center"><strong> APPLIED MATERIALS, INC. </strong><br> <strong> CONSOLIDATED CONDENSED BALANCE SHEETS*<br> </strong> <pre> October 31, January 30, (In thousands) 1999 2000 ---------------------------------------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.................... $823,272 $796,284 Short-term investments....................... 1,937,179 2,207,893 Accounts receivable, net..................... 1,198,069 1,320,362 Inventories.................................. 632,717 683,378 Deferred income taxes........................ 324,024 317,858 Other current assets......................... 145,200 136,753 ------------ ------------ Total current assets............................ 5,060,461 5,462,528 Property, plant and equipment, net.............. 1,227,737 1,188,433 Other assets.................................... 418,306 407,038 ------------ ------------ Total assets.................................... $6,706,504 $7,057,999 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable................................ $5,789 $595 Current portion of long-term debt............ 36,484 36,493 Accounts payable and accrued expenses........ 1,388,806 1,343,693 Income taxes payable......................... 238,314 207,230 ------------ ------------ Total current liabilities....................... 1,669,393 1,588,011 Long-term debt.................................. 584,357 585,097 Deferred income taxes and other liabilities..... 116,152 128,345 ------------ ------------ Total liabilities............................... 2,369,902 2,301,453 ------------ ------------ Stockholders' equity: Common stock................................. 3,827 3,865 Additional paid-in capital................... 1,257,512 1,347,450 Retained earnings............................ 3,075,589 3,404,058 Accumulated other comprehensive income/(loss)............................... (326) 1,173 ------------ ------------ Total stockholders' equity...................... 4,336,602 4,756,546 ------------ ------------ Total liabilities and stockholders' equity...... $6,706,504 $7,057,999 ============ ============ </pre> <font size="2"> ^<p>*&nbsp;&nbsp; Amounts as of January 30, 2000 are unaudited. Amounts as of October 31, 1999 are from the October 31, 1999 audited financial statements.<br> </font size="2"> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; See accompanying notes to consolidated condensed financial statements. <br> <br> <HR WIDTH="85%"> <br> <br> <A NAME="flows"></A> <p align="center"><strong> APPLIED MATERIALS, INC. </strong><br> <strong> CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS<br> <i> (UNAUDITED)</i> </strong> <pre> Three Months Ended -------------------------- January 31, January 30, (In thousands) 1999 2000 --------------------------------------------------- ------------ ------------ Cash flows from operating activities: Net income...................................... $52,885 $328,469 Adjustments required to reconcile net income to cash provided by operations: Depreciation and amortization................. 70,788 80,923 Deferred income taxes......................... 92 6,685 Changes in assets and liabilities, net of amounts acquired: Accounts receivable, net................... 104,530 (115,157) Inventories................................ 3,702 (50,276) Other current assets....................... (7,750) 8,765 Other assets............................... 9,081 (3,362) Accounts payable and accrued expenses...... (171,883) (51,846) Income taxes payable....................... 86,847 (31,900) Other liabilities.......................... 3,904 11,756 ------------ ------------ Cash provided by operations....................... 152,196 184,057 ------------ ------------ Cash flows from investing activities: Capital expenditures, net of retirements........ (39,267) (21,795) Proceeds from sales of short-term investments... 194,831 322,535 Purchases of short-term investments............. (368,392) (593,249) ------------ ------------ Cash used for investing........................... (212,828) (292,509) ------------ ------------ Cash flows from financing activities: Short-term debt activity, net................... (2,699) (6,522) Long-term debt activity, net.................... (2,183) (1,092) Common stock transactions, net.................. 52,130 89,976 ------------ ------------ Cash provided by financing........................ 47,248 82,362 ------------ ------------ Effect of exchange rate changes on cash........... 580 (898) ------------ ------------ Decrease in cash and cash equivalents............. (12,804) (26,988) Cash and cash equivalents - beginning of period... 575,205 823,272 ------------ ------------ Cash and cash equivalents - end of period......... $562,401 $796,284 ============ ============ </pre> <font size="2"> For the three months ended January 31, 1999, cash payments for interest were $426 and net income tax refunds were $63,787. For the three months ended January 30, 2000, cash payments for interest and income taxes were $429 and $169,090, respectively. </font size="2"> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; See accompanying notes to consolidated condensed financial statements. <br> <br> <br> <br> <br> <br> <A NAME="notes"></A> <p align="center"><strong> APPLIED MATERIALS, INC.<br> NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS <i>(Unaudited)</i><br> THREE MONTHS ENDED JANUARY 30, 2000<br> </strong></p> <br> <p>1) &nbsp;&nbsp;&nbsp;&nbsp;<u> Basis of Presentation</u><br> In the opinion of management, the unaudited consolidated condensed financial statements of Applied Materials, Inc. (Applied) included herein have been prepared on a basis consistent with the October 31, 1999 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 consolidated condensed financial statements should be read in conjunction with the October 31, 1999 audited consolidated financial statements and notes thereto included in Applied's 1999 Annual Report, which is incorporated by reference in Applied's Form 10-K for the fiscal year ended October 31, 1999. Applied's results of operations for the three months ended January 30, 2000 are not necessarily indicative of future operating results. <p>Applied's fiscal year ends on the last Sunday in October of each year. Fiscal 1999 contained 53 weeks, whereas fiscal 2000 will contain 52 weeks. For fiscal 1999, the first quarter contained 14 weeks, and all other quarters contained 13 weeks. The additional week in the first fiscal quarter of 1999 did not have a material effect on Applied's financial position or results of operations. <p>Certain prior year amounts have been reclassified from discontinued operations to continuing operations as a result of Applied's October 1999 acquisition of the remaining 50 percent that it did not own of Applied Komatsu Technology, Inc. (AKT), a joint venture that was previously treated as a discontinued operation. These reclassifications had no effect on net income for any of the affected prior periods. Effective with the beginning of fiscal 2000, AKT's results of operations have been consolidated with those of Applied. AKT's results of operations did not have a material effect on Applied's results of operations for the first fiscal quarter of 2000. <p>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. <p>2) &nbsp;&nbsp;&nbsp;&nbsp;<u> Earnings Per Share </u><br> Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and equivalents (representing the dilutive effect of stock options) outstanding during the period. Applied's net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share. <p>For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeded the average fair market value of Applied's common stock for the period. For the three months ended January 30, 2000, the average fair market value of Applied's common stock exceeded the exercise price of all options outstanding. Therefore, no stock options were excluded from the diluted earnings per share computation for the three months ended January 30, 2000. <p>3) &nbsp;&nbsp;&nbsp;&nbsp;<u> Accounts Receivable, Net</u><br> Applied has several agreements with various financial institutions to sell accounts receivable from selected customers. During the three months ended January 31, 1999 and January 30, 2000, Applied sold $159 million and $348 million, respectively, of accounts receivable under these agreements. At January 30, 2000, $393 million of sold receivables remained outstanding and subject to certain recourse provisions. Applied does not expect these recourse provisions to have a material effect on its financial condition or results of operations. Discounting fees were not material for the three-month periods ended January 31, 1999 or January 30, 2000, and were recorded as interest expense. <p>4) &nbsp;&nbsp;&nbsp;&nbsp;<u> Inventories</u><br> 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 were as follows (in thousands): <pre> October 31, January 30, 1999 2000 ------------ ------------ Customer service spares............ $239,082 $243,667 Raw materials...................... 102,843 151,123 Work-in-process.................... 202,312 193,122 Finished goods..................... 88,480 95,466 ------------ ------------ $632,717 $683,378 ============ ============ </pre> <p>5) &nbsp;&nbsp;&nbsp;&nbsp;<u> Other Assets</u><br> The components of other assets were as follows (in thousands): <pre> October 31, January 30, 1999 2000 ------------ ------------ Purchased technology, net.......... $205,213 $195,172 Goodwill, net...................... 162,015 156,480 Other.............................. 51,078 55,386 ------------ ------------ $418,306 $407,038 ============ ============ </pre> <p>Purchased technology and goodwill are presented at cost, net of accumulated amortization, and are being amortized over their estimated useful lives of five to ten years using the straight-line method. Applied periodically analyzes these assets to determine whether an impairment in carrying value has occurred. <p>6) &nbsp;&nbsp;&nbsp;&nbsp;<u> Accounts Payable and Accrued Expenses</u><br> The components of accounts payable and accrued expenses were as follows (in thousands): <pre> October 31, January 30, 1999 2000 ------------ ------------ Accounts payable................... $363,179 $379,334 Compensation and benefits.......... 295,028 179,866 Installation and warranty.......... 228,892 251,180 Customer deposits.................. 83,390 81,720 Restructuring...................... 15,536 10,935 Other.............................. 402,781 440,658 ------------ ------------ $1,388,806 $1,343,693 ============ ============ </pre> <p>7) &nbsp;&nbsp;&nbsp;&nbsp;<u> Accrued Restructuring Costs </u><br> During fiscal 1998, Applied recorded pre-tax restructuring charges of $135 million, consisting of $75 million for headcount reductions and $60 million for consolidation of facilities and related fixed assets. Restructuring activity for fiscal 2000 was as follows (in thousands): <pre> Severance and Benefits Facilities Total ------------ ------------ ------------ Balance, October 31, 1999.......... $5,434 $10,102 $15,536 Amount utilized.................... (2,356) (2,245) (4,601) ------------ ------------ ------------ Balance, January 30, 2000.......... $3,078 $7,857 $10,935 ============ ============ ============ </pre> <p>During the first fiscal quarter of 2000, $5 million of cash was used for restructuring costs. The majority of the remaining cash outlays of $11 million is expected to occur in fiscal 2000. <p>8) &nbsp;&nbsp;&nbsp;&nbsp;<u> Non-recurring Income</u><br> During the first fiscal quarter of 1999, Applied received a $20 million payment from ASMI International, N.V. (ASMI) related to a prior litigation settlement and recorded the amount as non-recurring income. ASMI's remaining payment of $35 million is due in the first fiscal quarter of 2001. <p>9) &nbsp;&nbsp;&nbsp;&nbsp;<u> Stockholders' Equity</u><br> <p><i>Comprehensive Income<br></i> Applied adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," in the first fiscal quarter of 1999. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components, but does not affect net income or total stockholders' equity. Components of comprehensive income, on an after- tax basis, are as follows (in thousands): <pre> Three Months Ended -------------------------- January 31, January 30, 1999 2000 ----------- ----------- Net income......................... $52,885 $328,469 Foreign currency translation adjustments...................... (3,961) 1,499 ----------- ----------- Comprehensive income............... $48,924 $329,968 =========== =========== </pre> <p>Accumulated other comprehensive income/(loss) presented in the accompanying consolidated condensed balance sheets consists entirely of foreign currency translation adjustments. <p><i>Stock Repurchase Program</i><br> Since March 1996, Applied has systematically repurchased shares of its common stock in the open market to partially fund its stock-based employee benefit and incentive plans. During the three months ended January 30, 2000, Applied repurchased 152,000 shares of its common stock at an average price of $124.83 per share, for a total cash outlay of $19 million. During the three months ended January 31, 1999, Applied did not repurchase any shares of its common stock in accordance with its systematic plan. <p><i>Stock Dividend</i><br> On February 15, 2000, Applied's Board of Directors approved a two-for-one stock split of Applied's common stock in the form of a 100 percent stock dividend. Shares issuable pursuant to the stock dividend are expected to be distributed on or about March 15, 2000 to stockholders of record as of February 25, 2000. None of the share and per share data presented in this Form 10-Q, including Note 10 below, has been adjusted to reflect this stock dividend. <p>10)&nbsp;&nbsp;&nbsp;&nbsp;<u> Pending Acquisition</u><br> On January 12, 2000, Applied announced that it entered into an agreement to acquire Etec Systems, Inc. (Etec), a supplier of mask pattern generating equipment for the worldwide semiconductor and electronics industries, in a stock-for-stock merger that will be accounted for as a pooling of interests. The closing of the transaction is subject to approval from Etec's shareholders and clearance by regulatory authorities. Pursuant to the merger agreement, each share of Etec's stock will be exchanged for 0.649 of a share of Applied's common stock. Applied expects to issue approximately 14 million shares of its common stock to complete this transaction. <p>11)&nbsp;&nbsp;&nbsp;&nbsp;<u> Segment Information</u><br> In fiscal 1999, Applied adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information." Applied operates in one segment for the manufacture, marketing and servicing of semiconductor wafer fabrication equipment. All material operating units qualify for aggregation under SFAS 131 due to their similar economic characteristics, nature of products and services, procurement, manufacturing and distribution processes, and identical customer base. Since Applied operates in one segment, all required information regarding segment revenues, profit and total assets is in the consolidated financial statements. <p>12)&nbsp;&nbsp;&nbsp;&nbsp;<u> Recent Accounting Pronouncements</u><br> In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." Applied will adopt SFAS 133 in the first fiscal quarter of 2001, and does not expect the adoption to have a material effect on its financial condition or results of operations. <br> <br> <br> <A NAME="item2"></A> <p><strong>Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations </strong> <p>Certain information contained in this Quarterly Report on Form 10-Q is forward-looking in nature. All statements included in this Quarterly Report on Form 10-Q or made by management of Applied Materials, Inc. and its subsidiaries (Applied), other than statements of historical fact, are forward- looking statements. Examples of forward-looking statements include statements regarding Applied's future financial results, operating results, product successes, business strategies, projected costs, future products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should, " "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section below entitled "Trends, Risks and Uncertainties." Other risks and uncertainties are disclosed in Applied's prior SEC filings, including its Annual Report on Form 10-K for the fiscal year ended October 31, 1999. These and many other factors could affect Applied's future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. <A NAME="results"></A> <p><u><strong>Results of Operations</u></strong></p> <p>Applied is a supplier of semiconductor manufacturing equipment and services to the semiconductor industry. During the first fiscal quarter of 2000, the semiconductor manufacturing equipment industry continued to grow, as customers increased capital spending for both capacity expansion and advanced technology requirements in response to growing demand for semiconductors. Applied achieved record quarterly levels for new orders, net sales and net income for its first fiscal quarter of 2000. Historically, the semiconductor and semiconductor manufacturing equipment industries have been cyclical; therefore, Applied's results of operations for the three months ended January 30, 2000 may not necessarily be indicative of future operating results. <p>Applied received new orders of $2.4 billion for the first fiscal quarter of 2000, versus $1.6 billion for the fourth fiscal quarter of 1999 and $1.0 billion for the first fiscal quarter of 1999. New orders by region were as follows (dollars in millions): <pre> Three Months Ended ----------------------------------- October 31, 1999 January 30, 2000 ---------------- ---------------- ($) (%) ($) (%) ------- ------- ------- ------- North America*..................... 456 28 591 25 Taiwan............................. 422 25 608 26 Japan.............................. 293 18 331 14 Europe............................. 325 20 277 12 Korea.............................. 31 2 326 14 Asia-Pacific....................... 118 7 226 9 ------- ------- ------- ------- Total............................ 1,645 100 2,359 100 ======= ======= ======= ======= </pre> <font size="2"> ^<p>*&nbsp;&nbsp; Primarily the United States. </font size="2"> <p>The increase in new orders from the fourth fiscal quarter of 1999 was primarily the result of strong global demand for semiconductors, driven by a growth of applications in telecommunication, internet-related and consumer products. This increase in demand is driving Applied's customers to increase and accelerate their capital spending in calendar year 2000 for expanded capacity and more advanced technologies, such as copper materials and 0.18 micron and below applications. Applied's backlog at January 30, 2000 was $2.3 billion, compared to $1.7 billion at October 31, 1999. <p>Net sales for the first fiscal quarter of 2000 increased 6 percent from the fourth fiscal quarter of 1999, and increased 125 percent from the first fiscal quarter of 1999. The increase from the first fiscal quarter of 1999 was due primarily to the industry growth mentioned in the preceding paragraph. Business volume was much higher than the first fiscal quarter of 1999, as in the prior year semiconductor manufacturers were still limiting capital spending due to a severe industry downturn that began in early-to-mid 1998. Net sales by region were as follows (dollars in millions): <pre> Three Months Ended ---------------------------------- January 31, 1999 January 30, 2000 ---------------- ---------------- ($) (%) ($) (%) --------- ------ --------- ------ North America*................... 324 44 408 24 Taiwan........................... 96 13 518 31 Japan............................ 121 16 296 18 Europe........................... 135 18 256 15 Korea............................ 30 4 64 4 Asia-Pacific..................... 36 5 125 8 --------- ------ --------- ------ Total.......................... 742 100 1,667 100 ========= ====== ========= ====== </pre> <font size="2"> ^<p>*&nbsp;&nbsp; Primarily the United States. </font size="2"> <p>Applied's gross margin was 50.1 percent for the first fiscal quarter of 2000, compared to 50.1 percent for the fourth fiscal quarter of 1999 and 43.2 percent for the first fiscal quarter of 1999. The increase from the prior year quarter was caused primarily by higher business volume and the favorable effects of restructuring and other operational programs implemented during fiscal 1999. <p>Excluding non-recurring items, operating expenses as a percentage of net sales were 23 percent for the three months ended January 30, 2000, compared to 37 percent for the first fiscal quarter of 1999. The decrease can be attributed primarily to the increased business volume in fiscal 2000. In terms of absolute dollars, operating expenses for the three months ended January 30, 2000 were higher than those for the comparable period of fiscal 1999. Research and development spending increased $67 million to support development, particularly for 300mm, copper and other advanced applications. Marketing, selling, general and administrative expenses increased $51 million to support Applied's higher level of business volume. <p>Non-recurring income for the three months ended January 31, 1999 related to Applied's settlement of all outstanding litigation with ASM International, N.V. For further details, see Note 8 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q. <p>Net interest income was $25 million for the three months ended January 30, 2000, compared to $14 million for the three months ended January 31, 1999. The increase can be attributed primarily to higher average cash and investment balances. <p>Applied's effective income tax rate for the three months ended January 30, 2000 was 30 percent, compared to 31 percent for the three months ended January 31, 1999. The lower rate resulted primarily from a shift in the geographic composition of pre-tax income to entities operating in countries with lower tax rates. <A NAME="liquid"></A> <p><u><strong>Financial Condition, Liquidity and Capital Resources</u></strong></p> <p>Applied's financial condition at January 30, 2000 improved, with a ratio of current assets to current liabilities of 3.4:1, compared to 3.0:1 at October 31, 1999. Applied had cash, cash equivalents and short-term investments of $3.0 billion at January 30, 2000. <p>For the three months ended January 30, 2000, cash, cash equivalents and short-term investments increased by $244 million, primarily due to net income (excluding depreciation and amortization expense) and proceeds from stock issuances. These sources of cash were partially offset by uses of working capital, particularly increases in accounts receivable and inventories, required to support Applied's increased business volume. For further details, see the Consolidated Condensed Statements of Cash Flows in this Form 10-Q. <p>Applied utilized programs to sell accounts receivable of $348 million during the first fiscal quarter of 2000. These receivable sales had the effect of increasing cash and reducing accounts receivable and days sales outstanding. For further details regarding accounts receivable sales, see Note 3 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q. <p>As of January 30, 2000, Applied's principal sources of liquidity consisted of $3.0 billion of cash, cash equivalents and short-term investments and approximately $650 million of existing credit facilities. Applied's liquidity is affected by many factors, some of which are based on the normal ongoing operations of the business, and others of which relate to the uncertainties of global economies and the semiconductor and semiconductor equipment industries. Although Applied's cash requirements fluctuate based on the timing and extent of these factors, Applied believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy liquidity requirements for the next 12 months. <A NAME="risks"></A> <p><u><strong>Trends, Risks and Uncertainties</u></strong></p> <p><strong>The industry that Applied serves is highly volatile and unpredictable.</strong><br> The semiconductor industry has historically been cyclical because of sudden changes in semiconductor supply and demand, and corresponding pricing. The health of the semiconductor manufacturing equipment industry is affected by these semiconductor industry cycles, the timing, length and severity of which are difficult to predict. Although semiconductors are used in many different products, the markets for those products are interrelated to various degrees. During periods of rapid growth, Applied must be able to acquire and/or develop sufficient manufacturing capacity and inventory to meet customer demand, and to attract, hire, assimilate and retain a sufficient number of qualified people. During periods of declining demand for semiconductor manufacturing equipment, customers may reduce purchases, delay delivery of products and/or cancel orders. Therefore, Applied must be able to quickly and effectively align its cost structure with prevailing market conditions, to manage its inventory levels in order to reduce the possibility of future inventory write- downs resulting from obsolescence, and to motivate and retain key employees. If Applied is unable to achieve its objectives in a timely manner during these industry cycles, there could be a material adverse effect on its financial condition and results of operations. <p><strong>Applied operates in a highly competitive industry characterized by increasingly rapid technological changes.</strong><br> Applied's competitive advantage and future success depend on its ability to successfully develop new products and technologies, develop new markets in the semiconductor industry for its products and services, introduce new products to the marketplace in a timely manner, qualify new products with its customers, and commence and adjust production to meet customer demands. The introduction of new products and technologies grows increasingly complex over time. If Applied does not develop and introduce new products and technologies in a timely manner in response to changing market conditions or customer requirements, its financial condition and results of operations could be materially and adversely affected. <p><strong>Applied is exposed to the risks of operating a global business.</strong><br> Managing Applied's global operations presents challenges that could materially and adversely affect demand for Applied's systems and related services. These challenges include cultural diversities, periodic economic downturns (such as the Asian economic crisis that began in early fiscal 1998), trade balance issues, political instability and fluctuations in interest and currency exchange rates, among other risks. <p><strong>Applied is exposed to risks associated with acquisitions.</strong><br> Applied has made, and may in the future make, acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. Acquisitions involve numerous risks, including, but not limited to: 1) difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies; 2) diversion of management's attention from other operational matters; 3) the potential loss of key employees of acquired companies; 4) lack of synergy, or inability to realize expected synergies, resulting from the acquisition; and 5) acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired company. Mergers and acquisitions are inherently risky and the inability to effectively manage acquisition risks, including those associated with the pending acquisition of Etec, could materially and adversely affect Applied's business, financial condition and results of operations. <p><strong>Failure of critical suppliers to deliver sufficient quantities of product in a timely and cost-effective manner could negatively affect Applied's business.</strong><br> Applied uses numerous vendors to supply parts, components and subassemblies (collectively "parts") for the manufacture and support of its products. Although Applied makes reasonable efforts to ensure that parts are available from multiple suppliers, this is not always possible; accordingly, some key parts may be obtained only from a single supplier or a limited group of suppliers. There can be no assurance that Applied's results of operations will not be materially and adversely affected if, in the future, Applied does not receive in a timely and cost-effective manner a sufficient quantity of parts to meet its production requirements. <p><strong>Applied is exposed to various litigation risks.</strong><br> Applied currently is, and in the future may be, involved in legal proceedings or claims regarding patent infringement, intellectual property rights, antitrust, environmental regulations, contracts and other matters (see Part II below). These proceedings and claims, whether with or without merit, could be time-consuming and expensive to defend, and could divert management's attention and resources. There can be no assurance regarding the outcome of current or future legal proceedings or claims. If Applied is not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend its position, Applied's financial condition and results of operations could be materially and adversely affected. <p><strong>Applied is subject to risks associated with non-compliance with environmental regulations.</strong><br> Applied is subject to environmental regulations related to the development, manufacturing and demonstration of its products. From time to time, Applied receives notices alleging violations of these regulations. It is Applied's policy to respond promptly to these notices and to take any necessary corrective actions. Failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of production, each of which could have a material adverse effect on Applied's financial condition and results of operations. <p><strong>Manufacturing interruptions or delays could affect Applied's ability to meet customer demand.</strong><br> Applied's business depends on its ability to manufacture products that meet the rapidly changing demands of its customers. Significant interruptions of manufacturing operations as a result of natural disasters, software issues, infrastructure failure, or other cause, could result in delayed product deliveries or manufacturing inefficiencies, any or all of which could materially and adversely affect Applied's financial condition and results of operations. <p><strong>Applied is subject to risks from Year 2000 issues.</strong><br> To date, Applied has not been significantly affected by Year 2000 issues. Based on this experience, Applied does not expect any future Year 2000-related issues to materially and adversely affect its financial condition or results of operations. <p>In addition to the risks mentioned above, other risk factors are discussed in detail in Applied's Annual Report on Form 10-K for the fiscal year ended October 31, 1999. <p> <A NAME="Item3"></A> <p><strong>Item 3. Quantitative and Qualitative Disclosures About Market Risk</strong></p> <p>Applied purchases forward exchange and currency option contracts to hedge certain existing firm commitments and foreign currency denominated transactions expected to occur during the next year. Gains and losses on these contracts are recognized in income when the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on forward exchange and currency option contracts generally offsets the related effect on the underlying items being hedged, these financial instruments are not expected to subject Applied to risks that would otherwise result from changes in currency exchange rates. Net foreign currency gains and losses were not material for the three months ended January 30, 2000. <p>Applied has performed an analysis to assess the potential effect of reasonably possible near-term changes in interest and foreign currency exchange rates. Based upon Applied's analysis, the effect of such rate changes is not expected to be material to Applied's cash flows, financial condition or results of operations. <br> <br> <br> <p align="center"><strong> PART II. OTHER INFORMATION </strong></p> <A NAME="legal"></A> <p><b>Item 1. Legal Proceedings</b></p> <p><strong>KLA</strong><br> As a result of Applied's acquisition of Orbot Instruments, Ltd. (Orbot) in 1997, Applied was involved in a lawsuit captioned KLA Instruments Corporation (KLA) v. Orbot (case no. C-93-20886-JW) in the United States District Court for the Northern District of California. KLA alleged that Orbot infringed a patent regarding equipment for the inspection of masks and reticles, and sought an injunction, damages and other relief. In February 2000, the parties reached an agreement pursuant to which the case was dismissed without prejudice. <p><strong>Varian and Novellus</strong><br> On June 13, 1997, Applied filed a lawsuit against Varian Associates, Inc. (Varian) captioned Applied Materials, Inc. v. Varian Associates, Inc. (case no. C-97-20523-RMW) in the United States District Court for the Northern District of California, alleging infringement of several of Applied's patents concerning physical vapor deposition (PVD) technology. The complaint was later amended on July 7, 1997 to include Novellus Systems, Inc. (Novellus) as a defendant as a result of Novellus' acquisition of Varian's thin film systems PVD business. Applied seeks damages for past infringement, a permanent injunction, treble damages for willful infringement, pre-judgment interest and attorneys' fees. Varian answered the complaint by denying all allegations, counterclaiming for declaratory judgment of invalidity and unenforceability and alleging conduct by Applied in violation of antitrust laws. On June 23, 1997, Novellus filed a separate lawsuit against Applied captioned Novellus Systems, Inc. v. Applied Materials, Inc. (case no. C-97-20551-EAI) in the United States District Court for the Northern District of California, alleging infringement by Applied of three patents concerning PVD technology that were formerly owned by Varian. On July 8, 1997, Varian filed a separate lawsuit against Applied captioned Varian Associates, Inc. v. Applied Materials, Inc. (case no. C-97-20597-PVT) in the United States District Court for the Northern District of California, alleging a broad range of conduct in violation of federal antitrust laws and state unfair competition and business practice laws. On July 16, 1999, Varian was granted permission to file a First Amended Complaint in that action. On November 8, 1999, the Court granted in part Applied's partial motion to dismiss the First Amended Complaint. On December 10, 1999, Varian filed its Second Amended Complaint and Applied has answered. Discovery has commenced in these actions. The Court has scheduled trial of all patent claims for April 2001. No other trial dates have been set. Applied believes it has meritorious claims and defenses and intends to pursue them vigorously. <p><strong>OKI</strong><br> In November 1997, OKI Electric Industry, Co., Ltd. (OKI) filed suit against Applied's subsidiary, Applied Materials Japan (AMJ), in Tokyo District Court in Japan, alleging that AMJ is obligated to pay OKI relating to license payments OKI made to a third party. In February 2000, the dispute was resolved on mutually acceptable terms and conditions, and the case will be dismissed. <p>Applied is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, Applied does not believe that any of these other legal matters will have a material adverse effect on its financial condition or results of operations. <A NAME="EFC"></A> <p><b>Item 5. Other Information</b></p> <p>The ratio of earnings to fixed charges for the three months ended January 31, 1999 and January 30, 2000, and for each of the last five fiscal years, was as follows: <pre> Three Months Ended Fiscal Year ---------------------- ------------------------------------------------ Jan. 31, Jan. 30, 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- ---------- ---------- 21.25x 20.14x 18.96x 6.92x 14.76x 5.26x 25.51x ======== ======== ======== ======== ======== ========== ========== </pre> <A NAME="exhibit"></A> <p><b>Item 6. Exhibits and Reports on Form 8-K</b></p> <p>a) Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K: <BLOCKQUOTE> <p>27.0 &nbsp;&nbsp Financial Data Schedule for the three months ended January 30, 2000: filed electronically. </BLOCKQUOTE> <p>b) Applied did not file a report on Form 8-K during its first fiscal quarter of 2000. <br> <br> <br> <br> <br> <br> <A NAME="sign"></A> <p align="center"><strong> SIGNATURES </strong></p> <p> Pursuant to the requirement of the Security Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. <P> <TABLE border=0 cellPadding=0 cellSpacing=0 width="100%"> <TR> <TD width="38%"></TD> <TD width="62%"></TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD align=left> APPLIED MATERIALS, INC. </TD></TR></TABLE> <p>March 8, 2000 <P> <TABLE border=0 cellPadding=0 cellSpacing=0 width="100%"> <TR> <TD width="38%"></TD> <TD width="2%"></TD> <TD width="60%"></TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD>By:&nbsp;</TD> <TD align=left> /s/ Joseph R. Bronson </TD></TR></TABLE> <TABLE border=0 cellPadding=0 cellSpacing=0 width="100%"> <TR> <TD width="38%"></TD> <TD width="62%"></TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD align=left> <HR align=left SIZE=1> </TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD align=left> Joseph R. Bronson </TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD align=left><I> Senior Vice President, Office of the President,<br> Chief Financial Officer and Chief Administrative Officer </I></TD></TR></TABLE></P> <br> <br> <br> <TABLE border=0 cellPadding=0 cellSpacing=0 width="100%"> <TR> <TD width="38%"></TD> <TD width="2%"></TD> <TD width="60%"></TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD>By:&nbsp;</TD> <TD align=left> /s/ Patrick Crom </TD></TR></TABLE> <TABLE border=0 cellPadding=0 cellSpacing=0 width="100%"> <TR> <TD width="38%"></TD> <TD width="62%"></TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD align=left> <HR align=left SIZE=1> </TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD align=left> Patrick Crom </TD></TR> <TR vAlign=top> <TD>&nbsp;</TD> <TD align=left><I> Vice President, Global Controller and Principal Accounting Officer </I></TD></TR></TABLE></P> <pre> </pre> <pre> EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ---------- ----------- 27.0 Financial Data Schedule for the three months ended January 30, 2000: filed electronically. </pre> </body> </HTML>

2000

0QTR1

ANDW

https://www.sec.gov/Archives/edgar/data/317093/000091205700005488/0000912057-00-005488-d1.html

<HTML> <HEAD> <TITLE> Prepared by MERRILL CORPORATION www.edgaradvantage.com </TITLE> </HEAD> <BODY BGCOLOR="#FFFFFF"> <H2><FONT SIZE=3 ><A HREF="#00CHI1452_1">QuickLinks</A></FONT></H2> <HR NOSHADE> <HR NOSHADE> <BR> <P ALIGN="CENTER"><FONT SIZE=5><B>SECURITIES AND EXCHANGE COMMISSION<BR></B></FONT><FONT SIZE=2><B>Washington, DC 20549</B></FONT></P> <HR NOSHADE WIDTH=120> <BR> <P ALIGN="CENTER"><FONT SIZE=5><B>Form 10-Q</B></FONT></P> <P><FONT SIZE=2><B><I>(Mark-One)</I></B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="101%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="9%" ALIGN="CENTER"><FONT SIZE=2>&nbsp;<BR></FONT><FONT SIZE=3>/x/</FONT></TD> <TD WIDTH="91%"><FONT SIZE=3>&nbsp;<BR></FONT><FONT SIZE=3><B>QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2><I>For the quarterly period ended December&nbsp;31, 1999.</I></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><I>OR</I></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="101%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="9%" ALIGN="CENTER"><FONT SIZE=3>/&nbsp;/</FONT></TD> <TD WIDTH="91%"><FONT SIZE=3><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2><B>For the transition period from <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U> to <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;</U></B></FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>Commission file number 001-14617</B></FONT></P> <HR NOSHADE WIDTH=120> <P ALIGN="CENTER"><FONT SIZE=5><B>ANDREW CORPORATION<BR></B></FONT><FONT SIZE=2>(Exact name of Registrant as specified in its charter)</FONT></P> <!-- User-specified TAGGED TABLE --> <CENTER><TABLE WIDTH="72%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="49%" ALIGN="CENTER"><FONT SIZE=2><B>DELAWARE</B></FONT><FONT SIZE=2><BR> (State or other jurisdiction of<BR> incorporation or organization)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="49%" ALIGN="CENTER"><FONT SIZE=2><B>36-2092797</B></FONT><FONT SIZE=2><BR> (IRS Employer identification No.)</FONT></TD> </TR> </TABLE></CENTER> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2><B>10500 W. 153rd Street, Orland Park, Illinois 60462</B></FONT><FONT SIZE=2><BR> (Address of principal executive offices and zip code)</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>(708) 349-3300<BR></B></FONT><FONT SIZE=2>(Registrant's telephone number, including area code)</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2><B>No Change<BR></B></FONT><FONT SIZE=2>(Former name, former address and former fiscal year, if changed since last report)</FONT></P> <HR NOSHADE WIDTH=120> <BR> <P><FONT SIZE=2>Indicate by check mark whether the Registrant (1)&nbsp;has filed all reports required to be filed by Section&nbsp;13 or 15(d)&nbsp;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)&nbsp;has been subject to such filing requirements for the past 90 days.&nbsp;Yes&nbsp;/x/&nbsp;&nbsp;No&nbsp;/&nbsp;/</FONT></P> <P><FONT SIZE=2>Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.</FONT></P> <P ALIGN="CENTER"><FONT SIZE=2>Common Stock, $.01 Par Value&#151;80,545,972 shares as of January&nbsp;31, 2000</FONT></P> <HR NOSHADE> <HR NOSHADE> <P><FONT SIZE=2> <!-- ZEQ.=1,SEQ=1,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=blank,FILE='DISK037:[00CHI2.00CHI1452]BA1452A.;5',USER='MWEINST',CD='11-FEB-2000;11:17' --> </FONT></P> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=3 > </FONT></H2> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="fa1452_index_andrew_corporation"> </A></FONT><FONT SIZE=2><B>INDEX<BR> ANDREW CORPORATION </B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="77%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>PART I.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>FINANCIAL INFORMATION</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> Item 1.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> Financial Statements (Unaudited)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> Consolidated balance sheets&#151;December&nbsp;31, 1999 and September&nbsp;30, 1999.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> Consolidated statements of income&#151;Three months ended December&nbsp;31, 1999 and 1998.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> Consolidated statements of cash flows&#151;Three months ended December&nbsp;31, 1999 and 1998.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> Notes to consolidated financial statements&#151;December&nbsp;31, 1999.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> Item 2.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> Management's Discussion and Analysis of Financial Condition and Results of Operations.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> &nbsp;<BR> PART II.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> &nbsp;<BR> OTHER INFORMATION</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> Item 6.</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> Exhibits and Reports on Form 8-K.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> Exhibit 27</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> Financial Data Schedule for the period ended December&nbsp;31, 1999.</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="11%"><FONT SIZE=2>&nbsp;<BR> &nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="87%"><FONT SIZE=2>&nbsp;<BR> &nbsp;<BR> &nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2>SIGNATURES <!-- ZEQ.=1,SEQ=2,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=2,FILE='DISK037:[00CHI2.00CHI1452]FA1452A.;9',USER='MWEINST',CD='11-FEB-2000;11:17' --> </FONT></P> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=3 > </FONT></H2> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="fc1452_andrew_corporation_cons__fc102357"> </A></FONT><FONT SIZE=2><B>ANDREW CORPORATION<BR> CONSOLIDATED BALANCE SHEET<BR> (In Thousands) </B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="88%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="64%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="15%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>December&nbsp;31,<BR> 1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="16%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>September&nbsp;30,<BR> 1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="64%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="15%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>(Unaudited)<BR></B></FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="16%" COLSPAN=2 ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2><B>ASSETS</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Current Assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Cash and Cash Equivalents</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>13,795</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>38,287</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Accounts Receivable, less allowances<BR> (Dec.&nbsp;$2,928; Sept. $3,403)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>214,462</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>200,068</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Inventories</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Finished Products</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>59,110</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>58,225</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Materials and Work in Process</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>132,131</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>106,261</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>191,241</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>164,486</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR> Miscellaneous Current Assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 8,552</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 10,662</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Total Current Assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>428,050</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>413,503</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR> Other Assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Cost in excess of net assets of businesses acquired, less accumulated amortization (Dec.&nbsp;$5,437; Sept. $4,654)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>35,889</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>21,498</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Investments in and Advances to Affiliates</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>53,911</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>63,992</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Other assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>10,950</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>6,297</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR> Property, Plant, and Equipment</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Land and land improvements</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>18,016</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>17,016</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Buildings</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>91,359</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>83,850</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Equipment</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>347,743</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>335,125</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Allowances for Depreciation</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>283,500</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>275,191</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>173,618</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>160,800</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>TOTAL ASSETS</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>702,418</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>666,090</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR></FONT><FONT SIZE=2><B>LIABILITIES AND STOCKHOLDERS' EQUITY</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Current Liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Notes Payable</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>36,927</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>3,053</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Accounts Payable</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>51,827</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>43,105</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Restructuring Reserve</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>11,291</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>12,128</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Accrued expenses and other liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>23,091</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>21,212</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Compensation and related expenses</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>15,456</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>21,947</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Income taxes</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>3,290</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>0</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Current portion of long-term debt</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>8,337</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>8,205</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Total Current Liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>150,219</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>109,650</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR> Deferred Liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 19,683</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 18,602</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR> Long-term debt, less current portion</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 48,300</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 48,760</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR> Minority Interest</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 7,878</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 5,068</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR></FONT><FONT SIZE=2><B>STOCKHOLDERS' EQUITY</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Common stock (par value, $.01 a share:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>400,000,000 shares authorized;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>102,718,210 shares issued, including treasury)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>1,027</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>1,027</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Additional paid-in capital</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>56,253</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>55,802</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Accumulated other comprehensive income</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>(23,330</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>(21,755</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Retained earnings</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>698,296</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>681,530</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>Treasury stock, at cost (22,208,759 shares in Dec.;<BR> 20,527,072 shares in Sept.)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>(255,908</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>(232,594</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>476,338</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>484,010</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;<BR></FONT><FONT SIZE=2><B>TOTAL LIABILITIES AND EQUITY</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 702,418</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>$</FONT></TD> <TD WIDTH="13%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 666,090</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="64%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="15%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="16%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P ALIGN="CENTER"><FONT SIZE=2> <!-- ZEQ.=1,SEQ=3,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=3,FILE='DISK037:[00CHI2.00CHI1452]FC1452A.;16',USER='MWEINST',CD='11-FEB-2000;11:18' --> </FONT></P> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="fc1452_andrew_corporation_consolidate__and04024"> </A></FONT><FONT SIZE=2><B>ANDREW CORPORATION<BR> CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)<BR> (In thousands, except per share amounts) </B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="85%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="71%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="26%" COLSPAN=5 ALIGN="CENTER"><FONT SIZE=1><B>Three Months Ended<BR> December&nbsp;31</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="71%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="12%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="12%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1998</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Sales</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 233,568</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 218,573</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>Cost of products sold</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>157,524</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>139,041</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>Gross Profit</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>76,044</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>79,532</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Operating Expenses</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>Research and development</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>9,646</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>5,631</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>Sales and administrative</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>41,489</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>38,915</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>51,135</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>44,546</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Operating Income</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 24,909</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 34,986</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Other</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>Interest expense</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>1,378</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>1,452</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>Interest income</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(385</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(2,023</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>Other (income) expense</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(738</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>435</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>255</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>(136</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Income Before Taxes</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 24,654</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 35,122</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Income Taxes</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 7,888</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 11,941</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Net Income</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 16,766</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 23,181</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Basic and Diluted Net Income per Average Share of<BR> Common Stock Outstanding</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 0.21</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>$</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 0.28</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Average Basic Shares Outstanding</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 81,161</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 83,814</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;<BR> Average Diluted Shares Outstanding</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 81,276</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="10%" ALIGN="RIGHT"><FONT SIZE=2>&nbsp;<BR> 83,938</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="71%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="12%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2> <!-- ZEQ.=2,SEQ=4,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=4,FILE='DISK037:[00CHI2.00CHI1452]FC1452B.;8',USER='MWEINST',CD='11-FEB-2000;11:18' --> </FONT></P> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=3 > </FONT></H2> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="fe1452_consolidated_statements_of_cas__con02382"> </A></FONT><FONT SIZE=2><B>CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)<BR> (In thousands) </B></FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="84%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="72%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="25%" COLSPAN=5 ALIGN="CENTER"><FONT SIZE=1><B>Three Months Ended<BR> December 31</B></FONT><HR NOSHADE><BR></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="72%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1998</B></FONT><HR NOSHADE></TH> <TH WIDTH="1%"><FONT SIZE=1>&nbsp;</FONT></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Cash Flows from Operations<BR> Net Income</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>16,766</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>23,181</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Adjustments to Net Income<BR> Restructuring Costs</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(432</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Depreciation and amortization</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>10,173</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>8,777</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>(Increase) in accounts receivable</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(14,894</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(5,615</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>(Increase) in inventories</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(24,639</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(2,896</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Decrease (increase) in miscellaneous current and other assets</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>1,836</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(1,741</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Decrease (increase) in receivables from affiliates</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>18</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Increase (decrease) in accounts payable<BR> and other liabilities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>7,931</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(5,320</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Other</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>459</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>172</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="72%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Net Cash (Used in) From Operations</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(2,782</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>16,558</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Investing Activities<BR> Capital Expenditures</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(18,745</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(13,869</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Acquisition of businesses, net of cash received</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(14,929</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>0</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Investments in and advances to affiliates</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>2,646</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(1,835</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Proceeds from sale of property, plant<BR> and equipment</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>69</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>578</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="72%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Net Cash Used in Investing Activities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(30,959</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(15,126</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Financing Activities<BR> Long-term (payments) borrowings&#151;net</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(972</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>3,153</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Short-term borrowings (payments)&#151;net</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>33,065</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(3,622</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Purchase of treasury stock</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(24,630</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(36,249</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Stock purchase and option plans</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>1,784</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>883</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="72%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Net Cash From (Used in) Financing Activities</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>9,247</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(35,835</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Effect of exchange rate changes on cash</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>2</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(646</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="72%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Decrease for the Period</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(24,492</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>)</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>(35,049</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>)</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Cash and equivalents at beginning of period</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>38,287</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>78,395</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="72%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="BOTTOM"> <TD WIDTH="72%"><FONT SIZE=2>Cash and equivalents at end of period</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>13,795</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>43,346</FONT></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="72%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="1%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2> <!-- ZEQ.=1,SEQ=5,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=5,FILE='DISK037:[00CHI2.00CHI1452]FE1452A.;12',USER='MWEINST',CD='11-FEB-2000;11:19' --> </FONT></P> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=3 > </FONT></H2> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="fg1452_andrew_corporation_notes_to_co__and02528"> </A></FONT><FONT SIZE=2><B>ANDREW CORPORATION<BR> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS </B></FONT></P> <P><FONT SIZE=2><B>NOTE A&#151;BASIS OF PRESENTATION</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;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&nbsp;10-Q and Rule&nbsp;10-01 of Regulation&nbsp;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&nbsp;31, 1999 are not necessarily indicative of the results that may be expected for the year ending September&nbsp;30, 2000. 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&nbsp;30, 1999.</FONT></P> <P><FONT SIZE=2><B>NOTE B&#151;EARNINGS PER SHARE</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth the computation of basic and diluted earnings per share:</FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="83%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="74%" ALIGN="LEFT"><FONT SIZE=2>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="24%" COLSPAN=5 ALIGN="CENTER"><FONT SIZE=1><B>Three Months Ended<BR> December&nbsp;31</B></FONT><HR NOSHADE></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="74%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1999</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="11%" COLSPAN=2 ALIGN="CENTER"><FONT SIZE=1><B>1998</B></FONT><HR NOSHADE></TH> </TR> <TR VALIGN="BOTTOM"> <TH WIDTH="74%" ALIGN="LEFT"><FONT SIZE=1>&nbsp;</FONT><BR></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="24%" COLSPAN=5 ALIGN="CENTER"><FONT SIZE=1><B>(In thousands, except per share amounts)<BR></B></FONT><BR></TH> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2><B>BASIC EARNINGS PER SHARE</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Numerator:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Numerator for net income per share</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>16,766</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>23,181</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Denominator:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Weighted average shares outstanding</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>81,161</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>83,814</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Net income per share&#151;basic</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>0.21</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>0.28</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>&nbsp;<BR></FONT><FONT SIZE=2><B>DILUTED EARNINGS PER SHARE</B></FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;<BR> &nbsp;</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Numerator:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Numerator for net income per share</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>16,766</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>23,181</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Denominator:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Weighted average shares outstanding</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>81,161</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>83,814</FONT></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Effect of dilutive securities:</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%"><FONT SIZE=2>&nbsp;</FONT></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Stock options</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>115</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>124</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE></TD> </TR> <TR BGCOLOR="White" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>81,276</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>83,938</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="11%" COLSPAN=2 ALIGN="RIGHT"><HR NOSHADE SIZE=4></TD> </TR> <TR BGCOLOR="#CCEEFF" VALIGN="TOP"> <TD WIDTH="74%"><FONT SIZE=2>Net income per share&#151;diluted</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>0.21</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>$</FONT></TD> <TD WIDTH="8%" ALIGN="RIGHT"><FONT SIZE=2>0.28</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Options to purchase 3,056,570 shares of common stock, at prices ranging from $15.13 - $38.17 per share, were not included in the computation of diluted earnings per share for the three months ended December&nbsp;1999 because the options' exercise prices were greater than the average market price of the common shares. Options to purchase 2,899,000 shares of common stock, at prices ranging from $17.11 - $38.17 per share, were not included in the December&nbsp;1998 diluted earnings per share calculation because the options' exercise prices were higher than the average market price of the common shares.</FONT></P> <P><FONT SIZE=2><B>NOTE C&#151;COMPREHENSIVE INCOME</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;1997, the FASB issued Statement of Financial Accounting Standards No.&nbsp;130, "Reporting Comprehensive Income." Statement No.&nbsp;130 establishes new rules for the reporting and display of <!-- ZEQ.=1,SEQ=6,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=6,FILE='DISK037:[00CHI2.00CHI1452]FG1452A.;10',USER='MWEINST',CD='11-FEB-2000;11:18' --> comprehensive income and its components. The adoption of this statement had no impact on the company's net income or stockholders' equity. Statement No.&nbsp;130 requires the company to report foreign currency translation adjustments, which were previously reported as a separate component of stockholders' equity, as a component of other comprehensive income. Prior year financial statements have been reclassified to conform with the requirements of Statement No.&nbsp;130. Comprehensive income for the three months ended December&nbsp;31, 1999 and 1998 amounted to $15,191,000 and $21,368,000 respectively.</FONT></P> <P><FONT SIZE=2><B>NOTE D&#151;RESTRUCTURING</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In March&nbsp;1999, the company initiated a plan to restructure the manufacturing operations of its towers and wireless accessories businesses, phase out of its AVS small aperture earth station product line and divest itself of its SciComm government electronics business.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;In connection with restructuring plans, approximately 600 employees and 280 temporary/contract workers will be terminated. Estimated employee termination costs of $5.2&nbsp;million were accrued in the second quarter of 1999. In addition to termination costs, the total restructuring reserve of $36.7 included a goodwill write-off of $14.1&nbsp;million, long-term lease commitments of $3.5&nbsp;million and inventory, equipment and other asset write-downs of $13.9&nbsp;million.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Actual costs charged against the restructuring liability in the first quarter of 2000 were $0.8&nbsp;million, including termination costs of $0.4&nbsp;million paid to 63 terminated employees and inventory write-downs of $0.4&nbsp;million. Cumulative costs that have been charged against the $36.7&nbsp;million restructuring liability since March&nbsp;of 1999 are $25.4&nbsp;million. This $25.4&nbsp;million includes termination cost of $3.2&nbsp;million paid to 487 terminated employees, a $14.1&nbsp;million goodwill write-off and inventory and other asset write-downs of $7.8&nbsp;million. The company expects to complete the restructuring prior to September&nbsp;30, 2000.</FONT></P> <P><FONT SIZE=2><B>NOTE E&#151;SEGMENT</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The company manages its business as one operating segment. This segment serves commercial markets, including coaxial cable, terrestrial microwave systems, wireless accessories and other products and services.</FONT></P> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="fg1452_item_2._management_s_discussio__ite03663"> </A></FONT><FONT SIZE=2><B>ITEM 2.&nbsp;&nbsp;MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL<BR> CONDITION AND RESULTS OF OPERATIONS </B></FONT></P> <P><FONT SIZE=2><B>RESULTS OF OPERATIONS</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Sales for the quarter ended December&nbsp;31, 1999 were $233.6&nbsp;million, 6.9% higher than the same period last fiscal year. The increase was due to growth in sales to the wireless infrastructure market, which increased significantly over the first quarter of last fiscal year. The wireless infrastructure market showed substantial increases in the U.S. and Asia. Sales to the fixed telecommunications network market decreased sharply due to a decrease in large terrestrial microwave antenna projects. Sales to the Broadcast and Government market were relatively flat. Wireless Accessory sales increased modestly.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;From a product standpoint coaxial cable sales increased significantly, driven by large increases in Asia, primarily China. Terrestrial microwave sales decreased. Special antennas and other products increased due mainly to equipment shelter and base station antenna sales to the wireless infrastructure market.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Gross margin as a percentage of sales was 32.6% in the first quarter compared to 36.4% in the first quarter of last fiscal year. The decrease in gross margin is mainly driven by competitive market conditions and increased pricing pressure in the cable market. On a sequential basis, gross margin improved 1.1% <!-- ZEQ.=2,SEQ=7,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=7,FILE='DISK037:[00CHI2.00CHI1452]FG1452A.;10',USER='MWEINST',CD='11-FEB-2000;11:18' --> from a gross margin percentage of 31.5% for the quarter ending September&nbsp;30, 1999. This improvement was due to increased volume and better product mix.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses as a percentage of sales were 21.9% in the first quarter of 2000, compared to 20.4% for the same period last fiscal year. This increase was due to additional research and development expense, which increased 71.3% from $5.6&nbsp;million to $9.6&nbsp;million as a result of accelerated efforts to develop new products and move into new markets. Sales and administrative expense remained flat at 17.8% of revenue for both the first quarter of fiscal years 2000 and 1999.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Interest expense remained relatively unchanged compared to the same period last fiscal year. Interest income decreased $1.6&nbsp;million compared to last fiscal year. The decrease was due to a decline in short term investments and in interest earned on advances to the company's Russian joint ventures. Other income increased $1.1&nbsp;million from an expense of $0.4&nbsp;million in the first quarter of 1999 to income of $0.7&nbsp;million in the first quarter of 2000. Other income is made up primarily of foreign exchange gains and losses. The increase in other income was driven by foreign exchange gains that were recognized by the company's European and Brazilian operations.</FONT></P> <P><FONT SIZE=2><B>LIQUIDITY</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Cash and cash equivalents decreased $24.5&nbsp;million during the first quarter of 2000 to $13.8&nbsp;million. Working capital totaled $277.8&nbsp;million compared to $303.9&nbsp;million at September&nbsp;30, 1999. The decrease in working capital in the quarter was primarily driven by the repurchase of 1.8&nbsp;million shares of stock for $24.6&nbsp;million. Management believes the current working capital level is adequate to meet the company's normal operating needs.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The company used $2.8&nbsp;million dollars to fund operations in the first quarter of 2000. The cash was used to increase inventories by $14.9&nbsp;million and accounts receivable by $24.6&nbsp;million. This was partially offset by an increase in accounts payable and other liabilities, which increased $7.9&nbsp;million. These increases were due to the growth in sales volumes that the company experienced in the quarter. Days sales in billed receivables increased from 73 days at December&nbsp;31, 1998 to 79 days at December&nbsp;31,1999. On a sequential basis, days sales in receivables decreased 2 days from 81 days at September&nbsp;30, 1999.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Net cash used in investing activities during the first quarter of fiscal year 2000 was $31.0&nbsp;million, including $18.7&nbsp;million spent on capital additions. Capital expenditures increased $4.9&nbsp;million from the first quarter of fiscal year 1999. The majority of this growth was due to increased expenditures for the company's management information systems. During the first quarter of 2000, the company acquired the capital stock of Conifer Corporation for $13.0&nbsp;million, net of cash acquired. Conifer Corporation designs and manufactures Multichannel Multipoint Distribution Service (MMDS) subscriber products, Wireless LAN equipment, and Direct Broadcast Satellite (DBS) accessories. The company also acquired a controlling interest in Comtier Corporation. The company had previously accounted for its minority investment in Comtier Corporation under the equity accounting method. Comtier Corporation manufactures and designs high-speed broad band modems that use satellite technology. The company decreased its investment in its Russian joint telecommunications ventures by $2.6&nbsp;million primarily due to a dividend received in the first quarter of 2000.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;Net cash generated from financing activities totaled $9.2&nbsp;million for the first quarter of the fiscal year 2000. The company repurchased 1.8&nbsp;million shares of stock for $24.6&nbsp;million. The company has purchased 11.8&nbsp;million of the 15.0 million shares that the company's Board of Directors has authorized to be repurchased. The company increased its net short-term borrowings by $33.1 million. This was driven by a $34.5&nbsp;million dollar increase in the company's revolving line of credit with Bank of America. The company decreased its net long term borrowing by $1.0&nbsp;million. This was due to the company paying off higher interest rate debt that had been acquired as part of the Chesapeake Microwave Technologies Inc. acquisition and the Conifer Corporation acquisition. <!-- ZEQ.=3,SEQ=8,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=8,FILE='DISK037:[00CHI2.00CHI1452]FG1452A.;10',USER='MWEINST',CD='11-FEB-2000;11:18' --> </FONT></P> <P><FONT SIZE=2><B>YEAR 2000</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;The company has not experienced any problems with its management information systems or with third parties related to Year 2000 issues. It is possible that Year 2000 compliance problems exist that have not been identified yet. The company has devoted the resources necessary to ensure that all Year 2000 issues have been properly addressed. However, there can be no assurance that all Year 2000 problems have been detected. Further, there can be no assurance that all Year 2000 problems that may occur with third party vendors and suppliers have been detected. Amounts expended on information technology systems exclusively to ensure year 2000 compliance were not material to the company's consolidated results of operations or financial position.</FONT></P> <P><FONT SIZE=2><B>RISK FACTORS</B></FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Safe Harbor for Forward-Looking Statements.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;We have made forward-looking statements in this Form&nbsp;10-Q under "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of the company. Although we have based these statements on the beliefs and assumptions of our management and on information currently available to them, they are subject to risks and uncertainties. We wish to ensure that such statements are accompanied by meaningful cautionary statements, so as to obtain the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Accordingly, such statements are qualified by reference to the discussion below of certain important factors that could cause actual results to differ materially from those projected in such forward-looking statements.</FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;We caution the reader that the list of factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such risk factors, nor can we assess the impact, if any, of such risk factors on our business or the extent to which any factors may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, you should not put undue reliance on any 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. While Andrew Corporation's management is optimistic about the company's long-term prospects, the following risks and uncertainties, among others, should be considered in evaluating its growth outlook.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Share Price Volatility.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;The market price of our common stock is very volatile. We believe the price fluctuates in response to changes in the company's sales, net income and cash flow; volatility in the U.S. stock market in general and in wireless equipment stocks in particular; changes in analysts' estimates; and changes in general economic conditions. We expect that the price of our common stock will fluctuate in the future, perhaps substantially.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Fluctuations in Operating Results.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;Historically our quarterly and annual revenues and operating results have fluctuated. We expect similar fluctuations in the future. In addition to general economic and political conditions, the following factors affect our revenues: timing of significant customer orders, inability to forecast future revenue due to our just-in-time supply approach, changes in competitive pricing, and wide variations in profitability by product line. Since our quarterly and annual revenues and operating results vary, we believe that period-to-period comparisons are not necessarily meaningful and you should not rely on such comparisons as indicators of our future performance.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Impact of restructuring.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;We believe that our current restructuring efforts will generate significant cost savings. The cost savings are dependent upon the company's ability to divest the SciComm government electronics business, to outsource tower production, and to relocate the wireless accessory production to a lower cost manufacturing facility. <!-- ZEQ.=4,SEQ=9,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=9,FILE='DISK037:[00CHI2.00CHI1452]FG1452A.;10',USER='MWEINST',CD='11-FEB-2000;11:18' --> </FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Intense Competition and Pricing Pressure.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;We consider our principal competitive factors to include product quality and performance, service and support, pricing and proprietary technology. We believe we must respond effectively to increased competitive pressure. Over the past three years, in response to aggressive pricing practices by our competitors, we have significantly lowered prices for most of our products. If we are unable to compete successfully, we may lose market share. We expect that a significant loss in market share would have a material negative effect on our business, financial condition and operating results.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Rapid Technological Change and Pressure to Develop New Products.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;We believe that our future success depends on our ability to effectively anticipate and respond to changes in technology, customer needs and industry standards. Failure to anticipate changes, to adapt current products, to develop and introduce new products on a timely basis, or to gain market acceptance for new products would impair our competitiveness and could have a material negative impact on our business and operating results.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;International Risk.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;Over half of our sales are outside the United States and in recent years we have significantly increased our international manufacturing capabilities. We anticipate that international sales will continue to represent a substantial portion of our revenues and that continued growth and profitability will require further international expansion. International business risks include currency fluctuations, tariffs and other trade barriers, longer customer payment cycles, adverse taxes, restrictions on the repatriation of earnings, compliance with local laws and regulations, political and economic instability, and difficulties in managing and staffing operations. We believe that international risk factors could materially impact our future sales, financial condition and operating results.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Ability to Attract and Retain Qualified People.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;We believe that our future success significantly depends on our ability to attract and retain highly qualified personnel. We cannot be sure that we will be able to attract and retain key personnel in the future. We believe our inability to do so could negatively impact our business, financial condition and operating results.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Year 2000 Compliance.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;We have not yet experienced any Year 2000 issues. We believe that our business, manufacturing and facilities systems are Year 2000 compliant. It is possible that Year 2000 compliance problems exist that have not been identified yet. The company has devoted the resources necessary to ensure that all Year 2000 issues have been properly addressed. However, there can be no assurance that all Year 2000 problems have been detected. Further, there can be no assurance that all Year 2000 problems that may occur with third party vendors and suppliers have been detected. Our failure to detect and address our own and third-party Year 2000 problems could have a significant negative impact on our business, financial condition and results of operations.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Dependence on Intellectual Property Rights.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;Others could obtain or use our intellectual property without our permission, develop equivalent or superior technology, or claim that we have infringed on their intellectual property rights. We rely on a combination of patent, copyright, trademark and trade secret laws, and non-disclosure and non-competition agreements to protect our rights. We are dependent on our intellectual property rights as a whole; however, we do not believe that the loss of exclusivity with respect to any one right would have a significant negative impact on our business, financial condition or operating results.</FONT></P> <P><FONT SIZE=2><B>&nbsp;&nbsp;&nbsp;&nbsp;Impact of Governmental Regulation.</B></FONT><FONT SIZE=2>&nbsp;&nbsp;We are not directly regulated in the U.S., but most of our customers and the telecommunications industry generally are subject to Federal Communications Commission regulation. We believe that regulatory changes could have a significant negative effect on our business and operating results by restricting our customers' development efforts, making current products obsolete or increasing competition. Internationally, where many of our customers are government owned and operated entities, we also are at risk of changes in economic policy and communications regulation. In addition, our joint ventures in Russia and Mexico require telecommunications licenses, which may limit or otherwise affect the operations of the ventures. <!-- ZEQ.=5,SEQ=10,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=10,FILE='DISK037:[00CHI2.00CHI1452]FG1452A.;10',USER='MWEINST',CD='11-FEB-2000;11:18' --> </FONT></P> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <P ALIGN="CENTER"><FONT SIZE=2><B>PART II&#151;OTHER INFORMATION</B></FONT></P> <P><FONT SIZE=2><B>Item 6.&nbsp;&nbsp;Exhibits and reports on Form 8-K</B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;a)&nbsp;&nbsp;EXHIBIT INDEX</FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="75%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="BOTTOM"> <TH WIDTH="9%" ALIGN="CENTER"><FONT SIZE=1><B>Exhibit No.</B></FONT><HR NOSHADE></TH> <TH WIDTH="2%"><FONT SIZE=1>&nbsp;</FONT></TH> <TH WIDTH="89%" ALIGN="LEFT"><FONT SIZE=1><B>Description<BR></B></FONT><HR NOSHADE></TH> </TR> <TR VALIGN="TOP"> <TD WIDTH="9%" ALIGN="RIGHT"><FONT SIZE=2>27</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="89%"><FONT SIZE=2>Financial Data Schedule December&nbsp;31, 1999</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Reports on Form 8-K</FONT></P> <P><FONT SIZE=2>No reports on Form 8-K were filed during the quarter ended December&nbsp;31, 1999. <!-- ZEQ.=1,SEQ=11,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=11,FILE='DISK037:[00CHI2.00CHI1452]JA1452A.;11',USER='MWEINST',CD='11-FEB-2000;11:18' --> </FONT></P> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=3 > </FONT></H2> <BR> <P ALIGN="CENTER"><FONT SIZE=2><A NAME="jc1452_signatures"> </A></FONT><FONT SIZE=2><B>SIGNATURES </B></FONT></P> <P><FONT SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;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.</FONT></P> <!-- User-specified TAGGED TABLE --> <TABLE WIDTH="76%" BORDER=0 CELLSPACING=0 CELLPADDING=0> <TR VALIGN="TOP"> <TD WIDTH="5%"><FONT SIZE=2>Date</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="34%"><FONT SIZE=2>February&nbsp;11, 2000</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;</FONT></TD> <TD WIDTH="56%"><FONT SIZE=2>/s/&nbsp;</FONT><FONT SIZE=2>F. L. ENGLISH</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> F. L. English<BR> Chairman, President and Chief Executive Officer</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;<BR> Date</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="34%"><FONT SIZE=2>&nbsp;<BR> February&nbsp;11, 2000</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="56%"><FONT SIZE=2>&nbsp;<BR> /s/&nbsp;</FONT><FONT SIZE=2>C. R. NICHOLAS</FONT><FONT SIZE=2>&nbsp;&nbsp;&nbsp;</FONT><HR NOSHADE><FONT SIZE=2> C. R. Nicholas<BR> Executive Vice President and Chief Financial Officer</FONT></TD> </TR> <TR VALIGN="TOP"> <TD WIDTH="5%"><FONT SIZE=2>&nbsp;<BR> &nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="34%"><FONT SIZE=2>&nbsp;<BR> &nbsp;<BR> &nbsp;</FONT></TD> <TD WIDTH="2%"><FONT SIZE=2>&nbsp;<BR>&nbsp;<BR>&nbsp;</FONT></TD> <TD WIDTH="56%"><FONT SIZE=2>&nbsp;<BR> &nbsp;<BR> &nbsp;</FONT></TD> </TR> </TABLE> <!-- end of user-specified TAGGED TABLE --> <P><FONT SIZE=2> <!-- ZEQ.=1,SEQ=12,EFW="2003383",CP="ANDREW CORPORATION",DN="1",FOLIO=12,FILE='DISK037:[00CHI2.00CHI1452]JC1452A.;8',USER='MWEINST',CD='11-FEB-2000;11:18' --> </FONT></P> <!-- Generated by Merrill Corporation (www.merrillcorp.com) --> <H2><FONT SIZE=3 ><A NAME="00CHI1452_1">QuickLinks</A></FONT></H2> <!-- TOC_BEGIN --> <P><FONT SIZE=2><A HREF="#fa1452_index_andrew_corporation">INDEX ANDREW CORPORATION</A></FONT><BR> </P> <!-- TOC_END --> <!-- TOC_BEGIN --> <P><FONT SIZE=2><A HREF="#fc1452_andrew_corporation_cons__fc102357">ANDREW CORPORATION CONSOLIDATED BALANCE SHEET (In Thousands)</A></FONT><BR> <FONT SIZE=2><A HREF="#fc1452_andrew_corporation_consolidate__and04024">ANDREW CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts)</A></FONT><BR> </P> <!-- TOC_END --> <!-- TOC_BEGIN --> <P><FONT SIZE=2><A HREF="#fe1452_consolidated_statements_of_cas__con02382">CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)</A></FONT><BR> </P> <!-- TOC_END --> <!-- TOC_BEGIN --> <P><FONT SIZE=2><A HREF="#fg1452_andrew_corporation_notes_to_co__and02528">ANDREW CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</A></FONT><BR> <FONT SIZE=2><A HREF="#fg1452_item_2._management_s_discussio__ite03663">ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</A></FONT><BR> </P> <!-- TOC_END --> <!-- TOC_BEGIN --> <P><FONT SIZE=2><A HREF="#jc1452_signatures">SIGNATURES</A></FONT><BR> </P> <!-- TOC_END --> </BODY> </HTML>

2000

0QTR1

APD

https://www.sec.gov/Archives/edgar/data/2969/0000002969-00-000006.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, PQZNflHmR1Vwjrs7S8+U2P2P+BjJLUS6FdS3iWM9s6oJjCI3kuYMSFuyeW6yjWoj GHiUqu3pu1SOb88uImkRYg== <SEC-DOCUMENT>0000002969-00-000006.txt : 20000214 <SEC-HEADER>0000002969-00-000006.hdr.sgml : 20000214 ACCESSION NUMBER: 0000002969-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: SEC FILE NUMBER: 001-04534 FILM NUMBER: 532794 BUSINESS ADDRESS: STREET 1: 7201 HAMILTON BLVD CITY: ALLENTOWN STATE: PA ZIP: 18195-1501 BUSINESS PHONE: 6104814911 MAIL ADDRESS: STREET 1: 7201 HAMILTON BLVD CITY: ALLENTOWN STATE: PA ZIP: 18195-1501 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FOR PERIOD ENDING 31 DECEMBER 1999 <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 31 December 1999 ---------------- 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 2000 -------------------------- --------------------------------- Common Stock, $1 par value 229,305,191 <PAGE> <TABLE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries INDEX <CAPTION> Page No. Part I. Financial Information <S> <C> Consolidated Balance Sheets - 31 December 1999 and 30 September 1999 ........................ 3 Consolidated Income - Three Months Ended 31 December 1999 and 1998 .................. 4 Consolidated Statement of Comprehensive Income Three Months Ended 31 December 1999 and 1998 .................. 5 Consolidated Cash Flows - Three Months Ended 31 December 1999 and 1998 .................. 6 Summary by Business Segments - Three Months Ended 31 December 1999 and 1998 .................. 7 Summary by Geographic Regions - Three Months Ended 31 December 1999 and 1998 .................. 9 Notes to Consolidated Financial Statements ....................... 10 Management's Discussion and Analysis ............................. 11 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ........................ 19 Signatures ....................................................... 20 </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> <TABLE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries CONSOLIDATED BALANCE SHEETS <CAPTION> (Millions of dollars) - ------------------------------------------------------------------------------------------- 31 December 30 September ASSETS 1999 1999 (Unaudited) - ------------------------------------------------------------------------------------------- <S> <C> <C> CURRENT ASSETS Cash and cash items $ 79.5 $ 61.6 Trade receivables, less allowances for 921.5 894.7 doubtful accounts Inventories 430.5 424.9 Contracts in progress, less progress billings 95.9 79.8 Other current assets 335.7 321.4 - ------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,863.1 1,782.4 - ------------------------------------------------------------------------------------------- INVESTMENTS IN NET ASSETS OF AND ADVANCES 492.5 521.4 TO EQUITY AFFILIATES OTHER INVESTMENTS AND ADVANCES 38.9 38.4 - ------------------------------------------------------------------------------------------- PLANT AND EQUIPMENT, at cost 10,381.5 10,187.9 Less - Accumulated depreciation 5,055.5 4,995.0 - ------------------------------------------------------------------------------------------- PLANT AND EQUIPMENT, net 5,326.0 5,192.9 - ------------------------------------------------------------------------------------------- GOODWILL 339.0 350.4 OTHER NONCURRENT ASSETS 455.4 350.0 - ------------------------------------------------------------------------------------------- TOTAL ASSETS $8,514.9 $8,235.5 =========================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------- CURRENT LIABILITIES Payables, trade and other $ 554.8 $ 505.8 Accrued liabilities 494.5 407.0 Accrued income taxes 61.5 64.4 Short-term borrowings 763.7 407.6 Current portion of long-term debt 321.0 473.0 - ------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,195.5 1,857.8 - ------------------------------------------------------------------------------------------- LONG-TERM DEBT 2,010.3 1,961.6 DEFERRED INCOME & OTHER NONCURRENT LIABILITIES 505.8 596.1 DEFERRED INCOME TAXES 745.7 731.1 - ------------------------------------------------------------------------------------------- TOTAL LIABILITIES 5,457.3 5,146.6 - ------------------------------------------------------------------------------------------- MINORITY INTERESTS IN SUBSIDIARY COMPANIES 128.3 127.3 - ------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, par value $1 per share 249.4 249.4 Capital in excess of par value 342.4 341.5 Retained earnings 3,714.0 3,701.8 Accumulated other comprehensive income (323.2) (274.4) Treasury Stock, at cost (681.6) (681.6) Shares in trust (371.7) (375.1) - ------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 2,929.3 2,961.6 - ------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,514.9 $8,235.5 =========================================================================================== </TABLE> 3 <PAGE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries CONSOLIDATED INCOME (Unaudited) <TABLE> <CAPTION> (Millions of dollars, except per share) - -------------------------------------------------------------------------------------------------- Three Months Ended 31 December 1999 1998 - -------------------------------------------------------------------------------------------------- <S> <C> <C> SALES AND OTHER INCOME Sales $1,264.4 $1,274.6 Other income (expense), net 6.8 4.9 - -------------------------------------------------------------------------------------------------- 1,271.2 1,279.5 - -------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of sales 877.1 875.6 Selling and administrative 167.8 183.2 Research and development 30.1 31.7 - -------------------------------------------------------------------------------------------------- OPERATING INCOME 196.2 189.0 Income from equity affiliates, net of related expenses 20.3 9.8 Net gain on formation of polymer venture -- 31.2 Loss on currency hedges related to BOC transaction 113.2 -- and preacquisition expenses Interest expense 41.3 40.4 - -------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES AND MINORITY INTEREST 62.0 189.6 Income taxes 9.1 59.9 Minority interest (a) 2.3 3.3 - -------------------------------------------------------------------------------------------------- NET INCOME $50.6 $126.4 ================================================================================================== BASIC EARNINGS PER COMMON SHARE $.24 $.60 - -------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER COMMON SHARE $.23 $.59 - -------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON 213.2 211.4 SHARES (in millions) - -------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON 215.5 215.4 AND COMMON EQUIVALENT SHARES (in millions)(b) - -------------------------------------------------------------------------------------------------- DIVIDENDS DECLARED PER COMMON SHARE - Cash $.18 $.17 - -------------------------------------------------------------------------------------------------- </TABLE> (a) Minority interest primarily includes before-tax amounts. (b) The dilution of earnings per common share is due mainly to the impact of unexercised stock options. 4 <PAGE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited) <TABLE> <CAPTION> (Millions of dollars) - -------------------------------------------------------------------------------------------------- Three Months Ended 31 December 1999 1998 - -------------------------------------------------------------------------------------------------- <S> <C> <C> NET INCOME $50.6 $126.4 - -------------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME (LOSS), net of tax Foreign currency translation adjustments (44.8) 24.3 Unrealized gains (losses) on investments: Unrealized holding gains (losses) arising during the (4.0) 3.9 period Less: reclassification adjustment for gains included -- -- in net income - -------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on investments (4.0) 3.9 - -------------------------------------------------------------------------------------------------- TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (48.8) 28.2 - -------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $1.8 $154.6 ================================================================================================== </TABLE> 5 <PAGE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries CONSOLIDATED CASH FLOWS (Unaudited) <TABLE> <CAPTION> (Millions of dollars) - --------------------------------------------------------------------------------------------- Three Months Ended 31 December 1999 1998 <S> <C> <C> - --------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $50.6 $126.4 Adjustments to reconcile income to cash provided by operating activities: Depreciation 131.7 127.8 Deferred income taxes 3.2 21.4 Gain on formation of polymer venture -- (31.2) (Gain) loss on currency hedges related to BOC transaction 109.3 -- Undistributed (earnings) losses of unconsolidated affiliates (13.2) 6.7 (Gain) loss on sale of assets and investments (4.4) .5 Other (10.2) 58.5 Working capital changes that provided (used) cash, net of effects of acquisitions: Trade receivables (27.9) 6.7 Inventories and contracts in progress (20.5) (47.5) Payables, trade and other 43.8 2.1 Other (13.6) 1.7 - --------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 248.8 273.1 - --------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to plant and equipment (194.4) (189.5) Acquisitions, less cash acquired (162.7) (4.6) Investment in and advances to unconsolidated affiliates (16.0) (50.4) Proceeds from sale of assets and investments 16.1 17.3 Other (13.7) 14.7 - --------------------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (370.7) (212.5) - --------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Long-term debt proceeds 4.2 .8 Payments (proceeds) on long-term debt (161.6) 4.2 Net increase (decrease) in commercial paper 290.6 (16.1) Net increase (decrease) in other short-term borrowings 44.7 (1.2) Dividends paid to shareholders (38.4) (36.0) Purchase of Treasury Stock -- (24.6) Other .3 7.6 - --------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 139.8 (65.3) - --------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash -- 1.0 Increase (decrease) in Cash and Cash Items 17.9 (3.7) Cash and Cash Items - Beginning of Year 61.6 61.5 - --------------------------------------------------------------------------------------------- Cash and Cash Items - End of Period $79.5 $57.8 ============================================================================================= </TABLE> 6 <PAGE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries SUMMARY BY BUSINESS SEGMENTS (Unaudited) <TABLE> <CAPTION> Business segment information is shown below: (Millions of dollars) - -------------------------------------------------------------------------------- Three Months Ended 31 December 1999 1998 - -------------------------------------------------------------------------------- <S> <C> <C> Revenues from external customers Gases $780.6 $753.3 Equipment 50.6 119.5 Chemicals 433.2 401.8 - -------------------------------------------------------------------------------- Segment Totals 1,264.4 1,274.6 - -------------------------------------------------------------------------------- Consolidated Totals $1,264.4 $1,274.6 - -------------------------------------------------------------------------------- Operating income Gases $153.3 $121.5(a) Equipment 1.2 22.8(a) Chemicals 51.6 50.8(a) - -------------------------------------------------------------------------------- Segment Totals 206.1 195.1 - -------------------------------------------------------------------------------- Corporate research and development and other (9.9) (6.1)(a) income/(expense) - -------------------------------------------------------------------------------- Consolidated Totals $196.2 $189.0 - -------------------------------------------------------------------------------- Operating income (excluding special items) Gases $153.3 $137.8 Equipment 1.2 24.7 Chemicals 51.6 52.4 - -------------------------------------------------------------------------------- Segment Totals 206.1 214.9 - -------------------------------------------------------------------------------- Corporate research and development and other (9.9) (5.6) income/(expense) - -------------------------------------------------------------------------------- Consolidated Totals $196.2 $209.3 - -------------------------------------------------------------------------------- Equity affiliates' income Gases $16.4 $6.7 Equipment .3 .5 Chemicals 3.6 2.1 Other -- .5 - -------------------------------------------------------------------------------- Segment Totals 20.3 9.8 - -------------------------------------------------------------------------------- Consolidated Totals $20.3 $9.8 - -------------------------------------------------------------------------------- Total assets Gases $6,203.8 $5,506.4 Equipment 252.7 299.6 Chemicals 1,689.5 1,712.7 - -------------------------------------------------------------------------------- Segment Totals 8,146.0 7,518.7 - -------------------------------------------------------------------------------- Corporate assets 368.9 200.2 - -------------------------------------------------------------------------------- Consolidated Totals $8,514.9 $7,718.9 - -------------------------------------------------------------------------------- </TABLE> 7 <PAGE> Operating Return On Net Assets (ORONA) Gases 10.5% 11.2% Equipment 4.9% 24.9% Chemicals 12.5% 15.8% - -------------------------------------------------------------------------------- Segment Totals 10.8% 12.8% - -------------------------------------------------------------------------------- Consolidated Totals 10.0% 12.0% - -------------------------------------------------------------------------------- (a) The results for the three months ended 31 December 1998 include the global cost reduction plan charge in Gases ($16.3 million), Equipment ($1.9 million), Chemicals ($1.6 million), and Corporate ($.5 million). A reconciliation of total segment operating income to consolidated income before income taxes and minority interest is as follows: (Millions of dollars) - -------------------------------------------------------------------------------- Three Months Ended 31 December 1999 1998 - -------------------------------------------------------------------------------- Total segment operating income $206.1 $195.1 Corporate research and development and other (9.9) (6.1) income/(expense) - -------------------------------------------------------------------------------- Consolidated operating income 196.2 189.0 - -------------------------------------------------------------------------------- Segment equity affiliates' income 20.3 9.8 Net gain on formation of polymer venture -- 31.2 Loss on currency hedges related to BOC transaction 113.2 -- and preacquisition expenses Interest expense 41.3 40.4 - -------------------------------------------------------------------------------- Consolidated income before taxes and minority $62.0 $189.6 interest ================================================================================ 8 <PAGE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries SUMMARY BY GEOGRAPHIC REGIONS (Unaudited) (Millions of dollars) - -------------------------------------------------------------------------------- Three Months Ended 31 December 1999 1998 - -------------------------------------------------------------------------------- Revenues from external customers United States $839.2 $807.9 - -------------------------------------------------------------------------------- United Kingdom 121.1 171.0 Spain 76.8 84.4 Other Europe 140.8 143.9 - -------------------------------------------------------------------------------- Total Europe 338.7 399.3 - -------------------------------------------------------------------------------- Canada/Latin America 58.4 58.0 Asia 28.0 9.3 All Other .1 .1 - -------------------------------------------------------------------------------- Total $1,264.4 $1,274.6 - -------------------------------------------------------------------------------- Note: Geographic information is based on country of origin. The other Europe segment operates principally in France, Germany, Netherlands, and Belgium. 9 <PAGE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the computation of basic and diluted earnings per share: (Millions, except per share) Three months ended 31 December 1999 1998 - ---------------------------------------------------------------------------- Numerator for basic EPS and diluted EPS-net income $50.6 $126.4 Denominator for basic EPS - -weighted average shares 213.2 211.4 Effect of dilutive securities: Employee stock options 1.6 3.0 Other award plans .7 1.0 ------------------------------------ 2.3 4.0 Denominator for diluted EPS - -weighted average shares and assumed conversions 215.5 215.4 ==================================== Basic EPS $.24 $.60 ==================================== Diluted EPS $.23 $.59 ==================================== Options on 6.6 million and 8.1 million shares of common stock were not included in computing diluted EPS for the first quarter of fiscal 2000 and 1999, respectively because their effects were antidilutive. The results for the three months ended 31 December 1999 include a charge of $113.2 million ($70.6 million after-tax, or $.33 per share) for costs related to the BOC acquisition. Of this amount, $109.3 million ($68.2 million after-tax, or $.32 per share) of accounting charges were recorded on purchased currency option and forward exchange contracts entered into to hedge the currency exposure of the BOC acquisition. The remaining charge of $3.9 million ($2.4 million after-tax, or $.01 per share) consists of preacquisition expenses including $2.4 million of credit facility fees. The results for the three months ended 31 December 1998 include a net gain of $31.2 million ($21.4 million after-tax, or $.10 per share) related to the formation of Air Products Polymers (a 65% majority owned venture with Wacker-Chemie GmbH). The gain was partially offset by costs related to an emulsions facility shutdown not included in the joint venture and for costs related to indemnities provided by Air Products to the venture. In December 1998, the Company committed to a global cost reduction plan. The plan included a staffing reduction of 206 employees in the areas of manufacturing, distribution and overhead. $20.3 million ($12.9 million after-tax, or $.06 per share) related to employee termination benefits was charged to expense in the fiscal quarter ended 31 December 1998. The final expense and number of positions eliminated is essentially as planned. The charges to cost of sales, selling and administrative and research and development were $9.9 million, $9.3 million and $1.1 million, respectively. 10 <PAGE> AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS FIRST QUARTER FISCAL 2000 VS. FIRST QUARTER FISCAL 1999 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Consolidated Sales in the first quarter of fiscal 2000 were $1,264.4 million, slightly less than 1% lower than the same quarter in the prior year. Operating income was $196.2 million, up $7.2 million or 4%. Profits of equity affiliates increased $10.5 million to $20.3 million for the three months ended 31 December 1999. Net income was $50.6 million, or $.23 diluted earnings per share, compared to net income of $126.4 million, or $.59 diluted earnings per share, in the year-ago quarter. The current year included a significant special item, an after-tax charge of $70.6 million, or $.33 per share, related to the BOC acquisition. A large majority of this amount relates to the accounting charges recorded on purchased currency option and forward exchange contracts entered into to hedge the currency exposure of the BOC acquisition. The prior year included two special items: an after-tax gain of $21.4 million, or $.10 per share related to the formation of Air Products Polymers and an after-tax charge of $12.9 million, or $.06 per share for a global cost reduction plan. Excluding the special items, current year net income is $121.2 million compared to $117.9 million in the prior year, up 3%. Diluted earnings per share are $.56, up 2% over the prior year's $.55 diluted earnings per share, excluding special items. Consolidated sales are down about 1% from the prior year. Excluding a 2% unfavorable foreign currency impact, consolidated sales are up 1%. Sales in the gases and chemicals segments essentially offset the anticipated decline in activity in the equipment segment. Gases volumes experienced improvement in the metals, chemical process, and electronics end markets. Chemicals sales were up on broad based volume gains. Operating income was 6% below the prior year, excluding the charge for the global cost reduction plan in the prior year. An 11% improvement in the gases segment operating income was not able to offset the impact of declining activity in the equipment segment. Chemicals operating income declined 2% as higher volumes were more than offset by raw material cost increase impacts on margins. Selling and administrative overheads were down 4%, excluding the prior year global cost reduction charge. Currency and exchange related impacts reduced the year-to-year comparison by about 4%. Equity affiliates' income increased due to improved activity at several gas affiliates, particularly Mexico and Korea. Additionally, there were favorable currency and exchange impacts relative to the prior year. Industrial Gases-Sales increased 4% to $780.6 million in the first quarter of fiscal 2000. Excluding unfavorable currency impacts relative to the prior year, sales 11 <PAGE> increased 7%. Prior year acquisitions contributed about 2% to the sales growth rate. Operating income increased $31.8 million to $153.3 million. Excluding the impact of the global cost reduction plan in fiscal 1999, operating income of $153.3 million is up $15.5 million, or 11%. Overall gases volumes grew about 8%, with strong growth performance in the electronics and chemical process end markets. LOX/LIN volumes in North America were up 2% including non-cryo. LOX/LIN pricing was down about 1% from the prior year with a slowing in decline observed as pricing actions take effect. Packaged gases volumes in North America were up 3% on a same store basis. Overall tonnage gas volumes were up 5% in North America, with metals volumes improved as steel demand increased, and strong HYCO volumes in the chemicals process industry. In Europe, LOX/LIN volumes including non-cryo, increased 7%. LOX/LIN pricing was down about 1%. Packaged gases volumes increased 4% over the prior year. Southern Europe continues strong performance, while there are some indications of improving volumes in Northern Europe. European tonnage volumes grew 7%, with higher demand for GOX/GAN from steel and process industry customers. A customer outage in Rotterdam resulted in lower HYCO volumes. Asian sales were up due to improved demand in China, Singapore, and Malaysia, coupled with the impact of prior year acquisitions. Higher volumes, particularly in the electronics specialty gases and Schumacher products as well as improved Asian business helped increase operating income 11%, excluding the impact of the prior year cost reduction charge. Somewhat offsetting the favorable volume impacts were feedstock supply, higher natural gas costs which impacted the North American hydrogen results, and unfavorable currency effects. A customer outage in Rotterdam also constrained the operating income growth. The gases segment operating margin was 19.6%, up 1.3% from the prior year. The strong performance in electronics and Asia, combined with overhead cost control drove the increase. Gases equity affiliates' income of $16.4 million was up $9.7 million over the prior year, due to currency and exchange impacts and higher performance in Mexico and Korea. In December 1999, the Company purchased the remaining 51.1 percent of the shares in the Korean affiliate and will begin consolidating this business in the second fiscal quarter. Equipment-Sales were $50.6 million in the first quarter of fiscal 2000, compared to $119.5 million in fiscal 1999, down $68.9 million. Operating income of $1.2 million was down from the prior year by $21.6 million. Excluding the impact of the prior year cost reduction charge, the operating income decline was $23.5 million. The sales and operating income decline reflects lower project activity levels in all product areas. The sales backlog for the equipment segment at 31 December 1999 was $144 million. This compares to $175 million at 30 September 1999 and $212 million at 31 December 1998. Delays in customer capital spending plans caused expected orders not to materialize. 12 <PAGE> Chemicals-Sales in the first quarter of fiscal 2000 of $433.2 million were up 8%, or $31.4 million. Operating income increased $.8 million from the prior year. Excluding the impact of the cost reduction plan charge in 1999, operating income of $51.6 million was down 2%. Broad based volume gains were 12% higher. In the polymers business, emulsion volumes had strong demand from the paper and non-woven end markets. Polyvinyl alcohol (PVOH) volumes were at record levels based on strength in the textile and adhesive markets. Volumes were up 14% overall in the performance chemicals business, including improvement in Asian activity. Volumes were up in both the polyurethane intermediates and amines businesses, but impacted by expected customer outages. The operating income decline resulted from raw material cost increases, primarily in the polymers business, combined with price reductions in selected products. A planned plant turnaround also reduced operating income. The impact of these cost and price factors was a decline in the segment operating margin of 1.1%, to 11.9% from the prior year. The Company has engaged Goldman, Sachs & Co. to assess strategic alternatives in the PVOH business. Sales from this business in fiscal 1999 were about $200 million. Equity affiliates' income for the first quarter of fiscal 2000 was $3.6 million, up $1.5 million from the prior year. This increase reflects the improved performance of the Company's 20% interest in the redispersible powders venture formed in the first quarter of the prior year. INTEREST Interest expense of $41.3 million is up $.9 million, or 2% over the prior year. The increase is primarily due to higher debt. INCOME TAXES The current year consolidated effective tax rate is 15.3%, after minority interest of $2.3 million. This compares to a rate of 32.2% in the prior year. The fiscal 2000 rate is significantly impacted by a higher tax rate on the BOC acquisition hedging transactions. Excluding this tax impact, the effective rate for the current quarter is 29.9%. The effective rate in the prior year, excluding the tax rate impact of the gain on the formation of the polymer ventures and the global cost reduction, was 32.8%. The rate decrease from 32.8% to 29.9% is due to higher after-tax equity affiliate income and tax credits. It is anticipated that the Company's effective tax rate related to its current operations will increase upon acquisition of BOC due to the non-tax deductibility of goodwill and the loss of foreign tax credits. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures during the first three months of fiscal 2000 totaled $404.8 million compared to $245.4 million in the corresponding period of the prior year. Additions to plant and equipment increased from $189.5 million during the first three 13 <PAGE> months of fiscal 1999 to $194.4 million during the current period. Investments in unconsolidated affiliates were $16.0 million during the first three months of fiscal 2000 versus $50.4 million last year. The prior year results include a cash contribution of $33.5 million related to the formation of the redispersible powders venture with Wacker-Chemie GmbH. Expenditures for acquisitions increased from $4.6 million during the first three months of fiscal 1999 to $162.7 million during the current period. The current year amount includes the acquisition of the remaining 51.1 percent of the shares in Korea Industrial Gases Ltd. (KIG), the largest industrial gas company in Korea. The joint acquisition of BOC by Air Products and Air Liquide is expected to close in mid-fiscal 2000 at a cost of approximately $6 billion to Air Products. Other capital expenditures are expected to be approximately $1.2 billion in fiscal 2000. Bridge financing for the acquisition will be in the form of commercial paper backed by a committed bank facility that has been executed or direct borrowing against the facility. It is anticipated the permanent financing will be accomplished by a combination of debt and equity. The other 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 2000 ($248.8 million) combined with proceeds from the sale of assets and investments ($16.1 million) and proceeds from commercial paper and other short- term borrowings ($335.3) were used largely for capital expenditures ($404.8 million), long-term debt repayments ($157.4 million) and cash dividends ($38.4 million). Cash and cash items increased $17.9 million from $61.6 million at the beginning of the fiscal year to $79.5 million at 31 December 1999. The net increase in commercial paper was $290.6 million. Total debt at 31 December 1999 and 30 September 1999, expressed as a percentage of the sum of total debt and shareholders' equity, was 51% and 49%, respectively. Total debt increased from $2,842.2 million at 30 September 1999 to $3,095.0 million at 31 December 1999. There was $653.6 million of commercial paper outstanding at 31 December 1999. In the first three months of fiscal 2000, the Company added an additional $300 million revolving credit commitment. The Company's total revolving credit commitments amounted to $900.0 million at 31 December 1999. No borrowings were outstanding under these commitments. Additional commitments totaling $85.1 million are maintained by the Company's foreign subsidiaries, of which $16.6 million was utilized at 31 December 1999. During fiscal 1999, a bank credit facility was executed to ensure the availability of funding to finance the anticipated acquisition of BOC. The facility consists of two tranches: a 364-day (subject to an additional 364-day term out option under certain circumstances) UK(pound)3,950.0 million tranche to fund the acquisition and a five-year $800 million tranche to replace the Company's existing revolving credit facilities. Interest rates are based on LIBOR plus a spread which is a function of the Company's long-term credit ratings. The agreement includes certain financial covenants and other restrictions, including restrictions pertaining to the ability to create property liens and enter into certain sale and leaseback transactions. Funds are not available under this credit facility until the offer for BOC shares is declared unconditional. 14 <PAGE> 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 rate 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 principally indexed 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 agreements. The notional principal amounts outstanding and net unrealized gain of interest rate swap agreements at 31 December 1999 and 30 September 1999 were as follows: <TABLE> <CAPTION> (Millions of dollars) 31 December 1999 30 September 1999 --------------------------- ----------------------------- Net Net Notional Unrealized Notional Unrealized Amount Gain Amount Gain --------------------------- ------------------------------ <S> <C> <C> <C> <C> Fixed to Variable $181.0 $1.1 $311.0 $5.6 Variable to Variable 60.0 134.1 60.0 121.1 --------------------------- ------------------------------ Total $241.0 $135.2 $371.0 $126.7 =========================== ============================== </TABLE> During the first three months of fiscal 2000 two fixed to variable interest rate swap agreements with a total notional amount of $100.0 million were terminated, resulting in a deferred gain of $2.4 million. A $73.7 million asset has been recognized in the financial statements related to the above variable to variable interest rate swap agreements. Additionally, a $73.7 million liability has been recognized in the financial statements related to the corresponding debt agreements. 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 1999 was $238.8 million. The fair value of the agreements was a gain of $12.5 million, of which a $23.1 million gain related to the currency component was recognized in the financial statements. The remaining $10.6 million loss was related to the interest component and has not been recognized in the financial statements. This loss reflects that current interest rates are generally lower than the interest rates paid under the interest rate and currency swap agreements. As of 30 September 1999 interest rate and currency swap agreements were outstanding with a notional principal amount and fair value of $270.8 million and a gain of $10.2 million, respectively. 15 <PAGE> The estimated fair value of the Company's long-term debt, including current portion, as of 31 December 1999 is $2,519.1 million compared to a book value of $2,331.3 million. FINANCIAL INSTRUMENTS Excluding the impact of the derivative instruments entered into to hedge the currency exposure of the BOC acquisition which are discussed in the `BOC Transaction' section below, there has been no material change in the net financial instrument position or sensitivity to market risk since the disclosure in the annual report. BOC TRANSACTION In July 1999, Air Products and L'Air Liquide S.A. ("Air Liquide") of France agreed to the terms of a recommended offer under which they would acquire BOC, the leading British industrial gases company, for UK(pound)14.60 per share in cash, or a total of approximately UK(pound)7.2 billion. Air Products has a UK(pound)3,950.0 million credit agreement to provide backup for commercial paper or direct funding for its 50% share of the offer price. Fees incurred to secure this credit agreement have been deferred and will be amortized on a straight-line basis over the term of the related debt. The offer will formally commence in the United Kingdom and the United States upon receipt of the necessary regulatory clearances, which are expected in the first quarter of calendar year 2000. The Company expects the transaction will be included in the Company's financial results for approximately six months of fiscal 2000. Due to the joint control with Air Liquide, the operations will initially be accounted for under the equity method. As the Company gains control and ownership of approximately one-half of the BOC assets expected to be allocated to it, the operations will be accounted for as consolidated entities. Excluding transaction and integration charges, the impact of the transaction should be modestly accretive to earnings per share before goodwill amortization, and approximately 10% dilutive to reported earnings per share after goodwill amortization. Air Products has filed a Form 8-K on 13 July 1999 with the United States Securities and Exchange Commission which provides additional details of this transaction. As previously disclosed in the Form 10K filed in December 1999, the Company is hedging its the foreign exchange exposure of the BOC acquisition. Hedging protects the Company from a currency rate change that could negatively affect costs or profits. The Company has exposure since the BOC shares to be acquired are denominated in British Pound Sterling (GBP), while the assets and anticipated cash flows being acquired are denominated in currencies other than the GBP. As of 31 December 1999, the Company has entered into purchased currency option contracts and forward exchange contracts for approximately UK(pound)1.8 billion and UK(pound)1.5 billion on an after-tax basis, respectively. The net impact of the contracts entered into as of 31 December 1999 is that the Company has effectively hedged 100% of the currency exposure related to the purchase of BOC shares. Gains and losses associated with changes in the market value of these contracts are recorded currently in earnings since hedge accounting may not be applied to instruments which are used to hedge the currency exposure of a business combination. Accordingly, the results of the quarter ended 31 December 1999 included a before-tax loss of $109 million, reflecting an exchange rate of 1.6145 for the $/GBP as of 31 December 1999. Due to the 16 <PAGE> required mark-to-market accounting, future accounting results will include gains and losses based on changes in the $/GBP exchange rate. The Company is fully protected economically from these exchange rate variations related to its portion of the BOC share purchase. The results for the three months ended 31 December 1999 include a charge of $113.2 million ($70.6 million after-tax, or $.33 per share) for costs related to the BOC acquisition. Of this amount, $109.3 million ($68.2 million after-tax, or $.32 per share) of accounting charges were recorded on purchased currency option and forward exchange contracts entered into to hedge the currency exposure of the BOC acquisition. The remaining charge of $3.9 million ($2.4 million after-tax, or $.01 per share) consists of preacquisition expenses including $2.4 million of credit facility fees. In anticipation of the purchase transaction, the company approved a 5-7% reduction in the combined Air Products and BOC workforce. GLOBAL COST REDUCTION PLAN The Company began a global cost reduction plan ("the 1999 plan") in the fiscal quarter ended 31 December 1998. The plan included staffing reductions of 206 employees in the areas of manufacturing, distribution, and overheads. An amount of $20.3 million ($12.9 million after-tax, or $.06 per share) related to employee termination expense was charged to expense in the quarter ended 31 December 1998. The total number of reductions of 211 is slightly higher than the 206 in the plan. The total cost of the plan is $19.9 million, slightly less than planned, primarily due to some foreign currency impacts. The Company expanded the plan in the quarter ended 30 June 1999, with an additional 142 reductions. There was a charge of $13.9 million ($9.0 million after-tax, or $.04 per share) for the plan expansion. The expected total cost remains as planned and 71 of the reductions have been completed. Expenses of $5.4 million have been charged to the accrual and the balance is in accrued liabilities. YEAR 2000 READINESS DISCLOSURE The Company expended approximately $35 million to date on its Year 2000 program. The Company continues to believe that the previously disclosed $40 million cost estimate for the Year 2000 program is sufficient, including contingencies that may arise through February 29, 2000 and the rollover into 2001. During the rollover into 2000, none of the Company's information technology systems, process control and embedded chip systems, or suppliers experienced Year 2000 events which had a material adverse impact on the Company's operations or financial condition. Contingency plans remain in place as part of the Company's normal business procedures to address operational issues that may arise from time to time, including those caused by Year 2000 events. FORWARD-LOOKING STATEMENTS The forward-looking statements contained in this document are based on current expectations regarding important risk factors. Actual results may differ materially 17 <PAGE> from those expressed. Important risk factors and uncertainties include the impact of worldwide economic growth, pricing of both the Company's products and raw materials such as electricity, customer outages and customer demand, and other factors resulting from fluctuations in interest rates and foreign currencies, the impact of competitive products and pricing, success of cost control programs, and the impact of tax and other legislation and other regulations in the jurisdictions in which the Company and its affiliates operate. Factors that might cause forward-looking statements related to the BOC acquisition to differ materially from actual results include, among other things, requirements or delays imposed by regulatory authorities to permit the transaction to be consummated; unanticipated tax and other costs in separating the ownership of BOC's businesses and assets; ability to amortize goodwill over 40 years; overall economic and business conditions; demand for the goods and services of Air Products, BOC or their respective affiliates; competitive factors in the industries in which each of them competes; changes in government regulation; success of implementing synergies and other cost reduction programs; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; fluctuations in interest rates and foreign currencies, and the price at which Air Products would issue additional equity; and the impact of tax and other legislation and other regulations in the jurisdictions in which Air Products, BOC and their respective affiliates operate. 18 <PAGE> PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a)(10.1) Amendment No. 1 dated as of 1 January 2000 to the Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. dated 1 August 1999 relating to Defined Benefit Plans (Filed as Exhibit 10.13 to the Company's Form 10-K Report for the fiscal year ended September 30, 1999.) (a)(10.2) Amendment No. 1 dated as of 1 January 2000 to the Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. dated 1 August 1999 relating to Defined Contribution Plans (Filed as Exhibit 10.14 to the Company's Form 10-K Report for the fiscal year ended September 30, 1999.) (a)(12) Computation of Ratios of Earnings to Fixed Charges. (a)(27) Financial Data Schedule for the three months ended 31 December 1999, which is submitted electronically to the Securities and Exchange Commission for information only, and not filed. (b) Current Reports on Form 8-K dated 20 October 1999 and 7 December 1999 were filed by the Registrant during the quarter ended 31 December 1999 in which Item 5 of such form was reported. 19 <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. Air Products and Chemicals, Inc. -------------------------------- (Registrant) Date: February 10, 2000 By: /s/ Leo J. Daley ----------------------------------- Leo J. Daley Vice President - Finance (Chief Financial Officer) 20 <PAGE> =============================================================================== 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 1999 Commission File No. 1-4534 ------------------- AIR PRODUCTS AND CHEMICALS, INC. (Exact name of registrant as specified in its charter) =============================================================================== <PAGE> INDEX TO EXHIBITS (a)(10.1) Amendment No. 1 dated as of 1 January 2000 to the Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. dated 1 August 1999 relating to Defined Benefit Plans (Filed as Exhibit 10.13 to the Company's Form 10-K Report for the fiscal year ended September 30, 1999.) (a)(10.2) Amendment No. 1 dated as of 1 January 2000 to the Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. dated 1 August 1999 relating to Defined Contribution Plans (Filed as Exhibit 10.14 to the Company's Form 10-K Report for the fiscal year ended September 30, 1999.) (a)(12) Computation of Ratios of Earnings to Fixed Charges. (a)(27) Financial Data Schedule for the three months ended 31 December 1999, which is submitted electronically to the Securities and Exchange Commission for information only, and not filed. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1(A) <SEQUENCE>2 <DESCRIPTION>AMENDMENT 1 TO TRUST AGREEMENT OF PENSION PLAN <TEXT> Exhibit (a)(10.1) Amendment No. 1 to the Amended and Restated Trust Agreement dated 1 August 1999 (the "Trust Agreement") Covering Defined Benefit Pension Plans This Amendment No. 1 to the Trust Agreement is made and entered into as of the 1st day of January 2000, by and between Air Products and Chemicals, Inc. (the "Company") and PNC Bank, N.A. (the "Trustee"). WHEREAS, the Company wishes to cover the Air Products and Chemicals, Inc. Pension Plan for Directors (the "Director Plan") by the Trust created by and under the Trust Agreement, and the Company and the Trustee have determined to amend, with the consent of the Participant Representatives, the Trust Agreement to expand Exhibit A thereto (List of Plans) to include the Director Plan; WHEREAS, the Company contemplates increasing, effective 3 January 2000, in accordance with Section 1.01 of the Trust Agreement, the amount of the Trust Amount to sixty million seven hundred thousand dollars ($60,700,000) to cover the $700,000 Current Plan Termination Liability of the Director Plan, as well as that of the other Plans, by written notice to the Trustee and contribution of Company Stock by reservation thereof under a Company Stock Agreement; and WHEREAS, all capitalized terms used herein shall have the meanings set forth in the Trust Agreement, except as otherwise provided herein or amended hereby; NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the parties hereto, intending to be legally bound, agree as follows: 1. Definitions: Plans and Participants. The term "Plans," as used in the Trust Agreement, is amended to include the Director Plan as indicated on Exhibit A hereto; and the term "Participants," as used in the Trust Agreement, is amended to include employees and past employees of the Company and certain of its subsidiaries and past members of the Board of Directors of the Company who are receiving benefits under the Director Plan (together with their respective Designated Beneficiaries, if applicable under the respective Plan). <PAGE> 2. Benefit Calculation Schedule and Participant Information. Attached hereto as Exhibit B is a schedule (said schedule, together with all documents and materials attached thereto as annexes or referred to therein as having been provided to the Trustee by the Company, being hereinafter referred to as the current "Director Benefit Calculation Schedule") describing, as of the date hereof and to the extent applicable under the Director Plan, how to calculate the basic or primary form of benefit and all alternative or optional forms of benefits payable under the Director Plan. In addition, the Company has provided to the Trustee the Participant Information pertaining to, and to the extent relevant under, the Director Plan, in Exhibit B hereto, which is complete and accurate as of December 31, 1999, or such later date as indicated therein. During the first calendar quarter of each calendar year beginning with calendar year 2001, the Company shall provide the Trustee with any revisions to the Director Benefit Calculation Schedule and updated Participant Information, in each case as of the end of the immediately preceding calendar year. IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to the TRUST AGREEMENT as of the date set forth above. AIR PRODUCTS AND CHEMICALS, INC. Attest: By: /s/ W. D. Brown ------------------------------- W. D. Brown Vice President, General Counsel and Secretary /s/ K. G. Wright - --------------------------- Assistant Secretary PNC BANK, N.A. Attest: By: /s/ Peter M. VanDine ------------------------------- Vice President <PAGE> IN WITNESS WHEREOF, the undersigned Participant Representatives, effective as of the 1st day of January 2000, have executed this Amendment No. 1 to the Trust Agreement in evidence of their consent to the amendments made thereto which are set above. /s/ W. D. Brown -------------------------------------- W. D. Brown Participant Representative /s/ L. J. Daley -------------------------------------- L. J. Daley Participant Representative /s/ J. J. Kaminski -------------------------------------- J. J. Kaminski Participant Representative /s/ J. P. McAndrew -------------------------------------- J. P. McAndrew Participant Representative </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2(A) <SEQUENCE>3 <DESCRIPTION>AMENDMENT 1 TO TRUST AGREEMENT OF SAVINGS PLAN <TEXT> Exhibit (a)(10.2) Amendment No. 1 to the Amended and Restated Trust Agreement dated 1 August 1999 (the "Trust Agreement") Covering Supplementary Savings Plan This Amendment No. 1 to the Trust Agreement is made and entered into as of the 1st day of January 2000, by and between Air Products and Chemicals, Inc. (the "Company") and PNC Bank, N.A. (the "Trustee") and upon amendment hereby, shall thereafter be entitled the Trust Agreement covering Defined Contribution Plans. WHEREAS, the Company wishes to cover the Air Products and Chemicals, Inc. Deferred Compensation Plan for Directors (the "Director Plan") by the Trust created by and under the Trust Agreement, and the Company and the Trustee have determined to amend, with the consent of the Participant Representatives, the Trust Agreement to expand Exhibit A thereto (List of Plans) to include the Director Plan; WHEREAS, the Company contemplates increasing, effective 3 January 2000, in accordance with Section 1.01 of the Trust Agreement, the amount of the Trust Amount to eight million eight hundred thousand dollars ($8,800,000) to cover the $2,300,000 Current Plan Termination Liability of the Director Plan, as well as that of the other Plans, by written notice to the Trustee and contribution of Company Stock by reservation thereof under a Company Stock Agreement; and WHEREAS, all capitalized terms used herein shall have the meanings set forth in the Trust Agreement, except as otherwise provided herein or amended hereby; NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the parties hereto, intending to be legally bound, agree as follows: 1. Definitions: Plan and Participants. The term "Plan," as used in the Trust Agreement, is amended to be "Plans" and include the Director Plan as indicated on Exhibit A hereto; and the term "Participants," as used in the Trust Agreement, is amended to include employees and past employees of the Company and certain of its subsidiaries and members and past members of the Board of Directors of the Company who are participants in the Director Plan (together with their respective Designated Beneficiaries, if applicable under the respective Plan). <PAGE> 2. Benefit Calculation Schedule and Participant Information. Attached hereto as Exhibit B is a schedule (said schedule, together with all documents and materials attached thereto as annexes to or referred to therein as having been provided to the Trustee by the Company, being hereinafter referred to as the current "Director Benefit Calculation Schedule") describing, as of the date hereof and to the extent applicable under the Director Plan, how to calculate the basic or primary form of benefit and all alternative or optional forms of benefits payable under the Director Plan. In addition, the Company has provided to the Trustee the Participant Information pertaining to, and to the extent relevant under, the Director Plan, in Exhibit B hereto, which is complete and accurate as of December 31, 1999, or such later date as indicated therein. During the first calendar quarter of each calendar year beginning with calendar year 2001, the Company shall provide the Trustee with any revisions to the Director Benefit Calculation Schedule and updated Participant Information, in each case as of the end of the immediately preceding calendar year. 3. Texts of Director Plan and Plan Amendments. The Company has delivered to the Trustee true and complete copies of the texts of the Director Plan as in effect during the service of current Participants in such Plan. The Company shall provide to the Trustee a copy of any amendment to the Director Plan, promptly following the effective date thereof, together with a certification of the completeness and accuracy thereof and, following a Change in Control should the Company fail to do so, the Participant Representatives may supply and certify such amendments to the Trustee, whereupon the Trustee shall supply a copy thereof to the Company. <PAGE> IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to the TRUST AGREEMENT as of the date set forth above. AIR PRODUCTS AND CHEMICALS, INC. Attest: By: /s/ W. D. Brown ------------------------------- W. D. Brown Vice President, General Counsel and Secretary /s/ K. G. Wright - --------------------------- Assistant Secretary PNC BANK, N.A. Attest: By: /s/ Peter M. VanDine ------------------------------- Vice President IN WITNESS WHEREOF, the undersigned Participant Representatives, effective as of the 1st day of January 2000, have executed this Amendment No. 1 to the Trust Agreement in evidence of their consent to the amendments made thereto which are set above. /s/ W. D. Brown -------------------------------------- W. D. Brown Participant Representative /s/ L. J. Daley -------------------------------------- L. J. Daley Participant Representative /s/ J. J. Kaminski -------------------------------------- J. J. Kaminski Participant Representative /s/ J. P. McAndrew -------------------------------------- J. P. McAndrew Participant Representative </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>4 <DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES <TEXT> 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 Dec ------------------------------------------------------ ------ 1995 1996 1997 1998 1999 1999 ------ ----- ------ ------ ------ ------ Earnings: <S> <C> <C> <C> <C> <C> <C> Income before extraordinary item and the cumulative effect of accounting $368.2 $416.4 $429.3 $546.8 $450.5 $50.6 changes: Add (deduct): Provision for income taxes 186.2 195.5 203.4 280.9 209.5 10.7 Fixed charges, excluding capitalized interest 148.8 184.0 233.0 202.8 194.4 49.9 Capitalized interest amortized during the period 9.1 9.4 8.3 7.4 6.1 1.7 Undistributed earnings of less-than- fifty-percent-owned affiliates (25.4) (40.6) (31.1) (25.3) (44.5) (10.6) ------ ------ ------ -------- ------ ------ Earnings, as adjusted $686.9 $764.7 $842.9 $1,012.6 $816.0 $102.3 ====== ====== ====== ======== ====== ====== Fixed Charges: Interest on indebtedness, including capital lease obligations $139.4 $171.7 $217.8 $186.7 $175.4 $45.2 Capitalized interest 18.5 20.0 20.9 18.4 24.7 8.4 Amortization of debt discount premium and expense .2 1.5 1.8 1.9 1.3 .2 Portion of rents under operating leases representative of the interest factor 9.2 10.8 13.4 14.2 17.7 4.5 ------ ------ ------ ------ ------ ----- Fixed charges $167.3 $204.0 $253.9 $221.2 $219.1 $58.3 ====== ====== ====== ====== ====== ===== Ratio of Earnings to Fixed Charges: 4.1 3.7 3.3 4.6 3.7 1.8 ====== ====== ====== ====== ====== ===== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <DESCRIPTION>FDS -- <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 Dollar <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-2000 <PERIOD-START> OCT-01-1999 <PERIOD-END> DEC-31-1999 <EXCHANGE-RATE> 1 <CASH> 80 <SECURITIES> 0 <RECEIVABLES> 933 <ALLOWANCES> 11 <INVENTORY> 431 <CURRENT-ASSETS> 1863 <PP&E> 10382 <DEPRECIATION> 5056 <TOTAL-ASSETS> 8515 <CURRENT-LIABILITIES> 2195 <BONDS> 2010 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 249 <OTHER-SE> 2680 <TOTAL-LIABILITY-AND-EQUITY> 8515 <SALES> 1264 <TOTAL-REVENUES> 1264 <CGS> 877 <TOTAL-COSTS> 877 <OTHER-EXPENSES> 30 <LOSS-PROVISION> 2 <INTEREST-EXPENSE> 41 <INCOME-PRETAX> 62 <INCOME-TAX> 9 <INCOME-CONTINUING> 51 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 51 <EPS-BASIC> 0.24 <EPS-DILUTED> 0.23 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

AZO

https://www.sec.gov/Archives/edgar/data/866787/0000866787-00-000003.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, Kp8KFt2iJuYarg4IyS3uXWmHLGtkef2PpxWEMP8j196ZyfGBMQg60xQgP/rdUNPN BdkjRF72jDSogE/krFcYPQ== <SEC-DOCUMENT>0000866787-00-000003.txt : 20000327 <SEC-HEADER>0000866787-00-000003.hdr.sgml : 20000327 ACCESSION NUMBER: 0000866787-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000212 FILED AS OF DATE: 20000323 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: SEC FILE NUMBER: 001-10714 FILM NUMBER: 577042 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 <TEXT> 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 February 12, 2000, 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) Nevada 62-1482048 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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 - 133,781,794 shares as of March 17, 2000. <PAGE> AUTOZONE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) FEB. 12, AUG. 28, 2000 1999 -------- -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 6,836 $ 5,918 Accounts receivable 18,923 25,917 Merchandise inventories 1,147,429 1,129,693 Prepaid expenses 32,137 33,468 Deferred income taxes 25,810 30,088 --------- --------- Total current assets 1,231,135 1,225,084 Property and equipment: Property and equipment 2,200,535 2,089,052 Less accumulated depreciation and amortization 500,675 450,566 --------- --------- 1,699,860 1,638,486 Other assets: Cost in excess of net assets acquired 333,247 337,261 Deferred income taxes 73,116 76,412 Other assets 6,973 7,524 -------- -------- 413,336 421,197 -------- -------- $3,344,331 $3,284,767 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 691,236 $ 757,447 Accrued expenses 239,945 230,036 Income taxes payable 23,149 13,071 Notes payable 48,090 --------- --------- Total current liabilities 1,002,420 1,000,554 Long-term debt 1,074,181 888,340 Other liabilities 67,560 72,072 Stockholders' equity 1,200,170 1,323,801 ----------- ----------- $ 3,344,331 $ 3,284,767 =========== =========== SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS <PAGE> AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share amounts) <TABLE> <CAPTION> TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED ----------------------- -------------------------- FEB. 12, FEB. 13, FEB. 12, FEB. 13, 2000 1999 2000 1999 --------- --------- --------- ---------- <S> <C> <C> <C> <C> Net sales $ 924,164 $ 852,538 $1,930,636 $1,753,487 Cost of sales, including warehouse and delivery expenses 535,737 499,045 1,120,693 1,023,512 Operating, selling, general and administrative expenses 308,414 286,220 624,182 572,887 --------- -------- --------- --------- Operating profit 80,013 67,273 185,761 157,088 Interest expense 16,452 10,234 31,056 18,749 --------- -------- --------- --------- Income before income taxes 63,561 57,039 154,705 138,339 Income taxes 24,500 21,000 59,600 51,000 --------- -------- --------- --------- Net income $ 39,061 $ 36,039 $ 95,105 $ 87,339 ========= ======== ========== ========== Weighted average shares for basic earnings per share 138,056 149,929 138,659 150,345 Effect of dilutive stock options 1,029 1,740 911 1,274 ------- ------- ------- ------- Adjusted weighted average shares for diluted earnings per share 139,085 151,669 139,570 151,619 ======= ======= ======= ======= Basic earnings per share $ 0.28 $ 0.24 $ 0.69 $ 0.58 ========= ======== ========== ========== Diluted earnings per share $ 0.28 $ 0.24 $ 0.68 $ 0.58 ========= ======== ========== ========== </TABLE> SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS <PAGE> AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) TWENTY-FOUR WEEKS ENDED ----------------------- FEB. 12, FEB. 13, 2000 1999 -------- -------- Cash flows from operating activities: Net income $ 95,105 $ 87,339 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 60,956 56,675 Net increase in merchandise inventories (17,736) (66,374) Net decrease in current liabilities (46,224) (45,872) Other-net 10,293 8,817 -------- ------- Net cash provided by operating activities 102,394 40,585 Cash flows from investing activities: Purchases of property and equipment (126,008) (265,114) Proceeds from sale of property and equipment 9,337 Notes receivable from officers (4,000) --------- --------- Net cash used in investing activities (120,671) (265,114) Cash flows from financing activities: Net proceeds from debt 233,931 294,360 Proceeds from sale of Common Stock, including related tax benefit 4,544 7,340 Purchase of treasury stock (219,280) (77,482) --------- -------- Net cash provided by financing activities 19,195 224,218 --------- -------- Net increase(decrease) in cash and cash equivalents 918 (311) Cash and cash equivalents at beginning of period 5,918 6,631 -------- --------- Cash and cash equivalents at end of period $ 6,836 $ 6,320 ======== ========= SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS <PAGE> 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 twenty-four weeks ended February 12, 2000, are not necessarily indicative of the results that may be expected for the fiscal year ending August 26, 2000. For further information, refer to the financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended August 28, 1999. 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-FINANCING ARRANGEMENTS The Company's long-term debt as of February 12, 2000, and August 28, 1999, consisted of the following (in thousands): Feb. 12, Aug. 28, 2000 1999 --------- ---------- 6.5% Debentures due July 2008 $ 200,000 $200,000 6% Notes due November 2003 150,000 150,000 Commercial paper, weighted average rate of 6% at February 12, 2000, and 5.4% at August 28, 1999 553,790 533,000 Unsecured bank loans 194,300 Other 24,181 5,340 --------- -------- Total debt 1,122,271 888,340 Less portion included in notes payable 48,090 ---------- -------- Total long-term debt $1,074,181 $888,340 ========== ======== In November 1998, the Company sold $150 million of 6% Notes due November 2003 at a discount. Interest on the Notes is payable semi-annually on May 1 and November 1 each year. In July 1998, the Company sold $200 million of 6.5% Debentures due July 2008 at a discount. Interest on the Debentures is payable semi-annually on January 15 and July 15 of each year. Proceeds from the Notes and Debentures were used to repay portions of the Company's long-term variable rate bank debt and for general corporate purposes. The Company has a commercial paper program that allows borrowing up to $700 million. In connection with the program, the Company has a credit facility with a group of banks for up to $350 million which extends until December 2001, and a 364-day $350 million credit facility with another group of banks. The 364-day facility includes a renewal feature as well as an option to extinguish the outstanding debt one year from the maturity date. As of February 12, 2000, there were borrowings of $4.3 million outstanding under this facility. Borrowings under the commercial paper program reduce availability under the credit facilities. Outstanding commercial paper and unsecured bank loans at February 12, 2000, of $700 million are classified as long-term debt as it is the Company's intention to refinance them on a long-term basis; the remaining amount is included in current maturities. During the first quarter of fiscal 2000 the Company entered into unsecured bank loans totaling $190 million with maturity dates from March to August 2000 and interest rates ranging from 6.43% to 6.63%. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR) or the lending bank's base rate (as defined in the agreement) at the option of the Company. In addition, the $350 million credit facility maturing in December 2001 contains a competitive bid rate option. All of the credit facilities contain a covenant limiting the amount of debt the Company may incur relative to its total capitalization. The facilities are available to support domestic commercial paper borrowings and to meet cash requirements. NOTE D-STOCKHOLDERS' EQUITY The Company presents basic and diluted earnings per share (EPS) in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options. As of February 29, 2000, the Company's Board of Directors had authorized the Company to repurchase up to $1 billion of common stock in the open market. From January 1998 to February 12, 2000, approximately $482.6 million of common stock has been repurchased under the plan. Additionally, the Company purchased $54.8 million of common stock between February 13 and March 22, 2000. At times, the Company utilizes equity instrument contracts to facilitate its repurchase of common stock. The Company held equity instrument contracts that relate to the purchase of approximately 5.3 million shares of common stock at an average cost of $27.80 per share at February 12, 2000 and 9.4 million shares of common stock at an average cost of $24.78 per share at March 22, 2000. NOTE E-COMPREHENSIVE INCOME Comprehensive income for the periods presented equals net income. NOTE F- CONTINGENCIES AutoZone, Inc., is a defendant in a purported class action lawsuit entitled "Melvin Quinnie on behalf of all others similarly situated v. AutoZone, Inc., and DOES 1 through 100, inclusive" filed in the Superior Court of California, County of Los Angeles, in November 1998. The plaintiff claims that the defendants failed to pay overtime to store managers as required by California law and failed to pay terminated managers in a timely manner as required by California law. The plaintiff is seeking injunctive relief, restitution, statutory penalties, prejudgment interest, and reasonable attorneys' fees, expenses and costs. The case is in the early stages of pre-class certification discovery and therefore the Company is unable to predict the outcome of this lawsuit at this time. The Company is vigorously defending against this action. AutoZone, Inc., and its wholly-owned subsidiary, Chief Auto Parts Inc., are defendants in a purported class action lawsuit entitled "Paul D. Rusch, on behalf of all others similarly situated, v. Chief Auto Parts Inc. and AutoZone, Inc." filed in the Superior Court of California, County of Los Angeles, in May 1999. The plaintiffs claim that the defendants have failed to pay their store managers overtime pay from March 1997 to present. The plaintiffs are seeking back overtime pay, interest, an injunction against the defendants committing such practices in the future, costs, and attorneys' fees. The Company is unable to predict the outcome of this lawsuit at this time, but believes that the potential damages recoverable by any single plaintiff are minimal. However, if the plaintiff class were to be certified and prevail on all of its claims, the aggregate amount of damages could be substantial. The Company is vigorously defending against this action. The Company currently, and from time to time, is involved in various other legal proceedings incidental to the conduct of its business. Although the amount of liability that may result from these proceedings cannot be ascertained, the Company does not currently believe that, in the aggregate, they will result in liabilities material to the Company's financial condition or results of operations. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TWELVE WEEKS ENDED FEBRUARY 12, 2000, COMPARED TO TWELVE WEEKS ENDED FEBRUARY 13, 1999 Net sales for the twelve weeks ended February 12, 2000, increased by $71.6 million, or 8.4%, over net sales for the comparable period of fiscal 1999. This increase was due to a comparable store sales increase of 3%, and increases in net sales for stores opened or acquired since the beginning of fiscal 1999. On a rolling basis (stores opened for more than one year) comparable store sales increased 4%. At February 12, 2000, the Company had 2,837 stores in operation compared with 2,700 stores at February 13, 1999. Gross profit for the twelve weeks ended February 12, 2000, was $388.4 million, or 42.0% of net sales, compared with $353.5 million, or 41.5% of net sales, during the comparable period for fiscal 1999. The increase in the gross profit percentage was due primarily to better gross margins in acquired stores as a result of the conversion to AutoZone systems and format. Operating, selling, general and administrative expenses for the twelve weeks ended February 12, 2000, increased by $22.2 million over such expenses for the comparable period for fiscal 1999, and decreased as a percentage of net sales from 33.6% to 33.4%. The decrease in the expense ratio was due primarily to leverage of payroll and occupancy costs, principally in acquired stores, and acquisition integration expenses incurred in fiscal 1999. Interest expense for the twelve weeks ended February 12, 2000, was $16.5 million compared with $10.2 million during the comparable period of 1999. The increase in interest expense was primarily due to higher levels of borrowings as a result of the stock repurchases. The Company's effective income tax rate was 38.5% of pre-tax income for the twelve weeks ended February 12, 2000, and 36.8% for the twelve weeks ended February 13, 1999. The fiscal 1999 effective tax rate reflects the utilization of acquired company net operating loss carryforwards. TWENTY-FOUR WEEKS ENDED FEBRUARY 12, 2000, COMPARED TO TWENTY-FOUR WEEKS ENDED FEBRUARY 13, 1999 Net sales for the twenty-four weeks ended February 12, 2000, increased by $177.1 million, or 10.1%, over net sales for the comparable period of fiscal 1999. This increase was due to a comparable store sales increase of 5%, and increases in net sales for stores opened or acquired since the beginning of fiscal 1999. On a rolling basis (stores opened for more than one year) comparable store sales increased 6%. Gross profit for the twenty-four weeks ended February 12, 2000, was $809.9 million, or 42.0% of net sales, compared with $730.0 million, or 41.6% of net sales, during the comparable period for fiscal 1999. The increase in the gross profit percentage was due primarily to better gross margins in acquired stores. Operating, selling, general and administrative expenses for the twenty-four weeks ended February 12, 2000, increased by $51.3 million over such expenses for the comparable period for fiscal 1999, and decreased as a percentage of net sales from 32.7% to 32.3%. The decrease in the expense ratio was due primarily to leverage of payroll and occupancy costs in acquired stores. Interest expense for the twenty-four weeks ended February 12, 2000, was $31.1 million compared with $18.7 million during the comparable period of 1999. The increase in interest expense was primarily due to higher levels of borrowings as a result of the stock repurchases. The Company's effective income tax rate was 38.5% of pre-tax income for the twenty-four weeks ended February 12, 2000, and 36.9% for the twenty-four weeks ended February 13, 1999. The fiscal 1999 effective tax rate reflects the utilization of acquired company net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES For the twenty-four weeks ended February 12, 2000, net cash of $102.4 million was provided by the Company's operations versus $40.6 million for the comparable period of fiscal year 1999. The comparative increase in cash provided by operations is due primarily to the absence of working capital requirements in the acquired businesses in fiscal year 2000. Capital expenditures for the twenty-four weeks ended February 12, 2000, were $126.0 million. Year to date, the Company opened 126 net new AutoZone stores. The Company expects to operate between 2,900 and 2,950 auto parts stores at the end of the fiscal year. The Company anticipates that it will continue to generate significant operating cash flow. The Company foresees no difficulty in obtaining long- term financing in view of its credit rating and favorable experiences in the debt market in the past. The Company has a commercial paper program that allows borrowing up to $700 million. In connection with the program, the Company has a credit facility with a group of banks for up to $350 million which extends until December 2001, and a 364-day $350 million credit facility with another group of banks. The 364-day facility includes a renewal feature as well as an option to extinguish the outstanding debt one year from the maturity date. As of February 12, 2000, there were borrowings of $4.3 million outstanding under this facility. Borrowings under the commercial paper program reduce availability under the credit facilities. Outstanding commercial paper and unsecured bank loans at February 12, 2000, of $700 million are classified as long-term debt as it is the Company's intention to refinance them on a long-term basis; the remaining amount is included in current maturities. During the first quarter of fiscal 2000 the Company entered into unsecured bank loans totaling $190 million with maturity dates from March to August 2000 and interest rates ranging from 6.43% to 6.63%. As of February 29, 2000, the Company's Board of Directors had authorized the Company to repurchase up to $1 billion of common stock in the open market. From January 1998 to February 12, 2000, approximately $482.6 million of common stock has been repurchased under the plan. Additionally, the Company purchased $54.8 million of common stock between February 13 and March 22, 2000. At times, the Company utilizes equity instrument contracts to facilitate its repurchase of common stock. The Company held equity instrument contracts that relate to the purchase of approximately 5.3 million shares of common stock at an average cost of $27.80 per share at February 12, 2000, and 9.4 million shares of common stock at an average cost of $24.78 per share at March 22, 2000. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q are forward-looking statements. These statements discuss, among other things, expected growth, domestic and international development and expansion strategy, and future performance. The forward-looking statements are subject to risks, uncertainties and assumptions including, without limitation, competition, product demand, domestic and international economies, government approvals, inflation, the ability to hire and retain qualified employees, consumer debt levels and the weather. Actual results may materially differ from anticipated results. Please refer to the Risk Factors section in the Annual Report on Form 10-K for fiscal year ended August 28, 1999, for more details. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Chief Auto Parts Inc. is a defendant in a class action lawsuit entitled "Doug Winfrey, et al. on their own behalf and on behalf of a class and all others similarly situated, v. Chief Auto Parts Inc. et al.," filed in the Superior Court of California, County of San Joaquin in August 1995 and then transferred to The Superior Court of California, County of San Francisco, in October 1995. In the complaint, the plaintiffs allege that Chief had a policy and practice of denying hourly employees in California mandated rest periods during their scheduled hours of work. The plaintiffs are seeking damages, restitution, disgorgement of profits, statutory penalties, declaratory relief, injunctive relief, prejudgment interest, and reasonable attorneys' fees, expenses and costs. In November 1998, the Superior Court certified the class as to all persons considered by Chief to be non-exempt hourly employees who, from August 1991, to the present, either work or did work in one of Chief's California retail stores, in excess of total work time of three and one-half (3.5) hours in any one work day and who were denied an off-duty rest break. In September 1999, the parties agreed to settle the suit. The settlement was approved by the court on January 10, 2000. The settlement does not have a material effect upon our financial results or operations. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Stockholders was held on December 18, 1999. (b) Not applicable. (c) 1. Election of Directors. All nominees for director were elected pursuant to the following vote: NOMINEE VOTES FOR VOTES WITHHELD John C. Adams, Jr. 123,843,938 1,935,972 Andrew M. Clarkson 123,815,484 1,964,426 N. Gerry House 116,238,152 9,541,758 Robert J. Hunt 123,835,869 1,944,041 J.R. Hyde, III 123,962,610 1,817,300 James F. Keegan 123,920,472 1,859,438 Edward S. Lampert 123,959,034 1,820,876 Michael W. Michelson 123,941,862 1,838,048 Ronald A. Terry 123,939,692 1,840,218 Timothy D. Vargo 123,840,617 1,939,293 2. For the approval of the AutoZone, Inc. 2000 Executive Incentive Compensation Plan: For: 123,131,668 Against: 1,944,132 Abstain: 704,110 3. For the approval of Ernst & Young LLP as independent auditors: For: 125,456,346 Against: 46,734 Abstain: 276,830 (d) Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: 3.1 Restated Articles of Incorporation of AutoZone, Inc. Incorporated by reference to Exhibit 3.1 to the Form 10-Q for the quarter ended February 13, 1999. 3.2 Amended and Restated By-laws of AutoZone, Inc. Incorporated by reference to Exhibit 3.3 to the Form 10-K for the fiscal year ended August 29, 1998. 10.1 Form of Demand Promissory Note granted by certain executive officers in favor of AutoZone, Inc. 10.2 AutoZone, Inc. 2000 Executive Incentive Compensation Plan. Incorporated by reference to Exhibit A to the definitive Proxy Statement for the annual meeting of stockholders held December 9, 1999. 10.3 AutoZone, Inc. Executive Deferred Compensation Plan. 27.1 Financial Data Schedule (SEC Use Only). (b) On December 8, 1999, the Company filed a Form 8-K containing a press release announcing its earning for the fiscal quarter ended November 20, 1999. <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. AUTOZONE, INC. By: /s/ ROBERT J. HUNT ------------------------------ Robert J. Hunt Executive Vice President and Chief Financial Officer-Customer Satisfaction (Principal Financial Officer) By: /S/ WILLIAM C. RHODES, III -------------------------------- William C. Rhodes, III Senior Vice President, Finance-Customer Satisfaction (Principal Accounting Officer) Dated: March 23, 2000 <PAGE> EXHIBIT INDEX 3.1 Restated Articles of Incorporation of AutoZone, Inc. Incorporated by reference to Exhibit 3.1 to the Form 10-Q for the quarter ended February 13, 1999. 3.2 Amended and Restated By-laws of AutoZone, Inc. Incorporated by reference to Exhibit 3.3 to the Form 10-K for the fiscal year ended August 29, 1998. 10.1 Form of Demand Promissory Note granted by certain executive officers in favor of AutoZone, Inc. 10.2 AutoZone, Inc. 2000 Executive Incentive Compensation Plan. Incorporated by reference to Exhibit A to the definitive Proxy Statement for the annual meeting of stockholders held December 9, 1999. 10.3 AutoZone, Inc. Executive Deferred Compensation Plan. 27.1 Financial Data Schedule (SEC Use Only). </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>2 <DESCRIPTION>FORM OF NOTE <TEXT> EXHIBIT 10.1 [FORM OF] DEMAND PROMISSORY NOTE $ Memphis, Tennessee - --------------- ---------------------- ---------------- Amount City, State Date FOR VALUE RECEIVED, the Undersigned acknowledges that he is indebted to the Lender in the amount stated herein and promises to pay on demand to the order of AUTOZONE, INC., a Nevada corporation, with its principal place of business at 123 South Front Street, Memphis, Tennessee (the "Lender"), the principal sum of ______________________ ($_____________) together with interest thereon from the date hereof to maturity at an annual interest rate of 6%, compounded annually. Said principal sum is due on demand, and in the absence of any demand is due five years from the date hereof. All installments, prepayments, and other payments of principal and interest are payable to Lender at 123 South Front Street, Memphis, Tennessee 38103, or at such other place as the Lender or holder may hereafter and from time to time designate in writing. Should the Undersigned cease to be employed by Lender prior to this Note being paid in full, the Undersigned hereby authorizes Lender to apply any and all amounts of his final payroll check, or any other amounts owed by Lender to Undersigned or held by Lender for the benefit of the Undersigned, including, but not limited to, stock options, to be applied to this indebtedness. This Note may be prepaid, in whole or in part, without penalty at anytime. At maturity, or upon demand or default or failure to pay any installment of principal and interest required herein, the entire balance shall be immediately due and payable. Any remedy of Lender or holder upon default of the Undersigned shall be cumulative and not exclusive and choice of remedy shall be at the sole election of Lender or holder. The Undersigned agrees to pay all costs of collection, including reasonable attorney's fees, whether or not any suit, civil action, or other proceeding at law or in equity, is commenced. The Undersigned waives demand, presentment for payment, protest and notice of protest and nonpayment of this Note and expressly agrees to remain bound for the payment of principal, interest and other sums provided for by the terms of this Note, notwithstanding any extension or extensions of the time of, or for the payment of, said principal. No delay or omission on the part of the Lender or holder in exercising any rights shall operate as a waiver of such right. This Note shall be governed by the laws of the State of Tennessee, and each party hereto agrees to venue and jurisdiction in the federal and state courts located in Shelby County, Tennessee. Executed on_______________. UNDERSIGNED: _____________________________________ Printed Name: _____________________________________ Social Security Number WITNESS: ______________________________ Printed Name ______________________________ Signature <PAGE> Schedule to Form of Demand Promissory Note The following directors and executive officers have executed the Demand Promissory Note in the amounts and on the dates indicated below: NAME DATE AMOUNT Johnston C. Adams, Jr. 1/27/2000 $136,500.00 Johnston C. Adams, Jr. 1/7/2000 $148,062.50 William C. Rhodes, III 10/25/1999 $174,473.44 N. Gerry House 12/30/1999 $62.500.00 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3 <SEQUENCE>3 <DESCRIPTION>DEFERRED COMPENSATION PLAN <TEXT> <HTML> <body> &nbsp; <br>&nbsp; <br>&nbsp; <center> <p><b><font size=+4>AutoZone, Inc.</font></b> <br>&nbsp; <br>&nbsp; <p><b><i><font size=+2>Executive Deferred Compensation Plan</font></i></b></center> <hr WIDTH="100%"> <center> <p><b>TABLE OF CONTENTS</b></center> <p><b>ARTICLE I</b> <b>INTRODUCTION</b> <dir>I.1 Name of Plan <dir>I.2 Purposes of Plan <br>I.3 "Top Hat" Pension Benefit Plan. <br>I.4 Funding <br>I.5 Effective Date <br>I.6 Administration</dir> </dir> <b>ARTICLE II</b> <b>DEFINITIONS AND CONSTRUCTION</b> <dir> <dir>II.1 Definitions <br>II.2 Number and Gender <br>II.3 Headings</dir> </dir> <b>ARTICLE III</b> <b>PARTICIPATION AND ELIGIBILITY</b> <dir> <dir>III.1 Participation <br>III.2 Commencement of Participation <br>III.3 Cessation of Active Participation</dir> </dir> <b>ARTICLE IV</b> <b>DEFERRALS AND MATCHING CREDITS</b> <dir> <dir>IV.1 Deferrals by Participants <br>IV.2 Matching Credits <br>IV.3 Effective Date of Executive Deferred Compensation Agreement <br>IV.4 Modification or Revocation of Election by Participant</dir> </dir> <b>ARTICLE V</b> <b>DEFINED BENEFIT</b> <dir> <dir>V.1 Defined Benefit Accruals <br>V.2 Service Credit</dir> </dir> <b>ARTICLE VI</b> <b>VESTING, DEFERRAL PERIODS AND EARNINGS ELECTION</b> <dir> <dir>VI.1 Vesting <br>VI.2 Deferral Periods <br>VI.3 Earnings Elections</dir> </dir> <b>ARTICLE VII</b> <b>ACCOUNTS</b> <dir> <dir>VII.1 Establishment of Bookkeeping Accounts <br>VII.2 Subaccounts <br>VII.3 Hypothetical Nature of Accounts</dir> </dir> <b>ARTICLE VIII</b> <b>PAYMENT OF ACCOUNT</b> <dir> <dir>VIII.1 Timing of Distribution of Benefits <br>VIII.2 Adjustment for Investment Gains and Losses Upon Distribution <br>VIII.3 Form of Payment or Payments <br>VIII.4 Defined Benefit Accrual Payments <br>VIII.5 Designation of Beneficiaries <br>VIII.6 Unclaimed Benefits <br>VIII.7 Hardship Withdrawals</dir> </dir> <b>ARTICLE IX</b> <b>ADMINISTRATION</b> <dir> <dir>IX.1 Administrative Committee <br>IX.2 General Powers of Administration <br>IX.3 Indemnification of Administrative Committee</dir> </dir> <b>ARTICLE X</b> <b>DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION</b> <dir> <dir>X.1 Claims <br>X.2 Claim Decision</dir> </dir> <b>ARTICLE XI MISCELLANEOUS</b> <dir> <dir>XI.1 Not Contract of Employment <br>XI.2 Non-Assignability of Benefits <br>XI.3 Withholding <br>XI.4 Amendment and Termination <br>XI.5 No Trust Created <br>XI.6 Unsecured General Creditor Status Of Employee <br>XI.7 Severability <br>XI.8 Governing Laws <br>XI.9 Binding Effect <br>XI.10 Entire Agreement</dir> </dir> <hr WIDTH="100%"> <center><b>ARTICLE I</b> <p><b>INTRODUCTION</b></center> <dir> <dir>I.1 <b>Name of Plan</b>. <p>AutoZone, Inc. (the "Company") hereby adopts the AutoZone, Inc. Executive Deferred Compensation Plan (the "Plan"). <p>I.2 <b>Purposes of Plan</b>. <p>The purposes of the Plan are to provide certain eligible employees of the Company the opportunity to defer elements of their compensation which might not otherwise be deferrable under other Company plans, including the AutoZone 401(k) Plan, and to receive the benefit of additions to their deferral comparable to those obtainable under the AutoZone 401(k) Plan in the absence of certain restrictions and limitations in the Internal Revenue Code. In addition the Plan is intended to provide benefits in addition to those provided by the AutoZone, Inc. Pension Plan which are limited due to certain restrictions and limitations in the Internal Revenue Code. <p>I.3 <b>"Top Hat" Pension Benefit Plan</b>. <p>The Plan is an "employee pension benefit plan" within the meaning of ERISA. The Plan is maintained, however, for a select group of management or highly compensated employees and, therefore, it is intended that the Plan is exempt from Parts 2, 3 and 4 of Title I of ERISA. The Plan is not intended to qualify under Code section 401(a). <p>I.4 <b>Funding</b>. <p>The Plan is unfunded. All benefits will be paid from the general assets of the Company. <p>I.5 <b>Effective Date</b>. <p>The Plan is effective as of the date adopted by AutoZone, Inc. <p>I.6 <b>Administration</b>. <p>The Plan shall be administered by the Administrative Committee. <br>&nbsp; <br>&nbsp;</dir> </dir> <center><b>ARTICLE II</b> <p><b>DEFINITIONS AND CONSTRUCTION</b></center> <dir> <dir>II.1 <b>Definitions</b>. <p>For purposes of the Plan, the following words and phrases shall have the respective meanings set forth below, unless their context clearly requires a different meaning: <br>&nbsp; <dir> <dir>(a) Account" means the bookkeeping account maintained by the Company on behalf of each Participant pursuant to Article VI that is credited with Base Salary Deferrals. Bonus Deferrals and Matching Credits made by the Company on behalf of each Participant pursuant to Article IV, and the earnings and losses on such amounts as determined in accordance with Article V. As of any Valuation Date, a Participant's Defined Contribution Benefit under the Plan shall be equal to the amount credited to his Account as of such date. <p>(b) "Administrative Committee" means the Compensation Committee of the Board of Directors. <p>(c) "Base Salary" means the base rate of cash compensation paid by the Company to or for the benefit of a Participant for services rendered or labor performed while a Participant, including base pay a Participant could have received in cash in lieu of (A) deferrals pursuant to Section 4.1 and (B) contributions made on his behalf to any qualified plan maintained by the Company or to any cafeteria plan under section 125 of the Code maintained by the Company. <p>(d) "Base Salary Deferral" means the amount of a Participant's Base Salary which the Participant elects to have withheld on a pre-tax basis from his Base Salary and credited to his Account pursuant to Section 4.1. <p>(e) "Beneficiary" means the person or persons designated by the Participant in accordance with Section 7.4. <p>(f) "Bonus Compensation" means the amount awarded to a Participant for a Plan Year under any bonus plan maintained by the Company. <p>(g) "Bonus Deferral" means the amount of a Participant's Bonus Compensation which the Participant elects to have withheld on a pre-tax basis from his Bonus Compensation and credited to his account pursuant to Section 4.1. <p>(h) "Change In Control" means the happening of any of the following events:</dir> </dir> </dir> </dir> <dir> <dir> <dir> <dir> <dir> <dir>(i) An acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13 d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to Vote generally in the election of directors (the "Outstanding Company Voting Securities"): provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its affiliated companies or (D) any acquisition of the Company by any corporation pursuant to a reorganization, merger, consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (iii) of this Section 2.1(g) are satisfied; or <p>(ii) Individuals who, as of the date hereof, constitute the Board (the Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A 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; or</dir> </dir> </dir> </dir> </dir> </dir> <dir> <dir> <dir> <dir> <dir> <dir>(iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger of consolidation, (i) all or substantially all of the individuals and entities who were beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting. Securities immediately prior to such reorganization, merger or consolidation beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or of the corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, or consolidation or the combined voting power of the then outstanding voting securities of such corporation and (3) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation: or</dir> </dir> </dir> </dir> </dir> </dir> <dir> <dir> <dir> <dir> <dir> <dir>(iv) The approval by the shareholders of the Company of (1) a complete liquidation or dissolution of the Company or (2) the sale or other disposition of all or substantially all of the assets of the Company; excluding, however, such a sale or other disposition to a corporation, with respect to which following such sale or other disposition, (A) more than 60% of, respectively, the outstanding shares of common stock of such corporation and the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors will be beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company and any employee benefit plan (or related trust) of the Company or of such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) then beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of such corporation. <br>&nbsp;</dir> </dir> (i) "Code" means the Internal Revenue Code of 1986, as amended. <p>(j) "Company" means AutoZone, Inc. and its direct and indirect subsidiaries, as designated from time to time by the Compensation Committee of the Board of Directors of AutoZone, Inc. <p>(k) "Compensation" shall include only a Participant's Base Salary and Bonus Compensation. Severance Pay and non-cash compensation shall not be included. Compensation shall not be limited by Code &sect; 401(a)(17). For purposes of computing the Pension Excess Benefit, a Participant's Compensation calculation shall disregard any effect of excluding voluntary salary or bonus deferrals to a nonqualified, unfunded plan of deferred compensation. <p>(l) "Deferral Period" means the period of time for which a Participant elects to defer receipt of the Base Salary Deferrals, and Bonus Deferrals credited to such Participant's Account and shall be either the Retirement Date, a period of years as specified in Section 5.2 or upon a Change In Control. Deferral Periods shall be measured on the basis of Plan Years, beginning with the Plan Year that commences immediately following the Plan Year for which the applicable Base Salary Deferrals, and Bonus Deferrals are credited to the Participant's Account. <p>(m) "Executive Deferred Compensation Agreement" means the written agreement entered into between the Company and a Participant pursuant to which the Participant elects the amount of his Base Salary and/or his Bonus Compensation to be deferred into the Plan and the Deferral Period, the deemed investment and the form of payment for such amounts. <p>(n) "Directors" means the Board of Directors of the Company. <p>(o) "Effective Date" means January l, 2000. <p>(p) "Employee" means any common-law employee of the Company. <p>(q) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. <p>(r) "401(k) Plan" means the AutoZone 401(k) Plan. <p>(s) Participant" means each Employee who has been selected for participation in the Plan and who has become a Participant pursuant to Article III. <p>(t) "Plan" means the AutoZone, Inc. Executive Deferred Compensation Plan, as amended from time to time.</dir> </dir> </dir> </dir> <dir> <dir> <dir> <dir>(u) "Plan Year" means the twelve-consecutive month period commencing January 1 of each year ending on December 31. <p>(v) "Retirement Date" means the date the Participant is eligible for and retires under any qualified retirement plan maintained by the Company. <p>(w) "Valuation Date" means the last business day of each calendar month and each special valuation date designated by the Administrative Committee. <p>(x) "Pension Plan" means the AutoZone, Inc. Pension Plan. <p>(y) "Defined Benefit Accrual" means the amounts accrued to a Participant pursuant to Article V. <p>(z) "Defined Contribution Benefit" means the amounts accrued to a Participant pursuant to Article IV. <br>&nbsp; <br>&nbsp;</dir> </dir> II.2 <b>Number and Gender</b>. <p>Wherever appropriate herein, words used in the singular shall be considered to include the plural and words used in the plural shall be considered to include the singular. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender. <p>II.3 <b>Headings</b>. <p>The headings of Articles and Sections herein are included solely for convenience, and if there is any conflict between such headings and the test of the Plan, the text shall control. <br>&nbsp;</dir> </dir> <center><b>ARTICLE III</b> <p><b>PARTICIPATION AND ELIGIBILITY</b></center> <dir> <dir>III.1 <b>Participation</b>. <p>Participants in the Plan are those Employees who are (a) subject to the income tax laws of United States, (b) determined by the Company to be members of a select group of highly compensated or management Employees of the Company, and (c) selected by the Administrative Committee, in its sole discretion, as Participants. The Administrative Committee shall notify each Participant of his selection as a Participant. Subject to the provisions of Section 3.3 a Participant shall remain eligible to continue participation in the Plan for each Plan Year following his initial year of participation in the Plan, provided the Participant continues to satisfy Sections 3.1(a) and (b) above.</dir> </dir> <dir> <dir>III.2 <b>Commencement of Participation</b>. <p>An Employee shall become a Participant effective as of the date the Administrative Committee determines, which date shall be on or after the date his Executive Deferred Compensation Agreement becomes effective. Newly eligible employees must make deferral elections during the first 30 days after becoming eligible. <p>III.3 <b>Cessation of Active Participation</b>. <p>Notwithstanding any provision herein to the contrary, an individual who has become a Participant in the Plan shall cease to be a Participant hereunder effective as of any date designated by the Administrative Committee. <br>&nbsp;</dir> </dir> <center><b>ARTICLE IV</b> <p><b>DEFERRALS AND MATCHING CREDITS</b></center> <dir> <dir>IV.1 <b>Deferrals by Participants</b>. <p>At least thirty days preceding the first day of each Plan Year (or the remaining portion thereof for an Employee who commences participation in the Plan other than on the first day of a Plan Year), a Participant may file with the Administrative Committee an Executive Deferred Compensation Agreement pursuant to which such Participant elects to make Base Salary Deferrals and/or Bonus Deferrals. The Participant's Base Salary Deferrals and Bonus Deferrals shall not exceed twelve percent (12%) of the Participant's Compensation, minus the Participant's elective deferrals under the 401(k) Plan. Base Salary Deferrals and Bonus Deferrals shall not be limited by Code &sect; 402(g), or Code &sect; 401(k) or Code &sect; 401(m), or Code &sect; 415(c). Any such Participant election shall be subject to any maximum or minimum percentage or dollar amount limitations and to any other rules prescribed by the Administrative Committee in its sole discretion. Base Salary Deferrals will be credited to the Account of each Participant as of the last day of each calendar month, provided that such Participant is an Employee on the last day of such calendar month. A Participant whose employment terminates during the calendar month shall be paid the amount of his Base Salary Deferrals for such month in cash. Bonus Deferrals will be credited to the Account of each Participant as of the day of the month in which such Bonus Compensation otherwise would have been paid to the Participant in cash, provided that the Participant is an Employee on the payment date. If a Participant fails to file a new Executive Compensation Agreement or revoke a prior Executive Compensation Agreement, the latest Executive Compensation Agreement on file with the Committee shall remain in effect for each Plan Year subsequent to its filing. <p>IV.2 <b>Matching Credits</b>.</dir> </dir> <dir> <dir>In addition to Base Salary Deferrals and Bonus Deferrals, the Company shall credit to the Participant's Account an amount equal to the Matching Contribution that would be made to the Participants Matching Contributions Account under the 401(k) Plan with respect to the Participant's Compensation (as defined in this Plan) without regard to any limitations imposed by Code &sect; 401(a)(17), Code &sect; 401(k), Code &sect; 401(m) or Code &sect; 415(c), less the amount of Matching Contribution made to the Participant's Matching Contribution Account in the 401(k) Plan.</dir> </dir> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IV.3 <b>Effective Date of Executive Deferred Compensation Agreement</b>. <dir> <dir>A Participant's initial Executive Deferred Compensation Agreement shall be effective as of the first payroll period after the date the Participant commences participation in the Plan. Each subsequent Executive Deferred Compensation Agreement shall become effective on the first day of the Plan Year to which it relates. If a Participant fails to complete an Executive Deferred Compensation Agreement on or before the date the Participant commences participation in the Plan or the first day of any Plan Year, the Participant shall be deemed to have elected not to make Base Salary Deferrals and/or Bonus Deferrals for such Plan Year (or remaining portion thereof if the Participant enters the Plan other than on the first day of a Plan Year). <p>IV.4 <b>Modification or Revocation of Election by Participant</b>. <p>A Participant may not change the amount of his Base Salary Deferrals or Bonus Deferrals during a Plan Year. However, a Participant may discontinue a Base Salary Deferral or Bonus Deferral election at any time by filing, on such forms and subject to such limitations and restrictions as the Administrative Committee may prescribe in its discretion, a revised Executive Deferred Compensation Agreement with the Administrative Committee. If approved by the Administrative Committee, revocation shall take effect as of the first payroll period next following its filing. A Participant who discontinues a Base Salary Deferral or Bonus Deferral election during a Plan Year will not be permitted to elect to make Base Salary Deferrals or Bonus Deferrals again until the next Plan Year. Under no circumstances may a Participant's Executive Deferred Compensation Agreement be made, modified or revoked retroactively. A Participant' s Executive Deferred Compensation Agreement shall remain in effect in the event of a Change in Control. <br>&nbsp;</dir> </dir> <center><b>ARTICLE V</b> <p><b>DEFINED BENEFIT</b></center> <dir> <dir>V.1 <b>Defined Benefit Accruals</b>. <p>A Participant shall accrue, each Plan Year, a benefit under this Plan equal to the benefit the Participant would accrue under the Pension Plan for such Plan Year absent the effect of Code &sect; 401(a)(17) and Code &sect; 415(b), less the benefit accrued under the Pension Plan for such Plan Year. <p>V.2 <b>Service Credit</b>. <p>The Administrative Committee shall determine the service to be credited to the Participant for purposes of calculating the Defined Benefit Accrual provided by Section 5.1 of this Plan. Such service may only include, service for the Company or service for a prior employer that is related or formerly related to the Company. <br>&nbsp;</dir> </dir> <center><b>ARTICLE VI</b> <p><b>VESTING, DEFERRAL PERIODS AND EARNINGS ELECTION</b></center> <dir> <dir>VI.1 <b>Vesting</b>. <p>A Participant shall be 100% vested in his Account at all times. <p>VI.2 <b>Deferral Periods</b>. <p>A Deferral Period may be for any period of five (5) years, or ten (10) years or any period of one (l) year or more after the Participant has completed one (l) year of participation, or more, and may not end later than the year in which the Participant attains age 70. A Participant must specify on the Executive Deferred Compensation Agreement the Deferral Period for the Base Salary Deferrals, and Bonus Deferrals to be made to the Plan for the Plan Year (or the remaining portion thereof for a Participant who enters the Plan other than on the first day of a Plan Year) to which the Executive Deferred Compensation Agreement relates, subject to certain rules as determined by the Administrative Committee from time to time. A Participant may change an election of a Deferral Period at any time prior to the first day of the calendar year in which payments are to commence. <br>&nbsp;</dir> </dir> <dir> <dir>VI.3 <b>Earnings Elections</b>. <p>Amounts credited to a Participant's Account shall he credited with earnings and losses based on hypothetical investment directions made by the Participant, in accordance with investment options and procedures adopted by the Administrative Committee from time to time. Any amounts credited to a Participant's Account with respect to which a Participant does not provide investment direction shall be credited with earnings in an amount determined by the Administrative Committee in its sole discretion. A Participant's Account shall be adjusted as of each Valuation Date to reflect investment gains and losses. <br>&nbsp;</dir> </dir> <center><b>ARTICLE VII</b> <p><b>ACCOUNTS</b></center> <dir> <dir>VII.1 <b>Establishment of Bookkeeping Accounts</b>. <p>A separate bookkeeping account shall be maintained for each Participant. Such account shall he credited with the Participant's Base Salary Deferrals, Bonus Deferrals and Matching Credits and credited (or charged, as the case may be) with the hypothetical investment results determined pursuant to Section 6.3. A separate bookkeeping account shall also be maintained for each Participant's Defined Benefit Accruals, but shall not be adjusted for hypothetical or actual investment results. <p>VII.2 <b>Subaccounts</b>. <p>Separate subaccounts shall be maintained to the extent necessary for the administration of the Plan. For example, it may be necessary to maintain separate subaccounts where the Participant has specified different Deferral Periods, methods of payment or investment directions with respect to Base Salary Deferrals, and Bonus Deferrals for different Plan Years. <p>VII.3 <b>Hypothetical Nature of Accounts</b>.</dir> </dir> <dir> <dir>The account established under this Article VI shall be hypothetical in nature and shall be maintained for bookkeeping purposes only so that earnings and losses on the Base Salary Deferrals, Bonus Contributions and Matching Credits made to the Plan can be credited (or charged, as the case may be). Neither the Plan nor any of the accounts (or subaccounts) established hereunder shall hold any actual funds or assets. The right of any person to receive one or more payments under the Plan shall be an unsecured claim against the general assets of the Company. Any liability of the Company to any Participant, former Participant, or Beneficiary with respect to a right to payment shall be based solely upon contractual obligations created by the Plan. Neither the Company, the Directors, nor any other person shall be deemed to be a trustee of any amounts to be paid under the Plan. Nothing contained in the Plan, 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 a Participant or any other Person.</dir> </dir> <center><b>ARTICLE VIII</b> <p><b>PAYMENT OF ACCOUNT</b></center> <dir> <dir>VIII.1 <b>Timing of Distribution of Benefits</b>. <p>Distribution of a Participant's Account shall be made or commence as soon as practicable following the date the Deferral Period for such amounts ends. Notwithstanding the foregoing, the Participant's entire Account shall be distributed to him (or his Beneficiary in the event of his death) as soon as practicable following the earliest to occur of the following: (i) the Participant's death; (ii) the Participant's permanent disability (as defined in the Company's long-term disability program; or (iii) the Participant's termination of employment. <p>VIII.2 <b>Adjustment for Investment Gains and Losses Upon Distribution</b>. <p>Upon a distribution pursuant to this Article VII, the balance of a Participant's Account shall be determined as of the Valuation Date immediately preceding the date of the distribution to be made and shall be adjusted for investment gains and losses which have accrued to the date of distribution but which have not been credited to his Account. <p>VIII.3 <b>Form of Payment or Payments</b>. <p>The Participant's Account shall be distributed in accordance with the form of payment elected by the Participant on the Executive Deferred Compensation Agreement to which such amounts relate. The form of payment with respect to amounts and the earnings credited thereon may be in any of the following forms: <br>&nbsp; <dir> <dir>(a) In the event of distribution after the expiration of the Deferral Period, distribution may be made in a lump sum, or in installment payments for a period not to exceed fifteen years; <p>(b) In the event of distribution after the Participant's death or permanent disability, distribution shall be made in a lump sum: <p>(c) In the event of distribution after termination of employment other than by reason of death or disability, distribution shall be made in a lump sum if the value of the Participant's Account is Fifty Thousand Dollars ($50,000) or less, and shall be made as follows, if the Account exceeds Fifty Thousand Dollars ($50,000):</dir> </dir> </dir> </dir> <dir> <dir> <dir> <dir> <dir> <dir>(i) the sum of Fifty Thousand Dollars ($50,000) shall be distributed in a lump sum; and <p>(ii) the remaining balance shall be distributed in annual installments of at least Five Thousand Dollars ($5,000) over a period of up to five (5) years. <br>&nbsp;</dir> </dir> </dir> </dir> Installment payments shall be paid annually on the first business day of January of each Plan Year as elected by the Participant on the Executive Deferred Compensation Agreement. Each installment payment shall be determined by multiplying the amounts to be distributed by a fraction, the numerator of which is one and the denominator of which is the number of remaining installment payments to be made to Participant. Anything contained herein to the contrary notwithstanding, total distribution of a Participant's Account must be made by the date such Participant attains age 85. <p>Upon termination of a Participant's employment following a Change in Control (unless elected as a Deferral Period in the Executive Deferred Compensation Agreement), a Participant's Account shall be distributed as described in 8.3(c)(1) and (2) above in five (5) annual installments with the first installment payment to begin commencing no later than ninety (90) days after the Participant's employment is terminated. However, such Participant or Beneficiary, as the case may be, may apply to the Administrative Committee for payment of installments over a shorter period of time, including the right to distribute the entire Account in a lump sum payment. <p>VIII.4 <b>Defined Benefit Accrual Payments</b>. <p>Payment of Defined Benefit Accruals shall be in the form elected by the Participant for payment of benefits under the Pension Plan. <p>VIII.5 <b>Designation of Beneficiaries</b>. <p>Each Participant shall have the right to designate the beneficiary or beneficiaries to receive payment of his benefit in the event of his death. A beneficiary designation shall be made by executing the beneficiary designation form prescribed by the Administrative Committee and filing the same with the Administrative Committee. Any such designation may be changed at any time by execution of a new designation in accordance with this Section. If no such designation is on file with the Administrative Committee at the time of the death of the Participant or such designation is not effective for any reason as determined by the Administrative Committee, then the designated beneficiary or beneficiaries to receive such benefit shall be the Participant's surviving spouse, if any, or if none, the Participant's executor or administrator, or his heirs at law if there is no administration of such Participant's estate.</dir> </dir> <dir> <dir>VIII.6 <b>Unclaimed Benefits</b>. <p>In the case of a benefit payable on behalf of such Participant, if the Administrative Committee is unable to locate the Participant or beneficiary to whom such benefit is payable, such benefit may be forfeited to the Company, upon the Administrative Committee's determination. Notwithstanding the foregoing, if subsequent to any such forfeiture the Participant or beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit shall be paid by the Company or restored to the Plan by the Company. <p>VIII.7 <b>Hardship Withdrawals</b>. <p>A Participant may apply in writing to the Administrative Committee for, and the Administrative Committee may permit, a hardship withdrawal of all or any part of a Participant's Account if the Administrative Committee, in its sole discretion, determines that the Participant has incurred a severe financial hardship resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in section 1 52(a) of the Code) of the Participant, 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, as determined by the Administrative Committee, in its sole and absolute discretion. The amount that may be withdrawn shall be limited to the amount reasonably necessary to relieve the hardship or financial emergency upon which the request is based, plus the federal and state taxes due on the withdrawal, as determined by the Administrative Committee. The Administrative Committee may require a Participant who requests a hardship withdrawal to submit such evidence as the Administrative Committee, in its sole discretion, deems necessary or appropriate to substantiate the circumstances upon which the request is based. <br>&nbsp;</dir> </dir> <center><b>ARTICLE IX</b> <p><b>ADMINISTRATION</b></center> <dir> <dir>IX.1 <b>Administrative Committee</b>. <p>The Plan shall be administered by an Administrative Committee appointed by the Board of Directors. The Administrative Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Administrative Committee may delegate to others certain aspects of the management and operational responsibilities of the Plan including the employment of advisors and the delegation of ministerial duties to qualified individuals, provided that such delegation is in writing.</dir> </dir> <dir> <dir>IX.2 <b>General Powers of Administration</b>. <p>The Administrative Committee shall have all powers necessary or appropriate to enable it to carry out its administrative duties. Not in limitation, but in application of the foregoing, the Administrative Committee shall have the duty and power to interpret the Plan and determine all questions that may arise hereunder as to the status and rights of Employees, Participants, and Beneficiaries. The Administrative Committee may exercise the powers hereby granted in its sole and absolute discretion. No member of the Administrative Committee shall be personally liable for any actions taken by the Administrative Committee unless the member's action involves willful misconduct. <p>IX.3 <b>Indemnification of Administrative Committee</b>. <p>The Company shall indemnify, hold harmless, and defend the members of the Administrative Committee against any and all claims, losses, damages, expenses, including attorney's fees, incurred by them, and any liability, including any amounts paid in settlement with their approval arising from their action or failure to act, except when the same is judicially determined to be attributable to their gross negligence or willful misconduct. <br>&nbsp;</dir> </dir> <center><b>ARTICLE X</b> <p><b>DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION</b></center> <dir> <dir>X.1 <b>Claims</b>. <p>A person who believes that he is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Administrative Committee, setting forth his claim, The request must be addressed to the Administrative Committee at the Company at its then principal place of business. <p>X.2 <b>Claim Decision</b>. <p>Upon receipt of a claim, the Company shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Company may, however, extend the reply period for an additional ninety (90) days for reasonable cause. <br>&nbsp;</dir> </dir> <center><b>ARTICLE XI</b> <p><b>MISCELLANEOUS</b></center> <dir> <dir>XI.1 <b>Not Contract of Employment</b>. <p>The adoption and maintenance of the Plan shall not be deemed to be a contract between the Company and any person or to be consideration for the employment of any person. <p>Nothing herein contained shall be deemed to give any person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge any person at any time nor shall the Plan be deemed to give the Company the right to require any person to remain in the employ of the Company or to restrict any person's right to terminate his employment at any time. <p>XI.2 <b>Non-Assignability of Benefits</b>. <p>No Participant, Beneficiary or distributee of benefits under the Plan shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder, which are expressly declared to be unassignable and nontransferable. Any such attempted assignment or transfer shall be void. No amount payable hereunder shall, prior to actual payment thereof, be subject to seizure by any creditor of any such Participant, Beneficiary or other distributee for the payment of any debt judgment or other obligation, by a proceeding at law or in equity, nor transferable by operation of law in the event of the bankruptcy, insolvency or death of such Participant, Beneficiary or other distributee hereunder. <p>XI.3 <b>Withholding</b>. <p>All deferrals and payments provided for hereunder shall be subject to applicable withholding and other deductions as shall be required of the Company under any applicable local, state or federal law. <p>XI.4 <b>Amendment and Termination</b>. <p>The Company may from time to time, in its discretion, amend, in whole or in part, any or all of the provisions of the Plan: provided, however, that no amendment may be made that would impair the rights of a Participant with respect to amounts already allocated to his Account. The Company may terminate the Plan at any time. In the event that the Plan is terminated, the balance in a Participant's Account shall be paid to such Participant or his Beneficiary in a single cash lump sum, in full satisfaction of all such Participant's or Beneficiary's benefits hereunder.</dir> </dir> <dir> <dir>XI.5 <b>No Trust Created</b>. <p>Nothing contained in this Agreement, and no action taken pursuant to its provisions by either party hereto, shall create, nor be construed to create, a trust of any kind or a fiduciary relationship between the Company and the Participant, his beneficiary, or any other person. <p>XI.6 <b>Unsecured General Creditor Status Of Employee</b>. <p>The payments to Participant, his Beneficiary or any other distributee hereunder shall he made from assets which shall continue, for all purposes, to be a part of the, general, unrestricted assets of the Company; no person shall have nor acquire any interest in any such assets by virtue of the provisions of this Agreement. The Company's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that the Participant Beneficiary or other distributee acquires a right to receive payments from the Company under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Company: no such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Company. <p>In the event that, in its discretion, the Company purchases an insurance policy, or policies insuring the life of the Employee (or any other property) to allow the Company to recover the cost of providing the benefits, in whole, or in part, hereunder, neither the Participant, Beneficiary or other distributee shall have nor acquire any rights whatsoever therein or in the proceeds therefrom. The Company shall be the sole owner and beneficiary of any such policy or policies and, as such, shall possess and, may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for a Participant, Beneficiary or other distributee or held as collateral security for any obligation of the Company hereunder. <p>XI.7 <b>Severability</b>. <p>If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein. <p>XI.8 <b>Governing Laws</b>. <p>All provisions of the Plan shall be construed and enforced in accordance with the laws of the State of Tennessee, and in the courts situated in that State.</dir> </dir> <dir> <dir>XI.9 <b>Binding Effect</b>. <p>This Plan shall be binding on each Participant and his heirs and legal representatives and on the Company and its successors and assigns. <p>XI.10 <b>Entire Agreement</b>. <p>This document and any amendments contain all the terms and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect. <p>IN WITNESS WHEREOF, the Company has caused this Plan to be properly executed on</dir> </dir> the 1st day of December, 1999. <br>&nbsp; <table BORDER=0 CELLSPACING=0 CELLPADDING=8 WIDTH="624" > <tr> <td VALIGN=TOP WIDTH="50%">ATTEST: <br>&nbsp; <p> <br>Title:</td> <td VALIGN=TOP WIDTH="50%"><b>AUTOZONE, INC.</b> <br>&nbsp; <br>&nbsp; <p>By: /s/ Harry L. Goldsmith <p>Title: Senior Vice President</td> </tr> </TABLE> <p> <hr WIDTH="100%"> <center><b>TRUST UNDER THE AUTOZONE, INC.</b> <br><b>EXECUTIVE COMPENSATION PLAN</b></center> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement made this day of , by and between AUTOZONE, INC. (Company) and the AutoZone, Inc. Executive Deferred Compensation Administrative Committee (Trustee): <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS, Company has adopted the AutoZone, Inc. Executive Deferred Compensation Plan (the "Plan"). <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS, Company has incurred or expects to incur liability under the terms of such Plan(s) with respect to the individuals participating in the Plan; <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS, Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such time as specified in the Plan. <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974. <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS, it is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan. <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: <p><b>Section 1. Establishment of Trust</b> <dir> <dir>(a) Company hereby deposits with Trustee in trust the sum of Ten and 00/100 Dollars ($10.00), which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. <p>(b) The Trust hereby established is revocable by Company; it shall become irrevocable upon a Change of Control, as defined herein.</dir> </dir> <dir> <dir>(c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, Part 1, subchapter J, Chapter l, subtitle A of the Internal Revenue Code of l 986, as amended, and shall be construed accordingly. <p>(d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust Any rights created under the Plan(s) and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. <p>(e) Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits. <p>(f) Within thirty (30) days following the end of each Plan Year ending after the Trust has become irrevocable pursuant to Section l(b) hereof, Company shall be required to irrevocably deposit additional cash or other property to the Trust in an amount sufficient to pay each Plan participant or beneficiary the benefits payable pursuant to the terms of the Plan as of the close of such Plan year(s). <br>&nbsp;</dir> </dir> <b>Section 2. Payments to Plan Participants and Their Beneficiaries</b>. <dir> <dir>(a) Company shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan(s), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company.</dir> </dir> <dir> <dir>(b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan(s) shall be determined by Company or such party as it shall designate under the Plan(s), and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan(s). <p>(c) Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan(s). Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan(s), Company shall make the balance of each such payment as it falls due Trustee shall notify Company where principal and earnings are not sufficient. <br>&nbsp;</dir> </dir> <b>Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When Company Is Insolvent</b>. <dir> <dir>(a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. <p>(b) At all times during the continuance of this Trust, as provided in Section I (d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below. <br>&nbsp; <dir> <dir>( l ) The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. <p>(2) Unless Trustee has actual knowledge of Company's insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency.</dir> </dir> </dir> </dir> <dir> <dir> <dir> <dir>(3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants of their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan(s) or otherwise. <p>(4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). <br>&nbsp; <br>&nbsp;</dir> </dir> (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan(s) for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance. <br>&nbsp;</dir> </dir> <b>Section 4. Payments to Company</b>. <dir> <dir>Except as provided in Section 3 hereof, after the Trust has become irrevocable, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payments of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan(s).</dir> </dir> <b>Section 5. Investment Authority</b>. <dir> <dir>(a) In no event may Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by Company, other than a de minimis amount held in common investment vehicles in which Trustee invests. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with Plan participants, except that voting rights with respect to Trust assets will be exercised by Company and except that dividend rights with respect to Trust assets will rest with Company. <p>(b) Company shall have the right, at anytime, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. <br>&nbsp;</dir> </dir> <b>Section 6. Disposition of Income</b>. <dir> <dir>During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. <br>&nbsp;</dir> </dir> <b>Section 7. Accounting by Trust</b>. <dir> <dir>Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within thirty (30) days following the close of each calendar year and within thirty (30) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. <br>&nbsp;</dir> </dir> <b>Section 8. Responsibility of Trustee</b>. <dir> <dir>(a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan(s) or this Trust and is given in writing by Company. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. <p>(b) If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses and liabilities in a reasonable timely manner, Trustee may obtain payment from the Trust. <p>(c) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. <p>(d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder.</dir> </dir> <dir> <dir>(e) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. <p>(f) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law. Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301 7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. <br>&nbsp;</dir> </dir> <b>Section 9. Compensation and Expenses of Trustee</b>. <br>&nbsp; <blockquote> <blockquote>Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust.</blockquote> </blockquote> <b>Section 10. Resignation and Removal of Trustee</b> <dir> <dir>(a) Trustee may resign at any time by written notice to Company, which shall be effective thirty (30) days after receipt of such notice unless Company and Trustee agree otherwise. <p>(b) Trustee may be removed by Company on ten (10) days notice or upon shorter notice accepted by Trustee. <p>(c) Upon a Change of Control, as defined herein, Trustee may not be removed by Company for five (5) years(s), and the composition of the Administrative Committee shall not be changed during such period. <p>(d) If Trustee resigns within five (5) years(s) after a Change of Control, as defined herein, Company shall apply to a court of competent jurisdiction for the appointment of a successor Trustee or for instructions. <p>(e) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within ninety (90) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit. <p>(f) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraph(s) (a) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. <br>&nbsp;</dir> </dir> <b>Section 11. Appointment of Successor</b> <dir> <dir>(a) If Trustee resigns or is removed in accordance with Section 10(a) hereof, Company may appoint any bank or trust company or other entity having trust powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably required by Company or the successor Trustee to evidence the transfer. <p>(b) If Trustee resigns or is removed pursuant to the provisions of Section 10(e) hereof and selects a successor Trustee, Trustee may appoint any bank or trust company or other entity having trust powers under state law. The appointment of a successor Trustee shall be effective when accepted in writing by the new Trustee. The new Trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer. <p>(c) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. <br>&nbsp;</dir> </dir> <b>Section 12. Amendment or Termination</b> <dir> <dir>(a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan(s) or shall make the Trust revocable after it has become irrevocable in accordance with Section I (b) hereof. <p>(b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan(s) unless sooner revoked in accordance with Section 1 (b) (hereof upon termination of the Trust any assets remaining in the Trust shall be returned to Company). <p>(c) Sections(s) 1,10,11 and 12 of this Trust Agreement may not be amended by Company for five (5) year(s) following a Change of Control, as defined herein. <br>&nbsp;</dir> </dir> <b>Section 13. Miscellaneous</b>. <dir> <dir>(a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. <p>(b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. <p>(c) This Trust Agreement shall be governed by and construed in accordance with the laws of Tennessee. <p>(d) For purposes of this Trust, Change of Control shall mean: 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, of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Act) of 20 percent or more of either the outstanding shares of common stock or the combined voting power of Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of 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, or a liquidation or dissolution of Company or of the sale of all or substantially all of Company's assets". <br>&nbsp;</dir> </dir> <b>Section 14. Effective Date</b>. <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The effective date of this Trust Agreement shall be January 1, 2000. <br>&nbsp; <br>&nbsp; <br>&nbsp; <dir> <dir> <dir> <dir> <dir> <dir> <dir> <dir><b>AUTOZONE, INC.</b> <dir> <dir> <dir> <dir>&nbsp;</dir> </dir> </dir> </dir> <b>"Company"</b> <dir> <dir> <dir> <dir>&nbsp; <br>&nbsp;</dir> </dir> </dir> </dir> By:_________________________ <dir> <dir> <dir> <dir>&nbsp;</dir> </dir> </dir> </dir> Its___________________________ <br>&nbsp; <br>&nbsp;</dir> </dir> </dir> </dir> </dir> </dir> </dir> </dir> <dir> <dir> <dir> <dir> <dir> <dir> <dir> <dir><b>AUTOZONE, INC. EXECUTIVE DEFERRED COMPENSATION COMMITTEE</b> <p><b>"Trustee"</b> <p>By <p>Its</dir> </dir> </dir> </dir> </dir> </dir> </dir> </dir> </body> </HTML> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary consolidated financial information extracted from the financial statements for the quarter ended February 12, 2000, and is qualified in its entirety by reference to such consolidated financial statements. </LEGEND> <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> AUG-26-2000 <PERIOD-END> FEB-12-2000 <CASH> 6,836 <SECURITIES> 0 <RECEIVABLES> 18,923 <ALLOWANCES> 0 <INVENTORY> 1,147,429 <CURRENT-ASSETS> 1,231,135 <PP&E> 2,200,535 <DEPRECIATION> 500,675 <TOTAL-ASSETS> 3,344,331 <CURRENT-LIABILITIES> 1,002,420 <BONDS> 350,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,542 <OTHER-SE> 1,198,628 <TOTAL-LIABILITY-AND-EQUITY> 3,344,331 <SALES> 1,930,636 <TOTAL-REVENUES> 1,930,636 <CGS> 1,120,693 <TOTAL-COSTS> 1,120,693 <OTHER-EXPENSES> 624,182 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 31,056 <INCOME-PRETAX> 154,705 <INCOME-TAX> 59,600 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 95,105 <EPS-BASIC> .69 <EPS-DILUTED> .68 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

BBBY

https://www.sec.gov/Archives/edgar/data/886158/0000950123-00-000199.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, Tgcl4gcH30A1J35XINMzNLao0tGSeY3F/DH+f0ZP0wJUMj7AkW0J1P47nX3eqppG czj8z9POtICFjF3fvjE8tA== <SEC-DOCUMENT>0000950123-00-000199.txt : 20000202 <SEC-HEADER>0000950123-00-000199.hdr.sgml : 20000202 ACCESSION NUMBER: 0000950123-00-000199 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991127 FILED AS OF DATE: 20000111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BED BATH & BEYOND INC CENTRAL INDEX KEY: 0000886158 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 112250488 STATE OF INCORPORATION: NY FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20214 FILM NUMBER: 504902 BUSINESS ADDRESS: STREET 1: 650 LIBERTY AVENUE CITY: UNION STATE: NJ ZIP: 07083 BUSINESS PHONE: 2013791520 MAIL ADDRESS: STREET 1: 715 MORRIS AVENUE CITY: SPRINGFIELD STATE: NJ ZIP: 07081 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>BED BATH & BEYOND INC.: 3RD QUARTER 10-Q <TEXT> <PAGE> 1 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 27, 1999 COMMISSION FILE NUMBER 0-20214 BED BATH & BEYOND INC. ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW YORK 11-2250488 (State of incorporation) (I.R.S. Employer Identification No.) 650 LIBERTY AVENUE, UNION, NEW JERSEY 07083 ------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (908) 688-0888 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: CLASS OUTSTANDING AT NOVEMBER 27, 1999 ----- -------------------------------- Common Stock - $0.01 par value 140,340,662 <PAGE> 2 <TABLE> <CAPTION> BED BATH & BEYOND INC. AND SUBSIDIARIES INDEX PAGE NO. -------- PART I - FINANCIAL INFORMATION <S> <C> Consolidated Balance Sheets November 27, 1999 and February 27, 1999 ................. 3 Consolidated Statements of Earnings Three Months and Nine Months Ended November 27, 1999 and November 28, 1998 ................. 4 Consolidated Statements of Cash Flows Nine Months Ended November 27, 1999 and November 28, 1998 5 Note to Consolidated Financial Statements ................. 6 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 Exhibit Index ............................................. 11 </TABLE> <PAGE> 3 BED BATH & BEYOND INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> November 27, February 27, 1999 1999 ------------ ------------ (unaudited) ASSETS <S> <C> <C> Current assets: Cash and cash equivalents ................................ $107,635 $ 90,396 Merchandise inventories .................................. 522,433 360,337 Prepaid expenses and other current assets ................ 9,749 4,546 -------- -------- Total current assets .................................. 639,817 455,279 -------- -------- Property and equipment, net ................................. 202,362 150,438 Other assets ................................................ 33,186 27,431 -------- -------- $875,365 $633,148 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ........................................ $201,997 $ 99,370 Accrued expenses and other current liabilities .......... 124,205 89,725 Income taxes payable .................................... 20,783 16,610 -------- -------- Total current liabilities ........................... 346,985 205,705 -------- -------- Deferred rent ................................................ 19,067 16,356 -------- -------- Total liabilities ................................... 366,052 222,061 -------- -------- Shareholders' equity: Preferred stock - $0.01 par value; authorized - 1,000,000 shares; no shares issued or outstanding .............................................. -- -- Common stock - $0.01 par value; authorized -350,000,000 shares; issued and outstanding - November 27, 1999, 140,340,662 shares and February 27, 1999, 139,418,120 shares ........... 1,403 1,394 Additional paid-in capital ................................. 95,059 79,679 Retained earnings .......................................... 412,851 330,014 -------- -------- Total shareholders' equity ............................ 509,313 411,087 -------- -------- $875,365 $633,148 ======== ======== </TABLE> See accompanying Note to Consolidated Financial Statements. -3- <PAGE> 4 BED BATH & BEYOND INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- November 27, November 28, November 27, November 28, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net sales .............................................. $ 486,457 $ 363,431 $ 1,303,415 $ 977,948 Cost of sales, including buying, occupancy and indirect costs ......................... 289,673 214,958 774,847 577,353 ------------ ------------ ------------ ------------ Gross profit .................................... 196,784 148,473 528,568 400,595 Selling, general and administrative expenses ........... 146,177 108,319 396,366 297,937 ------------ ------------ ------------ ------------ Operating profit ................................ 50,607 40,154 132,202 102,658 Interest income ........................................ 1,371 761 3,596 2,149 ------------ ------------ ------------ ------------ Earnings before provision for income taxes ...... 51,978 40,915 135,798 104,807 Provision for income taxes ............................. 20,271 16,264 52,961 41,661 ------------ ------------ ------------ ------------ Net earnings.................................... $ 31,707 $ 24,651 $ 82,837 $ 63,146 ============ ============ ============ ============ Net earnings per share - Basic ......................... $ 0.23 $ 0.18 $ 0.59 $ 0.46 Net earnings per share - Diluted ....................... $ 0.22 $ 0.17 $ 0.57 $ 0.44 Weighted average shares outstanding - Basic ............ 140,179,414 138,971,762 139,828,298 138,667,458 Weighted average shares outstanding - Diluted .......... 144,172,597 143,079,852 144,125,462 142,921,542 </TABLE> See accompanying Note to Consolidated Financial Statements. -4- <PAGE> 5 BED BATH & BEYOND INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, UNAUDITED) <TABLE> <CAPTION> Nine Months Ended ---------------------------- November 27, November 28, 1999 1998 ------------ ------------ <S> <C> <C> Cash Flows from Operating Activities: Net earnings ............................................................... $ 82,837 $ 63,146 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ......................................... 22,367 16,642 Deferred income taxes ................................................. (3,761) (3,533) Increase in assets: Merchandise inventories .......................................... (162,096) (131,392) Prepaid expenses and other current assets ........................ (5,203) (5,194) Other assets ..................................................... (1,994) (1,279) Increase (decrease) in liabilities: Accounts payable ................................................. 102,627 98,636 Accrued expenses and other current liabilities ................... 34,480 11,587 Income taxes payable ............................................. 4,173 (2,195) Deferred rent .................................................... 2,711 2,777 --------- --------- Net cash provided by operating activities .................................. 76,141 49,195 --------- --------- Cash Flows from Investing Activities: Capital expenditures ....................................................... (74,291) (42,512) --------- --------- Net cash used in investing activities ...................................... (74,291) (42,512) --------- --------- Cash Flows from Financing Activities: Proceeds from exercise of stock options .................................... 15,389 14,587 --------- --------- Net cash provided by financing activities .................................. 15,389 14,587 --------- --------- Net increase in cash and cash equivalents .................................. 17,239 21,270 Cash and cash equivalents: Beginning of period ........................................................ 90,396 53,280 --------- --------- End of period .............................................................. $ 107,635 $ 74,550 ========= ========= </TABLE> See accompanying Note to Consolidated Financial Statements. -5- <PAGE> 6 BED BATH & BEYOND INC. AND SUBSIDIARIES NOTE TO CONSOLIDATED FINANCIAL STATEMENTS 1) BASIS OF PRESENTATION The accompanying consolidated financial statements, except for the February 27, 1999 consolidated balance sheet, have been prepared without audit. In the opinion of Management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of Bed Bath & Beyond Inc. and subsidiaries (the "Company") as of November 27, 1999 and February 27, 1999 and the results of their operations for the three months and nine months ended November 27, 1999 and November 28, 1998, respectively, and their cash flows for the nine months ended November 27, 1999 and November 28, 1998. Because of the seasonality of the specialty retailing business, operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. The accompanying unaudited consolidated financial statements are presented in accordance with the requirements for Form 10-Q and consequently do not include all the disclosures normally required by generally accepted accounting principles. Reference should be made to Bed Bath & Beyond Inc.'s Annual Report for the fiscal year ended February 27, 1999 for additional disclosures, including a summary of the Company's significant accounting policies. -6- <PAGE> 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three Months November 27, 1999 vs. Three Months November 28, 1998 Net sales for the third quarter ended November 27, 1999 were $486.5 million, an increase of $123.0 million or approximately 33.9% over net sales of $363.4 million for the corresponding quarter last year. Approximately 79.1% of the increase was attributable to new store net sales. The increase in comparable store net sales in the third quarter of 1999 was approximately 7.8%. The increase in net sales reflects a number of factors, including but not limited to, the continued consumer acceptance of the Company's merchandise offerings and customer service and the generally favorable retailing environment. Approximately 55% and 45% of net sales for the third quarter were attributable to sales of domestics merchandise and home furnishings merchandise, respectively. Gross profit for the third quarter of 1999 was $196.8 million or 40.5% of net sales compared with $148.5 million or 40.9% of net sales during the third quarter of 1998. The decrease as a percentage of net sales in gross profit in the third quarter of 1999, as compared to the same period a year ago, was attributable to a number of factors, including a different mix of sales as well as a continued emphasis on providing value pricing to the customer. Selling, general and administrative expenses ("SG&A") were $146.2 million in the third quarter of 1999 compared with $108.3 million in the same quarter last year and as a percentage of net sales were 30.0% and 29.8%, respectively. The increase in SG&A, as a percentage of net sales, primarily reflects an increase in costs associated with new store openings, including the Company's new electronic service site. Nine Months November 27, 1999 vs. Nine Months November 28, 1998 Net sales for the nine months ended November 27, 1999 were $1,303.4 million, an increase of $325.5 million or approximately 33.3% over net sales of $977.9 million for the corresponding period last year. Approximately 75.0% of the increase was attributable to new store net sales. The increase in comparable store net sales for the first nine months of 1999 was approximately 9.0%. Gross profit for the first nine months of 1999 was $528.6 million or 40.6% of net sales compared with $400.6 million or 41.0% of net sales during the same period last year. The decrease in gross profit for the nine months of 1999 as a percentage of net sales, as compared to the same period a year ago, was attributable to a number of factors, including a different mix of sales as well as a continued emphasis on providing value pricing to the customer. SG&A was $396.4 million in the first nine months of 1999 compared with $297.9 million for the same period last year and as a percentage of net sales were 30.4% and 30.5%, respectively. -7- <PAGE> 8 EXPANSION PROGRAM The Company is engaged in an ongoing expansion program involving the opening of new stores in both existing and new markets and the expansion or replacement of existing stores with larger stores. As a result of this program, the total number of stores has increased to 237 stores at the end of the third quarter of 1999 compared with 185 stores at the end of the corresponding quarter last year. Total square footage grew to 9,696,000 square feet at the end of the third quarter of 1999, from 7,653,000 square feet at the end of the third quarter of last year. During the fiscal third quarter, the Company opened 36 new superstores as compared with 26 new superstores in the corresponding quarter a year ago. During the first nine months of fiscal 1999, the Company opened 51 new superstores and expanded four existing stores resulting in an aggregate addition of 2,008,000 square feet to total store space. The Company anticipates opening approximately four additional stores by the end of the fiscal year, aggregating approximately 119,000 square feet of store space. FINANCIAL CONDITION Total assets at November 27, 1999 were $875.4 million compared with $633.1 million at February 27, 1999, an increase of $242.2 million. Of the total increase, $184.5 million represented an increase in current assets and $57.7 million represented an increase in non-current assets. The increase in current assets was primarily attributable to an increase in merchandise inventories, which resulted from new store space and, to a lesser extent, changes in merchandising mix. Total liabilities at November 27, 1999 were $366.1 million compared with $222.1 million at February 27, 1999, an increase of $144.0 million. The increase was primarily attributable to a $102.6 million increase in accounts payable (resulting from an increase in inventories) and a $34.5 million increase in accrued expenses and other current liabilities. Shareholders' equity was $509.3 million at November 27, 1999 compared with $411.1 million at February 27, 1999. The increase primarily reflects net earnings for the first nine months of fiscal 1999 and additional paid-in capital from the exercise of stock options. Capital expenditures for the first nine months of fiscal 1999 were $74.3 million compared with $42.5 million for the corresponding period last year. The increase is primarily attributable to expenditures for furniture, fixtures and leasehold improvements for the 51 new superstores opened and four stores expanded during the first nine months and for the electronic service site, compared to furniture, fixtures and leasehold improvements for the 44 new superstores opened and three stores expanded in the same period last year. For the foreseeable future, the Company believes that it will be able to finance both its normal operations and its expansion program through internally generated funds. YEAR 2000 To date, the Year 2000 issue has not had a material adverse effect on the Company. The Company's information systems are operating effectively. At this time, the Company is not aware of any vendors or principal suppliers that are not Year 2000 compliant; however, it will continue to maintain contingency plans with respect to its third-party relationships. The Company's costs incurred associated with the Year 2000 issue were not material. -8- <PAGE> 9 FORWARD LOOKING STATEMENTS This Form 10-Q may contain forward looking statements. Important factors which may affect these statements are contained in the Company's Annual Report to shareholders for the fiscal year ended February 27, 1999. -9- <PAGE> 10 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The exhibits to this report are listed on the Exhibit Index included elsewhere herein. (b) No reports on Form 8-K were filed by the Company during the three month period ended November 27, 1999. 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. BED BATH & BEYOND INC. (Registrant) Date: January 10, 2000 By: /s/ Ronald Curwin ------------------------- Ronald Curwin Chief Financial Officer and Treasurer -10- <PAGE> 11 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Exhibit Page No. - ----------- ------- -------- <S> <C> <C> 10.1 Stock Option Agreement between the Company 12-14 and Warren Eisenberg, dated as of August 13, 1999 10.2 Stock Option Agreement between the Company and 15-17 Leonard Feinstein, dated as of August 13, 1999 10.3 Form of Standard Stock Option Agreement 18-19 27 Financial Data Schedule 20 (Filed electronically with SEC only) </TABLE> -11- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>2 <DESCRIPTION>STOCK OPTION AGREEMENT: EISENBERG <TEXT> <PAGE> 1 Exhibit 10.1 STOCK OPTION AGREEMENT dated as of August 13, 1999 between BED BATH & BEYOND INC., a New York corporation, and WARREN EISENBERG (Co-Chief Executive Officer) (the "Optionee"). PRELIMINARY STATEMENT Pursuant to the Bed Bath & Beyond Inc. 1996 Stock Option Plan (the "1996 Plan"), the Stock Option Committee for Senior Executives that administers the Plan (the "Committee") has authorized the granting to Optionee of an option (the "Option") to purchase 400,000 shares of the Company's common stock, par value $.01 per share ("Common Stock"), subject to the Plan and the terms and conditions set forth herein. The parties hereto desire to enter into this Agreement in order to set forth the terms of such Option. Accordingly, the parties hereto agree as follows: 1. Grant of Option. Subject to the Plan and the terms and conditions of this Agreement, the Company hereby grants to Optionee the Option to purchase from the Company up to 400,000 shares of Common Stock at a price of $29.53125 per share. The Option shall not be immediately exercisable but shall become exercisable in installments, which shall be cumulative, as indicated below (which installments may be accelerated as indicated below): <TABLE> <CAPTION> Date on which Installment Number of Shares First Vests and Becomes Exercisable In Installments - ----------------------------------- ---------------- <S> <C> August 13, 2000 133,333 shares, being 33 1/3% of the number of shares originally subject to the Option August 13, 2001 133,333 shares, being 33 1/3% of the number of shares originally subject to the Option August 13, 2002 133,334 shares, being 33 1/3% of the number of shares originally subject to the Option </TABLE> The dates on which installments vest and become exercisable shall be accelerated upon the death of the Optionee, or the termination of the Optionee's employment with the Company pursuant to section 7(a) (i.e., death), 7(b) (i.e., disability) or 7(d) (i.e., Constructive Termination Without Cause), or following a Change in Control, as defined in section 8(a), of the Optionee's employment agreement with the Company dated as of June 30, 1997, and upon the occurrence of any of such events, the total number of shares originally subject to the Option shall vest and become immediately exercisable. In the event of any acceleration pursuant to the immediately preceding sentence, the unexercised portion of the Option shall continue to be exercisable for 12 months thereafter as -12- <PAGE> 2 provided in paragraph 4 of this Agreement, but in no event later than the tenth anniversary of the date hereof. 2. Plans Governing Terms of Option. Except as otherwise specifically herein provided, the Option is subject in all respects to the terms and conditions of the Plan, a copy of which is attached hereto as Exhibit A. 3. Type of Option. The Option is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 4. Termination. The Option shall terminate on the tenth anniversary of the date hereof, unless the Optionee's employment with the Company terminates before that date, in which event the Option shall terminate upon termination of the Optionee's employment with the Company, if the termination is for Cause pursuant to section 7(c) of the Optionee's employment agreement or is on the Optionee's own initiative pursuant to section 7(e) of the Optionee's employment agreement, but the unexercised portion of the Option shall continue to be exercisable for 12 months after such termination of employment (but in no event later than the tenth anniversary of the date hereof), if such termination of employment is for any other cause. The Optionee's election pursuant to section 3 of the Optionee's employment agreement to commence the Senior Status Period and provide the limited consulting services contemplated therein shall not be deemed a termination of the Optionee's employment for the purposes of this Agreement. 5. Exercise. The Option may be exercised by delivering to the Company a written notice (signed by the Optionee) stating the number of shares with respect to which the Option is being exercised, together with full payment of the purchase price therefor. Payment may be made in cash or by certified check, bank draft, or money order payable to the order of the Company or, if permitted by the Committee, through delivery of shares of Common Stock (such shares to be valued as provided in the Plan). As provided in the Plan, the Committee may require the Optionee to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements (or make other arrangements satisfactory to the Company with regard to such taxes) prior to delivering to the Optionee any shares purchased upon exercise of the Option. The Option may not be exercised with respect to a fractional share. 6. Restriction on Transfer. The Option may not be assigned or transferred except by will or the laws of descent and distribution and except by a written assignment (signed by the Optionee and delivered to the Company), provided such assignment assigns all or a portion of the Option to the Optionee's spouse, descendants or trusts for the sole benefit of the Optionee's spouse or descendants. The Option may be exercised only by the Optionee, the Optionee's assignee pursuant to an assignment permitted hereunder, or by the executor or personal representative of the Optionee or of such assignee. 7. Notice. Any notice or communication to the Company hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, or by United States mail, to the following address (or to such other address as the Company shall from time to time specify): -13- <PAGE> 3 Bed Bath & Beyond Inc. C/O Petitti, Eisenberg & Gamache, P.C. Attention: Todd Eisenberg 488 Pleasant Street New Bedford, MA 02740 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. BED BATH & BEYOND INC. By: /s/ Leonard Feinstein --------------------------- /s/ Warren Eisenberg --------------------------- Warren Eisenberg -14- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2 <SEQUENCE>3 <DESCRIPTION>STOCK OPTION AGREEMENT: FEINSTEIN <TEXT> <PAGE> 1 Exhibit 10.2 STOCK OPTION AGREEMENT dated as of August 13, 1999 between BED BATH & BEYOND INC., a New York corporation, and LEONARD FEINSTEIN (Co-Chief Executive Officer) (the "Optionee"). PRELIMINARY STATEMENT Pursuant to the Bed Bath & Beyond Inc. 1996 Stock Option Plan (the "1996 Plan"), the Stock Option Committee for Senior Executives that administers the Plan (the "Committee") has authorized the granting to Optionee of an option (the "Option") to purchase 400,000 shares of the Company's common stock, par value $.01 per share ("Common Stock"), subject to the Plan and the terms and conditions set forth herein. The parties hereto desire to enter into this Agreement in order to set forth the terms of such Option. Accordingly, the parties hereto agree as follows: 1. Grant of Option. Subject to the Plan and the terms and conditions of this Agreement, the Company hereby grants to Optionee the Option to purchase from the Company up to 400,000 shares of Common Stock at a price of $29.53125 per share. The Option shall not be immediately exercisable but shall become exercisable in installments, which shall be cumulative, as indicated below (which installments may be accelerated as indicated below): <TABLE> <CAPTION> Date on which Installment Number of Shares First Vests and Becomes Exercisable In Installments - ----------------------------------- ---------------- <S> <C> August 13, 2000 133,333 shares, being 33 1/3% of the number of shares originally subject to the Option August 13, 2001 133,333 shares, being 33 1/3% of the number of shares originally subject to the Option August 13, 2002 133,334 shares, being 33 1/3% of the number of shares originally subject to the Option </TABLE> The dates on which installments vest and become exercisable shall be accelerated upon the death of the Optionee, or the termination of the Optionee's employment with the Company pursuant to section 7(a) (i.e., death), 7(b) (i.e., disability) or 7(d) (i.e., Constructive Termination Without Cause), or following a Change in Control, as defined in section 8(a), of the Optionee's employment agreement with the Company dated as of June 30, 1997, and upon the occurrence of any of such events, the total number of shares originally subject to the Option shall vest and become immediately exercisable. In the event of any acceleration pursuant to the immediately preceding sentence, the unexercised portion of the Option shall continue to be exercisable for 12 months thereafter as -15- <PAGE> 2 provided in paragraph 4 of this Agreement, but in no event later than the tenth anniversary of the date hereof. 2. Plans Governing Terms of Option. Except as otherwise specifically herein provided, the Option is subject in all respects to the terms and conditions of the Plan, a copy of which is attached hereto as Exhibit A. 3. Type of Option. The Option is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 4. Termination. The Option shall terminate on the tenth anniversary of the date hereof, unless the Optionee's employment with the Company terminates before that date, in which event the Option shall terminate upon termination of the Optionee's employment with the Company, if the termination is for Cause pursuant to section 7(c) of the Optionee's employment agreement or is on the Optionee's own initiative pursuant to section 7(e) of the Optionee's employment agreement, but the unexercised portion of the Option shall continue to be exercisable for 12 months after such termination of employment (but in no event later than the tenth anniversary of the date hereof), if such termination of employment is for any other cause. The Optionee's election pursuant to section 3 of the Optionee's employment agreement to commence the Senior Status Period and provide the limited consulting services contemplated therein shall not be deemed a termination of the Optionee's employment for the purposes of this Agreement. 5. Exercise. The Option may be exercised by delivering to the Company a written notice (signed by the Optionee) stating the number of shares with respect to which the Option is being exercised, together with full payment of the purchase price therefor. Payment may be made in cash or by certified check, bank draft, or money order payable to the order of the Company or, if permitted by the Committee, through delivery of shares of Common Stock (such shares to be valued as provided in the Plan). As provided in the Plan, the Committee may require the Optionee to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements (or make other arrangements satisfactory to the Company with regard to such taxes) prior to delivering to the Optionee any shares purchased upon exercise of the Option. The Option may not be exercised with respect to a fractional share. 6. Restriction on Transfer. The Option may not be assigned or transferred except by will or the laws of descent and distribution and except by a written assignment (signed by the Optionee and delivered to the Company), provided such assignment assigns all or a portion of the Option to the Optionee's spouse, descendants or trusts for the sole benefit of the Optionee's spouse or descendants. The Option may be exercised only by the Optionee, the Optionee's assignee pursuant to an assignment permitted hereunder, or by the executor or personal representative of the Optionee or of such assignee. 7. Notice. Any notice or communication to the Company hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, or by United States mail, to the following address (or to such other address as the Company shall from time to time specify): -16- <PAGE> 3 Bed Bath & Beyond Inc. C/O Petitti, Eisenberg & Gamache, P.C. Attention: Todd Eisenberg 488 Pleasant Street New Bedford, MA 02740 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. BED BATH & BEYOND INC. By: /s/ Warren Eisenberg ---------------------------- /s/ Leonard Feinstein ---------------------------- Leonard Feinstein -17- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3 <SEQUENCE>4 <DESCRIPTION>FORM OF STANDARD STOCK OPTION AGREEMENT <TEXT> <PAGE> 1 Exhibit 10.3 FORM OF STANDARD STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT dated as of ______________ between BED BATH & BEYOND INC., a New York corporation, and _______________ (the "Optionee"). PRELIMINARY STATEMENT Pursuant to the Bed Bath & Beyond Inc. ____ Stock Option Plan (the "Plan"), the Committee that administers the Plan (the "Committee") has authorized the granting to Optionee of an option to purchase ______ shares of the Company's common stock, par value $.01 per share ("Common Stock"), subject to the Plan and the terms and conditions set forth herein. The parties hereto desire to enter into this Agreement in order to set forth the terms of such option. Accordingly, the parties hereto agree as follows: 1. Grant of Option. Subject to the Plan and the terms and conditions of this Agreement, the Company hereby grants to Optionee the option (the "Option") to purchase from the Company up to _______ shares of Common Stock at a price of $_____ per share. The Option shall not be immediately exercisable but shall become exercisable in installments, which shall be cumulative, as indicated below: <TABLE> <CAPTION> <S> <C> Date on which Installment Number of Shares First Vests and Becomes Exercisable In Installments - ----------------------------------- ---------------- (one year from date of grant) 20% of the number of shares originally subject to the Option (two years from date of grant) 20% of the number of shares originally subject to the Option (three years from date of grant) 20% of the number of shares originally subject to the Option (four years from date of grant) 20% of the number of shares originally subject to the Option (five years from date of grant) 20% of the number of shares originally subject to the Option </TABLE> 2. Plans Governing Terms of Option. The Option is subject in all respects to the terms and conditions of the Plan, a copy of which is attached hereto as Exhibit A. 3. Type of Option. The Option is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 4. Termination. The Option shall terminate on the tenth anniversary of the date hereof, unless terminated earlier pursuant to the following sentence or otherwise pursuant to the -18- <PAGE> 2 Plan. The Option shall immediately terminate upon termination of the Optionee's employment with the Company, subject to the following exceptions (i) if such termination is by reason of the death or disability of the Optionee, the unexercised portion of the Option shall continue to be exercisable for 12 months after such termination and (ii) if such termination is for any other reason, excluding termination for cause, the unexercised portion of the Option shall continue to be exercisable for three months after such termination (subject, in the case of both clauses (i) and (ii) above, to the preceding sentence). 5. Exercise. The Option may be exercised by delivering to the Company a written notice (signed by the Optionee) stating the number of shares with respect to which the Option is being exercised, together with full payment of the purchase price therefor. Payment may be made in cash or by certified check, bank draft, or money order payable to the order of the Company or, if permitted by the Committee, through delivery of shares of Common Stock (such shares to be valued as provided in the Plan). As provided in the Plan, the Committee may require Optionee to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements (or make other arrangements satisfactory to the Company with regard to such taxes) prior to delivering to Optionee any shares purchased upon exercise of the Option. The Option may not be exercised with respect to a fractional share. 6. Restriction on Transfer. The Option may not be assigned or transferred except by will or the laws of descent and distribution and during the Optionee's lifetime may be exercised only by him. 7. Notice. Any notice or communication to the Company hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, or by United States mail, to the following address (or to such other address as the Company shall from time to time specify): Bed Bath & Beyond Inc. C/O Petitti, Eisenberg & Gamache, P.C. Attention: Todd Eisenberg 488 Pleasant Street New Bedford, MA 02740 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. BED BATH & BEYOND INC. By: ------------------------ ------------------------ (Optionee) -19- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 27, 1999 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED NOVEMBER 27, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> FEB-26-2000 <PERIOD-START> FEB-28-1999 <PERIOD-END> NOV-27-1999 <CASH> 107,635 <SECURITIES> 0 <RECEIVABLES> 0 <ALLOWANCES> 0 <INVENTORY> 522,433 <CURRENT-ASSETS> 639,817 <PP&E> 304,949 <DEPRECIATION> (102,587) <TOTAL-ASSETS> 875,365 <CURRENT-LIABILITIES> 346,985 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,403 <OTHER-SE> 507,910 <TOTAL-LIABILITY-AND-EQUITY> 875,365 <SALES> 1,303,415 <TOTAL-REVENUES> 1,303,415 <CGS> 774,847 <TOTAL-COSTS> 774,847 <OTHER-EXPENSES> 396,366 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> (3,596) <INCOME-PRETAX> 135,798 <INCOME-TAX> 52,961 <INCOME-CONTINUING> 82,837 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 82,837 <EPS-BASIC> .59 <EPS-DILUTED> .57 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

BBY

https://www.sec.gov/Archives/edgar/data/764478/0000912057-00-000855.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, OsqkBUDtmYRCO5Uk/qduL/JdLYVcy578k6eKYpF2ftQo28uIv3oR9R3sVxSyiQO1 vG6/2N1Z2LQIXmc/ARMiqQ== <SEC-DOCUMENT>0000912057-00-000855.txt : 20000202 <SEC-HEADER>0000912057-00-000855.hdr.sgml : 20000202 ACCESSION NUMBER: 0000912057-00-000855 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991127 FILED AS OF DATE: 20000111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEST BUY CO INC CENTRAL INDEX KEY: 0000764478 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RADIO TV & CONSUMER ELECTRONICS STORES [5731] IRS NUMBER: 410907483 STATE OF INCORPORATION: MN FISCAL YEAR END: 0301 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09595 FILM NUMBER: 505403 BUSINESS ADDRESS: STREET 1: 7075 FLYING CLOUD DR CITY: EDIN PRARIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129472000 MAIL ADDRESS: STREET 1: P O BOX 9312 CITY: MINNEAPOLIS STATE: MN ZIP: 55440-9312 FORMER COMPANY: FORMER CONFORMED NAME: BEST BUYS CO INC DATE OF NAME CHANGE: 19900809 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q <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 NOVEMBER 27, 1999 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: 1-9595 BEST BUY CO., INC. (Exact name of registrant as specified in its charter) Minnesota 41-0907483 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7075 Flying Cloud Drive 55344 Eden Prairie, Minnesota (Zip Code) (Address of principal executive offices) (612) 947-2000 (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 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 November 27, 1999, there were 204,411,000 shares of common stock, $.10 par value, outstanding. <PAGE> BEST BUY CO., INC. FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 27, 1999 INDEX <TABLE> <CAPTION> PAGE ---- Part I. Financial Information <S> <C> Item 1. Consolidated Financial Statements: a) Consolidated balance sheets as of 3-4 November 27, 1999, February 27, 1999 and November 28, 1998 b) Consolidated statements of earnings 5 for the three and nine months ended November 27, 1999 and November 28, 1998 c) Consolidated statement of changes in 6 shareholders' equity for the nine months ended November 27, 1999 d) Consolidated statements of cash flows 7 for the nine months ended November 27, 1999 and November 28,1998 e) Notes to consolidated financial statements 8-10 Item 2. Management's Discussion and Analysis of 11-15 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures 16 About Market Risk Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 </TABLE> 2 <PAGE> PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS BEST BUY CO., INC. CONSOLIDATED BALANCE SHEETS ASSETS ($ in 000) <TABLE> <CAPTION> November 27, November 28, 1999 February 27, 1998 (Unaudited) 1999 (Unaudited) ----------- ------------ ----------- <S> <C> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 514,797 $ 785,777 $ 409,373 Receivables 383,461 132,401 278,468 Recoverable costs from developed properties 87,377 73,956 75,329 Merchandise inventories 2,082,543 1,046,366 1,684,928 Other current assets 40,601 33,900 31,878 ----------- ------------ ----------- Total current assets 3,108,779 2,072,400 2,479,976 PROPERTY AND EQUIPMENT Land and buildings 51,905 23,158 22,946 Leasehold improvements 221,434 174,495 164,140 Furniture, fixtures and equipment 679,391 505,232 455,084 Property under capital leases 29,079 29,079 29,079 ----------- ------------ ----------- 981,809 731,964 671,249 Less accumulated depreciation and amortization 372,722 308,324 297,822 ----------- ------------ ----------- Net property and equipment 609,087 423,640 373,427 OTHER ASSETS 54,187 35,583 22,114 ----------- ------------ ----------- TOTAL ASSETS $3,772,053 $ 2,531,623 $ 2,875,517 ----------- ------------ ----------- ----------- ------------ ----------- </TABLE> See notes to consolidated financial statements. 3 <PAGE> BEST BUY CO., INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY ($ in 000) <TABLE> <CAPTION> November 27, November 28, 1999 February 27, 1998 (Unaudited) 1999 (Unaudited) ----------- ------------ ----------- <S> <C> <C> <C> CURRENT LIABILITIES Accounts payable $2,070,254 $1,011,746 $1,534,021 Accrued compensation and related expenses 78,691 86,667 59,270 Accrued liabilities 359,062 282,711 265,657 Current portion of long-term debt 9,046 30,088 32,132 ----------- ------------ ----------- Total current liabilities 2,517,053 1,411,212 1,891,080 LONG-TERM LIABILITIES 72,932 55,957 59,794 LONG-TERM DEBT 23,679 30,509 31,830 SHAREHOLDERS' EQUITY Preferred stock, $1.00 par value: Authorized - 400,000 shares; Issued and outstanding - none - - - Common stock, $.10 par value: Authorized - 400,000,000 shares; Issued and outstanding 204,411,000, 203,621,000 and 201,764,000 shares, respectively 20,441 10,181 10,088 Additional paid-in capital 473,296 542,377 510,145 Retained earnings 664,652 481,387 372,580 ----------- ------------ ----------- Total shareholders' equity 1,158,389 1,033,945 892,813 ----------- ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,772,053 $2,531,623 $2,875,517 ----------- ------------ ----------- ----------- ------------ ----------- </TABLE> See notes to consolidated financial statements. 4 <PAGE> BEST BUY CO., INC. CONSOLIDATED STATEMENTS OF EARNINGS ($ in 000, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended --------------------------- --------------------------- November 27, November 28, November 27, November 28, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues $ 3,107,337 $ 2,492,467 $ 8,179,408 $ 6,608,616 Cost of goods sold 2,516,970 2,048,252 6,596,519 5,409,472 ------------ ------------ ------------ ------------ Gross profit 590,367 444,215 1,582,889 1,199,144 Selling, general and administrative expenses 467,779 353,985 1,298,994 1,017,693 ------------ ------------ ------------ ------------ Operating income 122,588 90,230 283,895 181,451 Net interest income (expense) 4,451 (3,190) 13,140 (6,695) ------------ ------------ ------------ ------------ Earnings before income tax expense 127,039 87,040 297,035 174,756 Income tax expense 48,650 33,497 113,770 67,281 ------------ ------------ ------------ ------------ Net earnings $ 78,389 $ 53,543 $ 183,265 $ 107,475 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per share $ .38 $ .27 $ .90 $ .54 Diluted earnings per share $ .37 $ .25 $ .86 $ .52 Basic weighted average common shares outstanding (000's) 204,784 201,612 204,618 198,070 Diluted weighted average common shares outstanding (000's) 212,760 210,046 213,430 209,346 </TABLE> See notes to consolidated financial statements. 5 <PAGE> BEST BUY CO., INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED NOVEMBER 27, 1999 ($ in 000) (Unaudited) <TABLE> <CAPTION> Additional Common paid-in Retained stock capital earnings --------- --------- --------- <S> <C> <C> <C> Balance, February 27, 1999 $ 10,181 $ 542,377 $ 481,387 Stock options exercised 357 30,140 -- Tax benefit from stock options exercised -- 69,386 -- Two-for-one stock split 10,190 (10,190) -- Repurchase of common stock (287) (158,417) -- Net earnings, nine months ended November 27, 1999 -- -- 183,265 --------- --------- --------- Balance, November 27, 1999 $ 20,441 $ 473,296 $ 664,652 --------- --------- --------- --------- --------- --------- </TABLE> See notes to consolidated financial statements. 6 <PAGE> BEST BUY CO., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in 000) (Unaudited) <TABLE> <CAPTION> Nine Months Ended --------------------------- November 27, November 28, 1999 1998 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net earnings $ 183,265 $ 107,475 Depreciation, amortization and other non-cash charges 71,134 56,394 ------------ ------------ 254,399 163,869 Changes in operating assets and liabilities: Receivables (251,060) (182,766) Merchandise inventories (1,036,177) (624,140) Other assets (7,562) (3,525) Accounts payable 1,058,508 771,369 Other liabilities 153,542 82,183 ------------ ------------ Total cash provided by operating activities 171,650 206,990 ------------ ------------ INVESTING ACTIVITIES Additions to property and equipment (255,624) (95,040) Increase in recoverable costs from developed properties (13,421) (67,114) Increase in other assets (16,841) (3,245) ------------ ------------ Total cash used in investing activities (285,886) (165,399) ------------ ------------ FINANCING ACTIVITIES Repurchase of common stock (158,704) (2,462) Common stock issued 29,832 12,148 Long-term debt payments (27,872) (162,031) ------------ ------------ Total cash used in financing activities (156,744) (152,345) ------------ ------------ DECREASE IN CASH AND CASH EQUIVALENTS (270,980) (110,754) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 785,777 520,127 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 514,797 $ 409,373 ------------ ------------ ------------ ------------ </TABLE> Amounts in this statement are presented on a cash basis and therefore may differ from those shown in other sections of this quarterly report. <TABLE> <CAPTION> Supplemental cash flow information: Cash paid during the period for: <S> <C> <C> Interest: $ 3,879 $ 23,822 Income taxes: $ 47,595 $ 60,728 </TABLE> See notes to consolidated financial statements. 7 <PAGE> BEST BUY CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The consolidated balance sheets as of November 27, 1999, and November 28, 1998, the related consolidated statements of earnings for the three and nine months then ended, consolidated cash flows for the nine months then ended and the consolidated statement of changes in shareholders' equity for the nine months ended November 27, 1999, are unaudited; in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included and were normal and recurring in nature. The Company's business is seasonal in nature and interim results are not necessarily indicative of results for a full year. These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in the Company's Annual Report to Shareholders for the fiscal year ended February 27, 1999, and incorporated by reference into the Company's Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation. 2. CHANGE IN ACCOUNTING POLICY - PERFORMANCE SERVICE PLANS: The Company sells performance service plans (PSPs) on behalf of an unrelated third party. In December 1999, the staff of the Securities and Exchange Commission (SEC Staff) announced its position with respect to the accounting for revenues from insured extended service contracts, such as PSPs. The SEC Staff indicated that in those states where a retailer is deemed to be the obligor, net revenues from the sales of service contracts should be recognized over the life of the underlying contract rather than at the time of the sale. The designation of a retailer as the obligor varies depending in large part on applicable state regulations. The Company had, until the third quarter of fiscal 2000, recognized the net commission revenue from the sale of all insured PSPs at the time of sale. Effective as of the beginning of the third quarter of fiscal 2000, the Company has changed its accounting policy with respect to the recognition of revenues from the sale of obligor service contracts. Pursuant to the Company's new policy, the Company recognizes revenues, net of direct selling expenses (consisting primarily of a lump sum payment due to the administrator at the time of sale), ratably over the terms of the contracts sold, generally two to five years. Previously, the Company recognized all revenues, net of direct selling expenses, for the sale of obligor service contracts at the time of sale. That accounting policy was adopted in fiscal 1996, the year the Company began selling insured PSPs. The Company has and will continue to recognize net commission revenues from the sale of non-obligor service contracts at the time of sale. The Company has given retroactive effect to this new accounting policy by restating its previously published financial statements beginning with fiscal 1996. The impact of the restatement on the consolidated statements of operations for the three and nine month periods ended November 28, 1998, is as follows (in thousands, except per share amounts): <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------------------- ------------------------------- As Previously As Previously Reported As Restated Reported As Restated November 28, November 28, November 28, November 28, 1998 1998 1998 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues $2,493,843 $2,492,467 $6,619,631 $6,608,616 Cost of goods sold 2,048,252 2,048,252 5,409,472 5,409,472 ------------ ------------ ------------ ------------ Gross profit 445,591 444,215 1,210,159 1,199,144 Selling, general and administrative expenses 353,985 353,985 1,017,693 1,017,693 ------------ ------------ ------------ ------------ Operating income 91,606 90,230 192,466 181,451 Income tax expense 34,027 33,497 71,522 67,281 Net earnings 54,389 53,543 114,249 107,475 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per share $.27 $.27 $.58 $.54 Diluted earnings per share $.26 $.25 $.55 $.52 </TABLE> 8 <PAGE> In addition, the restatement also resulted in changes to the consolidated balance sheets as of February 27, 1999 and November 28, 1998, the statement of earnings for the nine-month period ended November 28, 1998, and certain classifications within the statements of cash flows for the nine-month period ended November 28, 1998. As of the beginning of fiscal 2000, the restatement resulted in a net reduction in retained earnings of approximately $30 million. The revenue deferred under the new policy will be recognized over the lives of the related contracts. 3. INCOME TAXES: Income taxes are provided on an interim basis based upon management's estimate of the annual effective tax rate. 4. EARNINGS PER SHARE: The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ----------------------------- ----------------------------- November 27, November 28, November 27, November 28, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Numerator (000's): Net earnings $ 78,389 $ 53,543 $ 183,265 $ 107,475 Interest on preferred securities, net of tax - - - 770 ------------ ------------ ------------ ------------ Net earnings assuming dilution $ 78,389 $ 53,543 $ 183,265 $ 108,245 Denominator (000's): Weighted average common shares outstanding 204,784 201,612 204,618 198,070 Effect of dilutive securities: Employee stock options 7,976 8,434 8,812 5,690 Preferred securities - - - 5,586 ------------ ------------ ------------ ------------ Weighted average common shares outstanding assuming dilution 212,760 210,046 213,430 209,346 Basic earnings per share $ .38 $ .27 $ .90 $ .54 Diluted earnings per share $ .37 $ .25 $ .86 $ .52 </TABLE> Net earnings reflect the change in accounting for PSPs described in Note 2 and have been restated as necessary. In March 1999, the Company effected a two-for-one stock split in the form of a stock dividend. All share and per share information reflects the stock split. 5. CREDIT FACILITY: In August 1999, the Company entered into an unsecured $100 million revolving credit facility, replacing the $220 million facility that was scheduled to mature in June 2000. The Company was able to reduce the size of the facility due to improved operating performance and better inventory management. In addition, the new facility makes certain financial covenants less restrictive thereby providing the Company with additional flexibility. The current facility is scheduled to mature in August 2002. 6. SHARE REPURCHASE PROGRAMS: In October 1998, the Company's Board of Directors approved the purchase of up to $100 million of the Company's common stock from time to time through open market purchases over the following twelve months. This repurchase program was completed in the second quarter of fiscal 2000 with a total of 1.8 million shares purchased. 9 <PAGE> In September 1999, the Company's Board of Directors approved the purchase of up to $200 million of the Company's common stock from time to time through open market purchases. This repurchase program has no stated expiration date. As of November 27, 1999, 1.1 million shares have been purchased at a cost of approximately $61 million. 10 <PAGE> BEST BUY CO., INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net earnings for the third quarter of fiscal 2000 were a record $78.4 million, or $.37 per share on a diluted basis, compared to net earnings of $53.5 million, or $.25 per share, for the comparable period last year. For the first nine months of the current fiscal year, net earnings were a record $183.3 million, or $.86 per share on a diluted basis, compared to $107.5 million, or $.52 per share, for the same period last year. A combination of new products, strong consumer demand and improved execution of selling strategies at the Company's retail stores has generated market share gains and improved gross profit margins resulting in record quarterly and year-to-date financial performance. Quarterly net earnings have exceeded those of the comparable quarter of the prior year by 30% or more for the past ten consecutive quarters. Results of operations reflect a change in accounting and restatement of previously reported amounts where necessary to reflect recent SEC Staff guidance on accounting for extended service contracts, as more fully described in Note 2 to the accompanying financial statements. Net earnings for the third quarter of fiscal 2000 were $.38 per share before being reduced by $2.0 million, or $.01 per share, to reflect the change. The combined reduction to retained earnings through February 27, 1999, totals approximately $30 million. For the nine-month period, net earnings were reduced by $3.4 million, or $.01 per share. For the prior year's third quarter and year-to-date periods, results were restated and reduced earnings by $846,000 and $6.8 million, or $.01 and $.03 per share, respectively. Revenues in the third quarter increased 25% to $3.107 billion compared to $2.492 billion in the third quarter last year. Revenues in the first nine months increased 24% to $8.179 billion compared to $6.609 billion last year. Comparable store sales increases of 9.2% for the third quarter and 11.1% year-to-date and a net increase of 42 new stores in the past twelve months drove the revenue increases. All major product categories generated comparable store sales increases for the eighth consecutive quarter. Sales of digital technology products such as Digital Versatile Disc (DVD), Digital Broadcast Satellite (DBS), digital cameras and camcorders, as well as strong sales of video games fueled the comparable store sales gains. Management believes that the comparable store sales gains illustrate the Company's ability to successfully bring new products and selling strategies to market and capture market share. Management expects that comparable store sales increases could moderate in the future, as the compounding effect of the sales gains over the past two years makes future increases more difficult. As of November 27, 1999, the Company operated 354 stores compared to 312 stores one year ago. In the third quarter, the Company opened 22 new stores, including entry into the markets of Norfolk and Richmond, Virginia; Albany and Rochester, New York; Jacksonville and Tallahassee, Florida; and San Diego, California. Included in the 22 new store openings were three small market stores designed to serve markets with populations under 200,000. All new stores opened during the quarter were Concept IV stores which feature improved merchandising, signage and customer service and are expected to better address customers' needs as the industry continues to progress into new digital products. The Company also relocated six stores and expanded two stores to the Concept IV format during the third quarter. In fiscal 2001, the Company plans to open approximately 60 new stores including entry into the New York metropolitan market. The Company continues to invest in building the systems infrastructure and content base to support its developing e-commerce business, BestBuy.com. The Company has filled most of the critical leadership roles for BestBuy.com and has finalized agreements with nearly all major vendors to offer an expanded product assortment on-line. The Company's objective is to begin rolling out its expanded online product assortment in the first quarter of fiscal 2001. 11 <PAGE> Retail store sales mix by major product category for the three-month and nine-month periods was as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- November 27, November 28, November 27, November 28, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Home Office 36% 38% 36% 37% Consumer Electronics Audio 10 10 10 10 Video 17 17 17 16 Entertainment Software 19 19 18 19 Appliances 8 8 9 10 Other 10 8 10 8 ---- ---- ---- ---- Total 100% 100% 100% 100% ---- ---- ---- ---- ---- ---- ---- ---- </TABLE> In the home office category, sales of personal computers benefited throughout the quarter from subsidy offers provided by Internet Service Providers (ISPs). The offers provide customers with an instant rebate on the purchase of a personal computer when the customer signs a contract to subscribe to Internet service provided by the ISP. This rebate to the customer is funded by the ISP, who also bears the risk of collection of the monthly subscriber fees paid by the customer to the ISP. Nearly 500,000 customers have signed up for the ISP offers since the offers began in July. Average selling prices of computers have remained relatively flat for the last two quarters, but declined 20-25% compared to the third quarter of fiscal 1999. The year-over-year decline in average selling prices was offset by an increase in unit volume driven in part by the ISP subsidy. The increased unit volume stimulated sales of ancillary products and services such as accessories and PSPs. Digital technology continued to be the driving force in consumer electronics with digital product sales currently representing more than eight percent of the Company's total sales for the quarter. Digital technology products such as DVD hardware, digital satellite systems and digital camcorders made strong contributions to the quarterly comparable store sales increase. While not yet significant to total revenues, digital television sales increased as a result of an expanded number of models available, lower price points and more programming options. Sales of DBS systems are expected to increase in markets where local programming is available as a result of recent federal legislation permitting local broadcast signals to be offered over DBS Systems. Sales of large screen televisions and home theater systems also contributed to the overall sales increase. In the entertainment software category, sales of compact discs and DVD movies were particularly strong driven by solid in-stock levels and a consistent flow of new music releases and new DVD movie releases including new Disney classics. Strong sales of DVD players, with price points beginning under $200, continued to positively impact DVD software sales. The Company believes it has the largest assortment of DVD movies of any retailer and has increased the retail floor space dedicated to DVD movies to accommodate more than 1,800 DVD movie titles, an increase of 30% over last year. Sales of video games were strong, benefiting from the launch of Sega's 128-bit Dreamcast system and the popularity of newly released software titles. Gross profit margin in the third quarter improved to 19.0% compared to 17.8% in the third quarter of fiscal 1999. Gross profit margin for the nine-month period improved 1.3% of sales to 19.4% compared to 18.1% in the same period last year. These improvements reflect the ongoing benefit from the Company's initiatives to generate more profitable product assortments, improve inventory management and enhance advertising effectiveness. A more profitable sales mix, as well as higher gross profit margins in most product categories, were significant contributors to the year-over-year improvements. In addition, increased sales of higher margin PSPs and accessories favorably impacted margins in the quarter and year-to-date periods stimulated by higher unit volume sales of personal computers and digital products. Sales of PSPs accounted for 4.1% and 4.2% of sales for the third quarter and nine-month periods of the current year, respectively, compared to 3.8% for both the quarter and nine-month periods of the prior year. Management expects that while gross profit margins will continue to improve over prior year levels, the improvement will not be as significant due to benefits already realized from progress on the Company's strategic initiatives. The gross profit margin in the third quarter of this fiscal year improved by 3% of sales, over the third quarter two years ago. Also, a traditionally lower margin product sales mix and a lower level of PSP sales during the high-volume holiday season 12 <PAGE> could result in a lower gross profit margin in the fourth quarter of the year as compared to the first three quarters. Selling, general and administrative (SG&A) expenses increased to 15.1% of sales in the quarter compared to 14.2% in the third quarter last year. Year-to-date, SG&A expenses increased to 15.9% of sales in the current year compared to 15.4% in the same period last year. The increases were largely due to three factors. Store labor expenses have increased as a result of hiring a more highly skilled sales staff to support higher levels of sales of complex products, including the new digital technology products that have contributed to the sales and gross profit margin gains. The higher skilled labor has also resulted in increased sales of the basket of products and services that accompany a major product purchase. These labor costs, coupled with a decline in average selling prices of products, particularly personal computers, have led to a higher ratio of labor to revenues. Also, the increased rate of store expansion and preparation for approximately 60 new stores in fiscal 2001, compared to only 28 new stores in fiscal 1999, has led to an increased number of managers in the Company's management development program. Finally, personnel expenses and consulting costs have increased as a result of the Company's programs to re-engineer systems and processes and implement the technological infrastructure to provide long-term benefits and position the Company for further growth. All of these expenses have been funded through year-over-year increases in gross profit margins, as illustrated by the decrease in SG&A expenses as a percent of gross profit margin to 79.2% and 82.1% for the third quarter and nine-month periods of the current year, respectively, as compared to 79.7% and 84.9% for the same periods, respectively, in the prior fiscal year. Management currently expects that SG&A spending will continue to increase on a year-over-year basis, however seasonally higher sales volumes in the fourth quarter are expected to result in a traditionally lower ratio of SG&A expenses as a percentage of sales compared to the first three quarters of the year. Net interest income was $4.5 million in the third quarter and $13.1 million year-to-date compared to net interest expense of $3.2 million and $6.7 million in the same periods, respectively, last year. These improvements were principally due to the early retirement of the Company's $150 million 8-5/8% Senior Subordinated Notes in the third quarter of fiscal 1999 and the conversion into equity of the Company's $230 million in preferred securities in the first quarter of fiscal 1999. Interest earned on higher cash balances resulting from faster inventory turns and improved profitability also contributed to the improvement. The Company's effective income tax rate for the third quarter and first nine months of the current fiscal year was 38.3%, compared to 38.5% for the same periods last year. The Company's effective tax rate is primarily impacted by the levels and taxability of investment income, as well as state income taxes. In December 1999, the Company announced its plans to form a comprehensive strategic alliance with Microsoft Corp. (Microsoft) that encompasses development of broadband and narrowband technology, as well as in-store and online efforts. The parties signed a letter of intent that provides for significant joint marketing in Best Buy's retail stores, online and through print/broadcast vehicles, profit sharing, the promotion of BestBuy.com throughout Microsoft's properties, and technology assistance. In addition, the agreement is expected to provide for the issuance of $200 million of Best Buy stock to Microsoft in exchange for cash. Also, in December 1999, BestBuy.com made a $10 million strategic equity investment in Collabrative Media, Inc. dba etown.com, the leading online information and shopping source for buyers of consumer electronics products. In connection with the investment, the Company has obtained non-exclusive license rights to etown.com's editorial content including more than 4,200 product profiles and unbiased, expert product reviews and side-by-side product comparisons. BestBuy.com intends to integrate selective portions of this content into its new Internet shopping site. 13 <PAGE> FINANCIAL CONDITION Working capital of $592 million at November 27, 1999 was essentially unchanged from $589 million one year ago. Cash and cash equivalents increased by $105 million compared to one year ago even with the repurchase of approximately $160 million of the Company's common stock and the investment of over $330 million in new stores, systems, and corporate facilities in the past 12 months. Merchandise inventories increased by approximately $400 million compared to the third quarter last year, a 24% increase consistent with the rate of sales growth. Inventory turns continued to improve while in-stock levels remained strong in preparation for the holiday selling season. Rolling twelve-month inventory turns improved to 6.8 times from 6.2 times for the period one year ago. The Company's net investment in inventory (i.e., inventory net of accounts payable) was $12 million at November 27, 1999, down from $151 million at November 28, 1998. The Company's cash position and net investment in inventory are impacted by the timing of payments to vendors and can vary significantly. Receivables increased by $105 million as compared to a year ago and $251 million compared to last fiscal year end, primarily due to higher business volumes including amounts due from the ISP subsidy providers. Recoverable costs from developed properties increased by $12 million compared to last year, primarily due to the development of new stores. Other assets and long-term liabilities both increased due to the investments and deferrals related to the Company's deferred compensation plan. Acquisition of leasehold rights also contributed to the increase in other long-term assets. Accounts payable increased as compared to a year ago as a result of the higher business volume and increased inventory levels. Accruals for payroll related liabilities increased as compared to last year's third quarter which is consistent with the expanding employee base needed to support the Company's growth. Other accrued liabilities increased compared to November 28, 1998, as a result of the overall higher levels of business activity. Capital spending in the first nine months of fiscal 2000 was $256 million compared to $95 million for the same period last year as the Company invested in 44 new stores and 13 remodeled, expanded or relocated stores opened in fiscal 2000. Additionally, the Company expanded its corporate facilities to support the growth of the business, the most significant investment being the purchase of an additional office building to supplement the Company's existing corporate office. The Company also continued to invest in new systems and technology to better position the Company for continued growth and generate improvements in its existing business. Management expects total capital spending for fiscal 2000 to be approximately $400 million, exclusive of the amounts expected to be recovered through subsequent sales and leasebacks. In October 1998, the Company's Board of Directors authorized the purchase of up to $100 million of the Company's common stock over a twelve-month period. This repurchase program was completed in the second quarter of fiscal 2000, with a total of 1.8 million shares purchased. In September 1999, the Board authorized the purchase of up to an additional $200 million of the Company's common stock. During the third quarter, the Company repurchased 1.1 million shares of stock at a cost of approximately $61 million under this plan, bringing the total amount of stock repurchased in the current fiscal year under both stock repurchase plans to approximately $160 million. In August 1999, the Company entered into an unsecured $100 million revolving credit facility, replacing the $220 million facility that was scheduled to mature in June 2000. The Company was able to reduce the size of the facility due to improved operating performance and better inventory management. In addition, the new facility makes certain financial covenants less restrictive thereby providing the Company with additional flexibility. The current facility is scheduled to mature in August 2002. Management believes that funds from the expected results of operations and available cash and cash equivalents will be sufficient to support the Company's anticipated expansion plans and strategic initiatives for the next year. The revolving credit facility and the Company's inventory financing program are also available for additional working capital needs or investment opportunities. YEAR 2000 The Company recognized the material nature of the business issues surrounding computer processing of dates into and beyond the year 2000 (Y2K) and began taking corrective action in 1997. The Company's efforts included replacing and testing Y2K affected mainframe computer code, identifying and resolving non-mainframe computer hardware and software Y2K issues, assessing the Y2K readiness of the Company's business partners and 14 <PAGE> developing contingency plans. Management believes the Company has completed all of the activities within its control to ensure that the Company's systems are Y2K compliant. The Company's Y2K readiness costs were approximately $18 million, including $9 million in outside professional fees. Of the total costs, approximately $9 million were incurred in the current fiscal year. The Company funded both the capital and expensed elements of resolving Y2K issues through funds generated from operations. The Company successfully completed its Y2K rollover without any major problems or disruptions. All of the Company's stores, logistics operations, service centers and corporate support areas were fully functional subsequent to the Y2K rollover. The Company is not aware that any of its major business partners have experienced significant Y2K issues. Additionally, the Company generally believes that the vendors that supply products to the Company for resale are responsible for the products' Y2K functionality. To date, the Company's efforts in handling customer product returns and repairs at its retail stores have not been significant. Although the Company's Y2K rollover was successful, there are some remaining Y2K-related risks. These risks include potential product supply issues and other non-operational issues. Management believes appropriate action has been taken to address these remaining Y2K issues and contingency plans are in place to minimize the financial impact to the Company. While the Company believes that it has pursued the appropriate course of action to ensure Y2K readiness, there can be no assurance that this objective will be achieved as it relates to its business partners or its remaining internal Y2K issues. SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "1995 ACT") The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements and may be identified by the use of words such as "believe," "expect," "anticipate," "plan," "estimate," "intend" and "potential." Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause the Company's actual results to differ materially from the anticipated results expressed in such forward-looking statements, including, among other things, general economic conditions, product availability, sales volumes, profit margins and the impact of labor markets and new product introductions on the Company's overall profitability. Readers are encouraged to review the Company's Current Report on Form 8-K filed on May 15, 1998, that describes additional important factors that could cause actual results to differ materially from those contemplated by the statements made herein. 15 <PAGE> ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's operations are not currently subject to market risks for interest rates, foreign currency rates, commodity prices or other market price risks of a material nature. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: <TABLE> <CAPTION> a. Exhibits: Method of Filing ---------------- <S> <C> 10.1 1997 Directors' Non-Qualified Stock Option Plan; 1999-2 Amendment and Restatement Filed herewith 27.1 Financial Data Schedule Filed herewith </TABLE> b. Reports on Form 8-K: Announcement of $200 million stock repurchase program filed on September 23, 1999. Announcement of new member of Company's Board of Directors filed on September 27, 1999. Announcement of new member of Company's Board of Directors filed on November 19, 1999. 16 <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. BEST BUY CO., INC. (Registrant) Date: January 11, 2000 By: /s/ Allen U. Lenzmeier --------------------------------------- Allen U. Lenzmeier, Executive Vice President & Chief Financial Officer (principal financial officer) By: /s/ Robert C. Fox ---------------------------------------- Robert C. Fox, Senior Vice President- Finance & Treasurer (principal accounting officer) 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 10.1 <TEXT> <PAGE> BEST BUY CO., INC. 1997 DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN 1999-2 AMENDMENT AND RESTATEMENT A. PURPOSE. The purpose of this Directors' Non-Qualified Stock Option Plan ("Plan") is to further the growth and general prosperity of Best Buy Co., Inc. (the "Company"), and its directly and indirectly wholly-owned subsidiaries (collectively, the "Companies") by enabling current directors of the Company, who have been or are serving on the Company's Board of Directors (the "Board") and upon whose judgment, initiative and effort the Companies were or are largely dependent for the successful conduct of their business, to acquire shares of the common stock of the Company under the terms and conditions and in the manner contemplated by this Plan, thereby increasing their personal involvement in the Companies. Options granted under the Plan are intended to be options which do not meet the requirements of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). B. ADMINISTRATION. This Plan shall be administered by the Compensation and Human Resources Committee (the "Committee") of the Board. Subject to such orders and resolutions not inconsistent with the provisions of this Plan as may from time to time be issued or adopted by the Board, the Committee shall have full power and authority to interpret the Plan. All decisions and determinations made by the Committee pursuant to the provisions of the Plan and applicable orders and resolutions of the Board shall be final. Each option granted shall be evidenced by a written agreement containing such terms and conditions as may be approved by the Committee and which shall not be inconsistent with the Plan and the orders and resolutions of the Board with respect thereto. C. ELIGIBILITY, PARTICIPATION AND GRANTS. Options shall be granted under the Plan to current members of the Board. The Committee shall grant to each director options to purchase shares in such amounts as the Committee shall from time to time determine. D. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided below, an aggregate of 2,800,000 shares of $0.10 par value common stock of the Company shall be subject to this Plan from authorized but unissued shares of <PAGE> the Company. Such number and kind of shares shall be appropriately adjusted in the event of any one or more stock splits, reverse stock splits or stock dividends hereafter paid or declared with respect to such stock. If, prior to the termination of the Plan, shares issued pursuant hereto shall have been repurchased by the Company pursuant to this Plan, such repurchased shares shall again become available for issuance under the Plan. Any shares which, after the effective date of this Plan, shall become subject to valid outstanding options under this Plan may, to the extent of the release of any such shares from option by termination or expiration of option(s) without valid exercise, be made the subject of additional options under this Plan. E. NO ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Except as expressly provided herein, in the event of a merger, consolidation, reorganization, stock dividend, stock split, or other change in corporate structure or capitalization affecting the common stock of the Company, there shall be no change in the number of shares subject to options to be granted thereafter pursuant to the Plan; provided, however, that in such event, an appropriate adjustment may be made in the number and kind of shares subject to and the exercise prices of outstanding options granted under the Plan as determined by the Committee. F. TERMS AND CONDITIONS OF OPTIONS. The Committee shall have the power, subject to the limitations contained in this Plan, to prescribe any terms and conditions in respect of the granting or exercise of any option under this Plan and, in particular, shall prescribe the following terms and conditions: (1) Each option shall state the number of shares to which it pertains. (2) The price at which shares shall be sold to participants hereunder (the "Exercise Price") shall be the Fair Market Value of the Company's common stock on the date of grant. Payment of the Exercise Price shall be made (a) if payment is made by check payable to the Company, at the time the shares are sold hereunder, or (b) if payment is made pursuant to an irrevocable election to surrender outstanding shares of common stock of the Company which have a Fair Market Value on the date of surrender equal to the Exercise Price of the shares as to which the option is being exercised, no later than the settlement date for the shares sold in the market to cover the Exercise Price, or (c) by a combination thereof, UNLESS an option is exercised in connection with a deferral election pursuant to the Deferred Compensation Plan, defined below, in which case payment of the Exercise Price shall be made as provided in Section M herein. (3) An option shall be exercisable in whole or in part with respect to the shares included therein until the earlier of (a) the close of business on the tenth day prior to the proposed effective date of (i) any merger or consolidation of the Company with any other -2- <PAGE> corporation or entity as a result of which the holders of the common stock of the Company will own less than a majority voting control of the surviving corporation; (ii) any sale of substantially all of the assets of the Companies or (iii) any sale of common stock of the Company to a person not a shareholder on the date of issuance of the option who thereby acquires majority voting control of the Company, subject to any such transaction actually being consummated, or (b) the close of business on the date ten (10) years after the date the option was granted. The Company shall give written notice to the optionee not less than 30 days prior to the proposed effective date of any of the transactions described in (a) above. Notwithstanding the foregoing, in the event a director who is not an employee of the Companies resigns or is removed from the Board prior to the end of the term to which he or she has been elected or appointed (the "Term End"), all of the then outstanding options granted pursuant hereto shall expire on and as of the Term End; provided, however, that the foregoing shall not apply to any resignation or removal due to health reasons. (4) An option shall be exercised when notice of such exercise, whether in writing or orally, has been given to the Company at its principal business office or to its designated agent by the person entitled to exercise the option and full payment for the shares with respect to which the option is exercised has been received by the Company. Until the stock certificates are issued, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to optioned shares, notwithstanding the exercise of the option. (5) Each optionee shall be obligated to maintain the confidentiality of all of the confidential and proprietary information of the Companies and, in the event of a breach by the optionee of such obligation, all of the optionee's options granted pursuant to the Plan and all rights thereunder shall immediately terminate. Notwithstanding the foregoing, this Section F(5), adopted as of April 16, 1999, shall be effective only for options granted hereunder on and after April 16, 1999. G. OPTIONS NOT TRANSFERABLE. Options under the Plan may not be sold, pledged, assigned or transferred in any manner, whether by operation of law or otherwise, except by will, the laws of descent or a qualified domestic relations order. H. AMENDMENT OR TERMINATION OF THE PLAN. The Board may amend this Plan from time to time as it may deem advisable and may at any time terminate the Plan, provided that any such termination of the Plan shall not adversely affect options already granted and such options shall remain in full force and effect as if the Plan had not been terminated. -3- <PAGE> I. AGREEMENT AND REPRESENTATIONS OF PARTICIPANTS. As a condition precedent to the exercise of any option or portion thereof, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation or rule of any governmental agency. In the event legal counsel to the Company renders an opinion to the Company that shares for options exercised pursuant to this Plan cannot be issued to the optionee because such action would violate any applicable federal or state securities laws, then in that event the optionee agrees that the Company shall not be required to issue said shares to the optionee and shall have no liability to the optionee other than the return to optionee of amounts tendered to the Company upon exercise of the option. J. EFFECTIVE DATE AND TERMINATION OF THE PLAN. The Plan shall become effective as of April 18, 1997 if approved thereafter by the Company's shareholders. The Plan shall terminate on the earliest of: (1) The date when all the shares available under the Plan shall have been acquired through the exercise of options granted under the Plan; or (2) Ten (10) years after the date of approval of the Plan by the Company's shareholders; or (3) Such other earlier date as the Board may determine. K. FAIR MARKET VALUE. "Fair Market Value" shall mean the last reported sale price of the Company's common stock on the date of grant, as quoted on by the New York Stock Exchange. If the Company's common stock ceases to be listed for trading on the New York Stock Exchange, "Fair Market Value" shall mean the value determined in good faith by the Board. L. COMPLIANCE WITH RULE 16b-3 AND SECTION 162(m). Transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and avoid loss of the deduction referred to in paragraph (1) of Section 162(m) of the Code. Anything in the Plan to the contrary notwithstanding, to the extent any provision of the Plan or action by the Committee fails to so comply -4- <PAGE> or avoid the loss of such deduction, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. M. DEFERRAL OF OPTION GAIN. Participants in the Company's Deferred Compensation Plan, effective as of April 1, 1998 (the "Deferred Compensation Plan"), may be able to defer the gain, if any, upon exercise of options granted hereunder pursuant to and in accordance with the terms of the Deferred Compensation Plan. To the extent that the Deferred Compensation Plan permits a participant to defer any gain with respect to an option, the Exercise Price must be satisfied utilizing shares of the Company's common stock held at least six months prior to exercise. In the event any deferral election is made with respect to an option, if the optionee is unable to deliver the requisite number of shares of the Company's common stock to cover the full Exercise Price prior to the expiration of such option, the portion of the option that corresponds to the portion of the full Exercise Price not covered shall be forfeited. N. FORM OF OPTION. Options shall be issued in substantially the same form as the Committee or the Board may approve. -5- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 27.1 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS INDICATED 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-26-2000 <PERIOD-START> FEB-28-1999 <PERIOD-END> NOV-27-1999 <CASH> 514,797 <SECURITIES> 0 <RECEIVABLES> 383,461 <ALLOWANCES> 0 <INVENTORY> 2,082,543 <CURRENT-ASSETS> 3,108,779 <PP&E> 981,809 <DEPRECIATION> 372,722 <TOTAL-ASSETS> 3,772,053 <CURRENT-LIABILITIES> 2,517,053 <BONDS> 23,679 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 20,441 <OTHER-SE> 1,137,948 <TOTAL-LIABILITY-AND-EQUITY> 3,772,053 <SALES> 8,179,408 <TOTAL-REVENUES> 8,179,408 <CGS> 6,596,519 <TOTAL-COSTS> 6,596,519 <OTHER-EXPENSES> 1,298,994 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> (13,140) <INCOME-PRETAX> 297,035 <INCOME-TAX> 113,770 <INCOME-CONTINUING> 183,265 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 183,265 <EPS-BASIC> .90 <EPS-DILUTED> .86 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

BDX

https://www.sec.gov/Archives/edgar/data/10795/0000950130-00-000666.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, CAV1IM4NllDV+e/z0rNk4UrAdVzSA2ovBk9wGGLbobKpdl33Go0dUKbWUmjIyfWl qeKqG6w8Xa1VjIorO+AYFg== <SEC-DOCUMENT>0000950130-00-000666.txt : 20000215 <SEC-HEADER>0000950130-00-000666.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950130-00-000666 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: SEC FILE NUMBER: 001-04802 FILM NUMBER: 540694 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, 1999 ----------------------- 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 001-4802 ---------- 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 incorporation or organization) Identification No.) 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, 2000 --------------------- ----------------------------------------- Common stock, par value $1.00 251,570,836 <PAGE> BECTON, DICKINSON AND COMPANY FORM 10-Q For the quarterly period ended December 31, 1999 TABLE OF CONTENTS <TABLE> <CAPTION> Part I. FINANCIAL INFORMATION Page Number - ------- --------------------- ----------- <S> <C> 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 Financial Condition and Results of Operations............................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 13 Part II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings................................................. 14 Item 2. Changes in Securities and Use of Proceeds......................... 15 Item 3. Defaults Upon Senior Securities................................... 15 Item 4. Submission of Matters to a Vote of Security Holders............... 15 Item 5. Other Information................................................. 15 Item 6. Exhibits and Reports on Form 8-K.................................. 15 Signature .................................................................. 16 Exhibits .................................................................. 17 </TABLE> 2 <PAGE> ITEM 1. FINANCIAL STATEMENTS BECTON, DICKINSON AND COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS Thousands of Dollars <TABLE> <CAPTION> December 31, September 30, Assets 1999 1999 - ------ ---------------------------------------- (Unaudited) <S> <C> <C> Current Assets: Cash and equivalents $ 70,936 $ 59,932 Short-term investments 663 4,660 Trade receivables, net 790,952 812,544 Inventories (Note 2): Materials 169,838 160,332 Work in process 99,384 94,627 Finished products 397,174 387,574 ------------- ----------- 666,396 642,533 Prepaid expenses, deferred taxes and other 173,692 164,056 ------------- ----------- Total Current Assets 1,702,639 1,683,725 Property, plant and equipment 2,969,062 2,932,804 Less allowances for depreciation and amortization 1,526,333 1,501,655 ------------- ----------- 1,442,729 1,431,149 Goodwill, Net 513,880 526,942 Core and Developed Technology, Net 324,359 329,460 Other Intangibles, Net 173,866 178,285 Other 334,168 287,397 ------------- ----------- Total Assets $ 4,491,641 $ 4,436,958 ============= =========== Liabilities and Shareholders' Equity - ------------------------------------ Current Liabilities: Short-term debt $ 611,317 $ 631,254 Payables and accrued expenses 743,345 698,068 ------------- ----------- Total Current Liabilities 1,354,662 1,329,322 Long-Term Debt 953,433 954,169 Long-Term Employee Benefit Obligations 336,914 344,068 Deferred Income Taxes and Other 41,417 40,711 Commitments and Contingencies - - Shareholders' Equity: Preferred stock 45,890 46,717 Common stock 332,662 332,662 Capital in excess of par value 51,859 44,626 Retained earnings 2,590,826 2,539,020 Unearned ESOP compensation (20,535) (20,310) Deferred compensation 6,064 5,949 Shares in treasury - at cost (993,291) (997,333) Accumulated other comprehensive income (208,260) (182,643) ------------- ----------- Total Shareholders' Equity 1,805,215 1,768,688 ------------- ----------- Total Liabilities and Shareholders' Equity $ 4,491,641 $ 4,436,958 ============= =========== </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, -------------------------------- 1999 1998 ---------------- -------------- <S> <C> <C> Revenues $ 859,164 $ 768,966 Cost of products sold 449,951 385,710 Selling and administrative 233,838 223,116 Research and development 53,743 49,310 ------------- ---------- Total Operating Costs and Expenses 737,532 658,136 ------------- ---------- Operating Income 121,632 110,830 Interest expense, net (21,557) (17,871) Other income, net 1,674 1,025 ------------- ---------- Income Before Income Taxes 101,749 93,984 Income tax provision 26,455 17,826 ------------- ---------- Net Income $ 75,294 $ 76,158 ============= ========== Earnings Per Share: Basic $ .30 $ .30 ============= ========== Diluted $ .29 $ .29 ============= ========== Dividends Per Common Share $ .0925 $ .085 ============= ========== </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, ------------------------------------- 1999 1998 -------------- ---------------- Operating Activities -------------------- <S> <C> <C> Net income $ 75,294 $ 76,158 Adjustments to Net Income to Derive Net Cash Provided By Operating Activities: Depreciation and amortization 72,440 62,688 Change in working capital (25,960) (67,321) Other, net (539) 15,340 --------- --------- Net Cash Provided by Operating Activities 121,235 86,865 --------- --------- Investing Activities -------------------- Capital expenditures (66,697) (61,778) Acquisitions of businesses, net of cash acquired - (41,706) Change in investments, net 3,529 2,895 Capitalized Software (10,992) (6,776) Other, net (20,686) (8,419) --------- --------- Net Cash Used for Investing Activities (94,846) (115,784) --------- --------- Financing Activities -------------------- Change in short-term debt (21,417) 75,199 Proceeds of long-term debt - 185 Payments of long-term debt (349) (4,903) Issuance of common stock from treasury 7,445 5,701 Dividends paid (698) - --------- --------- Net Cash (Used for) Provided by Financing Activities (15,019) 76,182 --------- --------- Effect of exchange rate changes on cash and equivalents (366) (1,936) --------- --------- Net increase in cash and equivalents 11,004 45,327 Opening Cash and Equivalents 59,932 83,251 --------- --------- Closing Cash and Equivalents $ 70,936 $ 128,578 ========= ========= </TABLE> See notes to condensed consolidated financial statements 5 <PAGE> BECTON, DICKINSON AND COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Dollar and Share Amounts in Thousands, Except Per-share Data December 31, 1999 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 1999 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. Prior year information has been reclassified to conform to current year presentation. 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 - Comprehensive Income - ----------------------------- Comprehensive income for the Company includes the following: <TABLE> <CAPTION> Three Months Ended December 31, ------------------------------- 1999 1998 ---------- ---------- <S> <C> <C> Net income $ 75,294 $ 76,158 Other Comprehensive Income, Net of Tax Foreign currency translation adjustments (38,685) (6,882) Unrealized gain (loss) on investments 13,068 (6,733) ---------- ---------- Comprehensive Income $ 49,677 $ 62,543 ========== ========== </TABLE> On February 9, 2000, the Company sold a portion of its holdings in an available- for-sale investment for a gain of approximately $16,000 before taxes. The proceeds from this sale were approximately $18,400. The cost of this investment was determined based upon the specific identification method. 6 <PAGE> Note 4 - Earnings per Share - --------------------------- The following table sets forth the computations of basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended December 31, ---------------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Net income $ 75,294 $ 76,158 Preferred stock dividends (746) (790) ------------ ------------ Income available to common shareholders (A) 74,548 75,368 Preferred stock dividends - using "if converted" method 746 790 Additional ESOP contribution - using "if converted" method (169) (202) ------------ ------------ Income available to common shareholders after assumed conversions (B) $ 75,125 $ 75,956 ============ ============ Average common shares outstanding (C) 251,328 248,320 Dilutive stock equivalents from stock plans 6,287 11,823 Shares issuable upon conversion of preferred stock 4,978 5,276 ------------ ------------ Average common and common equivalent shares outstanding - assuming dilution (D) 262,593 265,419 ============ ============ Basic earnings per share (A/C) $ .30 $ .30 ============ ============ Diluted earnings per share (B/D) $ .29 $ .29 ============ ============ </TABLE> Note 5 - Contingencies - ---------------------- The Company is involved, both as a plaintiff and a defendant, in various legal proceedings which arise in the ordinary course of business, including product liability and environmental matters. In the opinion of the Company, the results of these matters, individually and in the aggregate, are not expected to have a material impact on its results of operations, financial condition or cash flows. The Company designed and implemented a Company-wide Year 2000 plan to ensure that its computer equipment and software and devices with date-sensitive embedded technology would be Year 2000-compliant. To date, the Company is not aware of any significant Year 2000-related issues. The Company's belief that it has completed each of the phases of the plan is based upon management's best estimates, which depend upon numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, and other factors. These estimates and assumptions, however, may prove not to be accurate, and actual results could differ materially from those anticipated. 7 <PAGE> Note 6 - Segment Data - --------------------- The Company's organizational structure is based upon its three principal business segments: BD Medical Systems, BD Biosciences, and BD Preanalytical Solutions. The Company evaluates performance based upon operating income. Segment operating income represents revenues reduced by product costs and operating expenses. Financial information for the Company's segments is as follows: Three Months Ended December 31, ------------------------------------- 1999 1998 -------------- -------------- Revenues -------- Medical Systems $ 462,606 $ 425,165 Biosciences 264,416 223,279 Preanalytical Solutions 132,142 120,522 -------------- -------------- Total Revenues (A) $ 859,164 $ 768,966 ============== ============== Segment Operating Income ------------------------ Medical Systems $ 94,701 $ 80,826 Biosciences 25,311 29,457 Preanalytical Solutions 27,308 28,129 -------------- -------------- Total Segment Operating Income 147,320 138,412 Unallocated Expenses (B) (45,571) (44,428) -------------- -------------- Income Before Income Taxes $ 101,749 $ 93,984 ============== ============== (A) Intersegment revenues are not material. (B) Includes interest, net; foreign exchange; and corporate expenses. Note 7 - Special Charges - ------------------------ The Company recorded special charges in fiscal 1999 and 1998 associated with two restructuring programs, primarily designed to improve the Company's cost structure, refocus certain businesses, and write down impaired assets. A summary of the special charge accrual activity during the first three months of fiscal 2000 follows: Severance Restructuring Other ------------- ------------- ------------- Accrual Balance at September 30, 1999 $13,100 $ 9,250 $ 6,100 Payments (600) (4,100) (600) ------------- ------------- ------------- Accrual Balance at December 31, 1999 $12,500 $ 5,150 $ 5,500 ============= ============= ============= The 1998 restructuring plan included charges associated with the restructuring of certain manufacturing operations. As of December 31, 1999, approximately 95 positions have been eliminated, and the Company expects that an additional 150 people will be affected by this plan. These remaining affected employees are related to the planned closure of a surgical blade plant in the United States, scheduled for the first half of fiscal year 2002. The remaining 1998 8 <PAGE> restructuring accruals related to this closure consist primarily of severance. Note 8 - Acquisition Reserves - ----------------------------- During fiscal year 1998, the Company acquired the Medical Devices Division ("MDD") of The BOC Group. The assumed liabilities for the MDD acquisition included approximately $14,300 for severance and exit costs associated with the integration of certain MDD administrative functions. As of December 31, 1999, these accruals had been substantially paid. During fiscal year 1997, the Company acquired Difco Laboratories Incorporated ("Difco"). The assumed liabilities for the Difco acquisition included approximately $17,500 for severance and other exit costs associated with the closing of certain Difco facilities. As of December 31, 1999, approximately $5,700 of these reserves remained. The Company expects to substantially pay these remaining accruals over the next six months. 9 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- Results of Operations - --------------------- First quarter revenues of $859 million exceeded prior year revenues by 12 percent. Revenue growth for the quarter was unfavorably affected by the strengthened dollar versus the prior year, which reduced revenues by an estimated $11 million. We believe that revenues modestly benefited from purchases related to the preparation for potential year 2000 disruptions. Three Months Ended December 31, Segment Revenues ------------------------------- (Dollars in millions) 1999 1998 % Change ================================================================== Medical Systems --------------- United States $ 207 $ 193 7 International 256 233 10 ------------------------------------------------------------------ Total $ 463 $ 425 9 ================================================================== Biosciences ----------- United States $ 151 $ 123 22 International 114 100 14 ------------------------------------------------------------------ Total $ 264 $ 223 18 ================================================================== Preanalytical Solutions ----------------------- United States $ 69 $ 63 9 International 63 57 10 ------------------------------------------------------------------ Total $ 132 $ 121 10 ================================================================== Total Revenues -------------- United States $ 426 $ 379 13 International 433 390 11 ------------------------------------------------------------------ Total $ 859 $ 769 12 ================================================================== Recent acquisitions, primarily in the United States, added about $20 million to BD Biosciences ("Biosciences") revenues and about $6 million to BD Medical Systems ("Medical") revenues for the quarter. Worldwide revenues for the Medical and BD Preanalytical Solutions ("Preanalytical") segments reflected good growth in sales of advanced protection devices. All segments reported strong growth in international sales of core products. International revenues grew approximately 14 percent after excluding the unfavorable impact of foreign currency translation. Medical segment operating income increased from the prior year primarily due to sales growth in advanced protection devices. The decrease in Biosciences segment operating income reflects the amortization associated with fiscal 1999 acquisitions. Preanalytical segment operating income decreased from the prior year despite an increase in sales growth in advanced protection devices. This decrease is due to continued investment in the research and development and the future 10 <PAGE> generation of advanced protection devices, as well as the unfavorable effect of changes in foreign currency rates. (See Note 6 in "Notes to Condensed Consolidated Financial Statements" for additional segment income information.) Gross profit margin was 47.6% compared with last year's first quarter ratio of 49.8%. This decline reflects an unfavorable mix of sales, particularly in some of our emerging markets, and higher costs associated with the scale up of production of advanced protection devices. We expect gross profit margin to be higher for the remaining quarters of fiscal 2000. Selling and administrative expense decreased to 27.2% of revenues, reflecting spending controls and productivity improvements. The prior year's first quarter ratio of 29% included expenses related to acquisitions and reengineering charges associated with our enterprise-wide business systems upgrade program ("Genesis"). Investment in research and development was 6.3% of revenues in the current quarter, which was about the same as last year. Operating income increased 10% from last year's first quarter. Operating margin was 14.2%, which is about the same as last year. Net interest expense was about $4 million higher than the prior year, due to additional borrowings to fund prior year acquisitions. Other income, net was about $1 million higher than last year. Other income, net included the impact of a favorable patent settlement in the current quarter, which was partially offset by the absence in the current quarter of one-time items recorded in the prior year. The first quarter income tax rate was 26%, compared with the prior year's rate of 19%, which included a favorable $7 million tax judgment in Brazil. We expect our tax rate for the full year to be about 26%. Net income and diluted earnings per share were about the same as last year. Prior year earnings benefited from the favorable tax judgment in Brazil, which increased earnings per share by three cents. The impact of unfavorable foreign currency translation reduced diluted earnings per share for the current quarter by an estimated one cent. Financial Condition - ------------------- During the first three months of 2000, cash provided by operating activities increased to $121 million compared to $87 million during the first three months of last year. This increase reflects more stringent cash management policies and lower build-up of inventories compared with the prior year's first quarter largely due to Year 2000-related sales activity. Capital expenditures during the first three months were $67 million, slightly ahead of last year's amount of $62 million. We expect capital spending for fiscal 2000 to be about $350 million, reflecting increased investment in additional manufacturing capacity for advanced protection devices. Capitalized software represents expenditures associated with the Genesis program. As of December 31, 1999, total debt of $1.6 billion represented 46.3% of total capital (shareholders' equity, net non-current deferred income tax liabilities, and debt), higher than 42.2% a year ago due to additional borrowings to fund acquisitions. Because of our strong credit 11 <PAGE> rating, we believe we have the capacity to arrange additional borrowings should the need arise. At its November 1999 meeting, the Board of Directors increased our quarterly dividend from $.085 to $.0925 per common share. Year 2000 Update - ---------------- We designed and implemented a company-wide Year 2000 plan to ensure that our computer equipment and software and devices with date-sensitive embedded technology would be Year 2000-compliant. In other words, we wanted to ensure that this equipment and software and these devices would be able to distinguish between the year 1900 and the year 2000 and would function properly with respect to all dates, whether in the twentieth or twenty-first centuries. Based upon our identification, assessment, remediation and testing efforts, we believe we completed all modifications to and replacements of our computer equipment and software that are necessary to avoid any potential Year 2000- related disruptions or malfunctions that were identified. To date, we have not experienced any major disruptions to our business nor are we aware of any significant Year 2000-related disruptions impacting our customers and suppliers. We will continue to monitor our critical systems over the next few months, as well as those of our suppliers and customers, for any Year-2000 related exposures. As of December 31, 1999, we have incurred approximately $17 million in costs related to our Year 2000 project, which has been, and will continue to be, funded through operating cash flows. We do not anticipate any additional significant costs related to our plan. None of our other information technology projects have been delayed or deferred as a result of the implementation of the plan. We believe we effectively anticipated and resolved any potential Year 2000 issues affecting us and our products, as well as those of third-party suppliers, in a timely manner. We cannot assure you, however, that Year 2000 issues will not materially and adversely affect our results of operations, cash flows or relationships with third parties in the event that . we have not properly identified our Year 2000 issues or the potential business disruption among third parties with whom we conduct significant business, or . our compliance assessment, remediation and testing activities, and our deployment of product upgrades have not effectively addressed all relevant Year 2000 issues affecting us and our products. In addition, disruptions in the economy generally resulting from Year 2000 issues also could materially and adversely affect us. At this time, we cannot reasonably estimate the amount of potential liability and lost revenue that would be reasonably likely to result from the failure by us and certain key third parties to achieve Year 2000 compliance on a timely basis. Costs of our plan and our belief that we have completed each of the phases of the plan are based upon management's best estimates, which rely upon numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, 12 <PAGE> and other factors. These estimates, however, may prove not to be accurate, and actual results could differ materially from those anticipated. Factors that could result in material differences include, without limitation, the availability and cost of personnel with the appropriate training and experience, the ability to identify, assess, remediate and test all devices, relevant computer codes and embedded technology, and similar uncertainties. In addition, Year 2000-related issues may lead to possible third-party claims, the impact of which we cannot yet estimate. We cannot assure you that the aggregate cost of defending and resolving such claims, if any, would not have a material adverse effect on us. Adoption of New Accounting Standards - ------------------------------------ In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement requires that all derivatives be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133. As a result, we will be adopting the provisions of this Statement no later than our first quarter of fiscal 2001. We are in the process of evaluating this Statement and have not yet determined the future impact on our consolidated financial statements. Forward-Looking Statements - -------------------------- This interim report on Form 10-Q may contain certain forward looking statements (as defined under Federal securities laws) regarding the performance of Becton, Dickinson and Company ("BD"), including future revenues, products and income, which are based upon current expectations of BD and are subject to a number of business risks and uncertainties. Actual results could vary materially from anticipated results described in any forward-looking statement. Factors that could cause actual results to vary materially include, but are not limited to, competitive factors, changes in regional, national or foreign economic conditions, changes in interest or foreign currency exchange rates, delays in product introductions, litigation, Year 2000 issues, and changes in health care or other governmental regulation, as well as other factors discussed herein and in other of BD's filings with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures About Market Risk. ---------------------------------------------------------- There have been no material changes in information reported since the fiscal year ended September 30, 1999. 13 <PAGE> PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings. ----------------- We are involved, both as a plaintiff and a defendant, in various legal proceedings which arise in the ordinary course of business, including product liability and environmental matters. As described more fully in our 1999 annual report on Form 10-K, we, along with a number of other manufacturers, have been named as a defendant in approximately 335 product liability lawsuits related to natural rubber latex that have been filed in various state and Federal courts. Cases pending in Federal court are being coordinated under the matter In re Latex Gloves Products Liability Litigation (MDL Docket No. 1148) in Philadelphia, and analogous procedures have been implemented in the state courts of California, Pennsylvania and New Jersey. We are vigorously defending these lawsuits. Also as discussed in our 1999 Annual Report on Form 10-K, we have been named as a defendant in eleven product liability lawsuits relating to health care workers who allegedly sustained accidental needle sticks, but have not become infected with any disease. Another manufacturer and several medical product distributors also have been named as defendants in most of these cases. The cases have been filed on behalf of an unspecified number of health care workers in eleven different states seeking class action certification under the laws of these states. On January 13, 2000, in the matter of Usrey v. Becton, Dickinson and Company, et al. (Case No. 342-173329-98, Tarrant County District Court), filed in Texas court on April 9, 1998, the Court signed an order conditionally granting plaintiffs' motion for class certification on behalf of certain Texas healthcare workers, subject to modification and alteration under Texas procedural law. Under Texas law, the order is subject to an immediate appeal, and any trial in the matter is stayed pending appeal. An appeal from the order was filed on February 1, 2000 and we will otherwise continue to vigorously defend this matter. On January 13, 2000, in the matter of Benner v. Becton, Dickinson and Company, et al., originally filed on June 1, 1999 in Supreme Court of the State of New York (Case No. 99-111372) and removed to federal court on July 1, 1999 (No. 99 Civ. 4785, United States District Court, Southern District of New York), the Court granted our motion to dismiss the plaintiff's complaint for failure to state a cause of action. The Benner matter was an action seeking class action certification on behalf of certain New York healthcare workers alleging that syringes and other medical devices were defectively designed. The Court dismissed the complaint without prejudice, giving the plaintiff twenty-one days within which to file an amended complaint, which has been stayed subject to further court order. To date no other class has been certified in these cases. Generally, these actions 14 <PAGE> allege that health care workers have sustained needle sticks using hollow-bore needle devices manufactured by us and, as a result, require medical testing, counseling and/or treatment. In our opinion, the results of the above matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition or cash flows. Item 2. Changes in Securities and Use of Proceeds. ----------------------------------------- Not applicable. Item 3. Defaults Upon Senior Securities. ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- Not applicable. Item 5. Other Information. ----------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K. -------------------------------- a) Exhibits 27 - Financial Data Schedule. b) Reports on Form 8-K During the three-month period ended December 31, 1999, we filed three Current Reports on Form 8-K under Item 5 - Other Events: (i) In a report dated October 13, 1999, we announced that our Chief Financial Officer was leaving to pursue other interests. (ii) In a report dated October 29, 1999, we announced that in the Usrey matter, the Court had advised that it believed that it was appropriate to address the issues in the case by way of a class action. (iii) In a report dated November 4, 1999, we announced our results for the quarter and year ended September 30, 1999. 15 <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 14, 2000 ------------------ /s/ Richard M. Hyne ----------------------------- Richard M. Hyne Vice President and Controller (Principal Financial and Accounting Officer) 16 <PAGE> EXHIBIT INDEX ------------- Exhibit Number Description Method of Filing - ------------------------------------------------------------- 27 Financial Data Schedule Filed with this report 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <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 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-30-2000 <PERIOD-END> DEC-31-1999 <CASH> 70,936 <SECURITIES> 663 <RECEIVABLES> 790,952 <ALLOWANCES> 0<F1> <INVENTORY> 666,396 <CURRENT-ASSETS> 1,702,639 <PP&E> 2,969,062 <DEPRECIATION> 1,526,333 <TOTAL-ASSETS> 4,491,641 <CURRENT-LIABILITIES> 1,354,662 <BONDS> 953,433 <PREFERRED-MANDATORY> 0 <PREFERRED> 45,890 <COMMON> 332,662 <OTHER-SE> 1,426,663 <TOTAL-LIABILITY-AND-EQUITY> 4,491,641 <SALES> 859,164 <TOTAL-REVENUES> 859,164 <CGS> 449,951 <TOTAL-COSTS> 449,951 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0<F1> <INTEREST-EXPENSE> 22,301 <INCOME-PRETAX> 101,749 <INCOME-TAX> 26,455 <INCOME-CONTINUING> 75,294 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 75,294 <EPS-BASIC> 0.30 <EPS-DILUTED> 0.29 <FN> <F1>THESE ITEMS ARE CONSOLIDATED ONLY AT YEAR-END </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

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https://www.sec.gov/Archives/edgar/data/38777/0000038777-00-000301.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, Hwr+flT9+O83XNZHA/JNY6insElUZgHxfGBX0trv6Zfgt2sc5oGT+wVOOtoZ0l6z KqtZ4KEM9Vm0iC1VDwmBHQ== <SEC-DOCUMENT>0000038777-00-000301.txt : 20000215 <SEC-HEADER>0000038777-00-000301.hdr.sgml : 20000215 ACCESSION NUMBER: 0000038777-00-000301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN RESOURCES INC CENTRAL INDEX KEY: 0000038777 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 132670991 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09318 FILM NUMBER: 538963 BUSINESS ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD STREET 2: 6TH FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 6503123000 MAIL ADDRESS: STREET 1: FRANKLIN RESOURCES INC STREET 2: 901 MARINERS ISLAND BLVD 6TH FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FOR PERIOD ENDED 12/31/99 <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 Quarterly Period Ended December 31, 1999 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. 1-9318 FRANKLIN RESOURCES, INC. (Exact name of registrant as specified in its charter) Delaware 13-2670991 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 777 Mariners Island Blvd., San Mateo, CA 94404 (Address of Principal Executive Offices) (Zip Code) (650) 312-2000 (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 (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: Outstanding: 248,652,854 shares, common stock, par value $.10 per share at January 30, 2000. 1 <PAGE> PART I -FINANCIAL INFORMATION Item 1. Condensed Financial Statements FRANKLIN RESOURCES, INC. Consolidated Statements of Income Unaudited Three months ended December 31 (In thousands, except per share data) 1999 1998 - ------------------------------------------------------------------------------- Operating revenues: Investment management fees $344,042 $330,370 Underwriting and distribution fees 164,243 188,604 Shareholder servicing fees 51,759 45,734 Other, net 5,623 2,971 - ------------------------------------------------------------------------------- Total operating revenues 565,667 567,679 - ------------------------------------------------------------------------------- Operating expenses: Underwriting and distribution 143,168 163,046 Compensation and benefits 130,849 133,814 Information systems, technology and occupancy 51,631 48,479 Advertising and promotion 22,545 28,238 Amortization of deferred sales commissions 20,631 25,019 Amortization of intangible assets 9,283 9,373 Other 19,925 22,805 Restructuring charge - 46,140 - ------------------------------------------------------------------------------- Total operating expenses 398,032 476,914 - ------------------------------------------------------------------------------- Operating income 167,635 90,765 Other income/(expenses): Investment and other income 16,679 10,536 Interest expense (3,364) (6,173) - ------------------------------------------------------------------------------- Other income, net 13,315 4,363 - ------------------------------------------------------------------------------- Income before taxes on income 180,950 95,128 Taxes on income 43,428 26,636 - ------------------------------------------------------------------------------- Net income $137,522 $68,492 - ------------------------------------------------------------------------------- Earnings per share: Basic $0.55 $0.27 Diluted $0.55 $0.27 Dividends per share $0.06 $0.055 The accompanying notes are an integral part of these consolidated financial statements. 2 <PAGE> FRANKLIN RESOURCES, INC. Consolidated Balance Sheets Unaudited December 31 September 30 (In thousands) 1999 1999 - ------------------------------------------------------------------------------- ASSETS: Current assets: Cash and cash equivalents $951,169 $811,300 Receivables: Sponsored investment products 229,846 225,132 Other 27,141 33,178 Investment securities, available-for-sale 254,772 392,022 Prepaid expenses and other 14,818 24,257 - ------------------------------------------------------------------------------- Total current assets 1,477,746 1,485,889 - ------------------------------------------------------------------------------- Banking/Finance assets: Cash and cash equivalents 9,148 7,944 Loans receivable, net 237,580 186,185 Investment securities, available-for-sale 15,045 20,484 Other 3,703 3,165 - ------------------------------------------------------------------------------- Total banking/finance assets 265,476 217,778 - ------------------------------------------------------------------------------- Other assets: Deferred sales commissions 101,504 103,289 Property and equipment, net 420,900 416,395 Intangible assets, net 1,193,494 1,202,777 Receivable from banking/finance group 154,860 107,148 Other 135,312 133,514 - ------------------------------------------------------------------------------- Total other assets 2,006,070 1,963,123 - ------------------------------------------------------------------------------- Total assets $3,749,292 $3,666,790 =============================================================================== The accompanying notes are an integral part of these consolidated financial statements. 3 <PAGE> FRANKLIN RESOURCES, INC. Consolidated Balance Sheets Unaudited December 31 September 30 (In thousands except share data) 1999 1999 - ----------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Compensation and benefits $89,631 $162,842 Current maturities of long-term debt 59,134 108,985 Accounts payable and accrued expenses 81,296 80,966 Commissions 65,231 61,971 Income taxes 63,183 57,968 Other 10,750 13,758 - ----------------------------------------------------------------------------- Total current liabilities 369,225 486,490 - ----------------------------------------------------------------------------- Banking/finance liabilities: Payable to Parent 154,860 107,148 Deposits 55,583 58,216 Other 9,006 11,042 - ----------------------------------------------------------------------------- Total banking/finance liabilities 219,449 176,406 - ----------------------------------------------------------------------------- Other liabilities: Long-term debt 377,379 294,260 Other 58,849 52,640 - ----------------------------------------------------------------------------- Total other liabilities 436,228 346,900 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Total liabilities 1,024,902 1,009,796 - ----------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued - - Common stock, $.10 par value, 500,000,000 shares authorized; 248,675,576 and 251,006,541 shares issued and outstanding, for December 24,868 25,101 and September, respectively Capital in excess of par value 237 69,631 Retained earnings 2,688,649 2,566,048 Other (4,327) (3,532) Accumulated other comprehensive income 14,963 (254) - ----------------------------------------------------------------------------- Total stockholders' equity 2,724,390 2,656,994 - ----------------------------------------------------------------------------- Total liabilities and stockholders' equity $3,749,292 $3,666,790 ============================================================================= The accompanying notes are an integral part of these consolidated financial statements. 4 <PAGE> FRANKLIN RESOURCES, INC. Consolidated Statements of Cash Flows Unaudited Three months ended December 31 (In thousands) 1999 1998 - ------------------------------------------------------------------------------- Net income $137,522 $68,492 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in receivables, prepaid expenses and other current assets 2,097 (39,970) Advances of deferred sales commissions (18,846) (9,838) (Decrease) increase in restructuring liabilities (1,190) 46,140 Increase in other current liabilities 3,160 18,998 Increase (decrease) in income taxes payable 5,216 (29,933) Increase in commissions payable 3,260 2,996 Decrease in accrued compensation and benefits (46,291) (55,425) Depreciation and amortization 48,762 51,553 Losses on disposition of assets 455 2,546 - ------------------------------------------------------------------------------- Net cash provided by operating activities 134,145 55,559 - ------------------------------------------------------------------------------- Purchase of investments (41,597) (61,671) Liquidation of investments 197,429 325,479 Purchase of banking/finance investments (2,744) (8,319) Liquidation of banking/finance investments 8,172 7,986 Net origination of loans receivable (52,196) (27,792) Purchase of property and equipment (22,496) (31,658) Proceeds from sale of property - 176 - ------------------------------------------------------------------------------- Net cash provided by investing activities 86,568 204,201 - ------------------------------------------------------------------------------- Decrease in bank deposits (2,633) (7,566) Exercise of common stock options 266 476 Dividends paid on common stock (13,799) (12,587) Purchase of stock (98,423) (7,113) Issuance of debt 190,583 40,000 Payments on debt (155,634) (177,843) - ------------------------------------------------------------------------------- Net cash used in financing activities (79,640) (164,633) - ------------------------------------------------------------------------------- Increase in cash and cash equivalents 141,073 95,127 Cash and cash equivalents, beginning of period 819,244 556,043 - ------------------------------------------------------------------------------- Cash and cash equivalents, end of period $960,317 $651,170 - ------------------------------------------------------------------------------- Supplemental disclosure of non-cash information: Value of common stock issued, principally restricted stock $28,531 $27,769 The accompanying notes are an integral part of these consolidated financial statements. 5 <PAGE> FRANKLIN RESOURCES, INC. Notes to Consolidated Financial Statements December 31, 1999 (Unaudited) 1. Basis of Presentation --------------------- We have prepared these unaudited interim financial statements of Franklin Resources, Inc. and its consolidated subsidiaries ("Franklin Templeton") in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). We have condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles pursuant to such rules and regulations. In our opinion, all appropriate adjustments necessary to a fair presentation of the results of operations have been made for the periods shown. All adjustments are of a normal recurring nature. We have reclassified certain prior year amounts have been to conform to current year presentation. You should read these financial statements in conjunction with our audited financial statements for the fiscal year ended September 30, 1999. 2. Restructuring ------------- In December 1998, we adopted a restructuring plan estimated to cost approximately $58 million and designed to reduce costs, improve service levels and reprioritize our business activities. Approximately 87% of the total estimated charges were utilized at December 31, 1999 and the remaining $7.7 million is expected to be utilized during the second quarter of fiscal 2000. Approximately $19.9 million of the amounts utilized represented cash payments. The remaining balance of $7.7 million is included in other current liabilities. The following table shows the component parts and utilization of the restructuring liability: Restructuring Additional Restructuring Restructuring liability liability liability liability (In millions) Dec-98 Jan-99 utilized Dec-99 - -------------------------------------------------------------------------------- Asset write-down $31.9 - $(29.1) $2.8 Employee severance and termination benefits - 12.3 (12.3) - Lease termination charges and other 14.2 - (9.3) 4.9 =================================================================== ============ Total $46.1 $12.3 $(50.7) $7.7 =================================================================== ============ 3. Debt ---- During the quarter ended December 31, 1999, we repaid $50 million of our medium-term notes at maturity. Interest rate swap agreements which fixed interest rates on $40 million of commercial paper expired. The remaining interest rate swap agreements, maturing through October 2000, effectively fix interest rates on $90 million of commercial paper. The fixed rates of interest range from 6.36% to 6.64%. At December 31, 1999, our overall weighted average interest rate on outstanding commercial paper and medium-term notes was 6.2%. 6 <PAGE> 4. Comprehensive Income -------------------- The following table shows comprehensive income for the three months ended December 31, 1999 and 1998. (In thousands) 1999 1998 - ----------------------------------------------------------------------------- Net income $137,522 $68,492 Net unrealized gain on available-for-sale securities 13,259 5,529 Foreign currency translation adjustment 1,958 3,125 ============================================================================= Comprehensive income $152,739 $77,146 ============================================================================= 5. Segment information ------------------- Franklin Templeton has two operating segments; investment management and banking/finance. The investment management segment derives substantially all of its revenues and net income from providing investment advisory, fund administration, distribution and related services to our sponsored investment products. The banking/finance segment offers consumer lending and selected retail banking services to individuals. Financial information for our two operating segments for the quarters ending December 31, 1999 and 1998 is presented in the table below. Operating revenues of the banking/finance segment are reported net of interest expense. Assets Income before Operating (In thousands) taxes revenues - -------------------------------------------------------------------------------- December 1999 Investment management $3,483,884 $180,085 $561,062 Banking/finance 265,408 865 4,605 ================================================================================ Company Totals $3,749,292 $180,950 $565,667 ================================================================================ Assets Income before Operating taxes revenues - -------------------------------------------------------------------------------- December 1998 Investment management $3,161,975 $96,252 $565,164 Banking/finance 236,178 (1,124) 2,515 ================================================================================ Company Totals $3,398,153 $95,128 $567,679 ================================================================================ 7 <PAGE> 6. Earnings per share ------------------ Earnings per share were computed as follows: Three months ended December 31 (In thousands except per share amounts) 1999 1998 ------------------------------------------------------------------------- Net income $137,522 $68,492 ========================================================================= Weighted-average shares outstanding - basic 250,432 251,860 Incremental shares from assumed conversions 160 195 ========================================================================= Weighted-average shares outstanding - diluted 250,592 252,055 ========================================================================= Earnings per share: Basic $0.55 $0.27 Diluted $0.55 $0.27 ------------------------------------------------------------------------- 7. Adoption of Statement of Position 98-1 -------------------------------------- We adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), on October 1, 1999. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. The adoption of SOP 98-1 did not materially affect our net income or financial condition for the quarter. 8. Subsequent Event ---------------- On February 5, 2000, Franklin Templeton purchased and retired approximately 1.5 million shares of its common stock for $51.8 million. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS In this section, we discuss our results of operations and our financial condition. We also make some statements relating to the future, which are called "forward-looking" statements. Although we do our best to make clear and accurate forward-looking statements, the actual results and outcomes could be significantly different from those that we discuss in this document. For this reason, you should not rely too heavily on these forward-looking statements. We encourage you to look at the "Risk Factors" section below, where we discuss these statements in more detail. GENERAL The majority of our operating revenues, operating expenses and net income are derived from providing investment advisory and related services to retail mutual funds, institutional and private accounts, and other investment products. This is our primary business activity and operating segment. Our sponsored investment products include a broad range of domestic and global/international equity, fixed-income and money market mutual funds, as well as other investment products that meet a wide variety of investment needs of individuals and institutions. 8 <PAGE> ASSETS UNDER MANAGEMENT December 31 September 30 December 31 (In billions) 1999 1999 1998 - ------------------------------------------------------------------------------ Equity: Global/international $111.0 $96.8 $92.8 Domestic 44.3 37.6 40.4 - ------------------------------------------------------------------------------ Total equity 155.3 134.4 133.2 - ------------------------------------------------------------------------------ Hybrid Funds 9.6 10.2 11.5 Fixed-income: Tax-free 45.2 48.2 50.9 Taxable Domestic 15.4 15.8 16.0 Global/international 3.9 3.9 4.0 - ------------------------------------------------------------------------------ Total fixed-income 64.5 67.9 70.9 - ------------------------------------------------------------------------------ Money funds 5.6 5.6 4.6 ============================================================================== Total end of period $235.0 $218.1 $220.2 ============================================================================== Simple monthly average for the three-month period <F1> $224.1 $223.3 $217.0 ============================================================================== <F1>Investment management fees from approximately 70% of our assets under management are calculated using a daily average. Total assets under management increased $16.9 billion (8%) and $14.8 billion (7%) from September 1999 and December 1998, respectively. Most of these increases were in equity products. During the periods under review, market appreciation has offset cash outflows in most categories of our sponsored investment products. Equity assets now comprise 66% of total assets under management compared to 60% at December 31, 1998. Fixed income funds now comprise 27% of total assets under management, as compared to 32% at December 31, 1998. The shift in our managed asset mix toward higher fee equity products and higher average assets has resulted in higher investment management fee revenues for the three months ended December 31, 1999, as compared to the same period a year ago. 9 <PAGE> RESULTS OF OPERATIONS Three months ended December 31 Percent 1999 1998 Change - -------------------------------------------------------------------------------- Net income (millions) $137.5 $68.5 101% Earnings per share Basic $0.55 $0.27 104% Diluted $0.55 $0.27 104% Without restructuring charge $0.55 $0.41 34% Operating margin As reported 30% 16% Without restructuring charge 30% 24% EBITDA margin<F1> As reported 37% 22% Without restructuring charge 37% 30% - -------------------------------------------------------------------------------- <F1> EBITDA margin is earnings before interest, taxes on income, depreciation and the amortization of intangibles (not including amortization of deferred sales commission) divided by total revenues. Net income and operating margins during the quarter ended December 31, 1999 increased compared to the same quarter last year, as a result of a restructuring charge taken in the quarter ended December 31, 1998 and reduced operating expenses in the current quarter. EBITDA margins improved principally as a result of improved operating margins in the current quarter. Operating revenue Three months ended December 31 Percent (In millions) 1999 1998 Change - -------------------------------------------------------------------------------- Investment management fees $344.0 $330.4 4% Underwriting and distribution fees 164.3 188.6 (13)% Shareholder servicing fees 51.8 45.7 13% Other, net 5.6 3.0 87% - -------------------------------------------------------------------------------- Total operating revenues $565.7 $567.7 - - -------------------------------------------------------------------------------- Investment management fees, the largest component of our operating revenues, include both investment advisory and fund administration fees. These fees are generally calculated under fixed-fee arrangements as a percentage of the value of assets under management. In return for these fees, we provide investment advisory and administrative services. There have been no significant changes in these fee structures for the funds and accounts that we manage in the periods under review. Investment management fees during the quarter ended December 31, 1999 increased 4% over the same period last year, mainly due to the 3% increase in the simple monthly average assets under management between these periods. Our effective investment management fee rate (investment management fees divided by simple monthly average assets under management) remained constant at 0.61% from December 31, 1998. 10 <PAGE> Underwriting commissions are earned from the sale of certain classes of mutual funds that have a front-end sales commission. Distribution fees are paid by our sponsored mutual funds in return for sales and marketing efforts on their behalf. Distribution fees include 12b-1 plan fees that are subject to maximum pay-out levels, based upon a percentage of the assets in each fund. A significant portion of underwriting commissions and distribution fees are paid to the brokers and other intermediaries who sell funds to the public on our behalf. See the description of underwriting and distribution expenses below. Underwriting and distribution fees decreased 13% over the same period last year due to a decrease in commissionable sales, principally of Class A retail mutual fund shares. Distribution fees remained relatively constant. Shareholder servicing fees are primarily fixed charges per shareholder account that vary with the particular type of fund and the service being rendered. For certain products, particularly outside the U.S. and Canada, shareholder servicing fees are calculated as a percentage of assets under management. Fees are received as compensation for providing transfer agency services, which include providing customer statements, transaction processing, customer service and tax reporting. In accordance with current agreements with most U.S. funds, closed accounts in a given calendar year remain billable through the second quarter of the following calendar year at a reduced rate. Shareholder servicing fees increased 13% as a result of increases in the total number of billable accounts and the per account charge. In addition, fees increased from funds whose servicing fees are based on assets under management. Other, net consists primarily of revenues from the banking/finance operating segment: - - Operating revenues, consisting primarily of interest and servicing income - - Interest expense, and - - Provision for loan losses. Other, net increased compared with the same quarter last year, primarily due to banking/finance segment revenues from increased auto loans outstanding. Securitizations of auto loans took place in September 1998 and May 1999 and a further securitization is planned for the second quarter of fiscal 2000. Banking/finance interest expense increased 9% as the borrowing requirements of the group increased to finance the expansion in loans outstanding. The provision for loan losses remained relatively stable in the current quarter as compared to the same period a year ago. Operating expenses Three months ended December 31 (In millions) 1999 1998 Change ------------------------------------------------------------------------------- Underwriting and distribution $143.2 $163.1 (12)% Compensation and benefits 130.9 133.8 (2)% Information systems, technology and 51.6 48.5 6% occupancy Advertising and promotion 22.5 28.2 (20)% Amortization of deferred sales commissions 20.6 25.0 (18)% Amortization of intangible assets 9.3 9.4 (1)% Other 19.9 22.8 (13)% Restructuring charge - 46.1 - =============================================================================== Total operating expenses $398.0 $476.9 (17)% =============================================================================== 11 <PAGE> Underwriting and distribution includes sales commissions and distribution fees paid to brokers and other third party intermediaries. The decrease in underwriting and distribution expenses was consistent with the decrease in underwriting and distribution revenues. Compensation and benefits costs during the quarter ended December 31, 1999 decreased 2% over the same period last year primarily due to a decrease in the number of employees offset by annual salary increases awarded in October 1999. In January 1999, we announced that we were eliminating 560 positions, primarily as a result of efficiencies gained from conversion to one domestic transfer agency system. In addition, employee headcount further decreased by 1,200 persons due to attrition. In order to hire and retain our key employees in the current low unemployment labor market, we are committed to keeping our salaries and benefit packages competitive, which means that the level of compensation and benefits may increase more quickly than our revenues. Information systems, technology and occupancy costs increased 6% over the same period last year. During the past year, we have embarked on a number of significant systems projects, made further enhancements to our transfer agency system, and increased spending on our Year 2000 project. We are also developing e-business strategies to meet the needs of our distribution network and our mutual fund shareholders. We expect that such major systems undertakings will continue to have an impact on our operating results through fiscal 2000 and beyond. Advertising and promotion expenses decreased 20% over the same period last year, mainly due to decreased promotional activity and to reduced production and printing costs. However, we are currently embarking on a number of new advertising campaigns that will be run during the second quarter of fiscal 2000. Certain fund classes are sold without a front-end sales charge to shareholders, while, at the same time, we pay a commission to selling brokers and other intermediaries. We expect to recover the payments in distribution revenues and contingent deferred sales charges over periods of up to a maximum of eight years following the sale. Accordingly, the payments are deferred and amortized over periods not exceeding eight years. Amortization of deferred sales commissions decreased 18% over the same period last year primarily due to the decrease in the sale of these products. Also, in the second quarter of 1999, our sponsored Canadian funds arranged for financing of their sales commissions directly with a third party. This new arrangement contributed to the decrease in period-over-period amortization levels. During fiscal 1999, we recognized pretax restructuring charges of $58.4 million, of which $46.1 million was recognized during first quarter. These charges were related to a plan announced and initiated by management in the first quarter of fiscal 1999. See Note 2 to the condensed financial statements. We do not expect to incur any incremental charges with respect to the plan during fiscal 2000. Of the $58.4 million total restructuring charge, approximately 87% was utilized at December 31, 1999. The anticipated lost revenues associated with discontinued products are not expected to have a material impact on ongoing results of operations. Substantially all of the remaining restructuring liability is expected to be utilized during the second quarter of fiscal year 2000. 12 <PAGE> Other income/(expenses): Three months ended December 31 (In millions) 1999 1998 Change - -------------------------------------------------------------------------- Investment and other income $16.7 $10.5 59% Interest expense (3.4) (6.2) (45)% - -------------------------------------------------------------------------- Other income, net $13.3 $4.3 209% ========================================================================== Investment and other income increased 209% from the same period last year. Investment income for the current quarter exceeded that earned in the prior year, due to higher interest income and realized gains. Interest expense decreased over the same period last year, following a reduction in our outstanding debt. Taxes on income Our effective income tax rate for the quarter ended December 31, 1999 has decreased to 24%, compared to 28% for the same period last year. This decrease reflects the increase in the relative contributions of foreign earnings that are subject to reduced tax rates and that are not currently included in U.S. taxable income. The effective tax rate will continue to be reflective of the relative contributions of foreign earnings that are subject to reduced tax rates and that are not currently included in U.S. taxable income. MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999 and September 30, 1999, our assets aggregated $3.7 billion, and stockholders' equity approximated $2.7 billion. Outstanding debt (long-term and short-term) increased by $33.3 million (8%) at December 31, 1999, from $403.2 million at September 30, 1999. Cash provided by operating activities for the quarter ended December 31, 1999 was $134.1 million, compared to $55.6 million in the same quarter last year. This increase was due mainly to higher net income in the current quarter. The increase in net income was due to lower operating expenses and the restructuring plan, which required little incremental cash expenditure in the first quarter of fiscal 2000. We sold $161.3 million of our investments in the period, net of purchases, originated $52.2 million of new banking/finance loans and used $22.5 million to purchase property and equipment, providing $86.6 million from investing activities in the quarter. The net issuance of debt raised $34.9 million. We used $98.4 million in cash to purchase 3.2 million shares of common stock and paid $13.8 million of cash dividends. Overall, for the quarter, $79.6 million in cash was used in financing activities. As of December 31, 1999, through our interest-rate swap agreements and medium term note-program, we had fixed the rates of interest we pay on 54% of our outstanding debt. Interest-rate swaps with notional amounts aggregating $40 million matured during the quarter ended December 1999. We expect that the principal uses of cash will be to advance sales commissions, fund property and equipment acquisitions, purchase company stock, pay shareholder dividends and service debt. We expect to finance future increases in investment in our banking/finance activities through existing debt facilities, operating cash flows, or through the securitization of a portion of the receivables from such consumer lending activities. We believe that our existing liquid assets, together with the expected continuing cash flow from operations, our borrowing capacity under current credit facilities and our ability to issue stock will be sufficient to meet our present and reasonably foreseeable cash needs. 13 <PAGE> YEAR 2000 READINESS DISCLOSURE Year 2000 Readiness - ---------------------- As of the date of this filing, all of our mission-critical systems and important non-mission critical systems, including non-IT systems, have successfully transitioned to the Year 2000 and are operating in production. We will continue to monitor system compliance into the year. We will pay special attention to February 29, 2000, which falls in a non-standard leap year that could potentially cause Year 2000-related problems. We utilized this unusual leap year date in our test procedures and do not anticipate any material system problems. Third Parties and Year 2000 - ---------------------------- During the cross-over to the Year 2000, we did not experience, and were not alerted to, any material problems involving third-party systems, some of which are Franklin Templeton's mission-critical systems and upon which we are heavily reliant. Communication with third parties will continue as we proceed with our Year 2000 project, through the leap year date, and into the Year 2000 to monitor system functions. Contingency Planning - --------------------- Franklin Templeton's worldwide contingency plans for the Year 2000 were in place over the cross-over weekend but no material problems were experienced. Our contingency planning also includes the upcoming leap year date. Cost Estimates - --------------- Unless unanticipated problems arise in connection with the leap year date, the total estimated costs through March 2000 associated with the Year 2000 project should not exceed $50 million. These estimated costs are mainly internal and third-party labor costs which are expensed as incurred. The total amount expended on the project through January 31, 2000 was approximately $47.5 million. Liquidity - --------- Franklin Templeton arranged for two short-term special lines of credit, aggregating approximately $1.0 billion, for certain of its sponsored retail mutual funds to assist in meeting liquidity requirements that could arise out of Year 2000 concerns. As of the date of this filing, no such liquidity requirements have materialized, and the lines of credit have not been utilized. One of the lines of credit remained open until February 11, 2000 and the other remains open until March 1, 2000. Specific Risks Associated with the Year 2000 - --------------------------------------------- Although our computer systems have successfully transitioned to the year 2000, our ability to manage Year 2000 issues, in general and in relation to the upcoming leap year date, is still subject to uncertainties beyond our control. Franklin Templeton could become subject to legal claims or regulatory actions in the event of any Year 2000 problem in our business operations. If there are Year 2000 market disruptions or investor panic, system interruptions or failures of important third parties, such as securities transfer agents, stock exchanges, data providers or providers of our mission-critical systems, this could have a material adverse effect on our business, financial condition and results of operations. 14 <PAGE> RISK FACTORS FRANKLIN TEMPLETON FACES STRONG GLOBAL COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We compete with numerous stock brokerage and investment banking firms, investment management companies, insurance companies, banks, online and Internet investment sites, savings and loan associations and other financial institutions. These companies also offer financial services and other investment alternatives. In recent years, there has been a trend of consolidation in the financial services industry, resulting in stronger competitors, some with greater financial resources than Franklin Templeton. There has also been a trend toward online Internet financial services. We are currently expanding our Internet e-business, but there can be no assurance that our e-business will compete effectively with other alternatives available to investors. To the extent that existing customers stop investing with us and instead invest with our competitors, or if potential customers decide to invest with other companies instead, this could cause our market share, revenues and net income to decline. COMPETING SECURITIES DEALERS AND BANKS COULD RESTRICT SALES OF OUR FUNDS. Although we rely on securities dealers to sell and distribute Franklin, Templeton and Mutual Series fund shares, many of those securities dealers also have mutual funds under their own names that compete directly with our products. The banking industry also continues to expand its sponsorship of proprietary funds. These firms or banks could decide to limit or restrict the sale of our fund shares, which could lower our future sales, increase redemption rates, and cause our revenues to decline. WE CURRENTLY RELY UPON OUR DISTRIBUTION CHANNELS. Franklin Templeton derives a significant portion of its income from sales made by broker/dealers and other similar investment advisors, and we are heavily dependent upon these distribution channels. However, there is increasing competition for access to these channels, which has caused our distribution costs to rise and could cause further increases in the future as competition continues and service expectations increase. Higher distribution costs lower our net revenues and earnings. If one of these major financial advisors had to cease operations, even for a few days, it could have a significant adverse impact on our revenues and earnings. Similarly, Franklin Templeton relies upon these business relationships and there is no guarantee that good relations can be maintained. If we cannot effectively compete, distribute and sell our products, this would have a negative effect on our level of assets under management, related revenues and overall business and financial condition. SALES OF B AND C SHARE CLASSES BRING IN LOWER REVENUES IN THE YEAR OF SALE THAN THE TRADITIONAL A SHARE CLASS. Franklin Templeton receives no or reduced sales charges at the time of an initial investment in B and C shares but still must pay or finance the related dealer commission. In most instances, Franklin Templeton will realize lower operating margins on C share assets as compared to A or B share assets. IF OUR ASSET MIX SHIFTS TO PREDOMINANTLY FIXED-INCOME, OUR REVENUES WOULD DECLINE. We derive higher fee revenues and income from the equity assets that we manage. A shift in our asset mix towards fixed-income products has caused in the past, and would cause in the future, a decline in our income and revenue. WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN THE GLOBAL EQUITY MARKETS. As Franklin Templeton's asset mix has shifted since 1992 from predominantly fixed-income to a majority of equity assets, we have become subject to an increased risk of asset volatility from changes in global equity markets. U.S. equity markets have been experiencing extraordinary returns for an unusually long period of time which, due to the cyclical nature of these markets, could decline in the future. Declines in these markets - whether in general, or in certain geographic regions or investment sectors - have caused in the past, and would cause in the future, a decline in our income and revenue. 15 <PAGE> GLOBAL ECONOMIC CONDITIONS, INTEREST RATES, INFLATION RATES AND OTHER FACTOR WHICH ARE DIFFICULT TO PREDICT AFFECT THE MIX, MARKET VALUES, AND LEVELS OF OUR ASSETS UNDER MANAGEMENT. Fluctuations in interest rates and in the yield curve affect the value of fixed-income assets under management as well as the flow of monies to and from fixed-income funds. In turn, this affects our revenues from those funds. In addition, changes in the equity marketplace may significantly affect the level of our assets under management. The multiplicity of factors impacting asset mix make it difficult to predict the net effect of any particular set of conditions. GENERAL ECONOMIC AND SECURITIES MARKETS FLUCTUATIONS AFFECT OUR BUSINESS. Adverse general securities market conditions, currency fluctuations, governmental regulations and recessionary global economic conditions could lower Franklin Templeton's mutual fund share sales and other financial services product sales. AN INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION AND BUSINESS OPERATIONS. Franklin Templeton's ability to meet anticipated cash needs depends upon factors including our asset value, our creditworthiness as perceived by lenders and the market value of our stock. Similarly, our ability to securitize future portfolios of auto loan and credit card receivables would also be affected by the market's perception of those portfolios, finance rates offered by competitors, and the general market for private debt. WE FACE INCREASED COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our continued success will depend upon our ability to attract and retain qualified personnel. The competition from other companies to hire these kinds of employees has increased, particularly in certain geographic locations where the majority of our workforce is employed. We may be forced to offer compensation and benefits to these employees at a level that exceeds our revenue growth. With historically low unemployment in the United States and other nations in which we operate, qualified personnel are now moving between firms and starting their own companies with greater frequency. If Franklin Templeton is not able to attract and retain these employees, our overall business condition and revenues could suffer. OUR EMERGING MARKET PORTFOLIOS AND RELATED REVENUES ARE SUBJECT TO INCREASED RISKS. These portfolios and our revenues derived from managing these portfolios are subject to significant risks of loss from political and diplomatic developments, currency fluctuations, social instability, changes in governmental polices, expropriation, nationalization, asset confiscation and changes in legislation related to foreign ownership. Foreign trading markets, particularly in some emerging market countries are often smaller, less liquid, less regulated and significantly more volatile. OUR SECURITIZED CONSUMER RECEIVABLES BUSINESS IS SUBJECT TO MARKETPLACE FLUCTUATION AND COMPETES WITH BUSINESSES WITH SIGNIFICANTLY LARGER PORTFOLIOS. Auto loan and credit card portfolio losses can be influenced significantly by trends in the economy and credit markets which reduce borrowers' ability to repay loans. DIVERSE AND STRONG COMPETITION LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON CONSUMER LOANS. We compete with many types of institutions for consumer loans, including the finance subsidiaries of large automobile manufacturers. Some of these competitors can provide loans at significantly below market interest rates in connection with automobile sales. We rely on our relationships with various automobile dealers and there is no guarantee that we can maintain relationships with these dealers. 16 <PAGE> Item 3. Quantitative and Qualitative Disclosures About Market Risk In the normal course of business, Franklin Templeton's financial position is subjected to a variety of risks, including market risk associated with interest rate movements. Franklin Templeton is exposed to changes in interest rates primarily in its debt transactions. Through its interest-rate swap agreements and its medium-term note program Franklin Templeton has effectively fixed the rate of interest it pays on 54% of its debt outstanding at December 31, 1999. Franklin Templeton does not believe that the effect of reasonably possible near-term changes in interest rates on Franklin Templeton's financial position, results of operations or cash flow would be material. We have considered the potential impact of the effect on the banking/finance segment of a 100 basis point (1%) movement in market interest rates and we do not expect it would have a material impact on our operating revenues or results of operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings We have previously reported three complaints filed by the same law firm, in January 1998, February 1998, and September 1998, in the U. S. District Court for the Southern District of Florida, against Templeton Asset Management, Ltd., an indirect wholly-owned subsidiary of Franklin Resources, Inc. ("FRI") and the investment manager of the closed-end investment company; Templeton Vietnam Opportunities Fund, Inc. (now known as Templeton Vietnam and Southeast Asia Fund, Inc.) (the "fund"); certain of the fund's officers and directors; FRI; and Templeton Worldwide, Inc., a direct wholly-owned FRI subsidiary. We have also previously reported that all defendants moved to dismiss those complaints. In December, 1999, the trial court granted those motions in part and denied them in part, permitting the plaintiffs the option to amend their complaints. The plaintiffs, James C. Roumell, Michael J. Wetta and Richard Waksman, chose to amend and on January 6, 2000 they filed a single, first amended and consolidated class action complaint, captioned In Re: Templeton Securities Litigation (Civil Action No. 98-6059). The consolidated complaint alleges that the defendants, including the fund, committed violations of the Investment Company Act of 1940 in connection with the fund's decision to conduct a tender offer commencing at the end of 1997. Also, plaintiff Wetta asserts a claim under Maryland state law on behalf of the fund and against the other defendants. The consolidated complaint seeks damages in excess of $40 million from all defendants. Wetta's claim also seeks equitable and monetary relief from the defendants other than the fund in favor of the fund. Management believes that this lawsuit is without merit and intends to defend this suit vigorously. Other than as stated above, there have been no material developments in this litigation since the report made in our Form 10-K for the period ended September 30, 1999 filed with the SEC on December 21, 1999. Franklin Templeton is involved from time to time in litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect Franklin Templeton's business or financial position. 17 <PAGE> Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of the report: Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (the "1994 Annual Report") Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit (3)(ii) to the 1994 Annual Report Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit (3)(iii) to the 1994 Annual Report Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit (3)(iv) to the 1994 Annual Report Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to Exhibit 3(ii) to the Company's Form 10-K for the fiscal year ended September 30, 1999 Exhibit 12 Computations of ratios of earnings to fixed charges Exhibit 27 Financial Data Schedule. (Filed with the Securities and Exchange Commission only.) (b) Reports on Form 8-K: (i) Form 8-K dated October 14, 1999 reporting Year 2000 Readiness Disclosure under Item 5 "Other Events." (ii) Form 8-K dated October 21, 1999 reporting under Item 5 "Other Events" the filing of an earnings press release by the Registrant on October 21, 1999 and including said press release as an Exhibit under Item 7 "Financial Statements and Exhibits." 18 <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. FRANKLIN RESOURCES, INC. Registrant. Date: February 14, 2000 /S/ Martin L. Flanagan MARTIN L. FLANAGAN President, Member - Office of the President and Principal Financial Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF RATIOS TO FIXED CHARGES <TEXT> Exhibit 12 COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES Three months ended December 31 (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------- Income before taxes $180,950 $95,128 Add fixed charges: Interest expense 6,154 8,737 Interest factor on rent 4,436 3,577 ------------------------------------- Total fixed charges $10,590 $12,314 ------------------------------------- Earnings before fixed charges and taxes on income $191,540 $107,442 ===================================== Ratio of earnings to fixed charges 18.1 8.7 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1999 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-30-2000 <PERIOD-END> DEC-31-1999 <CASH> 951,169 <SECURITIES> 254,772 <RECEIVABLES> 256,987 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 1,477,746 <PP&E> 420,900 <DEPRECIATION> 0 <TOTAL-ASSETS> 3,749,292 <CURRENT-LIABILITIES> 369,225 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 24,868 <OTHER-SE> 2,699,522 <TOTAL-LIABILITY-AND-EQUITY> 3,749,292 <SALES> 0 <TOTAL-REVENUES> 565,667 <CGS> 0 <TOTAL-COSTS> 398,032 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 3,364 <INCOME-PRETAX> 180,950 <INCOME-TAX> 43,428 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 137,522 <EPS-BASIC> 0.55 <EPS-DILUTED> 0.55 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

BGG

https://www.sec.gov/Archives/edgar/data/14195/0000950124-00-000424.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, SPFVhkUtV218nl0kveArpiBxw254KZZ6VjY5YnsZS2RG99Imo8D7d8C7xJSE2Kay pXfU4xNTjoi2otgZACW67A== <SEC-DOCUMENT>0000950124-00-000424.txt : 20000209 <SEC-HEADER>0000950124-00-000424.hdr.sgml : 20000209 ACCESSION NUMBER: 0000950124-00-000424 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991226 FILED AS OF DATE: 20000208 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: 0627 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01370 FILM NUMBER: 527543 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>FORM 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 26, 1999 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) Wisconsin 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 January 28, 2000 - ------------------------------------------------------------------------------- COMMON STOCK, par value $0.01 per share 22,981,270 Shares 1 <PAGE> 2 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Condensed Balance Sheets - December 26, 1999 and June 27, 1999 3 Consolidated Condensed Statements of Income - Three Months and Six Months ended December 26, 1999 and December 27, 1998 5 Consolidated Condensed Statements of Cash Flow - Six Months ended December 26, 1999 and December 27, 1998 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 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 Signatures 12 </TABLE> 2 <PAGE> 3 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) ASSETS <TABLE> <CAPTION> December 26, June 27, 1999 1999 ------------ -------- (Unaudited) <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 10,282 $ 60,806 Accounts receivable, net 395,033 194,096 Inventories - Finished products and parts 177,240 72,196 Work in process 71,455 59,665 Raw materials 5,473 5,587 ----------- ----------- Total inventories 254,168 137,448 Future income tax benefits 37,951 34,383 Prepaid expenses 18,964 16,119 ----------- ----------- Total current assets 716,398 442,852 ----------- ----------- OTHER ASSETS: Marketable securities and other investments 44,528 19,024 Deferred income tax assets 647 2,039 Capitalized software 6,873 7,516 ----------- ----------- Total other assets 52,048 28,579 ----------- ----------- PLANT AND EQUIPMENT: Cost 812,392 859,848 Less accumulated depreciation 420,527 455,394 ----------- ----------- Total plant and equipment, net 391,865 404,454 ----------- ----------- $ 1,160,311 $ 875,885 =========== =========== </TABLE> The accompanying notes are an integral part of these statements. 3 <PAGE> 4 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Continued) (In thousands) LIABILITIES & SHAREHOLDERS' INVESTMENT <TABLE> <CAPTION> December 26, June 27, 1999 1999 ------------ --------- (Unaudited) CURRENT LIABILITIES: <S> <C> <C> Accounts payable $ 109,108 $ 117,757 Domestic notes payable 229,967 4,335 Foreign loans 17,445 13,824 Current maturities of long-term debt 15,000 15,000 Accrued liabilities 131,467 119,685 Dividends payable 6,926 - Federal and state income taxes 21,610 11,901 ----------- ----------- Total current liabilities 531,523 282,502 ----------- ----------- OTHER LIABILITIES: Deferred revenue on sale of plant and equipment 15,742 15,798 Accrued pension cost 11,620 17,306 Accrued employee benefits 13,653 13,185 Accrued postretirement health care obligation 67,286 67,877 Long-term debt 113,410 113,307 ----------- ----------- Total other liabilities 221,711 227,473 ----------- ----------- SHAREHOLDERS' INVESTMENT: Common stock- Authorized 60,000 shares, $.01 par value, Issued 28,927 shares 289 289 Additional paid-in capital 36,946 37,657 Retained earnings 665,797 612,807 Accumulated other comprehensive income (1,211) (1,732) Unearned compensation on restricted stock (261) (235) Treasury stock at cost, 5,910 and 5,476 shares, respectively (294,483) (282,876) ----------- ----------- Total shareholders' investment 407,077 365,910 ----------- ----------- $ 1,160,311 $ 875,885 =========== =========== </TABLE> The accompanying notes are an integral part of these statements. 4 <PAGE> 5 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- Dec. 26 Dec. 27 Dec. 26 Dec. 27 1999 1998 1999 1998 ------- ------- ------- ------- <S> <C> <C> <C> <C> NET SALES $ 422,238 $ 359,943 $ 721,171 $ 583,924 COST OF GOODS SOLD 322,515 288,472 566,066 474,841 --------- --------- --------- --------- Gross profit on sales 99,723 71,471 155,105 109,083 ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 33,196 29,107 62,836 58,355 --------- --------- --------- --------- Income from operations 66,527 42,364 92,269 50,728 INTEREST EXPENSE (5,208) (4,748) (8,335) (8,158) GAIN ON DISPOSITION OF FOUNDRY ASSETS - - 16,545 - OTHER INCOME, net 3,985 1,801 5,618 3,948 --------- --------- --------- --------- Income before provision for income taxes 65,304 39,417 106,097 46,518 PROVISION FOR INCOME TAXES 24,160 14,780 39,250 17,440 --------- --------- --------- --------- Net income $ 41,144 $ 24,637 $ 66,847 $ 29,078 ========= ========= ========= ========= EARNINGS PER SHARE DATA - Average shares outstanding 23,092 23,308 23,120 23,467 ====== ====== ====== ====== Basic earnings per share $ 1.78 $ 1.06 $ 2.89 $ 1.24 ====== ====== ====== ====== Diluted average shares outstanding 23,190 23,481 23,254 23,588 ====== ====== ====== ====== Diluted earnings per share $ 1.77 $ 1.05 $ 2.87 $ 1.23 ====== ====== ====== ====== CASH DIVIDENDS PER SHARE $ .30 $ .29 $ .60 $ .58 ====== ====== ====== ====== </TABLE> The accompanying notes are an integral part of these statements. 5 <PAGE> 6 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dec. 26, 1999 Dec. 27, 1998 ------------- ------------- <S> <C> <C> Net income $ 66,847 $ 29,078 Adjustments to reconcile net income to net cash used for operating activities - Depreciation and amortization 25,052 23,825 Equity in earnings of unconsolidated affiliates (4,655) (1,687) (Gain) loss on disposition of plant and equipment (16,236) 195 Provision (credit) for deferred income taxes (2,913) 2,450 Change in operating assets and liabilities - Increase in accounts receivable (200,916) (166,692) Increase in inventories (118,079) (64,625) Increase in prepaid expenses (3,356) (1,174) Increase in accounts payable and accrued liabilities 19,768 30,557 Other, net (5,131) (4,262) ----------- ----------- Net cash used in operating activities (239,619) (152,335) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to plant and equipment (39,440) (29,881) Proceeds received on disposition of plant and equipment 23,509 1,382 Other, net 2,641 (391) ----------- ----------- Net cash used in investing activities (13,290) (28,890) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on loans and notes payable 229,253 138,714 Dividends (13,857) (13,618) Purchase of common stock for treasury (17,661) (35,614) Proceeds from exercise of stock options 5,248 8,897 ----------- ----------- Net cash provided by financing activities 202,983 98,379 ----------- ----------- EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (598) 562 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (50,524) (82,284) CASH AND CASH EQUIVALENTS, beginning 60,806 84,527 ----------- ----------- CASH AND CASH EQUIVALENTS, ending $ 10,282 $ 2,243 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 6,872 $ 7,559 =========== =========== Income taxes paid $ 32,400 $ 2,937 =========== =========== </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. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto which were included in the Company's latest Annual Report on Form 10-K. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The caption entitled Marketable Securities and Other Investments represents equity securities of other entities that are held by the Company. Marketable Securities are classified as available-for-sale and are reported at fair market value with any changes in fair market value reported in Accumulated Other Comprehensive Income. Other Investments represent investments in joint ventures and affiliates and are accounted for using the equity method of accounting. Financial Accounting Standard (FAS) No. 130, Reporting Comprehensive Income, requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting method that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Total comprehensive income is as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------ ------------------------ Dec. 26 Dec. 27 Dec. 26 Dec. 27 1999 1998 1999 1998 ------- ------- ------- ------- <S> <C> <C> <C> <C> Net income $ 41,144 $ 24,637 $ 66,847 $ 29,078 Unrealized gain (loss) on marketable securities 257 (64) 1,153 (64) Foreign currency translation adjustments (540) 243 (632) 769 -------- -------- -------- -------- Total comprehensive income $ 40,861 $ 24,816 $ 67,368 $ 29,783 ======== ======== ======== ======== </TABLE> The components of Accumulated Other Comprehensive Income are as follows (in thousands): <TABLE> <CAPTION> Dec. 26 June 27 1999 1999 ------- ------- <S> <C> <C> Cumulative translation adjustments $ (2,941) $ (2,309) Unrealized gain on marketable securities 1,730 577 --------- -------- Accumulated other comprehensive income $ (1,211) $ (1,732) ========= ======== </TABLE> At the end of August 1999, the Company contributed its two ductile iron foundries to Metal Technologies Holding Company, Inc. ("MTHC") in exchange for $23.6 million in cash and $45.0 million aggregate par value convertible preferred stock which was recorded at its estimated fair value of $21.6 million. The transaction resulted in a $16.5 million gain, and is shown as such on the income statement. The provisions of the preferred stock include a 15% cumulative dividend and conversion rights into a minimum of 31% of the common stock of MTHC. MTHC became the primary supplier to Briggs & Stratton Corporation of ductile iron castings for crankshafts and cam gears. 7 <PAGE> 8 BRIGGS & STRATTON CORPORATION 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 the Company's financial condition and results of operations for the periods included in the accompanying consolidated condensed financial statements: RESULTS OF OPERATIONS SALES Net sales for the second fiscal quarter totaled $422 million, an increase of $62 million or 17% compared to the same period of the preceding year. This increase resulted from the following factors: a favorable mix change in engines sold of $48 million, a $23 million increase in sales dollars due to a 6% increase in engine unit shipments, and $6 million from increased prices. The $23 million increase from engine unit sales is offset by a $15 million decrease of casting sales resulting from the disposition of the foundry assets in the first quarter of fiscal 2000. Net sales for the six months ended December 1999 totaled $721 million, an increase of $137 million or 24% compared to the first six months of the prior year. This increase resulted from the following factors: an $88 million increase in sales dollars resulting from a 17% increase in engine unit shipments, a favorable mix change to higher-priced units of $59 million, and $6 million from increased prices. These increases were offset by a $16 million decrease in casting sales for reasons discussed above. GROSS PROFIT MARGIN The gross profit rate increased to 24% in the current quarter from 20% in the preceding year's second quarter. This resulted in additional gross profit totaling $16 million. Significant reasons for this improvement were $12 million attributed to the benefit of higher production, and $6 million of price increases. The gross profit rate for the six-month period increased to 22% in the current year from 19% in the preceding year. This resulted in additional gross profit totaling $20 million. This increase resulted primarily from the same factors discussed above for the quarter. An increase in engine units produced attributed a favorable $20 million, and $6 million of price increases. Offsetting these improvements was a $2 million mix shift to the lower margin engines. ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES This category increased $4 million or 14% between the second fiscal quarters of 2000 and 1999. This resulted primarily from a $2 million increase in engineering costs related to development and testing of new products and a $1 million increase in profit sharing expense due to improved results. The $4 million or 8% increase for the comparative six-month periods was due primarily to the same factors discussed above for the quarter. Engineering costs and profit sharing expenses both increased $3 million. These increases were offset by a $2 million decrease in costs related to the Company's POWERCOM software business that was sold in the first quarter of the preceding year. 8 <PAGE> 9 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES INTEREST EXPENSE Interest expense increased 10% or $.5 million in the three-month comparison and increased 2% or $.2 million in the six-month comparison. These increases were the result of the Company's higher level of short-term borrowings in the latter part of the second quarter of fiscal 2000 to fund working capital needs. GAIN ON DISPOSITION OF FOUNDRY ASSETS At the end of August 1999, the Company contributed its two ductile iron foundries to Metal Technologies Holding Company, Inc. ("MTHC") in exchange for $23.6 million in cash and $45.0 million aggregate par value convertible preferred stock which was recorded at its estimated fair value of $21.6 million. The transaction resulted in a $16.5 million gain, and is shown as such on the income statement. The provisions of the preferred stock include a 15% cumulative dividend and conversion rights into a minimum of 31% of the common stock of MTHC. MTHC became the primary supplier to Briggs & Stratton Corporation of ductile iron castings for crankshafts and cam gears. PROVISION FOR INCOME TAXES The effective tax rate used in both the three-month and six-month periods for the current year was 37.0%. This is management's estimate of what the rate will be for the entire 2000 fiscal year. Last year's rate was 37.5% in both periods. EARNINGS PER SHARE The six-month diluted earnings per share calculation included herein reflects an immaterial change from the diluted earnings per share presented in the Company's press release of second quarter financial results. The change resulted from a correction in diluted shares outstanding. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities for the six-month periods of fiscal 2000 and fiscal 1999 were $240 million and $152 million, respectively. The significant increase was due to the following: The fiscal 2000 cash flow from operating activities reflects improved net income, excluding depreciation and gain on disposition of plant and equipment, of $23 million. Offsetting this improvement is an increased requirement for working capital of $110 million, caused primarily by three factors. First is a $53 million increase in inventories in anticipation of third quarter in-season demand for engine units. Second is a $34 million increase in accounts receivable attributed to the increased sales volume when compared to the previous year. Last are decreased accounts payable and accrued liabilities of $11 million. Accounts payable and federal and state income taxes payable both decreased between the comparable six months, $12 million and $3 million respectively, caused by timing of payments. Accrued liabilities increased $4 million attributed to an increase in the warranty reserve due to higher sales volume. Net cash used in investing activities totaled $13 million and $29 million, respectively. The $16 million decrease is attributed primarily to $23 million of cash received from the foundry transaction, offset by a $9 million increase in capital expenditures related to capacity increases and new products. Net cash provided by financing activities amounted to $203 million and $98 million in fiscal 2000 and 1999, respectively. These financing activities reflect higher levels of short-term borrowings in the latter part of the second quarter of fiscal 2000 to fund working capital requirements, causing a $91 million increase in debt between the periods. Also, the Company did not repurchase as many shares of its common stock in the open market during fiscal 2000. 9 <PAGE> 10 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES FUTURE LIQUIDITY AND CAPITAL RESOURCES In January 1999, the Board of Directors approved a repurchase of up to 1.3 million shares of the Company's common stock in open market or private transactions. As of the end of December 1999, stock repurchases totaling 1.0 million shares were made in open market transactions. This repurchase authorization is intended to minimize dilution from shares issued for employee benefit plans. Future purchases will be funded from available cash. Management expects cash flows for capital expenditures to total $80 million in fiscal 2000 and to be funded from available cash. These anticipated expenditures include a significant amount for capacity increases, as well as continuing reinvestment in equipment and new products. The Company currently intends to increase future cash dividends per share at a rate approximating the inflation rate, subject to the discretion of its Board of Directors and requirements of applicable law. OUTLOOK Overall, the Company expects that engine unit sales will increase by approximately 3% to 5% in fiscal 2000 compared to fiscal 1999. As discussed earlier, the Company experienced a significant increase in engine unit shipments in the first six months of fiscal 2000. It appears this represents a shift in original equipment manufacturers' timing of purchases from later in the year to earlier in the year. Lawn and garden equipment manufacturers are building product, particularly lawn tractors, earlier this year, hoping to avoid the engine shortages that developed in the peak selling season last year and the year before. The Company believes that demand from the lawn and garden segment will remain strong through the third fiscal quarter but weaken in the fourth fiscal quarter. Most of the market's requirements will have been built by the end of the third fiscal quarter. The Company expects a modest improvement in third quarter earnings and lower sales and earnings in the fourth quarter. Higher sales and earnings are expected for the full fiscal year. OTHER MATTERS YEAR 2000 The Company has not experienced any significant year 2000 issues to date. The Company continues to monitor its Year 2000 Program for unexpected issues that could possibly still develop. The year 2000 problem has many aspects and potential consequences, some of which are not reasonably foreseeable, and there can be no assurance that unforeseen consequences will not arise. The Company has spent to date $33 million on its enterprise-wide information system. The Company does not expect any additional incremental costs related to year 2000 matters. 10 <PAGE> 11 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. The words "anticipate", "believe", "estimate", "expect", "objective", and "think" or similar expressions are intended to identify forward-looking statements. The forward-looking statements are based on the Company's current views and assumptions and involve risks and uncertainties that include, among other things, the effects of weather on the purchasing patterns of the Company's customers and end use purchasers of the Company's engines; the seasonal nature of the Company's business; actions of competitors; changes in laws and regulations, including accounting standards; employee relations; customer demand; prices of purchased raw materials and parts; domestic economic conditions, including housing starts and changes in consumer disposable income; foreign economic conditions, including currency rate fluctuations; the ability of the Company's customers and suppliers to meet year 2000 compliance; and unanticipated internal year 2000 issues. Some or all of the factors may be beyond the Company's control. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes since the September 7, 1999 filing of the Company's Annual Report on Form 10-K. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The information required by this item was previously reported in the Company's Form 10-Q for the first quarter ended September 26, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. <TABLE> <CAPTION> Exhibit Number Description ------ ----------- <S> <C> 10.0 Amended and Restated Deferred Compensation Plan for Directors* 11 Computation of Earnings Per Share of Common Stock* 12 Computation of Ratio of Earnings to Fixed Charges* 27 Financial Data Schedule, December 26, 1999* </TABLE> [FN] * Filed herewith </FN> (b) Reports on Form 8-K. There were no reports on Form 8-K for the second quarter ended December 26, 1999. 11 <PAGE> 12 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES 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 4, 2000 /s/ James E. Brenn ------------------------------------------------- James E. Brenn Senior Vice President and Chief Financial Officer Date: February 4, 2000 /s/ Todd J. Teske ------------------------------------------------- Todd J. Teske Controller 12 <PAGE> 13 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description ------ ----------- <S> <C> 10.0 Amended and Restated Deferred Compensation Plan for Directors (Filed herewith) 11 Computation of Earnings Per Share of Common Stock (Filed herewith) 12 Computation of Ratio of Earnings to Fixed Charges (Filed herewith) 27 Financial Data Schedule (Filed herewith) </TABLE> 13 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.0 <SEQUENCE>2 <DESCRIPTION>AMENDED AND RESTATED DEFERRED COMPENSATION PLAN <TEXT> <PAGE> 1 BRIGGS & STRATTON CORPORATION Form 10-Q for Quarterly Period Ended December 26, 1999 Exhibit No. 10.0 DEFERRED COMPENSATION PLAN FOR DIRECTORS AS AMENDED AND RESTATED TO October 19, 1999 <PAGE> 2 BRIGGS & STRATTON CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS AS AMENDED AND RESTATED TO October 19, 1999 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. "Common Stock" shall mean shares of Briggs & Stratton Corporation common stock awarded as part of Non-Employee Director Compensation. e. "Compensation" shall mean payments which the Participant receives from the Corporation for services, including retainer fees, meeting fees, consent resolution fees and Common Stock. f. "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. g. "Distribution Date" shall mean the date designated by a Participant in the Notice of Election form for distribution of the Participant's Accounts. h. "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 or share of Common Stock credited to such Account. <PAGE> 3 i. "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. j. "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. k. "Participant" shall mean any Non-Employee Director who elects to defer any amount of Compensation under the Plan. l. "Plan" shall mean this Briggs & Stratton Corporation Deferred Compensation Plan for Directors, as amended and restated. m. "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. 0. 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. A separate record of each deferred Participant's Account shall be maintained by the Corporation for each Participant in the Plan. The Participant's Account shall segregate the reporting of Common Stock deferrals and cash deferrals. The Director shall elect to have any cash 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 cash 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 as it would otherwise be 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. (c) Briggs & Stratton Common Stock Account Any Common Stock deferred under the Plan shall be credited to the Account in shares on the same date as they would otherwise be payable to the Participant. If Common Stock exists in the 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 3 <PAGE> 5 adjustments, if any, by reason of any such change, deemed appropriate in the number of Common Share Units and/or Common Stock credited to each Participant's Account. 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 is 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. If the Participant has a balance in Common Stock, distribution will be made in shares of Briggs & Stratton Corporation Common Stock. If the Participant has a balance in Briggs & Stratton Common Share Units, the Participant may elect to receive distributions in cash or stock; provided that any such distributions shall be subject to any necessary approvals under securities laws or exchange requirements. 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 4 <PAGE> 6 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 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. 5 <PAGE> 7 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. 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. 0. 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 - Cash ____% Retainer - Common Stock ____% Board Meeting Fees ____% Committee Meeting Fees ____% Consent Resolution Fees ____% Account(s) to be Credited with Cash 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: Year to Which Payment is Deferred: __ (no later than the year in which you attain age 71) Method of Payment: Deferred account 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. 0. 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. 0. 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:____________________________ ____________________________ <PAGE> 11 EXHIBIT "D" BRIGGS & STRATTON CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS NOTICE OF ELECTION DISTRIBUTION OF ACCOUNT BALANCE IN BRIGGS & STRATTON COMMON SHARE UNITS I understand that pursuant to the terms of the Briggs & Stratton Corporation Deferred Compensation Plan for Directors I may elect to receive any balance in my account recorded in Briggs & Stratton Corporation Common Share Units (Common Share Units) in cash or shares of Briggs & Stratton common stock. I hereby elect that any Common Share Units in my account be paid out to me at the time of distribution in the following form: ______ Cash ______ Briggs & Stratton common stock Director:______________________________ Date_______________________ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>3 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK <TEXT> <PAGE> 1 EXHIBIT 11 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK (In thousands except per share data) <TABLE> <CAPTION> Quarter Ended Six Months Ended ------------------------------- ---------------------------- December 26, December 27, December 26, December 27, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> COMPUTATIONS FOR STATEMENTS OF INCOME Net income $ 41,144 $ 24,637 $ 66,847 $ 29,078 ========= ========= ========= ========= Basic earnings per share of common stock: Average shares of common stock outstanding 23,092 23,308 23,120 23,467 ========= ========= ========= ========= Basic earnings per share of common stock $ 1.78 $ 1.06 $ 2.89 $ 1.24 ========= ========= ========= ========= Diluted earnings per share of common stock: Average shares of common stock outstanding 23,092 23,308 23,120 23,467 Incremental common shares applicable to common stock options based on the common stock average market price during the period 97 172 133 120 Incremental common shares applicable to restricted common stock based on the common stock average market price during the period 1 1 1 1 --------- --------- --------- --------- Average common shares assuming dilution 23,190 23,481 23,254 23,588 ========= ========= ========= ========= Fully diluted earnings per average share of common stock, assuming conversion of all applicable securities $ 1.77 $ 1.05 $ 2.87 $ 1.23 ========= ========= ========= ========= </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>4 <DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES <TEXT> <PAGE> 1 EXHIBIT 12 BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended ------------------------------------- December 26, December 27, 1999 1998 ------------ ------------ <S> <C> <C> Net income $ 66,847 $ 29,078 Add: Interest 8,335 8,158 Income tax expense and other taxes on income 39,250 17,440 Fixed charges of unconsolidated subsidiaries 71 153 ---------- ---------- Earnings as defined $ 114,503 $ 54,829 ========== ========== Interest $ 8,335 $ 8,158 Fixed charges of unconsolidated subsidiaries 71 153 ---------- ---------- Fixed charges as defined $ 8,406 $ 8,311 ========== ========== Ratio of earnings to fixed charges 13.62 x 6.60 x ========== ========== </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF BRIGGS & STRATTON CORPORATION FOR THE SIX MONTHS ENDED DECEMBER 26, 1999, 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-02-2000 <PERIOD-START> JUN-28-1999 <PERIOD-END> DEC-26-1999 <CASH> 10,282 <SECURITIES> 0 <RECEIVABLES> 395,033 <ALLOWANCES> 0 <INVENTORY> 254,168 <CURRENT-ASSETS> 716,398 <PP&E> 812,392 <DEPRECIATION> 420,527 <TOTAL-ASSETS> 1,160,311 <CURRENT-LIABILITIES> 531,523 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 289 <OTHER-SE> 407,077 <TOTAL-LIABILITY-AND-EQUITY> 1,160,311 <SALES> 721,171 <TOTAL-REVENUES> 721,171 <CGS> 566,066 <TOTAL-COSTS> 566,066 <OTHER-EXPENSES> 40,673 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 8,335 <INCOME-PRETAX> 106,097 <INCOME-TAX> 39,250 <INCOME-CONTINUING> 66,847 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 66,847 <EPS-BASIC> 2.89 <EPS-DILUTED> 2.87 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

BMC

https://www.sec.gov/Archives/edgar/data/835729/0000950129-00-000635.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, IMYuxgkXt9dSQkccNgZ36KIWQ8IxcI3OmEauIaY0DRFjpSCsOVHWJVldYJurGS5+ I8xOhdoIeViPHDyHzHcTRA== <SEC-DOCUMENT>0000950129-00-000635.txt : 20000215 <SEC-HEADER>0000950129-00-000635.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950129-00-000635 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BMC SOFTWARE INC CENTRAL INDEX KEY: 0000835729 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 742126120 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17136 FILM NUMBER: 543913 BUSINESS ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 BUSINESS PHONE: 7139188800 MAIL ADDRESS: STREET 1: 2101 CITYWEST BLVD CITY: HOUSTON STATE: TX ZIP: 77042-2827 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>BMC SOFTWARE, INC. - 12/31/99 <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 31, 1999 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 0-17136 BMC SOFTWARE, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-2126120 (State or other jurisdiction of (IRS Employer identification No.) incorporation or organization) BMC SOFTWARE, INC. 2101 CITYWEST BOULEVARD HOUSTON, TEXAS 77042 (Address of principal executive officer) (Zip Code) Registrant's telephone number including area code: (713) 918-8800 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 7, 2000, there were outstanding 244,183,392 shares of Common Stock, par value $.01, of the registrant. ================================================================================ <PAGE> 2 BMC SOFTWARE, INC. AND SUBSIDIARIES QUARTER ENDED DECEMBER 31, 1999 INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements................................ 3 Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1999 (Unaudited).... 3 Condensed Consolidated Statements of Earnings and Comprehensive Income for the three months and nine months ended December 31, 1998 and 1999 (Unaudited)......................................... 4 Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1998 and 1999 (Unaudited)......................................... 5 Notes to Condensed Consolidated Financial Statements.......................................... 6 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.................. 10 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk......................................... 21 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings................................... 23 ITEM 6. Exhibits and Reports on Form 8-K.................... 23 SIGNATURES.......................................... 24 </TABLE> 2 <PAGE> 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1999 1999 ---------- ---------- (UNAUDITED) <S> <C> <C> Current assets: Cash and cash equivalents ....................................... $ 347,914 $ 105,143 Investment securities ........................................... 106,292 94,025 Trade accounts receivable, net .................................. 178,388 234,856 Trade finance receivables, current .............................. 180,614 165,484 Deferred tax asset .............................................. 19,363 12,641 Prepaid expenses and other ...................................... 40,854 144,518 ---------- ---------- Total current assets .................................... 873,425 756,667 Property and equipment, net ....................................... 244,359 316,576 Software development costs, net ................................... 110,136 144,896 Purchased software, net ........................................... 32,766 139,768 Investment securities ............................................. 750,427 847,690 Deferred tax asset ................................................ 7,473 16,455 Long-term finance receivables ..................................... 223,977 206,911 Goodwill and other intangibles, net ............................... 2,494 359,014 Deferred charges and other assets ................................. 37,636 30,759 ---------- ---------- Total assets ............................................ $2,282,693 $2,818,736 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable .......................................... $ 27,310 $ 30,605 Accrued commissions payable ..................................... 31,944 29,632 Accrued liabilities and other ................................... 142,120 109,911 Accrued merger related costs .................................... 38,305 16,891 Short-term debt ................................................. -- 320,000 Current portion of deferred revenue ............................. 411,172 332,389 ---------- ---------- Total current liabilities ............................... 650,851 839,428 Deferred revenue and other ...................................... 297,477 302,485 ---------- ---------- Total liabilities ....................................... 948,328 1,141,913 Stockholders' equity: Common stock .................................................... 2,366 2,413 Additional paid-in capital ...................................... 185,831 392,659 Retained earnings ............................................... 1,143,131 1,287,479 Accumulated other comprehensive income (loss) ................... 8,762 (39) ---------- ---------- 1,340,090 1,682,552 Less unearned portion of restricted stock compensation .......... 5,725 5,689 ---------- ---------- Total stockholders' equity .............................. 1,334,365 1,676,823 ---------- ---------- $2,282,693 $2,818,736 ========== ========== </TABLE> See accompanying notes to condensed consolidated financial statements. 3 <PAGE> 4 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------------- ---------------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Revenues: Licenses ...................................... $ 240,575 $ 288,257 $ 631,114 $ 850,624 Maintenance ................................... 103,552 138,087 286,231 392,183 ----------- ----------- ----------- ----------- Total revenues ........................ 344,127 426,344 917,345 1,242,807 ----------- ----------- ----------- ----------- Operating expenses: Selling and marketing ......................... 105,559 158,567 290,928 455,367 Research and development ...................... 39,182 54,555 117,464 161,365 Cost of maintenance services and product licenses ................................... 38,339 43,731 106,268 121,880 General and administrative .................... 27,327 37,423 68,545 101,434 Acquired research and development costs ....... -- -- 17,304 80,800 Amortization of goodwill and intangibles ...... 1,058 36,218 3,176 102,837 Legal settlement .............................. -- 16,558 -- 55,384 Merger related costs .......................... -- 433 -- 14,336 ----------- ----------- ----------- ----------- Total operating expenses .............. 211,465 347,485 603,685 1,093,403 ----------- ----------- ----------- ----------- Operating income ................................ 132,662 78,859 313,660 149,404 Interest expense ................................ -- (5,840) -- (18,980) Interest and other income ....................... 16,369 16,505 45,772 50,416 ----------- ----------- ----------- ----------- Other income, net ............................... 16,369 10,665 45,772 31,436 ----------- ----------- ----------- ----------- Earnings before taxes ........................... 149,031 89,524 359,432 180,840 Income taxes .................................... 39,034 20,362 97,243 36,492 ----------- ----------- ----------- ----------- Net earnings .......................... $ 109,997 $ 69,162 $ 262,189 $ 144,348 =========== =========== =========== =========== Basic earnings per share ........................ $ 0.47 $ 0.28 $ 1.12 $ 0.60 =========== =========== =========== =========== Shares used in computing basic earnings per share ..................................... 234,831 242,749 234,004 239,956 =========== =========== =========== =========== Diluted earnings per share ...................... $ 0.44 $ 0.27 $ 1.05 $ 0.57 =========== =========== =========== =========== Shares used in computing diluted earnings per share ..................................... 248,830 255,435 248,672 252,786 =========== =========== =========== =========== Comprehensive Income: Net earnings .................................. $ 109,997 $ 69,162 $ 262,189 $ 144,348 Foreign currency translation adjustment, net of taxes of $154, $(616), $1,458 and $1,124 ................................... 438 (1,755) 4,151 3,200 Unrealized gain (loss) on securities available for sale: Gross unrealized gain (loss), net of taxes of $2,846, $(1,176), $3,473 and $1,904 ...................................... 8,099 (3,347) 9,883 5,418 Realized (gain) loss included in net earnings, net of taxes of $(60), $210, $(650) and $(130) ........................... (170) 596 (1,850) (370) ----------- ----------- ----------- ----------- Net unrealized gain (loss) on securities available for sale ............ 7,929 (2,751) 8,033 5,048 Unrealized gain on derivative instruments: Gross unrealized gain, net of taxes of $-- , $(940), $-- and $1,147 ..... -- 2,676 -- 3,264 Realized (gain) loss included in net earnings, net of taxes of $-- , $320, $-- and $(115) .................................... -- 910 -- (328) ----------- ----------- ----------- ----------- Net unrealized gain (loss) on derivative instruments .............. -- 1,766 -- 2,936 ----------- ----------- ----------- ----------- Comprehensive income .................. $ 118,364 $ 66,422 $ 274,373 $ 155,532 =========== =========== =========== =========== </TABLE> See accompanying notes to condensed consolidated financial statements. 4 <PAGE> 5 BMC SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31, ------------------------ 1998 1999 --------- --------- <S> <C> <C> Cash flows from operating activities: Net earnings .......................................... $ 262,189 $ 144,348 Adjustments to reconcile net earnings to net cash provided by operating activities: Acquired research and development and merger related costs ..................................... 17,304 80,800 Depreciation and amortization ....................... 56,627 135,959 Loss on sale/disposal of fixed assets ............... 42 -- Gain on sale/disposal of investments ................ (3,449) (1,306) Stock issued under compensatory stock plans ......... 98 (21) Net change in receivables, payables, deferred revenue and other components of working capital ........................................... 116,666 (206,101) --------- --------- Total adjustments ................................ 187,288 9,331 --------- --------- Net cash provided by operating activities ..... 449,477 153,679 --------- --------- Cash flows from investing activities: Technology acquisitions, net of cash acquired ......... (6,638) (635,501) Purchased software and related assets ................. (4,661) (1,658) Capital expenditures .................................. (82,769) (72,576) Capitalization of software development ................ (50,208) (54,435) Purchases of securities held to maturity .............. (293,802) (168,666) Proceeds from securities held to maturity ............. 52,988 88,108 (Increase) decrease in long-term finance receivables ......................................... (7,314) 42,295 --------- --------- Net cash used in investing activities ......... (392,404) (802,433) --------- --------- Cash flows from financing activities: Proceeds from borrowings .............................. -- 498,825 Repayments of borrowings .............................. (1,366) (180,000) Stock options exercised and other ..................... 19,743 82,834 Treasury stock acquired ............................... (25,068) -- Proceeds from issuance of Boole common stock .......... 5,921 -- --------- --------- Net cash provided by financing activities ..... (770) 401,659 --------- --------- Adjustment to conform quarter end of Boole .............. 7,388 -- Effect of exchange rate changes on cash ................. 4,529 4,324 --------- --------- Net change in cash and cash equivalents ................. 68,220 (242,771) Cash and cash equivalents at beginning of period ........ 106,016 347,914 --------- --------- Cash and cash equivalents at end of period .............. $ 174,236 $ 105,143 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest ................................ $ 2,508 $ 14,189 Cash paid for income taxes ............................ $ 23,121 $ 30,775 </TABLE> See accompanying notes to condensed consolidated financial statements. 5 <PAGE> 6 BMC SOFTWARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of BMC Software, Inc. and its wholly owned subsidiaries (collectively, "BMC" or the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the condensed consolidated financial statements for prior years to conform with the current presentation. The accompanying unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. These 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. These financial statements should be read in conjunction with the Company's annual audited financial statements for the year ended March 31, 1999 as filed with the Securities and Exchange Commission ("SEC") on Form 10-K. Effective March 30, 1999 the Company merged with Boole & Babbage, Inc. ("Boole") in a pooling of interests transaction. The Company's results of operations for the three months and nine months ended December 31, 1998 have been restated to include the historical results of operations of Boole for the same period. The Company acquired New Dimension Software, Ltd. ("New Dimension") effective April 14, 1999, in a purchase transaction. The Company's financial results for the three months and nine months ended December 31, 1999, include, respectively, the financial results of New Dimension for the three months ended December 31, 1999 and for the period beginning April 14, 1999 through December 31, 1999. See Note 3 -- Technology Acquisition for further discussion regarding the New Dimension acquisition and for the unaudited pro forma financial information. NOTE 2 -- EARNINGS PER SHARE The Company presents its earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires dual presentation of earnings per share ("EPS"); basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For purposes of this calculation, outstanding stock options and unearned restricted stock are considered common stock equivalents using the treasury stock method. The following table summarizes the basic EPS and diluted EPS computations for the three months and nine months ended December 31, 1998 and 1999 (in thousands, except per share amounts): <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------- --------------------- 1998 1999 1998 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> Basic earnings per share: Net earnings .................................. $109,997 $ 69,162 $262,189 $144,348 Weighted average number of common shares ...... 234,831 242,749 234,004 239,956 -------- -------- -------- -------- Basic earnings per share ...................... $ 0.47 $ 0.28 $ 1.12 $ 0.60 ======== ======== ======== ======== Diluted earnings per share: Net earnings .................................. $109,997 $ 69,162 $262,189 $144,348 Weighted average number of common shares ...... 234,831 242,749 234,004 239,956 Incremental shares from assumed conversion of stock options and other .................. 13,999 12,686 14,668 12,830 -------- -------- -------- -------- Adjusted weighted average number of common shares ..................................... 248,830 255,435 248,672 252,786 -------- -------- -------- -------- Diluted earnings per share .................... $ 0.44 $ 0.27 $ 1.05 $ 0.57 ======== ======== ======== ======== </TABLE> 6 <PAGE> 7 NOTE 3 -- TECHNOLOGY ACQUISITION On April 14, 1999, the Company acquired, through a public tender offer, in excess of 95% of the outstanding ordinary shares of New Dimension. Total consideration paid approximated $673 million, including the cost of the remaining approximately 5% of the outstanding shares acquired during the quarter ended September 30, 1999. The acquisition was accounted for as a purchase transaction, and the purchase price was allocated as follows: $126 million to software assets, $436 million to goodwill and other intangibles and $30 million to equipment, receivables and other non-software assets, net of liabilities assumed. Additionally, BMC allocated $81 million, or 12% of the purchase price, to purchased in-process research and development ("IPR&D"), which was charged to expense in the June 1999 quarter. Purchased IPR&D represents the present value of the estimated after-tax cash flows expected to be generated by purchased technology that, at the acquisition date, had not yet reached technological feasibility. The cash flow estimates for revenues were based on estimates of relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by the Company and its competitors, individual product sales cycles and the estimated life of each products' underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash flows. Estimated operating expenses included cost of goods sold, selling and marketing expenses, general and administrative expenses and research and development expenses, including estimated costs to maintain the products once they have been introduced into the market and are generating revenue. The rates utilized to discount to present value the estimated cash flows were 20% for in-process technologies and 15% for developed technologies and were based primarily on venture capital rates of return and the weighted average cost of capital for BMC at the time of the acquisition. As of the date of acquisition, the Company concluded that the IPR&D had no alternative future use after taking into consideration the potential use of the technology in different products, the stage of development and life cycle of each project, resale of the software and internal use. Refer to "Acquired Research and Development and Related Costs" in Management's Discussion and Analysis of Results of Operations and Financial Condition for further discussion of the Company's IPR&D charges. In order to fund the purchase price for New Dimension, the Company entered into a 364-day, unsecured revolving credit facility with a group of banks on which the Company drew down approximately $500 million of short-term borrowings. See Note 5 -- Short-term Borrowings for further discussion regarding the credit facility. The remaining consideration was satisfied from the Company's existing working capital. Additionally, the purchase price includes the Company's historical cost of approximately $2 million for 452,800 shares of New Dimension held by Boole, a wholly owned subsidiary of the Company, prior to the acquisition. Such shares would have been valued at approximately $24 million based on the $52.50 per share tender offer price. The following unaudited pro forma results of operations for the three months and nine months ended December 31, 1998 and 1999 are presented as if the acquisition of New Dimension had occurred at the beginning of each period presented. The pro forma information includes New Dimension's financial results for the three months and nine months ended September 30, 1998 and December 31, 1999, respectively, combined with the accounts of the Company for the three months and nine months ended December 31, 1998 and 1999, respectively. <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- ------------------------- 1998 1999 1998 1999 ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> Total revenues(1) ................. $ 364,892 $ 426,344 $ 970,748 $1,245,701 Total operating expenses(1)(2) .... $ 262,117 $ 347,485 $ 749,541 $1,021,659 Net earnings(2) ................... $ 73,699 $ 69,162 $ 150,498 $ 188,241 Basic EPS(2) ...................... $ 0.31 $ 0.28 $ 0.64 $ 0.78 Shares used in computing Basic EPS ............................. 234,831 242,749 234,004 239,956 Diluted EPS(2) .................... $ 0.30 $ 0.27 $ 0.61 $ 0.74 Shares used in computing Diluted EPS ....................... 248,830 255,435 248,672 252,786 </TABLE> - ---------- (1) Includes the elimination of $3.9 million and $10.2 million for the three months and nine months, respectively, ended December 31, 1998, of royalties paid by the Company to New Dimension. (2) The pro forma results of operations exclude the effects of the $80.8 million ($56.6 million, net of taxes) write-off of IPR&D associated with the acquisition, in accordance with generally accepted accounting principles. 7 <PAGE> 8 NOTE 4 -- STOCK SPLIT On April 20, 1998, the Company's board of directors declared a two-for-one stock split. The stock split was effected in the form of a stock dividend. The stockholders of record received one additional share of common stock for each share held. All stock related data in the condensed consolidated financial statements and related notes reflect this stock split for all periods presented. NOTE 5 -- SHORT-TERM BORROWINGS In April 1999, the Company entered into a 364-day unsecured revolving credit facility (the "Credit Facility") with a group of banks. The Company drew down approximately $500 million on the Credit Facility during the June 1999 quarter to fund the New Dimension acquisition. Interest on the outstanding balance is payable monthly and is accrued at LIBOR plus 75 basis points, which approximated 7.0% as of December 31, 1999, and has averaged 6.4% over the period outstanding. The Company holds a renewal option on the Credit Facility, which, if exercised, will enable the Company to convert the outstanding balance at the end of the initial 364-day period into a one-year term loan. The Company has repaid $180 million of outstanding principal as of December 31, 1999. NOTE 6 -- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" at the beginning of the fourth quarter of fiscal 1999. The Statement established accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement also requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met, in which case changes are recognized in comprehensive income for cash flow hedges. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that the Company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. One of the Company's principal hedging activities is to purchase foreign currency option contracts to hedge anticipated revenue transactions. The Company has reported the option contracts at fair value each reporting period and the change in the intrinsic value of such contracts has been reported as other comprehensive income. NOTE 7 -- SEGMENT REPORTING SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued in June 1997. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis used internally for evaluating segment performance and resource allocation. The Company currently operates in a single segment, distributing its enterprise systems management software products. Revenues are tracked by both geography and product categories based upon the predominant operating environments of enterprise computing: mainframe and distributed systems. The Company is not organized into business units along these product categories nor does it capture expenses on this basis. Revenues relating to product categories are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- ------------------------- 1998 1999 1998 1999 ---------- ---------- ---------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> REVENUES Mainframe: License ....................................... $ 159,044 $ 180,762 $ 438,121 $ 543,121 Maintenance ................................... 77,494 94,859 220,007 279,149 ---------- ---------- ---------- ---------- Total mainframe revenues .............. 236,538 275,621 658,128 822,270 Distributed systems: License ....................................... 81,531 107,495 192,993 307,503 Maintenance ................................... 26,058 43,228 66,224 113,034 ---------- ---------- ---------- ---------- Total distributed systems revenues .... 107,589 150,723 259,217 420,537 ---------- ---------- ---------- ---------- Total revenues ........................ $ 344,127 $ 426,344 $ 917,345 $1,242,807 ========== ========== ========== ========== </TABLE> Mainframe revenue represents revenue pertaining to products that operate primarily on the IBM OS/390 mainframe operating system and databases. Distributed systems revenue represents revenue pertaining to products that operate on Unix, MS Windows NT and other distributed systems operating systems and Oracle, Informix, Sybase, Microsoft SQL Server and other distributed systems databases. Also classified as distributed systems products are cross-platform products that operate in both environments. These cross-platform products are generally licensed based on metrics such as number of users or tasks managed. 8 <PAGE> 9 NOTE 8 -- MERGER RELATED COSTS Pursuant to the close of the Company's merger with Boole in March 1999, BMC's management approved a formal plan of restructuring to integrate fully the operations of the two companies, consolidate duplicate facilities and eliminate redundancies to achieve reductions in overhead expenses in future periods. In connection with this plan, in March of 1999, the Company accrued approximately $17.7 million in restructuring related costs and $20.6 million in direct transaction costs. During the quarter ended June 30, 1999, the Company made certain revisions to this restructuring plan. Significant revisions include the following: the termination of approximately 275 additional employees, primarily in the United States and Europe, which resulted in an increase in accrued termination benefits of approximately $11 million; the accrual of other termination benefits which were contingent upon certain performance criteria of approximately $1 million; revisions to the original exit strategy for certain operating leases for office space in the United States and Europe which led to a decrease in the liability of approximately $3 million; and the accrual for termination costs for certain operating leases for computer hardware and equipment of approximately $1 million. Additionally, in conjunction with the New Dimension acquisition (see Note 3 -- Technology Acquisition), the Company has accrued approximately $0.4 million for estimated costs to terminate certain operating leases for duplicate office space. As of December 31, 1999, the Company had paid approximately $14.4 million for restructuring related charges, comprised mostly of employee termination benefits. In addition to the restructuring charges, the Company incurred various direct transaction costs, such as investment banking, legal and accounting fees, pursuant to the Boole and New Dimension transactions. As of December 31, 1999, the Company's accrual for unpaid transaction costs approximated $16.9 million. The Company expects that payment of these accruals will occur by the end of fiscal 2000. The following table summarizes the activity during the quarter ended December 31, 1999 in the accruals for acquisition and other costs, excluding direct transaction costs (in millions): <TABLE> <CAPTION> PAID OUT OR BALANCE AT CHARGED AGAINST REVISION OF THE BALANCE AT SEPTEMBER 30, 1999 THE RELATED ASSETS ACCRUAL DECEMBER 31, 1999 ------------------ ------------------ ------- ----------------- <S> <C> <C> <C> <C> Facility costs and write-down of fixed assets to be disposed of ... $ 7.0 $(1.4) $ -- $ 5.6 Employee termination benefits ......... 10.5 (1.7) 0.2 9.0 ----- ----- ----- ----- Total ....................... $17.5 $(3.1) $ 0.2 $14.6 ===== ===== ===== ===== </TABLE> This accrual, which excludes accrued transaction costs, represents management's best estimate, based on available information as of December 31, 1999 of identifiable and quantifiable charges that the Company anticipates it will incur as a result of the actions taken under the restructuring plan. The Company expects to incur other costs which were either not quantifiable or to which the Company had not committed to a course of action as of December 31, 1999, and therefore, have not been included in the accrual. These costs could have a material adverse impact on future operating results. In addition to costs included in the accrual for the merger and restructuring plan, the Company will incur other incremental expenses in the near term as a direct result of its integration efforts, but for which classification as restructuring charges is not allowed under current accounting standards. These items, such as relocation and retraining of personnel and development or marketing efforts for enhanced or integrated products, could be significant to future operating results. NOTE 9 -- LEGAL SETTLEMENT In October 1999, the Company settled all claims in a lawsuit styled BMC Software vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc., Neon Systems, Inc., Wayne E. Fisher and John J. Moores vs. BMC Software, Inc. and Max P. Watson. The settlement comprised a $30 million payment by the Company to certain defendants and an $8.6 million payment to Neon Systems, Inc. under a software distribution agreement entered into in connection with the settlement. The $16.6 million charge for legal settlement taken in the December 1999 quarter includes legal fees and other litigation expenses incurred by the Company during the quarter of $8.6 million and the Company's obligation under the above-mentioned software distribution agreement. The $38,826,000 charge for legal settlement taken in the September 1999 quarter includes legal fees and other litigation expenses incurred by the Company during the quarter of $8,826,000. 9 <PAGE> 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FORWARD LOOKING STATEMENTS In addition to historical information, this Quarterly Report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are identified by the use of the words "may," "believes," "expects," "anticipates," "estimates," "will," "plans," "contemplates," "would" and similar expressions that contemplate future events. Examples of forward looking statements include statements regarding the Company's future financial results, operating results, market positions, product successes, business strategies, projected costs, future products, competitive positions and plans and objectives of management for future operations. Numerous important factors, risks and uncertainties affect the Company's operating results and could cause the Company's actual results to differ materially from the results implied by these or any other forward looking statements made by, or on behalf of, the Company. These important factors, risks and uncertainties include, but are not limited to, those described in the paragraphs below under the heading "B. Certain Risks and Uncertainties that Could Affect Future Operating Results" and those contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999 (the "1999 10-K Annual Report"). Readers are cautioned not to place undue reliance on these forward looking statements as there can be no assurance that future results will meet expectations. You should also read the discussion below together with the Company's Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report. A. RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth, for the periods indicated, the percentages that selected items in the Condensed Consolidated Statements of Earnings and Comprehensive Income bear to total revenues. These comparisons of financial results are not necessarily indicative of future results. <TABLE> <CAPTION> PERCENTAGE OF TOTAL REVENUE -------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ---------------- ---------------- 1998 1999 1998 1999 ----- ----- ----- ----- <S> <C> <C> <C> <C> Revenues: License ..................................... 69.9% 67.6% 68.8% 68.4% Maintenance ................................. 30.1 32.4 31.2 31.6 ----- ----- ----- ----- 100.0 100.0 100.0 100.0 Operating expenses: Selling and marketing ....................... 30.7 37.2 31.7 36.6 Research and development .................... 11.4 12.8 12.8 13.0 Cost of maintenance services and product licenses .................................. 11.1 10.3 11.6 9.8 General and administrative .................. 7.9 8.8 7.5 8.2 Acquired research and development costs ..... -- -- 1.9 6.5 Amortization of goodwill and intangibles .... 0.3 8.5 0.3 8.3 Legal settlement ............................ -- 3.9 -- 4.4 Merger related costs ........................ -- 0.1 -- 1.2 ----- ----- ----- ----- Operating income .............................. 38.5 18.5 34.2 12.0 Other income .................................. 4.8 2.5 5.0 2.5 ----- ----- ----- ----- Earnings before taxes ......................... 43.3 21.0 39.2 14.5 Income taxes .................................. 11.3 4.8 10.6 2.9 ----- ----- ----- ----- Net earnings ........................ 32.0% 16.2% 28.6% 11.6% ===== ===== ===== ===== </TABLE> 10 <PAGE> 11 REVENUES <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------------- ------------------------- 1998 1999 CHANGE 1998 1999 CHANGE ---------- ---------- ------- ---------- ---------- ------ (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> North American license revenues ....... $ 138,044 $ 163,662 19% $ 387,510 $ 560,797 45% International license revenues ........ 102,531 124,595 22 243,604 289,827 19 ---------- ---------- ---------- ---------- Total license revenues ...... 240,575 288,257 20 631,114 850,624 35 North American maintenance revenues ... 61,598 82,605 34 168,704 239,723 42 International maintenance revenues .... 41,954 55,482 32 117,527 152,460 30 ---------- ---------- ---------- ---------- Total maintenance revenues ............ 103,552 138,087 33 286,231 392,183 37 ---------- ---------- ---------- ---------- Total revenues .............. $ 344,127 $ 426,344 24% $ 917,345 $1,242,807 35% ========== ========== ========== ========== </TABLE> Total Revenues The Company generates revenues primarily from product license revenues for its computer software products and product maintenance fees for the associated maintenance, enhancement and support of these products. For a discussion of the Company's revenue recognition policies for these types of revenues, see Footnote 1(h) to Notes to Consolidated Financial Statements in the 1999 10-K Annual Report. The Company also provides fee-based consulting services to its customers. The Company recognizes consulting services revenues as the services are performed. Product License Revenues Product license revenues consist of product license fees and license upgrade fees. Product license fees are all fees associated with a customer's licensing of a given software product for the first time. License upgrade fees are all fees associated with a customer's purchase of the right to run a previously licensed product on a larger computer or computers. License upgrade fees are primarily generated by the Company's mainframe products and include fees associated both with current and future additional processing capacity. Effective April 1, 1999 the Company adopted a modified definition of product license and product upgrade fees as discussed below under the heading "Definition of License Revenue Categories." The Company's North American operations generated 57% of total license revenues in the three months ended December 31, 1998 and 1999 and 61% and 66% of total license revenues for the nine-month periods ended December 31, 1998 and 1999, respectively. The 19% growth in North American license revenues in the third quarter of fiscal 2000 as compared to the same period in fiscal 1999 was derived principally from license upgrade fees associated with future processing capacity and from increased product license fees from distributed systems product sales. For the nine months ended December 31, 1999, the 45% increase in North American license revenues over the comparable prior year nine-month period is primarily attributable to the same factors. International license revenues represented 43% of total license revenues for both of the quarters ended December 31, 1998 and 1999, and 39% and 34% of total license revenues for the nine months ended December 31, 1998 and 1999, respectively. International license revenue growth of 22% from the third quarter of fiscal 1999 to the comparable quarter of fiscal 2000 was principally derived from increased product license fees generated from the Company's distributed systems and mainframe products and from license upgrade fees associated with future processing capacity. For the nine months ended December 31, 1999, the 19% increase in international license revenues over the prior year was primarily attributable to product license fees generated from the Company's distributed systems products. Foreign currency exchange rate changes reduced international license revenues by 10% and 5% for the three months and nine months ended December 31, 1999 respectively. The sustainability and growth of the Company's mainframe-based license revenues are dependent upon capacity-based license upgrade fees, particularly within its largest customer accounts. Most of the Company's largest customers have entered into enterprise license agreements allowing them to install the Company's products on any number of CPUs, subject to a maximum limit on the aggregate processing power of the CPUs as measured in millions of instructions per second ("MIPS"). Additional license upgrade fees are due if the MIPS limit is exceeded. Substantially all of these transactions include license upgrade fees associated with additional processing capacity beyond the customer's current usage level and some include product license fees for additional products. The fees associated with future additional mainframe processing capacity typically comprise from one-half to substantially all of the license fees included in the enterprise license transaction. During the quarter ended December 31, 1999, license upgrade fees (for current and future processing capacity) accounted for 30% of total revenues. The Company has experienced a strong increase in demand from its mainframe customers for the right to run its products on increased future mainframe processing capacity 11 <PAGE> 12 as enterprises invest heavily in their core OS/390 mainframe information systems. This trend has led to larger single transactions with higher per MIPS discounts. The Company expects that it will continue to be dependent upon these capacity-related license upgrade fees. With the rapid advancement of distributed systems technology and customers' needs for more functional and open applications, such as pre-packaged enterprise resource planning applications, to replace legacy systems, there can be no assurance that the demand for mainframe processing capacity or the perceived benefits of the Company's core mainframe products will continue at current levels. Should this trend slow or reverse, it would adversely impact the Company's mainframe license revenues and its operating results. See the discussion below under the heading "Certain Risks and Uncertainties that Could Affect Future Operating Results." Definitions of License Revenue Categories The Company licenses its products primarily in two ways: by copy and on an enterprise license basis by aggregate licensed capacity. When products are licensed on a per copy basis, license revenues from the initial licensing of each copy of the product are product license fees. All revenues from the customer's licensing of the right to use a previously licensed copy on a larger computer are license upgrade fees. When products are licensed on an enterprise aggregate licensed processing capacity basis, all license revenues associated with the first time licensing of such products are product license fees. All revenues associated with the licensing of a previously licensed product to operate on additional aggregate processing capacity are license upgrade fees. The definition of product license fees received when a product is licensed on an aggregate licensed capacity basis became effective for the June 1999 quarter and represents a change from the Company's practices prior to acquiring Boole and New Dimension. Previously in aggregate licensed capacity transactions, revenues associated with the first time licensing of a product were allocated between revenues associated with the customer's current processing capacity, which were categorized as product license fees, and revenues associated with future processing capacity, which were categorized as license upgrade fees. Now all of these fees are categorized as product license fees. The effect of this change is to increase the amount of revenues allocated to product license fees and to decrease the amount of revenues allocated to license upgrade fees. For large enterprise license transactions that include newly licensed products, the effect of this change is significant. This change solely impacts the Company's internal characterization of license revenues and has no effect on the Company's license revenue recognition. Maintenance and Support Revenues; Services Revenues Maintenance and support revenues represent the ratable recognition of fees to enroll licensed products in the Company's software maintenance, enhancement and support program and recognition of revenues from professional services performed during the period by the Company's professional services business. Maintenance and support enrollment entitles customers to product enhancements, technical support services and ongoing compatibility with third-party operating systems, database management systems and applications. These fees are generally charged annually and equal 15% to 20% of the list price of the product at the time of renewal, less any applicable discounts. Customers that elect to prepay for multiple years of maintenance coverage receive an additional, time-value-of-money discount. Maintenance revenues also include the ratable recognition of the bundled fees for any first-year maintenance services covered by the related perpetual license agreement. In the three months and nine months ended December 31, 1999, maintenance revenues increased 33% to $138 million and 37% to $392 million, respectively, as compared to the same periods in the prior fiscal year. The growth in both periods was derived from high maintenance renewal rates, customers' deployment of the Company's mainframe products on greater processing capacity and rapid growth of distributed systems licenses. Consulting services fees also contributed to the maintenance revenue growth. Product Line Revenues The Company develops and distributes software products designed to improve the availability, performance and recoverability of enterprise applications, databases and other Information Technology ("IT") systems components operating in mainframe (OS/390) and distributed computing environments. The Company's mainframe products accounted for 69% and 65%, respectively, of total revenues in the quarters ended December 31, 1998 and 1999, and 72% and 66% of total revenues, respectively, for the nine-month periods ended December 31, 1998 and 1999. Total revenues from mainframe products for the three months and nine months ended December 31, 1999 grew 17% and 25% as compared to the respective prior year periods. The revenues from these products are driven largely by the growth in customers' future processing capacity. Including prior period revenues associated with New Dimension, which the Company acquired in April 1999, total revenue growth was approximately 17% in the December 1999 quarter and 28% in the first nine months of fiscal 2000, respectively. 12 <PAGE> 13 The high performance utilities and administrative tools for IBM's IMS and DB2 database management systems comprise the largest portion of the Company's mainframe-based revenues and total revenues. The IMS and DB2 tools and utilities contributed 43% and 36% of total revenues for the three months ended December 31, 1998 and 1999, respectively, and 44% and 34% of license revenues for the same periods. The IMS and DB2 tools and utilities contributed 45% and 40% of total revenues for the nine-month periods ended December 31, 1998 and 1999, respectively and 46% and 41% of license revenues for the same periods. Total revenues and license revenues from these product lines combined grew 3% and declined 9%, respectively, in the third quarter of fiscal 2000, and grew 24% and 19% in the nine-month period of fiscal 2000, as compared to the respective prior year periods. The Company's other products for the OS/390 mainframe environment contributed 26% and 29% of total revenues for the three months ended December 31, 1998 and 1999, respectively, and 22% and 29% of license revenues for the same periods. The products contributed 27% and 26% of total revenues for the nine-month periods ended December 31, 1998 and 1999, respectively, and 23% of license revenues for the same periods. Total revenues and license revenues for these other mainframe products grew 40% and 59%, respectively, in the third quarter of fiscal 2000 and grew 27% and 33%, respectively, in the nine-month period of fiscal 2000. Distributed systems product revenue growth in the quarter was derived primarily from increased market acceptance of the PATROL application and data management product suite, the Company's significant and growing investment in its distributed systems direct and indirect sales channels and higher distributed systems maintenance fees. In total, the distributed systems product lines contributed 31% and 35% of total revenues for the quarters ended December 31, 1998 and 1999, respectively, and 34% and 37% of license revenues for the same periods. In the nine months ended December 31, 1998 and 1999, these product lines contributed 28% and 34% of total revenues and 31% and 36% of license revenues, respectively. Total distributed systems revenues grew 40% and license revenues from distributed systems grew 32% in the third quarter of fiscal 2000, and 62% and 59%, respectively, for the nine months ended December 31, 1999 as compared to the respective prior year periods. In the December quarter, the PATROL product line generated approximately one-half of total revenues generated by distributed systems products. The revenues from the Company's distributed systems product offerings depend upon the continued market acceptance of the Company's existing products and the Company's ability to successfully develop and deliver additional products for the distributed systems environment. The Company has experienced rapid growth in its distributed systems product lines since their introduction in late fiscal 1994. The distributed systems market is highly competitive and dynamic and there can be no assurance that this growth will continue. OPERATING EXPENSES <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- ------------------------- 1998 1999 CHANGE 1998 1999 CHANGE ---------- ---------- ------ ---------- ---------- ------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Selling and marketing ................ $ 105,559 $ 158,567 50% $ 290,928 $ 455,367 57% Research and development ............. 39,182 54,555 39 117,464 161,365 37 Cost of maintenance services and product licenses ................... 38,339 43,731 14 106,268 121,880 15 General and administrative ........... 27,327 37,423 37 68,545 101,434 48 Acquired research and development .... -- -- -- 17,304 80,800 367 Amortization of goodwill and intangibles .......................... 1,058 36,218 N/M 3,176 102,837 N/M Legal settlement ..................... -- 16,558 N/M -- 55,384 N/M Merger related costs ................. -- 433 N/M -- 14,336 N/M ---------- ---------- ---------- ---------- Total operating expenses .... $ 211,465 $ 347,485 64% $ 603,685 $1,093,403 81% ========== ========== ========== ========== </TABLE> Selling and Marketing The Company's selling and marketing expenses include personnel and related costs, sales commissions and costs associated with advertising, industry trade shows and sales seminars. Personnel costs and sales commissions, were the largest contributors to the expense growth in the three months and nine months ended December 31, 1999. This increase was primarily attributable to significant hiring of additional distributed systems sales representatives and technical sales support consultants as well as significant growth in the Company's professional services group. The increase in sales commissions was attributable to the increase in license revenues. Marketing costs have continued to increase to meet the requirements of marketing a greater number of increasingly complex distributed systems products and to support a growing indirect distribution channel. Marketing expenses were further impacted by a major re-branding effort which began in the first quarter and continued through the third quarter. Other contributors to the increase were significantly higher levels of expenses for travel and office rent. 13 <PAGE> 14 Research and Development Research and development expenses mainly comprise personnel costs related to software developers and development support personnel, including software programmers, testing and quality assurance personnel and writers of technical documentation such as product manuals and installation guides. These expenses also include computer hardware/software costs and telecommunications expenses necessary to maintain the Company's data processing center. Increases in the Company's research and development expenses in the third quarter of fiscal 2000 were the result of increased compensation costs associated with both software developers and development support personnel, as well as associated benefits and facilities costs. Research and development costs were reduced by amounts capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86. The Company capitalizes its software development costs when the projects under development reach technological feasibility as defined by SFAS No. 86. During the third quarter of fiscal 1999 and 2000, the Company capitalized approximately $19.5 million and $21.4 million, respectively, of software development costs. Capitalized software development costs for the nine months ended December 31, 1998 and 1999 were $50.1 million and $54.4 million, respectively. Cost of Maintenance Services and Product Licenses Cost of maintenance services and product licenses consists of amortization of purchased and internally developed software, costs associated with the maintenance, enhancement and support of the Company's products and royalty fees. Growth in the cost of maintenance services and product licenses from the three months and nine months ended December 31, 1998 to the three months and nine months ended December 31, 1999 was due to increases in technical and customer support employees. The Company amortized $10.5 million and $8.3 million in the third quarter of fiscal 1999 and 2000, respectively, of capitalized software development costs pursuant to SFAS No. 86. For the nine months ended December 31, 1998 and 1999, the Company amortized $25.7 million and $19.7 million, respectively. For the quarter and nine months ended December 31, 1999, the Company expensed $2.1 million and $2.8 million, respectively, of capitalized software development costs to accelerate the amortization of certain software products. The Company accelerated the amortization of these software products as they were not expected to generate sufficient future revenues which would be required for the Company to realize the carrying value of the assets. The Company expects its cost of maintenance services and product licenses will continue to increase as the Company capitalizes a higher level of software development costs and as the Company builds its distributed systems product support organization, which is less cost-effective than its mainframe support organization because of the complexity and variability of the environments in which the products operate. The distributed systems products operate in a high number of operating environments, including operating systems, DBMSs and ERP applications and require greater ongoing platform support development activity relative to the Company's OS/390 mainframe products. General and Administrative General and administrative expenses are comprised primarily of compensation and personnel costs within executive management, finance and accounting, product distribution, facilities management and human resources. Other expenses included in general and administrative expenses are fees paid for legal and accounting services, consulting projects, insurance and costs of managing the Company's foreign currency exposure. The increase in general and administrative expenses for both the three months and nine months ended December 31, 1999 over the same periods ended December 31, 1998 was largely due to increased personnel costs, increased professional service fees and higher costs associated with the related infrastructure to support the Company's growth. Acquired Research and Development and Related Costs The Company did not incur acquired in-process research and development ("IPR&D") costs during the quarters ended December 31, 1998 and 1999. Acquired IPR&D costs for the nine months ended December 31, 1998 and 1999, were $17.3 million and $80.8 million, respectively. These technology charges related to the acquisitions of in-process technologies and technology rights in the first quarter of fiscal 1999 and the acquisition of New Dimension in the first quarter of fiscal 2000. The following table presents information, in thousands, concerning the purchase price allocations for the acquisitions accounted for under the purchase method for the nine months ended December 31, 1998 and 1999. 14 <PAGE> 15 <TABLE> <CAPTION> ACQUIRED GOODWILL TOTAL COMPANY NAME SOFTWARE IPR&D AND OTHER PRICE - ------------ -------- -------- -------- -------- <S> <C> <C> <C> <C> Fiscal 1999: Nastel ............ $ -- $ 6,000 $ -- $ 6,000 Envive ............ 6,400 11,304 -- 17,704 -------- -------- -------- -------- $ 6,400 $ 17,304 $ -- $ 23,704 ======== ======== ======== ======== Fiscal 2000: New Dimension ..... $126,300 $ 80,800 $465,946 $673,046 -------- -------- -------- -------- $126,300 $ 80,800 $465,946 $673,046 ======== ======== ======== ======== </TABLE> In the latter part of fiscal 1998, the Company was in the process of designing a middleware management product to assist customers with optimizing middleware performance and with handling enterprise environmental changes. In this regard, in April 1998, the Company acquired a license from Nastel Technologies, Inc. ("Nastel") for certain infrastructure source code for use in its MQ management product that was under development, but had not yet reached technological feasibility. Accordingly, the Company allocated the entire $6 million purchase price to IPR&D. The Company completed the acquired IPR&D by creating an effective installation routine, developing an automated MQ configuration routine, fortifying the underlying Nastel database and modifying the code to work in environments with complementary management products. Upon completion of the IPR&D, the Company completed the initial related product after developing efficient data collection, user interface and business logic code. In June 1998, the Company entered into a technology agreement with Envive Corporation ("Envive") primarily to strengthen its ERP business management solutions to provide better diagnostic and correlation ability, service level management and end-to-end monitoring capability. The Company also secured the rights to distribute certain products in the SAP management market. The Company's committed costs associated with the transaction approximated $17.7 million. The Company allocated $6.4 million of the transaction costs to software assets, prepaid royalties and interest. The remaining $11.3 million was allocated to acquired IPR&D that had not reached technological feasibility as of the date of the transaction. The Company is in the process of evaluating the alternative levels of commitment and effort required to develop the above-mentioned functionality in the non-SAP environments. The range of future expenditures associated with these alternatives is $0.5 million to $3.5 million. On April 14, 1999, the Company acquired through a public tender offer in excess of 95% of the outstanding ordinary shares of New Dimension for approximately $673 million in total consideration. The purchase price includes the Company's historical cost of approximately $2 million for shares of New Dimension previously owned by Boole. Unrealized gains related to these New Dimension shares of approximately $22 million included in long term marketable securities and accumulated other comprehensive income at March 31, 1999 were eliminated at the closing of the purchase. In order to fund the purchase price, the Company entered into a 364-day unsecured revolving credit facility with a group of banks from which the Company drew down approximately $500 million of short-term borrowings. The remaining consideration was funded from the Company's existing working capital. The acquisition was accounted for as a purchase transaction, and the purchase price was allocated as follows: $126 million to software assets, $436 million to goodwill and other intangibles, and $30 million to equipment, receivables and other non-software assets, net of liabilities assumed. Additionally, the Company allocated $80.8 million, or 12% of the purchase price, to IPR&D, which was charged to expense in the June 1999 quarter. Purchased IPR&D represents the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at the acquisition date, had not yet reached technological feasibility nor had alternative future use. Refer to the June 1999 Form 10-Q for a description of the acquired New Dimension IPR&D. As of the date of the New Dimension acquisition, the Company concluded that the in-process technology had no alternative future use after taking into consideration the potential use of the technology in different products, the stage of development and life cycle of each project, resale of the software, and internal use. As such, the value of the purchased IPR&D was expensed at the time of the acquisition. Remaining anticipated development costs in connection with all the products classified as in-process technology at the time of acquisition are expected to be approximately $24.5 million. Projected completion dates range from two to twenty months, at which time the Company expects to begin selling those developed products. The Company intends to continue devoting effort to developing commercially viable products from the purchased IPR&D, although it may not develop such commercially viable products. All of the foregoing estimates and projections were based on assumptions the Company believed to be reasonable at the time but which were inherently uncertain and unpredictable. 15 <PAGE> 16 The values assigned to acquired IPR&D were generally determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projections used to value the acquired IPR&D were based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. Operating expenses were estimated based on historical results and anticipated profit margins. Due to purchasing power increases and general economies of scale, estimated operating expenses as a percentage of revenues were, in some cases, estimated to decrease after the acquisition. The rates utilized to discount the net cash flows to their present value were based on cost of capital calculations and venture capital rates of return. Due to the nature of the forecast and risks associated with the projected growth, profitability and the developmental nature of the projects, a 20% discount rate was used to value the New Dimension acquired IPR&D. The Company used a 15% rate in discounting the cash flows associated with the developed New Dimension technology. The Company believes these discount rates are commensurate with the respective stage of development and the uncertainties in the economic estimates described above. If the acquired IPR&D projects are not successfully completed, the Company's business, operating results, and financial condition may be materially adversely affected in future periods. In addition, the value of other intangible assets acquired may become impaired. Amortization of Goodwill and Intangibles In connection with the application of the purchase accounting method to the Company's acquisitions, portions of the purchase price were allocated to goodwill, workforce, customer base, software and other intangible assets. The Company is amortizing these intangibles over 4 to 5 year periods which reflect the estimated useful lives of the respective assets. The increase in the quarterly amortization expense is directly related to the acquisition of New Dimension discussed above. Legal Settlement In October 1999, the Company settled all claims in a lawsuit styled BMC Software vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc., Neon Systems, Inc., Wayne E. Fisher and John J. Moores vs. BMC Software, Inc. and Max P. Watson. See Note 9-- Legal Settlement in the Notes to Condensed Consolidated Financial Statements. Merger Related Costs In conjunction with the Company's merger with Boole in March 1999, the Company's management approved a formal plan of restructuring which included steps to be taken to integrate the operations of the two companies, consolidate duplicate facilities and streamline operations to achieve reductions in overhead expenses in future periods. As of December 31, 1999, the Company has accrued merger related costs of approximately $16.9 million comprised principally of the following components: employee related expenses including severance and other benefits, costs to eliminate duplicate facilities, transaction costs and impairment of assets to be disposed of as a result of integrating the combined companies. OTHER INCOME For the third quarter of fiscal 2000, other income was $10.7 million, reflecting a decrease of 35% from $16.4 million of other income in the same quarter of fiscal 1999. Other income consists primarily of interest earned on tax-exempt municipal securities, Euro bonds, corporate bonds, mortgage securities and money market funds. The decrease in other income is primarily due to approximately $5.8 million in interest expense related to the revolving credit facility entered into in April 1999. INCOME TAXES For the three months and nine months ended December 31, 1999, income tax expense was $20.4 million and $36.5 million, respectively, compared to $39.0 million and $97.2 million for the same respective periods in fiscal 1999. The Company's lower income tax expense related primarily to the tax benefits resulting from the amortization of goodwill and other intangibles and the write-off of IPR&D in the first quarter of fiscal 2000 stemming from the New Dimension acquisition in April 1999. The Company's income tax expense represents the federal statutory rate of 35%, plus certain foreign and state taxes, reduced primarily by the benefit from lower income taxes associated with the Company's European operations and the effect of tax exempt interest earned from cash investments. 16 <PAGE> 17 LIQUIDITY AND CAPITAL RESOURCES The Company has financed its growth through funds generated from operations. As of December 31, 1999, the Company had cash, cash equivalents and investment securities of $1.05 billion. As of December 31, 1999, the Company owed $320 million under its $500 million credit facility established in connection with the Company's acquisition of New Dimension in April 1999. The Company did not repurchase any of its common shares on the open market during the third quarter of fiscal 2000. The Company believes that existing cash balances and funds generated from operations will be sufficient to meet its liquidity requirements for the foreseeable future. While operating cash flow for the nine months ended December 31, 1999 was $153.7 million, the Company's operations for the three months ended December 31, 1999 generated negative cash flows of $5.2 million. Operating cash flow for the three months ended December 31, 1999 was negatively impacted by the reduction in deferred revenue and by a legal settlement payment. See Note 9 - Legal Settlement in the Notes to Condensed Consolidated Financial Statements. B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING RESULTS. Volatility of Stock Price. The Company's stock price has been and is highly volatile. The Company's stock price is highly influenced by current expectations of sustained future revenue and earnings growth rates. Any failure to meet anticipated revenue and earnings levels in a period or any negative change in perceived long-term growth prospects of the Company would likely have a significant adverse effect on the Company's stock price. The Company's historical financial results should not be seen as indicative of future results. The Timing and Size of License Contracts Could Cause Quarterly Revenues and Earnings to Fluctuate. The Company's revenues and results of operations are difficult to predict and may fluctuate substantially. The timing and amount of the Company's license revenues are subject to a number of factors that make estimation of operating results prior to the end of a quarter extremely uncertain. The Company generally operates with little or no sales backlog and, as a result, license revenues in any quarter are dependent upon contracts entered into or orders booked and shipped in that quarter. Most of the Company's sales are closed at the end of each quarter. There has been and continues to be a trend toward larger enterprise license transactions, which can have sales cycles of up to a year or more and require approval by a customer's upper management. These transactions are typically difficult to manage and predict. Failure to close an expected individually significant transaction or multiple expected transactions could cause the Company's revenues and earnings in a period to fall short of expectations. The Company generally does not know whether revenues and earnings will meet expected results until the final days or day of a quarter. High Degree of Operating Leverage. The Company's business model is characterized by a very high degree of operating leverage. A substantial portion of the Company's operating costs and expenses consist of employee and facility related costs, which are relatively fixed over the short term. In addition, the Company's expense levels and hiring plans are based substantially on the Company's projections of future revenue. If near term demand weakens in a given quarter, there would likely be a material adverse effect on operating results and a resultant drop in the Company's stock price. Risks Related to Contraction of Operating Margins. There is a risk that the Company will not be able to sustain its high operating margins which would adversely affect its earnings. The Company's operating margins, excluding one-time charges, have varied from the low to mid 30% range in recent quarters, which is at the high-end of the range for peer companies. The Company does not compile margin analysis other than on an aggregated basis; however, the Company believes that the operating margins associated with its distributed systems products are substantially below those of its traditional mainframe products. Since the Company's mix of business continues to shift to distributed systems revenues and since research and development, sales, support and distribution costs for distributed systems software products are generally higher than for mainframe products, operating margins will experience more pressure. The Company may be unable to increase or even maintain its current level of profitability on a quarterly or annual basis in the future. Additionally, Boole and New Dimension historically experienced lower operating margins than the Company. Although the Company's objective is to increase the profitability from the integrated Boole and New Dimension operations to more closely resemble the Company's historical margins, there is no guarantee the Company will be successful or as to the length of time which the Company will require to accomplish this goal. Increased Competition and Pricing Pressures Could Adversely Affect Sales. The market for systems management software has been increasingly competitive for the past number of years and is currently intensifying. The Company competes with a variety of software vendors including IBM and Computer Associates International, Inc. ("CA"). The Company derived approximately 70% of its total revenues in fiscal 1999 from software products for IBM and IBM-compatible mainframe computers. IBM continues to focus on reducing the overall software costs associated with the OS/390 mainframe platform. IBM continues, directly and through third parties, to aggressively enhance its utilities for IMS and DB2 to provide lower cost alternatives to the products provided by the Company and 17 <PAGE> 18 other independent software vendors. IBM has significantly increased its level of activity in the IMS and DB2 high speed utility markets over the last two years. If IBM is successful with its efforts to achieve performance and functional equivalence with the Company's IMS, DB2 and other products at a lower cost, the Company's business will be materially adversely affected. CA has recently entered the mainframe database tools and utilities market with its acquisitions of Platinum Technology International, Inc. (DB2 tools and utilities) and IDI, Inc. (IMS tools and utilities) and is competing with the Company in these markets. Capacity-based upgrade fees associated with both current and future processing capacity contributed approximately one-fourth to one-third of the Company's total revenues in each of fiscal years 1997, 1998 and 1999. Historically, these fees were not separately captured by Boole; however, the addition of Boole has not significantly changed the contribution of these fees to total revenues. The charging of upgrade fees based on the capacity to which the product is licensed is standard among mainframe systems software vendors, including IBM. While the Company believes its current pricing policies properly reflect the value provided by its products, the pricing of mainframe systems software and particularly the charging of capacity-based upgrade fees is under constant pressure from customers and competitive vendors. IBM continues to reduce the costs of its mainframe systems software to increase the overall cost competitiveness of its mainframe hardware and software products. IBM also generally charges less for its software products. These actions continue to increase pricing pressures with the mainframe systems software markets. The Company has continued to reduce the cost of its mainframe tools and utilities in response to these and other competitive pressures. Decreasing Demand for Mainframe Processing Capacity Could Adversely Affect Revenues. Fees from enterprise license transactions remain fundamental components of the Company's revenues and the primary source of mainframe license revenues. These revenues depend upon the Company's customers continuing to perceive an increasing need to use the Company's existing software products on substantially greater mainframe processing capacity in future periods. The Company believes that the demand for enterprise licenses has been driven by customer's recommitment over the last 36 months to the OS/390 mainframe platform for large scale, transaction intensive information systems. Whether this trend will continue is difficult to predict. If the Company's customers' processing capacity growth were to slow and/or if such customers were to perceive less relative benefit from the Company's current mainframe products, the Company's revenues would be adversely affected. Maintenance Revenue Growth Could Slow. Maintenance revenues have increased over the last three fiscal years as a result of the continuing growth in the base of installed products and the processing capacity on which they run. Maintenance fees increase as the processing capacity on which the products are installed increases; consequently, the Company receives higher absolute maintenance fees as customers install its products on additional processing capacity. Due to increased discounting for higher levels of additional processing capacity, the maintenance fees on a per MIPS basis are typically reduced in enterprise license agreements for the Company's mainframe products. Historically, the Company has enjoyed high maintenance renewal rates for its mainframe-based products. Should customers migrate from their mainframe applications or find alternatives to the Company's products, increased cancellations could adversely impact the sustainability and growth of the Company's maintenance revenues. To date, the Company has been successful in extending its traditional maintenance and support pricing model to the distributed systems market. Renewal rates for maintenance on the Company's distributed systems products are lower than on its mainframe products. Failure to Adapt to Technological Change Could Adversely Affect the Company's Earnings. If the Company fails to keep pace with technological change in its industry, such failure would have an adverse effect on its revenues and earnings. The Company operates in a highly competitive industry characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. The distributed systems and application management markets in which the Company operates are far more crowded and competitive than its traditional mainframe systems management markets. The Company's ability to compete effectively and its growth prospects depend upon many factors, including the success of its existing client/server systems products, the timely introduction and success of future software products and the ability of its products to interoperate and perform well with existing and future leading databases and other platforms supported by its products. The Company has experienced long development cycles and product delays in the past, particularly with some of its client/server systems products, and expects to have delays in the future. Delays in new mainframe or client/server systems product introductions or less-than-anticipated market acceptance of these new products are possible and would have an adverse effect on the Company's revenues and earnings. New products or new versions of existing products may, despite testing, contain undetected errors or bugs that will delay the introduction or adversely affect commercial acceptance of such products. Uncertainty of Operating in Emerging Area. Despite the tremendous growth in emerging areas such as the Internet, on-line services and electronic commerce, the impact on the Company of this growth is uncertain. The Company has recently announced that it will expand its technology into supporting Internet/electronic commerce. This area is relatively new to the Company's product development and sales and marketing personnel. There is no assurance that the Company will compete effectively or will generate significant revenues in this new area. 18 <PAGE> 19 Changes in Pricing Practices Could Adversely Affect Revenues and Earnings. The Company may choose in fiscal year 2001 or a future fiscal year to make changes to its product packaging, pricing or licensing programs. If made, such changes may have a material adverse impact on revenues or earnings, and such changes may cause the Company to revise its guidance on future operating results. Risks Related To Business Combinations. As part of its overall strategy, the Company has acquired or invested in, and plans to continue to acquire or invest in, complementary companies, products, technologies and to enter into joint ventures and strategic alliances with other companies. The Company's acquisitions of DataTools in May 1997; BGS Systems, Inc. ("BGS") in March 1998, Boole in March 1999 and New Dimension in April 1999 are the results of this strategy. Risks commonly encountered in such transactions include: the difficulty of assimilating the operations and personnel of the combined companies; the risk that the Company may not be able to integrate the acquired technologies or products with its current products and technologies; the potential disruption of the Company's ongoing business; the inability to retain key technical and managerial personnel; the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses; and decreases in reported earnings as a result of charges for in-process research and development and amortization of acquired intangible assets. In order for the Company to maximize the return on its investments in BGS, Boole and New Dimension, the products of these various entities must be integrated with each other and with the Company's existing products. Integration of the BEST/1 and COMMAND/POST products with PATROL is also very important. The Company is integrating the MainView product line with its IMS, DB2 and other OS/390 products and the BEST/1 products with the COMMAND/POST and MainView products, adding to the complexity of the task of integration. Each of these integrations will be difficult and unpredictable, especially given that these software products are highly complex, have been developed independently and were designed with no regard to such integration. The difficulties are compounded when the products involved are well established, as these are, because compatibility with the existing base of installed products must be preserved. Successful integration of these product lines also requires coordination of different development and engineering teams. This too will be difficult and unpredictable because of possible cultural conflicts and different opinions on technical decisions and product roadmaps. There can be no assurance that the Company will be successful in these product integration efforts or that the Company will realize the expected benefits. With the acquisitions of BGS, Boole and New Dimension, the Company has initiated efforts to integrate the disparate cultures, employees, systems and products of these companies. In all three acquisitions, retention of key employees is critical to ensure the continued advancement, development, support, sales and marketing efforts pertaining to the acquired products. The Company has implemented retention programs to keep many of the key technical, sales and marketing employees; nonetheless, the Company has lost some key employees and may lose others in the future. The Company has also elected to retain the principal locations of BGS, Boole and New Dimension and has reorganized the management structure at all of these locations. The Company has not historically managed significant, fully staffed business units at locations different from the Company's headquarters. As a result, the Company may experience difficulties. Risks Associated With Managing Growth. The Company has experienced an extended period of: (i) significant revenue growth; (ii) acquisitions; (iii) expansion of its software product lines and supported platforms; (iv) significant expansion in its number of employees; (v) increased pressure on the viability and scope of its operating and financial systems; and (vi) expansion in the geographic scope of its operations. This growth has resulted in new and increased responsibilities for management personnel and has placed a significant strain upon the Company's management, operating and financial controls and resources, including its services and development organizations. To accommodate recent growth, compete effectively and manage potential future growth, the Company must continue to implement and improve the speed and quality of its information decision support systems, management decisions, reporting systems, procedures and controls. The Company's personnel, procedures, systems and controls may not be adequate to support its future operations. The Company realigned its product development and marketing operations in the June quarter along five product market oriented groups. It is uncertain if this reorganization will yield the desired benefits and whether this organizational structure will prove effective. Enforcement of the Company's Intellectual Property Rights. The Company relies on a combination of copyright, patent, trademark, trade secrets, confidentiality procedures and contractual procedures to protect its intellectual property rights. Despite the Company's efforts to protect its intellectual property rights, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to reverse engineer or obtain and use technology or other information that the Company regards as proprietary. There can also be no assurances that the Company's intellectual property rights would survive a legal challenge to their validity or provide significant protection for the Company. In addition, the laws of certain countries do not protect the Company's proprietary 19 <PAGE> 20 rights to the same extent as do the laws of the United States. Accordingly, there can be no assurance that the Company will be able to protect its proprietary technology against unauthorized third party copying or use, which could adversely affect the Company's competitive position. Possibility of Infringement Claims. The Company from time to time receives notices from third parties claiming infringement by the Company's products of third party patent and other intellectual property rights. The Company expects that software products will increasingly be subject to such claims as the number of products and competitors in the Company's industry segments grow and the functionality of products overlaps. In addition, the Company expects to receive more patent infringement claims as companies increasingly seek to patent their software, especially in light of recent developments in the law that extend the ability to patent software. Regardless of its merit, responding to any such claim could be time-consuming, result in costly litigation and require the Company to enter into royalty and licensing agreements which may not be offered or available on terms acceptable to the Company. If a successful claim is made against the Company and the Company fails to develop or license a substitute technology, the Company's business, results of operations or financial position could be materially adversely affected. Risk of Year 2000 Related Problems. Although the Company has not experienced any material failures related to Year 2000 to date, there remains a risk that Year 2000 problems could affect the Company or the Company's products. The Company has tested the ability of its software products to process Year 2000 data without interruption or errors and believes that its products are substantially Year 2000 compliant. Despite these tests, there can be no assurance that undetected errors or defects do not exist that could cause these software products to fail to process Year 2000 data correctly. There is a risk that such undetected errors or defects could surface at a later date, and that a customer may assert claims against the Company for any losses resulting from such errors or defects. To date, the Company is not aware of any material claims being asserted or made against it related to Year 2000 failures. However, the Company cannot predict whether or to what extent any legal claims will be brought, or whether the Company will suffer any liability as a result of any adverse consequences to its customers related to Year 2000 failures. Risks Related to International Operations and the Euro Currency. The Company has committed, and expects to continue to commit, substantial resources and funding to build its international service and support infrastructure. Operating costs in many countries, including many of those in which the Company operates, are higher than in the United States. In order to increase international sales in fiscal year 2000 and subsequent periods, the Company must continue to globalize its software product lines; expand existing and establish additional foreign operations; hire additional personnel; identify suitable locations for sales, marketing, customer service and development; and recruit international distributors and resellers in selected territories. Future operating results are dependent on sustained performance improvement by the Company's international offices, particularly its European operations. Revenue growth by the Company's European operations has been slower than revenue growth in North America. There can be no assurance that the Company will be successful in accelerating the revenue growth of its European operations. The Company's operations and financial results internationally could be significantly adversely affected by several risks such as changes in foreign currency exchange rates, sluggish regional economic conditions and difficulties in staffing and managing international operations. Generally, the Company's foreign sales are denominated in its foreign subsidiaries' local currencies. If these foreign currency exchange rates change unexpectedly, the Company could have significant gains or losses. Many systems and applications software vendors are experiencing difficulties internationally. The European Union's adoption of the Euro single currency raises a variety of issues associated with the Company's European operations. Although the transition will be phased in over several years, the Euro became Europe's single currency on January 1, 1999. The Company's foreign exchange exposures to legacy sovereign currencies of the participating countries in the Euro became foreign exchange exposures to the Euro upon its introduction. Although the Company is not aware of any material adverse financial risk consequences of the change from legacy sovereign currencies to the Euro, conversion may result in problems, which may have an adverse impact on the Company's business since the Company may be required to incur unanticipated expenses to remedy these problems. Conditions in Israel. The Company's New Dimension operations are conducted partially in Israel and, accordingly, the Company is directly affected by economic, political and military conditions in Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could materially adversely affect the Company's business, operating results and financial condition. 20 <PAGE> 21 Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980's, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. In addition, Israel and companies doing business with Israel have been the subject of an economic boycott by the Arab countries since Israel's establishment. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, the Company cannot predict whether or in what manner these problems will be resolved. In addition, certain of the Company's New Dimension employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time. New Dimension has operated effectively under these requirements since its inception. However, the Company cannot predict the effect of these obligations on New Dimension's operations in the future. Possible Adverse Impact of Recent Accounting Pronouncements. The American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition", SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" in October 1997, March 1998, and December 1998, respectively. These standards address software revenue recognition matters, supersede an earlier SOP and are effective for transactions entered into for fiscal years beginning after December 15, 1997 and, for SOP 98-99, March 15, 1999. Based on its reading and interpretation of these SOPs, the Company believes that its current sales contract terms and business arrangements have been properly reported. However, the American Institute of Certified Public Accountants and its Software Revenue Recognition Task Force will continue to issue interpretations and guidance for applying the relevant standards to a wide range of sales contract terms and business arrangements that are prevalent in the software industry. Future interpretations of existing accounting standards or changes in the Company's business practices could result in future changes in the Company's current revenue accounting policies that could have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a variety of risks, including foreign currency exchange rate fluctuations and changes in the market value of its investments. In the normal course of business, the Company employs established policies and procedures to manage these risks, including the use of derivative instruments. Foreign Currency Exchange Rate Risks The Company operates globally and the functional currency for most of its non-U.S. enterprises is the local currency. For the three months ended December 31, 1998 and 1999, approximately 42% of the Company's consolidated revenues were derived from customers outside of North America, substantially all of which were billed and collected in foreign currencies. Similarly, substantially all of the expenses of operating the Company's foreign subsidiaries are incurred in foreign currencies. As a result, the Company's U.S. dollar earnings and net cash flows from international operations may be adversely affected by changes in foreign currency exchange rates. To minimize the Company's risk from changes in foreign currency exchange rates, the Company utilizes certain derivative financial instruments. The Company utilizes primarily two types of derivative financial instruments in managing its foreign currency exchange risk: forward exchange contracts and purchased option contracts. Forward exchange contracts are used to achieve hedges of firm commitments that subject the Company to transaction risk. The terms of the forward exchange contracts are generally one month or less and are entered into at the prevailing market rate. Purchased option contracts, with terms generally less than one year, are used by the Company to hedge anticipated, but not firmly committed, sales transactions. Principal currencies hedged are the German deutschemark, British pound and the French franc in Europe and the Japanese yen and Australian dollar in the Pacific Rim region. The Company performs comparisons, on a monthly basis, of the purchased option contracts and the forecasted sales revenues to determine hedge effectiveness. While the Company actively manages its foreign currency risks on an ongoing basis, there can be no assurance the Company's foreign currency hedging activities will offset the full impact of fluctuations in currency exchange rates on its results of operations, cash flows and financial position. For the three months ended December 31, 1999, foreign currency rate fluctuations reduced license revenues and EPS by 3%, respectively. Foreign currency fluctuations did not have a material impact on the Company's results of operations and financial position during the nine months ended December 31, 1998 and 1999, respectively. 21 <PAGE> 22 Based on the Company's foreign currency exchange instruments outstanding at December 31, 1999, the Company estimates that a near-term change in foreign currency rates would not materially affect its financial position, results of operations or net cash flows for the quarter or six-month period ended December 31, 1999. The Company used a value-at-risk ("VAR") model to measure potential fair value losses due to foreign currency exchange rate fluctuations. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. The VAR model is a risk estimation tool, and as such, is not intended to represent actual losses in fair value that could be incurred by the Company. Interest Rate Risk The Company adheres to a conservative investment policy, whereby its principle concern is the preservation of liquid funds while maximizing its yield on such assets. Cash, cash equivalents and marketable securities approximated $1.05 billion at December 31, 1999, and were invested in different types of investment-grade securities with the intent of holding these securities to maturity. Although the Company's portfolio is subject to fluctuations in interest rates and market conditions, no gain or loss on any security would actually be recognized in earnings unless the instrument was sold. The Company estimates that a near-term change in interest rates would not materially affect its financial position, results of operations or net cash flows for the quarter ended December 31, 1999. The Company used a VAR model to measure potential market risk on its marketable securities due to interest rate fluctuations. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. The VAR model is a risk estimation tool, and as such, is not intended to represent actual losses in fair value that could be incurred by the Company. 22 <PAGE> 23 PART II OTHER INFORMATION BMC SOFTWARE, INC. AND SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS. On March 9, 1999, a class action complaint was filed against the Company and four senior executives of the Company alleging violations of Sections 10(b) and 20(a) of the Exchange Act in connection with the Company's financial statement presentation following its acquisition of BGS in March 1998 in a pooling-of-interests transaction. Four similar actions were filed in the Southern District of Texas. All of the actions were subsequently consolidated in a single action. The lawsuits were filed following the Company's announcement that it was restating its historical financial results to include BGS's financial results in the Company's financial statements as a condition to the Securities and Exchange Commission declaring effective the Company's registration statement on Form S-4 relating to its acquisition of Boole. The plaintiffs seek an unspecified amount of compensatory damages, interest and costs, including legal fees. The Company denies the allegations of wrongdoing in connection with the matters set forth in the complaint and intends to vigorously defend the action. An unfavorable judgement or settlement, however, could have a material adverse effect on the financial results of the Company. In October 1999, the Company settled all claims in a lawsuit styled BMC Software vs. Peregrine/Bridge Transfer Corp., Skunkware, Inc., Neon Systems, Inc., Wayne E. Fisher and John J. Moores vs. BMC Software Inc. and Max P. Watson. The settlement comprised a $30 million payment by the Company to certain defendants and an $8.6 million payment to Neon Systems, Inc. under a software distribution agreement entered into in connection with the settlement. The Company is subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company's results of operation or consolidated financial position. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27 -- Financial Data Schedule (b) Reports on Form 8-K. None 23 <PAGE> 24 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. BMC SOFTWARE INC. February 14, 2000 By: /s/ MAX P. WATSON JR. ------------------------------------- Max P. Watson Jr. Chairman of the Board, President and Chief Executive Officer February 14, 2000 By: /s/ WILLIAM M. AUSTIN ------------------------------------- William M. Austin Senior Vice President and Chief Financial Officer February 14, 2000 By: /s/ JOHN W. COX -------------------------------------- John W. Cox Chief Accounting Officer 24 <PAGE> 25 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 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING DECEMBER 31, 1999. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-2000 <PERIOD-START> APR-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 105,143 <SECURITIES> 941,715 <RECEIVABLES> 648,783 <ALLOWANCES> 41,532 <INVENTORY> 0 <CURRENT-ASSETS> 756,667 <PP&E> 492,466 <DEPRECIATION> 175,890 <TOTAL-ASSETS> 2,818,736 <CURRENT-LIABILITIES> 839,428 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 2,413 <OTHER-SE> 1,674,410 <TOTAL-LIABILITY-AND-EQUITY> 2,818,736 <SALES> 850,624 <TOTAL-REVENUES> 1,242,807 <CGS> 121,880 <TOTAL-COSTS> 1,093,403 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 18,980 <INCOME-PRETAX> 180,840 <INCOME-TAX> 36,492 <INCOME-CONTINUING> 144,348 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 144,348 <EPS-BASIC> 0.60 <EPS-DILUTED> 0.57 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

BMET

https://www.sec.gov/Archives/edgar/data/351346/0000351346-00-000001.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, Mqvgce1xxTZnCnWPmqrmoGbC7rB86mXnF/UTUpep6KrdrThXT0v7TTjHWJp9pFdR lVZzOa8X+vXndPaq6P56sg== <SEC-DOCUMENT>0000351346-00-000001.txt : 20000202 <SEC-HEADER>0000351346-00-000001.hdr.sgml : 20000202 ACCESSION NUMBER: 0000351346-00-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000113 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: SEC FILE NUMBER: 001-15601 FILM NUMBER: 507088 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, 1999. 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 As of November 30, 1999, the registrant had 112,857,994 common shares outstanding. 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 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 Part II. Other Information 13 Signatures 14 Index to Exhibits 15 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS at November 30, 1999 and May 31, 1999 (in thousands) ASSETS November 30, May 31, 1999 1999 ------------ ------- Current assets: Cash and cash equivalents $ 164,257 $ 129,359 Investments 84,500 60,078 Accounts and notes receivable, net 226,879 215,034 Refundable income taxes 31,308 31,308 Inventories 227,544 205,238 Prepaid expenses and other 45,637 40,691 --------- --------- Total current assets 780,125 681,708 --------- --------- Property, plant and equipment, at cost 285,487 265,010 Less, Accumulated depreciation 108,961 96,137 --------- --------- Property, plant and equipment, net 176,526 168,873 --------- --------- Investments 125,840 146,859 Intangible assets, net 8,523 7,665 Excess acquisition costs over fair value of acquired net assets, net 54,746 47,861 Other assets 15,751 14,990 --------- --------- Total assets $1,161,511 $1,067,956 ========= ========= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS at November 30, 1999 and May 31, 1999 (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY November 30, May 31, 1999 1999 ------------ ------- Current liabilities: Short-term borrowings $ 70,099 $ 45,137 Accounts payable 28,856 27,676 Accrued income taxes 9,565 17,088 Accrued wages and commissions 18,763 19,596 Other accrued liabilities 107,094 91,933 --------- --------- Total current liabilities 234,377 201,430 Long-term liabilities: Deferred federal income taxes 8,414 9,565 Other liabilities 447 324 --------- --------- Total liabilities 243,238 211,319 --------- --------- Minority interest 83,951 80,690 --------- --------- Contingencies (Note 8) Shareholders' equity: Common shares 80,288 77,843 Additional paid-in capital 26,920 26,920 Retained earnings 747,489 687,828 Accumulated other comprehensive income (20,375) (16,644) --------- --------- Total shareholders' equity 834,322 775,947 --------- --------- Total liabilities and shareholders' equity $1,161,511 $1,067,956 ========= ========= 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, 1999 and 1998 (in thousands, except per share data) Six Months Ended Three Months Ended November 30, November 30, ---------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $394,631 $360,004 $202,480 $183,340 Cost of sales 117,527 109,102 60,691 55,585 ------- ------- ------- ------- Gross profit 277,104 250,902 141,789 127,755 Selling, general and administrative expenses 135,490 123,979 69,194 63,100 Research and development expense 16,842 17,254 8,304 9,162 Special charge 9,000 -- 9,000 -- ------- ------- ------- ------- Operating income 115,772 109,669 55,291 55,493 Other income, net 7,983 7,419 4,864 4,575 ------- ------- ------- ------- Income before income taxes and minority interest 123,755 117,088 60,155 60,068 Provision for income taxes 45,047 43,214 22,167 22,118 ------- ------- ------- ------- Income before minority interest 78,708 73,874 37,988 37,950 Minority interest 3,261 4,386 1,845 2,056 ------- ------- ------- ------- Net income $ 75,447 $ 69,488 $ 36,143 $ 35,894 ======= ======= ======= ======= Earnings per share: Basic $.67 $.62 $.32 $.32 ==== ==== ==== ==== Diluted $.66 $.61 $.32 $.32 ==== ==== ==== ==== Shares used in the computation of earnings per share: Basic 112,839 112,184 112,774 112,258 ======= ======= ======= ======= Diluted 113,723 113,564 114,004 113,651 ======= ======= ======= ======= Cash dividends per common share $.14 $.12 $ -- $ -- ==== ==== ==== ==== 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, 1999 and 1998 (in thousands) 1999 1998 ---- ---- Cash flows from (used in) operating activities: Net income $ 75,447 $ 69,488 Adjustments to reconcile net income to net cash from operating activities: Depreciation 12,083 9,531 Amortization 4,036 4,161 Gain on sale of investments, net (432) (1,054) Minority interest 3,261 4,386 Deferred federal income taxes (181) (242) Changes in current assets and liabilities, excluding effects of acquisitions: Accounts and notes receivable, net (10,041) (12,842) Inventories (18,167) (13,735) Prepaid expenses and other (2,652) 7,444 Accounts payable (73) (1,404) Accrued income taxes (8,026) 9,921 Accrued wages and commissions (639) (507) Other accrued laibilities 12,577 (4,764) ------- ------ Net cash from operating activities 67,193 70,383 ------- ------ Cash flows from (used in) investing activities: Proceeds from sales and maturities of investments 7,323 24,171 Purchases of investments (13,288) (62,648) Capital expenditures (20,881) (19,374) Acquisitions, net of cash acquired (13,530) (1,075) Other (1,720) (1,963) ------- ------ Net cash used in investing activities (42,096) (60,889) ------- ------ Cash flows from (used in) financing activities: Increase in short-term borrowings, net 24,435 2,166 Issuance of common shares 2,439 982 Cash dividends (15,786) (13,453) ------- ------ Net cash from (used in) financing activities 11,088 (10,305) ------- ------ Effect of exchange rate changes on cash (1,287) (1,289) ------- ------ Increase (decrease) in cash and cash equivalents 34,898 (2,100) Cash and cash equivalents, beginning of year 129,359 117,089 ------- ------- Cash and cash equivalents, end of period $164,257 $114,989 ======= ======= The accompanying notes are a part of the consolidated financial statements. BIOMET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION. The accompanying consolidated financial statements include the accounts of Biomet, Inc. and its subsidiaries (individually 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, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2000. 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 fiscal year ended May 31, 1999. The accompanying consolidated balance sheet at May 31, 1999, has been derived from the audited Consolidated Financial Statements at that date, but does not include all disclosures required by generally accepted accounting principles. The Company has one reportable segment, orthopedic products, which includes designing, manufacturing and marketing of reconstructive products, fixation devices, spinal products and other. Other products consist primarily of Arthrotek's arthroscopy products, AOA's softgoods products, general instruments and operating room supplies. The Company manages its business segments primarily on a geographic basis. These geographic segments are comprised of the United States, Europe and other. Other geographic segments include Canada, South America, Mexico, Japan, and the Pacific Rim. Net sales of orthopedic products by product category are as follows for the six and three months ended November 30: Six Months Ended Three Months Ended November 30, November 30, ---------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) Reconstructive $233,085 $213,376 $120,565 $109,628 Fixation 85,363 78,341 43,329 38,899 Spinal products 25,119 20,819 12,951 11,062 Other 51,064 47,468 25,635 23,751 ------- ------- ------- ------- $394,631 $360,004 $202,480 $183,340 ======= ======= ======= ======= NOTE 2: COMPREHENSIVE INCOME. Other comprehensive income includes foreign currency translation adjustments and unrealized appreciation of available-for-sale securities, net of taxes. Other comprehensive income (loss) for the three months ended November 30, 1999 and 1998 was $(977) and $9,000, respectively. Other comprehensive income (loss) for the six months ended November 30, 1999 and 1998 was ($3,731) and $8,713, respectively. Total comprehensive income combines reported net income and other comprehensive income. Total comprehensive income for the three months ended November 30, 1999 and 1998 was $35,166 and $44,894, respectively. Total comprehensive income for the six months ended November 30, 1999 and 1998 was $71,716 and $78,201, respectively. NOTE 3: INVENTORIES. Inventories at November 30, 1999 and May 31, 1999 are as follows: November 30, May 31, 1999 1999 ------------ ------- (in thousands) Raw materials $ 28,218 $ 26,372 Work-in-process 26,214 24,221 Finished goods 93,446 87,362 Consigned inventory 79,666 67,283 ------- ------- $227,544 $205,238 ======= ======= NOTE 4: COMMON SHARES. During the six months ended November 30, 1999, the Company issued 280,490 Common Shares upon the exercise of outstanding stock options for proceeds aggregating $2,438,976. NOTE 5: EARNINGS PER SHARE. Earnings per common share amounts ("basic EPS") are computed by dividing net income by the weighted average number of common shares outstanding and excludes any potential dilution. Earnings per common share amounts assuming dilution ("diluted EPS") are computed by reflecting potential dilution from the exercise of stock options. NOTE 6: 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 benefits relating to operations in Puerto Rico, tax-exempt income and tax credits. NOTE 7: SUBSEQUENT EVENT. On December 16, 1999, the Company and Implant Innovations International Corporation ("3i") completed the merger as previously announced. The Company issued 5.2 million Common Shares for all of the issued and outstanding shares of 3i. 3i and its subsidiaries design, develop, manufacture, market and distribute oral reconstructive products. 3i's corporate headquarters and manufacturing facility are located in Palm Beach, Florida and it has sales offices in Canada, Europe and Mexico. The business combination will be accounted for as a pooling-of-interests whereby all prior period financial statements of the Company will be restated to include the combined financial position, results of operations and cash flows of the Company and 3i. The following supplementary pro forma financial information combines 3i's operating results with the Company's for the periods presented. The supplementary pro forma financial information is subject to final adjustments and revisions; however, management believes adjustments, if any, will not be material. Further, management does not expect there will be any material adjustments to conform the accounting policies of the two companies. The Company will take a one-time pretax charge of approximately $2.7 million for merger-related costs during the third quarter of fiscal year 2000. Supplementary Pro Forma Financial Information Six Months Ended Three Months Ended November 30, November 30, ---------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands, except per share data) Reconstructive $275,910 $247,740 $142,832 $127,747 Fixation 85,363 78,341 43,329 38,899 Spinal products 25,119 20,819 12,951 11,062 Other 51,064 47,468 25,635 23,751 ------- ------- ------- ------- $437,456 $394,368 $224,747 $201,459 ======= ======= ======= ======= U.S. sales $293,116 $263,538 $149,926 $134,894 Foreign sales 144,340 130,830 74,821 66,565 ------- ------- ------- ------- $437,456 $394,368 $224,747 $201,459 ======= ======= ======= ======= Net sales $437,456 $394,368 $224,747 $201,459 Gross profit 304,592 269,578 156,349 137,693 Operating income 124,003 113,462 60,008 57,793 Net income 79,958 71,541 38,186 37,150 Basic earnings per share .68 .62 .33 .32 Diluted earning per share .67 .60 .33 .31 Three Months Ended February 28, 1999 May 31, 1999 ----------------- ------------ (in thousands, except per share data) Reconstructive $131,757 $141,868 Fixation 41,191 43,293 Spinal products 11,642 12,664 Other 25,101 26,018 ------- ------- $209,691 $223,843 ======= ======= U.S. sales $139,489 $145,485 Foreign sales 70,202 78,358 ------- ------- $209,691 $223,843 ======= ======= Net sales $209,691 $223,843 Gross profit 143,552 155,346 Operating income, excluding special items (a) 58,567 62,329 Income, excluding special items (b) 38,342 43,914 Income per share, excluding special items (b): Basic .33 .38 Diluted .32 .37 (a) Operating income, excluding special items for the three month period ended May 31, 1999 excludes a $55 million special charge for litigation for Biomet and $6.6 million of special income from a litigation settlement of 3i. (b) Income, excluding special items for the three month period ended May 31, 1999 excludes a $32.9 million special charge (net of tax) for litigation for Biomet and $4.1 million of special income (net of tax) from a litigation settlement of 3i. Income per share excludes the per share effect of the above noted special items - $.25 (basic) and $.24 (diluted). NOTE 8: CONTINGENCIES. On June 30, 1999, the United States Court of Appeals for the Third Circuit (the "Third Circuit") significantly reduced the judgment previously entered against the Company and its wholly-owned subsidiaries, Electro-Biology, Inc. and EBI Medical Systems, Inc. and in favor of Orthofix SRL ("Orthofix"). The Third Circuit upheld the trial court's award of compensatory damages to Orthofix in the amount of $48,875,397; however, it virtually eliminated the $50 million punitive damage award, reducing it to $1 million. The Company and Orthofix filed petitions for rehearing with the Third Circuit and both petitions were denied. Orthofix filed an appeal of the Third Circuit's decision to the United States Supreme Court, and on January 10, 2000 the Supreme Court decided, without comment, not to review the decision of the lower court. As a result of the Third Circuit's decision, and consultation with outside legal counsel, the Company recorded a special charge of $55 million in its fiscal 1999 consolidated financial statements. The Company recorded an additional special charge of $9 million for the quarter ended November 30, 1999 to reflect the final determination of the interest element of the judgment. On November 30, 1999, the Company's investments on the consolidated balance sheet include $108 million of investment securities which were previously delivered to an escrow agent pursuant to an order of the trial court. It is anticipated that the final amount payable to Orthofix of approximately $64 million will be paid prior to January 31, 2000, at which time this matter will be finally resolved and the escrow account closed. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AS OF NOVEMBER 30, 1999 The Company's cash and investments increased $38,301,000 from $336.3 million at May 31, 1999 to $374.6 million at November 30, 1999, net of the $15,786,000 cash dividend paid during the first quarter. Cash flows provided by operating activities were $67,193,000 for the first six months of fiscal 2000 compared to $70,383,000 in 1999. Net income plus depreciation and amortization and the increase in other liabilities were the principal sources of cash from operating activities, offset by increases in accounts receivable, inventories and accrued income taxes. Cash flows used in investing activities were $42,096,000 for the first six months of fiscal 2000 compared to a use of $60,889,000 in 1999. The primary source of cash flows from investing activities were sales and maturities of investments offset by purchases of investments, purchases of capital equipment and business acquisitions. Cash flows from financing activities were $11,088,000 for the first six months of fiscal 2000 compared to a use of $10,305,000 in 1999. The primary use of cash flows from financing activities was the cash dividend paid in the first quarter while the primary source of cash flows from financing activities was from increasing short-term borrowings used by BioMer in its operations and for business acquisitions. 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 capital expenditures, research and development costs and the Orthofix judgment. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1999 AS COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 1998 Net sales increased 10% to $394,631,000 for the six-month period ended November 30, 1999, from $360,004,000 for the same period last year. The Company's U.S.-based revenue increased 10% to $270,411,000 during the first six months, while foreign sales increased 8% to $124,220,000, net of a negative foreign exchange adjustment of approximately $5,000,000. Biomet's worldwide sales of reconstructive products during the first six months of fiscal 2000 were $233,085,000, representing a 9% 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 revision products, the Repicci Unicondylar Knee and the Ascent Total Knee System. Sales of fixation products were $85,363,000 for the first six months of fiscal 2000, representing a 9% increase as compared to the same period in 1999. Sales of spinal products were $25,119,000 for the first six months of fiscal 2000, representing a 21% increase as compared to the same period in 1999. Sales of spinal hardware contributed to this increase. The Company's sales of other products totaled $51,064,000, representing an 8% increase over the first six months of fiscal year 1999, primarily as a result of increased sales of softgood and Arthroscopy products. Cost of sales decreased as a percentage of net sales to 29.8% for the first six months of fiscal 2000 from 30.3% last year primarily as a result of increased sales of higher margin products, increased in-house manufacturing efficiencies, improved margins realized through acquisitions of international distributors and the higher growth rate of U.S. sales compared to international sales. Selling, general and administrative expenses as a percentage of net sales decreased slightly from 34.4% for the first six months of last year to 34.3% for the current six month period. Research and development expenditures decreased during the first six months to $16,842,000. On January 10, 2000, the United States Supreme Court declined to review the Third Circuit's decision in the Orthofix case, leaving its damage award standing. The Company recorded a $9 million special charge in the second quarter of fiscal year 2000, to reflect the final determination of the interest element of the judgment. Operating income rose 6% from $109,669,000 for the first six months of fiscal 1999, to $115,772,000 for the first six months of fiscal 2000. Excluding this special charge, operating income would have increased 14% to $124,772,000 for the first six months of fiscal 2000. Other income increased 8% resulting from the increase in the Company's investable cash. The effective income tax rate decreased to 36.4% for the six months of fiscal year 2000 from 36.9% last year primarily as a result of U.S. pretax income growing at a higher rate than international pretax income where tax rates are higher. These factors resulted in a 9% increase in net income to $75,447,000 from $69,488,000 for the first six months of fiscal 2000 as compared to the same period in fiscal 1999. Basic and diluted earnings per share both increased 8%, from $.62 and $.61 to $.67 and $.66, respectively, for the periods presented. Excluding the effect of the special charge, net income would have increased 17% to $81,147,000 and basic and diluted earnings per share would have both increased 16% to $.72 and $.71, respectively. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999 AS COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1998 Net sales increased 10% to $202,480,000 for the second quarter of fiscal year 2000, as compared to $183,340,000 for the same period last year. Operating income decreased .4% from $55,493,000 for the second quarter of fiscal 1999, to $55,291,000 for the second quarter of fiscal 2000. Excluding the special charge, operating income would have increased 16% to $64,291,000 for the second quarter of fiscal 2000. During the second quarter, net income increased 1% to $36,143,000 as compared to $35,894,000 for the same period last year. Basic and diluted earnings per share both remained at $.32 per share for the second quarter of fiscal 1999 and 2000. Excluding the special charge, second quarter net income would have increased 17% to $41,843,000 and basic and diluted earnings per share both would have increased 16% to $.37 per share. 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. YEAR 2000 The Year 2000 ("Y2K") issue stems from the way dates are recorded in many computer-dependent products and software programs. As the century date change occurs, date-sensitive systems may recognize the year 2000 as the year 1900, or not at all. This inability to recognize or properly treat the year 2000 may cause systems to process financial or operations information incorrectly. Prior to January 1, 2000, the Company, its vendors and customers and other parties made significant efforts and expenditures to upgrade, change and modify computer-dependent products and software programs to be Y2K compliant. As a result, the Company experienced only a few minor Y2K related problems (subsequent to December 31, 1999 and through the date of this filing), which have been corrected. The Company will continue to closely monitor its computer based systems and equipment and other business activities for possible problems related to Y2K; however, as of the date of this filing, the Company believes its business operations will not be adversely affected by Y2K. ACQUISITION As discussed in Note 7 of the Notes to Consolidated Financial Statements, on December 16, 1999, the Company and Implant Innovations International Corporation completed their merger. PART II. OTHER INFORMATION Item 1: Legal Proceedings. On June 30, 1999, the United States Court of Appeals for the Third Circuit (the "Third Circuit") significantly reduced the judgment previously entered against the Company and its wholly-owned subsidiaries, Electro-Biology, Inc. and EBI Medical Systems, Inc. and in favor of Orthofix SRL ("Orthofix"). The Third Circuit upheld the trial court's award of compensatory damages to Orthofix in the amount of $48,875,397; however, it virtually eliminated the $50 million punitive damage award, reducing it to $1 million. The Company and Orthofix filed petitions for rehearing with the Third Circuit and both petitions were denied. Orthofix filed an appeal of the Third Circuit's decision to the United States Supreme Court, and on January 10, 2000 the Supreme Court decided, without comment, not to review the decision of the lower court. As a result of the Third Circuit's decision, and consultation with outside legal counsel, the Company recorded a special charge of $55 million in its fiscal 1999 consolidated financial statements. The Company recorded an additional special charge of $9 million for the quarter ended November 30, 1999 to reflect the final determination of the interest element of the judgment. On November 30, 1999, the Company's investments on the consolidated balance sheet include $108 million of investment securities which were previously delivered to an escrow agent pursuant to an order of the trial court. It is anticipated that the final amount payable to Orthofix of approximately $64 million will be paid prior to January 31, 2000, at which time this matter will be finally resolved and the escrow account closed. 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: 1/14/2000 BY: /s/ GREGORY D. HARTMAN ---------- ------------------------- Gregory D. Hartman Senior Vice President - Finance and Treasurer (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 16, 1999. (Incorporated by reference to Exhibit 4.01 to Biomet, Inc. Form 8-K Current Report dated December 16, 1999, 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-31-2000 <PERIOD-END> NOV-30-1999 <CASH> 164257000 <SECURITIES> 84500000 <RECEIVABLES> 231834000 <ALLOWANCES> 4955000 <INVENTORY> 227544000 <CURRENT-ASSETS> 780125000 <PP&E> 285487000 <DEPRECIATION> 108961000 <TOTAL-ASSETS> 1161511000 <CURRENT-LIABILITIES> 234377000 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 80288000 <OTHER-SE> 754034000 <TOTAL-LIABILITY-AND-EQUITY> 1161511000 <SALES> 394631000 <TOTAL-REVENUES> 394631000 <CGS> 117527000 <TOTAL-COSTS> 278859000 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 1065000 <INCOME-PRETAX> 123755000 <INCOME-TAX> 45047000 <INCOME-CONTINUING> 75447000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 75447000 <EPS-BASIC> .67 <EPS-DILUTED> .66 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

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https://www.sec.gov/Archives/edgar/data/777001/0000777001-00-000012.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, CXLzb03qhT9FPG4shQNqkcKZv/CGx0NuS1QJ3uC0ntp0pdjpBG5YbKUiYuBsdKxs 0veirMD9eME7SIFC3ryITg== <SEC-DOCUMENT>0000777001-00-000012.txt : 20000215 <SEC-HEADER>0000777001-00-000012.hdr.sgml : 20000215 ACCESSION NUMBER: 0000777001-00-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEAR STEARNS COMPANIES INC CENTRAL INDEX KEY: 0000777001 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133286161 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08989 FILM NUMBER: 543564 BUSINESS ADDRESS: STREET 1: 245 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10167 BUSINESS PHONE: 2122722000 </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, 1999 [ ] 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 1-8989 The Bear Stearns Companies Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3286161 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 245 Park Avenue, New York, New York 10167 (Address of principal executive offices) (Zip Code) (212)272-2000 (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 10, 2000, the latest practicable date, there were 113,409,567 shares of Common Stock, $1 par value, outstanding. <PAGE> TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition at December 31, 1999 (Unaudited) and June 30, 1999 Consolidated Statements of Income (Unaudited)for the three-and six-month periods ended December 31, 1999 and December 31, 1998 Consolidated Statements of Cash Flows (Unaudited)for the six-month periods ended December 31, 1999 and December 31, 1998 Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signature <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Assets <CAPTION> December 31, June 30, 1999 1999 -------------------- --------------------- (Unaudited) (In thousands) <S> <C> <C> Cash and cash equivalents $ 822,780 $ 2,129,080 Cash and securities deposited with clearing organizations or segregated in compliance with federal regulations 2,185,529 2,891,397 Securities purchased under agreements to resell 34,701,654 32,996,226 Receivable for securities provided as collateral 1,763,128 1,735,293 Securities borrowed 73,529,786 54,173,726 Receivables: Customers 19,059,883 14,510,628 Brokers, dealers and others 434,861 1,452,590 Interest and dividends 446,353 366,110 Financial instruments owned, at fair value 42,588,736 41,942,878 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization 517,406 486,735 Other assets 1,342,478 1,209,677 --------------------- -------------------- Total Assets $ 177,392,594 $ 153,894,340 ==================== ===================== See Notes to Consolidated Financial Statements. </TABLE> <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Liabilities and Stockholders' Equity <CAPTION> December 31, June 30, 1999 1999 -------------------- --------------------- (Unaudited) (In thousands, except share data) <S> <C> <C> Short-term borrowings $ 17,943,682 $ 14,145,410 Securities sold under agreements to repurchase 63,128,957 50,673,644 Obligation to return securities received as collateral 2,938,766 1,944,286 Payables: Customers 43,457,705 40,822,913 Brokers, dealers and others 4,284,488 2,195,691 Interest and dividends 547,711 542,478 Financial instruments sold, but not yet purchased, at fair value 21,480,555 21,506,372 Accrued employee compensation and benefits 879,743 1,306,357 Other liabilities and accrued expenses 513,141 654,588 -------------------- --------------------- 155,174,748 133,791,739 -------------------- --------------------- Commitments and contingencies Long-term borrowings 16,787,849 14,647,092 -------------------- --------------------- Guaranteed Preferred Beneficial Interests in Company Subordinated Debt Securities 500,000 500,000 -------------------- --------------------- Stockholders' Equity Preferred Stock 800,000 800,000 Common Stock, $1.00 par value; 200,000,000 shares authorized; 184,805,848 and 176,011,113 shares issued at December 31, 1999 and June 30, 1999, respectively 184,806 176,011 Paid-in capital 2,510,569 2,269,927 Retained earnings 2,033,656 1,931,957 Capital Accumulation Plan 1,174,690 1,144,329 Treasury stock, at cost Adjustable Rate Cumulative Preferred Stock, Series A - 2,520,750 shares (103,421) (103,421) Common Stock - 69,441,402 shares and 56,333,508 shares at December 31, 1999 and June 30, 1999, respectively (1,670,303) (1,263,294) -------------------- --------------------- Total Stockholders' Equity 4,929,997 4,955,509 -------------------- --------------------- Total Liabilities and Stockholders' Equity $ 177,392,594 $ 153,894,340 ==================== ===================== See Notes to Consolidated Financial Statements. </TABLE> <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <CAPTION> Three-Months Ended Six-Months Ended ------------------------------ -------------------------- December 31, December 31, December 31, December 31, 1999 1998 (1) 1999 1998 (1) ------------- -------------- ------------ ------------- (In thousands, except share data) <S> <C> <C> <C> <C> Revenues Commissions $ 297,859 $ 254,676 $ 526,391 $ 495,476 Principal transactions 606,261 419,002 968,467 616,051 Investment banking 273,164 163,664 535,694 285,440 Interest and dividends 1,302,362 1,068,680 2,316,274 2,173,519 Other income 59,439 26,705 82,667 42,845 ------------- -------------- ------------ ------------ Total Revenues 2,539,085 1,932,727 4,429,493 3,613,331 Interest expense 1,113,399 911,935 1,957,794 1,851,638 ------------- -------------- ------------ ------------ Revenues, net of interest expense 1,425,686 1,020,792 2,471,699 1,761,693 ------------- -------------- ------------ ------------ Non-interest expenses Employee compensation and benefits 673,740 552,344 1,190,133 958,225 Floor brokerage, exchange and clearance fees 41,455 41,375 77,353 83,439 Communications 39,940 36,362 77,633 69,457 Depreciation and amortization 38,000 32,758 75,422 65,152 Occupancy 28,515 25,923 55,430 51,811 Advertising and market development 24,797 23,854 49,983 46,892 Data processing and equipment 29,002 15,293 49,487 26,278 Other expenses 160,205 85,405 256,649 159,652 ------------- -------------- ------------ ------------ Total non-interest expenses 1,035,654 813,314 1,832,090 1,460,906 ------------- -------------- ------------ ------------ Income before provision for income taxes 390,032 207,478 639,609 300,787 Provision for income taxes 144,935 71,558 236,655 100,764 ------------- -------------- ------------ ------------ Net income $ 245,097 $ 135,920 $ 402,954 $ 200,023 ============= ============== ============ ============ Net income applicable to common shares $ 235,319 $ 126,142 $ 383,398 $ 180,150 ============= ============== ============ ============ Earnings per share $ 1.64 $ 0.80 (2) $ 2.58 $ 1.16 (2) ============= ============== ============ ============ Weighted average common and common equivalent shares outstanding 161,852,191 166,273,480 (2) 164,423,424 166,934,802 (2) ============= ============== ============ ============ Cash dividends declared per common share $ 0.15 $ 0.14 (2) $ 0.29 $ 0.27 (2) ============= ============== ============ ============ (1) Certain amounts have been reclassified to conform to the current period's presentation. (2) Adjusted for all stock dividends declared through October 29, 1999. See Notes to Consolidated Financial Statements. </TABLE> <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <CAPTION> Six-Months Ended --------------------------------------------- December 31, December 31, 1999 1998 --------------------- ------------------ (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 402,954 $ 200,023 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 75,422 65,152 Deferred income taxes (76,200) 6,682 Other 28,802 36,759 Decreases (increases) in operating assets: Cash and securities deposited with clearing organizations or segregated in compliance with federal regulations 705,868 (1,306,886) Securities purchased under agreements to resell (1,705,428) (3,214,244) Securities borrowed (19,356,060) 2,251,790 Receivables: Customers (4,549,255) 2,807,770 Brokers, dealers and others 1,017,729 (475,020) Financial instruments owned 320,787 943,797 Other assets (137,887) 412,993 Increases (decreases) in operating liabilities: Securities sold under agreements to repurchase 12,455,313 4,659,499 Payables: Customers 2,634,792 4,725,473 Brokers, dealers and others 2,078,178 (979,434) Financial instruments sold, but not yet purchased (25,817) (4,659,933) Accrued employee compensation and benefits (499,064) (613,523) Other liabilities and accrued expenses (136,214) (323,248) --------------------- ------------------ Cash (used in) provided by operating activities (6,766,080) 4,537,650 --------------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from (payments on) short-term borrowings 3,798,272 (4,593,267) Net proceeds from issuance of long-term borrowings 3,196,837 1,936,990 Net proceeds from issuance of subsidiary securities - 290,550 Capital Accumulation Plan 70,406 153,785 Tax benefit of Common Stock distributions 3,457 603 Note repayment for ESOP Trust - 7,114 Payments for: Retirement of long-term borrowings (1,065,852) (1,398,805) Treasury stock purchases (436,512) (229,491) Cash dividends paid (54,548) (53,691) --------------------- ------------------ Cash provided by (used in) financing activities 5,512,060 (3,886,212) --------------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements (106,093) (91,585) Purchases of investment securities and other assets (41,261) (19,870) Proceeds from sales of investment securities and other assets 95,074 50,273 --------------------- ------------------ Cash used in investing activities (52,280) (61,182) --------------------- ------------------ Net (decrease) increase in cash and cash equivalents (1,306,300) 590,256 Cash and cash equivalents, beginning of period 2,129,080 1,073,821 --------------------- ------------------ Cash and cash equivalents, end of period $ 822,780 $ 1,664,077 ===================== ================== Statement of Financial Accounting Standards No. 125 requires balance sheet recognition of collateral related to certain secured financing transactions, which is a non-cash activity and did not impact the Consolidated Statements of Cash Flows. See Notes to Consolidated Financial Statements. </TABLE> <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of The Bear Stearns Companies Inc. and its subsidiaries (the "Company"). All material intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to the current period's presentation. On October 29, 1999 the Board of Directors declared a 5% stock dividend on the Company's Common Stock to stockholders of record on November 12, 1999 which was distributed November 26, 1999. Earnings per share data for all prior periods included in the consolidated financial statements are presented after giving retroactive effect to the 5% stock dividend. The consolidated financial statements reflect all adjustments which, in the opinion of management, are normal and recurring and are necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The nature of the Company's business is such that the results of any interim period may not be indicative of the results to be expected for an entire fiscal year. <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments owned and financial instruments sold, but not yet purchased consist of the Company's proprietary trading and investment accounts, at fair value, as follows: <CAPTION> December 31, June 30, In thousands 1999 1999 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Financial instruments owned: US government and agency $ 7,982,129 $ 8,211,944 Other sovereign governments 2,780,371 2,742,486 Corporate equity and convertible debt 9,317,507 14,578,501 Corporate debt 4,932,118 4,972,621 Derivative financial instruments 5,958,362 3,035,278 Mortgages and other mortgage-backed securities 11,249,716 7,869,884 Other 368,533 532,164 ------------- ------------ $ 42,588,736 $ 41,942,878 ============= ============ Financial instruments sold, but not yet purchased: US government and agency $ 5,080,489 $ 5,250,633 Other sovereign governments 1,189,436 2,639,952 Corporate equity 8,468,678 6,134,317 Corporate debt 1,383,321 1,707,998 Derivative financial instruments 5,358,500 5,687,296 Other 131 86,176 ------------- ------------ $ 21,480,555 $ 21,506,372 ============= ============ </TABLE> 3. COMMITMENTS AND CONTINGENCIES At December 31, 1999, the Company was contingently liable for unsecured letters of credit of approximately $1.8 billion and letters of credit secured by financial instruments of approximately $23.9 million, both of which are principally used as deposits for securities borrowed or to satisfy margin deposits at option and commodity exchanges. The Company had various other commitments aggregating $879.3 million at December 31, 1999. In the normal course of business, the Company has been named as a defendant in several lawsuits, which involve claims for substantial amounts. Although the ultimate outcome of these matters cannot be ascertained at this time, it is the opinion of management, after consultation with counsel, that the resolution of such matters will not have a material adverse effect on the results of operations or the financial condition of the Company. <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. NET CAPITAL REQUIREMENTS The Company's principal operating subsidiary, Bear, Stearns & Co. Inc. ("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns Securities Corp. ("BSSC"), are registered broker-dealers and, accordingly, are subject to Rule 15c3-1 of the Securities Exchange Act of 1934 (the "Net Capital Rule") and the capital rules of the New York Stock Exchange, Inc. ("NYSE") and other principal exchanges of which Bear Stearns and BSSC are members. Included in the computation of net capital of Bear Stearns is net capital of BSSC in excess of 5% of aggregate debit items arising from customer transactions, as defined. At December 31, 1999, Bear Stearns' net capital, as defined, of $1.54 billion exceeded the minimum requirement by $1.49 billion. Bear, Stearns International Limited ("BSIL") and Bear, Stearns International Trading Limited ("BSIT"), London-based broker-dealer subsidiaries, which are indirectly wholly owned by the Company, are subject to regulatory capital requirements of the Securities and Futures Authority, a self-regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. Bear Stearns Bank Plc ("BSB"), which is indirectly wholly owned by the Company, is incorporated in Dublin, Ireland and is subject to the regulatory capital requirements of the Central Bank of Ireland. At December 31, 1999, Bear Stearns, BSSC, BSIL, BSIT and BSB were in compliance with their respective regulatory capital requirements. 5. EARNINGS PER SHARE Earnings per share is computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding during each period presented. Common shares include the assumed distribution of shares of common stock issued or issuable under various employee benefit plans, including certain of the Company's deferred compensation arrangements, with appropriate adjustments made to net income for expense accruals related thereto. <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. CASH FLOW INFORMATION Cash payments for interest approximated interest expense for the six-months ended December 31, 1999 and December 31, 1998. Income taxes paid totaled $207.1 million and $43.3 million for the six-months ended December 31, 1999 and December 31, 1998, respectively. 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company, in its capacity as a dealer in over-the-counter derivative financial instruments and in connection with its proprietary market-making and trading activities, enters into transactions in a variety of cash and derivative financial instruments in order to reduce its exposure to market risk, which includes interest rate, exchange rate and equity price risk. Statement of Financial Accounting Standards ("SFAS") No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," defines a derivative as a future, forward, swap, or option contract, or other financial instrument with similar characteristics such as caps, floors and collars. Generally, these financial instruments represent future commitments to exchange interest payment streams or currencies or to purchase or sell other financial instruments at specific terms at specified future dates. Option contracts provide the holder with the right, but not the obligation, to purchase or sell a financial instrument at a specific price on or before an established date. These financial instruments may have market and/or credit risk in excess of amounts recorded in the Consolidated Statements of Financial Condition. In order to measure derivative activity, notional or contract amounts are frequently used. Notional/contract amounts, which are not included on the balance sheet, are used to calculate contractual cash flows to be exchanged and are generally not actually paid or received, with the exception of currency swaps and foreign exchange forwards and mortgage-backed securities forwards. The notional/contract amounts of financial instruments that give rise to off-balance-sheet market risk are indicative only of the extent of involvement in the particular class of financial instrument and are not necessarily an indication of overall market risk. <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) The following table represents the notional/contract amounts of the Company's outstanding derivative financial instruments as of December 31, 1999 and June 30, 1999: <CAPTION> December 31, June 30, In billions 1999 1999 --------------------------------------------------------------------------------------------- <S> <C> <C> Interest Rate: Swap agreements, including options, swaptions, caps, collars, and floors $377.6 $339.1 Futures contracts 25.2 52.5 Options held 38.5 24.0 Options written 11.3 3.9 Foreign Exchange: Futures contracts 21.2 19.3 Forward contracts 12.0 15.6 Options held 4.8 2.6 Options written 5.3 3.1 Mortgage-Backed Securities: Forward Contracts 51.2 63.4 Equity: Swap agreements 14.5 11.9 Futures contracts 0.9 0.8 Options held 5.9 7.5 Options written 5.4 7.3 </TABLE> <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) The derivative financial instruments used in the Company's trading and dealer activities are recorded at fair value with the resulting unrealized gains or losses recorded in the Consolidated Statements of Financial Condition and the related income or loss reflected in revenues derived from principal transactions. The fair values of derivative financial instruments held or issued for trading and hedging purposes as of December 31, 1999 and June 30, 1999, were as follows: <CAPTION> December 31, June 30, 1999 1999 ------------------------------------------------------- In millions Assets Liabilities Assets Liabilities --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Swap agreements $4,045 $3,848 $1,375 $2,290 Futures and forward Contracts 314 167 278 259 Options held 1,627 1,397 Options written 1,371 3,164 The average monthly fair values of the derivative financial instruments for the six-months ended December 31, 1999 and the fiscal year ended June 30, 1999 were as follows: December 31, June 30, 1999 1999 ------------------------------------------------------ In millions Assets Liabilities Assets Liabilities --------------------------------------------------------------------------------------- Swap agreements $2,653 $2,800 $2,227 $2,317 Futures and forward Contracts 331 284 334 368 Options held 1,242 1,154 Options written 1,547 3,156 The notional/contract amounts of these instruments do not represent the Company's potential risk of loss due to counterparty nonperformance. Credit risk arises from the potential inability of counterparties to perform in accordance with the terms of the contract. The Company's exposure to credit risk associated with counterparty nonperformance is limited to the net replacement cost of over-the-counter contracts, which are recognized as assets in the Company's Consolidated Statements of Financial Condition. Exchange-traded financial instruments, such as futures and options, generally do not give rise to significant counterparty exposure due to the margin requirements of the individual exchanges. Generally, options written </TABLE> <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) do not give rise to counterparty credit risk since they obligate the Company (not its counterparty) to perform. The Company has controls in place to monitor credit exposures by limiting transactions with specific counterparties and assessing the creditworthiness of counterparties. The Company also seeks to control credit risk by following an established credit approval process, monitoring credit limits and requiring collateral where appropriate. The following table summarizes the credit quality of the Company's over-the-counter derivatives by showing counterparty credit ratings for the replacement cost of contracts in a gain position, net of $2.8 billion and $1.7 billion of collateral, respectively, as of December 31, 1999 and June 30, 1999: December 31, June 30, In millions 1999 1999 -------------------------------------------------------- RATING(1) NET REPLACEMENT COST AAA $ 147.6 $ 140.0 AA 579.9 627.1 A 448.8 303.4 BBB 92.7 56.6 BB and Lower 30.8 39.7 Non-rated 0.5 3.4 (1) Internal designations of counterparty credit quality are based on actual ratings made by external ratings agencies or comparable ratings established and utilized by the Company's Credit Department. 8. SEGMENT DATA The Company operates in three principal segments: Capital Markets, Execution Services and Wealth Management. These segments are strategic business units that offer different products and services. They are managed separately as different levels and types of expertise are required to effectively manage the segments' transactions. The Capital Markets segment is comprised of Equities, Fixed Income and Investment Banking areas. Equities combines the efforts of sales, trading <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. SEGMENT DATA (continued) and research in such areas as block trading, convertible bonds, over-the-counter equities, equity derivatives and risk arbitrage. Fixed Income includes the efforts of sales, trading and research for institutional clients. Investment Banking provides capabilities in capital raising, strategic advisory, mergers and acquisitions and merchant banking. The Execution Services segment is comprised of clearance and predominantly commission-related areas, including institutional equity sales, institutional futures sales and specialist activities. Clearance provides clearing, margin lending and securities borrowing to facilitate customer short sales to approximately 2,800 clearing clients worldwide. The commission-related areas provide research and execution capabilities in US equity securities and financial futures to our institutional clients. The Wealth Management segment is comprised of the Private Client Services ("PCS") and Asset Management areas. PCS provides high-net-worth individuals with an institutional level of service. Asset Management serves the diverse investment needs of corporations, municipal governments, multi-employer plans, foundations, endowments, family groups and high-net-worth individuals. The three business segments are comprised of the many business areas with interactions among each as they serve the needs of similar clients. Revenues and expenses reflected below include those which are directly related to each segment. Revenue from inter-segment transactions are credited based upon specific criteria or agreed upon rates with such amounts eliminated in consolidation. Individual segments also include revenues and expenses relating to various items including corporate overhead and interest which are internally allocated by the Company primarily based on balance sheet usage or expense levels. The Company generally evaluates performance of the segments based on net revenues and profit or loss before provision for income taxes. <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. SEGMENT DATA (continued) For the three-months ended December 31, 1999: <S> <C> <C> <C> (in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets - --------------------------------------------------------------------------------------------------------- Capital Markets $ 756,211 $ 267,642 $ 114,809,087 Execution Services 378,261 134,893 60,876,923 Wealth Management 217,620 56,749 3,133,425 Other (a) 73,594 (69,252) (1,426,841) - --------------------------------------------------------------------------------------------------------- Total $ 1,425,686 $ 390,032 $ 177,392,594 ========================================================================================================= For the three-months ended December 31, 1998: (in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets - --------------------------------------------------------------------------------------------------------- Capital Markets $ 511,580 $ 95,916 $ 101,617,686 Execution Services 300,469 107,970 46,485,101 Wealth Management 143,582 26,068 3,159,677 Other (a) 65,161 (22,476) (131,965) - --------------------------------------------------------------------------------------------------------- Total $ 1,020,792 $ 207,478 $ 151,130,499 ========================================================================================================= For the six-months ended December 31, 1999: (in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets - --------------------------------------------------------------------------------------------------------- Capital Markets $ 1,308,295 $ 430,206 $ 114,809,087 Execution Services 694,876 249,672 60,876,923 Wealth Management 346,949 75,324 3,133,425 Other (a) 121,579 (115,593) (1,426,841) - --------------------------------------------------------------------------------------------------------- Total $ 2,471,699 $ 639,609 $ 177,392,594 ========================================================================================================= For the six-months ended December 31, 1998: (in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets - --------------------------------------------------------------------------------------------------------- Capital Markets $ 780,632 $ 32,710 $ 101,617,686 Execution Services 598,110 232,523 46,485,101 Wealth Management 263,996 39,826 3,159,677 Other (a) 118,955 (4,272) (131,965) - --------------------------------------------------------------------------------------------------------- Total $1,761,693 $ 300,787 $ 151,130,499 ========================================================================================================= (a) Other is comprised of consolidation/elimination entries as well as corporate administrative functions, including costs related to the Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan") which were $52.0 million and $12.0 million for the three-months ended December 31, 1999 and December 31, 1998, respectively and $72.5 million and $24.0 million for the six-months ended December 31, 1999 and December 31, 1998, respectively. </TABLE> <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. STOCK AWARD PLAN On October 28, 1999, the stockholders of the Company approved the Company's Stock Award Plan (the "Stock Award Plan"). The purpose of the Stock Award Plan is to secure for the Company and its stockholders the benefits of the additional incentive, inherent in the ownership of the Company's stock, by selected key employees of the Company who are important to the success and growth of the business. Pursuant to the Stock Award Plan, such employees may be offered the opportunity to acquire common stock through the grant of options and stock appreciation rights in tandem with such options. In January 1999, the Company granted 3,886,334 options under such plan, at fair market value on date of grant. These options vest after three years and have a ten year expiration. <PAGE> Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those discussed in the forward-looking statements. The Company's principal business activities, investment banking, securities trading and brokerage, are, by their nature, highly competitive and subject to various risks, in particular volatile trading markets and fluctuations in the volume of market activity. Consequently, the Company's net income and revenues in the past have been, and are likely to continue to be, subject to wide fluctuations, reflecting the impact of many factors, including securities market conditions, the level and volatility of interest rates, competitive conditions, liquidity of global markets, international and regional political events, regulatory developments and the size and timing of transactions. For a description of the Company's business, including its trading in cash instruments and derivative products, its underwriting and trading policies, and their respective risks, and the Company's risk management policies and procedures, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Business Environment The business environment during the Company's second fiscal quarter ended December 31, 1999 was characterized by strong US economic growth and low inflation, which resulted in robust domestic equity markets and growth in both New York Stock Exchange ("NYSE") and NASDAQ trading volume. In an effort to slow the nation's economic growth and mitigate the risk of rising inflationary pressures, the Federal Reserve raised the Federal Funds rate by 25 basis points on November 16, 1999. For the quarter ended December 31, 1999, the Dow Jones Industrial Average, Standard and Poor's 500 Index and NASDAQ Composite Index increased 11.8%, 15.0% and 48.5%, respectively. These factors contributed to strong equity underwriting and mergers and acquisitions activities. Fixed income markets, while improved over the comparable prior year period, remained weak in the face of rising interest rates and reduced trading activity due to the Year 2000 uncertainty, which led to lower investor and issuer activity. In the fiscal quarter ended December 31, 1998, US financial markets were recovering from economic turmoil in both the Far East and emerging market nations and the default by Russia on its debt obligations. The Federal Reserve reduced the Federal Funds rate on three occasions during the 1998 quarter. The reduction in the Federal Funds rate by a total of 75 basis points, coupled with the US economy's resilience, prompted the recovery of US financial markets. Credit spreads tightened significantly, which led to improved, but still weak, conditions in both the primary and secondary domestic fixed income markets with reduced levels of liquidity in all market segments. Rising domestic equity markets during the 1998 quarter reflected strong investor interest in the internet and technology sectors. <PAGE> Results of Operations Three-Months Ended December 31, 1999 Compared to Three-Months Ended December 31, 1998 Net income in the 1999 quarter was $245.1 million, an increase of 80.3% from the $135.9 million in the comparable prior year quarter. Revenues, net of interest expense ("net revenues") increased 39.7% to $1.4 billion in the 1999 quarter from $1.0 billion in the comparable 1998 quarter. The increase was attributable to strong performances from all of the Company's core businesses during the quarter, most notably from principal transactions and investment banking. Earnings per share were $1.64 for the 1999 quarter versus $0.80 for the comparable 1998 quarter. The 1998 quarter earnings per share amount reflects the adjustment for the 5% stock dividends declared by the Company in January 1999 and October 1999. Commission revenues increased 17.0% in the 1999 quarter to a record level $297.9 million from $254.7 million in the comparable 1998 quarter. This increase was primarily attributable to the firm's clearance business, which was positively impacted by overall increases in average daily volume in the 1999 quarter compared to the 1998 quarter. The Company's principal transactions revenues by reporting categories, including derivatives, are as follows: Three-Months Ended Three-Months Ended December 31, 1999 December 31, 1998 Fixed Income $ 265,774 $ 223,582 Equity 204,063 139,170 Foreign Exchange & Other Derivative Financial Instruments 136,424 56,250 --------- --------- $ 606,261 $ 419,002 ========= ========= Revenues from principal transactions increased 44.7% in the 1999 quarter, principally attributable to an increase in revenues derived from derivative financial instruments, including both equity and fixed income, which benefited from strong market conditions and customer flow. Principal transactions revenues also increased as a result of equity activities, including the over-the-counter and international equity areas. Stronger market conditions resulted in higher trading volumes in these areas, especially in the technology and telecommunications sectors. Revenues derived from fixed income also increased, <PAGE> primarily reflecting increases in both the distressed and emerging markets areas. Comparisons in these areas are against a 1998 quarter that reflected the impact of difficult market conditions in the Far East and emerging market nations, which led to credit spread widening across a range of fixed income products in the 1998 quarter. Investment banking revenues increased 66.9% to $273.2 million in the 1999 quarter from $163.7 million in the comparable 1998 quarter. This increase was driven by record level equity underwriting revenues which increased 241.4% in the 1999 quarter, reflecting a strong volume of technology related initial public offerings ("IPO"). Revenues from the Company's mergers and acquisitions activities increased 225.7% in the 1999 quarter reflecting strong domestic activity and continuing deal interest. Net interest and dividends (revenues from interest and net dividends, less interest expense) increased 20.6% to $189.0 million in the 1999 quarter from $156.7 million in the comparable 1998 quarter. This increase was primarily attributable to higher levels of margin debt principally attributable to the Company's securities clearance business. The increase in net interest profit was partially offset by generally higher funding costs incurred by the Company as we extended debt maturities due to uncertainty in anticipation of potential Year 2000 issues. Customer margin debt at December 31, 1999 approximated $56.2 million from $42.7 million at December 31, 1998. Average margin debt balances increased to $48.2 billion in the 1999 quarter from $38.4 billion in the comparable 1998 quarter reflecting strong equity markets. Average customer shorts decreased slightly to $61.1 billion in the 1999 quarter from $61.8 billion in the comparable 1998 quarter. Average free credit balances increased to $14.1 billion in the 1999 quarter from $12.5 billion in the comparable 1998 quarter. Other income increased 122.6% to $59.4 million in the 1999 quarter from $26.7 million in the comparable 1998 quarter. This increase was primarily attributable to increases in management and performance-based fees derived from the Company's Asset Management area. Asset Management increased assets under management at December 31, 1999 to $13.1 billion, which reflected a 29.7% increase over the comparable 1998 quarter. The largest component of the increase was primarily attributable to alternative investments, including venture capital hedge funds, equity hedge funds and mortgage hedge funds. Active equity markets and strong customer volumes resulted in the increase in management and performance-based fees. Employee compensation and benefits increased 22.0% to $673.7 million in the 1999 quarter from $552.3 million in the comparable 1998 quarter. This increase was primarily attributable to an increase in incentive and discretionary bonus accruals related to increased net revenues and earnings in the 1999 quarter, as well as an increase in salesmen's compensation resulting from increased commission revenues and an increase in headcount from the 1998 quarter. Employee compensation and benefits, as a percentage of net revenues, decreased to 47.3% in the 1999 quarter from 54.1% in the comparable 1998 quarter reflecting the improved operating results. <PAGE> All other expenses increased 38.7% to $361.9 million in the 1999 quarter from $261.0 million in the comparable 1998 quarter. Expenses associated with the Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan") increased by $40.0 million from the comparable 1998 quarter, reflecting higher pre-tax earnings in the 1999 quarter. Communications, depreciation and data processing expenses increased by approximately $22.5 million as a result of both increased usage and the upgrading of existing communication and computer systems. Electronic data processing ("EDP") professional fees increased by $10.1 million due to various technology initiatives, including the Year 2000 issue. EDP professional fees related to the Year 2000 issue increased $3.5 million to $5.1 million in the 1999 quarter. The Company's effective tax rate increased to 37.2% in the 1999 quarter compared to 34.5% in the comparable 1998 quarter due to higher levels of earnings and a lower level of tax preference items in the 1999 quarter. Six-Months Ended December 31, 1999 Compared to Six-Months Ended December 31, 1998 Net income for the six-months ended December 31, 1999 was $403.0 million, an increase of 101.5% from $200.0 million for the comparable 1998 period. Net revenues increased 40.3% to $2.5 billion in the 1999 period from $1.8 billion in the 1998 period. The increase was primarily attributable to increased principal transactions and investment banking revenues. Earnings per share were $2.58 for the 1999 period versus $1.16 for the comparable 1998 period. The 1998 period earnings per share amount reflects the adjustment for the 5% stock dividends declared by the Company in January 1999 and October 1999. Commission revenues increased 6.2% in the 1999 period to $526.4 million from $495.5 million in the comparable 1998 period. This increase was primarily attributable to higher commissions earned in the clearance area due to significantly higher customer activity and increases in average daily volume in the 1999 period when compared to the 1998 period. The increase was also attributable to increased revenues from the institutional and private client services areas. <PAGE> The Company's principal transaction revenues by reporting categories, including derivatives, are as follows: Six-Months Ended Six-Months Ended December 31, 1999 December 31, 1998 ------------------- ----------------- Fixed Income $473,599 $ 296,136 Equity 293,323 212,790 Foreign Exchange & Other Derivative Financial Instruments 201,545 107,125 -------- -------- $968,467 $616,051 ======== ======== Revenues from principal transactions increased 57.2% in the 1999 period to $968.5 million from $616.1 million in the comparable 1998 period. This increase reflects increased revenues derived from each of the Company's reporting categories. Revenues derived from fixed income activities increased as a result of increases in revenues in the high yield, mortgage-backed securities, emerging markets, and corporate bonds areas. The 1998 period reflects decreased activities due to the volatility experienced in the equity and fixed income markets and the widening of credit spreads during the quarter ended September 1998. These conditions led to the declines in revenues derived from several business areas including the high yield, emerging markets and corporate bonds areas. Revenues derived from both equity and fixed income derivatives increased due to strong market conditions and customer flow. Revenues derived from equity activities also increased in the 1999 period as a result of increases in revenues in the over-the-counter stock and arbitrage areas. Investment banking revenues increased 87.7% to $535.7 million in the 1999 period from $285.4 million in the comparable 1998 period. The increase was principally attributable to higher equity underwriting revenues refelcting a strong domestic equity underwriting calendar and mergers and acquisitions revenues earned during the 1999 period compared to the weak levels and relative inactivity in the comparable 1998 period. Equity underwriting revenues increased 189.1%, due to a strong volume of technology-related IPOs. Revenues from merchant banking activities were also very strong, increasing six-fold due to gains realized from certain of the Company's investments. Net interest and dividends increased 11.4% to $358.5 million in the 1999 period from $321.9 million in the comparable 1998 period. The increase was primarily attributable to increased levels of customer margin debt. Average customer margin debt increased to $45.6 billion in the 1999 period from $41.5 billion in the comparable 1998 period. Average customer shorts decreased to $58.9 billion in the 1999 period from $63.0 billion in the comparable 1998 period. Average free credit balances increased to $13.4 billion in the 1999 period from $12.8 billion in the comparable 1998 period. <PAGE> Employee compensation and benefits increased 24.2% to $1,190.1 million in the 1999 period from $958.2 million in the comparable 1998 period. The increase in employee compensation and benefits was primarily attributable to an increase in incentive and discretionary bonus accruals related to increased net revenues and earnings in the 1999 period. Employee compensation and benefits, as a percentage of net revenues, decreased to 48.2% in the 1999 period from 54.4% in the comparable 1998 period primarily due to improved six-month net revenue performance. All other expenses increased 27.7% to $642.0 million in the 1999 period from $502.7 million in the comparable 1998 period. CAP Plan expense increased by $48.5 million in the 1999 period from the comparable 1998 period, reflecting higher pre-tax earnings. Data processing, communications and depreciation increased $41.7 million or 25.9% as a result of both increased usage and the upgrading of existing communication and computer systems. EDP professional fees increased by $15.4 million due to various technology initiatives, including the Year 2000 issue. EDP professional fees related to the Year 2000 issue increased $5.5 million to $8.2 million in the 1999 period. The Company's effective tax rate increased to 37.0% in the 1999 period compared to 33.5% in the comparable 1998 period due to higher levels of earnings and a lower level of tax preference items in the 1999 period. Business Segments The Company is primarily engaged in business as a securities broker and dealer operating in three principal segments: Capital Markets, Execution Services and Wealth Management. These segments are strategic business units analyzed separately due to the distinct nature of the products they provide and the clients they serve. Certain Capital Markets products are distributed by the Wealth Management and Execution Services distribution network with the related revenues of such intersegment services allocated to the respective segments through transfer pricing. The following segment operating results exclude certain corporate items. See Note 8, footnote (a), of Notes to Consolidated Financial Statements. <PAGE> Three-Months Ended December 31, 1999 Compared to Three-Months Ended December 31, 1998 - -------------------------------------------------------------- Capital Markets ----------------------------------------------------------------------------- Three-Months Ended Three-Months Ended In thousands December 31,1999 December 31,1998 ----------------------------------------------------------------------------- Net revenues $ 756,211 $ 511,580 Pre-tax income 267,642 95,916 ----------------------------------------------------------------------------- Net revenues for Capital Markets approximated $756.2 million in the 1999 quarter, up 47.8% from $511.6 million in the comparable 1998 quarter. Pre-tax income for Capital Markets was $267.6 million in the 1999 quarter, up 179.0% from $95.9 million in the comparable 1998 quarter. Fixed income results in the 1999 quarter improved over the 1998 quarter due to improved results in the Company's distressed, derivatives, corporate bonds and emerging markets trading operations, which were partially offset by lower levels of customer activity across all asset classes. Fixed income results in the 1998 quarter were adversely impacted as a result of market volatility in the Far East and emerging market areas. Equity results improved as active markets and strong deal flow resulted in improved performances from equity derivatives and block trading. Investment banking revenues increased reflecting record levels of equity underwriting activity, as well as an increase in mergers and acquisitions activity. Execution Services ---------------------------------------------------------------------------- Three-Months Ended Three-Months Ended In thousands December 31,1999 December 31,1998 ---------------------------------------------------------------------------- Net revenues $ 378,261 $ 300,469 Pre-tax income 134,893 107,970 ---------------------------------------------------------------------------- At December 31, 1999, the Company provided clearing, margin lending and securities borrowing to facilitate customer short sales to approximately 2,800 clearing clients worldwide. Such clients include approximately 2,400 prime brokerage clients including hedge funds and clients of money managers, short sellers, arbitrageurs and other professional investors and approximately 400 fully disclosed clients, who engage in either the retail or institutional brokerage business. The Company processes trades in over 70 countries and accounts for approximately 10% of the average daily NYSE volume, and processed an average of in excess of 208,000 trades per day during the 1999 quarter versus approximately 159,000 trades per day in the comparable 1998 quarter. <PAGE> Net revenues for Execution Services approximated $378.3 million in the 1999 quarter, up 25.9% from $300.5 million in the comparable 1998 quarter. Pre-tax income for Execution Services was $134.9 million in the 1999 quarter, up 24.9% from $108.0 million in the comparable 1998 quarter. Clearance revenues increased due to improved domestic and European institutional equity sales volume. Additionally, higher average margin balances and wider spreads on customer short balances resulted in higher net interest revenues during the 1999 quarter. Wealth Management -------------------------------------------------------------------------- Three-Months Ended Three-Months Ended In thousands December 31,1999 December 31,1998 -------------------------------------------------------------------------- Net revenues $ 217,620 $ 143,582 Pre-tax income 56,749 26,068 -------------------------------------------------------------------------- PCS provides high-net-worth individuals with an institutional level of service, including access to the Company's resources and professionals. PCS maintains a select team of approximately 500 account executives in seven regional offices. PCS had approximately $42.0 billion in client assets at December 31, 1999, an increase of 17.8% compared to December 31, 1998. The Asset Management area, through Bear Stearns Asset Management Inc. ("BSAM"), had approximately $13.1 billion in assets under management at December 31, 1999 which reflected a 29.7% increase over December 31, 1998. The largest components of the increase were attributable to mutual funds and alternative investments, including mortgage hedge funds and equity hedge funds. Asset Management serves the diverse investment needs of corporations, municipal governments, multi-employer plans, foundations, endowments, family groups and high-net-worth individuals. Net revenues for Wealth Management were $217.6 million in the 1999 quarter, up 51.6% from $143.6 million in the comparable 1998 quarter. Pre-tax income for Wealth Management was $56.7 million in the 1999 quarter, up 117.7% from $26.1 million in the comparable 1998 quarter. Growth in assets under management, active equity markets and strong customer volumes resulted in the increase in management and performance-based fees and commissions in the 1999 quarter. <PAGE> Six-Months Ended December 31, 1999 Compared to Six-Months Ended December 31, 1998 Capital Markets ------------------------------------------------------------------------- Six-Months Ended Six-Months Ended In thousands December 31, 1999 December 31, 1998 ------------------------------------------------------------------------- Net revenues $ 1,308,295 $ 780,632 Pre-tax income 430,206 32,710 ------------------------------------------------------------------------- Net revenues for Capital Markets approximated $1,308.3 million in the 1999 period, up 67.6% from $780.6 million in the comparable 1998 period. Pre-tax income for Capital Markets was $430.2 million in the 1999 period compared to $32.7 million in the comparable 1998 period, an increase of 1,215.2%. Fixed income results improved in the 1999 period over the 1998 period due to performances from the Company's high yield, mortgage-backed, corporate bonds, emerging markets and derivatives trading operations, partially offset by decreases in government bond securities trading. Equity results improved as active markets and increased deal flow resulted in improved performances from equity derivatives, over-the-counter equities, and risk arbitrage. Investment banking revenues increased in the 1999 period due to strong equity underwriting revenues and increased mergers and acquisitions activity. In addition, merchant banking revenues increased significantly in the 1999 period due to gains realized from certain investments. Execution Services ----------------------------------------------------------------------- Six-Months Ended Six-Months Ended In thousands December 31, 1999 December 31, 1998 ----------------------------------------------------------------------- Net revenues $ 694,876 $ 598,110 Pre-tax income 249,672 232,523 ----------------------------------------------------------------------- Net revenues for Execution Services approximated $694.9 million in the 1999 period, up 16.2% from $598.1 million in the comparable 1998 period. Pre-tax income for Execution Services was $249.7 million in the 1999 period, up 7.4% from $232.5 million in the comparable 1998 period. Results reflect improved domestic and European equity sales volume and increased levels of customer margin debt. <PAGE> Wealth Management ---------------------------------------------------------------------- Six-Months Ended Six-Months Ended In thousands December 31, 1999 December 31, 1998 ---------------------------------------------------------------------- Net revenues $ 346,949 $ 263,996 Pre-tax income 75,324 39,826 ---------------------------------------------------------------------- Net revenues for Wealth Management were $346.9 million in the 1999 period, up 31.4% from $264.0 million in the comparable 1998 period. Pre-tax income for Wealth Management was $75.3 million in the 1999 period, up 89.1% from $39.8 million in the comparable 1998 period. Growth in assets under management, active equity markets and strong customer volumes resulted in the increase in management and performance-based fees and commissions in the 1999 period. Liquidity and Capital Resources Financial Leverage The Company maintains a highly liquid balance sheet with a majority of the Company's assets consisting of marketable securities inventories, which are marked-to-market daily, and collateralized receivables arising from customer-related and proprietary securities transactions. Collateralized receivables consist of resale agreements secured predominantly by US government and agency securities, customer margin loans and securities borrowed, which are typically secured by marketable corporate debt and equity securities. The Company's total assets and financial leverage can fluctuate significantly, depending largely upon economic and market conditions, volume of activity, customer demand and underwriting commitments. The Company's total assets at December 31, 1999 increased to $177.4 billion from $153.9 billion at June 30, 1999. The increase is primarily attributable to an increase in securities borrowed and receivables from customers. The Company's ability to support increases in total assets is a function of its ability to obtain short-term secured and unsecured funding and its access to sources of long-term capital in the form of long-term borrowings and equity, which together form its capital base. The Company continuously monitors the adequacy of its capital base, which is a function of asset quality and liquidity. Highly liquid assets, such as US government and agency securities, typically are funded by the use of repurchase agreements, which require very low levels of margin. In contrast, assets of lower quality or liquidity require higher levels of margin or overcollateralization and consequently increased levels of capital. Accordingly, the mix of assets being held by the Company significantly influences the amount of leverage the Company can employ and the adequacy of its capital base. <PAGE> Funding Strategy The Company's general funding strategy provides for the diversification of its short-term funding sources in order to maximize liquidity. Sources of short-term funding consist principally of collateralized borrowings, including repurchase transactions and securities lending arrangements, customer free credit balances, unsecured commercial paper, medium-term notes and bank borrowings generally having maturities from overnight to one year. Repurchase transactions, whereby the Company sells securities with an agreement to repurchase at a future date, represent the dominant component of secured short-term funding. In addition to short-term funding sources, the Company utilizes long-term debt, including medium-term notes, as a longer-term source of unsecured financing. During the six- months ended December 31, 1999, the Company received proceeds approximating $3.2 billion from the issuance of long-term debt which, net of retirements, served to increase long-term debt to $16.8 billion at December 31, 1999 from $14.6 billion at June 30, 1999. The Company maintains an alternative funding strategy focused on the liquidity and self-funding ability of the underlying assets. The objective of the strategy is to maintain sufficient sources of alternative funding to enable the Company to fund debt obligations without issuing any new unsecured debt, including commercial paper. The most significant source of alternative funding is the Company's ability to hypothecate or pledge its unencumbered assets as collateral for short-term funding. As part of the Company's alternative funding strategy, the Company regularly monitors and analyzes the size, composition, and liquidity characteristics of the assets being financed and evaluates its liquidity needs in light of current market conditions and available funding alternatives. Through this analysis, the Company can continuously evaluate the adequacy of its equity base and the schedule of maturing term-debt supporting its present asset levels. The Company can then seek to adjust its maturity schedule, in light of market conditions and funding alternatives. The Company currently has in place a committed revolving-credit facility (the "facility") totaling $3.225 billion, which permits borrowing on a secured basis by Bear Stearns, BSSC and certain affiliates. The facility also provides that the Company may borrow up to $1.6125 billion of the facility on an unsecured basis. Secured borrowings can be collateralized by both investment-grade and non-investment-grade financial instruments. In addition, the facility provides for defined margin levels on a wide range of eligible financial instruments that may be pledged under the secured portion of the facility. The facility terminates in October 2000 with all loans outstanding at that date payable no later than October 2001. <PAGE> Capital Resources The Company conducts a substantial portion of all of its operating activities within its regulated subsidiaries Bear Stearns, BSSC, BSIL, Bear Stearns International Trading Limited ("BSIT") and Bear Stearns Bank Plc ("BSB"). In connection therewith, a substantial portion of the Company's long-term borrowings and equity have been used to fund investments in, and advances to, these regulated subsidiaries. The Company regularly monitors the nature and significance of assets or activities conducted outside the regulated subsidiaries and attempts to fund such assets with either capital or borrowings having maturities consistent with the nature and liquidity of the assets being financed. During the six-months ended December 31, 1999, the Company repurchased a total of 8,122,792 shares of Common Stock through open market transactions in connection with the CAP Plan at a cost of approximately $320.1 million. The Company intends, subject to market conditions, to continue to purchase, in future periods, a sufficient number of shares of Common Stock in the open market to enable the Company to issue shares with respect to all compensation deferred and any additional amounts allocated to participants under the CAP Plan. On October 28, 1999, the stockholders of the Company approved the Company's Stock Award Plan (the "Stock Award Plan"). The purpose of the Stock Award Plan is to secure for the Company and its stockholders the benefits of the additional incentive, inherent in the ownership of the Company's stock, by selected key employees of the Company who are important to the success and growth of the business. Separately, the Board of Directors of the Company approved an amendment to the Stock Repurchase Program (the "Repurchase Program") to allow an additional amount up to $500 million. The Repurchase Program will be utilized primarily to acquire shares of Common Stock in order to mitigate the dilutive effect of the Company's Stock Award Plan. Repurchases of Common Stock pursuant to the CAP Plan are not made pursuant to the Repurchase Program and are not included in calculating the maximum aggregate number of shares of Common Stock that the Company may repurchase under the Repurchase Program. Purchases under the Repurchase Program may be made periodically in fiscal year 2000 or beyond either in the open market or through privately negotiated transactions. During the six-months ended December 31, 1999, the Company repurchased, under the previous repurchase program authorization, a total of 3,366,960 shares of Common Stock through open market transactions in connection with the Stock Award Plan at a cost of approximately $128.0 million. <PAGE> Cash Flows Cash and cash equivalents decreased by $1.3 billion during the six-months ended December 31, 1999. Cash used in operating activities during the six-months ended December 31, 1999 was $6.8 billion, primarily due to increases in securities borrowed and customer receivables, partially offset by an increase in securities sold under agreements to repurchase. Financing activities provided cash of $5.5 billion, primarily derived from proceeds of the issuance of short-term borrowings and proceeds from the issuance of long-term borrowings, partially offset by payments for the retirement of long-term borrowings. Cash used in investing activities of $52.3 million was primarily attributable to purchases of property, equipment and leasehold improvements, offset by net sales of investment securities and other assets. Regulated Subsidiaries As registered broker-dealers, Bear Stearns and BSSC are subject to the net capital requirements of the Securities Exchange Act of 1934, the NYSE, and the Commodity Futures Trading Commission, which are designed to measure the general financial soundness and liquidity of broker-dealers. BSIL and BSIT, London-based broker-dealer subsidiaries, are subject to the regulatory capital requirements of the Securities and Futures Authority, a self-regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. Additionally, BSB is subject to the regulatory capital requirements of the Central Bank of Ireland. At December 31, 1999 Bear Stearns, BSSC, BSIL, BSIT, and BSB were in compliance with their respective regulatory capital requirements. Merchant Banking and High Yield Securities As part of the Company's merchant banking activities, it participates from time to time in principal investments in leveraged acquisitions. As part of these activities, the Company originates, structures and invests in merger, acquisition, restructuring, and leveraged capital transactions, including leveraged buyouts. The Company's principal investments in these transactions are generally made in the form of equity investments, equity-related investments or subordinated loans, and have not historically required significant levels of capital investment. At December 31, 1999, the Company's aggregate investments in leveraged transactions and its exposure related to any one transaction was not material to the Company's consolidated financial position. As part of the Company's fixed-income securities activities, the Company participates in the trading and sale of high yield, non-investment-grade debt securities, non-investment-grade mortgage loans and securities of companies that are the subject of pending bankruptcy proceedings (collectively "high yield investments"). Non-investment-grade mortgage loans are principally secured by residential properties and include both non-performing loans and real estate owned. At December 31, 1999 the Company held high yield instruments of $1.4 billion owned and $0.3 billion sold short, as compared to $1.4 billion owned and $0.2 billion sold short as of June 30, 1999. <PAGE> These investments generally involve greater risk than investment-grade debt securities due to credit considerations, illiquidity of secondary trading markets, and increased vulnerability to general economic conditions. The level of the Company's high yield investment inventories, and the impact of such activities upon the Company's results of operations, can fluctuate from period to period as a result of customer demand and economic and market considerations. The Company's Risk Committee monitors exposure to market and credit risk with respect to high yield investment inventories and establishes limits with respect to overall market exposure and concentrations of risk by both individual issuer and industry group. Year 2000 Issue The Year 2000 issue was the result of legacy computer programs having been written using two digits rather than four digits to define the applicable year and therefore without consideration of the impact of the upcoming change in the century. Such programs, unless corrected, may not have been able to accurately process dates ending in the Year 2000 and thereafter. Through December 31, 1999, the amounts incurred related to the assessment of, and efforts in connection with, the Year 2000 and the development and execution of a remediation plan have approximated $77.0 million of which approximately $11.0 million in hardware and software costs have been capitalized. The total remaining Year 2000 project cost is estimated at approximately $1.0 million. Nothing has come to the Company's attention which would cause it to believe that its Year 2000 compliance effort was not successful. While the Company will continue to monitor for Year 2000 related problems, to date no significant Year 2000 issues have been encountered. <PAGE> Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal business activities by their nature engender significant market and credit risks. In addition, the Company is also subject to operating risk and funding risk. Managing these risks is critical to the success and stability of the Company. As a result, comprehensive risk management policies and procedures have been established to identify, control and monitor each of these major risks. Additionally, the Company's diverse portfolio of business activities helps to reduce the impact that volatility in any particular market may have on its net revenues. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates, equity and futures prices, changes in the implied volatility of interest rate, foreign exchange rate, equity and futures prices and also changes in the credit ratings of either the issuer or its related country of origin. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of the Company's market risk management procedures includes all market risk-sensitive financial instruments. The Company's exposure to market risk is directly related to its role as a financial intermediary in customer-related transactions and to its proprietary trading and arbitrage activities. For a discussion of the Company's primary market risk exposures, which include interest rate risk, foreign exchange rate risk, and equity price risk, and a discussion of how those exposures are managed, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Value at Risk The estimation of potential losses that could arise from changes in market conditions is typically accomplished through the use of statistical models, which seek to predict risk of loss based on historical price and volatility patterns. The output of such statistical models is commonly referred to as value at risk. Value at risk is used to describe a probabilistic approach to measuring the exposure to market risk. This approach utilizes statistical concepts to estimate the probability of the value of a financial instrument rising above or falling below a specified amount. The calculation utilizes the standard deviation of historical changes in value (i.e., volatility) of the market risk sensitive financial instruments to estimate the amount of change in the current value that could occur at a specified probability level. Measuring market risk using statistical risk management models has been the main focus of risk management efforts by many companies whose earnings are significantly exposed to changes in the fair value of financial instruments. The Company believes that statistical models alone do not provide a reliable method of monitoring and controlling risk. While value at risk models are relatively sophisticated, the quantitative risk information generated is limited by the parameters established in creating the related models. The financial instruments being evaluated, in some cases, have features which may trigger a potential loss in excess of the amounts previously disclosed if the changes in market rates or prices exceed the confidence level of the model used. Therefore, such models do not substitute for the experience or judgment of senior management and traders, who have extensive knowledge of the markets and adjust positions and revise strategies, as they deem necessary. The Company uses these models only as a supplement to other risk management tools. <PAGE> For purposes of Securities and Exchange Commission disclosure requirements, the Company has performed an entity-wide value at risk analysis of virtually all of the Company's financial assets and liabilities, including all reported financial instruments owned and sold, repurchase and resale agreements, and funding assets and liabilities. The value at risk related to non-trading financial instruments has been included in this analysis and not reported separately because the amounts were not material. The calculation is based on a methodology, which uses a one-day interval and a 95% confidence level. Interest rate and foreign exchange rate risk use a "Monte Carlo" value at risk approach. Monte Carlo simulation involves the generation of price movements in a portfolio using a random number generator. The generation of random numbers is based on the statistical properties of the securities in the portfolio. For interest rates, each country's yield curve has five factors that describe possible curve movements. These were generated from principal component analysis. In addition, volatility and spread risk factors were used, where appropriate. Intercountry correlations were also used. Equity price risk was measured using a combination of historical and Monte Carlo value at risk approaches. Equity derivatives were treated as correlated with various indexes, of which the Company used approximately fifty. Parameter estimates, such as volatilities and correlations, were based on daily tests through December 31, 1999. The total value at risk presented below is less than the sum of the individual components (i.e. Interest Rate Risk, Foreign Exchange Rate Risk, Equity Risk) due to the benefit of diversification among the risks. This table illustrates the value at risk for each component of market risk as of: December 31, June 30, in millions 1999 1999 - ----------- ----------- -------- MARKET RISK Interest $ 7.7 $ 9.3 Currency 1.1 1.3 Equity 14.4 11.3 Diversification benefit (6.8) (7.2) -------- ------- Total $ 16.4 $ 14.7 ======== ======= As previously discussed, the Company utilizes a wide variety of market risk management methods, including: limits for each trading activity; marking all positions to market on a daily basis; daily profit and loss statements; position reports; aged inventory position reports; and independent verification of inventory pricing. Additionally, management of each trading department reports positions, profits and losses, and trading strategies to the Risk Committee on a weekly basis. The Company believes that these procedures, which stress timely communication between trading department management and senior management, are the most important elements of the risk management process. <PAGE> Part II - Other Information Item 1. Legal Proceedings Alpha Group Consultants, et al. v. Weintraub, et al./In re Weintraub Entertainment Group Litigation As previously reported in the Company's Report on Form 10-K for the fiscal year ending June 30, 1999 ("1999 Form 10-K"), Bear Stearns is a defendant in litigation pending in the United States District Court for the Southern District of California. On November 17, 1999, the parties agreed, subject to final court approval, to settle this action. On January 12, 2000, the court granted preliminary approval to the parties' proposed settlement. A.R. Baron & Company, Inc. As previously reported in the Company's Report 1999 Form 10-K, Bear Stearns is a defendant in litigation pending in the Supreme Court of the State of New York, County of New York. On November 30, 1999, the Supreme Court of the State of New York, Appellate Division, affirmed the lower court order dismissing the complaint in the Schwarz action. Goldberger v. Bear, Stearns & Co. Inc./Bier, et al. v. Bear, Stearns & Co. Inc. As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a defendant in litigation pending in the United States District Court for the Southern District of New York. On October 22, 1999, this action was transferred by the Judicial Panel on Multi-District Litigation to the United States District Court for the Eastern District of New York. Crescent Porter Hale Foundation, et al. v. Bob K. Pryt, et al. As previously reported in the Company's 1999 Form 10-K and Report on Form 10-Q for the quarter ended September 24, 1999 ("Fiscal First Quarter 2000 Form 10-Q"), Bear Stearns is a defendant in litigation pending in the Superior Court of the State of California, San Francisco County. On December 9, 1999, the court approved the settlement of this action. <PAGE> In re Granite Partners, L.P., Granite Corporation and Quartz Hedge Fund As previously reported in the Company's 1999 Form 10-K and Fiscal First Quarter 2000 Form 10-Q, Bear Stearns is a defendant in litigation pending in the United States District Court for the Southern District of New York. On November 18, 1999, the court approved the settlement of the Primavera, ABF Capital, Montpellier, Johnston, Bambou, AIG and Litigation Advisory Board actions. McKesson HBOC, Inc. As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a defendant in litigation pending in the Chancery Court of the State of Delaware, New Castle County, the Superior Court of the State of California, San Francisco County, and the United States District Court for the Northern District of California. On January 20, 2000, plaintiffs voluntarily dismissed the Kelly Action without prejudice. Sterling Foster & Co., Inc. As previously reported in the Company's 1999 Form 10-K and Fiscal First Quarter 2000 Form 10-Q, Bear Stearns is a defendant in litigation pending in the United States District Court for the Eastern District of New York. On January 22, 2000, the court granted defendants' motion to dismiss the complaint in the Greenberg action. In re Stewart Enterprises, Inc. Securities Litigation. Beginning on August 25, 1999, a series of purported class actions were commenced in the United States District Court for the Eastern District of Louisiana, later consolidated under the above caption. On December 13, 1999, a consolidated amended class action complaint was filed. Named as defendants are Stewart Enterprises, Inc. ("Stewart"), three officers of Stewart, Bear Stearns, Merrill Lynch & Co. and Johnson Rice & Company L.L.C. The complaint alleges, among other things, that the defendants violated Sections 11 and 12(a)(2) of the Securities Act of 1933 in connection with certain allegedly false and misleading statements regarding Stewart's business prospects contained in a prospectus for a public offering of Stewart common stock. Plaintiffs purport to represent a class of all persons who purchased Stewart stock pursuant to the offering. Plaintiffs seek compensatory damages in an unspecified amount. Bear Stearns denies all allegations of wrongdoing asserted against it in this litigation, and believes that it has substantial defenses to these claims. The Company also is involved from time to time in investigations and proceedings by governmental, regulatory and self-regulatory agencies. <PAGE> Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of the Company held on October 28, 1999 (the "Annual Meeting"), the stockholders of the Company approved amendments to the Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan Amendments"), an amendment to the Performance Compensation Plan (the "Performance Compensation Plan Amendment"), and the adoption of the Stock Award Plan. In addition, at the Annual Meeting the stockholders of the Company elected eleven directors to serve until the next Annual Meeting of Stockholders or until successors are duly elected and qualified. The affirmative vote of a majority of the shares of Common Stock represented at the Annual Meeting and entitled to vote on each matter was required to approve the CAP Plan Amendments, the Performance Compensation Plan Amendment and the adoption of the Stock Award Plan, while the affirmative vote of a plurality of the votes cast by holders of shares of Common Stock was required to elect the directors. With respect to the approval of the CAP Plan Amendments, the Performance Compensation Plan Amendment and the adoption of the Stock Award Plan, set forth below is information on the results of the votes cast at the Annual Meeting. Broker For Against Abstained Non-Votes CAP Plan Amendments 101,165,196 4,203,978 397,699 1 Performance Compensation Plan Amendment 101,398,767 3,991,686 376,419 2 Adoption of Stock Award Plan 69,446,597 19,548,372 384,151 16,387,754 With respect to the election of directors, set forth below is information with respect to the nominees elected as directors of the Company at the Annual Meeting and the votes cast and/or withheld with respect to each such nominee. Nominees For Withheld ------------------------ ----------------- ------------------- James E. Cayne 102,468,914 3,297,960 Carl D. Glickman 102,674,060 3,092,814 Alan C. Greenberg 102,425,686 3,341,188 Donald J. Harrington 102,714,497 3,052,377 William L. Mack 102,443,201 3,323,673 Frank T. Nickell 85,566,361 20,200,513 Frederic V. Salerno 102,599,923 3,166,951 Alan D. Schwartz 102,434,858 3,332,016 Warren J. Spector 102,435,860 3,331,014 Vincent Tese 82,935,666 22,831,208 Fred Wilpon 102,429,750 3,337,124 <PAGE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10) (a) (4) Capital Accumulation Plan for Senior Managing Directors, as amended and restated as of October 28, 1999 (10) (a) (5) Performance Compensation Plan, as amended and restated as of October 28, 1999 (10) (a) (6) Stock Award Plan, as amended and restated as of January 11, 2000 (11) Statement Re Computation of Per Share Earnings (12) Statement Re Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K During the quarter, the Company filed the following Current Reports on Form 8-K. (i) A Current Report on Form 8-K dated October 13, 1999 and filed on October 14, 1999, pertaining to the Company's results of operations for the quarter ended September 24, 1999. (ii) A Current Report on Form 8-K dated October 29, 1999 and filed on November 3, 1999, announcing its declaration of quarterly cash dividends and a 5% stock dividend on its outstanding shares of common stock. (iii) A Current Report on Form 8-K dated December 1, 1999 and filed on December 7, 1999, pertaining to an opinion of Cadwalader, Wickersham & Taft as to the legality of 7.625% of Global Notes due 2009 ("Global Notes") issued by the Company, certain federal income tax consequences in connection with the offering of the Global Notes, and a consent in connection with the offering of the Global Notes. <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. The Bear Stearns Companies Inc. (Registrant) Date: February 14, 2000 By: /s/ Marshall J Levinson ----------------------- Marshall J Levinson Controller (Principal Accounting Officer) <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. FORM 10-Q Exhibit Index <CAPTION> <S> <C> Exhibit No. Description Page (10) (a) (4) Capital Accumulation Plan for Senior Managing Directors, as amended and restated as of October 28, 1999 41 (10) (a) (5) Performance Compensation Plan, as amended and restated as of October 28, 1999 78 (10) (a) (6) Stock Award Plan, as amended and restated as of January 11, 2000 83 (11) Statement Re Computation of Per Share Earnings 93 (12) Statement Re Computation of Earnings to Fixed Charges 94 (27) Financial Data Schedule 95 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>2 <TEXT> Exhibit 10 (a) (4) THE BEAR STEARNS COMPANIES INC. CAPITAL ACCUMULATION PLAN FOR SENIOR MANAGING DIRECTORS (Amended and Restated as of October 28, 1999) SECTION 1 Purpose The purpose of the Plan is to promote the interests of the Company and its stockholders by providing long-term incentives to certain key executives of the Company and Bear Stearns who contribute significantly to the long-term performance and growth of the Company. SECTION 2 Definitions 2.1 Terms Defined. When used herein, the following terms shall have the following meanings: "Account" means a Capital Accumulation Account or a Cash Balance Account, as the context may require. "Accredited Investor" means an "accredited investor" as defined in Rule 501 under the Securities Act, or any successor rule or regulation. "Additional Deferral Amount" has the meaning assigned to such term in Section 4.1. "Additional Plan Election" has the meaning assigned to such term in Section 4.1. "Adjusted Book Value Per Share" means the amount determined as of the end of any Fiscal Year by dividing Adjusted Common Stockholders' Equity by the sum of (a) the number of shares of Common Stock outstanding on such date, (b) the number of CAP Units credited to the Capital Accumulation Accounts of all Participants as of such date and the number of Earnings Units credited to the Earnings Unit Accounts of all participants in the PUP Plan as of such date, (c) the number of CAP Units to be credited to all such Accounts as a result of making any adjustment to such Accounts required by Sections 5.1 and 5.10 in respect of all Fiscal Years ending on or prior to the date of determination and the number of Earnings Units credited to the Earnings Unit Accounts of all participants in the PUP Plan as a result of making any adjustment to such accounts required by Section 4.2 of the PUP Plan in respect of all Fiscal Years ending on or prior to the date of such determination, and (d) the number of shares of Common Stock purchased by the Company for purposes other than for the Plan and the PUP Plan during all Fiscal Years ending on or prior to the date of such determination, less (e) the number of shares of Common Stock issued by the Company (whether from Treasury shares or otherwise) other than pursuant to the Plan or the PUP Plan during all Fiscal Years ending on or prior to the date of such determination. <PAGE> "Adjusted Common Stockholders' Equity" means, for the first Fiscal Year of any Deferral Period, Consolidated Common Stockholders' Equity as of the last day of the preceding Fiscal Year and for Fiscal Years following the first Fiscal Year of such Deferral Period, means Adjusted Common Stockholders' Equity determined for the prior Fiscal Year of such Deferral Period, plus all increases (or less any decreases) in retained earnings of the Company and its subsidiaries attributable to net income (or loss), determined on a consolidated basis, minus all amounts accrued in respect of cash dividends declared with respect to any capital stock of the Company during such Fiscal Year. "Adjusted Earnings Per Share" means, for any Fiscal Year, (a) the Company's consolidated net income or loss for such Fiscal Year, less the amount of the Preferred Stock Dividend Requirement for such Fiscal Year, plus the product obtained by multiplying the product of the Net Earnings Adjustment multiplied by the Average Cost Per Share for such Fiscal Year by the fraction which is 1 minus the Marginal Tax Rate, divided by (b) the sum of (i) the number of shares of Common Stock outstanding during such Fiscal Year, computed on a weighted average basis based on the number of days outstanding during such Fiscal Year, (ii) the aggregate number of CAP Units credited to the Accounts of all Participants computed on a weighted average basis based on the number of days outstanding during such Fiscal Year but not including in such computation the day that CAP Units are credited, increased or decreased pursuant to Section 5.1, 5.3 or 5.10 of the Plan, and (iii) the aggregate number of Earnings Units credited to the Earnings Unit Accounts of all participants in the PUP Plan computed on a weighted average basis based on the number of days outstanding during such Fiscal Year but not including in such computation the day that Earnings Units are credited, increased or decreased pursuant to Section 4.2 or 4.5 of the PUP Plan. "Adjusted Preferred Stock Dividend Requirement" means, for any Fiscal Year, the quotient obtained by dividing (i) the aggregate amount of all dividends actually declared by the Company on, or, if no such dividends are actually declared, required to be declared by the Company in accordance with the terms of, any Preferred Stock, in such Fiscal Year, by (ii) the fraction which is one minus the Marginal Tax Rate for such Fiscal Year. "Advisory Committee" means a committee of five Participants, of which two shall be appointed by the President of the Company, two by the President's Advisory Council of Bear Stearns and one by the Management and Compensation Committee. <PAGE> "Affiliate" means (a) Bear Stearns, (b) any other subsidiary of the Company and (c) any other corporation or other entity which is controlled, directly or indirectly, by, or under common control with, the Company and which the Board Committee designates as an "Affiliate" for purposes of the Plan. "Aggregate Imputed Cost" means, with respect to any Fiscal Year, the sum of (a) the aggregate of the Cost of Carry for such Fiscal Year for all Participants in the Plan plus (b) the Capital Reduction Charge for such Fiscal Year plus (c) the product of (i) the sum of the Net Earnings Adjustments for such Fiscal Year for all Participants in the Plan multiplied by (ii) the Average Cost Per Share for such Fiscal Year, minus (d) the Dividend Savings for such Fiscal Year. "Appropriate Committee" means the Management and Compensation Committee or, in the case of Participants who are Reporting Persons, the Board Committee. "Associate" of a Person means (a) any corporation or organization of which such Person is an officer or partner or is, directly or indirectly, the Beneficial Owner of 10% or more of any class of equity securities, (b) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of such Person or any of its parents or subsidiaries. "Available Shares" means, with respect to any Fiscal Year or portion thereof, the sum of (a) the number of shares of Common Stock purchased by the Company in the open market or in private transactions or otherwise during such period that have not been previously allocated under the Plan and designated by the Board Committee at the time of purchase as having been purchased for issuance under the Plan with respect to the Fiscal Year or portion thereof specified by the Board Committee and (b) shares of Common Stock purchased prior to such period that were designated as Available Shares but were not allocated under the Plan which the Company makes available to the Plan subsequent to the period in which such shares were purchased and the Board Committee thereafter designates as Available Shares for issuance under the Plan with respect to the Fiscal Year or portion thereof specified by the Board Committee. "Average Cost Per Share" means with respect to any period the weighted average of the sum of (a) the average price paid (including commissions) by the Company in respect of Available Shares purchased by the Company during such period and (b) in respect of Available Shares purchased by the Company prior to such period that the Company makes available to the Plan and that are accepted by the Board Committee, the Fair Market Value as of the last trading day of such period. "Average Federal Funds Rate" means, with respect to any Fiscal Year, the percentage (expressed as a decimal fraction) obtained by taking the sum of the Federal Funds Rates for each day during the Fiscal Year and dividing such amount by the number of days in such Fiscal Year. <PAGE> "Base Year" means the first Fiscal Year of a Required Deferral Period. "Bear Stearns" means Bear, Stearns & Co. Inc., a Delaware corporation, and its successors and assigns. "Beneficial Owner" has the meaning ascribed thereto in Rule 13d-3 under the Exchange Act, except that, in any case, a Person shall be deemed the Beneficial Owner of any securities owned, directly or indirectly, by the Affiliates and Associates of such Person. "Beneficiary" of a Participant means the beneficiary or beneficiaries designated by such Participant in accordance with Section 10 to receive the amount, if any, payable hereunder upon the death of such Participant. "Board Committee" means the Compensation Committee of the Board of Directors or another committee of the Board of Directors designated by the Board of Directors to perform the functions of the Board Committee hereunder. To the extent required by Rule 16b-3, the Board Committee shall be composed solely of directors who are not Participants in the Plan and are in other respects "Non-Employee Directors" within the meaning of Rule 16b-3. "Board of Directors" means the Board of Directors of the Company. "Book Value Adjustment" has the meaning assigned to such term in Section 5.5. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or permitted by law to be closed. "CAP Units" means the units, each such unit corresponding to one share of Common Stock, credited to a Participant's Capital Accumulation Account pursuant to Section 5. All calculations and determinations of the number of CAP Units hereunder shall be made in whole and fractional units, with such fractional units rounded to the nearest one-thousandth of a unit. "Capital Accumulation Account" has the meaning assigned to such term in Section 5.1. <PAGE> "Capital Reduction Charge" means (a) for Fiscal Years 1991 and 1992, zero; (b) for Fiscal Year 1993, the product of (i) the excess of (A) the amount determined by multiplying the Aggregate Imputed Cost of the Plan for Fiscal Year 1992 by the fraction which is one minus the Marginal Tax Rate for Fiscal Year 1992, over (B) the aggregate amount of all cash dividends that would have been paid by the Company during Fiscal Year 1992 on the aggregate number of shares of Common Stock purchased by the Company and taken into account for purposes of the Plan in respect of Fiscal Year 1991, if all such shares had remained outstanding, and (ii) the Average Federal Funds Rate for Fiscal Year 1993; and (c) for each Fiscal Year thereafter, the product of (x) the sum of (A) the amount determined by multiplying the Aggregate Imputed Cost of the Plan for the Fiscal Year preceding the year for which the determination is being made by the fraction which is one minus the Marginal Tax Rate for such preceding Fiscal Year (the "Tax-Effected Aggregate Imputed Cost" for such Fiscal Year), plus (B) the aggregate Tax-Effected Aggregate Imputed Cost of the Plan for all preceding Fiscal Years, other than the Fiscal Year immediately preceding the year for which the determination is being made, plus (C) the sum of the respective amounts obtained by multiplying the Capital Reduction Charge for each preceding Fiscal Year by the fraction which is one minus the Marginal Tax Rate for the corresponding Fiscal Year, less (D) the aggregate amount of all cash dividends that would have been paid by the Company on the aggregate number of shares of Common Stock purchased by the Company for purposes of the Plan and taken into account pursuant to Section 5.1, 5.3 or 5.10(a) prior to the end of the Fiscal Year preceding the year for which the determination is being made, measured from the date the corresponding CAP Units were first credited to such Accounts, if all such shares had remained outstanding and (y) the Average Federal Funds Rate for such Fiscal Year. "Cash Balance" means the amount from time to time credited to a Participant's Cash Balance Account. "Cash Balance Account" has the meaning assigned to such term in Section 5.2. "Change in Control" means (a) a majority of the Board of Directors ceases to consist of Continuing Directors; (b) any Person becomes the Beneficial Owner of 50% or more of the outstanding voting power of the Company unless such acquisition is approved by a majority of the Continuing Directors; (c) the stockholders of the Company approve an agreement to merge or consolidate into any other entity, unless such merger or consolidation is approved by a majority of the Continuing Directors; or (d) the stockholders of the Company approve an agreement to dispose of all or substantially all of the assets of the Company, unless such disposition is approved by a majority of the Continuing Directors. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes. "Committee" means each of the Advisory Committee, the Board Committee and the Management and Compensation Committee. "Common Stock" means the common stock, par value $1.00 per share, of the Company. "Company" means The Bear Stearns Companies Inc., a Delaware corporation, and its successors and assigns. <PAGE> "Consolidated Common Stockholders' Equity" means, as of any date of determination, the consolidated stockholders' equity of the Company and its subsidiaries applicable to Common Stock. "Continuing Director" means any member of the Board of Directors who is a member on the Effective Date or who is elected to the Board of Directors after the Effective Date upon the recommendation or with the approval of a majority of the Continuing Directors at the time of such recommendation or approval. "Cost of Carry" means, with respect to a Participant, the sum of (a) the amount obtained by multiplying the Deferred Tax Benefit for each Plan Year by the Average Federal Funds Rate in the Fiscal Year for which the determination is being made, and (b) the amounts obtained by compounding the amounts so obtained for each preceding Fiscal Year for which a Cost of Carry was calculated less the tax benefits associated with the amounts so determined, calculated on the basis of the Marginal Tax Rate in each such Fiscal Year, on an annual basis, at the Average Federal Funds Rate in effect during each succeeding Fiscal Year; and, with respect to the Plan as a whole, means the aggregate Cost of Carry of all Participants in any Fiscal Year. "Deferral Period" means the period of five Fiscal Years commencing on the first day of the Fiscal Year following the Plan Year for which a Participant's compensation being deferred pursuant to this Plan was payable, or such greater or lesser number of whole Fiscal Years as the Appropriate Committee may approve pursuant to Section 4.1, 4.3, 4.5 or 4.6. Notwithstanding the foregoing, the Deferral Period applicable to compensation being deferred for a particular Plan Year for any Participant who will attain age 56 prior to the last day of any such Plan Year and who elects in any Plan Election to be governed by this sentence in the manner specified by the Company shall be, (i) in the case of Participants who attain the age of 56 in such Plan Year, four Fiscal Years, (ii) in the case of Participants who attain the age of 57 in such Plan Year, either three or four Fiscal Years, (iii) in the case of Participants who attain the age of 58 in such Plan Year, either two, three or four Fiscal Years, or (iv) in the case of Participants who attain the age of 59 or older in such Plan Year, either one, two, three or four Fiscal Years, in each such case as the Participant may so elect for each such Plan Year. "Deferral Year" means any Fiscal Year during a Deferral Period. "Deferred Tax Benefit" means, for each Plan Year of a Participant, the sum of (a) the amounts obtained by multiplying such Participant's Total Deferral Amount, if any, for such Plan Year by the Marginal Tax Rate for such Plan Year and (b) the respective amounts obtained by multiplying the dollar amount of all Net Earnings Adjustments made with respect to the subaccount of such Participant's Capital Accumulation Account corresponding to such Plan Year by the respective Marginal Tax Rates for each Deferral Year for which such adjustments are made. The Deferred Tax Benefit shall be computed and recorded separately for each Plan Year. <PAGE> "Disability" means the complete and permanent inability of an individual to perform his duties due to his physical or mental incapacity, all as determined by the Appropriate Committee upon the basis of such evidence, including independent medical reports and data, as the Appropriate Committee deems necessary or appropriate. "Dividend Savings" means (a) for Fiscal Year 1991, zero; (b) for Fiscal Year 1992, the sum of (i) the amount obtained by multiplying (A) the aggregate number of CAP Units credited to the Capital Accumulation Accounts of all Participants pursuant to Section 5.1 in respect of Fiscal Year 1991 by (B) the weighted average per share amount of all cash dividends paid by the Company on its Common Stock in such Fiscal Year (such weighted average amount to be determined by multiplying the amount of each such dividend by the number of days in the Fiscal Year on and after the date on which such dividend is paid, adding all the amounts so obtained and dividing the total by the number of days in such Fiscal Year) and by multiplying the product so obtained by (C) the Average Federal Funds Rate for such Fiscal Year, and (ii) the amounts (the "Partial Year Dividend Savings") obtained by multiplying (x) for each fiscal quarter in such Fiscal Year, the aggregate number of CAP Units credited to the Capital Accumulation Accounts of all Participants pursuant to Section 5.3 during such Fiscal Year by (y) the respective weighted average per share amounts of all cash dividends paid by the Company on its Common Stock in fiscal quarters of such Fiscal Year beginning after the date on which such CAP Units were so credited (each such weighted average amount to be determined in the manner described in the preceding clause (b)(i)(B)), and by multiplying the product so obtained by (z) the Average Federal Funds Rate for such Fiscal Year; and (c) for Fiscal Year 1993 and each succeeding Fiscal Year of the Plan, means the amount obtained by first (i) multiplying the sum of (A) all CAP Units credited to the Capital Accumulation Accounts of all Participants pursuant to Section 5.1 in respect of all preceding Fiscal Years of the Plan and all CAP Units credited to such Accounts pursuant to Section 5.10(a) in respect of Net Earnings Adjustments, if any, for such Fiscal Years by (B) the weighted average per share amount of all cash dividends paid by the Company on its Common Stock in the Fiscal Year for which the determination is being made (determined in the manner described in the preceding clause (b)(i)(B)), (ii) calculating the amount of cash dividends that would have been paid by the Company in all preceding Fiscal Years on the aggregate number of shares of Common Stock purchased by the Company and taken into account for purposes of this Plan pursuant to Section 5.1, 5.3 or 5.10(a), measured from the date on which the corresponding CAP Units were credited to Participants' Accounts, if all such shares had remained outstanding and (iii) multiplying the respective Dividend Savings determined as provided herein for each preceding Fiscal Year by the fraction which is one minus the Marginal Tax Rate for the corresponding preceding Fiscal Year, and then multiplying the sum of the amounts so determined in clauses (i), (ii) and (iii) by the Average Federal Funds Rate for such Fiscal Year, and finally adding to such sum the Partial Year Dividend Savings for such Fiscal Year determined in the manner provided in the preceding clause (b)(ii). <PAGE> "Earnings Adjustment" has the meaning assigned to such term in Section 5.4(a). "Earnings Unit Account" has the meaning specified in the PUP Plan. "Earnings Units" has the meaning specified in the PUP Plan. "Effective Date" means September 6, 1990. "Effective Tax Rate" means, for any Fiscal Year, the fraction the numerator of which is the consolidated tax expense of the Company and its subsidiaries for such Fiscal Year and the denominator of which is the consolidated income or loss before income taxes of the Company and its subsidiaries for such Fiscal Year. For this purpose, consolidated income or loss of the Company and its subsidiaries shall be calculated by including extraordinary items and the income or loss of discontinued operations, and income tax expense shall be calculated by including the income tax expense attributable to such extraordinary items or discontinued operations. "Elective Plan Year" has the meaning assigned to such term in Section 4.3. "Eligible Employee" means any individual who is employed by Bear Stearns as a Senior Managing Director and is an Accredited Investor. "Enrollment Period" in respect of a Plan Year means the period commencing with the first day of the fiscal quarter immediately preceding such Plan Year and ending on December 31 of such Plan Year, or such shorter period contained therein designated by the Board Committee, provided that, unless otherwise determined by the Board Committee, the Enrollment Period with respect to an individual who becomes an Eligible Employee after December 31 of a Plan Year shall be the period commencing on the date such individual becomes an Eligible Employee and ending on the earliest of (a) the 30th day thereafter, (b) March 31 of the Plan Year in the case of an individual who was an employee prior to becoming an Eligible Employee or (c) the end of the Plan Year. Without limiting the generality of the foregoing, the Board Committee may designate one Enrollment Period for individuals who are Eligible Employees on the first day of a Base Year and one or more Enrollment Periods for individuals who become Eligible Employees after the first day of a Base Year; provided, however, with respect to participants in The Bear Stearns Companies Inc. Management Compensation Plan in no event shall any Enrollment Period in respect of any Plan Year extend more than 90 days into such Plan Year so as to allow a Participant to make an election to increase or decrease the deferral amount or Deferral Period relating to such Plan Year. <PAGE> "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes. "Executive Committee" means the Executive Committee of the Board of Directors. "Fair Market Value" of a share of Common Stock as of any date means the closing sales price of a share of Common Stock on the composite tape for New York Stock Exchange listed securities on such date or, if the Common Stock is not quoted on the composite tape or is not listed on the New York Stock Exchange, on the principal United States securities exchange registered under the Exchange Act on which the Common Stock is listed or, if the Common Stock is not listed on any such exchange, on the National Association of Securities Dealers, Inc. Automated Quotation National Market System ("NASDAQ-NMS") or, if the Common Stock is not quoted on NASDAQ-NMS, the average closing bid quotation of a share on the National Association of Securities Dealers, Inc. Automated Quotation System or any similar system then in use or, if the Common Stock is not listed or quoted, the fair value thereof as of such date as determined by the Appropriate Committee. "Federal Funds Rate" means, for any day which is a Business Day, the rate for U.S. dollar funds settled through the Federal Reserve System or other immediately available U.S. dollar funds, as quoted by an independent broker of such funds selected by the Company, for the last transaction completed prior to 9:30 A.M. (Eastern time) on the Business Day on which such rate is determined, rounded up or down on a daily alternating basis to the nearest whole multiple of one-eighth of one percent, and for any day which is not a Business Day means such rate as determined for the next preceding day which was a Business Day. "Fiscal Year" means the fiscal year of the Company commencing on July 1 and ending on June 30. "Fiscal Year 1991" shall mean the Fiscal Year ending on June 30, 1991; "Fiscal Year 1992" shall mean the Fiscal Year ending on June 30, 1992; and "Fiscal Year 1993" shall mean the Fiscal Year ending on June 30, 1993. If the Company shall change its Fiscal Year after the Effective Date so as to end on a date other than June 30 ("Year-end Date") then, if such new Year-end Date falls after June 30 and on or prior to December 31, the Fiscal Year in which such change occurs shall be deemed to consist, for purposes of this Plan, of the period of not more than 18 months beginning on the July 1 following the last Fiscal Year preceding such change and ending such new Year-end Date or, if such new Year-end Date falls on or after January 1 and prior to June 30, the Fiscal Year in which such change occurs shall be deemed to consist, for purposes of this Plan, of the period of less than 12 months beginning on the first day of the Fiscal Year in which such change occurs and ending on such new Year-end Date. "Full Year Units" has the meaning assigned to such term in Section 5.4. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time. <PAGE> "Historical Book Value" means, with respect to a CAP Unit credited to a Participant's Account pursuant to Section 5.1 or 5.10(a), an amount determined by dividing (a) Consolidated Common Stockholders' Equity as of the end of the Fiscal Year for which such CAP Unit was credited by (b) the sum of (i) the aggregate number of shares of Common Stock outstanding on the last day of such Fiscal Year, (ii) the aggregate number of CAP Units credited to the Capital Accumulation Accounts of all Participants as of the end of such Fiscal Year, and, with respect to a CAP Unit credited to a Participant's Account pursuant to Section 5.3, an amount determined by dividing (x)(i) Consolidated Common Stockholders' Equity, as of the last day of the Fiscal quarter for which such CAP Unit was credited, and (iii) the aggregate number of Earnings Units credited to the Earnings Unit Accounts of all Participants in the PUP Plan as of the end of such Fiscal Year, less (ii) all increases (or plus any decreases) in retained earnings of the Company and its subsidiaries attributable to net income (or loss), determined on a consolidated basis for all fiscal quarters of the Fiscal Year prior to and including the fiscal quarter during which such CAP Unit was credited, plus (iii) the amount determined by multiplying (A) a fraction, the numerator of which is the number of fiscal quarters in the Fiscal Year prior to and including the fiscal quarter during which such CAP Unit was credited, and the denominator of which is 4, by (B) the increase (or decrease) in retained earnings of the Company and its subsidiaries, attributable to net income (or loss), determined on a consolidated basis for the Fiscal Year during which such CAP Unit was credited, less (iv) the amount determined by multiplying (C) a fraction, the numerator of which is the number of fiscal quarters in the Fiscal Year prior to and including the fiscal quarter during which such CAP Unit was credited, and the denominator of which is 4, by (D) the total amount accrued in respect of cash dividends with respect to any capital stock of the Company for the Fiscal Year during which such CAP Unit was credited, plus (v) the total amount accrued in respect of cash dividends with respect to any capital stock of the Company for all fiscal quarters of the Fiscal Year prior to and including the fiscal quarter during which such CAP Unit was credited by (y) the sum of (i) the aggregate number of shares of Common Stock outstanding on the last day of such fiscal quarter, (ii) the aggregate number of CAP Units credited to the Capital Accumulation Accounts of all Participants as of the end of such date and (iii) the aggregate number of Earnings Units credited to the Earnings Unit Accounts of all Participants in the PUP Plan as of the end of such Fiscal Year. "Income Per Share" for any Fiscal Year means the consolidated income or loss before income taxes of the Company and its subsidiaries, adjusted as hereinafter provided, divided by the sum of (a) the number of shares of Common Stock outstanding during such Fiscal Year, computed on a weighted average basis based on the number of days outstanding during such Fiscal Year, (b) the number of CAP Units credited to the Capital Accumulation Accounts of all Participants computed on a weighted average basis based on the number of days outstanding during such Fiscal Year but not including in such computation the day that CAP Units are credited, increased or decreased pursuant to Section 5.1, 5.3 or 5.10 of the Plan and (c) the aggregate number of Earnings Units credited to the Earnings Unit Accounts of all Participants in the PUP Plan computed on a weighted average basis based on the number of days outstanding during such Fiscal Year but not including in such computation the day that Earnings Units are credited, increased or decreased pursuant to Section 4.2 or 4.5 of the PUP Plan. For purposes of this Plan, consolidated income or loss before income taxes of the Company and its subsidiaries (i) shall be determined prior to any charge or credit to income required in such Fiscal Year by reason of Net Earnings Adjustments pursuant to Section 5.10(a), (ii) shall include the amounts of any pre-tax earnings or loss attributable to discontinued operations or extraordinary items and (iii) shall be reduced by the Adjusted Preferred Stock Dividend Requirement during such Fiscal Year, and may be decreased, but not increased, by such amount determined by the Board Committee in its sole discretion as appropriate to carry out the purposes of the Plan. <PAGE> "Initial Plan Election" has the meaning assigned to such term in Section 4.1. "Investment Letter" means a letter, in a form to be approved by the Appropriate Committee, by which a Participant represents that he is an accredited Investor and that he is acquiring his interest in the Plan and any shares of Common Stock that may be acquired hereunder for investment and without a view to any distribution thereof. "Management and Compensation Committee" means the Management and Compensation Committee of the Company or another committee of the Company or the Board of Directors designated by the Board of Directors to perform the functions of the Management and Compensation Committee hereunder. "Marginal Tax Rate" means the maximum combined marginal rate of tax expressed as a fraction to which the Company is subject for the applicable Fiscal Year, including Federal, New York State and New York City income taxes (including any minimum or alternative tax), net of any tax benefit resulting from the deductibility of state and local taxes for federal income tax purposes. "Net Earnings Adjustment" has the meaning assigned to such term in Section 5.10(a). "Part Year Units" has the meaning assigned to such term in Section 5.4(a). "Participant" means any Eligible Employee who has validly elected to participate in the Plan pursuant to Section 4.l. "Person" means an individual, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization or a government or a political subdivision thereof. "Personal Leave of Absence" means the absence from the Company by a Participant, with the consent of the Company, for an extended period of time without salary under circumstances in which a return to full-time employment by the Participant is contemplated. <PAGE> "Plan" means The Bear Stearns Companies Inc. Capital Accumulation Plan for Senior Managing Directors as set forth herein and as amended and restated from time to time. "Plan Election" means the election to defer compensation made by a participant pursuant to Section 4. "Plan Year" means Fiscal Year 1991, Fiscal Year 1992, Fiscal Year 1993 and any other Fiscal Year with respect to which the Board Committee makes the determination provided for in Section 3.1. "Preferred Stock" means any capital stock of the Company that has a right to dividends or distributions in liquidation (or both) prior to the holders of the Common Stock. "Preferred Stock Dividend Requirement" means, for any Fiscal Year, the amount of all dividends actually declared by the Company on, or required to be declared by the Company in accordance with the terms of, any Preferred Stock, in such Fiscal Year. "Pre-Plan Earnings Per Share" means, for any Fiscal Year, (a) the sum of (i) the Company's consolidated net income or loss for such Fiscal Year less (ii) the amount of the Preferred Stock Dividend Requirement for such Fiscal Year, plus (iii) the amount obtained by multiplying the Aggregate Imputed Costs of the Plan deducted in the calculation of consolidated net income or loss for such Fiscal Year by the fraction which is one minus the Marginal Tax Rate for such Fiscal Year, divided by (b) the sum of (x) the number of shares of Common Stock outstanding during such Fiscal Year, computed on a weighted average basis based on the number of days outstanding during such Fiscal Year, (y) the aggregate number of CAP Units credited to the Accounts of all Participants computed on a weighted average basis based on the number of days outstanding during such Fiscal Year but not including in such computation the day that CAP Units are credited, increased or decreased pursuant to Section 5.1, 5.3 or 5.10 of the Plan, and (z) the aggregate number of Earnings Units credited to the Earnings Unit Accounts of all participants in the PUP Plan computed on a weighted average basis based on the number of days outstanding during such Fiscal Year but not including in such computation the day that Earnings Units are credited, increased or decreased pursuant to Section 4.2 or 4.5 of the PUP Plan. "PUP Plan" means The Bear Stearns Companies Inc. Performance Unit Plan for Senior Managing Directors, as the same shall be amended, supplemented or modified from time to time. "Quarter End Date" has the meaning assigned to such term in Section 5.3. <PAGE> "Registration Statement" has the meaning assigned to such term in Section 6.7. "Reporting Person" means a director or officer of the Company who is subject to the reporting requirements of Section 16(a) of the Exchange Act. "Required Deferral Amount" means, for any Plan Year, the following percentages of that portion of a Participant's current compensation for such Plan Year (prior to giving effect to any effective election hereunder to defer receipt of a portion of such amount but after giving effect to any effective election to defer compensation under any other plan sponsored by the Company or any Affiliate) which exceeds $200,000 (or the then prevailing annual base salary for Senior Managing Directors of Bear Stearns for such Plan Year): 25% of the first $ 300,000 30% of the next $ 500,000 40% of the next $ 1,000,000 50% of compensation exceeding $ 2,000,000 Notwithstanding the foregoing, (a) the Required Deferral Amount for any Participant who will attain age 55 prior to the last day of any Plan Year and who elects in his Plan Election to be governed by this sentence in the manner specified by the Appropriate Committee shall be 25% of such compensation of such Participant for each Plan Year in which he attains age 55 or older and (b) no Participant shall be required or entitled to defer any portion of his compensation for any Plan Year for which he was entitled to receive payment prior to the date of his Plan Election. The Required Deferral Amount in his initial Plan Year for any Participant who first becomes an Eligible Employee after the first day of any Plan Year shall be determined by multiplying each of the foregoing amounts in this paragraph by a fraction, the numerator of which is the number of whole months remaining in the Plan Year following his date of employment and the denominator of which is 12. "Required Deferral Period" has the meaning assigned to such term in Section 3.1. "Rule 16b-3" means Rule 16b-3 of the Securities and Exchange Commission promulgated under the Exchange Act, as the same may be modified or amended from time to time, and any successor rule. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor statute or statutes. "Special Plan Election" has the meaning assigned to such term in Section 4.6. <PAGE> "Stock Award Amount" means, for a Plan Year, a dollar amount equal to the sum of (a) a Participant's Required Deferral Amount for the Plan Year, multiplied by the related Stock Award Percentage, plus (b) a Participant's Additional Deferral Amount, if any, multiplied by the related Stock Award Percentage. "Stock Award Percentage" means, for any Plan Year, the percentage determined by the Compensation Committee, which will be applied to either the Required Deferral Amount or the Additional Deferral Amount to determine the amount which will be awarded pursuant to the Stock Award Plan. The Compensation Committee has the right to select different percentages for determining each of these amounts. "Termination Date" means the last day of any Deferral Period. "Total CAP Units" means the aggregate number of CAP Units, adjusted through any date of determination thereof, theretofore credited to a Participant's Capital Accumulation Account. "Total Deferral Amount" for any Participant means, for each Plan Year, the sum of the Required Deferral Amount and the Additional Deferral Amount, reduced by the Stock Award Amount. 2.2 Accounting Terms. Whenever any accounting term is used herein, or the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purposes of this Plan, such accounting term shall have the meaning assigned to such term or such determination or computation shall be made (as the case may be), to the extent applicable and except as otherwise specified herein, in accordance with GAAP. SECTION 3 Eligibility 3.1 Not later than 90 days after the commencement of any Fiscal Year, the Board Committee shall determine whether Eligible Employees who are not then Participants shall be entitled to defer a portion of their compensation for such Fiscal Year and the two Fiscal Years next succeeding such Fiscal Year (such three Fiscal Years being referred to collectively as a "Required Deferral Period"); provided, however, that in the case of the Required Deferral Period of which the Base Year is the Fiscal Year ending June 30, 1992, such determination may be made not later than October 30, 1991. 3.2 Each individual who is an Eligible Employee at any time during the Enrollment Period in respect of a Plan Year and is not then a Participant shall be eligible to participate in the Plan by deferring compensation as provided in Section 4.1; provided, however, that an Eligible Employee who does not elect to participate in the Plan during the Enrollment Period for the first Plan Year in which he is an Eligible Employee shall not be entitled to participate in the Plan in respect of subsequent Plan Years unless such participation is approved by the Appropriate Committee not later than the last day of the Enrollment Period for such Plan Year; and provided, further, that no individual shall be eligible to participate in the Plan unless such individual agrees to execute such documents or agrees to such restrictions, including but not limited to the execution of an Investment Letter, as the Appropriate Committee in its sole discretion may require. <PAGE> SECTION 4 Deferrals of Compensation 4.1 Plan Election. Each Eligible Employee who satisfies the eligibility requirements of Section 3.2 during a Plan Year may, during the applicable Enrollment Period, execute and file with the Appropriate Committee a Plan Election (an "Initial Plan Election"), in the form provided by the Company, (a) electing to defer (i) the Required Deferral Amount of his current compensation for each of the three Fiscal Years in the Required Deferral Period and (ii) subject to the approval of the Appropriate Committee, any amount of his current compensation in excess of the Required Deferral Amount for his Base Year (the "Additional Deferral Amount") and (b) electing, subject to the approval of the Appropriate Committee, a Deferral Period (in whole Fiscal Years) in respect of the Required Deferral Amount and any Additional Deferral Amount for such Base Year of more than Five Fiscal Years. During the Enrollment Period occurring during the second and third Fiscal Years of a Required Deferral Period (or if there is no Enrollment Period for such Fiscal Year, the period commencing on the anniversary of the first day of the most recent preceding Enrollment Period and ending on the anniversary of the last day of such Enrollment Period), a Participant may execute and file with the Appropriate Committee an additional Plan Election (an "Additional Plan Election"), in the form provided by the Company electing, if applicable, a shorter Deferral Period or, subject to the approval of the Appropriate Committee, an Additional Deferral Amount for such Fiscal Year or a Deferral Period in respect of the Required Deferral Amount and any Additional Deferral Amount for such Fiscal Year of more than five Fiscal Years. The Appropriate Committee may approve any election of an Additional Deferral Amount and any election of a Deferral Period in excess of five Fiscal Years, or may deny any such request, in its sole discretion. If the Appropriate Committee shall deny any election of any Additional Deferral Amount, then the Additional Plan Election shall be deemed to relate only to the Participant's Required Deferral Amount for the Fiscal Year involved and, if the Appropriate Committee shall deny any election of a Deferral Period in excess of five Fiscal Years, then the Deferral Period applicable to the Required Deferral Amount and any Additional Deferral Amount for the Fiscal Year involved shall be five Fiscal Years. 4.2 Effect of Initial Plan Election. An Initial Plan Election filed during the Enrollment Period in respect of a Plan Year in accordance with Section 4.1 shall constitute an election (a) to become a Participant in this Plan with respect to such Fiscal Year and the two succeeding Fiscal Years, (b) to defer for Deferral Period receipt of the Required Deferral Amount and the Additional Deferral Amount (if any) approved by the Appropriate Committee for such Fiscal Year and (c) to defer receipt of the Required Deferral Amount for the second and third Fiscal Years of the Required Deferral Period beginning with such Fiscal Year for the Deferral Period or such other period as may be approved by the Appropriate Committee pursuant to Section 4.1, unless, in the case of such second and third Fiscal Years, such Participant is excluded from participation in respect of subsequent Fiscal Years of a Required Deferral Period upon approval of the Appropriate Committee pursuant to Section 4.5(a). <PAGE> 4.3 Elective Deferrals. For each Plan Year occurring after the third Fiscal Year of a Participant's Required Deferral Period as to which such Participant has not theretofore had the opportunity to elect to defer compensation (each such Plan Year being referred to as an "Elective Plan Year"), such Participant may, subject as provided below, during the Enrollment Period in respect of any Plan Year during which the Board Committee has determined pursuant to Section 3.1 to allow any Eligible Employees to defer compensation for such Elective Plan Year, execute and file with the Appropriate Committee an Additional Plan Election electing to defer for the applicable Deferral Period the Required Deferral Amount of his current compensation for such Elective Plan Year. Thereafter, during the Enrollment Period occurring during each such Elective Plan Year (or if there is no Enrollment Period for such Fiscal Year, the period commencing on the anniversary of the first day of the most recent preceding Enrollment Period and ending on the anniversary of the last day of such Enrollment Period) a Participant may execute and file an Additional Plan Election, electing, subject to the approval of the Appropriate Committee, an Additional Deferral Amount for such Elective Plan Year and a Deferral Period (in whole Fiscal Years) in respect of the Required Deferral Amount and any Additional Deferral Amount for such Elective Plan Year of more than five Fiscal Years or, if applicable, a shorter Deferral Period. The Appropriate Committee may approve any election under this Section 4.3 to defer an Additional Deferral Amount and any election of a Deferral Period in excess of five Fiscal Years, or may deny any such request, in its sole discretion. If the Appropriate Committee shall deny any election of an Additional Deferral Amount, then the additional Plan Election shall be deemed to relate only to the Participant's Required Deferral Amount for the Elective Plan Year involved and, if the Appropriate Committee shall deny any election of a Deferral Period in excess of five Fiscal Years, then the Deferral Period applicable to the Required Deferral Amount and any Additional Deferral Amount for the Elective Plan Year involved shall be five Fiscal Years. If at any time there is more than one Elective Plan Year as to any Participant, then the Appropriate Committee shall determine whether or not the additional Plan Election which may be submitted in respect of such Elective Plan Years by such Participant shall relate to one or more than one of such Elective Plan Years. If the Appropriate Committee determines that such Plan Election shall relate to more than one Elective Plan Year, then the additional Plan Election to be filed by such Participant shall constitute an election to defer the Required Deferral Amount of his current compensation for each of such Elective Plan Years. Notwithstanding the foregoing, however, if an Eligible Employee does not elect to defer at least the Required Deferral Amount in respect of any Elective Plan Year, such Eligible Employee shall be ineligible to submit an additional Plan Election in respect of any succeeding Elective Plan Year unless the Appropriate Committee, in its sole discretion, shall determine (including, without limitation, by reason of hardship as contemplated by Section 4.5(a)) that such Eligible Employee shall once again be eligible to elect to defer compensation under this Section 4.3. In the event that the Appropriate Committee shall make the determination contemplated by the preceding sentence in respect of any Elective Plan Year for which the Enrollment Period has already expired, then the Appropriate Committee, may, in its discretion, establish a supplementary enrollment period for the Eligible Employee involved, in which case such supplementary enrollment period shall be deemed the Enrollment Period for such Eligible Employee for purposes of this Plan in respect of the Elective Plan Year involved. <PAGE> 4.4 Election Irrevocable. The election to defer compensation pursuant to a Plan Election or Additional Plan Election, once made for the first, second and third Fiscal Years of a Required Deferral Period or for any Elective Plan Year, shall be irrevocable and shall not be subject to cancellation by the Participant or, except as expressly provided herein, by the Appropriate Committee or the Company. Without limiting the generality of the foregoing, such an election for the first, second and third Fiscal Years of a Required Deferral Period or for any Elective Plan Year shall not be subject to cancellation by a Participant by reason of termination of his employment with the Company or an Affiliate. 4.5 Hardship Exceptions. (a) A Participant may request to be excluded from participating in the Plan in respect of any Plan Year other than his Base Year by filing with the Appropriate Committee during the Enrollment Period occurring during such Fiscal Year (or if there is no Enrollment Period for such Fiscal Year, the period commencing on the anniversary of the first day of the most recent preceding Enrollment Period and ending on the anniversary of the last day of such Enrollment Period) a written request for non-participation, which request shall set forth the circumstances that have arisen since the Enrollment Period in respect of such Plan Year that would make continued participation in the Plan an unanticipated financial hardship for such Participant. The Appropriate Committee, in its sole discretion, shall determine whether or not to grant any such request. A Participant who requests and is granted such an exclusion shall not be eligible to participate in the Plan in respect of the Plan Year for which such request is granted, but shall continue to participate in the Plan in respect of any other Plan Years for which an election has previously been made hereunder and shall be eligible to participate in the Plan for future Plan Years. (b) A Participant may request a reduction in any Deferral Period by one or more Fiscal Years at any time by filing with the Appropriate Committee a written request setting forth the circumstances that have arisen since the Enrollment Period for the related Plan Year that would make the failure to reduce the Deferral Period an unanticipated financial hardship for such Participant. The Appropriate Committee, in its sole discretion, shall determine whether or not to grant any such request and, if so, the number of whole Fiscal Years by which the Deferral Period shall be so reduced. 4.6 Special Elections. The Appropriate Committee shall have the right in its sole discretion to permit a Participant to execute and file with the Appropriate Committee, at such times and on such terms and conditions as the Appropriate Committee shall determine, a Plan Election (a "Special Plan Election") in form provided by the Company, electing to extend the Deferral Period previously selected with respect to any Required Deferral Amount and/or Additional Deferral Amount for such periods and in such proportions as shall be determined by the Appropriate Committee, provided that the Deferral Period being extended shall terminate no earlier than the end of the Fiscal Year following the Fiscal Year in which the Special Plan Election is made, except that any election with respect to the Deferral Period ending on June 30, 1997 shall be made on or before December 31, 1996. The Earnings Adjustment with respect to each Plan Year in any such additional Deferral Period shall be calculated in accordance with Section 5.4(e). <PAGE> SECTION 5 Capital Accumulation Accounts; Cash Balance Accounts 5.1 Annual Credits to Capital Accumulation Accounts. For each Plan Year, the Company shall credit to each Participant, as of the last day of such Plan Year, by means of a bookkeeping entry established and maintained by the Company for each such Participant (a "Capital Accumulation Account"), a number of CAP Units equal to the quotient obtained by dividing the Total Deferral Amount for such Plan Year by the Average Cost Per Share of the Available Shares for such Plan Year. The Available Shares for this purpose shall be the total number of Available Shares for such Plan Year less a number of shares equal to any CAP Units credited to Participants in respect of any fiscal quarter during such Plan Year pursuant to Section 5.3 and less a number of shares equal to the number of CAP Units to be credited to Participants as a Net Earnings Adjustment pursuant to Section 5.10(a) for such Plan Year. Notwithstanding the foregoing, if the aggregate number of CAP Units that otherwise would be credited to the Capital Accumulation Accounts of all Participants pursuant to the first sentence of this Section 5.1 would exceed the number of Available Shares, then the aggregate number of CAP Units to be credited to the Capital Accumulation Accounts of all Participants shall be limited to the number of Available Shares and such aggregate number of CAP Units shall be allocated on a pro rata basis, based on the respective Total Deferral Amounts of each Participant in respect of such Plan Year. The Company shall record CAP Units credited in respect of each Plan Year in a separate subaccount of each Participant's Capital Accumulation Account and any credits or adjustments hereunder to such CAP Units shall be made separately with respect to the CAP Units credited to each such subaccount. 5.2 Cash Balance Account. If the number of CAP Units which the Company is able to credit to Participants in respect of any Plan Year is limited by the third sentence of Section 5.1, then the Company shall also credit to each Participant an amount equal to (a) the Total Deferral Amount for such Plan Year for such Participant, less (b) the product of (i) the number of CAP Units credited to such Participant in respect of such Plan Year and (ii) the Average Cost per Share of the Available Shares taken into account in such determination. Such amounts shall be credited as of the last day of such Plan Year by means of a bookkeeping entry established and maintained by the Company for each Participant (a "Cash Balance Account"). The Company shall record Cash Balances credited in respect of each Plan Year in a separate subaccount of each Participant's Cash Balance Account and any credits or adjustments hereunder to such Cash Balances shall be made separately with respect to each such subaccount. 5.3 Quarterly Credits in Respect of Cash Balances. If there shall exist a Cash Balance in the Cash Balance Account of any Participant on the last day of any fiscal quarter of the Company, including the last day of a Plan Year (a "Quarter End Date"), the Company shall credit the Capital Accumulation Account of each such Participant, as of such Quarter End Date, with a number of additional CAP Units determined by dividing such Cash Balance by the Average Cost Per Share of the Available Shares acquired by the Company and designated by the Board Committee as being allocated to such period. If the aggregate number of CAP Units required to be credited to the Capital Accumulation Accounts of all such Participants pursuant to the preceding sentence would exceed the number of Available Shares, then the aggregate number of CAP Units to be credited shall be limited to the number of Available Shares and such CAP Units shall be allocated on a pro rata basis, based on the respective Cash Balances of each Participant. In connection with any crediting of CAP Units pursuant to this Section 5.3, the Cash Balance of each such Participant shall be reduced by debiting to his Cash Balance Account an amount equal to the product of the number of CAP Units credited to his Capital Accumulation Account and the Average Cost Per Share of the Available Shares acquired by the Company during the annual or quarterly period specified by the Board Committee. <PAGE> 5.4 Earnings Adjustments. For purposes of calculating the Net Earnings Adjustment with respect to any Deferral Year pursuant to Section 5.10, the Earnings Adjustment shall be calculated with respect to such Deferral Year, after making any credits to the Capital Accumulation Accounts of the Participants in respect of the fourth fiscal quarter of such Deferral Year pursuant to Section 5.3, as follows: (a) first, the Company shall determine a dollar amount of interest to be credited to each Participant who had a positive Cash Balance at any time during the Deferral Year by multiplying the daily weighted average amount of each such Participant's Cash Balance (such weighted average to be determined by adding the amounts of the Participant's Cash Balance on each day during such Deferral Year and dividing the total so obtained by the number of days in such Deferral Year) by a percentage equal to the daily average of the highest rates of interest paid by Bear Stearns to its employees from time to time during such Deferral Year on free credit balances; (b) the Company next shall determine a dollar amount to be credited or debited to each Participant in respect of CAP Units credited to such Participant's Capital Accumulation Account as of the first day of the Deferral Year and at all times throughout such Deferral Year ("Full Year Units") by multiplying such number of Full Year Units by the Income Per Share for the Deferral Year; provided, however, that the amount to be credited or debited pursuant to this clause (b) to a Participant whose employment with the Company and its Affiliates was terminated during such Deferral Year shall be the amount determined as aforesaid multiplied by a fraction, the numerator of which shall be the number of whole months in such Deferral Year prior to the month in which his employment terminated and the denominator of which shall be 12; (c) the Company then shall determine a dollar amount to be credited to each Participant in respect of CAP Units credited or debited to his Capital Accumulation Account as of any date subsequent to the first day of the Deferral Year ("Part Year Units") by multiplying such number of Part Year Units by the Income Per Share for the Deferral Year and multiplying the product so obtained by a fraction, the numerator of which shall be the number of whole months in such Deferral Year during which such Part Year Units were so credited (less, in the case of a Participant whose employment by the Company and its Affiliates is terminated in such Deferral Year, the number of whole months following the effective date of such termination, plus one) and the denominator of which shall be 12 (if a Participant's Capital Accumulation Account has been credited with Part Year Units which initially were credited to such Account as of different dates during the Deferral Year, then the calculation required by this clause (c) shall be made separately for each such group of Part Year Units); <PAGE> (d) the Company then shall calculate a dollar amount to be charged to each Participant who has any Additional Deferral Amount by determining the Cost of Carry for such Participant with respect to each Plan Year for which he has any such Additional Deferral Amount and multiplying each such amount by a fraction, the numerator of which shall be the Participant's Additional Deferral Amount for such Plan Year and the denominator of which shall be his Total Deferral Amount for such Plan Year; provided that the charge computed pursuant to this subparagraph (d) resulting from an Additional Deferral Amount in Plan Year 1993 or Plan Year 1994 shall be taken into account only with respect to a Participant who has elected to defer such Additional Deferral Amount for more than five Fiscal Years and then only with respect to Deferral Years after the fifth Deferral Year; (e) the Company then shall calculate a dollar amount to be charged to each Participant who elected to defer any Required Deferral Amount in respect of any Plan Year for more than five Fiscal Years by determining the Cost of Carry for such Participant with respect to each such Plan Year and multiplying each such amount by a fraction, the numerator of which shall be the Participant's Required Deferral Amount for such Plan Year and the denominator of which shall be his Total Deferral Amount for such Plan Year; provided that the charge computed pursuant to this subparagraph (e) shall be taken into account only with respect to Deferral Years after the fifth Deferral Year; (f) the Company shall then calculate an amount to be charged to each Participant whose employment with the Company and its Affiliates has terminated equal to the Cost of Carry for such Participant for such Deferral Year or, if his employment terminated in such Deferral Year, for the portion thereof beginning with the month in which his employment terminated; and (g) finally, (i) if the sum (or net amount) of the amounts determined for a Participant in subparagraphs (a), (b) and (c) above is a positive number and such sum (or net amount) exceeds the aggregate of the charges, if any, determined for such Participant pursuant to subparagraphs (d), (e) and (f) above, then the Earnings Adjustment shall equal such sum (or net amount), as determined for purposes of this Section 5.4, or (ii) if the net amount of the amounts determined for a Participant in subparagraphs (a), (b) and (c) less the aggregate of the charges, if any, determined pursuant to subparagraphs (d), (e) and (f) is a negative number (an "Earnings Charge") and such Participant has a positive Cash Balance, then (A) such Cash Balance first shall be reduced by an amount equal to such Earnings Charge (provided that no such reduction shall be made to the extent the Earnings Charge relates to a negative result from sub-paragraph (b) or (c)) and (B) if, after reducing such Cash Balance to zero, any amount determined in accordance with the preceding clause (ii)(A) remains unapplied, or if such Participant has no Cash Balance, then the Earnings Adjustment shall be zero. <PAGE> 5.5 Book Value Adjustment. For purposes of calculating the Net Earnings Adjustment with respect to any Deferral Year pursuant to Section 5.10, the Book Value Adjustment shall equal the sum of (1) the amount maintained in the Book Value Adjustment Carry Forward Account pursuant to Section 5.10(a), if any, and (2) the product of (a) the total number of CAP Units credited to the Capital Accumulation Account of each Participant as of the last day of such Deferral Year but without including any CAP Units credited on such date pursuant to Sections 5.1, 5.3 and 5.10 multiplied by (b) the difference between Adjusted Book Value Per Share as of the last day of the Deferral Year and Adjusted Book Value Per Share as of the last day of the preceding Deferral Year. 5.6 Overall Cost Limitation. Notwithstanding the provisions of Section 5.10, if the operation of the Plan (without giving effect to this Section 5.6) would result in Adjusted Earnings Per Share for any Fiscal Year being less than 98.5% of Pre-Plan Earnings Per Share for such Fiscal Year, then, after making the other credits and adjustments required by Section 5.3, (a) the Net Earnings Adjustments required by Section 5.10(a) first shall be reduced or eliminated, and (b) if necessary after eliminating all such Net Earnings Adjustments, the Cash Balance Accounts of all Participants shall be reduced or eliminated so that to the extent possible, after giving effect to all such reductions and eliminations, Adjusted Earnings Per Share for such Fiscal Year will be 98.5% of Pre-Plan Earnings Per Share. 5.7 Antidilution Adjustments. In the event of a stock split or if the Company makes any distribution (other than a cash dividend) with respect to Common Stock after the date CAP Units initially are credited to a Participant's Capital Accumulation Account in accordance with this Section 5, the number of CAP Units held in each Participant's Capital Accumulation Account shall be equitably adjusted (as determined by the Appropriate Committee in its sole discretion) to reflect such event. If there shall be any other change in the number or kind of outstanding shares of Common Stock as a result of a recapitalization, combination of shares, merger, consolidation or otherwise, the number of CAP Units credited to each Participant's Capital Accumulation Account shall be equitably adjusted (as determined by the Appropriate Committee in its sole discretion) to reflect such event. 5.8 Apportionment of Credits. Whenever CAP Units are credited to a Participant's Capital Accumulation Account pursuant to Section 5.3 or 5.10 in respect of any Deferral Year, they shall be apportioned among the CAP Units originally credited to such Account in respect of each Plan Year on a pro rata basis, based on the respective number of the CAP Units originally credited in respect of each such Plan Year, and such additional CAP Units shall have the same Termination Date as the original CAP Units to which they are so apportioned. <PAGE> 5.9 Amounts Vested. A Participant shall be fully vested at all times in the CAP Units credited to his Capital Accumulation Account and in the Cash Balance credited to his Cash Balance Account; provided, however, that the establishment and maintenance of, or credits to, such Capital Accumulation Account and Cash Balance Account shall not vest in any Participant or his Beneficiary any right, title or interest in or to any specific asset of the Company. 5.10 Net Earnings Adjustments. (a) After making any credits to the Capital Accumulation Accounts of the Participants in respect of the fourth fiscal quarter of such Deferral Year pursuant to Section 5.3, each Participant's Account shall be adjusted, effective as of the last day of such Deferral Year, as provided in this Section 5.10(a). The Company shall credit the Capital Accumulation Account of each Participant with an additional number of CAP Units (a "Net Earnings Adjustment") equal to the quotient of (i) the difference between the Earnings Adjustment calculated in accordance with Section 5.4 and the Book Value Adjustment calculated in accordance with Section 5.5 for such Deferral Year, divided by (ii) the Average Cost Per Share of the Available Shares acquired by the Company and designated by the Board Committee as being allocated to such period. Notwithstanding the foregoing, however, if (i) the Earnings Adjustment is a negative number or (ii) the Book Value Adjustment exceeds the Earnings Adjustment then no CAP Units shall be credited to the Accounts of any Participants and the amounts of each of such Book Value Adjustment and Earnings Adjustment shall be disregarded and shall not be taken into account for purposes of the Plan in any subsequent Deferral Year. If the aggregate number of CAP Units required to be credited to the Accounts of all Participants pursuant to this Section 5.10(a) shall exceed the number of Available Shares in respect of such Plan Year, then the Company shall credit to each Participant only that number of CAP Units as shall equal the number of Available Shares, on a pro rata basis, based on the number of CAP Units which each Participant otherwise would have been entitled to be credited. In such event, the Company shall also carry forward to subsequent Deferral Years the respective amounts obtained by multiplying each of the Earnings Adjustment and the Book Value Adjustment applicable for each Participant by the fraction which is one minus the quotient obtained by dividing (a) the number of Available Shares by (b) the aggregate number of CAP Units required to be credited pursuant to this Section 5.10(a). Such respective amount shall be credited (or debited) by means of separate bookkeeping entries established and maintained by the Company to the Cash Balance Account in respect of the Earnings Adjustment and a "Book Value Adjustment Carryforward Account" in respect of the applicable Book Value Adjustment of each Participant. The amounts credited to the Cash Balance Account in respect of the Earnings Adjustment shall equal the product of (a) the applicable amount carried forward in respect of Earnings Adjustment and (b) the Average Cost Per Share for the Plan Year involved. (b) Notwithstanding anything in the Plan to the contrary, for purposes of determining Historical Book Value Per Share and Adjusted Book Value Per Share, the Net Earnings Adjustments credited to each Participants' Capital Accumulation Account pursuant to Section 5.10(a) shall be disregarded and in lieu thereof the Earnings Adjustments provided for in Section 5.4 and the Book Value Adjustments provided for in Section 5.5 shall be deemed made without giving effect to Section 5.10(a). In addition, for purposes of calculating the Earnings Adjustment and the Book Value Adjustment (except as required by Section 5.2 any amounts credited to a Book Value Adjustment Carryforward Account in a prior Deferral Year shall be deemed made as a Book Value Adjustment in the year so credited and not carried forward to subsequent Deferral Years. 5.11 Certification of the Board Committee. As a condition to the right of any Participant to receive any shares payable in respect of CAP Units credited to such Participant's Capital Accumulation Account or cash in respect of such Participant's Cash Account, in respect of fractional CAP Units credited to such Participant's Capital Accumulation Account or payable pursuant to Section 6.6, prior to the time CAP Units or cash is credited to the appropriate Accounts of such Participant or a Participant receives cash pursuant to Section 6.6, the Board Committee shall be required to certify, by resolution of the Board Committee or other appropriate action, that the amounts to which such Participant is entitled have been accurately determined in accordance with the provisions of the Plan. <PAGE> SECTION 6 Payment of Benefits 6.1 Distributions. As soon as practicable following each Termination Date, each Participant shall be entitled to receive from the Company, in respect of the Total Deferral Amount for the related Plan Year, a number of shares of Common Stock equal to the Total CAP Units credited to his Capital Accumulation Account in respect of such Plan Year and an amount in cash equal to his Cash Balance, if any, in respect of such Plan Year, each determined as of such Termination Date. 6.2 Accelerated Distributions. Notwithstanding the provisions of Section 6.1 and in lieu of any distribution on a Termination Date selected by a Participant, a Participant may receive a distribution prior to a Termination Date as follows: (a) If a Participant shall die during any Fiscal Year prior to the end of all of his Deferral Periods, the Participant's estate (or his Beneficiary) shall be entitled to receive from the Company, as soon as practicable after the end of the Fiscal Year in which such Participant's death occurs, a number of shares of Common Stock equal to the Total CAP Units credited to his Capital Accumulation Account, as adjusted pursuant to Sections 5.6 and 5.10 as of the end of the Fiscal Year in which such Participant's death occurs, and an amount in cash equal to his Cash Balance, if any, as of the end of the Fiscal Year in which such Participant's death occurs. (b) If a Participant's employment with the Company and its Affiliates shall be terminated for any reason prior to the end of all of his Deferral Periods (other than by reason of death), or if such Participant shall suffer a Disability or shall become a Managing Director Emeritus of Bear Stearns, then such Participant (or his Beneficiary) shall, unless otherwise determined by the Appropriate Committee as hereinafter provided, continue to be bound by, and to be subject to, all the terms and provisions of this Plan, except that (i) in lieu of making any calculations pursuant to subparagraphs (ii) and (iii) of Section 5.4 in respect of the portion of the Deferral Year beginning with the month in which his employment terminates and for any subsequent Deferral Year prior to any Termination Date, the Company shall credit to the Cash Balance Account of such Participant, on an annual basis as of the last day of each Fiscal Year, a dollar amount equal to the cash dividends declared by the Company, in the fiscal quarter of the Company following the fiscal quarter in which his employment terminated or in any subsequent fiscal quarter ending on or prior to a Termination Date, on that number of shares of Common Stock corresponding to the number of CAP Units credited to his Capital Accumulation Account (A) as of the last day of the month before his employment terminates in respect of the Fiscal Year in which his employment terminated and (B) as of the first day of the Fiscal Year after which his employment terminated in respect of all subsequent Fiscal Years, and (ii) notwithstanding the provisions of Section 5.5, the Book Value Adjustment for any Fiscal Year following the Fiscal Year in which his employment terminated shall be zero. For purposes of calculating the Book Value Adjustment for the Fiscal Year in which the employment of a Participant is terminated, the denominator of the fraction referred to in Section 5.5 of the Plan shall be (in lieu of the Adjusted Book Value Per Share on the last day of the Deferral Year for which the adjustment is being made) the Adjusted Book Value Per Share calculated by including in the definition of Adjusted Common Stockholder Equity (in lieu of all increases (or decreases) in retained earnings attributable to net income (or loss) minus all amounts accrued in respect of cash dividends declared with respect to any capital stock of the Company) the amount determined by multiplying (A) the increase (or decrease) in retained earnings in such Fiscal Year attributable to net income (or loss) minus all amounts accrued in respect of cash dividends declared with respect to any capital stock of the Company by (B) a fraction, the numerator of which is the number of months in the Fiscal Year prior to but not including the month in which his employment terminates, and the denominator of which is 12. <PAGE> Notwithstanding the foregoing: (i) the Appropriate Committee shall have the right in its sole discretion (A) to treat a Participant who has suffered a Disability or who has become a Managing Director Emeritus of Bear Stearns as a Participant (1) in all respects under this Plan, (2) to whom the provisions of Section 5.4 but not the provisions of Section 4.1 shall apply or (3) whose employment with the Company and its Affiliates has terminated and to whom the foregoing provisions of this paragraph (b) shall apply, and (B) at any time or from time to time, to change any such treatment with respect to any such Participant to any other such treatment; (ii) the Appropriate Committee shall have the right in its sole discretion to accelerate any Termination Date with respect to any Plan Year of a Participant whose employment with the Company and its Affiliates terminates to the last day of the Fiscal Year in which such employment terminates or to the last day of any subsequent Fiscal Year, in which case the date so determined by the Appropriate Committee with respect to each such Plan Year shall be the Participant's Termination Date for all purposes of this Plan with respect to each such Plan Year. The Appropriate Committee shall give notice of any such determination to the Participant at least ten days prior to the earliest of such accelerated Termination Dates. In addition, if a Participant whose employment with the Company has terminated shall request the Appropriate Committee to accelerate the Termination Date with respect to any Plan Year of such Participant to the last day of the Fiscal Year immediately preceding the Fiscal Year in which such Participant's employment terminates, the Appropriate Committee may in its sole discretion so accelerate the Termination Date with respect to any such Plan Year of such Participant. If the Appropriate Committee takes such action, such Participant's distribution from the Plan for any Plan Year the Termination Date of which is so accelerated shall be based on the Total CAP Units and his Cash Balance at the end of such prior Fiscal Year for each such Plan Year, without giving effect to any adjustments otherwise required to be made during the Fiscal Year in which his employment terminates, including, without limitation, for Net Earnings Adjustments, dividends on the Common Stock, or interest, and the distributions called for in Section 6.1 of the Plan shall be made as soon as practicable after such action is taken by the Appropriate Committee; (iii) Notwithstanding clause (ii) above, the Appropriate Committee shall have the right in its sole discretion to determine that, regardless of the Termination Date with respect to any other Plan Year or Plan Years, the Termination Date with respect to the Plan Year in which the employment of the Participant with the Company and its Affiliates terminates, and the Plan Year immediately preceding such Plan Year if such employment terminates prior to the date on which the Capital Accumulation Account of such Participant is credited pursuant to Section 5.1 hereof with respect to such immediately preceding Plan Year, shall be the last day of the Fiscal Year immediately preceding the Plan Year in which such employment terminates or, if applicable, the prior Plan Year; and (iv) the Appropriate Committee may permit a Participant whose employment with the Company and its Affiliates terminates more than five years after the last day of his first Plan Year and who has elected a Deferral Period of more than five Fiscal Years for any Plan Year to participate in the Plan with respect to any such Plan Year for one or more Fiscal Years (but not beyond his Termination Date as determined in accordance with his applicable Plan Election) on substantially the same terms as other Participants whose employment has not terminated, in which case the Capital Accumulation Account of such Participant shall continue to be adjusted in the manner provided in Section 5.10 for other Participants except that subparagraph (f) of Section 5.4 shall apply to such a Participant, and the Termination Date with respect to each such Plan Year shall be the last day of such Fiscal Year as shall be determined by the Appropriate Committee. <PAGE> (c) If a Participant shall take a Personal Leave of Absence prior to the end of all his Deferral Periods, the Appropriate Committee shall have the right in its sole discretion to require the Participant to become subject to the provisions of paragraph (b) above (to the same extent as a Participant whose employment had terminated) during the period of such Personal Leave of Absence, except that in the event the Participant resumes full-time employment after the first day of a Fiscal Year, all calculations under this Plan with respect to such Fiscal Year shall be made by treating the Participant in the same manner as a full-time employee for the number of full months of such employment during such Fiscal Year and as a Participant whose employment had been terminated for the balance of such Fiscal Year. If the Appropriate Committee shall not take such action the Participant shall continue to be treated under this Plan on the same basis as a Participant who is not on a Personal Leave of Absence. (d) In addition, in the event of hardship, actual or prospective change in tax laws, or any other unforeseen or unintended circumstance or event (including, without limitation, if the tax laws of any foreign jurisdiction do not provide for tax consequences to Participants or the Company that are comparable to those provided under United States tax laws), or if desirable to preserve the deductibility for federal income taxes of compensation paid or payable by the Company to any Participant, the Appropriate Committee, in its sole discretion, may accelerate any Termination Date of any Participant to the last day of any Fiscal Year, in which case the accelerated date determined by the Appropriate Committee shall be the Termination Date for all purposes of this Plan. (e) Notwithstanding anything else contained in this Plan, upon determination by the Appropriate Committee to accelerate any Termination Date or distribution of payment pursuant to this Plan, in consideration of such decision, the Appropriate Committee shall require the Participant to execute an agreement, in form and substance satisfactory to the Appropriate Committee, providing for the Participant's agreement not to solicit any employees of the Company for a period terminating on the last deferral date when the Participant would have otherwise received a distribution from the Plan; and the Appropriate Committee may require, in its sole discretion, the Participant to further agree to such terms and conditions as determined by the Appropriate Committee in its sole discretion. 6.3 Change in Control and Parachute Limitation. Notwithstanding the provisions of Sections 6.1 and 6.2, within sixty (60) days of the occurrence of a Change in Control, each Participant shall be entitled to receive from the Company that number of shares of Common Stock which is equal to the Total CAP Units credited to his Capital Accumulation Account as of the date of such Change in Control and an amount in cash equal to his Cash Balance, if any, as of such date; provided, however, no amount shall be immediately distributable or payable under the Plan if and to the extent that the Appropriate Committee determines that such distribution or payment (taken together with any other payment received or to be received by the Participant from the Company or any of its Affiliates in connection with a Change in Control) would constitute an "excess parachute payment" under section 280G of the Code, which would cause such amount to be subject to an excise tax to the recipient or to be nondeductible to the Company or any of its Affiliates, or would subject a Reporting Person to liability under Section 16(b) of the Exchange Act or any rule or regulation thereunder by reason of transactions or events occurring on or prior to the occurrence of the Change in Control. Payment of amounts not distributed by reason of this Section 6.3 shall be made as soon as practicable, consistent with this Section 6.3. <PAGE> 6.4 Additional Distributions in Certain Cases. In addition to the amounts provided by Section 6.1, 6.2 or 6.3, if (a) upon making any distribution to any Participant, the Company determines that the Company or Bear Stearns would realize a tax benefit calculated at its Marginal Tax Rate in the year of such distribution (without giving effect to any carryovers or carrybacks of losses, credits or deductions from any prior or succeeding Fiscal Year) in excess of the amount of Deferred Tax Benefit in respect of its liability to such Participant on account of such distribution, and (b) such Participant's Cash Balance Account or the number of CAP Units credited to his Capital Accumulation Account had been reduced in a prior Fiscal Year as a result of the application of subparagraphs (d) or (e) of Section 5.4 or Section 5.6, then at the time of the distribution pursuant to this Section 6 the Company also shall pay to such Participant, in cash, an additional amount equal to the lesser of (i) the amount by which the actual tax benefit to be received by the Company or Bear Stearns exceeds such Deferred Tax Benefit and (ii) the amount by which such Participant's Cash Balance Account or Capital Accumulation Account was so reduced. Notwithstanding the foregoing, a Participant shall not be entitled to any payment from the Company pursuant to this Section 6.4 in respect of any reduction in his Cash Balance Account or in the number of CAP Units credited to his Capital Accumulation Account for any period commencing with the first day of the month following the month in which his employment by the Company and its Affiliates was terminated. 6.5 Special Provisions for Reporting Persons. If required by Rule 16b-3, shares of Common Stock distributed to Participants who are Reporting Persons shall bear an appropriate legend to the effect that such shares of Common Stock may not be transferred for a period of six (6) months after they are credited to the Account of such Participant. 6.6 Form of Payments. Except as otherwise provided herein, all distributions in respect of CAP Units to be made to a Participant (or his Beneficiary) under the Plan shall be made in whole shares of Common Stock. Payment in respect of any fractional CAP Unit shall be made in cash based upon the Fair Market Value of a share of Common Stock on the second Business Day preceding the payment date. Shares of Common Stock distributed hereunder may be treasury shares, shares of authorized but unissued Common Stock, or a combination thereof, and shall be fully paid and nonassessable. If shares of Common Stock are distributed pursuant to Sections 6.1, 6.2(a) or 6.2(b) to any Participant after the record date for any cash dividend occurring after the Termination Date with respect to which such shares are distributed or, in the cases of Sections 6.2(a) or 6.2(b), after the end of the Fiscal Year in which the death or Disability of a Participant occurs, then such Participant (or his estate or Beneficiary) shall be entitled to receive from the Company an amount of cash equal to the cash dividends per share payable to holders of record on such record date multiplied by the number of shares of Common Stock so distributed to such Participant after such record date. <PAGE> 6.7 Registration and Listing of Common Stock. Prior to the date on which any shares of Common Stock are required to be issued to any Participant under this Plan without taking into account any acceleration of such distribution date pursuant to the provisions of Section 6.2 of the Plan, the Company shall file a registration statement (a "Registration Statement") on Form S-3 and/or Form S-8 (or any successor form then in effect) under the Securities Act, with respect to all shares of Common Stock which the Company then estimates are distributable under the Plan; provided, however, that the Company need not file a Registration Statement hereunder if, prior to such date, the Company receives a written opinion of counsel to the effect that such shares of Common Stock may be sold, transferred or otherwise disposed of under the Securities Act without registration thereunder. The Company shall use its best efforts to have any such Registration Statement declared effective as soon as reasonably practicable after filing and shall use reasonable efforts to keep each such Registration Statement continuously in effect until all shares of Common Stock to which such Registration Statement relates have been so issued, and for a two-year period thereafter. From time to time the Company also shall amend such Registration Statement to cover any additional shares of Common Stock which become distributable under the Plan and otherwise would not be covered by such Registration Statement. In the event that Participants would be precluded from selling any shares of Common Stock distributable hereunder unless such shares were registered or qualified under the securities or "blue sky" laws of any state (or otherwise received the approval of any state governmental or regulatory authority), then the Company shall use its best efforts to cause such shares of Common Stock to be duly registered or qualified (or to receive such approval) as may be required. If the shares of Common Stock distributable hereunder satisfy the criteria for listing on any exchange on which the Common Stock is then listed, then (unless such shares of Common Stock already are listed on such exchange) the Company shall apply for and use its best efforts to obtain a listing of all such shares of Common Stock on such exchange. All costs and expenses incurred by the Company in connection with the satisfaction of its obligations under this Section 6.7 shall be borne by the Company. The Company shall immediately notify each Participant in the event that a Registration Statement which has been filed and remains effective contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. Upon receipt of such notice, no Participant shall sell or agree to sell any shares of Common Stock pursuant to such Registration Statement unless and until the Company has notified each Participant that such Registration Statement no longer contains such misstatement or omission. In the event that shares of Common Stock are issued to Participants hereunder other than pursuant to a Registration Statement, then, unless the Company shall have obtained the opinion of counsel referred to above, each certificate representing such shares shall bear a legend substantially to the following effect: The securities represented by this Certificate have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws, and may not be sold, assigned, transferred, pledged or otherwise disposed of except in compliance with the requirements of such Act. By submitting a Plan Election, each Participant shall be deemed to have agreed to the foregoing provisions of this Section 6.7. <PAGE> 6.8 Reservation of Shares. The Company, as soon as practicable after the end of each Fiscal Year prior to the termination of this Plan, shall reserve such number of shares of Common Stock (which may be authorized but unissued shares or treasury shares) as shall be required so that the total of all shares reserved hereunder, including shares reserved pursuant to this Section 6.8 in preceding Fiscal Years, shall be equal to the number of shares of Common Stock which the Company would be obligated to issue to all Participants in accordance with the terms of the Plan if the Plan were to be terminated at such time. SECTION 7 Source of Payments Notwithstanding any other provision of this Plan, the Company shall not be required to establish a special or separate fund or otherwise segregate any assets to assure any payments hereunder. If the Company shall make any investment to aid it in meeting its obligations hereunder, a Participant and his Beneficiary shall have no right, title or interest whatsoever in or to any such investments. Nothing contained in this Plan, and no action taken pursuant to its provisions, including without limitation the acquisition of any shares of Common Stock by the Company, shall create or be construed to create a trust of any kind between the Company and any Participant or Beneficiary. To the extent that any Participant or Beneficiary acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of a general unsecured creditor of the Company. SECTION 8 Administration of the Plan 8.1 Authority of Committee. The Plan shall be administered by the Appropriate Committees, which shall have full power and authority as set forth herein to interpret, to construe and to administer the Plan and to review claims for benefits under the Plan. Each Appropriate Committee's interpretations and constructions of the Plan and actions thereunder, including but not limited to the determination of the amounts to be credited to any Capital Accumulation Account or Cash Balance Account, shall be binding and conclusive on all persons and for all purposes. 8.2 Duties of Committee. The Appropriate Committees shall cause the Company to establish and maintain records of the Plan, of each Capital Accumulation Account and Cash Balance Account and of each subaccount thereof established for any Participant hereunder. Either of the Appropriate Committees may engage such certified public accountants, who may be accountants for the Company, as it shall require or may deem advisable for purposes of the Plan, may arrange for the engagement of such legal counsel, who may be counsel for the Company, and may make use of such agents and clerical or other personnel as it shall require or may deem advisable for purposes of the Plan. Each such Committee may rely upon the written opinion of the accountants and counsel engaged by it. Subject to any limitations imposed by applicable law (including Rule 16b-3), either Appropriate Committee may delegate to any agent or to any subcommittee or member of such Committee its authority to perform any act hereunder, including, without limitation, those matters involving the exercise of discretion, provided that such delegation of authority shall be subject to revocation at any time at the discretion of such Committee. <PAGE> 8.3 Purchase of Common Stock. The Company intends to purchase shares of Common Stock in the open market or in private transactions or otherwise during the term of the Plan for issuance to Participants in accordance with the terms hereof. Shares of Common Stock shall be purchased for purposes of the Plan and for purposes of the PUP Plan on a combined or joint basis without identifying shares so purchased as having been purchased for this Plan or the PUP Plan. Notwithstanding the foregoing, the Company will specifically designate all such shares at the time they are purchased as having been purchased for the purpose of making determinations under this Plan and the PUP Plan; provided, however, that any shares so purchased shall be the sole property of the Company and no Participant or Beneficiary shall have any right, title or interest whatsoever in or to any such shares. All shares of Common Stock purchased by the Company on or after July 1, 1992 and designated by the Company as having been purchased for the CAP Plan shall be considered, notwithstanding such designation, to have been purchased for purposes of both this Plan and the PUP Plan. The acquisition of Common Stock as described above will be subject to the sole discretion of the Board Committee, which shall determine the time and price at which and the manner in which such shares are to be acquired, subject to applicable law. In making any such determination, the Board Committee may, but shall in no event be obligated to, consider the recommendations of the Advisory Committee. 8.4 Plan Expenses. The Company shall pay the fees and expenses of accountants, counsel, agents and other personnel and all other costs of administration of the Plan. 8.5 Indemnification. To the maximum extent permitted by applicable law, no member of any Committee shall be personally liable by reason of any contract or other instrument executed by him or on his behalf in his capacity as a member of such Committee or for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless, directly from its own assets (including the proceeds of any insurance policy the premiums of which are paid from the Company's own assets), each member of each Committee and each other director, officer, employee or agent of the Company to whom any duty or power relating to the administration or interpretation of the Plan or to the management or control of the assets of the Plan may be delegated or allocated, against any cost or expense (including fees, disbursements and other charges of legal counsel) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan, unless arising out of such person's own fraud, willful misconduct or bad faith. The foregoing shall not be deemed to limit the Company's obligation to indemnify any member of any Committee under the Company's Restated Certificate of Incorporation or Bylaws, or under any other agreement between the Company and such member. <PAGE> 8.6 Maximum Number of Shares. (a) The aggregate number of CAP Units that may be credited to Participants' Capital Accumulation Accounts under the Plan for any Plan Year shall not exceed the equivalent number of shares of Common Stock equal to the sum of 15% of the outstanding shares of Common Stock as of the last day of such Plan Year (the "Base Shares") and the number, if any, by which the sum of the Base Shares in all prior Fiscal Years beginning on or after July 1, 1993 exceeds the number of shares credited to Participants' Capital Accumulation Accounts under this Plan in all such prior Fiscal Years. For purposes of determining the number of shares of Common Stock outstanding as of the last day of any Plan Year, such number shall be calculated as the sum of (i) the number of shares of Common Stock outstanding at such year end, (ii) the number of shares underlying CAP Units credited to Participants' Capital Accumulation Accounts as of such date and Earnings Units credited to Participants' Earnings Unit Accounts under the PUP Plan as of such date and (iii) the number of shares underlying CAP Units to be credited to all such Accounts as a result of making any adjustment to such Accounts required by Sections 5.1 and 5.10 in respect of all Fiscal Years ending on or prior to the date of determination and the number of Earnings Units credited to the Earnings Unit Accounts of all Participants in the PUP Plan as a result of making any adjustment to such Accounts required by Section 4.2 of the PUP Plan in respect of all Fiscal Years ending on or prior to the date of such determination. (b) If there shall be any change in the Common Stock of the Company, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, spinoff, split up, dividend in kind or other change in the corporate structure or distribution to the stockholders, appropriate adjustments may be made by the Board Committee (or if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) in the aggregate number and kind of shares subject to the Plan, and the number and kind of shares which may be issued under the Plan. Appropriate adjustments may also be made by the Board Committee in the terms of any awards under the Plan to reflect such changes and to modify any other terms of outstanding awards on an equitable basis as the Board Committee in its discretion determines. 8.7 Forward Repurchases of Common Stock. The Company shall have the right, upon authorization of the Board Committee, to enter into forward contracts for the repurchase from one or more Participants of any or all shares of Common Stock representing CAP Units previously credited to the Capital Accumulation Accounts of such Participants with respect to any Plan Year and distributed on or after the relevant Termination Date of the Deferral Period ending in the then current Fiscal Year, having such terms and conditions as shall be determined by the Board Committee, for a purchase price per share equal to the average of the closing prices of the Common Stock as reported on the New York Stock Exchange Consolidated Tape for each day of trading in the Common Stock during the period from the effective date of the contract to the date of repurchase, provided that such price is within the range defined by the Board Committee, and provided further that a contract may not be entered into more than twelve (12) months prior to the expiration of the applicable Deferral Period and will terminate, and be null and void, unless the Company satisfies performance goals established by the Board Committee in writing, by resolution of the Board Committee or other appropriate action, not later than ninety (90) days after the commencement of the Fiscal Year to which the performance goals relate, and certified by the Board Committee in writing as having been satisfied prior to the relevant Termination Date. The formula for calculating the performance goals shall be based upon one or more of the following criteria, individually or in combination, adjusted in such manner as the Board Committee shall determine, for a period of not less than nine (9) months of the applicable Fiscal Year: (a) pre-tax or after-tax return on equity; (b) earnings per share; (c) pre-tax or after-tax net income; (d) business unit or departmental pre-tax or after-tax income; (e) book value per share; (f) market price per share; (g) relative performance to peer group companies; (h) expense management; and (i) total return to stockholders. <PAGE> SECTION 9 Amendment and Termination The Plan shall terminate when all distributions required to be made hereunder have been made following the last Termination Date. The Plan may be amended, suspended or earlier terminated, in whole or in part as to a particular Plan Year, and at any time and from time to time, by the Board Committee, but except as provided below no such action shall retroactively impair or otherwise adversely affect the rights of any person to benefits under the Plan which have accrued prior to the date of such action. Except as provided in the following sentence, if the Plan is terminated prior to the end of any Fiscal Year, (i) Participants' Plan Elections in respect of the Plan Year in which such termination occurs and any subsequent Plan Year shall be canceled, (ii) the Company shall credit the Capital Accumulation Accounts of all Participants (other than those whose employment with the Company and its Affiliates had terminated prior to the date the Plan terminates, except a Participant referred to in subparagraph (iii) of Section 6.2(b)) in the manner provided in Section 5.10 in respect of the portion of the Company's Fiscal Year ended on the date of such termination, and (iii) as soon as practicable following the end of the Fiscal Year in which such termination occurs, the Company shall deliver to each Participant the number of shares of Common Stock corresponding to the number of CAP Units credited to his Capital Accumulation Account and an amount in cash equal to his Cash Balance which the Participant otherwise would be entitled to receive pursuant to Section 6 as of the designated Termination Date in respect of the Plan Year or Plan Years involved. Notwithstanding the foregoing, if the Company shall determine that the Plan should be terminated immediately, either in its entirety or in part in respect of any Plan Year, no adjustments or credits shall be made to the Capital Accumulation Accounts of the Participants pursuant to Section 5 in respect of the Fiscal Year in which such termination occurs and each Participant shall be entitled to receive from the Company, as soon as practicable following the date of such termination, shares of Common Stock and/or amounts in cash determined in accordance with Section 6 hereof as if the Termination Date in respect of the Plan Year or Plan Years involved were the last day of the Fiscal Year preceding the Fiscal Year in which such termination occurs. <PAGE> In such event, however, the Capital Accumulation Account of each Participant who is an employee of the Company and/or its Affiliates (or who is a Participant who has suffered a Disability or who has become a Managing Director Emeritus of Bear Stearns and whom the Appropriate Committee shall have determined to treat in the manner specified in clause (1) or (2) of subparagraph (i) of Section 6.2(b)) on the date of such termination shall be adjusted in respect of the Fiscal Year in which such termination occurs as follows: Each such Account shall be credited with a Net Earnings Adjustment for the Fiscal Year in which such termination occurs except that, for purposes of computing such Net Earnings Adjustment, Income Per Share for purposes of calculating the Earnings Adjustment shall be computed for each terminated Plan Year based only on the consolidated income or loss before taxes of the Company and its subsidiaries accrued from the beginning of such Fiscal Year through and including the end of the month in which such termination occurred, and the Book Value Adjustment for the Fiscal Year in which such termination occurs shall be calculated on the basis of the shares distributed pursuant to the preceding sentence in respect of each terminated Plan Year, provided that for purposes of computing such Book Value Adjustment, the definition of Adjusted Common Stockholders' Equity used in the computation of Adjusted Book Value Per Share shall be modified by deleting the adjustments to Adjusted Common Stockholders' Equity specified therein and substituting in lieu thereof the following: "plus all increases (or less any decreases) in retained earnings of the Company and its subsidiaries attributable to net income (or loss), determined on a consolidated basis, minus all amounts accrued in respect of cash dividends declared with respect to any capital stock of the Company during such Fiscal Year, for the period from the beginning of such Fiscal Year through and including the month in which such termination occurred." If the Plan is not terminated in its entirety but one or more Plan Years are terminated, then any amounts credited to Participants' Accounts pursuant to the preceding sentence shall continue to be subject to the provisions of the Plan for the balance of the original Deferral Period with respect to the terminated Plan Year or Plan Years, as if such Plan Year or Plan Years had not been terminated. If the Plan is terminated in its entirety, then as soon as may be practicable thereafter, the Company shall deliver to each Participant (in addition to amounts distributable pursuant to the fourth sentence of this paragraph) a number of shares of Common Stock equal to the number of CAP Units credited to each such Participant's Account pursuant to the second preceding sentence, provided that if the aggregate number of such CAP Units exceeds the number of Available Shares for such Fiscal Year as of the date of determination, then the Company shall deliver to each such Participant only that number of shares of Common Stock as shall equal the number of Available Shares on a pro rata basis, based on the number of shares which each Participant otherwise would have been entitled to receive, and shall distribute to each Participant an amount in cash equal to the number of additional shares of Common Stock that would have been distributed to such Participant but for the limitation contained in this sentence, multiplied by the Average Cost Per Share of the Available Shares in respect of such Fiscal Year. <PAGE> SECTION 10 Designation of Beneficiaries 10.1 General. Each Participant may file with the Appropriate Committee a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, which the Participant is entitled to receive under the Plan upon his death. A Participant, from time to time, may revoke or change his Beneficiary designation without the consent of any prior Beneficiary by filing a new such designation with the Appropriate Committee. The most recent such designation received by the Appropriate Committee shall be controlling; provided, however, that no designation, or change of revocation thereof, shall be effective unless received by the Appropriate Committee prior to the Participant's death, and in no event shall any such designation be effective as of a date prior to such receipt. 10.2 Lack of Designated Beneficiary. If no such Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, or if such designation conflicts with law, the Participant's estate shall be deemed to have been designated as his Beneficiary and shall receive the payment of the amount, if any, payable under the Plan upon his death. If the Appropriate Committee is in doubt as to the right of any person to receive such amount, the Committee may cause the Company to retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Appropriate Committee may pay and deliver such amount into any court of appropriate jurisdiction, and such payment shall be a complete discharge of the liability of the Plan and the Company therefor. SECTION 11 General Provisions 11.1 Successors. The Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns, and each Participant and his Beneficiary. 11.2 No Continued Employment. Neither the Plan nor any action taken thereunder shall be construed as giving to a Participant the right to be retained in the employ of the Company or any of its Affiliates or as affecting the right of the Company or any of its Affiliates to dismiss any Participant. 11.3 Withholding. As a condition to receiving any distribution or payment of amounts hereunder, the Company may require the Participant to make a cash payment to the Company or, in its sole discretion, upon the request of a Participant, may withhold from any amount or amounts payable under the Plan, in either case, in an amount equal to all federal, state, city or other taxes as may be required to be withheld in respect of such payments pursuant to any law or governmental regulation or ruling. 11.4 Non-alienation of Benefits. No right to any amount payable at any time under the Plan may be assigned, transferred, pledged or encumbered, either voluntarily or by operation of law, except as expressly provided herein or as may otherwise be required by law. If, by reason of any attempted assignment, transfer, pledge or encumbrance, or any bankruptcy or other event happening at any time, any amount payable under the Plan would be made subject to the debts or liabilities of the Participant or his Beneficiary or would otherwise not be enjoyed by him, then the Appropriate Committee, if it so elects, may terminate such person's interest in any such payment and direct that the same be held and applied to or for the benefit of the Participant, his Beneficiary or any other person or persons deemed to be the natural objects of his bounty, taking into account the expressed wishes of the Participant (or, in the event of his death, his Beneficiary). 11.5 Incompetency. If the Appropriate Committee shall find that any person to whom any amount is or was distributable or payable hereunder is unable to care for his affairs because of illness or accident, or has died, then the Appropriate Committee, if it so elects, may direct that any payment due him or his estate (unless a prior claim therefor has been made by a duly appointed legal representative) or any part thereof be paid or applied for the benefit of such person or to or for the benefit of his spouse, children or other dependents, an institution maintaining or having custody of such person, any guardian or any other person deemed by such Appropriate Committee to be a proper recipient on behalf of such person otherwise entitled to payment, or any of them, in such manner and proportion as such Appropriate Committee may deem proper. Any such payment shall be in complete discharge of the liability therefor of the Company, the Plan, the Committee or any member, officer or employee thereof. <PAGE> 11.6 Offsets. To the extent permitted by law, the Company or any of its Affiliates shall have the absolute right to withhold any shares of Common Stock or any amounts otherwise required to be distributed or paid to any Participant or Beneficiary under the terms of the Plan, to the extent of any amount owed or which in the sole judgment of the Appropriate Committee may in the future be owed for any reason by such Participant, in the case of a payment to such Participant, or to the extent of any amount owed or which in the sole judgment of the Appropriate Committee may in the future be owed for any reason by the Participant or such Beneficiary, in the case of payment to a Beneficiary, to the Company or any of its Affiliates, and to set off and apply the amounts so withheld to payment of any such amount ultimately determined by the Appropriate Committee, in its sole discretion, to be owed to the Company or any of its Affiliates, whether or not such amounts shall then be immediately due and payable and in such order or priority as among such amounts owed as the Appropriate Committee, in its sole discretion, shall determine. In determining the amount of a permitted offset under this Section 11.6, any shares of Common Stock required to be distributed to a Participant or a Beneficiary shall be valued at the Fair Market Value of such Shares on the date of offset. 11.7 Notices, etc. All elections, designations, requests, notices, instructions and other communications from a Participant, Beneficiary or other person to any Appropriate Committee required or permitted under the Plan shall be in such form as is prescribed from time to time by the Appropriate Committee, shall be mailed by first-class mail or delivered to such location as shall be specified by the Appropriate Committee, and shall be deemed to have been given and delivered only upon actual receipt thereof at such location. 11.8 Other Benefits. The benefits, if any, payable under the Plan shall be in addition to any other benefits provided for Participants. 11.9 Interpretation, etc. The captions of the sections and paragraphs of this Plan have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions of the Plan. References to sections herein are to the specified sections of this Plan unless another reference is specifically stated. The masculine pronoun wherever used herein shall include the feminine pronoun, and a singular number shall be deemed to include the plural unless a different meaning is plainly required by the context. 11.10 Laws; Severability. The Plan shall be governed by, and construed in accordance with, the laws of the State of New York, except to the extent preempted by the Employee Retirement Income Security Act of 1974, as amended. If any provision of the Plan shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions shall continue to be effective. 11.11 Effective Date; Board Committee and Stockholder Approval. This Plan shall be subject to the approval by a vote of the stockholders of the Company at the 1993 Annual Meeting, and such stockholder approval shall be a condition to the right of a Participant to receive any benefits hereunder other than CAP Units and cash credited to Participants' Accounts prior to such approval. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>3 <TEXT> ` Exhibit 10 (a) (5) THE BEAR STEARNS COMPANIES INC. PERFORMANCE COMPENSATION PLAN (Amended and Restated as of October 28, 1999) Section 1. Purpose. The purposes of The Bear Stearns Companies Inc. Performance Compensation Plan, as amended and restated (the "Plan") are (i) to compensate certain Senior Managing Directors of The Bear Stearns Companies Inc. and its subsidiaries (the "Company") on an individual basis for significant contributions to the Company and (ii) to stimulate the efforts of such persons by giving them a direct interest in the performance of the Company. Section 2. Term. The Plan shall be effective as of July 1, 1998 (the "Effective Date"), and shall be applicable for the five (5) full fiscal years of the Company ending June 30, 2003, unless earlier terminated by the Company pursuant to Section 9. Section 3. Coverage. For purposes of the Plan, the term "Participant" shall include for each fiscal year each Senior Managing Director so designated by the Compensation Committee within 90 days following the first day of such fiscal year. Section 4. Base Salary. 4.1. Each Participant shall receive a salary of $200,000 per annum ("Base Salary"). The Base Salary of the Participants may be increased from time to time by the Compensation Committee of the Board (the "Compensation Committee") by amendment of the Plan pursuant to Section 9. 4.2. Notwithstanding the provisions of Section 4.1 above, in the event a Participant is not a Senior Managing Director for an entire fiscal year, his Base Salary for such fiscal year shall be computed by multiplying such Base Salary as computed under Section 4.1 by a fraction, the numerator of which is the number of days in such fiscal year during which such Participant was a Senior Managing Director and the denominator of which is the number of days in the fiscal year. Any Base Salary shall be in addition to any base salary payable with respect to periods during the fiscal year in which a Participant was not a Senior Managing Director. Section 5. Annual Bonus Pools. 5.1. For each fiscal year of the Company, each Participant shall be entitled to receive an award of a bonus (the "Bonus"), payable from one or more annual bonus funds (the "Annual Bonus Pools") in an amount not to exceed the amount provided for in Section 6. A Bonus under the Plan shall be the sole bonus payable with respect to a fiscal year to each Participant ("Full Year Participant") who was a Senior Managing Director on the date that proportionate shares of the Annual Bonus Pools for such fiscal year were determined by the Compensation Committee and who remains a Senior Managing Director at all times thereafter during such fiscal year. For each fiscal year, each Participant who was not a Full Year Participant shall be entitled to such a Bonus, if any, for the portion of such fiscal year not covered by the Plan, determined in accordance with the procedures applicable to employees who are not Senior Managing Directors, in addition to the Bonus, if any, payable pursuant to the Plan. <PAGE> 5.2. For each fiscal year, the formula for calculating the Annual Bonus Pools shall be determined by the Compensation Committee in writing, by resolution of the Compensation Committee or other appropriate action, not later than 90 days after the commencement of such fiscal year. Such formula shall be based upon one or more of the following criteria, individually or in combination, adjusted in such manner as the Compensation Committee shall determine: (a) pre-tax or after-tax return on equity; (b) earnings per share; (c) pre-tax or after-tax net income; (d) business unit or departmental pre-tax or after-tax income; (e) book value per share; (f) market price per share; (g) relative performance to peer group companies; (h) expense management; and (i) total return to stockholders. 5.3. As a condition to the right of a Participant to receive any Bonus under this Plan, the Compensation Committee shall first be required to certify in writing, by resolution of the Compensation Committee or other appropriate action, that the Bonus has been accurately determined in accordance with the provisions of this Plan. 5.4. The Compensation Committee shall have the right to reduce the Bonus of any Participant in its sole discretion at any time and for any reason prior to the certification of the Bonus otherwise payable to such Participant pursuant to Section 5.3 hereof. 5.5. The maximum amount allocable by the Compensation Committee to the Annual Bonus Pool related to Participants who are members of the executive committee of Bear, Stearns & Co. Inc. in the aggregate for any fiscal year shall not exceed $150,000,000. The maximum amount allocable to any individual Participant who is not a member of such executive committee shall not exceed $15,000,000. Section 6. Allocations. 6.1. Prior to the commencement of each fiscal year, or not later than 90 days after the commencement of each fiscal year, the Compensation Committee shall determine in writing, by resolution of the Compensation Committee or other appropriate action, each Participant's proportionate share of the Annual Bonus Pools for such fiscal year, which shall not exceed in respect of any Participant who is a member of such executive committee 30% of the amount of such Annual Bonus Pool. <PAGE> 6.2. Notwithstanding anything in Section 6.1 to the contrary, any Participant who ceases to be a Senior Managing Director for any reason prior to the end of such fiscal year shall be entitled to a Bonus computed as follows: A Bonus first shall be computed as if such Participant had been a Senior Managing Director for the full fiscal year, and such Bonus then shall be multiplied by a fraction the numerator of which shall be the number of days in the fiscal year through the date the Participant ceased to be a Senior Managing Director and the denominator of which shall be the number of days in the fiscal year; provided, however, that if the application of the preceding clause would cause the total Bonuses payable under the Plan to exceed the Annual Bonus Pools, the Bonuses payable to each Participant shall be reduced pro rata, so that the total of all Bonuses shall equal the Annual Bonus Pools. If a Participant ceases to be a Senior Managing Director after the end of the fiscal year in respect of which such Bonus is payable, the amounts thereof nonetheless shall be payable to him or his estate, as the case may be. 6.3. Except as hereinafter provided, Bonuses for a fiscal year shall be payable as soon as practicable following the certification thereof by the Compensation Committee for such fiscal year. In its discretion, the Compensation Committee may authorize, prior to the final determination of Participants' Bonuses for such fiscal year, payments on account of Bonuses payable hereunder to one or more Participants entitled to such Bonuses, (a) during the last month of such fiscal year, in an amount not exceeding 95% of the aggregate amount that would be payable to such Participant or Participants hereunder as determined by the Controller or Chief Accounting Officer of the Company (so long as he is not a Participant) on the basis of his good faith estimate, (b) during the last ten calendar days of such fiscal year or after the end of such fiscal year, in an amount not to exceed 98% of the aggregate amount that would be payable to such Participant or Participants hereunder as determined by the Controller or Chief Accounting Officer of the Company (so long as he is not a Participant) on the basis of his good faith estimate, and (c) at any time during such fiscal year or after the end of such fiscal year to a Participant who ceases to be a Senior Managing Director for any reason prior to the end of such fiscal year. Within the limitations set forth in the preceding sentence, the Compensation Committee may authorize one or more such "on account" payments, but the aggregate amount of any such on account payments shall not exceed the aggregate amount permitted to be paid pursuant to the Plan with respect to the same fiscal year. In connection with any such "on account" payments, the Compensation Committee shall require an undertaking or other assurance by or on behalf of the Participant receiving such payment to repay the Company the amount, if any, by which such "on account" payment exceeds the actual amount determined to be due to such person under the Plan in respect of such fiscal year. Any "on account" payments received prior to the end of a fiscal year shall be discounted to reasonably reflect the time value of money from the date of payment to the date 30 days after the end of the fiscal year. <PAGE> 6.4. The Compensation Committee may determine that payment of a portion of the Bonuses shall be deferred, the periods of such deferrals and any interest, not to exceed a reasonable rate, to be paid in respect of deferred payments. The Compensation Committee may also define such other conditions of payments of Bonuses as it may deem desirable in carrying out the purposes of the Plan. 6.5. In any fiscal year, any balance in the Annual Bonus Pools for any reason, including the limitation contained in Section 6.1, the forfeiture of a Bonus under Section 6.2, the reduction of a Bonus under Section 5.4, or otherwise, shall not be distributed to other Participants and shall not be carried forward or be available for distribution as Bonuses under the Plan in a future year or years. Section 7. Administration and Interpretation. The Plan shall be administered by the Compensation Committee, which shall have the sole authority to interpret and to make rules and regulations for the administration of the Plan. The Compensation Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Compensation Committee deems necessary or desirable to carry it into effect. Any decision of the Compensation Committee in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. No member of the Compensation Committee and no officer of the Company shall be liable for anything done or omitted to be done by him or her, by any other member of the Compensation Committee or by any officer of the Company in connection with the performance of duties under the Plan, except for his or her own willful misconduct or as expressly provided by statute. The Compensation Committee may request advice or assistance or employ such persons (including, without limitation, legal counsel and accountants) as it deems necessary for the proper administration of the Plan. Section 8. Administrative Expenses. Any expense incurred in the administration of the Plan shall be borne by the Company out of its general funds and not charged against the Annual Bonus Pools, except insofar as such expenses shall be taken into account in determining the components of the Annual Bonus Pools hereunder. Section 9. Amendment or Termination. The Compensation Committee of the Company may from time to time amend the Plan in any respect or terminate the Plan in whole or in part, provided that no such action shall retroactively impair or otherwise adversely affect the rights of any Participant to benefits under the Plan which have accrued prior to the date of such action. Section 10. No Assignment. The rights hereunder, including without limitation rights to receive a Base Salary or Bonus, shall not be sold, assigned, transferred, encumbered or hypothecated by an employee of the Company (except by testamentary disposition or intestate succession), and, during the lifetime of any recipient, any payment of Base Salary or a Bonus shall be payable only to such recipient. <PAGE> Section 11. The Company. For purposes of this Plan, the "Company" shall include the successors and assigns of the Company, and this Plan shall be binding on any corporation or other person with which the Company is merged or consolidated, or which acquires substantially all of the assets of the Company, or which otherwise succeeds to its business. Section 12. Stockholder Approval. This Plan shall be subject to approval by the affirmative vote of a majority of the shares cast in a separate vote of the stockholders of the Company at the 1998 Annual Meeting of Stockholders, and such stockholder approval shall be a condition to the right of a Participant to receive any Bonus hereunder. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>4 <TEXT> Exhibit 10 (a) (6) THE BEAR STEARNS COMPANIES INC. STOCK AWARD PLAN (Amended and Restated as of January 11, 2000) 1. Purpose. The purpose of The Bear Stearns Companies Inc. Stock Award Plan (the "Plan") is to secure for The Bear Stearns Companies Inc. and its successors and assigns (the "Company") and its stockholders the benefits of the additional incentive, inherent in the ownership of the Company's common stock, par value $1.00 per share (the "Common Stock"), by selected key employees of the Company and its subsidiaries who are important to the success and growth of the business of the Company and its subsidiaries and to help the Company and its subsidiaries secure and retain the services of such persons. Compensation awarded under the Plan is intended to qualify for tax deductibility pursuant to the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended from time to time or any successor statute or statutes (the "Code"), to the extent deemed appropriate by the Committee (as defined in Paragraph 2.1). Pursuant to the Plan, such employees will be offered the opportunity to acquire Common Stock through the grant of options and stock appreciation rights in tandem with such options. Options granted under the Plan will be either "incentive stock options," intended to qualify as such under the provisions of Section 422 of the Code, or "nonqualified stock options." For purposes of the Plan, the terms "parent" and "subsidiary" shall mean "parent corporation" and "subsidiary corporation," respectively, as such terms are defined in Sections 424(e) and (f) of the Code. 2. Committee. 2.1 Administration. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). Any vacancy on the Committee, whether due to action of the Board of Directors or due to any other cause, may be filled, and shall be filled if required to maintain a Committee of at least two disinterested persons, by resolution adopted by the Board of Directors. For purposes of the Plan, a person shall be deemed to be a "disinterested person" if, at the time of reference, such person is not, and has not been at any time during the preceding one-year period, eligible to participate in the Plan or any other plan of the Company or any of its affiliates entitling participants therein to acquire stock, stock options or stock appreciation rights of the Company or any of its affiliates. Notwithstanding any of the foregoing, the Board of Directors may designate one or more persons, who at the time of such designation are not disinterested persons, to serve on the Committee effective upon the date such person or persons qualify as disinterested persons. <PAGE> 2.2 Procedures. The Committee shall select one of its members as Chairman and shall adopt such rules and regulations as it shall deem appropriate concerning the holding of its meetings and the administration of the Plan. A majority of the whole Committee shall constitute a quorum, and the acts of a majority of the members of the Committee present at a meeting at which a quorum is present, or acts approved in writing by all of the members of the Committee, shall be the acts of the Committee. 2.3 Interpretation. The Committee shall have full power and authority to interpret the provisions of the Plan and any agreement evidencing options granted under the Plan, and to determine any and all questions arising under the Plan, and its decisions shall be final and binding on all participants in the Plan. 3. Shares Subject to Grants. 3.1 Number of Shares. Subject to the provisions of Paragraph 17 (relating to adjustments upon changes in capitalization), the number of shares of Common Stock subject at any one time to options granted under the Plan, plus the number of shares of Common Stock theretofore issued or delivered pursuant to the exercise of options granted under the Plan, shall not exceed 16,000,000 shares. If and to the extent that options granted under the Plan terminate, expire or are cancelled without having been exercised, new options may be granted under the Plan with respect to the shares of Common Stock covered by such terminated, expired or cancelled options; provided, that the granting and terms of such new options shall in all respects comply with the provisions of the Plan. 3.2 Character of Shares. Shares of Common Stock delivered under the Plan may be authorized and unissued Common Stock, issued Common Stock held in the Company's treasury, or both. 3.3 Reservation of Shares. There shall be reserved at all times for sale or award under the Plan a number of shares of Common Stock (authorized and unissued Common Stock, issued Common Stock held in the Company's treasury, or both) equal to the maximum number of shares set forth in Paragraph 3.1. 4. Employees Eligible. Options may be granted under the Plan to any key employee of the Company or any of its subsidiaries, or to any prospective key employee of the Company or any of its subsidiaries, conditioned upon, and effective not earlier than, such person's becoming an employee. Directors and executive officers shall be eligible to receive grants under the Plan only if they are also key employees of the Company or any of its subsidiaries. Notwithstanding the foregoing: <PAGE> (a) No member of the Committee, while serving as such, shall be eligible to receive any grants under the Plan and no person designated by the Board of Directors pursuant to Paragraph 2.1 to serve on the Committee effective at the time he or she qualifies as a disinterested person shall be eligible to receive any grants under the Plan during the period from the date such designation is made to the date such designation becomes effective. (b) No incentive stock options may be granted under the Plan to any person who owns, directly or indirectly (within the meaning of Sections 422(b)(6) and 424(d) of the Code), at the time the incentive stock option is granted, stock possessing more than 10% of the total combined voting power of all classes of stock of the employee's employer corporation or of its parent, if any, or any of its subsidiaries, unless the option price is at least 110% of the fair market value of the shares subject to the option, determined on the date of the grant, and the option by its terms is not exercisable after the expiration of five years from the date such option is granted. (c) In each calendar year during any part of which the Plan is in effect, no Participant (as defined below) may be granted options relating in the aggregate to more than 1,000,000 shares of Common Stock, subject to adjustment as provided in Paragraph 17. An individual receiving any option under the Plan is hereinafter referred to as a "Participant." Any reference herein to the employment of a Participant by the Company shall include (i) his or her employment by the Company or any of its subsidiaries, and (ii) with respect to a Participant who was not an employee of the Company or any of its subsidiaries at the time of grant of his or her option, his or her period of service in the capacity for which the option was granted. For all purposes of this Plan, the time at which an option is granted, in the case of the grant of an option to a key employee shall be deemed to be the effective date of such grant. 5. Grant of Options. The Committee shall determine, within the limitations of the Plan, the persons to whom options are to be granted, the number of shares that may be purchased under each option, the option price, and shall designate options at the time of grant as either "incentive stock options" or "nonqualified stock options"; provided, that the aggregate fair market value (determined as of the time the option is granted) of the Common Stock with respect to which incentive stock options become exercisable for the first time by any Participant (as defined in Paragraph 4) in any calendar year (under all stock option plans of the employee's employer corporation and its parent, if any, and its subsidiaries) shall not exceed $100,000 (the provisions of Section 422(d) of the Code are intended to govern). In determining the persons to whom options shall be granted and the number of shares to be covered by each option, the Committee shall take into consideration the person's present and potential contribution to the success of the Company and its subsidiaries and such other factors as the Committee may deem proper and relevant. Each option granted under the Plan shall be evidenced by a written agreement between the Company and the Participant containing such terms and conditions and in such form, not inconsistent with the provisions of the Plan or, with respect to incentive stock options, Section 422 of the Code, as the Committee shall provide. 6. Option Price. Subject to Paragraph 17, the option price of each share of Common Stock purchasable under any incentive stock option or non-qualified stock option granted under the Plan shall not be less than the fair market value of such share of Common Stock at the time the option is granted. The option price of an option issued in a transaction described in Section 424(a) of the Code shall be an amount which conforms to the requirements of that Section and the regulations thereunder. <PAGE> For purposes of this Plan, the "fair market value" of the Common Stock on any date means (i) if the Common Stock is listed on a national securities exchange or quotation system, the closing sales price on such exchange or quotation system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, (ii) if the Common Stock is not listed on a national securities exchange or quotation system, the mean between the bid and offered prices as quoted by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") for such date or (iii) if the Common Stock is neither listed on a national securities exchange or quotation system nor quoted by NASDAQ, the fair value as determined by such other method as the Committee determines in good faith to be reasonable. 7. Stock Appreciation Right. The Committee, in its sole discretion, may in connection with the grant of any option also grant to the Participant a stock appreciation right. Such stock appreciation right shall be granted by the Committee simultaneously with the grant of the related stock option. A stock appreciation right shall be exercised in the manner provided in Paragraph 9, and shall result in the cancellation of options on shares with respect to which the Participant exercises a stock appreciation right, and, upon such exercise, the Company shall pay to the Participant an amount equal to the excess of the fair market value of such shares with respect to which options are cancelled on the date of exercise over the option price of such shares. A stock appreciation right shall be exercisable to the same extent and under the same conditions as the underlying option, except that a stock appreciation right granted in connection with an incentive stock option may be exercised only when the fair market value of the shares subject to the option exceeds the option price of such shares. Payments on the exercise of stock appreciation rights shall be made by the Company in cash to the Participant as soon as practicable following exercise. 8. Exercisability and Duration of Options. 8.1 Determination of Committee; Acceleration. Each option granted under the Plan shall be exercisable at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Committee shall specify in the agreement evidencing the option. Subsequent to the grant of an option which is not immediately exercisable in full, the Committee, at any time before complete termination of such option, may accelerate the time or times at which such option may be exercised in whole or in part. 8.2 Automatic Termination. The unexercised portion of any option granted under the Plan shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following: (a) The expiration of ten years from the date on which such option was granted; (b) The expiration of 30 days from the date of termination of the Participant's employment by the Company unless a longer period is provided by the Committee (other than a termination described in subparagraph (c) below or in the event of termination as a result of death, in which case expiration will be at the end of the term set forth in the option agreement or such other time specified therein); (c) The termination of the Participant's employment by the Company if such termination constitutes or is attributable to a breach by the Participant of an employment or consulting agreement with the Company or any of its subsidiaries, or if the Participant is discharged or his or her services are terminated for cause; or (d) The expiration of such period of time or the occurrence of such event as the Committee in its discretion may provide upon the granting thereof. <PAGE> The Committee or the Board of Directors shall have the right to determine what constitutes cause for discharge or termination of services, whether the Participant has been discharged or his or her services terminated for cause and the date of such discharge or termination of services, and such determination of the Committee or the Board of Directors shall be final and conclusive. 9. Exercise of Options, Stock Appreciation Rights. Options and stock appreciation rights granted under the Plan shall be exercised by the Participant (or by his or her executors or administrators, as provided in Paragraph 10) as to all or part of the shares covered thereby, by the giving of written notice of exercise to the Company, specifying the number of shares to be purchased or the number of shares with respect to which stock appreciation rights are being exercised, accompanied, in the case of an option, by payment of the full purchase price for the shares being purchased. Payment of such purchase price shall be made (a) by check payable to the Company, (b) with the consent of the Committee, by delivery of shares of Common Stock already owned by the Participant for at least six months (which may include shares received as the result of a prior exercise of an option) having a fair market value (determined as of the date such option is exercised) equal to all or part of the aggregate purchase price, (c) in accordance with a "cashless exercise" program established by the Committee in its sole discretion under which if so instructed by the Participant, shares may be issued directly to the Participant's broker or dealer upon receipt of the purchase price in cash from the broker or dealer, (d) by any combination of (a), (b), or (c) above, or (e) by other means that the Committee deems appropriate. Such notice of exercise, accompanied by such payment, shall be delivered to the Company at its principal business office or such other office as the Committee may from time to time direct, and shall be in such form, containing such further provisions consistent with the provisions of the Plan, as the Committee may from time to time prescribe. The date of exercise shall be the date of the Company's receipt of such notice. The Company shall effect the transfer of the shares so purchased to the Participant (or such other person exercising the option pursuant to Paragraph 10 hereof) as soon as practicable. No Participant or other person exercising an option shall have any of the rights of a stockholder of the Company with respect to shares subject to an option granted under the Plan until due exercise and full payment has been made as provided above. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such due exercise and full payment. In no event may any option granted hereunder be exercised for a fraction of a share. 10. Non-Transferability of Options. Except as provided herein, no option granted under the Plan or any right evidenced thereby shall be transferable by the Participant other than by will or by the laws of descent and distribution, and an option may be exercised, during the lifetime of a Participant, only by such Participant. Notwithstanding the preceding sentence: (a) in the event of a Participant's death during his or her employment by the Company, its parent, if any, or any of its subsidiaries, or during the 30 day period following the date of termination of such employment, his or her options shall thereafter be exercisable, during the period set forth in the option agreement, or, if no period is specifically set forth, during the remaining term of the option, by his or her executors or administrators; and (b) the Participant, with the approval of the Committee, may transfer his or her options (other than incentive stock options) for no consideration to or for the benefit of the Participant's spouse, parents, children (including stepchildren or adoptive children), grandchildren, or siblings, or to a trust for the benefit of any of such persons. <PAGE> 11. Reload Options. At the time an option (the "original option") is granted, the Committee may also authorize the grant of a "reload option," which shall be subject to the following terms: (a) The number of shares of Common Stock subject to the reload option shall be the number of shares, if any, used by the Participant to pay the purchase price upon exercise of the original option, plus the number of shares, if any, delivered by the Participant to satisfy the tax withholding requirement relating to such exercise. (b) The reload option shall be a nonqualified stock option. (c) The grant of the reload option shall be effective upon the date of exercise of the original option, and the term of the reload option shall be the period, if any, remaining from that date to the date upon which the original option would have expired. (d) The grant of the reload option shall not be effective if, on the date of exercise of the original option, the Participant is not employed by the Company. (e) Except as specified in (a) through (d) above, the terms of the reload option shall be as prescribed in the preceding Paragraphs of this Plan. 12. Withholding Tax. (iv) Whenever under the Plan shares of stock are to be delivered upon exercise of a nonqualified stock option, the Company shall be entitled to require as a condition of delivery that the Participant remit or, in appropriate cases, agree to remit when due an amount sufficient to satisfy all federal, state and local withholding tax requirements relating thereto. At the option of the Company, such amount may be remitted by check payable to the Company, in shares of Common Stock (which may include shares received as the result of a prior exercise of an option), by the Company's withholding of shares of Common Stock issuable upon the exercise of any option or stock appreciation right pursuant to the Plan, or any combination thereof. Whenever an amount shall become payable to a Participant in connection with the exercise of a stock appreciation right, the Company shall be entitled to withhold therefrom an amount sufficient to satisfy all federal, state and local withholding tax requirements relating to such amount. 13. Restrictions on Delivery and Sale of Shares. Each option granted under the Plan is subject to the condition that if at any time the Committee, in its discretion, shall determine that the listing, registration or qualification of the shares covered by such option upon any securities exchange or under any state or federal law is necessary or desirable as a condition of or in connection with the granting of such option or the purchase or delivery of shares thereunder, the delivery of any or all shares pursuant to exercise of the option may be withheld unless and until such listing, registration or qualification shall have been effected. The Committee may require, as a condition of exercise of any option that the Participant represent, in writing, that the shares received are being acquired for investment and not with a view to distribution and agree that the shares will not be disposed of except pursuant to an effective registration statement, unless the Company shall have received an opinion of counsel satisfactory to the Company that such disposition is exempt from such requirement under the Securities Act of 1933. The Committee may require that the sale or other disposition of any shares acquired upon exercise of an option hereunder shall be subject to a right of first refusal in favor of the Company, which right shall permit the Company to repurchase such shares from the Participant or his or her representative prior to their sale or other disposition at their then current fair market value in accordance with such terms and conditions as shall be specified in the agreement evidencing the grant of the option. The Company may endorse on certificates representing shares issued upon the exercise of an option such legends referring to the foregoing representations or restrictions or any other applicable restrictions on resale as the Company, in its discretion, shall deem appropriate. <PAGE> 14. Change in Control. (a) In the event of a Change in Control of the Company, as defined below, the Committee may, in its sole discretion, provide that any of the following applicable actions be taken as a result, or in anticipation, of any such event to assure fair and equitable treatment of Participants: (i) accelerate the exercisability of any outstanding options awarded pursuant to this Plan; (ii) offer to purchase any outstanding options made pursuant to this Plan from the holder for its equivalent cash value, as determined by the Committee, as of the date of the Change in Control; or (iii) make adjustments or modifications to outstanding options as the Committee deems appropriate to maintain and protect the rights and interests of the Participants following such Change in Control. Any such action approved by the Committee shall be conclusive and binding on the Company, its subsidiaries and all Participants. (b) In no event, however, may (i) any option be exercised prior to the expiration of six (6) months from the date of grant (unless otherwise provided in the agreement evidencing the option), or (ii) any option be exercised after ten (10) years from the date it was granted. (c) To the extent not otherwise defined in this Plan, the following terms used in this Paragraph 14 shall have the following meanings: "Affiliate" means (a) Bear Stearns (b) any other subsidiary of the Company and (c) any other corporation or other entity which is controlled, directly or indirectly, by, or under common control with, the Company and which the Committee designates as an "Affiliate" for purposes of the Plan. "Associate" of a Person means (a) any corporation or organization of which such Person is an officer or partner or is, directly or indirectly, the Beneficial Owner of 10% or more of any class of equity securities, (b) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of such Person or any of its parents or subsidiaries. "Bear Stearns" means Bear, Stearns & Co. Inc., a Delaware corporation, and its successors and assigns. "Beneficial Owner" has the meaning ascribed thereto in Rule 13d-3 under the Exchange Act, except that, in any case, a Person shall be deemed the Beneficial Owner of any securities owned, directly or indirectly, by the Affiliates and Associates of such Person. <PAGE> "Change in Control" means (a) a majority of the Board of Directors ceases to consist of Continuing Directors; (b) any Person becomes the Beneficial Owner of 25% or more of the outstanding voting power of the Company unless such acquisition is approved by a majority of the Continuing Directors; (c) the stockholders of the Company approve an agreement to merge or consolidate into any other entity, unless such merger or consolidation is approved by a majority of the Continuing Directors; or (d) the stockholders of the Company approve an agreement to dispose of all or substantially all of the assets of the Company, unless such disposition is approved by a majority of the Continuing Directors. "Continuing Director" means any member of the Board of Directors who is a member on the effective date of the Plan as set forth in Paragraph 19 or who is elected to the Board of Directors after such date upon the recommendation or with the approval of a majority of the Continuing Directors at the time of such recommendation or approval. "Person" means an individual, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization or a government or a political subdivision thereof. 15. Right to Terminate Employment. Nothing in the Plan or in any option granted under the Plan shall confer upon any Participant the right to continue as an employee of the Company or affect the right of the Company or any of its subsidiaries, to terminate the Participant's employment at any time, subject, however, to the provisions of any agreement of employment between the Participant and the Company, its parent, if any, or any of its subsidiaries. 16. Transfer, Leave of Absence. For purposes of this Plan, neither (i) a transfer of an employee from the Company to a subsidiary or other affiliate of the Company, or vice versa, or from one subsidiary or affiliate of the Company to another, nor (ii) a duly authorized leave of absence, shall be deemed a termination of employment. 17. Adjustment Upon Changes in Capitalization, etc. In the event of any stock split, stock dividend, reclassification or recapitalization which changes the character or amount of the Company's outstanding Common Stock while any portion of any option theretofore granted under the Plan is outstanding but unexercised, the Committee shall make such adjustments in the character and number of shares subject to such options and in the option price, as shall be equitable and appropriate in order to make the option, as nearly as may be practicable, equivalent to such option immediately prior to such change; provided, however, that no such adjustment shall give any Participant any additional benefits under his or her option; and provided further, that, with respect to any outstanding incentive stock option, if any such adjustment is made by reason of a transaction described in Section 424(a) of the Code, it shall be made so as to conform to the requirements of that Section and the regulations thereunder. <PAGE> If any transaction (other than a change specified in the preceding paragraph) described in Section 424(a) of the Code affects the Company's Common Stock subject to any unexercised option theretofore granted under the Plan (hereinafter for purposes of this Paragraph 17 referred to as the "old option"), the Board of Directors or any surviving or acquiring corporation may take such action as it deems appropriate, and in conformity with the requirements of that Section and the regulations thereunder, to substitute a new option for the old option, in order to make the new option, as nearly as may be practicable, equivalent to the old option, or to assume the old option. If any such change or transaction shall occur, the number and kind of shares for which options may thereafter be granted under the Plan shall be adjusted to give effect thereto. 18. Expiration and Termination of the Plan. 18.1 General. Options may be granted under the Plan at any time and from time to time on or prior to the tenth anniversary of the effective date of the Plan as set forth in Paragraph 19 (the "Expiration Date"), on which date the Plan will expire except as to options then outstanding under the Plan. Such outstanding options shall remain in effect until they have been exercised, terminated or have expired. The Plan may be terminated, modified or amended by the Board of Directors at any time on or prior to the Expiration Date, except with respect to any options then outstanding under the Plan; provided, however, that the approval of the Company's stockholders will be required for any amendment which (i) changes the class of employees eligible for grants, as specified in Paragraph 4, (ii) increases the maximum number of shares subject to grants, as specified in Paragraph 3 (unless made pursuant to the provisions of Paragraph 17) or (iii) materially increases the benefits accruing to participants under the Plan, within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 18.2 Modifications. No modification, extension, renewal or other change in any option granted under the Plan shall be made after grant, unless the same is consistent with the provisions of the Plan and does not disqualify an incentive stock option under the provisions of Section 422 of the Code. In addition, the option price of an option may not be changed after grant, other than in the case of an adjustment described in Paragraph 14 or pursuant to Paragraph 17. 19. Effective Date of Plan. The Plan shall become effective on September 28, 1999, the date of its adoption by the Board of Directors, subject, however, to the approval of the Plan by the Company's stockholders within 12 months of such adoption. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>5 <TEXT> <TABLE> EXHIBIT 11 THE BEAR STEARNS COMPANIES INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) <CAPTION> Three-Months Ended Six-Months Ended --------------------------------- ------------------------------ December 31, December 31, December 31, December 31, 1999 1998 1999 1998 ----------------------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> <C> Weighted average common and common equivalent shares outstanding: (1) Average Common Stock outstanding 119,271 124,106 121,852 124,774 Average Common Stock equivalents: Common Stock issuable under employee benefit plans 484 521 474 515 Common Stock issuable assuming conversion of CAP Units 42,097 41,646 42,097 41,646 --------- --------- --------- -------- Total weighted average common and common equivalent shares outstanding 161,852 166,273 164,423 166,935 ========= ========= ========= ======== Net income $ 245,097 $ 135,920 $ 402,954 $ 200,023 Preferred Stock dividend requirements (9,778) (9,778) (19,556) (19,873) Income adjustment (net of tax) applicable to deferred compensation arrangements 29,521 6,777 41,099 13,555 ========= ========= ======== ======== Adjusted net income $ 264,840 $ 132,919 $ 424,497 $ 193,705 ========= ========= ======== ======== Earnings per share (1) $ 1.64 $ 0.80 $ 2.58 $ 1.16 ========= ========= ======== ======== (1) Adjusted for all stock dividends declared through October 29, 1999. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>6 <TEXT> <TABLE> EXHIBIT 12 THE BEAR STEARNS COMPANIES INC. STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In thousands, except for ratio) <CAPTION> (Unaudited) (Unaudited) Six-Months Six-Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended Ended Ended Ended December 31, 1999 December 31,1998 June 30, 1999 June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995 ------------------- ------------------ ------------- ------------ ------------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Earnings before taxes on income $ 639,609 $ 300,787 $1,064,108 $1,063,492 $1,013,690 $ 834,926 $ 388,082 ------------------- -------------------- ------------- ------------ ------------- ----------- ---------- Add: Fixed Charges Interest 1,957,794 1,851,638(1) 3,379,914 3,638,513 2,551,364 1,981,171 1,678,515 Interest factor in rents 15,350 15,336 31,363 30,130 26,516 25,672 24,594 ------------------- -------------------- ---------- ---------- ---------- ---------- ---------- Total fixed charges 1,973,144 1,866,974 3,411,277 3,668,643 2,577,880 2,006,843 1,703,109 ------------------- -------------------- ----------- ---------- ---------- ---------- ---------- Earnings before fixed charges and taxes on income $ 2,612,753 $ 2,167,761 $4,475,385 $4,732,135 $3,591,570 $2,841,769 $2,091,191 =================== ==================== =========== ========== =========== ========== ========== Ratio of earnings to fixed charges 1.3 1.2 1.3 1.3 1.4 1.4 1.2 =================== ==================== ============ ========== =========== ========== ========== (1) This amount has been changed to conform to the current period's presentation. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>7 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> BD <LEGEND> Exhibit 27 THE BEAR STEARNS COMPANIES INC. FINANCIAL DATA SCHEDULE (UNAUDITED) (In thousands, except share data) This schedule contains summary financial information extracted from the unaudited Consolidated Statement of Financial Condition at December 31, 1999 and the unaudited Consolidated Statement of Income for the six-months ended December 31, 1999, which are contained in the body of the accompanying 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> Nov-30-2000 <PERIOD-END> Dec-31-1999 <CASH> 822,780 <RECEIVABLES> 19,494,744 <SECURITIES-RESALE> 34,701,654 <SECURITIES-BORROWED> 73,529,786 <INSTRUMENTS-OWNED> 42,588,736 <PP&E> 517,406 <TOTAL-ASSETS> 177,392,594 <SHORT-TERM> 17,943,682 <PAYABLES> 47,742,193 <REPOS-SOLD> 63,128,957 <SECURITIES-LOANED> 0 <INSTRUMENTS-SOLD> 21,480,555 <LONG-TERM> 16,787,849 <PREFERRED-MANDATORY> 0 <PREFERRED> 800,000 <COMMON> 184,806 <OTHER-SE> 3,945,191 <TOTAL-LIABILITY-AND-EQUITY> 177,392,594 <TRADING-REVENUE> 968,467 <INTEREST-DIVIDENDS> 2,316,274 <COMMISSIONS> 526,391 <INVESTMENT-BANKING-REVENUES> 535,694 <FEE-REVENUE> 0 <INTEREST-EXPENSE> 1,957,794 <COMPENSATION> 1,190,133 <INCOME-PRETAX> 639,609 <INCOME-PRE-EXTRAORDINARY> 639,609 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 402,954 <EPS-BASIC> 2.58 <EPS-DILUTED> 2.58 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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-----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, FCQ1ngAGt9Xd1g2DArxsWIHoRFV6zz9UVphffvZj/LKOPza+p6DF9d/VJnYAxV6y KL9kX2W0TIR3RKfgRIV4jg== <SEC-DOCUMENT>0000777001-00-000025.txt : 20000307 <SEC-HEADER>0000777001-00-000025.hdr.sgml : 20000307 ACCESSION NUMBER: 0000777001-00-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991126 FILED AS OF DATE: 20000303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEAR STEARNS COMPANIES INC CENTRAL INDEX KEY: 0000777001 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133286161 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08989 FILM NUMBER: 560876 BUSINESS ADDRESS: STREET 1: 245 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10167 BUSINESS PHONE: 2122722000 </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 _________________ [X] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from July 1, 1999 to November 26, 1999 Commission File Number 1-8989 The Bear Stearns Companies Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3286161 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 245 Park Avenue, New York, New York 10167 (Address of principal executive offices) (Zip Code) (212)272-2000 (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 March 1, 2000, the latest practicable date, there were 112,333,634 shares of Common Stock, $1 par value, outstanding. <PAGE> TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition at November 26, 1999 (Unaudited) and June 30, 1999 Consolidated Statements of Income (Unaudited) for the five-month periods ended November 26, 1999 and November 27, 1998 Consolidated Statements of Cash Flows (Unaudited) for the five-month periods ended November 26, 1999 and November 27, 1998 Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signature <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Assets <CAPTION> November 26, June 30, 1999 1999 -------------------- --------------------- (Unaudited) (In thousands) <S> <C> <C> Cash and cash equivalents $ 1,570,483 $ 2,129,080 Cash and securities deposited with clearing organizations or segregated in compliance with federal regulations 1,188,788 2,891,397 Securities purchased under agreements to resell 35,999,998 32,996,226 Receivable for securities provided as collateral 2,571,404 1,735,293 Securities borrowed 60,429,297 54,173,726 Receivables: Customers 16,839,040 14,510,628 Brokers, dealers and others 542,038 1,452,590 Interest and dividends 422,402 366,110 Financial instruments owned, at fair value 40,764,802 41,942,878 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization 504,040 486,735 Other assets 1,205,670 1,209,677 ---------------- ---------------- Total Assets $ 162,037,962 $ 153,894,340 ================ ================ See Notes to Consolidated Financial Statements. </TABLE> <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Liabilities and Stockholders' Equity <CAPTION> November 26, June 30, 1999 1999 -------------------- --------------------- (Unaudited) (In thousands, except share data) <S> <C> <C> Short-term borrowings $ 13,424,201 $ 14,145,410 Securities sold under agreements to repurchase 53,323,109 50,673,644 Obligation to return securities received as collateral 3,999,229 1,944,286 Payables: Customers 42,843,757 40,822,913 Brokers, dealers and others 5,596,577 2,195,691 Interest and dividends 532,023 542,478 Financial instruments sold, but not yet purchased, at fair value 19,704,921 21,506,372 Accrued employee compensation and benefits 733,241 1,306,357 Other liabilities and accrued expenses 527,565 654,588 -------------------- --------------------- 140,684,623 133,791,739 -------------------- --------------------- Commitments and contingencies Long-term borrowings 15,911,392 14,647,092 -------------------- --------------------- Guaranteed Preferred Beneficial Interests in Company Subordinated Debt Securities 500,000 500,000 -------------------- --------------------- Stockholders' Equity Preferred Stock 800,000 800,000 Common Stock, $1.00 par value; 200,000,000 shares authorized; 184,805,848 and 176,011,113 shares issued at November 26, 1999 and June 30, 1999, respectively 184,806 176,011 Paid-in capital 2,509,801 2,269,927 Retained earnings 1,916,516 1,931,957 Capital Accumulation Plan 1,179,101 1,144,329 Treasury stock, at cost Adjustable Rate Cumulative Preferred Stock, Series A - 2,520,750 shares (103,421) (103,421) Common Stock - 66,367,276 shares and 56,333,508 shares at November 26, 1999 and June 30, 1999, respectively (1,544,856) (1,263,294) -------------------- --------------------- Total Stockholders' Equity 4,941,947 4,955,509 -------------------- --------------------- Total Liabilities and Stockholders' Equity $ 162,037,962 $ 153,894,340 ==================== ===================== See Notes to Consolidated Financial Statements. </TABLE> <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <CAPTION> Five-Months Ended ------------------------------------- November 26, November 27, 1999 1998 ---------------- ------------------ (In thousands, except share data) <S> <C> <C> Revenues Commissions $ 419,619 $ 411,204 Principal transactions 745,679 397,045 Investment banking 434,410 217,711 Interest and dividends 1,810,598 1,916,799 Other income 59,984 32,422 ---------------- ------------------ Total Revenues 3,470,290 2,975,181 Interest expense 1,531,787 1,650,885 ---------------- ------------------ Revenues, net of interest expense 1,938,503 1,324,296 ---------------- ------------------ Non-interest expenses Employee compensation and benefits 973,990 732,884 Floor brokerage, exchange and clearance fees 63,088 71,335 Communications 65,445 57,440 Depreciation and amortization 62,714 54,281 Occupancy 45,414 43,372 Advertising and market development 39,927 38,234 Data processing and equipment 39,709 19,683 Other expenses 194,624 117,339 ---------------- ------------------ Total non-interest expenses 1,484,911 1,134,568 ---------------- ------------------ Income before provision for income taxes 453,592 189,728 Provision for income taxes 167,778 59,460 ---------------- ------------------ Net income $ 285,814 $ 130,268 ================ ================== Net income applicable to common shares $ 269,517 $ 113,654 ================ ================== Earnings per share (1) $ 1.78 $ 0.73 ================ ================== Weighted average common and common equivalent shares outstanding (1) 165,584,457 167,240,877 ================ ================== Cash dividends declared per common share (1) $ 0.29 $ 0.27 ================ ================== (1) Reflects all stock dividends declared through October 29, 1999. See Notes to Consolidated Financial Statements. </TABLE> <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Five-Months Ended --------------------------------------------- November 26, November 27, <CAPTION> 1999 1998 --------------------- ------------------ (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 285,814 $ 130,268 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 62,714 54,281 Deferred income taxes (54,023) (82,008) Other 22,506 26,179 Decreases (increases) in operating assets: Cash and securities deposited with clearing organizations or segregated in compliance with federal regulations 1,702,609 (1,745,518) Securities purchased under agreements to resell (3,003,772) (6,881,984) Securities borrowed (6,255,571) (4,003,150) Receivables: Customers (2,328,412) 3,446,752 Brokers, dealers and others 910,552 195,373 Financial instruments owned 2,396,908 (849,513) Other assets (37,188) 396,947 Increases (decreases) in operating liabilities: Securities sold under agreements to repurchase 2,649,465 16,621,746 Payables: Customers 2,020,844 4,140,575 Brokers, dealers and others 3,394,914 (2,800,058) Financial instruments sold, but not yet purchased (1,801,451) (3,567,784) Accrued employee compensation and benefits (618,866) (742,307) Other liabilities and accrued expenses (141,618) 499,260 --------------------- ----------------- Cash (used in) provided by operating activities (794,575) 4,839,059 --------------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Net payments on short-term borrowings (721,209) (2,689,879) Net proceeds from issuance of long-term borrowings 1,942,107 1,481,606 Capital Accumulation Plan 70,406 153,785 Tax benefit of Common Stock distributions 2,568 1,053 Payments for: Retirement of long-term borrowings (681,751) (1,042,180) Treasury stock purchases (311,289) (209,057) Cash dividends paid (54,548) (53,691) --------------------- ----------------- Cash provided by (used in) financing activities 246,284 (2,358,363) --------------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements (80,019) (69,206) Purchases of investment securities and other assets (24,546) (19,870) Proceeds from sales of investment securities and other assets 94,259 30,459 --------------------- ----------------- Cash used in investing activities (10,306) (58,617) --------------------- ----------------- Net (decrease) increase in cash and cash equivalents (558,597) 2,422,079 Cash and cash equivalents, beginning of period 2,129,080 1,073,821 --------------------- ----------------- Cash and cash equivalents, end of period $ 1,570,483 $ 3,495,900 ===================== ================= Statement of Financial Accounting Standards No. 125 requires balance sheet recognition of collateral related to certain secured financing transactions, which is a non-cash activity and did not impact the Consolidated Statements of Cash Flows. See Notes to Consolidated Financial Statements. </TABLE> <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of The Bear Stearns Companies Inc. and its subsidiaries (the "Company"). All material intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to the current period's presentation. The Board of Directors declared a 5% stock dividend on the Company's Common Stock in January 1999 and October 1999. Earnings per share data for all periods included in the consolidated financial statements reflect such 5% stock dividends. On January 18, 2000, the Company's Board of Directors elected to change its fiscal year-end to November 30 from June 30, effective with the year beginning November 27, 1999, as announced in its Form 8-K filed on January 21, 2000. The five-month period ended November 26, 1999 is the Company's "Transition Period". This Transition Report on Form 10-Q presents the results of the Company's operations for the five-month periods ended November 26, 1999 and November 27, 1998. The consolidated financial statements reflect all adjustments which, in the opinion of management, are normal and recurring and are necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The nature of the Company's business is such that the results of any interim period may not be indicative of the results to be expected for an entire fiscal year. <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments owned and financial instruments sold, but not yet purchased consist of the Company's proprietary trading and investment accounts, at fair value, as follows: <CAPTION> November 26, June 30, In thousands 1999 1999 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Financial instruments owned: US government and agency $ 7,662,482 $ 8,211,944 Other sovereign governments 2,785,025 2,742,486 Corporate equity and convertible debt 9,421,251 14,578,501 Corporate debt 4,835,056 4,972,621 Derivative financial instruments 4,734,149 3,035,278 Mortgages and other mortgage-backed securities 10,911,528 7,869,884 Other 415,311 532,164 ------------- ------------ $ 40,764,802 $ 41,942,878 ============= ============ Financial instruments sold, but not yet purchased: US government and agency $ 4,074,379 $ 5,250,633 Other sovereign governments 2,116,448 2,639,952 Corporate equity 7,665,516 6,134,317 Corporate debt 1,228,338 1,707,998 Derivative financial instruments 4,599,592 5,687,296 Other 20,648 86,176 ------------- ------------ $ 19,704,921 $ 21,506,372 ============= ============ </TABLE> 3. COMMITMENTS AND CONTINGENCIES At November 26, 1999, the Company was contingently liable for unsecured letters of credit of approximately $1.9 billion and letters of credit secured by financial instruments of approximately $23.9 million, both of which are principally used as deposits for securities borrowed or to satisfy margin deposits at option and commodity exchanges. The Company had various other commitments aggregating $1.1 billion at November 26, 1999. In the normal course of business, the Company has been named as a defendant in several lawsuits, which involve claims for substantial amounts. Although the ultimate outcome of these matters cannot be ascertained at this time, it is the opinion of management, after consultation with counsel, that the resolution of such matters will not have a material adverse effect on the results of operations or the financial condition of the Company. <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. NET CAPITAL REQUIREMENTS The Company's principal operating subsidiary, Bear, Stearns & Co. Inc. ("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns Securities Corp. ("BSSC"), are registered broker-dealers and, accordingly, are subject to Rule 15c3-1 of the Securities Exchange Act of 1934 (the "Net Capital Rule") and the capital rules of the New York Stock Exchange, Inc. ("NYSE") and other principal exchanges of which Bear Stearns and BSSC are members. Included in the computation of net capital of Bear Stearns is net capital of BSSC in excess of 5% of aggregate debit items arising from customer transactions, as defined. At November 26, 1999, Bear Stearns' net capital, as defined, of $1.84 billion exceeded the minimum requirement by $1.80 billion. Bear, Stearns International Limited ("BSIL") and Bear Stearns International Trading Limited ("BSIT"), London-based broker-dealer subsidiaries, which are indirectly wholly owned by the Company, are subject to regulatory capital requirements of the Securities and Futures Authority, a self-regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. Bear Stearns Bank plc ("BSB"), which is indirectly wholly owned by the Company, is incorporated in Dublin and is subject to the regulatory capital requirements of the Central Bank of Ireland. At November 26, 1999, Bear Stearns, BSSC, BSIL, BSIT and BSB were in compliance with their respective regulatory capital requirements. 5. EARNINGS PER SHARE Earnings per share is computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding during each period presented. Common shares include the assumed distribution of shares of common stock issued or issuable under certain employee benefit plans, including certain of the Company's deferred compensation arrangements, with appropriate adjustments made to net income for expense accruals related thereto. <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. CASH FLOW INFORMATION Cash payments for interest approximated interest expense for the five-months ended November 26, 1999 and November 27, 1998. Income taxes paid totaled $57.8 million and $17.9 million for the five-months ended November 26, 1999 and November 27, 1998, respectively. 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company, in its capacity as a dealer in over-the-counter derivative financial instruments and in connection with its proprietary market-making and trading activities, enters into transactions in a variety of cash and derivative financial instruments in order to reduce its exposure to market risk, which includes interest rate, exchange rate and equity price risk. Statement of Financial Accounting Standards ("SFAS") No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," defines a derivative as a future, forward, swap, or option contract, or other financial instrument with similar characteristics such as caps, floors and collars. Generally, these financial instruments represent future commitments to exchange interest payment streams or currencies or to purchase or sell other financial instruments at specific terms at specified future dates. Option contracts provide the holder with the right, but not the obligation, to purchase or sell a financial instrument at a specific price on or before an established date. These financial instruments may have market and/or credit risk in excess of amounts recorded in the Consolidated Statements of Financial Condition. In order to measure derivative activity, notional or contract amounts are frequently used. Notional/contract amounts, which are not included on the balance sheet, are used to calculate contractual cash flows to be exchanged and are generally not actually paid or received, with the exception of currency swaps and foreign exchange forwards and mortgage-backed securities forwards. The notional/contract amounts of financial instruments that give rise to off-balance-sheet market risk are indicative only of the extent of involvement in the particular class of financial instrument and are not necessarily an indication of overall market risk. <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) The following table represents the notional/contract amounts of the Company's outstanding derivative financial instruments as of November 26, 1999 and June 30, 1999: <CAPTION> November 26, June 30, In billions 1999 1999 ---------------------------------------------------------------------------------------------- <S> <C> <C> Interest Rate: Swap agreements, including options, swaptions, caps, collars, and floors $371.4 $339.1 Futures contracts 47.3 52.5 Options held 43.8 24.0 Options written 18.4 3.9 Foreign Exchange: Futures contracts 39.9 19.3 Forward contracts 10.0 15.6 Options held 5.5 2.6 Options written 4.1 3.1 Mortgage-Backed Securities: Forward Contracts 51.9 63.4 Equity: Swap agreements 15.1 11.9 Futures contracts 2.1 0.8 Options held 6.5 7.5 Options written 6.3 7.3 </TABLE> <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) The derivative financial instruments used in the Company's trading and dealer activities are recorded at fair value with the resulting unrealized gains or losses recorded in the Consolidated Statements of Financial Condition and the related income or loss reflected in revenues derived from principal transactions. The fair values of derivative financial instruments held or issued for trading and hedging purposes as of November 26, 1999 and June 30, 1999, were as follows: <CAPTION> November 26, June 30, 1999 1999 --------------------------------------------------------------- In millions Assets Liabilities Assets Liabilities ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Swap agreements $3,016 $2,952 $1,375 $2,290 Futures and forward Contracts 264 158 278 259 Options held 1,454 1,397 Options written 1,490 3,164 The average monthly fair values of the derivative financial instruments for the five-months ended November 26, 1999 and the fiscal year ended June 30, 1999 were as follows: November 26, June 30, 1999 1999 ----------------------------------------------------------------- In millions Assets Liabilities Assets Liabilities ------------------------------------------------------------------------------------------------- Swap agreements $2,421 $2,625 $2,227 $2,317 Futures and forward Contracts 244 287 334 368 Options held 1,178 1,154 Options written 1,577 3,156 The notional/contract amounts of these instruments do not represent the Company's potential risk of loss due to counterparty nonperformance. Credit risk arises from the potential inability of counterparties to perform in accordance with the terms of the contract. The Company's exposure to credit risk associated with counterparty nonperformance is limited to the net replacement cost of over-the-counter contracts, which are recognized as assets in the Company's Consolidated Statements of Financial Condition. Exchange-traded financial instruments, such as futures and options, generally do not give rise to significant counterparty exposure due to the margin requirements of the individual exchanges. Generally, options written do not </TABLE> <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) give rise to counterparty credit risk since they obligate the Company (not its counterparty) to perform. The Company has controls in place to monitor credit exposures by limiting transactions with specific counterparties and assessing the creditworthiness of counterparties. The Company also seeks to control credit risk by following an established credit approval process, monitoring credit limits and requiring collateral where appropriate. The following table summarizes the credit quality of the Company's over-the-counter derivatives by showing counterparty credit ratings for the replacement cost of contracts in a gain position, net of $1.7 billion of collateral as of November 26, 1999 and June 30, 1999: November 26, June 30, In millions 1999 1999 -------------------------------------------------------- RATING(1) NET REPLACEMENT COST AAA $ 192.2 $ 140.0 AA 597.1 627.1 A 600.7 303.4 BBB 79.8 56.6 BB and Lower 56.9 39.7 Non-rated 0.0 3.4 (1) Internal designations of counterparty credit quality are based on actual ratings made by external ratings agencies or comparable ratings established and utilized by the Company's Credit Department. 8. SEGMENT DATA The Company operates in three principal segments: Capital Markets, Execution Services and Wealth Management. These segments are strategic business units that offer different products and services. They are managed separately as different levels and types of expertise are required to effectively manage the segments' transactions. The Capital Markets segment is comprised of Equities, Fixed Income and Investment Banking areas. Equities combines the efforts of sales, trading <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. SEGMENT DATA (continued) and research in such areas as block trading, convertible bonds, over-the-counter equities, equity derivatives and risk arbitrage. Fixed Income includes the efforts of sales, trading and research for institutional clients in a variety of products such as mortgage-backed and asset-backed securities, corporate and government bonds, municipal and high yield securities and foreign exchange and derivatives. Investment Banking provides capabilities in capital raising, strategic advisory, mergers and acquisitions and merchant banking. The Execution Services segment is comprised of clearance and predominantly commission-related areas, including institutional equity sales, institutional futures sales and specialist activities. Clearance provides clearing, margin lending and securities borrowing to facilitate customer short sales to approximately 2,800 clearing clients worldwide. The commission-related areas provide research and execution capabilities in US equity securities and financial futures to our institutional clients. The Wealth Management segment is comprised of the Private Client Services ("PCS") and Asset Management areas. PCS provides high-net-worth individuals with an institutional level of service. Asset Management serves the diverse investment needs of corporations, municipal governments, multi-employer plans, foundations, endowments, family groups and high-net-worth individuals. The three business segments are comprised of the many business areas with interactions among each as they serve the needs of similar clients. Revenues and expenses reflected below include those which are directly related to each segment. Revenue from inter-segment transactions are credited based upon specific criteria or agreed upon rates with such amounts eliminated in consolidation. Individual segments also include revenues and expenses relating to various items including corporate overhead and interest which are internally allocated by the Company primarily based on balance sheet usage or expense levels. The Company generally evaluates performance of the segments based on net revenues and profit or loss before provision for income taxes. <PAGE> <TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. SEGMENT DATA (continued) For the five-months ended November 26, 1999: <S> <C> <C> <C> (in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets - ----------------------------------- ---------------------- -------------------------- --------------------- Capital Markets $ 1,017,482 $ 322,155 $ 105,441,874 Execution Services 566,995 210,704 54,401,790 Wealth Management 269,028 52,340 2,982,637 Other (a) 84,998 (131,607) (788,339) - ----------------------------------------------------------------------------------------------------------- Total $ 1,938,503 $ 453,592 $ 162,037,962 =========================================================================================================== For the five-months ended November 27, 1998: (in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets - ----------------------------------- ---------------------- -------------------------- --------------------- Capital Markets $ 519,661 $ (49,539) $ 111,856,697 Execution Services 499,857 203,635 49,881,166 Wealth Management 212,144 31,247 3,191,443 Other (a) 92,634 4,385 909,557 - ----------------------------------------------------------------------------------------------------------- Total $ 1,324,296 $ 189,728 $ 165,838,863 =========================================================================================================== (a) Other is comprised of consolidation/elimination entries, unallocated revenues (predominantly interest) and corporate administrative functions, including costs related to the Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan") which were $45.8 million and $14.0 million for the five-months ended November 26, 1999 and November 27, 1998, respectively. </TABLE> <PAGE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. STOCK AWARD PLAN On October 28, 1999, the stockholders of the Company approved the Company's Stock Award Plan (the "Stock Award Plan"). The purpose of the Stock Award Plan is to secure for the Company and its stockholders the benefits of the additional incentive, inherent in the ownership of the Company's stock, by selected key employees of the Company who are important to the success and growth of the business. Pursuant to the Stock Award Plan, such employees may be offered the opportunity to acquire common stock through the grant of options and stock appreciation rights in tandem with such options. In January 2000, the Company granted 3,886,334 options under such plan. The stock options were issued with an exercise price equal to the market price of the common stock on the date of the grant. These options vest after three years and have a ten-year expiration. <PAGE> Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those discussed in the forward-looking statements. The Company's principal business activities, investment banking, securities trading and brokerage, are, by their nature, highly competitive and subject to various risks, in particular volatile trading markets and fluctuations in the volume of market activity. Consequently, the Company's net income and revenues in the past have been, and are likely to continue to be, subject to wide fluctuations, reflecting the impact of many factors, including securities market conditions, the level and volatility of interest rates, competitive conditions, liquidity of global markets, international and regional political events, regulatory developments and the size and timing of transactions. For a description of the Company's business, including its trading in cash instruments and derivative products, its underwriting and trading policies, and their respective risks, and the Company's risk management policies and procedures, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Business Environment The business environment during the Company's five-month period ended November 26, 1999 was characterized by strong US economic growth and low inflation, which resulted in robust domestic equity markets and growth in both New York Stock Exchange ("NYSE") and NASDAQ trading volume. In an effort to slow the nation's economic growth and mitigate the risk of rising inflationary pressures, the Federal Reserve raised the Federal Funds rate twice during the period by a total of 50 basis points. For the five-months ended November 26, 1999, the Dow Jones Industrial Average, Standard and Poor's 500 Index and NASDAQ Composite Index increased 0.2%, 3.2% and 28.4%, respectively. These factors contributed to strong equity underwriting and mergers and acquisitions activities. The fixed income markets improved over the comparable prior year period, which had reflected the impact of difficult market conditions in the Far East and emerging markets. However, the fixed income markets in the 1999 period were characterized by rising interest rates and reduced trading volume predominantly as a result of uncertainty surrounding the Year 2000 , which led to lower investor and issuer activity. The first three months of the 1998 period were marked by extreme fixed income market volatility attributed to economic turmoil in the Far East and emerging markets nations and the default by Russia on its debt obligations, which triggered the flight to quality by investors who sought safer, less risky investments. This caused yield spreads between US Treasury securities and lower-rated issues to widen dramatically and resulted in a decline in liquidity in the global markets. As a result, the Federal Reserve reduced the Federal Funds rate on three occasions during the months of September, October and November. The reduction in the Federal Funds rate by a total of 75 basis points, coupled with the US economy's resilience, resulted in the recovery of US financial markets in October 1998 and November 1998. Credit spreads tightened, which led to improved, but still weak, conditions in both the primary and secondary domestic fixed income markets. Rising domestic equity markets during October 1998 and November 1998 reflected strong investor interest in the internet and technology sectors. <PAGE> Results of Operations Five-Months Ended November 26, 1999 Compared to Five-Months Ended November 27, 1998 On January 18, 2000, the Company's Board of Directors approved a change in the Company's fiscal year-end to November 30 from June 30, effective with the year beginning November 27, 1999. The discussion that follows compares the results of operations for the five-months ended November 26, 1999 to the five-months ended November 27, 1998. Net income for the five-months ended November 26, 1999 was $285.8 million, an increase of 119.4% from $130.3 million for the comparable 1998 period. Net revenues increased 46.4% to $1.9 billion in the 1999 period from $1.3 billion in the 1998 period. The increase was primarily attributable to increased principal transactions and investment banking revenues, as further discussed below. Earnings per share were $1.78 for the 1999 period versus $0.73 for the comparable 1998 period. Earnings per share amounts for all periods reflect the adjustment for stock dividends declared by the Company in January 1999 and October 1999. Commission revenues increased 2.0% in the 1999 period to $419.6 million from $411.2 million in the comparable 1998 period. This increase was primarily attributable to higher commissions earned in the clearance area due to higher customer activity and increases in average daily volume in the 1999 period when compared to the 1998 period. The increase was also attributable to increased revenues from the institutional area, partially offset by a decrease in futures commissions in the 1999 period when compared to the 1998 period. The Company's principal transactions revenues by reporting categories, including derivatives, are as follows: Five-Months Ended Five-Months Ended November 26, 1999 November 27, 1998 ----------------- ----------------- Fixed Income $366,359 $171,245 Equity 223,266 151,036 Foreign Exchange & Other Derivative Financial Instruments 156,054 74,764 ------- -------- $745,679 $397,045 ======== ======== <PAGE> Revenues from principal transactions increased 87.8% in the 1999 period to $745.7 million from $397.0 million in the comparable 1998 period. This increase reflects increased revenues derived from each of the Company's reporting categories. Revenues derived from fixed income activities increased as a result of increases in revenues in the high yield, mortgage-backed securities, corporate bonds and emerging markets areas. The 1998 period reflects decreased activities due to the volatility experienced in the equity and fixed income markets and the widening of credit spreads during the early months of the period. These conditions led to the declines in revenues derived from several business areas including the high yield, emerging markets and corporate bonds areas. Revenues derived from both equity and fixed income derivatives increased due to strong market conditions and customer flow. Revenues derived from equity activities also increased in the 1999 period as a result of increases in revenues in the arbitrage and over-the-counter stock areas. Investment banking revenues increased 99.5% to $434.4 million in the 1999 period from $217.7 million in the comparable 1998 period. The increase is principally attributable to higher equity underwriting revenues reflecting a strong domestic equity underwriting calendar and mergers and acquisitions revenues earned during the 1999 period compared to the weak levels and relative inactivity in the comparable 1998 period. Equity underwriting revenues increased 279.3%, due to a strong volume of technology-related IPOs. Revenues from merchant banking activities also increased reflecting gains realized from certain of the Company's investments. Net interest and dividends increased 4.9% to $278.8 million in the 1999 period from $265.9 million in the comparable 1998 period. The increase was primarily attributable to increased levels of customer margin debt. The increase in net interest profit was partially offset by generally higher funding costs incurred by the Company as debt maturities were extended into the Year 2000. Customer margin debt at November 26, 1999 approximated $48.4 billion compared to $39.1 billion at November 27, 1998. Average customer margin debt increased to $51.4 billion in the 1999 period from $40.2 billion in the comparable 1998 period. Average customer shorts decreased to $57.6 billion in the 1999 period from $62.9 billion in the comparable 1998 period. Average free credit balances increased to $13.3 billion in the 1999 period from $10.8 billion in the comparable 1998 period. Employee compensation and benefits increased 32.9% to $974.0 million in the 1999 period from $732.9 million in the comparable 1998 period. The increase in employee compensation and benefits was primarily attributable to an increase in incentive and discretionary bonus accruals related to increased net revenues and earnings in the 1999 period as well as an increase in headcount. Employee compensation and benefits, as a percentage of net revenues, decreased to 50.2% in the 1999 period from 55.3% in the comparable 1998 period primarily due to improved five-month net revenue performance. <PAGE> All other expenses increased 27.2% to $510.9 million in the 1999 period from $401.7 million in the comparable 1998 period. CAP Plan expense increased by $31.8 million in the 1999 period from the comparable 1998 period, reflecting higher pre-tax earnings. Data processing, communications and depreciation increased $36.5 million or 27.7% as a result of both increased usage and the upgrading of existing communication and computer systems. EDP professional fees increased by $11.8 million in the 1999 period due to various technology initiatives, including the Year 2000 issue, which accounted for $5.0 million of the increase in the 1999 period. The Company's effective tax rate increased to 37.0% in the 1999 period compared to 31.3% in the comparable 1998 period due to higher levels of earnings and a lower level of tax preference items in the 1999 period. Business Segments The Company is primarily engaged in business as a securities broker and dealer operating in three principal segments: Capital Markets, Execution Services and Wealth Management. These segments are strategic business units analyzed separately due to the distinct nature of the products they provide and the clients they serve. Certain Capital Markets products are distributed by the Wealth Management and Execution Services distribution network with the related revenues of such intersegment services allocated to the respective segments through transfer pricing. The following segment operating results exclude certain corporate items. See Note 8, footnote (a), of Notes to Consolidated Financial Statements. Five-Months Ended November 26, 1999 Compared to Five-Months Ended November 27, 1998 - ------------------------------------------------------------- Capital Markets - -------------------------------------------------------------------------------- Five-Months Ended Five-Months Ended In thousands November 26, 1999 November 27, 1998 - -------------------------------------------------------------------------------- Net revenues $ 1,017,482 $ 519,661 Pre-tax income (loss) 322,155 (49,539) - -------------------------------------------------------------------------------- <PAGE> Net revenues for Capital Markets approximated $1.0 billion in the 1999 period, up 95.8% from $519.7 million in the comparable 1998 period. Pre-tax income for Capital Markets was $322.2 million in the 1999 period, up from a loss of $49.5 million in the comparable 1998 period. Fixed income results in the 1999 period improved over the 1998 period due to improved results in the Company's high yield, derivatives, mortgage-backed securities and corporate bonds operations. Fixed income results in the 1998 period were adversely impacted as a result of market volatility resulting from the dislocation in the emerging markets areas. The default by Russia in its sovereign debt resulted in dramatic spread widening across the various fixed income asset classes and dramatically reduced levels of customer activity. Equity results improved in the 1999 period as active markets and strong deal flow resulted in improved performances from equity derivatives, risk arbitrage and block trading. Investment banking revenues increased sharply in the 1999 period reflecting strong levels of equity underwriting activity, as well as increases in merchant banking and mergers and acquisitions activities. Investment banking revenues in the 1998 period were significantly lower than the 1999 period reflecting the weakness in the fixed income and equity markets during the period which resulted in a substantial decline in new issue and mergers and acquisitions activity. Execution Services - -------------------------------------------------------------------------------- Five-Months Ended Five-Months Ended In thousands November 26, 1999 November 27, 1998 - -------------------------------------------------------------------------------- Net revenues $ 566,995 $ 499,857 Pre-tax income 210,704 203,635 - -------------------------------------------------------------------------------- At November 26, 1999, the Company provided clearing, margin lending and securities borrowing to facilitate customer short sales to approximately 2,800 clearing clients worldwide. Such clients include approximately 2,400 prime brokerage clients including hedge funds and clients of money managers, short sellers, arbitrageurs and other professional investors and approximately 400 fully disclosed clients, who engage in either the retail or institutional brokerage business. The Company processes trades in over 70 countries and accounts for approximately 10% of the average daily NYSE volume, and processed an average of in excess of 192,000 trades per day during the 1999 period versus approximately 160,000 trades per day in the comparable 1998 period. Net revenues for Execution Services approximated $567.0 million in the 1999 period, up 13.4% from $499.9 million in the comparable 1998 period. Pre-tax income for Execution Services was $210.7 million in the 1999 period, up 3.5% from $203.6 million in the comparable 1998 period. Results reflect improved domestic and European sales volume which benefitted the Company's institutional equity business. In addition, increased levels of customer margin debt and transaction volumes benefitted the Company's clearance revenues. Partially offsetting these revenue increases were increased data processing expenses corresponding to systems development initiated in the clearance area. <PAGE> Wealth Management - -------------------------------------------------------------------------------- Five-Months Ended Five-Months Ended In thousands November 26, 1999 November 27, 1998 - -------------------------------------------------------------------------------- Net revenues $ 269,028 $ 212,144 Pre-tax income 52,340 31,247 - -------------------------------------------------------------------------------- PCS provides high-net-worth individuals with an institutional level of service, including access to the Company's resources and professionals. PCS maintains a select team of approximately 500 account executives in seven regional offices. PCS had approximately $41.0 billion in client assets at November 26, 1999, an increase of 16.8% compared to November 27, 1998. The Asset Management area, through Bear Stearns Asset Management Inc. ("BSAM"), had approximately $13.0 billion in assets under management at November 26, 1999 which reflected a 29.4% increase over November 27, 1998. The largest components of the increase were attributable to alternative investments and mutual funds. Alternative investments include mortgage hedge funds which increased 454.6% from the 1998 period, and equity hedge funds which increased 74.9% from the 1998 period, as well as real estate and venture capital investments. Asset Management serves the diverse investment needs of corporations, municipal governments, multi-employer plans, foundations, endowments, family groups and high-net-worth individuals. Net revenues for Wealth Management were $269.0 million in the 1999 period, up 26.8% from $212.1 million in the comparable 1998 period. Pre-tax income for Wealth Management was $52.3 million in the 1999 period, up 67.5% from $31.2 million in the comparable 1998 period. Growth in assets under management, active equity markets and strong customer volumes resulted in the increase in management fees and commissions in the 1999 period. Strong performances by certain of the Company's managed funds led to sharp increases in incentive-based fees during the period. Liquidity and Capital Resources Financial Leverage The Company maintains a highly liquid balance sheet with a majority of the Company's assets consisting of marketable securities inventories, which are marked-to-market daily, and collateralized receivables arising from customer-related and proprietary securities transactions. <PAGE> Collateralized receivables consist of resale agreements secured predominantly by US government and agency securities, customer margin loans and securities borrowed, which are typically secured by marketable corporate debt and equity securities. The Company's total assets and financial leverage can fluctuate significantly, depending largely upon economic and market conditions, volume of activity, customer demand and underwriting commitments. The Company's total assets at November 26, 1999 increased to $162.0 billion from $153.9 billion at June 30, 1999. The increase is primarily attributable to an increase in securities borrowed, securities purchased under agreements to resell and receivables from customers. The Company's ability to support increases in total assets is a function of its ability to obtain short-term secured and unsecured funding and its access to sources of long-term capital in the form of long-term borrowings and equity, which together form its capital base. The Company continuously monitors the adequacy of its capital base, which is a function of asset quality and liquidity. Highly liquid assets, such as US government and agency securities, typically are funded by the use of repurchase agreements, which require very low levels of margin. In contrast, assets of lower quality or liquidity require higher levels of margin or overcollateralization and consequently increased levels of capital. Accordingly, the mix of assets being held by the Company significantly influences the amount of leverage the Company can employ and the adequacy of its capital base. Funding Strategy The Company's general funding strategy provides for the diversification of its short-term funding sources in order to maximize liquidity. Sources of short-term funding consist principally of collateralized borrowings, including repurchase transactions and securities lending arrangements, customer free credit balances, unsecured commercial paper, medium-term notes and bank borrowings generally having maturities from overnight to one year. Repurchase transactions, whereby the Company sells securities with an agreement to repurchase at a future date, represent the dominant component of secured short-term funding. In addition to short-term funding sources, the Company utilizes long-term debt, including medium-term notes, as a longer-term source of unsecured financing. During the five- months ended November 26, 1999, the Company received proceeds approximating $1.9 billion from the issuance of long-term debt which, net of retirements, served to increase long-term debt to $15.9 billion at November 26, 1999 from $14.6 billion at June 30, 1999. <PAGE> The Company maintains an alternative funding strategy focused on the liquidity and self-funding ability of the underlying assets. The objective of the strategy is to maintain sufficient sources of alternative funding to enable the Company to fund debt obligations without issuing any new unsecured debt, including commercial paper. The most significant source of alternative funding is the Company's ability to hypothecate or pledge its unencumbered assets as collateral for short-term funding. As part of the Company's alternative funding strategy, the Company regularly monitors and analyzes the size, composition, and liquidity characteristics of the assets being financed and evaluates its liquidity needs in light of current market conditions and available funding alternatives. Through this analysis, the Company can continuously evaluate the adequacy of its equity base and the schedule of maturing term-debt supporting its present asset levels. The Company can then seek to adjust its maturity schedule, in light of market conditions and funding alternatives. The Company currently has in place a committed revolving-credit facility (the "facility") totaling $3.225 billion, which permits borrowing on a secured basis by Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp. ("BSSC") and certain affiliates. The facility also provides that the Company may borrow up to $1.6125 billion of the facility on an unsecured basis. Secured borrowings can be collateralized by both investment-grade and non-investment-grade financial instruments. In addition, the facility provides for defined margin levels on a wide range of eligible financial instruments that may be pledged under the secured portion of the facility. The facility terminates in October 2000 with all loans outstanding at that date payable no later than October 2001. Capital Resources The Company conducts a substantial portion of all of its operating activities within its regulated subsidiaries Bear Stearns, BSSC, Bear, Stearns International Limited ("BSIL"), Bear Stearns International Trading Limited ("BSIT") and Bear Stearns Bank plc ("BSB"). In connection therewith, a substantial portion of the Company's long-term borrowings and equity have been used to fund investments in, and advances to, these regulated subsidiaries. The Company regularly monitors the nature and significance of assets or activities conducted outside the regulated subsidiaries and attempts to fund such assets with either capital or borrowings having maturities consistent with the nature and liquidity of the assets being financed. <PAGE> During the five-months ended November 26, 1999, the Company repurchased a total of 6,936,936 shares of Common Stock through open market transactions in connection with the CAP Plan at a cost of approximately $272.0 million. The Company intends, subject to market conditions, to continue to purchase, in future periods, a sufficient number of shares of Common Stock in the open market to enable the Company to issue shares with respect to all compensation deferred and any additional amounts allocated to participants under the CAP Plan. On October 28, 1999, the stockholders of the Company approved the Company's Stock Award Plan (the "Stock Award Plan"). The purpose of the Stock Award Plan is to secure for the Company and its stockholders the benefits of the additional incentive, inherent in the ownership of the Company's stock, by selected key employees of the Company who are important to the success and growth of the business. See Note 9 of Notes to Consolidated Financial Statements. Separately, on January 18, 2000, the Board of Directors of the Company approved an amendment to the Stock Repurchase Program (the "Repurchase Program") to allow the Company to purchase up to an additional $500 million of Common Stock. The Repurchase Program will be utilized primarily to acquire shares of Common Stock in order to mitigate the dilutive effect of the Company's Stock Award Plan. Purchases under the Repurchase Program may be made periodically in fiscal year 2000 or beyond either in the open market or through privately negotiated transactions. During the five-months ended November 26, 1999, the Company repurchased, under the previous repurchase program authorization, a total of 1,312,500 shares of Common Stock through open market transactions in connection with the Stock Award Plan at a cost of approximately $45.6 million. Purchases of Common Stock pursuant to the CAP Plan are not made pursuant to the Repurchase Program and are not included in calculating the maximum aggregate number of shares of Common Stock that the Company may purchase under the Repurchase Program. Cash Flows Cash and cash equivalents decreased by $558.6 million during the five-months ended November 26, 1999. Cash used in operating activities during the five-months ended November 26, 1999 was $794.6 million, primarily due to increases in securities borrowed, securities purchased under agreements to resell and customer receivables. Financing activities provided cash of $246.3 million, primarily derived from proceeds from the issuance of long-term borrowings, partially offset by payments for the retirement of short-term and long-term borrowings, as well as purchases of treasury stock. Cash used in investing activities of $10.3 million was primarily attributable to purchases of property, equipment and leasehold improvements, offset by net proceeds from sales of investment securities and other assets. <PAGE> Regulated Subsidiaries As registered broker-dealers, Bear Stearns and BSSC are subject to the net capital requirements of the Securities Exchange Act of 1934, the NYSE, and the Commodity Futures Trading Commission, which are designed to measure the general financial soundness and liquidity of broker-dealers. BSIL and BSIT, London-based broker-dealer subsidiaries, are subject to the regulatory capital requirements of the Securities and Futures Authority, a self-regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. Additionally, BSB is subject to the regulatory capital requirements of the Central Bank of Ireland. At November 26, 1999 Bear Stearns, BSSC, BSIL, BSIT, and BSB were in compliance with their respective regulatory capital requirements. Merchant Banking and High Yield Securities As part of the Company's merchant banking activities, it participates from time to time in principal investments in leveraged acquisitions. As part of these activities, the Company originates, structures and invests in merger, acquisition, restructuring, and leveraged capital transactions, including leveraged buyouts. The Company's principal investments in these transactions are generally made in the form of equity investments, equity-related investments or subordinated loans, and have not historically required significant levels of capital investment. At November 26, 1999, the Company's aggregate investments in leveraged transactions and its exposure related to any one transaction was not material to the Company's consolidated financial position. As part of the Company's fixed-income securities activities, the Company participates in the trading and sale of high yield, non-investment-grade debt securities, non-investment-grade mortgage loans, non-investment-grade commercial loans and securities of companies that are the subject of pending bankruptcy proceedings (collectively "high yield investments"). Non-investment-grade mortgage loans are principally secured by residential properties and include both non-performing loans and real estate owned. At November 26, 1999 the Company held high yield instruments of $1.5 billion owned and $0.3 billion sold short, as compared to $1.4 billion owned and $0.2 billion sold short as of June 30, 1999. These investments generally involve greater risk than investment-grade debt securities due to credit considerations, illiquidity of secondary trading markets, and increased vulnerability to general economic conditions. The level of the Company's high yield investment inventories, and the impact of such activities upon the Company's results of operations, can fluctuate from period to period as a result of customer demand and economic and market considerations. The Company's Risk Committee monitors exposure to market and credit risk with respect to high yield investment inventories and establishes limits with respect to overall market exposure and concentrations of risk by both individual issuer and industry group. <PAGE> Year 2000 Issue The Year 2000 issue was the result of legacy computer programs having been written using two digits rather than four digits to define the applicable year and therefore without consideration of the impact of the upcoming change in the century. Such programs, unless corrected, may not have been able to accurately process dates ending in the Year 2000 and thereafter. Through November 26, 1999, the amounts incurred related to the assessment of, and efforts in connection with, the Year 2000 and the development and execution of a remediation plan have approximated $74.0 million of which approximately $11.0 million in hardware and software has been capitalized. The total remaining Year 2000 project cost as of November 26, 1999 is estimated at approximately $4.0 million. Nothing has come to the Company's attention which would cause it to believe that its Year 2000 compliance effort was not successful. While the Company will continue to monitor for Year 2000 related problems, to date no significant Year 2000 issues have been encountered. <PAGE> Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal business activities by their nature engender significant market and credit risks. In addition, the Company is also subject to operating risk and funding risk. Managing these risks is critical to the success and stability of the Company. As a result, comprehensive risk management policies and procedures have been established to identify, control and monitor each of these major risks. Additionally, the Company's diverse portfolio of business activities helps to reduce the impact that volatility in any particular market may have on its net revenues. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates, equity and futures prices, changes in the implied volatility of interest rate, foreign exchange rate, equity and futures prices and also changes in the credit ratings of either the issuer or its related country of origin. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of the Company's market risk management procedures includes all market risk-sensitive financial instruments. The Company's exposure to market risk is directly related to its role as a financial intermediary in customer-related transactions and to its proprietary trading and arbitrage activities. For a discussion of the Company's primary market risk exposures, which include interest rate risk, foreign exchange rate risk, and equity price risk, and a discussion of how those exposures are managed, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Value at Risk The estimation of potential losses that could arise from changes in market conditions is typically accomplished through the use of statistical models, which seek to predict risk of loss based on historical price and volatility patterns. The output of such statistical models is commonly referred to as value at risk. Value at risk is used to describe a probabilistic approach to measuring the exposure to market risk. This approach utilizes statistical concepts to estimate the probability of the value of a financial instrument rising above or falling below a specified amount. The calculation utilizes the standard deviation of historical changes in value (i.e., volatility) of the market risk sensitive financial instruments to estimate the amount of change in the current value that could occur at a specified probability level. Measuring market risk using statistical risk management models has been the main focus of risk management efforts by many companies whose earnings are significantly exposed to changes in the fair value of financial instruments. <PAGE> The Company believes that statistical models alone do not provide a reliable method of monitoring and controlling risk. While value at risk models are relatively sophisticated, the quantitative risk information generated is limited by the parameters established in creating the related models. The financial instruments being evaluated, in some cases, have features which may trigger a potential loss in excess of the amounts previously disclosed if the changes in market rates or prices exceed the confidence level of the model used. Therefore, such models do not substitute for the experience or judgment of senior management and traders, who have extensive knowledge of the markets and adjust positions and revise strategies, as they deem necessary. The Company uses these models only as a supplement to other risk management tools. For purposes of Securities and Exchange Commission disclosure requirements, the Company has performed an entity-wide value at risk analysis of virtually all of the Company's financial assets and liabilities, including all reported financial instruments owned and sold, repurchase and resale agreements, and funding assets and liabilities. The value at risk related to non-trading financial instruments has been included in this analysis and not reported separately because the amounts were not material. The calculation is based on a methodology, which uses a one-day interval and a 95% confidence level. Interest rate and foreign exchange rate risk use a "Monte Carlo" value at risk approach. Monte Carlo simulation involves the generation of price movements in a portfolio using a random number generator. The generation of random numbers is based on the statistical properties of the securities in the portfolio. For interest rates, each country's yield curve has five factors that describe possible curve movements. These were generated from principal component analysis. In addition, volatility and spread risk factors were used, where appropriate. Intercountry correlations were also used. Equity price risk was measured using a combination of historical and Monte Carlo value at risk approaches. Equity derivatives were treated as correlated with various indexes, of which the Company used approximately fifty. Parameter estimates, such as volatilities and correlations, were based on daily tests through November 26, 1999. The total value at risk presented below is less than the sum of the individual components (i.e. Interest Rate Risk, Foreign Exchange Rate Risk, Equity Risk) due to the benefit of diversification among the risks. This table illustrates the value at risk for each component of market risk as of: November 26, June 30, in millions 1999 1999 - ----------- --------- ------- MARKET RISK Interest $ 11.9 $ 9.3 Currency 1.2 1.3 Equity 12.6 11.3 Diversification benefit (8.4) (7.2) ------- ------- Total $ 17.3 $ 14.7 ======= ======= <PAGE> As previously discussed, the Company utilizes a wide variety of market risk management methods, including: limits for each trading activity; marking all positions to market on a daily basis; daily profit and loss statements; position reports; aged inventory position reports; and independent verification of inventory pricing. Additionally, management of each trading department reports positions, profits and losses, and trading strategies to the Risk Committee on a weekly basis. The Company believes that these procedures, which stress timely communication between trading department management and senior management, are the most important elements of the risk management process. <PAGE> Part II- Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement Re Computation of Per Share Earnings (12) Statement Re Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K During the five-month period, the Company filed the following Current Reports on Form 8-K. (i) A Current Report on Form 8-K dated and filed on July 21, 1999, pertaining to the Company's results of operations for the three-months and fiscal year ended June 30, 1999. (ii) A Current Report on Form 8-K dated July 22, 1999 and filed on July 28, 1999, pertaining to an opinion of Cadwalader, Wickersham & Taft as to the legality of Global Notes due 2001 and 2002 ("Global Notes") issued by the Company and an opinion of Cadwalader, Wickersham & Taft as to certain federal income tax consequences in connection with the offering of the Global Notes. (iii) A Current Report on Form 8-K dated August 5, 1999 and filed on August 6, 1999, pertaining to Bear, Stearns Securities Corp.'s settlement of an administrative proceeding filed by the United States Securities and Exchange Commission resolving allegations related to the firm's role as clearing broker for A.R. Baron & Co. (iv) A Current Report on Form 8-K dated August 9, 1999 and filed on August 11, 1999, pertaining to an opinion of Cadwalader, Wickersham & Taft as to certain federal income tax consequences related to the Company's Medium Term Note Program. (v) A Current Report on Form 8-K dated October 13, 1999 and filed on October 14, 1999, pertaining to the Company's results of operations for the quarter ended September 24, 1999. (vi) A Current Report on Form 8-K dated October 29, 1999 and filed on November 3, 1999, announcing its declaration of quarterly cash dividends and a 5% stock dividend on its outstanding shares of common stock. <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. The Bear Stearns Companies Inc. (Registrant) Date: March 3, 2000 By: /s/ Marshall J Levinson Marshall J Levinson Controller (Principal Accounting Officer) <PAGE> THE BEAR STEARNS COMPANIES INC. FORM 10-Q Exhibit Index Exhibit No. Description Page (11) Statement Re Computation of Per Share Earnings 34 (12) Statement Re Computation of Earnings to Fixed Charges 35 (27) Financial Data Schedule 36 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> <TABLE> EXHIBIT 11 THE BEAR STEARNS COMPANIES INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) <CAPTION> Five-Months Ended ------------------------------------- November 26, November 27, 1999 1998 -------------------------------------- (In thousands, except per share data) <S> <C> <C> Weighted average common and common equivalent shares outstanding: Average Common Stock outstanding 122,832 125,018 Average Common Stock equivalents: Common Stock issuable under employee benefit plans 490 511 Common Stock issuable assuming conversion of CAP Units 42,262 41,712 ------------ ------------ Total weighted average common and common equivalent shares outstanding (1) 165,584 167,241 ============ ============ Net income $285,814 $130,268 Preferred Stock dividend requirements (16,297) (16,614) Income adjustment (net of tax) applicable to deferred compensation arrangements 25,839 7,907 ------------ ------------ Adjusted net income $295,356 $121,561 ============ ============ Earnings per share (1) $ 1.78 $ 0.73 ============ ============ (1) Reflects all stock dividends declared through October 29, 1999. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <TEXT> <TABLE> THE BEAR STEARNS COMPANIES INC. STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 (In thousands, except for ratio) <CAPTION> (Unaudited) (Unaudited) Five-Months Five-Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended Ended Ended Ended November 26,1999 November 27,1998 June 30, 1999 June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995 ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Earnings before taxes on income $ 453,592 $ 189,728 $ 1,064,108 $ 1,063,492 $ 1,013,690 $ 834,926 $ 388,082 ---------- ----------- ----------- ------------ ------------- ------------- ------------- Add: Fixed Charges Interest 1,531,787 1,650,885 3,379,914 3,638,513 2,551,364 1,981,171 1,678,515 Interest factor in rents 12,783 12,870 31,363 30,130 26,516 25,672 24,594 ----------- ----------- ----------- ------------ ------------- ------------- ------------- Total fixed charges 1,544,570 1,663,755 3,411,277 3,668,643 2,577,880 2,006,843 1,703,109 ----------- ----------- ----------- ------------ ------------- ------------- ------------- Earnings before fixed charges and taxes on income $ 1,998,162 $ 1,853,483 $ 4,475,385 $ 4,732,135 $ 3,591,570 $ 2,841,769 $ 2,091,191 =========== =========== =========== ============ ============= ============= ============= Ratio of earnings to fixed charges 1.3 1.1 1.3 1.3 1.4 1.4 1.2 =========== =========== =========== ============ ============= ============= ============= </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> BD <LEGEND> Exhibit 27 THE BEAR STEARNS COMPANIES INC. FINANCIAL DATA SCHEDULE (UNAUDITED) (In thousands, except share data) This schedule contains summary financial information extracted from the unaudited Consolidated Statement of Financial Condition at November 26, 1999 and the unaudited Consolidated Statement of Income for the five-months ended November 26, 1999, which are contained in the body of the accompanying Form 10-Q and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 5-Mos <FISCAL-YEAR-END> Nov-30-2000 <PERIOD-END> Nov-26-1999 <CASH> 1,570,483 <RECEIVABLES> 17,381,078 <SECURITIES-RESALE> 35,999,998 <SECURITIES-BORROWED> 60,429,297 <INSTRUMENTS-OWNED> 40,764,802 <PP&E> 504,040 <TOTAL-ASSETS> 162,037,962 <SHORT-TERM> 13,424,201 <PAYABLES> 48,440,334 <REPOS-SOLD> 53,323,109 <SECURITIES-LOANED> 0 <INSTRUMENTS-SOLD> 19,704,921 <LONG-TERM> 15,911,392 <PREFERRED-MANDATORY> 0 <PREFERRED> 800,000 <COMMON> 184,806 <OTHER-SE> 3,957,141 <TOTAL-LIABILITY-AND-EQUITY> 162,037,962 <TRADING-REVENUE> 745,679 <INTEREST-DIVIDENDS> 1,810,598 <COMMISSIONS> 419,619 <INVESTMENT-BANKING-REVENUES> 434,410 <FEE-REVENUE> 0 <INTEREST-EXPENSE> 1,531,787 <COMPENSATION> 973,990 <INCOME-PRETAX> 453,592 <INCOME-PRE-EXTRAORDINARY> 453,592 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 285,814 <EPS-BASIC> 1.78 <EPS-DILUTED> 1.78 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CA

https://www.sec.gov/Archives/edgar/data/356028/0000356028-00-000003.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, FgF/1bmDSe21WbFGtFNy4jS9LcCmxDxkRbVVjKJxFpWmWK3hXdBoYfkl5xsK2RmI U01fuq4od2a4Tjvd+bC9mQ== <SEC-DOCUMENT>0000356028-00-000003.txt : 20000214 <SEC-HEADER>0000356028-00-000003.hdr.sgml : 20000214 ACCESSION NUMBER: 0000356028-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: SEC FILE NUMBER: 001-09247 FILM NUMBER: 534007 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, 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, 1999 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 1-9247 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 11749 (Address of principal executive offices) (Zip Code) (631) 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 February 7, 2000 par value $.10 per share 541,972,678 <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES INDEX PART I. Financial Information: Page No. Item 1. Consolidated Condensed Balance Sheets - December 31, 1999 and March 31, 1999............... 1 Consolidated Condensed Statements of Operations - Three Months Ended December 31, 1999 and 1998...... 2 Consolidated Condensed Statements of Operations - Nine Months Ended December 31, 1999 and 1998....... 3 Consolidated Condensed Statements of Cash Flows - Nine Months Ended December 31, 1999 and 1998....... 4 Notes to Consolidated Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 9 Item 3. Quantitative and Qualitative Disclosure of Market Risk 16 PART II. Other Information: Item 1. Legal Proceedings.................................. 17 Item 2. Exhibits and Reports on Form 8-K................... 18 <PAGE> Part I. FINANCIAL INFORMATION Item 1: COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In millions) <TABLE> <CAPTION> December 31, March 31, 1999 1999 ------------ --------- (Unaudited) <S> <C> <C> ASSETS: Cash and cash equivalents $ 294 $ 399 Marketable securities 96 137 Trade and installment accounts receivable 2,016 2,021 Inventories and other current assets 88 74 ------- ------- TOTAL CURRENT ASSETS 2,494 2,631 Installment accounts receivable, due after one year 3,680 2,844 Property and equipment 744 598 Purchased software products 1,130 221 Excess of cost over net assets acquired 3,971 1,623 Investments and other noncurrent assets 213 153 ------- ------ TOTAL ASSETS $12,232 $8,070 ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY: Loans payable and current portion of long-term debt $ 932 $ 492 Other current liabilities 1,924 1,371 Long-term debt 4,765 2,032 Deferred income taxes 1,096 1,034 Deferred maintenance revenue 457 412 Stockholders' equity 3,058 2,729 ------- ------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $12,232 $8,070 ======= ====== <FN> See Notes to Consolidated Condensed Financial Statements. </FN> </TABLE> <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (In millions, except per share amounts) <TABLE> <CAPTION> For the Three Months Ended December 31, -------------------- 1999 1998 -------- -------- <S> <C> <C> Product revenue and other related income $ 1,585 $ 1,176 Maintenance fees 227 185 -------- -------- TOTAL REVENUE 1,812 1,361 Costs and expenses: Selling, marketing and administrative 674 510 Product development and enhancements 150 105 Commissions and royalties 89 68 Depreciation and amortization 160 78 Interest expense - net 97 33 -------- -------- TOTAL COSTS AND EXPENSES 1,170 794 -------- -------- Income before income taxes 642 567 Provision for income taxes 241 212 -------- -------- NET INCOME $ 401 $ 355 BASIC EARNINGS PER SHARE $ .74 $ .66 -------- -------- Basic weighted average shares used in computation 540 538 DILUTED EARNINGS PER SHARE $ .72 $ .64 -------- -------- Diluted weighted average shares used in computation 559 554 <FN> See Notes to Consolidated Condensed Financial Statements. </FN> </TABLE> <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (In millions, except per share amounts) <TABLE> <CAPTION> For the Nine Months Ended December 31, -------------------- 1999 1998 -------- -------- <S> <C> <C> Product revenue and other related income $ 4,002 $ 3,073 Maintenance fees 638 551 -------- -------- TOTAL REVENUE 4,640 3,624 Costs and expenses: Selling, marketing and administrative 1,805 1,454 Product development and enhancements 412 307 Commissions and royalties 229 183 Depreciation and amortization 430 241 Interest expense - net 244 91 Purchased research and development 646 - 1995 Stock Plan charge - 1,071 -------- -------- TOTAL COSTS AND EXPENSES 3,766 3,347 Income before income taxes 874 277 Provision for income taxes 570 109 -------- -------- NET INCOME $ 304 $ 168 BASIC EARNINGS PER SHARE $ .56 $ .31 -------- -------- Basic weighted average shares used in computation 538 548 DILUTED EARNINGS PER SHARE $ .55 $ .30 -------- -------- Diluted weighted average shares used in computation 555 565 <FN> See Notes to Consolidated Condensed Financial Statements. </FN> </TABLE> <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) <TABLE> <CAPTION> For the Nine Months Ended December 31, ------------------------------- 1999 1998 ------------- ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 304 $ 168 Adjustments to reconcile net income to net cash provided by operating activities, excluding effects of acquisitions: Depreciation and amortization 430 241 Provision for deferred income taxes 76 100 Charge for purchased research and development 646 - Compensation expense related to stock and pension plans 28 776 Increase in noncurrent installment accounts receivable (909) (415) Increase (decrease) in deferred maintenance revenue 5 (31) Gain on sale of property and equipment - (14) Changes in other operating assets and liabilities 254 (127) -------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 834 698 INVESTING ACTIVITIES: Acquisitions, primarily purchased software, marketing rights and intangibles (4,139) (217) Purchase of property and equipment (119) (142) Proceeds from sale of property and equipment - 38 Decrease (increase) in current marketable securities 127 (47) Capitalized software development costs (25) (21) -------------- ------------ NET CASH USED IN INVESTING ACTIVITIES (4,156) (389) FINANCING ACTIVITIES: Debt borrowings - net 3,163 567 Dividends paid (21) (23) Exercise of common stock options/other 81 31 Purchases of treasury stock - (920) -------------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,223 (345) DECREASE IN CASH AND CASH EQUIVALENTS BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH (99) (36) Effect of exchange rate changes on cash (6) 4 -------------- ------------ DECREASE IN CASH AND CASH EQUIVALENTS (105) (32) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 399 251 -------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 294 $ 219 ============== ============ <FN> See Notes to Consolidated Condensed Financial Statements. </FN> </TABLE> <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1999 (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed 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 considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the nine months ended December 31, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2000. 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, 1999. Cash Dividends: In December 1999, the Company's Board of Directors declared its regular, semi-annual cash dividend of $.04 per share. The dividend was paid on January 10, 2000 to stockholders of record on December 22, 1999. Statements of Cash Flows: For the nine months ended December 31, 1999 and 1998, interest payments were $243 million and $98 million respectively, and income taxes paid were $246 million and $171 million, respectively. Net Income per Share: Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period, plus the assumed exercise of all dilutive securities, such as stock options. <TABLE> <CAPTION> (In millions, except per share amounts) For the Three Months For the Nine Months Ended December 31, Ended December 31, -------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Income $ 401 $ 355 $ 304 $ 168 ======== ======== ======== ======== Diluted Earnings Per Share - ------------------------------------- Weighted average shares outstanding and common share equivalents 559 554 555 565 Diluted Earnings Per Share $ .72 $ .64 $ .55 $ .30 ======== ======== ======== ======== Diluted Share Computation: Average common shares outstanding 540 538 538 548 Average common share equivalents 19 16 17 17 -------- -------- -------- -------- Weighted average shares outstanding and common share equivalents 559 554 555 565 ======== ======== ======== ======== </TABLE> <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1999 (Unaudited) Comprehensive Income: Financial Accounting Standard ("FAS") No. 130, "Reporting Comprehensive Income" establishes new rules for reporting and displaying comprehensive income and its components; however, the adoption has no impact on the Company's net income or shareholders' equity. Comprehensive income includes foreign currency translation adjustments and unrealized gains or losses on the Company's available-for-sale securities which, prior to adoption, were reported separately in shareholders' equity. The components of comprehensive income, net of related tax, for the three month and nine month periods ended December 31, 1999 and 1998 are as follows: <TABLE> <CAPTION> (In millions) For the Three Months For the Nine Months Ended December 31, Ended December 31, -------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income $ 401 $ 355 $ 304 $ 168 Foreign currency translation adjustment (44) (5) (42) 29 Reclassification adjustment included in net income (9) -------- -------- -------- -------- Total comprehensive income $ 357 $ 350 $ 253 $ 197 ======== ======== ======== ======== </TABLE> Software Revenue Recognition: In October 1997, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-2 "Software Revenue Recognition," as amended in 1998 by SOP 98-4 and further amended by SOP 98-9, which is effective for transactions entered into in fiscal years beginning after March 15, 1999. These SOPs provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions, requiring deferral of part or all of the revenue related to a specific contract depending on the existence of vendor specific objective evidence and the ability to allocate the total contract value to all elements within the contract. Effective for the quarter ended June 30, 1999, the Company implemented the guidelines of SOP 98-9, with no material impact on its overall maintenance deferral. The Company believes that its maintenance deferral is consistent with current interpretations; however, as additional implementation guidelines become available, there may be unanticipated changes in the Company's revenue recognition practices including, but not limited to, changes in the period over which revenue is recognized up to and including recognition of revenue over the contract term. Any future implementation guidelines and interpretations may also require the Company to further change its business practices in order to continue to recognize a substantial portion of its software revenue when the product is delivered. These changes may extend sales cycles, increase administrative costs, or otherwise adversely affect existing operations and results of operations. The Company also continues to evaluate its pricing models to ensure that it remains competitive in an evolving marketplace. As such, there are no assurances that a change in the Company's pricing model will not impact its ability to recognize a substantial portion of its software revenue when the product is delivered. Segment Disclosure: During fiscal year 1999, the Company adopted FAS No. 131, "Disclosures about Segments and Related Information" which establishes standards for reporting operating segments and disclosures about products and services, geographic areas, and major customers. The Company operates as a single segment providing integrated computer software solutions. The Company has no individual customers which constitute a significant concentration. See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information. <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1999 (Unaudited) NOTE B - ACQUISITIONS On May 28, 1999, the Company acquired approximately 98% of the issued and outstanding shares of common stock of Platinum technology International, inc. ("Platinum"), and on June 29, 1999, merged one of its wholly owned subsidiaries into Platinum at which time Platinum became a wholly owned subsidiary of the Company. The aggregate purchase price, including assumed liabilities, of approximately $4.2 billion was paid, or will be paid, from drawings under the Company's $4.5 billion credit agreements. Platinum was engaged in providing software products in the areas of database management, e-commerce, application infrastructure management, decision support, data warehousing, and knowledge management, as well as Year 2000 reengineering and other consulting services. The Company recorded a $646 million charge against earnings for the write-off of purchased Platinum 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, 1999, net income for the nine months ended December 31, 1999 would have been $950 million, or $1.71 per share on a diluted basis. The following table reflects pro-forma combined results of operations of the Company and Platinum on the basis that the acquisition of Platinum had taken place at the beginning of the fiscal year for all periods presented: <TABLE> <CAPTION> (In millions, except per share amounts) For the Three Months For the Nine Months Ended December 31, Ended December 31, -------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Revenue $ 1,812 $ 1,679 $ 4,750 $ 4,422 Net income (loss) 401 327 241 (42) Diluted earnings (loss) per share $ .72 $ .59 $ .43 $ (.08) Shares used in computation 559 554 555 548 </TABLE> The following table reflects pro-forma combined results of operations of the Company and Platinum on the basis that the acquisition of Platinum had taken place at the beginning of the fiscal year for all periods presented. All special charges, including the purchased research and development charge for Platinum in fiscal year 2000 of $646 million, the non-cash asset writedown of $37 million recorded in fiscal year 2000, the one-time charge of $1,071 million relating to the 1995 Key Employee Stock Ownership Plan (the "1995 Plan") recorded in fiscal year 1999, and all special charges recorded by Platinum in fiscal year 1999 have been excluded from all periods presented: <TABLE> <CAPTION> (In millions, except per share amounts) For the Three Months For the Nine Months Ended December 31, Ended December 31, -------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Revenue $ 1,812 $ 1,679 $ 4,750 $ 4,422 Net income 425 331 910 702 Diluted earnings per share $ .76 $ .60 $ 1.64 $ 1.24 Shares used in computation 559 554 555 565 </TABLE> <PAGE> COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1999 (Unaudited) NOTE B - ACQUISITIONS (CONTINUED) 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 2000 or of future operations of the combined entities under the ownership and operation of the Company. On March 9, 1999, the Company acquired more than 98% of the issued and outstanding shares of common stock of Computer Management Sciences, Inc. ("CMSI"), and on March 19, 1999, merged one of its wholly owned subsidiaries into CMSI at which time CMSI became a wholly owned subsidiary of the Company. The aggregate purchase price of approximately $400 million was funded from drawings under the Company's credit agreements and cash from operations. CMSI was engaged in providing custom developed information technology solutions to a Fortune 1000 client base. The acquisition was accounted for as a purchase. During fiscal years 2000 and 1999, the Company acquired a number of other consulting businesses and product technologies in addition to the ones described above which, either individually or collectively, are not material. The acquisitions were all accounted for as purchases. The excess of cost over net assets acquired is amortized on a straight-line basis over the expected period to be benefited. The Consolidated Condensed Statements of Operations reflect the results of operations of the companies since the effective dates of the purchases. NOTE C - ASSET WRITEDOWN In the quarter ended December 31, 1999, the Company recorded a pre-tax impairment charge of approximately $37 million associated with an other than temporary decline in the fair value of $50 million of securities of CHS Electronics, Inc. purchased in the quarter ended June 1999. Such charge is included in selling, marketing, and administrative expenses in the accompanying Consolidated Condensed Statement of Operations. <PAGE> 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 "Results of Operations". RESULTS OF OPERATIONS Revenue For the three months ended December 31, 1999: Total revenue for the quarter ended December 31, 1999 increased 33%, or $451 million, over the prior year's comparable quarter. Excluding an approximate $37 million negative foreign exchange impact, total revenue increased 36% to $1.85 billion. The product revenue achievement and growth over the prior year's comparable quarter were primarily attributable to demand for the Company's enterprise licensing plans, offering clients increased flexibility; the addition of Platinum products; and demand for Unicenter TNG (The Next Generation), a family of integrated business solutions for monitoring and administering systems management across multi-platform environments. These factors accounted for the increase in product revenue of approximately $360 million in the third quarter. Since the beginning of the fiscal year, the Company introduced the Millennium License, a perpetual MIPS based license with added flexibility in usage and pricing as well as enterprise licensing with separate optional maintenance. Acquisitions of services companies, including Platinum's services operations, as well as internal growth, increased professional services revenue by 64% or $49 million over the prior year's comparable period. Professional Services revenue is reflected in the "Product revenue and other related income" line of the Company's Statement of Operations. Maintenance revenue increased 23%, or $42 million, over last year's comparable quarter. Additional maintenance revenue from prior year license arrangements, as well as from Platinum licenses, was partially offset by the ongoing trend of site consolidations and expanding distributed platform revenues, which yield lower maintenance revenue. <TABLE> <CAPTION> (In millions) Product/ Professional Quarter Ended Maintenance Services Total ------------- ----------- ------------ --------- <S> <C> <C> <C> December 31, 1999 $ 1,686 $ 126 $ 1,812 December 31, 1998 1,284 77 1,361 </TABLE> Professional Services revenue for the quarter ended December 31, 1999 was negatively impacted by the Company's use of consultants to supplement its technical resources during and after the changeover of the date to the year 2000. The consultants were positioned at large client sites without charge to the client, to assist with any potential difficulties attributable to the date change. Such activities were conducted by the Company during the last five days of 1999, and the first five days of 2000. Total North American revenue for the third quarter grew 41% over the prior year's third quarter. This resulted from continued growth in distributed platform product sales, OS/390 solutions, the addition of Platinum products, and professional services. North American sales represented 68% of revenue for the December 1999 quarter compared to 64% of revenue for the December 1998 quarter. The European market, the Company's <PAGE> Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS largest outside of North America, was marginally higher in the current quarter, with growth in the Asia/Pacific market contributing more than half of the $95 million increase over the prior year's comparable quarter. <TABLE> <CAPTION> (In millions) Quarter Ended North America International Total ------------- ------------- ------------- --------- <S> <C> <C> <C> December 31, 1999 $ 1,232 $ 580 $ 1,812 December 31, 1998 876 485 1,361 </TABLE> Price changes did not have a material impact in this quarter or the prior year's comparable quarter. For the nine months ended December 31, 1999: On a year to date basis, total revenue increased 28%, or $1,016 million, from the comparable period in the prior year. The increase was primarily attributable to growth in distributed platform product revenue and the addition of Platinum products, which accounted for 50% of the Company's overall year to date revenue, as well as growth in professional services revenue. Year to date distributed platform and professional services revenue increased 35% and 97%, or $597 and $190 million, respectively, over the prior year. Maintenance revenue increased 16%, or $87 million, over last year's comparable period. <TABLE> <CAPTION> (In millions) Product/ Professional Nine Months Ended Maintenance Services Total ---------------- ----------- ------------ --------- <S> <C> <C> <C> December 31, 1999 $ 4,255 $ 385 $ 4,640 December 31, 1998 3,429 195 3,624 </TABLE> Total North American revenue for the nine months ended December 31, 1999 grew 34% over the prior year's comparable period. On a year to date basis, North American sales represented 69% of revenue for fiscal year 2000 and 65% of revenue for fiscal year 1999. On a year to date basis, international revenue increased by $207 million, or 17%, over the prior year. In addition, the effect of exchange rates on the US dollar versus foreign currencies decreased revenue by $76 million for the current year. Excluding the exchange impact, international revenue increased by $283 million, or 23% over the prior year. The growth in international revenue was supported by the Asia/Pacific operations, which contributed more than half of the $207 million increase this fiscal year compared to the prior fiscal year. <TABLE> <CAPTION> (In millions) Nine Months Ended North America International Total ---------------- ------------- ------------- --------- <S> <C> <C> <C> December 31, 1999 $ 3,182 $ 1,458 $ 4,640 December 31, 1998 2,373 1,251 3,624 </TABLE> Price changes did not have a material impact year to date in fiscal year 2000 or in the comparable period in fiscal year 1999. <PAGE> Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Costs and Expenses For the three months ended December 31, 1999: Selling, marketing and administrative expenses as a percentage of total revenue for the third quarter, excluding the asset writedown of $37 million, decreased to 35% from 37% the prior year. The decrease was largely attributable to efficiencies realized by eliminating redundant headcount and overhead expenses as a result of the Platinum integration. This was partially offset by an increase in personnel costs related to an overall increase in headcount resulting from the expansion of the Company's Field Services Group (professional services technical resources), as well as higher spending on marketing associated with a new television campaign which commenced in the quarter ended December 31, 1999. Net research and development expenditures increased $45 million, or 43%, for the third quarter compared to last year's third quarter. There was continued emphasis on adapting and enhancing products for the distributed processing environment, in particular Unicenter TNG, Jasmine ii, Neugents, the Enterprise and Workgroup Solutions, as well as broadening of the Company's e-commerce product offerings, and additional expenses related to development efforts of products obtained through the acquisition of Platinum. Commissions and royalties as a percentage of revenue were 5% for both the December 1999 and 1998 quarters. Depreciation and amortization expense in the third quarter increased $82 million from the comparable quarter in the prior year. The increase was primarily due to the additional amortization of purchased intangibles associated with the acquisition of Platinum marginally offset by the scheduled reductions in the amortization associated with past acquisitions. Net interest expense increased $64 million for the third quarter compared to last year's third quarter. The additional interest expense was related to the increase in average debt outstanding associated with borrowings incurred to fund the Platinum acquisition in the first quarter of fiscal year 2000 and other smaller acquisitions in the current and prior fiscal years. For the nine months ended December 31, 1999: On a year to date basis, selling, marketing and administrative expenses as a percentage of total revenue, excluding the asset writedown in the current quarter, decreased to 38% from 40% the prior year. This decrease was largely attributable to efficiencies obtained by eliminating redundant headcount and overhead expenses as a result of the Platinum integration. Net research and development expenditures increased $105 million, or 34%, year to date. The increase was primarily attributable to continued emphasis on adapting and enhancing products for the distributed processing environment, as well as a broadening of the Company's e-commerce product offerings, and development of technology and products obtained through the acquisition of Platinum. Commissions and royalties as a percentage of revenue were 5% year to date for both fiscal years 2000 and 1999. On a year to date basis, depreciation and amortization expense increased by $189 million from the prior year. The increase was primarily due to the additional amortization of purchased intangibles associated with the acquisition of Platinum marginally offset by the scheduled reductions in the amortization associated with prior acquisitions. Net interest expense increased $153 million, or 168%, year to date from last year's comparable period as a result of the increase in average debt outstanding associated with the Platinum acquisition in the first quarter of fiscal year 2000 and other acquisitions during the fiscal year ended March 31, 1999. Operating Margins The pretax income of $642 million for the third quarter of fiscal year 2000 is an increase of 13%, or $75 million, over the third quarter in the prior year. Excluding the $37 million asset writedown, pretax income was $679 million, a 20% increase over the prior year's third quarter. The year to date pretax income was $874 <PAGE> Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS million, reflecting the $646 million charge for in-process research and development relating to the acquisition of Platinum, and the $37 million asset writedown. Net income in the December 1999 quarter was $401 million, an increase of $46 million, or 13%, over the December 1998 quarter. Year to date net income, excluding the in-process research and development charge and asset writedown, was $973 million, an increase of $130 million, or 15%, over last year's net income, excluding the one-time after tax charge of $675 million associated with the vesting of 20.25 million shares under the 1995 Plan. The Company's consolidated effective tax rate for both comparable quarters and year to date, excluding the in-process research and development charge, was 37.5%. The current year's effective tax rate remains unchanged. The addition of non-deductible intangibles from the acquisition of Platinum was offset by a shift in the mix of domestic and foreign income. 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 revenue has been greater than the first half of the year, as these two quarters coincide with clients' calendar year-end budget periods and culmination of the Company's annual sales plan. This historically higher second half revenue has 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, particularly due to the acquisition of Platinum during the June 1999 quarter. Under the 1998 Incentive Award Plan (the "1998 Plan"), a total of 4 million Phantom Shares, as defined by the 1998 Plan, were available for grant to certain of the Company's employees from time to time through March 31, 2008. As of December 31, 1999, there are approximately 1.8 million Phantom Shares outstanding. Each Phantom Share is equivalent to one share of the Company's Common Stock. Vesting is contingent upon attainment of specific criteria, including an annual Target Closing Price ("Price") for the Company's Common Stock, and the participant's continued employment. The Price is based on the average closing price of the Company's Common Stock on the New York Stock Exchange for the ten trading days up to and including March 31 of each fiscal year. If this Price is met on March 31, 2000, the Company will recognize a non-cash charge over the employment period. At this time, since the Price is undetermined, the amount of any such charge is unknown. Risks and Uncertainties The Company's products are designed to improve the productivity and efficiency of its clients' information 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 information processing resources. However, a general or regional slowdown in the world economy could adversely affect the Company's operations. Additionally, further deterioration of the exchange rate of foreign currencies against the US Dollar may continue to affect the Company's ability to increase its revenue within those markets. As the Company grows, it is increasingly dependent upon large dollar enterprise transactions with individual clients. The size and magnitude of such transactions have increased over time. There are no assurances that comparable transactions will occur in subsequent periods. <PAGE> Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's future operating results may also be affected by a number of other factors, including but not limited to: the significant percentage of CA's quarterly sales consummated in the last few days of the quarter making financial predictions especially difficult and raising a substantial risk of variance in actual results; the risks of potential litigation arising from the year 2000 date change for computer programs; the emergence of new competitive initiatives resulting from rapid technological advances or changes in pricing in the market; the risks associated with new product introductions as well as the uncertainty of customer acceptance of these new or enhanced products from either CA or its competition; risks associated with the entry into new markets at lower profit margins, such as professional services; the risks associated with integrating newly acquired businesses and technologies; delays in product delivery; reliance on mainframe capacity growth; the ability to recruit and retain qualified personnel; business conditions in the client/server and mainframe software and hardware markets; uncertainty and volatility associated with Internet and eBusiness related activities; use of software patent rights to attempt to limit competition; fluctuations in foreign currency exchange rates and interest rates; the volatility of the international marketplace; and other risks described in the Company's filings with the Securities and Exchange Commission. In-Process Research and Development In the first quarter of fiscal year 2000, there was an after tax charge of $646 million for in-process technology relating to the Platinum acquisition, approximately 15 percent of the aggregate purchase price. There was no acquired in-process technology charge in fiscal year 1999. Acquired in-process research and development ("in- process R&D") charges relate to acquisitions of software companies accounted for under the purchase method, in which a portion of the purchase price is allocated to acquired in-process technology and expensed immediately since the technological feasibility of the research and development projects have not yet been achieved and are believed to have no alternative future use. An independent valuation was performed and used as an aid in determining the fair value of the identifiable assets and in allocating the purchase price among the acquired assets, including the portion of the purchase price attributed to in-process R&D. The "Income Approach" was utilized for the valuation analysis. This approach focuses on the income producing capability of the asset and was obtained through on-site interviews with management, review of data provided by the Company and the acquired companies, and analysis of relevant market sizes, growth factors, and expected trends in technology. The steps followed in applying this approach included estimating the expected cash flow over its life and converting these cash flows to present value. Discounting the net cash flows back to their present value was based on a risk adjusted discount rate. The rate used in discounting the net cash flows from the in-process R&D ranged from 20 to 23 percent. This discount, higher than the Company's, is due to the uncertainties surrounding the successful development of in-process R&D. The projects, on average, were approximately 80 percent complete. The Company believes the discount rate is appropriate given the level of risk of unsuccessful completion of the technology after evaluating the stage of each project reviewed. The Platinum projects currently under development consist primarily of application development, database and enterprise management tools, and data warehousing solutions. If these projects are not successfully developed, the revenue and profitability of the Company may be adversely affected in future periods. Additionally, the value of other intangible assets acquired may become impaired. Consistent with original projections, the Company's benefit from the purchased in-process R&D in the current fiscal quarter was marginal. The Company expects the benefit to increase over the next several quarters. Management believes that the assumptions used in the purchased in-process R&D valuation reasonably estimate the future benefits. There can be no assurance that in future periods actual results will not deviate from current estimates. <PAGE> Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year 2000 As of the date of this filing, the Company has not incurred any significant business disruptions nor product interruptions as a result of the Year 2000 date change. While no such occurrence has developed to date, Year 2000 issues may not become apparent as of this date, and therefore there is no assurance that the company will not experience future disruptions. The Company has designed and tested substantially all of its recent product offerings to be Year 2000 compliant. These products have met rigorous compliance criteria and have undergone extensive review to detect any Year 2000 failures. The Company has publicly identified any products that have not been and will not be updated to be Year 2000 compliant and has been encouraging clients using these products to migrate to compliant versions/products. In general, these Year 2000 compliance efforts have been part of the Company's ongoing software development process. As such, incremental costs are not deemed material and have been included in net research and development expenses. The Year 2000 readiness of the Company's customers varies, and the Company continues to actively encourage its customers to prepare their own systems, making available a broad array of product, service, and educational offerings. These offerings have been made available to all clients and prospects. It is possible that the Company may experience increased expense levels addressing migration issues for such customers. There can be no assurances that the Company's compliant products do not contain undetected problems associated with Year 2000 compliance. Although the Company believes that its license agreements provide it with protection against liability, the Company cannot predict whether, or to what extent, any legal claims will be brought, or whether the Company will suffer any potential liability as a result of any adverse consequences to its customers. The Company has recognized the significance of the Year 2000 issue as it relates to its internal systems including IT and non-IT systems, and understands that the impact extends beyond traditional hardware and software to automated facility systems and third party suppliers. The Company established a comprehensive four-step plan: (1) assessment; (2) remediation; (3) testing; and (4) implementation, with dedicated project managers to address Year 2000 issues. With regard to internal administrative and financial systems, the Company completed conversion and testing efforts. For its facility-related systems such as telephone, voicemail, and security, the Company conducted internal assessment audits and confirmed Year 2000 readiness with its vendors. As part of the contingency planning efforts, the Company created alternative strategies, where necessary, if significant exposures were identified up to and including the Company's computer systems being rendered inoperable. The contingency plan addressed these issues including temporary relocation of employees, manual workarounds, and the use of Company-owned generators and cellular phones. The total cost of preparing internal systems to be Year 2000 compliant has not been and is not expected to be material to the Company's operations, liquidity, or capital resources. Total known expenditures, excluding personnel costs of existing staff, related to internal systems' Year 2000 readiness was approximately $30 million. Such expenditures commenced in 1996. Additionally, the Company adopted a Millennium Watch plan whereby clients around the world were provided with 24 hour onsite and in-house technical support from December 27, 1999 through January 7, 2000. In addition, the Company extended the schedules of the internal administrative and facility related staff to support the infrastructure during the Millennium Watch. It is estimated that the plan has resulted in approximately $8 million of additional expenditures over the period. Demand for certain of the Company's products was generated by customers who were replacing or upgrading computer systems to accommodate the Year 2000 date change. With the arrival of Year 2000, demand for some of the Company's products may diminish, which could negatively impact the Company's revenue growth rate. Additionally, because the Company believes that some of its customers were allocating a substantial portion of their 1999 IT budgets to Year 2000 compliance, sales of certain of the Company's traditional product offerings may be adversely affected through the end of fiscal year 2000. <PAGE> Item 2: (Continued) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and capital resources Liquidity and capital resources: The Company's cash, cash equivalents and marketable securities increased approximately $34 million from the September 30, 1999 balance of $356 million to $390 million at December 31, 1999. Cash generated from operations for the quarter was $163 million. On a year to date basis, cash from operations was $834 million as compared with $698 million for the prior comparable fiscal period. The current year was negatively impacted by $220 million of higher taxes and interest paid versus the prior year. The prior year was negatively impacted by a $318 million withholding tax payment related to the 1995 Plan. The Company continues to offer financing alternatives to its clients. The Company has increased the use of financing arrangements, which negatively impacted the cash generated from operations. Such financing, which the Company views as a competitive advantage, has been widely accepted by clients who have elected the use of this alternative. The Company's bank credit facilities consist of a $1.5 billion 364-day revolving credit facility, a $1 billion 4-year revolving credit facility, and a $2 billion 4-year term loan. Interest charged is based on the London InterBank Offered Rate ("LIBOR") subject to a margin based on a bank credit facility ratings grid. The Company is required to maintain certain financial ratios. At December 31, 1999, a total of $3.5 billion was drawn under these facilities. The company also utilizes other sources of liquidity in its capital structure. On April 24, 1998, the Company issued $1.75 billion of unsecured senior notes. Amounts borrowed, rates and maturities for each issue were $575 million at 6 1/4% due April 15, 2003, $825 million at 6 3/8% due April 15, 2005 and $350 million at 6 1/2% due April 15, 2008. Proceeds were used to repay borrowings from bank credit facilities and for general corporate purposes. The issuance of these notes allowed the Company to extend the maturity of its debt, commit to an attractive fixed rate of interest and broaden the Company's sources of liquidity. Debt ratings for the Company's senior unsecured notes and its bank credit facilities are Baa1 and BBB+ from Moody's Investor Services and Standard & Poor's, respectively. The Company also has $256 million of 6.77% senior notes outstanding at December 31, 1999. The Company maintains an 85 million pound-sterling denominated credit facility (approximately US$137 million) established to finance construction of its new European Headquarters. Approximately US$122 million was outstanding under this facility at December 31, 1999. This facility is subject to interest primarily at the prevailing LIBOR subject to a fixed spread, which is dependent on the achievement of certain financial ratios. The Company is also required to maintain certain financial conditions. Additionally, the Company has approximately US$40 million of unsecured and uncommitted multicurrency lines of credit established to meet any short-term working capital needs for subsidiaries operating outside the U.S. During the quarter ended December 31, 1999, the Company did not purchase any shares under its various open market Common Stock repurchase programs. The cumulative total number of shares purchased is approximately 150 million shares. The remaining number of shares authorized for repurchase is approximately 50 million. In addition to expansion efforts at its U.S. headquarters in Islandia, N.Y., capital resource requirements at December 31, 1999 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, marketable securities, the availability of borrowings under credit lines, the availability of financing alternatives in the capital markets, and cash provided from operations will be sufficient to meet ongoing cash requirements. <PAGE> Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK Exposure to market rate risk for changes in interest rates relate primarily to the Company's investment portfolio and its floating rate debt. On the investment side, the Company has a prescribed methodology whereby it invests its excess cash in debt instruments of government agencies and high quality corporate issuers (Standard & Poor's single "A" rating and higher). To further mitigate risk, the vast majority of the securities have a maturity date within one year. Holdings of any one issuer excluding the U.S. government shall not exceed 10%, and the portfolio is reviewed on a periodic basis and adjusted in the event that the credit rating of a security held has deteriorated. The Company has not used derivative financial instruments in its investment portfolio. At December 31, 1999, the Company's outstanding debt approximated $5.6 billion with approximately $2 billion of fixed rate obligations. If market rates decline, the Company runs the risk that the related required payments on the fixed rate debt will exceed those based on the current market rate. On an annual basis, each 25 basis point decrease in interest rates would increase the value of these instruments by approximately $5 million. Each 25 basis point increase or decrease in the level of interest rates would have approximately $9 million annual impact on variable rate debt interest based on the balances of such debt at December 31, 1999. In order to mitigate these risks, the Company maintains both fixed and floating rate debt instruments. There have been no material changes in the way the Company conducts its worldwide business, foreign exchange risk management strategy, or investments in marketable equity securities, thus overall foreign currency exchange and equity price risk remains unchanged from the description in the Company's Form 10-K for the year ended March 31, 1999. <PAGE> PART II. OTHER INFORMATION Item 1: LEGAL PROCEEDINGS The Company and certain of its officers are defendants in a number of shareholder class action lawsuits alleging that a class consisting of all persons who purchased the Company's stock during the period January 20, 1998 until July 22, 1998 were harmed by misleading statements, representations, and omissions regarding the Company's future financial performance. These cases have been consolidated into a single action (the "Shareholder Action") in the United States District Court for the Eastern District of New York ("NY Federal Court"). Defendant's motion to dismiss was denied and discovery in the Shareholder Action has recently commenced. In addition, a number of derivative actions alleging facts similar to those alleged in the Shareholder Action were brought in the NY Federal Court. An additional derivative action, alleging that the Company issued more shares than were authorized under the 1995 Key Employee Stock Ownership Plan (the "1995 Plan"), was also filed in the NY Federal Court. In all but one of these derivative actions, all of the Company's directors at that time were named as defendants. These derivative actions have been consolidated into a single action (the "Derivative Action") in the NY Federal Court. Another derivative action was filed in the Chancery Court in Delaware (the "Delaware Action") also alleging that more shares were issued than were authorized under the 1995 Plan. In a decision dated November 8, 1999, the Chancery Court held that 9.5 million of the shares issued under the Plan, as well as all dividends and other financial benefits derived from the shares, should be returned to the Company. The Company and its directors, who are parties to the Delaware Action, as well as one of the Plaintiffs, have cross-appealed the Court's decision. The Court's order has been stayed pending outcome of the appeal. Although the ultimate outcome and liability, if any, cannot be determined in each of the actions, management, after consultation and review with counsel, believes that the facts in each of the actions do not support the plaintiffs' claims and that the Company and its officers and directors have meritorious defenses. The Company, various subsidiaries, and certain current and former officers have been named as defendants in other various claims and lawsuits arising in the normal course of business. The Company believes that the facts do not support the plaintiffs' claims, and intends to vigorously contest each of them. <PAGE> Item 2: 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 dated November 22, 1999 reporting an event under Item 5. 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 11, 2000 By: /s/Sanjay Kumar -------------------------------------- Sanjay Kumar, President and Chief Operating Officer Dated: February 11, 2000 By: /s/Ira Zar -------------------------------------- Ira Zar 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> 1,000,000 <CURRENCY> USD <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-2000 <PERIOD-START> APR-1-1999 <PERIOD-END> DEC-31-1999 <EXCHANGE-RATE> 1 <CASH> 294 <SECURITIES> 96 <RECEIVABLES> 2016 <ALLOWANCES> 0 <INVENTORY> 88 <CURRENT-ASSETS> 2494 <PP&E> 744 <DEPRECIATION> 0 <TOTAL-ASSETS> 12232 <CURRENT-LIABILITIES> 2856 <BONDS> 4765 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 3058 <TOTAL-LIABILITY-AND-EQUITY> 12232 <SALES> 4002 <TOTAL-REVENUES> 4640 <CGS> 0 <TOTAL-COSTS> 3766 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 244 <INCOME-PRETAX> 874 <INCOME-TAX> 570 <INCOME-CONTINUING> 304 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 304 <EPS-BASIC> .56 <EPS-DILUTED> .55 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CAG

https://www.sec.gov/Archives/edgar/data/23217/0000912057-00-000848.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, MOitKVaT4n4Kom+3W1li+ic82BAQP+lOC9t6GwgeONs7aca59h3VAMu9VxzS2euO QP3P+PksXOv0bH+dHuTw6Q== <SEC-DOCUMENT>0000912057-00-000848.txt : 20000202 <SEC-HEADER>0000912057-00-000848.hdr.sgml : 20000202 ACCESSION NUMBER: 0000912057-00-000848 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991128 FILED AS OF DATE: 20000111 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: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07275 FILM NUMBER: 505379 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 <DESCRIPTION>10-Q <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 November 28, 1999 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 26, 1999 was 492,444,582. <PAGE> PART I -- FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (in millions except per share amounts) (unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ---------------------------- ------------------------------ NOVEMBER 28, NOVEMBER 29, NOVEMBER 28, NOVEMBER 29, 1999 1998 1999 1998 ------------- ------------ ------------ ----------- <S> <C> <C> <C> <C> Net sales $ 6,602.9 $ 6,404.4 $ 13,196.5 $ 12,887.8 Costs and expenses Cost of goods sold * 5,461.4 5,298.5 11,078.8 10,864.4 Selling, administrative and general expenses * 731.8 658.9 1,464.1 1,322.2 Interest expense 77.4 91.0 153.6 167.4 Restructuring/Impairment charges 30.2 -- 33.7 -- ----------- ----------- ----------- ----------- 6,300.8 6,048.4 12,730.2 12,354.0 ----------- ----------- ----------- ----------- Income before income taxes 302.1 356.0 466.3 533.8 Income taxes 114.8 137.0 177.2 205.5 ----------- ----------- ----------- ----------- Net income $ 187.3 $ 219.0 $ 289.1 $ 328.3 =========== =========== =========== =========== Income per share -- basic $ .39 $ .47 $ .61 $ .70 =========== =========== =========== =========== Income per share -- diluted $ .39 $ .46 $ .60 $ .69 =========== =========== =========== =========== - ----------------------------------------------------------------------------------------------------------------------- </TABLE> * Other restructuring-related items for the thirteen weeks and twenty-six weeks ended November 28, 1999 include: accelerated depreciation of $33.8 million and $64.8 million, respectively, included in cost of goods sold; $7.5 million and $11.5 million, respectively, of accelerated depreciation included in selling, administrative and general expenses; and inventory markdowns of $25.1 million and $33.7 million, respectively, included in cost of goods sold. For both the thirteen weeks and twenty-six weeks ended November 28, 1999, restructuring plan implementation costs included in selling, administrative and general expenses were $7.8 million. See notes to the condensed consolidated financial statements. 2 <PAGE> CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions) (unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ---------------------------- ----------------------------- NOVEMBER 28, NOVEMBER 29, NOVEMBER 28, NOVEMBER 29, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net income $ 187.3 $ 219.0 $ 289.1 $ 328.3 Other comprehensive income/(loss): Currency translation adjustment 2.1 23.1 (4.4) 5.2 ----------- ----------- ----------- ----------- Comprehensive income $ 189.4 $ 242.1 $ 284.7 $ 333.5 =========== =========== =========== =========== - ------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to the condensed consolidated financial statements. 3 <PAGE> CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in millions except per share amount) (unaudited) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- NOVEMBER 28, MAY 30, NOVEMBER 29, 1999 1999 1998 -------------- -------------- ------------ <S> <C> <C> <C> ASSETS Current assets Cash and cash equivalents $ 9.6 $ 62.8 $ 44.3 Receivables, less allowance for doubtful accounts of $85.9, $60.0 and $80.6 2,527.6 1,637.5 2,687.0 Inventories 4,378.8 3,639.9 4,189.6 Prepaid expenses 305.2 315.9 318.7 ---------- ----------- ---------- Total current assets 7,221.2 5,656.1 7,239.6 ---------- ----------- ---------- Property, plant and equipment 6,447.1 6,213.8 6,086.7 Less accumulated depreciation (2,887.4) (2,599.6) (2,486.0) ---------- ----------- ---------- Property, plant and equipment, net 3,559.7 3,614.2 3,600.7 ---------- ----------- ---------- Brands, trademarks and goodwill, net 2,384.0 2,408.7 2,640.7 Other assets 412.7 467.1 465.9 ---------- ----------- ---------- $ 13,577.6 $ 12,146.1 $ 13,946.9 ========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable $ 2,760.9 $ 837.9 $ 3,432.1 Current installments of long-term debt 20.5 21.1 16.4 Accounts payable 2,129.5 2,036.5 1,823.9 Advances on sales 229.4 1,191.7 253.9 Other accrued liabilities 1,464.1 1,299.2 1,456.0 ---------- ----------- ---------- Total current liabilities 6,604.4 5,386.4 6,982.3 ---------- ----------- ---------- Senior long-term debt, excluding current installments 1,851.2 1,793.1 1,854.0 Other noncurrent liabilities 802.5 782.8 784.6 Subordinated debt 750.0 750.0 750.0 Preferred securities of subsidiary company 525.0 525.0 525.0 Common stockholders' equity Common stock of $5 par value, authorized 1,200,000,000 shares; issued 524,071,467, 519,648,673 and 519,547,668 2,620.4 2,598.2 2,597.7 Additional paid-in capital 161.9 219.4 350.3 Retained earnings 1,486.1 1,369.8 1,507.7 Foreign currency translation adjustment (70.3) (65.9) (62.4) Less treasury stock, at cost, common shares 31,789,174, 31,475,678 and 30,197,659 (757.3) (749.9) (710.6) ---------- ----------- ---------- 3,440.8 3,371.6 3,682.7 Less unearned restricted stock and value of 15,941,851, 17,184,831 and 19,168,681 common shares held in Employee Equity Fund (396.3) (462.8) (631.7) ---------- ----------- ---------- Total common stockholders' equity 3,044.5 2,908.8 3,051.0 ---------- ----------- ---------- $ 13,577.6 $ 12,146.1 $ 13,946.9 ========== =========== ========== - ------------------------------------------------------------------------------------------------------------- </TABLE> See notes to the condensed consolidated financial statements. 4 <PAGE> CONAGRA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- TWENTY-SIX WEEKS ENDED ----------------------------- NOVEMBER 28, NOVEMBER 29, 1999 1998 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 289.1 $ 328.3 Adjustments to reconcile net income to net cash provided by Operating activities: Depreciation and other amortization 224.6 210.8 Goodwill amortization 31.9 34.2 Restructuring/impairment charges and other restructuring-related charges (includes accelerated depreciation) 151.5 -- Other noncash items (includes nonpension postretirement benefits) 51.8 50.0 Change in assets and liabilities before effects from business acquisitions (2,381.8) (2,494.7) -------- --------- Net cash flows from operating activities (1,632.9) (1,871.4) ------- --------- Cash flows from investing activities: Additions to property, plant and equipment (223.4) (274.2) Payment for business acquisitions (14.3) (401.4) Sale of businesses and property, plant and equipment 27.0 7.2 Notes receivable and other items (21.4) (10.6) --------- --------- Net cash flows from investing activities (232.1) (679.0) --------- --------- Cash flows from financing activities: Net short-term borrowings 1,908.1 2,571.5 Proceeds from issuance of long-term debt 64.7 595.2 Repayment of long-term debt (12.4) (532.1) Cash dividends paid (171.8) (144.7) Cash distributions of pooled companies -- (1.2) Employee Equity Fund stock transactions -- 6.4 Other items 23.2 (8.8) --------- --------- Net cash flows from financing activities 1,811.8 2,486.3 --------- --------- Net change in cash and cash equivalents (53.2) (64.1) Cash and cash equivalents at beginning of period 62.8 108.4 --------- --------- Cash and cash equivalents at end of period $ 9.6 $ 44.3 ========= ========= - --------------------------------------------------------------------------------------------------------------- </TABLE> See notes to the condensed consolidated financial statements. 5 <PAGE> CONAGRA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 28, 1999 (COLUMNAR DOLLARS IN MILLIONS) 1. ACCOUNTING POLICIES The unaudited interim financial information included herein reflects normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's fiscal 1999 annual report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results to be expected for other interim periods or the full year. Certain prior year amounts have been reclassified in order to conform to current year classifications. 2. OPERATION OVERDRIVE During the fourth quarter of fiscal 1999, the Company approved a 36-month restructuring plan in connection with its previously announced initiative, "Operation Overdrive." The restructuring plan is aimed at eliminating overcapacity, streamlining operations and improving profitability through margin improvement and expense reductions. The total pre-tax charge of the plan is presently estimated at $880 million, with a pre-tax charge recorded to-date of $592.3 million. In accordance with generally accepted accounting principles, the remaining cost will be recognized when employees are notified of separation or when appropriate restructuring plan costs result in accruable expenses. Of the $592.3 million recognized to-date, $440.8 million ($337.9 million net of tax) was recognized in fiscal 1999, $47.1 million ($29.2 million net of tax) was recognized in the first quarter of fiscal 2000, with the remaining $104.4 million ($64.7 million net of tax) recognized in the second quarter of fiscal 2000. Fiscal 2000 second quarter charges were as follows: <TABLE> <CAPTION> PACKAGED REFRIGERATED AGRICULTURAL FOODS FOODS PRODUCTS TOTAL -------- -------- -------- -------- <S> <C> <C> <C> <C> Accelerated depreciation $ 40.0 $ 1.3 $ -- $ 41.3 Inventory markdowns 14.5 -- 10.6 25.1 Restructuring plan implementation costs 2.6 4.4 .8 7.8 Restructuring/Impairment charges 11.4 12.2 6.6 30.2 -------- -------- -------- -------- Total $ 68.5 $ 17.9 $ 18.0 $ 104.4 ======== ======== ======== ======== </TABLE> 6 <PAGE> CONAGRA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 28, 1999 (COLUMNAR DOLLARS IN MILLIONS) 2. OPERATION OVERDRIVE (CONTINUED) For the twenty-six weeks ended November 28, 1999, the Company has recognized $151.5 million ($93.9 million net of tax) for restructuring/impairment charges and other restructuring-related charges as follows: <TABLE> <CAPTION> PACKAGED REFRIGERATED AGRICULTURAL FOODS FOODS PRODUCTS TOTAL -------- -------- -------- -------- <S> <C> <C> <C> <C> Accelerated depreciation $ 67.4 $ 8.9 $ -- $ 76.3 Inventory markdowns 14.5 .1 19.1 33.7 Restructuring plan implementation costs 2.6 4.4 .8 7.8 Restructuring/Impairment charges 12.8 12.6 8.3 33.7 -------- -------- -------- ------- Total $ 97.3 $ 26.0 $ 28.2 $ 151.5 ======== ======== ======== ======= </TABLE> The second quarter and year-to-date charges are reflected in the Company's Consolidated Statements of Earnings as follows: accelerated depreciation of $33.8 million and $64.8 million, respectively, are included in cost of goods sold; accelerated depreciation of $7.5 million and $11.5 million, respectively, are included in selling, administrative and general expenses; inventory markdowns are included in cost of goods sold; plan implementation costs (primarily third-party consulting costs) are included in selling, administrative and general expenses; and restructuring/impairment charges are reflected as such and result from asset impairments, employee related costs and contractual termination costs. Asset impairment charges, year-to-date, are primarily reflected in the Company's Refrigerated Foods and Agricultural Products segments. Certain assets to be disposed of that are not immediately removed from operations are depreciated on an accelerated basis over their remaining useful lives. Inventory markdowns represent losses on the carrying value of non-strategic inventory resulting from the closure of facilities and discontinuation of certain products. In association with the restructuring plan, the Company has, to date, closed/sold a total of seven production facilities, 19 non-production locations (e.g., storage, distribution, administrative, etc.) and eight non-core businesses. The historical operating results and gains/losses associated with sold businesses or facilities were not material. Approximately 6,700 employee separations will occur as a result of the restructuring plan, primarily in manufacturing and operating facilities. In addition, other exit costs (consisting of lease termination and other contractual termination costs) will occur as a result of the restructuring plan. Such activity recognized to-date is as follows: <TABLE> <CAPTION> SEVERANCE --------------------------- OTHER EXIT AMOUNT HEADCOUNT COSTS --------- --------- ----------- <S> <C> <C> <C> Fiscal 1999 activity: Charges to income $ 45.1 3,160 $ 7.3 Utilized (6.1) (260) -- --------- ------- -------- Balance, May 30, 1999 39.0 2,900 7.3 Fiscal 2000 activity, to date: Charges to income 14.2 1,710 9.0 Utilized (16.3) (3,210) (5.8) -------- ------ -------- Balance, November 28, 1999 $ 36.9 1,400 $ 10.5 ======== ====== ======== </TABLE> 7 <PAGE> CONAGRA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 28, 1999 (COLUMNAR DOLLARS IN MILLIONS) 3. INCOME PER SHARE The following table reconciles the income and average share amounts used to compute both basic and diluted income per share (share amounts in millions): <TABLE> <CAPTION> THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ----------------------- ---------------------- NOV. 28, NOV. 29, NOV. 28, NOV. 29, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> NET INCOME $ 187.3 $ 219.0 $ 289.1 $ 328.3 =========== =========== =========== =========== INCOME PER SHARE -- BASIC Weighted average shares outstanding -- basic 476.2 469.8 474.7 469.3 =========== =========== =========== =========== INCOME PER SHARE -- DILUTED Weighted average shares outstanding -- basic 476.2 469.8 474.7 469.3 Add shares contingently issuable upon exercise of stock options 3.4 7.1 3.9 6.8 ----------- ----------- ----------- ----------- Weighted average shares outstanding -- diluted 479.6 476.9 478.6 476.1 =========== =========== =========== =========== </TABLE> 4. INVENTORIES The major classes of inventories are as follows: <TABLE> <CAPTION> NOV. 28, MAY 30, NOV. 29, 1999 1999 1998 --------------- ------------ ------------- <S> <C> <C> <C> Hedged commodities $ 1,410.3 $ 1,306.2 $ 1,531.3 Food products and livestock 1,405.0 1,144.7 1,271.8 Agricultural chemicals, fertilizer and feed 809.1 597.4 660.8 Other, principally ingredients and supplies 754.4 591.6 725.7 ------------ ------------ ------------ $ 4,378.8 $ 3,639.9 $ 4,189.6 ============ ============ ============ </TABLE> 5. CONTINGENCIES In fiscal 1991, ConAgra acquired Beatrice Company ("Beatrice"). As a result of the acquisition and the significant pre-acquisition contingencies of the Beatrice businesses and its former subsidiaries, the consolidated post-acquisition financial statements of ConAgra reflect significant liabilities associated with the estimated resolution of these contingencies. These include 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 40 of these sites. Substantial reserves for these matters have been established based on the Company'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 its experience in remediating sites. 8 <PAGE> CONAGRA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 28, 1999 (COLUMNAR DOLLARS IN MILLIONS) 5. CONTINGENCIES (CONTINUED) ConAgra is a 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 operations or liquidity. 6. BUSINESS SEGMENTS The Company has three segments, which are organized based upon similar economic characteristics and the similarity of products and services offered, the nature of production processes, the type or class of customer and distribution methods. Packaged Foods includes companies that produce shelf-stable and frozen foods. This segment markets food products in retail and foodservice channels. Refrigerated Foods includes companies that produce and market branded processed meats, beef, pork, chicken and turkey. Agricultural Products includes companies involved in distribution of agricultural inputs and procurement, processing, trading and distribution of commodity food ingredients and agricultural commodities. Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment 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 expenses, goodwill amortization, interest expense and income taxes have been excluded from segment operations. The Company operates principally in the United States. 9 <PAGE> CONAGRA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 28, 1999 (COLUMNAR DOLLARS IN MILLIONS) 6. BUSINESS SEGMENTS (CONTINUED) <TABLE> <CAPTION> THIRTEEN WEEKS ENDED ------------------------------ NOVEMBER 28, NOVEMBER 29, 1999 1998 ------------ ------------ <S> <C> <C> Sales to unaffiliated customers Packaged Foods $ 2,035.4 $ 2,037.0 Refrigerated Foods 3,160.8 2,906.0 Agricultural Products 1,406.7 1,461.4 ------------ ---------- Total $ 6,602.9 $ 6,404.4 ============ ========== Intersegment sales Packaged Foods $ 12.0 $ 12.0 Refrigerated Foods 71.9 58.2 Agricultural Products 46.4 67.2 ------------ ---------- 130.3 137.4 Intersegment elimination (130.3) (137.4) ------------ ---------- Total $ -- $ -- ============ ========== Net sales Packaged Foods $ 2,047.4 $ 2,049.0 Refrigerated Foods 3,232.7 2,964.2 Agricultural Products 1,453.1 1,528.6 Intersegment elimination (130.3) (137.4) ------------ ---------- Total $ 6,602.9 $ 6,404.4 ============ ========== Operating profit * Packaged Foods $ 239.1 $ 294.2 Refrigerated Foods 123.8 113.9 Agricultural Products 87.4 98.1 ------------ ---------- Total operating profit 450.3 506.2 Interest expense 77.4 91.0 General corporate expenses 55.0 42.3 Goodwill amortization 15.8 16.9 ------------ ---------- Income before tax $ 302.1 $ 356.0 ============ ========== </TABLE> - ------------------- * Thirteen weeks ended November 28, 1999 includes before-tax restructuring/impairment charges and other restructuring-related charges of $104.4 million. The charges were included in operating profit as follows: $68.5 million in Packaged Foods; $17.9 million in Refrigerated Foods; and $18.0 million in Agricultural Products. 10 <PAGE> CONAGRA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 28, 1999 (CONTINUED) (COLUMNAR DOLLARS IN MILLIONS) 6. BUSINESS SEGMENTS (CONTINUED) <TABLE> <CAPTION> TWENTY-SIX WEEKS ENDED ------------------------------ NOVEMBER 28, NOVEMBER 29, 1999 1998 ------------ ------------ <S> <C> <C> Sales to unaffiliated customers Packaged Foods $ 3,771.4 $ 3,685.0 Refrigerated Foods 6,282.1 5,780.3 Agricultural Products 3,143.0 3,422.5 ----------- ----------- Total $ 13,196.5 $ 12,887.8 =========== =========== Intersegment sales Packaged Foods $ 24.0 $ 25.1 Refrigerated Foods 124.2 111.4 Agricultural Products 175.6 150.5 ----------- ----------- 323.8 287.0 Intersegment elimination (323.8) (287.0) ----------- ----------- Total $ -- $ -- =========== =========== Net sales Packaged Foods $ 3,795.4 $ 3,710.1 Refrigerated Foods 6,406.3 5,891.7 Agricultural Products 3,318.6 3,573.0 Intersegment elimination (323.8) (287.0) ----------- ----------- Total $ 13,196.5 $ 12,887.8 =========== =========== Operating profit * Packaged Foods $ 409.4 $ 465.3 Refrigerated Foods 233.5 178.2 Agricultural Products 146.6 196.1 ----------- ----------- Total operating profit 789.5 839.6 Interest expense 153.6 167.4 General corporate expenses 137.7 104.2 Goodwill amortization 31.9 34.2 ----------- ----------- Income before tax $ 466.3 $ 533.8 =========== =========== </TABLE> - ------------------- *Twenty-six weeks ended November 28, 1999 includes before-tax restructuring/impairment charges and other restructuring-related charges of $151.5 million. The charges were included in operating profit as follows: $97.3 million in Packaged Foods; $26.0 million in Refrigerated Foods; and $28.2 million in Agricultural Products. 11 <PAGE> CONAGRA, INC. AND SUBSIDIARIES PART I -- FINANCIAL INFORMATION ITEM 2. 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 condensed consolidated financial statements. Results for the thirteen and twenty-six week periods ended November 28, 1999 are not necessarily indicative of results that may be attained in the future. This report contains forward-looking statements. The statements reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The statements are based on many assumptions and factors including availability and prices of raw materials, product pricing, competitive environment and related market conditions, operating efficiencies, access to capital and actions of governments. Any changes in such assumptions or factors could produce significantly different results. OPERATION OVERDRIVE During fiscal 1999, ConAgra commenced an initiative ("Operation Overdrive") to improve margins and sales, streamline operations and to combine and leverage ConAgra's strengths. In the fourth quarter of fiscal 1999, as part of Operation Overdrive, the Company announced a restructuring plan covering a 36-month period aimed at consolidating capacity, streamlining operations and improving profitability through margin improvement and expense reductions. The total pre-tax charge of the plan is presently estimated at $880 million. Pretax savings associated with the Company's restructuring plan are currently projected at approximately $90 million in fiscal 2000, $150 million in fiscal 2001, and $200 million in fiscal 2002. These planned savings are primarily a result of reducing duplicative efforts, lowering employee-related expense, and reducing depreciation and amortization costs going forward. Accordingly, the Company anticipates these savings will positively impact the Company's "cost of goods sold" and "selling, administrative and general" line items within its Consolidated Statements of Earnings. Of the $880 million estimated charge, approximately $170 million of the charge is expected to be a cash expense, offset partially by approximately $80 million in cash proceeds from business and facility dispositions. The Company expects to fund the net cash outlay associated with the restructuring plan through cash generated by its ongoing operations. The approximate net cash outlay, by year of associated expense, is as follows (dollars in millions): <TABLE> <CAPTION> FISCAL 1999 FISCAL 2000 FISCAL 2001 ----------- ----------- ----------- <S> <C> <C> <C> Cash expense $ (52) $ (91) $ (27) Cash proceeds 16 53 11 ------ ------ ------ Net cash outlay $ (36) $ (38) $ (16) ====== ====== ====== </TABLE> During the second quarter of fiscal 2000, the Company recognized restructuring/impairment charges and other restructuring-related costs ("restructuring charges") of $104.4 million ($64.7 million net of tax), bringing total restructuring charges recorded to-date to $592.3 million. Of the $104.4 million charge recognized in the second quarter, $28.2 million will require cash expenditures resulting from contractual terminations, employee-related costs and third-party consulting costs. The remaining $76.2 million is a non-cash charge resulting from asset impairments, accelerated depreciation and inventory markdowns associated with the Company's restructuring plan. For fiscal 2000 year-to-date, the Company recognized restructuring charges of $151.5 million ($93.9 million net of tax). Of the $151.5 million charge, $31.0 million will require cash expenditures resulting from contractual terminations, employee-related costs and third-party consulting costs. The remaining 12 <PAGE> CONAGRA, INC. AND SUBSIDIARIES PART I -- FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) $120.5 million is a non-cash charge resulting from asset impairments, accelerated depreciation and inventory markdowns associated with the Company's restructuring plan. In association with the restructuring plan, the Company has, to date, closed/sold a total of seven production facilities, 19 non-production locations (e.g., storage, distribution, administrative, etc.) and eight non-core businesses. The historical operating results and gains/losses associated with sold businesses or facilities were not material. The Company recorded net income of $187.3 million or $.39 diluted income per share for the second quarter of fiscal 2000. Excluding restructuring charges, the Company's net income was $252.0 million or $.53 diluted income per share. The after-tax effect of restructuring charges on the Company's second quarter of fiscal 2000 was $64.7 million or $.14 diluted income per share. Fiscal 2000 year-to-date, the Company recorded net income of $289.1 million or $.60 diluted income per share. Excluding restructuring charges, the Company's net income was $383.0 million or $.80 diluted income per share for fiscal 2000 year-to-date. The after-tax effect of restructuring charges for fiscal 2000 year-to-date was $93.9 million or $.20 diluted income per share. FINANCIAL CONDITION ConAgra's earnings are generated principally from its capital investment, which consists of working capital (current assets less current liabilities) plus all noncurrent assets. Capital investment is financed with stockholders' equity, long-term debt and other noncurrent liabilities. Capital investment increased $213.5 million, or 3.2 percent, compared to May 30, 1999. Working capital increased $347.1 million, and noncurrent assets decreased $133.6 million. The increase in working capital was primarily caused by normal seasonal increases in accounts receivable and inventory which was funded by short-term debt. ConAgra invested $223.4 million in property, plant and equipment in the first half of fiscal 2000 compared to $274.2 million for the first half of fiscal 1999. The decrease of $50.8 million, or 18.5 percent, is reflective of the Company's ongoing efforts to critically analyze its capital expenditure process. Investments in business acquisitions for the first half of fiscal 2000 were $14.3 million as compared to $401.4 million for the first half of fiscal 1999. The Company's objective is that senior long-term debt normally will not exceed 30 percent of total long-term debt plus equity. For purposes of computing the ratio, preferred securities of subsidiary company are treated as equity due to their preferred stock characteristics. This objective was met for all periods presented. 13 <PAGE> CONAGRA, INC. AND SUBSIDIARIES PART I -- FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING RESULTS A summary of the period to period increases (decreases) in the principal components of operations, both before and after restructuring charges, is shown below (dollars in millions, except per share amounts). <TABLE> <CAPTION> THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED NOV. 28, 1999 AND NOV. 29, 1998 NOV. 28, 1999 AND NOV. 29, 1998 ------------------------------- ------------------------------- POST- PRE- POST- PRE- RESTRUCTURING RESTRUCTURING RESTRUCTURING RESTRUCTURING DOLLAR CHANGE DOLLAR CHANGE DOLLAR CHANGE DOLLAR CHANGE ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net sales $ 198.5 $ 198.5 $ 308.7 $ 308.7 Costs and expenses Cost of goods sold 162.9 104.0 214.4 115.9 Selling, administrative and general expenses 72.9 57.6 141.9 122.6 Interest expense (13.6) (13.6) (13.8) (13.8) Restructuring/Impairment charges 30.2 -- 33.7 -- ---------- ---------- --------- --------- 252.4 148.0 376.2 224.7 ---------- ---------- --------- --------- Income before income taxes (53.9) 50.5 (67.5) 84.0 Income taxes (22.2) 17.5 (28.3) 29.3 ---------- ---------- --------- --------- Net income $ (31.7) $ 33.0 $ (39.2) $ 54.7 ========== ========== ========= ========= Income per share -- basic $ (.08) $ .06 $ (.09) $ .11 ========== ========== ========= ========= Income per share -- diluted $ (.07) $ .07 $ (.09) $ .11 ========== ========== ========= ========= </TABLE> In ConAgra's Packaged Foods segment, second quarter sales were consistent with last year, but operating profit decreased 18.7 percent to $239.1 million, down from last year's second quarter operating profit of $294.2 million. Excluding restructuring charges, operating profit increased 4.6 percent, or $13.4 million. For the first half, sales increased 2.3 percent, and operating profit decreased 12 percent to $409.4 million from last year's first half operating profit of $465.3 million. Excluding restructuring charges, the segment's operating profit increased 8.9 percent, or $41.4 million. The segment's second quarter and first half operating profit improvement, excluding restructuring charges, were driven by strong year-to-year performance improvement in ConAgra's Foodservice and Frozen Prepared Foods units. In the Company's Refrigerated Foods segment, second quarter sales increased 8.8 percent, and operating profit for the quarter increased 8.7 percent to $123.8 million from $113.9 million in fiscal 1999's second quarter. Excluding restructuring charges, operating profit increased 24.4 percent, or $27.8 million. First half sales increased 8.7 percent, and operating profit increased 31.0 percent to $233.5 million from $178.2 million. Excluding restructuring charges, the segment's first half operating profit increased 45.6 percent, or $81.3 million. The segment's beef and pork units achieved sales and operating profit increases for both the second quarter and first half of fiscal 2000, and were the primary drivers of the segment's improved performance over the prior year. In ConAgra's Agricultural Products segment, sales decreased 3.7 percent, and operating profit decreased 10.9 percent from $98.1 million to $87.4 million for the quarter. Excluding restructuring charges, operating profit increased 7.4 percent, or $7.3 million. First half sales in this segment decreased 8.2 percent, and operating profit decreased 25.2 percent from $196.1 million to $146.6 million. Excluding 14 <PAGE> CONAGRA, INC. AND SUBSIDIARIES PART I -- FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) restructuring charges, the segment's first half operating profit decreased 10.9 percent, or 21.3 million. The segment's results continue to be negatively impacted by unfavorable industry conditions as compared to the prior fiscal year. For the Company in total, net income was $187.3 million for the second quarter, while diluted earnings per share were $.39, a decrease of $.07 from the second quarter of fiscal 1999. Excluding restructuring charges, net income was $252.0 million, while diluted earnings per share were $.53, an increase of $.07, as compared to prior year's second quarter. As compared to second quarter fiscal 1999, selling, administrative and general expenses increased $72.9 million, or 11.1 percent, resulting primarily from an increase in advertising and promotion costs, Operation Overdrive implementation costs and information systems' integration costs. Interest expense for the second quarter decreased by $13.6 million, or 14.9 percent, as compared to the second quarter of fiscal 1999 due to the Company carrying lower short-term debt balances. For the first half of fiscal 2000, ConAgra's net income was $289.1 million, while diluted earnings per share were $.60, a decrease of $.09 as compared to the first half of fiscal 1999. Excluding restructuring charges, net income was $383.0 million, while diluted earnings per share were $.80, an increase of $.11 as compared to the first half of fiscal 1999. As compared to the first half of fiscal 1999, selling, administrative and general expenses increased $141.9 million, or 10.7 percent, resulting primarily from an increase in advertising and promotion costs, Operation Overdrive implementation costs and information systems' integration costs. Interest expense for the first half of fiscal 2000 decreased by $13.8 million, or 8.2 percent, as compared to the first half of fiscal 1999 due to the Company carrying lower short-term debt balances. YEAR 2000 The Year 2000 ("Y2K") computer software compliance issues affect ConAgra and most companies in the world. The Company has established a Y2K project office and contracted with an independent consulting group to provide assistance with regard to Y2K compliance. The Company's Y2K project covers both traditional computer systems and infrastructure ("IT systems") and computer-based manufacturing, logistical and related systems ("non-IT systems"). The Y2K project has six phases: systems inventory, assessment, renovation, validation, implementation and contingency planning. For both IT and non-IT systems, the Company has completed all phases of its Y2K project. ConAgra operates on a decentralized operating company ("OC") structure. As a result of this OC structure, there are few IT systems and non-IT systems, the failure of which could have a material effect on the Company as a whole. Such material systems include general ledger, payroll, fixed assets and cash management systems. ConAgra's Y2K project also considers the readiness of significant customers and suppliers. The Company does not have any suppliers or customers that are material to its operations as a whole. Each OC is verifying the readiness of suppliers and customers that may be significant for such OC. ConAgra's Y2K project includes contingency plans that focus on processes exposed to potential risk, and critical high availability systems. Joint contingency plans between OC's and several major customers have been coordinated to prevent uninterrupted service. ConAgra has incurred approximately $52 million of Y2K project expenses to date. No significant future expenses are expected to be incurred. 15 <PAGE> CONAGRA, INC. AND SUBSIDIARIES PART I -- FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Subsequent to January 1, 2000, ConAgra experienced no Y2K failures having a material impact on the Company. 16 <PAGE> CONAGRA, INC. AND SUBSIDIARIES PART I -- FINANCIAL INFORMATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the twenty-six weeks ended November 28, 1999. For additional information, refer to pages 38 through 40 of the Company's 1999 Annual Report to Stockholders, incorporated by reference into the Company's annual report on Form 10-K for the fiscal year ended May 30, 1999. 17 <PAGE> CONAGRA, INC. AND SUBSIDIARIES PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 12 -- Statement regarding computation of ratio of earnings to fixed charges 27 -- Financial Data Schedule (B) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter covered by this report. CONAGRA, INC. By: /s/ James P. O'Donnell ------------------------------ James P. O'Donnell Executive Vice President, Chief Financial Officer and Corporate Secretary By: /s/ Jay D. Bolding ------------------------------ Jay D. Bolding Vice President and Controller Dated this 11th day of January, 2000. 18 <PAGE> CONAGRA, INC. AND SUBSIDIARIES EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT DESCRIPTION PAGE ------- ----------- ---- <S> <C> <C> 12 Statement regarding computation of ratio of 20 earnings to fixed charges 27 Financial Data Schedule 21 </TABLE> 19 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 12 <TEXT> <PAGE> EXHIBIT 12 CONAGRA, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (in millions) <TABLE> <CAPTION> TWENTY-SIX WEEKS ENDED NOVEMBER 28, 1999 ------------ <S> <C> Fixed Charges Interest expense $ 172.9 Capitalized interest 2.8 Interest in cost of goods sold 13.0 One-third of noncancelable lease rent 19.8 ------------- Total fixed charges (A) $ 208.5 ============= Earnings Pretax income* $ 466.3 Adjustment for unconsolidated subsidiaries (0.3) Add fixed charges 208.5 Less capitalized interest (2.8) ------------- Earnings and fixed charges (B) $ 671.7 ============= Ratio of earnings to fixed charges (B/A) 3.2 </TABLE> - ------------------- * Pretax income includes $151.5 million of restructuring/impairment charges and other restructuring-related charges. Excluding these charges, the "ratio of earnings to fixed charges" was 3.9. See note 2 to the condensed consolidated financial statements. 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 noncancelable 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. 20 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-28-1999 <PERIOD-START> MAY-31-1999 <PERIOD-END> NOV-28-1999 <CASH> 9,600 <SECURITIES> 0 <RECEIVABLES> 2,613,500 <ALLOWANCES> 85,900 <INVENTORY> 4,378,800 <CURRENT-ASSETS> 7,221,000 <PP&E> 6,447,100 <DEPRECIATION> 2,887,400 <TOTAL-ASSETS> 13,577,600 <CURRENT-LIABILITIES> 6,604,400 <BONDS> 2,601,200 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 2,620,400 <OTHER-SE> 424,100 <TOTAL-LIABILITY-AND-EQUITY> 13,577,600 <SALES> 13,196,500 <TOTAL-REVENUES> 13,196,500 <CGS> 11,078,800 <TOTAL-COSTS> 11,078,800 <OTHER-EXPENSES> 1,497,800 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 153,600 <INCOME-PRETAX> 466,300 <INCOME-TAX> 177,200 <INCOME-CONTINUING> 289,100 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 289,100 <EPS-BASIC> 0.61 <EPS-DILUTED> 0.60 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CAH

https://www.sec.gov/Archives/edgar/data/721371/0000950152-00-000968.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, UxwzfEq6U2lSHcDkq0k23ccqVgqyz50KkhtzSfpyjpbU5P1tBQoQUhw2vH94MaAQ 9tYcc9TnN1+9djinraYZBQ== <SEC-DOCUMENT>0000950152-00-000968.txt : 20000214 <SEC-HEADER>0000950152-00-000968.hdr.sgml : 20000214 ACCESSION NUMBER: 0000950152-00-000968 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDINAL HEALTH INC CENTRAL INDEX KEY: 0000721371 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 310958666 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11373 FILM NUMBER: 536775 BUSINESS ADDRESS: STREET 1: 5555 GLENDON COURT CITY: DUBLIN STATE: OH ZIP: 43016 BUSINESS PHONE: 6147175000 MAIL ADDRESS: STREET 1: 5555 GLEDNON COURT CITY: DUBLIN STATE: OH ZIP: 43016 FORMER COMPANY: FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC DATE OF NAME CHANGE: 19920703 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>CARDINAL HEALTH, INC. QUARTERLY REPORT <TEXT> <PAGE> 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended December 31, 1999 Commission File Number 0-12591 CARDINAL HEALTH, INC. (Exact name of registrant as specified in its charter) OHIO 31-0958666 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7000 CARDINAL PLACE, DUBLIN, OHIO 43017 (Address of principal executive offices and zip code) (614) 757-5000 (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 --- --- The number of Registrant's Common Shares outstanding at the close of business on February 1, 2000 was as follows: Common Shares, without par value: 281,295,303 ----------- <PAGE> 2 CARDINAL HEALTH, INC. AND SUBSIDIARIES Index * <TABLE> <CAPTION> Page No. -------- Part I. Financial Information: --------------------- <S> <C> Item 1. Financial Statements: Condensed Consolidated Statements of Earnings for the Three and Six Months Ended December 31, 1999 and 1998 (unaudited)....................................... 3 Condensed Consolidated Balance Sheets at December 31, 1999 and June 30, 1999 (unaudited).......................................................... 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1999 and 1998 (unaudited)............................................. 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............................................................ 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 14 Part II. Other Information: ----------------- Item 1. Legal Proceedings.................................................................. 15 Item 4. Submission of Matters to a Vote of Security Holders................................ 16 Item 6. Exhibits and Reports on Form 8-K................................................... 16 </TABLE> * Items not listed are inapplicable. Page 2 <PAGE> 3 PART I. FINANCIAL INFORMATION CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1999 1998 -------- -------- --------- --------- <S> <C> <C> <C> <C> Revenue: Operating revenue $6,254.3 $5,289.5 $12,083.6 $10,306.9 Bulk deliveries to customer warehouses 1,145.2 999.8 2,099.6 1,781.5 -------- -------- --------- --------- Total revenue 7,399.5 6,289.3 14,183.2 12,088.4 Cost of products sold: Operating cost of products sold 5,532.7 4,634.9 10,707.2 9,060.9 Cost of products sold - bulk deliveries 1,144.9 999.8 2,099.3 1,781.5 -------- -------- --------- --------- Total cost of products sold 6,677.6 5,634.7 12,806.5 10,842.4 Gross margin 721.9 654.6 1,376.7 1,246.0 Selling, general and administrative expenses 415.3 401.4 806.6 775.3 Merger-related costs 5.5 3.1 42.3 37.5 -------- -------- --------- --------- Operating earnings 301.1 250.1 527.8 433.2 Interest expense and other (26.8) (28.9) (51.7) (53.2) -------- -------- --------- --------- Earnings before income taxes 274.3 221.2 476.1 380.0 Provision for income taxes 100.8 79.7 180.6 143.8 -------- -------- --------- --------- Net earnings $ 173.5 $ 141.5 $ 295.5 $ 236.2 ======== ======== ========= ========= Earnings per Common Share: Basic $ 0.62 $ 0.51 $ 1.05 $ 0.85 Diluted $ 0.61 $ 0.50 $ 1.03 $ 0.83 Weighted average number of Common Shares outstanding: Basic 280.4 277.0 280.2 276.9 Diluted 285.1 284.5 285.8 284.2 Cash dividends declared per Common Share $ 0.025 $ 0.025 $ 0.050 $ 0.050 - -------------------------------------------------------------------------------------------------------------------- Net earnings $ 173.5 $ 141.5 $ 295.5 $ 236.2 Pro forma adjustment for income taxes (Note 4) -- 2.8 -- 4.3 -------- -------- --------- --------- Pro forma net earnings $ 173.5 $ 138.7 $ 295.5 $ 231.9 ======== ======== ========= ========= Pro forma earnings per Common Share: Basic $ 0.62 $ 0.50 $ 1.05 $ 0.84 Diluted $ 0.61 $ 0.49 $ 1.03 $ 0.82 </TABLE> See notes to condensed consolidated financial statements. Page 3 <PAGE> 4 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1999 1999 ------------ --------- <S> <C> <C> ASSETS Current assets: Cash and equivalents $ 290.5 $ 185.4 Trade receivables, net 1,887.8 1,602.1 Current portion of net investment in sales-type leases 166.2 152.5 Inventories 4,041.2 2,940.0 Prepaid expenses and other 540.5 320.6 --------- --------- Total current assets 6,926.2 5,200.6 --------- --------- Property and equipment, at cost 2,904.5 2,798.9 Accumulated depreciation and amortization (1,300.1) (1,237.4) --------- --------- Property and equipment, net 1,604.4 1,561.5 Other assets: Net investment in sales-type leases, less current portion 506.4 454.3 Goodwill and other intangibles 969.4 942.1 Other 273.6 246.0 --------- --------- Total $10,280.0 $ 8,404.5 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, banks $ 153.8 $ 28.6 Current portion of long-term obligations 9.8 11.6 Accounts payable 3,027.3 2,363.9 Other accrued liabilities 961.6 561.2 --------- --------- Total current liabilities 4,152.5 2,965.3 --------- --------- Long-term obligations, less current portion 1,657.9 1,223.9 Deferred income taxes and other liabilities 608.2 645.7 Shareholders' equity: Common Shares, without par value 1,125.1 1,091.7 Retained earnings 2,802.7 2,544.0 Common Shares in treasury, at cost (17.5) (17.2) Cumulative foreign currency adjustment (43.3) (44.0) Other (5.6) (4.9) --------- --------- Total shareholders' equity 3,861.4 3,569.6 --------- --------- Total $10,280.0 $ 8,404.5 ========= ========= </TABLE> See notes to condensed consolidated financial statements. Page 4 <PAGE> 5 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, 1999 1998 --------- ------- <S> <C> <C> Net earnings $ 295.5 $ 236.2 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 125.3 114.4 Provision for bad debts 14.0 5.1 Change in operating assets and liabilities, net of effects from acquisitions: Increase in trade receivables (301.4) (139.5) Increase in inventories (1,102.3) (452.2) Increase in net investment in sales-type leases (65.8) (151.7) Increase in accounts payable 675.5 237.7 Other operating items, net 76.5 67.3 --------- ------- Net cash used in operating activities (282.7) (82.7) --------- ------- Acquisition of subsidiary, net of cash acquired (62.6) (69.6) Proceeds from sale of property and equipment 14.5 2.6 Additions to property and equipment (149.3) (174.5) Other 48.3 (0.9) --------- ------- Net cash used in investing activities (149.1) (242.4) --------- ------- Net change in commercial paper and short-term debt 693.8 142.7 Reduction of long-term obligations (140.8) (19.2) Proceeds from long-term obligations, net of issuance costs -- 161.1 Proceeds from issuance of Common Shares 20.6 34.7 Dividends on Common Shares and cash paid in lieu of fractional shares (14.1) (20.1) Other (22.6) (45.5) --------- ------- Net cash provided by financing activities 536.9 253.7 NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 105.1 (71.4) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 185.4 389.1 --------- ------- CASH AND EQUIVALENTS AT END OF PERIOD $ 290.5 $ 317.7 ========= ======= </TABLE> See notes to condensed consolidated financial statements. Page 5 <PAGE> 6 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. The condensed consolidated financial statements of Cardinal Health, Inc. (the "Company") include the accounts of all majority-owned subsidiaries and all significant intercompany amounts have been eliminated. The condensed consolidated financial statements contained herein have been restated to give retroactive effect to the merger transactions with Pacific Surgical, Inc. ("PSI") on May 21, 1999 and Automatic Liquid Packaging, Inc. ("ALP") on September 10, 1999, both of which were accounted for as pooling of interests business combinations (see Note 4). These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim reporting. In the opinion of management, all adjustments necessary for a fair presentation have been included. Except as disclosed elsewhere herein, all such adjustments are of a normal and recurring nature. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999 (the "1999 Form 10-K"). Without limiting the generality of the foregoing, Note 1 of the "Notes to Consolidated Financial Statements" from the 1999 Form 10-K is specifically incorporated herein by reference. Note 2. Basic earnings per Common Share ("Basic") is computed by dividing net earnings (the numerator) by the weighted average number of Common Shares outstanding during each period (the denominator). Diluted earnings per Common Share is similar to the computation for Basic, except that the denominator is increased by the dilutive effect of stock options outstanding, computed using the treasury stock method. Note 3. The Company's comprehensive income consists of net earnings and foreign currency translation adjustments as follows: <TABLE> <CAPTION> For the For the three months ended six months ended December 31, December 31, -------------------- ------------------ (in millions) 1999 1998 1999 1998 ------ ------ ------ ------ <S> <C> <C> <C> <C> Net earnings $173.5 $141.5 $295.5 $236.2 Foreign currency translation gain/(loss) (1.2) 4.1 0.7 3.3 ------ ------ ------ ------ Total comprehensive income $172.3 $145.6 $296.2 $239.5 ====== ====== ====== ====== </TABLE> Note 4. On September 10, 1999, the Company completed a merger transaction with ALP (the "ALP Merger") which was accounted for as a pooling of interests. In the ALP Merger, the Company issued approximately 5.8 million Common Shares to ALP stockholders. On May 21, 1999, the Company completed a merger transaction with PSI (the "PSI Merger") which was accounted for as a pooling of interests. In the PSI Merger, the Company issued approximately 0.2 million Common Shares to PSI stockholders. Page 6 <PAGE> 7 The table below presents a reconciliation of total revenue and net earnings available for Common Shares as reported in the accompanying condensed consolidated financial statements with those previously reported by the Company. The term "Cardinal Health" as used in the table below refers to Cardinal Health, Inc. and subsidiaries prior to the ALP and PSI mergers. <TABLE> <CAPTION> Cardinal (in millions) Health ALP PSI Combined -------- --- --- -------- <S> <C> <C> <C> <C> Three months ended December 31, 1998 Total revenue $ 6,269.2 $17.5 $2.6 $ 6,289.3 Net earnings $ 134.1 $ 7.0 $0.4 $ 141.5 Six months ended December 31, 1998 Total revenue $12,050.1 $34.2 $4.1 $12,088.4 Net earnings $ 224.9 $11.0 $0.3 $ 236.2 </TABLE> Adjustments affecting net earnings and shareholders' equity as a result of ALP and PSI adopting the Company's accounting practices were not material for any periods presented herein. In addition, there were no material intercompany transactions. Since April 1998, ALP had been organized as an S-Corporation for tax purposes. Accordingly, ALP was not subject to federal income tax from April 1998 up to the date that the ALP merger transaction was consummated. For the quarter and six months ended December 31, 1998, net earnings would have been reduced by $2.8 million and $4.3 million, respectively, if ALP had been subject to federal income taxes. Pro forma combined net earnings for the three and six months ended December 31, 1999 are $138.7 million and $231.9 million, respectively, taking into consideration ALP income taxes. Note 5. Costs of effecting mergers and subsequently integrating the operations of the various merged companies are recorded as merger-related costs when incurred. During the three and six months ended December 31, 1999, merger-related costs totaling $5.5 million ($3.4 million, net of tax) and $42.3 million ($33.1 million, net of tax) were recorded, respectively. During the six months ended December 31, 1999, approximately $31.6 million related to transaction and employee-related costs associated with the ALP merger transaction and $5.2 million related to exit and employee costs associated with the Company's merger transaction with Allegiance Corporation ("Allegiance"), of which $31.6 million and $4.3 million, respectively were recorded during the first quarter of fiscal year 2000. In addition, $7.0 million was recorded associated with the business restructuring as a result of the Company's merger transaction with R.P. Scherer Corporation ("Scherer"), of which $6.9 million was recorded during the first quarter of fiscal 2000. As part of the business restructuring, the Company is currently closing certain facilities. In connection with such closings, the Company has incurred employee-related costs, asset impairment charges and exit costs related to the termination of contracts and lease agreements. During the first six months of fiscal 2000, the Company recorded costs of $8.8 million related to integrating the operations of companies that previously engaged in merger transactions with the Company. Of these integration costs, $4.3 million were recorded during the quarter ended September 30, 1999. Partially offsetting the total charges recorded was a $10.3 million credit recorded in the first quarter of fiscal 2000 to adjust the estimated transaction and employee-related costs previously recorded in connection with the Allegiance merger transaction. Actual billings and employee-related costs were less than the amounts originally anticipated, resulting in a reduction of the merger-related costs. During the three and six-month periods ended December 31, 1998, merger-related costs totaled $3.1 million ($1.9 million, net of tax) and $37.5 million ($29.7 million, net of tax), respectively. Of the amount recorded, $22.3 million related to transaction and employee-related costs and $12.5 million related to business restructuring and asset impairment costs associated with the Company's merger transaction with Scherer. In addition, the Company recorded costs of $1.1 million related to severance costs for a restructuring associated with the change in management that resulted from the merger with Owen Healthcare, Inc. and $4.8 million related to integrating the operations of companies that previously engaged in merger transactions with the Company, of which $1.8 million was recorded during the first quarter of fiscal 1999. Partially offsetting the charge recorded was a $3.2 million credit, of which $2.2 million was recorded during the first quarter of fiscal 1999, to adjust the estimated transaction and termination costs previously recorded in connection with the canceled merger transaction with Bergen Brunswig Corporation. The actual billings for services provided by third parties engaged by the Company were less than the estimate, resulting in a reduction of the merger-related costs. Page 7 <PAGE> 8 The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes (see Note 4) during the three months ended December 31, 1999 and 1998 was to reduce net earnings by $3.4 million to $173.5 million and to increase net earnings by $0.9 million to $141.5 million, respectively, and to reduce reported diluted earnings per Common Share by $0.01 per share to $0.61 per share and to increase reported diluted earnings per Common Share by $0.01 per share to $0.50 per share, respectively. The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes during the six months ended December 31, 1999 and 1998 was to reduce net earnings by $33.1 million to $295.5 million and by $25.4 million to $236.2 million, respectively, and to reduce reported diluted earnings per Common Share by $0.12 per share to $1.03 per share and by $0.09 per share to $0.83 per share, respectively. Note 6. The Company is organized based on the products and services it offers. Under this organizational structure, the Company operates in three business segments: Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical Products. The Company has not made any significant changes in the segments reported or the basis of measurement of segment profit or loss from the information provided in the Company's 1999 Form 10-K. The Pharmaceutical Distribution segment involves the distribution of a broad line of pharmaceuticals, health and beauty care products, therapeutic plasma and other specialty pharmaceutical products and additional items typically sold by hospitals, retail drug stores and other health-care providers. The Pharmaceutical Services segment provides services to the health-care industry through the design of unique drug delivery systems, contract manufacturing, comprehensive packaging services, integrated pharmacy management, reimbursement services, clinical information system services and pharmacy automation equipment. The Medical-Surgical Products segment involves the manufacture of medical, surgical and laboratory products and the distribution of these products to hospitals, physician offices, surgery centers and other health-care providers. The Company evaluates the performance of the segments based on operating earnings after the corporate allocation of administrative expenses. Information about interest income and expense, and income taxes is not provided on a segment level. In addition, special charges are not allocated to the segments. The following table includes revenue and operating earnings for the three months ended December 31, 1999 and 1998 for each segment and reconciling items necessary to equal amounts reported in the consolidated financial statements: <TABLE> <CAPTION> For the three months ended For the six months ended (in millions) December 31, December 31, -------------------------- ------------------------ Net Revenue: 1999 1998 1999 1998 -------- -------- --------- --------- <S> <C> <C> <C> <C> Operating revenue: Pharmaceutical Distribution $4,509.9 $3,622.0 $ 8,693.1 $ 7,067.7 Pharmaceutical Services 552.6 536.7 1,062.8 1,026.9 Medical-Surgical Products 1,279.2 1,209.3 2,492.0 2,358.9 Inter-segment (1) (87.4) (78.5) (164.3) (146.6) -------- -------- --------- --------- Total operating revenue 6,254.3 5,289.5 12,083.6 10,306.9 Bulk Deliveries to Customer Warehouses: Pharmaceutical Distribution 1,145.2 999.8 2,099.6 1,781.5 -------- -------- --------- --------- Total Net Revenue $7,399.5 $6,289.3 $14,183.2 $12,088.4 ======================================================================================== </TABLE> Page 8 <PAGE> 9 <TABLE> <CAPTION> For the For the three months ended six months ended December 31, December 31, -------------------- ------------------- Operating Earnings: 1999 1998 1999 1998 ------ ------ ------ ------ <S> <C> <C> <C> <C> Pharmaceutical Distribution $118.1 $ 93.8 $224.7 $175.7 Pharmaceutical Services 107.1 91.9 186.6 160.7 Medical-Surgical Products 88.9 73.5 175.5 144.6 Corporate (2) (13.0) (9.1) (59.0) (47.8) ------ ------ ------ ------ Total Operating Earnings $301.1 $250.1 $527.8 $433.2 =============================================================================== </TABLE> (1) Inter-segment revenue consists primarily of the elimination of inter-segment activity - primarily sales from Pharmaceutical Distribution to Pharmaceutical Services. Sales from one segment to another are priced at the equivalent external customer selling prices. (2) Corporate operating earnings primarily consist of merger-related costs of $5.5 million and $3.1 million for the three months ended December 31, 1999 and 1998 and $42.3 million and $37.5 million for the six months ended December 31, 1999 and 1998, respectively, and unallocated corporate depreciation and amortization and administrative expenses. Note 7. On September 30, 1996, Baxter International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries their U.S. Healthcare distribution business, surgical and respiratory therapy business and healthcare cost-saving business, as well as certain foreign operations (the "Allegiance Business") in connection with a spin-off of the Allegiance Business by Baxter. In connection with this spin-off, Allegiance, which merged with the Company on February 3, 1999, assumed the defense of litigation involving claims related to the Allegiance Business from Baxter, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Since none of the cases involving natural rubber latex gloves has proceeded to a hearing on the merits, the Company is unable to evaluate the extent of any potential liability, and unable to estimate any potential loss. Because of the increase in claims filed and the ongoing defense costs that will be incurred, the Company believes it is probable that it will continue to incur significant expenses related to the defense of cases involving natural rubber latex gloves. The Company believes a substantial portion of any potential liability and defense costs, excluding defense costs already reserved, relating to natural latex gloves cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Although the ultimate resolution of litigation cannot be forecast with certainty, the Company does not believe that the outcome of any pending litigation would have a material adverse effect on the Company's consolidated financial statements. Note 8. As of July 1, 1999, the Company adopted the Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for costs of computer software developed or obtained for internal use. The adoption of this statement did not have a material impact on the Company's financial statements. On November 24, 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 100 ("SAB 100"), "Restructuring and Impairment Charges." SAB 100 provides the SEC staff's views regarding the accounting for and disclosure of certain expenses commonly reported in connection with exit activities and business combinations. The Company believes that its current accounting procedures related to these expenses comply with SAB 100. On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." While not intended to change current literature related to revenue recognition, SAB 101 provides additional guidance on revenue recognition policies and procedures. The Company does not anticipate that the issuance of SAB 101 will have a material impact on the consolidated financial statements. Page 9 <PAGE> 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management's discussion and analysis presented below has been prepared to give retroactive effect to the pooling of interests business combinations with Pacific Surgical, Inc. ("PSI") on May 21, 1999 and Automatic Liquid Packaging, Inc. ("ALP") on September 10, 1999. The discussion and analysis is concerned with material changes in financial condition and results of operations for the Company's condensed consolidated balance sheets as of December 31, 1999 and June 30, 1999, and for the condensed consolidated statements of earnings for the three and six month periods ended December 31, 1999 and 1998. This discussion and analysis should be read together with management's discussion and analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Portions of management's discussion and analysis presented below include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "project", and similar expressions, among others, identify "forward-looking statements", which speak only as of the date the statement was made. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to materially differ from those made, projected or implied. The most significant of such risks, uncertainties and other factors are described in Exhibit 99.01 to this Form 10-Q and are incorporated herein by reference. The Company disclaims any obligation to update any forward-looking statement. GENERAL The Company operates within three operating business segments: Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical Products. See Note 6 of "Notes to Condensed Consolidated Financial Statements" for a description of these segments. RESULTS OF OPERATIONS Operating Revenue <TABLE> <CAPTION> Three months ended Six months ended December 31, 1999 December 31, 1999 ------------------------------------------------------------------- Percent of Total Percent of Total Growth (1) Operating Revenues Growth (2) Operating Revenues - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Pharmaceutical Distribution 25% 71% 23% 71% Pharmaceutical Services 3% 9% 3% 9% Medical-Surgical Products 6% 20% 6% 20% Total Company 18% 100% 17% 100% - ------------------------------------------------------------------------------------------------------------ </TABLE> (1) The growth rate applies to the three-month period ended December 31, 1999 as compared to the corresponding period of the prior year. (2) The growth rate applies to the six-month period ended December 31, 1999 as compared to the corresponding period of the prior year. Operating revenue for the three and six months ended December 31, 1999 increased 18% and 17% as compared to the same period in the prior year. The majority of the operating revenue increase (approximately 85% and 81%, respectively for the three and six-month periods ended December 31, 1999) came from existing customers in the form of increased volume and price increases. The remainder of the growth came from the addition of new customers. The Pharmaceutical Distribution segment's operating revenue growth over the three and six months ended December 31, 1999 was primarily related to strong sales to all customer segments, especially to retail pharmacy chains and through the Company's specialty distribution businesses. All operating revenue growth was internal. Page 10 <PAGE> 11 The operating revenue growth for the Pharmaceutical Services segment was primarily a result of growth in the Company's pharmaceutical drug delivery systems, comprehensive packaging services and contract manufacturing businesses. The recent pharmaceutical introductions in the form of the Company's proprietary drug delivery formulations and sales of health and nutritional products in Asia contributed to this revenue growth. In addition, the comprehensive packaging services and the contract manufacturing businesses have contributed to the revenue growth through the receipt of contracts on new products and organic growth of existing products under contract. Offsetting this growth was the impact of the pharmacy management business continuing to exit unprofitable accounts and temporarily flat sales in the pharmacy automation business due to customers delaying purchases to focus internally on their Y2K readiness. The Medical-Surgical Products segment's operating revenue growth was due to an increase in sales for all product lines. In particular, sales of distributed products increased during the quarter and six-month periods. In addition, international and service revenues for the Medical-Surgical Products segment increased over the comparable quarter of fiscal 1999. Several multiple year contracts have contributed to this growth. Bulk Deliveries to Customer Warehouses. The Company reports as revenue bulk deliveries made to customers' warehouses, whereby the Company acts as an intermediary in the ordering and subsequent delivery of pharmaceutical products. Fluctuations in bulk deliveries result largely from circumstances that are beyond the control of the Company, including consolidation within customers' industries, decisions by customers to either begin or discontinue warehousing activities, and changes in policies by manufacturers related to selling directly to customers. Due to the lack of margin generated through bulk deliveries, fluctuations in their amount have no significant impact on the Company's operating earnings. Gross Margin <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, - ------------------------------------------------------------------------------------------------------- (As a percentage of operating revenue) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Pharmaceutical Distribution 5.02% 5.29% 5.03% 5.17% Pharmaceutical Services 36.28% 33.27% 34.46% 32.43% Medical-Surgical Products 22.97% 23.53% 22.99% 23.20% Total Company 11.54% 12.37% 11.39% 12.09% - ------------------------------------------------------------------------------------------------------- </TABLE> The decrease in gross margin from the three and six months ended December 31, 1998 to the comparable periods of fiscal 2000 was due primarily to a greater mix of lower margin pharmaceutical distribution during the first half of fiscal 2000 compared to the same period a year ago. The Pharmaceutical Distribution segment's mix increased to 71% of total operating revenues for the three and six months ended December 31, 1999 from 67% and 68% for the comparable periods of the prior year, respectively. The Pharmaceutical Distribution segment's gross margin as a percentage of operating revenue decreased primarily as a result of lower selling margins due to a greater mix of sales to retail pharmacy chains which have a relatively lower margin in connection with a lower cost of service (see discussion in selling, general and administrative expenses). This decrease was partially offset by higher vendor margins from favorable price increases and manufacturer marketing programs. The increase in the Pharmaceutical Services segment's gross margin was due primarily to the drug delivery development business' improvement as a result of a shift in mix to higher margin pharmaceutical products from lower margin health and nutrition products. In addition, the pharmacy management contract rationalization program has resulted in improved gross margins. Gross margin was also favorably impacted by an improvement in manufacturing processes as a result of improved productivity, ongoing plant modernization and rationalization programs. The decrease in the Medical-Surgical Products segment's gross margin was primarily due to a shift in mix between distributed and self-manufactured products, as well as competitive pressures in the latex glove business. Competition in the cyclical exam gloves market has become focused on price resulting in temporarily decreased margins for manufacturers. Page 11 <PAGE> 12 Selling, General and Administrative Expenses <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, - ------------------------------------------------------------------------------------------------------- (As a percentage of operating revenue) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Pharmaceutical Distribution 2.40% 2.70% 2.43% 2.69% Pharmaceutical Services 16.90% 16.14% 16.90% 16.78% Medical-Surgical Products 16.02% 17.46% 15.95% 17.07% Total Company 6.64% 7.59% 6.67% 7.52% - ------------------------------------------------------------------------------------------------------- </TABLE> The improvement in selling, general and administrative expenses as a percentage of operating revenue for the three and six months ended December 31, 1999 reflects economies of scale associated with the Company's revenue growth, as well as significant productivity gains resulting from continued cost control efforts and the consolidation and selective automation of operating facilities. In addition, the Company is continuing to take advantage of synergies from recent acquisitions to decrease selling, general and administrative expenses as a percentage of operating revenues. The 3% and 4% growth in selling, general and administrative expenses experienced in the three and six months ended December 31, 1999, respectively, compared to the same period a year ago, was due primarily to increases in personnel costs and depreciation expense, and compares favorably to the 18% and 17% growth in operating revenue for the same respective periods. Merger-Related Costs. Costs of effecting mergers and subsequently integrating the operations of the various merged companies are recorded as merger-related costs when incurred. During the three and six months ended December 31, 1999, merger-related costs totaling $5.5 million ($3.4 million, net of tax) and $42.3 million ($33.1 million, net of tax) were recorded, respectively. During the six months ended December 31, 1999, approximately $31.6 million related to transaction and employee-related costs associated with the ALP merger transaction and $5.2 million related to exit and employee costs associated with the Company's merger transaction with Allegiance Corporation ("Allegiance"), of which $31.6 million and $4.3 million, respectively were recorded during the first quarter of fiscal year 2000. In addition, $7.0 million was recorded associated with the business restructuring as a result of the Company's merger transaction with R.P. Scherer Corporation ("Scherer"), of which $6.9 million was recorded during the first quarter of fiscal 2000. As part of the business restructuring, the Company is currently closing certain facilities. In connection with such closings, the Company has incurred employee-related costs, asset impairment charges and exit costs related to the termination of contracts and lease agreements. During the first six months of fiscal 2000, the Company recorded costs of $8.8 million related to integrating the operations of companies that previously engaged in merger transactions with the Company. Of these integration costs, $4.3 million were recorded during the quarter ended September 30, 1999. Partially offsetting the total charges recorded was a $10.3 million credit recorded in the first quarter of fiscal 2000 to adjust the estimated transaction and employee-related costs previously recorded in connection with the Allegiance merger transaction. Actual billings and employee-related costs were less than the amounts originally anticipated, resulting in a reduction of the merger-related costs. During the three and six-month periods ended December 31, 1998, merger-related costs totaled $3.1 million ($1.9 million, net of tax) and $37.5 million ($29.7 million, net of tax), respectively. Of the amount recorded, $22.3 million related to transaction and employee-related costs and $12.5 million related to business restructuring and asset impairment costs associated with the Company's merger transaction with Scherer. In addition, the Company recorded costs of $1.1 million related to severance costs for a restructuring associated with the change in management that resulted from the merger with Owen Healthcare, Inc. and $4.8 million related to integrating the operations of companies that previously engaged in merger transactions with the Company, of which $1.8 million was recorded during the first quarter of fiscal 1999. Partially offsetting the charge recorded was a $3.2 million credit, of which $2.2 million was recorded during the first quarter of fiscal 1999, to adjust the estimated transaction and termination costs previously recorded in connection with the canceled merger transaction with Bergen Brunswig Corporation. The actual billings for services provided by third parties engaged by the Company were less than the estimate, resulting in a reduction of the merger-related costs. Since April 1998, ALP had been organized as an S-Corporation for tax purposes. Accordingly, ALP was not subject to federal income tax from April 1998 up to the date that the ALP merger transaction was consummated. For the quarter and six months ended December 31, 1998, net earnings would have been reduced by $2.8 million and $4.3 million, respectively, if ALP had been subject to federal income taxes. Page 12 <PAGE> 13 The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes during the three months ended December 31, 1999 and 1998 was to reduce net earnings by $3.4 million to $173.5 million and to increase net earnings by $0.9 million to $141.5 million, respectively, and to reduce reported diluted earnings per Common Share by $0.01 per share to $0.61 per share and to increase reported diluted earnings per Common Share by $0.01 per share to $0.50 per share, respectively. The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes during the six months ended December 31, 1999 and 1998 was to reduce net earnings by $33.1 million to $295.5 million and by $25.4 million to $236.2 million, respectively, and to reduce reported diluted earnings per Common Share by $0.12 per share to $1.03 per share and by $0.09 per share to $0.83 per share, respectively. The Company estimates that it will incur additional merger-related costs associated with the various mergers it has completed to date (primarily related to the Scherer, Allegiance and ALP mergers) of approximately $91.8 million ($58.4 million, net of tax) in future periods (primarily fiscal 2000 and 2001) related to the exit of contractual arrangements, employee-related costs, and costs to properly integrate operations and implement efficiencies. Such amounts will be charged to expense when incurred. Provision for Income Taxes. The Company's provision for income taxes relative to pre-tax earnings was 37% and 36% for the second quarter of fiscal 2000 and 1999, respectively. The increase in the effective tax rate for the second quarter over the corresponding period of prior year is due primarily to nondeductible items associated with the current year's business combinations and the change in ALP tax status (see Note 5 to the "Notes to Condensed Consolidated Financial Statements"). For the six-month periods ended December 31, 1999 and 1998, the Company's income tax provision as a percentage of pre-tax earnings was 38% for both periods. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $2.8 billion at December 31, 1999 from $2.2 billion at June 30, 1999. This increase from June 30, 1999 included additional investments in inventories and trade receivables of $1.1 billion and $285.7 million, respectively. Offsetting the increases in working capital was an increase in accounts payable of $663.4 million. The Company's inventory levels have risen due to the higher volume of current and anticipated business in pharmaceutical distribution activities. In addition, the Company invested in supplemental inventory to cover possible year 2000 issues. A portion of the inventory increase can also be attributed to the Company investing in inventories in conjunction with various vendor-margin programs. The increase in trade receivables is consistent with the Company's operating revenue growth (see "Operating Revenue" above) and the change in accounts payable is due primarily to the timing of inventory purchases and related payments. The Company has a commercial paper program, providing for the issuance of up to $750 million in aggregate maturity value of commercial paper. At December 31, 1999, commercial paper with an effective interest rate of 5.78% and an aggregate maturity value of $629.9 million was outstanding. At June 30, 1999, the outstanding commercial paper balance was $49.2 million with an effective interest rate of 4.82%. Property and equipment, at cost, increased by $105.6 million from June 30, 1999. The increase was primarily due to ongoing plant expansion and manufacturing equipment purchases in certain service businesses, as well as additional investments made for management information systems and upgrades to distribution facilities. Shareholders' equity increased to $3.9 billion at December 31, 1999 from $3.6 billion at June 30, 1999, primarily due to net earnings of $295.5 million and the investment of $20.6 million by employees of the Company through various stock incentive plans which are offset by dividends of $14.1 million and a $22.3 million payment related to the repurchase of ALP common shares. The Company believes that it has adequate capital resources at its disposal to fund currently anticipated capital expenditures, business growth and expansion, and current and projected debt service requirements. See "Other" below. Page 13 <PAGE> 14 OTHER Year 2000 Project. The Company utilizes computer technologies in each of its businesses to effectively carry out its day-to-day operations. Computer technologies include both information technology in the form of hardware and software, as well as embedded technology in the Company's facilities and equipment. Similar to most companies, the Company had to determine whether its systems were capable of recognizing and processing date sensitive information properly in the year 2000. The Company's year 2000 plan was described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. The Company believes it has been able to modify, replace, or mitigate its affected systems in time to avoid any material detrimental impact on its operations. In addition, the Company has taken steps to monitor the progress made by significant suppliers, customers and critical business partners, and has tested critical interfaces for the year 2000 readiness. While the Company is not presently aware of any significant probability that its systems have not been properly remediated, there can be no assurances that contingency plans will sufficiently mitigate the risk of an unanticipated year 2000 readiness problem Since the initiation of the year 2000 project, the Company estimates that it has incurred costs of approximately $26.4 million of which approximately $7.6 million represented incremental costs. To date, the Company has not experienced any significant year 2000 related system failures nor, to its knowledge, have any of its significant suppliers and customers. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes there has been no material change in its exposure to market risk from that discussed in the Company's Form 10-K for the fiscal year ended June 30, 1999. Page 14 <PAGE> 15 PART II. OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The following disclosure should be read together with the disclosure set forth in the Company's Form 10-K for the fiscal year ended June 30, 1999, and to the extent any such statements constitute "forward looking statements" reference is made to Exhibit 99.01 of this Form 10-Q. In November 1993, the Company and Whitmire Distribution Corporation ("Whitmire"), one of the Company's wholly-owned subsidiaries, as well as other pharmaceutical wholesalers, were named as defendants in a series of purported class action lawsuits which were later consolidated and transferred by the Judicial Panel for Multi-District Litigation to the United States District Court for the Northern District of Illinois. Subsequent to the consolidation, a new consolidated complaint was filed which included allegations that the wholesaler defendants, including the Company and Whitmire, conspired with manufacturers to inflate prices using a chargeback pricing system. The wholesaler defendants, including the Company and Whitmire, entered into a Judgment Sharing Agreement whereby the total exposure for the Company and its subsidiaries is limited to $1,000,000 or 1% of any judgment against the wholesalers and the manufacturers, whichever is less, and provided for a reimbursement mechanism for legal fees and expenses. The trial of the class action lawsuit began on September 23, 1998. On November 19, 1998, after the close of plaintiffs' case-in-chief, both the wholesaler defendants and the manufacturer defendants moved for judgment as a matter of law in their favor. On November 30, 1998, the Court granted both of these motions and ordered judgment as a matter of law in favor of both the wholesaler defendants and the manufacturer defendants. On January 25, 1999, the class plaintiffs filed a notice of appeal of the District Court's decision with the Court of Appeals for the Seventh Circuit. On July 13, 1999, the Court of Appeals for the Seventh Circuit issued its decision, which, in part, affirmed the dismissal of the wholesaler defendants, including the Company and Whitmire. On July 27, 1999, the class plaintiffs filed a Petition for Rehearing with the Court of Appeals for the Seventh Circuit, which was denied. On November 5, 1999, the class plaintiffs filed a petition for writ of certiorari with the United States Supreme Court. In addition to the federal court cases described above, the Company and Whitmire have also been named as defendants in a series of related antitrust lawsuits brought by chain drug stores and independent pharmacies who opted out of the federal class action lawsuits, and in a series of state court cases alleging similar claims under various state laws regarding the sale of brand name prescription drugs. The Judgment Sharing Agreement mentioned above also covers these litigation matters. On September 30, 1996, Baxter International, Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries their U.S. health-care distribution business, surgical and respiratory therapy business and health-care cost-saving business, as well as certain foreign operations (the "Allegiance Business") in connection with a spin-off of the Allegiance Business by Baxter. In connection with this spin-off, Allegiance, which merged with the Company on February 3, 1999, assumed the defense of litigation involving claims related to the Allegiance Business from Baxter Healthcare Corporation ("BHC"), including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves described below. Allegiance will be defending and indemnifying BHC, as contemplated by the agreements between Baxter and Allegiance, for all expenses and potential liabilities associated with claims pertaining to the litigation assumed by Allegiance. As of December 31, 1999, there were approximately 486 lawsuits involving BHC and/or Allegiance containing allegations of sensitization to natural rubber latex products. Since none of these cases has proceeded to a hearing on the merits, the Company is unable to evaluate the extent of any potential liability, and unable to estimate any potential loss. Because of the increase in claims filed and the ongoing defense costs that will be incurred, the Company believes it is probable that it will continue to incur significant expenses related to the defense of cases involving natural rubber latex gloves. The Company believes a substantial portion of any potential liability and defense costs, excluding defense costs already reserved, relating to natural latex gloves cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The Company also becomes involved from time-to-time in other litigation (including environmental matters) incidental to its business. Although the ultimate resolution of the litigation referenced in this Item 1 cannot be forecast with certainty, the Company does not believe that the outcome of these lawsuits would have a material adverse effect on the Company's consolidated financial statements. Page 15 <PAGE> 16 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) Registrant's 1999 Annual Meeting of Shareholders was held on November 3, 1999. (b) Proxies were solicited by Registrant's management pursuant to Regulation 14A under the Securities Exchange Act of 1934; there was no solicitation in opposition to management's nominees as listed in the proxy statement; and all director nominees were elected to the class indicated in the proxy statement pursuant to the vote of the Registrant's shareholders. (c) Matters voted upon at the Annual Meeting were as follows: (i) Election of Regina E. Herzlinger, John C. Kane, J. Michael Losh, John B. McCoy, and Michael D. O'Halleran. The results of the shareholder vote were as follows: Mrs. Herzlinger - 242,017,803 for, 0 against, 2,295,079 withheld, and 0 broker non-votes; Mr. Kane - 241,998,472 for, 0 against, 2,314,410 withheld, and 0 broker non-votes; Mr. Losh - 242,075,613 for, 0 against, 2,237,269 withheld, and 0 broker non-votes; Mr. McCoy - 242,016,568 for, 0 against, 2,296,314 withheld, and 0 broker non-votes; Mr. O'Halleran - 242,030,618 for, 0 against, 2,282,264 withheld, and 0 broker non-votes. (ii) Adoption of the Cardinal Health, Inc. Employee Stock Purchase Plan pursuant to Section 423(b) of the Internal Revenue Code. The results of the shareholder vote were as follows: 241,021,665 for, 2,874,793 against, 416,424 withheld, and 0 broker non-votes. (iii) Re-approval of the Performance Goals under the Cardinal Health, Inc. Equity Incentive Plan relating to Section 162(m) of the Internal Revenue Code. The results of the shareholder vote were as follows: 238,733,365 for, 4,833,411 against, 746,106 withheld, and 0 broker non-votes. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K: (a) Listing of Exhibits: Exhibit Number Exhibit Description ------ ------------------- 10.01 Employment Agreement between Stephen S. Thomas and the Registrant* 27.01 Financial Data Schedule - Six months ended December 31, 1999 27.02 Financial Data Schedule - Six months ended December 31, 1998 99.01 Statement Regarding Forward-Looking Information - -------------- * Management contract or compensation plan or arrangement (b) Reports on Form 8-K: None. Page 16 <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. CARDINAL HEALTH, INC. Date: February 11, 2000 By: /s/ Robert D. Walter ------------------------------------ Robert D. Walter Chairman and Chief Executive Officer By: /s/ Richard J. Miller ------------------------------------ Richard J. Miller Executive Vice President and Chief Financial Officer Page 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.01 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 10.01 <TEXT> <PAGE> 1 EXHIBIT 10.01 EMPLOYMENT AGREEMENT This is an agreement between Cardinal Health, Inc., an Ohio corporation (the "Company" ) and Stephen S. Thomas (the "Executive"), dated as of the 1st day of July, 1999, to be performed and executed in Dublin, Ohio. 1. Employment Period. The Company shall employ the Executive, and the Executive hereby accepts such employment, on the terms and conditions set forth in this Agreement, for the period commencing on July 1, 1999 (the "Effective Date") and ending on the third anniversary of the Effective Date (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, the Executive shall be employed by the Company, and shall perform such duties and responsibilities of an executive nature as may be determined from time to time by the Company's Board of Directors (the "Board") or its lawfully designated representative. (b) During the Employment Period, the Executive shall devote his full time and attention to the business and affairs of the Company, and shall use his best efforts to promote and establish the business of the Company and to carry out faithfully and efficiently the responsibilities assigned to him under this Agreement. It shall not be considered a violation of the foregoing for the Executive to (i) serve on corporate boards with the approval of Cardinal, (ii) serve on civic or charitable boards or committees, and (iii) manage personal investments, so long as such activities do not interfere with the performance of the Executive's responsibilities under this Agreement. 3. Compensation. (a) Base Salary. During the Employment Period, the Company shall pay the Executive a base salary (the "Base Salary") at an annual rate of $336,050, payable in accordance with the Company's payroll practices for management personnel, as in effect from time to time (but not less frequently than monthly). During the Employment Period, the Base Salary shall be reviewed for possible increase annually in accordance with the Company's normal payroll practices for management personnel. Any increase in the Base Salary shall not limit, expand or reduce any other obligation of the Company under this Agreement. (b) Annual Bonus. In addition to the Base Salary, during the Employment Period the Executive shall be eligible to receive annual bonuses (each, regardless of whether for a 12-month period or a different period, an "Annual Bonus") pursuant to this Section 3(b). The Annual Bonus shall be determined and paid at the sole discretion of the Company pursuant to the terms and conditions of the Company's standard Management Incentive Plan as in effect from time to time, or any successor thereto (the "MIP"), with an MIP potential equal to 85 percent of the Base Salary. (c) Other Benefits. During the Employment Period, the Executive shall be entitled to participate in the group health, life, disability insurance, retirement savings and other employee benefit plans (collectively, "Group Plans") generally offered to the Company's employees in accordance with the standard terms and conditions of such plans as in effect from <PAGE> 2 time to time. In addition, the Executive shall be eligible to participate in the Company's Equity Incentive Plan or any successor thereto (the "Cardinal Stock Plan"), although the actual awards and benefits, if any, to be granted to the Executive thereunder shall be in the sole discretion of the Compensation and Personnel Committee of the Company's Board of Directors. The Employee shall at all times comply with the Company's policies on option exercises and the selling and buying of Company stock. (d) Expenses. The Company shall reimburse the Executive for all reasonable business expenses incurred by the Executive in the performance of his services hereunder for the Company, which expenses shall be substantiated to the reasonable satisfaction of the Company, in a manner similar to that applicable to other management personnel of the Company, and the Executive shall provide all necessary records to reflect the reasonable business expenses incurred. (e) Vacation. During the Employment Period, the Executive shall be entitled to annual paid vacations as provided in the Company's vacation policy as in effect as of the Effective Date, as it may be revised thereafter from time to time. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means the illness or disability of the Executive which prevents or hampers the performance of his obligations hereunder, and which continues for a consecutive period of one hundred and twenty (120) days or longer or an aggregate period of one hundred and eighty (180) days or longer, in either instance during the Employment Period. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective upon receipt of such notice by the Executive (the "Disability Effective Date"). (b) By the Company. The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" shall mean (A) fraud, misappropriation, embezzlement or material misconduct on the part of the Executive, (B) the Executive's (x) failure to substantially perform his duties for the Company when and to the extent requested by the Board or its lawfully designated representative to do so and (y) failure to correct same within five (5) business days after notice from the Board or its lawfully designated representative requesting the Executive to do so, or (C) the Executive's breach of any material provision of this Agreement, the Certificate of Compliance with Company Policies then applicable to management personnel of the Company, or other agreements between the Executive and the Company and such breach continues for a period of five (5) business days after notice from the Board or its lawfully designated representative of such breach. A termination of the Executive's employment by the Company without Cause shall be effected by giving the Executive five (5) business days written notice of the termination. (c) Good Reason. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means: 2 <PAGE> 3 (A) the assignment to the Executive of duties inconsistent in any material respect with Section 2(a) of this Agreement, other than any such action that is remedied by the Company within five (5) business days after receipt of notice thereof from the Executive; or (B) any failure by the Company to comply with any provision of Section 3 of this Agreement other than any such failure that is remedied by the Company within five (5) business days after receipt of notice thereof from the Executive. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the fifth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given); provided, that such a termination of employment shall not become effective if the Company shall have substantially corrected the circumstance giving rise to the Notice of Termination within such period. (d) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or by the Executive for Good Reason is effective, the date on which the Company gives the Executive notice of a termination of employment without Cause, or the date on which the Executive gives the Company notice of a termination of employment without Good Reason, as the case may be. 5. Obligations of the Company upon Termination. (a) Death, Disability, Cause; Without Good Reason. If, during the Employment Period, the Executive's employment is terminated because of death, Disability, for Cause, or by the Executive without Good Reason, then the Executive shall not be entitled to any compensation provided for under this Agreement, other than Base Salary through the Termination Date, benefits under any long-term disability insurance coverage in the case of termination because of Disability, and (without limiting the provisions of Section 6 hereof) vested benefits, if any, required to be paid or provided by law. (b) Without Cause; Good Reason. If, during the Employment Period, the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason (collectively, an "Eligible Termination"), the Executive shall not be entitled to any compensation provided for under this Agreement except as set forth in the following three sentences. If the Eligible Termination occurs prior to the second anniversary of the Effective Date, then the Company (i) shall continue to pay the Executive his Base Salary, at the rate then in effect, for and with respect to the period beginning on the date of such termination of employment and ending on the last day of the Employment Period (hereinafter, the "Continuation 3 <PAGE> 4 Period") in the same manner as specified in Section 3(a) hereof; and (ii) shall pay the Executive, in lieu of annual bonuses pursuant to Section 3(b), an annual amount equal to the Executive's most recent previous annual bonus actually paid at the same time and in the same manner as such annual bonuses would have been paid during the Continuation Period pursuant to Section 3(b). If the Eligible Termination occurs on or after the second anniversary of the Effective Date, then the Company (i) shall continue to pay the Executive his Base Salary, at the rate then in effect, for and with respect to the period beginning on the date of such termination of employment and ending on the first anniversary of such date; and (ii) shall pay the Executive, in lieu of an annual bonus pursuant to Section 3(b), an amount equal to the Executive's most recent previous annual bonus actually paid at the same time and in the same manner as such annual bonus would have been paid had the Executive continued to be employed by the Company during such one year period. 6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor, subject to Section 9(f), shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 7. Confidential Information; Business Interference; Noncompetition; Inventions. (a) Both during his association with the Company or the Affiliated Companies (as defined below) and at all times thereafter, Executive shall not disclose to anyone else, directly or indirectly, any confidential, proprietary or business-sensitive information or trade secrets concerning or relating to the business of the Company or the Affiliated Companies (collectively, "Confidential Information") or use, or permit or assist, by acquiescence or otherwise, anyone else to use, directly or indirectly, any such Confidential Information. "Confidential Information" is information not generally known to the public and which, if released to unauthorized persons, could be detrimental to the reputation or business interests of the Company or the Affiliated Companies or parties with which the Company or the Affiliated Companies contract, or which could permit such unauthorized persons to benefit improperly. Examples of Confidential Information include, but are not limited to, the following: strategic business plans; computer materials such as software programs or documentation; information concerning the Company's and the Affiliated Companies' customers and potential customers, including their identities, contact persons, requirements, preferences, pricing or contract terms; marketing and sales information; research and development plans or data; budgets and unpublished financial statements; pricing information and cost data; information concerning the skills and compensation of other employees of the Company or the Affiliated Companies; and information concerning the suppliers of the Company and the Affiliated Companies. The foregoing restrictions shall not apply to disclosure of information by the Executive as may be required in the proper conduct of his duties on behalf of the Company or the Affiliated Companies or as may be specifically authorized in writing by the Company's chief executive officer, president, or chief 4 <PAGE> 5 financial officer. Upon termination of employment with the Company for any reason, Executive shall promptly deliver to the Company all property belonging to the Company and the Affiliated Companies and shall not retain any copies or reproductions of correspondence, reports, proposals, lists, computer programs or files, or other information relating in any way to the affairs of the Company or the Affiliated Companies. (b) Both during his association with the Company and at all times thereafter, Executive shall not take any action which is intended to or would disparage or diminish the reputation of the Company or the Affiliated Companies. In addition, while associated with the Company and for a period of two (2) years after expiration or termination of employment or other association with the Company, Executive shall not directly or indirectly, employ, contact concerning employment, or participate in any way in the recruitment for employment (whether as an employee, officer, director, agent, consultant or independent contractor) of any person who was or is at any time during the previous 12 months an employee, representative, officer, or director of the Company or any of the Affiliated Companies. (c) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Board, engage in or become associated with a Competitive Activity. For purposes of this Section 7(c): (i) the "Noncompetition Period" means (A) the period during which the Executive is employed by the Company, plus (B) one year; (ii) a "Competitive Activity" means any business or other endeavor, in the United States or Canada or any other country, of a kind then being conducted by the Company or any of the Affiliated Companies in such country; and (v) the Executive shall be considered to have become "associated with a Competitive Activity" if he becomes directly or indirectly involved as an owner, principal, employee, officer, director, independent contractor, representative, stockholder, financial backer, agent, partner, advisor, lender, or in any other individual or representative capacity with any individual, partnership, corporation, other organization or entity that is engaged in a Competitive Activity. Notwithstanding the foregoing, the Executive may make and retain investments during the Employment Period in not more than five percent of the equity of any entity engaged in a Competitive Activity, if such equity is listed on a national securities exchange or regularly traded in an over-the-counter market. Should this provision be unenforceable in any jurisdiction because it is deemed too broad, as to time, area, subject matter, or otherwise, this provision shall be deemed modified to the extent necessary to be enforceable in such jurisdiction. (d) As special consideration for the Executive's agreement to be bound by the provisions of Section 7(c), the receipt and adequacy of which is hereby confirmed and acknowledged, he is receiving, as of the Effective Date, a special grant of restricted shares pursuant to the Cardinal Stock Plan. (e) All plans, discoveries and improvements, whether patentable or unpatentable, made or devised by the Executive, whether by himself or jointly with others, from the date of the Executive's initial employment by the Company and continuing until the end of the Employment Period and any subsequent period when the Executive is employed by the Company or any of the Affiliated Companies, relating or pertaining in any way to his employment with or the business of the Company or any of the Affiliated Companies, shall be promptly disclosed in writing to the 5 <PAGE> 6 Board and are hereby transferred to and shall redound to the benefit of the Company, and shall become and remain its sole and exclusive property. The Executive agrees to execute any assignments to the Company or its nominee, of his entire right, title and interest in and to any such discoveries and improvements and to execute any other instruments and documents requisite or desirable in applying for and obtaining patents or copyrights, at the expense of the Company, with respect thereto in the United States and in all foreign countries. The Executive further agrees, during and after the Employment Period, to cooperate to the extent and in the manner required by the Company, in the prosecution or defense of any patent or copyright claims or any litigation, or other proceeding involving any trade secrets, processes, discoveries or improvements covered by this Agreement, but all necessary expenses thereof shall be paid by the Company. (f) The Executive acknowledges and agrees that the Company's remedy at law for any breach of the Executive's obligations under this Section 7 would be inadequate and agrees and consents that temporary and permanent injunctive relief may be granted in any proceeding which may be brought to enforce any provision of such Section without the necessity of proof of actual damage. With respect to any provision of this Section 7 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. 8. Successors. (a) This Agreement is personal to the Executive, and he may not assign any interest herein in any manner whatsoever. Any purported assignment by the Executive shall be void. (b) In addition to assignments by operation of law, the Company shall have the right to assign this Agreement to any person, firm or corporation, controlling, controlled by or under common control with the Company (including without limitation any of the Affiliated Companies), or acquiring substantially all of its assets, but such assignment shall not release the Company from its obligations under this Agreement. 9. Miscellaneous. (a) The provisions of Sections 5, 6, 7, 8, and 9 of this Agreement shall survive any expiration or termination of this Agreement. (b) This Agreement shall be governed by and construed in accordance with, the laws of the State of Ohio, without reference to principles of conflict of laws. THE PARTIES HERETO HEREBY AGREE THAT ANY DISPUTE CONCERNING FORMATION, MEANING, APPLICABILITY OR INTERPRETATION OF THIS AGREEMENT SHALL BE RESOLVED BY ARBITRATION IN FRANKLIN COUNTY, OHIO, IN ACCORDANCE WITH THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION AND JUDGMENT ON THE AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. 6 <PAGE> 7 (c) All notices, requests, consents and other communications required or provided under this Agreement shall be in writing and shall be deemed sufficient if delivered by facsimile, overnight courier, or certified or registered mail, return receipt requested, postage prepaid, and shall be effective upon delivery as follows: If to the Executive: ------------------- Stephen S. Thomas 3750 Torrey View Court San Diego, CA 92121 Facsimile: ___________________ If to the Company: ----------------- Cardinal Health, Inc. 7000 Cardinal Place Dublin, Ohio 43017 Attention: General Counsel Facsimile: (614) 757-6948 Either party may change the address and/or facsimile number to which notices are to be sent to that party by giving written notice of such change of address to the other party in the same manner above provided for giving notice. (d) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective, but only to the extent of such prohibition or unenforceability, without invalidating the other provisions hereof or without affecting the validity or enforceability of such provision in any other jurisdiction. (e) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (f) As of the Effective Date, this Agreement shall constitute the entire agreement between the parties relative to the subject matter contained herein, superseding, canceling and replacing all prior agreements. No promises, covenants or representations of any character or nature other than those expressly stated herein have been made to induce either party to enter into this Agreement. This Agreement shall not be modified, waived or discharged except in writing duly signed by each of the parties or their authorized assignees. (g) The Executive's or the Company's failure to insist upon strict compliance with 7 <PAGE> 8 any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement except to the extent any other party hereto is materially prejudiced by such failure. (h) The term "Affiliated Companies" means all companies controlled by, controlling or under common control with the Company. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Company has caused this Agreement to be executed in its name on its behalf, in Dublin, Ohio, all as of the day and year first above written. /s/ Stephen S. Thomas --------------------- Stephen S. Thomas CARDINAL HEALTH, INC. By: John C. Kane ----------------- Title: President, COO -------------- 8 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.01 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 27.01 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL HEALTH INC.'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 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-30-2000 <PERIOD-START> JUL-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 291 <SECURITIES> 0 <RECEIVABLES> 1,968 <ALLOWANCES> (80) <INVENTORY> 4,041 <CURRENT-ASSETS> 6,926 <PP&E> 2,905 <DEPRECIATION> (1,300) <TOTAL-ASSETS> 10,280 <CURRENT-LIABILITIES> 4,153 <BONDS> 1,658 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,125 <OTHER-SE> 2,735 <TOTAL-LIABILITY-AND-EQUITY> 10,280 <SALES> 14,183 <TOTAL-REVENUES> 14,183 <CGS> 12,807 <TOTAL-COSTS> 12,807 <OTHER-EXPENSES> 807 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> (51) <INCOME-PRETAX> 476 <INCOME-TAX> 181 <INCOME-CONTINUING> 295 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 295 <EPS-BASIC> 1.05 <EPS-DILUTED> 1.03 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.02 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 27.02 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL HEALTH INC.'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1998 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-30-1999 <PERIOD-START> JUL-01-1998 <PERIOD-END> DEC-31-1998 <CASH> 318 <SECURITIES> 14 <RECEIVABLES> 1,651 <ALLOWANCES> (80) <INVENTORY> 3,075 <CURRENT-ASSETS> 5,381 <PP&E> 2,736 <DEPRECIATION> (1,191) <TOTAL-ASSETS> 8,465 <CURRENT-LIABILITIES> 3,083 <BONDS> 1,535 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,100 <OTHER-SE> 2,196 <TOTAL-LIABILITY-AND-EQUITY> 8,465 <SALES> 12,088 <TOTAL-REVENUES> 12,088 <CGS> 10,842 <TOTAL-COSTS> 10,842 <OTHER-EXPENSES> 775 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> (49) <INCOME-PRETAX> 380 <INCOME-TAX> 144 <INCOME-CONTINUING> 236 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 236 <EPS-BASIC> 0.85 <EPS-DILUTED> 0.83 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99.01 <SEQUENCE>5 <DESCRIPTION>EXHIBIT 99.01 <TEXT> <PAGE> 1 EXHIBIT 99.01 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for "forward-looking statements" (as defined in the Act). The Company's Form 10-K, the Company's Annual Report to Shareholders, any Form 10-Q or any Form 8-K of the Company, the Company's press releases, or any other written or oral statements made by or on behalf of the Company, may include or incorporate by reference forward-looking statements which reflect the Company's current view (as of the date such forward-looking statement is first made) with respect to future events, prospects, projections or financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from those made, implied or projected in such statements. These uncertainties and other factors include, but are not limited to: o uncertainties relating to general economic conditions; o the loss of one or more key customer or supplier relationships, such as pharmaceutical and medical/surgical manufacturers for which alternative supplies may not be available; o challenges associated with integrating our information systems with those of our customers; o potential liabilities associated with warranties of our information systems, and the malfunction or failure of our information systems or those of third parties with whom we do business, such as malfunctions or failures associated with date-related issues and disruption to internet-related operations; o the costs and difficulties related to the integration of recently acquired businesses; o changes to the presentation of financial results and position resulting from adoption of new accounting principles or upon the advice of our independent auditors or the staff of the SEC; o changes in the distribution or outsourcing pattern for pharmaceutical and medical/surgical products and services, including an increase in direct distribution or a decrease in contract packaging by pharmaceutical manufacturers; o changes in government regulations or our failure to comply with those regulations; o the costs and other effects of legal and administrative proceedings; o injury to person or property resulting from our manufacturing, packaging, repackaging, drug delivery system development and manufacturing, information systems, or pharmacy management services; o competitive factors in our healthcare service businesses, including pricing pressures; o unforeseen changes in our existing agency and distribution arrangements; o the continued financial viability and success of our customers, suppliers, and franchisees; o difficulties encountered by our competitors, whether or not we face the same or similar issues; o technological developments and products offered by competitors; o failure to retain or continue to attract senior management or key personnel; o risks associated with international operations, including fluctuations in currency exchange ratios and implementation of the Euro currency; o costs associated with protecting our trade secrets and enforcing our patent, copyright and trademark rights, and successful challenges to the validity of our patents, copyrights or trademarks; o difficulties or delays in the development, production, manufacturing, and marketing of new products and services; o strikes or other labor disruptions; o labor and employee benefit costs; o pharmaceutical and medical/surgical manufacturers' pricing policies and overall drug price inflation; o changes in hospital buying groups or hospital buying practices; and o other factors described in this Form 10-Q or the documents we file with the Securities and Exchange Commission. The words "believe", "expect", "anticipate", "project", and similar expressions identify "forward-looking statements", which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CFC

https://www.sec.gov/Archives/edgar/data/25191/0000025191-00-000005.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, Jy0buquVhxgsa8I7MjaEuMPZkx4vachrYpR7VSFOhikit4uM1601oyFdFx5fFaR8 D2Mas9aVKH4A8TBXqkRJ4A== <SEC-DOCUMENT>0000025191-00-000005.txt : 20000202 <SEC-HEADER>0000025191-00-000005.hdr.sgml : 20000202 ACCESSION NUMBER: 0000025191-00-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000025191 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 132641992 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12331-01 FILM NUMBER: 507408 BUSINESS ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8182253000 MAIL ADDRESS: STREET 1: 4500 PARK GRANADA BLVD CITY: CALABASAS STATE: CA ZIP: 91302 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q <TEXT> 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 November 30, 1999 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: 1-8422 COUNTRYWIDE CREDIT INDUSTRIES, INC. ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-2641992 - --------------------------------------------------------- --------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4500 Park Granada, Calabasas, California 91302 - --------------------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) (818) 225-3000 ------------------------------------------------------------------------- (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 registrant's classes of common stock, as of the latest practicable date. Class Outstanding at January 13, 2000 Common Stock $.05 par value 113,329,466 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollar amounts in thousands, except per share data) A S S E T S <TABLE> November 30, February 28, 1999 1999 ------------------- ------------------- <S> <C> <C> Cash $171,503 $ 58,748 Mortgage loans and mortgage-backed securities held for sale 3,556,272 6,231,220 Property, equipment and leasehold improvements, at cost - net of accumulated depreciation and amortization 354,470 311,741 Mortgage servicing rights, net 5,262,854 4,496,439 Other assets 6,225,356 4,550,108 ------------------- ------------------- Total assets $ 15,570,455 $ 15,648,256 =================== =================== Borrower and investor custodial accounts (segregated in special accounts - excluded from corporate assets) $ 3,452,498 $ 4,020,998 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable $ 9,570,944 $ 9,935,759 Drafts payable issued in connection with mortgage loan closings 368,465 1,083,499 Accounts payable, accrued liabilities and other 1,056,274 517,937 Deferred income taxes 1,291,804 1,092,176 ------------------- ------------------- Total liabilities 12,287,487 12,629,371 Commitments and contingencies - - Company-obligated mandatorily redeemable capital trust pass-through securities of subsidiary trusts holding solely Company guaranteed related subordinated debt 500,000 500,000 Shareholders' equity Preferred stock - authorized, 1,500,000 share of $0.05 par value; issue and outstanding, none - - Common stock - authorized, 240,000,000 shares of $0.05 par value; issued and outstanding, 113,287,766 shares at November 30, 1999 and 112,619,313 shares at February 28, 1999 5,664 5,631 Additional paid-in capital 1,169,588 1,153,673 Accumulated other comprehensive (loss) income (48,022) (19,593) Retained earnings 1,655,738 1,379,174 ------------------- ------------------- Total shareholders' equity 2,782,968 2,518,885 ------------------- ------------------- Total liabilities and shareholders' equity $ 15,570,455 $ 15,648,256 =================== =================== Borrower and investor custodial accounts $ 3,452,498 $ 4,020,998 =================== =================== </TABLE> The accompanying notes are an integral part of these statements. <PAGE> COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollar amounts in thousands, except per share data) <TABLE> Three Months Nine Months Ended November 30, Ended November 30, 1999 1998 1999 1998 ---------------- -- -------------- -------------- -------------- Revenues <S> <C> <C> <C> <C> Loan origination fees $74,598 $ 166,934 $344,036 $ 462,740 Gain on sale of loans, net of commitment fees 115,954 186,241 444,618 517,073 ---------------- -------------- -------------- -------------- Loan production revenue 190,552 353,175 788,654 979,813 Interest earned 232,185 251,799 772,724 751,029 Interest charges (219,264) (244,681) (700,836) (722,752) ---------------- -------------- -------------- -------------- Net interest income 12,921 7,118 71,888 28,277 Loan servicing income 312,596 261,349 881,494 755,523 Amortization & impairment/recovery of mortgage servicing rights, net of servicing hedge (75,984) (147,897) (352,264) (448,340) ---------------- -------------- -------------- -------------- Net loan administration income 236,612 113,452 529,230 307,183 Commissions, fees and other income 47,270 40,452 171,601 131,346 Gain on sale of subsidiary 4,424 - 4,424 - ---------------- -------------- -------------- -------------- Total revenues 491,779 514,197 1,565,797 1,446,619 Expenses Salaries and related expenses 159,075 176,015 528,830 484,255 Occupancy and other office expenses 67,862 71,483 211,191 196,817 Guarantee fees 49,892 45,634 143,699 135,655 Marketing expenses 15,851 17,085 56,454 47,189 Other operating expenses 34,359 43,372 116,814 117,454 ---------------- -------------- -------------- -------------- Total expenses 327,039 353,589 1,056,988 981,370 ---------------- -------------- -------------- -------------- Earnings before income taxes 164,740 160,608 508,809 465,249 Provision for income taxes 64,176 62,637 198,363 181,447 ---------------- -------------- -------------- -------------- NET EARNINGS $100,564 $ 97,971 $310,446 $ 283,802 ================ ============== ============== ============== Earnings per share Basic $0.89 $0.88 $2.75 $2.56 Diluted $0.87 $0.84 $2.65 $2.43 </TABLE> The accompanying notes are an integral part of these statements. <PAGE> <TABLE> COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands) Nine Months Ended November 30, 1999 1998 ---------------- ----------------- Cash flows from operating activities: <S> <C> <C> Net earnings $ 310,446 $ 283,802 Adjustments to reconcile net earnings to net cash Provided (used) by operating activities: Gain on sale of available-for-sale securities (11,914) (56,820) Gain on sale of subsidiary (4,424) - Gain on sale of securitized service fees (444) - Amortization and impairment/recovery of mortgage servicing rights 90,514 1,271,231 Depreciation and other amortization 45,939 41,418 Deferred income taxes 198,363 181,848 Origination and purchase of loans held for sale (55,533,204) (67,812,248) Principal repayments and sale of loans 58,208,152 65,324,697 ---------------- ----------------- Decrease (increase) in mortgage loans and mortgage- Backed securities held for sale 2,674,948 (2,487,551) Increase in other assets (849,160) (1,526,884) Increase in accounts payable and accrued liabilities 85,861 674,181 ---------------- ----------------- Net cash provided (used) by operating activities 2,540,129 (1,618,775) ---------------- ----------------- Cash flows from investing activities: Additions to mortgage servicing rights, net (1,075,699) (1,391,224) Proceeds from sale of securitized service fees 134,480 - Acquisition of insurance company (425,000) - Purchase of property, equipment and leasehold Improvements, net (77,958) (85,483) Proceeds from sale of available-for-sale securities 93,529 231,555 Proceeds from sale of subsidiary 21,053 - ---------------- ----------------- Net cash used by investing activities (1,329,595) (1,245,152) ---------------- ----------------- Cash flows from financing activities: Net decrease in warehouse debt and other short-term borrowings (1,723,786) (64,844) Issuance of long-term debt 1,462,355 3,062,070 Repayment of long-term debt (818,418) (144,796) Issuance of common stock 15,952 79,768 Cash dividends paid (33,882) (26,648) ---------------- ----------------- Net cash provided (used) by financing activities (1,097,779) 2,905,550 ---------------- ----------------- Net increase in cash 112,755 41,623 Cash at beginning of period 58,748 10,707 ================ ================= Cash at end of period $171,503 $ 52,330 ================ ================= Supplemental cash flow information: Cash used to pay interest $ 671,340 $ 422,788 Cash used to pay income taxes $ 1,270 $ 1,367 Noncash financing activities: Unrealized gain (loss) on available-for-sale securities, net of tax $ (28,429) $ (14,772) The accompanying notes are an integral part of these statements. </TABLE> COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Dollar amounts in thousands) <TABLE> Three Months Nine Months Ended November 30, Ended November 30, 1999 1998 1999 1998 --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> NET EARNINGS $100,564 $ 97,971 $310,446 $283,802 Other comprehensive income, net of taxes: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period (7,699) (9,342) (21,161) 19,888 Less: reclassification adjustment for gains included in net earnings (147) (25,604) (7,268) (34,660) --------------- --------------- --------------- --------------- Other comprehensive income (loss) (7,846) (34,946) (28,429) (14,772) =============== =============== =============== =============== COMPREHENSIVE INCOME $92,718 $63,025 $282,017 $ 269,030 =============== =============== =============== =============== </TABLE> The accompanying notes are an integral part of these statements. <PAGE> COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Page 9 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying 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 adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended November 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the fiscal year ended February 28, 1999 of Countrywide Credit Industries, Inc. (the "Company"). Certain amounts reflected in the consolidated financial statements for the nine-month period ended November 30, 1998 have been reclassified to conform to the presentation for the nine-month period ended November 30, 1999. NOTE B - MORTGAGE SERVICING RIGHTS The activity in mortgage servicing rights was as follows. <TABLE> ------------------------------------------------ --------------------- ------------------------- Nine Months Ended November 30, (Dollar amounts in thousands) 1999 ------------------------------------------------ -- ---------------- -- --------------------- Mortgage Servicing Rights <S> <C> Balance at beginning of period $4,591,191 Additions 1,075,699 Securitization of service fees (218,770) Scheduled amortization (354,213) Hedge losses (gains) applied 213,899 --------------------- Balance before valuation reserve at end of period 5,307,806 --------------------- Reserve for Impairment of Mortgage Servicing Rights Balance at beginning of period (94,752) Reductions (additions) 49,800 --------------------- Balance at end of period (44,952) ===================== Mortgage Servicing Rights, net $5,262,854 ===================== ----------------------------------------------- -- ---------------- -- --------------------- --- </TABLE> <PAGE> COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) NOTE C - OTHER ASSETS <TABLE> Other assets consisted of the following. ------------------------------------------------------------ ----------------------------------------------------- November 30, February 28, (Dollar amounts in thousands) 1999 1999 -------------------------------------------------------------------- -- ----------------- --- ---------------- --- <S> <C> <C> Servicing hedge instruments $1,781,452 $991,401 Trading securities 1,232,000 1,460,446 Mortgage-backed securities retained in securitization 645,493 500,631 Insurance company investment portfolio 639,304 - Rewarehoused FHA and VA loans 435,054 216,598 Reverse repurchase agreements 313,464 76,246 Servicing related advances 202,731 199,143 Loans held for investment 162,450 125,236 Receivables related to broker-dealer activities 29,410 401,232 Other 783,998 579,175 ----------------- --- ---------------- $6,225,356 $4,550,108 ================= ================ -------------------------------------------------------------------- -- ----------------- --- ---------------- --- </TABLE> The insurance company investment portfolio includes fixed income securities, stocks and other short-term investments. The Company has designated these investments as available for sale securities. See footnote N. NOTE D - AVAILABLE FOR SALE SECURITIES Amortized cost and fair value of available for sale securities were as follows. <TABLE> ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- November 30, 1999 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in <S> <C> <C> <C> <C> securitization $639,193 $31,794 ($25,494) $645,493 Principal only securities 962,372 3,123 (65,254) 900,241 Insurance company investment portfolio 639,304 - - 639,304 Equity securities 63,136 2,234 (25,093) 40,277 ================ ================= ================ ================ $2,304,005 $37,151 ($115,841) $2,225,315 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- </TABLE> <TABLE> NOTE D - AVAILABLE FOR SALE SECURITIES (Continued) ---------------------------------- ---------------- - ------------------------------------ -- ---------------- --- February 28, 1999 ---------------- - ------------------------------------ -- ---------------- --- Gross Gross Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- Mortgage-backed securities retained in <S> <C> <C> <C> securitization $519,321 - ($18,690) $500,631 Principal only securities 32,514 312 - 32,826 Equity securities 42,498 3,098 (16,904) 28,692 ================ ================= ================ ================ $594,333 $3,410 ($35,594) $562,149 ================ ================= ================ ================ ---------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- --- </TABLE> NOTE E - NOTES PAYABLE Notes payable consisted of the following. <TABLE> ------------------------------------------------------------ ----------------------------------------------------- November 30, February 28, (Dollar amounts in thousands) 1999 1999 -------------------------------------------------------------------- -- --- ---------------- --- ----------------- --- <S> <C> <C> Commercial paper $1,930 $176,559 Medium-term notes, Series A, B, C, D, E, F, G, H and Euro Notes 8,672,824 8,039,824 Repurchase agreements 693,282 1,517,405 Subordinated notes 200,000 200,000 Other notes payable 2,908 1,971 ================= ================ $9,570,944 $9,935,759 ================= ================ -------------------------------------------------------------------- -- ----------------- --- ---------------- --- </TABLE> Commercial Paper and Backup Credit Facilities As of November 30, 1999, CHL, the Company's mortgage banking subsidiary, had unsecured credit agreements (revolving credit facilities) with consortiums of commercial banks permitting CHL to borrow an aggregate maximum amount of $5.0 billion. The facilities included a $4.0 billion revolving credit facility with forty-four commercial banks consisting of: (i) a five-year facility of $3.0 billion, which expires on September 24, 2002, and (ii) a one-year facility of $1.0 billion which expires on September 20, 2000. As consideration for the facility, CHL pays annual commitment fees of $3.8 million. There is an additional one-year facility, which expires April 12, 2000, with eleven of the forty-four banks referenced above for total commitments of $1.0 billion. As consideration for the facility, CHL pays annual commitment fees of $0.8 million. The purpose of these credit facilities is to provide liquidity backup for CHL's commercial paper program. No amount was outstanding under these revolving credit facilities at November 30, 1999. The weighted average borrowing rate on commercial paper borrowings for the nine months ended November 30, 1999 was 5.08%. The weighted average borrowing rate on commercial paper outstanding as of November 30, 1999 was 5.33%. In addition, CHL has entered into a $1.2 billion committed mortgage loan conduit facility, with four commercial banks. The committed mortgage loan conduit facility has a maturity date of December 3, 1999. As consideration for this facility, CHL pays annual commitment fees of $1.5 million. Loans made under this facility are secured by conforming and non-conforming mortgage loans. This facility was extended on December 3, 1999. See footnote K. All of the facilities contain various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CHL. NOTE E - NOTES PAYABLE (Continued) Medium-Term Notes As of November 30, 1999, outstanding medium-term notes issued by CHL under various shelf registrations filed with the Securities and Exchange Commission or issued by CHL pursuant to its Euro medium-term note program were as follows. <TABLE> - --------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Outstanding Balance Interest Rate Maturity Date ---------------------- ---------------------- ------------------------- Floating-Rate Fixed-Rate Total From To From To ------------------------------------------- ----------- ---------- -------------- ------------- <S> <C> <C> <C> <C> <C> <C> Series A - $143,500 $143,500 7.29% 8.79% Aug. 2000 Mar. 2002 Series B - 301,000 301,000 6.53% 6.98% Apr. 2000 Aug. 2005 Series C $163,000 127,000 290,000 5.66% 7.75% Feb. 2000 Mar. 2004 Series D 75,000 385,000 460,000 5.81% 6.88% Aug. 2000 Sep. 2005 Series E 310,000 690,000 1,000,000 5.55% 7.45% Feb. 2000 Oct. 2008 Series F 581,000 1,344,000 1,925,000 5.47% 7.00% Jan. 2000 May 2013 Series G 5,000 581,000 586,000 5.35% 7.00% Oct. 2000 Nov. 2018 Series H 114,500 2,069,000 2,183,500 5.16% 8.00% Dec. 1999 Oct. 2019 Euro Notes 659,600 1,124,224 1,783,824 5.41% 6.81% Jul. 2000 Jan. 2009 ------------------------------------------- Total $1,908,100 $6,764,724 $8,672,824 =========================================== - --------------------------------------------------------------------------------------------------------------------------- </TABLE> As of November 30, 1999, substantially all of the outstanding fixed-rate notes had been effectively converted through interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the nine-months ended November 30, 1999, including the effect of the interest rate swap agreements, was 5.63%. As of November 30, 1999, $1,074 million foreign currency denominated fixed-rate notes issued pursuant to the Euro medium-term notes program were outstanding. Such notes are denominated in Deutsche Marks, French Francs, Portuguese Escudos and Euros. The Company manages the associated foreign currency risk by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into U.S. dollars. Repurchase Agreements The Company routinely enters into short-term financing arrangements to sell MBS under agreements to repurchase. The weighted average borrowing rate for the nine-months ended November 30, 1999 was 5.04%. The weighted average borrowing rate on repurchase agreements outstanding as of November 30, 1999, was 5.74%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers or banks. All agreements are to repurchase the same or substantially identical MBS. NOTE E - NOTES PAYABLE (Continued) Pre-Sale Funding Facilities As of November 30, 1999, CHL had uncommitted revolving credit facilities with the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. As of November 30, 1999, the Company had no outstanding borrowings under any of these facilities. NOTE F - FINANCIAL INSTRUMENTS The following table summarizes the notional amounts of derivative contracts included in the Servicing Hedge. <TABLE> - -------------------------------------- -------------------- -------------------- ------------------ --------------------- (Dollar amounts in millions) Balance, Balance, February 28, 1999 Additions Dispositions/ November 30, Expirations 1999 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- <S> <C> <C> <C> <C> Interest Rate Floors $33,000 18,000 (500) $50,500 Long Call Options on Interest Rate Futures $32,000 18,750 (35,750) $15,000 Long Put Options on Interest Rate Futures $54,600 3,500 (58,100) - Short Call Options on Interest Rate Futures $22,000 2,000 (24,000) - Short Put Options on Interest Rate Futures $720 - (720) - Interest Rate Futures $22,500 - (22,500) - Capped Swaps $1,000 - - $1,000 Interest Rate Swaps $15,150 1,050 (14,700) $1,500 Interest Rate Cap $4,500 - (1,000) $3,500 Swaptions $32,550 20,500 (11,800) $41,250 Options on Callable Pass-through Certificates $4,561 - - $4,561 - -------------------------------------- -------------------- -------------------- ------------------ --------------------- </TABLE> Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments as of November 30, 1999 and February 28, 1999 is made by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. <PAGE> NOTE F- FINANCIAL INSTRUMENTS (Continued) <TABLE> ---- ------------------------------------------------- --------------------------------- --- ---------------------------- November 30, 1999 February 28, 1999 --------------------------------- --- ---------------------------- Carrying Estimated Carrying Estimated (Dollar amounts in thousands) Amount fair value Amount fair value ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- ------------- Assets: Mortgage loans and mortgage-backed securities <S> <C> <C> <C> <C> held for sale $3,556,272 $3,556,272 $6,231,220 $6,231,220 Items included in other assets: Trading securities 1,232,000 1,232,000 1,460,446 1,460,446 Principal only securities purchased 900,241 900,241 32,826 32,826 Mortgage-backed securities retained in securitizations 645,493 645,493 500,631 500,631 Insurance company investment portfolio 639,304 639,304 - - Rewarehoused FHA and VA loans 435,054 435,054 216,598 216,598 Reverse repurchase agreements 313,464 313,464 76,246 76,246 Loans held for investment 162,450 162,450 125,236 125,236 Equity Securities - restricted and unrestricte40,277 40,277 59,875 46,971 Receivables related to broker-dealer activitie29,410 29,410 401,232 401,232 Liabilities: Notes payable 9,570,944 9,250,782 9,935,759 9,883,859 Securities sold not yet purchased 172,668 172,668 84,775 84,775 Derivatives: Interest rate floors 435,821 251,197 426,838 402,061 Forward contracts on MBS 1,680 13,674 12,775 120,709 Options on MBS 25,516 17,293 34,883 62,475 Options on interest rate futures 2,743 609 18,261 15,729 Options on callable pass-through certificates 54,092 19,197 55,593 36,460 Interest rate caps 55,464 42,765 77,508 40,437 Capped Swaps (2,319) (5,590) 8,470 3,092 Swaptions 366,163 148,717 337,703 271,073 Interest rate futures - - 57,280 57,280 Interest rate swaps (3,018) (300,265) 43,570 93,205 Short-term commitments to extend credit - 49,300 - 26,400 ---- ------------------------------------------------- -------------- -- ------------- -- ------------- --- ------------- </TABLE> The fair value estimates as of November 30, 1999 and February 28, 1999 are based on pertinent information that was available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. NOTE G - LEGAL PROCEEDINGS Legal Proceedings The Company and certain subsidiaries are defendants in various legal proceedings involving matters generally incidental to their business. Although it is difficult to predict the ultimate outcome of these proceedings, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries. NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY <TABLE> Summarized financial information for Countrywide Home Loans, Inc. was as follows. ---- ----------------------------------------- ---- ------------------------------------------------- --------- November 30, February 28, (Dollar amounts in thousands) 1999 1999 ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- Balance Sheets: Mortgage loans and mortgage-backed <S> <C> <C> securities held for sale $3,556,272 $ 6,231,220 Mortgage servicing rights, net 5,262,854 4,496,439 Other assets 4,661,646 2,955,382 ============== ============== Total assets $13,480,772 $13,683,041 ============== ============== Short- and long-term debt $9,338,217 $9,910,966 Other liabilities 1,588,676 1,434,727 Equity 2,553,879 2,337,348 ============== ============== Total liabilities and equity $13,480,772 $13,683,041 ============== ============== ---- ---------------------------------------------- ------- -------------- ----------- -------------- --------- ----- ----------------------------------------- --- --------------------------------------------------- -------- Nine Months Ended November 30, (Dollar amounts in thousands) 1999 1998 ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- --------------- ---------- --------------- --------- Statements of Earnings: Revenues $1,260,294 $1,224,689 Expenses 857,321 844,303 Provision for income taxes 156,837 148,351 =============== =============== Net earnings $246,136 $232,035 =============== =============== ----- --------------------------------------------- ------- --------------- ---------- --------------- --------- </TABLE> NOTE I - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement becomes effective in the fiscal year ending February 28, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. NOTE J - SEGMENTS AND RELATED INFORMATION The Company has three major segments: Loan Production, Loan Servicing and Capital Markets. The Loan Production segment is comprised of the Consumer Markets, Wholesale and Correspondent Divisions and Full Spectrum Lending, Inc. The Loan Production segment originates and purchases conventional mortgage loans, mortgage loans insured by the FHA and VA, home equity and sub-prime loans and sells those loans to permanent investors. The Loan Servicing segment services on a primarily non-recourse basis substantially all of the mortgage loans originated and purchased by the Loan Production segment. In addition, the Loan Servicing segment purchases bulk servicing rights, also on a non-recourse basis, to service single-family residential mortgage loans originated by other lenders. The Capital Markets segment trades securities, primarily mortgage-related securities, with broker-dealers and institutional investors and, as an agent, facilitates the purchase and sale of bulk servicing rights and mortgage loans. Included in the tables below labeled "Other" are the operating segments that provide ancillary services and certain reclassifications to conform management reporting to the consolidated financial statements. <TABLE> - --------------------------------------------------------------------------------------------------------------------- For the three months ended November 30, 1999 - -------------------------------- -- -- ----------- --- ---------- -- ------------ -- ------------ -- ------------ --- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- --- ---------- -- ------------ -- ------------ -- ------------ --- <S> <C> <C> <C> <C> <C> Non-interest revenues $174,426 $263,500 $17,086 $23,846 $478,858 Interest earned 154,613 59,067 23,755 (5,250) 232,185 Interest charges (121,199) (84,255) (18,742) 4,932 (219,264) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 33,414 (25,188) 5,013 (318) 12,921 ----------- ----------- ------------ ------------ ------------ Total revenue $207,840 $238,312 $22,099 $23,528 $491,779 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $25,309 $127,684 $8,141 $3,606 $164,740 Segment assets $5,013,922 $8,550,616 $1,557,535 $448,382 $15,570,455 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ --- - -------------------------------------------------------------------------------------------------------------------- For the nine months ended November 30, 1999 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $744,039 $629,117 $45,858 $74,895 $1,493,909 Interest earned 534,137 176,846 75,066 (13,325) 772,724 Interest charges (405,997) (248,175) (57,972) 11,308 (700,836) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 128,140 (71,329) 17,094 (2,017) 71,888 ----------- ----------- ------------ ------------ ------------ Total revenue $872,179 $557,788 $62,952 $72,878 $1,565,797 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $251,467 $221,434 $23,493 $12,415 $508,809 Segment assets $5,013,922 $8,550,616 $1,557,535 $448,382 $15,570,455 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- </TABLE> NOTE J - SEGMENTS AND RELATED INFORMATION (Continued) <TABLE> - --------------------------------------------------------------------------------------------------------------------- For the three months ended November 30, 1998 - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- <S> <C> <C> <C> <C> <C> Non-interest revenues $339,827 $125,333 $14,844 $27,075 $507,079 Interest earned 168,386 71,434 16,768 (4,789) 251,799 Interest charges (143,998) (90,316) (14,019) 3,652 (244,681) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 24,388 (18,882) 2,749 (1,137) 7,118 ----------- ----------- ------------ ------------ ------------ Total revenue $364,215 $106,451 $17,593 $25,938 $514,197 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $141,465 $4,893 $7,512 $6,738 $160,608 Segment assets $8,688,629 $6,465,712 $982,718 $65,784 $16,202,843 - -------------------------------- -- -- ----------- --- ----------- -- ------------ -- ------------ -- ------------ -- - -------------------------------------------------------------------------------------------------------------------- For the Nine months ended November 30, 1998 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- (Dollars in thousands) Loan Loan Capital Consolidated Production Servicing Markets Other Total - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- Non-interest revenues $943,346 $359,522 $40,521 $74,953 $1,418,342 Interest earned 527,482 202,648 20,867 32 751,029 Interest charges (441,299) (264,848) (16,394) (211) (722,752) ----------- ----------- ------------ ------------ ------------ Net interest income (expense) 86,183 (62,200) 4,473 (179) 28,277 ----------- ----------- ------------ ------------ ------------ Total revenue $1,029,529 $297,322 $44,994 $74,774 $1,446,619 =========== =========== ============ ============ ============ Segment earnings (pre-tax) $424,046 $1,886 $19,546 $19,771 $465,249 Segment assets $8,688,629 $6,465,712 $982,718 $65,784 $16,202,843 - -------------------------------- -- -- ----------- -- ----------- -- ------------ -- ------------ -- ------------ -- </TABLE> NOTE K - SUBSEQUENT EVENTS On December 3, 1999, CHL entered into $1.1 billion committed mortgage loan facility. This facility will expire on November 21, 2000. On December 20, 1999, the Company declared a cash dividend of $0.10 per common share payable January 31, 2000 to shareholders of record on January 12, 2000. NOTE L - EARNINGS PER SHARE Basic earnings per share is determined using net income divided by the weighted average shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. The following table presents basic and diluted EPS for the three and nine month periods ended November 30, 1999 and 1998. <TABLE> - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Three Months Ended November 30, -- -- ----- ------------------------------------ -- ----- ---- 1999 1998 --------- --------- --------- ---------- --------- --------- (Dollar amounts in thousands, except per Net Per-Share Net Per-Share share data) Earnings Shares Amount Earnings Shares Amount - ------------------------ --------- --------- --------- --------- --------- --------- <S> <C> <C> Net earnings $100,564 $97,971 ========= ========== Basic EPS Net earnings available to common shareholders $100,564 113,236 $0.89 $97,971 111,923 $ 0.88 Effect of dilutive stock options - 2,881 - 5,071 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $100,564 116,117 $0.87 $97,971 116,994 $ 0.84 ========= ========= ========= ========== ========= --------- - ------------------------ --------- --------- --------- - ---------- --------- --------- - ------------------------ -- -- ----- ------------------------------------ -- ----- ---- Nine Months Ended November 30, -- -- ----- ------------------------------------ -- ----- ---- 1999 1998 --------- --------- --------- ---------- --------- --------- (Dollar amounts in Per-Share Per-Share thousands, except per Net Amount Net Amount share data) Earnings Shares Earnings Shares - ------------------------ -------- --------- --------- ----------- --------- --------- Net earnings $310,446 $283,802 ========= ========== Basic EPS Net earnings available to common shareholders $310,446 112,992 $2.75 $283,802 111,065 $ 2.56 Effect of dilutive stock options - 4,053 - 5,749 --------- --------- ---------- --------- Diluted EPS Net earnings available to common shareholders $310,446 117,045 $2.65 $283,802 116,814 $ 2.43 ========= ========= ========= ========== ========= --------- - ------------------------ --------- --------- --------- - ---------- --------- --------- </TABLE> NOTE M - RELATED PARTY TRANSACTIONS During the nine months ended November 30, 1999, the Company sold 780,000 shares of IndyMac Mortgage Holdings, Inc. common stock, which resulted in a pre-tax gain of $0.4 million. NOTE N - ACQUISITION OF BALBOA LIFE AND CASUALTY GROUP On November 30, 1999, the Company acquired all of the outstanding shares of common stock of Balboa Life and Casualty Group for a cash price of $425 million, subject to adjustment based on a post closing audit. NOTE N - ACQUISITION OF BALBOA LIFE AND CASUALTY GROUP (Continued) The acquisition of Balboa Life and Casualty Group was accounted for using the purchase method of accounting. Accordingly, a portion of the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair market value at the date of acquisition. The fair value of identifiable assets acquired and liabilities assumed was $898 million and $473 million, respectively. <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 17 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q may contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," "intend," "estimate," "should" and other expressions which indicate future events and trends identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated: (1) the level of demand for mortgage credit, which is affected by such external factors as the level of interest rates, the strength of the various segments of the economy and demographics of the Company's lending markets; (2) the direction of interest rates; (3) the relationship between mortgage interest rates and the cost of funds; (4) federal and state regulation of the Company's mortgage banking operations, capital markets operations, and insurance services; and (5) competition within the mortgage banking industry, capital markets industries, and insurance services; and (6) the ability of the Company to manage expenses. RESULTS OF OPERATIONS Quarter Ended November 30, 1999 Compared to Quarter Ended November 30, 1998 Revenues for the quarter ended November 30, 1999 decreased 4% to $491.8 million, down from $514.2 million for the quarter ended November 30, 1998. Net earnings increased 3% to $100.6 million for the quarter ended November 30, 1999, up from $98.0 million for the quarter ended November 30, 1998. The decrease in revenues for the quarter ended November 30, 1999 compared to the quarter ended November 30, 1998 was primarily due to a decline in prime loan originations attributable to a decline in loan refinancings, largely offset by increased revenue from the loan servicing segment, along with increased production of non traditional loan products (home equity and sub-prime loans). The increase in net earnings in the quarter ended November 30, 1999 compared to the quarter ended November 30, 1998 was attributed to expense reductions, primarily in the production divisions, in response to the decline in loan production which offset the decline in revenues. The total volume of loans produced by the Company decreased 47% to $12.7 billion for the quarter ended November 30, 1999, down from $24.0 billion for the quarter ended November 30, 1998. The decrease in loan production was primarily due to a decrease in the mortgage origination market, driven largely by a reduction in refinances. Total loan production volume by purpose and by interest rate type is summarized below. <TABLE> - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- <S> <C> <C> Purchase $9,696 $ 9,757 Refinance 3,019 14,246 ============= ================ Total Loan Volume $12,715 $24,003 ============= ================ ------------- ---------------- Fixed Rate $10,374 $ 22,933 Adjustable Rate 2,341 1,070 ============= ================ Total Loan Volume $12,715 $24,003 ============= ================ - --------------------------------------------------------------------------------------------- Total loan production volume by Division is summarized below. - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- Consumer Markets Division $3,658 $ 8,037 Wholesale Lending Division 3,530 7,601 Correspondent Lending Division 5,175 8,185 Full Spectrum Lending, Inc. 352 180 ============= ================ Total Loan Volume $12,715 $24,003 ============= ================ - --------------------------------------------------------------------------------------------- </TABLE> The factors which affect the relative volume of production among the Company's Divisions include the price competitiveness of each Division's various product offerings, the level of mortgage lending activity in each Division's market and the success of each Division's sales and marketing efforts. Non traditional loan production volume (which is included in the Company's total volume of loans produced) is summarized below. <TABLE> - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Three Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- <S> <C> <C> Sub-prime $ 969 $ 603 Home Equity Loans 886 625 ============= ================ Total Non Traditional Loan Volume $1,855 $1,228 ============= ================ - --------------------------------------------------------------------------------------------- </TABLE> As of November 30, 1999 and 1998, the Company's pipeline of loans in process was $8.2 billion and $16.2 billion, respectively. Historically, approximately 43% to 77% of the pipeline of loans in process have funded. In addition, as of November 30, 1999, the Company had committed to make loans in the amount of $2.0 billion, subject to property identification and approval of the loans (the "LOCK 'N SHOP (R) Pipeline"). As of November 30, 1998, the LOCK 'N SHOP (R) Pipeline was $1.2 billion. During the quarters ended November 30, 1999 and 1998, the Company received 184,914 and 331,903 new loan applications, respectively, at an average daily rate of $295 million and $596 million, respectively. The factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production Divisions' loan processing efficiency and loan pricing decisions. Loan origination fees decreased in the quarter ended November 30, 1999 as compared to the quarter ended November 30, 1998 primarily due to lower production and a change in the Divisional mix. The Consumer Markets and Wholesale Lending Divisions (which, due to their cost structures, charge higher origination fees per dollar loaned than the Correspondent Division), comprised a lower percentage of total production in the quarter ended November 30, 1999 than in the quarter ended November 30, 1998. Gain on sale of loans decreased in the quarter ended November 30, 1999 as compared to the quarter ended November 30, 1998 primarily due to decreased production and lower margins on prime credit quality mortgages partially offset by increased sales during the quarter ended November 30, 1999 of higher margin home equity and sub-prime loans. The sale of home equity loans contributed $23.2 million and $13.5 million to gain on sale of loans in the quarter ended November 30, 1999 and the quarter ended November 30, 1998, respectively. Sub-prime loans contributed $44.1 million to the gain on sale of loans in the quarter ended November 30, 1999 and $20.6 million in the quarter ended November 30, 1998. In general, loan origination fees and gain on sale of loans are affected by numerous factors including the volume and mix of loans produced and sold, loan pricing decisions, interest rate volatility and the general direction of interest rates. Net interest income (interest earned net of interest charges) increased to $12.9 million for the quarter ended November 30, 1999, up from $7.1 million for the quarter ended November 30, 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($33.4 million and $24.4 million for the quarter ended November 30, 1999 and the quarter ended November 30, 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($77.0 million and $88.9 million for the quarters ended November 30, 1999 and November 30, 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($51.8 million and $70.0 million for the quarters ended November 30, 1999 and November 30, 1998, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its inventory. The increase in net interest income from the mortgage loan inventory was primarily attributable to a higher net earnings rate combined with a longer warehousing period during the quarter ended November 30, 1999. The decrease in interest expense related to the investment in servicing rights resulted primarily from a decrease in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs") as a result of a decrease in the amount of prepayments. The decrease in net interest income earned from the custodial balances was primarily related to a decrease in the average custodial balances also caused by a decrease in the amount of prepayments. During the quarter ended November 30, 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. As of November 30, 1999, the Company serviced $244 billion of loans (including $2.4 billion of loans subserviced for others), up from $205.4 billion (including $2.3 billion of loans subserviced for others) as of November 30, 1998, a 19% increase. The growth in the Company's servicing portfolio since November 30, 1998 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments, partial prepayments and scheduled amortization. During the quarter ended November 30, 1999, the annual prepayment rate of the Company's servicing portfolio was 9%, compared to 30% for the quarter ended November 30, 1998. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, and activity in the housing market. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio as of November 30, 1999 was 7.5% compared to 7.6% as of November 30, 1998. The Company recorded MSR amortization net of impairment recovery for the quarter ended November 30, 1999 totaling $51.3 million (consisting of amortization amounting to $109.2 million reduced by recovery of previous impairment of $57.9 million), compared to $680.9 million of amortization and impairment (consisting of amortization amounting to $147.4 million and impairment of $533.5 million) for the quarter ended November 30, 1998. The primary factors affecting the amount of amortization and impairment of MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). In the quarter ended November 30, 1999, the Company recognized a net expense of $24.7 million from its Servicing Hedge. The net expense included unrealized net losses of $11.9 million and realized net expense of $12.8 million from premium amortization and the sale of various financial instruments that comprise the Servicing Hedge. In the quarter ended November 30, 1998, the Company recognized a net benefit of $533.0 million from its Servicing Hedge. The net benefit included unrealized gains of $174.7 million and net realized gains of $358.3 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. The financial instruments that comprised the Servicing Hedge include options on interest rate futures, interest rate futures, interest rate floors, interest rate swaps, interest rate swaps with the Company's maximum payment capped ("Capped Swaps"), options on interest rate swaps ("Swaptions"), interest rate caps, principal only securities ("P/O securities") and options on callable pass-through certificates ("options on CPCs"). With the Capped Swaps, the Company receives and pays interest on a specified notional amount. The rate received is fixed. The rate paid is adjustable, is indexed to the London Interbank Offered Rate for U.S. dollar deposits ("LIBOR") and has a specified maximum or "cap". With Swaps, the Company receives and pays interest on a specified amount. The Company has entered into Swaps in which the rate received is fixed and the rate paid is adjustable and is indexed to LIBOR ("Receiver Swap") as well as Swaps in which the rate paid is fixed and the rate received is adjustable and is indexed to LIBOR ("Payor Swap") The Swaptions consist of options to enter into a receive-fixed, pay-floating interest swap ("Receiver Swaption") and options to enter into a pay-fixed, receive-floating interest rate swap ("Payor Swaption") at a future date or to settle the transaction for cash. The P/O securities consist of certain tranches of collateralized mortgage securities ("CMOs"), mortgage trust principal only securities and treasury principal only strips. These securities have been purchased at deep discounts to their par values. As interest rates decrease, prepayments on the collateral underlying the CMOs and mortgage trust principal only securities should increase. This results in a decline in the average lives of the P/O securities and a corresponding increase in the present values of their cash flows. Conversely, as interest rates increase, prepayments on the collateral underlying the CMOs and mortgage trust principal only securities should decrease. This would result in an increase in the average lives of the P/O Securities and a decrease in the present values of their cashflows. The prices of the treasury principal only Strips are determined by the discount rate used to determine their present value, as interest rates decline the discount rate applied to the maturity principal payment declines, resulting in an increase in the price. An option on CPCs gives the holder the right to call a mortgage-backed security at par and receive the remaining cash flows from the particular pool. This option has a one year lockout, meaning it cannot be exercised until the end of the first year. After the lockout period, the option can be exercised at any time. The Servicing Hedge is designed to protect the value of the MSRs from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the MSRs increases while the value of the hedge instruments declines. With respect to the floors, options, caps, Swaptions, options on CPC and P/O Securities, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments plus any unrealized gains recognized to date. The Company's exposure to loss on futures is related to changes in the LIBOR rate over the life of the contract. The Company was not a party to any futures contracts at November 30, 1999. With respect to the Interest Rate Swaps contracts entered into by the Company as of November 30, 1999, the Company estimates that its maximum exposure to loss over the contractual term is $1 million. With respect to the Capped Swaps contracts entered into by the Company as of November 30, 1999, the Company estimates that its maximum exposure over the contractual term is $9 million. Salaries and related expenses are summarized below for the quarters ended November 30, 1999 and 1998. <TABLE> ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended November 30, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ <S> <C> <C> <C> <C> <C> Base Salaries $55,324 $16,168 $26,475 $13,375 $111,342 Incentive Bonus 18,245 595 4,917 5,675 29,432 Payroll Taxes and Benefits 8,906 3,165 4,711 1,519 18,301 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $82,475 $19,928 $36,103 $20,569 $159,075 ============ ============= ============= ============= ------------ Average Number of Employees 5,308 2,320 2,164 638 10,430 ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Quarter Ended November 30, 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $56,175 $13,502 $23,347 $10,124 $ 103,148 Incentive Bonus 41,148 529 5,500 5,570 52,747 Payroll Taxes and Benefits 12,664 3,048 2,893 1,515 20,120 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $109,987 $17,079 $31,740 $17,209 $176,015 ============ ============= ============= ============= ------------ Average Number of Employees 5,849 2,026 1,885 695 10,455 ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ </TABLE> The amount of salaries increased during the quarter ended November 30, 1999 as compared to the quarter ended November 30, 1998 as a result of the Company's growth in servicing and other subsidiaries offset by a reduction in the production areas due to the decline in loan originations. Incentive bonuses earned during the quarter ended November 30, 1999 decreased primarily due to the decline in production volume. Occupancy and other office expenses for the quarter ended November 30, 1999 decreased to $67.9 million from $71.5 million for the quarter ended November 30, 1998. This was primarily due to a reduction in temporary personnel expense as a result of decreased production. Guarantee fees are paid to Fannie Mae, Freddie Mac, and Ginnie Mae ("GSEs") to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For the quarter ended November 30, 1999, guarantee fees expense increased 9% to $49.9 million, up from $45.6 million for the quarter ended November 30, 1998. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio guaranteed by the GSEs and terms negotiated at the time of loan sales. Marketing expenses for the quarter ended November 30, 1999 decreased 7% to $15.9 million as compared to $17.1 million for the quarter ended November 30, 1998. Other operating expenses were $34.4 million for the quarter ended November 30, 1999 as compared to $43.4 million November 30, 1998. The decline was primarily due to lower loan production and reduced reserves for bad debts. The Company's pre-tax earnings by segment is summarized below. <TABLE> - -------------------------------------------- --------------------------------------- -------- Three months ended (Dollar amounts in millions) November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- <S> <C> <C> Loan Production $ 25,309 $141,465 Loan Servicing 127,684 4,893 Capital Markets 8,141 7,512 Other Activities 3,606 6,738 ============= ================ Pre-tax Earnings $164,740 $160,608 ============= ================ - --------------------------------------------------------------------------------------------- </TABLE> Profitability of Loan Production Segment Loan production segment activities include loan origination and purchases, warehousing and sales. The decline in pre-tax earnings of $116.2 million was primarily attributable to decreased production combined with reduced margins on prime credit quality mortgages which in turn was attributable to the decline in refinance activity. These factors were partially offset by increased production and sales of higher margin home equity and subprime loans. Profitability of Loan Servicing Segment Loan servicing segment activities include administering the loans in the servicing portfolio, selling homeowners and other insurance, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer. The increase in pre-tax earnings of $122.8 million was primarily due to an increase in servicing revenues resulting from servicing portfolio growth and a reduction in MSR amortization and recovery of previous impairment both attributable to the decline in refinance activity. These positive factors were partially offset by higher servicing expenses driven by the growth in the servicing portfolio. Profitability of Capital Markets Segment Capital Markets segment activities include primarily the operations of Countrywide Securities Corporation ("CSC"), a registered broker dealer specializing in the secondary mortgage market. The increase in pre-tax earnings of $0.6 million was primarily due to CSC's increased trading volumes. Profitability of Other Activities In addition to loan production, loan servicing and capital markets, the Company offers ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting, and home inspection and flood zone determination services. In addition, through its subsidiaries, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For the quarter ended November 30, 1999, LandSafe Inc. contributed $0.6 million to the Company's pre-tax income compared to $7.8 million for the quarter ended November 30, 1998. The decrease in the profitability of LandSafe Inc. resulted primarily from decreased title business attributable to the decline in refinance activity. The operations of other activities, excluding LandSafe Inc., consist primarily of the holding company. These operations incurred pre-tax earnings of $3.0 million during the quarter ended November 30, 1999 compared to pre-tax loss of $1.1 million during the quarter ended November 30, 1998. The increase in pre-tax earnings was primarily due to the sale of Countrywide Financial Services, Inc. which resulted in a $4.4 million pre-tax gain. RESULTS OF OPERATIONS Nine months ended November 30, 1999 Compared to Nine months ended November 30, 1998 Revenues for the nine months ended November 30, 1999 increased 8% to $1.57 billion, up from $1.45 billion for the nine months ended November 30, 1998. Net earnings increased 9% to $310.4 million for the nine months ended November 30, 1999, up from $283.8 million for November 30, 1998. The increase in revenues and net earnings for the nine months ended November 30, 1999 compared to the nine months ended November 30, 1998 was primarily attributable to improved profitability in the loan servicing segment, together with an increased production contribution from non traditional loan products (home equity and sub-prime loans). This was partially offset by a decline in earnings from the Company's traditional prime loan origination business, attributable to the market-wide decline in loan refinancings. The total volume of loans produced by the Company decreased 18% to $55.5 billion for the nine months ended November 30, 1999, down from $67.8 billion for the nine months ended November 30, 1998. The decrease in loan production was primarily due to a decrease in the mortgage origination market, driven largely by a reduction in refinances. Total loan production volume by purpose and by interest rate type is summarized below. <TABLE> - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- <S> <C> <C> Purchase $35,131 $30,233 Refinance 20,402 37,579 ============= ================ Total Loan Volume $55,533 $67,812 ============= ================ ------------- ---------------- Fixed Rate $48,794 $64,033 Adjustable Rate 6,739 3,779 ============= ================ Total Loan Volume $55,533 $67,812 ============= ================ - --------------------------------------------------------------------------------------------- Total loan production volume by Division is summarized below. - -------------------------------------------- -------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine months ended November 30, - -------------------------------------------- -------------------------------------- -------- 1999 1998 ------------- --------------- Consumer Markets Division $16,747 $ 21,294 Wholesale Lending Division 16,110 22,590 Correspondent Lending Division 21,621 23,434 Full Spectrum Lending, Inc. 1,055 494 ============= =============== Total Loan Volume $55,533 $ 67,812 ============= =============== - -------------------------------------------- ------------- -------- --------------- -------- </TABLE> The factors which affect the relative volume of production among the Company's Divisions include the price competitiveness of each Division's various product offerings, the level of mortgage lending activity in each Division's market and the success of each Division's sales and marketing efforts. Non traditional loan production volume (which is included in the Company's total volume of loans produced) is summarized below. <TABLE> - -------------------------------------------- --------------------------------------- -------- (Dollar amounts in millions) Loan Production Nine Months Ended November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- <S> <C> <C> Sub-prime $3,056 $1,996 Home Equity Loans 2,757 1,690 ============= ================ Total Non Traditional Loan Volume $5,813 $3,686 ============= ================ - --------------------------------------------------------------------------------------------- </TABLE> Loan origination fees decreased in the nine months ended November 30, 1999 as compared to the nine months ended November 30, 1998 primarily due to lower production and a change in the divisional mix. The Consumer Markets and Wholesale Lending Divisions (which, due to their cost structures, charge higher origination fees per dollar loaned than the Correspondent Division), comprised a lower percentage of total production in the nine months ended November 30, 1999 than in the nine months ended November 30, 1998. Gain on sale of loans also decreased in the nine months ended November 30, 1999 as compared to the nine months ended November 30, 1998 primarily due to lower production volume and reduced margins on prime credit quality mortgages partially offset by increased sales during the nine months ended November 30, 1999 of higher margin home equity and sub-prime loans. Net interest income (interest earned net of interest charges) increased to $71.9 million for the nine months ended November 30, 1999, up from $28.3 million for the nine months ended November 30, 1998. Net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan inventory ($128.1 million and $86.2 million for the nine months November 30, 1999 and the nine months ended November 30, 1998, respectively); (ii) interest expense related to the Company's investment in servicing rights ($235.7 million and $263.1 million for the quarter ended November 30, 1999 and the nine months ended November 30, 1998, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($164.4 million and $200.9 million for the nine months ended November 30, 1999 and the nine months ended November 30, 1998, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in inventory. The increase in net interest income from the mortgage loan inventory was primarily attributable to an increase in inventory levels as a result of a longer warehouse period combined with a higher net earnings rate during the nine months ended November 30, 1999. The decrease in interest expense related to the investment in servicing rights resulted primarily from a decrease in Interest Costs Incurred on Payoffs. The decrease in net interest income earned from the custodial balances was primarily related to a decrease in the average custodial balances caused by a decrease in the amount of prepayments. During the nine months ended November 30, 1999, loan servicing income before amortization increased primarily due to growth of the loan servicing portfolio. The growth in the Company's servicing portfolio since November 30, 1998 was the result of loan production volume and the acquisition of bulk servicing rights. This was partially offset by prepayments and scheduled amortization. During the nine months ended November 30, 1999, the annual prepayment rate of the Company's servicing portfolio was 15%, compared to 28% for the nine months ended November 30, 1998. In general, the prepayment rate is affected by the level of refinance activity, which in turn is driven by the relative level of mortgage interest rates, and activity in the housing market. The Company recorded MSR amortization net of impairment recovery for the nine months ended November 30, 1999 totaling $90.5 million (consisting of amortization amounting to $354.2 million reduced by recovery of previous impairment of $263.7 million), compared to $1.3 billion of amortization and impairment (consisting of amortization amounting to $416.4 million and impairment of $854.8 million) for the nine months ended November 30, 1998. The primary factors affecting the amount of amortization and impairment of MSRs recorded in an accounting period are the level of prepayments during the period and the change, if any, in estimated future prepayments. To mitigate the effect on earnings of MSR impairment that may result from increased current and projected future prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in aggregate value when interest rates decline (the "Servicing Hedge"). In the nine months ended November 30, 1999, the Company recognized a net expense of $261.8 million from its Servicing Hedge. The net expense included unrealized net losses of $231.8 million and realized net expense of $30.0 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. In the nine months ended November 30, 1998, the Company recognized a net benefit of $822.9 million from its Servicing Hedge. The net benefit included unrealized gains of $447.4 million and net realized gains of $375.5 million from the sale of various financial instruments that comprise the Servicing Hedge net of premium amortization. Salaries and related expenses are summarized below for the nine months ended November 30, 1999 and 1998. <TABLE> ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Nine months ended November 30, 1999 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ <S> <C> <C> <C> <C> <C> Base Salaries $180,732 $46,500 $78,157 $40,560 $345,949 Incentive Bonus 81,199 2,090 15,989 18,102 117,380 Payroll Taxes and Benefits 36,299 9,575 14,461 5,166 65,501 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $298,230 $58,165 $108,607 $63,828 $528,830 ============ ============= ============= ============= ------------ Average Number of Employees 5,921 2,221 2,161 760 11,063 ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ ---- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- ----- (Dollar amounts in Nine months ended November 30, 1998 thousands) -- ------ ------------------------------------------------- ----- -- ---- ----- ---- --------------------------- -- Production Loan Corporate Other Activities Administration Administration Activities Total ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ Base Salaries $149,277 $38,370 $65,972 $26,859 $ 280,478 Incentive Bonus 112,344 1,462 15,392 13,787 142,985 Payroll Taxes and Benefits 36,848 8,667 11,214 4,063 60,792 ------------ ------------- ------------- ------------- ------------ Total Salaries and Related Expenses $298,469 $48,499 $92,578 $44,709 $484,255 ============ ============= ============= ============= ------------ Average Number of Employees 5,189 1,917 1,757 603 9,466 ---- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------ </TABLE> The amount of salaries increased during the nine months ended November 30, 1999 reflecting the continued expansion of the consumer branch network. This was partially offset by a reduction in loan processing personnel resulting from the decline in refinance activity. In addition, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries also contributed to the increase. Incentive bonuses earned during the nine months ended November 30, 1999 decreased primarily due to the reduction in loan production. Occupancy and other office expenses for the nine months ended November 30, 1999 increased to $211.2 million from $196.8 million for the nine months ended November 30, 1998. The increase was primarily due to: (i) the continued expansion of the consumer branch network; (ii) a larger servicing portfolio; and (iii) growth in the Company's non-mortgage banking activities. Guarantee fees are paid to Fannie Mae, Freddie Mac, and Ginnie Mae to guarantee timely and full payment of principal and interest on MBS and to transfer the credit risk of the loans in the servicing portfolio sold to these entities. For the nine months ended November 30, 1999, guarantee fees expense increased 6% to $143.7 million, up from $135.7 million for the nine months ended November 30, 1998. The increase resulted from an increase in the servicing portfolio, changes in the mix of the portfolio guaranteed by the GSEs and terms negotiated at the time of loan sales. Marketing expenses for the nine months ended November 30, 1999 increased 20% to $56.5 million compared to from $47.2 million for the nine months ended November 30, 1998. This increase supported the larger consumer branch network. Other operating expenses for the nine months ended November 30, 1999 decreased by 1% from the nine months ended November 30, 1998. This decrease was due primarily to a reduction in reserves for bad debt offset by the expansion of the consumer branch network, a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries in the nine months ended November 30, 1999 as compared to the nine months ended November 30, 1998. The Company's pre-tax earnings by segment is summarized below. <TABLE> - -------------------------------------------- --------------------------------------- -------- Nine months ended (Dollar amounts in millions) November 30, - -------------------------------------------- --------------------------------------- -------- 1999 1998 ------------- ---------------- <S> <C> <C> Loan Production $251,467 $424,046 Loan Servicing 221,434 1,886 Capital Markets 23,493 19,546 Other Activities 12,415 19,771 ============= ================ Pre-tax Earnings $508,809 $465,249 ============= ================ - --------------------------------------------------------------------------------------------- </TABLE> Profitability of Loan Production Segment Loan production segment activities include loan origination and purchases, warehousing and sales. The decrease of $172.5 million was primarily attributable to lower production, higher production costs and reduced margins on prime credit quality mortgages. These factors were partially offset by increased production and sales of higher margin home equity and subprime loans. Profitability of Loan Servicing Segment Loan servicing segment activities include administering the loans in the servicing portfolio, selling homeowners and other insurance, acting as tax payment agent, marketing foreclosed properties and acting as reinsurer. The increase of $219.5 million is primarily due to an increase in servicing revenues resulting from servicing portfolio growth combined with a reduction in the MSR amortization and recovery of previous MSR impairment attributable to the decline in refinance activity. These positive factors were partially offset by higher servicing costs driven by the increase in the servicing portfolio. Profitability of Capital Markets Segment Capital Markets segment activities include primarily the operations of CSC, a registered broker dealer specializing in the secondary mortgage market. The increase of $4.0 million was primarily due to increased trading volumes. Profitability of Other Activities In addition to loan production, loan servicing and capital markets, the Company offers ancillary products and services related to its mortgage banking activities, primarily through its subsidiary, LandSafe, Inc. Through several subsidiaries, LandSafe, Inc. acts as a title insurance agent and a provider of settlement, escrow, appraisal and credit reporting, and home inspection and flood zone determination services. In addition, through its subsidiaries, LandSafe, Inc. provides property profiles to realtors, builders, consumers, mortgage brokers and other financial institutions. For the nine months ended November 30, 1999, LandSafe Inc. contributed $10.9 million to the Company's pre-tax income compared to $18.6 million for the nine months ended November 30, 1998. The decrease in the profitability of LandSafe Inc. resulted primarily from decreased title business attributable to the decline in refinance activity. The operations of other activities, excluding LandSafe Inc., consist primarily of the holding company. These operations incurred pre-tax income of $1.5 million during the nine months ended November 30, 1999 compared to pre-tax income of $1.2 million during the nine months ended November 30, 1998. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The primary market risk facing the Company is interest rate risk. From an enterprise perspective, the Company manages this risk by striving to balance its loan origination and loan servicing business segments, which are counter cyclical in nature. In addition, the Company utilizes various financial instruments, including derivatives contracts, to manage the interest rate risk related specifically to its committed pipeline, mortgage loan inventory and MBS held for sale, MSRs, mortgage-backed securities retained in securitizations, trading securities and debt securities. The overall objective of the Company's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. The Company does not speculate on the direction of interest rates in its management of interest rate risk. As part of its interest rate risk management process, the Company performs various sensitivity analyses that quantify the net financial impact of changes in interest rates on its interest rate-sensitive assets, liabilities and commitments. These analyses incorporate scenarios including selected hypothetical (instantaneous) parallel shifts in the yield curve. Various modeling techniques are employed to value the financial instruments. For mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread ("OAS") model is used. The primary assumptions used in this model are the implied market volatility of interest rates and prepayment speeds. For options and interest rate floors, an option-pricing model is used. The primary assumption used in this model is implied market volatility of interest rates. MSRs and residual interests are valued using discounted cash flow models. The primary assumptions used in these models are prepayment rates, discount rates and credit losses. Utilizing the sensitivity analyses described above, as of November 30, 1999, the Company estimates that a permanent 0.50% reduction in interest rates, all else being constant, would result in a $3.8 million after-tax loss related to its trading securities and that there would be no loss related to its other financial instruments. As of November 30, 1999, the Company estimates that this combined after-tax loss of $3.8 million is the largest such loss that would occur within the range of reasonably possible interest rate changes. These sensitivity analyses are limited by the fact that they are performed at a particular point in time, are subject to the accuracy of various assumptions used including prepayment speed forecasts, and do not incorporate other factors that would impact the Company's financial performance in such a scenario. Consequently, the preceding estimates should not be viewed as a forecast. An additional market risk facing the Company is foreign currency risk. The Company has issued foreign currency denominated medium-term notes (See Note E). The Company manages the foreign currency risk associated with such medium-term notes by entering into currency swaps. The terms of the currency swaps effectively translate the foreign currency denominated medium-term notes into the Company's reporting currency (i.e., U.S. dollars), thereby eliminating the associated foreign currency risk (subject to the performance of the various counterparties to the currency swaps). As a result, hypothetical changes in the exchange rates of foreign currencies denominating such medium-term notes would not have a net financial impact on future earnings, fair values or cash flows. Inflation Inflation affects the Company most significantly in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production decreases, particularly from loan refinancings. Although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down thereby extending the average life of the Company's servicing portfolio and reducing amortization and impairment of the MSRs, as well as Interest Costs Incurred on Payoffs, and because the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings primarily due to increased amortization and impairment of the MSRs, a decreased rate of interest earned from the custodial balances and increased Interest Costs Incurred on Payoffs. The servicing hedge is designed to mitigate the impact of changing interest rates on servicing-related earnings. Seasonality The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses. Liquidity and Capital Resources The Company's principal financing needs are the financing of its mortgage loan inventory and its investment in MSRs. To meet these needs, the Company currently utilizes commercial paper supported by the revolving credit facility, medium-term notes, senior debt, MBS repurchase agreements, subordinated notes, pre-sale funding facilities, an optional cash purchase feature in the dividend reinvestment plan, redeemable capital trust pass-through securities, securitization of servicing fee income and cash flow from operations. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, private placements of unsecured notes and other financings, direct borrowings from the revolving credit facility and public offerings of common and preferred stock. Certain of the debt obligations of the Company and Countrywide Home Loans, Inc. ("CHL") contain various provisions that may affect the ability of the Company and CHL to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CHL to pay dividends. The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows. In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management. In the course of the Company's mortgage banking operations, the Company sells the mortgage loans it originates and purchases to investors but generally retains the right to service the loans, thereby increasing the Company's investment in MSRs. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. Cash Flows Operating Activities In the nine months ended November 30, 1999, the Company's operating activities provided cash of approximately $2.5 billion. In the nine months ended November 30, 1998, operating activities used approximately $1.6 billion. The increase in cash provided by operating activities was due primarily to the reduction in mortgage loan inventory driven by the reduction in loan originations. Investing Activities The primary investing activity for which cash was used by the Company was the investment in MSRs and the acquisition of Balboa Life and Casualty Group. Net cash used by investing activities was $1.3 billion for the nine months ended November 30, 1999 and $1.2 billion for the nine months ended November 30, 1998. Financing Activities Net cash used by financing activities amounted to $1.1 billion for the nine months ended November 30, 1999. Net cash provided by financing activities amounted to $2.9 billion for the nine months ended November 30, 1998. The increase or decrease in cash flow from financing activities was primarily the result of the change in the Company's mortgage loan inventory and investment in MSRs. Prospective Trends Applications and Pipeline of Loans in Process For the month ended December 31, 1999, the Company received new loan applications at an average daily rate of $247 million. As of December 31, 1999, the Company's pipeline of loans in process was $7.0 billion. This compares to a daily application rate for the month ended in December 31, 1998 of $569 million and a pipeline of loans in process as of December 31, 1998 of $15.5 billion. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 77% of the pipeline of loans in process has funded. In addition, the Company's LOCK `N SHOP(R) Pipeline as of December 31, 1999 was $1.6 billion and as of December 31, 1998 was $1.1 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage loans, the level of competition in the market, the direction of interest rates, seasonal factors and general economic conditions. Market Factors Loan production decreased 47% from the quarter ended November 30, 1998 to the quarter ended November 30, 1999. This decrease was primarily due to a smaller mortgage origination market, driven by reduced refinances. Home purchase related loan production was essentially unchanged during the same period. The prepayment rate in the servicing portfolio decreased from 30% for the quarter ended November 30, 1998 to 9% for the quarter ended November 30, 1999. This was due primarily to a decrease in refinances. The loan origination segment has recently experienced increased pricing competition. The Company attributes this to excess capacity currently in the marketplace caused by the significant drop in refinance activity. This pricing competition is being exacerbated by increased consumer demand for adjustable rate mortgages, which certain banks and thrifts are currently pricing very competitively. The Company expects this heightened pricing competition to continue until remaining excess capacity in the marketplace is eliminated. The Company's California mortgage loan production (as measured by principal balance) constituted 20% of its total production during the quarter ended November 30, 1999 and 23% during the quarter ended November 30, 1998. The Company is continuing its efforts to expand its production capacity outside of California. Some regions in which the Company operates have experienced slower economic growth, and real estate financing activity in these regions has been impacted negatively. The Company has striven to diversify its mortgage banking activities geographically to mitigate such effects. The delinquency rate in the Company's servicing portfolio, excluding sub-servicing, increased to 3.97% at November 30, 1999 from 3.61% as of November 30, 1998. The Company believes that this increase was primarily the result of changes in portfolio mix and aging. Sub-prime loans (which tend to experience higher delinquency rates than prime loans) represented approximately 3% of the total portfolio as of November 30, 1999, up from 1% as of November 30, 1998. In addition, the weighted average age of the government loans increased to 33 months at November 30, 1999 from 31 months in November 30, 1998. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. However, because the loans in the portfolio are generally serviced on a non-recourse basis, the Company's exposure to credit loss resulting from increased delinquency rates is substantially limited. Furthermore, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate. The percentage of loans in the Company's servicing portfolio, excluding sub-servicing, that are in foreclosure decreased to 0.33% as of November 30, 1999 from 0.36% as of November 30, 1998. Generally, the Company is not exposed to credit risk. Because the Company services substantially all conventional loans on a non-recourse basis, related foreclosure losses are generally the responsibility of the investor or insurer and not the Company. While the Company does not generally retain credit risk with respect to the prime credit quality first mortgage loans it sells, it does have potential liability under representations and warranties made to purchasers and insurers of the loans. In the event of a breach of these representations and warranties, the Company may be required to repurchase a mortgage loan and any subsequent loss on the mortgage loan may be borne by the Company. Similarly, government loans serviced by the Company (24% of the Company's servicing portfolio as of November 30, 1999) are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Administration. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Administration is inadequate to cover the total credit losses incurred. The Company retains credit risk on the home equity and sub-prime loans it securitizes, through retention of a subordinated interest. As of November 30, 1999, the Company had investments in such subordinated interests amounting to $357.4 million. Servicing Hedge As previously discussed, the Company's Servicing Hedge is designed to protect the value of its investment in MSRs from the effects of increased prepayment activity that generally results from declining interest rates. In periods of increasing interest rates, the value of the Servicing Hedge generally declines and the value of MSRs generally increases. There can be no assurance that, in periods of increasing interest rates, the increase in value of the MSRs will fully offset the decline in value of the Servicing Hedge. Likewise, there can be no assurance that, in periods of declining interest rates, that the Servicing Hedge will generate gains, or if gains are generated, that they will fully offset impairment of the MSRs. Implementation of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize the fair value of all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This statement will become effective in the fiscal year ended February 28, 2002. The Company has not yet determined the impact upon adoption of this standard on the Consolidated Financial Statements. Year 2000 Update The Company conducted tests of its systems and applications, including electronic interfaces with business partners, throughout the weekend of January 1 and 2, 2000. To date, the Company has not experienced any material issues associated with the date rollover into the year 2000. The Company continues to monitor its systems and applications for such issues in order to address them promptly, should any arise. The Company had four distinct Year 2000 Projects, each of which focused on a particular critical area. The Company's primary platform is the IBM AS/400 which contains all of the data relating to the origination and servicing of the home loans in the Company's portfolio. As of December 31, 1998 the Company had substantially reprogrammed and re-engineered the system to incorporate four-digit century date fields by testing the function and accuracy of the reprogrammed fields, implementing the revised code and forward-date testing of the more than 17,000 production programs on the AS/400. Many of the Company's Client Server applications have been developed in-house and in a Year 2000 compliant format. The majority of these applications interface with the AS/400. The Company reviewed and forward-date tested each of its mission critical and less critical Client Server applications to confirm their Year 2000 readiness. Additionally, as part of this project, the Company tested the interfaces between the individual critical Client Server applications and the AS/400 to confirm that accurate data is exchanged. Newly-developed Client Server applications were forward-date tested before they were implemented into production. The Company's Infrastructure Project inventoried the personal computers used by the Company's employees nationwide to determine the Year 2000 readiness of these computers. As part of the Infrastructure Project, the Company also identified "shrink-wrapped" and desktop software used company-wide, as well as desktop software supporting individuals and individual business units, in order to determine whether the vendor's products were compliant. This Project also monitored websites and other available information concerning software and hardware vendors and disseminated the latest available information to those business units relying on the product. With respect to non-compliant software, the Company either sought alternative sources of similar applications or developed its own applications. The Infrastructure Project inventoried, assessed, corrected and forward-date tested the Company's mission critical wide area network components, telecommunications systems and unique business systems. Additionally, the Infrastructure Project personnel, along with personnel from the Company's Facilities Department, tested the energy management, environmental and safety ad security systems of the Company's corporate facilities to determine that they would operate satisfactorily in the Year 2000 and beyond. The Communications Project personnel developed a database for collecting information regarding the Year 2000 status of the Company's strategic business partners and other vendors and suppliers to achieve a reasonable understanding of the Year 2000 readiness and contingency plans of those entities in advance of the Year 2000. Contingency Planning With the assistance of a vendor specializing in business continuity planning, the Company reviewed and improved its business continuity procedures on a company-wide basis. The business analysis aspect of the contingency planning process also served as a means of verifying the Company's inventories of Client Server applications, Infrastructure hardware and software, vendors and suppliers, external and internal interfaces and business partners. All mission critical business units participated in a major disaster simulation to test the interaction of the business recovery plans of multiple business units. Costs The total cost associated with the Company's Year 2000 efforts is not material to the Company's financial position. The Company expensed these costs during the period in which they were incurred. [The estimated total cost of the Year 2000 Project is approximately $36 million, of which $34 million had been incurred through November 30, 1999.] Although the Company's expectations about future costs associated with the Year 2000 are subject to uncertainties, in light of the minimal issues occurring to date the Company believes that the actual costs will not differ materially from the Company's expectations. Risks Due to the global nature of the Year 2000 issue, the Company cannot determine all of the consequences the Year 2000 may have on its business and operations. The Company believes that in light of minimal issues occurring to date, the efforts of its Year 2000 Projects, including the Contingency Planning aspect, the possibility of material business interruptions is unlikely. However, there may be instances where the Company has relied on third party information, which proves to be unreliable and could have an adverse effect on the Company. <PAGE> Page 34 PART II. OTHER INFORMATION Item 5. Other Information Any proposal that a stockholder wishes to present for consideration at the 2000 Annual meeting of the Stockholders must be received by the Company no later than July 12, 2000 for inclusion in the 2000 Notice of Annual Meeting, Proxy Statement and Proxy. Any other proposal that a stockholder wishes to bring before the 2000 Annual Meeting of Stockholders must also be received by the Company no later than July 12, 2000. All proposals must comply with the applicable requirements or conditions established by the Securities and Exchange Commission and Article II, Section 13 of the Company's Bylaws, which requires among other things, certain information to be provided in connection with the submission of stockholder proposals. All proposals must be directed to the Secretary of the Company at 4500 Park Granada, MSN CH-19, Calabasas, California 91302. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement Regarding Computation of Per Share Earnings 12.1 Computation of the Ratio of Earnings to Fixed Charges 27 Financial Data Schedules (included only in the electronic filing with the SEC). (b) Reports on Form 8-K. None. <PAGE> 35 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. COUNTRYWIDE CREDIT INDUSTRIES, INC. (Registrant) DATE: January 13, 2000 /s/ Stanford L. Kurland -------------------------------------- Senior Managing Director and Chief Operating Officer DATE: January 13, 2000 /s/ Carlos M. Garcia -------------------------------------- Managing Director; Finance, Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>STATEMENT REGARDING COMPUTATION OF EPS <TEXT> Page 37 Exhibit 11.1 COUNTRYWIDE CREDIT INDUSTRIES, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS <TABLE> Nine Months Ended November 30, 1999 1998 ----------------- -- ---------------- (Amounts in thousands, except per share data) Basic <S> <C> <C> Net earnings applicable to common stock $310,446 $283,802 ================ ================= Average shares outstanding 112,992 111,065 ================ ================= Per share amount $2.75 $2.56 ================ ================= Diluted Net earnings applicable to common stock $310,446 $283,802 ================ ================= Average shares outstanding 112,992 111,065 Net effect of dilutive stock options -- based on the treasury stock method using the average market price. 4,053 5,749 ---------------- ----------------- Total average shares 117,045 116,814 ================ ================= Per share amount $2.65 $2.43 ================ ================= </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <DESCRIPTION>STATEMENT RE: COMPUTATION OF RATIOS <TEXT> COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) The following table sets forth the ratio of earnings to fixed charges of the Company for the nine months ended November 30, 1999 and 1998 and for the five fiscal years ended February 28, 1999 computed by dividing net fixed charges (interest expense on all debt plus the interest element (one-third) of operating leases) into earnings (income before income taxes and fixed charges). <TABLE> Nine months ended November 30, Fiscal Years Ended February 29(28), -------------------------- ------------------------------------------------------------------ 1999 1998 1999 1998 1997 1996 1995 ------------ ------------- ------------ ------------- ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> <C> Net earnings $310,446 $283,802 $385,401 $344,983 $257,358 $195,720 $ 88,407 Income tax expense 198,363 181,447 246,404 220,563 164,540 130,480 58,938 Interest charges 700,836 722,752 983,829 568,359 423,447 337,655 267,685 Interest portion of rental Expense 14,180 10,457 14,898 10,055 7,420 6,803 7,379 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Earnings available to cover fixed charges $1,223,825 $1,198,458 $1,630,532 $1,143,960 $852,765 $670,658 $422,409 ============ ============= ============ ============= ============ ============ ============= Fixed charges Interest charges $700,836 $722,752 $983,829 $568,359 $423,447 $337,655 $267,685 Interest portion of rental Expense 14,180 10,457 14,898 10,055 7,420 6,803 7,379 ------------ ------------- ------------ ------------- ------------ ------------ ------------- Total fixed charges $715,016 $733,209 $998,727 $578,414 $430,867 $344,458 $275,064 ============ ============= ============ ============= ============ ============ ============= Ratio of earnings to fixed Charges 1.71 1.63 1.63 1.98 1.98 1.95 1.54 ============ ============= ============ ============= ============ ============ ============= </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <CIK> 0000025191 <NAME> Countrywide Credit Industries <MULTIPLIER> 1,000 <CURRENCY> 1.00 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> FEB-28-2000 <PERIOD-START> MAR-01-1999 <PERIOD-END> NOV-30-1999 <EXCHANGE-RATE> 1.00 <CASH> 171,503 <SECURITIES> 0 <RECEIVABLES> 0 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 0 <PP&E> 354,470 <DEPRECIATION> 202,678 <TOTAL-ASSETS> 15,570,455 <CURRENT-LIABILITIES> 12,287,487 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 5,664 <OTHER-SE> 2,777,304 <TOTAL-LIABILITY-AND-EQUITY> 15,570,455 <SALES> 0 <TOTAL-REVENUES> 1,565,797 <CGS> 0 <TOTAL-COSTS> 1,056,988 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 508,809 <INCOME-TAX> 198,363 <INCOME-CONTINUING> 310,446 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 310,446 <EPS-BASIC> 2.75 <EPS-DILUTED> 2.65 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CLX

https://www.sec.gov/Archives/edgar/data/21076/0000021076-00-000001.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, QlI4SjsUhFS8+xi7JzifvU2OmtItkBeB/hmyl6wAUCamPodcvnhEfGktzcEnVRNp 1P/joOZhUkMj/RJU3nQTMw== <SEC-DOCUMENT>0000021076-00-000001.txt : 20000215 <SEC-HEADER>0000021076-00-000001.hdr.sgml : 20000215 ACCESSION NUMBER: 0000021076-00-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: SEC FILE NUMBER: 001-07151 FILM NUMBER: 539201 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, 1999 ----------------- 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 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, 1999 there were 236,516,258 shares outstanding of the registrant's common stock (par value - $1.00), the registrant's only outstanding class of stock. <PAGE> THE CLOROX COMPANY PART I. Financial Information Page No. --------------------- -------- Item 1. Financial Statements Condensed Statements of Consolidated Earnings Three Months and Six Months Ended December 31, 1999 and 1998 3 Condensed Consolidated Balance Sheets December 31, 1999 and June 30, 1999 4 Condensed Statements of Consolidated Cash Flows Six Months Ended December 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-12 <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Statements of Consolidated Earnings (In millions, except share and per-share amounts) <S> <C> <C> Three Months Ended Six Months Ended --------------------- --------------------- 12/31/99 12/31/98 12/31/99 12/31/98 -------- -------- -------- -------- Net Sales $ 954 $ 947 $ 1,896 $ 1,912 Cost and Expenses Cost of products sold 478 459 940 917 Selling, delivery and administration 192 201 374 392 Advertising 110 122 226 237 Research and development 15 15 29 30 Merger, integration and restructuring 6 - 8 - Interest expense 23 25 46 53 Other expense, net 10 7 16 7 -------- -------- -------- -------- Total costs and expenses 834 829 1,639 1,636 -------- -------- -------- -------- Earnings before income taxes 120 118 257 276 Income taxes 44 44 94 102 -------- -------- -------- -------- Net Earnings $ 76 $ 74 $ 163 $ 174 ======== ======== ======== ======== Earnings per Common Share Basic $ 0.32 $ 0.32 $ 0.69 $ 0.74 Diluted 0.32 0.31 0.68 0.73 Weighted Average Shares Outstanding (in thousands) Basic 236,475 234,588 236,747 234,522 Diluted 239,737 239,598 240,211 239,348 Dividends per Share $ 0.20 $ 0.18 $ 0.40 $ 0.35 </TABLE> See Notes to Condensed Consolidated Financial Statements. <PAGE> <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Condensed Consolidated Balance Sheets (In millions) 12/31/99 6/30/99 -------- ------- <S> <C> <C> ASSETS - ------ Current Assets Cash and short-term investments $ 159 $ 132 Receivables, net 575 610 Inventories 359 319 Prepaid expenses and other 23 29 Deferred income taxes 24 26 -------- ------- Total current assets 1,140 1,116 Property, Plant and Equipment - Net 1,061 1,054 Brands, Trademarks, Patents and Other Intangibles - Net 1,489 1,497 Investments in Affiliates 115 104 Other Assets 347 361 -------- ------- Total $ 4,152 $ 4,132 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities Accounts payable $ 214 $ 206 Accrued liabilities 325 350 Accrued merger, integration, and restructuring 12 23 Short-term debt and notes payable 697 734 Income taxes payable 36 48 Current maturities of long-term debt 12 7 -------- ------- Total current liabilities 1,296 1,368 Long-term Debt 695 702 Other Obligations 186 255 Deferred Income Taxes 230 237 Stockholders' Equity Common stock 250 250 Additional paid-in capital 128 50 Retained earnings 1,923 1,842 Treasury shares, at cost (374) (392) Accumulated other comprehensive loss (161) (160) Other (21) (20) -------- ------- Stockholders' equity 1,745 1,570 -------- ------- Total $ 4,152 $ 4,132 ======== ======= See Notes to Condensed Consolidated Financial Statements. </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 millions) Six Months Ended ------------------------------------ 12/31/99 12/31/98 ------------------ ----------------- <S> <C> <C> Operations: Net earnings $ 163 $ 174 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 98 97 Deferred income taxes 9 4 Other 3 (7) Changes in (excluding effects of businesses purchased): Accounts receivable 36 89 Inventories (38) (11) Prepaid expenses and other 6 6 Accounts payable 8 (68) Accrued liabilities (23) (99) Accrued merger, integration, and restructuring (11) (9) Income taxes payable (12) 32 ------------------ ----------------- Net cash provided by operations 239 208 Investing Activities: Purchases of property, plant and equipment (67) (69) Proceeds from disposals of property, plant and equipment 3 4 Businesses purchased (31) (111) Other (27) (46) ------------------ ----------------- Net cash used for investing (122) (222) Financing Activities: Credit facilities and short-term debt repayments, net (37) (69) Long-term debt and other borrowings 14 201 Long-term debt and other repayments (12) (6) First Brands receivables financing program, net - (15) Cash dividends (95) (82) Treasury stock purchased (51) (33) Settlement of share repurchase and options contracts 82 - Issuance of common stock for employee stock plans and other 8 41 ------------------ ----------------- Net cash provided by (used for) financing (91) 37 ------------------ ----------------- Effect on cash of exchange rate changes 1 - Net increase in cash and short-term investments 27 23 Cash and short-term investments: Beginning of period 132 102 ------------------ ----------------- End of period $ 159 $ 125 See Notes to Condensed Consolidated Financial Statements. </TABLE> <PAGE> PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (In millions, except share and per-share amounts) 1) The condensed consolidated financial statements for the three and six months ended December 31, 1999 and 1998 has not been audited but, in the opinion of management, include all adjustments (consisting of normal recurring and merger related accruals) necessary for a fair presentation of the consolidated results of operations, financial position, and cash flows of The Clorox Company and its subsidiaries (the "Company"). The Company's results reflect the January 29, 1999 merger with First Brands Corporation ("First Brands"). The merger was accounted for as a pooling of interests and all historical financial information has been restated to include First Brands. The results for the three and six months ended December 31, 1999 and 1998 should not be considered as necessarily indicative of the annual results for the respective years. 2) Inventories at December 31, 1999 and at June 30, 1999 consisted of: 12/31/99 6/30/99 ------------ ------------ Finished goods and work in process $ 248 $ 220 Raw materials and supplies 111 99 ------------ ------------ Total $ 359 $ 319 ============ ============ 3) International acquisitions since June 30, 1999 totaled $31 and were funded using a combination of cash and debt. These acquisitions included an increase in ownership to 100% in Tecnoclor, S.A. in Colombia (previously 72% owned and fully consolidated) and a rubber glove business purchased in Australia. 4) Basic earnings per share (EPS) is computed by dividing net earnings by the weighted average number of common shares outstanding each period. Diluted EPS is computed by dividing net earnings by the diluted weighted average number of common shares outstanding during each period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, restricted stock, warrants and other convertible securities. The weighted average number of shares outstanding (denominator) used to calculate basic EPS is reconciled to those used in calculating diluted EPS as follows (in thousands): Weighted Average Number of Shares Outstanding --------------------------------------------- Three Months Ended Six Months Ended ------------------ ------------------ 12/31/99 12/31/98 12/31/99 12/31/98 -------- -------- -------- -------- Basic 236,475 234,588 236,747 234,522 Stock options 3,225 4,932 3,428 4,744 Other 37 78 36 82 -------- -------- -------- -------- Diluted 239,737 239,598 240,211 239,348 ======== ======== ======== ======== PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (In millions, except share and per-share amounts) 5) Comprehensive income for the Company includes net income and foreign currency translation adjustments that are excluded from net income but included as a separate component of total stockholders' equity. Comprehensive income for the three and six months ended December 31, 1999 and 1998 is as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended ---------------------- -------------------- 12/31/99 12/31/98 12/31/99 12/31/98 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net Earnings $ 76 $ 74 $ 163 $ 174 Other comprehensive income (loss): Foreign currency translation adjustments 4 8 (1) (14) --------- --------- --------- --------- Total $ 80 $ 82 $ 162 $ 160 ========= ========= ========== ========= </TABLE> 6) On January 29, 1999, the Company completed a merger with First Brands. Related merger, integration, restructuring and asset impairment charges through December 31, 1999 are as follows: <TABLE> <CAPTION> Merger and Asset Integration Restructuring Sub-Total Impairment Total ----------- ------------- --------- ---------- ------ <S> <C> <C> <C> <C> <C> Provision for merger, integration, restructuring, and asset impairment: For the year ended June 30, 1999 $36 $53 $89 $91 $180 For the six months ended December 31, 1999 6 2 8 - 8 ----------- ------------- --------- ---------- ------ Total provision for merger, integration, restructuring and asset impairment through December 31, 1999 42 55 97 $91 $188 ========== ====== Total paid through December 31, 1999 (37) (48) (85) ----------- ------------- --------- Accrued liability as of December 31, 1999 $5 $7 $12 =========== ============= ========= </TABLE> Total merger, integration, restructuring and asset impairment costs are estimated to be approximately $210, including $196 recognized through December 31, 1999 (includes $8 of obsolete inventory written off to cost of sales). The Company expects to incur approximately an additional $14 over the remainder of the fiscal year and such costs will be expensed as merger, integration and restructuring costs as incurred. PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (In millions, except share and per-share amounts) 7) The Company's operating segments are as follows: Household Products: Includes cleaning, bleach and other home care products, and water filtration products marketed in the United States and all products marketed in Canada. U. S. Specialty Products: Includes charcoal, automotive care, cat litter, insecticides, dressings, sauces, professional products and food storage and disposal categories. International: Includes operations outside the United States and Canada. Corporate, Interest and Other: Includes certain non-allocated administrative and sales costs, goodwill amortization, interest income, interest expense, merger, integration and restructuring, and other income and expense. Each segment is individually managed with separate operating results that are reviewed regularly by the chief operating decision maker. The following table shows operating segment information. Net Sales ------------------------------------------ Three Months Ended Six Months Ended --------------------- ------------------- 12/31/99 12/31/98 12/31/99 12/31/98 --------- -------- -------- -------- Household Products $ 388 $ 381 $ 789 $ 796 U.S. Specialty Products 400 403 804 812 International 166 163 303 304 --------- -------- -------- -------- Total Company $ 954 $ 947 $1,896 $ 1,912 ========= ======== ======== ======== Earnings Before Income Taxes ------------------------------------------ Three Months Ended Six Months Ended --------------------- ------------------- 12/31/99 12/31/98 12/31/99 12/31/98 --------- -------- -------- -------- Household Products $ 120 $ 122 $ 252 $ 258 U.S. Specialty Products 93 90 190 191 International 26 17 39 26 Corporate, Interest and Other (119) (111) (224) (199) --------- -------- -------- -------- Total Company $ 120 $ 118 $ 257 $ 276 ========= ======== ======== ======== As a result of several executive promotions and management realignments which occurred after June 30, 1999, operating segment information for years ending June 30, 1999 and June 30, 1998 has been restated to reflect the Company's current organizational structure and management responsibilities. The restated information is as follows: PART I - FINANCIAL INFORMATION (Continued) Item 1. Financial Statements The Clorox Company and Subsidiaries Notes to Condensed Consolidated Financial Statements (In millions, except share and per-share amounts) <TABLE> (CAPTION> U.S. Corporate Fiscal Household Specialty Interest & Total Year Products Products International Other Company -------- ----------- ----------- --------------- ------------ ---------- <S> <C> <C> <C> <C> <C> <C> Net Sales 1999 $1,439 $1,856 $ 708 $ - $4,003 1998 1,376 1,796 726 - 3,898 Earnings before Tax 1999 496 456 54 (576) 430 1998 440 426 96 (406) 556 Identifiable Assets 1999 1,253 1,251 1,020 608 4,132 1998 1,192 1,138 1,025 710 4,065 Capital Spending 1999 55 64 27 30 176 1998 32 99 33 26 190 Depreciation and 1999 42 68 41 51 202 Amortization 1998 43 61 40 38 182 Interest Expense 1999 - - - 97 97 1998 - - - 104 104 </TABLE> 8) In September 1999, in response to declines in the Company's stock price in the first quarter, the Board of Directors authorized a common stock repurchase and hedging program intended to reduce or eliminate dilution when shares are issued in accordance with the Company's various stock compensation plans. The Company had canceled a prior share repurchase and hedging program (previously authorized in September 1996 by the Board of Directors to offset the dilutive effects of employee stock exercises) when it merged with First Brands. From inception of the new program through December 31, 1999, a total of 1,123,000 shares were acquired at a cost of $51. PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Diluted earnings per share increased 3% to 32 cents and decreased 7% to 68 cents for the three and six months ended December 31, 1999, respectively. Net earnings increased 3% to $76 million and decreased 6% to $163 million for the three and six months ended December 31, 1999, respectively. The Company's results reflect the January 29, 1999 merger with First Brands Corporation ("First Brands"). The merger was accounted for as a pooling of interests and all historical financial information has been restated to include First Brands. Net sales for the second quarter of fiscal 2000 increased 1% to $954 million mostly due to the results achieved from the Company's household products and international segments partially offset by lower net sales from the Company's U.S. specialty products segment. The increase in household product's net sales resulted mostly from the introduction of new products, such as Clorox Disinfecting Spray, Liquid-Plumr Foaming Pipe Snake, and Clorox FreshCare fabric refresher, partially offset by lower shipments of Brita water filtration systems driven by lower demand for pour-through pitchers, and a decrease in shipments of Clorox liquid bleach and Clorox 2 bleach. International net sales increases reflected higher shipments due to an increase in market share in the Brazilian bleach market and growth in Australia and New Zealand partly attributable to the acquisition of a rubber glove business in Australia; such increases were partially offset by currency devaluations experienced by some of the Company's Latin American businesses. The U.S. specialty products segment's net sales decreased mostly due to the discontinuation of First Brands prior year promotional activities partially offset by higher shipments of charcoal products due to an extended season, and higher shipments of Hidden Valley bottled dressings resulting from strong demand for club-size products. Net sales for the six month period ended December 31, 1999 decreased 1% to $1,896 million mostly due to the discontinuation of prior year First Brands promotional activities, lower shipments of Tilex Fresh Shower due to higher volumes in the prior year during its launch, an increase in international promotional spending during the first quarter of fiscal 2000, and currency devaluations experienced by some of the Company's Latin American businesses. Partially offsetting these decreases were higher shipments from new product launches, the full year results of the Handi Wipes business acquired in the prior year, higher charcoal shipments and international growth. Cost of products sold as a percentage of sales increased to 50.1% from 48.5% and increased to 49.6% from 48.0% for the three and six months ended December 31, 1999, respectively. These increases were mostly due to higher resin prices, somewhat offset by cost savings initiatives throughout the Company's domestic and international business units. Selling, delivery, and administrative expenses decreased 4% to $192 million and decreased 5% to $374 million for the three and six months ended December 31, 1999, respectively, mostly from continued benefits from combining the former First Brands businesses with Clorox. These decreases reflect a savings from lower commission expense primarily due to the consolidation of the Company's broker network. Advertising expense decreased 10% to $110 million and decreased 5% to $226 million for the three and six months ended December 31, 1999, respectively, mostly due to savings resulting from changing certain of First Brands couponing practices. These savings are partially offset by higher media spending to support former First Brands' businesses and the introduction of new products. Merger, integration and restructuring for the six months ended December 31, 1999 primarily reflect relocation expenses and retention bonuses paid to former First Brands employees and costs associated with the closure of First Brands distribution centers. The Company expects to incur approximately an additional $14 million over the remainder of the fiscal year and such costs will be expensed as merger, integration and restructuring costs as incurred. Interest expense decreased to $23 million from $25 million and decreased to $46 million from $53 million for the three and six months ended December 31, 1999, respectively. The decreases are mostly due to the refinancing of former First Brands debt at lower interest rates made possible by Clorox's more favorable credit rating. 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 quarter. Normal seasonal variations experienced by the Company's seasonal businesses and higher shipment volumes recorded in the fourth quarter of fiscal 1999 were the primary drivers causing reductions in receivables and accrued liabilities and the increase in inventories. International acquisitions since June 30, 1999 totaled $31 million and were funded using a combination of cash and debt. These acquisitions included an increase in ownership to 100% (from 72%) in Tecnoclor, S.A. in Colombia and a rubber glove business purchased in Australia. In September 1999, in response to declines in the Company's stock price in the first quarter, the Board of Directors authorized a common stock repurchase and hedging program intended to reduce or eliminate dilution when shares are issued in accordance with the Company's various stock compensation plans. The Company had canceled a prior share repurchase and hedging program (previously authorized in September 1996 by the Board of Directors to offset the dilutive effects of employee stock exercises) when it merged with First Brands. During the six month period ended December 31, 1999, a total of 1,123,000 shares were acquired at a cost of $51 million. On September 15, 1999, the Company settled prior share repurchase agreements and options contracts realizing cash proceeds of approximately $82 million. On the same day, the Company entered into two new share repurchase transactions whereby the Company contracted for future delivery of 2,260,000 shares on September 15, 2002 and 2,260,000 shares on September 15, 2004, each for a strike price of $43 per share. In November 1999, the Company entered into an agreement to purchase an additional 1,000,000 shares on December 1, 2003 at a price of $46.32 per share. On November 17, 1999, the stockholders approved an amendment of the Company's Certificate of Incorporation to increase the authorized capital of the Company to consist of 750,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, each with a par value of $1.00 per share. Management believes the Company has access to sufficient capital through existing lines of credit and, should the need arise, from other public and private sources. Year 2000 Compliance In 1997, the Company established a comprehensive corporate-wide program to address what is commonly referred to as the "Year 2000" or "Y2K" problem. This effort encompassed software, hardware, electronic data interchange, networks, personal computers, manufacturing and other facilities, embedded chips, century certification, supplier and customer readiness, contingency planning and domestic and international operations. Following the Company's January 29, 1999 merger with First Brands, the Company incorporated First Brands (since renamed The Glad Products Company) and its subsidiaries into the Company's comprehensive Y2K compliance program. As of December 31, 1999, the Company completed all of its Y2K compliance efforts on all of its critical domestic and international business systems, through retirement, upgrades or replacements, its critical plant floor equipment, instrumentation and facilities, and its third party assessment for all of its operations. The Company developed written contingency plans for its critical operations and third party relationships, including key customers, suppliers and other service providers. The Company did not implement any of its contingency plans because it did not experience any material Y2K related issues with the arrival of the new millennium. Y2K costs were expensed as incurred and funded through operating cash flows. Through December 31, 1999, the Company has expensed incremental remediation costs of $20 million and accelerated strategic upgrade costs of $20 million. The Company spent approximately 6.4% of its 1999 fiscal year information technology budget on Y2K remediation issues. The Company has not deferred any critical information technology projects because of its Year 2000 program efforts, which were primarily addressed through a joint team of the Company's business and information technology resources. PART I - FINANCIAL INFORMATION (Continued) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Cautionary Statement Except for historical information, matters discussed above and in the financial statements and footnotes, including statements about future growth, profitability, costs, expectations, plans or objectives, are forward-looking statements based on management's estimates, assumptions and projections. These forward-looking statements are subject to risks and uncertainties, and actual results could differ materially from those discussed above and in the financial statements and footnotes. Important factors that could affect performance and cause results to differ materially from management's expectations are described in "Forward-Looking Statements and Risk Factors" in the Company's Annual Report on Form 10-K for the year ending June 30, 1999, and in the Company's subsequent SEC filings. Those factors include, but are not limited to, marketplace conditions and events, competitors' actions, the Company's costs, risks inherent in litigation and international operations, the success of new products, the integration of acquisitions and mergers, including First Brands, and environmental, regulatory and intellectual property matters. . PART I - FINANCIAL INFORMATION (Continued) Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3) (iii) Restated Certificate of Incorporation (10) Material Contracts (XIX) Agreement between Henkel KGaA and the Company, November 2, 1999 <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: February 14, 2000 BY /S/ GREGORY S. FRANK Gregory S. Frank Vice-President - Controller INDEX TO EXHIBITS Exhibit Number Description of Exhibit - -------------- ------------------------------------- 3(iii) Restated Certificate of Incorporation 10(XIX) Agreement between Henkel KGaA and the Company, November 2, 1999 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>Q2 98 FDS RESTATED <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL STATEMENTS OF THE CLOROX COMPANY FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1998, AS PRESENTED IN THE CLOROX COMPANY'S FORM 10-Q FILED FOR SUCH PERIOD, AND AS RESTATED HEREIN, AND IS INCORPORATED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <RESTATED> <MULTIPLIER> 1000000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1999 <PERIOD-END> DEC-31-1998 <CASH> 65 <SECURITIES> 60 <RECEIVABLES> 464 <ALLOWANCES> 4 <INVENTORY> 381 <CURRENT-ASSETS> 1047 <PP&E> 1765 <DEPRECIATION> 741 <TOTAL-ASSETS> 4136 <CURRENT-LIABILITIES> 1146 <BONDS> 938 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 249 <OTHER-SE> 1297 <TOTAL-LIABILITY-AND-EQUITY> 4136 <SALES> 1912 <TOTAL-REVENUES> 1912 <CGS> 917 <TOTAL-COSTS> 1576 <OTHER-EXPENSES> 7 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 53 <INCOME-PRETAX> 276 <INCOME-TAX> 102 <INCOME-CONTINUING> 174 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 174 <EPS-BASIC> 0.74 <EPS-DILUTED> 0.73 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>Q2 00 FDS <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, 1999, AS PRESENTED IN THE CLOROX COMPANY'S FORM 10-Q FILED FOR SUCH PERIOD, AND IS INCORPORATED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1000000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-2000 <PERIOD-END> DEC-31-1999 <CASH> 98 <SECURITIES> 61 <RECEIVABLES> 578 <ALLOWANCES> 3 <INVENTORY> 359 <CURRENT-ASSETS> 1140 <PP&E> 1889 <DEPRECIATION> 828 <TOTAL-ASSETS> 4152 <CURRENT-LIABILITIES> 1296 <BONDS> 695 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 250 <OTHER-SE> 1495 <TOTAL-LIABILITY-AND-EQUITY> 4152 <SALES> 1896 <TOTAL-REVENUES> 1896 <CGS> 940 <TOTAL-COSTS> 1569 <OTHER-EXPENSES> 24 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 46 <INCOME-PRETAX> 257 <INCOME-TAX> 94 <INCOME-CONTINUING> 163 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 163 <EPS-BASIC> 0.69 <EPS-DILUTED> 0.68 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>4 <DESCRIPTION>REST. CERT. <TEXT> RESTATED CERTIFICATE OF INCORPORATION OF THE CLOROX COMPANY This corporation was originally incorporated on September 5, 1986. ARTICLE ONE The name of the corporation is THE CLOROX COMPANY ARTICLE TWO The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the registered agent of the corporation at such address is The Corporation Trust Company. ARTICLE THREE The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE FOUR The total number of shares of stock which the corporation shall have authority to issue is 755,000,000, consisting of 750,000,000 shares of Common Stock having a par value of $1.00 per share and 5,000,000 shares of Preferred Stock having a par value of $1.00 per share. The board of directors of the corporation is authorized, subject to limitations prescribed by law and the provisions of this Article Four, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. ARTICLE FIVE The business and affairs of the corporation shall be managed by the board of directors which shall consist of not less than 9 persons. The exact number of directors shall be fixed from time to time by, or in the manner provided in, the by-laws of the corporation and may be increased or decreased as therein provided. Directors of the corporation need not be elected by ballot unless required by the by-laws. The board of directors is authorized to adopt, amend or repeal the by-laws. ARTICLE SIX Part I Vote Required For Certain Business Combinations A. In addition to any affirmative vote required by law or this Restated Certificate of Incorporation, and except as otherwise expressly provided in Part II of this Article Six, the following transactions: (i) or any Subsidiary any merger or consolidation of this corporation (as hereinafter defined) into or with (a) any Interested Stockholder (as hereinafter defined); or (b) any other corporation (whether or not it is an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of this corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of more than ten percent (10%) of the Fair Market Value of the consolidated total assets of this corporation; or (iii) the issuance or transfer by this corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of this corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property having an aggregate Fair Market Value of more than ten percent (10%) of the Fair Market Value of the consolidated total assets of this corporation; or (iv) the adoption of any plan or proposal for the liquidation of this corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) any reclassification of this corporation's securities (including any reverse stock split), or recapitalization of this corporation, or any merger or consolidation of this corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of this corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder; shall require the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding shares of stock of this corporation entitled to vote regularly in the election of directors (the "Voting Stock") voting as a single class (it being understood that for purposes of this Article Six, each share of the Voting Stock other than Common Stock shall have the number of votes granted to it pursuant to Article Four of this Restated Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The term "Business Combination" as used in this Article Six shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of Part I. Part II When Higher Vote Is Not Required The provisions of Part I of this Article Six shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Restated Certificate of Incorporation, if all of the conditions specified in either of the following paragraphs A and B are met: A. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). B. All of the following conditions shall have been met: (i) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (a) (if applicable) the highest per share price paid by the Interested Stockholder for any shares of Common Stock acquired by it (1) within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; and (b) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article Six as the "Determination Date"), whichever is higher. (ii) The aggregate amount of the cash and the Fair Market Value on the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B (ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the highest per share price paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of this corporation; or (c) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (iii) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. The price determined in accordance with paragraphs B(i) and B(ii) shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (iv) After such Interested Stockholder has become an Interested Stockholder except as approved by a majority of the Disinterested Directors, there shall have been: (a) no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Stock, if any; and (b) no reduction in the effective annual rate of dividends paid on the Common Stock. (v) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise. Part III Certain Definitions For the purpose of this Article Six: A. A "person" shall mean any individual, firm, corporation or other entity. B. "Interested Stockholder" shall mean any person (other than this corporation, any Subsidiary or any compensation plan of this corporation) who or which: (i) is the beneficial owner, directly or indirectly, of more than 5% of the voting power of the outstanding Voting Stock; or (ii) is an Affiliate of this corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of more than five percent (5%) of the voting power of the then outstanding Voting Stock; or (iii) is an assignee of or has otherwise acquired or succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. C. A person shall be a "Beneficial Owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has: (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. D. For the purpose of determining whether a person is an Interested Stockholder pursuant to paragraph B of this Part III, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph C of this Part III but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. E. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on March 1, 1984. F. "Subsidiary" means any corporation of which a majority of any class of equity securities is owned, directly or indirectly, by this corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph B of this Part III, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity securities is owned, directly or indirectly, by this corporation. G. "Disinterested Director" means any member of the board of directors of this corporation (the "Board") who is unaffiliated with the Interested Stockholder by whom or on whose behalf, directly or indirectly, the Business Combination is proposed or was a member of the Board prior to the time that such Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is unaffiliated with such Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board. H. "Fair Market Value" means: (i) In the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock as reported in the principal consolidated transaction reporting system for securities listed or admitted to trading on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange, registered under the Securities Exchange Act of 1934 on which stock is listed, or, if such stock is not listed on such an exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period immediately preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotation System or any system then in use, and (ii) in the case of property other than cash or stock valued under (i) above, the fair market value of such property on the date in question as determined in good faith by a majority of the Disinterested Directors. I. In the event of any Business Combination in which this corporation is the surviving corporation, the phrase "consideration other than cash to be received" as used in clauses (i) and (ii) of paragraph B of Part II of this Article Six shall include the Fair Market Value of the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. Part IV Powers of The Board of Directors A majority of the Disinterested Directors of this corporation shall have the power and duty to determine for the purposes of this Article Six, on the basis of information known to them after reasonable inquiry: A. whether a person is an Interested Stockholder; B. the number of shares of Voting Stock beneficially owned by any person; C. whether a person is an Affiliate or Association of another; and D. whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by this corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of more than ten percent (10%) of the Fair Market Value of the consolidated total assets of this corporation. Part V Fiduciary Obligations Nothing contained in this Article Six shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Part VI Amendment Or Repeal The provisions set forth in this Article Six may not be amended or repealed in any respect, unless such action is approved by the affirmative vote of the holders of not less than eighty percent (80%) of the then outstanding Voting Stock, voting as a single class. ARTICLE SEVEN Action shall be taken by stockholders of the corporation only at annual or special meetings of stockholders and stockholders may not act by written consent. ARTICLE EIGHT Part I Right To Indemnification Each person who was or is made 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 ("proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of this corporation or is or was serving at the request of the corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer shall be indemnified and held harmless by the corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended, (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment) against all expenses, liability and loss (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; provided, however, that the corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. Such right shall be a contract right and shall include the right to be paid by the corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Article Eight or otherwise. The corporation may, by action of the board of directors, provide indemnification to employees and agents of the corporation with a lesser or the same scope and effect as the foregoing indemnification of directors and officers. Part II Right of Claimant To Bring Suit If a claim under Part I of this Article Eight is not paid in full by the corporation within ninety 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 be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such 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 not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware 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 stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in said law, nor an actual determination by the corporation (including its board of directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant had not met the applicable standard of conduct. Part III Non-Exclusivity Of Rights The rights conferred on any person by Parts I and II of this Article Eight shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of this Restated Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. Part IV Insurance The corporation may maintain insurance, at its expense, to protect itself and any such director or officer of the corporation or of another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. ARTICLE NINE A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. This Restated Certificate of Incorporation of THE CLOROX COMPANY was adopted by The Board of Directors of this corporation in accordance with Section 245 & 242 of the General Corporation Law of the State of Delaware. It restates. integrates and further amends the provisions of this corporation's Certificate of Incorporation. THE CLOROX COMPANY Date: November 19, 1999 By: /S/ G. C. SULLIVAN G.C. Sullivan Chairman of the Board and Chief Executive Officer Attest: /S/ PETER D. BEWLEY Peter D. Bewley Secretary THE UNDERSIGNED, the duly elected, and qualified Assistant Secretary of THE CLOROX COMPANY, a Delaware corporation, does hereby certify the foregoing to be the Restated Certificate of Incorporation of said Corporation. Date: November 19, 1999 /S/ THOMAS W. HUCKABY Thomas W. Huckaby </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>5 <DESCRIPTION>HENKEL AGMT. <TEXT> This Agreement, made and entered into as of this 2nd day of November, 1999 between THE CLOROX Company, 1221 Broadway, Oakland, California 94612, USA (hereinafter referred to as "CLOROX") and HENKEL KGaA, Henkelstrasse 67, D-40191 Duesseldorf, Federal Republic of Germany (hereinafter referred to as "HENKEL") WITNESSETH: WHEREAS, CLOROX and HENKEL have concluded an agreement dated January 16, 1992, providing for cooperative research and development in the field of consumer products excluding cosmetics; and WHEREAS, CLOROX and HENKEL have also concluded a Joint Venture Agreement dated October 1, 1985, and WHEREAS, CLOROX and HENKEL, in light of the progress made and the experience so far gathered, wish to renew and extend their cooperation on a basis mutually beneficial, and to revise their prior agreements related to ownership and licensing of their inventions, know how and patents to enhance such cooperative efforts and MAXIMIZE the mutual benefits thereof to both parties. NOW, THEREFORE, the Parties hereto have agreed as follows: (1) SUPERSEDES PRIOR AGREEMENTS This Agreement supersedes and replaces in their entirety the agreement of January 16, 1992, the provisions of section 9.2 of the Joint Venture Agreement of October 1, 1985. (2) DEFINITIONS "Affiliate" shall mean an entity or party controlled by a party hereto, either directly or indirectly. "Cleaning Product Categories" shall mean all consumer chlorine laundry bleach, fabric deodorizer products and household cleaning products, except the "Excepted Cleaning Product Categories." "Excepted Cleaning Product Categories" shall mean consumer dish detergents and in-home dry cleaning products, including products for cleaning, deodorizing, freshening, softening, static control or spot removal in a clothes dryer. "Clorox Territory" shall mean the United States, Canada, Argentina and Caribbean countries. "Henkel Territory" shall mean Western Europe, as defined below. "Other Territory" shall mean all territories other than the Clorox Territory and the Henkel Territory. "Western Europe" shall comprise the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Malta, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom. "Technology" shall mean, with respect to Cleaning Product Categories, all rights to any developments, trade secrets, know how, inventions, patent applications and patents wholly owned by a party including its Affiliates, or jointly with Affiliates, but excluding any rights jointly owned by a party with third parties other than Affiliates. (3) LICENSES OF TECHNOLOGY To facilitate the communication, sharing and cooperative development efforts of the parties with respect to Technology in the Cleaning Product Categories, CLOROX and HENKEL agree that all rights in their respective Technology with respect to the Cleaning Product Categories shall upon request of the other party be licensed to the other party as follows: (a) CLOROX shall grant to HENKEL an exclusive, royalty free license under its Technology rights with respect to the Cleaning Product Categories in the HENKEL Territory. (b) HENKEL shall grant to CLOROX an exclusive, royalty free license under its Technology rights with respect to the Cleaning Product Categories in the CLOROX Territory. (c) Neither party shall have any rights in the other's Technology in the Other Territory unless the other party gives written notice to it at any time within nine (9) months after first launching a product utilizing such Technology in any country, at its sole option, that it does not choose to use a specific Technology, or launch a specific product, in one or more specific countries of the Other Territory, (a "Disclaimed Country"), whereupon the party so notified, including its Affiliates and joint ventures, (the "Notified Party"), shall have a period of nine (9) months from such notice of the owning party during which it may launch a product utilizing the same Technology in the Disclaimed Countries. (If a party does not give such notice within nine (9) months after first launch of a product utilizing any specific Technology in a country, then this subsection (c) shall be inapplicable with respect to such Technology.) If the Notified Party launches such a product in a Disclaimed Country within this period, it will have an exclusive, royalty free license in such Technology in every Disclaimed Country where it launched the product within such period. For each of the Disclaimed Countries in which it does not launch such a product within this time period it will have no further rights to a license in such Technology, and the owning party shall be free to license others under such Technology. The date of the first launch shall be the last day of the month in which a product is first generally available to the consumer. Each party further agrees not to license its Technology in the Other Territory to any third party without giving notice to the other party as provided in Article 3(c). (d) Such licenses shall include Technology developed prior to this agreement to the extent not previously licensed to others. Hereafter, the right to grant licenses to others in areas outside the granting party's territory shall be limited by the rights granted herein. (e) It is understood that if Technology developed for the Excepted Cleaning Product Categories can be applied to the fields included in the Cleaning Product Categories, the license provisions of Article 3(a) through (c) will extend to such application within the Cleaning Product Categories unless otherwise restricted by agreements entered into before the effective date of this agreement. (f) The licenses and rights provided for herein shall include the right to sublicense Affiliates, including subsidiaries and joint ventures. (g) The parties recognize that conflicts may arise with respect to the non-exclusive licenses outside the Territories of the respective parties, and, accordingly, either party may bring to the attention of the other the existence of a conflict or potential conflict with respect to any specific product, whereupon the senior management of the parties shall confer in good faith to try to resolve any conflicts or potential conflicts. (h) In the event that either party acquires a business in the other party's Territory, the exclusive licenses of sections (3)(a) and (b) shall not apply to Technology acquired with such business or to Technology subsequently developed by such party to the extent that such Technology has application to such business. (4) COOPERATIVE RESEARCH AND DEVELOPMENT The parties shall cooperate on research and development in the Cleaning Product Categories as follows: 1) Joint Projects The parties agree to undertake joint research and development projects ("Joint Projects") in the Cleaning Product Categories in areas of mutual interest as may be agreed upon from time to time by the parties. Each party shall bear its own costs for work done pursuant to a Joint Project. 2) Experimental Work The parties also agree to individually undertake Experimental Work in the Cleaning Product Categories which is not of mutual interest and which is unrelated to any experimental or other work undertaken as a part of a Joint Project. Such work may be requested from time to time by either party and shall be carried out at the expense of the requesting party, subject to mutual agreement, and consistent with each party's available capacity for undertaking such work. 3) Disclosure of Individual Developments The parties also agree to disclose to each other their own individual inventions and product developments as follows: (a) Each party shall provide the other with a quarterly listing (informative title) of all patent applications first filed anywhere in the world relating to the Cleaning Product Categories making the patent application itself available for review by the other party if so requested. (b) Each party shall supply the other with a description and sample of each consumer product in the Cleaning Product Categories for which they conduct market testing within four weeks after initiation of such market testing test. (c) Each party shall disclose to the other all analytical techniques and test methods that they employ or develop related to consumer products in the Cleaning Product Categories and deliver copies of technical reports primarily related thereto on request. (d) Each party will inform the other of any new chemical product developments relating to the Cleaning Product Categories in, to the extent that such information can be of use in formulating end products in the Cleaning Product Categories , provided however, that such exchange of information, per se, shall not confer any rights in such information. 4) Visiting Scientists The parties also agree that, from time to time, and upon their mutual agreement, one or more scientists of a party will be temporarily assigned to work at the research facilities and with the scientists of the other party in connection with said other party's own research. Such visiting scientists shall at all times remain the employees of their normal employer, which will continue to be responsible for all salary and benefits for the visiting scientists. (5) JOINT PROJECTS 1) Establishment CLOROX and HENKEL shall identify areas of mutual interest in the Cleaning Product Categories from time to time. They shall undertake Joint Projects in such areas as the parties may agree upon from time to time. Each agrees to use its reasonable best efforts in implementing the Joint Projects instituted under this Agreement, taking into account the available research and development capacity of each party. Upon the commencement of any Joint Project, each party will disclose to the other party any prior invention and patent which it owns, which dominates, or is likely to dominate, any inventions arising from the Joint Project, and any licenses which have been granted under such patent unless such disclosure is not permitted according to the terms of such license agreements. At the commencement of Joint Projects under this Agreement the parties shall promptly prepare a formal project proposal for approval of management of each party which, to the extent possible, shall set forth,: (a) objectives and scope of the projects to be undertaken, equipment needs, personnel needs, and the like; (b) provisions for the administration of the project, including budget provisions, project organization, the respective parties' responsibilities, and the like; (c) prior developments of each of the parties that relate to the proposed Joint Project; and (d) inventions which dominate, or are likely to dominate, inventions arising from the Joint Project. 2) Communication of Joint Project Information The parties shall keep each other fully informed of their progress in all Joint Project work performed under this Agreement. The parties' research and development management shall meet from time to time (at least once a year) to review the progress of the work and outline and agree upon any changes in the program which may be necessary or desirable in view of the results, and to select additional areas of cooperation. In addition, working meetings of scientists participating directly in a Joint Project will be held as needed. Scientist employees of each party shall have access to the laboratories of the other to participate in work conducted with respect to the Joint Project. Copies of all written work reports prepared by either party for its own internal use will be supplied to the other party within a reasonable time to the extent as they relate to Joint Projects or Experimental Work under this Agreement. 3) Termination of Joint Projects Joint Projects established hereunder may be terminated by either party at any time by giving the other party sixty (60) days written notice thereof. Upon such termination of a Joint Project the parties shall prepare a written summary of the Joint Project, including an identification of all developments made during the Joint Project and the contributions of each party to the Joint Project, as well as identification of any prior dominating inventions of either party. All developments made on a Joint Project up to the time of termination shall be owned and treated as Joint Project inventions as provided in Article (7), and all information obtained from the other party during the course of the Joint Project shall continue to be treated as provided in Article (9). Developments related to a terminated Joint Project made by a party after termination of the Joint Project shall not be considered Joint Project developments. However, they should be treated as other inventions, and disclosed pursuant to Article (4) Paragraph 3), and shall be licensed to the other pursuant to Article (3) . If a Joint Project is reinstituted after such a termination developments made after reinstitution of the Joint Project shall be Joint Project developments, but developments made while the Joint Project was terminated shall not become Joint Project developments. 4) Joint Projects with Third Parties Upon agreement of both parties, a third party may be included in a Joint Project, either at its inception or at any other time, provided the third party agrees to the terms of this agreement related to Joint Projects, namely: Disclosure of and agreement to license prior dominating inventions, - - Full disclosure and reports on Joint Project work and developments, and - - Prior disclosure and agreement on filing patents on Joint Project inventions, as well as any territorial restrictions on rights to Joint Project developments that the parties deem appropriate. (6) EXPERIMENTAL WORK Each party performing Experimental Work under this Agreement shall be compensated by the other party for the true and accurate costs incurred by it. The cost shall be computed on the basis of the hourly manpower rates prevailing at the time of the performance of the work in the party performing the Experimental Work and shall consist of the following: 1) cost of the personnel performing the work under this Agreement plus prorated overhead cost of the respective department; 2) other costs directly incurred in the performance of the work under this Agreement, e.g.consumption of factory supplies, energy and the like, depreciation on buildings and machinery, services of other departments, travel expenses, transportation costs plus prorated overhead costs for the administration of the foregoing. In addition to the compensation of actual cost hereunder the party performing the project work shall be entitled to a surplus benefit of ten percent (10%) of the true and accurate costs incurred by it as consideration for making laboratory capacity available. The aforementioned costs and surplus benefits shall be computed on a quarterly basis by the party performing the project work under this Agreement and be paid by the other party no later than thirty (30) days after presentation of the invoice. (7) PATENT RIGHTS 1) Ownership of Inventions (a) Generally Inventions and developments, and patents thereon, will be owned by the party whose employees made such inventions, except as provided in (b) or (c) below. Inventorship of employees of the parties shall be determined in accordance with the applicable laws of the USA and the Federal Republic of Germany. Where inventorship is unclear, inventorship shall be reviewed and resolved jointly by research and development management and patent attorneys in keeping with the patent laws of the applicable countries.. (b) Joint Inventions All inventions made and trade secrets and know-how developed in the course of a Joint Project or otherwise determined to be joint inventions of employees of both parties shall be assigned to and owned by one of the parties herein, regardless of inventorship, such owning party to be chosen by joint agreement of the parties pursuant to consideration of the relative investments and contributions of the parties, and the relevance and importance of the invention to each party's markets and other patents. Such Technology shall be subject to the licensing provisions of Article (3). However, outside of each parties' Territories such licenses shall be exclusive except for the owning party and its Affiliates. Each party shall agree to the other party's licensing or sublicensing third parties as to such inventions, trade secrets and know-how if that is necessary or reasonable to avert mandatory licensing according to the applicable laws. c) Experimental work All patent rights covering inventions made by employees of either party, whether solely or jointly, in the course of any Experimental Work requested under this Agreement shall be the property of the party requesting and paying for such work. To the extent that they relate to the Cleaning Product Categories, they shall be subject to the licensing provisions of section (3). Otherwise, the other party, who did the experimental work, shall have a non-exclusive royalty-free license with the right to sublicense. 2) Patent Filing a) General (i) Each party shall file such patent applications in its Territory on its own inventions that it deems warranted, and shall file corresponding patent applications thereon in the other party's Territory unless otherwise instructed by the other party. In other territories, if the owning party chooses not file an application or maintain a patent, it will so advise the other party at least ninety (90) days prior to any deadline set in the subject case for taking action and it will give the other party a right to do so upon request. (ii) Each party shall pay for or reimburse the other for all maintenance costs related to the other party's patent applications and patents licensed to it in its Territory pursuant to Article (3). (b) Joint Project Inventions Prior to filing any patent application on a Joint Project invention, the parties shall discuss the contents of such applications including claims, initial filing country, countries of mutual interest, and the party to undertake initial preparation and filing as promptly as feasible in order not to jeopardize priority. Rights in such Joint Project Inventions, and the costs of maintenance of such patent applications and patents, shall be in accordance with Article (3) and Article (7) section (1)(b). However, prior to the first filing of an application on a Joint Project invention or any other joint invention, a copy of the application shall be provided to the other party with an opportunity for review and comment, at least two weeks before filing. If the reviewing party notifies the filing party that there is a disagreement as to inventorship or the use of the reviewing party's information in the application that cannot be resolved by the Technical and Legal staffs of the parties, the application will not be filed until the matter is resolved, except with the agreement of the Vice President of Research and Development for each party. Also, each party shall disclose to the other party any patent applications on their own individual projects which utilize or disclose any information derived from Joint Project disclosures or any information of the other party obtained in the course of cooperation under this Agreement, whether or not any related Joint Project has been terminated, as soon as reasonably possible, but in any event at least ten (10) days prior to filing to allow the other party to review and comment on or object to such a utilization or disclosure. (c) Experimental Work Inventions Each party shall notify the other as to all countries in which it intends to apply for patent rights on inventions made in the course of the Experimental Work performed under this Agreement which it owns under the terms hereof and, if so requested, shall grant to the other the right to apply in the other's own name and at its own expense for patents with respect to such inventions in any country where the first party does not intend to apply; and if either party intends to abandon any of the aforementioned patent rights covering such inventions, it shall first advise the other, who shall then have the right to receive an assignment of such patent or patent application and to maintain such patent right or to continue its prosecution at its own expense. 3) Visiting Scientists (a) Ownership and Licensing of Inventions Any inventions made by an employee of a party while assigned to work with scientists of the other party on research or development work not falling within Article 4, Section 1, whether or not the sole invention of the employee, or an invention made jointly with scientists of the other party, shall be owned by the party to whose research project the invention relates (typically the host company). However, the other party shall have a right to a license under such inventions and any patents granted thereon. as provided in Article (3). (b) Any employee assigned to work with scientists of the other party shall receive compensation (inventors fees and the like) for inventions made and covered by these provisions from his employer. (8) MARKETING RIGHTS Henkel and Clorox shall inform each other about all new consumer products that they develop in the Cleaning Product Categories and make them available to the other party for manufacture or marketing in accordance with the provisions of Article (3) with respect to rights in Technology. (9) CONFIDENTIALITY Each party shall retain in strict confidence and disclose to no one without the prior written consent to the other party, any information which it first acquires as a result of any Joint Project work, or which otherwise is disclosed to it by the other party under this Agreement, provided, however, that this obligation: 1) shall not prevent the disclosure under a like condition of confidence and trust of information to companies at least 50% of which one of the parties hereto owns or controls; 2) shall not apply to information already lawfully known to the receiving party prior to the date of this Agreement, or to information which is or becomes part of the public domain through no fault of the receiving party; and 3) shall be limited to a period of ten (10) years from the date of such disclosure. The foregoing shall not be interpreted to allow either party to disclose information concerning test marketing of the other party disclosed to it according to Article (4) Paragraph 3) b). (10) INDEMNITY Marketing any of the products and substances developed under this Agreement or utilization of any Technology as provided in this Agreement remains the sole responsibility of the party deciding so to do. Therefore, the party marketing any product developed or disclosed pursuant to this Agreement shall indemnify the other party against any and all loss, liability, damage and expense of every character whatsoever for loss of, or damage to, property, or for personal injury, sickness and disease (including death) sustained by any person, if such loss, damage or injury is caused by, or is in any way connected with products developed under this Agreement. Neither party shall have any liability to the other for patent infringement, or the like, for utilization of its Technology by the other party pursuant to this Agreement. However, each party will use its reasonable best efforts to insure that it has obtained all inventor's rights in its Technology that it makes available to the other pursuant to this Agreement. (11) TERMINATION The term of this Agreement shall commence on the date and day first written above and shall continue for ten (10) years thereafter, unless sooner terminated as herein provided. This Agreement may be terminated by either party on twelve (12) calendar months prior written notice given as of any date after one (1) year from the commencement date of this Agreement. Either party may terminate this Agreement forthwith in any of the following events: 1) if at any time and for any reason HENKEL should hold directly or indirectly less than 15 per cent of the then outstanding shares of CLOROX common stock; or 2) if at any time one or more corporations or individuals acting in concert or as a syndicate or other group, or any persons so acting on behalf of any of the foregoing, shall acquire without HENKEL's consent or hold more than 15 percent of the then outstanding shares of CLOROX common stock; or 3) if either party is subject to corporate reorganization and as a result thereof is not the surviving or controlling corporation. Also, this agreement shall terminate immediately upon any termination of the Joint Venture Agreement dated October 1, 1985. (12) SURVIVABILITY Upon the expiration or sooner termination of the term hereof, all rights and obligations of the parties shall come to an end except that: 1) the non-disclosure provisions of Article (9) shall not immediately terminate but shall remain in full force and effect for the period provided in Article (9) and shall then terminate; 2) with respect to Technology for which a party has developed plans for use or actually made use in a commercial product prior to such expiration or termination the provisions of Article (3) and (7) relating to licenses under patent, trade secret and know-how rights shall not terminate but shall continue in full force and effect, as to patents, until expiration of the patents and, as to trade secrets and know-how, perpetually; (13) ENTIRE AGREEMENT This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. Any alteration, amendment or termination of this Agreement shall be valid only if made in written form. (14) SEVERABILITY In the event that any provision of this Agreement shall be held illegal, void or in effective, the remaining portions hereof shall remain in full force and effect. In this case, the parties hereto shall replace the illegal, void or ineffective provision by a provision which has the same or similar economic effect. (15) NOTICES All notices given under this Agreement shall be in writing and as to CLOROX shall be addressed to: THE CLOROX COMPANY Attention: General Counsel 1221 Broadway Oakland, California 94612 U S A and as to HENKEL shall be addressed to HENKEL KGaA Attention: General Counsel Henkelstrasse 67 D-40191 Duesseldorf Germany or as modified from time to time by the parties hereto. (16) ASSIGNABILITY This Agreement shall be assignable in whole or in part by either party to any assignee controlled by the parties hereto. Otherwise, this Agreement shall be assignable in whole or in part only with the prior written consent of the other party. (17) GOVERNING LAW This Agreement shall be construed and interpreted in accordance with and its performance governed by the laws of the State of New York, USA. All disputes arising in connection with this Agreement shall be finally settled by the courts of the State of New York, USA. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. THE CLOROX COMPANY /S/ G. CRAIG SULLIVAN G. Craig Sullivan Chairman of the Board and Chief Executive Officer HENKEL KGaA /S/ DR. KLAUS MORWIND Dr. Klaus Morwind Executive Vice President, Personally Liable Associate and Member of Management Board </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CNXT

https://www.sec.gov/Archives/edgar/data/1069353/0001095811-00-000223.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, De7mz/OzZ0ggeQDabSuI5m29Hg2e3OJ2QSgpghTApxvBwaUHM8htbXogszOjeOdH qqgB3IhRuV343Gs9rKPhfA== <SEC-DOCUMENT>0001095811-00-000223.txt : 20000214 <SEC-HEADER>0001095811-00-000223.hdr.sgml : 20000214 ACCESSION NUMBER: 0001095811-00-000223 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONEXANT SYSTEMS INC CENTRAL INDEX KEY: 0001069353 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 251799439 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24923 FILM NUMBER: 534845 BUSINESS ADDRESS: STREET 1: 4311 JAMBOREE RD CITY: NEWPORT BEACH STATE: CA ZIP: 92660-3095 BUSINESS PHONE: 9492214600 MAIL ADDRESS: STREET 1: 4311 JAMBOREE RD CITY: NEWPORT BEACH STATE: CA ZIP: 92660-3095 FORMER COMPANY: FORMER CONFORMED NAME: ROCKWELL SEMICONDUCTOR SYSTEMS INC DATE OF NAME CHANGE: 19980929 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 000-24923 CONEXANT SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 25-1799439 - ------------------------ ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 4311 JAMBOREE ROAD NEWPORT BEACH, CALIFORNIA 92660-3095 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (949) 483-4600 - -------------------------------------------------------------------------------- (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 [ ] Registrant's number of shares of common stock outstanding as of February 4, 2000 was 202,571,118. ================================================================================ <PAGE> 2 CONEXANT SYSTEMS, INC. INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited): Consolidated Condensed Balance Sheets -- December 31, 1999 and September 30, 1999 3 Consolidated Condensed Statements of Operations -- Three Months Ended December 31, 1999 and 1998 4 Consolidated Condensed Statements of Cash Flows -- Three Months Ended December 31, 1999 and 1998 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 </TABLE> 2 <PAGE> 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONEXANT SYSTEMS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited, in thousands, except per share amounts) <TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1999 1999 ----------- ------------ <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 277,516 $ 398,516 Receivables, net of allowances of $6,545 and $9,658 at December 31 and September 30, 1999 286,508 238,940 Inventories, net 222,712 224,477 Deferred income taxes 81,860 81,860 Other current assets 63,866 35,381 ----------- ----------- Total current assets 932,462 979,174 Property, plant and equipment, net 759,166 723,013 Intangible assets, net 51,437 47,824 Other assets 244,479 91,939 ----------- ----------- Total assets $ 1,987,544 $ 1,841,950 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 224,509 $ 265,151 Deferred revenue on shipments to distributors 29,170 21,027 Accrued compensation and benefits 70,808 48,530 Other current liabilities 30,176 40,013 ----------- ----------- Total current liabilities 354,663 374,721 Convertible subordinated notes 350,000 350,000 Other long-term liabilities 99,371 82,076 ----------- ----------- Total liabilities 804,034 806,797 ----------- ----------- Commitments and contingencies -- -- Shareholders' equity: Preferred and junior preferred stock (no par value, 25,000 shares authorized, no shares issued or outstanding) -- -- Common stock ($1.00 par value, 500,000 shares authorized; 198,118 and 196,387 outstanding at December 31 and September 30, 1999, respectively) 198,128 196,387 Additional paid-in capital 836,820 769,563 Retained earnings 121,883 70,052 Accumulated other comprehensive income 29,468 149 Treasury stock, at cost (528) -- Unearned compensation (2,261) (998) ----------- ----------- Total shareholders' equity 1,183,510 1,035,153 ----------- ----------- Total liabilities and shareholders' equity $ 1,987,544 $ 1,841,950 =========== =========== </TABLE> See notes to consolidated condensed financial statements. 3 <PAGE> 4 CONEXANT SYSTEMS, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share amounts) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, ------------------------- 1999 1998 --------- --------- <S> <C> <C> Net revenues $ 509,963 $ 294,678 Cost of goods sold 277,446 216,754 --------- --------- Gross margin 232,517 77,924 Operating expenses: Research and development 88,477 71,109 Selling, general and administrative 68,168 64,016 Amortization of intangibles 2,405 2,064 Special charges -- Rockwell retained assets -- 20,000 Special charges -- other -- 17,906 --------- --------- Total operating expenses 159,050 175,095 --------- --------- Operating income (loss) 73,467 (97,171) Other income, net 578 (143) --------- --------- Income (loss) before provision (benefit) for income taxes 74,045 (97,314) Provision (benefit) for income taxes 22,214 (40,191) --------- --------- Net income (loss) $ 51,831 $ (57,123) ========= ========= Net income per share: Basic $ 0.26 ========= Diluted $ 0.24 ========= Number of shares used in per share computation: Basic 196,715 ========= Diluted 228,974 ========= </TABLE> See notes to consolidated condensed financial statements. 4 <PAGE> 5 CONEXANT SYSTEMS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited, in thousands) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, -------------------------- 1999 1998 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 51,831 $ (57,123) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 46,762 51,764 Deferred income taxes -- 11,564 Amortization of deferred compensation--restricted stock 449 -- Special charges -- Rockwell retained assets -- 20,000 Special charges -- other -- 17,906 Changes in assets and liabilities: Receivables (47,568) 30,606 Inventories 1,765 58,876 Accounts payable (40,642) (58,048) Accrued expenses and other current liabilities 30,535 16,771 Other 16,692 (35,310) --------- --------- Net cash provided by operating activities 59,824 57,006 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (84,656) (14,845) Investments in and advances to businesses (105,498) -- --------- --------- Net cash used in investing activities (190,154) (14,845) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of debt -- (725) Net transfers to Rockwell -- (42,154) Proceeds from exercise of stock options 9,330 -- --------- --------- Net cash provided by (used in) financing activities 9,330 (42,879) --------- --------- Net decrease in cash and cash equivalents (121,000) (718) Cash and cash equivalents at beginning of period 398,516 14,000 --------- --------- Cash and cash equivalents at end of period $ 277,516 $ 13,282 ========= ========= </TABLE> See notes to consolidated condensed financial statements. 5 <PAGE> 6 CONEXANT SYSTEMS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES On December 31, 1998, Conexant Systems, Inc. (formerly named Rockwell Semiconductor Systems, Inc.) (the "Company" or "Conexant"), became an independent, separately traded, publicly-held company when Rockwell International Corporation ("Rockwell") spun off its semiconductor systems business ("Semiconductor Systems") by means of a distribution (the "Distribution") of all the outstanding shares of common stock of the Company to the shareholders of Rockwell in a tax-free spin-off. In the Distribution, each Rockwell shareholder of record on December 11, 1998 received one share of Conexant common stock, along with an associated preferred share purchase right, for every two shares of Rockwell common stock (prior to the effect of Conexant's October 1999 stock split). The unaudited consolidated condensed financial statements through the date of the Distribution present the historical financial position, results of operations, and cash flows of Semiconductor Systems, as it was spun off, and exclude the assets, liabilities, and results of operations of non-semiconductor businesses retained by Rockwell. The financial statements prior to the Distribution are not necessarily indicative of what the financial position, results of operations, or cash flows would have been had Conexant been an independent public company during such periods. Financial data included in the accompanying unaudited consolidated condensed financial statements for periods subsequent to the Distribution have been prepared on a basis that reflects the historical assets, liabilities, and operations of the business contributed to Conexant by Rockwell. Prior to the Distribution, Rockwell provided certain management services that were allocated based on sales in proportion to total Rockwell sales. Rockwell continues to provide certain services to the Company (primarily research and development activities) under the terms of a transition agreement. Costs for these services and programs are billed to Conexant based on actual usage and are included in Conexant's unaudited consolidated condensed statements of operations. Management believes that the methods of billing these costs are reasonable and that the costs charged to Conexant are approximately those which would have been incurred on a stand-alone basis. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, as well as the special charges recorded in the first quarter of 1999 (see Note 2), necessary to present fairly the financial position, results of operations, and cash flows of Conexant. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. FISCAL PERIODS For presentation purposes, references made to the quarter ended December 31, 1998 relate to the actual fiscal 1999 first quarter ended January 1, 1999, as previously reported. STOCK SPLIT Common share and per common share amounts for all periods presented have been restated to reflect the two-for-one stock split (in the form of a dividend) effected on October 29, 1999 for shareholders of record as of September 24, 1999. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current period presentation. RECENT ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. When adopted, SFAS 133 will require the Company to record all derivatives as an asset or liability in the balance sheet, measured at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of derivatives will either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or be recognized in other comprehensive income until the hedged item is recognized in earnings. The 6 <PAGE> 7 change in a derivative's fair value related to the ineffective portion of a hedge, if any, will generally be immediately recognized in earnings. Implementation of SFAS 133 is required as of the beginning of fiscal year 2001 and is not expected to have a material effect on the Company's financial position or results of operations. 2. SPECIAL CHARGES ROCKWELL RETAINED ASSETS: Prior to the Distribution, the Company distributed its wafer fabrication facilities in Colorado Springs, Colorado (and the related tax benefit) to Rockwell. The transition agreement with Rockwell provided for the lease of the Colorado Springs facilities by Conexant through April 30, 1999, pursuant to a triple-net lease under which Conexant paid all costs of the facilities. In the first fiscal quarter of 1999, Conexant recorded a special charge for an additional asset impairment of $20 million for the Colorado Springs wafer fabrication facilities as a result of Rockwell's decision to further write-down the facilities, which were retained by Rockwell as part of the spin-off. This non-cash charge was required to be reported in the Company's last fiscal quarter as a subsidiary of Rockwell. OTHER: In the fourth fiscal quarter of 1998, Conexant restructured its business and recorded special charges of $147 million. In the first fiscal quarter of 1999, Conexant recorded additional special charges of $18 million. The additional charges include $17 million relating to the Voluntary Early Retirement Program (VERP) and $1 million relating to decommissioning equipment, activities at foreign subsidiaries, and contract cancellations at the Colorado Springs wafer fabrication facilities. The restructuring actions are substantially complete. 3. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) for the three months ended December 31, 1999 and 1998 is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, ------------------------ 1999 1998 -------- -------- <S> <C> <C> Net income (loss) $ 51,831 $(57,123) Other comprehensive income: Foreign currency translation adjustments 2,207 (3,845) Unrealized gains on marketable securities 43,856 1,726 Income taxes (16,744) -- -------- -------- Other comprehensive income (loss) 29,319 (2,119) -------- -------- Comprehensive income (loss) $ 81,150 $(59,242) ======== ======== </TABLE> Accumulated other comprehensive income consists of the following: <TABLE> <CAPTION> AS OF ---------------------------- DECEMBER 31, SEPTEMBER 30, 1999 1999 ----------- ------------- <S> <C> <C> Unrealized gains on marketable securities $ 43,856 $ -- Foreign currency translation adjustments 2,356 149 Income taxes (16,744) -- -------- -------- Accumulated other comprehensive income $ 29,468 $ 149 ======== ======== </TABLE> 4. NET INCOME (LOSS) PER SHARE Prior to the December 31, 1998 spin-off of Conexant from Rockwell, Conexant was not an independent company. Consequently, for periods prior to the spin-off, net income (loss) per share is not presented and pro forma net loss per share (computed as if the spin-off had occurred on October 1, 1998) is shown below. The number of pro forma weighted average shares outstanding used in the computation of pro forma net loss per share for the quarter ended December 31, 1998 was based upon the weighted average number of Rockwell shares and share equivalents outstanding during the period, adjusted for the distribution ratio of one share of the Company's common stock for every two shares of Rockwell common stock and for the effect of Conexant's October 1999 two-for-one stock split. These pro forma results are not indicative of future results. 7 <PAGE> 8 Pro forma basic and diluted loss per share for the quarter ended December 31, 1998 is as follows (in thousands, except per share data): THREE MONTHS ENDED DECEMBER 31, 1998 ----------------- Net loss $(57,123) Pro forma basic and diluted net loss per share $ (0.30) Pro forma basic and diluted weighted average common shares outstanding 189,870 The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, ------------------------- PRO FORMA 1999 1998 --------- --------- <S> <C> <C> Income: Net income (loss) available to common shareholders - basic $ 51,831 $ (57,123) Interest expense on convertible subordinated notes, net of tax 2,299 -- --------- --------- Net income (loss) available to common shareholders - diluted $ 54,130 $ (57,123) ========= ========= Shares: Weighted-average shares outstanding - basic 196,715 189,870 Effect of dilutive securities: Stock options 16,791 -- Restricted stock 315 -- Convertible subordinated notes 15,153 -- --------- --------- Weighted-average shares outstanding - diluted 228,974 189,870 ========= ========= Net income (loss) per share: Basic $ 0.26 $ (0.30) ========= ========= Diluted $ 0.24 $ (0.30) ========= ========= </TABLE> The effect of common share equivalents outstanding for the three months ended December 31, 1998 was not included in the computation of pro forma diluted loss per share as their effect was antidilutive. 5. INVENTORIES Inventories, net consist of the following (in thousands): DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- Raw materials, parts, and supplies $ 35,362 $ 29,998 Work-in-process 137,131 160,781 Finished goods 50,219 33,698 -------- -------- Inventories, net $222,712 $224,477 ======== ======== 6. CONTINGENT LIABILITIES Claims have been asserted against Conexant for utilizing the intellectual property rights of others in certain of the Company's products. The resolution of these matters may entail the negotiation of a license agreement, a settlement, or the resolution of such claims through arbitration or litigation. On October 14, 1997, Brent Townshend ("Townshend") filed suit against Rockwell and Conexant in the Superior Court of California for San Mateo County seeking an injunction to halt the sale of products containing Conexant's K56Flex(TM) chipsets and requesting unspecified damages, claiming that Conexant had engaged in unfair competition, misappropriation of trade secrets, breach of contract and breach of confidence by using technical information allegedly disclosed in confidence by Mr. Townshend to accelerate its 8 <PAGE> 9 development of 56 Kbps modem technology. In January 1999, Townshend dismissed his State Court action and re-filed the same claims and three new claims for patent infringement in the U.S. District Court for the Northern District of California. In the Federal action, Townshend alleges that each of his patents (the "Townshend Patents") covers certain aspects of the V.90 standard and are infringed by Conexant's 56 Kbps products. In the Federal action, Townshend seeks injunctive relief, compensatory damages, restitution and exemplary and punitive damages. Townshend and 3Com Corporation had publicly announced that 3Com was the exclusive licensee for the Townshend Patents and acted as Townshend's agent in sublicensing the Townshend Patents to third parties. More recently, Townshend and 3Com publicly announced that Townshend has reacquired exclusive control over the licensing and enforcement of the patents as well as other ownership rights, while 3Com retained a non-exclusive license to practice the Townshend inventions. Conexant has filed its answer to Townshend and counterclaims against Townshend and claims against 3Com. Conexant is vigorously defending its position that it independently developed the 56 Kbps modem technology using entirely its own skills and public domain information and will vigorously contest the infringement claims and the validity of the asserted patents. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against Rockwell or Conexant or their respective subsidiaries, including those pertaining to product liability, intellectual property, environmental, safety and health, and employment matters. In connection with the Distribution, Conexant assumed responsibility for all contingent liabilities and current and future litigation (including environmental and intellectual property proceedings) against Rockwell or its subsidiaries in respect of Semiconductor Systems. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to Conexant. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that a license will be granted. Injunctive relief could have a material adverse effect on the financial condition or results of operations of Conexant. Based on its evaluation of matters which are pending or asserted and taking into account Conexant's reserves for such matters, management of Conexant believes the disposition of such matters will not have a material adverse effect on the financial condition or results of operations of Conexant. 7. ACQUISITIONS In November 1999, Conexant acquired Istari Design Inc. ("Istari"), a provider of consulting and contract engineering services for communication systems design and implementation. The Company intends for Istari to be integrated with its product development organizations. Aggregate consideration for the acquisition was $6.0 million, paid in the form of $0.4 million cash and 100,506 shares of Conexant common stock. The transaction was recorded under the purchase method of accounting. In December 1999, Conexant entered into an agreement to acquire Maker Communications, Inc. ("Maker"), a fabless semiconductor company that develops and markets high-performance programmable network processors, software solutions, and development tools. Under the agreement, Conexant will issue 0.66 of a share of Conexant common stock in exchange for each share of Maker common stock. The transaction is subject to customary regulatory approvals and the approval of Maker's shareholders and, although there can be no assurance, is expected to be completed during the quarter ending March 31, 2000. Holders of approximately 35% of Maker's outstanding common stock have executed agreements to vote their shares in favor of the transaction. The total value of the consideration for the acquisition of Maker is approximately $957.1 million, based on the closing price of Conexant common stock on December 17, 1999 of $69.625. The acquisition of Maker will be recorded under the purchase method of accounting. In October 1999, Conexant entered into a $150 million strategic agreement with a vendor under which Conexant will receive foundry capacity to support its future growth. As part of the agreement, Conexant advanced $75 million to the vendor and will advance an additional $75 million to the vendor in fiscal 2001. 8. SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid for interest, net of amounts capitalized, for the three months ended December 31, 1999 was $6.4 million. Cash paid for income taxes for the three months ended December 31, 1999 was approximately $9.5 million. For the three months ended December 31, 1998, all interest and income tax payments were made by Rockwell. Significant noncash transactions during the three months ended December 31, 1999 include income tax benefits of approximately $52.7 million resulting from employee stock transactions which were credited to additional capital. During the three months ended 9 <PAGE> 10 December 31, 1998, Conexant transferred its wafer fabrication facilities in Colorado Springs, Colorado (and the related tax benefit) with a book value of approximately $59 million to Rockwell as well as certain other tax benefits of $25 million related to a litigation matter. 9. SUBSEQUENT EVENTS ACQUISITIONS In January 2000, Conexant acquired Microcosm Communications Limited ("Microcosm"), a technology leader in the field of high-speed integrated circuits for fiber optic communications located in Bristol, England. The purchase price was approximately $129 million, subject to a holdback of approximately $18 million to pay contingent indemnification obligations. The closing payment was made by delivery of 1,523,430 shares of common stock to the shareholders of Microcosm and 94,078 stock options to the option holders of Microcosm. Certain shareholders and option holders of Microcosm could receive additional consideration of up to approximately $52 million, payable in the form of shares of common stock and stock options, if certain performance and technology goals are achieved. Also in January 2000, Conexant acquired the wireless broadband business unit of Oak Technology, Inc. located in Bristol, England through the acquisition of all outstanding ordinary shares of its wholly-owned subsidiary, Oak Technology Ltd. and certain assets related to that business. The purchase price was approximately $25 million, paid in a combination of 293,794 shares of Conexant common stock and $5 million in cash. In connection with these acquisitions, Conexant granted the sellers certain registration rights. The acquisitions of Microcosm and the wireless broadband business unit of Oak Technology, Inc. will each be recorded under the purchase method of accounting. CONVERTIBLE SUBORDINATED NOTES In February 2000, Conexant completed a private offering of $650 million principal amount of its 4% Convertible Subordinated Notes due 2007 for net proceeds (after costs of issuance) of approximately $632 million. The notes are general unsecured obligations of Conexant and interest on the notes is payable in arrears semiannually on each February 1 and August 1. The notes are convertible, at the option of the holder, into shares of the Company's common stock at a conversion price of $108 per share, subject to certain adjustments. The notes may be redeemed, at Conexant's option, on or after February 6, 2003 at a declining premium to par. 10 <PAGE> 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. The results of operations for the periods prior to the January 1, 1999 spin-off from Rockwell reflect the Company's operations as a subsidiary of Rockwell. The results of operations subsequent to that date reflect the Company's operations as a stand-alone entity. The results of operations for periods when the Company was a subsidiary of Rockwell may not be indicative of the results of operations of the Company had it been a stand-alone entity during such periods. RESULTS OF OPERATIONS The following table summarizes the net revenues of the Company's five product platforms (dollars in thousands): THREE MONTHS ENDED DECEMBER 31, ----------------------------------------- 1999 1998 ----------------- ------------------ Personal Computing $190,096 38% $152,277 52% Network Access 118,547 23 41,727 14 Wireless Communications 103,018 20 45,214 15 Digital Infotainment 67,126 13 39,444 13 Personal Imaging 31,176 6 16,016 6 --------- --- -------- --- Totals $509,963 100% $294,678 100% ======== === ======== === NET REVENUES: Net revenues of $510.0 million for the first quarter of fiscal 2000, compared to $294.7 million for the first quarter of fiscal 1999, included revenue growth in each of the Company's product platforms. The "expansion platform" products (all products excluding the Personal Computing products) continue to be the Company's fastest-growing products. Net revenues for Personal Computing increased by 25% for the first quarter of fiscal 2000 over the first quarter of fiscal 1999. The increase principally reflects increasing unit volume in PC-based dial-up modems, led by the Company's V.90 software modem, partially offset by lower average selling prices and the ongoing shift toward lower priced products. Net revenues for the Network Access product platform increased 184% for the first quarter of fiscal 2000 over the first quarter of fiscal 1999 as demand continued to be fueled by the ongoing global upgrading of the Internet infrastructure. Shipments of the AnyPort multi-service access product family had significant growth as networking original equipment manufacturers continued their deployment of IP gateways. Revenue growth among the Company's broadband access portfolio, including symmetrical and asymmetrical digital subscriber line products, resulted from continued strong demand from a broad customer base of DSL access multiplexer and customer premise equipment manufacturers. Finally, the Company's WAN transport portfolio had significant growth as the result of the strong demand in the T/E framers, ATM, and SONET product portfolios. Within the Wireless Communications platform, net revenues increased 128% for the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999. Demand for digital cellular handsets remains strong worldwide. There was continued growth in shipments of power amplifiers and radio frequency subsystems used in both CDMA and GSM digital cellular handsets, along with substantial growth in DSS chipsets for digital cordless telephone applications. For our Digital Infotainment platform, net revenues increased 70% for the first quarter of fiscal 2000 over the first quarter of fiscal 1999. The revenue growth reflects solid demand for PCI and side-port video decoders (for "TV in the PC" applications), satellite set-top box tuners and demodulators, and back-channel telephony solutions. Net revenues for Personal Imaging increased 95% for first quarter of fiscal 2000 over the first quarter of fiscal 1999. The increase was mainly due to record unit shipments of fax modems and facsimile engines to leading office equipment OEMs and increased penetration of the expanding multifunction peripheral market. In addition, revenues for the first quarter of fiscal 1999 were affected by the economic recession in the Asia-Pacific markets during that period. GROSS MARGIN: Gross margin was $232.5 million (46% of net revenues) for the first quarter of fiscal 2000, compared to $77.9 million (26% of net revenues) for the similar period in fiscal 1999. The gross margins achieved in the first quarter of fiscal 2000 11 <PAGE> 12 reflect better product mix, and higher factory utilization at our wafer fabrication facilities. In addition, gross margin for the first quarter of fiscal 1999 was adversely affected by unusually high inventory costs which resulted from low manufacturing capacity utilization during the preceding four months. RESEARCH AND DEVELOPMENT: Research and development expenses were $88.5 million for the first quarter of fiscal 2000, compared to $71.1 million for the first quarter of fiscal 1999. The first quarter of fiscal 1999 reflects certain cost-cutting actions taken in the fourth quarter of fiscal 1998, including headcount reductions, design center closures, and certain project cancellations. The increase in expenses for the fiscal 2000 first quarter reflects higher engineering headcount and related costs associated with the Company's refocused efforts to develop technology to expand its product portfolio. SELLING, GENERAL, AND ADMINISTRATIVE: Selling, general, and administrative expenses were $68.2 million (13% of sales) for the first quarter of fiscal 2000 compared to $64.0 million (22% of sales) for the first quarter of fiscal 1999. The change reflects the Company's increased investment in its sales and marketing organizations, partially offset by lower spending for advertising and purchased services. The Company also incurred higher compensation and related expenses in the fiscal 2000 first quarter, principally reflecting the development of corporate infrastructure to support Conexant's recent and anticipated future growth. SPECIAL CHARGES - ROCKWELL RETAINED ASSETS: In the first quarter of fiscal 1999, Conexant recorded a special charge for an additional asset impairment of $20 million for the Colorado Springs wafer fabrication facilities as a result of Rockwell's decision to further write-down the facilities, which were retained by Rockwell as part of the spin-off. This non-cash charge was required to be reported in the Company's last fiscal quarter as a subsidiary of Rockwell. SPECIAL CHARGES - OTHER: In the first fiscal quarter of 1999, Conexant recorded additional special charges of approximately $18 million. The additional charges include approximately $17 million relating to a voluntary early retirement program and $1 million relating to decommissioning equipment, activities at foreign subsidiaries, and contract cancellations at the Colorado Springs wafer fabrication facilities. OTHER INCOME, NET: Other income, net was $0.6 million for the first quarter of fiscal 2000, compared to net expenses of $0.1 million for the similar period in fiscal 1999. Other income for the first quarter of fiscal 2000 reflects increased interest income resulting from higher invested cash balances, partially offset by the interest expense on the $350 million convertible notes. PROVISION (BENEFIT) FOR INCOME TAXES: The income tax provision for the first quarter of fiscal 2000 was $22.2 million (approximately 30% of pretax income). In the similar period of fiscal 1999, an income tax benefit of $40.2 million was recorded due to a loss from operations. The tax rate reflects the positive impact of various tax credits available to the Company, including state tax credits and federal research and experimentation tax credits. However, the Company's book effective tax rate will increase in the second quarter of fiscal 2000 as a result of nondeductible amortization of goodwill resulting from the recently completed acquisitions of Microcosm and the wireless broadband business unit of Oak Technology Inc., and from the pending acquisition of Maker Communications, Inc. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $59.8 million for the first quarter of fiscal 2000, compared to cash provided by operating activities of $57.0 million for the similar period in fiscal 1999. Operating cash flows reflect the Company's net income of $51.8 million and noncash charges of $47.2 million, offset by net working capital increases of approximately $39.2 million. The working capital increases include a $47.6 million increase in receivables principally due to increased sales and a $40.6 million decrease in accounts payable due to the timing of vendor payments. These amounts were partially offset by a $30.5 million increase in accrued expenses and other current liabilities, a $13.0 million reduction of prepaid expenses, and other working capital changes. Investing activities used $190.2 million of cash during the first quarter of fiscal 2000, compared to $14.8 million for the similar period in fiscal 1999. Capital expenditures totaled $84.7 million during the most recent period, as the Company increased its investment in new process technologies including its gallium arsenide wafer manufacturing facility in Newbury Park, California and the expansion of its assembly and test operations in Mexicali, Mexico. In addition, the Company made investments in, or advances to, businesses totaling $105.5 million, including a $75.0 million advance to a vendor and approximately $30.5 million of equity investments, principally in early-stage communications technology companies. The vendor advance was made pursuant to a multi-year wafer supply agreement under which the Company will receive foundry capacity to support future growth. Cash used in 12 <PAGE> 13 investing activities during the comparable period of the prior year for capital expenditures ($14.8 million) reflects the results of activities associated with its restructuring plan in anticipation of the spin-off from Rockwell. The Company's financing activities provided cash of $9.3 million during the first quarter of fiscal 2000, representing proceeds from the exercise of stock options. During the similar period of fiscal 1999, cash used in financing activities of $42.9 million was principally transfers of available cash balances to Rockwell. The Company's principal sources of liquidity are its existing cash reserves, cash generated from operations, and available borrowings under its $350 million secured credit facility. As of December 31, 1999, there were no borrowings outstanding under the credit facility. Cash and cash equivalents at December 31, 1999 totaled $277.5 million compared to $398.5 million at September 30, 1999. Working capital at December 31, 1999 totaled $577.8 million compared to $604.5 million at September 30, 1999. In addition, in February 2000 Conexant completed the sale of $650 million principal amount of its 4% Convertible Subordinated Notes due 2007 for net proceeds (after costs of issuance) of approximately $632 million. The notes are general unsecured obligations of Conexant and interest on the notes is payable in arrears semiannually on each February 1 and August 1. The notes are convertible, at the option of the holder, into shares of the Company's common stock at a conversion price of $108 per share, subject to certain adjustments. The notes may be redeemed, at Conexant's option, on or after February 6, 2003 at a declining premium to par. The Company believes that its existing sources of liquidity, along with cash expected to be generated from future operations, will be sufficient to fund operations, research and development efforts, and anticipated capital expenditures and advances for the foreseeable future. However, the Company continues to evaluate acquisition opportunities to extend its technology portfolio and design expertise and expand its product offerings. In addition the Company's manufacturing operations are capital intensive, and the Company may need to increase its capital spending to obtain sufficient manufacturing capacity to support continued revenue growth. In order to complete any such acquisitions or increased capital expenditures, the Company may seek to obtain additional borrowings or issue additional shares of its common stock. There can be no assurance that such financing will be available on terms favorable to the Company, or at all. RECENT ACQUISITIONS In December 1999, Conexant entered into an agreement to acquire Maker Communications, Inc., a fabless semiconductor company that develops and markets high-performance programmable network processors, software solutions, and development tools. Under the agreement, Conexant will issue 0.66 of a share of Conexant common stock in exchange for each share of Maker common stock. The total value of the consideration for the acquisition of Maker is approximately $957.1 million, based on the closing price of Conexant common stock on December 17, 1999 of $69.625. The transaction is subject to customary closing conditions, including regulatory approvals and the approval of Maker's shareholders. While no assurance can be given, the transaction is expected to be completed during the second quarter of fiscal 2000. The acquisitions will each be recorded under the purchase method of accounting. As a result of the acquisitions of Microcosm and the wireless broadband business unit of Oak Technology, Inc., and assuming completion of the acquisition of Maker, the Company expects to record additional goodwill and intangible assets of approximately $1.0 billion. In each of the five years following the acquisitions, we expect to record approximately $207 million of non-deductible amortization of intangible assets. In addition, upon completion of each of these acquisitions, the Company expects to record a non-recurring charge for the value of the purchased in-process research and development, the amounts of which have not been finally determined. The purchase price allocation for each of these acquisitions, including the amount of the charge for purchased in-process research and development, is preliminary and will be revised upon receipt of final valuation information. Such revisions to the purchase price allocation will also affect the amounts of amortization of intangible assets. YEAR 2000 READINESS DISCLOSURE During the first week of calendar 2000, Conexant completed the transition from calendar 1999 to calendar 2000 with no significant reported impact on its operations. The Company continues to monitor its products, business systems, infrastructure, and manufacturing systems to ensure that latent defects do not manifest themselves over the next few months. However, there can be no assurance that Year 2000 issues will not have a material adverse impact on the Company, since the Company's evaluation process is not yet complete and it is early in the year 2000. 13 <PAGE> 14 In addition, the Company continues to monitor the impact of the Year 2000 on those suppliers and other third parties on whom the Company is dependent for key raw materials, components, products, or services. Based upon information currently available, the Company believes that its most reasonably likely worst case Year 2000 scenario would relate to a temporary disruption in the supply of key raw materials, components, products, or services resulting from problems with the systems and services of third parties, rather than with its internal systems or products. The Company continues to maintain critical supplier contingency plans, including alternate sourcing and stockpiling of materials, and these plans will be validated and modified as needed as the Company learns about disruptions, if any, caused by the Year 2000 date rollover. Conexant incurred total costs of approximately $6 million, including the cost of purchasing certain hardware and software, to complete its Year 2000 project. Approximately $5 million of this amount was for capital investments, with the remainder (primarily salary costs) charged to expense as incurred. Monitoring costs or other Year 2000 project costs past January 1, 2000 are not expected to be significant. CAUTIONARY STATEMENT This Quarterly Report 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. These risks and uncertainties include, but are not limited to: global economic and market conditions, including the cyclical nature of the semiconductor industry and the markets addressed by the Company's and its customers' products; demand for, and market acceptance of, new and existing products; successful development of new products; the timing of new product introductions; the successful integration of acquisitions; the availability and extent of utilization of manufacturing capacity and raw materials; pricing pressures and other competitive factors; changes in product mix; fluctuations in manufacturing yields; product obsolescence; the ability to develop and implement new technologies and to obtain protection of the related intellectual property; the successful implementation of the Company's diversification strategy; labor relations of the Company, its customers and suppliers; and the uncertainties of litigation, as well as other risks and uncertainties including those discussed in the Company's Annual Report on Form 10-K for the year ended September 30, 1999 or detailed from time to time in the Company's Securities and Exchange Commission filings. Reference is made to the "Certain Business Risks" section on pages 10 to 20 of the Annual Report. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and cash equivalents, marketable securities, and long-term debt. At December 31, 1999, the carrying values of the Company's cash and cash equivalents approximated their carrying value due to the short maturities of these instruments. The Company's long-term debt consists of convertible subordinated notes with interest at a fixed rate. Consequently, the Company does not have significant cash flow exposure on its long-term debt. However, the fair value of the convertible subordinated notes is subject to significant fluctuation due to their convertibility into shares of Conexant common stock. The Company's marketable securities consist of an equity investment in a semiconductor company, initially made for the promotion of business and strategic objectives, which are subject to equity price risk. Such securities are classified as available for sale and, as of December 31, 1999, unrealized gains of $27.1 million (net of related income taxes of $16.7 million) on these securities are included in other comprehensive income. The following table shows the fair values of the Company's investments and its long-term debt as of December 31, 1999 (in thousands): Carrying Value Fair Value -------------- ---------- Cash and equivalents $277,516 $ 277,516 Marketable securities (including unrealized gains of $43.9 million) 59,234 59,234 Long-term debt 350,000 1,033,000 The Company transacts business in various foreign currencies, and the Company has established a foreign currency hedging program utilizing foreign currency forward exchange contracts to hedge certain foreign currency transaction exposures (principally the Japanese yen). Under this program, the Company seeks to offset foreign currency transaction gains and losses with gains and losses on the forward contracts, so as to mitigate its overall risk of foreign transaction gains and losses. The Company does not enter into forward contracts for trading purposes. At December 31, 1999, the Company held foreign currency forward exchange contracts 14 <PAGE> 15 (principally to sell Japanese yen at specified rates) having an aggregate notional amount of $49.8 million, at a notional weighted average exchange rate of approximately 102.1 yen to one dollar. The gains and losses relating to these forward contracts are deferred and included in the measurement of the foreign currency transaction subject to the hedge. The net unrealized gain/loss on the forward contracts outstanding at December 31, 1999 was not material to the Company's consolidated financial statements. Based on the Company's overall currency rate exposure at December 31, 1999, a 10 percent change in currency rates would not have had a material effect on the financial position, results of operations or cash flows of the Company. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 14, 1997, Brent Townshend ("Townshend") filed suit against Rockwell and Conexant in the Superior Court of California for San Mateo County seeking an injunction to halt the sale of products containing Conexant's K56Flex(TM) chipsets and requesting unspecified damages, claiming that Conexant had engaged in unfair competition, misappropriation of trade secrets, breach of contract and breach of confidence by using technical information allegedly disclosed in confidence by Mr. Townshend to accelerate its development of 56 Kbps modem technology. In January 1999, Townshend dismissed his State Court action and re-filed the same claims and three new claims for patent infringement in the U.S. District Court for the Northern District of California. In the Federal action, Townshend alleges that each of his patents (the "Townshend Patents") covers certain aspects of the V.90 standard and are infringed by Conexant's 56 Kbps products. In the Federal action, Townshend seeks injunctive relief, compensatory damages, restitution and exemplary and punitive damages. Townshend and 3Com Corporation had publicly announced that 3Com was the exclusive licensee for the Townshend Patents and acted as Townshend's agent in sublicensing the Townshend Patents to third parties. More recently, Townshend and 3Com publicly announced that Townshend has reacquired exclusive control over the licensing and enforcement of the patents as well as other ownership rights, while 3Com retained a non-exclusive license to practice the Townshend inventions. Conexant has filed its answer to Townshend and counterclaims against Townshend and claims against 3Com. Conexant is vigorously defending its position that it independently developed the 56 Kbps modem technology using entirely its own skills and public domain information and will vigorously contest the infringement claims and the validity of the asserted patents. On July 29, 1991, Shumpei Yamazaki filed suit against a Japanese subsidiary of Rockwell in the Tokyo District Court, Twenty-ninth Civil Division for patent infringement relating to Conexant's facsimile modem chipsets seeking 685 million yen (approximately $6.4 million based on the exchange rate on January 31, 2000) and court costs. In October 1998, the District Court rendered its decision dismissing the suit, from which decision Mr. Yamazaki appealed. On April 12, 1999, Mr. Yamazaki presented his position, as well as additional causes of action at the first portion of the appellate hearing. Conexant presented its position to the appellate court on June 16, 1999. The Court will hear arguments on Mr. Yamazaki's new causes of action in April 2000. Conexant believes it has meritorious defenses to these claims and is vigorously defending this action. On May 30, 1997, Klaus Holtz filed suit against Rockwell in the U.S. District Court for the Northern District of California for patent infringement relating to Conexant's modem products utilizing the V.42bis standard for data compression. On September 30, 1998, the Court barred any alleged damages arising before May 30, 1997. On December 17, 1998, the Court issued an order construing the claims of the patent. Conexant filed a motion for Summary Judgment of Non-Infringement on February 22, 1999. A hearing was held thereon on June 14, 1999. On October 25, 1999, the Company was notified that the Court found in favor of the Company and the case was dismissed. Holtz filed a notice of appeal to the court of appeals for the Federal circuit on November 18, 1999. Conexant believes it has meritorious defenses to these claims and is vigorously defending this action. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against Rockwell or Conexant or their respective subsidiaries, including those pertaining to product liability, intellectual property, environmental, safety and health, and employment matters. In connection with the Distribution, Conexant assumed responsibility for all current and future litigation (including environmental and intellectual property proceedings) against Rockwell or its subsidiaries in respect of Semiconductor Systems. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to Conexant. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that a license will be granted. Injunctive relief could have a material adverse effect on the financial condition or results of operations of Conexant. 15 <PAGE> 16 Based on its evaluation of matters which are pending or asserted and taking into account Conexant's reserves for such matters, management of Conexant believes the disposition of such matters will not have a material adverse effect on the financial condition or results of operations of Conexant. ITEM 2. CHANGES IN SECURITIES In November 1999, in connection with the Company's acquisition of Istari Design Inc., the Company issued 100,506 shares of its common stock pursuant to an exemption from registration. The holders of such shares have been granted certain registration rights. In January 2000, the Company issued shares of its common stock in connection with the acquisitions of Microcosm Communications Limited (1,523,430 shares) and the wireless broadband business unit of Oak Technology, Inc. (293,794 shares), in each case pursuant to an exemption from registration. The holders of such shares have been granted certain registration rights. Each outstanding share of common stock, par value $1 per share, of Conexant also evidences one preferred share purchase right. Each preferred share purchase right entitles the registered holder to purchase from Conexant one two-hundredth of a share of Series A Junior Participating Preferred Stock. Pursuant to the First Amendment to Rights Agreement dated as of December 9, 1999 between Conexant and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, the Rights Agreement dated as of November 30, 1998 was amended to increase the exercise price of each preferred share purchase right to $300, subject to adjustment. In addition, the Rights Agreement was amended to provide that in connection with the issuance or sale of our common stock following the date the preferred share purchase rights are no longer attached to the common stock (the "Distribution Date") and prior to the earlier of (1) the date the preferred share purchase rights are redeemed and (2) the date the preferred share purchase rights expire, (a) Conexant will, with respect to common stock issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement in existence prior to the Distribution Date, or upon the exercise, conversion or exchange of securities, notes or debentures (pursuant to the terms thereof) issued by Conexant and in existence prior to the Distribution Date, and (b) Conexant may, in any other case, if deemed necessary or appropriate by the board of directors, issue certificates representing the appropriate number of preferred share purchase rights in connection with such issuance or sale. Conexant will not be obligated to issue any of these certificates if, and to the extent that, Conexant is advised by counsel that the issuance of those certificates would create a significant risk of material adverse tax consequences to Conexant or the person to whom such certificate would be issued or would create a significant risk that the stock options or employee plans or arrangements would fail to qualify for otherwise available special tax treatment. In addition, no certificate will be issued if, and to the extent that, appropriate adjustments otherwise have been made in lieu of the issuance thereof. ITEM 5. OTHER INFORMATION In February 2000, Conexant completed the sale of $650 million principal amount (including $150 million principal amount sold pursuant to an option granted to the initial purchaser) of its 4% Convertible Subordinated Notes due 2007 for net proceeds (after costs of issuance) of approximately $632 million. The press release announcing this transaction is filed as Exhibit 99.1 hereto. 16 <PAGE> 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 2.1 Agreement and Plan of Merger, dated as of December 18, 1999, among Conexant Systems, Inc., Merlot Acquisition Corp. and Maker Communications, Inc., filed as Exhibit 2.01 to the Company's Registration Statement on Form S-4 (Registration No. 333-96033), incorporated herein by reference. 2.2 Stock Purchase Agreement, dated as of January 6, 2000, by and among Conexant Systems, Inc. and the shareholders and option holders of Microcosm Communications Limited. 4.1 First Amendment to Rights Agreement, dated as of December 9, 1999, between Conexant Systems, Inc. and ChaseMellon Shareholder Services, L.L.C., as rights agent. 4.2 Indenture, dated as of February 1, 2000, between the Company and Bank One Trust Company, National Association, as trustee, including the form of the Company's 4% Convertible Subordinated Notes Due February 1, 2007 attached as Exhibit A thereto, filed as Exhibit 4.04 to the Company's Registration Statement on Form S-4 (Registration No. 333-96033), incorporated herein by reference. 10.1 Fourth Amendment to Loan Documents, dated as of November 23, 1999 among Conexant Systems, Inc., certain of its subsidiaries, the Lenders and the Issuing Banks thereunder, and Credit Suisse First Boston, as administrative agent. 12 Statement re: computation of ratios. 27 Financial Data Schedule. 99.1 Press release dated January 28, 2000, relating to offering of $500 million convertible subordinated notes. (b) Reports on Form 8-K Report on Form 8-K dated January 4, 2000, as amended January 11, 2000, reporting the Company's agreement to acquire Maker Communications, Inc. The Company did not file any Current Reports on Form 8-K during the quarter ended December 31, 1999. 17 <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. CONEXANT SYSTEMS, INC. (Registrant) Date: February 11, 2000 By /s/ Balakrishnan S. Iyer ---------------------------------- Balakrishnan S. Iyer Senior Vice President and Chief Financial Officer (principal financial officer) Date: February 11, 2000 By /s/ Steven M. Thomson ---------------------------------- Steven M. Thomson Vice President and Controller (principal accounting officer) Date: February 11, 2000 By /s/ Dennis E. O'Reilly ---------------------------------- Dennis E. O'Reilly Senior Vice President, General Counsel and Secretary 18 <PAGE> 19 EXHIBIT INDEX 2.2 Stock Purchase Agreement, dated as of January 6, 2000, by and among Conexant Systems, Inc. and the shareholders and option holders of Microcosm Communications Limited. 4.1 First Amendment to Rights Agreement, dated as of December 9, 1999, between Conexant Systems, Inc. and ChaseMellon Shareholder Services, L.L.C., as rights agent. 10.1 Fourth Amendment to Loan Documents, dated as of November 23, 1999 among Conexant Systems, Inc., certain of its subsidiaries, the Lenders and the Issuing Banks thereunder, and Credit Suisse First Boston, as administrative agent. 12 Statement re: computation of ratios. 27 Financial Data Schedule. 99.1 Press release dated January 28, 2000, relating to offering of $500 million convertible subordinated notes. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-2.2 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 2.2 <TEXT> <PAGE> 1 EXHIBIT 2.2 ================================================================================ STOCK PURCHASE AGREEMENT by and among CONEXANT SYSTEMS, INC. and THE SHAREHOLDERS AND OPTION HOLDERS OF MICROCOSM COMMUNICATIONS LIMITED ---------------------------------- Dated as of January 6, 2000 ----------------------------------- ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> ARTICLE I Definitions........................................................2 ARTICLE II PURCHASE AND SALE OF SHARES AND EXCHANGE OF OPTIONS..............17 Section 2.1. Purchase and Sale of Shares and Exchange of Options.......17 Section 2.2. Closing Payments..........................................18 Section 2.3. Payment of Indemnification Holdback.......................20 Section 2.4. Technology Earn-Out.......................................25 Section 2.5. Performance Earn-Out......................................27 Section 2.6. Buyer Stock and Buyer Options.............................30 Section 2.7. Earn-Out Protections......................................33 Section 2.8. Consideration Adjustments.................................35 Section 2.9. Pond Stock Certificates...................................36 ARTICLE III CLOSING.........................................................37 Section 3.1. Closing...................................................37 Section 3.2. Closing Deliveries of Sellers.............................37 Section 3.3. Closing Deliveries of Buyer...............................38 Section 3.4. Transfer Taxes............................................39 Section 3.5. Non-Warrantor Sellers Finders' Fees.......................39 Section 3.6. Sellers Expense Amount....................................40 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF EACH SELLER....................40 ARTICLE V REPRESENTATIONS AND WARRANTIES OF WARRANTOR SELLERS...............40 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER..........................40 ARTICLE VII COVENANTS.......................................................40 Section 7.1. Public Announcements......................................40 Section 7.2. Further Assurances........................................41 Section 7.3. Confidential Information..................................41 </TABLE> i <PAGE> 3 <TABLE> <CAPTION> Page ---- <S> <C> Section 7.4. Registration Rights.......................................42 Section 7.5. Employment Matters........................................43 Section 7.6. Power of Attorney.........................................43 Section 7.7. Stock Certificates; Option Agreements.....................43 ARTICLE VIII RELEASES AND WAIVERS...........................................44 Section 8.1. General Release...........................................44 Section 8.2. Waiver of Preemptive Rights...............................45 ARTICLE IX [INTENTIONALLY OMITTED]..........................................46 ARTICLE X [INTENTIONALLY OMITTED]...........................................46 ARTICLE XI SURVIVAL.........................................................46 Section 11.1. Survival..................................................46 ARTICLE XII INDEMNIFICATION.................................................47 Section 12.1. Individual Warrantor Indemnification......................47 Section 12.2. Joint Warrantor Indemnification...........................47 Section 12.3. Buyer Indemnification.....................................48 Section 12.4. Indemnification Procedures................................48 Section 12.5. Procedures for Third Party Claims.........................53 Section 12.6. Certain Rights and Limitations............................57 ARTICLE XIII RESTRICTIVE COVENANT...........................................63 Section 13.1. Non-compete...............................................63 Section 13.2. Non-solicitation of Employees.............................64 Section 13.3. Remedies..................................................64 Section 13.4. Severability..............................................64 Section 13.5. Non-exclusivity...........................................64 ARTICLE XIV GENERAL PROVISIONS..............................................65 Section 14.1. Assignment................................................65 Section 14.2. Parties in Interest.......................................65 Section 14.3. Amendment.................................................66 Section 14.4. Waiver; Remedies..........................................66 Section 14.5. [Intentionally omitted]...................................66 Section 14.6. Fees and Expenses.........................................66 Section 14.7. Notices...................................................67 </TABLE> ii <PAGE> 4 <TABLE> <CAPTION> Page ---- <S> <C> Section 14.8. Captions; Currency........................................69 Section 14.9. Entire Agreement..........................................69 Section 14.10. Severability..............................................70 Section 14.11. Consent to Jurisdiction; Waiver of Jury Trial.............70 Section 14.12. Schedules and Exhibits; Disclosure........................71 Section 14.13. Governing Law.............................................72 Section 14.14. Counterparts..............................................72 Section 14.15. Specific Performance......................................72 Section 14.16. Construction; Interpretation..............................72 Section 14.17. Performance by Certain Affiliates.........................73 Section 14.18. Warrantor Representative..................................73 Section 14.19. Non-Warrantor Representative..............................76 </TABLE> iii <PAGE> 5 <TABLE> <CAPTION> EXHIBITS -------- <S> <C> Exhibit A - Technology Milestones Exhibit B - Representations and Warranties of Each Seller Exhibit C - Representations and Warranties of Warrantor Sellers Exhibit D - Representations and Warranties of Buyer </TABLE> <TABLE> <CAPTION> SCHEDULES --------- <S> <C> Schedule 2.2 - Closing Payments; Sellers Expense Amounts Schedule 3.5 - Non-Warrantor Sellers Finders' Fees Schedule 4.4 - Title to Stock Schedule 4.5 - Government Approvals Schedule 5.1 - Foreign Establishments and Jurisdictions in which the Company Transacts Business Schedule 5.2 - No Breach Schedule 5.3 - Company Stock and Options Outstanding Schedule 5.5 - Affiliate Transactions Schedule 5.6(g) - Residence for Tax Purposes Schedule 5.6(j) - Tax Correspondence Schedule 5.6(p) - Tax Audit Matters Schedule 5.6(u) - Stamp Duty Schedule 5.7(b) - Commitments Relating to Intellectual Property Schedule 5.7(c) - Intellectual Property Matters Schedule 5.7(d) - Confidentiality Schedule 5.8(a) - Debenture Schedule 5.8(c) - Leased Premises Schedule 5.9(a) - Contracts Schedule 5.9(b) - Certain Contracts Schedule 5.9(c) - Contract Matters Schedule 5.9(d) - Change in Control Provisions Schedule 5.10(a) - Litigation Schedule 5.12(a) - Statutory Accounts and Management Accounts Schedule 5.12(b) - Liabilities Schedule 5.12(e) - Year 2000 Schedule 5.13(a) - Compliance with Laws Schedule 5.14 - Licenses </TABLE> iv <PAGE> 6 <TABLE> <S> <C> Schedule 5.15(a) - Collective Bargaining Schedule 5.15(b) - Plans Schedule 5.15(c) - Employee Agreements Schedule 5.15(d) - Employee Information Schedule 5.15(e) - Non-UK Employees Schedule 5.16(a) - Material Adverse Effect Schedule 5.16(b) - Material Events Schedule 5.18 - Governmental Approvals Schedule 5.20(a) - Insurance Policies Schedule 5.20(b) - Insurance Against All Risks Schedule 5.21 - Bank Accounts and Powers of Attorney Schedule 5.23 - Supplemental Information Reviewed by the Buyer and/or Its Legal and Financial Advisors Schedule 7.4(a) - Registration Rights Schedule 7.5 - Employment Matters </TABLE> v <PAGE> 7 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of January 6, 2000 by and between CONEXANT SYSTEMS, INC., a Delaware corporation ("Buyer"), the shareholders of MICROCOSM COMMUNICATIONS LIMITED, a corporation incorporated under the laws of England and Wales (registration number 3116655) (the "Company"), set forth on the signature pages hereof (each a "Shareholder" and collectively, the "Shareholders"), and the option holders of the Company set forth on the signature pages hereof (each an "Option Holder" and collectively, the "Option Holders" and, together with the Shareholders, the "Sellers"). W I T N E S S E T H : WHEREAS, the Shareholders are the registered holders of all the issued (a) ordinary shares, par value 0.0333 pence each (the "Ordinary Shares"), of the Company, (b) A ordinary shares, par value 0.0333 pence each (the "Class A Shares"), of the Company and (c) convertible redeemable preference shares, par value 0.0333 pence each (the "Preference Shares"), of the Company (the Ordinary Shares, the Class A Shares and the Preference Shares are sometimes referred to herein collectively as the "Shares"); and WHEREAS, the Option Holders are the owners of all the Company Options (as defined below) granted and unexercised immediately prior to the Closing (as defined below); WHEREAS, Buyer desires to purchase from Sellers, and Sellers desire to sell to Buyer, all of the issued Shares and Buyer and Sellers desire to cancel all Company Options in exchange for the grant of Buyer Options (as defined below) upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties, covenants and agreements hereinafter contained, the parties agree as follows: <PAGE> 8 ARTICLE I DEFINITIONS For purposes of this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): "Action" means any legal, administrative, governmental or regulatory proceeding or other action, suit, proceeding, claim, arbitration, mediation, alternative dispute resolution procedure, inquiry or investigation by or before any arbitrator, mediator, court or other Governmental Entity. "Adjusted Sum" shall have the meaning set forth in Section 2.8(a)(i). "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of the immediately preceding sentence, the term "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities, by contract or otherwise. "Aggregate Closing Consideration" means One Hundred Twenty Million dollars ($120,000,000), less the Sellers Expense Amount. "Aggregate Unresolved Indemnity Claim Amount" means an amount equal to the aggregate Indemnity Claim Amounts set forth in all Notices of Claim that have been given by Buyer on or prior to the Holdback Release Date that remain outstanding and unresolved on that date, except to the extent that Buyer no longer has the right to claim any portion of the Indemnity Claim Amount set forth in any such Notice of Claim by reason of the provisions of Section 12.4(b)(ii)(4), as such amount may be reduced from time to time after the Holdback Release Date to the extent that any 2 <PAGE> 9 such Indemnity Claim Amount is resolved and no longer outstanding. "Agreement" means this Stock Purchase Agreement, as the same may be amended, modified or supplemented from time to time in accordance with its terms. "Audit Notice" shall have the meaning set forth in Section 2.5(c). "Authorized Agent" shall have the meaning set forth in Section 14.11(a). "Business" means the business and operations of the Company as conducted on the date hereof, including (i) researching, developing, designing, engineering, manufacturing, selling and supporting of CMOS, BiCMOS and Bipolar integrated circuits for fiber optics, including "Physical Layer" chips and chip sets for ATM, FDDI, ESCON, Ethernet, Fast Ethernet, Gigabit Ethernet, Fibre Channel, SONET and Fiber-Array applications and (ii) activities related to the foregoing. "Business Day" shall have the meaning set forth in Schedule 7.4(a). "Business Intellectual Property" shall have the meaning set forth in Section 5.7(a)(iii) of Exhibit C. "Buyer" shall have the meaning set forth in the preamble to this Agreement. "Buyer Group" means Buyer and its Affiliates (including the Company) and their respective employees, directors, officers and representatives, individually and collectively. "Buyer Option" means options to purchase shares of Buyer Stock granted by Buyer under Buyer's Microcosm Communications Limited Stock Option Plan. "Buyer SEC Filings" shall have the meaning set forth in Section 6.9(a) of Exhibit D. "Buyer Stock" means shares of Common Stock, par value $1 per share, of Buyer. 3 <PAGE> 10 "Class A Shares" shall have the meaning set forth in the recitals to this Agreement. "Closing" shall have the meaning set forth in Section 3.1. "Closing Date" shall have the meaning set forth in Section 3.1. "Closing Market Price" means the average of the daily closing sale prices per share of Buyer Stock as reported by the NASDAQ Stock Market (as published in The Wall Street Journal, Eastern United States Edition) for the ten consecutive NASDAQ trading days ending January 4, 2000 (December 21, 22, 23, 27, 28, 29, 30 and 31, 1999 and January 3 and 4, 2000) which the parties agree is equal to $66.48125. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Companies Act" means the Companies Act 1985 of the U.K. "Company" shall have the meaning set forth in the preamble to this Agreement. "Company Options" means options to purchase Ordinary Shares that are outstanding as of the date hereof (whether or not vested) as set forth on Schedule 5.3. "Consents" means consents, waivers, approvals, requirements, allowances, novations, authorizations, declarations, filings, registrations and notifications. "Continuing Employee" shall have the meaning set forth in Section 7.5(a). "Contracts" means all agreements, undertakings, contracts, obligations and commitments (whether written or oral), including all Intellectual Property and other license agreements, manufacturing agreements, supply agreements, purchase orders, sales orders, distributor agreements, sales representation agreements, warranty agreements, indemnity agreements, service agreements, employment and consulting agreements, guarantees, credit agreements, notes, mortgages, 4 <PAGE> 11 security agreements, financing leases, leases (including Leases), comfort letters, swap agreements (as defined in 11 U.S.C. 101(53B)), confidentiality agreements, joint venture agreements, partnership agreements, open bids, powers of attorney, memoranda of understanding and letters of intent, including, in each case, all amendments, modifications and supplements thereto and waivers and consents thereunder. "Damages" means any and all losses, Liabilities, claims, damages, deficiencies, diminutions in value, fines, payments, Taxes, Liens, costs and expenses, whether known or unknown, and whenever or however arising and whether or not resulting from Third Party Claims (including the costs and expenses of any and all Actions or other legal matters; all amounts paid in connection with any demands, assessments, judgments, settlements and compromises relating thereto; interest and penalties with respect thereto; and costs and expenses, including attorneys', accountants' and other experts' fees and expenses, incurred in investigating, preparing for or defending against any such Actions or other legal matters or in asserting, preserving or enforcing an Indemnitee's rights hereunder). "Designated Action" means any action referred to in Sections 12.1(b) and 12.1(c), and any falsity, breach or inaccuracy of any representation or warranty made by any Warrantor Seller in Section 4.4 of Exhibit B. "Dispute Notice" means a written notice of an objection to a Notice of Claim that sets forth in reasonable detail the basis for such objection and the amount of the Indemnity Claim Amount to which the objection is made, if calculable. "Earn-Out Statement" shall have the meaning set forth in Section 2.5(c). "Employment Agreement" means an agreement between Buyer and each of Gary Steele, Richard Mayo, Richard Watts, Mark Richardson, Alistair Blaxill, Stephen King, Nicholas Weiner, Brian Williams, Rudolf van Ettinger, Andrew Benford, Paul Denny and Graham Jones. "Environment" means the natural and man-made environment and all or any of the following media namely: 5 <PAGE> 12 air, water and land including air within buildings and air within other natural or man-made structures above or below ground and groundwater. "Environmental Laws" means any and all applicable Laws and Licenses issued, promulgated or entered into by any Governmental Entity and all codes of practice and guidance notes relating to the Environment, human health or the health of animals or plants or concerning health and safety matters or the generation, treatment, use, discharge, storage or disposal of any material, chemical, or substance that, whether because of its nature, form, condition or quantity, is regulated under applicable Environmental Laws. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Final Order" means a final order of a court of competent jurisdiction, (i) from which there is no right of appeal to a higher court or (ii) with respect to which either (A) all applicable time periods during which an appeal may be made have expired or (B) a period of six months has elapsed from the date on which the order which would otherwise be the subject of the appeal was issued and no appeal has been taken, whichever is the earliest to occur. "Fiscal 2000" means the period beginning on April 1, 1999 and ending March 31, 2000. "Fiscal 2001" means the period beginning on April 1, 2000 and ending April 15, 2001. "Fully Diluted Per-Share Closing Payment" means the amount equal to the quotient of (i) the Aggregate Closing Consideration, divided by (ii) the Fully Diluted Share Number, which the parties agree is $22.36. "Fully Diluted Per-Share Indemnification Release Amount" means the amount equal to the quotient of (i) the Indemnification Release Amount, divided by (ii) the Fully Diluted Warrantor Share Number. "Fully Diluted Per-Share Performance Earn-Out Amount" means the amount equal to the quotient of (i) the 6 <PAGE> 13 Performance Earn-Out Amount, divided by (ii) the Fully Diluted Warrantor Share Number. "Fully Diluted Per-Share Technology Earn-Out Amount" means the amount equal to the quotient of (i) the Technology Earn-Out Amount, divided by (ii) the Fully Diluted Warrantor Share Number. "Fully Diluted Per-Share Warrantor Closing Payment" means the amount equal to the remainder of (i) the Fully Diluted Per-Share Closing Payment, minus (ii) the Fully Diluted Per-Share Warrantor Holdback Amount, which the parties agree is $16.34. "Fully Diluted Per-Share Warrantor Holdback Amount" means the amount equal to the quotient of (i) Eighteen Million dollars ($18,000,000), divided by (ii) the Fully Diluted Warrantor Share Number, which the parties agree is $6.02. "Fully Diluted Per-Share Warrantor Resolved Claim Amount" means the amount equal to the quotient of (i) the applicable Warrantor Resolved Claim Amount, divided by (ii) the Fully Diluted Warrantor Share Number. "Fully Diluted Share Number" means the aggregate number of Shares issued immediately prior to the Closing plus the aggregate number of Shares subject to Company Options granted and unexercised immediately prior to the Closing, which the parties agree is 5,239,495. "Fully Diluted Warrantor Share Number" means the aggregate number of Shares issued immediately prior to the Closing held by Warrantor Sellers plus the aggregate number of Shares subject to Company Options granted and unexercised immediately prior to the Closing, which the parties agree is 2,991,395. "Governmental Entity" means, in any jurisdiction, any (i) federal, state, local, foreign or international government, (ii) court, arbitral or other tribunal, (iii) governmental or quasi-governmental authority of any nature (including any political subdivision, instrumentality, branch, department, official or entity) or (iv) agency, commission, authority or body exercising, or 7 <PAGE> 14 entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature. "Gross Margin" means, for any specified period, an amount equal to the quotient (expressed as a percentage) of (i) the remainder of (A) Sales, minus (B) the cost of sales (including the cost of purchased materials, labor and overhead (including depreciation) directly associated with product manufacturing, royalty and other intellectual property costs, warranty costs arising in the relevant year in respect of goods shipped in the relevant year and sustaining engineering expenses pertaining to products sold), divided by (ii) Sales in each case, as recorded in the financial records of the Company in accordance with the historical practices of the Company. "Holdback" means an amount equal to Eighteen Million dollars ($18,000,000). "Holdback Release Date" means the date which is fifteen (15) months after the Closing Date. "Indemnification Release Amount" means the excess, if any, of (i) $18,000,000 over (ii) the sum of (A) the aggregate Indemnity Amount Payable by Warrantor Sellers with respect to Joint Indemnity Claims as of the Holdback Release Date, plus (B) the Aggregate Unresolved Indemnity Claim Amount with respect to Joint Indemnity Claims as of the Holdback Release Date. "Indemnification Release Market Price" means, with respect to any Indemnification Release Payment Date, the average of the daily closing sale prices per share of Buyer Stock as reported by the NASDAQ Stock Market (as published in The Wall Street Journal, Eastern United States Edition, or, if not published therein, in another authoritative source mutually selected by Buyer and the Warrantor Representative) for the ten consecutive full NASDAQ trading days immediately preceding the first full NASDAQ trading day prior to such Indemnification Release Payment Date. "Indemnification Release Payment Date" means any applicable date (not earlier than 10 days after the Holdback 8 <PAGE> 15 Release Date) on which any amount is paid to the Warrantor Sellers or any Warrantor Seller pursuant to Section 2.3. "Indemnifying Party" means any member of Buyer Group or any member of the Seller Group who or which is or may be obligated to provide indemnification pursuant to this Agreement, except as otherwise expressly provided in Section 12.4(a). "Indemnitee" means (i) in the case of any claim for indemnification pursuant to Section 12.1 or 12.2, Buyer, acting for itself or as agent on behalf of any member of the Buyer Group or (ii) in the case of any claim for indemnification pursuant to Section 12.3, any Warrantor Seller, acting for itself or as agent on behalf of any member of the Seller Group. "Indemnity Amount Payable" means any amount of an Indemnity Claim Amount which has become an Indemnity Amount Payable in accordance with Section 12.4(b). "Indemnity Claim Amount" means the amount of Damages claimed in any Notice of Claim, which amount, if not finally determined, may be a good faith estimate of the Damages that may be subject to indemnification pursuant to this Agreement. "Individual Indemnity Claim" means any claim made for indemnification pursuant to Section 12.1. "Individual Warrantor Resolved Claim Amount" shall have the meaning set forth in Section 2.3(e). "Insurance Policies" shall have the meaning set forth in Section 5.20(a) of Exhibit C. "Intellectual Property" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents (including utility and design patents, industrial designs and utility models), patent applications and patent and invention disclosures, and all other rights of inventorship, worldwide, together with all reissuances, continuations, continuations-in-part, divisions, revisions, supplementary protection certificates, extensions and re-examinations thereof; (b) all registered and unregistered 9 <PAGE> 16 trademarks, service marks, trade names, trade dress, logos, business, corporate and product names and slogans, worldwide, and registrations and applications for registration thereof; (c) all copyrights in copyrightable works, and all other rights of authorship, worldwide, and all applications, registrations and renewals in connection therewith; (d) all mask works and semiconductor chip rights, worldwide, and all applications, registrations and renewals in connection therewith; (e) all trade secrets and confidential business and technical information (including ideas, research and development, know-how, formulas, technology, compositions, manufacturing and production processes and techniques, technical data, engineering, production and other designs, plans, drawings, engineering notebooks, industrial models, software, specifications, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information); (f) all computer and electronic data, data processing programs, documentation and software, both source code and object code (including flow charts, diagrams, descriptive texts and programs, computer print-outs, underlying tapes, computer databases and similar items), computer applications and operating programs; (g) all rights to sue for and remedies against past, present and future infringements of any or all of the foregoing and rights of priority and protection of interests therein under the Laws of any jurisdiction worldwide; (h) all copies and tangible embodiments of any or all of the foregoing (in whatever form or medium, including electronic media); and (i) all other proprietary, intellectual property and other rights relating to any or all of the foregoing. "Investment Agreement" shall have the meaning set forth in Section 8.1(a). "Joint Indemnity Claim" means any claim made for indemnification pursuant to Section 12.2. "Joint Warrantor Resolved Claim Amount" shall have the meaning set forth in Section 2.3(c). "knowledge", with respect to the Warrantor Sellers, shall have the meaning set forth in Section 14.16(b). 10 <PAGE> 17 "Laws" means all laws, statutes, constitutions, treaties, rules, regulations, directives, ordinances, codes, judgments, rulings, orders, writs, decrees, stipulations, injunctions and determinations of all Governmental Entities. "Leased Premises" shall have the meaning set forth in Section 5.8(c) of Exhibit C. "Leases" means all leases, subleases, licenses, rights to occupy or use and other Contracts with respect to real property, including, in each case, all amendments, modifications and supplements thereto and waivers and consents thereunder. "Liability" means any and all claims, debts, liabilities, obligations and commitments of whatever nature, whether known or unknown, asserted or unasserted, fixed, absolute or contingent, matured or unmatured, accrued or unaccrued, liquidated or unliquidated or due or to become due, and whenever or however arising (including those arising out of any Contract or tort, whether based on negligence, strict liability or otherwise) and whether or not the same would be required by UK GAAP to be reflected as a liability in financial statements or disclosed in the notes thereto. "Licenses" means all Consents, licenses, permits, certificates, variances, exemptions, franchises and other approvals or authorizations issued, granted, given, required or otherwise made available by any Governmental Entity. "Lien" means any charge, equitable interest, lien, encumbrance, option, proxy by way of security, pledge, security interest, mortgage, right of first refusal, right of preemption, transfer or retention of title agreement, or restriction by way of security of any kind or nature, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership. "Management Accounts" shall have the meaning set forth in Section 5.12(a) of Exhibit C. "Management Sellers" shall mean the following Warrantor Sellers: Gary Steele, Richard Mayo and Richard Watts. 11 <PAGE> 18 "Material Adverse Effect" means any material adverse effect on the business, condition (financial or otherwise), operations, results of operations, assets or liabilities of the Company taken as a whole. "Material Contract" shall have the meaning set forth in Section 5.9(a) of Exhibit C. "Non-Warrantor Representative" shall have the meaning set forth in Section 14.19(a). "Non-Warrantor Sellers" means 3i Group plc, Vertex Technology Fund II Limited, Defta-Pond Co-Investment L.P., Pond Ventures I L.P., Charles Irving and Shen Chia Wong. "Notice of Claim" means a written notice of a claim for indemnification pursuant to this Agreement that (1) sets forth in reasonable detail the basis for such claim, (2) sets forth the Indemnity Claim Amount, and (3) sets forth the name of any person against whom the claim is being made. "October 31, 1999 Balance Sheet" means the balance sheet of the Company as of October 31, 1999 included in the Management Accounts. "officer" means, in respect of the Company, any officer other than its independent auditors. "Olswang" means solicitors Olswang of 90 Long Acre, London WC2E 9TT, England. "Option Agreements" means the Stock Option Agreements (including the Terms and Conditions attached thereto and made a part thereof) evidencing the grant of Buyer Options made pursuant to the terms of this Agreement. "Option Holder" shall have the meaning set forth in the preamble to this Agreement. "Ordinary Shares" shall have the meaning set forth in the recitals to this Agreement. "Osborne Clarke" means solicitors Osborne Clarke of Apex Plaza, Forbury Road, Reading RG1 1AX, England. 12 <PAGE> 19 "Own Use Intellectual Property" shall have the meaning set forth in Section 5.7(a)(ii) of Exhibit C. "Performance Earn-Out Amount" shall have the meaning set forth in Section 2.5(a). "Performance Earn-Out Market Price" means the average of the daily closing sale prices per share of Buyer Stock as reported by the NASDAQ Stock Market (as published in The Wall Street Journal, Eastern United States Edition, or, if not published therein, in another authoritative source mutually selected by Buyer and the Warrantor Representative) for the ten consecutive full NASDAQ trading days immediately preceding the first full NASDAQ trading day prior to the Performance Earn-Out Payment Date. "Performance Earn-Out Payment Date" means the date not more than 10 days after the Performance Earn-Out Amount is resolved in accordance with Section 2.5(c). "Permit" means any License required under any Environmental Law. "Permitted Liens" means Liens for (i) Taxes, assessments and other governmental charges, if such Taxes, assessments or charges shall not be due and payable; and (ii) inchoate workmen's, repairmen's or other similar Liens or retentions of title in respect of raw materials and supplies not yet paid for, in each case arising or incurred in the ordinary course of business consistent with past practices in respect of obligations which are not overdue, minor title defects and recorded easements, which workmen's, repairmen's or other similar Liens, retentions of title, minor title defects and recorded easements do not, individually or in the aggregate, impair the continued use, occupancy, value or marketability of title of the property to which they relate or the Business, assuming that the property is used on substantially the same basis as such property is currently being used by the Company. "Person" means any individual, firm, partnership, joint venture, trust, corporation, limited liability entity, unincorporated organization, estate or other entity (including a Governmental Entity). 13 <PAGE> 20 "Plans" shall have the meaning set forth in Section 5.15(b) of Exhibit C. "Preference Shares" shall have the meaning set forth in the recitals to this Agreement. "Product Intellectual Property" shall have the meaning set forth in Section 5.7(a)(i) of Exhibit C. "Registration Rights" means the registration rights and obligations set forth on Schedule 7.4(a). "Representatives" means, with respect to any Person, such Person's Affiliates, directors, officers, employees, agents, consultants, advisors and other representatives, including legal counsel, accountants and financial advisors. "Sales" means, for any specified period, all revenues from the direct sale by the Company of products of the Company, as recorded in the financial records of the Company when such products are shipped in accordance with the historical practices of the Company, after taking into account all returns of and rebates for products sold and reserves therefor. "Schedule 5.23 Documents" shall have the meaning set forth in Section 5.23 of Exhibit C. "SEC" means the U.S. Securities and Exchange Commission. "Securities Act" means the U.S. Securities Act of 1933, as amended. "Seller Group" means the Warrantor Sellers and their respective Affiliates (other than the Company) and their respective employees, directors, officers and representatives, individually and collectively. "Sellers" shall have the meaning set forth in the preamble to this Agreement. "Sellers Expense Amount" means the aggregate amount of all Sellers Expenses paid at or prior to the Closing Date or which are known by Warrantor Representative 14 <PAGE> 21 to be payable after the Closing Date as set forth on Schedule 2.2. "Sellers Expenses" means any and all fees and out-of-pocket costs and expenses (including any fees and expenses of counsel to the Company or any Sellers, Broadview International Ltd. and other investment bankers, advisors or experts retained by the Company or any Seller) incurred by the Company or the Sellers in connection with the Transaction. "Shareholder" shall have the meaning set forth in the preamble to this Agreement. "Shares" shall have the meaning set forth in the recitals to this Agreement. "Statutory Accounts" shall have the meaning set forth in Section 5.12(a) of Exhibit C. "Subscription Agreement" shall have the meaning set forth in Section 8.1(a). "Tax Claims" shall have the meaning set forth in Section 12.6(j)(iv). "Tax Returns" shall have the meaning set forth in Section 5.6(a) of Exhibit C. "Tax Warranties" shall have the meaning set forth in Section 12.6(j)(iv). "Taxes" means all taxes, charges, duties, fees, levies or other assessments, including corporation tax, advance corporation tax, the charge under Section 419 of the Taxes Act 1988, income tax, capital gains tax, the charge under Section 601(2) of the Taxes Act 1988, value added tax, excise duties, property, sales, use, gross receipts, recording, insurance profits, license, withholding, payroll, employment, net worth, transfer, social security, environmental, occupation and franchise taxes, the charge to tax under Schedule 9A of the Value Added Tax Act 1994, customs and other import duties, inheritance tax, stamp duty, stamp duty reserve tax, capital duties, national insurance contributions, local authority council taxes, petroleum revenue tax, foreign taxation and duties, amounts 15 <PAGE> 22 payable in consideration for the surrender of group relief or advance corporation tax or refunds pursuant to Section 102 of the Finance Act 1989 and any payment whatsoever which the Company may be or become bound to make to any Person as a result of the operation of any enactment relating to any such taxes or duties imposed by any Governmental Entity and all penalties, charges, interest and additions relating to any of the foregoing or resulting from a failure to comply with the provisions of any enactment relating to taxation. "Taxes Act 1988" means the Income and Corporation Taxes Act 1988 of the U.K. "Technology Earn-Out Amount" shall have the meaning set forth in Section 2.4(a). "Technology Earn-Out Market Price" means the average of the daily closing sale prices per share of Buyer Stock as reported by the NASDAQ Stock Market (as published in The Wall Street Journal, Eastern United States Edition, or, if not published therein, in another authoritative source mutually selected by Buyer and the Warrantor Representative) for the ten consecutive full NASDAQ trading days immediately preceding the first full NASDAQ trading day prior to the Technology Earn-Out Payment Date. "Technology Earn-Out Milestone Achievement" means achievement by the Company of the events set forth in Exhibit A. "Technology Earn-Out Payment Date" shall have the meaning set forth in Section 2.4(a). "Third Party Claim" means any claim or demand that is made by a person who is not a party to this Agreement (or a member of the Buyer Group or the Seller Group entitled to indemnification under this Agreement) against any member of the Buyer Group or any member of the Seller Group and such claim or demand does or is likely to result in a claim for indemnification by such member of the Buyer Group or such member of the Seller Group for indemnification pursuant to this Agreement. "Transaction" means the transactions contemplated by the Transaction Documents. 16 <PAGE> 23 "Transaction Documents" means this Agreement and all other instruments, certificates and documents delivered or required to be delivered by Sellers, the Warrantor Representative or Buyer pursuant to this Agreement. "UK GAAP" means generally accepted accounting principles in the United Kingdom. "Value Added Tax" means value added tax as provided for in the Value Added Tax Act 1994 of the U.K. and legislation supplemental thereto or replacing, modifying or consolidating it; references to income or profits or gains earned, accrued or received shall include income or profits or gains treated as earned, accrued or received for the purposes of any legislation. "Warrantor Indemnity Amount" means, on any given determination date, the aggregate Indemnity Amount Payable by Warrantor Sellers to Buyer with respect to all Joint Indemnity Claims accumulated through the date of determination. "Warrantor Representative" shall have the meaning set forth in Section 14.18(a). "Warrantor Sellers" means all Sellers, other than the Non-Warrantor Sellers. "Warrantor Shareholder" means all Shareholders, other than the Non-Warrantor Sellers. ARTICLE II PURCHASE AND SALE OF SHARES AND EXCHANGE OF OPTIONS Section 2.1. Purchase and Sale of Shares and Exchange of Options. (a) Shares. Subject to the terms and conditions of this Agreement, each Shareholder, in reliance on the covenants, representations and warranties of Buyer contained herein, will at the Closing sell and deliver (with full title guarantee according to the laws of England and Wales) to Buyer all Shares owned by such Shareholder on the date 17 <PAGE> 24 hereof, and Buyer, in reliance on the covenants, representations and warranties of each of the Sellers contained herein, will purchase and acquire from the Shareholders at the Closing all such Shares, free and clear of all Liens. (b) Company Options. Subject to the terms and conditions of this Agreement, each Option Holder, in reliance on the covenants, representations and warranties of Buyer contained herein, will at the Closing deliver for cancellation to Buyer such Option Holders' letters of grant and option certificates, if any, in respect of all Company Options owned by such Option Holder on the date hereof, and such Company Options will be deemed surrendered and canceled and be of no further force or effect, and Buyer, in reliance on the covenants, representations and warranties of each of the Sellers contained herein, will at the Closing exchange therefor Buyer Options. Section 2.2. Closing Payments. (a) Shares. Subject to the terms and conditions set forth herein, in consideration for the sale and delivery of the Shares, at the Closing Buyer will deliver the following: (i) to Osborne Clarke, stock certificates duly registered in the name of each Non-Warrantor Seller representing that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the product of (1) the number of Shares owned by such Non-Warrantor Seller immediately prior to the Closing, multiplied by (2) the Fully Diluted Per-Share Closing Payment, divided by (B) the Closing Market Price; and (ii) to Olswang, stock certificates duly registered in the name of each Warrantor Shareholder (other than Daniel Draper) representing that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the product of (1) the number of Shares owned by such Warrantor Shareholder immediately prior to the Closing, multiplied by (2) the Fully Diluted Per-Share Warrantor 18 <PAGE> 25 Closing Payment, divided by (B) the Closing Market Price; and (iii) to the account designated by Osborne Clarke set forth on Schedule 2.2, an amount in dollars (by wire transfer of immediately available funds) equal to $221.78, representing the aggregate amount of the cash payments payable to the Non-Warrantor Sellers in respect of fractional shares required pursuant to Section 2.6(c) (fractional shares), together with a statement of the names and amounts payable to each Non-Warrantor Seller; and (iv) to the account designated by Olswang set forth on Schedule 2.2, an amount in dollars (by wire transfer of immediately available funds) equal to $768.58, representing the aggregate amount of the cash payments payable to the Warrantor Shareholders in respect of fractional shares required pursuant to Section 2.6(c) (fractional shares), together with a statement of the names and amounts payable to each Warrantor Shareholder; and (v) to the account designated by Daniel Draper set forth on Schedule 2.2, an amount in dollars (by wire transfer of immediately available funds) equal to $196,059.61, representing the product of (1) 12,000 which represents the number of shares held by Daniel Draper immediately prior to the Closing, multiplied by (2) the Fully Diluted Per-Share Warrantor Closing Payment. (b) Company Options. Subject to the terms and conditions set forth herein, in consideration for the termination, cancellation and surrender of the Company Options, at the Closing Buyer will deliver (x) to Olswang, in replacement of all Company Options held by each Option Holder immediately prior to the Closing, a Buyer Option duly registered in the name of such Option Holder and (y) to Olswang, an amount (payable by wire transfer of immediately available funds) in dollars equal to $1,307.82, representing the cash payments payable to the Option Holders in respect of fractional shares required pursuant to Section 2.6(c) (fractional shares), together with a statement of the names and amounts payable to each Option Holder. The number of 19 <PAGE> 26 shares of Buyer Stock subject to each such Buyer Option will equal the number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the product of (1) the number of Ordinary Shares subject to all such Company Options held by such Option Holder being replaced immediately prior to the Closing, multiplied by (2) the Fully Diluted Per-Share Warrantor Closing Payment, divided by (B) the Closing Market Price. The per-share exercise price of each such Buyer Option will equal the aggregate exercise prices of all such Company Options held by such Option Holder being replaced immediately prior to the Closing, divided by the aggregate number of shares of Buyer Stock subject to such Buyer Option. Each such Buyer Option will be immediately exercisable, will have a term expiring two years after the Closing Date and will be subject to the terms and conditions of the Option Agreement. Section 2.3. Payment of Indemnification Holdback. (a) Indemnification Release Amount. As additional consideration, within 10 days after the Holdback Release Date, Buyer will pay to each Warrantor Seller (by delivery of Buyer Stock, Buyer Options and money as provided in Section 2.3(b)) such Warrantor Seller's pro rata portion of the Indemnification Release Amount. (b) Payment of Indemnification Release Amount. Buyer shall pay to the Warrantor Sellers the following: (i) by delivery to each Warrantor Shareholder of stock certificates duly registered in the name of each Warrantor Shareholder (other than Daniel Draper) representing that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the product of (1) the number of Shares owned by such Warrantor Shareholder immediately prior to the Closing, multiplied by (2) the Fully Diluted Per-Share Indemnification Release Amount, divided by (B) the Indemnification Release Market Price; and (ii) by delivery to each Option Holder of Buyer Options duly registered in the name of each Option Holder exercisable for that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the product of (1) the number of 20 <PAGE> 27 Shares subject to all Company Options outstanding immediately prior to the Closing held by such Option Holder, multiplied by (2) the Fully Diluted Per-Share Indemnification Release Amount, divided by (B) the remainder of (x) the Indemnification Release Market Price, minus (y) $1.00. Each such Buyer Option will have a per-share exercise price of $1.00, will be immediately exercisable, will have a term expiring two years after the date of grant and will be subject to the terms and conditions of the Option Agreement; and (iii) by delivery to each Warrantor Seller of Buyer's check for an amount in dollars equal to the aggregate amount of the cash payments in respect of fractional shares payable to such Warrantor Seller pursuant to Section 2.6(c); and (iv) by delivery to the account designated by Daniel Draper set forth on Schedule 2.2, of dollars (by wire transfer of immediately available funds) equal to the product of (A) 12,000, which represents the number of Shares held by Daniel Draper immediately prior to the Closing, multiplied by (B) the Fully Diluted Per-Share Indemnification Release Amount; provided, however, that for each Warrantor Seller, if Buyer has made one or more Individual Indemnity Claims with respect to such Warranty Seller, the payments to such Warrantor Seller pursuant to this Section 2.2(b) shall not be made except to the extent that the amounts specified in Sections 2.3(b)(i)(A), 2.3(b)(ii)(A) and/or 2.3(b)(iv) exceed an amount equal to the sum of (i) the aggregate unpaid Indemnity Amount Payable by such Warrantor Seller with respect to such Individual Indemnity Claims as of the Holdback Release Date, plus (ii) the Aggregate Unresolved Indemnity Claim Amount with respect to such Individual Indemnity Claims as of the Holdback Release Date. (c) Joint Warrantor Resolved Claim Amount. Buyer will be obligated to pay to each Warrantor Seller (by delivery of Buyer Stock, Buyer Options and money as provided in Section 2.3(d)), within 10 days after such amount is determined in accordance with this Section 2.3(c), such Warrantor Seller's pro rata portion of an Indemnity Claim Amount with respect to a Joint Indemnity Claim represented 21 <PAGE> 28 by any unresolved Notice of Claim given by Buyer on or before the Holdback Release Date if, when and to the extent that after the Holdback Release Date (i) such Indemnity Claim Amount with respect to such Joint Indemnity Claim has been resolved to the satisfaction of Buyer in favor of the Warrantor Sellers, (ii) Buyer receives a Final Order resolving such Indemnity Claim Amount with respect to such Joint Indemnity Claim in favor of the Warrantor Sellers or (iii) Buyer no longer has the right to claim such portion of the Indemnity Claim Amount by reason of the provisions of Section 12.4(b)(ii)(4) (in each case, a "Joint Warrantor Resolved Claim Amount"), but only to the extent that such Joint Warrantor Resolved Claim Amount does not exceed the remainder of (x) Eighteen Million dollars ($18,000,000), minus (y) the sum of (A) the Indemnification Release Amount paid pursuant to Section 2.3(a) and all Joint Warrantor Resolved Claim Amounts with respect to Joint Indemnity Claims theretofore paid to the Warrantor Sellers pursuant to this Section 2.3(c), plus (B) the Warrantor Indemnity Amount as of such date of determination, plus (C) the Aggregate Unresolved Indemnity Claim Amounts with respect to Joint Indemnity Claims that remain outstanding and unresolved on such date of determination. (d) Payment of Joint Warrantor Resolved Claim Amount. Each Joint Warrantor Resolved Claim Amount with respect to a Joint Indemnity Claim payable pursuant to Section 2.3(c) will be paid by Buyer in accordance with the following payment procedures: (i) by delivery to each Warrantor Shareholder of stock certificates duly registered in the name of each Warrantor Shareholder (other than Daniel Draper) representing that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the product of (1) the number of Shares owned by such Warrantor Shareholder immediately prior to the Closing, multiplied by (2) the Fully Diluted Per-Share Warrantor Resolved Claim Amount, divided by (B) the Indemnification Release Market Price; and (ii) by delivery to each Option Holder of Buyer Options duly registered in the name of each Option Holder exercisable for that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional 22 <PAGE> 29 shares), equal to (A) the product of (1) the number of Shares subject to all Company Options outstanding immediately prior to the Closing held by such Option Holder, multiplied by (2) the Fully Diluted Per-Share Warrantor Resolved Claim Amount, divided by (B) the difference of (x) the Indemnification Release Market Price, minus (y) $1.00. Each such Buyer Option will have a per-share exercise price of $1.00, will be immediately exercisable, will have a term expiring two years after the date of grant and will be subject to the terms and conditions of the Option Agreement; and (iii) by delivery to each Warrantor Seller of Buyer's check for an amount in dollars equal to the aggregate amount of the cash payments in respect of fractional shares payable to such Warrantor Seller pursuant to Section 2.6(c); and (iv) by delivery to the account designated by Daniel Draper set forth on Schedule 2.2, of dollars (by wire transfer of immediately available funds) equal to the product of (A) 12,000, which represents the number of Shares held by Daniel Draper immediately prior to the Closing, multiplied by (B) the Fully Diluted Per-Share Warrantor Resolved Claim Amount; provided, however, that for each Warrantor Seller, if Buyer has made one or more Individual Indemnity Claims with respect to such Warrantor Seller, the payments to such Warrantor Seller pursuant to this Section 2.3(d) shall not be made except to the extent that the amounts specified in Sections 2.3(d)(i)(A), 2.3(d)(ii)(A) and/or 2.3(d)(iv) exceed an amount equal to the sum of (i) the aggregate unpaid Indemnity Amount Payable of such Warrantor Seller with respect to such Individual Indemnity Claims as of the date the Joint Warrantor Resolved Claim Amount is determined, plus (ii) the Aggregate Unresolved Indemnity Claim Amount with respect to such Individual Indemnity Claims as of the date the Joint Warrantor Resolved Claim Amount is determined. (e) Individual Warrantor Resolved Claim Amount. Buyer will be obligated to pay to each Warrantor Seller against whom an Individual Indemnity Claim has been made by Buyer (by delivery of Buyer Stock, Buyer Options and money 23 <PAGE> 30 as provided in Section 2.3(f)), within 10 days after such amount is determined in accordance with this Section 2.3(e), the portion of an Indemnity Claim Amount with respect to an Individual Indemnity Claim made against such Warrantor Seller in an unresolved Notice of Claim given by Buyer on or before the Holdback Release Date if, when and to the extent that after the Holdback Release Date (i) such Indemnity Claim Amount with respect to such Individual Indemnity Claim set forth in such Notice of Claim has been resolved to the satisfaction of Buyer in favor of the Warrantor Seller, (ii) Buyer receives a Final Order resolving the Indemnity Claim Amount with respect to such Individual Indemnity Claim set forth in such Notice of Claim in favor of the Warrantor Seller or (iii) Buyer no longer has the right to claim such portion of the Indemnity Claim Amount with respect to such Individual Indemnity Claim by reason of the provisions of Section 12.4(b)(ii)(4) (in each case, an "Individual Warrantor Resolved Claim Amount"), but only to the extent that such Individual Warrantor Resolved Claim Amount does not exceed the remainder of (x) such Warrantor Seller's pro rata portion of the Holdback minus (y) the sum of (A) such Warrantor Seller's pro rata portion of the Indemnification Release Amount or any Joint Warrantor Resolved Claim Amount actually paid to such Warrantor Seller, plus (B) all Individual Warrantor Resolved Claim Amounts theretofore paid to such Warrantor Seller pursuant to this Section 2.3(e), plus (C) the aggregate Indemnity Amount Payable by such Warrantor Seller to Buyer with respect to all Individual Indemnity Claims against such Warrantor Seller accumulated through the date of determination, plus (D) the Aggregate Unresolved Indemnity Claim Amounts with respect to Individual Indemnity Claims against such Warrantor Seller that remain outstanding and unresolved on such date of determination, plus (E) such Warrantor Seller's pro rata portion of the Warrantor Indemnity Amount and the Aggregate Unresolved Indemnity Claim Amount with respect to Joint Indemnity Claims that remain outstanding and unresolved on such date of determination. (f) Payment of Individual Warrantor Resolved Claim Amount. Each Individual Warrantor Resolved Claim Amount payable pursuant to Section 2.3(e) will be paid by Buyer to the Warrantor Seller against whom the Individual Indemnity Claim was made: 24 <PAGE> 31 (i) by delivery to such Warrantor Seller (other than Daniel Draper), if a Warrantor Shareholder, of stock certificates duly registered in the name of such Warrantor Seller representing that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to the Individual Warrantor Resolved Claim Amount, divided by the Indemnification Release Market Price; and (ii) by delivery to such Warrantor Seller, if an Option Holder, of Buyer Options duly registered in the name of such Warrantor Seller exercisable for that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the Individual Warrantor Resolved Claim Amount, divided by (B) the difference of (x) the Indemnification Release Market Price, minus (y) $1.00. Each such Buyer Option will have a per-share exercise price of $1.00, will be immediately exercisable, will have a term expiring two years after the date of grant and will be subject to the terms and conditions of the corresponding Option Agreement; and (iii) by delivery to such Warrantor Seller of Buyer's check for an amount in dollars equal to the aggregate amount of the cash payments in respect of fractional shares payable to such Warrantor Seller pursuant to Section 2.6(c); and (iv) if such Warrantor Seller is Daniel Draper, by delivery to the account designated by Daniel Draper set forth on Schedule 2.2, of dollars (by wire transfer of immediately available funds) equal to the Individual Warrantor Resolved Claim Amount. Section 2.4. Technology Earn-Out. (a) As additional consideration, on the applicable date set forth below (the "Technology Earn-Out Payment Date"), Buyer will pay to the Warrantor Shareholders (by delivery of shares of Buyer Stock and Buyer Options and money as provided in Section 2.4(b)), an aggregate amount equal to the following amount (the "Technology Earn-Out Amount"): 25 <PAGE> 32 (i) If on or prior to the first anniversary of the Closing Date, Technology Earn-Out Milestone Achievement occurs, then, within 10 days after the first anniversary of the Closing Date, Buyer will pay $11,400,000 in accordance with the provisions of Section 2.4(b); or (ii) If after the first anniversary of the Closing Date and on or prior to the second anniversary of the Closing Date, Technology Earn-Out Milestone Achievement occurs, then, within 10 days after Technology Earn-Out Milestone Achievement occurs, Buyer will pay $11,400,000 in accordance with the provisions of Section 2.4(b); or (iii) If Technology Earn-Out Milestone Achievement does not occur on or prior to the second anniversary of the Closing Date, no amount will be paid by Buyer and the Technology Earn-Out Amount will be $0. (b) The Technology Earn-Out Amount will be paid by Buyer on the Technology Earn-Out Payment Date in accordance with the following payment procedures set forth below, with the "Fully Diluted Per-Share Payment Amount" being the Fully Diluted Per-Share Technology Earn-Out Amount and the "Payment Market Price" being the Indemnification Technology Earn-Out Market Price: (i) by delivery to each Warrantor Shareholder of stock certificates duly registered in the name of each Warrantor Shareholder (other than Daniel Draper) representing that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the product of (1) the number of Shares owned by such Warrantor Shareholder immediately prior to the Closing, multiplied by (2) the Fully Diluted Per-Share Payment Amount, divided by (B) the Payment Market Price; and (ii) by delivery to each Option Holder of Buyer Options duly registered in the name of each Option Holder exercisable for that number of shares of Buyer Stock, subject to Section 2.6(c) (fractional shares), equal to (A) the product of (1) the number of Shares subject to each Company Option outstanding 26 <PAGE> 33 immediately prior to the Closing held by such Option Holder, multiplied by (2) the Fully Diluted Per-Share Amount, divided by (B) the remainder of (x) the Payment Market Price, minus (y) $1.00. Each such Buyer Option will have a per-share exercise price of $1.00, will be immediately exercisable; will have a term expiring two years after the date of grant and will be subject to the terms and conditions of the Option Agreement; and (iii) by delivery to each Warrantor Seller of Buyer's check for an amount in dollars equal to the aggregate amount of the cash payments in respect of fractional shares payable to such Warrantor Seller pursuant to Section 2.6(c); and (iv) by delivery to the account designated by Daniel Draper set forth on Schedule 2.2, of dollars (by wire transfer of immediately available funds) equal to the product of (1) 12,000, which represents the number of Shares held by Daniel Draper immediately prior to the Closing, multiplied by (2) the Fully Diluted Per-Share Payment Amount. Section 2.5. Performance Earn-Out. (a) As additional consideration, on the Performance Earn-Out Payment Date Buyer will pay to the Warrantor Sellers (by delivery of shares of Buyer Stock, Buyer Options and money as provided in Section 2.5(b)), an aggregate amount equal to the following amount (the "Performance Earn-Out Amount"): (i) $0, if the Company's Sales for Fiscal 2000 and Fiscal 2001, combined, are less than $24.5 million or if Gross Margin in Fiscal 2001 is less than 70 percent; or (ii) $20 million, if the Company's Sales for Fiscal 2000 and Fiscal 2001, combined, equal or exceed $24.5 million, but are less than $27.5 million, and Gross Margin in Fiscal 2001 is at least 70 percent; or (iii) $30 million, if the Company's Sales for Fiscal 2000 and Fiscal 2001, combined, equal or exceed 27 <PAGE> 34 $27.5 million, but are less than $30 million, and Gross Margin in Fiscal 2001 is at least 70 percent; or (iv) $40 million, if the Company's Sales for Fiscal 2000 and Fiscal 2001, combined, equal or exceed $30 million, and Gross Margin in Fiscal 2001 is at least 70 percent. (b) The Performance Earn-Out Amount will be paid by Buyer on the Performance Earn-Out Payment Date in accordance with the payment procedures set forth in Section 2.4(b), with the "Fully Diluted Per-Share Payment Amount" being the Fully Diluted Per-Share Performance Earn-Out Amount and the "Payment Market Price" being the Indemnification Performance Earn-Out Market Price. (c) On or before May 31, 2001, Buyer will deliver to the Warrantor Representative (in the same manner as a Notice of Claim with respect to a Joint Indemnity Claim is made pursuant to Section 12.4(a)(y)), with copies to the Non-Warrantor Representative and James Bailey at PricewaterhouseCoopers, a statement prepared by Buyer setting out the amount of Sales and Gross Margin of the Company for Fiscal 2000 and Fiscal 2001 and the amount, if any, of the Performance Earn-Out Amount payable pursuant to Section 2.5(a) with appropriate supporting calculations and supporting documentation (the "Earn-Out Statement"). Within 60 days after receipt (as determined in accordance with the provisions of Section 12.4(a) with respect to a Notice of Claim with respect to a Joint Indemnity Claim) by the Warrantor Representative of such Earn-Out Statement from Buyer, the Warrantor Representative may exercise the right (held on behalf of the Warrantor Sellers) to audit the Earn-Out Statement by so notifying Buyer and the Company in a written statement specifying the amount of the additional payments to which the Warrantor Representative believes the Warrantor Sellers are entitled and the nature and reasons for the Warrantor Representative's disagreement with Buyer's determination (an "Audit Notice"). If the Warrantor Representative does not exercise the audit rights within such 60-day period, the Warrantor Representative shall be deemed to have accepted the Sales and Gross Margin amounts and the Performance Earn-Out Amount set forth therein as final and binding. If the Warrantor Representative does issue an Audit Notice, then during the 30-day period 28 <PAGE> 35 following Buyer's receipt of the Audit Notice, Buyer and the Warrantor Representative shall attempt in good faith to resolve the disagreement with respect to the Earn-Out Statement, and during such 30-day period an independent auditing firm selected by the Warrantor Representative shall be given full access to the books and records of the Company and its Affiliates relevant to Sales and Gross Margin for the purposes of auditing, at the expense of the Warrantor Sellers, the Earn-Out Statement. If the Warrantor Representative and Buyer are unable to resolve any such disagreement within such 30-day period, the matter shall be submitted to an independent accounting firm of international reputation reasonably acceptable to the Warrantor Representative and Buyer. The Warrantor Representative and Buyer shall use reasonable best efforts to cause the independent accounting firm to render its determination on the matter within 90 days of its submission by the Warrantor Representative and Buyer. Such determination shall be, absent manifest error, final, conclusive and binding upon Buyer and all Warrantor Sellers. Buyer shall pay the Performance Earn-Out Amount in accordance with Sections 2.5(a) and 2.5(b). The fees and expenses for the independent accounting firm (A) shall be paid by the Warrantor Sellers if Buyer's determination is affirmed by the accounting firm, or (B) shall be apportioned between Buyer and the Warrantor Sellers, if the accounting firm determines that an additional amount is due Warrantor Sellers over and above the Performance Earn-Out Amount determined by Buyer; such apportionment shall be made so that Buyer shall pay the percentage of the fees and expenses equal to the percentage determined by dividing (x) the additional amount to be paid by Buyer to the Warrantor Sellers by (y) the disputed additional amount asserted by the Warrantor Representative. (d) Notwithstanding any other provision of this Agreement, to the extent the Technology Earn-Out Amount and/or the Performance Earn-Out Amount become payable by Buyer pursuant to Sections 2.4 and 2.5 of this Agreement, such amounts will be paid in full without any set-off, deduction or withholding whatsoever. 29 <PAGE> 36 Section 2.6. Buyer Stock and Buyer Options. (a) Securities Act Exemption. The issuance of Buyer Stock and Buyer Options pursuant to this Agreement is intended to be exempt from the registration requirements of the Securities Act pursuant to Regulation S and Section 4(2) thereunder and from applicable state securities laws. Each of the Sellers and Buyer hereby agrees to take all reasonable actions and to execute all necessary documents to qualify the issuance of Buyer Stock and Buyer Options for such exemptions; provided, however, that any action to be taken by the Sellers should be at Buyer's expense, such expense not to be unreasonable. (b) Stock Certificates; Stock Option Agreements. (i) Until the earlier of such time as (A) the shares of Buyer Stock are resold pursuant to Rule 144, (B) such shares of Buyer Stock are eligible to be resold under Rule 144(k) or (C) a registration statement under the Securities Act covering such shares of Buyer Stock is declared effective, each stock certificate, book-entry statement, confirmation, transaction statement or other instrument evidencing Buyer Stock issued (x) pursuant to this Agreement or (y) upon the exercise of Buyer Options issued pursuant to this Agreement, shall bear a legend in substantially the following form: "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE 'SECURITIES ACT'), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES (AS DEFINED IN RULE 902(L) UNDER THE SECURITIES ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN RULE 902(K) UNDER THE SECURITIES ACT) EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT EITHER(A) IT IS NOT A U.S. PERSON AND IS PHYSICALLY OUTSIDE THE UNITED STATES AT THE TIME IT IS ACQUIRING THE SHARES OR (B) IT IS AN 'ACCREDITED INVESTOR' (AS DEFINED IN RULE 501(A) UNDER THE SECURITIES ACT), (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THE SHARES RESELL OR OTHERWISE TRANSFER THE SHARES EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THREOF, (B) PURSUANT TO AN EFFECTIVE 30 <PAGE> 37 REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (D) PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANY OTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THE SHARES ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND AND (4) IF IT HAS ACQUIRED THE SHARES IN A TRANSACTION PURSUANT TO REGULATION S UNDER THE SECURITIES ACT, AGREES THAT IT WILL NOT WITHIN ONE YEAR ENGAGE IN HEDGING TRANSACTIONS INVOLVING THESE SECURITIES UNLESS IN COMPLIANCE WITH THE ACT. IN CONNECTION WITH ANY TRANSFER OF THESE SECURITIES WITHIN TWO YEARS AFTER ORIGINAL ISSUANCE OF THESE SECURITIES, IF THE PROPOSED TRANSFER IS OTHER THAN PURSUANT TO REGULATION S OR RULE 144 UNDER THE SECURITIES ACT, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRANSFER AGENT AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT." (ii) Each Option Agreement evidencing a Buyer Option delivered by Buyer pursuant to this Agreement, shall bear a legend in substantially the following form: "THE OPTIONS EVIDENCED BY THIS AGREEMENT HAVE not BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE 'SECURITIES ACT'), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES (AS DEFINED IN RULE 902(L) UNDER THE SECURITIES ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN RULE 902(K) UNDER THE SECURITIES ACT) EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT EITHER (A) IT IS NOT A U.S. PERSON AND IS PHYSICALLY OUTSIDE THE UNITED STATES AT THE TIME IT IS ACQUIRING THE OPTIONS OR (B) IT IS AN 'ACCREDITED INVESTOR' (AS DEFINED IN RULE 501(A) UNDER THE SECURITIES ACT), (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE GRANT DATE OF THE OPTIONS RESELL OR OTHERWISE TRANSFER THE OPTIONS EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THREOF, (B) PURSUANT TO AN 31 <PAGE> 38 EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (D) PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANY OTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THE OPTIONS ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND AND (4) IF IT HAS ACQUIRED THE OPTIONS IN A TRANSACTION PURSUANT TO REGULATION S UNDER THE SECURITIES ACT, AGREES THAT IT WILL NOT WITHIN ONE YEAR ENGAGE IN HEDGING TRANSACTIONS INVOLVING THESE SECURITIES UNLESS IN COMPLIANCE WITH THE ACT. IN CONNECTION WITH ANY TRANSFER OF THE OPTIONS WITHIN TWO YEARS AFTER ORIGINAL ISSUANCE OF THE OPTIONS, IF THE PROPOSED TRANSFER IS OTHER THAN PURSUANT TO REGULATION S OR RULE 144 UNDER THE SECURITIES ACT, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT." (iii) All Buyer Options issued pursuant to Sections 2.2(b), 2.3(b)(iii), 2.3(d)(ii), 2.3(f)(ii), 2.4(b)(ii) and 2.5(b) will be on the same terms and conditions (as set forth in the Option Agreement) except that the exercise prices, number of shares of Buyer Stock subject to such Buyer Options and grant dates will vary. (c) Fractional Shares of Buyer Stock. With respect to any payment by Buyer to be made by delivery of Buyer Stock or Buyer Options pursuant to Sections 2.2(a), 2.2(b), 2.3(b), 2.3(d), 2.3(f), 2.4(b), 2.5(b) or 3.5, no fractional shares of Buyer Stock will be issued and no Buyer Options exercisable for fractional shares of Buyer Stock will be granted and any holder of Shares or Company Options entitled pursuant to this Agreement to receive a fraction of a share of Buyer Stock or a Buyer Option exercisable for a fraction of a share of Buyer Stock but for this Section 2.6(c) will be entitled only to receive a cash payment in lieu thereof, without interest, in an amount, less the 32 <PAGE> 39 amount of any withholding taxes which may be required thereon, equal to the product of (i) the fraction of a share to which such holder would otherwise have been entitled multiplied by (ii) the Closing Market Price, the Indemnification Release Market Price, the Technology Earn-Out Market Price or the Performance Earn-Out Market Price, as the case may be. For purposes of paying such cash in lieu of fractional shares, with respect to each Seller, all shares of Buyer Stock to be delivered and Buyer Options to be granted pursuant this Agreement on any given payment date will be aggregated, and no Seller will receive cash in lieu of fractional shares in an amount equal to or greater than the value of one full share of Buyer Stock on such payment date. Section 2.7. Earn-Out Protections. To preserve the Business for the purposes of allowing the Warrantor Sellers to receive the payment contemplated by Sections 2.4 (Technology Earn-Out) and 2.5 (Performance Earn-Out), Buyer and Sellers agree that following the Closing, until the later of the Technology Earn-Out Payment Date and the Performance Earn-Out Payment Date, except with the prior written consent of Mr. Gary Steele (such consent not to be unreasonably withheld or delayed having regard to the best interests of the Company as a going concern), Buyer will not, and will not cause or permit any of its subsidiaries to: (i) cause the Business to cease in whole or in any material part; (ii) terminate the employment of any of the Warrantor Sellers, except for gross misconduct justifying dismissal, or with the approval of Gary Steele (or the chief executive officer of the Company at the time if Gary Steele is no longer a director of the Company) in the case of any Management Seller other than Gary Steele, or remove Gary Steele from the Board of Directors of the Company; (iii) deliberately, knowingly or recklessly interfere with or take any action which is reasonably likely to materially and adversely affect the relationship of the Company with any of its customers; 33 <PAGE> 40 (iv) take any action deliberately designed, or which is reasonably likely, to prevent the Business from being carried on in the ordinary course in all material respects; (v) take any action deliberately designed, or which is reasonably likely, to divert away from the Company any business opportunities that first become available to the Company in relation to business of the same type as conducted by the Company on the Closing Date; (vi) take any action knowingly or deliberately designed, or reasonably likely to: (A) cause the Business to be conducted other than on an arm's length basis, except that treasury, finance, human resources, legal, tax, accounting, insurance, employee benefits, property management, investor relations and similar functions may be conducted on such terms as Buyer determines from time to time in the ordinary course of business; (B) cause a material change in the nature of the Business; (C) cause any new employee or consultant (who is not employed, seconded to or engaged by the Company at the Closing) to be employed, seconded to or engaged by the Company or cause to be terminated the employment of such person except in accordance with their respective Employment Agreements, or with the approval of Gary Steele; (D) cause any change in the location of the Company's principal office in Bristol, England; or (E) materially adversely affect the relationship of the Company with its sources of revenues or its suppliers, except any such effect as may result from consummation of the Transaction; (vii) fail to provide sufficient working capital for the Business; or 34 <PAGE> 41 (viii) sell the Company or a material part of the Business of the Company or transfer a material part of the Business of the Company to any direct or indirect subsidiary of Buyer unless it has first paid the maximum amounts which may be earned under Sections 2.4 and 2.5 in full; provided, however, that notwithstanding the foregoing, Buyer may transfer the Shares of the Company in whole or in part, to any direct or indirect wholly-owned subsidiary of Buyer. Section 2.8. Consideration Adjustments. (a) Adjustments re Watts and Steele. Notwithstanding the payment provisions of this Article II Buyer has agreed that the amounts to be received by Gary Steele and Richard Watts pursuant to Section 2.2 (Closing Payments), Section 2.3 (Payment of Indemnification Holdback Release Amount), Section 2.4 (Technology Earn-Out) and Section 2.5 (Performance Earn-Out) will be adjusted as follows: (i) any payment to be made to Gary Steele pursuant to Sections 2.2, 2.3, 2.4 or 2.5 shall be reduced by an amount equal to the amount that would have otherwise been payable (but for this Section 2.8) multiplied by a fraction, the numerator of which is $2,600,000, and the denominator of which is $85,797,849 (the "Adjusted Sum"); and (ii) the Adjusted Sum shall be paid to Richard Watts provided that the total Adjusted Sum which will be paid to Richard Watts shall not exceed $2,600,000; and (iii) the total Adjusted Sum which shall be deducted from what would but for this Section 2.8 be Gary Steele's pro rata share of the total consideration shall not exceed $2,600,000. (b) Method of Payment. Payments to be made to Richard Watts pursuant to this Section 2.8(b) shall be made in shares of Buyer Stock. The number of shares of Buyer Stock shall be calculated in the same manner as set out in Sections 2.2, 2.3, 2.4 and 2.5. 35 <PAGE> 42 (c) Consequential Effect. Payments and reductions made pursuant to this Section 2.8(c) shall for all purposes of this Agreement be deemed to, and shall adjust the consideration paid to Gary Steele and Richard Watts. (d) Claims against Watts. (i) Buyer agrees that in respect of any claim made against Richard Watts pursuant to this Agreement (over and above the Holdback) Richard Watts may satisfy that claim (if admitted or proven) by surrendering to Buyer such number of shares of Buyer Stock (issued pursuant to this Agreement including pursuant to Section 2.8(b)) as at the market price of such shares on the last NASDAQ trading day before surrender of such Buyer Stock equal to the amount of the claim provided that: (A) if Richard Watts has before satisfaction of such a claim sold any of the Buyer Stock issued to him pursuant to this Agreement in an arms-length transaction to a person not affiliated with him, Buyer may pursue Richard Watts for the net cash amount received by him for such Buyer Stock; and (B) in no circumstances shall Richard Watts be liable to pay to the Buyer pursuant to a claim under this Agreement a sum greater than the aggregate of (1) Buyer Stock (issued to him pursuant to this Agreement including pursuant to Section 2.8(b)) valued at the date of payment of any claim; and (2) the net cash proceeds of sale of any such shares of Buyer Stock referred to in Section 2.8(d)(i)(A). (ii) Section 2.8(d)(i) shall not affect any of the limitations in Section 12.6 which shall continue to apply to Richard Watts notwithstanding this Section 2.8. Section 2.9. Pond Stock Certificates. Notwithstanding the provisions of Sections 2.2(a)(i) and 3.5, Defta-Pond Co-investment L.P., Pond Ventures I L.P. and 36 <PAGE> 43 Pond Venture Nominees Ltd. hereby direct Buyer to register the stock certificates representing any shares of Buyer Stock that Defta-Pond Co-investment L.P. and Pond Ventures I L.P. are entitled to receive pursuant to this Agreement in the name of Pond Venture Nominees Ltd. ARTICLE III CLOSING Section 3.1. Closing. The closing of the purchase and sale of the Shares and the cancellation of the Company Options (the "Closing") will take place (i) simultaneously at the offices of Manches & Co., Aldwych House, 81 Aldwych, London WC2B 4RP, England, at 9:00 p.m. London time on the date of this Agreement, or (ii) at such other place, date and time as Seller and Buyer may agree. The date and time at which the Closing actually occurs is referred to herein as the "Closing Date". Section 3.2. Closing Deliveries of Sellers. (a) At the Closing, the Warrantor Sellers will deliver to Buyer the following: (i) share certificates representing the Shares, accompanied by duly executed stock transfer forms in favor of Buyer, in form satisfactory to Buyer and any other documents that are necessary to transfer to Buyer good and marketable title to the Shares, free and clear of any Liens; (ii) letters of grant and option certificates, if any, in respect of all outstanding Company Options; (iii) written resignations of Richard Irving and David Ong, being all the directors of the Company other than Gary Steele (including acknowledgments of such directors and officers that they have no claims outstanding for compensation or otherwise or for any payment under the U.K. Employment Rights Act 1996) effective as of the Closing Date; 37 <PAGE> 44 (iv) the resignation of PricewaterhouseCoopers as auditors of the Company; (v) the statutory books of the Company; (vi) certified copy of resolutions adopted at a meeting of the Board of Directors of the Company at which the following actions were taken: (A) approval of the transfer of the Shares; (B) acceptance of the resignations referred to in Section 3.2(a)(iv); (C) appointment of Raouf Halim and Jasmina Theodore as directors of the Company effective as of the Closing; and (D) adoption of amendments to the Company Share Option Scheme to provide for the exercise by Daniel Draper of all of his Company Options prior to the Closing; (vii) the Employment Agreements duly executed by each individual party to such agreement; and (viii) receipts from each payee of the Sellers Expense Amount set forth on Schedule 2.2 acknowledging receipt of such payment and payment in full of such Sellers Expense Amount. (b) At the Closing, the Non-Warrantor Sellers will deliver to Buyer share certificates representing the Shares, accompanied by duly executed stock transfer forms in favor of Buyer, in form satisfactory to Buyer and any other documents that are necessary to transfer to Buyer good and marketable title to the Shares, free and clear of any Liens. Section 3.3. Closing Deliveries of Buyer. At the Closing, Buyer will deliver to the Persons referred to in Section 2.2 the following: (a) share certificates representing the Buyer Stock required to be delivered by Section 2.2(a); 38 <PAGE> 45 (b) the Buyer Options required to be delivered by Section 2.2(b); (c) the payment, by wire transfer to the account of Daniel Draper set forth on Schedule 2.2, of dollars in the amount required by Section 2.2(a)(v); (d) the payment, by wire transfer to the accounts of Olswang and Osborne Clarke set forth on Schedule 2.2, of dollars in the aggregate amount of the cash payments for fractional shares of Buyer Stock and Buyer Options for fractional shares payable pursuant to Section 2.6(c); and (e) certified copy of the resolutions adopted by the Board of Directors of Buyer approving the Transactions, including the issuance of shares of Buyer Stock pursuant to this Agreement, and adopting the Microcosm Communications Limited Stock Option Plan. Section 3.4. Transfer Taxes. All applicable sales and transfer Taxes (including any stock transfer Taxes due as a result of the sale of the Shares and Taxes, if any, imposed upon the transfer of real and personal property) and filing, recording, registration, stamp, documentary and other Taxes and fees payable in connection with the Transaction will be paid by Buyer. Section 3.5. Non-Warrantor Sellers Finders' Fees. On the Closing Date, Buyer will pay finders' fees (payable in shares of Buyer Stock as set forth below) in an aggregate amount equal to Eight Million Six Hundred Thousand dollars ($8,600,000) to the Non-Warrantor Sellers (which shall be paid in the individual amounts set forth in Schedule 3.5). Such fees shall be paid by delivery to each Non-Warrantor Seller of, (x) stock certificates registered in the name of such Non-Warrantor Seller representing that number of shares of Buyer Stock, subject to Section 2.6(c), equal to the quotient of (i) the amount set forth opposite such Non-Warrantor Seller's name in Schedule 3.5, divided by (ii) the Closing Market Price and (y) dollars (by wire transfer of immediately available funds) equal to the cash payments payable to such Non-Warrantor Seller pursuant to Section 2.6(c). 39 <PAGE> 46 Section 3.6. Sellers Expense Amount. On the Closing Date, Buyer will pay the Sellers Expense Amount in cash by wire transfer of the amount set forth in Schedule 2.2. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF EACH SELLER Each Seller, severally and not jointly, and only as to himself, herself or itself, makes the representation and warranties to Buyer set forth on Exhibit B. ARTICLE V REPRESENTATIONS AND WARRANTIES OF WARRANTOR SELLERS Each Warrantor Seller, jointly and severally, makes the representations and warranties to Buyer set forth on Exhibit C. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby makes the representations and warranties to Sellers set forth on Exhibit D. ARTICLE VII COVENANTS Section 7.1. Public Announcements. No press release or announcement concerning the transactions contemplated hereby will be issued by any Seller or the Company without the prior consent of Buyer or by Buyer without the prior consent of the Warrantor Representative, except as such release or announcement may be required by law, rule or regulation, in which case the Person required to make the release or announcement will allow the Person whose consent would otherwise be required reasonable time to 40 <PAGE> 47 comment on such release or announcement in advance of such issuance. Section 7.2. Further Assurances. (a) From time to time, as and when requested by any party to this Agreement, the other parties will execute and deliver, or cause to be executed and delivered, all such documents and instruments and will take, or cause to be taken, all such reasonable actions, as such other party may reasonably deem necessary or desirable to consummate the Transaction or to give Buyer the benefits of a shareholder of the Company after the Closing (including, prior to Buyer being registered in the statutory books of the Company, voting, consenting to any action or otherwise exercising any rights as a shareholder, in each case, as may be directed by Buyer); provided, however, that any action to be taken by any party pursuant to this Section 7.2(a) shall be at the expense of the party requesting such action, such expenses not to be unreasonable, except that with respect to the issuance of Buyer Stock such action shall be at Buyer's expense and with respect to the Registration Rights such expenses shall be borne as provided in Section 5 of Schedule 7.4(a). (b) Anything contained in this Agreement to the contrary notwithstanding, none of the parties to this Agreement or their Affiliates will be required to commence litigation or divest or hold separate any business or assets in connection with the consummation of the Transaction. Section 7.3. Confidential Information. (a) From and after the Closing, each Seller will, and will cause each of its Affiliates (in the case of a Non-Warrantor Seller, only its direct or indirect wholly-owned subsidiaries and any Person of which such Non-Warrantor Seller is a direct or indirect wholly-owned subsidiary) and its and their Representatives to (i) maintain in strict confidence any and all confidential information concerning the Company and (ii) refrain from using any and all such information for its own benefit or to compete with or otherwise to the detriment of Buyer or its Affiliates (including the Company). It is understood that no Seller shall have any liability hereunder with respect to 41 <PAGE> 48 information that (i) is in or, through no fault of such Seller or any of its Representatives, comes into the public domain or (ii) such Seller is legally required to disclose. (b) In the event that any Seller or any of its Affiliates (in the case of a Non-Warrantor Seller, only its direct or indirect wholly-owned subsidiaries and any Person of which such Non-Warrantor Seller is a direct or indirect wholly-owned subsidiary) or its or their Representatives are required by Law to disclose any such information, except where such disclosure has been required by the Inland Revenue or other taxing authorities such Seller will promptly notify Buyer in writing so that Buyer may seek a protective order and/or other motion to prevent or limit the production or disclosure of such information. If such motion has been denied, then the Person required to disclose such information may disclose only such portion of the such information which (i) based on advice of such Seller's outside legal counsel is required by Law to be disclosed (provided that the Person required to disclose such information will use all reasonable efforts to preserve the confidentiality of the remainder of such information) or (ii) Buyer consents in writing to having disclosed. Such Seller will not, and will not permit any of its Affiliates (in the case of a Non-Warrantor Seller, only its direct or indirect wholly-owned subsidiaries and any Person of which such Non-Warrantor Seller is a direct or indirect wholly-owned subsidiary) or its or their Representatives to, oppose any motion for confidentiality brought by Buyer or the Company. Such Seller will continue to be bound by its obligations pursuant to this Section 7.3 for any information that is not required to be disclosed, or that has been afforded protective treatment, pursuant to such motion. Section 7.4. Registration Rights. (a) From and after the Closing, each Seller and Buyer will have the Registration Rights set forth on Schedule 7.4(a) with respect to shares of Buyer Stock (a) received by such Seller pursuant to Sections 2.2(a), 2.3(b)(i), 2.3(d)(i), 2.3(f)(i), 2.4(b)(i) and 2.5(b) and (b) issued to such Seller upon the exercise of Buyer Options received by such Seller pursuant to Sections 2.2(b), 2.3(b)(ii), 2.3(d)(ii), 2.3(f)(ii), 2.4(b)(ii) and 2.5(b). 42 <PAGE> 49 (b) Each Seller hereby agrees to be bound by all obligations and agreements with respect to registration rights applicable to Sellers set forth on Schedule 7.4(a). Section 7.5. Employment Matters. (a) Buyer agrees that, following the Closing, it shall extend to each employee of the Company on the Closing Date (a "Continuing Employee") membership in Buyer's U.K. Pension, Life, Medical and Permanent Health Insurance plans (subject to the terms and conditions of the plans in force from time to time) and in the case of Stephen King and Daniel Draper, the U.S. equivalent of such plans. (b) Buyer also agrees that it will offer each Continuing Employee (i) the salary set forth opposite such Continuing Employee's name on Schedule 7.5, (ii) the award of options under Buyer's stock option plans in the amount set forth opposite such Continuing Employee's name on Schedule 7.5 and (iii) membership in Buyer's Peak Performance Bonus Plan or MBO Bonus Plan with the potential bonus amount set forth opposite such Continuing Employee's name of Schedule 7.5. (c) The extension of benefits and terms specified in this Section 7.5 by Buyer to any such Continuing Employee is conditional upon such Continuing Employee entering into a letter of amendment to his or her Service Agreement in a form substantially similar to the form of letter of amendment entered into at the Closing by Alistair Blaxill. Section 7.6. Power of Attorney. As promptly as practicable and in any event no later than 10 Business Days after the Closing Date, each Warrantor Seller shall execute and deliver to Buyer a power of attorney in respect of the rights attached to such Warrantor Seller's Shares in the form attached as Schedule 7.6. Section 7.7. Stock Certificates; Option Agreements. Notwithstanding the provisions of Sections 2.2(a), 2.2(b), 3.3(a), 3.3(b) and 3.5, as promptly as practicable and in any event no later than 10 Business Days after the Closing Date, Buyer shall deliver to the Sellers the original stock certificates representing shares of Buyer 43 <PAGE> 50 Stock and Buyer Options required to be delivered to Sellers pursuant to Sections 2.2(a), 2.2(b), 3.3(a), 3.3(b) and 3.5. ARTICLE VIII RELEASES AND WAIVERS Section 8.1. General Release. (a) For and in consideration of the amounts payable to each Seller under the Transaction Documents, effective as of the Closing Date, each Seller hereby releases, acquits and forever discharges the Company and its Affiliates, and each of their present and former officers, directors and employees and each of their respective heirs, executors, administrators, successors and assigns, of and from any and all manner of action or actions, cause or causes of action, demands, rights, Damages, debts, dues, sums of money, accounts, reckonings, costs, expenses, responsibilities, covenants, contracts, controversies, agreements, Actions and claims whatsoever, whether known or unknown, of every name and nature, both in law and in equity, which such Seller, or its heirs, executors, administrators, successors or assigns ever had, now has, or which it or, its heirs, executors, administrators, successors or assigns hereafter may have or shall have against the Company or any other Person referred to above arising out of any matters, causes, acts, conduct, claims, circumstances or events occurring or failing to occur or conditions existing at or prior to the Closing, including under (i) any account or Contract between the Company, on the one hand, and such Seller or any Affiliate of such Seller (in the case of a Non-Warrantor Seller, only its direct or indirect wholly-owned subsidiaries or any Person of which such Non-Warrantor Seller is a direct or indirect wholly-owned subsidiary), on the other hand, (ii) the Subscription Agreement dated May 13, 1998 between the Company, Gary Steele, Richard Mayo, Richard Watts and Defta-Pond Co-investment L.P. (the "Subscription Agreement") and (iii) the Investment Agreement dated July 22, 1999 between the Company, Gary Steele, 3i Group plc, Vertex Technology Fund II, Ltd., Defta-Pond Co-investment L.P. and Pond Ventures I L.P. (the "Investment Agreement"), other than 44 <PAGE> 51 such Seller's rights under existing employment Contracts and the Employment Agreements and the Transaction Documents. (b) Each Seller hereby: (i) consents to the transfer of the Shares to Buyer pursuant to Article 13.5 of the Company's Articles of Association; and (ii) consents to the transfer of shares by Gary Steele before May 13, 2001 pursuant to Article 13.10 of the Company's Articles of Association; and (iii) consents to the sale of a controlling interest in the Company and waives all rights of tag-along "at the same price per share" pursuant to Article 15.2 of the Company's Articles of Association; and (iv) consents to every other Seller taking all action required to be taken by that Seller under this Agreement and the entry into this Agreement by each other Seller, on and subject to the terms of this Agreement irrespective of any term in the Company's Articles of Association or the Investment Agreement or the Subscription Agreement; and (v) to the extent such Seller is a party to such agreement, hereby releases the Company and each other Seller party to such agreement from all obligations under the Investment Agreement and the Subscription Agreement, including any liability for antecedent breach. Section 8.2. Waiver of Preemptive Rights. For and in consideration of the amounts payable to each Seller under the Transaction Documents, each Seller hereby waives any and all preemptive rights or any option, contract or other rights to purchase capital stock of the Company that such Seller has or is or may be entitled to receive, including those which are vested in them pursuant to Article 14 of the Company's Articles of Association, and including those which arose or arise as a result of any event or transaction (whenever occurring), including the execution, 45 <PAGE> 52 delivery or performance of any Transaction Document or consummation of the Transaction. ARTICLE IX [INTENTIONALLY OMITTED] ARTICLE X [INTENTIONALLY OMITTED] ARTICLE XI SURVIVAL Section 11.1. Survival. The respective representations and warranties of each Seller and Buyer contained in this Agreement (other than Sellers' representations and warranties contained in Section 4.4 (Title to Stock) of Exhibit B, the Warrantor Sellers' representations and warranties contained in Sections 5.3 (Capitalization) and 5.6 (Taxes) of Exhibit C and Buyer's representations and warranties contained in Section 6.7 (Buyer Stock) of Exhibit D) will survive the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the Closing Date and will continue in full force and effect until the Holdback Release Date and then terminate and expire with respect to any theretofore unasserted claims arising out of or otherwise in respect of any falsity, breach or inaccuracy of such representations and warranties. Warrantor Sellers' representations and warranties contained in Section 5.6 (Taxes) of Exhibit C, will survive the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the Closing Date until the seventh anniversary of the Closing and then expire with respect to any theretofore unasserted claims arising out of or otherwise in respect of any falsity, breach or inaccuracy of such representations and warranties. Sellers' representations and warranties contained in Section 4.4 (Title to Stock) of Exhibit B, the Warrantor Sellers' 46 <PAGE> 53 representations and warranties contained in Section 5.3 (Capitalization) of Exhibit C and Buyer's representations and warranties contained in Section 6.7 (Buyer Stock) of Exhibit D will survive the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the Closing Date without time limitation. Notwithstanding the foregoing, in the event Buyer sells, transfers or otherwise disposes of the Company or all or substantially all of the Company's Business to any Person other than any direct or indirect subsidiary of Buyer, then all representations and warranties of Sellers shall terminate and expire with respect to any theretofore unasserted claims arising out of or otherwise in respect of any falsity, breach or inaccuracy of such representations and warranties. ARTICLE XII INDEMNIFICATION Section 12.1. Individual Warrantor Indemnification. Each Warrantor Seller shall, severally and not jointly, indemnify, defend and hold harmless Buyer from and against, and pay or reimburse, as the case may be, Buyer for, any and all Damages suffered by Buyer or any other member of the Buyer Group arising out of: (a) any falsity, breach or inaccuracy of any representation or warranty made by such Warrantor Seller in Exhibit B to this Agreement on the date of this Agreement; (b) any breach or violation by such Warrantor Seller of any covenant or agreement of such Warrantor Seller contained in Sections 2.1, 7.4(b), 13.1 and 13.2 of this Agreement; or (c) Any revocation, contest or challenge of, or denial of the validity, enforceability or binding effect of, Sections 8.1, 8.2, 14.11 and 14.18 by such Warrantor Seller. Section 12.2. Joint Warrantor Indemnification. The Warrantor Sellers shall, jointly and severally, indemnify, defend and hold harmless Buyer from and against, and pay or reimburse, as the case may be, Buyer for, any and 47 <PAGE> 54 all Damages suffered by Buyer or any other member of the Buyer Group arising out of: (a) any falsity, breach or inaccuracy of any representation or warranty made by the Warrantor Sellers in Exhibit C to this Agreement on the date of this Agreement; (b) any breach or violation of any covenant or agreement of the Warrantor Sellers contained in this Agreement (other than those set forth in Section 12.1(b), which are indemnified under such provision); or (c) Sellers Expenses in excess of the Sellers Expense Amount. Section 12.3. Buyer Indemnification. Buyer shall indemnify, defend and hold harmless each Warrantor Seller from and against, and pay or reimburse, as the case may be, each Warrantor Seller for, any and all Damages suffered by such Warrantor Seller or any other member of the Seller Group of such Warrantor Seller arising out of: (a) any falsity, breach or inaccuracy of any representation or warranty made by Buyer in this Agreement on the date of this Agreement (other than in respect of Registration Rights); or (b) any breach or violation of any covenant or agreement of Buyer contained in this Agreement (other than in respect of Registration Rights). Section 12.4. Indemnification Procedures. The following procedures shall apply to any claim for indemnification by Buyer or any Warrantor Seller: (a) Notice of Claim. A Notice of Claim shall be given as soon as practicable, but in no event later than thirty days, after the Indemnitee determines that it is or may be entitled to indemnification pursuant to this Agreement as follows: (x) in the case of any claim that is an Individual Indemnity Claim, by Buyer to each Warrantor Seller against whom such claim is made, (1) addressed to each such Warrantor Seller at the address of that Warrantor 48 <PAGE> 55 Seller set forth on the signature pages of this Agreement (or such other address as that Warrantor Seller may direct in a written notice to Buyer given in accordance with Section 14.7), and (2) delivered (A) first, by any recognized overnight courier service that obtains receipts for deliveries signed on behalf of the addressee and (B) second, not less than five or more than fifteen days later, by registered post (if sent to an address in the United Kingdom) or equivalent means (if sent to an address outside the United Kingdom). Each Warrantor Seller against whom an Individual Indemnity Claim is made shall be the Indemnifying Party for purposes of the procedures in this Section 12.4 and Section 12.5 and any Indemnity Amount Payable hereunder as to each Individual Indemnity Claim against such Warrantor Seller. (y) in the case of any claim that is a Joint Indemnity Claim, by Buyer to the Warrantor Representative and to each Management Seller, with a copy to the Non-Warrantor Representative (1) addressed to the Warrantor Representative and each such Management Seller at the address of the Warrantor Representative and that Management Seller set forth on the signature pages of this Agreement (or such other address as the Warrantor Representative and that Management Seller may direct in a written notice to Buyer given in accordance with Section 14.7), and (2) delivered (A) first, by any recognized overnight courier service that obtains receipts for deliveries signed on behalf of the addressee and (B) second, not less than five or more than fifteen days later, by registered post (if sent to an address in the United Kingdom) or equivalent means (if sent to an address outside the United Kingdom). The Warrantor Representative shall be the Indemnifying Party solely for purposes of the procedures 49 <PAGE> 56 in this Section 12.4 and Section 12.5 as to each Joint Indemnity Claim, and no liability in respect of any Joint Indemnity Claim shall be contested, settled, admitted, litigated or otherwise dealt with by or on behalf of the Warrantor Sellers by any person other than the Warrantor Representative, but any Indemnity Amount Payable hereunder shall be the joint and several liability of the Warrantor Sellers as provided in the other Sections of this Agreement, and not the exclusive liability of the Warrantor Representative. (z) in the case of any claim by any Warrantor Seller against Buyer, by the Warrantor Representative to Buyer at the address and in the manner provided in Section 14.7. The Buyer shall be the Indemnifying Party for purposes of the procedures in this Section 12.4 and Section 12.5 and any Indemnity Amount Payable hereunder as to each claim by any Seller. A Notice of Claim shall be effective on the date of receipt by any person to whom it is sent and, for purposes of clause (x) and (y), the date of receipt by the Warrantor Seller or the Warrantor Representative of the Notice of Claim sent pursuant to clause (2)(A) thereof shall control, unless the Warrantor Seller or the Warrantor Representative shows that such Notice of Claim was not received, in which case the date of receipt by the Warrantor Seller or the Warrantor Representative of the Notice of Claim sent pursuant to clause (2)(B) thereof shall control. (b) Dispute Notice. If the Indemnifying Party disputes (x) its obligation to indemnify the Indemnitee in respect of any claim set forth in a Notice of Claim, or (y) the Indemnity Claim Amount set forth in a Notice of Claim, a Dispute Notice shall be given as soon as practicable, but in no event later than 60 days, after the Notice of Claim becomes effective, as provided in Section 12.4(a), as follows: 50 <PAGE> 57 (1) in the case of any Individual Indemnity Claim, a Dispute Notice may be given by any Warrantor Seller against whom such claim is made (solely as to the Individual Indemnity Claim against such Warrantor Seller), and if given, shall be sent by the Warrantor Seller to Buyer at the address and in the manner provided in Section 14.7. (2) in the case of any Joint Indemnity Claim, a Dispute Notice may be given only by the Warrantor Representative, and if given, shall be sent by the Warrantor Representative to Buyer at the address and in the manner provided in Section 14.7. (3) in the case of any claim by any Warrantor Seller against Buyer, a Dispute Notice may be given by Buyer, and if given, shall be sent by Buyer to the Warrantor Seller making such claim against Buyer at the address and in the manner provided in Section 12.4(a)(x) or (y), as applicable, for a Notice of Claim to such Warrantor Seller. (i) If no Dispute Notice is given within such 60 day period, the validity of the claim for indemnification and the Indemnity Claim Amount, each as set forth in the Notice of Claim, shall be deemed to be agreed, effective on the first day following such 60 day period, and the Indemnity Claim Amount set forth in the Notice of Claim shall immediately be an Indemnity Amount Payable of the relevant Indemnifying Party. (ii) If a Dispute Notice is given within such 60 day period, then: (1) The portion, if any, of the Indemnity Claim Amount which is not disputed in the Dispute Notice shall immediately be an Indemnity Amount Payable of the relevant Indemnifying Party. (2) The Indemnifying Party and the Indemnitee shall negotiate in good faith to settle the dispute, and the portion, if any, of the 51 <PAGE> 58 Indemnity Claim Amount which the Indemnifying Party and the Indemnitee agree in writing is payable shall immediately be an Indemnity Amount Payable of the relevant Indemnifying Party. (3) If the Indemnifying Party and the Indemnitee are unable to resolve any portion of the Indemnity Claim Amount within four months following the date the Dispute Notice is given, either the Indemnifying Party or the Indemnitee may initiate legal proceedings in the courts specified in Section 14.11 of this Agreement to obtain judicial resolution of the dispute. (4) If neither the Indemnifying Party nor the Indemnitee initiates legal proceedings in respect of the dispute within six months following the date the Dispute Notice is given, the portion of the Indemnity Claim Amount which is disputed shall not be an Indemnity Amount Payable, and the Indemnitee shall have no further right, under this Agreement or otherwise, to seek to recover such amount from the Indemnifying Party or to withhold such amount from any payment otherwise required pursuant to Section 2.3. (5) If the Indemnifying Party or the Indemnitee initiates legal proceedings within the six month period specified in Section 12.4(b)(ii)(4), the amount, if any, determined in a Final Order as payable by the Indemnifying Party shall be an Indemnity Amount Payable of the relevant Indemnifying Party as of the date of such Final Order. (c) Payments of Indemnity Amounts Payable by Buyer. Subject to the limitations in Section 12.6, Buyer shall pay to each relevant Indemnitee any Indemnity Amount Payable by Buyer, by wire transfer of immediately available dollars (or as otherwise directed pursuant to any Final Order or as otherwise agreed by the Indemnitee and the Indemnifying Party), promptly and in no event later than ten Business Days after such Indemnity Amount Payable is established in accordance with this Agreement. 52 <PAGE> 59 (d) Payments of Indemnity Amounts Payable by Warrantor Sellers. Subject to the limitations in Section 12.6, the Warrantor Sellers shall pay to Buyer any Indemnity Amount Payable by the Warrantor Sellers as follows: (i) Prior to the Holdback Release Date, each Indemnifying Party who is a Warrantor Seller shall pay to Buyer any Indemnity Amount Payable by such Indemnifying Party, by wire transfer of immediately available dollars (or as otherwise directed pursuant to any Final Order or as otherwise agreed by the Indemnitee and the Indemnifying Party), promptly and in no event later than ten Business Days after such Indemnity Amount Payable is established in accordance with this Agreement, to the extent, but only to the extent, that, as of the date any payment is due, the sum of (1) such Indemnity Amount Payable plus (2) the aggregate amount of all other Indemnity Amounts Payable of all Warrantor Sellers which have not been paid, in each case, as of the date any such payment is due, exceeds the Holdback. (ii) After the Holdback Release Date, each Indemnifying Party who is a Warrantor Seller shall pay to Buyer any Indemnity Amount Payable by such Indemnifying Party, by wire transfer of immediately available dollars (or as otherwise directed pursuant to any Final Order or as otherwise agreed by the Indemnitee and the Indemnifying Party), promptly and in no event later than ten Business Days after such Indemnity Amount Payable is established in accordance with this Agreement, except that no such payment shall be required to the extent, but only to the extent that (1) such Indemnity Amount Payable was an Indemnity Claim Amount that was disputed as of the Holdback Release Date and (2) such Indemnity Claim Amount has not been paid to the Warrantor Sellers as a Joint Warrantor Resolved Claim Amount pursuant to Section 2.3(c). Section 12.5. Procedures for Third Party Claims. (a) Notice. If a Third Party Claim is made against an Indemnitee, or an Indemnitee shall otherwise 53 <PAGE> 60 learn of an assertion of a Third Party Claim, such Indemnitee will notify the Indemnifying Party in writing, and in reasonable detail, of the Third Party Claim as soon as reasonably practicable after becoming aware of such Third Party Claim and in any event within 30 days after becoming aware of such Third Party Claim; provided, however, that failure to give any such notification will not affect the indemnification provided hereunder except to the extent the Indemnifying Party shall have demonstrated that it has been actually prejudiced or the amount of the Third Party Claim is increased as a result of such failure. (b) Defense. (i) If a Third Party Claim is made against an Indemnitee, the Indemnifying Party will be entitled 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. Any such assumption must be express and made in a written notice given by the Indemnifying Party to the Indemnitee. (ii) Should the Indemnifying Party so elect to assume the defense of a Third Party Claim, the Indemnifying Party (x) will be entitled to control (solely and to the exclusion of the Indemnitee, except as otherwise provided in this Section 12.5) the defense of any Third Party Claim, at any time, if it unconditionally and irrevocably acknowledges in writing its obligation to indemnify the Indemnitee for such Third Party Claim and (y) will not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof as long as the Indemnifying Party diligently conducts such defense; provided that, if (1) in any Indemnitee's reasonable judgment a conflict of interest exists in respect of such Third Party Claim or (2) any Indemnifying Party fails to provide reasonable assurance to the Indemnitee (upon request of the Indemnitee) of such Indemnifying Party's financial capacity to defend such Third Party Claim and provide indemnification with respect thereto, in either such case, such Indemnitee will have the right to employ separate counsel to represent such Indemnitee and in 54 <PAGE> 61 that event the reasonable fees and expenses of such separate counsel will be paid by such Indemnifying Party. (iii) If the Indemnifying Party assumes the defense of any such Third Party Claim, each Indemnitee will have the right to participate in the defense thereof and to employ counsel separate from the counsel employed by the Indemnifying Party, but no Indemnitee may control the defense of such Third Party Claim, if the Indemnifying Party has unconditionally and irrevocably acknowledged in writing its obligation to indemnify the Indemnitee for such Third Party Claim. (iv) The Indemnifying Party will be liable for the fees and expenses of counsel employed by the Indemnitee: (1) for any period in which the Indemnifying Party has failed to expressly assume the defense of such Third Party Claim; (2) for any period in which the Indemnifying Party, after assuming the defense of a Third Party Claim, fails to diligently conduct the defense thereof; (3) for any period in which the Indemnifying Party has not provided its unconditional and irrevocable written acknowledgment of its obligation to indemnify for such Third Party Claim; and (4) to the extent provided in clause (ii)(y)(1) and (ii)(y)(2) and (vi) of this Section 12.5(b). (v) If the Indemnifying Party assumes the defense of any such Third Party Claim, the Indemnifying Party will promptly supply to the Indemnitee copies of all correspondence and documents relating to or in connection with such Third Party Claim and keep the Indemnitee fully informed of all developments relating to or in connection with such Third Party Claim (including, without limitation, providing to the 55 <PAGE> 62 Indemnitee on request updates and summaries as to the status thereof). (vi) If the Indemnifying Party chooses to defend a Third Party Claim, all the Indemnitees will reasonably cooperate with the Indemnifying Party in the defense thereof (such cooperation to be at the expense, including reasonable legal fees and expenses, of the Indemnifying Party). (c) Settlement. No Indemnifying Party will consent to any settlement, compromise or discharge (including the consent to entry of any judgment) of any Third Party Claim without the Indemnitee's prior written consent; provided, that if the Indemnifying Party unconditionally and irrevocably acknowledges in writing its obligation to indemnify the Indemnitee for a 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 any Damages in connection with such Third Party Claim and unconditionally and irrevocably releases the Indemnitee (pursuant to a release which is reasonably satisfactory to the Indemnitee) completely from all Liability in connection with such Third Party Claim, provided, however, that the Indemnitee may refuse to agree to any such settlement, compromise or discharge (x) that provides for injunctive or other nonmonetary relief affecting the Indemnitee or (y) that, in the reasonable opinion of the Indemnitee, would otherwise adversely affect the Indemnitee. If the Indemnifying Party unconditionally and irrevocably acknowledges in writing its obligation to indemnify the Indemnitee for a Third Party Claim, the Indemnitee will not (unless required by law) 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 will not be unreasonably withheld). If the Indemnifying Party has not unconditionally and irrevocably acknowledged in writing its obligation to indemnify the Indemnitee for a Third Party Claim, the Indemnitee may contest, settle, compromise or discharge such Third Party Claim on such terms as it considers necessary or appropriate and shall use reasonable efforts to give the Indemnifying Party prior written notice of the terms of such settlement, 56 <PAGE> 63 but shall have no obligation to obtain the Indemnifying Party's consent thereto. Section 12.6. Certain Rights and Limitations. (a) Insurance. No loss, Liability, damage or deficiency shall constitute Damages to any party to the extent of any insurance proceeds actually received by such party with respect to such loss, Liability, damage or deficiency (after deducting reasonable costs and expenses incurred in connection with recovery of such proceeds). (b) Small Buyer Claims. No Warrantor Sellers shall be required to pay to Buyer or any other member of the Buyer Group any amount with respect to the indemnification of any claims pursuant to this Agreement (either pursuant to the indemnification provisions in this Agreement, or through other legal proceedings that may be available under this Agreement, applicable law or otherwise) until the aggregate amount of Damages actually incurred by the Buyer Group with respect to such claims exceeds $1,000,000 in the aggregate, in which event Warrantor Sellers shall be responsible for the full amount of such Damages. (c) Maximum Liability of Non-Management Warrantor Sellers. Buyer and other members of the Buyer Group shall not be entitled to recover from any Warrantor Seller that is not a Management Seller (either pursuant to the indemnification provisions in this Agreement, or through other legal proceedings that may be available under this Agreement, applicable law or otherwise) any monetary amount in respect of Damages: (i) except in the case of any Indemnity Amount Payable arising from any Designated Action, by actual payment of any Indemnity Amount Payable, and the sole recourse of Buyer for recovery of any such Indemnity Amount Payable that does not arise out of any Designated Action shall be to withhold any payment otherwise due to such Warrantor Seller pursuant to Section 2.3, in accordance with the procedures and at the times provided in Section 2.3. (ii) in the case of any Indemnity Amount Payable arising from Designated Action, for any amount 57 <PAGE> 64 in excess of the aggregate amount of consideration actually paid to such Warrantor Seller hereunder (including Sections 2.2, 2.4 and 2.5). (iii) by set off against amounts payable pursuant to Section 2.4 or Section 2.5. (d) Maximum Liability of Management Warrantor Sellers. Buyer and other members of the Buyer Group shall not be entitled to recover from any Warrantor Seller that is a Management Seller (either pursuant to the indemnification provisions in this Agreement, or through other legal proceedings that may be available under this Agreement, applicable law or otherwise) any monetary amount in respect of Damages: (i) except in the case of any Indemnity Amount Payable arising from any Designated Action, for any amount in excess of 50% of the aggregate amount of consideration actually paid to such Warrantor Seller hereunder (including Sections 2.2, 2.4 and 2.5). (ii) in the case of any Indemnity Amount Payable arising from any Designated Action, for any amount in excess of the aggregate amount of consideration actually paid to such Warrantor Seller hereunder (including Sections 2.2, 2.4 and 2.5). (iii) by set off against amounts payable pursuant to Section 2.4 or Section 2.5. (e) Reduction of Taxation. In calculating the liability of the Warrantor Sellers for any Claim there shall be taken into account the amount by which any taxation for which the Company, Buyer or its Affiliates is now or in the future accountable or liable to be assessed is reduced or extinguished as a result of the matter giving rise to such liability, as determined by Buyer in its reasonable discretion. (f) Consequential Damages. Neither any Warrantor Seller nor Buyer shall have any obligation to indemnify any Indemnitee pursuant to this Agreement against such Indemnitee's own consequential damages or prospective lost profits arising out of a breach by any member of the Seller 58 <PAGE> 65 Group or by Buyer of its representations and warranties in this Agreement. Nothing in this Section 12.6(f) shall prevent any Indemnitee from being indemnified for all components of Third Party Claims against such Indemnitee, including consequential damages or prospective lost profits of such third parties. (g) Time Limits. A Notice of Claim for indemnification under this Agreement may not be given in respect of a claim under Sections 12.1(a), 12.2(a) or 12.3(a) after the date which is the last day of the survival period specified in Section 11.1 for the representation or warranty the falsity, breach or inaccuracy of which is or would be the basis for such claim. (h) Knowledge. A Notice of Claim for indemnification under this Agreement may not be given in respect of a claim under Sections 12.1(a), 12.2(a) or 12.3(a) if: (i) the matter is accurately disclosed in the appropriate Sections, Schedules and Exhibits of this Agreement; or (ii) the matter is disclosed in the Statutory Accounts, or Management Accounts (or any notes thereto) referred to in Section 5.12 of Exhibit C of this Agreement, but only to the extent of any accrual, liability, provision, reserve or allowance set forth in the Statutory Accounts, Management Accounts (or any notes thereto); or (iii) the matter is disclosed in any filing made by Buyer with the SEC prior to the Closing; or (iv) the matter is disclosed in or evident from the documentation listed in Schedule 5.23. (i) Certain Changes Affecting Warrantor Seller Liabilities. The Warrantor Sellers shall have no liability under this Agreement for the falsity, breach or inaccuracy of any representation or warranty herein to the extent, but only to the extent, that the falsity, breach or inaccuracy of such representation or warranty results from: 59 <PAGE> 66 (i) any act or omission or arrangement before the Closing carried out at the request of or with the prior written consent of Buyer; or (ii) any act or omission on or after the Closing by Buyer or any of its Subsidiaries (including the Company) or Buyer's successors in title to the Shares or any of their respective directors, employees or agents other than in the ordinary course of business; or (iii) any change after the Closing in the accounting policies or practices used in preparing the Company's Statutory Accounts or in the accounting reference date or fiscal year of the Company; or (iv) any reorganization or change after the Closing in the ownership of the Company; or (v) an act, event, occurrence or omission after the Closing compelled by Law, or from the enactment or amendment after the Closing of any Law, or a change after the Closing in the interpretation of any existing or new statute or regulation or in the practice of any Governmental Entity whether or not having retrospective effect. (j) Exclusion of Liability; Taxation Only. (i) The Warrantor Sellers shall not be liable in respect of a Tax Claim to the extent that such Tax Claim would not have occurred or arisen but for or is increased by: (A) any change in the basis of, or method of calculation of, or any increase in the rate or rates of, Taxes which comes into effect after the Closing with retrospective effect and announced after the date of the Agreement; or (B) the introduction of or any change in any law or in any practice of or concessions made by a Governmental Entity having retroactive effect and announced after the Closing. 60 <PAGE> 67 (ii) The Warrantor Sellers shall not be liable for any Tax Claim to the extent that: (A) it arises wholly or partly out of or is increased by virtue of a disclaimer by the Company or any Affiliate thereof after the Closing of any capital allowances available to it; or (B) it arises or is increased by virtue of a disclaimer by the Company or any Affiliate thereof after the Closing of capital or other allowances available to and claimed by the Company in respect of any period ended on or before the Closing; or (C) such Tax Claim arises or is increased by virtue of the failure or omission by the Company or any Affiliate thereof to make any claim, election, surrender or disclaimer or give any notice or consent to any other matter after the Closing, the making, giving or doing of which was taken into account or assumed in computing the provision for Tax or deferred Tax in the Statutory Accounts or Management Accounts and which has been disclosed to Buyer prior to the Closing; or (D) such Tax Claim arises or is increased by virtue of any claim, disclaimer or election made or notice of consent given by the Company or any Affiliate thereof after the Closing. (iii) The Warrantor Sellers shall not be liable for any Tax Claim if and to the extent that any pre-Closing relief is available to relieve, discharge or otherwise mitigate the liability of the Company or any Affiliate thereof for Tax which is the subject matter of such Tax Claim. (iv) In this Section 12.6(j), the term "Tax Warranties" means the warranties in Section 5.6 of Exhibit C and "Tax Claims" means a claim for indemnification under Section 12.2(a) for the falsity, breach or inaccuracy of the Tax Warranties. 61 <PAGE> 68 (k) General. (i) Any payment made in respect of any Indemnity Amount Payable by the Warrantor Sellers pursuant to Sections 12.1(a) or 12.2(a) or 12.2(c) shall be deemed (as between Buyer and the Warrantor Sellers) to be a reduction in the consideration payable by Buyer to the Warrantor Sellers for the Shares under this Agreement. (ii) No Indemnitee shall be entitled to receive more than one full recovery of any Indemnity Claim Amount. If any Indemnitee receives from any person other than an Indemnifying Party any payment in respect of Damages for which such Indemnitee has received actual payment of an Indemnity Amount Payable from an Indemnifying Party under this Agreement, and as a result thereof, the Indemnitee shall have received more than the actual amount of its Damages, the Indemnitee shall repay to the Indemnifying Party an amount equal to the excess of (x) the sum of (1) the Indemnity Amount Payable in respect of any Indemnity Claim Amount plus (2) the amounts paid to such Indemnitee by persons other than the Indemnifying Party in respect of the same Indemnity Claim Amount (after deducting any cost, liability, tax or other expense incurred in obtaining any such payments), over (y) the actual amount of the Damages of such Indemnitee. (iii) Each Indemnitee shall use commercially reasonable efforts to mitigate any damages in respect of which the Indemnitee files a Notice of Claim under this Agreement. (l) Richard Watts. In addition to the other limitations in this Section 12.6, Section 2.8(d) shall apply to any Indemnity Amounts Payable by Richard Watts. (m) Non-Warrantor Sellers. (i) Buyer and other members of the Buyer Group shall not be entitled to recover from any Non-Warrantor Seller (through legal proceedings that may be available under this Agreement, applicable law or otherwise) any monetary amount in respect of Damages 62 <PAGE> 69 for any amount in excess of the aggregate amount of consideration actually paid to such Non-Warrantor Seller hereunder (including Sections 2.2 and 3.5). (ii) Any payment to Buyer made in respect of any Damages by the Non-Warrantor Sellers shall be deemed (as between Buyer and the Non-Warrantor Sellers) to be a reduction in the consideration payable by Buyer to the Non-Warrantor Sellers for their Shares under this Agreement. ARTICLE XIII RESTRICTIVE COVENANT Section 13.1. Non-compete. (a) Each Warrantor Seller covenants and agrees that, for a period of two years after the Closing Date, none of such Warrantor Seller, any Affiliate of such Warrantor Seller or any Person now or hereafter controlled by such Warrantor Seller will, directly or indirectly, in any area of the world, enter into, engage in, represent, have or acquire more than a 5% interest in any business engaged in any from or manner, directly or indirectly, in competition with the Company or any of its Affiliates, including in researching, development, design, manufacture (including by means of procurement from third parties components for), integration, maintenance, testing, sale, installation, certification, modification, repair, servicing or support of any products of the type being sold or in development by the Company at any time on or prior to the Closing Date or any derivatives of or improvements to such products. (b) Notwithstanding the foregoing, the provisions of Section 13.1(a) shall terminate and no longer be in effect in the event that (i) Buyer has breached its obligations to register the resale of Buyer Stock under the Securities Act pursuant to the Registration Rights set forth in Schedule 7.4(a) and has not paid to the Warrantor Sellers the Liquidated Summary Payment Amounts due and payable thereunder or (ii) Buyer has breached its obligation to pay, when due, any of the payments to which the Warrantor Sellers 63 <PAGE> 70 are entitled pursuant to Sections 2.3, 2.4 and 2.5, except where Buyer is in good faith disputing such payment. Section 13.2. Non-solicitation of Employees. For a period of two years from and after the Closing Date, without the prior written consent of Buyer, no Seller will, and each Seller will cause its Affiliates (in the case of a Non-Warrantor Seller, only its direct or indirect wholly-owned subsidiaries and any Person of which such Non-Warrantor Seller is a direct or indirect wholly-owned subsidiary) not to, solicit, hire or retain as an employee, independent contractor or consultant any individual employed by the Company on the date hereof, other than advertisements or other general solicitations not directly targeted at such individuals, and will not, and will cause its Affiliates (in the case of a Non-Warrantor Seller, only its direct or indirect wholly-owned subsidiaries and any Person of which such Non-Warrantor Seller is a direct or indirect wholly-owned subsidiary), not to, during such period, induce or attempt to induce any such employee to terminate his or her employment with the Company or Buyer by resignation, retirement or otherwise. Section 13.3. Remedies. No waiver of any breach of the covenant contained in Section 13.1 or 13.2 shall be implied from any forbearance or failure of Buyer to take action thereon. Section 13.4. Severability. Sellers and Buyer agree that, if any provision of this Article XIII should be adjudicated to be invalid or unenforceable, such provision shall be deemed deleted herefrom with respect, and only with respect, to the operation of such provision in the particular jurisdiction in which such adjudication was made; provided, however, that to the extent any such provision may be valid and enforceable in such jurisdiction by limitations on the scope of the activities, geographical area or time period covered, Sellers and Buyer agree that such provision instead shall be deemed limited to the extent, and only to the extent, necessary to make such provision enforceable to the fullest extent permissible under the laws and public policies in such jurisdiction. Section 13.5. Non-exclusivity. The covenants contained in this Article XIII shall be construed and 64 <PAGE> 71 enforced independently of any other provision of this Agreement or any other understanding or agreement between the parties, and the existence of any claim or cause of action of any Seller against Buyer, of whatever nature, shall not constitute a defense to the enforcement against such Seller of the covenants contained herein, except as expressly provided in Section 13.1(b). ARTICLE XIV GENERAL PROVISIONS Section 14.1. Assignment. Except as provided in Schedule 7.4(a) with respect to the Registration, no party to this Agreement will convey, assign or otherwise transfer any of its rights or obligations under any Transaction Document without the prior written consent of Warrantor Representative (in the case of an assignment by Buyer) or of Buyer (in the case of an assignment by any Seller), except that Buyer may (without obtaining any consent) assign its rights, interests or obligations under any Transaction Documents, in whole or in part, to any direct or indirect subsidiary of Buyer or to any successor to all or any portion of its business (other than the Business); except that Buyer may not assign (x) its rights to make claims for indemnification under Article XII to any person that may acquire the Company or all or substantially all of the Business or (y) its registration obligations under Schedule 7.4(a). Any conveyance, assignment or transfer requiring the prior written consent of Warrantor Representative or Buyer which is made without such consent will be void ab initio. No assignment of this Agreement will relieve the assigning party of its obligations hereunder. Section 14.2. Parties in Interest. This Agreement is binding upon and is for the benefit of the parties hereto and their respective successors and permitted assigns, except with respect to Schedule 7.4(a), which is subject to Section 11 thereof. This Agreement is not made for the benefit of any Person not a party hereto, and no Person other than the parties hereto or their respective successors and permitted assigns will acquire or have any benefit, right, remedy or claim under or by reason of this Agreement, except that members of the Buyer Group and the 65 <PAGE> 72 Seller Group will be entitled to the rights to indemnification provided to the Buyer Group and the Seller Group, respectively, hereunder. Section 14.3. Amendment. This Agreement may not be amended, modified or supplemented except by a written agreement executed by Buyer and the Warrantor Representative, except with respect to Schedule 7.4(a), which is subject to Section 12 thereof; provided, however, that to the extent such amendment, modification or supplement shall affect the Non-Warrantor Sellers such written agreement shall also be executed by the Non-Warrantor Sellers. Section 14.4. Waiver; Remedies. No failure or delay on the part of Buyer, any Seller or Warrantor Representative in exercising any right, power or privilege under any Transaction Document will operate as a waiver thereof, nor will any waiver on the part of Buyer, any Seller or Warrantor Representative of any right, power or privilege under any Transaction Document operate as a waiver of any other right, power or privilege under any Transaction Document, nor will any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege under any Transaction Document. 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; provided, however, that the monetary limitations on indemnifiable Damages, the time limits for seeking reimbursement for Damages, and the limitations on set-off rights set forth in Sections 12.4, 12.5 and all of 12.6 shall apply to any Damages any party may recover pursuant to such other rights and remedies, when aggregated with any right to indemnification such party may have pursuant to Article XII, except that such limitations shall not apply to claims of fraud. Section 14.5. [Intentionally Omitted] Section 14.6. Fees and Expenses. Each of the Sellers, on the one hand, and Buyer, on the other hand, will pay, without right of reimbursement from the other, all of their respective costs and expenses incident to the performance of their respective obligations hereunder, 66 <PAGE> 73 including the fees and disbursements of counsel, accountants, experts and consultants employed by the respective parties in connection with the Transaction, whether or not the Transaction is consummated; provided that Buyer shall pay or cause to be paid the Sellers' Expense Amount at the Closing. Section 14.7. Notices. All notices, requests, claims, demands and other communications required or permitted to be given under any Transaction Document shall be in writing and will be delivered by hand or telecopied or sent, postage prepaid, by registered, certified or express mail or reputable overnight courier service and will be deemed given when so delivered by hand or telecopied, or three business days after being so mailed (one business day in the case of express mail or overnight courier service). A copy of any such notices, requests, claims, demands and other communications to the Warrantor Representative (other than with respect to indemnification matters subject to Article XII) shall also be sent to the Non-Warrantor Representative. Except as otherwise expressly provided in other Sections of this Agreement, all such notices, requests, claims, demands and other communications will be addressed as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice in accordance with this Section 14.7: 67 <PAGE> 74 (a) If to Buyer: Conexant Systems, Inc. 4311 Jamboree Road Newport Beach, California 92660-3095 Attention: Dennis E. O'Reilly, Esq. Senior Vice President, General Counsel and Secretary Telecopy: (949) 483-3206 with a copy to: Chadbourne & Parke LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Peter R. Kolyer, Esq. Telecopy: (212) 541-5369 (b) If to the Warrantor Representative: Mr. Gary Steele 23 Central Drive Elmer Beach Estate Middleton-on-Sea West Sussex PO22 7TT England Telecopy: 011-44-117-930-2401 with a copy to: Olswang, Solicitors 90 Long Acre London WC2E 9TT England, United Kingdom Attention: Heather Wilby, Esq. Telecopy: 011-44-171-208-8800 68 <PAGE> 75 (c) If to the Non-Warrantor Representative: Mr. Richard Irving c/o Pond Ventures Nominees Ltd. 2055 Gateway Place Suite 400 San Jose, California 95110 Telecopy: 408-776-3138 with a copy to: Osborne Clarke, Solicitors Apex Plaza Forbury Road Reading RG1 1AX England, United Kingdom Attention: Greg Leyshon, Esq. Telecopy: 011-44-118-925-2015 (d) If to any Seller, at the address set forth below such Seller's name on the signature page hereof. Section 14.8. Captions; Currency. The article and section captions herein and the table of contents hereto are for convenience of reference only, do not constitute part of this Agreement and will not be deemed to limit or otherwise affect any of the provisions hereof. Unless otherwise specified, all references herein to numbered articles and sections are to articles and sections of this Agreement and all references herein to exhibits or schedules are to exhibits or schedules to this Agreement. Unless otherwise specified, all references contained in any Transaction Document, in any exhibit or schedule referred to therein or in any instrument or document delivered pursuant thereto to dollars or "$" shall mean United States Dollars. Section 14.9. Entire Agreement. This Agreement, the other Transaction Documents and the Confidentiality Agreement collectively constitute the entire agreement between the parties with respect to the subject matter hereof and this Agreement, the other Transaction Documents and the Confidentiality Agreement supersede all prior 69 <PAGE> 76 negotiations, agreements and understandings of the parties of any nature, whether oral or written, relating thereto. Section 14.10. Severability. Except with respect to Article XIII as to which Section 13.4 shall apply, if any provision of any Transaction Document 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 thereof, 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. Section 14.11. Consent to Jurisdiction; Waiver of Jury Trial. (a) Each of the Sellers, the Warrantor Representative, the Non-Warrantor Representative, the Company and Buyer hereby irrevocably and unconditionally submits to the exclusive jurisdiction of (i) the Court of Chancery in and for the State of Delaware and the Superior Court in and for the State of Delaware and (ii) the United States District Court for the District of Delaware for the purposes of any Action arising out of any Transaction Document or the Transaction (and agrees not to commence any Action relating thereto except in such courts). Each Seller hereby designates and appoints CT Corporation Systems, a Delaware corporation, or any successor corporation (the "Authorized Agent"), as such person's authorized agent upon whom process may be served in any such Action at the office of such agent at 1209 Orange Street, Wilmington, Delaware 19801 (or such other address in the State of Delaware as the Authorized Agent may designate by written notice received by Buyer). Each Seller represents and warrants that the Authorized Agent has agreed to act as such agent for services of process and agrees to take any and all action, including the filing of any and all documents and instruments that may be necessary to continue such appointment in full force and effect as aforesaid. Each Seller agrees that service of any process, summons, notice or document upon the Authorized Agent, and written notice of said service to such Seller at the address for notices specified in Section 14.7 hereof, mailed by first class mail 70 <PAGE> 77 shall be effective service of process upon such Seller for any Action brought against it in such court with respect to any matters to which it has submitted to jurisdiction. Buyer further agrees that service of any process, summons, notice or document hand delivered or sent by U.S. registered mail to its address set forth in Section 14.7 will be effective service of process upon Buyer for any Action brought against it in any such court with respect to any matters to which it has submitted to jurisdiction as set forth above. Each of the Sellers, the Warrantor Representative, the Non-Warrantor Representative and Buyer irrevocably and unconditionally waives any objection to the laying of venue of any Action arising out of any Transaction Document or the Transaction in (i) the Court of Chancery in and for the State of Delaware and the Superior Court in and for the State of Delaware or (ii) the United States District Court for the District of Delaware, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such Action brought in any such court has been brought in an inconvenient forum. (b) EACH OF THE SELLERS, THE WARRANTOR REPRESENTATIVE, THE NON-WARRANTOR REPRESENTATIVE AND BUYER IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE TRANSACTION DOCUMENTS, THE TRANSACTION OR THE ACTIONS OF THE SELLERS, THE WARRANTOR REPRESENTATIVE, THE NON-WARRANTOR REPRESENTATIVE OR BUYER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF. Section 14.12. Schedules and Exhibits; Disclosure. All schedules and exhibits attached hereto are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Capitalized terms used in any other Transaction Document or in the schedules or exhibits hereto or thereto but not otherwise defined therein will have the respective meanings assigned to such terms in this Agreement. Disclosure of any item in any section of or on any schedule to this Agreement will not constitute disclosure of such item in any other section of or on any other schedule to this Agreement, whether or not the existence of the item or its contents should be or is relevant to any other section of or schedule to this 71 <PAGE> 78 Agreement, unless an explicit cross-reference thereto appears in such other section or schedule. Section 14.13. Governing Law. This Agreement will be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and to be performed entirely within such State, without regard to the conflicts of law principles of such State, except that the provisions of Section 3.2 as they relate to the procedures for the transfer of the Shares only and the non-competition provisions of Article XIII will be governed by and construed in accordance with the internal laws of England and Wales. Section 14.14. Counterparts. This Agreement may be executed in separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts will together constitute the same agreement. Section 14.15. Specific Performance. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of any Transaction Document, the party or parties who are or are to be thereby aggrieved will have the right of specific performance and injunctive relief giving effect to its or their rights under such Transaction Document, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies will be cumulative. The parties agree that any such breach or threatened breach would cause irreparable injury, that the remedies at law for any such 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. Section 14.16. Construction; Interpretation. (a) 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 presumption 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, local, or foreign Law shall 72 <PAGE> 79 be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. For the purposes of this Agreement, (i) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires, (ii) the terms "hereof", "herein", and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, (iii) the word "including" and words of similar import when used in this Agreement shall mean "including, without limitation" and (iv) the word "or" shall not be exclusive. (b) For purposes of this Agreement, "knowledge" or "aware of" or a similar phrase with respect to the Warrantor Sellers shall mean the knowledge of Gary Steele, Richard Mayo, Richard Watts, Nick Weiner, Alistair Blaxill, Stephen King, Brian Williams and Mark Richardson (i) if any such Person is actually aware of such fact or other matter or (ii) if any such Person could be expected to discover or otherwise become aware of such fact or other matter after due inquiry concerning the existence of such fact or other matter (including review of applicable files relating to such fact or other matter). Section 14.17. Performance by Certain Affiliates. Each Seller will cause to be performed and hereby guarantees that the performance of all actions, agreements, and obligations set forth herein to be performed by any Affiliate of such Seller (in the case of a Non-Warrantor Seller, only its direct or indirect wholly-owned subsidiaries and any Person of which such Non-Warrantor Seller is a direct or indirect wholly-owned subsidiary), except that no Seller will be deemed to be an Affiliate of Gary Steele by virtue of him being a director of the Company. Section 14.18. Warrantor Representative. (a) Each of the Warrantor Sellers hereby irrevocably makes, constitutes, and appoints Gary Steele its representative, agent and true and lawful attorney in fact of and for each of the Warrantor Sellers in connection with the Transaction Documents and the Transaction ("Warrantor 73 <PAGE> 80 Representative"). Each of the Warrantor Sellers hereby authorizes and empowers Warrantor Representative to make or give any approval, waiver, request, consent, instruction or other communication on behalf of each of the Warrantor Sellers as each such Warrantor Seller could do for himself, herself or itself, including with respect to the amendment of any provision of any Transaction Document (or any schedule thereto). Each of the Warrantor Sellers authorizes and empowers Warrantor Representative to receive all demands, notices or other communications directed to such Seller under any Transaction Document. Each of the Warrantor Sellers authorizes and empowers Warrantor Representative to (A) take any action (or to determine to refrain from taking any action) with respect thereto as the Warrantor Representative may deem appropriate as effectively as if such Warrantor Seller could act for himself, herself or itself (including, without limitation, the settlement or compromise of any dispute or controversy), which action will be binding on all the Warrantor Sellers and (B) execute and deliver all instruments and documents of every kind incident to the foregoing with the same effect as if such Warrantor Seller had executed and delivered such instruments and documents personally. Accordingly, any demands, notices or other communications directed to any Warrantor Seller hereunder shall be deemed effective if given to Warrantor Representative. Each of the Warrantor Sellers agrees to be bound by all actions and failures to act of the Warrantor Representative in accordance with the provisions of any Transaction Document, including in connection with any settlement or compromise entered into by the Warrantor Representative on behalf of one or more of the Warrantor Sellers. (b) (i) Upon the death, resignation or incapacity of the Warrantor Representative, or at any other time or from time to time, a successor may be appointed by Warrantor Sellers holding (or who held prior to the Closing) Shares and Company Options (determined as if the Shares and Company Options constitute one class of shares) representing 90% of the Fully Diluted Warrantor Share Number, but such appointment will not be effective until such successor shall agree in writing to accept such appointment and notice of the selection of such successor Warrantor Representative is provided to Buyer; and (ii) if a successor Warrantor Representative is not appointed pursuant to (i) above within 74 <PAGE> 81 60 days of such event, the Warrantor Representative shall be the individual Warrantor Seller who had the next largest holding of Shares and Company Options (determined as if the Shares and Company Options constitute one class of Shares) before the Closing, who agrees in writing to accept such appointment. (c) Each of the Warrantor Sellers and the Warrantor Representative agree as follows: (i) No provisions of this Agreement shall require the Warrantor Representative to expend or risk his own funds or incur any liability. (ii) The Warrantor Representative may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (iii) The Warrantor Representative shall not be liable for any action he takes or omits to take in good faith that he believes to be authorized or within the rights or powers conferred upon him by this Agreement. (iv) The Warrantor Sellers shall reimburse the Warrantor Representative promptly upon request for (and the Warrantor Representative shall be entitled to withhold from monies or other property received on behalf of the Warrantor Sellers) all reasonable disbursements, advances and expenses incurred or made by him in acting as Warrantor Representative. Such expenses shall include the reasonable compensation, disbursements and expenses of the Warrantor Representative's agents and counsel. (v) The Warrantor Sellers shall indemnify the Warrantor Representative against any and all losses, liabilities or expenses incurred by it arising out of or in connection with acting as Warrantor Representative under this Agreement and the other Transaction Documents, including the costs and expenses of enforcing this Agreement and defending the Warrantor Sellers against any claim whether asserted by the Buyer or any other person or liability in connection with the exercise or performance of any of its powers hereunder, 75 <PAGE> 82 except to the extent any such loss, liability or expense may be attributable to its gross negligence, bad faith or willful misconduct. Section 14.19. Non-Warrantor Representative. (a) Each of the Non-Warrantor Sellers hereby irrevocably makes, constitutes, and appoints Richard Irving its representative, of and for each of the Non-Warrantor Sellers in connection with the Transaction Documents and the Transaction ("Non-Warrantor Representative"). (b) Upon the death, resignation or incapacity of the Non-Warrantor Representative, or at any other time or from time to time, a successor may be appointed by Non-Warrantor Sellers. 76 <PAGE> 83 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the parties hereto as of the date first above written. CONEXANT SYSTEMS, INC. By:/s/ Dwight W. Decker ---------------------------------- Name: Dwight W. Decker Title: Chief Executive Officer SELLERS: /s/ Gary Steele ------------------------------------- Gary Steele 23 Central Drive Elmer Beach Estate Middleton-on-Sea West Sussex PO22 7TT England (2,170,000 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Donna Brailey 14 Blackmore Drive Southdown, Bath BA2 1JN England (1,900 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Jenny Brayne 15 Pinewood Close Westbury-on-Trym, Bristol BS9 4AJ England (237 Ordinary Shares) <PAGE> 84 /s/ Gary Steele* ------------------------------------- Christopher Bryson 3 Heol Syr Lewis Morgans Town, Cardiff CF4 8LE Wales (356 Ordinary Shares) * As Attorney-in-Fact. /s/ Gary Steele* ------------------------------------- Peter Davies 2 Shipley Road Westbury-on-Trym, Bristol BS9 3HS England (9,000 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Dan Draper 35 SW 101st Avenue, Portland, Oregon 97225 USA (12,000 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Jerome Garez 33 St. Johns Road Clifton, Bristol BS8 2HD England (1,733 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Christian Hess Noldestrasse. 1 66787 Wadgassen Germany (356 Ordinary Shares) <PAGE> 85 /s/ Gary Steele* ------------------------------------- Charles Irving Greyhound House 23-24 George Street Richmond, Surrey TW9 1HY England (51,000 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Graham Jones 178 High Street Wootton Bassett, Wiltshire SN4 7BZ England (2,137 Ordinary Shares) * As Attorney-in-Fact. /s/ Gary Steele* ------------------------------------- Amanda Karn 134 Hallen Road Henbury, Bristol BS10 7RB England (356 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Richard Mayo 5 North Rocks Road Paignton, Devon TQ4 6LF England (270,000 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Andrew John Millard Garden Flat 48 Hampton Road Redland, Bristol BS6 6HZ England (300 Ordinary Shares) <PAGE> 86 /s/ Gary Steele* ------------------------------------- John Michael Millard Garden Flat 48 Hampton Road Redland, Bristol BS6 6HZ England (300 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Stuart Millard Garden Flat 48 Hampton Road Redland, Bristol BS6 6HZ England (231 Ordinary Shares) /s/ Gary Steele* ------------------------------------- Ya Nong Ning 22 Hampden Close Yate BS37 5UW England (712 Ordinary Shares) * As Attorney-in-Fact. /s/ Mark Richardson ------------------------------------- Mark Richardson 61 Bloomfield Avenue Bath BA2 3AA England (2,375 Ordinary Shares) /s/ Richard Watts ------------------------------------- Richard Watts 108 York Road Montpelier, Bristol BS6 5QQ England (135,000 Ordinary Shares) <PAGE> 87 /s/ Mark Richardson* ------------------------------------- Colin Whitfield 13 Cleave Street St. Werburghs, Bristol BS2 9UD England (1,187 Ordinary Shares) /s/ Mark Richardson* ------------------------------------- Mark Wills 3 Princes Court, Longwell Green, Bristol BS30 7GB England (356 Ordinary Shares) /s/ Mark Richardson* ------------------------------------- Shen Chia Wong 5 Fl., No. 22-1 Alley 30, Lane 40, Sec. 7 Chung-Sam North Road Taipei, Taiwan (375,000 Ordinary Shares) * As Attorney-in-Fact. 3i GROUP, PLC 91 Waterloo Road London SE1 8XP England (22,727 Ordinary Shares) (352,773 Preference Shares) By:/s/ Paul Murray ---------------------------------- Name: Paul Murray Title: Investment Director <PAGE> 88 VERTEX TECHNOLOGY FUND II, LTD. 77 Science Park Drive #02-15 Cintech III Singapore Science Park Singapore 0511 (22,727 Ordinary Shares) (352,773 Preference Shares) By:/s/ Greg Leyshon** ---------------------------------- Name: Greg Leyshon Title: Solicitor (Osbourne Clarke) ** As Attorney-in-Fact for Vertex Technology Fund II Ltd. DEFTA-POND CO-INVESTMENT L.P. 23-24 George Street Richmond, Surrey TW9 1HY England (521 Ordinary Shares) (8,085 Preference Shares) (228,283 Class A Shares) By: Pond Venture Partners Limited By:/s/ Gary Steele* ---------------------------------- Name: Gary Steele Title: Director * As Attorney-in-Fact. <PAGE> 89 POND VENTURES I L.P. 2055 Gateway Place Suite 400 San Jose, California 95110 USA (4,025 Ordinary Shares) (62,469 Preference Shares) (767,717 Class A Shares) By: Pond Venture Partners limited By:/s/ Gary Steele* ------------------------------ Name: Gary Steele Title: Director * As Attorney-in-Fact. <PAGE> 90 OPTION HOLDERS: /s/ Gary Steele* ------------------------------------- Rahim Akbari 28 Clifton Park Road Clifton, Bristol BS8 3HL England (4,000 Options) /s/ Gary Steele* ------------------------------------- Tony Albon 410 Fishponds Road Upper Eastville, Bristol BS5 6RQ England (3,000 Options) /s/ Gary Steele* ------------------------------------- Michelle Allen 40 Osprey Park Thornbury, Bristol BS35 1LY England (1,000 Options) /s/ Gary Steele* ------------------------------------- Chettan Babla Basement Flat 13 Southleigh Road Clifton, Bristol BS8 2BQ England (6,000 Options) <PAGE> 91 /s/ Gary Steele* ------------------------------------- Andrew Benford 37 Russley Close Peatmoor, Swindon Wiltshire SN5 5AG England (10,000 Options) * As Attorney-in-Fact. /s/ Gary Steele* ------------------------------------- Nigel Bird 55 Norman Road Saltford, Bristol BS31 3BH England (2,000 Options) /s/ Gary Steele* ------------------------------------- Alistair Blaxill Little Orchard Ash Green Road Ash Green, Surrey GU12 6JQ England (22,500 Options) /s/ Gary Steele* ------------------------------------- Donna Brailey 14 Blackmore Drive Southdown, Bath BA2 1JN England (1,190 Options) /s/ Gary Steele* ------------------------------------- Jenny Brayne 15 Pinewood Close Westbury-on-Trym, Bristol BS9 4AJ England (1,024 Options) <PAGE> 92 /s/ Gary Steele* ------------------------------------- Christopher Bryson 3 Heol Syr Lewis Morgans Town, Cardiff CF4 8LE Wales (4,536 Options) /s/ Gary Steele* ------------------------------------- Mark Caines 22 Camden Road Southville, Bristol BS3 1QA England (1,000 Options) * As Attorney-in-Fact. /s/ Mark Richardson* ------------------------------------- Richard Clark 31 Llanwern Road Royal Oak, Newport South Wales NP9 9GF England (3,000 Options) /s/ Mark Richardson* ------------------------------------- Robin Commander 17 The Common Patchway, Bristol BS34 6AS England (8,000 Options) /s/ Mark Richardson* ------------------------------------- Peter Davies 2 Shipley Road Westbury-on-Trym, Bristol BS9 3HS England (12,000 Options) <PAGE> 93 /s/ Mark Richardson* ------------------------------------- Leigh Dawkins 96 Crawford Close Freshbrook, Swindon SN5 8PU England (2,000 Options) /s/ Mark Richardson* ------------------------------------- Paul Denny 1 Telconia Close Headley Down Bordon, Hampshire GU35 8ED England (10,000 Options) /s/ Mark Richardson* ------------------------------------- Ronald Downes Flat 6, Central Hall 15 Redcross Street Bristol BS2 0BA England (3,000 Options) * As Attorney-in-Fact. /s/ Mark Richardson* ------------------------------------- Jerome Garez 33 St. Johns Road Clifton, Bristol BS8 2HD England (3,174 Options) /s/ Mark Richardson* ------------------------------------- Mark Henderson Kiaora, Pisgah Road Talywain, Pontypool Gwent NP4 7HZ Wales (3,000 Options) <PAGE> 94 /s/ Mark Richardson* ------------------------------------- Christian Hess Noldestrasse. 1 66787 Wadgassen Germany (15,036 Options) /s/ Mark Richardson* ------------------------------------- Michael Higgs 13 Highlands Crescent Beaufort, Ebbw Vale NP3 5RQ Wales (3,000 Options) /s/ Mark Richardson* ------------------------------------- Graham Jones 178 High Street Wootton Bassett, Wiltshire SN4 7BZ England (12,214 Options) /s/ Mark Richardson* ------------------------------------- Peter Jones 28 Priorsgate Oakdale, Blackwood Gwent NP12 0EL Wales (6,000 Options) * As Attorney-in-Fact. /s/ Mark Richardson* ------------------------------------- Amanda Karn 134 Hallen Road Henbury, Bristol BS10 7RB England (6,036 Options) <PAGE> 95 /s/ Mark Richardson* ------------------------------------- Stephen King 10855 SW Falcon Court Beaverton, Oregon 97007 USA (50,000 Options) /s/ Mark Richardson* ------------------------------------- David Knight 3 Mariners Way Pill, Bristol BS20 0BD England (1,000 Options) /s/ Mark Richardson* ------------------------------------- Iain Lochhead 3 Down Road Winterbourne Down Bristol BS37 1BN England (8,000 Options) /s/ Mark Richardson* ------------------------------------- Sean Lord Willow Cottage Alexandra Road Frome, Somerset BA11 1LU England (8,000 Options) /s/ Mark Richardson* ------------------------------------- Colin Maddison 5 Lime Tree Cottages Quenington Gloucestershire GL7 5BU England (5,000 Options) * As Attorney-in-Fact. <PAGE> 96 /s/ Mark Richardson* ------------------------------------- Kevin Marris Merevale House West End, Magor NP26 3HT Wales (1,000 Options) /s/ Mark Richardson* ------------------------------------- Stuart Millard Garden Flat 48 Hampton Road Redland, Bristol BS6 6HZ England (6,084 Options) /s/ Mark Richardson* ------------------------------------- Andrew Millwater 79 Hughes Street Penygraig, Rhondda AC40 1LX Wales (3,000 Options) /s/ Mark Richardson* ------------------------------------- Ya Nong Ning 22 Hampden Close Yate BS37 5UW England (3,072 Options) /s/ Mark Richardson ------------------------------------- Mark Richardson 61 Bloomfield Avenue Bath BA2 3AA England (22,738 Options) <PAGE> 97 /s/ Mark Richardson* ------------------------------------- David Robbins 27 Berkeley Road Westbury Park, Bristol BS6 7PQ England (2,000 Options) * As Attorney-in-Fact. /s/ Mark Richardson* ------------------------------------- Lynda Roberts 11 Bamptons Croft Emmersons Green, Bristol BS16 7EN England (1,000 Options) /s/ Mark Richardson* ------------------------------------- Jacqueline Smith Bishport Avenue Withywood, Bristol BS13 9EH England (100 Options) /s/ Mark Richardson* ------------------------------------- Clive Thomas 7 Shannon Close Pontllanfriath, Blackwood Gwent NP12 2FW Wales (3,000 Options) /s/ Mark Richardson* ------------------------------------- Tatsuyuki Torii 793-9 Nakagawa Omiya-shi, Saitama 330-0831 Japan (22,500 Options) <PAGE> 98 /s/ Mark Richardson* ------------------------------------- Rudolf van Ettinger Church Farm House Pound Lane Hardwicke GL2 4RJ England (8,000 Options) /s/ Richard Watts ------------------------------------- Richard Watts 108 York Road Montpelier, Bristol BS6 5QQ England (15,000 Options) * As Attorney-in-Fact. /s/ Mark Richardson* ------------------------------------- Nick Weiner 29 Shirehampton Road Stoke Bishop, Bristol BS9 1EL England (45,000 Options) /s/ Mark Richardson* ------------------------------------- Colin Whitfield 13 Cleave Street St. Werburghs, Bristol BS2 9UD England (12,119 Options) /s/ Mark Richardson* ------------------------------------- Brian Williams 30 Barnfield Ponthir, Newport Gwent NP6 1TN Wales (22,500 Options) <PAGE> 99 /s/ Mark Richardson* ------------------------------------- Mark Wills 3 Princes Court Longwell Green, Bristol BS30 7GB England (1,036 Options) * As Attorney-in-Fact. <PAGE> 100 The undersigned is executing this Agreement to evidence the sale of all its right, title and interest in and to any Shares beneficially owned by Defta-Pond Co-investments L.P. and Pond Ventures I L.P. and its agreement to Section 2.9. pond venture nominees Ltd. By: /s/ Gary Steele* ---------------------------------- Name: Gary Steele Title: Managing Director * As Attorney-in-Fact. <PAGE> 101 EXHIBIT A TECHNOLOGY MILESTONES Customer sampling of a customer quality sample of a 10 gigabit integrated circuit in the standard chipset. <PAGE> 102 EXHIBIT B REPRESENTATIONS AND WARRANTIES OF EACH SELLER <TABLE> <CAPTION> Page ---- <S> <C> Section 4.1. Organization ....................... 2 Section 4.2. Authority .......................... 2 Section 4.3. No Breach .......................... 3 Section 4.4. Title to Stock ..................... 3 Section 4.5. Governmental Approvals ............. 4 Section 4.6. No Brokers ......................... 4 Section 4.7. Accredited Investors ............... 4 Section 4.8. Investment Intent .................. 4 Section 4.9. Regulation S ....................... 5 Section 4.10. Transfer Restrictions .............. 6 </TABLE> <PAGE> 103 REPRESENTATIONS AND WARRANTIES OF EACH SELLER Each Seller, severally and not jointly, only as to himself, herself or itself, represents and warrants to Buyer as follows: (i) Each Warrantor Seller makes the representations and warranties set forth in Sections 4.1 through 4.6 and in Section 4.9 (except that Stephen King makes the representations and warranties set forth in Sections 4.7 and 4.8 in lieu of the representations and warranties set forth in Section 4.9); and (ii) Each Non-Warrantor Seller makes the representations and warranties set forth in Sections 4.4, 4.7 and 4.8 (except that Shen Chia Wong makes the representations and warranties set forth in Section 4.9 in lieu of the representations and warranties set forth in Sections 4.7 and 4.8): Section 4.1. Organization. If such Seller is not an individual, it is duly incorporated under the laws of its jurisdiction of incorporation or organization. Section 4.2. Authority. Such Seller that is not an individual has all requisite power and authority, corporate or otherwise, and such Seller that is an individual has the capacity, to execute and deliver each Transaction Document delivered or to be delivered by such Seller and to perform all of such Seller's obligations hereunder and thereunder. The execution, delivery and performance by such Seller that is not an individual of each Transaction Document delivered or to be delivered by such Seller and the consummation by such Seller of the Transaction have been duly authorized by all necessary and proper action on the part of such Seller. This Agreement has been duly executed and delivered by such Seller and constitutes the legal, valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of 2 <PAGE> 104 creditors' rights in general and by general principles of equity. Each other Transaction Document to be delivered by such Seller will be duly executed and delivered by such Seller and, when so executed and delivered, will constitute the legal, valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general and by general principles of equity. Section 4.3. No Breach. None of the execution, delivery or performance by such Seller of any Transaction Document or the consummation by such Seller of the Transaction, with or without the giving of notice or the lapse of time or both, does or will conflict with, or result in a breach or violation of or a default under, or give rise to a right of amendment, termination, cancellation or acceleration of any obligation or to a loss of a benefit under (i) (if such Seller is not an individual) the memorandum and articles of association (or similar governance document) of such Seller or (ii) any Law or License to which such Seller or its properties or assets is subject, except, in the case of item (ii) above only, for those which would not have, individually or in the aggregate, a Material Adverse Effect. Section 4.4. Title to Stock. Except as set forth on Schedule 4.4, such Seller has title to, and is the legal and beneficial owner of, or otherwise is entitled to transfer to Buyer full right, title and interest in and to, the number of Ordinary Shares, Class A Shares, Preference Shares and Company Options set forth opposite such Seller's name on Schedule 5.3 (Company Stock and Options Outstanding). Such shares are free and clear of any Liens. Upon transfer and delivery to Buyer at the Closing, Buyer will have full title to such Shares, free and clear of any Liens. The number of Ordinary Shares, Class A Shares, Preference Shares and Company Options set forth opposite such Seller's name on Schedule 5.3 (Company Stock and Options Outstanding) constitute all of the Shares and 3 <PAGE> 105 Company Options over which any voting or dispositive power is held by such Seller. Section 4.5. Governmental Approvals. Except as set forth on Schedule 4.5, no material Consent or order of, with or to any Governmental Entity is required to be obtained or made by or with respect to such Seller in connection with the execution, delivery and performance by such Seller of any Transaction Document or the consummation by such Seller of the Transaction. Section 4.6. No Brokers. Except for Broadview International Ltd. and the Non-Warrantor Sellers entitled to receive the finders' fees described in Section 3.5 of this Agreement, none of such Seller or any of its Affiliates has authorized or retained any Person to act as an investment banker, broker, finder or other intermediary (other than legal and accounting professionals) who is or might be entitled to any fee, commission or payment in connection with the negotiation, preparation, execution or delivery of any Transaction Document or the consummation of the Transaction, nor, to the knowledge of such Seller, is there any basis for any such fee, commission or payment to be claimed by any Person against such Seller. Section 4.7. Accredited Investors. Each of the Non-Warrantor Sellers (other than Shen Chia Wong) and Stephen King represents and warrants, severally and not jointly, that he, she or it is an accredited investor as such term is defined in Regulation D under the Securities Act. Section 4.8. Investment Intent. Each of the Non-Warrantor Sellers (other than Shen Chia Wong) and Stephen King, severally and not jointly, represents and warrants that he, she or it is acquiring the Buyer Stock and/or the Buyer Options pursuant to this Agreement for its own account for investment purposes only and not with a view to, or for sale or resale in connection with, any public distribution thereof or with any present intention of selling, distributing or otherwise disposing of any of such shares in violation of the Securities Act. 4 <PAGE> 106 Section 4.9. Regulation S. Each of the Warrantor Sellers (other than Stephen King) and Shen Chia Wong, severally and not jointly, represents and warrants that he, she or it: (a) is not a U.S. person within the meaning of Rule 902(k) of Regulation S under the Securities Act, which term includes: (i) a natural person resident in the United States; (ii) a partnership or corporation organized or incorporated under the laws of the United States; (iii) an estate of which any executor or administrator is a U.S. person; (iv) a trust of which any trustee is a U.S. person; (v) an agency or branch of a foreign entity located in the United States; (vi) a non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) a discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated or (if an individual) resident in the United States; and (viii) a partnership or corporation (A) organized or incorporated under the laws of any foreign jurisdiction and (B) formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) under the Securities Act) who are not natural persons, estates or trusts. (b) has not been offered the shares of Buyer Stock and Buyer Options in the United States and at the time of execution of this Agreement is physically outside the United States. (c) acknowledges and agrees that until the expiration of the one-year distribution compliance period within the meaning of Rule 902(f) of Regulation S under the Securities Act, such Seller will only resell the Buyer Stock or Buyer Options acquired in the Transaction in compliance with the provisions of Regulation S, pursuant to registration under the Securities Act or pursuant to an exemption from registration. 5 <PAGE> 107 (d) is acquiring the Buyer Stock and/or Buyer Options for its own behalf and not on behalf or for the benefit of any U.S. Person and the sale and resale of the Buyer Stock or Buyer Options has not been pre-arranged with any U.S. person or buyer in the United States. (e) acknowledges that Buyer's transfer agent will not be required to accept for registration of transfer any shares of Buyer Stock acquired in the Transaction, except upon presentation of evidence satisfactory to Buyer and the transfer agent that the restrictions set forth therein have been complied with. (f) agrees not to engage in hedging transactions with regard to shares of Buyer Stock or Buyer Options acquired in the Transaction unless in compliance with the Securities Act. (g) acknowledges that Buyer will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agrees that if any of the acknowledgments, representations, warranties and agreements deemed to have been made by the acquisition of the Buyer Stock and/or Buyer Options by such Warrantor Seller (other than Stephen King) or by Shen Chia Wong, as the case may be, are no longer accurate, such Warrantor Seller (other than Stephen King) or Shen Chia Wong, as the case may be, shall promptly notify Buyer. Section 4.10. Transfer Restrictions. Such Seller is aware that the shares of Buyer Stock and Buyer Options to be issued to such Seller pursuant to this Agreement have not been registered under the Securities Act or any applicable U.S. state securities laws, and agrees that the Buyer Stock and Buyer Options will not be offered or transferred, sold, assigned, pledged, hypothecated, gifted, encumbered or otherwise disposed of prior to the date which is two years after the date of original issue of such shares of Buyer Stock except (a) to Buyer or any Subsidiary of Buyer or (b) pursuant to a registration statement which has been declared effective under the Securities Act or (c) pursuant to offers and sales to non-U.S. persons that occur outside the United 6 <PAGE> 108 States in an offshore transaction within the meaning of Rule 902 of Regulation S under the Securities Act or (d) pursuant to Rule 144 under the Securities Act or (e) pursuant to any other available exemption from the registration requirements of the Securities Act, if in the opinion of counsel reasonably acceptable to Buyer such exemption is applicable. Such Seller will not transfer any shares of Buyer Stock and/or Buyer Options in violation of the provisions of any applicable U.S. federal or state, United Kingdom or other jurisdiction's securities laws. 7 <PAGE> 109 EXHIBIT C REPRESENTATIONS AND WARRANTIES OF WARRANTOR SELLERS <TABLE> <CAPTION> Page ---- <S> <C> Section 5.1. Organization ........................................................ 1 Section 5.2. No Breach ........................................................... 1 Section 5.3. Capitalization ...................................................... 1 Section 5.4. Equity Interests .................................................... 2 Section 5.5. Affiliate Transactions .............................................. 3 Section 5.6. Taxes ............................................................... 4 Section 5.7. Intellectual Property Matters ....................................... 6 Section 5.8. Assets and Properties ............................................... 9 Section 5.9. Contracts ........................................................... 9 Section 5.10. Litigation ......................................................... 13 Section 5.11. Environmental Matters .............................................. 14 Section 5.12. Financial Information .............................................. 14 Section 5.13. Compliance With Applicable Law ..................................... 16 Section 5.14. Licenses ........................................................... 16 Section 5.15. Employee Matters ................................................... 17 Section 5.16. Absence of Material Adverse Effect and Certain Events .............. 19 Section 5.17. Sufficiency of Assets .............................................. 21 Section 5.18. Governmental Approvals ............................................. 21 Section 5.19. Product Warranty ................................................... 22 Section 5.20. Insurance .......................................................... 22 Section 5.21. Bank Accounts; Powers of Attorney .................................. 23 Section 5.22. No Material Misstatement or Omission ............................... 23 Section 5.23. Supplemental Information Reviewed by the Buyer and/or Its Legal and Financial Advisers ................................... 23 </TABLE> <PAGE> 110 REPRESENTATIONS AND WARRANTIES OF WARRANTOR SELLERS Each Warrantor Seller, jointly and severally, represents and warrants to Buyer as follows: Section 5.1. Organization. The Company is a corporation duly incorporated under the laws of England and Wales as a company limited by shares. The Company has all requisite power and authority, corporate or otherwise, to own, lease and operate its assets and properties and to carry on the Business as presently conducted. Except as set forth on Schedule 5.1, the Company is duly qualified to transact business and in good standing as a foreign corporation in each jurisdiction in which the ownership, leasing or holding of its properties or the conduct or nature of its business makes such qualification necessary. The failure to be so qualified in any of the jurisdictions set forth in Schedule 5.1 would not have, individually or in the aggregate, a Material Adverse Effect. Set forth on Schedule 5.1 is a list of the jurisdictions in which the Company transacts business. True and complete copies of the memorandum and articles of association and statutory books of the Company, duly written up immediately prior to the Closing, have previously been delivered or made available to Buyer. Section 5.2. No Breach. Except as set forth on Schedule 5.2, the consummation of the Transaction, with or without the giving of notice or the lapse of time or both, does not or will not result in the creation of any Lien upon any of the assets or properties of the Company (except for Permitted Liens), or conflict with, or result in a breach or violation of, or a default under, or give rise to a right of amendment, termination, cancellation or acceleration of any obligation or to a loss of a benefit under (i) the memorandum and articles of association of the Company, (ii) any Contract of the Company, or (iii) any Law or License to which the Company or its properties or assets is subject, except, in the case of items (ii) and (iii) above only, for those which would not have, individually or in the aggregate, a Material Adverse Effect. Section 5.3. Capitalization. The authorized share capital of the Company is Pound Sterling50,332.00 divided into 149,223,900 Ordinary Shares, 996,000 Class A Shares and 776,100 Preference Shares. As of the date hereof, 3,084,536 Ordinary Shares, 996,000 Class A Shares and 776,100 Preference Shares have been <PAGE> 111 issued and the Sellers are registered in the register of members as the owners of such Shares, as set forth on Schedule 5.3. The Company is not registered in the register of members of the Company as the owner of any Shares. Schedule 5.3 sets forth a list of all Company Options which have been granted by the Company as of the date hereof and, with respect to each such Company Option, the exercise price thereof, the number of Shares subject thereto and the owner thereof. As of the date hereof, (a) 382,859 Ordinary Shares are issuable upon exercise of outstanding Company Options, (b) 996,000 Ordinary Shares are issuable upon conversion of outstanding Class A Shares and (c) 776,100 Ordinary Shares are issuable upon conversion of outstanding Preference Shares. Except for as set forth in the immediately preceding sentences, no shares or other securities of the Company have been issued. The entire issued share capital of the Company is duly authorized, validly issued, and fully paid. After giving effect to Section 8.2, no person has any preemptive or subscription rights or any option, contract or other right to purchase capital stock of the Company, except as otherwise provided by the Companies Act. There are no bonds, debentures, notes or other indebtedness of any type whatsoever of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which any shareholders of the Company may vote. Except for the Company Options set forth on Schedule 5.3, the Class A Shares set forth on Schedule 5.3, and the Preference Shares set forth on Schedule 5.3, there are no outstanding options, warrants, calls, demands Contracts or other rights of any nature to purchase, obtain or acquire or otherwise relating to, or any securities or obligations convertible into or exchangeable for, or any voting agreements with respect to, any shares in the Company or any other securities of the Company. Neither the Company, nor any of its Affiliates is obligated, pursuant to any securities, options, warrants, calls, demands, Contracts or other rights of any nature or otherwise, now or in the future, contingently or otherwise, to issue, deliver, sell, purchase or redeem any shares in the Company, any other securities of the Company or any interest in the Company to or from any Person or to issue, deliver, sell, purchase or redeem any other Contracts of the Company relating to any shares in or other securities of the Company to or from any Person. Section 5.4. Equity Interests. The Company does not own any shares in or other equity interest in any 2 <PAGE> 112 corporation, partnership, limited liability entity or other entity. Section 5.5. Affiliate Transactions. Except as set forth on and, in the case of documents that are referred to as attached, attached to Schedule 5.5, there is no: (a) indebtedness, Contract, arrangement, and since March 31, 1999 there has not been any payment or transfer, directly or indirectly, of any funds or other property, between the Company, on the one hand, and any Affiliate, officer, director, secretary or shareholder of the Company or, other than in respect of the Non-Warrantor Sellers, any Affiliate of any thereof, on the other hand, except for (i) regularly scheduled cash compensation paid to employees consistent with written policies of the Company and amounts paid to employees pursuant to existing employee benefit plans listed on Schedule 5.15(b) (Plans) and (ii) reimbursements of employees' ordinary and necessary business expenses incurred in connection with their employment; (b) interest of any Affiliate, officer, director or shareholder of the Company or, other than in respect of the Non-Warrantor Sellers, any Affiliate of any thereof in any assets or properties (whether real, personal, or mixed and whether tangible or intangible) owned or used by or pertaining to the Company; or (c) ownership (whether legal or beneficial) by any Affiliate, officer, director, secretary or shareholder of the Company or, other than in respect of the Non-Warrantor Sellers, any Affiliate of any thereof of any equity, financial or profit interest (except for (x) ownership of less than five percent of the outstanding capital stock of any corporation that is publicly traded on any recognized exchange or in the over-the-counter market or (y) any interest held by any Non-Warrantor Sellers for investment purposes only)in a Person that has (i) had material business dealings or a material financial interest in any transaction with the Company (other than business dealings or transactions conducted in the ordinary course of business with the Company at prevailing market prices and on prevailing market terms) or (ii) engaged in competition with the Company with respect to any line of the products or services of the Company in any market presently served by the Company. 3 <PAGE> 113 Section 5.6. Taxes. (a) All United Kingdom and foreign Tax returns, reports, declarations, statements and other documents ("Tax Returns") required to be filed by or on behalf of the Company have been timely filed with the appropriate tax authorities or requests for extensions have been timely filed and any such extensions have been granted and have not expired. (b) Each such Tax Return was complete and correct in all material respects. (c) All Taxes with respect to taxable periods or portions thereof covered by such Tax Returns and all other material Taxes (without regard to whether a Tax Return was or is required) for which the Company is otherwise liable that are due have been paid in full and to the extent the liabilities for such Taxes are not due, adequate reserves have been established on the October 31, 1999 Balance Sheet of the Company in accordance with UK GAAP. (d) The Company has timely withheld proper and accurate amounts from its employees, customers, shareholders and others from whom it is or was required to withhold Taxes in compliance in all material respects with all applicable Laws and has timely paid all such withheld amounts to the appropriate taxing authorities. (e) All Taxes due with respect to any completed and settled claims, actions, proceedings, investigations or inquiries by any taxing authority for which the Company is or might otherwise be liable have been paid in full. (f) To the knowledge of the Management Sellers, there are no claims, actions, proceedings, investigations or inquiries pending with respect to any Taxes for which the Company is or might otherwise be liable. No taxing authority has given written notice of the commencement of any claims, actions, proceedings, investigations or inquiries with respect to any such Taxes. No issue has arisen in any examination of the Company by any taxing authority that, if raised with respect to the same or substantially similar facts arising in any other Tax period not so examined, would result in a deficiency for such other period, if upheld. (g) Except as set forth in Schedule 5.1 (Foreign Establishments and Jurisdictions in which the Company 4 <PAGE> 114 Transacts Business), the Company is and always has been resident in the United Kingdom for Tax purposes and is not and never has been resident for Tax purposes in any jurisdiction other than the United Kingdom. (h) Except as set forth in Schedule 5.1 (Foreign Establishments and Jurisdictions in which the Company Transacts Business), the United Kingdom is the only country in which the Company regularly conducts trade or business whose tax authorities seek to charge Tax on the worldwide profits or gains of the Company. (i) The Company has at no time been a member of a group for the purposes of Part X, Chapter IV of the Taxes Act 1988. (j) The documents attached to Schedule 5.6(j) and the other Schedules referred to in this Section 5.6 represent the only material correspondence or communication to date between the Company and the Inland Revenue regarding the Tax affairs of the Company, and there is no other correspondence or communication relating to any tax matters which is reasonably likely to have a Material Adverse Effect. (k) [Intentionally Omitted] (l) The Company is not a "passive foreign investment company", within the meaning of Section 1297(a) of the Code. (m) No Liens for Taxes, other than Permitted Liens, exist with respect to any of the assets or properties of the Company or the Business Intellectual Property. (n) [Intentionally Omitted] (o) The Company has properly operated the Pay As You Earn system deducting tax as required by law from all payments to or treated as made to employees and ex-employees of the Company and has timely accounted to the Inland Revenue for all tax so deducted and all returns required pursuant to Section 203 of the Taxes Act 1988 and regulations made thereunder have been timely made and are accurate and complete in all respects. (p) Schedule 5.6(p) contains full details of all dispensations obtained by the Company and all material details 5 <PAGE> 115 of any visit from the Inland Revenue within the last six years including full details of any settlement made pursuant thereto. (q) To the knowledge of the Management Sellers, the Company has not made any payment to or provided any benefit for any officer or employee or ex-officer or ex-employee of the Company which is not allowable as a deduction in calculating the profits of the Company for taxation purposes. (r) [Intentionally Omitted] (s) The Company is not and never has been either a contractor or a sub-contractor for the purposes of Chapter IV Part XIII of the Taxes Act 1988. (t) The Company has paid all national insurance contributions for which it is liable and has kept proper books and records relating to the same and has not been a party to any scheme or arrangement to avoid any liability to account for primary or secondary national insurance contributions. (u) Except as set forth on Schedule 5.6(u), the Company has duly paid all stamp duty on documents to which it is a party and which transfer property or rights to property. (v) The Company has made all returns and paid all stamp duty reserve tax in respect of any transaction in securities to which it has been a party and in respect of which it is liable to account for stamp duty reserve tax. (w) The Company has complied with all statutory provisions and regulations relating to Value Added Tax and has duly paid or provided for all amounts of Value Added Tax for which the Company is liable. Section 5.7. Intellectual Property Matters (a) In this Section 5.7: (i) "Product Intellectual Property" means all Intellectual Property owned or used by the Company and comprised in the Company's products; (ii) "Own Use Intellectual Property" means all Intellectual Property owned or used by the Company in the 6 <PAGE> 116 conduct of its business, other than the Product Intellectual Property; and (iii) "Business Intellectual Property" means the Product Intellectual Property and the Own Use Intellectual Property. (b) Set forth on Schedule 5.7(b) and (c) are details of all Contracts of the Company relating to Product Intellectual Property, including the distribution or license of, or royalty payments with respect to, Product Intellectual Property, whether as licensor or licensee, other than agreements set forth in Schedule 5.9(a) (Contracts) relating to the supply and distribution of the Company's products, and employment contracts. (c) Except as set forth on Schedule 5.7(c): (i) the Company owns all right title and interest in and to (or, in the case of Product Intellectual Property subject to license agreements in favor of the Company set forth on Schedule 5.7(b), has an absolute right to use) all of the Product Intellectual Property, free and clear of any Liens and free from any requirement of any past, present or future payments (other than maintenance payments, license fees or other payments referred to in the Contracts set forth on Schedule 5.7(b) or specifically disclosed in Schedule 5.7(c)); (ii) the Company is entitled to use the Own Use Intellectual Property in relation to the Business free from any outstanding requirement for any payment in respect of such use whether past present or future and free of any conditions or restrictions except (in the case of Own Use Intellectual Property licensed to the Company on a non-exclusive basis) for restrictions of a kind which are customarily imposed in generally available standard license agreements; (iii) to the knowledge of the Warrantor Sellers, no Product Intellectual Property or any service rendered by the Company, or any product, process or material developed, manufactured, produced, or used by the Company, or any use by the Company of any Own Use Intellectual Property, is alleged to infringe upon or 7 <PAGE> 117 infringes upon any Intellectual Property or other rights owned or held by any other Person; (iv) no Action relating to any Product Intellectual Property or the Company's use of any Own Use Intellectual Property has been issued by or against the Company or, to the knowledge of the Warrantor Sellers, is pending or threatened by or against the Company; (v) to the knowledge of the Warrantor Sellers, there is no infringement or misappropriation by any Person of any Product Intellectual Property or of any Own Use Intellectual Property licensed exclusively to the Company; (vi) except as set forth on Schedule 5.7(b), there are no Contracts between the Company, on the one hand, and any other Person, on the other hand, under which the Company has granted rights or licenses in any Business Intellectual Property or has granted an option to acquire any such rights or licenses; (vii) the Company has not covenanted or agreed with any Person not to sue or otherwise enforce any legal rights with respect to any Business Intellectual Property; and (viii) except as otherwise provided in any license agreements in favor of the Company set forth on Schedule 5.7(b) or 5.9(a) (Contracts), all Product Intellectual Property and all Own Use Intellectual Property owned by the Company was developed entirely by employees of the Company during the time they were employees of the Company. (d) Except as set forth on Schedule 5.7(d), the Company has taken all reasonable steps (including measures to protect secrecy and confidentiality) to protect all such rights, title and interest as it may have in and to all Business Intellectual Property. (e) The Business Intellectual Property constitutes all Intellectual Property Rights necessary to conduct fully the Business as currently conducted. (f) The Company has no registered Product Intellectual Property and has not applied for any registered trademarks, patents or designs. 8 <PAGE> 118 Section 5.8. Assets and Properties. (a) Except as to Intellectual Property, which is the subject of Section 5.7, the Company has (i) good and marketable title to all of its assets and properties (whether real, personal or mixed, or tangible or intangible) which it purports to own and (ii) valid lease agreements in respect of all of its assets and properties (other than Real Property) which it purports to lease, in each case free and clear of any Liens, other than Permitted Liens and the fixed and floating charge in favor of National Westminster Bank plc described in Schedule 5.8(a). (b) The Company does not own freehold to and has not previously owned freehold to any Real Property. (c) Schedule 5.8(c) contains a complete and accurate list of and copies of documents relating to: (i) all real property leased, subleased or occupied by the Company pursuant to a Lease (the "Leased Premises") and (ii) all Leases to which the Company is a party (including all subleases and other Leases through which the Company has granted any interest in any of the Leased Premises, or any portion thereof, to any Person). The Company has valid lease agreements in respect of each of the Leased Premises. (d) The Company enjoys peaceful and undisturbed possession of each of the Leased Premises. There are no restrictions imposed by any Lease or other Contract or by Law which preclude or restrict the ability to use the Leased Premises for the purposes for which they are currently being used. Section 5.9. Contracts. (a) Schedule 5.9(a) lists and attaches copies of all of the following Contracts of the Company (other than those set forth on Schedule 5.5 (Affiliate Transactions), Schedule 5.7(b) (Commitments Relating to Intellectual Property), Schedule 5.8(c) (Leased Premises), Schedule 5.15(b) (Plans) or Schedule 5.15(c) (Employee Agreements)): (i) all Contracts (or groups of related Contracts) for the lease (whether as lessor or lessee) of personal property to or from the Company which provide for lease payments in excess of Pound Sterling100,000 over the term of the Contract; 9 <PAGE> 119 (ii) all Contracts (or groups of related Contracts) for the purchase or sale of inventories, stock or raw materials, supplies, products, spare parts or real, personal or mixed property, or for the furnishing or receipt of services, including customer and supply Contracts, which provide for payments to or from the Company of Pound Sterling100,000 or more for each Contract; (iii) all Contracts concerning any partnership, joint venture, joint development or other cooperation arrangement; (iv) all material Contracts providing for management services or for the services of independent contractors or consultants (or similar arrangements); (v) all Contracts providing for advertising, promotional or marketing services; providing for payment by the Company of Pound Sterling50,000 or more; (vi) all Contracts (or groups of related Contracts) relating to or evidencing indebtedness for the borrowing of money by the Company (or the creation, incurrence, assumption, securing or guarantee thereof), including any Contract under which the Company has borrowed any money from, or issued any note, bond, debenture or other evidence of indebtedness to, any Person; (vii) all Contracts (or groups of related Contracts) under which (A) any Person has directly or indirectly guaranteed any indebtedness or other Liabilities of the Company or (B) the Company has directly or indirectly guaranteed any indebtedness or other Liabilities of any Person (in each case other than endorsements for the purpose of collection in the ordinary course of business); (viii) all Contracts (or groups of related Contracts) under which the Company has directly or indirectly made any material advance, loan, extension of credit or capital contribution to, or other investment in, any Person, including employees, or which involve a sharing of profits, losses, costs or Liabilities by the Company with any other Person, other than trade accounts payable arising in the ordinary course of business of the Company; 10 <PAGE> 120 (ix) all Contracts (or groups of related Contracts) providing for or containing any mortgage, pledge, security agreement or deed of trust or other Contract granting a material Lien upon any assets or properties of the Company; (x) all Contracts providing for indemnification of any Person with respect to material Liabilities relating to any current or former business of the Company; (xi) all Contracts with any broker, distributor, dealer, sales representative, supplier, manufacturer or other Person (other than Contracts with customers which are disclosed pursuant to clause (ii) above) relating to the distribution, sale, supply or manufacture of products providing for payment by or to the Company of Pound Sterling50,000 or more; (xii) all Contracts providing for or containing confidentiality and non-disclosure obligations (other than standard non-disclosure forms signed by employees generally, copies of which have been provided to Buyer); (xiii) all Contracts for the purchase or sale of any business, corporation, partnership, joint venture, association or other business organization or any division, material assets, operating unit or product line thereof (and for purposes of this Section 5.9, material assets means assets with a value of Pound Sterling50,000 or more and any assets that are otherwise material to the business, operations, properties or condition of the Company, taken as a whole); (xiv) all Contracts which limit or purport to limit the ability of the Company to compete in any line of business or with any Person or in any geographic area or which limit or purport to limit or restrict the ability of the Company with respect to the development, manufacture, marketing, sale or distribution of, or other rights with respect to, any products or services; (xv) all swap agreements (as defined in the definition of the term Contract); (xvi) all Contracts with any Governmental Entity; 11 <PAGE> 121 (xvii) all Contracts containing any restrictions with respect to payment of dividends or any other distributions in respect of the capital stock of the Company which will continue in effect after the Closing; and (xviii) all Contracts which are, in the reasonable opinion of the Management Sellers, otherwise material to the Company which are not described in any of the categories specified in this Section 5.9(a). Each Contract of the Company set forth or required to be set forth on Schedule 5.5 (Affiliate Transactions), Schedule 5.7(b) (Commitments Relating to Intellectual Property), Schedule 5.8(c) (Leased Premises), Schedule 5.9(a), Schedule 5.15(b) (Plans) or Schedule 5.15(c) (Employee Agreements) is referred to herein as a "Material Contract". (b) Except as set forth on Schedule 5.9(b), each Material Contract is in full force and effect and is legal, valid, binding and enforceable in accordance with its terms (subject to general principles of equity) as to the Company and, to the knowledge of the Management Sellers, each other party thereto. None of the Material Contracts requires any payments or the performance of any obligations that could reasonably be expected to have a Material Adverse Effect. (c) Except as set forth on Schedule 5.9(c) or 5.9(b), the Company (and, to the knowledge of the Management Sellers, each of the other party or parties thereto), has performed in all material respects all obligations required to be performed by it under each Material Contract. Except as set forth on Schedule 5.9(c), no event has occurred with respect to the Company or, to the knowledge of the Management Sellers, with respect to any other Person that (with or without lapse of time or the giving of notice or both) contravenes, conflicts with or results in a violation or breach of or give the Company or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity of, or to cancel, terminate or modify, any Material Contract. Except as set forth on Schedule 5.9(c), there are no pending renegotiations of, or requests to renegotiate, any Material Contract with any Person. The Company has not and, to the knowledge of the Management Sellers, no other party to any Material Contract has, repudiated any material provision thereof or terminated any 12 <PAGE> 122 Material Contract and the Company has not received any notice that any other party or parties to any Material Contract intends to exercise any right of cancellation, termination or non-renewal thereof. The Company has heretofore delivered to Buyer true and complete copies of all written Material Contracts and a true and complete written summary of all oral Material Contracts. (d) Except as set forth on Schedule 5.9(d) or Schedule 5.8(c) (Leased Premises), (i) there are no "change of control" or similar provisions or any obligations arising under any Material Contract and (ii) none of the execution, delivery or performance of any Transaction Document or consummation of the Transaction will, under the terms, conditions or provisions of any Material Contract (A) require any Consent of, with or to any Person, (B) result in any increase in any payment or change in any term or (C) grant any repayment or repurchase rights to any Person. Section 5.10. Litigation. (a) Except as set forth on Schedule 5.10(a) or Schedule 5.7(c) (Intellectual Property Matters), (i) no judgment, ruling, order, writ, decree, stipulation, injunction or determination by or with any Governmental Entity to which the Company or any of its Affiliates is party or by which, the Company or any of its Affiliates or any assets of any thereof is bound, and which relates to or affects the Company, the assets, properties, Liabilities or employees of the Company, any Transaction Document or the Transaction is in effect and (ii) neither the Company nor any of its Affiliates is party to or engaged in or, to the knowledge of the Management Sellers, threatened with any Action which relates to or affects the Company, the assets, properties, Liabilities or employees of the Company, any Transaction Document or the Transaction, and, to the knowledge of the Management Sellers, no event has occurred which could reasonably be expected to result in any such Action. (b) The Company is not in default under or with respect to any judgment, ruling, order, writ, decree, stipulation, injunction or determination of the type described in Section 5.10(a)(i). (c) No order has been made, petition presented or resolution passed for the winding-up of the Company and no meeting has been convened for the purposes of winding-up the 13 <PAGE> 123 Company. The Company has not taken and, to the knowledge of the Management Sellers, no other Person has taken, steps for the appointment of an administrator or receiver (including an administrative receiver) of all or any part of the Company's assets. The Company has not made or proposed any arrangement or composition with its creditors or any class of its creditors for the relief of its debts. The Company is not insolvent, and is not unable to pay its debts within the meaning of the Insolvency Act 1986. (d) None of the Actions set forth on Schedule 5.10(a) or Schedule 5.7(c) (Intellectual Property Matters), if adversely determined, will have a Material Adverse Effect. Section 5.11. Environmental Matters. The Company has obtained all Permits of a material nature required under Environmental Law and has at all times complied with all applicable Environmental Laws and with the terms and conditions of those Permits and has filed all material notifications required. To the knowledge of the Management Sellers, there are no circumstances which could reasonably give rise to any modification, suspension or revocation of a Permit. To the knowledge of the Management Sellers, there are in relation to the Company no past or present events, conditions, circumstances, activities, practices or incidents which interfere with or prevent compliance with or which give rise to any common law or legal liability or otherwise form the basis of any material claim, action, suit, proceeding, hearing or investigation relating to the Environment or any breach of Environmental Laws in any jurisdiction in which the Company has owned or leased property. Section 5.12. Financial Information. (a) Set forth on Schedule 5.12(a) are (i) the statutory accounts of the Company for the fiscal year ended March 31, 1999 filed with the Registrar of Companies, incorporating a statement of profit and loss, balance sheet and statement of cash flows for the period then ended, together with the notes thereto and the unqualified report of PricewaterhouseCoopers thereon (the "Statutory Accounts"), and (ii) the unaudited management accounts, including the unaudited balance sheet of the Company as of October 31, 1999 and the related statements of profit and loss for the seven months ended October 31, 1999 (the "Management Accounts"). 14 <PAGE> 124 The Statutory Accounts and the Management Accounts have been prepared from and in accordance with the books, accounts and financial records of the Company (which are maintained in accordance with UK GAAP) and in accordance with UK GAAP consistently applied (except that the Management Accounts are subject to year end audit adjustments and do not include a statement of cash flow or other notes thereto). The Statutory Accounts and the Management Accounts give a true and fair view, in conformity with UK GAAP applied on a consistent basis, of the financial position of the Company as of the dates to which they have been prepared and the profits and losses and, in the case of the Statutory Accounts, cash flows of the Company for the periods set forth therein. (b) Except for Liabilities (i) in the amounts set forth on Schedule 5.12(b), (ii) in the amounts set forth in the Management Accounts or (iii) arising in the ordinary course of business consistent with past practices since October 31, 1999 and which have not had and cannot reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or (iv) arising in connection with the Transaction, the Company does not have any Liabilities (whether absolute or contingent, or accrued or unaccrued) of a nature required to be set forth on a balance sheet prepared in accordance with UK GAAP or disclosed in the notes thereto. (c) All accounts receivable of the Company arose from bona fide sales and deliveries of goods or performance of services in the ordinary course of business. None of such receivables are subject to any performance obligations by the Company prior to collection. All accounts receivable arising before October 31, 1999 have been adequately reserved in the October 31, 1999 Balance Sheet in accordance with UK GAAP. Except as has been reserved against in the October 31, 1999 Balance Sheet, or as set forth in Schedule 5.10(a) (Litigation), there is no material dispute with respect to the amount or validity of any receivables of the Company. (d) The inventories of the Company consists of items which are usable and, in the case of finished goods inventory, saleable at prevailing market prices in the ordinary course of business, except for obsolete materials and excess quantities, all of which, if purchased before October 31, 1999, have been written down in accordance with UK GAAP to the lower of cost or net realizable market value in the October 31, 1999 Balance Sheet. All inventories of the 15 <PAGE> 125 Company have been procured and (in the case of work-in-process and finished goods inventory, produced for sale) in the ordinary course of business. Except as reserved against in the October 31, 1999 Balance Sheet, the quantities of each item of inventory are, in the opinion of the Management Sellers, not excessive and are consistent with anticipated requirements as of the time such Contracts therefor were made. The volume of production or purchases and orders for inventories have not been reduced or increased in anticipation of the Transaction. (e) As set forth in Schedule 5.12(e), the Company has made inquiries of suppliers of computer programs and software used in the operations of the Company (including critical business systems, facilities, shop floor controls and the flow of goods and services which the Company procures from third parties) concerning the ability of such computer programs and software correctly to recognize, calculate, sort, store, display and/or process dates outside of the range of 1900-1999, including the years 2000 and beyond, and correctly to recognize that the year 2000 is a leap year. Products sold by the Company correctly recognize, calculate, sort, store, display and/or process dates outside of the range of 1900-1999, including the years 2000 and beyond, and correctly recognize that the year 2000 is a leap year, to the extent such products include date sensitive software. Since December 31, 1999, the operations of the Company have not been materially interrupted or delayed due to phenomena related to "year 2000". Section 5.13. Compliance With Applicable Law. (a) Except as set forth on Schedule 5.13(a), (i) the Company is in compliance in all material respects and has complied in all material respects with all Laws applicable to the Company, including all Laws relating to the exportation of goods and services and export compliance and control, (ii) no material claims or complaints from any Governmental Entities or other Persons have been asserted or received by the Company or any of its Affiliates related to or affecting the Company and, to the knowledge of the Management Sellers, no claims or complaints are threatened, alleging that the Company or any Affiliate thereof is in violation of any Laws or Licenses applicable to the Company and (iii) to the knowledge of the Management Sellers, no investigation, inquiry, or review by any Governmental Entity with respect to 16 <PAGE> 126 the Company is pending or threatened, nor, to the knowledge of the Management Sellers, has any Governmental Entity indicated an intention to conduct any such investigation, inquiry or review. (b) Neither the Company nor any Affiliate thereof, nor any director, officer, agent, employee or other Person associated with or acting on behalf of any of the Company or any Affiliate thereof has, directly or indirectly, used any corporate funds for any unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, made any unlawful payment to any Governmental Entity or governmental, administrative or regulatory official or employee or to any political party or campaign from corporate funds or made any bribe, unrecorded rebate, payoff, influence payment, kickback or other unlawful payment. Section 5.14. Licenses. Schedule 5.14 contains a complete and accurate list of all material Licenses that are held by the Company. Except as specifically set forth on Schedule 5.14 and Schedule 5.7(b) (Commitments Relating to Intellectual Property), Schedule 5.8(c) (Leased Premises) and Schedule 5.9(a) (Contracts), the Licenses listed on Schedule 5.14 constitute all the Licenses that are necessary for the Company to operate the Business and to own and use the Company's assets in compliance with all Laws applicable to such operation, ownership and use. All Licenses set forth as Schedule 5.14 are validly held by the Company and are in full force and effect. Except as set forth on Schedule 5.14, no Licenses set forth as Schedule 5.14 will be subject to suspension, modification, revocation, cancellation, termination or nonrenewal as a result of the consummation of the Transaction. The Company has complied in all material respects with all of the terms and requirements of the Licenses of the Company. Section 5.15. Employee Matters. (a) The Company is not a party to any Contract regarding collective bargaining or other Contract with any labor or trade union or collective bargaining group representing any employee of the Company, nor does any labor or trade union or collective bargaining agent represent any employee of the Company. No Contract regarding collective bargaining has been requested by, or is under discussion between management of the Company (or any management group or 17 <PAGE> 127 association of which the Company is a member or otherwise a participant) and any group of employees of the Company, nor are there any representation proceedings or petitions seeking a representation proceeding presently pending against the Company, nor are there any other current activities known to Sellers to organize any employees of the Company into a collective bargaining unit. There are no unfair labor practice charges or complaints pending or, to the knowledge of Sellers, threatened against the Company. Except as set forth on Schedule 5.15(a), there has never been any labor strike, slow-down, work stoppage, or other work-related dispute involving the Company and no such dispute is now pending or, to the knowledge of the Management Sellers, threatened against the Company. (b) Schedule 5.15(b) sets forth a complete and accurate list of each pension, retirement, savings, profit sharing, deferred compensation, medical, vision, dental, hospitalization, and other health plan, cafeteria, flexible benefits, short-term and long-term disability, accident and life insurance plan, bonus, incentive and special compensation and other plan and each other employee benefit plan, program or Contract to which the Company thereof contributes or is required to contribute, or which the Company thereof sponsors, maintains or administers or which is otherwise applicable to employees or categories of employees of the Company (other than the Company Options) (hereinafter referred to collectively as the "Plans"). (c) Schedule 5.15(c) sets forth a complete and accurate list of each employment Contract (whether written or oral) and employment policy with or for the benefit of, or otherwise relating to, any employees of the Company. There are no termination, severance or retention agreements or any other Contract providing for severance or other termination payments to any employee whose employment is terminated, except Contracts listed in Schedule 5.15(c). Neither the Company nor, to the knowledge of Management Sellers, any employee is in default in any material respect under any employment Contract. Except as separately set forth on Schedule 5.15(c), none of the execution, delivery or performance of any Transaction Document or the consummation of the Transaction will result in any obligation to pay any employees of the Company severance pay or termination, retention or other benefits, except any benefits offered by the Buyer after the Closing, the sign-on bonuses to be 18 <PAGE> 128 offered to certain employees of the Company at the Closing, and the right of Option Holders to exercise Company Options immediately as a result of the Transaction and the exchange of Company Options for Buyer Options pursuant to this Agreement. (d) Schedule 5.15(d) contains a complete and accurate list of the following information (as of December 20, 1999) for each employee and director of the Company, including each employee on leave of absence, or disability status: job title; current compensation paid or payable; and the date on which service commenced. (e) Except as set forth on Schedule 5.15(e), the Company has never employed or retained any employees, consultants or independent contractors to provide services to the Company outside of the United Kingdom and the Company has never maintained, contributed to or incurred any Liability under any employee benefit plan, arrangement, program or Contract that is or was subject to ERISA. Section 5.16. Absence of Material Adverse Effect and Certain Events. (a) Except as set forth on Schedule 5.16(a), no conditions, circumstances or state of facts exist, and since March 31, 1999, there has not been any event, occurrence, change, development or circumstances which, individually or in the aggregate, have had or could reasonably be expected to have a Material Adverse Effect. (b) Without limiting the generality of the foregoing, except as set forth on Schedule 5.16(b) or Schedule 5.15(c) (Employee Agreements), from and after March 31, 1999, the Company has conducted the Business only in the ordinary course consistent with past practices and the Company has not: (i) suffered any loss to its property (whether through destruction, accident, casualty, expropriation, condemnation or otherwise) or its business, or incurred any liability, damage, award or judgment for injury to the property or business of others or for injury to any person (in each case, whether or not covered by insurance) in excess of Pound Sterling100,000 in the aggregate; 19 <PAGE> 129 (ii) made any capital expenditure or series of capital expenditures in excess of Pound Sterling50,000 in the aggregate; (iii) made any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable or to become payable to any of their respective directors, officers, employees or agents, or agreed or promised (orally or otherwise) to pay, conditionally or otherwise, any bonus or extra compensation or other employee benefit to any of such directors, officers, employees or agents or, if it has done so, the position immediately prior to the date of this Agreement is set forth in Schedules 5.15(b) and (d); (iv) sold, assigned, leased or transferred any of its assets or properties, other than sales of inventory in the ordinary course of business; (v) except as set forth in Schedules 5.9(b) and (c)(Contracts), amended, renegotiated or terminated (other than by completion thereof) any Material Contract; (vi) made any change in its accounting methods, policies, practices or principles; (vii) waived or released any rights or claims of material value, including rights or claims under any Material Contract or waived or released any rights or claims against any Affiliate, director, officer or shareholder of the Company or any Affiliate or Associate of any thereof; (viii) changed or modified any of the credit, collection or payment policies, procedures or practices of the Company, including acceleration of collections of receivables, failure to make or delay in making collections of receivables, acceleration of payment of payables or other Liabilities or failure to pay or delay in payment of payables or other Liabilities; (ix) engaged in any discount activity with customers of the Company that has accelerated or would accelerate sales that would otherwise in the ordinary course of business consistent with past practices be expected to occur in later periods; 20 <PAGE> 130 (x) declared, set aside, paid or made any dividend or other distribution with respect to any of its shares of capital stock, or otherwise made any payments to any of its shareholders in their capacity as such, or redeemed, repurchased or otherwise acquired any shares of its capital stock or other securities or any rights, options or warrants to acquire any such shares or other securities; (xi) made any tax election, changed any annual tax accounting period, amended any tax return, settled or compromised any income tax liability, entered into any closing agreement, settled any tax claim or assessment, surrendered any right to claim a tax refund or failed to make the payments or consent to any extension or waiver of the limitations period applicable to any tax claim or assessment; or (xii) entered into any agreement or Contract (other than the Transaction Documents) to take any of the types of action described in subclauses (i) through (xi) of this Section 5.16(b). Section 5.17. Sufficiency of Assets. The assets and properties of the Company (including the Business Intellectual Property), whether owned, leased, licensed or otherwise held, constitute (a) all of the material assets and rights that are used by the Company in the operation of the Business as it is being conducted as of the date hereof and (b) all the property, real and personal, tangible and intangible, necessary for the Company to conduct the Business after the Closing as it is being conducted as of the date hereof. Section 5.18. Governmental Approvals. Except as set forth on Schedule 5.18, no material Consent or order of, with or to any Governmental Entity is required to be obtained or made by or with respect to the Company in connection with the consummation of the Transaction. 21 <PAGE> 131 Section 5.19 Product Warranty. No product manufactured, sold, leased or delivered or service rendered by the Company is subject to any guarantee, warranty or other indemnity beyond those set forth in the terms and conditions of sale contained in the Material Contracts set forth on Schedule 5.9(a) (Contracts) or as implied by Laws of England which can not be waived or excluded. Section 5.20. Insurance. (a) Schedule 5.20(a) sets forth a complete and accurate list of all insurance policies and surety bonds which the Company maintains with respect to the Company or its assets, Liabilities, employees, officers or directors ("Insurance Policies"). Except as set forth on Schedule 5.20(a), the Company has previously delivered to Buyer true and complete copies of all Insurance Policies. (b) The Insurance Policies: (i) in the opinion of the Management Sellers, will not lapse or be subject to suspension, modification, revocation, cancellation, termination or nonrenewal by reason of the execution, delivery or performance of any Transaction Document or consummation of the Transaction; (ii) in the opinion of the Management Sellers, insure the Company in reasonably sufficient amounts against all risks except as set forth on Schedule 5.20(b) usually insured against by Persons operating similar businesses or properties in the localities where such businesses or properties are located and (iii) are sufficient for compliance with all material requirements of Law and Contracts. The Company is current in all premiums or other payments due under each Insurance Policy and, to the knowledge of the Management Sellers, has otherwise performed in all material respects all of its respective obligations thereunder. The Company has not received any notice that any Insurance Policy is not in full force and effect, and the Management Sellers have no knowledge of any event, circumstance or condition that would cause (or would be reasonably likely to cause) any Insurance Policy not to be in full force and effect. The Company has given timely notice to the insurer under each Insurance Policy of all claims that may be insured thereby. 22 <PAGE> 132 Section 5.21. Bank Accounts; Powers of Attorney. Schedule 5.21 sets forth a complete and accurate list of: (a) all bank accounts, investment accounts and safe deposit boxes maintained by or on behalf of the Company, including the location and account numbers of all such accounts and safe deposit boxes, (b) the names of all Persons authorized to take action with respect to such accounts and safe deposit boxes or who have access thereto and (c) the names of all Persons holding general or special powers of attorney from the Company, and with copies of such documents or a summary statement of the terms thereof if not in writing. Section 5.22. No Material Misstatement or Omission. The Transaction Documents (including any schedule or exhibit thereto) do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained in such Transaction Document not misleading in any material respect. Section 5.23. Supplemental Information Reviewed by the Buyer and/or Its Legal and Financial Advisers. Copies of the documents listed on and attached to Schedule 5.23 (the "Schedule 5.23 Documents") have been supplied to the Buyer and/or its legal and/or financial advisors at or prior to Closing. Except as expressly set forth on Schedule 5.16 or in any of the documents listed on Schedule 5.16, none of the Schedule 5.23 Documents may have, or includes information concerning any circumstance, event, condition or other matter that may have, a Material Adverse Effect. None of the Schedule 5.23 Documents is material, or includes information that is material concerning any circumstance, event, condition or other matter that is material, for purposes of Sections 5.1 through 5.22 (inclusive) or any Schedules to such Sections. 23 <PAGE> 133 EXHIBIT D REPRESENTATIONS AND WARRANTIES OF BUYER <TABLE> <CAPTION> Page ---- <S> <C> Section 6.1. Organization ............................ 2 Section 6.2. Authority; Binding Obligation ........... 2 Section 6.3. No Breach ............................... 2 Section 6.4. Governmental Approvals .................. 3 Section 6.5. No Brokers .............................. 3 Section 6.6. Investment Intent ....................... 3 Section 6.7. Buyer Stock ............................. 3 Section 6.8. Securities Act Exemptions ............... 3 Section 6.9. SEC Filings; Financial Statements ....... 4 Section 6.10. No Material Adverse Change .............. 4 </TABLE> <PAGE> 134 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Sellers as follows: Section 6.1. Organization. Buyer is a corporation duly organized, validly existing and is in good standing under the laws of the State of Delaware. Section 6.2. Authority; Binding Obligation. Buyer has all requisite corporate power and authority to execute and deliver each Transaction Document delivered or to be delivered by Buyer and to perform all of its obligations hereunder and thereunder. The execution, delivery and performance by Buyer of each Transaction Document delivered or to be delivered by Buyer and the consummation by Buyer of the Transaction have been or will be duly authorized by all necessary and proper action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general and by general principles of equity. Each other Transaction Document to be delivered by Buyer will be duly executed and delivered by Buyer and, when so executed and delivered, will constitute the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general and by general principles of equity. Section 6.3. No Breach. None of the execution, delivery or performance by Buyer of any Transaction Document or the consummation by Buyer of the Transaction does or will, with or without the giving of notice or the lapse of time or both, conflict with, or result in a breach or violation of, or a default under (a) the Restated Certificate of Incorporation or By-Laws of Buyer, (b) any Contract to which Buyer is a party or by which any of its properties or assets are bound or (c) any Law or License or other requirement to which Buyer or its properties or assets are subject, except, in the case of items (b) and (c) above only, for those which would not have, individually or in the 2 <PAGE> 135 aggregate, a material adverse effect on the ability of Buyer to consummate the Transaction. Section 6.4. Governmental Approvals. Except for the Consents contemplated by the Registration Rights, no material Consent or order of, with or to any Governmental Entity is required to be obtained or made by or with respect to Buyer in connection with the execution, delivery and performance by Buyer of any Transaction Documents or the consummation by Buyer of the Transaction, other than those which, if not obtained, would not have, individually or in the aggregate, a material adverse effect on the ability of Buyer to consummate the Transaction. Section 6.5. No Brokers. There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Buyer who is or might be entitled to any fee, commission or payment in connection with the negotiation, preparation, execution or delivery of any Transaction Document or the consummation of the Transaction, nor is there any basis for any such fee, commission or payment to be claimed by any Person against Buyer. Section 6.6. Investment Intent. Buyer is purchasing the Shares for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof. Section 6.7. Buyer Stock. The Buyer Stock to be issued to Sellers pursuant to this Agreement will be duly authorized, validly issued, fully paid and non-assessable. Section 6.8. Securities Act Exemptions. The offer and sale of shares of Buyer Stock in the manner contemplated by this Agreement will be exempt from the registration requirements of the Securities Act by reason of Regulation S and/or Section 4(2) under the Securities Act. Neither Buyer, nor any of its Affiliates, nor any other Person acting on its or their behalf (i) has or will at any time offer, sell, contract to sell, pledge or otherwise dispose of shares of Buyer Stock or other securities of Buyer by means of any form of general solicitation or general advertising (within the meaning of Rule 502(c) under the Securities Act) or otherwise in a manner which would cause the exemption afforded by Section 4(2) of the Securities Act to cease to be applicable to the offer and sale of Buyer Stock under this Agreement or (ii) has made or 3 <PAGE> 136 will make any directed selling efforts in the United States (within the meaning of Rule 902 under the Securities Act). Section 6.9. SEC Filings; Financial Statements. (a) Buyer has filed all forms, reports and documents with the SEC since November 27, 1998 required to be filed by Buyer, each of which, at the time it was filed, complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act, each as in effect on the dates such forms, reports or documents were filed. Buyer has heretofore made available to Sellers' Representative copies, in the form filed with the SEC (including any amendments thereto), of (i) its Annual Reports on Form 10-K for the fiscal year ended September 30, 1999 or (ii) all other reports or registration statements filed by Buyer with the SEC since November 27, 1998 (collectively, the "Buyer SEC Filings"). The Buyer SEC Filings did not contain, when filed, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (b) The consolidated financial statements of Buyer included in the Buyer SEC Filings complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and present fairly, in accordance with United States generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Buyer and its consolidated subsidiaries as of the dates set forth therein and their consolidated results of operations and changes in financial position for the periods then ended (subject, in the case of unaudited interim financial statements, to normal year-end adjustments). Since September 30, 1999, there has not been any change, or any application or request for any change, by Buyer or any of its consolidated subsidiaries in any accounting principles, methods or policies for financial accounting or tax purposes. Section 6.10. No Material Adverse Change. Since September 30, 1999, no event has occurred that has had a material adverse effect on the business, operations, assets and financial condition of Buyer and its subsidiaries, taken 4 <PAGE> 137 as a whole, other than as disclosed in the Buyer SEC Filings. 5 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.1 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 4.1 <TEXT> <PAGE> 1 EXHIBIT 4.1 [Conformed Copy] FIRST AMENDMENT TO RIGHTS AGREEMENT This FIRST AMENDMENT TO RIGHTS AGREEMENT (the "Amendment") dated as of December 9, 1999 between Conexant Systems, Inc., a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent") is entered into to amend the Rights Agreement dated as of November 30, 1998 in the following particulars only: W I T N E S S E T H : WHEREAS, the Company and the Rights Agent are party to the Rights Agreement dated as of November 30, 1998 (the "Agreement"); WHEREAS, the Board of Directors of the Company authorized the increase of the Purchase Price (as defined in the Agreement) to $300 effective September 13, 1999, subject to adjustment as provided in the Agreement; WHEREAS, the Board of Directors of the Company has authorized and directed the issuance of Rights with respect to certain Common Shares of the Company that may become outstanding after the Distribution Date and an amendment to the Agreement to so provide; and WHEREAS, the Company and the Rights Agent desire to amend the Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements hereinafter contained, the parties agree as follows: 1. Definitions. Capitalized terms used in this Amendment and defined in the Agreement shall, unless otherwise indicated in this Amendment, have the meanings ascribed to such terms in the Agreement. 2. Amendment of Preamble. The second paragraph of the preamble of the Agreement is hereby amended by adding at the end thereof the following: "; provided, however, that Rights may be issued with respect to Common Shares that shall become outstanding after the Distribution Date and prior to the earlier of the Redemption Date and the Final Expiration Date in accordance with the provisions of Section 22 hereof." <PAGE> 2 3. Amendment of Section 7(a). The last sentence of Section 7(a) of the Agreement is hereby amended and restated in its entirety to read as follows: "The purchase price (the 'Purchase Price') for each one one-hundredth of a Preferred Share purchasable pursuant to the exercise of a Right shall be $300.00 effective September 13, 1999, and shall be subject to adjustment from time to time as provided in Section 11 or 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below." 4. Amendment of Section 22. Section 22 of the Agreement is hereby amended by adding at the end thereof the following: "In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the earlier of the Redemption Date and the Final Expiration Date, the Company (a) shall with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement in existence prior to the Distribution Date, or upon the exercise, conversion or exchange of securities, notes or debentures (pursuant to the terms thereof) issued by the Company and in existence prior to the Distribution Date, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) the Company shall not be obligated to issue any such Right Certificates if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Right Certificate would be issued or would create a significant risk of such options or employee plans or arrangements failing to qualify for otherwise available special tax treatment, and (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof." 5. Interpretation. In the event of any inconsistency or contradiction between the terms of this Amendment and the Agreement, the provisions of this Amendment shall prevail and control. Except as expressly amended by this Amendment, the Agreement shall remain in full force and effect. 6. Effectiveness. This Amendment shall become effective when it has been executed by each party hereto. 7. Counterparts. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an 2 <PAGE> 3 original, and all such counterparts shall together constitute but one and the same instrument. 8. Governing Law. This Amendment for all purposes shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts to be made and performed entirely within such State, without regard to the conflicts of law principles of such State. 9. Severability. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment and of the Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and attested, all as of the day and year first above written. CONEXANT Systems, Inc. Attest: By /s/ Jasmina A. Theodore By /s/ Dwight W. Decker ------------------------------------- ------------------------------- Title: Assistant Secretary Title: Chairman and Chief Executive Officer CHASEMELLON SHAREHOLDER SERVICES, L.L.C., as Rights Agent Attest: By /s/ Ron Lug By /s/ Sharon Knepper ------------------------------------- ------------------------------ Title: Vice President Title: Vice President </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 10.1 <TEXT> <PAGE> 1 EXHIBIT 10.1 [Conformed Copy] FOURTH AMENDMENT TO LOAN DOCUMENTS THIS FOURTH AMENDMENT ("Amendment"), dated as of November 23, 1999, is entered into by and among Conexant Systems, Inc., (the "Company"), each of the Subsidiaries party to the Credit Agreement (as defined below) as of the date hereof (the "Borrower Subsidiaries" and together with the Company, each a "Borrower" and collectively, the "Borrowers"), the Lenders party to the Credit Agreement, the Issuing Bank (as defined in the Credit Agreement) and Credit Suisse First Boston, a bank organized under the laws of Switzerland, acting through its New York branch, as administrative agent (in such capacity, the "Administrative Agent") and as collateral agent for the Lenders (in such capacity, the "Collateral Agent", and together with the Administrative Agent, the "Agents"). RECITALS A. The Borrowers, Lenders, the Issuing Bank and the Agents are parties to a certain Credit Agreement dated as of December 21, 1998 (as amended prior to the date hereof, the "Credit Agreement") pursuant to which the Lenders have agreed to extend credit to the Borrower. B. The Company has requested that the Lenders amend certain provisions of the Credit Agreement. C. The parties are willing to amend and modify the Credit Agreement subject to the terms and conditions of this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement, as amended. 2. AMENDMENT OF CREDIT AGREEMENT. (a) Section 2.13(c) of the Credit Agreement is amended to read in its entirety as follows: "(c) Not later than the third Business Day following the receipt of Net Cash Proceeds in respect of any Restricted Indebtedness, which, when added to the Net Cash Proceeds of all Restricted Indebtedness previously incurred, created or assumed since the Closing Date exceed $100,000,000 in the aggregate, the Total Revolving Commitment shall be reduced on a dollar for dollar basis by the amount of such Net Cash Proceeds from Restricted Indebtedness in the aggregate in excess of $100,000,000, provided, however, that in determining the foregoing <PAGE> 2 there shall be excluded from Net Cash Proceeds any and all proceeds arising from Indebtedness referred to in clauses (2) and (3) of the definition of "Acquisition Cost" in Section 6.4." (b) Section 6.4(b)(ii) of the Credit Agreement is amended to read in its entirety as follows: "(ii) investments selected by the Company in accordance with its Investment Authority policy as adopted by the Company on December 14, 1998 (as the same may be amended to time to time);" (c) Section 6.4(b)(xiii) of the Credit Agreement is amended to read in its entirety as follows: "(xiii) other Investments of any kind in a Related Business; provided, that: (x) no Default or Event of Default exists at the time of making such Investment or would result from the making of such Investment; and (y) the Company shall have delivered to the Administrative Agent a certificate certifying that at the time of and immediately after giving effect to any such Investment, the ratio of (1) the Total Debt of the Company and its Subsidiaries on the date of such Investment (including all Indebtedness incurred in connection with or resulting from such Investment that would constitute Total Debt) to (2) the sum of, without duplication, (I) Pro Forma Acquisition EBITDA of the entity, business, property or assets acquired pursuant to such Investment, plus (II) Consolidated EBITDA, in each case for the period of four fiscal quarters most recently ended prior to the date of such Investment, shall be equal to or less than 2.25:1 on the subject date; provided, that the Company shall have no obligation to deliver a certificate certifying the information set forth in this clause (y) in respect of any Investment in a Related Business which has an Acquisition Cost of less than $10,000,000 until the first to occur of: (i) the aggregate Acquisition Cost of all such Investments for which no certificate has been delivered pursuant to this clause (y) exceeds $25,000,000, or (ii) the Company makes such an Investment with an Acquisition Cost equal to or greater than $10,000,000, at which time the Company shall deliver the certificate certifying the information set forth in this clause (y) on a combined basis for all such 2 <PAGE> 3 Investments in a Related Business for which no certificate has previously been delivered pursuant to such clause; and (z) in the case of an Investment in a Foreign Entity, immediately before and after giving effect thereto: (i) the dollar equivalent of the aggregate Company Share of the Tangible Assets of all Foreign Entities in which the Company or any of its Subsidiaries holds Investments shall not exceed 20% of the Tangible Assets of the Company and its Subsidiaries, determined on a consolidated basis in accordance with GAAP as of the date of the most recent financial statements filed pursuant to Section 5.4 of the Credit Agreement; and (ii) the dollar equivalent of the aggregate Company Share of the Tangible Net Worth of all Foreign Entities in which the Company or any of its Subsidiaries holds Investments shall not exceed 20% of the Tangible Net Worth of the Company and its Subsidiaries, determined on a consolidated basis in accordance with GAAP as of the date of the most recent financial statements filed pursuant to Section 5.4 of the Credit Agreement; provided, however, that this clause (z) shall not permit Investments of the type referred to in Section 6.4(a)(iv) in a Foreign Entity in which neither the Company nor any of its Subsidiaries holds an Investment consisting of capital stock or other equity interests. For purposes of this Agreement, the terms set forth below shall have the following meanings: "Acquisition Cost" shall mean, with respect to any Investment, the sum of, without duplication, (1) the amount of any money paid to acquire such Investment, plus (2) the principal amount of any Indebtedness issued by the Company or any Subsidiary to acquire such Investment, plus (3) the principal amount of any Indebtedness assumed in connection with the acquisition of such Investment (including, in the case of the acquisition of capital stock or other equity securities of any person that, after giving effect to such acquisition, becomes a Subsidiary, the principal amount of the Indebtedness of such person outstanding on the date it becomes a Subsidiary, after giving effect to any prepayment or repayment of Indebtedness made contemporaneously with such acquisition), plus (4) in the case of any Investment of the type referred to in Section 6.4(a)(iii), the fair market value, as determined by the board of directors of the Company, of any property contributed in kind to any person other than any Subsidiary Guarantor which is a Domestic Subsidiary. "Company Share" shall mean, with respect to any Person in which the 3 <PAGE> 4 Company or any Subsidiary holds an Investment consisting of capital stock or other equity interests, a percentage equal to the Company's or such Subsidiary's aggregate interest in the capital or profits of such Person (whichever is less). "Foreign Entity" shall mean any Foreign Subsidiary or any other Person not incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia. "Intangible Assets" shall mean assets that are considered to be intangible assets under GAAP. "Tangible Assets" shall mean, with respect to any Person, the assets of such Person determined in accordance with GAAP, exclusive of Intangible Assets of such Person. "Tangible Net Worth" shall mean, with respect to any Person, the Net Worth of such Person, less the value of the Intangible Assets of such Person determined in accordance with GAAP." (d) Section 6.5(a)(i) of the Credit Agreement is amended to read in its entirety as follows: "(i) if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing (A) any wholly-owned Subsidiary may merge into the Company in a transaction in which the Company is the surviving corporation, (B) any wholly-owned Subsidiary may merge into or consolidate with any other wholly-owned Subsidiary that is a Subsidiary Guarantor and is a Domestic Subsidiary in a transaction in which the surviving entity is a wholly-owned Subsidiary that is a Subsidiary Guarantor and is a Domestic Subsidiary and no person other than the Company or a wholly-owned Subsidiary that is a Subsidiary Guarantor and is a Domestic Subsidiary receives any consideration, (C) the Company or any Subsidiary may merge or consolidate with any other person in connection with any Investment permitted by Section 6.4(a)(i), provided that, to the extent the Company is a party to such a merger or consolidation with a Foreign Entity, the Company shall be the surviving corporation, (D) any wholly-owned Foreign Entity may merge into or consolidate with any other wholly-owned Foreign Entity, (E) any wholly-owned Foreign Entity may merge into or consolidate with the Company or any wholly-owned Subsidiary that is a Subsidiary Guarantor and is a Domestic Subsidiary in a transaction in which the surviving entity is the Company or a wholly-owned Subsidiary that is a Subsidiary Guarantor and is a Domestic Subsidiary and (F) any Foreign Entity may merge into or consolidate with any wholly-owned Foreign Entity in a transaction in which the surviving entity is a wholly-owned Foreign Entity in a transaction permitted by Section 6.4; and" 4 <PAGE> 5 (e) The parenthetical beginning on the third line of Section 6.5(a)(ii)(C) of the Credit Agreement is amended to read as follows: "(within 60 days after the occurrence of such sale or disposition of property)" 3. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and warrant to the Administrative Agent and the Lenders as follows: (a) No Default or Event of Default has occurred and is continuing after giving effect to this Amendment. (b) The execution, delivery and performance by the Borrowers of this Amendment has been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any Person in order to be effective and enforceable. The Credit Agreement, as amended by this Amendment, constitutes the legal, valid and binding obligation of the Borrowers parties thereto, enforceable against them in accordance with its terms. (c) All representations and warranties of the Borrowers contained in the Credit Agreement and in the other Loan Documents are true and correct in all material respects as of the date hereof with the same effect as though made on the date hereof and as though applied to the Credit Agreement as herein amended, except to the extent such representations and warranties expressly relate to an earlier date. (d) The Borrowers are entering into this Amendment on the basis of their own investigation and for their own reasons, without reliance upon the Agents, the Lenders or any other Person. 4. EFFECTIVENESS DATE. This Amendment shall become effective as of the date (the "Closing Date") as of which the Administrative Agent shall have received, in form and substance satisfactory to the Administrative Agent, counterparts (or if elected by the Administrative Agent, an executed facsimile copy) of (i) this Amendment executed by the Required Lenders, the Borrowers and the Agents and (ii) the Guarantor Acknowledgment and Consent annexed to this Amendment, executed by each of the Guarantors. 5. RESERVATION OF RIGHTS. The Borrowers acknowledge and agree that the execution and delivery by the Agents and the Lenders of this Amendment, shall not be deemed (i) to create a course of dealing or otherwise obligate the Agents or the Lenders to forbear or execute similar amendments under the same or similar circumstances in the future, or (ii) to amend, relinquish or impair any right of the Agents or the Lenders to receive any indemnity or similar payment from any Person or entity as a result of any matter arising from or relating to this Amendment. 6. MISCELLANEOUS. 5 <PAGE> 6 (a) Except as herein amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein to the Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of New York. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Administrative Agent of a facsimile transmitted document purportedly bearing the signature of a Lender or a Borrower shall bind such Lender or such Borrower, respectively, with the same force and effect as the delivery of a hard copy original. Any failure by the Administrative Agent to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document of the party whose hard copy page was not received by the Administrative Agent. (e) This Amendment, together with the Credit Agreement and the other Loan Documents, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended except in accordance with the provisions of Section 9.8 of the Credit Agreement. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or of the Credit Agreement, the Pledge Agreement and the Security Agreement. (g) The Borrowers covenant to pay to or reimburse the Administrative Agent, upon demand, for all reasonable costs and expenses (including costs of its outside legal counsel and allocated costs of in-house counsel) actually incurred by the Administrative Agent in connection with the development, preparation, negotiation, execution and delivery of this Amendment. (h) The Borrowers (and each Guarantor by execution of the Acknowledgment) confirm that the Security Documents secure the Obligations under the Credit Agreement as amended by this Amendment. Each Guarantor by execution of the Acknowledgment confirms 6 <PAGE> 7 that the benefit of such Guarantor's Company Guarantee Agreement or Subsidiary Guarantee Agreement, as applicable, applies to all Obligations under the Credit Agreement as amended by this Amendment. 7 <PAGE> 8 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. CONEXANT SYSTEMS, INC. By: /s/ Kerry K. Petry ----------------------------------------- Name: Kerry K. Petry Title: Vice President and Treasurer CONEXANT SYSTEMS FRANCE S.A.S. By: /s/ Marc Ugolini ----------------------------------------- Name: Marc Ugolini Title: Director of Finance & Administration, Europe CONEXANT SYSTEMS U.K. LIMITED By: /s/ Kerry K. Petry ----------------------------------------- Name: Kerry K. Petry Title: Treasurer CONEXANT SYSTEMS HOLDINGS LIMITED By: /s/ Kerry K. Petry ----------------------------------------- Name: Kerry K. Petry Title: Treasurer CREDIT SUISSE FIRST BOSTON, as a Lender, Issuing Bank, Administrative Agent, Collateral Agent and Swingline Lender By: /s/ Chris T. Horgan ----------------------------------------- Name: Chris T. Horgan Title: Vice President <PAGE> 9 By: /s/ Bill O'Daly ----------------------------------------- Name: Bill O'Daly Title: Vice President UNION BANK OF CALIFORNIA, N.A. as a Lender By: /s/ Glenn Leyrer ----------------------------------------- Name: Glenn Leyrer Title: Vice President BANK POLSKA KASA OPIEKI, S.A.-PEKAO S.A. GROUP, NEW YORK BRANCH, as a Lender By: ----------------------------------------- Name: ------------------------------------ Title: ----------------------------------- BANQUE NATIONALE DE PARIS, as a Lender By: /s/ C. Bettles ----------------------------------------- Name: C. Bettles Title: Senior Vice President & Manager By: /s/ Tjalling Terpstra ----------------------------------------- Name: Tjalling Terpstra Title: Vice President COMERICA WEST INCORPORATED, as a Lender By: /s/ Emmanuel M. Skevofilax ----------------------------------------- Name: Emmanuel M. Skevofilax Title: Vice President <PAGE> 10 BANK ONE, N.A. (f.k.a. The First National Bank of Chicago), as a Lender By: /s/ Mark A. Isley ----------------------------------------- Name: Mark A. Isley Title: First Vice President KEYBANK NATIONAL ASSOCIATION, as a Lender By: /s/ Mary K. Young ----------------------------------------- Name: Mary K. Young Title: Assistant Vice President NATIONAL BANK OF CANADA, as a Lender By: /s/ David W. Shaw ----------------------------------------- Name: David W. Shaw Title: Vice President By: /s/ Mark A. Tito ----------------------------------------- Name: Mark A. Tito Title: Vice President TRANSAMERICA COMMERCIAL FINANCE CORPORATION, as a Lender By: /s/ Christopher C. Meals ----------------------------------------- Name: Christopher C. Meals Title: Vice President - Credit <PAGE> 11 CHIAO TUNG BANK, as a Lender By: /s/ Mike Chiu ----------------------------------------- Name: Mike Chiu Title: Senior Vice President & General Manager HAMILTON BANK, as a Lender By: /s/ Hector F. Ramirez ----------------------------------------- Name: Hector F. Ramirez Title: Senior Vice President By: /s/ Adolfo D. Martinez ----------------------------------------- Name: Adolfo D. Martinez Title: Senior Vice President IBM CREDIT CORPORATION, as a Lender By: /s/ Sal Grasso ----------------------------------------- Name: Sal Grasso Title: Manager of Credit UBS AG, STAMFORD BRANCH, as a Lender By: /s/ Robert H. Riley III ----------------------------------------- Name: Robert H. Riley III Title: Executive Director By: /s/ Wilfred Saint ----------------------------------------- Name: Wilfred Saint Title: Associate Director Loan Portfolio Support, US <PAGE> 12 GUARANTOR ACKNOWLEDGMENT AND CONSENT The undersigned, each a guarantor or third party pledgor with respect to the Borrowers' obligations to the Agents and the Lenders under the Credit Agreement, each hereby (i) acknowledges and consents to the execution, delivery and performance by the Company and the Borrower Subsidiaries of the foregoing Fourth Amendment to Credit Agreement ("Amendment"), and (ii) reaffirm and agree that the respective guaranty, pledge agreement or security agreement to which the undersigned is party and all other documents and agreements executed and delivered by the undersigned to the Administrative Agent or the Collateral Agent and the Lenders in connection with the Credit Agreement are in full force and effect, without defense, offset or counterclaim. (Capitalized terms used herein have the meanings specified in the Amendment.) GUARANTORS CONEXANT SYSTEMS, INC. CONEXANT SYSTEMS WORLDWIDE, INC. BROOKTREE CORPORATION BROOKTREE WORLDWIDE SALES CORPORATION By: /s/ Kerry K. Petry ----------------------------------------- Name: Kerry K. Petry Title: Treasurer November 23, 1999 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>5 <DESCRIPTION>EXHIBIT 12 <TEXT> <PAGE> 1 EXHIBIT 12 CONEXANT SYSTEMS, INC. STATEMENT RE: COMPUTATION OF RATIOS (unaudited, dollars in thousands) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, 1999 ------------------ <S> <C> RATIO OF EARNINGS TO FIXED CHARGES Earnings: Income before provision for income taxes $74,045 Add: Fixed charges, net of capitalized interest 4,550 ------- $78,595 ======= Fixed charges: Interest expense $ 3,567 Capitalized interest 624 Interest portion of rental expense 983 ------- $ 5,174 ======= Ratio of earnings to fixed charges 15.2x ======= </TABLE> </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 CONEXANT SYSTEMS INC.'S UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 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-30-2000 <PERIOD-START> OCT-02-1999 <PERIOD-END> DEC-31-1999 <CASH> 277,516 <SECURITIES> 0 <RECEIVABLES> 293,053 <ALLOWANCES> 6,545 <INVENTORY> 222,712 <CURRENT-ASSETS> 932,462 <PP&E> 1,673,245 <DEPRECIATION> 914,079 <TOTAL-ASSETS> 1,987,544 <CURRENT-LIABILITIES> 354,663 <BONDS> 350,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 198,128 <OTHER-SE> 985,382 <TOTAL-LIABILITY-AND-EQUITY> 1,987,544 <SALES> 509,963 <TOTAL-REVENUES> 509,963 <CGS> 277,446 <TOTAL-COSTS> 277,446 <OTHER-EXPENSES> 88,477 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 3,567 <INCOME-PRETAX> 74,045 <INCOME-TAX> 22,214 <INCOME-CONTINUING> 51,831 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 51,831 <EPS-BASIC> 0.26 <EPS-DILUTED> 0.24 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99.1 <SEQUENCE>7 <DESCRIPTION>EXHIBIT 99.1 <TEXT> <PAGE> 1 EXHIBIT 99.1 Editorial contacts: Investor Relations contacts: Thomas Stites Michael Cortright Conexant Systems, Inc. Conexant Systems Inc. 949-483-1492 (949) 483-6773 thomas.stites@conexant.com investor.relations@conexant.com CONEXANT COMPLETES OFFERING OF $500 MILLION OF CONVERTIBLE SUBORDINATED NOTES NEWPORT BEACH, Calif., January 28, 2000 - Conexant Systems, Inc., (NASDAQ:CNXT), today announced that it has completed the private offering of $500 million aggregate principal amount (excluding any proceeds from an over-allotment option) of its 4% Convertible Subordinated Notes Due 2007. The notes are convertible into the company's common stock at a conversion price of $108 per share. The company intends to use the net proceeds for general corporate purposes, including potential acquisitions. The securities offered have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws, and may not be offered or sold in the United States absent registration under the Securities Act and applicable state securities laws or available exemptions from such registration requirements. Safe Harbor Statement: This press release 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. These risks and uncertainties include, but are not limited to: global and market conditions, including, but not limited to, the cyclical nature of the semiconductor industry and the markets addressed by the company's and its customers' products; demand for and market acceptance of new and existing products; successful development of new products; the timing of new product introductions; the availability and extent of utilization of manufacturing capacity; pricing pressures and other competitive factors; changes in product mix; fluctuations in manufacturing yields; product obsolescence; the ability to develop and implement new technologies and to obtain protection for the related intellectual property; the successful implementation of the company's diversification strategy; labor relations of the company, its customers and suppliers; timely completion of Year 2000 modifications by the company and its key suppliers and customers; and the uncertainties of litigation, 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. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Other brands and names contained in this release are the property of their respective owners. With revenues of approximately $1.5 billion, Conexant is the world's largest independent company focused exclusively on providing semiconductor products and systems solutions for communications electronics. With more than 30 years of experience in developing communications technology, the company draws upon its expertise in mixed-signal processing to deliver integrated systems and semiconductor products for a broad range of communications applications. These products facilitate communications worldwide through wireline voice and data communications networks, cordless and cellular wireless telephony systems, personal imaging devices and equipment, and emerging cable and wireless broadband communications networks. The company aligns its business into five product platforms: Network Access, <PAGE> 2 Wireless Communications, Digital Infotainment, Personal Imaging, and Personal Computing. Conexant is a member of the Nasdaq-100 Index, which represents the largest and most active stocks listed on The Nasdaq Stock Market across major industry groups. For more information, visit Conexant at www.conexant.com. # # # </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

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https://www.sec.gov/Archives/edgar/data/738076/0000912057-00-000595.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, KfVTbKwL/9C73Ov7r8Hy5Nt6J+Q1pQ2LRTZnqCAu7Hw4wlXJwaYjR62PRTGYlqce Ija2T0CxZhlw3+1wdmBz6w== <SEC-DOCUMENT>0000912057-00-000595.txt : 20000202 <SEC-HEADER>0000912057-00-000595.hdr.sgml : 20000202 ACCESSION NUMBER: 0000912057-00-000595 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991126 FILED AS OF DATE: 20000110 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: SEC FILE NUMBER: 002-92053 FILM NUMBER: 503761 BUSINESS ADDRESS: STREET 1: 5400 BAYFRONT PLZ CITY: SANTA CLARA STATE: CA ZIP: 95052-8145 BUSINESS PHONE: 4087645000 MAIL ADDRESS: STREET 1: 5400 BAYFRONT PLAZA CITY: SANTA CLARA STATE: CA ZIP: 95052-8145 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>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 26, 1999 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) DELAWARE 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) 326-5000 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 DECEMBER 24, 1999, 342,344,891 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING. THIS REPORT CONTAINS A TOTAL OF 35 PAGES OF WHICH THIS PAGE IS NUMBER 1. ================================================================================ <PAGE> 3COM CORPORATION TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Income Statements THREE AND SIX MONTHS ENDED NOVEMBER 26, 1999 AND NOVEMBER 27, 1998 3 Condensed Consolidated Balance Sheets NOVEMBER 26, 1999 AND MAY 28, 1999 4 Condensed Consolidated Statements of Cash Flows SIX MONTHS ENDED NOVEMBER 26, 1999 AND NOVEMBER 27, 1998 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 29 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 30 ITEM 2. Changes in Securities and Use of Proceeds 31 ITEM 3. Defaults Upon Senior Securities 31 ITEM 4. Submission of Matters to a Vote of Security Holders 32 ITEM 5. Other Information 32 ITEM 6. Exhibits and Reports on Form 8-K 32 Signatures 35 </TABLE> 3Com, Graffiti, and CoreBuilder are registered trademarks of 3Com Corporation or its subsidiaries. Palm is a trademark of 3Com Corporation or its subsidiaries. 2 <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3COM CORPORATION CONDENSED CONSOLIDATED INCOME STATEMENTS (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------------ ------------------------------ November 26, November 27, November 26, November 27, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Sales $ 1,474,997 $ 1,540,537 $ 2,862,406 $ 2,946,048 Cost of sales 788,866 848,047 1,527,944 1,650,086 ----------- ----------- ----------- ----------- Gross margin 686,131 692,490 1,334,462 1,295,962 ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing 298,697 292,627 571,522 571,278 Research and development 162,109 156,280 324,953 303,777 General and administrative 59,918 64,588 121,158 123,994 Merger-related charges (credits) and other - 638 (2,105) (9,580) Business realignment costs 5,884 - 5,884 - ----------- ----------- ----------- ----------- Total operating expenses 526,608 514,133 1,021,412 989,469 ----------- ----------- ----------- ----------- Operating income 159,523 178,357 313,050 306,493 Gains on sales of investments, net 71,322 - 94,873 - Interest and other income, net 20,206 12,274 36,120 21,919 ----------- ----------- ----------- ----------- Income before income taxes 251,051 190,631 444,043 328,412 Income tax provision 72,833 57,718 129,309 101,808 Equity interest in loss of consolidated joint venture (53) - (1,028) - Equity interest in loss of unconsolidated investee 946 - 946 - ----------- ----------- ----------- ----------- Net income $ 177,325 $ 132,913 $ 314,816 $ 226,604 =========== =========== =========== =========== Net income per share: Basic $ 0.52 $ 0.37 $ 0.90 $ 0.63 Diluted $ 0.51 $ 0.36 $ 0.89 $ 0.62 Shares used in computing per share amounts: Basic 342,889 358,302 348,066 358,418 Diluted 348,988 368,207 353,346 367,316 </TABLE> SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 <PAGE> 3COM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) <TABLE> <CAPTION> November 26, May 28, 1999 1999 ------------ ----------- (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and equivalents $ 1,095,611 $ 952,249 Short-term investments 915,892 709,365 Accounts receivable, net 730,395 925,598 Inventories, net 321,461 354,272 Deferred income taxes - 312,011 Investments and other 935,088 166,357 ------------ ----------- Total current assets 3,998,447 3,419,852 Property and equipment, net 776,111 831,557 Goodwill, intangibles, deposits and other assets 205,809 243,980 ------------ ----------- Total assets $ 4,980,367 $ 4,495,389 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 476,305 $ 336,503 Accrued liabilities and other 654,810 674,375 Income taxes payable 200,481 173,116 Deferred income taxes 47,783 - Current portion of long-term debt 13,822 14,568 ------------ ----------- Total current liabilities 1,393,201 1,198,562 Long-term debt 16,510 30,405 Deferred income taxes and other long-term obligations 52,324 64,492 Equity interest in consolidated joint venture - 5,475 Stockholders' equity: Preferred stock, $.01 par value, 10,000 shares authorized; none outstanding - - Common stock, $.01 par value, 990,000 shares authorized; shares outstanding: November 26, 1999, 365,825; May 28, 1999, 365,805 1,979,254 1,954,204 Treasury stock at cost, November 26, 1999, 23,902 shares; May 28, 1999, 8,190 shares (611,150) (197,064) Unamortized restricted stock grants (5,204) (5,303) Retained earnings 1,660,847 1,403,709 Accumulated other comprehensive income 494,585 40,909 ------------ ----------- Total stockholders' equity 3,518,332 3,196,455 ------------ ----------- Total liabilities and stockholders' equity $ 4,980,367 $ 4,495,389 ============ =========== </TABLE> SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 <PAGE> 3COM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended -------------------------------- November 26, November 27, 1999 1998 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net income $ 314,816 $ 226,604 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 156,786 131,836 Loss on disposal of fixed assets 7,433 8,161 Gains on sales of investments, net (94,873) - Deferred income taxes 46,122 60,830 Merger-related credits (2,105) (9,580) Equity in loss of consolidated joint venture (1,028) - Equity in loss of unconsolidated investee 946 - Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 193,714 (267,809) Inventories 27,336 198,770 Investments and other assets 6,112 38,592 Accounts payable 140,887 50,619 Accrued liabilities and other (18,306) 11,429 Income taxes payable 48,640 37,568 ----------- ----------- Net cash provided by operating activities 826,480 487,020 ----------- ----------- Cash flows from investing activities: Purchase of investments (439,189) (318,999) Proceeds from maturities and sales of investments 319,114 120,538 Purchase of property and equipment (93,161) (126,362) Proceeds from sale of property and equipment 6,790 14,746 Business acquired in purchase transaction - (6,258) Other, net 1,621 (2,402) ----------- ----------- Net cash used for investing activities (204,825) (318,737) ----------- ----------- Cash flows from financing activities: Issuance of common stock 72,623 53,147 Repurchase of common stock (540,780) (130,398) Repayments of long-term borrowings (12,000) (12,000) Other, net 1,864 (907) ----------- ----------- Net cash used for financing activities (478,293) (90,158) ----------- ----------- Increase in cash and equivalents 143,362 78,125 Cash and equivalents, beginning of period 952,249 528,981 ----------- ----------- Cash and equivalents, end of period $ 1,095,611 $ 607,106 =========== =========== </TABLE> SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 <PAGE> 3COM CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared by 3Com Corporation ("3Com," "us," "we," or "our"), pursuant to the rules of the Securities and Exchange Commission. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of 3Com's financial position as of November 26, 1999, results of operations for the three and six months ended November 26, 1999 and November 27, 1998, and cash flows for the six months ended November 26, 1999 and November 27, 1998. Certain amounts from the prior year have been reclassified to conform to the current year presentation. Effective June 1, 1998, 3Com adopted a 52-53 week fiscal year ending on the Friday nearest to May 31. Accordingly, fiscal 2000 will end on June 2, 2000, resulting in a 53-week fiscal 2000, rather than 52 weeks as reported in fiscal 1999. For fiscal year 2000, the first three quarters will contain 13 weeks, and the fourth quarter will contain 14 weeks. This change did not have a significant effect on 3Com's condensed consolidated financial statements for the six months ended November 26, 1999 as compared to the six months ended November 27, 1998. The results of operations for the three and six months ended November 26, 1999 may not be indicative of the results to be expected for the fiscal year ending June 2, 2000. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in 3Com's Annual Report on Form 10-K for the fiscal year ended May 28, 1999. 2. Merger Related Charges On June 12, 1997, 3Com completed a merger with U.S. Robotics, which was accounted for as a pooling-of-interests. As a result of this merger, 3Com recorded aggregate merger-related charges of $240.1 million through November 26, 1999, which included $196.3 million of integration expenses and $43.8 million of direct transaction costs (consisting primarily of investment banking and other professional fees). Remaining cash expenditures relating to the U.S. Robotics merger charge are estimated to be approximately $1.0 million, primarily for facilities. The following tables display the activity and balances relating to the U.S. Robotics merger reserve (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------ ------------------------ November 26, November 27, November 26, November 27, 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Merger reserve activity-Facilities: Revisions in estimates - 1,605 (2,091) (44) Deductions (697) (578) (10,954) (798) -------- -------- -------- -------- Total change in facilities reserve $ (697) $ 1,027 $(13,045) $ (842) ======== ======== ======== ======== Merger reserve activity-Long-term assets and other: Revisions in estimates - 2,233 (14) (6,336) Deductions (56) (6,296) (815) (17,478) -------- -------- -------- -------- Total change in long-term assets and other reserve $ (56) $ (4,063) $ (829) $(23,814) ======== ======== ======== ======== </TABLE> 6 <PAGE> <TABLE> <CAPTION> November 26, May 28, 1999 1999 ------- ------- <S> <C> <C> Merger reserve balance: Facilities $ 890 $13,935 Long-term assets and other 509 1,338 ------- ------- Total merger reserve balance $ 1,399 $15,273 ======= ======= </TABLE> 3. Business Realignment Costs On September 13, 1999, 3Com announced its intent to sell less than 20 percent of the common stock of its wholly-owned subsidiary, Palm Computing, Inc. ("Palm Computing"), in an initial public offering ("IPO") early in calendar 2000. 3Com intends to distribute the balance of the shares of Palm Computing to 3Com shareholders approximately six months following the IPO, subject to receiving board approval and a favorable tax ruling, as well as market conditions. As we execute the separation of Palm Computing from 3Com, we are incurring certain business realignment costs, which consist primarily of incremental third party costs related to legal and accounting services, strategic business planning, information systems separation, development of compensation and benefits strategies, and recruiting of certain key Palm Computing management. Internal costs incurred to separate the operations of Palm Computing and 3Com have been excluded from business realignment costs. Direct costs of the IPO, such as the underwriters' commissions and legal and accounting fees, will be deducted from the proceeds of the offering. 4. Comprehensive Income The components of comprehensive income, net of tax, are as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended -------------------------- -------------------------- November 26, November 27, November 26, November 27, 1999 1998 1999 1998 --------- --------- --------- --------- <S> <C> <C> <C> Net income $ 177,325 $ 132,913 $ 314,816 $ 226,604 Other comprehensive income: Change in net unrealized gain on investments 202,133 (213) 453,876 883 Change in accumulated translation adjustments (344) 5,801 (200) (2,293) --------- --------- --------- --------- Total comprehensive income $ 379,114 $ 138,501 $ 768,492 $ 225,194 ========= ========= ========= ========= </TABLE> 7 <PAGE> 5. Net Income Per Share The following table presents the calculation of basic and diluted earnings per share (in thousands, except per share data): <TABLE> <CAPTION> Three Months Ended Six Months Ended -------------------------- -------------------------- November 26, November 27, November 26, November 27, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net income $177,325 $132,913 $314,816 $226,604 ============ ============ ============ ============ Weighted average shares-Basic 342,889 358,302 348,066 358,418 Effect of dilutive securities: Employee stock options 5,768 9,721 5,024 8,696 Restricted stock 331 184 256 202 ------------ ------------ ------------ ------------ Weighted average shares-Diluted 348,988 368,207 353,346 367,316 ============ ============ ============ ============ Net income per share-Basic $ 0.52 $ 0.37 $ 0.90 $ 0.63 Net income per share-Diluted $ 0.51 $ 0.36 $ 0.89 $ 0.62 </TABLE> 6. Inventories Inventories, net, consist of (in thousands): <TABLE> <CAPTION> November 26, May 28, 1999 1999 ------------ -------- <S> <C> <C> Finished goods $203,104 $237,515 Work-in-process 48,103 49,452 Raw materials 70,254 67,305 ------------ -------- Total Inventory $321,461 $354,272 ============ ======== </TABLE> 7. Stock Repurchase and Put Option Programs The board of directors has authorized us to repurchase certain amounts of our common stock in the open market from time to time. During the second quarter of fiscal 2000 we initiated a program of selling put options on our common stock. Each put option entitles the holder to sell one share of our common stock to us at a specified price. During the second quarter of fiscal 2000, we realized proceeds of $4.9 million from the sale of put options covering 1.7 million shares of our common stock. The put options have an average exercise price of $29.14 per share and expire in January 2000. Under these put option arrangements, we have the right to settle any option exercises with either physical delivery or a net amount of common shares equal in value to the difference between the exercise price and market value at the date of exercise. For purposes of determining the number of shares available for repurchase under the present board authorization, the sale of one put option is counted as the repurchase of one share. As of November 26, 1999, the remaining number of shares authorized for repurchase was 8.0 million shares. 8 <PAGE> 8. Equity Interest in Consolidated Joint Venture In January 1999, we entered into a joint venture named ADMTek, Inc. ("ADMTek"), and began consolidating the joint venture with our results, due to our ability at that time to exercise significant influence over operating and financial policies of the joint venture. We entered into this joint venture to gain access to specific silicon design technology and expertise. In September 1999, we sold a portion of our existing interest in ADMTek to our joint venture partner. As a result of this sale, our ownership interest was reduced to 19 percent and we no longer have the ability to exercise significant influence over the joint venture. During our second fiscal quarter, we began accounting for this investment using the cost method. 9. Equity Interest in Unconsolidated Investee In August 1999, we invested $7.5 million in OmniSky Corporation ("OmniSky") (formerly OpenSky Corporation). OmniSky intends to provide a wireless data service that will allow mobile users to access the Internet, corporate intranets, and other data sources. As of November 26, 1999, we owned a 41 percent interest in OmniSky. This investment is being accounted for using the equity method. 10. Business Segment Information The following tables display information on our reportable segments (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended -------------------------- --------------------------- November 26, November 27, November 26, November 27, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Sales Network Systems $ 593,190 $ 672,414 $1,267,397 $1,293,225 Personal Connectivity 620,907 720,889 1,159,896 1,389,744 Handheld Computing 260,900 147,234 435,113 263,079 ------------ ------------ ------------ ------------ Total Sales $1,474,997 $1,540,537 $2,862,406 $2,946,048 ============ ============ ============ ============ Segment Income Network Systems $ 6,136 $ 57,519 $ 78,461 $ 78,323 Personal Connectivity 134,286 121,103 221,774 232,536 Handheld Computing 34,133 12,417 46,529 18,597 Corporate and Other (1) 2,770 (58,126) (31,948) (102,852) ------------ ------------ ------------ ------------ Total Segment Income $ 177,325 $ 132,913 $ 314,816 $ 226,604 ============ ============ ============ ============ <CAPTION> November 26, May 28, 1999 1999 ------------ ----------- <S> <C> <C> Inventory Network Systems $ 162,210 $ 172,577 Personal Connectivity 122,556 162,924 Handheld Computing 36,695 18,771 ------------ ------------ Total Inventory $ 321,461 $ 354,272 ============ ============ </TABLE> (1) Included in the corporate and other category are the following: bonuses based on 3Com results; corporate expenses; merger charges (credits) and other; business realignment costs; gains on sales of investments, net; interest and other income, net; income tax provision; equity interest in loss of consolidated joint venture; and equity interest in loss of unconsolidated investee. 9 <PAGE> 11. Subsequent Events In our third fiscal quarter, we sold our manufacturing facility and related assets in Salt Lake City, Utah to Manufacturers' Services Ltd. We expect to record a gain on this transaction of approximately $20 to $30 million. In connection with the sale, we agreed to purchase certain products previously manufactured in the Salt Lake City facility for two years. In December, we acquired LANSource Technologies, Inc., a leading vendor of data- and fax-over-Internet Protocol (IP) software applications. The acquisition targets the multi-billion dollar worldwide IP fax and unified messaging services markets. The transaction is valued at approximately $26 million and was accounted for as a purchase. Additionally, in December we acquired Interactive Web Concepts Inc., a privately held Internet business consulting, creative design, and software engineering firm. The acquisition expands our capabilities to provide total, turnkey e-business solutions for customers worldwide. The transaction was accounted for as a purchase. In December, we announced the formation of a strategic global alliance with USWeb/CKS to develop, market, and deliver wireless applications for the mobile workplace and converged voice, video, and data solutions. Under the alliance, 3Com will contribute up to $100 million in a combination of funded development and an equity investment in USWeb/CKS. The equity investment portion is expected to be up to $40 million. 12. Litigation We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in each of the cases set forth below and are vigorously contesting each of these matters. An unfavorable resolution of one or more of the following lawsuits could adversely affect our business, results of operations, or financial condition. SECURITIES LITIGATION On March 24 and May 5, 1997, securities class action lawsuits, captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977 (HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No. CV765962 (KRAVITZ), respectively, were filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County. The complaints allege violations of Sections 25400 and 25500 of the California Corporations Code and seek unspecified damages on behalf of a class of purchasers of 3Com common stock during the period from September 24, 1996 through February 10, 1997. The actions are in discovery. No trial date has been set. On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the HIRSCH and KRAVITZ actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. The plaintiffs have filed an amended complaint. 3Com has filed an answer to the amended complaint. The trial is scheduled for October 2000. 10 <PAGE> In December 1997, a securities class action, captioned REIVER V. 3COM CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. In July 1999, the court dismissed the complaint and granted the plaintiffs the right to file an amended complaint. Plaintiffs have filed an amended complaint, and defendants have filed a motion to dismiss. In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the REIVER action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. The action is in discovery. No trial date has been set. In October 1998, two shareholder derivative actions purportedly on behalf of 3Com, captioned SHAEV V. BARKSDALE, ET AL., Civil Action No. 16721-NC, and BLUM V. BARKSDALE, ET AL., Civil Action No. 16733-NC, were filed in Delaware Chancery Court. The complaints allege that 3Com's directors breached their fiduciary duties to 3Com through the issuance of and disclosures concerning director stock options. 3Com is named solely as a nominal defendant, against whom the plaintiffs seek no recovery. 3Com and the individual defendants filed a motion to dismiss, and on October 25, 1999, the Court issued an order dismissing these actions. On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California. Several similar actions have been consolidated into the GAYLINN action. On September 10, 1999, the plaintiffs filed a consolidated complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 22, 1998 through March 2, 1999. 3Com has filed a motion to dismiss. INTELLECTUAL PROPERTY LITIGATION On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case is now captioned: Xerox Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The complaint alleges willful infringement of a Xerox United States patent relating to computerized interpretation of handwriting. The complaint seeks unspecified damages and injunctive relief. Xerox has asserted that Graffiti-Registered Trademark- software and certain products of Palm Computing, Inc. infringe the patent. On June 25, 1999, the Court stayed the action pending reexamination of the patent by the U.S. Patent and Trademark Office. On December 15, 1999, we received a Notice of Intent to Issue Reexamination Certificate from the United States Patent and Trademark Office stating that the reexamination has been terminated and that a certificate will be issued in due course. The notice stated that the certificate will indicate that there will be no changes to the patent specification or drawings and that all claims of the patent will be confirmed without any changes. On December 16, 1999, both we and Xerox separately wrote the court requesting that the stay of the action be lifted. The parties are awaiting the scheduling of a status conference with the court. 11 <PAGE> COMMERCIAL LITIGATION On November 4, 1999, a lawsuit was filed against 3Com by Disney Interactive, Inc. ("DI") in the Superior Court of the State of California, Los Angeles County, Case No. BC219663, alleging breach of a purported contract for the bundling of DI video products with 3Com-Registered Trademark- modems. The complaint asserts that DI is seeking damages in excess of $15 million. The case is in discovery. No trial date has yet been set. 13. Effects of Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain costs related to internal-use software if certain criteria are met. 3Com adopted SOP 98-1 for our fiscal year ending June 2, 2000. The adoption of SOP 98-1 did not have a significant impact on our financial results for the six months ended November 26, 1999. In June 1998 and June 1999, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." These statements require companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. These statements will be effective for 3Com's fiscal year ending May 31, 2002. We believe that the adoption of these statements will not have a significant impact on our financial results. 12 <PAGE> 3COM CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of total sales represented by the line items reflected in 3Com's condensed consolidated income statements: <TABLE> <CAPTION> Three months ended Six months ended -------------------------- -------------------------- November 26, November 27, November 26, November 27, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 53.5 55.0 53.4 56.0 ----- ----- ----- ----- Gross margin 46.5 45.0 46.6 44.0 Operating expenses: Sales and marketing 20.2 19.0 20.0 19.4 Research and development 11.0 10.2 11.4 10.3 General and administrative 4.1 4.2 4.2 4.2 Merger-related charges (credits) and other - - (0.1) (0.3) Business realignment costs 0.4 - 0.2 - ----- ----- ----- ----- Total operating expenses 35.7 33.4 35.7 33.6 ----- ----- ----- ----- Operating income 10.8 11.6 10.9 10.4 Gains on sales of investments, net 4.8 - 3.3 - Interest and other income, net 1.4 0.8 1.3 0.7 ----- ----- ----- ----- Income before income taxes 17.0 12.4 15.5 11.1 Income tax provision 4.9 3.8 4.5 3.4 Equity interest in loss of consolidated joint venture - - - - Equity interest in loss of unconsolidated investee 0.1 - - - ----- ----- ----- ----- Net income 12.0% 8.6% 11.0% 7.7% ===== ===== ===== ===== Excluding merger-related charges (credits) and other, business realignment costs, and gains on sales of investments, net: Total operating expenses 35.3% 33.4% 35.5% 33.9% Operating income 11.2 11.6 11.1 10.1 Net income 8.9 8.7 8.7 7.5 </TABLE> 13 <PAGE> SALES Sales in the second quarter of fiscal 2000 totaled $1.47 billion, an increase of $88 million or six percent from the first quarter of fiscal 2000, and a decrease of $66 million or four percent from the corresponding quarter one year ago. Sales in the first six months of fiscal 2000 and fiscal 1999 both totaled $2.9 billion. NETWORK SYSTEMS. Sales of network systems products (E.G., switches, hubs, remote access concentrators, routers, and customer service and support) in the second quarter of fiscal 2000 decreased 12 percent both compared to the same quarter one year ago and sequentially from the first quarter of fiscal 2000. The decreases were primarily due to delayed introduction of several new products, such as our CoreBuilder-Registered Trademark- 9000 8-slot chassis, our Gigabit Layer 3 modules, and release 3.0 of our CoreBuilder software, customer deferrals of enterprise infrastructure purchases due to Year 2000-related buying freezes, and increased competition. Sales of network systems products in the second quarter of fiscal 2000 represented 40 percent of total sales compared to 44 percent in the second quarter of fiscal 1999. Sales of network systems products in the first six months of fiscal 2000 decreased two percent from the first six months of fiscal 1999. Sales of network systems products in the first six months of fiscal 2000 and fiscal 1999 represented 44 percent of total sales. PERSONAL CONNECTIVITY. Sales of personal connectivity products (E.G., desktop network interface cards (NICs), desktop modems, and personal computer (PC) cards for mobile computers) in the second quarter of fiscal 2000 decreased 14 percent compared to the same quarter one year ago and increased 15 percent sequentially from the first quarter of fiscal 2000. The decrease compared to the second quarter of fiscal 1999 was primarily due to price declines in both analog modems and network interface cards, partially offset by an increase in the sales of our 100 megabits per second (Mbps) Ethernet products. The sequential increase from the first quarter of 2000 was primarily due to strong seasonal demand for these products. Additionally, revenue from emerging high-growth markets such as broadband access (cable and digital subscriber line (DSL)) contributed to the increase. Sales of personal connectivity products in the second quarter of fiscal 2000 represented 42 percent of total sales compared to 47 percent in the second quarter of fiscal 1999. Sales of personal connectivity products in the first six months of fiscal 2000 decreased 17 percent from the first six months of fiscal 1999. Sales of personal connectivity products in the first six months of fiscal 2000 represented 41 percent of total sales, compared to 47 percent in the first six months of fiscal 1999. Historically, a significant portion of our sales has been derived from desktop NICs and analog modems. Although these products experienced sequential growth in the second quarter of fiscal 2000, sales of these products generally have been declining over the past year primarily due to price competition and the evolution to newer technologies such as cable and DSL. Further, our NICs and modems are increasingly being distributed through the PC original equipment manufacturer (OEM) channel that carries lower average selling prices. Sales of NICs and modems are also highly correlated with sales in the PC market. While the overall PC market continues to grow, sales of low-end PCs are growing faster than high-end PCs. Lower priced PCs are not typically sold with high performance NICs and modems such as those offered by 3Com. HANDHELD COMPUTING. Sales of handheld computing products in the second quarter of fiscal 2000 increased 50 percent sequentially and 77 percent compared to the same quarter one year ago. The sequential increase was primarily due to strong seasonal demand and new product introductions. The year-over-year increase was primarily due to continued increase in market acceptance of our handheld computing products and expansion of the market for handheld computing. Sales of handheld computing products in the second quarter of fiscal 2000 represented 18 percent of total sales compared to nine percent in the second quarter of fiscal 1999. Sales of handheld computing products in the first six months of fiscal 2000 increased 65 percent from the first six months of fiscal 1999. Sales of handheld computing products in the first six months of fiscal 2000 represented 15 percent of total sales, compared to nine percent in the first six months of fiscal 1999. 14 <PAGE> GEOGRAPHIC. In the second quarter of fiscal 2000, U.S. sales decreased 11 percent and international sales increased three percent compared to the same period one year ago. U.S. sales in the second quarter of fiscal 2000 represented 51 percent of total sales, compared to 55 percent of total sales in the second quarter of fiscal 1999. In the first six months of fiscal 2000, U.S. sales decreased eight percent and international sales increased four percent compared to the same period one year ago. U.S. sales in the first six months of fiscal 2000 represented 53 percent of total sales, compared to 56 percent of total sales in the first six months of fiscal 1999. In the first six months of fiscal 2000, international sales reflected strong growth in Asia Pacific and Canada, partially offset by lower sales in Europe. SEASONALITY. Our sales are subject to seasonality, reflecting spending patterns in different geographies and customer markets. Sales in the second quarter of the fiscal year have historically been the strongest, due in part to seasonal strength in international regions and holiday spending patterns. Third quarter sales have historically been either sequentially lower or only slightly up as compared to sales from the prior quarter. GROSS MARGIN Gross margin as a percentage of sales was 46.5 percent in the second quarter of fiscal 2000, compared to 46.7 percent in the first quarter of fiscal 2000 and 45.0 percent in the second quarter of fiscal 1999. Gross margin as a percentage of sales was 46.6 percent in the first six months of fiscal 2000, compared to 44.0 percent in the first six months of fiscal 1999. The increase in gross margin percentage for the first six months of fiscal 2000, compared to the same period a year ago, was primarily due to continued improvements in our inventory management, which resulted in reduced manufacturing period costs, as well as improvements in our operational management. The slight decrease in gross margin percentage from the prior quarter was attributable predominately to product mix. OPERATING EXPENSES Operating expenses in the second quarter of fiscal 2000 were $526.6 million, or 35.7 percent of sales, compared to $494.8 million, or 35.6 percent of sales in the first quarter of fiscal 2000 and $514.1 million, or 33.4 percent of sales in the second quarter of fiscal 1999. Operating expenses in the second quarter of fiscal 2000 included $5.9 million in business realignment costs. Operating expenses in the first quarter of fiscal 2000 included merger-related credits of $2.1 million. Operating expenses in the second quarter of fiscal 1999 included merger-related charges of $0.6 million. Excluding these unusual items, operating expenses for the second quarter of fiscal 2000 were $520.7 million, or 35.3 percent of sales, compared to $496.9 million, or 35.8 percent of sales in the first quarter of fiscal 2000 and $513.5 million, or 33.4 percent of sales in the second quarter of fiscal 1999. Operating expenses in the first six months of fiscal 2000 and fiscal 1999 were both $1.0 billion, corresponding to 35.7 percent of sales in the first six months of fiscal 2000 and 33.6 percent of sales in the first six months of fiscal 1999. Operating expenses in the first six months of fiscal 2000 included $5.9 million of business realignment costs and $2.1 million of credits related to the U.S Robotics merger. Operating expenses in the first six months of fiscal 1999 included a net credit of $9.6 million associated with the U.S. Robotics merger and real estate activities. Excluding these unusual items, operating expenses for the first six months of fiscal 2000 and fiscal 1999 were both $1.0 billion, corresponding to 35.5 percent of sales in the first six months of fiscal 2000 and 33.9 percent of sales in the first six months of fiscal 1999. 15 <PAGE> SALES AND MARKETING. Sales and marketing expenses in the second quarter of fiscal 2000 increased $25.9 million or nine percent from the first quarter of fiscal 2000, and increased to 20.2 percent of sales in the second quarter of fiscal 2000 compared to 19.7 percent in the first quarter of fiscal 2000. The sequential increase was due primarily to our marketing campaigns and television advertising for our e-Networks solutions and Palm-TM- handheld computing products. Sales and marketing expenses in the second quarter of fiscal 2000 increased $6.1 million or two percent from the second quarter of fiscal 1999, and increased to 20.2 percent of sales in the second quarter of fiscal 2000 compared to 19.0 percent in the second quarter of fiscal 1999. The year-over-year increase was due primarily to our marketing campaigns and television advertising for our e-Networks solutions and Palm handheld computing products, partially offset by reduced marketing expenditures on our analog modem products. Sales and marketing expenses for the first six months of fiscal 2000 were comparable to the first six months of fiscal 1999. RESEARCH AND DEVELOPMENT. Research and development expenses in the second quarter of fiscal 2000 decreased $0.7 million from the first quarter of fiscal 2000, and decreased to 11.0 percent of sales in the second quarter of fiscal 2000 compared to 11.7 percent in the first quarter of fiscal 2000. Research and development expenses in the second quarter of fiscal 2000 increased $5.8 million or 3.7 percent from the second quarter of fiscal 1999, and increased to 11.0 percent of sales in the second quarter of fiscal 2000 compared to 10.2 percent in the second quarter of fiscal 1999. This year-over-year increase was primarily due to increased investments in new and emerging technologies and markets including handheld computing, local area network (LAN) telephony, broadband access, wireless access, voice over the internet protocol (VoIP), and home networking, partially offset by decreased spending related to mature product lines such as analog modems. Research and development expenses for the first six months of fiscal 2000 increased by $21.2 million or 7.0 percent compared to the first six months of fiscal 1999. GENERAL AND ADMINISTRATIVE. General and administrative expenses in the second quarter of fiscal 2000 decreased $1.3 million or two percent from the first quarter of fiscal 2000, and decreased to 4.1 percent of sales in the second quarter of fiscal 2000 compared to 4.4 percent in the first quarter of fiscal 2000. General and administrative expenses in the second quarter of fiscal 2000 decreased $4.7 million or seven percent from the second quarter of fiscal 1999, and decreased to 4.1 percent of sales in the second quarter of fiscal 2000 compared to 4.2 percent in the second quarter of fiscal 1999. General and administrative expenses for the first six months of fiscal 2000 decreased by $2.8 million or two percent compared to the first six months of fiscal 1999. General and administrative expenses have remained fairly consistent because these costs are primarily workforce-related. MERGER-RELATED CHARGES (CREDITS) AND OTHER. During the first six months of fiscal 2000, we recorded a net pre-tax credit of approximately $2.1 million related to reductions in the estimates for remaining charges associated with the sale of a facility in Chicago. During the first six months of fiscal 1999, we recorded a net pre-tax credit of approximately $9.6 million, associated with the U.S. Robotics merger and real estate activities. BUSINESS REALIGNMENT COSTS. Business realignment costs in the second quarter of fiscal 2000 were $5.9 million, and represented incremental third party costs related to legal and accounting services, strategic business planning, information systems separation, development of compensation and benefits strategies, and recruiting of certain key Palm Computing management. Internal costs incurred to separate the operations of Palm Computing and 3Com have been excluded from business realignment costs. 16 <PAGE> GAINS ON SALES OF INVESTMENTS, NET Gains on sales of investments, net in the second quarter of fiscal 2000 of $71.3 million reflected gains realized from sales of investments in equity securities, partially offset by write-offs of certain other investments. Gains on sales of investments in the first quarter of fiscal 2000 of $23.6 million reflected gains realized from sales of investments in equity securities. INTEREST AND OTHER INCOME, NET Interest and other income, net in the second quarter of fiscal 2000 increased $4.3 million compared to the first quarter of fiscal 2000. Interest and other income, net in the second quarter of fiscal 2000 increased $7.9 million compared to the same quarter a year ago. In the first six months of fiscal 2000, interest and other income, net increased $14.2 million compared to the first six months of fiscal 1999. The increases noted above were primarily due to higher interest income as a result of higher cash and investment balances, as well as improved foreign currency results. INCOME TAX PROVISION 3Com's effective income tax rate was 29.1 percent for the first six months of fiscal 2000, compared to 31.0 percent for the first six months of fiscal 1999. The rate reduction compared to the same period a year ago is primarily attributable to increased offshore manufacturing in countries with tax rates significantly below the U.S. statutory rate. EQUITY INTEREST IN LOSS OF CONSOLIDATED JOINT VENTURE In January 1999, we entered into a joint venture named ADMTek, Inc. ("ADMTek"), and began consolidating the joint venture with our results, due to our ability to exercise significant influence over operating and financial policies of the joint venture. In September 1999, we sold a portion of our existing interest in ADMTek to our joint venture partner. As a result of this sale, our ownership interest was reduced to 19 percent and we no longer have the ability to exercise significant influence over the joint venture. During our second fiscal quarter, we began accounting for this investment using the cost method. EQUITY INTEREST IN LOSS OF UNCONSOLIDATED INVESTEE In August 1999, we invested $7.5 million in OmniSky Corporation ("OmniSky") (formerly OpenSky Corporation). As of November 26, 1999, we own a 41 percent interest in OmniSky. This investment is being reported using the equity method. NET INCOME AND NET INCOME PER SHARE Net income for the second quarter of fiscal 2000 was $177.3 million, or $0.51 per share, compared to net income of $137.5 million, or $0.38 per share for the first quarter of fiscal 2000 and net income of $132.9 million, or $0.36 per share, for the second quarter of fiscal 1999. Excluding the business realignment costs and net gains on sales of investments, net income was $130.9 million, or $0.37 per share for the second quarter of fiscal 2000. Excluding the merger-related credits and the gains on sales of investments, net income was $119.3 million, or $0.33 per share for the first quarter of fiscal 2000. Excluding the merger-related charge, net income was $133.4 million, or $0.36 per share for the second quarter of fiscal 1999. Net income for the first six months of fiscal 2000 was $314.8 million, or $0.89 per share, compared to net income of $226.6 million, or $0.62 per share for the first six months of fiscal 1999. Excluding the merger-related credits, business realignment costs, and net gains on sales of investments, net income was $250.1 million, or $0.71 per share for the first six months of fiscal 2000. Excluding the net merger-related charges credits, net income was $220.1 million, or $0.60 per share for the first six months of fiscal 1999. 17 <PAGE> BUSINESS ENVIRONMENT AND RISK FACTORS This report on Form 10-Q contains forward-looking statements, including statements concerning the growth of new markets within networking, the planned initial public offering and stock distribution of Palm Computing, effects of strategic relationships and investments, future sales of certain products and in certain markets (including NICs, analog modems, stackable hubs, LAN switching, remote access concentrators and wide area network (WAN) access), and our Year 2000 readiness and expectations of the impact of Year 2000 issues. These statements are subject to certain risks and uncertainties. Some of the factors that could cause future events or results to materially differ from those projected in the forward-looking statements are discussed below. The risk factors affecting Palm Computing as a separate company are described in detail in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 13, 1999. TRANSITIONING OF SALES BASE TO HIGH-GROWTH MARKETS We participate in many markets that are growing at varying rates. Historically, a significant portion of our sales has been derived from desktop NICs, analog modems, and stackable hubs, which have entered the mature phase of their product life cycles. Although several of these products have experienced recent sequential growth, sales of these products have been generally declining over the past year primarily due to price competition, increased reliance on the OEM channel and evolution to newer technologies. Consequently, we believe that sales derived from these products will decline as a percent of our total sales. Moderate growth markets in which we participate include LAN switching, remote access concentrators, and WAN access. We expect these markets will continue to grow and account for a significant portion of our sales. However, in the second quarter of fiscal 2000, sales in our network systems segment declined 12 percent sequentially and year-over-year, primarily due to lower than expected sales of LAN switches and hubs. If sales in this segment continue to decline, our consolidated financial results may be adversely affected. Finally, we are increasing our investments in several high-growth and emerging markets that are forecasted to grow at a significantly higher rate than the networking industry average. We expect these businesses to account for a higher percentage of our sales over time. In addition to handheld computing, we are focused on the following high-growth and emerging markets: - Voice over the Internet Protocol (VoIP) - LAN Telephony - Broadband Access (primarily cable and DSL) - Wireless Access - Home Networking The transition of our sales base to these new markets may cause disruption in historical relationships between our sales, research and development efforts, and manufacturing operations. We cannot be certain that these emerging markets will materialize in the timeframes that we expect, that we will introduce products for these markets in a timely manner, that the market will accept these products, or that we will successfully generate significant sales and profitability from these markets. In addition, sales from our mature product lines may decline more rapidly than sales grow in emerging product lines, and therefore, our results could be adversely impacted. 18 <PAGE> CONSOLIDATION IN OUR INDUSTRY There have been many mergers and acquisitions in the networking industry in the past several years. More recently, there have also been mergers between telecommunications equipment providers and networking companies, as well as between networking companies and computer component suppliers. Examples during calendar 1999 include: - 3Com acquired Smartcode, NBX, Interactive Web Concepts, LANSource Technologies, and certain assets of ICS; - Lucent Technologies, a telecommunications company, acquired 14 companies, including networking equipment supplier Ascend Communications; - Cisco Systems, a networking equipment supplier, acquired 18 companies, including the data networking business of IBM Corporation; - Nortel Networks, a telecommunications company, acquired three companies and integrated the operations of previously acquired Bay Networks, a networking equipment supplier; - Alcatel, a telecommunications company, acquired four companies, including Xylan, a networking equipment supplier; - Siemens A.G., a telecommunications company, acquired three networking firms; - General Electric Company, a UK-based engineering firm, acquired Fore, a networking equipment supplier; - Intel Corporation, a computer component manufacturer, acquired eight companies with networking technology. Future business combinations in the networking industry may result in more companies with greater resources and stronger competitive positions and products than 3Com. Continued industry consolidation may adversely affect our operating results or financial condition. COMPETITION AND PRICING PRESSURE We participate in a highly volatile industry characterized by vigorous competition for market share as well as rapid product and technology development and maturation. In addition, both 3Com and our competitors sometimes lower product prices in order to gain market share or create more demand for our products. For example, in the second quarter of fiscal 2000 we experienced pricing competition in our distribution channel, particularly for price-sensitive products sold through catalogs and certain workgroup systems products. Intense pricing competition in our industry may adversely affect our business, operating results, or financial condition. Our competition historically has come from start-up companies, well-capitalized computer systems and communications companies, and other technology companies focusing on data networking. However, our industry is changing, resulting in new and other potential competitors who have greater financial, marketing, and technical resources than 3Com. For example, technology innovations are driving the convergence of voice, video, and data traffic onto a single network infrastructure, and we now compete with much larger telecommunications equipment companies such as Cisco Systems, Lucent Technologies, and Nortel Networks. 19 <PAGE> We are also selling products into new markets where we compete with different companies than in the past. This is especially true in our high-growth emerging markets. For example, our Palm handheld computing products compete in the handheld device, operating system software and Internet services markets. The markets for these products and services are highly competitive and we expect competition to increase in the future. Some of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we do. Our principal competitors include Casio, Compaq, Hewlett-Packard, Microsoft, Psion, Sharp and Palm platform licensees such as TRG and Handspring, which was formed by two of the original founders of Palm Computing. These competitors may be able to respond more rapidly than we may to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do. Our failure to compete successfully against current or future competitors could seriously harm our business, financial condition and results of operations. BUSINESS REALIGNMENT On September 13, 1999, we announced plans to create two distinct companies by separating the operations of our Palm Computing subsidiary and making it an independent company. Planning and implementing the separation of Palm Computing from 3Com has and will require the dedication of management resources, and we expect to incur certain incremental expenses in future periods related to the separation. Efforts required to separate the operations of Palm Computing may disrupt our ongoing business activities. These factors could have an adverse affect on our results of operations or financial condition. In addition, a significant portion of our operational and administrative infrastructure represents costs that are fixed. Accordingly, these costs may represent a greater percentage of sales after the separation and thus could adversely affect our results of operations. It is anticipated that 3Com will provide transitional services to support the ongoing Palm Computing operations. These transitional services relate to information technology systems, supply chain management, human resources administration, product order administration, customer service, buildings and facilities, treasury management, and legal, finance, and accounting. If 3Com does not provide these services at an adequate level, we may be held liable for losses suffered as a result by Palm Computing. The transitional service agreements generally have terms of less than two years following the separation. After the expiration of these various arrangements, 3Com may not be able to effectively re-deploy the employees performing these services in a timely manner, and our financial results could be adversely affected. On December 13, 1999, we filed a registration statement with the Securities and Exchange Commission for the IPO of the common stock of Palm Computing. Although the registration statement has been filed, it has not yet become effective. Palm Computing common stock may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. The risk factors affecting Palm Computing as a separate company are described in detail in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 13, 1999. The Palm Computing IPO is expected to be completed in early calendar 2000, and will be for less than 20 percent of the Palm Computing shares. Approximately six months following the IPO, 3Com intends to distribute its remaining shares of Palm Computing (more than 80 percent) to 3Com shareholders, subject to receiving board approval and a favorable tax ruling, as well as market conditions. If 3Com does not receive a favorable tax ruling, it is unlikely that we will make the distribution in the expected time frame, if at all. If the distribution is delayed or is not completed at all, our stock price could be negatively impacted. After the IPO and before the final distribution of the remaining stock to 3Com shareholders, 3Com will own 80 percent or more of the common stock of Palm Computing. Thus, the market price of 3Com common stock could be subject to a period of volatility based on the value of Palm Computing's stock after it becomes publicly traded. Furthermore, after 3Com makes the final distribution of Palm Computing shares, 3Com's share price may experience a significant adjustment, as investors determine the stock price for our company as a separate company from Palm Computing. 20 <PAGE> MANAGEMENT OF STRATEGIC RELATIONSHIPS AND INVESTMENTS In addition to mergers and acquisitions, technology companies are continually entering into strategic relationships. For example, during calendar 1999, 3Com or its Palm Computing subsidiary announced or expanded strategic relationships with several companies including the following: - America Online - Dell Computer - Gateway - Hewlett-Packard - Hitachi - IBM - Microsoft Corporation - Motorola - Nokia - Siemens A.G. - Sony - Sun Microsystems - Unisys - USWeb/CKS The strategic relationships with America Online, Motorola, and Nokia include opportunities for these companies to make significant investments in the Palm Computing IPO. We believe all of the strategic relationships and investments will benefit 3Com and Palm Computing. However, our results of operations or financial condition could be adversely impacted if we experience difficulties managing relationships with our partners or if projects with partners are unsuccessful. In addition, if our competitors enter into successful strategic relationships, they could increase the competition that we face. We have also made strategic investments in several other networking companies. Some of these investments have significantly appreciated in value since the companies became publicly traded. Our results of operations or financial condition could be adversely impacted if the market value of our investments declines. RELIANCE ON DISTRIBUTORS, RESELLERS, AND PC OEMS We distribute many of our products through indirect distribution channels that include distributors, systems integrators, value-added resellers, and retailers. We also sell our products through the PC OEM channel. Our future results and financial condition are partially dependent on a number of factors relating to this distribution model, including issues associated with competition among and within our channels, selling to PC OEMs, and inventory and customer concentration. We believe our indirect distribution channels are experiencing heightened competition from Internet-based suppliers and PC OEMs that distribute directly to end-user customers. Further, 3Com is building in-house capabilities to sell directly to end-user customers and distribution partners over the Internet (e-business). If this initiative is successful, it could cause conflict with our current indirect channels of distribution. If we are unsuccessful in selling through our e-business channel, we could lose market share to competitors who have more successfully developed these capabilities. These changes in the pattern of distribution of networking products could have a material adverse affect on our sales and financial results. Our distributors and resellers maintain significant levels of our products in their inventories. As part of our efforts to optimize our supply chain, we are reducing the number of distributors through whom we sell our products. We work closely with distributors and resellers to monitor inventory levels and ensure that appropriate levels of products are available to end-users. If channel partners attempt to reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted. 21 <PAGE> PC-related networking products such as modems and NICs are increasingly being sold through the PC OEM channel rather than the distribution channel. We derive a significant portion of our personal connectivity product sales from PC OEMs such as Dell Computer, Toshiba, Gateway, Hewlett-Packard, and IBM, manufacturers that incorporate our NICs, analog modems, or chipsets into their products. While sales to PC OEMs are important, products sold through the PC OEM channel typically have a lower average selling price than those sold through other channels. Therefore, our sales and margins may be adversely impacted if sales to PC OEMs continue to become a larger percentage of our business. In addition, PC OEMs sometime elect to integrate NIC and modem functions onto the PC motherboard. Competitors such as large semiconductor companies who can integrate networking and other computer processing functions onto a single chip might offer PC OEMs a cheaper alternative to our solutions. If the integration of networking and computer processing functionality on a reduced number of components increases, our future sales growth and profitability could be adversely affected. Moreover, significant portions of our sales are made to a few customers. In the second quarter of fiscal 2000, Ingram Micro Inc. represented approximately 19 percent of our total sales and Tech Data Corporation represented approximately 13 percent of our total sales. Ingram Micro Inc. and Tech Data Corporation are both distributors of our products. We cannot be certain that these customers will continue to purchase our products at current levels. We typically do not enter into contracts with our customers that require them to purchase minimum quantities of our products, and our customers have some rights to extend or delay the shipment of their orders. Additionally, consolidation among distributors is reducing the number of distributors in the North American market. Because our sales are becoming more concentrated among a smaller number of customers, our results of operations, financial condition, or market share could be adversely affected if our customers: - stopped purchasing our products or focused more on selling our competitors' products; - reduced, delayed, or canceled their orders; - were unable to sell our products because we did not timely ship the products to them; or - experience competitive, operational, or financial difficulties resulting in less demand from them for our products or impairing our ability to collect payments from them. 3COM FINANCIAL MODEL In managing our business, we periodically establish and revise a long-term financial model based on observed and anticipated trends in technology and the marketplace. The model, which includes ranges for gross margin, operating expenses, and operating income, is not intended to be a prediction of future financial results. Instead, our management uses it in making decisions about the allocation of resources and investments. The current model is as follows: <TABLE> <S> <C> Gross margin 44.5 - 46.0% Operating expenses 28.0 - 29.5% Operating income 15.0 - 18.0% </TABLE> We intend to revisit and communicate an updated model as 3Com enters the next fiscal year, when the Palm Computing distribution is expected to be near completion. UNCERTAINTIES OF INTERNATIONAL MARKETS We operate internationally and expect that international markets will continue to account for a significant percentage of our sales. Some international markets are characterized by economic and political instability and currency fluctuations that can adversely affect our operating results or financial condition. Our results of operations in the past have been adversely impacted by economic instability in the Asia Pacific and Latin American regions. 22 <PAGE> ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS Products in the markets in which we compete have short life cycles. Therefore, 3Com's success depends on our ability to identify new market and product opportunities, to timely develop and introduce new products, and to gain market acceptance of new products, particularly in the emerging markets described above. For example, the timely introduction and delivery of a next generation multi-service access platform will be important for our long-term success in the Carrier/Network Service Provider market. Any delay in new product introductions or lower than anticipated demand for our new products could have an adverse affect on our operating results or financial condition, particularly in those product markets we have identified as emerging high-growth opportunities. INDUSTRY STANDARDS AND REGULATIONS 3Com's success also depends on: - the timely adoption of industry standards; - resolution of conflicting U.S. and international standards requirements created by the convergence of technology such as voice onto data networks; - the timely introduction of new standards-compliant products; and - a favorable regulatory environment. Slow market acceptance of new technologies and industry standards could adversely affect our results of operations or financial condition. In addition, if we fail to achieve timely certification of compliance to industry standards for our products, our sales of such products and our results of operations or financial condition could be adversely affected. Further, a number of new product initiatives, particularly in the area of VoIP and LAN Telephony, could be impacted by new or revised regulations, which in turn could adversely affect our results of operations or financial condition. CUSTOMER ORDER FULFILLMENT The timing and amount of our sales depend on a number of factors that make estimating operating results prior to the end of any period uncertain. For example, we do not typically maintain a significant backlog and sales are dependent on our ability to appropriately forecast product demand. In addition, our customers historically request fulfillment of orders in a short period of time, resulting in limited visibility to sales trends. As a result, our operating results depend on the volume and timing of orders and our ability to fulfill the orders in a timely manner. Historically, sales in the third month of the quarter have been higher than sales in each of the first two months of the quarter, particularly in the third fiscal quarter. Non-linear sales patterns make business planning difficult, and increase the risk that our quarterly results will fluctuate due to disruptions in functions such as manufacturing, order management, information systems, and shipping. WARRANTIES AND INTERNATIONAL REQUIREMENTS Because 3Com products are often covered by warranties, we may be subject to contractual and/or legal commitments to perform under such warranties. If our products fail to perform as warranted and we do not resolve product quality or performance issues in a timely manner, our operating results or financial condition could be adversely affected. Likewise, if we fail to meet commitments related to the installation of networks, we could be subject to claims for business disruption or consequential damages if a network implementation is not successfully or timely completed. Our products are sold and marketed in many countries, and as such, our products must function in and meet the requirements of many different telecommunications environments and be compatible with various telecommunications systems and products. If our products fail to meet the requirements of international telecommunication environments, our sales could be negatively impacted. 23 <PAGE> SUPPLY CHAIN MANAGEMENT Some key components of our products are currently available only from single or limited sources. Likewise, some services on which we rely are furnished from single or limited service providers. In addition, some of our suppliers are also competitors. While we generally have been able to obtain adequate supplies of components from existing sources, we cannot be certain that in the future our suppliers will be able to meet our demand for components in a timely and cost-effective manner. For example, within the electronics industry, we are experiencing a shortage in the availability of certain components. Our operating results, financial condition, or customer relationships could be adversely affected by these shortages. These adverse effects could result from an inability to fulfill customer demand or increased costs to acquire key components or services. We are working to significantly reduce our supply chain cycle time, from ordering raw materials, to manufacturing products and delivering the products to customers. For example, in our continual effort to streamline supply chain operations, we sold our Salt Lake City, Utah manufacturing facility in November 1999 to Manufacturers' Services Ltd. ("MSL"). Palm handheld computing products and our mobile connectivity products are manufactured in this facility. MSL will now manufacture these products for 3Com. We have a limited operating history with MSL. The cost, quality, and availability of third-party manufacturing operations are essential to the successful production and sale of many of 3Com's products. The inability of any third party manufacturer to meet our cost, quality, and availability standards could adversely impact 3Com's financial condition or results of operations. Changes to our supply chain processes may cause us to experience temporary disruptions in our ability to ship products timely to our customers, and our financial condition or results of operations may be negatively impacted as a result. COMMERCIAL COMMITMENTS We sometimes enter into minimum quantity or other non-cancelable commitments. If sales volumes fluctuate significantly, our obligation to meet commitments could adversely affect our results of operations or financial condition. INTELLECTUAL PROPERTY RIGHTS Many of 3Com's competitors, such as telecommunications and computer equipment manufacturers, have large intellectual property portfolios, including patents that may cover technologies that are relevant to our business. In addition, many smaller companies, universities, and individual inventors have obtained or applied for patents in areas of technology that may relate to our business. The industry is moving towards aggressive assertion, licensing, and litigation of patents and other intellectual property rights. In the course of our business, we frequently receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies, protocols, or specifications in our products. If we are unable to obtain and maintain licenses on favorable terms for intellectual property rights required for the manufacture, sale, and use of our products, particularly those which must comply with industry standard protocols and specifications to be commercially viable, our business, results of operations, or financial condition could be adversely impacted. 24 <PAGE> In addition to disputes relating to the validity or alleged infringement of other parties' rights, we may become involved in disputes relating to our assertion of our intellectual property rights. Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management and key technical personnel. Further, plaintiffs in intellectual property cases often seek injunctive relief and the measures of damages in intellectual property litigation are complex and often subjective or uncertain. Thus, the existence of or any adverse determinations in this litigation could subject us to significant liabilities and costs. In addition, if we are the alleged infringer, we could be required to seek licenses from others or be prevented from manufacturing or selling our products, which could cause disruptions to our operations or the markets in which we compete. If we are asserting our intellectual property rights, we could be prevented from stopping others from manufacturing or selling competitive products. Any one of these factors could adversely affect our results of operations or financial condition. PROPOSED CHANGES IN ACCOUNTING FOR BUSINESS COMBINATIONS AND INTANGIBLE ASSETS The Financial Accounting Standards Board (FASB) began deliberation of revisions to the rules for business combinations and intangible assets in 1996. Some of these deliberations have included accounting rule-making bodies from other nations as the financial communities attempt to develop global consistency where possible. Business combination rules govern the accounting for mergers and acquisitions used in either a purchase or a pooling-of-interests combination. Business combinations may generate intangible assets (including goodwill) which represent the excess purchase price of an acquired enterprise over net identifiable assets. Tentative conclusions of the FASB will prohibit the use of pooling-of-interests and will establish new accounting standards and financial presentation for intangible assets resulting from business combinations. The FASB expects to issue a final standard by the end of calendar year 2000. Changes to the current accounting rules for business combinations and intangible assets will not preclude mergers or acquisitions but may increase the earnings dilution associated with future transactions. In addition, if pooling-of-interests accounting is no longer available, we may use cash more often than our common stock to pay for acquisitions of other companies. FLUCTUATIONS IN QUARTERLY RESULTS 3Com's quarterly operating results are difficult to predict and may fluctuate significantly. A wide variety of factors can cause these fluctuations, including: - seasonality with respect to the volume and timing of orders; - the introduction and acceptance of new products and technologies; - price competition; - general conditions and trends in the networking industry and technology sector; - disruption in international markets; - general economic conditions; - industry consolidation, acquisitions, or litigation; - disruption in the distribution channel; and - timing of orders received within the quarter. In recent years, as the consumer mix of our business has grown, our third fiscal quarter has been a seasonally weaker period characterized by sequentially lower sales. We expect this pattern to continue in fiscal 2000. In the past few years, our financial results in the third quarter of our fiscal year have been disappointing. These factors, and accompanying fluctuations in periodic operating results, could have a significant adverse impact on the market price of our common stock. 25 <PAGE> COMPETITION FOR KEY PERSONNEL Our success depends to a significant extent upon a number of key employees and management. Recently, we have experienced an increased rate of employee turnover compared to historical levels. The loss of the services of key employees could adversely affect our product introduction schedules, customer relationships, operating results, or financial condition. Recruiting and retaining skilled personnel, including engineers, is highly competitive. There has been a dramatic increase of technology start-up companies recruiting for the same talent that 3Com requires. If we cannot successfully recruit and retain skilled personnel, our ability to compete may be adversely affected. In addition, we must carefully balance the growth of our employees commensurate with our anticipated sales growth. If our sales growth or attrition levels vary significantly, our results of operations or financial condition could be adversely affected. Further, 3Com's common stock price has been, and may continue to be, extremely volatile. When the 3Com common stock price is less than the exercise price of stock options granted to employees, turnover is likely to increase, which could adversely affect our results of operations or financial condition. YEAR 2000 READINESS DISCLOSURE As is true for most companies, 3Com faces a risk from the Year 2000 issue. We intend for some of our disclosures and announcements concerning our products and Year 2000 programs, including those in this report on Form 10-Q, to constitute "Year 2000 Readiness Disclosures" as defined in the Year 2000 Information and Readiness Disclosure Act. While not all Year 2000-date related disruption scenarios have been experienced, and there is a possibility of disruptions in the future, through the date of this report, the Company has experienced no material disruption or other significant problems. We are continuing to evaluate and mitigate our exposure in areas where appropriate. Based on currently available information, management continues to believe that Year 2000-related disruptions or other problems, if any, will not have a significant adverse impact on our operational results or financial condition. However, we cannot be certain that Year 2000 issues will not have a material adverse impact on us, since our evaluation process is not yet complete and it is early in the year 2000. STATE OF READINESS AND RISKS. 3Com has identified four key exposure areas within 3Com with respect to the Year 2000 issue, namely: key transaction processing applications, equipment and facilities, 3Com products, and key suppliers. As of the date of this report, the following impacts to 3Com of the Year 2000 date rollover have been observed: KEY TRANSACTION-PROCESSING APPLICATIONS. Key transaction processing applications include those used to run 3Com's business, such as finance, manufacturing, order processing and distribution. No errors were reported immediately after or since the Year 2000 date rollover. Applications will continue to be monitored for the next several weeks and over the Leap Year date to confirm continued correct date processing. If we identify significant new non-compliance issues or encounter unexpected difficulties in areas previously considered to be Year 2000 ready, our ability to conduct our business or record transactions could be disrupted, which could adversely affect our results of operations or financial condition. EQUIPMENT AND FACILITIES. To date, we have not experienced any Year 2000-related failures in critical equipment or facilities. If we encounter any unexpected difficulties in areas previously considered being Year 2000 ready, our production, design, and shipping capabilities could be disrupted, which could adversely affect our results of operations or financial condition. 26 <PAGE> PRODUCTS. To date, we are not aware of any Year 2000-related date processing errors regarding supported 3Com products. If any of our products do not operate properly in the Year 2000, we could have increased warranty costs, customer satisfaction issues, litigation or other material costs and liabilities, which could adversely affect our results of operations or financial condition. KEY SUPPLIERS. To date, there have been no Year 2000-related failures in the receipt of key raw materials, components, products, or services. If key suppliers fail to adequately address the Year 2000 issue for the products or services they provide to 3Com, critical materials, products and services may not be delivered in a timely manner, which could adversely affect our results of operations or financial condition. MOST REASONABLY LIKELY WORST-CASE SCENARIO. We believe that our most reasonably likely worst-case Year 2000 scenario would relate to problems with the systems and services of third parties rather than with 3Com's internal systems or products. 3Com cannot identify all possible disruption scenarios. Contingency plans for critical business operations are in place. These plans will continue to be validated and modified as needed, and as we learn about disruptions, if any, caused by the Year 2000 date rollover. COSTS TO ADDRESS YEAR 2000 ISSUES. Through November 26, 1999, we have spent $10.6 million on the program. Although we have incurred additional costs, primarily for increased staffing in our customer service organization to address potential Year 2000 issues and premium pay and bonuses for employees working during the Year 2000 date rollover period, we believe that the majority of our Year 2000 costs have already been incurred. We had previously estimated an additional $6 million to $15 million for contingencies related to Year 2000 issues. While it is still early in the year 2000, preliminary indications are that actual costs for these contingencies will be much lower. We have not included in the total cost estimate any costs associated with potential Year 2000 litigation exposure since these costs are not estimable. We have adequate funds to pay for the expected costs of Year 2000 programs. To date, we have not deferred any significant internal information technology projects due to our Year 2000 efforts. SALES IMPACT. Year 2000 readiness has been an issue for virtually all businesses whose computer systems and applications may require significant hardware and software upgrades or modifications. Companies owning and operating such systems may have devoted a substantial portion of their information systems' spending to fund such upgrades and modifications and divert spending away from networking solutions. In addition, some companies have deferred spending on networking solutions while they tested and ensured the stability of their current network configurations. Such changes in customers' spending patterns could adversely affect our sales, operating results, or financial condition, particularly in our third fiscal quarter. LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents and short-term investments at November 26, 1999 were $2.0 billion, an increase of $349.9 million or 21 percent compared to the balance of $1.7 billion at May 28, 1999. For the six months ended November 26, 1999, net cash generated from operating activities was $826.5 million. Accounts receivable at November 26, 1999 decreased $195.2 million from May 28, 1999 to $730.4 million. Days sales outstanding in receivables decreased to 45 days at November 26, 1999, compared to 59 days at May 28, 1999 primarily due to a lower percentage of sales in the last month of the November quarter compared to the last month of the May quarter. Inventory levels at November 26, 1999 decreased $32.8 million from May 28, 1999 to $321.5 million. Annualized inventory turnover was 9.4 turns for the quarter ended November 26, 1999, compared to 8.2 turns for the quarter ended May 28, 1999. 27 <PAGE> As part of our 3Com Ventures initiative, we selectively make strategic investments in the equity securities of privately held companies. For those securities which have become publicly-traded, we have marked the cost basis to market. During the six months ended November 26, 1999, 3Com's investments in the equity securities of privately-held and publicly-traded companies increased by $755.8 million, primarily due to market value appreciation of our investments in publicly-traded companies. During the six months ended November 26, 1999, 3Com made $93.2 million in capital expenditures. Major capital expenditures included upgrades and expansion of our facilities and purchases and upgrades of software and computer equipment. As of November 26, 1999, we had approximately $39.9 million in capital expenditure commitments outstanding primarily associated with the expansion of our facilities and purchases and upgrades of software and computer equipment. In addition, we have commitments related to operating lease arrangements in the U.S., under which we have an option to purchase the properties for an aggregate of $322.2 million, or arrange for the sale of the properties to a third party. If the properties are sold to a third party at less than the option price, 3Com retains an obligation for the shortfall, subject to certain provisions of the lease. During the first six months of fiscal 2000, the board of directors authorized the repurchase of an additional 25 million shares of 3Com's common stock. The share authorization will be used for purchases of our common stock made in the open market from time to time or the sale of put options on our common stock. During the first six months of fiscal 2000, we repurchased 20.5 million shares of our common stock at a total purchase price of $540.7 million. During the second quarter of fiscal 2000 we initiated a program of selling put options on our common stock. Each put option entitles the holder to sell one share of our common stock to us at a specified price. During the second quarter of fiscal 2000, we realized proceeds of $4.9 million from the sale of put options covering 1.7 million shares of our common stock. The put options have an average exercise price of $29.14 per share and expire in January 2000. For purposes of determining the number of authorized shares remaining for repurchase, the sale of one put option is counted as the repurchase of one share. As of November 26, 1999, the remaining number of shares authorized for repurchase was 8.0 million shares. During the six months ended November 26, 1999, we received net cash of $50.5 million from the sale of our common stock to employees through our employee stock purchase and option plans. 3Com had a $100 million revolving bank credit agreement, which expired December 20, 1999 and was not replaced or renewed. During the six months ended November 26, 1999, we repaid $12 million of borrowings under the 7.52% Unsecured Senior Notes agreement. As of November 26, 1999, $24 million of this debt remained outstanding, of which $12 million is classified as current. During the first six months of fiscal 2000, we recorded a tax benefit on stock option transactions of $21.3 million. During the same six month period one year ago, we recorded a tax benefit on stock option transactions totaling $19.1 million. Based on current plans and business conditions, we believe that our existing cash and equivalents, short-term investments, and cash generated from operations will be sufficient to satisfy anticipated cash requirements for at least the next twelve months. 28 <PAGE> EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain costs related to internal-use software if certain criteria are met. 3Com adopted SOP 98-1 for our fiscal year ending June 2, 2000. The adoption of SOP 98-1 did not have a significant impact on our financial results for the quarter ended November 26, 1999. In June 1998 and June 1999, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." These statements require companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. These statements will be effective for 3Com's fiscal year ending May 31, 2002. We believe that the adoption of these statements will not have a significant impact on our financial results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 3Com holds a substantial portfolio of marketable-equity traded securities that have a short trading history and are highly subject to market price volatility. Equity security price fluctuations of plus or minus 15 percent would have a $127.8 million impact on the value of these securities as of the end of the second quarter of fiscal 2000. Equity security price fluctuations of plus or minus 50 percent would have a $426.1 million impact on the value of these securities as of the end of the second quarter of fiscal 2000. For interest rate sensitivity and foreign currency exchange risk, reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended May 28, 1999. 29 <PAGE> PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in each of the cases set forth below and are vigorously contesting each of these matters. An unfavorable resolution of one or more of the following lawsuits could adversely affect our business, results of operations, or financial condition. SECURITIES LITIGATION On March 24 and May 5, 1997, securities class action lawsuits, captioned HIRSCH V. 3COM CORPORATION, ET AL., Civil Action No. CV764977 (HIRSCH), and KRAVITZ V. 3COM CORPORATION, ET AL., Civil Action No. CV765962 (KRAVITZ), respectively, were filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County. The complaints allege violations of Sections 25400 and 25500 of the California Corporations Code and seek unspecified damages on behalf of a class of purchasers of 3Com common stock during the period from September 24, 1996 through February 10, 1997. The actions are in discovery. No trial date has been set. On February 10, 1998, a securities class action, captioned EUREDJIAN V. 3COM CORPORATION, ET AL., Civil Action No. C-98-00508CRB (EUREDJIAN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California asserting the same class period and factual allegations as the HIRSCH and KRAVITZ actions. The complaint alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages. The plaintiffs have filed an amended complaint. 3Com has filed an answer to the amended complaint. The trial is scheduled for October 2000. In December 1997, a securities class action, captioned REIVER V. 3COM CORPORATION, ET AL., Civil Action No. C-97-21083JW (REIVER), was filed in the United States District Court for the Northern District of California. Several similar actions have been consolidated into this action, including FLORIDA STATE BOARD OF ADMINISTRATION AND TEACHERS RETIREMENT SYSTEM OF LOUISIANA V. 3COM CORPORATION, ET AL., Civil Action No. C-98-1355. On August 17, 1998, the plaintiffs filed a consolidated amended complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and which seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from April 23, 1997 through November 5, 1997. In July 1999, the court dismissed the complaint and granted the plaintiffs the right to file an amended complaint. Plaintiffs have filed an amended complaint, and defendants have filed a motion to dismiss. In October 1998, a securities class action lawsuit, captioned ADLER V. 3COM CORPORATION, ET AL., Civil Action No. CV777368 (ADLER), was filed against 3Com and certain of its officers and directors in the California Superior Court, Santa Clara County, asserting the same class period and factual allegations as the REIVER action. The complaint alleges violations of Sections 25400 and 25500 of the California Corporations Code and seeks unspecified damages. The action is in discovery. No trial date has been set. In October 1998, two shareholder derivative actions purportedly on behalf of 3Com, captioned SHAEV V. BARKSDALE, ET AL., Civil Action No. 16721-NC, and BLUM V. BARKSDALE, ET AL., Civil Action No. 16733-NC, were filed in Delaware Chancery Court. The complaints allege that 3Com's directors breached their fiduciary duties to 3Com through the issuance of and disclosures concerning director stock options. 3Com is named solely as a nominal defendant, against whom the plaintiffs seek no recovery. 3Com and the individual defendants filed a motion to dismiss, and on October 25, 1999, the Court issued an order dismissing these actions. 30 <PAGE> On May 11, 1999, a securities class action, captioned GAYLINN V. 3COM CORPORATION, ET AL., Civil Action No. C-99-2185 MMC (GAYLINN), was filed against 3Com and several of its present and former officers and directors in United States District Court for the Northern District of California. Several similar actions have been consolidated into the GAYLINN action. On September 10, 1999, the plaintiffs filed a consolidated complaint which alleges violations of the federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks unspecified damages on behalf of a purported class of purchasers of 3Com common stock during the period from September 22, 1998 through March 2, 1999. 3Com has filed a motion to dismiss. INTELLECTUAL PROPERTY LITIGATION On April 28, 1997, Xerox Corporation filed suit against U.S. Robotics Corporation and U.S. Robotics Access Corp. in the United States District Court for the Western District of New York. The case is now captioned: Xerox Corporation v. U.S. Robotics Corporation, U.S. Robotics Access Corp., Palm Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-6182T. The complaint alleges willful infringement of a Xerox United States patent relating to computerized interpretation of handwriting. The complaint seeks unspecified damages and injunctive relief. Xerox has asserted that Graffiti-Registered Trademark- software and certain products of Palm Computing, Inc. infringe the patent. On June 25, 1999, the Court stayed the action pending reexamination of the patent by the U.S. Patent and Trademark Office. On December 15, 1999, we received a Notice of Intent to Issue Reexamination Certificate from the United States Patent and Trademark Office stating that the reexamination has been terminated and that a certificate will be issued in due course. The notice stated that the certificate will indicate that there will be no changes to the patent specification or drawings and that all claims of the patent will be confirmed without any changes. On December 16, 1999, both we and Xerox separately wrote the court requesting that the stay of the action be lifted. The parties are awaiting the scheduling of a status conference with the court. COMMERCIAL LITIGATION On November 4, 1999, a lawsuit was filed against 3Com by Disney Interactive, Inc. ("DI") in the Superior Court of the State of California, Los Angeles County, Case No. BC219663, alleging breach of a purported contract for the bundling of DI video products with 3Com modems. The complaint asserts that DI is seeking damages in excess of $15 million. The case is in discovery. No trial date has yet been set. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 31 <PAGE> ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders was held on September 23, 1999. (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 of the proposals: <TABLE> <CAPTION> <S> <C> <C> <C> PROPOSAL I FOR WITHHELD BROKER NON-VOTES Election of Directors: Casey G. Cowell 308,896,702 6,574,318 0 David W. Dorman 309,124,492 6,346,528 0 Jean-Louis Gassee 309,123,028 6,347,992 0 Paul G. Yovovich 309,086,251 6,384,769 0 William F. Zuendt 309,159,762 6,311,258 0 </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> PROPOSAL II FOR AGAINST ABSTAIN BROKER NON-VOTES To ratify the appointment of Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year ending June 2, 2000: 311,318,844 2,730,899 1,421,277 0 </TABLE> ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K <TABLE> <CAPTION> (a) Exhibits Exhibit Number Description ------- ----------- <S> <C> 3.1 Certificate of Incorporation (11) 3.2 Certificate of Correction Filed to Correct a Certain Error in the Certificate of Incorporation (11) 3.3 Certificate of Merger (11) 3.4 Corrected Certificate of Merger (14) 3.5 Bylaws of 3Com Corporation, As Amended (12) 4.1 Amended and Restated Rights Agreement dated December 31, 1994 (Exhibit 10.27 to Form 10-Q) (4) 4.2 Amended and Restated Senior Notes Agreement between U.S. Robotics Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (5) 4.3 Amendment to amended and restated note agreements between 3Com Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (13) 4.4 Second amendment to amended and restated note agreements between 3Com Corporation, Metropolitan Life Insurance Company, The Northwestern Mutual Life Insurance Company, and Metropolitan Property and Casualty Insurance Company (14) 10.1 1983 Stock Option Plan, as amended (14)* 10.2 Amended and Restated Incentive Stock Option Plan (2)* 32 <PAGE> <S> <C> 10.3 License Agreement dated March 19, 1981 (1) 10.4 Second Amended and Restated 1984 Employee Stock Purchase Plan (Exhibit 10.5 to Form 10-Q) (6)* 10.5 3Com Corporation Director Stock Option Plan, as amended (Exhibit 19.3 to Form 10-Q) (3)* 10.6 Amended 3Com Corporation Director Stock Option Plan (Exhibit 10.8 to Form 10-Q) (6)* 10.7 3Com Corporation Restricted Stock Plan, as amended (Exhibit 10.17 to Form 10-Q) (6)* 10.8 1994 Stock Option Plan, as amended (14)* 10.9 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996 (Exhibit 10.37 to Form 10-Q) (8) 10.10 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q) (8) 10.11 Agreement and Plan of Reorganization among 3Com Corporation, OnStream Acquisition Corporation and OnStream Networks, Inc. dated as of October 5, 1996 (Exhibit 2.1 to Form S-4) (7) 10.12 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q) (10) 10.13 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of February 3, 1997 for the Combined Great America Headquarters site (Exhibit 10.20 to Form 10-Q) (10) 10.14 Credit Agreement dated as of December 20, 1996 among 3Com Corporation, Bank of America National Trust and Savings Association, as Agent, and the Other Financial Institutions Party Hereto Arranged by BA Securities, Inc. (Exhibit 10.21 to Form 10-Q) (10) 10.15 Amended and Restated Agreement and Plan of Merger by and among 3Com Corporation, TR Acquisitions Corporation, 3Com (Delaware) Corporation, and U.S. Robotics Corporation, dated as of February 26, 1997 and amended as of March 14, 1997 (9) 10.16 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 25, 1997 for the Great America Phase III (PAL) site (11) 10.17 Purchase Agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 25, 1997 for the Great America Phase III (PAL) site (11) 10.18 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of July 29, 1997 for the Marlborough site (11) 10.19 Purchase agreement between BNP Leasing Corporation and 3Com Corporation, effective as of July 29, 1997 for the Marlborough site (11) 10.20 Lease Agreement between BNP Leasing Corporation, as Landlord, and 3Com Corporation, as Tenant, effective as of August 11, 1997 for the Rolling Meadows site (11) 10.21 Purchase Agreement between BNP Leasing Corporation, and 3Com Corporation, effective as of August 11, 1997 for the Rolling Meadows site (11) 10.22 First Amendment to Credit Agreement (11) 27.1 Financial Data Schedule - ------------------------------------------------------------------------------- * Indicates a management contract or compensatory plan. </TABLE> 33 <PAGE> (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to Registrant's Registration Statement on Form S-1 filed on January 25, 1984 (File No. 2-89045) (2) 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) (3) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 10, 1992 (File No. 0-12867) (4) 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) (5) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on May 16, 1995 (File No. 0-19550) (6) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 15, 1996 (File No. 0-12867) (7) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4 filed on October 11, 1996 (File No. 333-13993) (8) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 13, 1997 (File No. 0-12867) (9) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Registration Statement on Form S-4 filed on March 17, 1997 (File No. 333-23465) (10) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on April 11, 1997 (File No. 0-12867) (11) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on October 14, 1997 (File No. 0-12867) (12) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed on January 11, 1999 (File No. 0-12867) (13) Incorporated by reference to the Exhibit identified in parentheses previously filed as an Exhibit to Registrant's Form 10-K filed on August 17, 1999 (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 October 8, 1999 (File No. 0-12867) (b) Reports on Form 8-K None. 34 <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. 3Com Corporation (Registrant) Dated: January 10, 2000 By: /s/ Christopher B. Paisley ---------------------- ----------------------------------------- Christopher B. Paisley Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 35 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 27.1 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-02-2000 <PERIOD-END> NOV-26-1999 <CASH> 1,095,611 <SECURITIES> 915,892 <RECEIVABLES> 730,395 <ALLOWANCES> 106,514 <INVENTORY> 321,461 <CURRENT-ASSETS> 3,998,447 <PP&E> 1,577,222 <DEPRECIATION> 801,111 <TOTAL-ASSETS> 4,980,367 <CURRENT-LIABILITIES> 1,393,201 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,368,104 <OTHER-SE> 2,150,228 <TOTAL-LIABILITY-AND-EQUITY> 4,980,367 <SALES> 2,862,406 <TOTAL-REVENUES> 2,862,406 <CGS> 1,527,944 <TOTAL-COSTS> 2,148,744 <OTHER-EXPENSES> 311,875 <LOSS-PROVISION> 6,000 <INTEREST-EXPENSE> 1,022 <INCOME-PRETAX> 444,043 <INCOME-TAX> 129,309 <INCOME-CONTINUING> 314,816 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 314,816 <EPS-BASIC> 0.90 <EPS-DILUTED> 0.89 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

COST

https://www.sec.gov/Archives/edgar/data/909832/0000912057-00-011443.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, QaIZ43Wud135Q0GO6ay9q+4okc4958pAHHaekkcOHyJtVAxsZAU3c3upaXHgu6ev BjHwF7AKJtcz3mUo8+UXMw== <SEC-DOCUMENT>0000912057-00-011443.txt : 20000315 <SEC-HEADER>0000912057-00-011443.hdr.sgml : 20000315 ACCESSION NUMBER: 0000912057-00-011443 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000213 FILED AS OF DATE: 20000314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSTCO WHOLESALE CORP /NEW CENTRAL INDEX KEY: 0000909832 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 330572969 STATE OF INCORPORATION: WA FISCAL YEAR END: 0830 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-04355 FILM NUMBER: 568934 BUSINESS ADDRESS: STREET 1: 999 LAKE DRIVE CITY: ISSAQUAH STATE: WA ZIP: 98027- BUSINESS PHONE: (206)-313- MAIL ADDRESS: STREET 1: 999 LAKE DRIVE CITY: ISSAQUAD STATE: WA ZIP: 98027 FORMER COMPANY: FORMER CONFORMED NAME: COSTCO COMPANIES INC DATE OF NAME CHANGE: 19970401 FORMER COMPANY: FORMER CONFORMED NAME: PRICE/COSTCO INC DATE OF NAME CHANGE: 19930728 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q <TEXT> <PAGE> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q <TABLE> <C> <S> /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 13, 2000 </TABLE> OR <TABLE> <C> <S> / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 </TABLE> COMMISSION FILE NUMBER 0-20355 ------------------------ COSTCO WHOLESALE CORPORATION (Exact name of registrant as specified in its charter) <TABLE> <S> <C> WASHINGTON 91-1223280 (State or other jurisdiction (I.R.S.Employer of Identification No.) incorporation or organization) </TABLE> 999 LAKE DRIVE, ISSAQUAH, WA 98027 (Address of principal executive office) (Zip Code) (Registrant's telephone number, including area code): (425) 313-8100 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: <TABLE> <S> <C> TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ----------------------------------------- ----------------------------------------- Common Stock $.005 Par Value The Nasdaq National Market </TABLE> ------------------------ 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 446,760,866 common shares, par value $.005, outstanding at March 10, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> COSTCO WHOLESALE CORPORATION INDEX TO FORM 10-Q PART I--FINANCIAL INFORMATION <TABLE> <CAPTION> PAGE -------- <S> <C> ITEM 1--FINANCIAL STATEMENTS................................ 3 Condensed Consolidated Balance Sheets..................... 10 Condensed Consolidated Statements of Operations........... 11 Condensed Consolidated Statements of Cash Flows........... 12 Notes to Condensed Consolidated Financial Statements...... 13 ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 3 PART II--OTHER INFORMATION ITEM 1--LEGAL PROCEEDINGS................................... 8 ITEM 2--CHANGES IN SECURITIES............................... 8 ITEM 3--DEFAULTS UPON SENIOR SECURITIES..................... 8 ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................... 8 ITEM 5--OTHER INFORMATION................................... 9 ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.................... 9 Exhibit (3.2) Bylaws of Costco Wholesale Corporation Exhibit (27) Financial Data Schedule Exhibit (28) Report of Independent Public Accountants..... 19 </TABLE> 2 <PAGE> PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Costco Wholesale Corporation's ("Costco" or the "Company") unaudited condensed consolidated balance sheet as of February 13, 2000, and the condensed consolidated balance sheet as of August 29, 1999, unaudited condensed consolidated statements of operations and cash flows for the 12- and 24-week periods ended February 13, 2000 and February 14, 1999 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 2000 is a 53-week year ending on September 3, 2000. The first, second, and third quarters consist of 12 weeks each and the fourth quarter consists of 17 weeks. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For these purposes, forward-looking statements are statements that address activities, events, conditions or developments that the company expects, or anticipates may occur in the future. Such forward-looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions including exchange rates, the effects of competition and regulation, conditions affecting the acquisition, development and ownership or use of real estate, actions of vendors and other risks identified from time to time in the Company's reports filed with the SEC. It is suggested that this management discussion be read in conjunction with the management discussion included in the Company's fiscal 1999 annual report on Form 10-K previously filed with the Securities and Exchange Commission. The Company's Board of Directors approved a 2-for-1 stock split of Costco Common Stock whereby shareholders received one additional share of common stock for every share held on the record date of December 24, 1999. The common stock began trading at a post-split price on January 14, 2000, and all per share data reflects this 2-for-1 stock split. COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 13, 2000 AND FEBRUARY 14, 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income for the second quarter of fiscal 2000 increased 19% to $181,608, or $0.39 per diluted share, from $152,032, or $0.33 per diluted share, during the second quarter of fiscal 1999. Net sales increased 17% to $7,613,601 during the second quarter of fiscal 2000, from $6,484,445 during the second quarter of fiscal 1999. This increase was due to opening a net of 18 new warehouses (24 opened, 6 closed) since the end of the second quarter of fiscal 1999 and an increase in comparable warehouse sales. Comparable sales, that is sales in warehouses open for at least a year, increased 14% during the second quarter of fiscal 2000, reflecting new marketing and merchandising efforts, including the rollout of 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 14% to $123,386 or 1.62% of net sales in the second quarter of fiscal 2000 from $107,913 or 1.66% of net sales in the second quarter of fiscal 1999. Membership fees include new membership sign-ups at the new warehouses opened since the end of the second quarter of fiscal 1999. Membership fees in both fiscal years reflect the change from a cash to a deferred method of 3 <PAGE> accounting for membership fees, beginning in the first quarter of fiscal 1999, whereby membership fee income is recognized ratably over the one-year life of the membership. Gross margin (defined as net sales minus merchandise costs) increased 18% to $821,234 or 10.79% of net sales in the second quarter of fiscal 2000 from $695,792 or 10.73% of net sales in the second quarter of fiscal 1999.The increase in gross margin as a percentage of net sales reflects increased sales penetration of certain higher gross margin ancillary businesses and private label products and improved performance of its international operations, offset by the Company's on-going efforts to continually lower prices to its members. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The second quarter of fiscal 2000 includes a $2,500 LIFO provision compared to a $3,500 LIFO provision in the second quarter of fiscal 1999. Selling, general and administrative expenses as a percent of net sales decreased to 8.36% during the second quarter of fiscal 2000 from 8.38% during the second quarter of fiscal 1999. This improvement in selling, general and administrative expenses as a percent of net sales was due to the increase in comparable warehouse sales noted above, and a year-over-year expense improvement at the Company's core warehouse operations and Central and Regional administrative offices, which was partially offset by higher expenses associated with international expansion; continued expansion and rollout of certain ancillary businesses; the opening of a new regional buying office and the increase in credit card discount fees associated with the rollout of a new co-branded credit card program. Preopening expenses totaled $8,108 or .11% of net sales during the second quarter of fiscal 2000 compared to $3,951 or 0.06% of net sales during the second quarter of fiscal 1999. Six warehouses were opened in the second quarter of fiscal 2000 compared to one warehouse opened during last year's second quarter. Additionally, the opening of a Southeast Regional Office to strengthen the administrative support of the region contributed to this increase. Preopening expenses also include costs related to remodels, including expanded fresh foods and ancillary operations at existing warehouses, as well as costs associated with expanding international operations. A provision for warehouse closing costs of $1,500 was recorded in the second quarter of fiscal 2000 compared to $3,000 in the second quarter of fiscal 1999. The provisions include actual and estimated closing costs for warehouses being relocated to new facilities during the fiscal year. Interest expense totaled $10,576 in the second quarter of fiscal 2000 compared to $10,995 in the second quarter of fiscal 1999. Interest expense primarily includes interest on the 3 1/2% Zero Coupon Notes and the 7 1/8% Senior Notes. The decrease in interest expense is primarily attributable to a decrease in the interest rate related to the 7 1/8% Senior Notes, due to entering into a "fix-to-floating" interest rate swap agreement on December 10, 1999 that effectively converted the fixed rate of 7 1/8% to a floating rate indexed to the thirty day commercial paper rate. Interest income and other totaled $14,983 in the second quarter of fiscal 2000 compared to $11,192 in the second quarter of fiscal 1999. The increase primarily reflects higher rates of interest earned on higher balances of cash and cash equivalents and short-term investments during the second quarter of fiscal 2000, as compared to the second quarter of fiscal 1999. The effective income tax rate on earnings in the second quarter of both fiscal 2000 and 1999 was 40%. COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 13, 2000 AND FEBRUARY 14, 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net operating results for the first half of fiscal 2000 reflect net income of $310,926, or $0.66 per diluted share, compared to net income of $138,243, or $0.30 per diluted share during the first half of fiscal 1999. Net income in the first half of fiscal 1999 included a $118,023 non-cash, after-tax charge, reflecting the cumulative effect of the Company's change in accounting for membership fees from a cash to a 4 <PAGE> deferred method. Before the impact of this non-cash charge, net earnings were $256,266, or $.55 per diluted share. Net sales increased 17% to $14,437,798 during the first half of fiscal 2000 from $12,378,683 during the first half of fiscal 1999. This increase was primarily due to an increase in comparable warehouse sales and opening a net of 18 warehouses (24 opened, 6 closed) since the end of the second quarter of fiscal 1999. Comparable sales, that is sales in warehouses open for at least a year, increased 13 percent during the first half of fiscal 2000, 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 $242,701 or 1.68% of net sales in the first half of fiscal 2000 from $211,753 or 1.71% of net sales in the first half of fiscal 1999. Membership fees include new membership sign-ups at the new warehouses opened since the end of the second quarter of fiscal 1999. Gross margin (defined as net sales minus merchandise costs) increased 17% to $1,525,230 or 10.56% of net sales in the first half of fiscal 2000 from $1,302,245 or 10.52% of net sales in the first half of fiscal 1999. The increase in gross margin as a percentage of net sales reflects increased sales penetration of certain higher gross margin ancillary businesses and private label products and improved performance of its international operations, offset by the Company's on-going efforts to continually lower prices to its members. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The first half of fiscal 2000 includes a $5,000 LIFO provision compared to a $6,000 LIFO provision in the first half of fiscal 1999. Selling, general and administrative expenses as a percent of net sales decreased to 8.54% during the first half of fiscal 2000 from 8.58% during the first half of fiscal 1999. This improvement in selling, general and administrative expenses as a percent of net sales was due to the increase in comparable warehouse sales noted above, and a year-over-year expense improvement at the Company's core warehouse operations and Central and Regional administrative offices, which was partially offset by higher expenses associated with international expansion and continued expansion and rollout of certain ancillary businesses; the opening of a new regional buying office and the increase in credit card discount fees associated with the rollout of a new co-branded credit card program. Preopening expenses totaled $18,442 or 0.13% of net sales during the first half of fiscal 2000 compared to $14,658 or 0.12% of net sales during the first half of fiscal 1999. Twelve warehouses were opened in the first half of fiscal 2000 (including 1 relocated warehouses) compared to nine new locations during the last year's first half (including two relocated warehouses). Preopening expenses also include costs related to remodels, including expanded fresh foods and ancillary operations at existing warehouses, as well as costs associated with expanding international operations. In the first half of fiscal 2000, the Company recorded a pre-tax provision for warehouse closing costs of $2,500 compared to a pre-tax provision for warehouse closing costs of $5,000 in the first half of fiscal 1999. The provisions included closing costs for warehouses closed in each respective fiscal year, including exit costs associated with warehouses which were or are being relocated to new facilities. There was one relocation in the first half of fiscal 2000 compared to two relocations in the first half of fiscal 1999. Interest expense totaled $20,973 in the first half of fiscal 2000 compared to $21,907 in the first half of fiscal 1999. Interest expense primarily includes interest on the 3 1/2% Zero Coupon Notes and the 7 1/8% Senior Notes. The decrease in interest expense is primarily attributable to a decrease in the interest rate related to the 7 1/8% Senior Notes, due to entering into a "fix-to-floating" interest rate swap agreement on December 10, 1999 that effectively converted the fixed rate of 7 1/8% to a floating rate indexed to the thirty day commercial paper rate. Interest income and other totaled $25,650 in the first half of fiscal 2000 compared to $17,231 in the first half of fiscal 1999. The increase primarily reflects higher interest rates earned on higher balances of 5 <PAGE> cash and cash equivalents and short-term investments during the first half of fiscal 1999, as compared to the year-earlier first half. The effective income tax rate on earnings in the first half of both fiscal 2000 and 1999 was 40.0%. LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) EXPANSION PLANS Costco's primary requirement for capital is the financing of the land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements, as well as additional capital for international expansion either directly or through investments in foreign subsidiaries and joint ventures. While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management's current intention to spend an aggregate of approximately $800,000 to $950,000 during fiscal 2000 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $100,000 to $150,000 for international expansion, including the United Kingdom, Asia, Mexico and other potential ventures. These expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents and short-term investments (which totaled $663,502 at February 13, 2000), short-term borrowings under revolving credit facilities and other financing sources as required. Expansion plans for the United States and Canada during fiscal 2000 are to open approximately 20 to 25 new warehouse clubs, including three to five relocations of existing warehouses to larger and better-located facilities. The Company expects to continue expansion of its international operations and plans to open two to three additional units in the United Kingdom through its 60%-owned subsidiary and an additional unit in Taiwan through its 55%-owned subsidiary during the year. Through the end of the first half of fiscal 2000, the Company opened 12 new warehouses (including one relocation). Expansion plans for the remainder of fiscal 2000 include 10 to 14 new openings in the U.S. and Canada (including two to four relocations) and two to three warehouses in the United Kingdom. Other international markets are being assessed. Costco and its Mexico-based joint venture partner, Controladora Comercial Mexicana, each own a 50% interest in Price Club Mexico. As of February 13, 2000, Price Club Mexico operated 17 warehouses in Mexico and plans to open two new warehouse clubs during fiscal 2000. BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN US DOLLARS) The Company has in place a $425,000 commercial paper program supported by a $425,000 bank credit facility with a group of 11 banks, which expires in January, 2001. At February 13, 2000 no amounts were outstanding under the loan facility or the commercial paper program. In addition, a wholly-owned Canadian subsidiary has a $138,000 commercial paper program supported by a $97,000 bank credit facility with three Canadian banks, which expires in March 2001. At February 13, 2000 no amounts were outstanding under the bank credit facility or the Canadian commercial paper program. The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian commercial paper programs to the $522,000 combined amounts of the respective supporting bank credit facilities. 6 <PAGE> LETTERS OF CREDIT The Company has separate letter of credit facilities (for commercial and standby letters of credit) totaling approximately $287,000. The outstanding commitments under these facilities at February 13, 2000 totaled approximately $122,000, including approximately $45,000 in standby letters of credit. DERIVATIVES The Company uses derivative financial instruments only to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases. The amount of interest rate and foreign exchange contracts outstanding at quarter-end or in place during the first 24 weeks of fiscal 2000 were not material to the Company's results of operations or its financial position. Effective December 10, 1999, the Company entered into a "fixed-to-floating" interest rate swap agreement on its $300 million 7 1/8% senior notes, replacing the fixed interest rate with a floating rate indexed to the 30-day commercial paper rate. YEAR 2000 The Company implemented a project to ensure that its systems were year 2000 compliant and fully operational prior to the year 2000 and on into the 21(st) Century. Virtually all systems--including information technology systems and non-information technology equipment--have worked properly in the year 2000 without any significant operational difficulties. In addition, the Company has not experienced any material year 2000-related problems with its significant suppliers with which its systems interface or exchange data. The total costs related to the year 2000 efforts were approximately $7,500--in line with prior estimates and were fully expensed as incurred during the relevant fiscal periods. FINANCIAL POSITION AND CASH FLOWS Working capital totaled approximately $447,000 at February 13, 2000 compared to $450,000 at August 29, 1999. Working capital was positively affected by an increase in net inventory levels (inventories less accounts payable) of $73,000, an increase in receivables of $18,000 and an increase in other current assets of $59,000, which increases were offset by a decrease in cash and cash equivalents and short-term investments of $34,000, an increase in deferred membership income of $29,000 (the result of accounting for membership fees on a deferred basis), and an increase in tax accruals and other current liabilities of $90,000. Net cash provided by operating activities totaled $408,453 in the first half of fiscal 2000 and $424,294 in the first half of fiscal 1999. The year-over-year decrease in net cash from operating activities is primarily a result of increased net income, adjusted for the non-cash cumulative effect of accounting change in fiscal 1999, during the first 24 weeks of fiscal 2000 compared to the first 24 weeks of fiscal 1999, offset by a reduction in the change in net receivables, other current assets and accrued and other current liabilities. Net cash used in investing activities totaled $397,418 in the first half of fiscal 2000 compared to $571,942 in the first half of fiscal 1999. The investing activities primarily relate to additions to property and equipment for new and remodeled warehouses of $515,118 and $367,075 in the first 24 weeks of fiscal 2000 and 1999, respectively. The Company opened 12 warehouses (including one relocation) in the first 24 weeks of fiscal 2000 and has plans to open 15 to 17 new warehouses (including two to four relocations) during the remainder of the fiscal year compared to 21 new warehouses (including seven relocations) opened during fiscal 1999. Net cash used in investing activities also reflects a decrease in short-term investments of $103,587 since the beginning of fiscal year 2000 compared to an increase of $228,361 in the first half of fiscal 1999. 7 <PAGE> Net cash provided by financing activities totaled $53,745 in the first half of fiscal 2000 compared to $106,543 in the first half of fiscal 1999. This decrease is primarily attributable to a decrease in bank checks outstanding. The Company's balance sheet as of February 13, 2000 reflects a $603,345 or 8% increase in total assets since August 29, 1999. The increase is primarily due to increases in merchandise inventory and property and equipment primarily related to the Company's expansion program. PART II--OTHER INFORMATION (DOLLARS IN THOUSANDS) ITEM 1. LEGAL PROCEEDINGS 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 its 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 of stockholders was held on January 27, 2000 at the Doubletree Hotel in Bellevue, Washington. Stockholders of record at the close of business on December 10, 1999 were entitled to notice of and to vote in person or by proxy at the annual meeting. At the date of record, December 10, 1999, there were 222,387,354 shares outstanding. The matters presented for vote received the required votes for approval and had the following total, for, against and abstained votes as noted below. The number of shares voted does not reflect the 2-for-1 stock split, which was approved by the Company's Board of Directors for shareholders of record on December 24, 1999, because the date of record for those entitled to vote preceded the stock split record date. (1) To elect three Class I directors to hold office until the 2003 Annual Meeting of Stockholders and until their successors are elected and qualified. <TABLE> <CAPTION> TOTAL SHARES FOR AGAINST WITHHELD AUTHORITY AND VOTED/(%) VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%) ------------ ----------- --------- ---------------------- <S> <C> <C> <C> <C> Jeffrey H. Brotman 175,087,870 172,259,356 -- 2,828,514 (Class I) 78.73% 98.38% -- 1.62% Richard A. Galanti 175,087,870 172,241,114 -- 2,846,756 (Class I) 78.73% 98.37% -- 1.63% James D. Sinegal 175,087,870 172,255,855 -- 2,832,015 (Class I) 78.73% 98.38% -- 1.62% </TABLE> 8 <PAGE> (2) To consider and approve indemnity agreements to be entered into between the Company and each of its directors and certain of its executive officers. <TABLE> <CAPTION> TOTAL SHARES FOR AGAINST WITHHELD AUTHORITY AND VOTED/(%) VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%) ------------ ----------- ----------- ---------------------- <S> <C> <C> <C> <C> 175,087,870 133,658,428 40,476,052 953,390 78.73% 76.34% 23.12% .54% </TABLE> (3) To consider and ratify the selection of the Company's independent public accountants, Arthur Andersen LLP. <TABLE> <CAPTION> TOTAL SHARES FOR AGAINST WITHHELD AUTHORITY AND VOTED/(%) VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%) ------------ ----------- ----------- ---------------------- <S> <C> <C> <C> <C> 175,087,870 173,303,280 103,106 1,681,484 78.73% 98.98% .06% .96% </TABLE> 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: (3.2) Bylaws of Costco Wholesale Corporation (27) Financial Data Schedule (28) Report of Independent Public Accountants (b) Current report on Form 8-K filed December 9, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. Costco Wholesale Corporation REGISTRANT <TABLE> <S> <C> Date: March 10, 2000 /s/ JAMES D. SINEGAL --------------------------------------------- James D. Sinegal PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: March 10, 2000 /s/ RICHARD A. GALANTI --------------------------------------------- Richard A. Galanti EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER </TABLE> 9 <PAGE> COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PAR VALUE) <TABLE> <CAPTION> FEBRUARY 13, AUGUST 29, 2000 1999 ------------ ----------- (UNAUDITED) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 510,027 $ 440,586 Short-term investments.................................... 153,475 256,688 Receivables, net.......................................... 186,491 168,648 Merchandise inventories, net.............................. 2,347,621 2,210,475 Other current assets...................................... 298,289 239,516 ----------- ----------- Total current assets.................................... 3,495,903 3,315,913 ----------- ----------- PROPERTY AND EQUIPMENT Land and land rights...................................... 1,442,075 1,264,125 Buildings and leasehold and land improvements............. 2,733,609 2,444,640 Equipment and fixtures.................................... 1,230,888 1,138,568 Construction in progress.................................. 122,638 176,824 ----------- ----------- 5,529,210 5,024,157 Less-accumulated depreciation and amortization............ (1,213,436) (1,117,269) ----------- ----------- Net property and equipment.............................. 4,315,774 3,906,888 ----------- ----------- OTHER ASSETS................................................ 296,669 282,200 ----------- ----------- $ 8,108,346 $ 7,505,001 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.......................................... $ 1,976,294 $ 1,912,632 Accrued salaries and benefits............................. 431,989 414,276 Accrued sales and other taxes............................. 136,367 122,932 Deferred membership income................................ 255,327 225,903 Other current liabilities................................. 249,342 190,490 ----------- ----------- Total current liabilities............................... 3,049,319 2,866,233 LONG-TERM DEBT.............................................. 923,414 918,888 DEFERRED INCOME TAXES AND OTHER LIABILITIES................. 68,805 66,990 ----------- ----------- Total liabilities....................................... 4,041,538 3,852,111 ----------- ----------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST........................................... 129,574 120,780 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock $.005 par value; 200,000,000 shares authorized; no shares issued and outstanding............ -- -- Common stock $.005 par value; 1,800,000,000 shares authorized; 446,401,000 and 442,736,000 shares issued and outstanding......................................... 2,232 2,214 Additional paid-in capital................................ 1,015,062 952,758 Other accumulated comprehensive loss...................... (86,208) (118,084) Retained earnings......................................... 3,006,148 2,695,222 ----------- ----------- Total stockholders' equity.............................. 3,937,234 3,532,110 ----------- ----------- $ 8,108,346 $ 7,505,001 =========== =========== </TABLE> The accompanying notes are an integral part of these balance sheets 10 <PAGE> COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> 12 WEEKS ENDED 24 WEEKS ENDED --------------------------- --------------------------- FEBRUARY 13, FEBRUARY 14, FEBRUARY 13, FEBRUARY 14, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> REVENUE Net sales................................... $7,613,601 $6,484,445 $14,437,798 $12,378,683 Membership fees and other................... 123,386 107,913 242,701 211,753 ---------- ---------- ----------- ----------- Total revenue............................. 7,736,987 6,592,358 14,680,499 12,590,436 OPERATING EXPENSES Merchandise costs........................... 6,792,367 5,788,653 12,912,568 11,076,438 Selling, general and administrative......... 636,739 543,565 1,233,456 1,062,555 Preopening expenses......................... 8,108 3,951 18,442 14,658 Provision for impaired assets and warehouse closing costs............................. 1,500 3,000 2,500 5,000 ---------- ---------- ----------- ----------- Operating income.......................... 298,273 253,189 513,533 431,785 OTHER INCOME (EXPENSE) Interest expense............................ (10,576) (10,995) (20,973) (21,907) Interest income and other................... 14,983 11,192 25,650 17,231 ---------- ---------- ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE............... 302,680 253,386 518,210 427,109 Provision for income taxes.................. 121,072 101,354 207,284 170,843 ---------- ---------- ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE......................... 181,608 152,032 310,926 256,266 Cumulative effect of accounting change, net of tax.................................... -- -- -- (118,023) ---------- ---------- ----------- ----------- NET INCOME.................................. $ 181,608 $ 152,032 $ 310,926 $ 138,243 ========== ========== =========== =========== NET INCOME PER COMMON SHARE: Basic earnings per share: Income before cumulative effect of accounting change..................... $ 0.41 $ 0.35 $ 0.70 $ 0.59 Cumulative effect of accounting change, net of tax............................ -- -- -- (0.27) ---------- ---------- ----------- ----------- Net Income.............................. $ 0.41 $ 0.35 $ 0.70 $ 0.32 ========== ========== =========== =========== Diluted earnings per share: Income before cumulative effect of accounting change..................... $ 0.39 $ 0.33 $ 0.66 $ 0.55 Cumulative effect of accounting change, net of tax............................ -- -- -- (.25) ---------- ---------- ----------- ----------- Net Income.............................. $ 0.39 $ 0.33 $ 0.66 $ .30 ========== ========== =========== =========== Shares used in calculation (000's) Basic..................................... 445,255 437,782 444,277 436,730 Diluted................................... 476,642 470,453 475,120 468,787 </TABLE> The accompanying notes are an integral part of these financial statements. 11 <PAGE> COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> 24 WEEKS ENDED --------------------------- FEBRUARY 13, FEBRUARY 14, 2000 1999 ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 310,926 $ 138,243 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 114,424 98,493 Accretion of discount on zero coupon notes.............. 7,431 7,586 Cumulative effect of accounting change, net of tax...... -- 118,023 Change in receivables, other current assets, accrued and other current liabilities............................. 66,124 154,424 Increase in merchandise inventories..................... (124,369) (130,368) Increase in accounts payable............................ 42,373 49,150 Other................................................... (8,456) (11,257) --------- --------- Total adjustments..................................... 97,527 286,051 --------- --------- Net cash provided by operating activities............... 408,453 424,294 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment....................... (515,118) (367,075) Proceeds from the sale of property and equipment.......... 33,738 30,101 Change in short-term investments.......................... 103,587 (228,361) Other..................................................... (19,625) (6,607) --------- --------- Net cash used in investing activities................... (397,418) (571,942) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from long-term borrowings.................... 253 2,807 Repayments of long-term debt.............................. (5,473) (5,517) Changes in bank checks outstanding........................ 10,608 70,793 Proceeds from minority interests.......................... 8,816 5,277 Exercise of stock options................................. 39,541 33,183 --------- --------- Net cash provided by financing activities............... 53,745 106,543 --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 4,661 3,730 --------- --------- Net increase/(decrease) in cash and cash equivalents...... 69,441 (37,375) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 440,586 361,974 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 510,027 $ 324,599 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amounts capitalized)..................... $ 14,531 $ 14,193 Income taxes.............................................. 118,559 108,393 </TABLE> The accompanying notes are an integral part of these financial statements 12 <PAGE> COSTCO WHOLESALE CORPORATION 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 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 August 29, 1999. The consolidated financial statements include the accounts of Costco Wholesale Corporation, a Washington corporation, and its subsidiaries ("Costco" or the "Company"). All inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation. The Price Company and Costco Wholesale Corporation primarily operate membership warehouses under the Costco Wholesale name. Costco operates membership warehouses that offer very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories in no-frills, self-service warehouse facilities. At February 13, 2000, Costco operated 303 warehouse clubs: 230 in the United States; 59 in Canada; seven in the United Kingdom; three in Korea; three in Taiwan; and one in Japan. As of February 13, 2000, the Company also operated (through a 50%-owned joint venture) 17 warehouses in Mexico. The Company also operates Costco Online, an electronic commerce web site, at www.costco.com. The Company's investment in the Price Club Mexico joint venture and in other unconsolidated joint ventures that are less than majority owned are accounted for under the equity method. FISCAL YEARS The Company reports on a 52/53-week fiscal year basis, which ends on the Sunday nearest August 31(st). Fiscal year 2000 is a 53-week year, with the first, second and third quarters consisting of 12 weeks each and the fourth quarter, ending September 3, 2000, consisting of 17 weeks. Fiscal year 1999 was a 52-week year. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. 13 <PAGE> COSTCO WHOLESALE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHORT-TERM INVESTMENTS At February 13, 2000 and August 29, 1999 short term investments consisted of the following: <TABLE> <CAPTION> FEBRUARY 13, 2000 AUGUST 29, 1999 ----------------- --------------- <S> <C> <C> Municipal securities........................... $ 41,154 $ 97,966 Corporate notes and bonds...................... 85,442 89,872 U.S. Treasury/Agency securities................ 21,738 43,699 Certificates of deposit........................ -- 24,841 Foreign Bonds.................................. 4,943 -- Other.......................................... 198 310 -------- -------- Total short-term investments................. $153,475 $256,688 ======== ======== </TABLE> The Company's short-term investments have been designated as being available-for-sale. The fair market value of short-term investments approximates their carrying value and unrealized holding gains and losses were not significant at February 13, 2000 or August 29, 1999. Realized gains and losses are included in interest income and were not significant in the first half of fiscal 2000 or 1999. RECEIVABLES Receivables consist primarily of vendor rebates and promotional allowances and other miscellaneous amounts due to the Company, and are net of allowance for doubtful accounts of $4,373 and $4,582 at February 13, 2000 and August 29, 1999. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or market as determined primarily by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S. merchandise inventories. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. If all merchandise inventories had been valued using the first-in, first-out (FIFO) method, inventories would have been higher by $16,150 at February 13, 2000 and $11,150 at August 29, 1999. 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 physical inventory counts, which generally occur in the second and fourth fiscal quarters. ACCOUNTS PAYABLE The Company's banking system provides for the daily replenishment of major bank accounts as checks are presented. Accordingly, included in Accounts Payable are $32,138 and $21,081 at February 13, 2000 and August 29, 1999, respectively, representing the excess of outstanding checks over cash on deposit at the banks on which the checks were drawn. 14 <PAGE> COSTCO WHOLESALE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MEMBERSHIP FEES Membership fee revenue represents annual membership fees paid by substantially all of the Company's members. Effective with the first quarter of fiscal 1999, the Company changed its method of accounting for membership fee income from a "cash basis" to a "deferred basis" whereby membership fee income is recognized ratably over the one-year life of the membership. The change to the deferred method of accounting for membership fees resulted in a one-time, non-cash, pre-tax charge of approximately $196,705 ($118,023 after-tax, or $.25 per diluted share) to reflect the cumulative effect of the accounting change as of the beginning of fiscal 1999. WAREHOUSE CLOSING COSTS The Company recorded a charge of $30,865 for warehouse and other facility closing costs in fiscal 1999. In the first and second quarters of fiscal 2000, the Company recorded additional charges of $1,000 and $1,500, respectively, in net warehouse closing costs. At February 13, 2000 the reserve for warehouse closing costs was $20,686, primarily representing future lease obligations. Warehouse closing costs incurred relate principally to the Company's efforts to relocate certain warehouses that were not otherwise impaired to larger and better-located facilities. INCOME TAXES Deferred income taxes are provided to reflect temporary differences between the financial and tax bases of assets and liabilities using presently enacted tax rates and laws. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE The following data show the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. <TABLE> <CAPTION> 12 WEEKS ENDED 24 WEEKS ENDED --------------------------- --------------------------- FEBRUARY 13, FEBRUARY 14, FEBRUARY 13, FEBRUARY 14, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net income available to common stockholders used in basic EPS............................ $181,608 $152,032 $310,926 $138,243 Interest on convertible bonds, net of tax...... 2,230 2,276 4,460 4,552 -------- -------- -------- -------- Net income available to common stockholders after assumed conversions of dilutive securities................................... $183,838 $154,308 $315,386 $142,795 ======== ======== ======== ======== Weighted average number of common shares used in basic EPS (000's)......................... 445,255 437,782 444,277 436,730 Stock options (000's).......................... 12,039 12,233 11,495 11,619 Conversion of convertible bonds (000's)........ 19,348 20,438 19,348 20,438 -------- -------- -------- -------- Weighted number of common shares and dilutive potential common stock used in diluted EPS (000's)...................................... 476,642 470,453 475,120 468,787 ======== ======== ======== ======== </TABLE> 15 <PAGE> COSTCO WHOLESALE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) All per share data reflects the 2-for-1 stock split which was approved by the Company's Board of Directors for shareholders of record on December 24, 1999. The common stock began trading at the post-split price on January 14, 2000. DERIVATIVES The Company uses derivative financial instruments only to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases. The amount of interest rate and foreign exchange contracts outstanding at quarter-end or in place during the first 24 weeks of fiscal 2000 were not material to the Company's results of operations or its financial position. Effective December 10, 1999, the Company entered into a "fixed-to-floating" interest rate swap agreement on its $300,000 7 1/8% senior notes, replacing the fixed interest rate with a floating rate indexed to the 30-day commercial paper rate. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which established accounting and reporting standards for derivative instruments and for hedging activities. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133 for the Company to the beginning of its fiscal 2001. Presently, the Company has limited use of derivative financial instruments and believes that SFAS No. 133 would not have a material impact on its results of operations or financial position. 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 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. 16 <PAGE> COSTCO WHOLESALE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (2)--COMPREHENSIVE INCOME Consolidated comprehensive income is as follows: <TABLE> <CAPTION> 12 WEEKS ENDED 24 WEEKS ENDED --------------------------- --------------------------- FEBRUARY 13, FEBRUARY 14, FEBRUARY 13, FEBRUARY 14, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net income..................................... $181,608 $152,032 $310,926 $138,243 Other comprehensive income (expense): Foreign currency translation................. 17,530 16,048 31,876 33,196 Income tax expense........................... (7,012) (6,419) (12,750) (13,278) -------- -------- -------- -------- Other comprehensive income, net of income taxes.................................... 10,518 9,629 19,126 19,918 -------- -------- -------- -------- Comprehensive income........................... $192,126 $161,661 $330,052 $158,161 ======== ======== ======== ======== </TABLE> NOTE (3)--DEBT BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS The Company has in place a $425,000 commercial paper program supported by a $425,000 bank credit facility with a group of 11 banks, which expires in January, 2001. At February 13, 2000 no amounts were outstanding under the loan facility or the commercial paper program. In addition, a wholly-owned Canadian subsidiary has a $138,000 commercial paper program supported by a $97,000 bank credit facility with three Canadian banks, which expires in March 2001. At February 13, 2000 no amounts were outstanding under the bank credit facility or the Canadian commercial paper program. The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian commercial paper programs to the $522,000 combined amounts of the respective supporting bank credit facilities. LETTERS OF CREDIT The Company has separate letter of credit facilities (for commercial and standby letters of credit) totaling approximately $287,000. The outstanding commitments under these facilities at February 13, 2000 totaled approximately $122,000, including approximately $45,000 in standby letters of credit. 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 in operations. 17 <PAGE> COSTCO WHOLESALE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (5)--SEGMENT REPORTING The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the United States, Canada, Japan; through majority-owned subsidiaries in the United Kingdom, Taiwan and Korea; and through a 50%-owned joint venture in Mexico. The Company's reportable segments are based on management responsibility. <TABLE> <CAPTION> OTHER UNITED STATES CANADIAN INTERNATIONAL OPERATIONS OPERATIONS OPERATIONS TOTAL ------------- ---------- ------------- ----------- <S> <C> <C> <C> <C> TWENTY-FOUR WEEKS ENDED FEBRUARY 13, 2000 Total revenue............................. $11,917,461 $2,172,814 $590,224 $14,680,499 Operating income (loss)................... 417,215 96,738 (420) 513,533 Depreciation and amortization............. 89,088 17,156 8,180 114,424 Capital expenditures...................... 432,234 21,023 61,861 515,118 Total assets.............................. 6,431,002 1,078,600 598,744 8,108,346 TWENTY-FOUR WEEKS ENDED FEBRUARY 14, 1999 Total revenue............................. $10,282,046 $1,878,012 $430,378 $12,590,436 Operating income (loss)................... 359,672 73,358 (1,245) 431,785 Depreciation and amortization............. 77,140 14,498 6,855 98,493 Capital expenditures...................... 296,074 48,976 22,025 367,075 Total assets.............................. 5,590,996 920,537 465,757 6,977,290 YEAR ENDED AUGUST 29, 1999 Total revenue............................. $22,404,026 $4,104,662 $947,343 $27,456,031 Operating income (loss)................... 723,375 146,839 (10,087) 860,127 Depreciation and amortization............. 177,661 32,559 14,591 224,811 Capital expenditures...................... 655,924 79,583 52,428 787,935 Total assets.............................. 5,984,537 992,943 527,521 7,505,001 </TABLE> 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.2 <SEQUENCE>2 <DESCRIPTION>EX-3.2 <TEXT> <PAGE> BYLAWS OF COSTCO WHOLESALE CORPORATION <PAGE> BYLAWS OF COSTCO WHOLESALE CORPORATION These Bylaws are promulgated pursuant to the Washington Business Corporation Act, as set forth in Title 23B of the Revised Code of Washington. ARTICLE 1 OFFICES 1.1 PRINCIPAL OFFICE. The principal office of the corporation shall be located at 999 Lake Drive, Issaquah, Washington 98027. 1.2 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of the corporation shall be located in the State of Washington at such place as may be fixed from time to time by the Board of Directors upon filing of such notices as may be required by law, and the registered agent shall have a business office identical with such registered office. Any change in the registered agent or registered office shall be effective upon filing such change with the office of the Secretary of State of the State of Washington. 1.3 OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Washington, as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE 2 SHAREHOLDERS 2.1 ANNUAL MEETING (a) The annual meeting of the shareholders of the corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year on a date and at a time and place to be set by the Board of Directors. (b) At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (i) specified in the notice of 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. 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, a shareholder's notice must be 2. <PAGE> delivered to or mailed and received at the principal executive offices of the corporation not later than the close of business on the one-hundred twentieth (120th) day prior to the first anniversary of the preceding year's annual meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting: (A) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (B) the name and address, as they appear on the corporation's books, of the shareholder proposing such business, (C) the class and number of shares of the corporation which are beneficially owned by the shareholder, (D) any material interest of the shareholder in such business and (E) any other information that is required to be provided by the shareholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a shareholder proposal. Notwithstanding the foregoing, in order to include information with respect to a shareholder proposal in the proxy statement and form of proxy for a shareholders' meeting, shareholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. 2.2 SPECIAL MEETINGS. In accordance with Article III of the Articles of Incorporation of the corporation (the "Articles of Incorporation"), special meetings of the shareholders for any purpose or purposes may be called at any time by a majority of the Board of Directors, the Chairman, the President, any Executive Vice President, the Secretary or any shareholders owning in the aggregate at least ten percent (10%) of all votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. The Board of Directors may designate any place as the place of any special meeting called by the Chairman, the President, any Executive Vice President, the Secretary, the Board of Directors or the shareholders owning the requisite number of votes. 2.3 NOTICE OF MEETINGS. Except as otherwise provided in Subsections 2.3(b) and 2.3(c) below, the Secretary, Assistant Secretary, or any transfer agent of the corporation shall deliver, either personally or by mail, private carrier, telegraph or teletype, or telephone, wire or wireless equipment which transmits a facsimile of the notice, not less than ten (10) nor more than sixty (60) days before the date of any meeting of shareholders, written notice stating the place, day, and time of the meeting to each shareholder of record entitled to vote at such meeting. If mailed in the United States, such notice shall be deemed to be delivered when deposited in the United States mail, with first-class postage thereon prepaid, addressed to the shareholder at his address as it appears on the corporation's record of shareholders. If mailed outside the United States, such notice shall be deemed to be delivered five (5) days after being deposited in the mail, with first-class airmail postage thereon, return receipt requested, addressed to the shareholder at the shareholder's address as it appears on the corporation's record of shareholders. 3. <PAGE> (a) NOTICE OF SPECIAL MEETING. In the case of a special meeting, the written notice shall also state with reasonable clarity the purpose or purposes for which the meeting is called and the actions sought to be approved at the meeting. No business other than that specified in the notice may be transacted at a special meeting. (b) PROPOSED ARTICLES OF AMENDMENT OR DISSOLUTION. If the business to be conducted at any meeting includes any proposed amendment to the Articles of Incorporation or the proposed voluntary dissolution of the corporation, then the written notice shall be given not less than twenty (20) nor more than sixty (60) days before the meeting date and shall state that the purpose or one of the purposes is to consider the advisability thereof, and, in the case of a proposed amendment, shall be accompanied by a copy of the amendment. (c) PROPOSED MERGER, CONSOLIDATION, EXCHANGE, SALE, LEASE OR DISPOSITION. If the business to be conducted at any meeting includes any proposed plan of merger or share exchange, or any sale, lease, exchange, or other disposition of all or substantially all of the corporation's property otherwise than in the usual or regular course of its business, then the written notice shall state that the purpose or one of the purposes is to consider the proposed plan of merger or share exchange, sale, lease, or disposition, as the case may be, shall describe the proposed action with reasonable clarity, and, if required by law, shall be accompanied by a copy or a detailed summary thereof; and written notice shall be given to each shareholder of record, whether or not entitled to vote at such meeting, not less than twenty (20) nor more than sixty (60) days before such meeting, in the manner provided in Section 2.3 above. (d) DECLARATION OF MAILING. A declaration of the mailing or other means of giving any notice of any shareholders' meeting, executed by the Secretary, Assistant Secretary, or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. (e) WAIVER OF NOTICE. Notice of any shareholders' meeting may be waived in writing by any shareholder at any time, either before or after the meeting. Except as provided below, the waiver must be signed by the shareholder entitled to the notice, and be delivered to the corporation for inclusion in the minutes or filing with the corporate records. A shareholder's attendance at a meeting waives objection to lack of notice, or defective notice, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. 2.4 QUORUM. A quorum shall exist at any meeting of shareholders if a majority of the shares entitled to vote is represented in person or by proxy. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. The shareholders present at a duly organized meeting may continue to transact business at such meeting and at any adjournment of such meeting (unless a new record date is or must be set for the adjourned meeting), notwithstanding the withdrawal of enough shareholders from either meeting to leave less than a quorum. Once a share is represented for any purpose at a meeting other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder 4. <PAGE> of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. 2.5 VOTING OF SHARES. Except as otherwise provided in the Articles of Incorporation or these Bylaws, and except as required by law, every shareholder of record shall have the right at every shareholders' meeting to one vote for every share standing in his name on the books of the corporation. If a quorum exists, action on a matter, other than the election of directors, is approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless a greater number is required by the Articles of Incorporation or the Washington Business Corporation Act. 2.6 ADJOURNED MEETINGS. A majority of the shares represented at a meeting, even if less than a quorum, may adjourn the meeting from time to time without further notice. When a meeting is adjourned to another time or place, 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. However, if a new record date for the adjourned meeting is or must be fixed in accordance with the Washington Business Corporation Act, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. At any adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. 2.7 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 entitled to receive payment of any dividend, the Board of Directors may fix in advance a record date for any such determination of shareholders, such date to be not more than seventy (70) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the meeting or action requiring such determination of shareholders. 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 date on which notice of the meeting is mailed or 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. 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 fixes a new record date, which it must do if the meeting is adjourned more than one hundred twenty (120) days after the date is fixed for the original meeting. 2.8 RECORD OF SHAREHOLDERS ENTITLED TO VOTE. After fixing a record date for a shareholders' meeting, the corporation shall prepare an alphabetical list of the names of all shareholders on the record date 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. A shareholder, shareholder's agent, or a shareholder's attorney may inspect the shareholders list, beginning ten days prior to the shareholders' meeting and continuing through the meeting, at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held during regular business hours and at the shareholder's expense. The shareholders list shall 5. <PAGE> be kept open for inspection during such meeting or any adjournment. Failure to comply with the requirements of this section shall not affect the validity of any action taken at such meeting. 2.9 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Unless otherwise provided in the Articles of Incorporation, any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing setting forth the action to be taken shall be signed by shareholders representing that number of votes of shares outstanding which is not less than the minimum number of votes of shares outstanding that would be necessary to approve the action at a meeting at which all shares entitled to vote thereon were present and voted. Notice of taking any corporate action by written consent of shareholders by less than unanimous written consent shall be given to all shareholders who have not consented in writing in the manner specified in the Washington Business Corporation Act. 2.10 PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his 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 three (3) years from the date of its execution, unless otherwise provided in the proxy. 2.11 ORGANIZATION (a) At every meeting of shareholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority of the Board of Directors, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President or the chairman, shall act as secretary of the meeting. (b) The Board of Directors of the corporation 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 corporation 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. 6. <PAGE> ARTICLE 3 BOARD OF DIRECTORS 3.1 MANAGEMENT RESPONSIBILITY. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board of Directors, except as may be otherwise provided in the Articles of Incorporation or the Washington Business Corporation Act. 3.2 NUMBER OF DIRECTORS, QUALIFICATION. The authorized number of directors of the corporation shall be as specified and set by resolution from time to time by the Board of Directors. Directors need not be shareholders. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION. Except as provided in Section 3.4 below, directors shall be elected by a plurality of the votes cast at each annual meeting of shareholders, and each director so elected shall hold office until the annual meeting which takes place in the year in which his or her term expires and until his or her successor is duly elected and qualified, or until his or her earlier resignation or removal. Despite the expiration of a director's term, the director continues to serve until the director's successor shall have been elected and qualified or until there is a decrease in the number of directors. 3.4 VACANCIES. Any vacancy occurring on the Board of Directors (whether caused by resignation, death, an increase in the number of directors, or otherwise) may be filled by affirmative vote of a majority of the Board of Directors. If the directors in office constitute fewer than a dquorum of the Board, they may fill the vacancy by the affirmative vote of a majority of all the directors in office, or by a sole remaining director. A director elected to fill any vacancy shall be identified by the class (Class I, II or III as set forth in Article V of the Articles of Incorporation) to which he or she is named and shall hold office until the next shareholders' meeting at which directors of the class for which such director has been chosen are elected and until his or her successor has been duly elected and qualified, or until his or her earlier resignation or removal. 3.5 REMOVAL. One or more members of the Board of Directors (including the entire Board) may be removed, for cause, at a meeting of shareholders called expressly for that purpose. A director may be removed only if the number of votes cast to remove the director exceeds the number of votes cast not to remove the director. 3.6 RESIGNATION. Any director may resign at any time by delivering his written resignation to the Chairman or the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Chairman or Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when 7. <PAGE> such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. 3.7 ANNUAL MEETING. The first meeting of each newly elected Board of Directors shall be known as the annual meeting thereof. 3.8 REGULAR MEETINGS. Regular meetings of the Board of Directors or of any committee designated by the Board may be held at such place and such day and hour as shall from time to time be fixed by the Board or committee, without other notice than the delivery of such resolution as provided in Section 3.10 below. 3.9 SPECIAL MEETINGS. Special meetings of the Board of Directors or any committee designated by the Board may be called by the Chairman, the President or any director or committee member, to be held at such place and such day and hour as specified by the person or persons calling the meeting. 3.10 NOTICE OF MEETING. Notice of the date, time, and place of all special meetings of the Board of Directors or any committee designated by the Board shall be given by the Secretary, Assistant Secretary, or by the person calling the meeting, by mail, private carrier, telegram, facsimile transmission, or personal communication over the telephone or otherwise, provided such notice is received at least two (2) days prior to the day upon which the meeting is to be held. Notice of any meeting of the Board of Directors or any committee designated by the Board need not be given to any director or committee member if it is waived in a writing signed by the director entitled to the notice, whether before or after such meeting is held. A director's attendance at or participation in a meeting waives any required notice to the director of the meeting unless the director at the beginning of the meeting, or promptly upon the director's arrival, objects to holding the meeting or transacting business at the meeting and 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 Board of Directors or any committee designated by the Board need be specified in the notice or waiver of notice of such meeting unless required by the Articles of Incorporation or these Bylaws. Any meeting of the Board of Directors or any committee designated by the Board shall be a legal meeting without any notice thereof having been given if all of the directors or committee members have received valid notice thereof, are present without objecting, or waive notice thereof in a writing signed by the director and delivered to the corporation for inclusion in the minutes or filing with the corporate records, or any combination thereof. 3.11 QUORUM OF DIRECTORS. A majority of the number of directors fixed by or in the manner provided by these Bylaws shall constitute a quorum for the transaction of business. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the Board of Directors unless the Articles of Incorporation or these Bylaws require the vote of a greater number of directors. 8. <PAGE> A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. If the meeting is adjourned for more than forty-eight (48) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.10 of these Bylaws, to the directors who were not present at the time of the adjournment. 3.12 PRESUMPTION OF ASSENT. Any director who is present at any 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 (a) the director objects at the beginning of the meeting, or promptly upon the director's arrival, to holding the meeting or transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director delivers written notice of dissent or abstention to the presiding officer of the meeting before the adjournment thereof or to the corporation within a reasonable time after adjournment of the meeting. Such right to dissent or abstain shall not be available to any director who voted in favor of such action. 3.13 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required by law to be taken or which may be taken at a meeting of the Board of Directors or of a committee thereof may be taken without a meeting if one or more written consents, setting forth the action so taken, shall be signed by all of the directors or all of the members of the committee, as the case may be, either before or after the action taken and delivered to the corporation for inclusion in the minutes or filing with the corporate records. Such consent shall have the same effect as a unanimous vote at a meeting duly held upon proper notice. 3.14 TELEPHONIC MEETINGS. Members of the Board of Directors or any committee designated by the Board may participate in a meeting of the Board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other during the meeting. 3.15 COMPENSATION. The directors and committee members may be paid their expenses, if any, or a fixed sum or a stated salary as a director or committee member for attendance at each meeting of the Board or of such committee as the case may be. No such payment shall preclude any director or committee member from serving the corporation in any other capacity and receiving compensation therefor. 3.16 COMMITTEES. The Board of Directors, by resolution adopted by a majority of the full Board, may from time to time designate from among its members one or more committees, each of which must have two (2) or more members and, to the extent provided in such resolution, shall have and may exercise all the authority of the Board of Directors, except that no such committee shall have the authority to: (a) authorize or approve a distribution except according to a general formula or method prescribed by the Board of Directors; (b) approve or propose to shareholders action that the Washington Business Corporation Act requires to be approved by shareholders; 9. <PAGE> (c) fill vacancies on the Board of Directors or on any of its committees; (d) adopt any amendment to the Articles of Incorporation; (e) adopt, amend or repeal these Bylaws; (f) approve a plan of merger; or (g) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee, or a senior executive officer of the corporation, to do so within limits specifically prescribed by the Board of Directors. Meetings of such committees shall be governed by the same procedures as govern the meetings of the Board of Directors. All committees so appointed shall keep regular minutes of their meetings and shall cause them to be recorded in books kept for that purpose at the office of the corporation. 10. <PAGE> ARTICLE 4 OFFICERS 4.1 APPOINTMENT. The officers of the corporation shall be appointed annually by the Board of Directors at its annual meeting. If the appointment of officers is not held at such meeting, such appointment shall be held as soon thereafter as a Board of Directors meeting conveniently may be held. Except in the case of death, resignation or removal, each officer shall hold office at the pleasure of the Board of Directors until the next annual meeting of the Board and until his successor is appointed and qualified. 4.2 QUALIFICATION. None of the officers of the corporation need be a director, except as specified below. Any two or more of the corporate offices may be held by the same person. 4.3 OFFICERS DESIGNATED. The officers of the corporation shall include a Chairman of the Board of Directors, a President and Chief Executive Officer, and a Chief Financial Officer, each of whom shall be elected by the Board of Directors. Such other officers and assistant officers, including but not limited to, one or more Executive Vice Presidents (each of whom shall also be an executive officer), a Secretary, a Treasurer, and one or more Vice Presidents, Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers as may be deemed necessary may be appointed by the Board of Directors. (a) CHAIRMAN. The Chairman shall, when present, preside at all meetings of the Board of Directors and the shareholders and shall have such other powers commonly incident to his office and as the Board may prescribe. Except where by law the signature of the President is required, the Chairman shall possess the same power as the President to sign all contracts, certificates and other instruments of the corporation which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman shall exercise all the powers and discharge all the duties of the President. The Chairman shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these Bylaws or by the Board of Directors. The Chairman may only be appointed or removed by action of a majority of the entire Board of Directors. (b) PRESIDENT. The President shall be the chief executive officer of the corporation and, subject to the direction and control of the Board of Directors, shall supervise and control all of the assets, business, and affairs of the corporation. The President shall vote the shares owned by the corporation in other corporations, domestic or foreign, unless otherwise prescribed by the Board, and shall execute all bonds, mortgages, contracts and other instruments of the corporation requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the corporation may sign and execute documents when so authorized by these Bylaws, the Board of Directors or the President. In general, the President shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board from time to time. The President shall, unless a Chairman has been appointed and is present, preside at all meetings of the shareholders and the Board of Directors. The President shall also perform such other duties 11. <PAGE> and may exercise such other powers as from time to time may be assigned to him by these Bylaws or by the Board of Directors. The President may only be appointed or removed by a majority of the entire Board of Directors. (c) EXECUTIVE VICE PRESIDENTS. At the request of the President or in his absence or his inability to act (and if there be no Chairman of the Board of Directors), an Executive Vice President designated by a majority of the Board of Directors shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Executive Vice President (including any Senior Executive Vice Presidents) shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Executive Vice President, the Board of Directors shall designate the officer of the corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. (d) SECRETARY. The Secretary shall: (i) keep the minutes of meetings of the shareholders and the Board of Directors in one or more books provided for that purpose; (ii) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (iii) be custodian of the corporate records and seal of the corporation, if one be adopted; (iv) keep a register of the post office address of each shareholder and director; (v) sign with the President, or the Chairman, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (vi) have general charge of the stock transfer books of the corporation; and (vii) 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 President or the Board of Directors. In the absence of the Secretary, an Assistant Secretary may perform the duties of the Secretary. (e) CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall 12. <PAGE> render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller, or other officer of the corporation, to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) TREASURER. Subject to the direction and control of the Board of Directors, the Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation; and, at the expiration of his term of office, he shall turn over to his successor all property of the corporation in his possession. In the absence of the Treasurer, an Assistant Treasurer may perform the duties of the Treasurer. 4.4 DELEGATION. In case of the absence or inability to act of any officer of the corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or director or other person whom it may select. 4.5 RESIGNATION. Any officer may resign at any time by delivering written notice to the corporation. Any such resignation shall take effect when the notice is delivered unless the notice specifies a later date. Unless otherwise specified in the notice, acceptance of such resignation by the corporation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 4.6 REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors at any time with or without cause. Election or appointment of an officer or agent shall not of itself create contract rights. 4.7 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, creation of a new office, or any other cause may be filled by the Board of Directors for the unexpired portion of the term or for a new term established by the Board of Directors. 4.8 COMPENSATION. Compensation, if any, for officers and other agents and employees of the corporation shall be determined by the Board of Directors, or by the President to the extent such authority may be delegated to him by the Board of Directors. No officer shall 13. <PAGE> be prevented from receiving compensation in such capacity by reason of the fact that he is also a director of the corporation. ARTICLE 5 EXECUTION OF INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION 5.1 EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 5.2 VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President or any Executive Vice President. ARTICLE 6 STOCK 6.1 FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Articles of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. 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 with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the 14. <PAGE> powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. 6.2 LOST CERTIFICATES. The corporation may issue a new certificate or certificates in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount 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, stolen, or destroyed. 6.3 TRANSFERS (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (b) The corporation shall have power to enter into and perform any agreement with any number of shareholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such shareholders in any manner not prohibited by the Act. 6.4 REGISTERED SHAREHOLDERS. 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, and to vote as such owner, 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 the laws of Washington. 6.5 EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 6.1), may be signed by the Chairman of the Board of Directors, the President, any Executive Vice President or Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; PROVIDED, HOWEVER, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on 15. <PAGE> such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE 7 BOOKS AND RECORDS 7.1 BOOKS OF ACCOUNTS, MINUTES AND SHARE REGISTER. The corporation shall keep as permanent records minutes of all meetings of its shareholders and Board of Directors, a record of all actions taken by the shareholders or Board of Directors without a meeting, and a record of all actions taken by a committee of the Board of Directors exercising the authority of the Board of Directors on behalf of the corporation. The corporation shall maintain appropriate accounting records. The corporation or its agent shall maintain a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each. The corporation shall keep a copy of the following records at its principal office: the Articles of Incorporation and all amendments to them currently in effect; the Bylaws and all amendments to them currently in effect; the minutes of all shareholders' meetings, and records of all actions taken by shareholders without a meeting, for the past three years; its financial statements for the past three years, including balance sheets showing in reasonable detail the financial condition of the corporation as of the close of each fiscal year, and an income statement showing the results of its operations during each fiscal year prepared on the basis of generally accepted accounting principles or, if not, prepared on a basis explained therein; a list of the names and business addresses of its current directors and officers; and its most recent annual report delivered to the Secretary of State of Washington. 7.2 COPIES OF RESOLUTIONS. Any person dealing with the corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors or shareholders, when certified by the President, Secretary or Assistant Secretary. ARTICLE 8 FISCAL YEAR The fiscal year of the corporation shall be set by the Board of Directors. 16. <PAGE> ARTICLE 9 CORPORATE SEAL The Board of Directors may adopt a corporate seal for the corporation which shall have inscribed thereon the name of the corporation, the year and state of incorporation and the words "corporate seal". ARTICLE 10 INDEMNIFICATION 10.1 RIGHT TO INDEMNIFICATION. The power, right and obligation of the corporation to indemnify any director of the corporation shall be as set forth in Article VII of the Articles of Incorporation. 10.2 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the advancement of expenses conferred in Article VII of the Articles of Incorporation 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 or Bylaws of the corporation, general or specific action of the Board of Directors, contract or otherwise. 10.3 INSURANCE, CONTRACTS AND FUNDING. The corporation may maintain insurance, at its expense, to protect itself and any 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 at the request of the corporation as an agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any expense, liability or loss asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee or agent, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. The corporation may enter into contracts with any director, officer, employee or agent of the corporation in furtherance of the provisions of Article VII of the Articles of Incorporation and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in Article VII of the Articles of Incorporation. 10.4 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS OF THE CORPORATION. The corporation may, by action of the Board of Directors, grant rights to indemnification and advancement of expenses to officers, employees and agents of the corporation with the same scope and effect as the provisions of Article VII of the Articles of Incorporation with respect to the indemnification and advancement of expenses of directors of the corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or otherwise. 17. <PAGE> 10.5 PERSONS SERVING OTHER ENTITIES. Any individual who is or was a director, officer or employee of the corporation who, while a director, officer or employee of the corporation, is or was serving (a) as a director or officer of another foreign or domestic corporation of which a majority of the shares entitled to vote in the election of its directors is held by the corporation, (b) as a trustee of an employee benefit plan and the duties of the director or officer to the corporation also impose duties on, or otherwise involve services by, the director or officer to the plan or to participants in or beneficiaries of the plan or (c) in an executive or management capacity in a foreign or domestic partnership, joint venture, trust or other enterprise of which the corporation or a wholly owned subsidiary of the corporation is a general partner or has a majority ownership or interest shall be deemed to be so serving at the request of the corporation and entitled to indemnification and advancement of expenses under Article VII of the Articles of Incorporation. ARTICLE 11 AMENDMENT OF BYLAWS 11.1 These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Board of Directors, except that the Board of Directors may not repeal or amend any Bylaw that the shareholders have expressly provided, in amending or repealing such Bylaw, may not be amended or repealed by the Board of Directors. The shareholders may also alter, amend and repeal these Bylaws or adopt new Bylaws. All Bylaws made by the Board of Directors may be amended, repealed, altered or modified by the shareholders. The foregoing Bylaws were read, approved, and duly adopted by the Board of Directors, of Costco Wholesale Corporation, on the ___ day of January, 2000, and the Secretary of the corporation was empowered to authenticate such Bylaws by his signature below. -------------------------------------------- Secretary 18. <PAGE> <TABLE> <S> <C> <C> ARTICLE 1 OFFICES.....................................................................................2 1.1 Principal Office................................................................................2 1.2 Registered Office and Registered Agent..........................................................2 1.3 Other Offices...................................................................................2 ARTICLE 2 SHAREHOLDERS................................................................................2 2.1 Annual Meeting..................................................................................2 2.2 Special Meetings................................................................................3 2.3 Notice of Meetings..............................................................................3 (a) Notice of Special Meeting...................................................................4 (b) Proposed Articles of Amendment or Dissolution...............................................4 (c) Proposed Merger, Consolidation, Exchange, Sale, Lease or Disposition........................4 (d) Declaration of Mailing......................................................................4 (e) Waiver of Notice............................................................................4 2.4 Quorum..........................................................................................4 2.5 Voting of Shares................................................................................5 2.6 Adjourned Meetings..............................................................................5 2.7 Record Date.....................................................................................5 2.8 Record of Shareholders Entitled to Vote.........................................................5 2.9 Action by Shareholders Without a Meeting........................................................6 2.11 Proxies.........................................................................................6 2.12 Organization....................................................................................6 ARTICLE 3 BOARD OF DIRECTORS..........................................................................7 3.1 Management Responsibility.......................................................................7 3.2 Number of Directors, Qualification..............................................................7 3.3 Election........................................................................................7 3.4 Vacancies.......................................................................................7 3.5 Removal.........................................................................................7 3.6 Resignation.....................................................................................7 3.7 Annual Meeting..................................................................................8 3.8 Regular Meetings................................................................................8 3.9 Special Meetings................................................................................8 3.10 Notice of Meeting...............................................................................8 </TABLE> 19. <PAGE> <TABLE> <S> <C> <C> 3.11 Quorum of Directors.............................................................................8 3.12 Presumption of Assent...........................................................................9 3.13 Action by Directors Without a Meeting...........................................................9 3.14 Telephonic Meetings.............................................................................9 3.15 Compensation....................................................................................9 3.16 Committees......................................................................................9 ARTICLE 4 OFFICERS...................................................................................11 4.1 Appointment....................................................................................11 4.2 Qualification..................................................................................11 4.3 Officers Designated............................................................................11 (a) Chairman...................................................................................11 (b) President..................................................................................11 (c) Vice Presidents............................................................................12 (d) Secretary..................................................................................12 (e) Chief Financial Officer....................................................................12 (f) Treasurer..................................................................................13 4.4 Delegation.....................................................................................13 4.5 Resignation....................................................................................13 4.6 Removal........................................................................................13 4.7 Vacancies......................................................................................13 4.8 Compensation...................................................................................13 ARTICLE 5 EXECUTION OF INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION.................14 5.1 Execution of Corporate Instruments.............................................................14 5.2 Voting of Securities Owned by the Corporation..................................................14 ARTICLE 6 STOCK......................................................................................14 6.1 Form and Execution of Certificates.............................................................14 6.2 Lost Certificates..............................................................................15 6.3 Transfers......................................................................................15 6.4 Registered Shareholders........................................................................15 6.5 Execution of Other Securities..................................................................15 ARTICLE 7 BOOKS AND RECORDS..........................................................................16 </TABLE> 20. <PAGE> <TABLE> <S> <C> <C> 7.1 Books of Accounts, Minutes and Share Register..................................................16 7.2 Copies of Resolutions..........................................................................16 ARTICLE 8 FISCAL YEAR................................................................................16 ARTICLE 9 CORPORATE SEAL.............................................................................17 ARTICLE 10 INDEMNIFICATION............................................................................17 10.1 Right to Indemnification.......................................................................17 10.3 Nonexclusivity of Rights.......................................................................17 10.4 Insurance, Contracts and Funding...............................................................17 10.5 Indemnification of Employees and Agents of the Corporation.....................................17 10.6 Persons Serving Other Entities.................................................................18 ARTICLE 11 AMENDMENT OF BYLAWS........................................................................18 </TABLE> 21. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>EX-27 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> SEP-03-2000 <PERIOD-START> AUG-30-1999 <PERIOD-END> FEB-13-2000 <CASH> 510,027 <SECURITIES> 153,475 <RECEIVABLES> 190,864 <ALLOWANCES> 4,373 <INVENTORY> 2,347,621 <CURRENT-ASSETS> 3,495,903 <PP&E> 5,529,210 <DEPRECIATION> 1,213,436 <TOTAL-ASSETS> 8,108,346 <CURRENT-LIABILITIES> 3,049,319 <BONDS> 923,414 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,017,294 <OTHER-SE> 2,919,940 <TOTAL-LIABILITY-AND-EQUITY> 8,108,346 <SALES> 14,437,798 <TOTAL-REVENUES> 14,680,499 <CGS> 12,912,568 <TOTAL-COSTS> 14,166,966 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 20,973 <INCOME-PRETAX> 518,210 <INCOME-TAX> 207,284 <INCOME-CONTINUING> 310,926 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 310,926 <EPS-BASIC> .70 <EPS-DILUTED> .66 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-28 <SEQUENCE>4 <DESCRIPTION>EX-28 <TEXT> <PAGE> EXHIBIT 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Costco Wholesale Corporation: We have reviewed the accompanying condensed consolidated balance sheet of Costco Wholesale Corporation (a Washington corporation) and subsidiaries as of February 13, 2000, and the related condensed consolidated statements of income for the twelve-week and twenty-four-week periods ended February 13, 2000 and February 14, 1999, and the condensed consolidated statements of cash flows for the twenty-four-week periods then ended. 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 February 29, 2000 19 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CPB

https://www.sec.gov/Archives/edgar/data/16732/0000893220-00-000279.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, A6ZoWH1x0l5W8YReVdxqjTyLAEpCwQyqiWrIVJjCy1wWjDetyXY6sA/1pZ82MYgP 2BTSEhoI6b3SKn9O7IiHcQ== <SEC-DOCUMENT>0000893220-00-000279.txt : 20000316 <SEC-HEADER>0000893220-00-000279.hdr.sgml : 20000316 ACCESSION NUMBER: 0000893220-00-000279 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000130 FILED AS OF DATE: 20000315 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: SEC FILE NUMBER: 001-03822 FILM NUMBER: 570325 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 30, 2000 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: (856) 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 422,502,096 SHARES OF CAPITAL STOCK OUTSTANDING AS OF MARCH 7, 2000. <PAGE> 2 PART I. FINANCIAL INFORMATION CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (millions, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended JANUARY January JANUARY January 30, 2000 31, 1999 30, 2000 31, 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $1,916 $1,832 $3,684 $3,636 ------ ------ ------ ------ Costs and expenses Cost of products sold 848 856 1,657 1,686 Marketing and selling expenses 464 511 892 931 Administrative expenses 87 74 170 152 Research and development expenses 15 17 31 33 Other expenses 29 3 50 16 ------ ------ ------ ------ Total costs and expenses 1,443 1,461 2,800 2,818 ------ ------ ------ ------ Earnings before interest and taxes 473 371 884 818 Interest, net 50 42 96 86 ------ ------ ------ ------ Earnings before taxes 423 329 788 732 Taxes on earnings 142 110 272 249 ------ ------ ------ ------ Net earnings $ 281 $ 219 $ 516 $ 483 ====== ====== ====== ====== Per share - basic Net earnings $ .66 $ .49 $ 1.21 $ 1.08 ====== ====== ====== ====== Dividends $ .225 $ .225 $ .450 $ .435 ====== ====== ====== ====== Weighted average shares outstanding - basic 427 444 428 446 ====== ====== ====== ====== Per share - assuming dilution Net earnings $ .65 $ .49 $ 1.19 $ 1.07 ====== ====== ====== ====== Weighted average shares outstanding - assuming dilution 431 449 432 451 ====== ====== ====== ====== See Notes to Financial Statements </TABLE> 2 <PAGE> 3 CAMPBELL SOUP COMPANY CONSOLIDATED BALANCE SHEETS (unaudited) (millions, except per share amounts) <TABLE> <CAPTION> JANUARY August 30, 2000 1, 1999 -------- ------- <S> <C> <C> Current assets Cash and cash equivalents $ 92 $ 6 Accounts receivable 638 541 Inventories 583 615 Other current assets 126 132 ------- ------- Total current assets 1,439 1,294 ------- ------- Plant assets, net of depreciation 1,678 1,726 Intangible assets, net of amortization 1,844 1,910 Other assets 603 592 ------- ------- Total assets $ 5,564 $ 5,522 ======= ======= Current liabilities Notes payable $ 1,874 $ 1,987 Payable to suppliers and others 446 511 Accrued liabilities 484 415 Dividend payable 96 97 Accrued income taxes 249 136 ------- ------- Total current liabilities 3,149 3,146 ------- ------- Long-term debt 1,336 1,330 Nonpension postretirement benefits 384 394 Other liabilities, including deferred income taxes of $260 and $263 430 417 ------- ------- Total liabilities 5,299 5,287 ------- ------- Shareowners' equity Preferred stock; authorized 40 shares; none issued - - Capital stock, $.0375 par value; authorized 560 shares; issued 542 shares 20 20 Capital surplus 326 382 Earnings retained in the business 4,365 4,041 Capital stock in treasury, at cost (4,266) (4,058) Accumulated other comprehensive income (180) (150) ------- ------- Total shareowners' equity 265 235 ------- ------- Total liabilities and shareowners' equity $ 5,564 $ 5,522 ======= ======= See Notes to Financial Statements </TABLE> 3 <PAGE> 4 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (millions) <TABLE> <CAPTION> Six Months Ended JANUARY January 30, 2000 31, 1999 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 516 $ 483 Non-cash charges to net earnings Depreciation and amortization 123 123 Deferred taxes 1 (3) Other, net 10 (1) Changes in working capital Accounts receivable (97) (47) Inventories 30 (62) Other current assets and liabilities 143 (104) ----- ----- Net cash provided by operating activities 726 389 ----- ----- Cash flows from investing activities: Purchases of plant assets (73) (126) Sales of plant assets 3 8 Businesses acquired - (105) Other, net (7) (8) ----- ----- Net cash used in investing activities (77) (231) ----- ----- Cash flows from financing activities: Long-term borrowings - 325 Repayments of long-term borrowings (5) (2) Short-term borrowings 483 737 Repayments of short-term borrowings (584) (588) Dividends paid (194) (188) Treasury stock purchases (283) (489) Treasury stock issuances 16 64 ----- ----- Net cash used in financing activities (567) (141) ----- ----- Effect of exchange rate changes on cash 4 (3) ----- ----- Net change in cash and cash equivalents 86 14 Cash and cash equivalents - beginning of period 6 16 ----- ----- Cash and cash equivalents - end of period $ 92 $ 30 ===== ===== See Notes to Financial Statements </TABLE> 4 <PAGE> 5 CAMPBELL SOUP COMPANY CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (unaudited) (millions, except per share amounts) <TABLE> <CAPTION> Capital stock --------------------------------------- Earnings Accumulated Issued In treasury retained other Total ---------------- ------------------ Capital in the comprehensive shareowners' Shares Amount Shares Amount surplus business income equity ------ ------ ------ ------ ------- -------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at August 2, 1998 542 $ 20 (94) $ (3,083) $ 395 $ 3,706 $ (164) $ 874 Comprehensive income Net earnings 483 483 Foreign currency translation adjustments (6) (6) Dividends ($.435 per share) (193) (193) Treasury stock purchased (9) (489) (489) Treasury stock issued under management incentive and stock option plans 2 31 (9) 22 --- ---- ----- --------- ------ -------- ------- ------ Balance at January 31, 1999 542 $ 20 (101) $ (3,541) $ 386 $ 3,996 $ (170) $ 691 === ==== ===== ========= ====== ======== ======= ====== BALANCE AT AUGUST 1, 1999 542 $ 20 (113) $ (4,058) $ 382 $ 4,041 $ (150) $ 235 COMPREHENSIVE INCOME NET EARNINGS 516 516 FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (30) (30) DIVIDENDS ($.450 PER SHARE) (192) (192) TREASURY STOCK PURCHASED (7) (283) (283) TREASURY STOCK ISSUED UNDER MANAGEMENT INCENTIVE AND STOCK OPTION PLANS 2 75 (56) 19 --- ---- ----- --------- ------ -------- ------- ------ BALANCE AT JANUARY 30, 2000 542 $ 20 (118) $ (4,266) $ 326 $ 4,365 $ (180) $ 265 === ==== ===== ========= ====== ======== ======= ====== See Notes to Financial Statements </TABLE> 5 <PAGE> 6 CAMPBELL SOUP COMPANY CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (unaudited) (dollars in millions, except per share amounts) (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. Certain reclassifications were made to the prior year amounts to conform with current presentation. (b) Comprehensive Income In 1999, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," issued in June 1997. SFAS 130 establishes a standard for reporting comprehensive income, which is comprised of net income and "other" comprehensive income items, in the financial statements. "Other" comprehensive income includes items recorded in shareowners' equity that are not the result of transactions with shareowners, such as foreign currency translation adjustments. As of January 30, 2000 and January 31, 1999, accumulated other comprehensive income, as reflected in the statements of shareowners' equity, represents the cumulative translation adjustment. (c) Restructuring Program A restructuring charge of $41 ($30 after tax or $.07 per share) was recorded in the fourth quarter fiscal 1999 to cover the costs of a restructuring and divestiture program approved in July 1999 by the company's Board of Directors. This charge relates to the streamlining of certain North American and European production and administrative facilities and the anticipated cost of a divestiture of a non-strategic business with annual sales of approximately $25. The restructuring charge includes approximately $20 in cash charges primarily related to severance and employee benefit costs. The balance of the restructuring charge includes non-cash charges related to the disposition of plant assets and the divestiture. The company expects to complete the restructuring and divestiture program in fiscal 2000. The expected net cash outflows will not have a material impact on the company's liquidity. From this program, the company expects to realize annual pre-tax savings of approximately $21. 6 <PAGE> 7 A summary of restructuring reserves at January 30, 2000, and related activity is as follows: <TABLE> <CAPTION> Losses on Asset Dispositions Severance and Other Exit and Divestitures Benefits Costs Total ---------------- -------- ----- ----- <S> <C> <C> <C> <C> Balance at August 1, 1999 $ 19 38 3 $ 60 SPENDING $ (3) (17) (2) $(22) BALANCE AT ------ ---- --- ----- JANUARY 30, 2000 $ 16 21 1 $ 38 ====== ==== === ===== </TABLE> The reserve balances as of August 1, 1999 also include amounts related to a fiscal 1998 program. The program was substantially completed by the second quarter fiscal 2000. (d) Earnings Per Share For the periods presented in the Statements of Earnings, the calculations of basic EPS and EPS assuming dilution vary in that the weighted average shares outstanding assuming dilution includes the incremental effect of stock options. For the three and six month periods ended January 30, 2000, the weighted average shares outstanding assuming dilution also includes the incremental effect of approximately two million shares under the forward stock purchase contract. See Note (g) for a description of the contract. (e) Segment Information The company operates in three business segments: Soup and Sauces, Biscuits and Confectionery, and Away From Home. The segments are managed as strategic units due to their distinct manufacturing processes, marketing strategies and distribution channels. The Soup and Sauces segment includes the worldwide soup businesses, Prego spaghetti sauces, Pace Mexican sauces, Franco-American pastas and gravies, Swanson broths, and V8 and V8 Splash beverages. The Biscuits and Confectionery segment includes the Godiva Chocolatier, Pepperidge Farm, and the Arnotts Limited businesses. Away From Home represents products, including Campbell's soups and Campbell's Specialty Kitchen entrees, which are distributed to the food service and home meal replacement markets. 7 <PAGE> 8 Accounting policies for measuring segment assets and earnings before interest and taxes are substantially consistent with those described in the summary of significant accounting policies included in the company's fiscal 1999 Annual Report on Form 10-K. The company evaluates segment performance based on earnings before interest and taxes, excluding certain non-recurring charges. Away From Home products are principally produced by the tangible assets of the company's other segments, except for the Stockpot premium refrigerated soups, which are produced in a separate facility. Accordingly, with the exception of the designated Stockpot facility, tangible assets have not been allocated to the Away From Home segment. For products produced by the assets of other segments, depreciation and amortization are allocated to Away From Home based on budgeted production hours. Transfers between segments are recorded at cost plus mark-up or at market. 8 <PAGE> 9 The following tables present information about the company's reportable segments. JANUARY 30, 2000 <TABLE> <CAPTION> Corporate Soup and Biscuits and Away From and THREE MONTHS ENDED Sauces Confectionery Home Other(1) Eliminations(2) Total ------ ------------- ---- -------- --------------- ----- <S> <C> <C> <C> <C> <C> <C> Net sales $1,361 419 143 9 (16) $1,916 Earnings before interest and taxes $ 406 78 16 1 (28) $ 473 Depreciation and amortization $ 31 21 4 - 5 $ 61 Capital expenditures $ 22 11 3 - 1 $ 37 </TABLE> <TABLE> <CAPTION> Corporate Soup and Biscuits and Away From and SIX MONTHS ENDED Sauces Confectionery Home Other(1) Eliminations(2) Total ------ ------------- ---- -------- --------------- ----- <S> <C> <C> <C> <C> <C> <C> Net sales $2,625 793 278 22 (34) $3,684 Earnings before interest and taxes $ 763 136 31 2 (48) $ 884 Depreciation and amortization $ 63 41 8 - 11 $ 123 Capital expenditures $ 43 23 3 - 4 $ 73 Segment assets $3,026 1,428 372 41 697 $5,564 </TABLE> (1) Represents financial information of certain prepared convenience food businesses not categorized as reportable segments. (2) Represents elimination of intersegment sales, unallocated corporate expenses, and unallocated assets, including corporate offices, deferred income taxes and prepaid pension assets. 9 <PAGE> 10 JANUARY 31, 1999 <TABLE> <CAPTION> Corporate Soup and Biscuits and Away From and THREE MONTHS ENDED Sauces Confectionery Home Other(1) Eliminations(2) Total ------ ------------- ---- -------- --------------- ----- <S> <C> <C> <C> <C> <C> <C> Net sales $1,278 407 135 36 (24) $1,832 Earnings before interest and taxes $ 290 71 17 4 (11) $ 371 Depreciation and amortization $ 33 21 3 2 5 $ 64 Capital expenditures $ 53 14 - 6 6 $ 79 </TABLE> <TABLE> <CAPTION> Corporate Soup and Biscuits and Away From and SIX MONTHS ENDED Sauces Confectionery Home Other(1) Eliminations(2) Total ------ ------------- ---- -------- --------------- ----- <S> <C> <C> <C> <C> <C> <C> Net sales $2,567 769 262 75 (37) $3,636 Earnings before interest and taxes $ 680 129 33 7 (31) $ 818 Depreciation and amortization $ 64 41 6 4 8 $ 123 Capital expenditures $ 80 27 - 9 10 $ 126 Segment assets $3,210 1,466 318 172 708 $5,874 </TABLE> (1) Represents financial information of certain prepared convenience food businesses not categorized as reportable segments. (2) Represents elimination of intersegment sales, unallocated corporate expenses, and unallocated assets, including corporate offices, deferred income taxes and prepaid pension assets. 10 <PAGE> 11 (f) Inventories JANUARY August 30, 2000 1, 1999 -------- ------- Raw materials, containers and supplies $212 $207 Finished products 371 408 ---- ---- $583 $615 ==== ==== Approximately 64% of inventory in fiscal 2000 and 70% in fiscal 1999 is accounted for on the last in, first out (LIFO) method of determining cost. If the first in, first out inventory valuation method had been used exclusively, inventories would not differ materially from the amounts reported at January 30, 2000 and August 1, 1999. (g) Forward Stock Purchase Program In October 1998, the company entered into a forward stock purchase contract to partially hedge the company's equity exposure from its stock option program. The contract, which matures in fiscal 2004, allows the company to repurchase approximately 11 million shares at an average price of approximately $47 per share. The company may elect to settle the contract on a net share basis in lieu of physical settlement. The contract permits early settlement and may be renewed for an additional five-year term. If the forward purchase contract had been settled on a net share basis as of January 30, 2000, the company would have provided the counterparty with approximately six million shares of its capital stock. 11 <PAGE> 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CAMPBELL SOUP COMPANY RESULTS OF CONTINUING OPERATIONS OVERVIEW The company reported net earnings of $281 million for the quarter ended January 30, 2000 compared to $219 million in the comparable quarter a year ago. Diluted earnings per share increased to $.65 from $.49 a year ago. Net sales increased 5% to $1.92 billion from $1.83 billion. The increase in sales and earnings was primarily driven by the rebound in U.S. soup shipments from the prior year. In January 1999, the company initiated certain modifications in its supply chain operation that resulted in lower shipments during that quarter. For the six months ended January 30, 2000, net sales increased 1%. Excluding currency and divestitures, sales from ongoing businesses increased 3%. Net earnings and diluted earnings per share increased 7% and 11%, respectively. SECOND QUARTER SALES Sales in the quarter increased 5% to $1.92 billion from $1.83 billion last year. The change in sales was due to a 5% increase from volume and mix, a 2% increase from higher selling prices, offset by 1% decline due to divestitures and 1% decline due to currency. An analysis of net sales by segment follows: <TABLE> <CAPTION> (millions) 2000 1999 % CHANGE ---------- ---- ---- -------- <S> <C> <C> <C> Soup and Sauces $1,361 $1,278 6% Biscuits and Confectionery 419 407 3% Away From Home 143 135 6% ------ ------ -- Subtotal 1,923 1,820 6% Other 9 36 Intersegment (16) (24) ------ ------ -- Total $1,916 $1,832 5% ====== ====== </TABLE> 12 <PAGE> 13 The sales increase in Soup and Sauces was due to a worldwide wet soup volume increase of 9%. U.S. wet soup shipments increased 12% over the prior period. The comparison to the prior period is impacted by the initiatives implemented in January 1999 that resulted in lower shipments in that period. During the quarter, ready-to-serve soups delivered solid volume gains, led by Swanson broths and new products that were introduced nationally earlier in the year, such as Campbell's ready-to-serve Tomato soup in a resealable plastic container and Campbell's Soup-To-Go! In addition, Campbell's Chunky soups posted solid gains, as did Campbell's Simply Home soups. International soup volume increased 1% primarily due to volume gains in France, Germany and Australia offset by lower shipments in Canada and the United Kingdom. Sales of prepared foods improved versus last year. Sales of Prego increased due to the introduction of new products and packaging. In the United Kingdom, Homepride cooking sauces contributed to the positive change in sales. Franco-American volumes were down versus last year due to continued intense competition in the category. The increase in sales reported by Biscuits and Confectionery compared to last year was primarily due to continued growth in Godiva Chocolatier and the core cracker business at Arnotts. Pepperidge Farm sales declined due to continued competitive pressure in the cheese cracker category. Away From Home reported an increase of 6% versus the comparable quarter a year ago driven by double-digit growth in soup sales in traditional food service outlets. The decline in Other is due to the divestiture of Fresh Start Bakeries, Inc. in May 1999. GROSS MARGIN Gross margin, defined as net sales less cost of products sold, increased $92 million in the quarter. As a percent of sales, gross margin was 55.7% compared to 53.3% last year. The improvement in margin percentage was principally due to stronger unit volume in the U.S., higher selling prices, and productivity programs. MARKETING AND SELLING EXPENSES Marketing and selling expenses as a percent of sales declined to 24% from 28% last year. The decrease is attributable to a shift in the timing of certain programs and reductions in programs to match marketplace performance. ADMINISTRATIVE EXPENSES Administrative expenses were relatively flat as a percent of sales compared to last year. OTHER EXPENSES Other expenses increased as compared to last year primarily due to higher incentive compensation costs. 13 <PAGE> 14 OPERATING EARNINGS Segment operating earnings increased 32% for the second quarter versus the prior year. An analysis of operating earnings by segment follows: <TABLE> <CAPTION> (millions) 2000 1999 % CHANGE - ---------- ---- ----- -------- <S> <C> <C> <C> Soup and Sauces $ 406 $ 290 40% Biscuits and Confectionery 78 71 10% Away From Home 16 17 (6)% ----- ----- ----- Subtotal 500 378 32% Other 1 4 ----- ----- ----- 501 382 Corporate (28) (11) ----- ----- ----- Total $ 473 $ 371 27% ===== ===== </TABLE> Earnings from Soup and Sauces increased 40% due to higher U.S. wet soup sales and lower marketing and selling spending. The ready-to-serve category showed continued growth behind Campbell's Chunky. Prego, Pace and Franco-American pasta also contributed to the earnings growth. Earnings from Biscuits and Confectionery increased 10% to $78 million. The increase was due to strong performance by Godiva Chocolatier and the increase in sales at Arnotts. Pepperidge Farm results continued to be adversely impacted by competition in the cheese cracker business. Away From Home earnings were relatively flat versus last year. NON-OPERATING ITEMS Net interest expense was $50 million versus $42 million in the prior year due to higher debt levels. The effective tax rate was 33.6% compared to 33.4% last year. SIX MONTHS SALES Sales for the six months increased 1% to $3.68 billion from $3.64 billion last year. The change in sales was due to a 1% increase from volume and mix, a 2% increase from higher selling prices, offset by a 2% decline from divestitures. 14 <PAGE> 15 An analysis of net sales by segment follows: <TABLE> <CAPTION> (millions) 2000 1999 % CHANGE - ---------- ---- ---- -------- <S> <C> <C> <C> Soup and Sauces $ 2,625 $ 2,567 2% Biscuits and Confectionery 793 769 3% Away From Home 278 262 6% ------- ------- --- Subtotal 3,696 3,598 3% Other 22 75 Intersegment (34) (37) ------- ------- --- Total $ 3,684 $ 3,636 1% ======= ======= </TABLE> The sales increase reported by Soup and Sauces was due to a 2% increase in worldwide wet soup volume, driven primarily by the second quarter U.S. soup shipment recovery. Outside the U.S., wet soup sales in Germany, France, and Australia contributed to this growth. Beverage sales were flat versus last year, while Pace and Franco-American experienced declines in sales. Biscuits and Confectionery reported a 3% increase versus 1999 due to continued gains in the Godiva business and the Arnotts biscuit business. Pepperidge Farm sales declined due to continued competitive pressure in the cheese cracker category. Away From Home reported a sales increase of 6% due to a 9% increase in soup volume. The decline in Other is due to the divestiture of Fresh Start Bakeries, Inc. in May 1999. GROSS MARGIN Gross margin, defined as net sales less cost of products sold, increased $77 million year-to-date. As a percent of sales, gross margin was 55% compared to 53.6% last year. The improvement in margin percentage was principally due to product mix with stronger volume in the U.S., selling price increases, and cost savings programs. MARKETING AND SELLING EXPENSE Marketing and selling expenses as a percent of sales decreased to 24% from 26% last year. The decrease is attributable to a shift in the timing of certain programs and reductions in programs to match marketplace performance. 15 <PAGE> 16 ADMINISTRATIVE EXPENSES Administrative expenses were relatively flat as a percent of sales compared to last year. OTHER EXPENSES Other expenses increased as compared to last year primarily due to increases in incentive compensation costs. OPERATING EARNINGS Segment operating earnings increased 10% versus the prior year. An analysis of operating earnings by segment follows: <TABLE> <CAPTION> (millions) 2000 1999 % CHANGE - ---------- ---- ---- -------- <S> <C> <C> <C> Soup and Sauces $ 763 $ 680 12% Biscuits and Confectionery 136 129 5% Away From Home 31 33 (6)% ----- ----- ----- Subtotal 930 842 10% Other 2 7 ----- ----- ----- 932 849 Corporate (48) (31) ----- ----- ----- Total $ 884 $ 818 8% ===== ===== </TABLE> The increase in earnings from Soup and Sauces is primarily due to the recovery in U.S. soup shipments from last year and improved earnings performance by Prego, Pace and Franco-American. Erasco and Liebig also contributed to operating margin gains. Biscuits and Confectionery reported an increase in earnings driven by Godiva Chocolatier and Arnotts. Earnings from Pepperidge Farm remained flat. Earnings from Away From Home declined due to increases in investments behind growth initiatives and costs associated with the new Stockpot facility. Earnings from Other declined due to the divestiture of Fresh Start Bakeries, Inc. in May 1999. 16 <PAGE> 17 NON-OPERATING ITEMS Net interest expense increased to $96 million from $86 million in the prior year due to the higher debt levels. The effective tax rate was 34.5% compared to 34.0% last year. RESTRUCTURING CHARGE A restructuring charge of $41 million ($30 million after tax or $.07 per share) was recorded in the fourth quarter fiscal 1999 to cover the costs of a restructuring and divestiture program approved in July 1999 by the company's Board of Directors. This charge relates to the streamlining of certain North American and European production and administrative facilities and the anticipated cost of a divestiture of a non-strategic business with annual sales of approximately $25 million. The restructuring includes approximately $20 million in cash charges primarily related to severance and employee benefit costs. The balance of the restructuring charge includes non-cash charges related to the disposition of plant assets and the divestiture. The company expects to complete the restructuring and divestiture program in fiscal 2000. The expected net cash outflows will not have a material impact on the company's liquidity. From this program the company expects to realize annual pre-tax savings of approximately $21 million. LIQUIDITY AND CAPITAL RESOURCES The company generated cash from operations of $726 million compared to $389 million last year. This increase is primarily due to higher earnings and improvement in working capital management. Capital expenditures were $73 million, a decrease from $126 million last year. The company continues to aggressively manage its capital outlays and expects total expenditures to approximate $270 million in fiscal 2000. In the first six months, the company repurchased 6.9 million shares versus 9.3 million last year. By repurchasing shares, the company expects to utilize existing cash and debt capacity to lower its cost of capital and increase returns to shareowners. The company's long-term strategy is to repurchase approximately two percent of its outstanding shares annually. In October 1998, the company entered into a forward stock purchase contract to partially hedge the company's equity exposure from its stock option program. See Note (g) of the Notes to Financial Statements for further discussion of the contract. 17 <PAGE> 18 YEAR 2000 The company recognized the material nature of the business issues related to the computer processing of dates into and beyond the Year 2000 and effected a readiness plan that was divided into three major phases: Business Systems Inventory and Assessment, Remediation and Replacement, and Testing. Management believes the company has completed all of the activities within its control to ensure that the company's systems are Year 2000 compliant. The company has not experienced any disruption or material adverse impacts in its operations, business systems or supply chain as a result of the Year 2000 date transition. The company is not aware that any of its major business partners have experienced significant Year 2000 issues. However, the company has developed contingency plans to mitigate any remaining Year 2000-related risks. The aggregate cost of the company's Year 2000 efforts was approximately $42 million. These costs, except for capital costs of approximately $3 million, were expensed as incurred and funded through operating cash flows. The company incurred Year 2000-related costs of approximately $23 million in fiscal 1999 and $5 million in fiscal 2000. No significant future expenses are expected to be incurred. An analysis of costs incurred is as follows: <TABLE> <CAPTION> (millions) <S> <C> External consulting $23 Hardware/software upgrades 13 Other 6 --- Total $42 === </TABLE> RECENT DEVELOPMENTS In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued and is expected to be effective for fiscal years beginning after June 15, 2000. The standard requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The company is currently assessing the impact of the adoption on the company's financial statements. Based on the company's current portfolio, it is not expected that adoption of this statement will have a material effect on the company's results of operations, financial condition or cash flows. 18 <PAGE> 19 FORWARD-LOOKING STATEMENTS This quarterly report contains certain statements, which reflect the company's current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company has tried, wherever possible, to identify these forward-looking statements by using words such as "anticipate," "believe," "estimate," "expect" and similar expressions. These statements reflect the company's current plans and expectations and are based on information currently available to it. They rely on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties. The company wishes to caution the reader that the following important factors and those important factors described elsewhere in the commentary, or in other Securities and Exchange Commission filings of the company, could affect the company's actual results and could cause such results to vary materially from those expressed in any forward-looking statements made by, or on behalf of, the company: - - the impact of strong competitive response to the company's efforts to leverage its brand power with product innovation, promotional programs and new advertising; - - the inherent risks in the marketplace associated with new product introductions, including uncertainties about trade and consumer acceptance; - - the company's ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume and product mix; - - the continuation of the company's successful record of integrating acquisitions into its existing operations and the availability of new acquisition and alliance opportunities that build shareowner wealth; - - the company's ability to achieve its cost savings objectives, including the projected outcome of supply chain management programs; - - the difficulty of predicting the pattern of inventory movements by the company's trade customers; - - the impact of unforeseen economic and political changes in international markets where the company competes such as currency exchange rates, inflation rates, recession, foreign ownership restrictions and other external factors over which the company has no control; and - - the ability of the company and its key service providers, vendors, suppliers, customers and governmental entities to replace, modify or upgrade computer systems in ways that adequately address any remaining Year 2000-related risks. This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact the company's outlook. 19 <PAGE> 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For information regarding the company's exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Annual Report on Form 10-K for fiscal 1999. There have been no significant changes in the company's portfolio of financial instruments or market risk exposures which have occurred since year-end. 20 <PAGE> 21 PART II ITEM 1. LEGAL PROCEEDINGS In management's opinion, there are no pending claims or litigation, the outcome of which would have a material effect on the consolidated results of operations, financial position or cash flows of the company. As of March 9, 2000, ten lawsuits had been commenced since January 2000 against Campbell Soup Company and certain of its officers in the United States District Court for the District of New Jersey, on behalf of persons who allegedly purchased the company's stock between November 18, 1997 and January 8, 1999. Specifically, the actions allege, among other things, that during this period, Campbell and certain of its officers misrepresented the company's financial condition by failing to disclose alleged shipping and revenue recognition practices in connection with the sale of certain company products at the end of the company's fiscal quarters in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The actions seek compensatory and other damages, and costs and expenses associated with the litigation. Campbell believes the complaints are without merit and intends to defend the actions vigorously. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits No. 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 the company during the second quarter of fiscal 2000. 21 <PAGE> 22 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 15, 2000 By: /s/ Basil Anderson ----------------------------- Basil Anderson Executive Vice President and Chief Financial Officer By: /s/ Ellen Oran Kaden ----------------------------- Ellen Oran Kaden Senior Vice President - Law and Government Affairs 22 <PAGE> 23 INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit Number - -------------- <S> <C> 27 Financial Data Schedule. </TABLE> 23 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUL-30-2000 <PERIOD-START> AUG-02-1999 <PERIOD-END> JAN-30-2000 <CASH> 92 <SECURITIES> 0 <RECEIVABLES> 684 <ALLOWANCES> 46 <INVENTORY> 583 <CURRENT-ASSETS> 1,439 <PP&E> 3,247 <DEPRECIATION> 1,569 <TOTAL-ASSETS> 5,564 <CURRENT-LIABILITIES> 3,149 <BONDS> 1,336 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 20 <OTHER-SE> 245 <TOTAL-LIABILITY-AND-EQUITY> 5,564 <SALES> 3,684 <TOTAL-REVENUES> 3,684 <CGS> 1,657 <TOTAL-COSTS> 1,657 <OTHER-EXPENSES> 50 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 101 <INCOME-PRETAX> 788 <INCOME-TAX> 272 <INCOME-CONTINUING> 516 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 516 <EPS-BASIC> $1.21 <EPS-DILUTED> $1.19 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CPWR

https://www.sec.gov/Archives/edgar/data/859014/0000950124-00-000634.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, EG/7bbQZoAR9VxoazYWs6y0pqgItF7bB28bHhlBwYaRlzAuXpwlhbgL1RO9VR0HZ N221kVIm++wC4/QmbeL4/Q== <SEC-DOCUMENT>0000950124-00-000634.txt : 20000215 <SEC-HEADER>0000950124-00-000634.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950124-00-000634 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUWARE CORPORATION CENTRAL INDEX KEY: 0000859014 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 382007430 STATE OF INCORPORATION: MI FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20900 FILM NUMBER: 538939 BUSINESS ADDRESS: STREET 1: 31440 NORTHWESTERN HWY CITY: FARMINGTON HILLS STATE: MI ZIP: 48334-2564 BUSINESS PHONE: 2487377300 MAIL ADDRESS: STREET 1: 31440 NORTHWESTERN HIGHWAY CITY: FARMINGTON HILLS STATE: MI ZIP: 48334-2564 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <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 DECEMBER 31, 1999 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 0-20900 COMPUWARE CORPORATION --------------------- (Exact name of registrant as specified in its charter) MICHIGAN 38-2007430 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 31440 NORTHWESTERN HIGHWAY FARMINGTON HILLS, MI 48334-2564 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (248) 737-7300 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 9, 2000, there were outstanding 360,472,031 shares of Common Stock, par value $.01, of the registrant. Page 1 of 22 pages <PAGE> 2 <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Page ---- <S> <C> Item 1. Financial Statements Condensed Consolidated Balance Sheets as of December 31, 1999 and March 31, 1999 3 Condensed Consolidated Statements of Operations for the three months and nine months ended 4 December 31, 1999 and 1998 Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Independent Accountants' Report 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 </TABLE> 2 <PAGE> 3 COMPUWARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> DECEMBER 31, MARCH 31, ASSETS 1999 1999 ------------ ------------ (UNAUDITED) <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 44,178 $ 193,128 Investments 145,282 309,787 Accounts receivable, net 691,421 526,469 Deferred tax asset 25,168 16,727 Prepaid expenses and other current assets 25,456 25,979 ------------ ------------ Total current assets 931,505 1,072,090 ------------ ------------ INVESTMENTS 84,349 175,689 ------------ ------------ PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 112,650 94,786 ------------ ------------ CAPITALIZED SOFTWARE, LESS ACCUMULATED AMORTIZATION 100,155 48,095 ------------ ------------ OTHER: Accounts receivable 380,666 145,793 Excess of cost over fair value of net assets acquired, less accumulated amortization 641,332 87,713 Other 80,479 52,517 ------------ ------------ Total other assets 1,102,477 286,023 ------------ ------------ TOTAL ASSETS $ 2,331,136 $ 1,676,683 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 57,465 $ 71,129 Accrued expenses 185,317 168,254 Income taxes payable 4,262 27,153 Deferred revenue 282,146 254,968 ------------ ------------ Total current liabilities 529,190 521,504 DEFERRED REVENUE 143,002 75,657 LONG TERM DEBT 523,476 ------------ ------------ Total liabilities 1,195,668 597,161 ------------ ------------ SHAREHOLDERS' EQUITY: Common stock 3,599 3,679 Additional paid-in capital 530,854 304,825 Retained earnings 608,444 777,318 Accumulated other comprehensive income (7,429) (6,300) ------------ ------------ Total shareholders' equity 1,135,468 1,079,522 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,331,136 $ 1,676,683 ============ ============ </TABLE> See notes to condensed consolidated financial statements. 3 <PAGE> 4 COMPUWARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------------ ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> REVENUES: Software license fees $ 250,532 $ 187,313 $ 623,118 $ 450,986 Maintenance fees 113,793 87,516 314,503 242,158 Professional services fees 273,043 158,289 710,947 445,166 ------------ ------------ ------------ ------------ Total revenues 637,368 433,118 1,648,568 1,138,310 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Cost of software license fees 8,290 6,992 21,152 20,892 Cost of maintenance 11,732 9,452 32,991 27,761 Cost of professional services 267,471 127,358 656,417 363,767 Software product development 22,644 16,803 58,305 48,121 Sales and marketing 111,799 111,456 325,910 298,594 Administrative and general 24,817 19,737 62,485 52,888 Purchased research and development 1,600 17,900 4,350 ------------ ------------ ------------ ------------ Total operating expenses 446,753 293,398 1,175,160 816,373 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 190,615 139,720 473,408 321,937 OTHER INCOME (EXPENSE): Interest and investment income 16,347 7,814 27,911 20,715 Interest expense (9,316) (170) (14,353) (441) ------------ ------------ ------------ ------------ Total other income 7,031 7,644 13,558 20,274 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 197,646 147,364 486,966 342,211 INCOME TAX PROVISION 74,710 50,104 181,521 116,316 ------------ ------------ ------------ ------------ NET INCOME $ 122,936 $ 97,260 $ 305,445 $ 225,895 ============ ============ ============ ============ Basic earnings per share $ 0.34 $ 0.26 $ 0.85 $ 0.62 ============ ============ ============ ============ Diluted earnings per share $ 0.32 $ 0.24 $ 0.79 $ 0.56 ============ ============ ============ ============ </TABLE> See notes to condensed consolidated financial statements. 4 <PAGE> 5 COMPUWARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31, -------------------------- 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> Net income $ 305,445 $ 225,895 Adjustments to reconcile net income to cash provided by operations: Purchased research and development 17,900 4,350 Depreciation and amortization 47,990 30,661 Tax benefit from exercise of stock options 48,363 77,102 Deferred income taxes 2,833 466 Gain on sale of marketable securities (10,918) Other 8,164 559 Net change in assets and liabilities, net of effects from acquisitions: Accounts receivable (326,036) (108,873) Prepaid expenses and other current assets 2,266 (8,468) Other assets (30,224) 2,453 Accounts payable and accrued expenses (39,009) 36,401 Deferred revenue 80,553 53,330 Income taxes (24,915) 25,068 ---------- ---------- Net cash provided by operating activities 82,412 338,944 ---------- ---------- CASH USED IN INVESTING ACTIVITIES: Purchase of: Businesses (678,301) (12,797) Property and equipment (26,957) (19,304) Capitalized software (10,373) (9,351) Investments: Proceeds from maturity 423,179 217,479 Proceeds from sales of securities 14,194 Purchases (174,433) (585,038) ---------- ---------- Net cash used in investing activities (452,691) (409,011) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from exercise of stock options 31,933 13,948 Net proceeds from sale of common stock 14,293 9,512 Repurchase of common stock (348,373) Proceeds from (payment of) long term debt 523,476 (2,607) ---------- ---------- Net cash provided by financing activities 221,329 20,853 ---------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (148,950) (49,214) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 193,128 206,278 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,178 $ 157,064 ========== ========== </TABLE> See notes to condensed consolidated financial statements. 5 <PAGE> 6 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED DECEMBER 31, 1999 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Compuware Corporation and its wholly owned subsidiaries (collectively, the "Company"). All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management of the Company, the accompanying condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended March 31, 1999 included in the Company's Annual Report to Shareholders and the Company's Form 10-K filed with the Securities and Exchange Commission. Certain amounts in the fiscal 1999 financial statements have been reclassified to conform to the fiscal 2000 presentation. NOTE 2 - COMPUTATION OF EARNINGS PER COMMON SHARE Earnings per common share ("EPS") data were computed as follows (in thousands, except for per share data): <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> BASIC EPS: Numerator: Net Income $ 122,936 $ 97,260 $ 305,445 $ 225,895 ---------- ---------- ---------- ---------- Denominator: Weighted-average common shares outstanding 358,666 368,341 357,841 365,212 ---------- ---------- ---------- ---------- Basic EPS $ 0.34 $ 0.26 $ 0.85 $ 0.62 ========== ========== ========== ========== DILUTED EPS: Numerator: Net Income $ 122,936 $ 97,260 $ 305,445 $ 225,895 ---------- ---------- ---------- ---------- Denominator: Weighted-average common shares outstanding 358,666 368,341 357,841 365,212 Dilutive effect of stock options 27,870 34,788 27,926 36,263 ---------- ---------- ---------- ---------- Total shares 386,536 403,129 385,767 401,475 ---------- ---------- ---------- ---------- Diluted EPS $ 0.32 $ 0.24 $ 0.79 $ 0.56 ========== ========== ========== ========== </TABLE> 6 <PAGE> 7 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED DECEMBER 31, 1999 NOTE 3 - COMPREHENSIVE INCOME Other comprehensive income includes foreign currency translation gains and losses. Unrealized gain on marketable securities that was previously included in other comprehensive income has been realized during the current quarter and included in net income. Total comprehensive income is summarized as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, -------------------------- -------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net income $ 122,936 $ 97,260 $ 305,445 $ 225,895 Foreign currency translation adjustment, net of tax (2,116) 353 (1,129) 353 Realized gain on sale of marketable securities (5,019) ---------- ---------- ---------- ---------- Total comprehensive income $ 115,801 $ 97,613 $ 304,316 $ 226,248 ========== ========== ========== ========== </TABLE> NOTE 4 - ACQUISITIONS In December 1999, the Company acquired certain assets of CACI Products Company (CACI), specializing in application capacity planning software, for approximately $40 million in cash. The acquisition has been accounted for as a purchase and, accordingly, assets and liabilities acquired have been recorded at fair value as of the date of acquisition. The amount by which the acquisition cost exceeded the fair value of the net assets acquired was approximately $24.1 million and is being amortized over a twenty-year period on a straight-line basis. In September 1999, the Company acquired Livernois Staffing Services, LLC (Livernois), a privately held provider of engineering and information technology services, for approximately $1.5 million in cash, notes payable that are due within one year and assumed liabilities of approximately $0.1 million. The acquisition has been accounted for as a purchase and, accordingly, assets and liabilities acquired have been recorded at fair value as of the date of acquisition. The amount by which the acquisition cost exceeded the fair value of the net assets acquired was approximately $1.6 million and is being amortized over a ten-year period on a straight-line basis. In September 1999, the Company acquired certain assets of Programart Corporation (Programart), a privately held developer of application performance management software, for approximately $125 million in cash. Of the total purchase price, $17.9 million was allocated to in-process research and development based upon independent valuations of the expected future cash flows, less costs to complete the development. In accordance with SFAS No. 2, this amount was expensed as of the purchase date. The acquisition has been accounted for as a purchase and, accordingly, assets and liabilities acquired have been recorded at fair value as of the date of acquisition. The amount by which the acquisition cost exceeded the fair value of the net assets acquired was approximately $62.2 million and is being amortized over a twenty-year period on a straight-line basis. 7 <PAGE> 8 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED DECEMBER 31, 1999 In August 1999, the Company acquired all outstanding common shares of Data Processing Resources Corporation ("DPRC"), a professional services company, for approximately $518 million in cash. This amount includes $115 million of DPRC subordinated debt and third party expenses of approximately $7 million. The acquisition has been accounted for under the purchase method of accounting, and accordingly, assets and liabilities acquired have been recorded at fair value as of the date of acquisition. The amount by which the acquisition cost exceeded the fair value of the net assets acquired was approximately $464.8 million and is being amortized over a twenty-year period on a straight-line basis. In May 1999, the Company acquired Reliant Data Systems, a privately held developer of data migration software, for approximately $10.4 million in cash and assumed liablilities of approximately $3.0 million. The acquisition has been accounted for as a purchase and, accordingly, assets and liabilities acquired have been recorded at fair value as of the date of acquisition. The amount by which the acquisition cost exceeded the fair value of the net assets acquired was approximately $13.4 million and is being amortized over a fifteen-year period on a straight-line basis. The pro forma unaudited consolidated results of operations assume the acquisitions occurred as of the beginning of each of the periods presented (in thousands, except per share amounts): <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenues $ 638,933 $ 543,508 $1,805,739 $1,424,102 Net Income 122,089 96,426 295,618 211,877 Diluted earnings per share 0.32 0.24 0.77 0.53 </TABLE> The pro forma results include the amortization of the goodwill and interest expense on debt assumed to finance these purchases. These amounts do not reflect any benefit from the anticipated reduction in costs for certain corporate functions from combined operations. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each of the fiscal periods presented, nor are they necessarily indicative of future consolidated results. 8 <PAGE> 9 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED DECEMBER 31, 1999 NOTE 5 - SEGMENTS Compuware operates in two business segments in the software industry: products and services. The Company provides software products and professional services to the world's largest IT organizations that help information technology professionals efficiently develop, implement and support the applications that run their businesses. Financial information for the Company's business segments is as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ------------------------------ ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenue: Products: Mainframe $ 301,382 $ 227,661 $ 779,488 $ 572,578 Windows and UNIX 62,943 47,168 158,133 120,566 Services 273,043 158,289 710,947 445,166 ------------ ------------ ------------ ------------ Total revenues $ 637,368 $ 433,118 $ 1,648,568 $ 1,138,310 ============ ============ ============ ============ Operating Expenses: Products $ 154,465 $ 144,703 $ 438,358 $ 395,368 Services 267,471 127,358 656,417 363,767 Administrative and general 24,817 19,737 62,485 52,888 ------------ ------------ ------------ ------------ Total operating expenses $ 446,753 $ 291,798 $ 1,157,260 $ 812,023 ============ ============ ============ ============ Income from operations, before other income and expense and purchased research and development: Products $ 209,860 $ 130,126 $ 499,263 $ 297,776 Services 5,572 30,931 54,530 81,399 Administrative and general (24,817) (19,737) (62,485) (52,888) ------------ ------------ ------------ ------------ Income from operations, before other income and expense and purchased research and development 190,615 141,320 491,308 326,287 Purchased research and development (1,600) (17,900) (4,350) Other income and expense 7,031 7,644 13,558 20,274 ------------ ------------ ------------ ------------ Income before income taxes $ 197,646 $ 147,364 $ 486,966 $ 342,211 ============ ============ ============ ============ </TABLE> 9 <PAGE> 10 COMPUWARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED DECEMBER 31, 1999 NOTE 6 - SENIOR CREDIT FACILITY In August 1999, the Company entered into a four year unsecured revolving Senior Credit Facility with several major financial institutions for $900 million. Proceeds from the credit facility were used to finance the acquisitions of DPRC, Programart and CACI. The remaining amount under the credit facility will be available for future acquisitions and working capital requirements. Interest may be determined on a Eurodollar or prime rate basis at the Company's option. For the quarter ended December 31, 1999, the average interest rate was 6.99% based upon the Eurodollar rate. The credit agreement contains restrictive covenants and requires commitment fees in accordance with standard banking practice. As of December 31, 1999, the Company had $523 million outstanding under the credit arrangement. The Company's $30 million revolving bank credit facility was terminated concurrently with the signing of the new credit facility. NOTE 7 - SUBSEQUENT EVENTS VIASOFT ACQUISITION In July 1999, the Company and Viasoft, Inc. announced that an agreement had been reached whereby Compuware would purchase any and all outstanding shares of Viasoft's common stock for $9 per share, for total consideration of $168 million. At the request of Viasoft on January 18, 2000, the Agreement and Plan of Merger was terminated. 10 <PAGE> 11 INDEPENDENT ACCOUNTANTS' REPORT Compuware Corporation: We have reviewed the accompanying condensed consolidated balance sheet of Compuware Corporation and subsidiaries (the "Company) as of December 31, 1999, and the related condensed consolidated statements of operations for the three-month and nine-month periods and cash flows for the nine-month periods ended December 31, 1999 and 1998. 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 such condensed 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 the Company as of March 31, 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated April 29, 1999, 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 31, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Detroit, Michigan February 9, 2000 11 <PAGE> 12 COMPUWARE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are identified by the use of the words "believes", "expects", "anticipates", "will", "contemplates", "would" and similar expressions that contemplate future events. Numerous important factors, risks and uncertainties affect the Company's operating results, including without limitation those contained in this report, and could cause the Company's actual results to differ materially from the results implied by these or any other forward looking statements made by, or on behalf of, the Company. There can be no assurance that future results will meet expectations. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operational data from the Company's consolidated statements of operations as a percentage of total revenues and the percentage change in such items compared to the prior period: <TABLE> <CAPTION> Percentage of Percentage of Total Revenues Total Revenues ------------------------- ----------------------- Three Months Ended Nine Months Ended December 31, Period- December 31, Period- ------------------------- to-Period ------------------------ to-Period 1999 1998 Change 1999 1998 Change ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> REVENUE: Software license fees 39.3% 43.2% 33.8% 37.8% 39.6% 38.2% Maintenance fees 17.9% 20.2% 30.0% 19.1% 21.3% 29.9% Professional services fees 42.8% 36.6% 72.5% 43.1% 39.1% 59.7% ---------- ---------- ---------- ---------- Total revenue 100.0% 100.0% 47.2% 100.0% 100.0% 44.8% ---------- ---------- ---------- ---------- OPERATING EXPENSES: Cost of license fees 1.3% 1.6% 18.6% 1.3% 1.8% 1.2% Cost of maintenance 1.8% 2.2% 24.1% 2.0% 2.4% 18.8% Cost of services 42.0% 29.4% 110.0% 39.8% 32.0% 80.4% Software product development 3.6% 3.9% 34.8% 3.5% 4.2% 21.2% Sales and marketing 17.5% 25.7% 0.3% 19.8% 26.2% 9.1% Administrative & general 3.9% 4.6% 25.7% 3.8% 4.7% 18.1% Purchased research & development 0.3% (100.0%) 1.1% 0.4% 311.5% ---------- ---------- ---------- ---------- Total operating expenses 70.1% 67.7% 52.3% 71.3% 71.7% 43.9% ---------- ---------- ---------- ---------- Income from operations 29.9% 32.3% 36.4% 28.7% 28.3% 47.0% Interest and investment income 2.6% 1.8% 109.2% 1.7% 1.8% 34.7% Interest expense (1.5%) * (0.9%) * ---------- ---------- ---------- ---------- Other income 1.1% 1.8% (8.0%) 0.8% 1.8% (33.1%) ---------- ---------- ---------- ---------- Income before taxes 31.0% 34.1% 34.1% 29.5% 30.1% 42.3% Income tax provision 11.7% 11.6% 49.1% 11.0% 10.2% 56.1% ---------- ---------- ---------- ---------- Net income 19.3% 22.5% 26.4% 18.5% 19.9% 35.2% ========== ========== ========== ========== </TABLE> * Calculation is not meaningful. 12 <PAGE> 13 COMPUWARE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth, for the periods indicated, certain operational data as a percentage of total revenues and the percentage change in such items as compared to prior periods after excluding special charges for purchased research and development and amortization of intangible assets acquired as a result of acquisitions: <TABLE> <CAPTION> Percentage of Percentage of Total Revenues Total Revenues ------------------------- ----------------------- Three Months Ended Nine Months Ended December 31, Period- December 31, Period- ------------------------- to-Period ------------------------ to-Period 1999 1998 Change 1999 1998 Change ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Income from operations 31.8% 33.0% 42.0% 31.0% 29.0% 54.7% Other income 1.1% 1.7% (8.0%) 0.8% 1.8% (33.1%) ---------- ---------- ---------- ---------- Income before taxes 32.9% 34.7% 39.5% 31.8% 30.8% 49.6% Income tax provision 12.0% 11.7% 49.9% 11.5% 10.4% 60.2% ---------- ---------- ---------- ---------- Net income 20.9% 23.0% 34.1% 20.3% 20.4% 44.3% ========== ========== ========== ========== </TABLE> The Company operates in two business segments in the software industry: products and professional services. PRODUCTS REVENUE The Company's products are designed to support three key activities within the application development process: building, testing and managing the application to optimize performance in production. Products revenue consists of software license fees and maintenance fees. Products revenue comprised 57.2% and 63.4% of total Company revenue during the third quarters of fiscal years 2000 and 1999, respectively, and 56.9% and 60.9% of total Company revenue during the first nine months of fiscal years 2000 and 1999, respectively. Mainframe product revenue increased $73.7 million or 32.4%, to $301.4 million during the third quarter of fiscal year 2000 from $227.7 million during the third quarter of fiscal year 1999 and $206.9 million or 36.1%, to $779.5 million during the first nine months of fiscal year 2000 from $572.6 million during the first nine months of fiscal year 1999. Revenue from products for windows and UNIX platforms increased $15.8 million or 33.4%, to $62.9 million during the third quarter of fiscal year 2000 from $47.2 million during the third quarter of fiscal year 1999 and $37.6 million or 31.2%, to $158.1 million during the first nine months of fiscal year 2000 from $120.5 million during the first nine months of fiscal year 1999. These increases occurred across all product lines and reflect an increase in enterprise license agreements (ELA's) which are defined as multi-year transactions that generally consist of existing product, new product, maintenance, growth capacity for a three to five year term and is greater than $500,000. The contract price for an ELA is allocated between license fees and maintenance revenue. All license fee revenue is recognized when the client commits unconditionally to the transaction and the software has been shipped to the client. Maintenance revenue is deferred and recognized over the applicable maintenance period. The client must commit to maintenance over the entire term of the deal. The portion of maintenance revenue that will be recognized over the twelve months following the balance sheet date is recorded as current deferred revenue. Maintenance that will be recognized more than one year from the balance sheet date is recorded as long-term deferred revenue. These ELA's generally include multi-year payment terms for our clients. When the contract includes deferred payment terms, the license fee portion of the payment stream is discounted to its net present value. Interest income is recognized ratably over the payment term. 13 <PAGE> 14 COMPUWARE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For more than five years, the Company has been entering into ELA's with deferred payment terms. However, during the past year, the volume of ELA's has shown significant growth as the practice expanded internationally and as the Company added additional sales representatives focused exclusively on these types of transactions. This trend continued during the quarter ended December 31, 1999, as ELA's represented a larger percentage of total revenue than in prior quarters. During December 1999, the Company completed the acquisition of certain assets of CACI Products Company from CACI International Inc. for $40 million. This acquisition introduces three new products within the ECOSystems suite of applications performance management solutions, EcoProfiler, EcoPredictor and COMNET III. PROFESSIONAL SERVICES REVENUE The Company offers a broad range of data processing professional services, including business systems analysis, design and programming, software conversion and system planning and consulting. Professional services revenue comprised 42.8% and 36.6% of total Company revenue during the third quarters of fiscal years 2000 and 1999, respectively, and 43.1% and 39.1% of total Company revenue during the first nine months of fiscal years 2000 and 1999, respectively. Revenue from professional services increased $114.7 million, or 72.5%, to $273.0 million during the third quarter of fiscal year 2000 from $158.3 million in the third quarter of fiscal year 1999 and revenue from professional services increased $265.7 million, or 59.7%, to $710.9 million during the first nine months of fiscal year 2000 from $445.2 million in the first nine months of fiscal year 1999. The Company's North American operations generated 93.6% and 87.4% of total professional services revenue during the third quarters of fiscal years 2000 and 1999, respectively, and 92.1% and 88.3% of total professional services revenue during the first nine months of fiscal years 2000 and 1999, respectively. Combined international services revenue decreased slightly during the third quarter and increased slightly for the first nine months of fiscal year 2000. During the second quarter of fiscal 2000, the Company completed the acquisition of Data Processing Resources Corporation (DPRC) and Livernois Staffing Services, LLC. The Company plans to continue the services revenue growth naturally and through acquisitions both in North America and internationally. OPERATING PROFIT The Company evaluates the performance of its segments based primarily on operating profit before corporate expenses, purchased research and development expense, net interest income and income taxes. Financial information for the Company's products segment is as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenue $ 364,325 $ 274,829 $ 937,621 $ 693,144 Operating expenses 154,465 144,703 438,358 395,368 ---------- ---------- ---------- ---------- Products operating profit $ 209,860 $ 130,126 $ 499,263 $ 297,776 ========== ========== ========== ========== </TABLE> 14 <PAGE> 15 COMPUWARE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Products revenue by geographic location is presented in the table below (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> United States $ 237,893 $ 167,606 $ 640,624 $ 432,904 European subsidiaries 81,325 73,979 201,427 180,709 Other international operations 45,107 33,244 95,570 79,531 ---------- ---------- ---------- ---------- Total products revenue $ 364,325 $ 274,829 $ 937,621 $ 693,144 ========== ========== ========== ========== </TABLE> The products segment generated operating margins of 57.6% and 47.3% during the third quarters of fiscal years 2000 and 1999, respectively, and operating margins of 53.2% and 43.0% during the first nine months of fiscal years 2000 and 1999, respectively. Products expenses include cost of software license fees, cost of maintenance, software product development costs and sales and marketing expenses. The increase in the operating margins quarter over quarter is primarily a result of economies associated with larger sales volumes, more sales representatives in the field with increased sales productivity, additional product offerings, and increased market penetration of our windows and UNIX platform products. Cost of software license fees includes amortization of capitalized software, the cost of preparing and disseminating products to customers and the cost of author royalties. Cost of software license fees increased $1.3 million, or 18.6%, to $8.3 million in the third quarter of fiscal year 2000 from $7.0 million in the third quarter of fiscal year 1999 and increased $0.3 million, or 1.2%, to $21.2 million in the first nine months of fiscal year 2000 from $20.9 million in the first nine months of fiscal year 1999. The increase in these costs is due primarily to an increase in amortization of capitalized software products, the majority of which relates to the Programart acquisition and increased author royalties, offset in part by decreased packaging and distribution costs. As a percentage of software license fees, these costs were 3.3% and 3.7% in the third quarters of fiscal years 2000 and 1999, respectively, and 3.4% and 4.6% in the first nine months of fiscal years 2000 and 1999, respectively. Cost of maintenance consists of the cost of maintenance programmers and product support personnel and the computing, facilities and benefits costs allocated to such personnel. Cost of maintenance increased $2.2 million, or 24.1%, to $11.7 million in the third quarter of fiscal year 2000 from $9.5 million in the third quarter of fiscal year 1999 and increased $5.2 million, or 18.8%, to $33.0 million in the first nine months of fiscal year 2000 from $27.8 million in the first nine months of fiscal year 1999. The increase in cost of maintenance was due primarily to the increase in maintenance and support staff in order to support the worldwide growth of the installed customer base. However, as a percentage of maintenance fees, these costs were 10.3% and 10.8% for the third quarters of fiscal years 2000 and 1999, respectively, and 10.5% and 11.5% for the first nine months of fiscal years 2000 and 1999, respectively. Software product development costs consist of the cost of programming personnel, the facilities, computing and benefits costs allocated to such personnel and the costs of preparing user and installation guides for the Company's software products, less the amount of software development costs capitalized during the period. Software product development costs increased $5.8 million or 34.8%, to $22.6 million in the third quarter of fiscal year 2000 from $16.8 million in the third quarter of fiscal year 1999 and increased $10.2 million or 21.2%, to $58.3 million in the first nine months of fiscal year 2000 from $48.1 million in the first nine months of fiscal year 1999. The increase in these costs was due primarily to an increase in software development staff as a result of the Programart 15 <PAGE> 16 COMPUWARE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) acquisition and depreciation of computing equipment needed to meet the demand for new and enhanced products. While continuing to support and enhance its traditional mainframe products, the Company has significantly increased the resources allocated to developing and enhancing its products for windows and UNIX platforms. Before the capitalization of internally developed software products, total research and development expenditures for the third quarter of fiscal year 2000 increased $6.8 million, or 34.6%, to $26.7 million from $19.9 million in the third quarter of fiscal year 1999 and for the first nine months of fiscal year 2000 these costs increased $11.6 million, or 20.4%, to $68.6 million from $57.0 million in the first nine months of fiscal year 1999. Capitalized research and development expenditures as a percentage of total software product development costs remained unchanged at 15.4% in the third quarters of fiscal years 2000 and 1999, respectively, and decreased to 15.0% in the first nine months of fiscal year 2000 from 15.5% in the first nine months of fiscal year 1999. Sales and marketing costs consist of the sales and marketing expenses associated with the Company's products business, which include costs of direct sales, sales support and marketing staff, the facilities and benefits costs allocated to such personnel and the costs of marketing and sales incentive programs. Sales and marketing costs increased $0.3 million or 0.3%, to $111.8 million in the third quarter of fiscal year 2000 from $111.5 million in the third quarter of fiscal year 1999 and increased $27.3 million or 9.1%, to $325.9 million in the first nine months of fiscal year 2000 from $298.6 million in the first nine months of fiscal year 1999. As a percentage of license fees, these costs were 44.6% and 59.5% for the third quarters of fiscal years 2000 and 1999, respectively, and 52.3% and 66.2% for the first nine months of fiscal years 2000 and 1999, respectively. Sales and marketing costs increased due to the expansion of the worldwide sales force and increases in distributor commissions, and travel related expenditures. These increases were offset by relatively lower commission rates paid on ELA's compared to commission rates on smaller single product sales. The direct sales and sales support staff increased by 486 to 2,585 people at December 31, 1999, as compared to 2,099 at December 31, 1998. Financial information for the Company's professional services segment is as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenue $ 273,043 $ 158,289 $ 710,947 $ 445,166 Operating expenses 267,471 127,358 656,417 363,767 ---------- ---------- ---------- ---------- Professional services operating profit $ 5,572 $ 30,931 $ 54,530 $ 81,399 ========== ========== ========== ========== </TABLE> Professional services revenue by geographic location is presented in the table below (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> United States $ 255,451 $ 138,287 $ 654,501 $ 393,193 European subsidiaries 15,161 17,479 48,708 45,434 Other international operations 2,431 2,523 7,738 6,539 ---------- ---------- ---------- ---------- Total professional services revenue $ 273,043 $ 158,289 $ 710,947 $ 445,166 ========== ========== ========== ========== </TABLE> 16 <PAGE> 17 COMPUWARE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The professional services segment generated operating margins of 2.0% and 19.5% during the third quarters of fiscal years 2000 and 1999, respectively, and 7.7% and 18.3% during the first nine months of fiscal years 2000 and 1999, respectively. The decrease in the professional services margin is primarily attributable to increased allocations of costs of corporate systems, increased use of subcontractors for special services, and additional billable staff currently off assignment. While off assignment, billable staff are participating in training programs focused on e:commerce and windows and UNIX platform applications to better meet anticipated client needs in the future. Cost of professional services includes all direct costs of the Company's professional services business, including the personnel costs of the professional, management and administrative staff directly associated with the Company's services business and the facilities and benefits costs allocated to such personnel. Cost of professional services increased $140.1 million, or 110.0%, to $267.5 million in the third quarter of fiscal year 2000 from $127.4 million in the third quarter of fiscal year 1999 and increased $292.6 million, or 80.4%, to $656.4 million in the first nine months of fiscal year 2000 from $363.8 million in the first nine months of fiscal year 1999. The increase in these expenses was due primarily to an increase of 4,336 professional billable staff to 10,003 people at December 31, 1999, from 5,667 people at December 31, 1998, an increase in sub-contractor costs, and to a lesser extent, increases in employee training, development and travel related expenditures. Administrative and general expenses increased $5.1 million, or 25.7%, to $24.8 million in the third quarter of fiscal year 2000 from $19.7 million in the third quarter of fiscal year 1999 and increased $9.6 million, or 18.1%, to $62.5 million in the first nine months of fiscal year 2000 from $52.9 million in the first nine months of fiscal year 1999. The increase in administrative and general expenses is attributable, primarily, to the costs associated with merging recent acquisitions into existing operations including amortization of goodwill. However, as a percentage of total revenue, these expenses decreased to 3.9% from 4.6% of total revenue during the third quarters of fiscal years 2000 and 1999, respectively, and decreased to 3.8% from 4.7% of total revenue during the first nine months of fiscal years 2000 and 1999, respectively. Net interest and investment income for the third quarter of fiscal year 2000 was $7.0 million as compared to $7.6 million in the third quarter of fiscal year 1999, and for the first nine months of fiscal year 2000, net interest and investment income was $13.6 million as compared to $20.3 million in the first nine months of fiscal year 1999. The decrease in net interest and investment income is primarily attributable to interest expense associated with the $900 million Senior Credit Facility discussed in the liquidity section of this document and a reduction in interest income from investments, offset by a $10.9 million gain on sale of marketable securities during the third quarter of fiscal year 2000. The Company's provision for income taxes was $74.7 million in the third quarter of fiscal year 2000, which represents an effective tax rate of 37.8% and $181.5 million in the first nine months of fiscal year 2000, which represents an effective tax rate of 37.3%. This compares to a tax provision of $50.1 million in the third quarter of fiscal year 1999, which represents an effective tax rate of 34.0% and of $116.3 million in the first nine months of fiscal year 1999, which represents an effective tax rate of 34.0%. The increase in the effective tax rate was due to the growth in pre-tax earnings, which dilutes the effect of the tax credits on the effective tax rate, nondeductible goodwill amortization associated with certain acquisitions and a shift of our state apportionment to states with higher corporate income tax rates. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999, the Company had approximately $273.8 million in cash and investments which resulted primarily from cash generated from operations. During the first nine months of fiscal years 17 <PAGE> 18 COMPUWARE CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 2000 and 1999, Compuware generated $82.4 million and $338.9 million, respectively, in operating cash flow. During these periods, the Company had capital expenditures which included property and equipment, capitalized research and software development and purchased software of $37.3 million and $28.7 million, respectively. The decrease in operating cash flow primarily reflects the increase in ELA's during the current fiscal year. These transactions often include extended payment terms which are reflected in the increase of long-term accounts receivable from $145.8 million at March 31, 1999 to $380.7 million at December 31, 1999. A portion of these receivables represents license fee revenue that is recognized in the period when the transaction is completed. The remaining portion of these receivables is related to the maintenance revenue and interest income which is recognized ratably over the term of the contract. The Company has had no issues with respect to the collectibility of these receivables. In addition to the growth in long-term accounts receivable, the cash flow from operations has been adversely affected by the decrease in utilization of professional services staff. Professional services staff who are off assignment are not generating revenue and cash flow, but are still paid while being retrained. As of December 31, 1999, the Company had $523.5 million in long term debt representing borrowings under the $900 million Senior Credit Facility entered into on August 3, 1999. Borrowings were used to help fund the acquisitions of Data Processing Resources Corporation (August 1999), Programart Corporation (September 1999) and CACI Products Company (December 1999). RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company is required to adopt this statement for the year ending March 31, 2002. SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. The Company has not determined the effect, if any, that adoption will have on its financial position or results of operations. YEAR 2000 The Company believes it was adequately prepared to meet the challenges of the coming of Year 2000 and noted no significant impact to the Company's ability to carry on its normal business operations. The Company believes that it was 100% complete with all Year 2000 efforts as of December 31, 1999. During the first three weeks of the calendar year 2000, the Company experienced no significant problems in its internal systems, or in its supply chain. However, there can be no assurances that the Company will not experience significant unanticipated negative consequences caused by undiscovered year 2000 problems in its internal systems, or by future Year 2000-related interruptions in supplier or infrastructure services. 18 <PAGE> 19 COMPUWARE CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed herewith or incorporated by reference. Exhibit Number Description of Document 15 Independent Accountants' Awareness Letter 27 Financial Data Schedule (b) Reports on Form 8-K. None 19 <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. COMPUWARE CORPORATION Date: February 10, 2000 By: /s/ JOSEPH A. NATHAN ----------------- ----------------------------------- Joseph A. Nathan President Chief Operating Officer Date: February 10, 2000 By: /s/ LAURA L. FOURNIER ----------------- ----------------------------------- Laura L. Fournier Senior Vice President Chief Financial Officer 20 <PAGE> 21 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description ----------- ----------- <S> <C> 15 Independent Accountants' Awareness Letter 27 Financial Data Schedule </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>2 <DESCRIPTION>INDEPENDENT ACCOUNTANT'S AWARENESS LETTER <TEXT> <PAGE> 1 INDEPENDENT ACCOUNTANTS' AWARENESS LETTER Compuware Corporation: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Compuware Corporation and subsidiaries for the periods ended December 31, 1999 and 1998, as indicated in our report dated February 9, 2000; 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 31, 1999, is incorporated by reference in the following Registration Statements on Form S - 8: 333-79821, 333-70549, 333-43971, 333-37873, 333-17263, 33-57364, 333-4522 and 33-70852. 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 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 that Act. DELOITTE & TOUCHE LLP Detroit, Michigan February 10, 2000 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-2000 <PERIOD-START> APR-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 44,178 <SECURITIES> 0 <RECEIVABLES> 704,637 <ALLOWANCES> 13,216 <INVENTORY> 0 <CURRENT-ASSETS> 931,505 <PP&E> 193,065 <DEPRECIATION> 80,415 <TOTAL-ASSETS> 2,331,136 <CURRENT-LIABILITIES> 529,190 <BONDS> 523,476 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 3,599 <OTHER-SE> 1,139,298 <TOTAL-LIABILITY-AND-EQUITY> 2,331,136 <SALES> 1,648,568 <TOTAL-REVENUES> 1,648,568 <CGS> 1,175,160 <TOTAL-COSTS> 1,175,160 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 14,353 <INCOME-PRETAX> 486,966 <INCOME-TAX> 181,521 <INCOME-CONTINUING> 305,445 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 305,445 <EPS-BASIC> .85 <EPS-DILUTED> .79 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CSCO

https://www.sec.gov/Archives/edgar/data/858877/0000891618-00-001422.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, LaBR9dJoVn0ugMZRPu7P8dtcvOKxH6zeHe6AwW4QPwhxfTee8WjEkuQ7FfnuGMfR gYzEMn0mi0IQbuuOX4PD4A== <SEC-DOCUMENT>0000891618-00-001422.txt : 20000315 <SEC-HEADER>0000891618-00-001422.hdr.sgml : 20000315 ACCESSION NUMBER: 0000891618-00-001422 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000314 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: SEC FILE NUMBER: 000-18225 FILM NUMBER: 568449 BUSINESS ADDRESS: STREET 1: 170 WEST TASMAN DRIVE CITY: SAN JOSE STATE: CA ZIP: 95134-1706 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 THE PERIOD ENDING 1/29/00 <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 29, 2000 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 Identification incorporation or organization) 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 February 25, 2000, 3,468,815,049 shares of the Registrant's common stock were outstanding. 1 <PAGE> 2 CISCO SYSTEMS, INC. FORM 10-Q FOR THE QUARTER ENDED JANUARY 29, 2000 INDEX <TABLE> <CAPTION> Page <S> <C> <C> Facing sheet 1 Index 2 Part I. Financial Information Item 1. Financial Statements a) Consolidated statements of operations for the three and six months 3 ended January 29, 2000 and January 23, 1999 b) Consolidated balance sheets at January 29, 2000 and 4 July 31, 1999 c) Consolidated statements of cash flows for the six months ended 5 January 29, 2000 and January 23, 1999 d) Notes to consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial 18 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 38 Part II. Other Information Item 2. Changes in Securities and Use of Proceeds 39 Item 6. Exhibits and Reports on Form 8-K 40 Signature 41 </TABLE> 2 <PAGE> 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per-share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended --------------------- --------------------- January 29, January 23, January 29, January 23, 2000 1999 2000 1999 ------ ------ ------ ------ (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Net sales $4,350 $2,845 $8,264 $5,443 Cost of sales 1,536 988 2,923 1,885 ------ ------ ------ ------ Gross margin 2,814 1,857 5,341 3,558 Operating expenses: Research and development 598 372 1,135 711 Sales and marketing 924 576 1,737 1,096 General and administrative 143 82 253 159 Amortization of goodwill and purchased intangible assets 47 12 71 23 Purchased research and development 43 349 424 390 ------ ------ ------ ------ Total operating expenses 1,755 1,391 3,620 2,379 ------ ------ ------ ------ Operating income 1,059 466 1,721 1,179 Interest and other income, net 151 79 253 146 ------ ------ ------ ------ Income before provision for income taxes 1,210 545 1,974 1,325 Provision for income taxes 385 263 729 534 ------ ------ ------ ------ Net income $ 825 $ 282 $1,245 $ 791 ====== ====== ====== ====== Net income per share--basic $ .24 $ .09 $ .37 $ .24 ====== ====== ====== ====== Net income per share--diluted $ .23 $ .08 $ .34 $ .23 ====== ====== ====== ====== Shares used in per-share calculation--basic 3,413 3,274 3,401 3,251 ====== ====== ====== ====== Shares used in per-share calculation--diluted 3,648 3,486 3,629 3,453 ====== ====== ====== ====== </TABLE> See notes to consolidated financial statements 3 <PAGE> 4 CISCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In millions, except par value) <TABLE> <CAPTION> January 29, July 31, 2000 1999 ------- ------- (Unaudited) ASSETS <S> <C> <C> Current assets: Cash and equivalents $ 3,719 $ 886 Short-term investments 249 1,189 Accounts receivable, net of allowance for doubtful accounts of $29 at January 29, 2000 and $27 at July 31, 1999 1,711 1,249 Inventories, net 695 656 Deferred tax assets 711 571 Prepaid expenses and other current assets 637 170 ------- ------- Total current assets 7,722 4,721 Investments 9,819 7,032 Restricted investments 1,107 1,080 Property and equipment, net 1,004 822 Other assets, net 1,739 1,191 ------- ------- Total assets $21,391 $14,846 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 482 $ 372 Income taxes payable 595 630 Accrued payroll and related expenses 814 679 Other accrued liabilities 1,887 1,353 ------- ------- Total current liabilities 3,778 3,034 Deferred tax liabilities 1,045 -- Minority interest 45 44 Shareholders' equity: Preferred stock, no par value, 5 shares authorized: none issued or outstanding at January 29, 2000 and July 31, 1999 Common stock and additional paid-in capital, $0.001 par value, 10,000 shares authorized: 3,445 shares issued and outstanding at January 29, 2000 and 3,374 at July 31, 1999 7,691 5,665 Retained earnings 7,011 5,805 Accumulated other comprehensive income 1,821 298 ------- ------- Total shareholders' equity 16,523 11,768 ------- ------- Total liabilities and shareholders' equity $21,391 $14,846 ======= ======= </TABLE> See notes to consolidated financial statements 4 <PAGE> 5 CISCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) <TABLE> <CAPTION> Six Months Ended ------------------------ January 29, January 23, 2000 1999 ------- ------- (Unaudited) <S> <C> <C> Cash flows from operating activities: Net income $ 1,245 $ 791 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 308 229 Deferred income taxes (106) (107) Tax benefits from employee stock plans 697 398 Adjustments to conform fiscal year end of pooled acquisitions (18) 1 Purchased research and development from acquisitions 424 298 Change in operating assets and liabilities: Accounts receivable (461) (175) Inventories (38) (114) Prepaid expenses and other current assets (43) (68) Income taxes payable (35) 50 Accounts payable 91 96 Accrued payroll and related expenses 132 119 Other accrued liabilities 519 172 ------- ------- Net cash provided by operating activities 2,715 1,690 ------- ------- Cash flows from investing activities: Purchases of short-term investments (417) (309) Proceeds from sales and maturities of short-term investments 1,227 890 Purchases of investments (5,988) (1,895) Proceeds from sales and maturities of investments 5,800 970 Purchases of restricted investments (158) (496) Proceeds from sales and maturities of restricted investments 123 251 Acquisition of property and equipment (411) (282) Acquisition of businesses, net of cash acquired and purchased research and development (11) (19) Increase in lease receivables (262) (137) Other (433) (128) ------- ------- Net cash used in investing activities (530) (1,155) ------- ------- Cash flows from financing activities: Issuance of common stock 642 376 Other 6 11 ------- ------- Net cash provided by financing activities 648 387 ------- ------- Net increase in cash and equivalents 2,833 922 Cash and equivalents, beginning of period 886 609 ------- ------- Cash and equivalents, end of period $ 3,719 $ 1,531 ======= ======= </TABLE> See notes to consolidated financial statements 5 <PAGE> 6 Cisco Systems, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS Cisco Systems, Inc. ("Cisco" or the "Company") is the worldwide leader in networking for the Internet. Cisco hardware, software, and service offerings are used to create Internet solutions so that individuals, companies, and countries have seamless access to information - regardless of differences in time and place. Cisco solutions provide competitive advantage to our customers through more efficient and timely exchange of information, which in turn leads to cost savings, process efficiencies, and closer relationships with their customers, prospects, business partners, suppliers, and employees. These solutions form the networking foundation for companies, universities, utilities, and government agencies worldwide. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year The Company's fiscal year is the 52- or 53-week period ending on the last Saturday in July. Fiscal year 2000 is a 52-week year while fiscal 1999 was a 53-week year. Basis of Presentation All historical financial information has been restated to reflect the acquisitions of StratumOne Communications, Inc.("StratumOne") and TransMedia Communications, Inc.("TransMedia") in the first quarter of fiscal 2000 and Cerent Corporation ("Cerent") and WebLine Communications Corporation ("Webline") in the second quarter of fiscal 2000 which were accounted for as poolings of interests. In addition, the historical financial information has been restated to reflect the acquisition of Fibex Systems which was completed in the fourth quarter of 1999 and accounted for as a pooling of interests. The accompanying financial data as of January 29, 2000 and for the three and six months ended January 29, 2000 and January 23, 1999, has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or 6 <PAGE> 7 omitted pursuant to such rules and regulations. The July 31, 1999 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 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 consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended July 31, 1999 and Current Report on Form 8-K/A filed February 3, 2000. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position as of January 29, 2000, results of operations for the three and six months ended January 29, 2000 and January 23, 1999, and cash flows for the six months ended January 29, 2000 and January 23, 1999 have been made. The results of operations for the three and six months ended January 29, 2000 are not necessarily indicative of the operating results for the full year. Computation of Net Income Per Common Share Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist primarily of stock options. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Management does not believe this will have a material effect on the Company's operations or financial position. Implementation of this standard has recently been delayed by the FASB for a twelve-month period. The Company will now be required to adopt SFAS 133 for its first quarterly filing of fiscal 2001. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally 7 <PAGE> 8 accepted accounting principles to revenue recognition in financial statements. The Company is required to adopt SAB 101 in the first quarter of fiscal 2001. Management does not expect the adoption of SAB 101 to have a material effect on the Company's operations or financial position. 3. BUSINESS COMBINATIONS Purchase Combinations The Company has made a number of purchase acquisitions. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or an aggregate basis. The amounts allocated to purchased research and development expense 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. Research and development costs to bring the products from the acquired companies to technological feasibility are not expected to have a material impact on the Company's future results of operations or cash flows. Amounts allocated to goodwill and purchased intangible assets are amortized on a straight-line basis over periods not exceeding five years. In September 1999, the Company completed its purchase of Monterey Networks, Inc. ("Monterey"), a developer of infrastructure-class, optical cross-connect technology that is used to increase network capacity at the core of an optical network. The Company's acquired technology consists of one product currently under development which will result in a wavelength router that would intelligently route signals over long-haul optical pipes created by dense wave division multiplexing ("DWDM"). Also in September 1999, the Company completed its purchase of MaxComm Technologies, Inc. ("MaxComm"), a developer of broadband Internet technology that brings data and multiple voice lines to consumers. The Company's acquired technology consists of one product currently under development which will allow the end user to create an easily adaptable home local area network utilizing their existing in-home wiring to support up to four separate phone lines with different numbers. 8 <PAGE> 9 In November 1999, the Company completed its purchase of Calista Inc. ("Calista") and Tasmania Network Systems, Inc. ("Tasmania"). Calista is a developer of Internet technology that allows different business phone systems to work together over an open Internet-based infrastructure. The Company's acquired technology consists of one product currently under development which will link up telecommuters or branch office phones to the corporate PBX over the Internet or intranet. Tasmania is a leading developer of network caching software technology. The Company's acquired technology consists of one product currently under development which will improve the performance of cache technology. In December 1999, the Company acquired Internet Engineering Group, LLC ("IEng") and Worldwide Data Systems, Inc. ("Worldwide"). IEng is a developer of high-performance software to enable service providers to build next-generation high speed networks. Worldwide is a leader in consulting and engineering services for the convergence of data and voice networks. 9 <PAGE> 10 Each of the completed purchase acquisition transactions is further outlined below: Summary of purchase transactions (in millions): <TABLE> <CAPTION> Purchased Research & Development Form of Consideration and Other Entity Name Consideration Charge Notes to Acquisition ----------- ------------- ------ -------------------- <S> <C> <C> <C> Fiscal 2000 Monterey $517 $354 Common stock and options assumed; $14 in liabilities assumed; goodwill and other intangibles recorded of $154 MaxComm $ 73 $ 27 Common stock and options assumed; goodwill and other intangibles recorded of $41 Calista $ 57 $ 28 Common stock and options assumed; $3 in liabilities assumed; goodwill and other intangibles recorded of $34 Tasmania $ 26 $ 15 Common stock; goodwill and other intangibles recorded of $13 </TABLE> Total purchased research and development expense for the six months ended January 29, 2000 and January 23, 1999 was $424 million and $390 million, respectively. The purchased research and development expense for the six months ended January 29, 2000 was attributable to stock consideration. The purchased research and development expense that was attributable to stock consideration for the six months ended January 23, 1999 was $298 million. The purchased research and development expense attributable to a cash purchase 10 <PAGE> 11 transaction for the six months ended January 23, 1999 was $92 million. Poolings of Interests Combinations In September 1999, the Company acquired StratumOne, a developer of highly integrated, high-performance semiconductor technology, and TransMedia, a provider of Media Gateway technology that unites the multiple networks of public voice communications. Under the terms of the agreements, approximately 12.3 million shares of common stock were issued to acquire StratumOne and TransMedia, and options to purchase an additional 1.4 million shares were assumed. Also in September 1999, the Company acquired Cocom A/S, ("Cocom"), an European developer of high-speed Internet access solutions over cable, satellite, and wireless networks based on international standards. Under the terms of the agreement, approximately 1.0 million shares of common stock were issued to acquire Cocom. Based on the shares of common stock and options exchanged, the values of the acquisitions were approximately $435 million, $407 million, and $66 million for StratumOne, Transmedia, and Cocom, respectively. In November 1999, the Company completed the acquisitions of Cerent and Webline. Cerent is a developer of next-generation optical transport products, and Webline is a provider of customer interaction management software for Internet customer service and e-commerce. Under the terms of the agreements, approximately 98.1 million and 3.7 million shares of common stock were issued to acquire Cerent and Webline, respectively. The Company also assumed outstanding options that were converted into options to purchase approximately 1.8 million shares and 0.6 million shares of the Company's common stock for Cerent and Webline, respectively. Based on the shares of common stock and options exchanged, the values of the acquisitions were approximately $6.9 billion and $325 million for Cerent and Webline, respectively. In December 1999, the Company acquired V-Bits, Inc. ("V-Bits"), a provider of standards-based digital video processing systems for cable television service providers. Under the terms of the agreement, approximately 1.4 million shares of common stock and options were exchanged to acquire V-Bits. Based on the shares of common stock and options exchanged, the value of the acquisition was approximately $128 million. All historical financial information contained herein has been restated to reflect the acquisitions of StratumOne, TransMedia, Cerent, and Webline. The historical operations of Cocom and V-Bits 11 <PAGE> 12 were not material to the Company's consolidated operations, therefore prior period statements have not been restated for these acquisitions. Acquisitions Pending or Completed After January 29, 2000 In November 1999, the Company announced a definitive agreement to acquire Aironet Wireless Communications, Inc. ("Aironet") for approximately $799 million payable in common stock. Aironet is a leading developer of standards-based, high speed wireless local area network products ("LAN"). The Aironet acquisition is expected to be completed in the third quarter of fiscal 2000. In December 1999, the Company announced a definitive agreement to acquire the optical systems business of Pirelli S.p.A of Milan, Italy ("Pirelli") for an aggregate amount of up to $2.15 billion payable in common stock, of which a portion is contingent on revenue targets and other performance milestones. Pirelli is a recognized innovator in both optical component technology and optical systems for service providers. The Company completed the acquisition of Pirelli in February 2000. Aironet and Pirelli will be accounted for as purchases. In March 2000, the Company announced a definitive agreement to acquire Atlantech Technologies ("Atlantech") for approximately $180 million payable in common stock. Atlantech is a leading provider of network element management software, which is designed to help configure and monitor network hardware. Atlantech will be accounted for as a purchase. In January and February 2000, the Company announced definitive agreements to acquire Altiga Networks ("Altiga"), Compatible Systems ("Compatible"), and Growth Networks Inc. ("Growth") for an aggregate of approximately $922 million payable in common stock. The acquisitions of Altiga and Compatible enhance the Company's New World Virtual Private Networks offerings by providing customers with industry-leading remote access and extranet solutions. Growth is a market leader in Internet switching fabrics, a new category of networking silicon. Altiga, Compatible and Growth will be accounted for as poolings of interests. 12 <PAGE> 13 4. BALANCE SHEET DETAIL (In millions) <TABLE> <CAPTION> Inventories, net: January 29, July 31, 2000 1999 ------- ------- (Unaudited) <S> <C> <C> Raw materials $ 91 $ 143 Work in process 263 198 Finished goods 280 280 Demonstration systems 61 35 ------- ------- Total $ 695 $ 656 ======= ======= </TABLE> <TABLE> <CAPTION> Other Assets, net: January 29, July 31, 2000 1999 ------- ------- (Unaudited) <S> <C> <C> Goodwill-gross $ 374 $ 157 Purchased intangible assets-gross 763 395 Less: Accumulated amortization (175) (92) ------- ------- Intangibles, net 962 460 Investments in nonpublic companies 351 179 Net investment in leases 212 500 Other assets 214 52 ------- ------- Total $ 1,739 $ 1,191 ======= ======= </TABLE> Amortization expense for the three months ended January 29, 2000 and January 23, 1999 was $53 million and $12 million, respectively. Amortization expense for the six months ended January 29, 2000 and January 23, 1999 was $83 million and $23 million, respectively. The following table presents the details of the amortization expense as reported in the consolidated statements of operations (in millions): <TABLE> <CAPTION> Three Months Six Months Ended Ended ------------------ ------------------ January 29, January 23, January 29, January 23, 2000 1999 2000 1999 --- --- --- --- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Reported as: Cost of sales $ 6 $-- $12 $-- Operating expenses 47 12 71 23 --- --- --- --- Total amortization expense $53 $12 $83 $23 === === === === </TABLE> 13 <PAGE> 14 5. COMPREHENSIVE INCOME The following table presents the calculation of comprehensive income as required by SFAS No. 130. Comprehensive income has no impact on the Company's net income, balance sheet, or shareholders' equity. The components of comprehensive income, net of tax, are as follows (in millions): <TABLE> <CAPTION> Three Months Six Months Ended Ended --------------------------- -------------------------- January 29, January 23, January 29, January 23, 2000 1999 2000 1999 ------- ------- ------- ------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Net income $ 825 $ 282 $ 1,245 $ 791 Other comprehensive income (loss): Change in unrealized gain on investments, net 999 74 1,519 91 Change in accumulated translation adjustments (2) - 4 11 ------- ------- ------- ------- Total comprehensive income $ 1,822 $ 356 $ 2,768 $ 893 ======= ======= ======= ======= </TABLE> 6. INCOME TAXES The Company paid income taxes of $174 million and $184 million for the six months ended January 29, 2000 and January 23, 1999, respectively. The Company's income taxes currently payable for federal, state, and foreign purposes have been reduced by the tax benefit from stock option transactions. The benefit totaled $697 million and $398 million for the six months ended January 29, 2000 and January 23, 1999, respectively, and was credited directly to shareholders' equity. 14 <PAGE> 15 7. SHAREHOLDERS' EQUITY AND STOCK SPLIT On November 10, 1999, the shareholders of the Company approved an increase to the authorized number of shares of common stock from 5.4 billion to 10 billion shares. Cisco's Board of Directors authorized the splitting of the Company's common stock on a two-for-one basis for shareholders of record on February 22, 2000. Shares resulting from the split are expected to be distributed by the transfer agent on March 22, 2000. All share and per-share numbers contained herein do not reflect this stock split. 8. SEGMENT INFORMATION AND MAJOR CUSTOMERS The Company's operations involve the design, development, manufacturing, marketing, and technical support of networking products and services. The Company offers end-to-end networking solutions for its customers. Cisco products include routers, LAN and ATM switches, dialup access servers, and network management software. These products, integrated by the Cisco IOS(R) software, link geographically dispersed LANs, WANs, and IBM networks. The Company conducts business globally and is managed geographically. The Company's management relies on an internal management accounting system which provides sales and standard cost information by geographic theater. Sales are attributed to a theater based on the ordering location of the customer. The Company's management makes financial decisions and allocates resources based on the information it receives from this internal system. The Company does not allocate marketing, engineering, or administrative expenses to geographical segments as management does not use this information to measure the performance of the operating segments. Management does not believe that allocating these expenses is material in evaluating a geographical segment's performance. Information from this internal management system differs from the amounts reported under generally accepted accounting principles due to certain corporate level adjustments. These corporate level adjustments are primarily sales adjustments related to credit memos and returns. Based on the criteria set forth in SFAS No. 131, the Company has four reportable segments: the Americas, EMEA, Asia/Pacific, and Japan. 15 <PAGE> 16 Summarized financial information by segment for the three and six months ended January 29, 2000 and January 23, 1999, as taken from the internal management information system discussed above, is as follows (in millions): <TABLE> <CAPTION> Three Months Ended Six Months Ended --------------------------- --------------------------- January 29, January 23, January 23, January 23, 2000 1999 2000 1999 ------- ------- ------- ------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Net Sales: U.S./Americas $ 2,872 $ 1,885 $ 5,530 $ 3,672 EMEA 1,082 759 2,102 1,424 Asia/Pacific 351 186 634 350 Japan 182 158 339 284 Sales adjustments (137) (143) (341) (287) ------- ------- ------- ------- Total - Net Sales $ 4,350 $ 2,845 $ 8,264 $ 5,443 ======= ======= ======= ======= Standard Margin: U.S./Americas $ 2,113 $ 1,361 $ 4,050 $ 2,665 EMEA 801 570 1,566 1,055 Asia/Pacific 259 134 467 257 Japan 144 123 269 217 Sales adjustments (137) (143) (341) (287) Production overhead (106) (61) (189) (117) Manufacturing variances and other related costs (260) (127) (481) (232) ------- ------- ------- ------- Total - Gross Margin $ 2,814 $ 1,857 $ 5,341 $ 3,558 ======= ======= ======= ======= </TABLE> The standard margins by geographical segment differ from the amounts recognized under generally accepted accounting principles because the Company does not allocate certain sales adjustments, production overhead, and manufacturing variances and other related costs to the segments. The above table reconciles the net sales and standard margins by geographic segment to net sales and gross margins as reported in the consolidated statements of operations by including such adjustments. 16 <PAGE> 17 The following table presents external net sales for groups of similar products and services (in millions): <TABLE> <CAPTION> Three Months Ended Six Months Ended --------------------------- --------------------------- January 29, January 23, January 29, January 23, 2000 1999 2000 1999 ------- ------- ------- ------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Routers $ 1,688 $ 1,285 $ 3,286 $ 2,442 Switches 1,695 1,188 3,267 2,317 Access 507 256 982 463 Other 597 259 1,070 508 Sales adjustments (137) (143) (341) (287) ------- ------- ------- ------- Total - Net Sales $ 4,350 $ 2,845 $ 8,264 $ 5,443 ======= ======= ======= ======= </TABLE> Substantially all of the Company's assets at January 29, 2000 and July 31, 1999 were attributable to U.S. operations. No single customer accounted for 10% or more of total revenue during the three or six months ended January 29, 2000 and January 23, 1999. 9. NET INCOME PER COMMON SHARE The following table presents the calculation of basic and diluted earnings per share (in millions, except per-share amounts): <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------ ------------------------ January 29, January 23, January 29, January 23, 2000 1999 2000 1999 ------ ------ ------ ------ (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Numerator: Net income $ 825 $ 282 $1,245 $ 791 ====== ====== ====== ====== Denominator: Weighted average shares--basic 3,413 3,274 3,401 3,251 Effect of dilutive securities: Employee stock options 235 212 228 202 ------ ------ ------ ------ Weighted average share--diluted 3,648 3,486 3,629 3,453 ====== ====== ====== ====== Net income per share--basic $ .24 $ .09 $ .37 $ .24 ====== ====== ====== ====== Net income per share--diluted $ .23 $ .08 $ .34 $ .23 ====== ====== ====== ====== </TABLE> 10. SUBSEQUENT EVENTS On January 31, 2000, the Company invested approximately $1 billion in mandatorily redeemable convertible preferred stock of KPMG Consulting, Inc., a privately held subsidiary of KPMG LLP. KPMG Consulting, Inc. is a provider of Internet integration services. 17 <PAGE> 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All historical financial information has been restated to reflect the acquisitions of StratumOne Communications, Inc. and TransMedia Communications, Inc. in the first quarter of fiscal 2000 and Cerent Corporation and WebLine Communications Corporation in the second quarter of fiscal 2000 which were accounted for as poolings of interests. In addition, the historical financial information has been restated to reflect the acquisition of Fibex Systems which was completed in the fourth quarter of fiscal 1999 and accounted for as a pooling of interests. 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." You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report, and in other documents we file with the Securities and Exchange Commission. Net sales grew to $4.35 billion in the second quarter of fiscal 2000 from $2.85 billion in the second quarter of fiscal 1999. Net sales for the first six months of fiscal 2000 were $8.26 billion, compared with $5.44 billion for the first six months of fiscal 1999. The 52.9% increase in net sales between the two three-month periods and the 51.8% increase in net sales between the two six-month periods were primarily a result of increasing unit sales of LAN switching products such as the Catalyst(R) 3500 and 6000 families and the Catalyst 2900 series of switches for smaller enterprise networks, the Cisco 12000 gigabit switch router ("GSR"), access servers such as the Cisco 2600 and 3600 families, growth in the sales of add-on boards that provide increased functionality, and increased maintenance service contract sales. The sales growth rate for lower-priced access and switching 18 <PAGE> 19 products targeted toward small and medium-sized businesses has increased faster than that of our high-end core router products. Additionally, sales of some of our more established product lines such as the Catalyst 5000, Cisco 2500 and Cisco 4000 product families have decreased as a percentage of total revenue. Sales in the second quarter of fiscal 2000 grew 52.4% in the Americas, 42.6% in EMEA, 88.7% in Asia/Pacific and 15.2% in Japan compared to the second quarter of fiscal 1999. Sales in the first six months of fiscal 2000 grew 50.6% in the Americas, 47.6% in EMEA, 81.1% in Asia/Pacific and 19.4% in Japan compared to the first six months of fiscal 1999 (See Note 8 to the consolidated financial statements). Market demand and deployment of Internet technologies and business solutions, as well as the overall economic health within these regions, are primarily driving the strong growth in the Americas, EMEA, and Asia/Pacific. The slower growth in Japan can be attributed to continued weaker economic conditions and delayed government spending. Gross margins decreased to 64.7% in the second quarter of fiscal 2000 from 65.3% in the second quarter of fiscal 1999. Gross margins decreased to 64.6% in the first six months of fiscal 2000 from 65.4% in the first six months of fiscal 1999. Standard margins for the Americas, EMEA, Asia/Pacific and Japan were 73.6%, 74.0%, 73.8%, and 79.1%, respectively, for the second quarter of fiscal 2000 compared to 72.2%, 75.1%, 72.0%, and 77.8%, respectively, for the second quarter of fiscal 1999. Standard margins for the Americas, EMEA, Asia/Pacific and Japan were 73.2%, 74.5%, 73.7%, and 79.4%, respectively, for the first six months of fiscal 2000 compared to 72.6%, 74.1%, 73.4%, and 76.4%, respectively, for the first six months of fiscal 1999 (see Note 8 to the consolidated financial statements). The standard margins by geographical segment differ from the amounts recognized under generally accepted accounting principles because the Company does not allocate certain sales adjustments, production overhead, and manufacturing variances and other related costs to the segments. Standard margins for the Americas, where 66.0% and 66.9% of our revenues were derived in the second quarter and the first six months of fiscal 2000, respectively, increased by 1.4% and 0.6%, respectively, compared to the same periods in fiscal 1999. Standard margins for EMEA, where 24.9% and 25.4% of our revenues were derived in the second quarter and the first six months of fiscal 2000, respectively, decreased by 1.1% and increased by 0.4%, respectively, compared to the same periods in fiscal 1999. The changes in standard margins for the Americas and EMEA were due to a shift in revenue mix and the timing of when certain sales adjustments are applied to geographical theatres. The decrease in the overall gross margin was primarily due to our continued shift in revenue mix towards our lower-margin 19 <PAGE> 20 products, other production related costs, and the continued pricing pressure seen from competitors in certain product areas. The prices of component parts have fluctuated in the recent past, and we expect that this trend may continue. An increase in the price of component parts may have a material adverse impact on gross margins. We expect that gross margins will continue to decrease in the future, because we believe that the market for lower-margin remote access and switching products for small to medium-sized businesses will continue to increase at a faster rate than the market for our higher-margin router and high-performance switching products. Additionally, as we focus on new market opportunities, we face increasing competitive pressure from large telecommunications equipment suppliers and well funded start-up companies, which may materially adversely affect gross margins. We are attempting to mitigate this trend through various means, such as increasing the functionality of our products, continued value engineering, controlling royalty costs, and improving manufacturing efficiencies. There can be no assurance that any efforts made by us in these and other areas will successfully offset decreasing margins. Research and development expenses increased by $226 million in the second quarter of fiscal 2000 over the second quarter of fiscal 1999, an increase to 13.7% from 13.1% of net sales. Research and development expenses increased by $424 million in the first six months of fiscal 2000 over the first six months of fiscal 1999, an increase to 13.7% from 13.1% of net sales. The increases reflect our ongoing research and development efforts in a wide variety of areas such as voice, video, and data integration, Digital Subscriber Line ("DSL") technologies, cable modem technology, wireless access, dial access, enterprise switching, optical transport, security, network management, and high-end routing technologies, among others. A significant portion of the increase was due to the addition of new personnel, partly through acquisitions, as well as higher expenditures on prototypes and depreciation on additional lab equipment. For the near future, research and development expenses are expected to increase at a rate similar to or slightly greater than the sales growth rate, as we invest in technology to address potential market opportunities. We also continue to purchase technology in order to bring a broad range of products to the market in a timely fashion. If we believe that we are unable to enter a particular market in a timely manner with internally developed products, we may license technology from other businesses or acquire other businesses as an alternative to internal research and development. All of our research and development costs are expensed as incurred. 20 <PAGE> 21 Sales and marketing expenses increased by $348 million in the second quarter of fiscal 2000 over the second quarter of fiscal 1999, an increase to 21.2% from 20.2% of net sales. Sales and marketing expenses increased by $641 million in the first six months of fiscal 2000 over the first six months of fiscal 1999, an increase to 21.0% from 20.1% of net sales. The increases were principally due to an increase in the size of our direct sales force and related commissions, additional marketing and advertising investments associated with the introduction of new products, the expansion of distribution channels, and general corporate branding. The increases also reflect our efforts to invest in certain key areas such as expansion of our end-to-end strategy and service provider coverage in order to position ourselves to take advantage of future market opportunities. General and administrative expenses increased by $61 million in the second quarter of fiscal 2000 over the second quarter of fiscal 1999, an increase to 3.3% from 2.9% of net sales. General and administrative expenses increased by $94 million in the first six months of fiscal 2000 over the first six months of fiscal 1999, an increase to 3.1% from 2.9% of net sales. General and administrative expenses for the three and six months ended January 29, 2000 include acquisition related costs of approximately $25 million. Excluding the acquisition related costs, the increases in general and administrative expenses as a percentage of sales primarily relate to the addition of new personnel and higher depreciation expense. It is management's intent to keep general and administrative costs relatively constant as a percentage of net sales; however, this is dependent upon the level of acquisition activity and our growth, among other factors. Amortization of goodwill and purchased intangible assets increased by $35 million in the second quarter of fiscal 2000 compared to the second quarter of fiscal 1999. Amortization of goodwill and purchased intangible assets increased by $48 million in the first six months of fiscal 2000 compared to the first six months of fiscal 1999. Amortization of goodwill and purchased intangible assets includes the amortization of goodwill and other purchased intangible assets relating to various purchase acquisitions (See Note 4 to the consolidated financial statements). The amounts expensed to purchased research and development in the first six months of fiscal 2000 arose from the completed acquisitions of Monterey, MaxComm, Calista, and Tasmania (See Note 3 to the consolidated financial statements). 21 <PAGE> 22 The fair value of the existing products and patents as well as the technology currently under development was determined by using the income approach, which discounts expected future cash flows to present value. The discount rates used in the present value calculations were typically derived from a weighted average cost of capital analysis and venture capital surveys, adjusted upward to reflect additional risks inherent in the development life cycle. These risk factors have increased the overall discount rate between 5% to 20% for acquisitions in the current period. We consider the pricing model for products related to these acquisitions to be standard within the high-technology communications industry. We do not expect to achieve a material amount of expense reductions or synergies as a result of integrating the acquired in-process technology. Therefore, the valuation assumptions do not include anticipated cost savings. We expect that products incorporating the acquired technology from these acquisitions will be completed and begin to generate cash flows over the six to nine months after integration. However, development of these technologies remains a significant risk to us due to the remaining effort to achieve technical viability, rapidly changing customer markets, uncertain standards for new products, and significant competitive threats from numerous companies. The nature of the efforts to develop the acquired technology into commercially viable products consists principally of planning, designing, and testing activities necessary to determine that the product can meet market expectations, including functionality and technical requirements. Failure to bring these products to market in a timely manner could result in a loss of market share, or a lost opportunity to capitalize on emerging markets, and could have a material adverse impact on our business and operating results. Regarding our purchase acquisitions completed in fiscal 1999, actual results to date have been consistent, in all material respects, with the assumptions at the time of the acquisitions as they relate to the value of purchased in-process research and development. The assumptions primarily consist of an expected completion date for the in-process projects, estimated costs to complete the projects, and revenue and expense projections once the products have entered the market. Products from these acquisitions are being introduced to the market six to nine months after the acquisition. Shipment volumes of products from acquired technologies are not material to our overall position at the present time, therefore, it is difficult to determine the accuracy of overall revenue projections early in the technology or product lifecycle. Failure to achieve the expected levels of revenues and net income from these products will negatively impact the return on investment expected at the time that the acquisition was completed 22 <PAGE> 23 and potentially result in impairment of any other assets related to the development activities. The following table summarizes the significant assumptions underlying the valuations in fiscal 2000 and fiscal 1999 and the development costs incurred by us in the periods after the respective acquisition date (in millions, except percentages): <TABLE> <CAPTION> Approximate Acquisition Assumptions Development ---------------------------------- Costs Incurred Estimated Cost to Date After to Complete Risk Adjusted Acquisition on Technology at Discount Acquired Time of Rate for In- In-Process Entity Name Acquisition Process R&D Technology ----------- ----------- ----------- ---------- <S> <C> <C> <C> Fiscal 2000 Monterey Networks, Inc. $ 4 30% $ 8 MaxComm Technologies, Inc. $ 2 25% $ 2 Calista Inc. $ 1 37.5% Tasmania Network Systems, $ 1 45% Inc. Fiscal 1999 American Internet Corp. $ 1 25% $ 1 Summa Four, Inc. $ 5 25% $18 Clarity Wireless, Inc. $42 32% $22 Selsius Systems, Inc. $15 31% $13 PipeLinks, Inc. $ 5 31% $18 Amteva Technologies, Inc. $ 4 35% $ 3 </TABLE> 23 <PAGE> 24 LIQUIDITY AND CAPITAL RESOURCES Cash and equivalents, short-term investments, and investments were $13.8 billion at January 29, 2000, an increase of $4.7 billion from July 31, 1999. The increase is primarily a result of unrealized gains on publicly held investments, cash generated by operations and the exercise of employee stock options. The cash flows from operating activities were partially offset by cash outflows from tax payments of approximately $174 million, and cash outflows from investing activities primarily relating to capital expenditures of approximately $411 million. On January 31, 2000, subsequent to the end of the fiscal quarter, the Company made a cash investment of approximately $1 billion in KPMG Consulting, Inc. Accounts receivable increased 37.0% from July 31, 1999 to January 29, 2000. Days sales outstanding in receivables increased to 36 days at January 29, 2000 from 32 days at July 31, 1999. Inventory levels remained relatively constant between the two periods; however, inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence because of rapidly changing technology and customer requirements. At January 29, 2000, we had a line of credit totaling $500 million, which expires July 2002. There have been no borrowings under this facility. We have entered into certain lease arrangements in San Jose, California, and Research Triangle Park, North Carolina, where we have established our headquarter's operations and certain research and development and customer support activities. In connection with these transactions, we pledged $1.1 billion of our investments as collateral for certain obligations of the leases. We anticipate that we will occupy more leased property in the future that will require similar pledged securities; however, we do not expect the impact of this activity to be material to liquidity. We believe that our current cash and equivalents, short-term investments, line of credit, and cash generated from operations will satisfy our expected working capital and capital expenditure requirements at least through the next 12 months. YEAR 2000 READINESS We have not experienced any known material adverse impacts on our current products, internal information systems, and noninformation technology systems (equipment and systems) as a result of the year 24 <PAGE> 25 2000 issue. Based on the work done, we have not incurred material costs to address the year 2000 readiness of our systems (as a result of relatively new information systems) and products. There can be no assurance that the cost estimates associated with Year 2000 or leap year date issues will not have a material adverse effect on our results of operations and financial condition. RISK FACTORS Set forth below and elsewhere in this Quarterly Report and in the other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward looking statements contained in this Quarterly Report. YOU SHOULD EXPECT THAT OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS The results of operations for any quarter are not necessarily indicative of results to be expected in future periods. Our operating results have in the past been, and will continue to 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 networking industry; - - The overall trend toward industry consolidation; - - The introduction and market acceptance of new technologies and standards, including switch routers, Gigabit Ethernet switching, Tag Switching (currently also known as multiprotocol label switching ["MPLS"]), optical transport and data, voice, and video capabilities; - - Variations in sales channels, product costs, or mix of products sold; - - The timing of orders and manufacturing lead times; - - The trend towards sales of integrated network solutions; - - Employer payroll taxes to be paid on an employee's gain on stock options exercised. Such payroll taxes are recorded as operating expenses and could be material based upon the number of optionees who exercise their options and the price of our common stock; and - - Changes in general economic conditions and specific economic conditions in the computer and networking industries. 25 <PAGE> 26 Any of the above factors could have a material adverse impact on our operations and financial results. For example, from time to time, we have made acquisitions that result in purchased research and development expenses being charged in an individual quarter. These charges may occur in any particular quarter resulting in variability in our quarterly earnings. Additionally, the dollar amounts of large orders for our products have been increasing and therefore the operating results for a quarter could be materially adversely affected if a number of large orders are either not received or are delayed, for example, due to cancellations, delays, or deferrals by customers. SINCE OUR GROWTH RATE MAY SLOW, OPERATING RESULTS FOR A PARTICULAR QUARTER ARE DIFFICULT TO PREDICT We expect that in the future, our net sales may grow at a slower rate than experienced in previous periods and that on a quarter-to-quarter basis, our growth in net sales may be significantly lower than our historical quarterly growth rate. As a consequence, operating results for a particular quarter are extremely difficult to predict. Our ability to meet financial expectations could be hampered if the nonlinear sales pattern seen in past quarters reoccur in future periods. We generally have had one quarter of the fiscal year when backlog has been reduced. Although such reductions have not occurred consistently in recent years, they are difficult to predict and may occur in the future. In addition, in response to customer demand, we continue to attempt to reduce our 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 predictability in our quarter-to-quarter net sales and operating results going forward. On the other hand, for certain products, lead times are longer than our goal. If we cannot reduce manufacturing lead times for such products, our customers may cancel orders or not place further orders if shorter lead times are available from other manufacturers, thus creating additional variability. WE EXPECT GROSS MARGINS TO DECLINE OVER TIME We expect 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, we believe that gross margins may decline over time because the markets for lower-margin access products targeted toward small to medium sized customers have continued to grow at a faster rate than the markets for our higher-margin router and high- 26 <PAGE> 27 performance switching products targeted toward enterprise and service provider customers. We have recently introduced several new products, with additional new products scheduled to be released in the future. If product or related warranty costs associated with these new products are greater than we have experienced historically, gross margins may be adversely affected. Our gross margins may also be impacted by geographic mix, as well as the mix of configurations within each product group. We continue to expand into third-party or indirect distribution channels, which generally results in lower gross margins. In addition, increasing third-party and indirect distribution channels generally result in greater difficulty in forecasting the mix of our product, and to a certain degree, the timing of orders from our customers. Downward pressures on our gross margin may be further impacted by other factors, such as increased percentage of revenues from service provider markets which may have lower margins and/or an increase in product costs, which would adversely affect our future operating results. We also expect that our operating margins may decrease as we continue to hire additional personnel and experience increases in overall operating expenses to support our business. We plan our operating expense levels based primarily on forecasted revenue levels. Because these expenses are relatively fixed in the short term, a shortfall in revenue could lead to operating results being below expectations. WE COMPETE IN THE HIGHLY COMPETITIVE TELECOMMUNICATIONS EQUIPMENT MARKET We compete in the telecommunications equipment market, providing solutions for transporting data, voice, and video traffic across intranets, extranets, and the Internet. The market is characterized by rapid growth, converging technologies, and a conversion to new solutions that offer superior advantages. These market factors represent both an opportunity and a competitive threat to us. We compete with numerous vendors in each product category. We expect that the overall number of competitors providing niche product solutions will increase due to the market's attractive growth. On the other hand, we expect the number of vendors supplying end-to-end telecommunications solutions will decrease due to the rapid pace of acquisitions in the industry. Ultimately we believe only a few large suppliers of end-to-end telecommunication equipment solutions will become our primary competitors. Our competitors include, among others, 3Com, Alcatel, Cabletron, Ericsson, IBM, Juniper, Lucent, Nortel, and Siemens. Some of our 27 <PAGE> 28 competitors compete across many of our product lines, while others do not offer as wide a breadth of solutions. Several of our current and potential competitors have greater financial, marketing, and technical resources than us. The principal competitive factors in the markets in which we presently compete and may compete in the future are: - price; - performance; - the ability to provide end-to-end solutions and support; - conformance to standards; - the ability to provide value added features such as security, reliability, and investment protection; and - market presence. We also face competition from customers we license technology to and suppliers from whom we transfer technology. Networking's inherent nature requires interoperability. As such, we must cooperate and at the same time compete with these companies. Our inability to effectively manage these complicated relationships with customers and suppliers could have a material adverse effect on our business, operating results, and financial condition. WE EXPECT TO MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE NUMEROUS RISKS The networking business is highly competitive, and as such, our growth is dependent upon market growth, our ability to enhance our existing products and our ability to introduce new products on a timely basis. One of the ways we have addressed and will continue to address the need to develop new products is through acquisitions of other companies. Acquisitions involve numerous risks, including the following: - - difficulties in integration of the operations, technologies, and products of the acquired companies; - - the risk of diverting management's attention from normal daily operations of the business; 28 <PAGE> 29 - - potential difficulties in completing projects associated with purchased in-process research and development; - - risks of entering markets in which we have 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. Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. We must also maintain our ability to manage any such growth effectively. Failure to manage growth effectively and successfully integrate acquisitions we made could harm our business and operating results. WE ARE EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY As a global concern, we face 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 our financial results. Historically, our primary exposures have related to nondollar-denominated sales in Japan, Canada, and Australia and nondollar-denominated operating expenses in Europe, Latin America, and Asia where we sell primarily in U.S. dollars. Additionally, we have recently seen our exposures to emerging market currencies, such as the Brazilian real, Korean won, and Russian ruble, among others, increase because of our expanding presence in these markets and the extreme currency volatility. We will continue to monitor our exposure and may hedge against these or any other emerging market currencies as necessary. The increasing use of the euro as a common currency for members of the European Union could impact our foreign exchange exposure. We are currently hedging against fluctuations with the euro and will continue to evaluate the impact of the euro on our future foreign exchange exposure as well as on our internal systems. At the present time, we hedge only those currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies and do not hedge anticipated foreign currency cash flows. The hedging activity undertaken by us is intended to offset the impact of currency fluctuations on certain nonfunctional currency assets and liabilities. 29 <PAGE> 30 WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND TO CREDIT EXPOSURES IN WEAKENED MARKETS We are experiencing a greater proportion of our sales activity through our partners in two-tier distribution channels than we have historically. These customers are generally given privileges to return inventory, receive credits for changes in selling prices, and participate in cooperative marketing programs. We maintain appropriate accruals and allowances for such exposures. However, such partners tend to have access to more limited financial resources than other resellers and end-user customers and therefore represent potential sources of increased credit risk. We are experiencing increased demands for customer financing and leasing solutions, particularly from competitive local exchange carriers ("CLECs"). CLECs typically finance significant networking infrastructure deployments through alternative forms of financing, including leasing, through us. Although we have programs in place to monitor and mitigate the associated risk, there can be no assurance that such programs will alleviate all of our credit risk. We also continue to monitor increased credit exposures because of the weakened financial conditions in Asia, and other emerging market regions, and the impact that such conditions may have on the worldwide economy. Although we have not experienced significant losses due to customers failing to meet their obligations to date, such losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS AND IN INTEREST RATES We maintain 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 accumulated other comprehensive income, net of tax. Part of this portfolio includes minority equity investments in several publicly traded companies, the values of which are subject to market price volatility. We have also invested in numerous privately held companies, many of which can still be considered in the startup or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire initial investment in these companies. We also have certain real estate lease commitments with payments tied to short-term interest rates. At any 30 <PAGE> 31 time, a sharp rise in interest rates could have a material adverse impact on the fair value of our investment portfolio while increasing the costs associated with our lease commitments. Conversely, declines in interest rates could have a material impact on interest earnings for our investment portfolio. We do not currently hedge these interest rate exposures. Readers are referred to pages 28-29 of our fiscal 1999 Annual Report to Shareholders for a more detailed discussion of quantitative and qualitative disclosures about market risk. The following analysis presents the hypothetical change in fair values of public equity investments that are sensitive to changes in the stock market. These equity securities are held for purposes other than trading. The modeling technique used measures the hypothetical change in fair values arising from selected hypothetical changes in each stock's price. Stock price fluctuations of plus or minus 15%, plus or minus 35%, and plus or minus 50% were selected based on the probability of their occurrence. This table estimates the fair value of the publicly traded corporate equities at a twelve-month time horizon (in millions): <TABLE> <CAPTION> Fair value Valuation of security as of Valuation of security given X% decrease in each January 29, given X% increase in each stock's price 2000 stock's price ---------------------------- ----------- -------------------------- (50%) (35%) (15%) 15% 35% 50% ----- ----- ----- --- --- --- <S> <C> <C> <C> <C> <C> <C> <C> Corporate Equities $ 1,762 $ 2,290 $ 2,995 $ 3,523 $4,051 $4,756 $5,285 </TABLE> Our equity portfolio consists of securities with characteristics that most closely match the S&P Index or companies traded on the NASDAQ Exchange. The NASDAQ Composite Index has occurrence of a 15% movement in all of the last three years and a 35% and 50% movement in at least one of the last three years. WE ARE EXPOSED TO UNFAVORABLE ECONOMIC CONDITIONS WORLDWIDE As a result of recent unfavorable economic conditions, sales to certain countries in the Pacific Rim, Eastern Europe, and Latin America have declined as a percentage of our total revenue. If the economic conditions in these markets, or other markets that recently experienced unfavorable conditions worsen, or if these unfavorable conditions result in a wider regional or global economic slowdown, this decline may have a material adverse impact on our business, operations, and financial condition. 31 <PAGE> 32 WE CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC AND FASB Recent actions and comments from the SEC have indicated they are reviewing the current valuation methodology of purchased in-process research and development related to business combinations. The SEC is concerned that some companies are writing off more of the value of an acquisition than is appropriate. We believe we are in compliance with all of the rules and related guidance as they currently exist. However, there can be no assurance that the SEC will not seek to reduce the amount of purchased in-process research and development previously expensed by us. This would result in the restatement of our previously filed financial statements and could have a material adverse effect on our results of operations and financial condition for periods subsequent to the acquisitions. Additionally, the Financial Accounting Standards Board ("FASB") has announced that it plans to rescind the pooling of interests method of acquisition accounting. If this occurs, it could alter our acquisition strategy and potentially impair our ability to acquire companies. The FASB has also announced that it is reviewing the current accounting rules associated with stock options. The FASB is concerned that current practice, as outlined in Accounting Principles Board No. 25 ("APB25"), does not accurately reflect appropriate compensation expense under a variety of scenarios, including the assumption of option plans from acquired companies. The changes proposed could make it more difficult to attract and retain qualified personnel and could unfavorably impact operating results. OUR BUSINESS DEPENDS UPON OUR PROPRIETARY RIGHTS, AND THERE IS A RISK OF INFRINGEMENT Our success is dependent upon our proprietary technology. We generally rely upon patents, copyrights, trademarks, and trade secret laws to establish and maintain our proprietary rights in our technology and products. We have a program to file applications for and obtain patents in the United States and in selected foreign countries where a potential market for our products exists. We have been issued a number of patents; other patent applications are currently pending. There can be no assurance that any of these patents will not be challenged, invalidated, or circumvented, or that any rights granted thereunder will provide competitive advantages to us. In addition, there can be no assurance that patents will be issued from pending applications, or that claims allowed on any future patents will be sufficiently broad to protect our technology. In addition, the laws of some foreign countries may not permit the protection of our proprietary rights to the same <PAGE> 33 extent as do the laws of the United States. Although we believe the protection afforded by our patents, patent applications, copyrights, and trademarks has value, the rapidly changing technology in the networking industry makes our future success dependent primarily on the innovative skills, technological expertise, and management abilities of our employees rather than on patent, copyright, and trademark protection. Many of our products are designed to include software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe that based upon past experience and standard industry practice, such licenses generally could be obtained on commercially reasonable terms. Because of the existence of a large number of patents in the networking field and the rapid rate of issuance of new patents, it is not economically practical to determine in advance whether a product or any of its components infringe on patent rights of others. From time to time, we receive notices from or are sued by third parties regarding patent claims. If infringement is alleged, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all, or that we would prevail in any such challenge. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation could have a material adverse effect on our business, operating results and financial condition. WE FACE RISKS FROM THE UNCERTAINTIES OF REGULATION OF THE INTERNET There are currently few laws or regulations that apply directly to access or commerce on the Internet. We could be materially adversely affected by regulation in any country where we operate, on such technology as voice over the Internet, encryption technology and access charges for Internet service providers, as well as the continuing deregulation of the telecommunications industry. The adoption of such measures could decrease demand for our products, and at the same time increase our cost of selling our products. Changes in laws or regulations governing the Internet and Internet commerce could have a material adverse effect on our business, operating results and financial condition. <PAGE> 34 THE ENTRANCE INTO NEW OR DEVELOPING MARKETS EXPOSES OUR BUSINESS AND OPERATIONS TO RISKS As we focus on new market opportunities, such as transporting data, voice, and video traffic across the same network, we will increasingly compete with large telecommunications equipment suppliers such as Alcatel, Ericsson, Lucent, Nortel, and Siemens, among others, and several well-funded start-up companies. Several of our current and potential competitors have greater financial, marketing, and technical resources than we do. Additionally, as customers in these markets complete infrastructure deployments, they may require greater levels of service, support, and financing than we have experienced in the past. We have not entered into a material amount of labor intensive service contracts which require significant production or customization. However, we expect that demand for these types of service contracts will increase in the future. There can be no assurance that we can provide products, service, support, and financing to effectively compete for these market opportunities. Further, provision of greater levels of services by us may result in less favorable timing of revenue recognition than we have historically experienced. WE ARE DEPENDENT UPON THE ABILITY OF SUPPLIERS TO DELIVER PARTS ON TIME Our growth and ability to meet customer demands also depend in part on our ability to obtain timely deliveries of parts from our suppliers. We have experienced component shortages in the past that have adversely affected our operations. Although we work closely with our suppliers to avoid these types of shortages, there can be no assurance that we will not encounter these problems in the future. THE LOCATION OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKES AND FLOODS Our corporate headquarters, including most of our research and development operations and our manufacturing facilities, are located in the Silicon Valley area of Northern California, a region known for seismic activity. Additionally, one of our manufacturing facilities is located near a river that has experienced flooding in the past. A significant natural disaster, such as an earthquake or <PAGE> 35 a flood, could have a material adverse impact on our business, operating results and financial condition. WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ARE SUBJECT TO RAPID CHANGES IN TECHNOLOGY AND THE MARKET Our operating results will depend to a significant extent on our ability to reduce the costs to produce existing products. In particular, we broadened our product line by introducing network access products. Sales of these products, which are generally lower priced and carry lower margins than our core products, have increased more rapidly than sales of our core products. The success of these and other new products is dependent on several factors, including proper new product definition, product cost, timely completion and introduction of new products, differentiation of new products from those of our competitors, and market acceptance of these products. The markets for our 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 we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, and achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive. WE ARE SUBJECT TO RISKS ASSOCIATED WITH STRATEGIC ALLIANCES We have increased the number of our strategic alliances with large and complex organizations. These arrangements are generally limited to specific projects, the goal of which is generally to facilitate product compatibility and adoption of industry standards. If successful, these relationships will be mutually beneficial and result in industry growth. However, these alliances carry an element of risk because, in most cases, we must compete in some business areas with a company with which we have strategic alliances and, at the same time, cooperate with such company in other business areas. Also, if these companies fail to perform, or if these relationships fail to materialize as expected, we could suffer delays in product development or other operational difficulties. THE INDUSTRY IN WHICH WE COMPETE IS SUBJECT TO CONSOLIDATION There has been a trend toward industry consolidation for several years. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market <PAGE> 36 positions in an evolving industry. We believe that industry consolidation may provide stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in operating results as we compete to be a single vendor solution and could have a material adverse effect on our business, operating results and financial condition. SALES IN THE SERVICE PROVIDER MARKET ARE SUBJECT TO VARIATION Although sales to the service provider market have grown historically, this market is characterized by large, and often sporadic purchases. Sales activity in this industry depends upon the stage of completion of expanding network infrastructures, the availability of funding, and the extent that service providers 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 our business, operating results and financial condition. WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE MANUFACTURE OF PARTS AND COMPONENTS OF OUR PRODUCTS Although we generally use standard parts and components for our products, certain components are presently available only from a single source or limited sources. A reduction or interruption in supply or a significant increase in the price of one or more components would adversely affect our business, operating results and financial condition and could materially damage customer relationships. WE FACE RISKS ASSOCIATED WITH CHANGES IN TELECOMMUNICATIONS REGULATION AND TARIFFS Changes in domestic and international telecommunications requirements could affect the sales of our products. In particular, we believe it is possible that there may be significant changes in domestic telecommunications regulation in the near future that could slow the expansion of the service providers' network infrastructures and materially adversely affect our business, operating results and financial condition. Future changes in tariffs by regulatory agencies or application of tariff requirements to currently untariffed services could affect the sales of our products for certain classes of customers. Additionally, in the U.S., our products must comply with various Federal Communications Commission requirements and regulations. In countries outside of the U.S., our products must meet various requirements of local telecommunications authorities. Changes in <PAGE> 37 tariffs, or failure by us to obtain timely approval of products could have a material adverse effect on our business, operating results, and financial condition. OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS We conduct business globally. Accordingly, our future results could be materially adversely affected by a variety of uncontrollable and changing factors including, among others, 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. In the first six months of fiscal 2000, the sales growth rate in Japan continued to be slower than that in other areas. Any or all of these factors could have a material adverse impact on our future international business in these or other countries. OUR BUSINESS SUBSTANTIALLY DEPENDS UPON THE CONTINUED GROWTH OF THE INTERNET AND INTERNET-BASED SYSTEMS We believe that there will be performance problems with Internet communications in the future which could receive a high degree of publicity and visibility. As we are a large supplier of equipment for the Internet infrastructure, customers' perceptions of our products and the marketplace's perception of us as a supplier of networking products may be materially adversely affected, regardless of whether or not these problems are due to the performance of our products. Such an event could also result in a material adverse effect on the market price of our common stock and could materially adversely affect our business, operating results and financial condition. OUR STOCK PRICE MAY BE VOLATILE Our common stock has experienced substantial price volatility, particularly as a result of variations between our actual or anticipated financial results, the published expectations of analysts, and as a result of announcements by our competitors and us. 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 factors, as well as general economic and political conditions, may materially adversely affect the market price of our common stock in the future. <PAGE> 38 OTHER PricewaterhouseCoopers LLP ("PWC"), our independent accountants, has notified us that PWC is engaged in discussions with the Securities and Exchange Commission following an internal review by PWC, pursuant to an administrative settlement with the SEC, of PWC's compliance with auditor independence guidelines. PWC has advised us that we are one of the companies affected by such discussions. We are not involved in the discussions between the SEC and PWC and cannot predict the result of those discussions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this item is provided under the caption "We Are Exposed To Fluctuations In The Market Values Of Our Portfolio Investments And In Interest Rates" under Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations. <PAGE> 39 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) The Board of Directors approved a two-for-one stock split of the Company's common stock to holders of record on February 22, 2000 to be distributed on March 22, 2000. The Company's Restated Articles of Incorporation will be amended to reflect the stock split. (c) During the quarter, the Company issued an aggregate of approximately 6.6 million shares of its common stock in exchange for the outstanding capital stock of Calista Inc, Tasmania Network Systems, Inc., V-Bits, Inc., WebLine Communications Corporation, and Worldwide Data Systems, Inc. The shares were issued pursuant to an exemption by reason of Section 4(2) of the Securities Act of 1933. These sales were made without general solicitation or advertising. Each purchaser was an accredited investor or a sophisticated investor (either alone or through its representative) with access to all relevant information necessary. The Company has filed Registration Statements on Form S-3 covering the resale of such securities. During the quarter, the Company issued an aggregate of approximately 98.1 million shares of its common stock in exchange for the outstanding capital stock of Cerent Corporation. The shares were issued pursuant to an exemption by reason of Section 3(a)(10) of the Securities Act of 1933. The terms and conditions of such issuances were approved after a hearing upon the fairness of such terms and conditions by a government authority expressly authorized by the law to grant such approval. <PAGE> 40 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed four reports on Form 8-K during the quarter ended January 29, 2000. Information regarding the items reported on is as follows: <TABLE> <CAPTION> Date Item Reported On - ---- ---------------- <S> <C> November 4, 1999 The Company announced the completion of the acquisitions of Cerent Corporation and WebLine Communications Corporation. November 17, 1999 The Company announced the acquisition of Aironet Wireless Communications, Inc. December 15, 1999 The Company reported that the supplementary consolidated financial information reflected the acquisitions of Fibex Systems, StratumOne Communications, Inc., TransMedia Communications, Inc., Cerent Corporation and WebLine Communications Corporation as if the acquired entities were wholly owned subsidiaries of the Company since inception. December 22, 1999 The Company announced the acquisition of the optical systems business of Pirelli S.p.A of Milan, Italy. </TABLE> <PAGE> 41 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 13, 2000 By /s/ Larry R. Carter ------------------------------------ Larry R. Carter, Senior Vice President, Finance and Administration, Chief Financial Officer, and Secretary <PAGE> 42 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT DESCRIPTION - ------- ----------- <S> <C> EX-27 Financial Data Schedule </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>EX-27 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the consolidated balance sheet and consolidated statement of operations included in the Company's Form 10-Q for the period ended January 29, 2000 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> JUL-29-2000 <PERIOD-START> OCT-31-1999 <PERIOD-END> JAN-29-2000 <CASH> 3,719 <SECURITIES> 11,175 <RECEIVABLES> 1,740 <ALLOWANCES> 29 <INVENTORY> 695 <CURRENT-ASSETS> 7,722 <PP&E> 2,251 <DEPRECIATION> 1,247 <TOTAL-ASSETS> 21,391 <CURRENT-LIABILITIES> 3,778 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 7,691 <OTHER-SE> 8,832 <TOTAL-LIABILITY-AND-EQUITY> 21,391 <SALES> 8,264 <TOTAL-REVENUES> 8,264 <CGS> 2,923 <TOTAL-COSTS> 2,923 <OTHER-EXPENSES> 3,367 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 1,974 <INCOME-TAX> 729 <INCOME-CONTINUING> 1,245 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 1,245 <EPS-BASIC> 0.37<F1> <EPS-DILUTED> 0.34 <FN> <F1>For purposes of this statement, primary means basic. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

CTX

https://www.sec.gov/Archives/edgar/data/818764/0000950134-00-001102.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, TE0ZcByRhfp61q9kOWDmljsSC6R1QrT1iRdF8TnSWVxz33NVJRbIxs7j2cuFKhp+ 2L6JEAwaG5xssL5AjR23Dg== <SEC-DOCUMENT>0000950134-00-001102.txt : 20000215 <SEC-HEADER>0000950134-00-001102.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950134-00-001102 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: SEC FILE NUMBER: 001-06776 FILM NUMBER: 537312 BUSINESS ADDRESS: STREET 1: P O BOX 199000 STREET 2: 2728 N HARWOOD CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2149815000 MAIL ADDRESS: STREET 1: PO BOX 199000 STREET 2: 2728 N HARWOOD CITY: DALLAS STATE: TX ZIP: 75201 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: SEC FILE NUMBER: 001-09624 FILM NUMBER: 537313 BUSINESS ADDRESS: STREET 1: PO BOX 199000 STREET 2: 3100 MCKINNON STE 370 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2149816548 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: SEC FILE NUMBER: 001-09625 FILM NUMBER: 537314 BUSINESS ADDRESS: STREET 1: PO BOX 19000 STREET 2: 3100 MCKINNON STE 370 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2149816548 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 QUARTER ENDING DECEMBER 31, 1999 <TEXT> <PAGE> 1 UNITED STATES 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, 1999 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 3100 McKinnon, Suite 370 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. Indicate the number of shares of each of the registrants' classes of common stock (or other similar equity securities) outstanding as of the close of business on January 31, 2000: <TABLE> <S> <C> <C> Centex Corporation Common Stock 59,385,282 shares 3333 Holding Corporation Common Stock 1,000 shares Centex Development Company, L.P. Class A Units of Limited Partnership Interest 32,260 units Centex Development Company, L.P. Class C Units of Limited Partnership Interest 35,082 units </TABLE> <PAGE> 2 CENTEX CORPORATION AND SUBSIDIARIES 3333 HOLDING CORPORATION AND SUBSIDIARY CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS DECEMBER 31, 1999 CENTEX CORPORATION AND SUBSIDIARIES <TABLE> <CAPTION> PAGE <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements 1 Condensed Consolidated Statement of Earnings for the Three Months Ended December 31, 1999 2 Condensed Consolidated Statement of Earnings for the Nine Months Ended December 31, 1999 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statement of Cash Flows for the Nine Months Ended December 31, 1999 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 27 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 28 SIGNATURES 29 </TABLE> i <PAGE> 3 3333 HOLDING CORPORATION AND SUBSIDIARY CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES <TABLE> <CAPTION> PAGE <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. Condensed Combining Financial Statements 30 Condensed Combining Statement of Operations for the Three Months Ended December 31, 1999 31 Condensed Combining Statement of Operations for the Nine Months Ended December 31, 1999 32 Condensed Combining Balance Sheets 33 Condensed Combining Statements of Cash Flows for the Nine Months Ended December 31, 1999 34 Notes to Condensed Combining Financial Statements 35 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 41 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 46 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 47 SIGNATURES 48, 49 </TABLE> ii <PAGE> 4 CENTEX CORPORATION AND SUBSIDIARIES 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. References herein to "Centex" or the "Company" include references to subsidiaries of Centex Corporation. 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, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> REVENUES Home Building Conventional Homes $ 863,177 $ 671,404 Manufactured Homes 47,160 39,819 Investment Real Estate 15,908 8,566 Financial Services 106,568 116,234 Construction Products 108,370 84,863 Contracting and Construction Services 287,978 335,200 ------------ ------------ 1,429,161 1,256,086 ------------ ------------ COSTS AND EXPENSES Home Building Conventional Homes 789,847 613,305 Manufactured Homes 44,484 36,345 Investment Real Estate 6,991 196 Financial Services 97,345 92,085 Construction Products 63,038 53,314 Contracting and Construction Services 281,178 331,511 Other, net 628 2,844 Corporate General and Administrative 8,483 7,084 Interest Expense 18,467 10,929 Minority Interest 16,971 13,839 ------------ ------------ 1,327,432 1,161,452 ------------ ------------ EARNINGS BEFORE INCOME TAXES 101,729 94,634 Income Taxes 38,553 35,591 ------------ ------------ NET EARNINGS $ 63,176 $ 59,043 ============ ============ EARNINGS PER SHARE Basic $ 1.07 $ 0.99 ============ ============ Diluted $ 1.04 $ 0.96 ============ ============ AVERAGE SHARES OUTSTANDING Basic 59,230,006 59,410,876 Common Share Equivalents Options 1,093,566 1,851,083 Convertible Debenture 400,000 400,000 ------------ ------------ Diluted 60,723,572 61,661,959 ============ ============ CASH DIVIDENDS PER SHARE $ 0.04 $ 0.04 ============ ============ </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, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> REVENUES Home Building Conventional Homes $ 2,461,533 $ 1,881,586 Manufactured Homes 145,978 130,748 Investment Real Estate 27,357 17,479 Financial Services 343,932 324,133 Construction Products 323,391 256,485 Contracting and Construction Services 928,646 999,343 ------------ ------------ 4,230,837 3,609,774 ------------ ------------ COSTS AND EXPENSES Home Building Conventional Homes 2,258,855 1,730,613 Manufactured Homes 138,153 120,522 Investment Real Estate 3,270 (4,752) Financial Services 301,536 252,508 Construction Products 190,822 163,007 Contracting and Construction Services 911,176 987,939 Other, net 3,529 7,605 Corporate General and Administrative 23,821 19,195 Interest Expense 45,828 29,164 Minority Interest 51,677 42,251 ------------ ------------ 3,928,667 3,348,052 ------------ ------------ EARNINGS BEFORE INCOME TAXES 302,170 261,722 Income Taxes 115,063 97,955 ------------ ------------ NET EARNINGS $ 187,107 $ 163,767 ============ ============ EARNINGS PER SHARE Basic $ 3.15 $ 2.75 ============ ============ Diluted $ 3.06 $ 2.65 ============ ============ AVERAGE SHARES OUTSTANDING Basic 59,370,180 59,496,866 Common Share Equivalents Options 1,434,485 1,991,600 Convertible Debenture 400,000 400,000 ------------ ------------ Diluted 61,204,665 61,888,466 ============ ============ CASH DIVIDENDS PER SHARE $ 0.12 $ 0.12 ============ ============ </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 -------------------------------- December 31, March 31, 1999* 1999** ------------ ------------ <S> <C> <C> ASSETS Cash and Cash Equivalents $ 161,713 $ 111,268 Receivables - Residential Mortgage Loans 734,885 1,395,616 Other 391,937 459,778 Inventories 2,096,026 1,533,819 Investments - Centex Development Company, L.P. 72,606 63,207 Joint Ventures and Other 66,674 48,594 Unconsolidated Subsidiaries -- -- Property and Equipment, net 338,025 313,655 Other Assets - Deferred Income Taxes 28,123 49,107 Goodwill, net 245,719 222,162 Mortgage Securitization Residual Interest 141,247 80,152 Deferred Charges and Other 124,201 57,388 ------------ ------------ $ 4,401,156 $ 4,334,746 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Liabilities $ 1,044,091 $ 1,018,650 Short-term Debt 1,236,462 1,626,600 Long-term Debt 570,179 284,299 Payables to Affiliates -- -- Minority Stockholders' Interest 133,567 140,721 Negative Goodwill 54,837 66,837 Stockholders' Equity - Preferred Stock, Authorized 5,000,000 Shares, None Issued -- -- Common Stock $.25 Par Value; Authorized 100,000,000 Shares; Issued and Outstanding 59,138,968 and 59,388,350 respectively 14,785 14,847 Capital in Excess of Par Value 5,340 20,822 Retained Earnings 1,341,943 1,161,970 Accumulated Other Comprehensive Loss (48) -- ------------ ------------ Total Stockholders' Equity 1,362,020 1,197,639 ------------ ------------ $ 4,401,156 $ 4,334,746 ============ ============ </TABLE> See notes to condensed consolidated financial statements. * Unaudited ** Condensed from audited financial statements. -4- <PAGE> 8 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) <TABLE> <CAPTION> - ---------------------------------------------------------------------------- Centex Corporation Financial Services - ----------------------------------- ---------------------------------- December 31, March 31, December 31, March 31, 1999* 1999** 1999* 1999** - -------------- -------------- -------------- -------------- <S> <C> <C> <C> $ 128,365 $ 72,279 $ 33,348 $ 38,989 -- -- 734,885 1,395,616 359,392 404,043 32,545 55,735 2,096,026 1,533,819 -- -- 72,606 63,207 -- -- 66,674 48,594 -- -- 241,451 221,744 -- -- 297,638 285,891 40,387 27,764 20,010 40,541 8,113 8,566 228,888 206,595 16,831 15,567 -- -- 141,247 80,152 64,644 40,962 59,557 16,426 - -------------- -------------- -------------- -------------- $ 3,575,694 $ 2,917,675 $ 1,066,913 $ 1,638,815 ============== ============== ============== ============== $ 974,347 $ 926,377 $ 69,744 $ 92,273 483,322 303,656 753,140 1,322,944 570,179 284,299 -- -- -- -- 73,781 102,652 130,989 138,867 2,578 1,854 54,837 66,837 -- -- -- -- -- -- 14,785 14,847 1 1 5,340 20,822 108,467 75,944 1,341,943 1,161,970 59,202 43,147 (48) -- -- -- - -------------- -------------- -------------- -------------- 1,362,020 1,197,639 167,670 119,092 - -------------- -------------- -------------- -------------- $ 3,575,694 $ 2,917,675 $ 1,066,913 $ 1,638,815 ============== ============== ============== ============== </TABLE> In the supplemental data presented above, "Centex Corporation" represents the combining of all subsidiaries other than those included in Financial Services. Transactions between Centex Corporation and Financial Services have been eliminated from the Centex Corporation and Subsidiaries balance sheets. -5- <PAGE> 9 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (unaudited) <TABLE> <CAPTION> ------------------------- For the Nine Months Ended December 31, ------------------------- 1999 1998 ------------ ----------- <S> <C> <C> CASH FLOWS - OPERATING ACTIVITIES Net Earnings $ 187,107 $ 163,767 Adjustments - Depreciation and Amortization 34,838 27,180 Deferred Income Taxes 10,941 42,814 Equity in (Earnings) Loss of Centex Development Company, L.P. and Joint Ventures (648) 396 Minority Interest, net of taxes 33,233 27,674 Decrease (Increase) in Receivables 68,912 (31,774) Decrease (Increase) in Residential Mortgage Loans 660,731 (287,721) Increase in Inventories (485,419) (494,997) Increase in Payables and Accruals 15,268 132,358 Increase in Other Assets (137,737) (152,488) Other, net (40,387) (32,471) ---------- --------- 346,839 (605,262) ---------- --------- CASH FLOWS - INVESTING ACTIVITIES Increase in Advances to Centex Development Company, L.P. and Joint Ventures (23,566) (44,116) Acquisition of Home Building Operations (74,119) -- Other Acquisitions (9,349) -- Increase in Property and Equipment, net (55,220) (34,836) ---------- --------- (162,254) (78,952) ---------- --------- CASH FLOWS - FINANCING ACTIVITIES (Decrease) Increase in Debt - Secured by Residential Mortgage Loans (569,804) 358,321 Other 458,390 357,889 Retirement of Common Stock (29,032) (19,049) Proceeds from Stock Option Exercises 13,488 7,719 Dividends Paid (7,134) (7,143) ---------- --------- (134,092) 697,737 ---------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (48) -- ---------- --------- NET INCREASE IN CASH 50,445 13,523 CASH AT BEGINNING OF PERIOD 111,268 98,316 ---------- --------- CASH AT END OF PERIOD $ 161,713 $ 111,839 ========== ========= </TABLE> See notes to condensed consolidated financial statements. -6- <PAGE> 10 CENTEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTES DECEMBER 31, 1999 (Dollars in thousands) (unaudited) (A) Comprehensive income is summarized for the three and nine months ended December 31, 1999 below: <TABLE> <CAPTION> -------------------------- ------------------------- For the Three Months Ended For the Nine Months Ended December 31, 1999 December 31, 1999 -------------------------- ------------------------- <S> <C> <C> Net Earnings $ 63,176 $ 187,107 Other Comprehensive Loss: Foreign Currency Translation Adjustments (16) (48) -------------------- -------------------- Comprehensive Income $ 63,160 $ 187,059 ==================== ==================== </TABLE> Other Comprehensive Income results from Centex's investment in Centex Development Company, L.P. and subsidiaries. For additional information on Centex Development Company, L.P. and subsidiaries, see their separate financial statements and related footnotes included elsewhere in this Report. (B) Changes in stockholders' equity are summarized below: <TABLE> <CAPTION> Accumulated Capital in Other Preferred Common Excess of Par Retained Comprehensive Stock Stock Value Earnings Loss Total ------------- -------------- ------------- ------------- --------------- -------------- <S> <C> <C> <C> <C> <C> <C> Balance, March 31, 1999 $ -- $ 14,847 $ 20,822 $ 1,161,970 $ -- $ 1,197,639 Net Earnings -- -- -- 187,107 -- 187,107 Exercise of Stock Options -- 204 13,284 -- -- 13,488 Retirement of 1,063,300 Shares -- (266) (28,766) -- -- (29,032) Cash Dividends -- -- -- (7,134) -- (7,134) Foreign Currency Translation Adjustments -- -- -- -- (48) (48) ------------- -------------- ------------- ------------- --------------- -------------- BALANCE, DECEMBER 31, 1999 $ -- $ 14,785 $ 5,340 $ 1,341,943 $ (48) $ 1,362,020 ============= ============== ============= ============= =============== ============== </TABLE> (C) In March 1987, certain of Centex's subsidiaries contributed to Centex Development Company, L.P. (the "Partnership"), a newly formed master limited partnership, certain properties at their historical cost basis. The Partnership was formed to enable stockholders to participate in long-term real estate development projects, the dynamics of which are inconsistent with Centex's traditional financial objectives. The Partnership is controlled by its general partner, 3333 Development Corporation ("Development"), which is in turn wholly-owned by 3333 Holding Corporation ("Holding"). Holding is a separate public company whose stock trades in tandem with Centex's stock. The common stock of Holding (the "Securities") -7- <PAGE> 11 was distributed in 1987 (with warrants to purchase approximately 80% of the Class B limited partnership units in the Partnership) as a dividend to the stockholders of Centex. The Securities, held by a nominee on behalf of the stockholders, will trade in tandem with the common stock of Centex until such time as they are detached. The Securities may be detached at any time by Centex's Board of Directors but the warrants to purchase Class B Units automatically become detached in November 2007. The four-person Board of Directors of Holding is elected by the stockholders of Centex. The majority of the Board members are independent outside directors, none of whom are directors of Centex. Accordingly, the general partner of the Partnership is controlled by the stockholders of Centex. The general partner and independent board of Holding manage the Partnership's conduct of its activities including the sales, development, maintenance and zoning of properties. The general partner may sell or acquire properties, including the contributed property, and enter into other business transactions without the consent of the limited partners. In addition, the limited partners cannot remove the general partner. The Company accounts for its investment in the Partnership on the equity method of accounting because the Company's interest in the cash and earnings of the Partnership is limited to defined amounts, and the Company does not control the Partnership. During fiscal 1998, the agreement governing the Partnership was amended to allow for the issuance of new Class C Limited Partnership Units ("Class C Units"). During fiscal 2000, 8,095 Class C Units were issued in exchange for assets with a fair market value of $8.1 million. Gains, if any, related to the assets acquired by the Partnership from Centex are deferred until the assets are sold by the Partnership. The partnership agreement provides that Centex, as the sole Class A and Class C limited partner, is entitled to a cumulative preferred return of 9% per annum on the average outstanding balance of its Unrecovered Capital, which is defined as its capital contributions, adjusted for cash distributions representing return of the capital. Unrecovered Capital as of December 31, 1999 was approximately $68 million and the unpaid preferred return as of that date was $13.3 million. No preferred return payments were made during the three or nine months ended December 31, 1999. Supplementary condensed combined financial statements for the Company, 3333 Holding Corporation and subsidiary and Centex Development Company, L.P. and subsidiaries are set forth below. For additional information on 3333 Holding Corporation and its subsidiary and Centex Development Company, L.P. and subsidiaries, see their separate financial statements and related footnotes included elsewhere in this Report. -8- <PAGE> 12 SUPPLEMENTARY CONDENSED COMBINED BALANCE SHEETS OF CENTEX CORPORATION AND SUBSIDIARIES, 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES <TABLE> <CAPTION> ------------ ------------ DECEMBER 31, March 31, 1999 1999* ------------ ------------ <S> <C> <C> ASSETS Cash and Cash Equivalents $ 186,010 $ 111,632 Receivables 1,139,829 1,860,090 Inventories 2,469,072 1,639,664 Investments in Joint Ventures and Other 68,316 49,266 Property and Equipment, net 341,635 313,886 Other Assets 579,655 410,321 ------------ ------------ $ 4,784,517 $ 4,384,859 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable and Accrued Liabilities $ 1,102,586 $ 1,026,867 Short-term Debt 1,561,328 1,668,496 Long-term Debt 570,179 284,299 Minority Stockholders' Interest 133,567 140,721 Negative Goodwill 54,837 66,837 Stockholders' Equity 1,362,020 1,197,639 ------------ ------------ $ 4,784,517 $ 4,384,859 ============ ============ </TABLE> * Condensed from audited financial statements. SUPPLEMENTARY CONDENSED COMBINED STATEMENTS OF EARNINGS <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 4,479,147 $ 3,626,072 Costs and Expenses 4,176,376 3,365,134 ------------ ------------ Earnings Before Income Taxes 302,771 260,938 Income Taxes 115,664 97,955 ------------ ------------ NET EARNINGS 187,107 162,983 Other Comprehensive Loss (48) -- ------------ ------------ COMPREHENSIVE INCOME $ 187,059 $ 162,983 ============ ============ </TABLE> (D) In order to ensure the future availability of land for the Company's homebuilding operations, the Company has made cumulative deposits totaling approximately $52 million for options to purchase undeveloped land and developed lots having a total purchase price of approximately $1.3 billion. These options and commitments expire at various dates through the year 2005. -9- <PAGE> 13 (E) Interest cost relating to the Financial Services operations is included in its costs and expenses. Interest cost related to non-financial services operations is included in interest expense. <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Total Interest Cost Incurred $ 34,272 $ 30,852 Less - Financial Services Interest Expense (15,805) (19,923) ------------ ------------ Interest Expense, net $ 18,467 $ 10,929 ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Total Interest Cost Incurred $ 97,657 $ 89,447 Less - Financial Services Interest Expense (51,829) (60,283) ------------ ------------ Interest Expense, net $ 45,828 $ 29,164 ============ ============ </TABLE> (F) In April 1994, Centex Construction Products, Inc. ("Construction Products") completed an initial public offering of its stock which began trading on the New York Stock Exchange under the symbol "CXP". Centex's ownership interest in Construction Products increased to 63.2% as of December 31, 1999 compared to 59.2% as of December 31, 1998 as a consequence of a share repurchase program authorized by Construction Products' Board of Directors. (G) In fiscal 1996, the Company acquired an equity interest in Vista Properties, Inc. ("Vista"), which owned a real estate portfolio of properties located in seven states in which the Company has significant operations. The Investment Real Estate portfolio was reduced to a nominal "book basis" after recording certain deferred tax benefits related to this acquisition. Accordingly, as these properties are developed or sold the net sales proceeds are reflected as operating margin. Negative goodwill related to the Vista acquisition is being amortized to earnings over the estimated period over which the related assets will be developed, sold or realized. All investment property operations are being reported through the "Investment Real Estate" business segment. (H) The Company operates in five principal business segments: Home Building, Investment Real Estate, Financial Services, Construction Products, and Contracting and Construction Services. These segments operate primarily in the United States and their markets are nationwide. Revenues from any one customer are not significant to the Company. Intersegment revenues and investments in joint ventures are not material and are not shown in the following tables. The investment in Centex Development Company, L.P. (approximately $73 million) is included in the Investment Real Estate segment. -10- <PAGE> 14 HOME BUILDING CONVENTIONAL HOMES Conventional Homes operations involve the purchase and development of land or lots as well as the construction and sale of single-family homes. The following tables set forth financial information relating to the Conventional Homes operations (dollars in millions): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 863.2 $ 671.4 Cost of Sales (666.6) (518.9) Selling, General & Administrative Expenses (123.3) (94.4) ------------ ------------ Operating Earnings $ 73.3 $ 58.1 ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 2,461.5 $ 1,881.6 Cost of Sales (1,898.9) (1,464.3) Selling, General & Administrative Expenses (359.9) (266.3) ------------ ------------ Operating Earnings $ 202.7 $ 151.0 ============ ============ </TABLE> MANUFACTURED HOMES Manufactured Homes operations involve the manufacture of residential and park model homes and the sale of these homes through a network of Company-owned and independent dealers. The Company entered the Manufactured Homes industry in March 1997, when a subsidiary acquired approximately 80% of Cavco Industries. Centex purchased the remaining minority interest in Cavco Industries during the third quarter of fiscal 2000. The following tables set forth financial information relating to the Manufactured Homes operations (dollars in millions): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 47.1 $ 39.8 Cost of Sales (36.5) (29.8) Selling, General & Administrative Expenses (7.1) (5.7) Goodwill Amortization (0.8) (0.8) ------------ ------------ Operating Earnings 2.7 3.5 Minority Interest -- (0.7) ------------ ------------ Net Operating Earnings to Centex $ 2.7 $ 2.8 ============ ============ </TABLE> -11- <PAGE> 15 <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 146.0 $ 130.8 Cost of Sales (114.2) (101.3) Selling, General & Administrative Expenses (21.4) (16.9) Goodwill Amortization (2.6) (2.4) ------------ ------------ Operating Earnings 7.8 10.2 Minority Interest (1.0) (2.0) ------------ ------------ Net Operating Earnings to Centex $ 6.8 $ 8.2 ============ ============ </TABLE> INVESTMENT REAL ESTATE Investment Real Estate operations involve the development of land primarily for multi-family, industrial, office, retail and mixed-use projects. The following tables set forth financial information relating to the Investment Real Estate operations (dollars in millions): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 15.9 $ 8.6 Cost of Sales (6.8) (2.7) Selling, General & Administrative Expenses (4.2) (1.5) Negative Goodwill Amortization 4.0 4.0 ------------ ------------ Operating Earnings $ 8.9 $ 8.4 ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 27.4 $ 17.5 Cost of Sales (8.0) (2.9) Selling, General & Administrative Expenses (7.3) (4.4) Negative Goodwill Amortization 12.0 12.0 ------------ ------------ Operating Earnings $ 24.1 $ 22.2 ============ ============ </TABLE> Property sales related to Investment Real Estate's nominally valued assets resulted in operating margins of $7.9 million and $16.8 million for the three and nine months ended December 31, 1999 and $5.6 million and $13.0 million for the same three and nine month periods last year. As of December 31, 1999, the Investment Real Estate Group had approximately $60 million of nominally valued assets. FINANCIAL SERVICES Financial Services operations involve the financing of conventional and manufactured homes, home equity and sub-prime lending and the sale of title and other insurance coverages. These activities include -12- <PAGE> 16 mortgage origination and other related services for homes sold by Centex subsidiaries and by others. The following tables set forth financial information relating to the Financial Services operations (dollars in millions): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues, including interest income of $19.2 million in fiscal 2000 and $25.0 million in fiscal 1999 $ 106.6 $ 116.2 Selling, General & Administrative Expenses (81.6) (72.2) Interest Expense (15.8) (19.9) ------------ ------------ Operating Earnings $ 9.2 $ 24.1 ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues, including interest income of $70.2 million in fiscal 2000 and $75.0 million in fiscal 1999 $ 343.9 $ 324.1 Selling, General & Administrative Expenses (249.7) (192.2) Interest Expense (51.8) (60.3) ------------ ------------ Operating Earnings $ 42.4 $ 71.6 ============ ============ </TABLE> CONSTRUCTION PRODUCTS Construction Products operations involve the manufacture and sale of cement, gypsum wallboard, and concrete and aggregates. The following tables set forth financial information relating to the Construction Products operations (dollars in millions): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 108.4 $ 84.9 Interest Income 1.1 0.6 Cost of Sales and Plant Operating Expenses (62.5) (52.3) Selling, General & Administrative Expenses (1.2) (1.2) Goodwill Amortization (0.4) (0.5) ------------ ------------ Operating Earnings 45.4 31.5 Minority Interest (17.0) (13.2) ------------ ------------ Net Operating Earnings to Centex $ 28.4 $ 18.3 ============ ============ </TABLE> -13- <PAGE> 17 <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 323.4 $ 256.5 Interest Income 2.4 2.2 Cost of Sales and Plant Operating Expenses (188.6) (161.7) Selling, General & Administrative Expenses (3.5) (3.0) Goodwill Amortization (1.1) (0.5) ------------ ------------ Operating Earnings 132.6 93.5 Minority Interest (50.7) (40.3) ------------ ------------ Net Operating Earnings to Centex $ 81.9 $ 53.2 ============ ============ </TABLE> CONTRACTING AND CONSTRUCTION SERVICES Contracting and Construction Services operations involve the construction of buildings for both private and government interests including (among others) office, commercial and industrial buildings, hospitals, hotels, museums, libraries, airport facilities and educational institutions. The following tables set forth financial information relating to the Contracting and Construction Services operations. As this segment generates significant positive cash flow, intercompany interest income (credited at the prime rate) is reflected in this segment data, however these amounts are eliminated in consolidation (dollars in millions): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 288.0 $ 335.2 Construction Contract Costs (269.6) (321.1) Selling, General & Administrative Expenses (11.6) (10.4) ------------ ------------ Operating Income, as reported 6.8 3.7 Intercompany Interest Income* 2.0 2.1 ------------ ------------ Total Economic Return $ 8.8 $ 5.8 ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 928.6 $ 999.3 Construction Contract Costs (875.5) (957.5) Selling, General & Administrative Expenses (35.6) (30.4) ------------ ------------ Operating Income, as reported 17.5 11.4 Intercompany Interest Income* 6.3 4.9 ------------ ------------ Total Economic Return $ 23.8 $ 16.3 ============ ============ </TABLE> *The "net assets" position of the Contracting and Construction Services segment provides significant cash flow because payables and accruals consistently exceed identifiable assets. Intercompany interest income is computed on the group's cash flow in excess of its equity. -14- <PAGE> 18 CORPORATE AND OTHER, NET Corporate general and administrative expenses represent salaries and other costs not identifiable with a specific segment. Other, net includes new business initiatives and other businesses which are not mature enough to stand alone as separate business segments. Assets are primarily cash and cash equivalents, receivables, property and equipment and other assets not associated with a business segment. The following tables summarize financial information relating to the Corporate and Other, net segments (dollars in millions): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Operating Loss - Other, net $ (0.6) $ (2.8) ============ ============ Corporate General and Administrative Expenses $ (8.5) $ (7.1) ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Operating Loss - Other, net $ (3.5) $ (7.6) ============ ============ Corporate General and Administrative Expenses $ (23.8) $ (19.2) ============ ============ </TABLE> (I) The computation of diluted earnings per share excludes anti-dilutive options to purchase 4,477,000 common shares at an average price of $36.98, and 3,652,000 common shares at an average price of $37.34 for the three and nine months ended December 31, 1999, respectively. The anti-dilutive options have expiration dates ranging from September 2007 to October 2009. (J) Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998. This statement addressed the accounting for derivative instruments, including derivative instruments embedded in other contracts (collectively referred to as derivatives), and hedging activities as well as the disclosure of these activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. In June 1999, SFAS No. 137 was issued which delays the implementation of this statement for the Company until April 2001. (K) Certain prior period balances have been reclassified to be consistent with the December 31, 1999 presentation. -15- <PAGE> 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Centex's consolidated revenues for the three months ended December 31, 1999 were $1.43 billion, a 14% increase over $1.26 billion for the same period last year. Earnings before income taxes were $101.7 million, 7% higher than $94.6 million last year. Net earnings for the three months ended December 31, 1999 were $63.2 million, a 7% increase over net earnings of $59.0 million for the same period last year. For the nine months ended December 31, 1999, consolidated revenues totaled $4.23 billion, 17% higher than $3.61 billion for the same period last year. Earnings before income taxes were $302.2 million, 15% higher than $261.7 million for the same period last year. Net earnings were $187.1 million for the nine months ended December 31, 1999, a 14% increase over net earnings of $163.8 for the same period last year. HOME BUILDING CONVENTIONAL HOMES The following summarizes Conventional Homes' results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in millions, except per unit data): <TABLE> <CAPTION> ------------------------------------------------------------- For the Three Months Ended December 31, ------------------------------------------------------------- 1999 1998 --------------------------- --------------------------- <S> <C> <C> <C> <C> Conventional Homes Revenues $ 863.2 100.0% $ 671.4 100.0% Cost of Sales (666.6) (77.2)% (518.9) (77.3)% Selling, General & Administrative Expenses (123.3) (14.3)% (94.4) (14.1)% ---------- ---------- ---------- ---------- Operating Earnings $ 73.3 8.5% $ 58.1 8.6% ========== ========== ========== ========== Units Closed 4,495 3,601 % Change 24.8% 19.0% Unit Sales Price $ 189,466 $ 183,522 % Change 3.2% 1.2% Operating Earnings Per Unit $ 16,314 $ 16,134 % Change 1.1% 15.4% </TABLE> -16- <PAGE> 20 <TABLE> <CAPTION> ------------------------------------------------------------- For the Nine Months Ended December 31, --------------------------- --------------------------- 1999 1998 --------------------------- --------------------------- <S> <C> <C> <C> <C> Conventional Homes Revenues $ 2,461.5 100.0% $ 1,881.6 100.0% Cost of Sales (1,898.9) (77.2)% (1,464.3) (77.8)% Selling, General & Administrative Expenses (359.9) (14.6)% (266.3) (14.2)% ---------- ---------- ---------- ---------- Operating Earnings $ 202.7 8.2% $ 151.0 8.0% ========== ========== ========== ========== Units Closed 12,854 10,050 % Change 27.9% 15.4% Unit Sales Price $ 188,595 $ 184,113 % Change 2.4% 1.3% Operating Earnings Per Unit $ 15,768 $ 15,022 % Change 5.0% 17.6% </TABLE> Conventional Homes' revenues for the three and nine months ended December 31, 1999 increased by $191.8 million and $579.9 million, respectively, from revenues for the corresponding periods last year. These increases resulted from an increased number of operating neighborhoods, revenues attributable to newly acquired operations, and an increased average unit selling price compared to fiscal 1999's average unit selling price. Home sales (orders) totaled 4,089 units during the three months ended December 31, 1999 compared to 3,610 units during the same period a year ago. Home sales (orders) totaled 13,191 units during the nine months ended December 31, 1999 compared to last year's 10,816 units. The backlog of homes sold but not closed at December 31, 1999 was 7,413 units, 15% higher than 6,419 units for the same period a year ago. -17- <PAGE> 21 MANUFACTURED HOMES The following summarizes Manufactured Homes' results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in millions): <TABLE> <CAPTION> ------------------------------------------------------------- For the Three Months Ended December 31, ------------------------------------------------------------- 1999 1998 --------------------------- --------------------------- <S> <C> <C> <C> <C> Manufactured Homes Revenues (Construction) $ 30.3 100.0% $ 29.5 100.0% Cost of Sales (23.3) (76.9)% (22.5) (76.3)% Selling, General & Administrative Expenses (3.4) (11.3)% (2.8) (9.4)% ---------- ---------- ---------- ---------- 3.6 11.8% 4.2 14.3% ---------- ---------- ---------- ---------- Retail Sales Revenues 16.8 100.0% 10.3 100.0% Cost of Sales (13.2) (78.4)% (7.3) (70.6)% Selling, General & Administrative Expenses (3.7) (21.9)% (2.9) (29.0)% ---------- ---------- ---------- ---------- (0.1) (0.3)% 0.1 0.4% ---------- ---------- ---------- ---------- Construction and Retail Earnings 3.5 4.3 Goodwill Amortization (0.8) (0.8) Minority Interest -- (0.7) ---------- ---------- Group Operating Earnings $ 2.7 $ 2.8 ========== ========== Units Sold 1,501 1,633 </TABLE> <TABLE> <CAPTION> ------------------------------------------------------------- For the Nine Months Ended December 31, ------------------------------------------------------------- 1999 1998 --------------------------- --------------------------- <S> <C> <C> <C> <C> Manufactured Homes Revenues (Construction) $ 98.1 100.0% $ 101.6 100.0% Cost of Sales (76.2) (77.6)% (79.6) (78.3)% Selling, General & Administrative Expenses (10.8) (11.0)% (9.6) (9.5)% ---------- ---------- ---------- ---------- 11.1 11.4% 12.4 12.2% ---------- ---------- ---------- ---------- Retail Sales Revenues 47.9 100.0% 29.2 100.0% Cost of Sales (38.0) (79.4)% (21.7) (74.6)% Selling, General & Administrative Expenses (10.6) (22.2)% (7.3) (24.7)% ---------- ---------- ---------- ---------- (0.7) (1.6)% 0.2 0.7% ---------- ---------- ---------- ---------- Construction and Retail Earnings 10.4 12.6 Goodwill Amortization (2.6) (2.4) Minority Interest (1.0) (2.0) ---------- ---------- Group Operating Earnings $ 6.8 $ 8.2 ========== ========== Units Sold 4,723 4,780 </TABLE> Cavco operates five manufacturing plants: three in the Phoenix, Arizona area, one near Albuquerque, New Mexico, and one in central Texas which was opened in January, 1999. As of December 31, 1999, Cavco operated 23 retail locations for the sale of manufactured homes compared to 10 retail locations in the prior year. -18- <PAGE> 22 Operating earnings for the three months ended December 31, 1999 were $2.7 million, a 6% decrease over the same period in the prior year. For the nine months ended December 31, 1999, Manufactured Homes' operating earnings were $6.8 million compared to $8.2 million for the nine months ended December 31, 1998. Third quarter and year-to-date operating earnings were negatively impacted by start-up and marketing costs associated with the new Texas plant and retail store openings in Texas as well as the extremely competitive market conditions. INVESTMENT REAL ESTATE The following summarizes Investment Real Estate's results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in millions): <TABLE> <CAPTION> ----------------------------- For the Three Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 15.9 $ 8.6 ============ ============ Operating Earnings $ 8.9 $ 8.4 ============ ============ </TABLE> <TABLE> <CAPTION> ----------------------------- For the Nine Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 27.4 $ 17.5 ============ ============ Operating Earnings $ 24.1 $ 22.2 ============ ============ </TABLE> For the three months ended December 31, 1999, Centex's Investment Real Estate operations, through which all investment property transactions are reported, had operating earnings of $8.9 million, 7% higher than $8.4 million for the same period a year ago. For the nine months ended December 31, 1999, Centex's Investment Real Estate operations had operating earnings of $24.1 million, 8% higher than $22.2 million for the same period last year. The timing of land sales is uncertain and can vary significantly from period to period. Property sales related to Investment Real Estate's nominally valued assets resulted in operating margins of $7.9 million and $5.6 million for the three months ended December 31, 1999 and 1998, and $16.8 million and $13.0 million for the nine months ended December 31, 1999 and 1998, respectively. At December 31, 1999, the Investment Real Estate Group had approximately $60 million of nominally valued assets, the majority of which are expected to be sold over the next four years. Negative goodwill amortization was $4 million for the three months ended December 31, 1999 and 1998, and $12 million for the nine months ended December 31, 1999 and 1998. -19- <PAGE> 23 FINANCIAL SERVICES The following summarizes Financial Services' results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in millions): <TABLE> <CAPTION> ----------------------------- For the Three Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 106.6 $ 116.2 ============ ============ Operating Earnings $ 9.2 $ 24.1 ============ ============ Origination Volume $ 2,176 $ 3,096 ============ ============ Number of Loans Originated CTX Mortgage Company ("CTX Mortgage") Centex-built Homes ("Builder") 2,449 2,308 Non-Centex-built Homes ("Retail") 10,932 19,117 ------------ ------------ 13,381 21,425 Centex Home Equity Corporation ("Home Equity") 5,367 4,032 Centex Finance Company 202 255 ------------ ------------ 18,950 25,712 ============ ============ </TABLE> <TABLE> <CAPTION> ----------------------------- For the Nine Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 343.9 $ 324.1 ============ ============ Operating Earnings $ 42.4 $ 71.6 ============ ============ Origination Volume $ 7,359 $ 8,368 ============ ============ Number of Loans Originated CTX Mortgage Company ("CTX Mortgage") Centex-built Homes ("Builder") 7,489 6,728 Non-Centex-built Homes ("Retail") 39,850 51,450 ------------ ------------ 47,339 58,178 Centex Home Equity Corporation ("Home Equity") 15,237 11,341 Centex Finance Company 674 610 ------------ ------------ 63,250 70,129 ============ ============ </TABLE> Financial Services' operating earnings for the three months ended December 31, 1999 were $9.2 million, 62% lower than the $24.1 million of operating earnings for the three months ended December 31, 1998. For the nine months ended December 31, 1999, operating earnings were $42.4 million, 41% lower than the $71.6 million of operating earnings for the same period last year. -20- <PAGE> 24 CTX Mortgage's operating earnings totaled $5.8 million for the three months ended December 31, 1999, 76% less than earnings for the same period a year ago. CTX Mortgage originations for the three months ended December 31, 1999 were 13,381, a 38% decrease from the 21,425 originations for the same period last year. The per loan profit for the three months ended December 31, 1999 was $435, 62% lower than the $1,139 per loan for the same period last year. CTX Mortgage's operating earnings for the nine months ended December 31, 1999 totaled $30.6 million, 54% less than earnings for the same period last year. Originations from CTX Mortgage were 47,339 for the nine months ended December 31, 1999, compared to 58,178 for the same period last year. The per loan profit for the nine months ended December 31, 1999 was $646, 43% lower than the $1,141 for the nine months ended December 31, 1998. The decline in CTX Mortgage's operating earnings is primarily due to the decrease in refinancing activity as a result of increasing interest rates and the delay in balancing operating costs with reduced production levels. CTX Mortgage's total mortgage applications for the three months ended December 31, 1999 decreased 45% to 11,197 from 20,498 applications for the same period last year. For the nine months ended December 31, 1999, CTX Mortgage's applications decreased to 44,210 from 58,371 for the same period last year. Applications are expected to continue to decline on a year-over-year basis if mortgage interest rates remain at present levels. Centex Home Equity ("Home Equity") reported $4.5 million of operating earnings for the three months ended December 31, 1999, 915% higher than the $0.4 million of operating earnings for the same period last year. Operating earnings from Home Equity for the nine months ended December 31, 1999 totaled $15.0 million, a 113% increase over the $7.0 million in operating earnings for the same period last year. Originations for the three months ended December 31, 1999 were 5,367, a 33% increase over the originations for the same period last year. Originations for the nine months ended December 31, 1999 were 15,237, a 34% increase over the 11,341 originated for the same period last year. Loan volume for the three months ended December 31, 1999 was $350 million, a 30% improvement over the same period a year ago. Loan volume for the nine months ended December 31, 1999 was $990 million, a 34% improvement over the prior year. Loan volume for the three and nine month periods was favorably impacted by the opening of new operating locations plus generally increased activity. Home Equity's sub-prime applications totaled 32,341 for the three months ended December 31, 1999, an increase of 42% over the 22,746 applications for the same period last year. Home Equity's sub-prime applications totaled 89,785 for the nine months ended December 31, 1999, a 65% improvement over the 54,433 applications for the same period last year. Per loan profit was $832 and $985 for the three and nine month periods ending December 31, 1999 compared to $109 and $621 for the same period last year. The increase is primarily related to earnings from the servicing operation partially offset by the absorption of costs related to the expansion of the branch network. As a consequence of increases in loan volume, during the three months ended December 31, 1999, Home Equity completed a securitization for $305 million, compared to a $189 million securitization in the prior year. For the nine months ended December 31, 1999, Home Equity completed securitizations totaling $1.0 billion, compared to $629 million in securitizations for the same period last year. As a result of the securitization process, Home Equity sells the loans but retains a residual interest in the securitization instrument as well as the servicing rights associated with these loans. Home Equity is the long-term servicer of these loans. Service fee income related to this long-term servicing was $4.0 million in the three months ended December 31, 1999 and $1.6 million for the same period last year. For the nine months ended December 31, 1999, service fee income was $10.0 million compared to $2.8 million for the same period a year ago. -21- <PAGE> 25 Centex Finance Company, the manufactured homes finance unit that was closed during the quarter, had an operating loss of approximately $1.1 million and $3.2 million for the three and nine months ended December 31, 1999. Revenues include the gains on sales of mortgage loans receivable. Such gains decreased to $65.4 million for the three months ended December 31, 1999 from $70.3 million for the same period last year. For the nine months ended December 31, 1999, gains on sales of mortgage loans receivable totaled $208.3 million, a 12% increase over the same period last year. The year to date increase is due to the expansion of Financial Services' product lines and an increase in securitization activity, partially offset by decreased loan origination volume. Gains on sales of mortgage loans includes the gain recorded upon the completion of securitization, the gain on sale of servicing, and/or gain on whole loan sales. Substantially all of the mortgage loans generated by CTX Mortgage are sold forward upon closing and subsequently delivered to third-party purchasers within approximately 60 days thereafter, while substantially all the mortgage loans produced by Home Equity are securitized, generally on a quarterly basis. In the normal course of its activities, Financial Services carries inventories of loans pending sale or securitization and earns a positive spread between the interest income earned on those loans and its cost of financing those loans (referred to herein as "positive carry"). Interest income decreased 23% for the three months ended December 31, 1999 to $19.2 million from $25.0 million for the same period last year. Interest expense for the three months ended December 31, 1999 was $15.8 million, a 20% decrease from $19.9 million for the same period last year. Interest income for the nine month period ended December 31, 1999 was $70.2 million, a 6% decrease from $75.0 million for the same period last year. For the nine month period ended December 31, 1999, interest expense was $51.8 million, a 14% decrease from $60.3 million for the same period last year. Financial Services' other sources of income include, among other things, loan origination fees, title policy fees and insurance commissions, mortgage loan broker fees, and fees for mortgage loan quality control and processing services. CONSTRUCTION PRODUCTS The following summarizes Construction Products' results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in millions): <TABLE> <CAPTION> ----------------------------- For the Three Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 108.4 $ 84.9 Interest Income 1.1 0.6 Cost of Sales and Expenses (62.5) (52.3) Selling, General & Administrative Expenses (1.2) (1.2) Goodwill Amortization (0.4) (0.5) ------------ ------------ Operating Earnings 45.4 31.5 Minority Interest (17.0) (13.2) ------------ ------------ Net Operating Earnings to Centex $ 28.4 $ 18.3 ============ ============ </TABLE> -22- <PAGE> 26 <TABLE> <CAPTION> ----------------------------- For the Nine Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 323.4 $ 256.5 Interest Income 2.4 2.2 Cost of Sales and Expenses (188.6) (161.7) Selling, General & Administrative Expenses (3.5) (3.0) Goodwill Amortization (1.1) (0.5) ------------ ------------ Operating Earnings 132.6 93.5 Minority Interest (50.7) (40.3) ------------ ------------ Net Operating Earnings to Centex $ 81.9 $ 53.2 ============ ============ </TABLE> Construction Products' revenues were $108.4 million for the three months ended December 31, 1999, 28% higher than the same period last year. For the three months ended December 31, 1999, Construction Products' operating earnings, net of minority interest, were $28.4 million, a 55% increase over $18.3 million for the same period last year. Revenues from Construction Products for the current nine months ended December 31, 1999 were $323.4 million, 26% higher than the same period last year. For the nine months ended December 31, 1999, Construction Products' operating earnings, net of minority interest, were $81.9 million, a 54% improvement over results for the same period a year ago. Construction Products' record operating earnings resulted from improved results in each of its businesses. Pricing and sales volume improved for virtually every product, particularly pricing for gypsum wallboard, which rose 33% over pricing for the same three months last year and 32% for the same nine months last year. CONTRACTING AND CONSTRUCTION SERVICES The following summarizes Contracting and Construction Services' results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in millions): <TABLE> <CAPTION> ----------------------------- For the Three Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 288.0 $ 335.2 ============ ============ Operating Earnings $ 6.8 $ 3.7 ============ ============ New Contracts Received $ 487 $ 298 ============ ============ Backlog of Uncompleted Contracts $ 1,322 $ 1,182 ============ ============ </TABLE> <TABLE> <CAPTION> ----------------------------- For the Nine Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 928.6 $ 999.3 ============ ============ Operating Earnings $ 17.5 $ 11.4 ============ ============ New Contracts Received $ 1,314 $ 1,022 ============ ============ Backlog of Uncompleted Contracts $ 1,322 $ 1,182 ============ ============ </TABLE> -23- <PAGE> 27 Contracting and Construction Services' revenues for the three and nine months ended December 31, 1999 were $288.0 million and $928.6 million, respectively. Operating earnings for the group improved 84% to $6.8 million for the three months and 53% to $17.5 million for the nine months ended December 31, 1999 over the same period last year. This increase was primarily the result of a continuing shift in recent years to higher-margin private negotiated projects from lower-margin public bid work. The Contracting and Construction Services operations provided a positive average net cash flow in excess of Centex's investment in the group of $94.7 million for the three months ended December 31, 1999 and $105.5 million for the same period last year. For the nine months ended December 31, 1999, the positive average net cash flow in excess of Centex's investment in the group was $102.8 million, compared to $78.6 million for the same period last year. YEAR 2000 COMPLIANCE Beginning in fiscal year 1997, the Company engaged in an ongoing process of evaluating and implementing changes to its systems in order to ensure Year 2000 compliance. As a result of this process, the Company and its subsidiaries tested all critical systems during calendar year 1999 and repaired, upgraded and/or replaced those found to be not Year 2000 compliant. The cost of replacing, upgrading or otherwise changing non-compliant systems was not material to the Company as a whole, or to the Company's individual subsidiaries. The Company used internally generated cash to fund the correction of all non-compliant systems. The Company's Year 2000 compliance preparation included the completion of a contingency plan, the hiring of a third party consultant and the surveying of material vendors and suppliers. As a result of the attention that the Company paid to addressing its Year 2000 readiness, the Company has not, to date, experienced any adverse impact on the Company's operations or financial condition or the operations or financial condition of any of its individual subsidiaries as a result of any Year 2000 compliance issues. In addition, the Company is not aware that any of its vendors, subcontractors or other third parties experienced any significant problems as a result of Year 2000 compliance issues. Furthermore, if any of those third parties were affected by Year 2000 compliance issues, such compliance issues have not caused, to date, any adverse effects on the Company's operations or financial condition, or the operations or financial condition of any of its individual subsidiaries. Although the Company has not been affected to date by the changes from December 31, 1999 to January 1, 2000, Year 2000 issues could arise subsequent to the filing of this report. As an example, the Company's systems could fail to recognize 2000 as a leap year. The Company believes that such circumstances are highly unlikely to occur and that, even if they were to occur, it is highly unlikely that the Company's financial condition or the operations and financial condition of its subsidiaries would be materially adversely affected. Nevertheless, the Company intends to continue to monitor Year 2000 related issues and immediately address any effects that may arise as a result. Year 2000 Forward-looking Statements Certain statements in this section, other than historical information, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the context of the statement and generally arise when the Company is discussing its beliefs, estimates or expectations. These statements involve risks and uncertainties relative to the Company's ability -24- <PAGE> 28 to assess and remediate any Year 2000 compliance issues, the ability of third parties to correct material non-compliant systems, and the Company's assessment of the Year 2000 issue's impact on its financial results and operations. FINANCIAL CONDITION AND LIQUIDITY At December 31, 1999, the Company had cash and cash equivalents of $161.7 million. The net cash provided by or used in the operating, investing, and financing activities for the nine months ended December 31, 1999 and 1998 is summarized below (dollars in thousands): <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> NET CASH PROVIDED BY (USED IN): Operating activities $ 346,839 $ (605,262) Investing activities (162,254) (78,952) Financing activities (134,092) 697,737 Effect of exchange rate changes on cash (48) -- ------------ ------------ Net increase in cash $ 50,445 $ 13,523 ============ ============ </TABLE> For the nine months ended December 31, 1999, cash was provided by a decreased investment in mortgage loans offset primarily by an increase in housing inventories. The decrease in mortgage loans is a result of a decrease in refinancing activity as well as the timing of loan sales and securitizations. The increase in housing inventories relates to the addition of new neighborhoods and acquisitions. Cash was used to fund acquisitions (primarily in the Home Building segment) and to fund additions to property and equipment (primarily for new production capacity within the Construction Products segment). The funds used in financing activities included a reduction in mortgage loan debt, partially offset by new debt raised primarily to fund the increased home building activity. Short-term debt as of December 31, 1999 was $1.2 billion, which included $700 million of debt applicable to the Financial Services operation. The majority of the Financial Services debt is collateralized by residential mortgage loans. Most of the Company's other unsecured borrowings are accomplished at prevailing market interest rates through short-term bank borrowings and from the Company's commercial paper programs. The Company maintains $735 million of committed credit facilities which serve as a back-up for bank and commercial paper borrowings. Under the terms of the agreement on one of these facilities, $170 million may be borrowed directly by CTX Mortgage. The Financial Services segment provides most of its own short-term financing needs through separate facilities which require only limited support from Centex Corporation. During the third quarter of fiscal 2000, CTX Mortgage committed to sell, and began selling to Centex Home Mortgage, LLC, a non-affiliated third party special-purpose Delaware limited liability company ("CHM"), substantially all of the conforming, Jumbo A, and GNMA eligible mortgages originated by CTX Mortgage. CHM is in the business of acquiring and then reselling mortgages into secondary markets. This facility gives CTX Mortgage access, on a revolving basis, to CHM's $1.5 billion of capacity. Sales to CHM are non-recourse and therefore are accounted for as sales rather than as financings. CTX Mortgage also maintains $300 million of secured committed mortgage warehouse facilities and $1.2 billion of uncommitted credit facilities to finance mortgages not sold to Centex Home Mortgage. Similarly, Centex Home Equity Corporation has $250 million of committed and $165 -25- <PAGE> 29 million of uncommitted secured mortgage warehouse facilities to finance sub-prime mortgages held until securitization. Long-term debt outstanding as of December 31, 1999 was as follows (in thousands): <TABLE> <S> <C> Subordinated Debentures, 7.375%, due in 2005 $ 99,735 Subordinated Debentures, 8.75%, due in 2007 99,509 Medium-term Note Programs, 6.4% to 6.95%, due through 2002 341,668 Other Indebtedness, 6.0% to 9.6%, due through 2027 29,267 ------------ $ 570,179 ============ </TABLE> Maturities of long-term debt during the next five years are as follows (in thousands): <TABLE> <S> <C> Fiscal Year ending: March 31, 2000 $ 18,060 March 31, 2001 331,159 March 31, 2002 849 March 31, 2003 15,147 March 31, 2004 205 ------------ $ 365,420 ============ </TABLE> The Company believes it has adequate resources and sufficient credit facilities to satisfy its current needs and to provide for future growth. - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the context of the statement and generally arise when the Company is discussing its beliefs, estimates or expectations. These statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results and outcomes may differ materially from what is expressed or forecast in such forward-looking statements. The principal risks and uncertainties that may affect the Company's actual performance and results of operations include the following: general economic conditions and interest rates; the cyclical and seasonal nature of the Company's businesses; adverse weather; changes in property taxes and energy costs; changes in federal income tax laws and federal mortgage financing programs; governmental regulation; changes in governmental and public policy; changes in economic conditions specific to any one or more of the Company's markets and businesses; competition; availability of raw materials; and unexpected operations difficulties. Other risks and uncertainties may also affect the outcome of the Company's actual performance and results of operations. -26- <PAGE> 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks related to fluctuations in interest rates on mortgage loans receivable, residual interest in mortgage securitizations, and debt. The Company utilizes forward sale commitments to mitigate the risk associated with the majority of its mortgage loan portfolio. The Company has also entered into a swap agreement with Bank of America in order to manage interest rate risk, non-credit related market value risk, and prepayment risk associated with certain loans originated by CTX Mortgage Company. Other than the forward commitments and the swap agreement listed above, the Company does not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments. There have been no material changes in the Company's market risk since March 31, 1999. As of December 31, 1999 the market risk associated with the swap listed above is considered minimal. For information regarding the Company's market risk, refer to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. -27- <PAGE> 31 CENTEX CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (1) Exhibits Exhibit 10.10 Centex Corporation Amended and Restated 1987 Stock Option Plan (Filed herewith) Exhibit 10.11 Amended and Restated Centex Corporation Employee Non-Qualified Stock Option Plan (Exhibit 4 to Registration Statement of Centex Corporation ("Centex") on Form S-8 filed with the Securities and Exchange Commission (the "Commission") on March 10, 1999) Exhibit 10.12 Second Amended and Restated Centex Corporation Employee Non-Qualified Stock Option Plan (Exhibit 4 to Registration Statement of Centex on Form S-8 filed with the Commission on August 27, 1999) Exhibit 27.1 Financial Data Schedule (2) Reports on Form 8-K The Registrant filed no reports on Form 8-K during the quarter ended December 31, 1999. All other items required under Part II are omitted because they are not applicable. -28- <PAGE> 32 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 11, 2000 /s/ David W. Quinn -------------------------------------- David W. Quinn Vice Chairman of the Board and Chief Financial Officer (principal financial officer) February 11, 2000 /s/ John S. Worth -------------------------------------- John S. Worth Vice President and Controller (chief accounting officer) -29- <PAGE> 33 3333 HOLDING CORPORATION AND SUBSIDIARY CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION CONDENSED COMBINING FINANCIAL STATEMENTS ITEM 1. The condensed combining financial statements include the accounts of 3333 Holding Corporation and subsidiary ("Holding") and Centex Development Company, L.P. and subsidiaries (the "Partnership") (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. -30- <PAGE> 34 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES CONDENSED COMBINING STATEMENTS OF OPERATIONS (Dollars in thousands, except per unit/share data) (unaudited) <TABLE> <CAPTION> ---------------------------------------------------------------------------------------- For the Three Months Ended December 31, ---------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------- ------------------------------------------- Centex Centex Development Development Company, L.P. 3333 Holding Company, L.P. 3333 Holding and Corporation and Corporation Combined Subsidiaries and Subsidiary Combined Subsidiaries and Subsidiary ------------ ------------ -------------- ------------ ------------ -------------- <S> <C> <C> <C> <C> <C> <C> REVENUES $ 79,450 $ 79,450 $ 153 $ 5,694 $ 5,653 $ 194 COSTS AND EXPENSES 79,533 79,527 159 5,681 5,262 572 ------------ ------------ ------------ ------------ ------------ ------------ (LOSS) EARNINGS BEFORE INCOME TAXES (83) (77) (6) 13 391 (378) INCOME TAXES 29 29 -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ NET (LOSS) EARNINGS $ (112) $ (106) $ (6) $ 13 $ 391 $ (378) ============ ============ ============ ============ ============ ============ NET (LOSS) EARNINGS ALLOCABLE TO LIMITED PARTNER $ (106) $ 391 ============ ============ (LOSS) EARNINGS PER UNIT/SHARE $ (1.66) $ (6) $ 6.99 $ (378) ============ ============ ============ ============ WEIGHTED-AVERAGE UNITS/SHARES OUTSTANDING 63,773 1,000 55,911 1,000 </TABLE> See notes to condensed combining financial statements. -31- <PAGE> 35 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES CONDENSED COMBINING STATEMENTS OF OPERATIONS (Dollars in thousands, except per unit/share data) (unaudited) <TABLE> <CAPTION> ---------------------------------------------------------------------------------------- For the Nine Months Ended December 31, ---------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------- ------------------------------------------- Centex Centex Development Development Company, L.P. 3333 Holding Company, L.P. 3333 Holding and Corporation and Corporation Combined Subsidiaries and Subsidiary Combined Subsidiaries and Subsidiary ------------ ------------ -------------- ------------ ------------ -------------- <S> <C> <C> <C> <C> <C> <C> REVENUES $ 249,249 $ 249,249 $ 457 $ 19,774 $ 19,385 $ 951 COSTS AND EXPENSES 248,684 247,603 1,538 19,732 18,559 1,735 ------------ ------------ ------------ ------------ ------------ ------------ EARNINGS (LOSS) BEFORE INCOME TAXES 565 1,646 (1,081) 42 826 (784) INCOME TAXES 601 601 -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ NET (LOSS) EARNINGS $ (36) $ 1,045 $ (1,081) $ 42 $ 826 $ (784) ============ ============ ============ ============ ============ ============ NET EARNINGS ALLOCABLE TO LIMITED PARTNER $ 1,045 $ 826 ============ ============ EARNINGS (LOSS) PER UNIT/SHARE $ 16.99 $ (1,081) $ 15.65 $ (784) ============ ============ ============ ============ WEIGHTED-AVERAGE UNITS/SHARES OUTSTANDING 61,489 1,000 52,783 1,000 </TABLE> See notes to condensed combining financial statements. -32- <PAGE> 36 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES CONDENSED COMBINING BALANCE SHEETS (Dollars in thousands) <TABLE> <CAPTION> -------------------------------------------------------------------------------------- DECEMBER 31, 1999* March 31, 1999** ------------------------------------------ ------------------------------------------ Centex Centex Development Development Company, L.P. 3333 Holding Company, L.P. 3333 Holding and Corporation and Corporation Combined Subsidiaries and Subsidiary Combined Subsidiaries and Subsidiary ------------ ------------ -------------- ------------ ------------ -------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Cash $ 24,297 $ 24,278 $ 19 $ 364 $ 331 $ 33 Accounts Receivable 9,647 12,875 10 1,180 3,133 10 Notes Receivable 3,360 3,360 -- 3,554 3,554 -- Investment in Affiliate -- -- 1,702 -- -- 1,616 Investment in Real Estate Joint Ventures 1,642 1,642 -- 672 672 -- Inventories 370,393 369,643 750 104,663 104,288 375 Property and Equipment, net 3,610 3,502 108 231 89 142 Other Assets - Goodwill, net 29,106 29,106 -- -- -- -- Deferred Charges and Other 11,259 11,084 175 1,512 1,166 346 ------------ ------------ ------------ ------------ ------------ ------------ $ 453,314 $ 455,490 $ 2,764 $ 112,176 $ 113,233 $ 2,522 ============ ============ ============ ============ ============ ============ LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL Accounts Payable and Accrued Liabilities $ 59,707 $ 59,203 $ 4,677 $ 8,968 $ 9,008 $ 2,772 Notes Payable and Long-term Debt 324,866 324,866 -- 42,478 41,896 582 ------------ ------------ ------------ ------------ ------------ ------------ Total Liabilities 384,573 384,069 4,677 51,446 50,904 3,354 ------------ ------------ ------------ ------------ ------------ ------------ Stockholders' Equity and Partners' Capital 68,741 71,421 (1,913) 60,730 62,329 (832) ------------ ------------ ------------ ------------ ------------ ------------ $ 453,314 $ 455,490 $ 2,764 $ 112,176 $ 113,233 $ 2,522 ============ ============ ============ ============ ============ ============ </TABLE> * Unaudited. ** Condensed from audited financial statements. See notes to condensed combining financial statements. -33- <PAGE> 37 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES CONDENSED COMBINING STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited) <TABLE> <CAPTION> ---------------------------------------------------------------------------------------- For the Nine Months Ended December 31, ---------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------- ------------------------------------------- Centex Centex Development Development Company, L.P. 3333 Holding Company, L.P. 3333 Holding and Corporation and Corporation Combined Subsidiaries and Subsidiary Combined Subsidiaries and Subsidiary ------------ ------------ -------------- ------------ ------------ -------------- <S> <C> <C> <C> <C> <C> <C> CASH FLOWS - OPERATING ACTIVITIES Net (Loss) Earnings $ (36) $ 1,045 $ (1,081) $ 42 $ 826 $ (784) Adjustments: Depreciation and Amortization 2,752 2,719 33 75 54 21 Earnings from Joint Venture (23) (23) (15) -- -- -- (Increase) Decrease in Receivables (5,662) (5,662) -- (977) 7,424 (690) Decrease in Notes Receivable 194 194 -- 1,375 1,375 -- Increase in Inventories (11,612) (11,237) (375) (32,938) (31,138) (451) (Increase) Decrease in Other Assets (2,744) (2,915) 171 (908) (845) (63) Increase (Decrease) in Payables and Accruals 12,131 10,313 1,905 5,353 5,357 (7,797) ------------ ------------ ------------ ------------ ------------ ------------ (5,000) (5,566) 638 (27,978) (16,947) (9,764) ------------ ------------ ------------ ------------ ------------ ------------ CASH FLOWS - INVESTING ACTIVITIES (Increase) Decrease in Advances to Joint Ventures and Investment in Affiliate (947) (948) (71) 2,872 1,810 (205) Decrease (Increase) in Property and Equipment 318 317 1 (223) (128) (95) ------------ ------------ ------------ ------------ ------------ ------------ (629) (631) (70) 2,649 1,682 (300) ------------ ------------ ------------ ------------ ------------ ------------ CASH FLOWS - FINANCING ACTIVITIES Increase (Decrease) in Notes Payable 24,719 25,301 (582) 17,301 14,890 2,411 Decrease in Notes Receivable -- -- -- 7,700 -- 7,700 Issuance of Class "C" Partnership Units 4,830 4,830 -- 1,000 1,000 -- ------------ ------------ ------------ ------------ ------------ ------------ 29,549 30,131 (582) 26,001 15,890 10,111 ------------ ------------ ------------ ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 13 13 -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH 23,933 23,947 (14) 672 625 47 CASH AT BEGINNING OF PERIOD 364 331 33 260 259 1 ------------ ------------ ------------ ------------ ------------ ------------ CASH AT END OF PERIOD $ 24,297 $ 24,278 $ 19 $ 932 $ 884 $ 48 ============ ============ ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES: Increase in Notes Payable Related to an Acquisition $ 253,812 $ 253,812 -- -- -- -- Issuance of Class C Units in Exchange for Assets $ 3,265 $ 3,265 -- $ 18,445 $ 18,445 -- </TABLE> See notes to condensed combining financial statements. -34- <PAGE> 38 3333 HOLDING CORPORATION AND SUBSIDIARY AND CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES CONDENSED COMBINING FINANCIAL STATEMENTS NOTES DECEMBER 31, 1999 (unaudited) (A) In March 1987, Centex Development Company, L.P. (the "Partnership"), a master limited partnership, was formed to enable holders of Centex Corporation ("Centex") stock to participate in long-term real estate development projects whose dynamics are inconsistent with Centex's traditional financial objectives. Certain of Centex's subsidiaries contributed to the Partnership certain properties at their historical cost basis in exchange for 1,000 limited partnership units ("Class A Units"). The Partnership is controlled by its general partner, 3333 Development Corporation ("Development"), which is in turn wholly-owned by 3333 Holding Corporation ("Holding"). Holding is a separate public company whose stock trades in tandem with Centex's stock. The common stock of Holding (the "Securities") was distributed in 1987 (with warrants to purchase approximately 80% of the Class B limited partnership units in the Partnership) as a dividend to the stockholders of Centex. The Securities, held by a nominee on behalf of the stockholders, will trade in tandem with the common stock of Centex until such time as they are detached. The securities may be detached at any time by Centex's Board of Directors but the warrants to purchase Class B Units automatically become detached in November 2007. The Board of Directors of Holding is elected by the stockholders of Centex. In October 1999, the Board of Directors expanded the size of the board to four directors. The majority of the Board members are independent outside directors, none of whom are directors of Centex. Accordingly, the general partner of the Partnership is controlled by the stockholders of Centex. The general partner and independent Board of Directors of Holding manage the Partnership's conduct of its activities including the sales, development, maintenance and zoning of properties. The general partner may sell or acquire properties, including the contributed property, and enter into other business transactions without the consent of the limited partners. In addition, the limited partners cannot remove the general partner. See Note (C) to the condensed consolidated financial statements of Centex and subsidiaries included elsewhere in this Form 10-Q for supplementary condensed combined financial statements for Centex and Subsidiaries, Holding and Subsidiary, and the Partnership and Subsidiaries. (B) Holding has a service agreement with Centex Service Company, a wholly-owned subsidiary of Centex, whereby Centex Service Company provides certain tax, accounting and other similar services for Holding. This agreement was amended in fiscal 1999 to include development services and the monthly fee was increased from $2,500 per month to $30,000 per month. The Partnership sells lots to Centex Homes pursuant to certain purchase and sale agreements. Revenues from these sales totaled $669,000 and $5.0 million for the three and nine months ended -35- <PAGE> 39 December 31, 1999, and $55,000 and $2.9 million for the three and nine months ended December 31, 1998, respectively. Gains associated with these sales totaled $132,000 and $305,000 for the three and nine months ended December 31, 1999 and $56,000 and $122,000 for the three and nine months ended December 31, 1998, respectively. (C) Comprehensive loss is summarized for the three and nine months ended December 31, 1999 below (dollars in thousands): <TABLE> <CAPTION> -------------------------- ------------------------- For the Three Months Ended For the Nine Months Ended December 31, 1999 December 31, 1999 -------------------------- ------------------------- <S> <C> <C> Net Loss $ (112) $ (36) Other Comprehensive Loss: Foreign Currency Translation Adjustments (16) (48) -------------------- -------------------- Comprehensive Loss $ (128) $ (84) ==================== ==================== </TABLE> (D) Changes in stockholders' equity and partners' capital are summarized below (dollars in thousands): <TABLE> <CAPTION> For the Nine Months Ended December 31, 1999 ------------------------------------------------------------------------------------ Centex Development Company, L.P. 3333 Holding Corporation and Subsidiaries and Subsidiary ---------------------------------- ---------------------------------- Class B General Limited Capital In Retained Unit Partner's Partner's Stock Excess of Earnings Combined Warrants Capital Capital Warrants Par Value (Deficit) ---------- ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at March 31, 1999 $ 60,730 $ 500 $ 767 $ 61,062 $ 1 $ 800 $ (1,633) Partnership Units Issued in Exchange for Assets 8,095 -- -- 8,095 -- -- -- Net (Loss) Earnings (36) -- -- 1,045 -- -- (1,081) Accumulated Other Comprehensive Loss: Foreign Currency Translation Adjustments (48) -- -- (48) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1999 $ 68,741 $ 500 $ 767 $ 70,154 $ 1 $ 800 $ (2,714) ========== ========== ========== ========== ========== ========== ========== </TABLE> During fiscal year 1998, the partnership agreement governing the Partnership was amended to allow for the issuance of new Class C Preferred Partnership Units ("Class C Units"), to be issued in exchange for assets. During the nine months ended December 31, 1999, 8,095 Class C Units were issued to Centex Homes, the Partnership's sole limited partner, in exchange for assets having a fair market value of $8.1 million. The partnership agreement provides that Class A and Class C limited partners are entitled to a cumulative preferred return of 9% per annum on the average outstanding balance of their Unrecovered Capital. Unrecovered Capital represents initial capital contributions reduced by repayments thereof, and is the basis for preference accruals. Unrecovered Capital for Class A and Class C limited partners was -36- <PAGE> 40 approximately $68 million as of December 31, 1999 and the unpaid preferred return as of that date was $13.3 million. No preferred return payments were made during the three months or nine months ended December 31, 1999. (E) On April 15, 1999 Centex Development Company UK Limited ("CDC-UK"), a company incorporated in England and Wales and a wholly-owned subsidiary of the Partnership, closed its acquisition of all of the voting shares of Fairclough Homes Group Limited, a British home builder ("Fairclough"). The purchase price at closing (approximately $218 million) was paid by the delivery of two-year non-interest bearing promissory notes. Additionally, the seller of the voting shares retained non-voting preference shares in Fairclough that will entitle it to receive substantially all of the net after-tax earnings of Fairclough until March 31, 2001. During that time period CDC-UK may, however, participate in Fairclough's earnings in excess of certain specified levels. However, because the non-voting preference shares retained by the seller have the characteristics of debt, the preference obligations are being reported as interest expense in the financial statements. A major portion of the promissory notes is secured by a letter of credit obtained by the Partnership from a United Kingdom bank. During the period between April 15, 1999 and March 31, 2001, Fairclough will be operated by CDC-UK subject to certain guidelines that were negotiated with the seller. After March 31, 2001, CDC-UK will redeem, for a nominal value, the preference shares. The purchase of Fairclough has been accounted for using the purchase method of accounting, pursuant to which the total cost of the acquisition has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values. The allocation of the purchase price is as follows (dollars in thousands): Inventories, Property and Equipment and Other $ 267,720 Goodwill 29,260 Notes Issued and Liabilities Assumed (296,980) ------------- Cash Paid $ -- ============= The following unaudited pro forma results of operations for the three and nine months ended December 31, 1998 give effect to the April 15, 1999 acquisition of Fairclough as if such transaction had occurred on April 1, 1998. The financial information for Fairclough included in the unaudited pro forma results of operations is derived from Fairclough's operating results for the three and nine months ended December 31, 1998, in accordance with U.S. generally accepted accounting principles and translated to U.S. dollars. This information is based on the historical financial statements of the Companies and the historical financial statements of Fairclough. The pro forma adjustments are directly attributable to the transaction referenced above, and are expected to have a continuing impact on the business, results of operations, and financial position. -37- <PAGE> 41 <TABLE> <CAPTION> Pro Forma Results of Operations -------------------------------------------------- For the Three Months Ended December 31, 1998 -------------------------------------------------- (Dollars in thousands, except per unit/share data) Centex Development Company, L.P. 3333 Holding and Corporation Combined Subsidiaries and Subsidiary ---------- ------------ -------------- <S> <C> <C> <C> Revenues $ 122,340 $ 122,311 $ 194 ========== ========== ========== Net (Loss) Earnings $ (23) $ 355 $ (378) ========== ========== ========== Net Earnings Allocable to Limited Partner $ 355 ========== Earnings (Loss) Per Unit/Share $ 6.35 $ (378) ========== ========== </TABLE> <TABLE> <CAPTION> Pro Forma Results of Operations -------------------------------------------------- For the Nine Months Ended December 31, 1998 -------------------------------------------------- (Dollars in thousands, except per unit/share data) Centex Development Company, L.P. 3333 Holding and Corporation Combined Subsidiaries and Subsidiary ---------- ------------ -------------- <S> <C> <C> <C> Revenues $ 290,838 $ 290,296 $ 951 ========== ========== ========== Net (Loss) Earnings $ (19) $ 765 $ (784) ========== ========== ========== Net Earnings Allocable to Limited Partner $ 765 ========== Earnings (Loss) Per Unit/Share $ 14.49 $ (784) ========== ========== </TABLE> The unaudited pro forma results of operations are not necessarily indicative of what actual results of operations of the Companies would have been for the period, nor do they represent the Companies' results of operations for future periods. The unaudited pro forma results of operations include the following adjustments: o Amortization of goodwill and other intangibles based upon the Partnership's allocation of the purchase price. Goodwill is being amortized over a 20-year period; o Elimination of the historical interest expense of Fairclough related to debt not assumed by the Partnership; o Additional interest expense representing the preference payments to the seller; o Amortization of deferred debt issuance costs which are being amortized over the term of the debt; o Income tax adjustments related to the above pro forma items. -38- <PAGE> 42 (F) The Partnership operates in five principal business segments: International Home Building, Domestic Home Building, Commercial Development, Multi-Family Development and Land Sales. All of the segments, with the exception of International Home Building, operate in the United States. International Home Building currently operates in the United Kingdom. The following tables set forth financial information relating to the five business segments for the three and nine months ended December 31, 1999 and December 31, 1998 (dollars in thousands): <TABLE> <CAPTION> ------------------------------------------------------------------------------------------- Three Months Ended December 31, 1999 ------------------------------------------------------------------------------------------- Home Building ----------------------------- Commercial Multi-Family International Domestic Development Development Land Sales Total ------------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Revenues $ 71,298 $ 3,791 $ 3,593 $ -- $ 768 $ 79,450 Cost of Sales (62,294) (3,355) (1,683) -- (539) (67,871) General & Administrative Expenses (6,433) (369) (974) (475) (125) (8,376) Interest Expense (2,542) -- (740) (4) -- (3,286) ----------- ----------- ----------- ----------- ----------- ----------- Operating Earnings (Loss) $ 29 $ 67 $ 196 $ (479) $ 104 $ (83) =========== =========== =========== =========== =========== =========== Identifiable Assets $ 327,154 $ 7,302 $ 81,175 $ 26,457 $ 11,226 $ 453,314 </TABLE> <TABLE> <CAPTION> ------------------------------------------------------------------------------------------- Three Months Ended December 31, 1998 ------------------------------------------------------------------------------------------- Home Building ----------------------------- Commercial Multi-Family International Domestic Development Development Land Sales Total ------------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Revenues * $ 5,403 $ 58 $ 41 $ 192 $ 5,694 Cost of Sales * (4,596) -- -- (15) (4,611) General & Administrative Expenses * (403) (95) (366) (120) (984) Interest Expense * -- (32) (54) -- (86) ----------- ----------- ----------- ----------- ----------- Operating Earnings (Loss) $ 404 $ (69) $ (379) $ 57 $ 13 =========== =========== =========== =========== =========== </TABLE> -39- <PAGE> 43 <TABLE> <CAPTION> ------------------------------------------------------------------------------------------- Nine Months Ended December 31, 1999 ------------------------------------------------------------------------------------------- Home Building ----------------------------- Commercial Multi-Family International Domestic Development Development Land Sales Total ------------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Revenues $ 208,389 $ 9,781 $ 7,177 $ 17,154 $ 6,748 $ 249,249 Cost of Sales (182,110) (8,500) (3,065) (17,049) (5,943) (216,667) General & Administrative Expenses (17,601) (1,088) (1,881) (1,505) (375) (22,450) Interest Expense (8,077) -- (1,471) (19) -- (9,567) ----------- ----------- ----------- ----------- ----------- ----------- Operating Earnings (Loss) $ 601 $ 193 $ 760 $ (1,419) $ 430 $ 565 =========== =========== =========== =========== =========== =========== Identifiable Assets $ 327,154 $ 7,302 $ 81,175 $ 26,457 $ 11,226 $ 453,314 </TABLE> <TABLE> <CAPTION> ------------------------------------------------------------------------------------------- Nine Months Ended December 31, 1998 ------------------------------------------------------------------------------------------- Home Building ----------------------------- Commercial Multi-Family International Domestic Development Development Land Sales Total ------------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Revenues * $ 13,976 $ 1,744 $ 324 $ 3,730 $ 19,774 Cost of Sales * (11,885) (1,577) -- (3,082) (16,544) General & Administrative Expenses * (1,205) (292) (1,111) (364) (2,972) Interest Expense * -- (60) (94) (62) (216) ----------- ----------- ----------- ----------- ----------- Operating Earnings (Loss) $ 886 $ (185) $ (881) $ 222 $ 42 =========== =========== =========== =========== =========== </TABLE> <TABLE> <CAPTION> ------------------------------------------------------------------------------------------- Fiscal Year Ended March 31, 1999 ------------------------------------------------------------------------------------------- Home Building ----------------------------- Commercial Multi-Family International Domestic Development Development Land Sales Total ------------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C Identifiable Assets * $ 10,920 $ 44,820 $ 31,337 $ 25,099 $112,176 </TABLE> * Business segment did not exist in prior fiscal year. (G) Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998. This statement addressed the accounting for derivative instruments, including derivative instruments embedded in other contracts (collectively referred to as derivatives), and hedging activities as well as the disclosure of these activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. In June 1999, SFAS No. 137 was issued which delays the implementation of this statement for the Companies until April 2001. (H) Certain prior period balances have been reclassified to be consistent with the December 31, 1999 presentation. -40- <PAGE> 44 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS On a combined basis, the Companies' revenues for the three and nine months ended December 31, 1999 totaled $79.4 million and $249.2 million, respectively. Revenues of $5.7 million and $19.8 million were reported for the three and nine months ended December 31, 1998, respectively. The significant increase in revenues for the three and nine months ended December 31, 1999 resulted primarily from the Partnership's acquisition of Fairclough. The Companies had combined net loss for the three and nine months ended December 31, 1999 of $112,000 and $36,000, respectively, compared to combined net earnings of $13,000 and $42,000 for the three and nine months ended December 31, 1998, respectively. HOME BUILDING INTERNATIONAL - The following summarizes International Home Building's results for the three and nine months ended December 31, 1999 (dollars in thousands): <TABLE> <CAPTION> -------------------------- ------------------------- For the Three Months Ended For the Nine Months Ended December 31, 1999 December 31, 1999 -------------------------- ------------------------- <S> <C> <C> Revenues $ 71,298 $ 208,389 Cost of Sales (62,294) (182,110) General & Administrative Expenses (6,433) (17,601) Interest Expense, Paid to Seller (2,542) (8,077) -------------- -------------- Operating Earnings $ 29 $ 601 ============== ============== Units Closed 377 1,147 ============== ============== </TABLE> -41- <PAGE> 45 The Partnership acquired this segment in the first quarter of fiscal 2000. The seller received $221.7 million in non-interest bearing promissory notes due March 31, 2001 and retained preferred non-voting shares in Fairclough. The preferred shares require a preferred distribution and have a nominal residual interest value that is mandatorily redeemable on March 31, 2001. During the three and nine months ended December 31, 1999, Fairclough generated earnings totaling $2.6 million and $8.1 million, respectively, which are subject to distribution to the seller under the preferred share arrangement. The Companies have accounted for the non-interest bearing debt and nominal residual value preferred shares as if they were a single debt instrument. Accordingly, distributions attributable to the preferred shares are accrued as interest expense in the accompanying financial statements. DOMESTIC - The following summarizes Domestic Home Building's results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in thousands): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Sales Revenues $ 3,791 $ 5,403 Cost of Sales (3,355) (4,596) General & Administrative Expenses (369) (403) ------------ ------------ Operating Earnings $ 67 $ 404 ============ ============ Units Closed 11 19 ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Sales Revenues $ 9,781 $ 13,976 Cost of Sales (8,500) (11,885) General & Administrative Expenses (1,088) (1,205) ------------ ------------ Operating Earnings $ 193 $ 886 ============ ============ Units Closed 30 48 ============ ============ </TABLE> During the three and nine months ended December 31, 1999 and 1998, sales revenues included revenues from the sale of single-family homes in New Jersey which completed the build-out of certain communities. In July 1999, the Partnership obtained final zoning approval for the development of an additional 251 single-family homes. -42- <PAGE> 46 COMMERCIAL DEVELOPMENT The following summarizes Commercial Development's results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars and square feet in thousands): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Sales Revenues $ 1,901 $ (116) Rental Income 1,692 174 Cost of Sales (1,683) -- General & Administrative Expenses (974) (95) Interest Expense (740) (32) ------------ ------------ Operating Earnings (Loss) $ 196 $ (69) ============ ============ Operating Square Feet 956 38 ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Sales Revenues $ 3,765 $ 1,570 Rental Income 3,412 174 Cost of Sales (3,065) (1,577) General & Administrative Expenses (1,881) (292) Interest Expense (1,471) (60) ------------ ------------ Operating Earnings (Loss) $ 760 $ (185) ============ ============ </TABLE> Sales revenues for the three months ended December 31, 1999 included the sale of certain residential lots in Texas and certain commercial land in California. Sales revenues for the same period in the prior year included the sale of industrial land to a joint venture in which the Partnership owns a 10% interest. -43- <PAGE> 47 MULTI-FAMILY DEVELOPMENT The following summarizes Multi-Family Development's ("Multi-Family") results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in thousands): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ -- $ 41 Cost of Sales -- -- General & Administrative Expenses (475) (366) Interest Expense (4) (54) ------------ ------------ Operating Loss $ (479) $ (379) ============ ============ </TABLE> <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Revenues $ 17,154 $ 324 Cost of Sales (17,049) -- General & Administrative Expenses (1,505) (1,111) Interest Expense (19) (94) ------------ ------------ Operating Loss $ (1,419) $ (881) ============ ============ </TABLE> Revenues during the three and nine months ended December 31, 1999 resulted from the sale of a Texas apartment complex that had been constructed subject to a pre-sale agreement. Revenues during the three and nine months ended December 31, 1998 consisted primarily of development fee income. LAND SALES The following summarizes Land Sales' operating results for the three and nine months ended December 31, 1999 compared to the same periods last year (dollars in thousands): <TABLE> <CAPTION> ------------------------------ For the Three Months Ended December 31, ------------------------------ 1999 1998 ---------- ---------- <S> <C> <C> Sales Revenues $ 768 $ 192 Cost of Sales (539) (15) General & Administrative Expenses (125) (120) Interest Expense -- -- ---------- ---------- Operating Earnings $ 104 $ 57 ========== ========== </TABLE> -44- <PAGE> 48 <TABLE> <CAPTION> ------------------------------ For the Nine Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ <S> <C> <C> Sales Revenues $ 6,748 $ 3,730 Cost of Sales (5,943) (3,082) General & Administrative Expenses (375) (364) Interest Expense -- (62) ------------ ------------ Operating Earnings $ 430 $ 222 ============ ============ </TABLE> Revenues for the three months ended December 31, 1999 included the sale of certain residential lots in Florida, Texas and New Jersey to Centex's homebuilding operations. Revenues for the nine month period ended December 31, 1999 consisted of $5.0 million in residential lot sales to Centex Homes and the sale of certain commercial land in Texas. Real Estate sales during the nine months ended December 31, 1998 included $2.9 million of lot sales to Centex Homes and the sale of certain commercial property in Texas. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended December 31, 1999, 8,095 Class C Preferred Partnership Units were issued in exchange for assets with a fair market value of $8.1 million. Also during the nine months ended December 31, 1999, the Companies closed on non-recourse commercial development project loans totaling $49.6 million. The project loans are collateralized by commercial properties and have ten-year maturities with fixed interest rates ranging from 6.9% to 7.8%. The Partnership believes that the revenues, earnings, and liquidity from its current operations and from construction and permanent financings will be sufficient to provide the necessary funding for the current and future needs. YEAR 2000 COMPLIANCE Beginning in fiscal year 1997, the Companies engaged in an ongoing process of evaluating and implementing changes to their systems in order to ensure Year 2000 compliance. As a result of this process, the Companies and their subsidiaries tested all critical systems during calendar year 1999 and repaired, upgraded and/or replaced those found to be not Year 2000 compliant. The cost of replacing, upgrading or otherwise changing non-compliant systems was not material to the Companies as a whole, or to the Companies' individual subsidiaries. The Companies used internally generated cash to fund the correction of all non-compliant systems. The Companies' Year 2000 compliance preparation included the completion of a contingency plan, the hiring of a third party consultant (through Holding's services agreement with Centex Service Company) and the surveying of material vendors and suppliers. As a result of the attention that the Companies paid to addressing their Year 2000 readiness, the Companies have not, to date, experienced any adverse impact on the Companies' operations or financial condition or the operations or financial condition of any of their individual subsidiaries as a result of any Year 2000 compliance issues. In addition, the Companies are not aware that any of their vendors, subcontractors -45- <PAGE> 49 or other third parties experienced any significant problems as a result of Year 2000 compliance issues. Furthermore, if any of those third parties were affected by Year 2000 compliance issues, such compliance issues have not caused, to date, any adverse effects on the Companies' operations or financial condition, or the operations or financial condition of any of their individual subsidiaries. Although the Companies have not been affected to date by the changes from December 31, 1999 to January 1, 2000, Year 2000 issues could arise subsequent to the filing of this report. As an example, the Companies' systems could fail to recognize 2000 as a leap year. The Companies believe that such circumstances are highly unlikely to occur and that, even if they were to occur, it is highly unlikely that the Companies' operations or financial condition would be materially adversely affected. Nevertheless, the Companies intend to continue to monitor Year 2000 related issues and immediately address any effects that may arise as a result. Year 2000 Forward-looking Statements Certain statements in this section, other than historical information, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties relative to the Companies' ability to assess and remediate any Year 2000 compliance issues, the ability of third parties to correct material non-compliant systems, and the Companies' assessment of the Year 2000 issue's impact on their financial results and operations. - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the context of the statement and generally arise when the Companies are discussing their beliefs, estimates or expectations. These statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results and outcomes may differ materially from what is expressed or forecast in such forward-looking statements. The principal risks and uncertainties that may affect the Companies' actual performance and results of operations include the following: general economic conditions and interest rates; the cyclical and seasonal nature of the Companies' businesses; changes in property taxes; changes in federal income tax laws; governmental regulation; changes in governmental and public policy; changes in economic conditions specific to any one or more of the Companies' markets and businesses; competition; availability of raw materials; and unexpected operations difficulties. Other risks and uncertainties may also affect the outcome of the Companies' actual performance and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. -46- <PAGE> 50 3333 HOLDING CORPORATION AND SUBSIDIARY CENTEX DEVELOPMENT COMPANY, L.P. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (1) Exhibits Exhibit 27.2 Financial Data Schedule Exhibit 27.3 Financial Data Schedule (2) Reports on Form 8-K The Registrant filed no reports on Form 8-K during the quarter ended December 31, 1999. All other items required under Part II are omitted because they are not applicable. -47- <PAGE> 51 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 11, 2000 /s/ Richard C. Decker ------------------------------------------------- Richard C. Decker Director, Chairman, President and Chief Executive Officer (principal executive officer) February 11, 2000 /s/ Kimberly A. Pinson ------------------------------------------------- Kimberly A. Pinson Vice President, Treasurer, Controller and Assistant Secretary (principal financial officer and chief accounting officer) -48- <PAGE> 52 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 11, 2000 /s/ Richard C. Decker ------------------------------------------------- Richard C. Decker Director, Chairman, President and Chief Executive Officer (principal executive officer) February 11, 2000 /s/ Kimberly A. Pinson ------------------------------------------------- Kimberly A. Pinson Vice President, Treasurer, Controller and Assistant Secretary (principal financial officer and chief accounting officer) -49- <PAGE> 53 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description ------- ----------- <S> <C> Exhibit 10.10 Centex Corporation Amended and Restated 1987 Stock Option Plan Exhibit 27.1 Financial Data Schedule - Centex Corporation Exhibit 27.2 Financial Data Schedule - 3333 Holding Corporation Exhibit 27.3 Financial Data Schedule - Centex Development Company, L.P. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.10 <SEQUENCE>2 <DESCRIPTION>AMENDED/RESTATED 1987 STOCK OPTION PLAN <TEXT> <PAGE> 1 EXHIBIT 10.10 CENTEX CORPORATION AMENDED AND RESTATED 1987 STOCK OPTION PLAN 1. PURPOSE The purpose of this Plan is to assist Centex Corporation, a Nevada corporation, in attracting and retaining as officers and key employees of the Company and its Affiliates, and as non-employee directors of the Company, individuals of training, experience and ability and to furnish additional incentive to such individuals by encouraging them to become owners of Shares of the Company's capital stock, by granting to such individuals Incentive Options, Nonqualified Options, Restricted Stock, or any combination of the foregoing. 2. DEFINITIONS Unless the context otherwise requires, the following words as used herein shall have the following meanings: "Act" -- The Securities Exchange Act of 1934, as amended. "Affiliates" -- Any corporation or other entity which is a direct or indirect parent or subsidiary (including, without limitation, partnerships and limited liability companies) of the Company. "Agreement" -- The written agreement between the Company and the Optionee evidencing the Option granted by the Company and the understanding of the parties with respect thereto. "Board" -- The Board of Directors of the Company as the same may be constituted from time to time. "Code" -- The Internal Revenue Code of 1986, as amended from time to time. "Committee" -- The Committee provided for in Section 3 of this Plan, as such Committee may be constituted from time to time. "Company"-- Centex Corporation, a Nevada corporation. "Fair Market Value" -- If a Share is traded on one or more established market or exchanges, the mean of the opening and closing price of the Share in the primary market or exchange on which the Share is traded, and if the Share is not so traded or the Share does not trade on the relevant date, the value determined in good faith by the Board. For purposes of valuing Shares to be made subject to Incentive Options, the Fair Market Value of stock shall be determined without regard to any restriction other than one which, by its terms, will never lapse. "Incentive Option" -- Stock Options that are intended to satisfy the requirements of Section 422 of the Code and Section 16 of this Plan. "Non-employee Director" -- An individual who satisfies the requirements of Rule 16b-3 promulgated under the Act. 1 <PAGE> 2 "Nonqualified Options" -- Stock Options which do not satisfy the requirements of Section 422 of the Code. "Option" -- An option to purchase one or more Shares of the Company granted under and pursuant to the Plan. Such Option may be either an Incentive Option or a Nonqualified Option. "Optionee" -- An individual who has been granted an Option under this Plan and who has executed a written option Agreement with the Company. "Plan"-- This Centex Corporation 1987 Stock Option Plan. "Permitted Transferees" -- (i) members of the Optionee's immediate family, (ii) one or more trusts for the benefit of such members of the Optionee's immediate family, (iii) partnerships in which such immediate family members are the only partners and (iv) limited liability companies in which such immediate family members are the only members. "Restricted Stock" -- Shares issued pursuant to Section 19 of the Plan. "Senior Management" -- Members of the senior management group of the Company and its Affiliates, such senior managers to be identified by the Chairman and Vice Chairman of the Board of the Company. "Share" -- A share of the Company's present twenty-five cents ($0.25) par value common stock and any share or shares of capital stock or other securities of the Company hereafter issued or issuable upon, in respect of or in substitution or in exchange for each present share. Such Shares may be unissued or reacquired Shares, as the Board, in its sole and absolute discretion, shall from time to time determine. 3. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") comprised of two or more Non-employee Directors appointed by the Board from time to time. The Committee shall (a) select the eligible employees or directors who are to receive Options or awards of Restricted Stock under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of Options or awards of Restricted Stock, (c) interpret the Plan, and (d) make all other determinations necessary or advisable for the administration of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. 4. SHARES SUBJECT TO PLAN (a) A maximum of 7,065,139 Shares shall be subject to grants of Options and awards of Restricted Stock under the Plan; provided that such maximum shall be increased or decreased as provided below in Section 12. (b) At any time and from time to time after the Plan takes effect, the Committee, pursuant to the provisions herein set forth, may grant Options and award Restricted Stock until the maximum number of Shares shall be exhausted or the Plan shall be sooner terminated; provided, however, that no Option shall be granted and no Restricted Stock shall be awarded after May 19, 2001. 2 <PAGE> 3 (c) Should any Option expire or be cancelled without being fully exercised, or should any Restricted Stock previously awarded be reacquired by the Company, the number of Shares with respect to which such Option shall not have been exercised prior to its expiration or cancellation and the number of Shares of such Restricted Stock so reacquired may again be optioned or awarded pursuant to the provisions hereof. (d) Any Shares withheld pursuant to subsection 18(c) shall not be available after such withholding for being optioned or awarded pursuant to the provisions hereof. 5. ELIGIBILITY Eligibility for the receipt of the grant of Options under the Plan shall be confined to (a) a limited number of persons who are employed by the Company, or one or more of its Affiliates and who are officers of or who, in the opinion of the Committee, hold other key positions in or for the Company or one or more of its Affiliates and (b) directors of the Company, including directors who are not employees of the Company or its Affiliates; provided that only employees of the Company or its Affiliates shall be eligible for the grant of Incentive Options. In addition, an individual who becomes a director of the Company, but who is not at the time he becomes a director also an employee of the Company, shall not be eligible for a grant of Options or an award of Restricted Stock, and shall not be eligible for the grant of an option, stock allocation, or stock appreciation right under any other plan of the Company or its affiliates (within the meaning of Rule 12b-2 promulgated under the Act) until the Board expressly declares such person eligible by resolution. In no event may an Option be granted to an individual who is not an employee of the Company or an Affiliate or a director of the Company. 6. GRANTING OF OPTIONS (a) From time to time while the Plan is in effect, the Committee may in its absolute discretion, select from among the persons eligible to receive a grant of Options under the Plan (including persons who have already received such grants of Options) such one or more of them as in the opinion of the Committee should be granted Options. The Committee shall thereupon, likewise in its absolute discretion, determine the number of Shares to be allotted for option to each person so selected; provided, however, that the total number of Shares subject to Options granted to any one person, including directors of the Company, when aggregated with the number of Shares of Restricted Stock awarded to such person, shall not exceed 706,513 Shares. (b) Each person so selected shall be offered an Option to purchase the number of Shares so allotted to him, upon such terms and conditions, consistent with the provisions of the Plan, as the Committee may specify. Each such person shall have a reasonable period of time, to be fixed by the Committee, within which to accept or reject the proffered Option. Failure to accept within the period so fixed may be treated as a rejection. (c) Each person who accepts an Option offered to him shall enter into an Agreement with the Company, in such form as the Committee may prescribe, setting forth the terms and conditions of the Option, whereupon such person shall become a participant in the Plan. In the event an individual is granted both one or more Incentive Options and one or more Nonqualified Options, such grants shall be evidenced by separate Agreements, one each for the Incentive Option grants and one each for the Nonqualified Options grants. The date which the Committee specifies to be the grant date of an Option to an individual shall constitute the date on which the Option covered by such Agreement is granted. In no event, however, shall an Optionee gain any rights in addition to those specified by the Committee in its grant, regardless of the time that may pass between the grant of the Option and the actual signing of the Agreement by the Company and the Optionee. 3 <PAGE> 4 7. OPTION PRICE The option price for each Share covered by each Incentive Option shall not be less than the greater of (a) the par value of each such Share or (b) the Fair Market Value of the Share at the time such Option is granted, except as provided hereinafter. The option price for each Share covered by each Nonqualified Option shall not be less than the greater of (a) the par value of each such Share or (b) 85% of the Fair Market Value of the Share at the time the Option is granted; provided, however, that the number of Shares covered by Nonqualified Options granted under this Plan that have an option price less than the Fair Market Value of a Share at the time the respective Option is granted shall not exceed 10% of the total number of Shares authorized to be issued under this Plan. If the Company or an Affiliate agrees to substitute a new Option under the Plan for an old Option, or to assume an old Option, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation (any of such events being referred to herein as a "Corporate Transaction"), the option price of the Shares covered by each such new Option or assumed Option may be other than the Fair Market Value of the stock at the time the Option is granted as determined by reference to a formula, established at the time of the Corporate Transaction, which will give effect to such substitution or assumption; provided, however, in no event shall -- (a) the excess of the aggregate Fair Market Value of the Share subject to the Option immediately after the substitution or assumption over the aggregate option price of such Shares be more than the excess of the aggregate Fair Market Value of all Shares subject to the Option immediately prior to the substitution or assumption over the aggregate option price of such Shares (b) in the case of an Incentive Option, the new Option or the assumption of the old Option give the Optionee additional benefits which he would not have under the old Option; or (c) the ratio of the option price to the Fair Market Value of the stock subject to the Option immediately after the substitution or assumption be more favorable to the Optionee than the ratio of the option price to the Fair Market Value of the stock subject to the old Option immediately prior such substitution or assumption, on a Share by Share basis. Notwithstanding the above, the provisions of this Section 7 with respect to the Option price in the event of a Corporate Transaction shall, in case of an Incentive Option, be subject to the requirements of Section 424(a) of the Code and the Treasury regulations and revenue rulings promulgated thereunder. In the case of an Incentive Option, in the event of a conflict between the terms of this Section 7 and the above cited statute, regulations, and rulings, or in the event of an omission in this Section 7 of a provision required by said laws, the latter shall control in all respects and are hereby incorporated herein by reference as if set out at length. 8. OPTION PERIOD (a) Each Option shall run for such period of time as the Committee may specify, but in no event for longer than ten (10) years from the date when the Option is granted, including the period of time provided in subsections (i) and (ii) of this subsection (a); and subject to such limits, and the further condition that, unless designated otherwise by the Committee, no Incentive Option shall become exercisable prior to one year from the date of its grant, (i) Except as provided below in this subsection (i), all rights to exercise an Option shall terminate within three months after the date the Optionee ceases to be an employee of at least one of the employers in the group of employers consisting of the Company and its Affiliates, or after the date the Optionee ceases to be a director of the Company, whichever may occur later, for any reason other than 4 <PAGE> 5 death, except that, (x) in the case of a Nonqualified Option which is held by an Optionee who is, on the date of cessation referred to in this clause, an officer or director of the Company (within the meanings thereof under Section 16b) of the Act), all rights to exercise such Option shall terminate within seven months after the date the Optionee ceases to be an employee of at least one of the employers in the group of employers consisting of the Company and its Affiliates, or, if later, after the date the Optionee ceases to be a director of the Company, for any reason other than death; and, except that, (y) the Committee, in its discretion, may provide in new Option grants or amend outstanding Options to provide an extended period of time during which an Optionee can exercise a Nonqualified Option to the maximum permissible period for which such Optionee's Option would have been exercisable in the absence of the Optionee's ceasing to be an employee of the Company and its Affiliates or ceasing to be a director of the Company; and, except that (z) in case the employment of the Optionee is terminated for cause, the Option shall thereafter be null and void for all purposes. (ii) If the Optionee ceases to be employed by at least one of the employers in the group of employers consisting of the Company and its Affiliates, or ceases to be a director of the Company, whichever may occur later, by reason of his death, all rights to exercise such Option shall terminate fifteen (15) months thereafter. (iii) If an Option is granted with a term shorter than ten (10) years, the Committee may extend the term of the Option, but for not more than ten (10) years from the date when the Option was originally granted. 9. OPTIONS NOT TRANSFERABLE No Option or interest therein shall be transferable by the person to whom it is granted otherwise than by will or by the applicable laws of descent and distribution. Notwithstanding the foregoing, the Committee may, in its sole discretion, provide in the Agreement relating to the grant of an Option that the Optionee may transfer such Option, without consideration, to members of the Optionee's immediate family or to one or more trusts for the benefit of such immediate family members or partnerships in which such immediate family members are the only partners. For purposes of this Section 9, "immediate family" shall mean the Optionee's spouse, parents, children (including adopted children) and grandchildren. Further, notwithstanding the foregoing, the Committee may, in its sole discretion, provide in each of those Agreements relating to the grant of an Option whose term will expire in 2000, 2001, 2003, 2004, 2005, 2006 or 2007 that a Director or Senior Management Optionee may transfer such Option to one or more Permitted Transferees with or without consideration to the Optionee provided that the following conditions are satisfied with respect to such transfer: (i) such transfer is made pursuant to the program that the Company has created to facilitate the reduction of its stock option overhang and is accomplished on or before March 5, 2000; (ii) the Permitted Transferee exercises the Option not more than 30 days following such transfer; (iii) all fees and expenses charged by accounting firms, law firms and all other third party consultants in connection with such transfer are paid by the Optionee, and such fees and expenses are not otherwise paid or reimbursed by the Company or any of its Affiliates; (iv) the Permitted Transferee agrees to be bound by all of the terms of the Agreement, except that once transferred by the Optionee to such Permitted Transferee, the Option may not be subsequently transferred except back to the Optionee; (v) if the consideration tendered by the Permitted Transferee for the Option is a term obligation, the principal amount under such term obligation will be due in full no later than the fifth anniversary of the Option's expiration date; and (vi) the Permitted Transferee agrees to inform the Company's Stock Plan Administrator upon (a) the sale or other transfer of the shares underlying the Option and (b) any other event or action taken by the Permitted Transferee with respect to the Option, the shares underlying the Option or the consideration for the Option, where such event or action will give rise to a recognizable event for the Company. 5 <PAGE> 6 10. EXERCISE OF OPTIONS (a) During the lifetime of an Optionee only he or his guardian or legal representative or transferee may exercise an Option granted to him. In the event of his death, any then exercisable portion of his Option may, within fifteen (15) months thereafter, or earlier date of termination of the Option, be exercised in whole or in part by any person empowered to do so under the deceased Optionee's will or under the applicable laws of descent and distribution. (b) At any time, and from time to time, during the period when any Option, or a portion thereof, is exercisable, such Option, or portion thereof, may be exercised in whole or in part; provided, however, that the Committee may require any Option which is partially exercised to be so exercised with respect to at least a stated minimum number of Shares. (c) Each exercise of an Option or portion or part thereof shall be evidenced by a notice in writing to the Company accompanied by payment in full of the option price of the Shares then being purchased. Payment in full shall mean payment of the full amount due, either in cash, by certified check or cashier's check or, with the consent of the Committee, with Shares owned by the Optionee, including an actual or deemed multiple series of exchanges of such Shares. (d) No Shares shall be issued until full payment therefor has been made, and an Optionee shall have none of the rights of a stockholder until Shares are issued to him. (e) Nothing herein or in any Agreement executed or Option granted hereunder shall require the Company to issue any Shares upon exercise of an Option if such issuance would, in the opinion of counsel for the Company, constitute a violation of the Securities Act of 1933, as amended, or any similar or superseding statute or statutes, or any other applicable statute or regulation, as then in effect. Upon the exercise of an Option or portion or part thereof, the Optionee shall give to the Company satisfactory evidence that he is acquiring such Shares for the purpose of investment only and not with a view to their distribution; provided, however, if or to the extent that the Shares subject to the Option shall be included in a registration statement filed by the Company, or one of its Affiliates, such investment representation shall be abrogated. 11. DELIVERY OF STOCK CERTIFICATES As promptly as may be practicable after an Option, or a portion or part thereof, has been exercised as hereinabove provided, the Company shall make delivery of one or more certificates for the appropriate number of Shares. In the event that an Optionee exercises both an Incentive Option, or a portion thereof, and a Nonqualified Option, or a portion thereof, separate stock certificates shall be issued, one for the Shares subject to the Incentive Option and one for the Shares subject to the Nonqualified Option. 12. CHANGES IN COMPANY'S SHARES AND CERTAIN CORPORATE TRANSACTIONS (a) If at any time while the Plan is in effect there shall be an increase or decrease in the number of issued and outstanding Shares of the Company effected without receipt of consideration therefor by the Company, through the declaration of a stock dividend or through any recapitalization or merger or otherwise in which the Company is the surviving corporation, resulting in a stock split-up, combination or exchange of Shares of the Company, then and in each such event: (i) An appropriate adjustment shall be made in the maximum number of Shares then subject to being optioned or awarded as Restricted Stock under the Plan, to the end that the same proportion of 6 <PAGE> 7 the Company's issued and outstanding Shares shall continue to be subject to being so optioned and awarded; (ii) Appropriate adjustment shall be made in the number of Shares and the option price per Share thereof then subject to purchase pursuant to each Option previously granted, to the end that the same proportion of the Company's issued and outstanding Shares in each such instance shall remain subject to purchase at the same aggregate option price: and (iii) In the case of Incentive Options, any such adjustments shall in all respects satisfy the requirements of Section 424(a) of the Code and the Treasury regulations and revenue rulings promulgated thereunder. Except as is otherwise expressly provided herein, the issue by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with a direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of or option price of Shares then subject to outstanding Options granted under the Plan. Furthermore, the presence of outstanding Options granted under the Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate (i) any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business; (ii) any merger or consolidation of the Company; (iii) any issue by the Company of debt securities or preferred or preference stock which would rank above the Shares subject to outstanding Options granted under the Plan; (iv) the dissolution or liquidation of the Company; (v) any sale, transfer or assignment of all or any part of the assets or business of the Company; or (vi) any other corporate act or proceeding, whether of a similar character or otherwise. (b) Notwithstanding anything to the contrary above, a dissolution or liquidation of the Company, a merger (other than a merger effecting a reincorporation of the Company in another state) or consolidation in which the Company is not the surviving corporation (or survives only as a subsidiary of another corporation in a transaction in which the stockholders of the parent of the Company and their proportionate interests therein immediately after the transaction are not substantially identical to the stockholders of the Company and their proportionate interests therein immediately prior to the transaction), a transaction in which another corporation becomes the owner of 50% or more of the total combined voting power of all classes of stock of the Company, or a change in control (as specified below), shall cause every Option then outstanding to become exercisable in full, subject to the limitation on the aggregate Fair Market Value of Shares that may become first exercisable during any calendar year set forth in Section 16, immediately prior to such dissolution, liquidation, merger, consolidation, transaction, or change in control, to the extent not theretofore exercised, without regard to the determination as to the periods and installments of exercisability contained in the Agreements if (and only if) such Options have not at that time expired or been terminated. For purposes of this paragraph, a change in control shall be deemed to have taken place if: (i) a third person, including a "group" as defined in Section 13(d)(3) of the Act, becomes the beneficial owner of Shares of the Company having 50% or more of the total number of votes that may be cast for the election of directors of the Company; or (ii) as a result of, or in connection with, a contested election for directors, the persons who were directors of the Company immediately before such election shall cease to constitute a majority of the Board. Notwithstanding the foregoing provisions of this paragraph, in the event of any such dissolution, merger, consolidation, transaction, or change in control, the Board may completely satisfy all obligations of the Company and its Affiliates with respect to any Option outstanding on the date of such event by delivering to the Optionee cash in an amount equal to the difference between the aggregate exercise price for Shares under the Option and the Fair Market Value of such Shares on the date of such event, such payment to be made within a reasonable time after such event. 7 <PAGE> 8 13. EFFECTIVE DATE The Plan shall be effective on May 20, 1987, the date of its adoption by the Board, but shall be submitted to the stockholders of the Company for ratification at the next regular or special meeting thereof to be held within twelve (12) months after the Board shall have adopted the Plan. If at such a meeting of the stockholders of the Company a quorum is present, the Plan shall be presented for ratification, and unless at such a meeting the Plan is ratified by the affirmative vote of a majority of the outstanding $0.25 par value common stock of the Company, then and in such event, the Plan and all Options granted under the Plan and all awards of Restricted Stock under the Plan shall become null and void and of no further force or effect. 14. AMENDMENT, SUSPENSION OR TERMINATION (a) Subject to the other terms and condition of this Plan and the limitations set forth in subsection 14(b) below, the Board may at any time amend, suspend or terminate the Plan; provided, however, that after the stockholders have ratified the Plan, the Board may not, without approval of the stockholders of the Company, amend the Plan so as to: (i) Increase the maximum number of Shares subject thereto, as specified above in Sections 4(a) and 12; or (ii) Increase the proportionate number of Shares which may be purchased pursuant to Option by any one person or awarded as Restricted Stock to any one person, as specified above in Section 6(a) or below in Section 19(a). (b) Neither the Board nor the Committee may amend the Plan or any Agreement to reduce the option price of an outstanding Option or modify, impair or cancel any existing Option without the consent of the holder thereof. 15. REQUIREMENTS OF LAW Notwithstanding anything contained herein to the contrary, the Company shall not be required to sell or issue Shares under any Option if the issuance thereof would constitute a violation by the Optionee or the Company of any provisions of any law or regulation of any governmental authority or any national securities exchange; and as a condition of any sale or issuance of Shares under Option the Company may require such agreements or undertakings, if any, as the Company may deem necessary or advisable to assure compliance with any such law or regulation. 16. INCENTIVE STOCK OPTIONS The Committee, in its discretion, may designate any Option granted under the Plan as an Incentive Option intended to qualify under Section 422 of the Code. Any provision of the Plan to the contrary notwithstanding, (i) no Incentive Option shall be granted to any person who, at the time such Incentive Option is granted, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any Affiliate unless the purchase price under such Incentive Option is at least 110 percent of the Fair Market Value of the Shares subject to an Incentive Option at the date of its grant and such Incentive Option is not exercisable after the expiration of five years from the date of its grant, and (ii) the aggregate Fair Market Value of the Shares subject to such Incentive Option and the aggregate Fair Market Value of the shares of stock of any Affiliate (or a predecessor of the Company or an Affiliate) subject to any other incentive stock option (within the meaning of 8 <PAGE> 9 Section 422 of the Code) of the Company and its Affiliates (or a predecessor corporation of any such corporation), that may become first exercisable in any calendar year, shall not (with respect to any Optionee) exceed $100,000, determined as of the date the Incentive Option is granted. For purposes of this Section 16, "predecessor corporation" means a corporation that was a party to a transaction described in Section 424(a) of the Code (or which would be so described if a substitution or assumption under such section had been effected) with the Company, or a corporation which, at the time the new incentive stock option (within the meaning of Section 422 of the Code) is granted, is an Affiliate of the Company or a predecessor corporation of any such corporations. 17. MODIFICATION OF OPTIONS Subject to the terms and conditions of and within the limitations of the Plan, the Committee may modify, extend or renew outstanding Options granted under the Plan, or accept the surrender of Options outstanding hereunder (to the extent not theretofore exercised) and authorize the granting of new Options hereunder in substitution therefor (to the extent not theretofore exercised). Notwithstanding the foregoing provisions of this Section 17, no modification of an Option granted hereunder shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option theretofore granted hereunder to such Optionee under the Plan, except as may be necessary, with respect to Incentive Options, to satisfy the requirements of Section 422 of the Code. 18. AGREEMENT PROVISIONS (a) Each Agreement shall contain such provisions (including, without limitation, restrictions or the removal of restrictions upon the exercise of the Option and the transfer of shares thereby acquired) as the Committee shall deem advisable. Each Agreement shall identify the Option evidenced thereby as an Incentive Option or Nonqualified Option, as the case may be. Incentive Options and Nonqualified Options may not both be covered by a single Agreement. Each such Agreement relating to Incentive Options granted hereunder shall contain such limitations and restrictions upon the exercise of the Incentive Option as shall be necessary for the Incentive Option to which such Agreement related to constitute an incentive stock option, as defined in Section 422 of the Code. (b) The Plan shall be annexed to each Agreement and each Agreement shall recite that it is subject to the Plan and that the Plan shall govern where there is any inconsistency between the Plan and the Agreement. (c) Each Agreement shall contain an agreement and covenant by the Optionee, in such form as the Committee may require in its discretion, that he consents to and will take whatever affirmative actions are required, in the opinion of the Board or Committee, to enable the Company or appropriate Affiliate to satisfy its Federal income tax and FICA withholding obligations. An Agreement may contain such provisions as the Committee deems appropriate to enable the Company or its Affiliates to satisfy such withholding obligations, including provisions permitting the Company, on exercise of an Option, to withhold Shares otherwise issuable to the Optionee exercising the Option to satisfy the applicable withholding obligations. (d) Each Agreement relating to an Incentive Option shall contain a covenant by the Optionee immediately to notify the Company in writing of any disqualifying disposition (within the meaning of section 421(b) of the Code) of an Incentive Option. 19. RESTRICTED STOCK (a) Shares of Restricted Stock may be awarded by the Committee to such individuals as are eligible for grants of Options, as the Committee may determine at any time and from time to time before the termination 9 <PAGE> 10 of the Plan. The total number of Shares of Restricted Stock awarded to any one person, including directors of the Company, when aggregated with the number of Shares subject to Options in favor of such person, shall not exceed shall not exceed 706,513 Shares. (b) A Share of Restricted Stock is a Share that does not irrevocably vest in the holder or that may not be sold, exchanged, pledged, transferred, assigned or otherwise encumbered or disposed of until the terms and conditions set by the Committee at the time of the award of the Restricted Stock have been satisfied. A Share of Restricted Stock shall be subject to a minimum three-year vesting period and shall contain such other restrictions, terms and conditions as the Committee may establish, which may include, without limitation, the rendition of services to the Company or its Affiliates for a specified time or the achievement of specific goals. The Committee may, when it deems it appropriate, require the recipient of an award of Restricted Stock to enter into an agreement with the Company evidencing the understanding of the parties with respect to such award. If an individual receives Shares of Restricted Stock, whether or not escrowed as provided below, the individual shall be the record owner of such Shares and shall have all the rights of a stockholder with respect to such Shares (unless the escrow agreement, if any, specifically provides otherwise), including the right to vote and the right to receive dividends or other distributions made or paid with respect to such Shares. Any certificate or certificates representing Shares of Restricted Stock shall bear a legend similar to the following: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO THE TERMS OF THE CENTEX CORPORATION 1987 STOCK OPTION PLAN AND MAY NOT BE SOLD, PLEDGED, TRANSFERRED, ASSIGNED OR OTHERWISE ENCUMBERED IN ANY MANNER EXCEPT AS SET FORTH IN THE TERMS OF SUCH AWARD DATED , 19 . In order to enforce the restrictions, terms and conditions that may be applicable to an individual's Shares of Restricted Stock, the Committee may require the individual, upon the receipt of a certificate or certificates representing such Shares, or at any time thereafter, to deposit such certificate or certificates, together with stock powers and other instruments of transfer, appropriately endorsed in blank, with the Company or an escrow agent designated by the Company under an escrow agreement in such form as shall be determined by the Committee. After the satisfaction of the terms and conditions set by the Committee at the time of an award of Restricted Stock to an individual, which award is not subject to a non-lapse feature, a new certificate, without the legend set forth above, for the number of Shares that are no longer subject to such restrictions, terms and conditions shall be delivered to the individual. If an individual to whom Restricted Stock has been awarded dies after satisfaction of the terms and conditions for the payment of all or a portion of the award but prior to the actual payment of all or such portion thereof, such payment shall be made to the individual's beneficiary or beneficiaries at the time and in the same manner that such payment would have been made to the individual. The Committee may cancel all or any portion of any outstanding restrictions prior to the expiration of such restrictions with respect to any or all of the Shares of Restricted Stock awarded to an individual hereunder only upon the individual's death, disability or retirement on or after the earlier of (i) age 65 or (ii) such time as the sum of the individual's age and years of service equals 70, provided such individual is at least 55. With respect to the occurrence of any event specified in the last paragraph of Section 12, the restrictions, if any, applicable to any outstanding Shares awarded as Restricted Stock shall lapse immediately prior to the occurrence of the event. (c) Subject to the provisions of subsection 19(b) above, if an individual to whom Restricted Stock has been awarded ceases to be employed by at least one of the employers in the group of employers consisting of 10 <PAGE> 11 the Company and its Affiliates, or ceases to be a director of the Company, whichever may occur later, for any reason prior to the satisfaction of any terms and conditions of an award, any Restricted Stock remaining subject to restrictions shall thereupon be forfeited by the individual and transferred to, and reacquired by, the Company or an Affiliate at no cost to the Company or the Affiliate. In such event, the individual, or in the event of his death, his personal representative, shall forthwith deliver to the Secretary of the Company the certificates for the Shares of Restricted Stock remaining subject to such restrictions, accompanied by such instruments of transfer, if any, as may reasonably be required by the Secretary of the Company. (d) In case of any consolidation or merger of another corporation into the Company in which the Company is the surviving corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the Shares (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination, but including any change in such shares into two or more classes or series of shares), the Committee may provide that payment of Restricted Stock shall take the form of the kind and amount of shares of stock and other securities (including those of any new direct or indirect parent of the Company), property, cash or any combination thereof receivable upon such reclassification, change, consolidation or merger. 20. GENERAL (a) The proceeds received by the Company from the sale of Shares pursuant to Options shall be used for general corporate purposes. (b) Nothing contained in the Plan, or in any Agreement, shall confer upon any Optionee or recipient of Restricted Stock the right to continue in the employ of the Company or any Affiliate, or interfere in any way with the rights of the Company or any Affiliate to terminate his employment at any time. (c) Neither the members of the Board nor any member of the Committee shall be liable for any act, omission, or determination taken or made in good faith with respect to the Plan or any Option or Restricted Stock granted under it; and the members of the Board and the Committee shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including counsel fees) arising therefrom to the full extent permitted by law and under any directors and officers liability or similar insurance coverage that may be in effect from time to time. (d) As partial consideration for the granting of each Option or award of Restricted Stock hereunder, the Optionee or recipient shall agree with the Company that he will keep confidential all information and knowledge which he has relating to the manner and amount of his participation in the Plan; provided, however, that such information may be disclosed as required by law or given in confidence to the individual's spouse, tax or financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan. In the event any breach of this promise comes to the attention of the Committee, it shall take into consideration such breach, in determining whether to grant any future Option or award any future Restricted Stock to such individual, as a factor militating against the advisability of granting any such future Option or awarding any such future Restricted Stock to such individual. (e) Participation in the Plan shall not preclude an individual from eligibility in any other stock option plan of the Company or any Affiliate or any old age benefit, insurance, pension, profit sharing, retirement, bonus, or other extra compensation plans which the Company or any Affiliate has adopted, or may, at any time, adopt for the benefit of its employees or directors. 11 <PAGE> 12 (f) Any payment of cash or any issuance or transfer of Shares to the Optionee, or to his legal representative, heir, legatee, or distributee, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Board or Committee may require any Optionee, legal representative, heir, legatee, or distributee, as a condition precedent to such payment, to execute a release and receipt therefor in such form as it shall determine. (g) Neither the Committee nor the Board nor the Company guarantees the Shares from loss or depreciation. (h) All expenses incident to the administration, termination, or protection of the Plan, including, but not limited to, legal and accounting fees, shall be paid by the Company or its Affiliates. (i) Records of the Company and its Affiliates regarding an individual's period of employment, termination of employment and the reason therefor, leaves of absence, re-employment, tenure as a director and other matters shall be conclusive for all purposes hereunder, unless determined by the Board or Committee to be incorrect. (j) The Company and its Affiliates shall, upon request or as may be specifically required hereunder, furnish or cause to be furnished, all of the information or documentation which is necessary or required by the Board or Committee to perform its duties and functions under the Plan. (k) The Company assumes no obligation or responsibility to an Optionee or recipient of Restricted Stock or his personal representatives, heirs, legatees, or distributees for any act of, or failure to act on the part of, the Board or Committee. (l) Any action required of the Company shall be by resolution of its Board or by a person authorized to act by resolution of the Board. Any action required of the Committee shall be by resolution of the Committee or by a person authorized to act by resolution of the Committee. (m) If any provision of this Plan or any Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan or the Agreement, as the case may be, but such provision shall be fully severable and the Plan or the Agreement, as the case may be, shall be construed and enforced as if the illegal or invalid provision had never been included herein or therein. (n) Whenever any notice is required or permitted hereunder, such notice must be in writing and personally delivered or sent by mail. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered on the date on which it is personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address which such person has theretofore specified by written notice delivered in accordance herewith. The Company, an Optionee or a recipient of Restricted Stock may change, at any time and from time to time, by written notice to the other, the address which it or he had theretofore specified for receiving notices. Until changed in accordance herewith, the Company and each Optionee and recipient of Restricted Stock shall specify as its and his address for receiving notices the address set forth in the Agreement pertaining to the shares of Stock to which such notice relates. (o) Any person entitled to notice hereunder may waive such notice. 12 <PAGE> 13 (p) The Plan shall be binding upon the Optionee or recipient of Restricted Stock, his heirs, legatees, and legal representatives, upon the Company, its successors, and assigns, and upon the Board and Committee, and their successors. (q) The titles and headings of Sections and paragraphs are included for convenience of reference only and are not to be considered in construction of the provisions hereof. (r) All questions arising with respect to the provisions of the Plan shall be determined by application of the laws of the State of Nevada except to the extent Nevada law is preempted by federal law. The obligation of the Company to sell and deliver Shares hereunder is subject to applicable laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Shares. (s) Words used in the masculine shall apply to the feminine where applicable, and wherever the context of this Plan dictates, the plural shall be read as the singular and the singular as the plural. 21. WITHHOLDING TAXES Federal, state, or local law may require the withholding of taxes applicable to gains resulting from the exercise of Nonqualified Options granted hereunder. Unless otherwise prohibited by the Committee, each participant may satisfy any such withholding tax obligation by electing (i) to tender a cash payment to the Company, (ii) to authorize the Company to withhold from the shares of stock of the Company otherwise issuable to the participant as a result of the exercise of the Nonqualified Option a number of shares having a fair market value, as of the date the withholding tax obligation arises, equal to the withholding obligations, or, at the election of the participant, up to the maximum of taxes due (the "Share Withholding Alternative"), (iii) to deliver to the Company previously acquired shares of common stock of the Company having a fair market value, as of the date the withholding tax obligation arises, equal to the amount to be withheld, or at the election of the participant, up to the maximum of taxes due, or (iv) any combination of the foregoing, provided the combination permits the payment of all withholding taxes attributable to the exercise of the Nonqualified Option. A Participant's election to pay the withholding tax obligation must be made in writing delivered to the Company before the time of exercise, or simultaneously with the exercise, of such Participant's Nonqualified Option. A valid and binding written election of the Share Withholding Alternative shall be irrevocable. A participant's failure to elect a withholding alternative prior to the time such election is required to be made shall be deemed to be an election to pay the withholding tax by tendering a cash payment to the Company. For purposes of this Section 21, the fair market value of the shares used to pay withholding taxes is the mean between the highest and lowest price quoted on the New York Stock Exchange for one share of common stock of the Company on the Tax Date. Also, as used in this Section 21, "Tax Date" shall mean the date on which a withholding tax obligation arises in connection with an exercise of a nonqualified stock option, which date shall be presumed to be the date of exercise, unless shares subject to a substantial risk of forfeiture (as defined in section 83(c)(1) or (c)(3) of the Code) are issuable on exercise of the option and the participant does not make a timely election under section 83(b) of the Code with respect thereto, in which case the Tax Date for such shares is the date on which the substantial risk of forfeiture lapses. Fractional shares remaining after payment of the withholding taxes shall be paid to the participant in cash. 13 </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, 1999, 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-31-2000 <PERIOD-START> APR-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 161,713 <SECURITIES> 0 <RECEIVABLES> 1,126,822 <ALLOWANCES> 0 <INVENTORY> 2,096,026 <CURRENT-ASSETS> 0 <PP&E> 602,037 <DEPRECIATION> 264,012 <TOTAL-ASSETS> 4,401,156 <CURRENT-LIABILITIES> 0 <BONDS> 570,179 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 14,785 <OTHER-SE> 1,347,235 <TOTAL-LIABILITY-AND-EQUITY> 4,401,156 <SALES> 4,230,837 <TOTAL-REVENUES> 4,230,837 <CGS> 3,807,341 <TOTAL-COSTS> 3,807,341 <OTHER-EXPENSES> 75,498 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 45,828 <INCOME-PRETAX> 302,170 <INCOME-TAX> 115,063 <INCOME-CONTINUING> 187,107 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 187,107 <EPS-BASIC> 3.15 <EPS-DILUTED> 3.06 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.2 <SEQUENCE>4 <DESCRIPTION>FINANCIAL DATA SCHEDULE-3333 HOLDING CORPORATION <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3333 HOLDING CORPORATION'S DECEMBER 31, 1999, 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-31-2000 <PERIOD-START> APR-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 19 <SECURITIES> 0 <RECEIVABLES> 10 <ALLOWANCES> 0 <INVENTORY> 750 <CURRENT-ASSETS> 0 <PP&E> 191 <DEPRECIATION> 83 <TOTAL-ASSETS> 2,764 <CURRENT-LIABILITIES> 0 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1 <OTHER-SE> (1,914) <TOTAL-LIABILITY-AND-EQUITY> 2,764 <SALES> 457 <TOTAL-REVENUES> 457 <CGS> 1,538 <TOTAL-COSTS> 1,538 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> (1,081) <INCOME-TAX> 0 <INCOME-CONTINUING> (1,081) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (1,081) <EPS-BASIC> 0.00 <EPS-DILUTED> 0.00 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.3 <SEQUENCE>5 <DESCRIPTION>FINANCIAL DATA SCHEDULE-CENTEX DEVELOPMENT CO, LP <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTEX DEVELOPMENT COMPANY, L.P.'S DECEMBER 31, 1999, 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-31-2000 <PERIOD-START> APR-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 24,278 <SECURITIES> 0 <RECEIVABLES> 16,235 <ALLOWANCES> 0 <INVENTORY> 369,643 <CURRENT-ASSETS> 0 <PP&E> 3,923 <DEPRECIATION> 421 <TOTAL-ASSETS> 455,490 <CURRENT-LIABILITIES> 0 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 71,421 <TOTAL-LIABILITY-AND-EQUITY> 455,490 <SALES> 249,249 <TOTAL-REVENUES> 249,249 <CGS> 247,603 <TOTAL-COSTS> 247,603 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 1,646 <INCOME-TAX> 601 <INCOME-CONTINUING> 1,045 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 1,045 <EPS-BASIC> 0.00 <EPS-DILUTED> 0.00 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

DE

https://www.sec.gov/Archives/edgar/data/315189/0000315189-00-000012.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, C+WSWca+OYB2TlMaSdBA3TV1tBDG1Hn5q8ua8q1VhV0pMjyN8ylDA5vz3IZjnaod RtkhmoNId5ckTSZw5VahOw== <SEC-DOCUMENT>0000315189-00-000012.txt : 20000314 <SEC-HEADER>0000315189-00-000012.hdr.sgml : 20000314 ACCESSION NUMBER: 0000315189-00-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000313 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: SEC FILE NUMBER: 001-04121 FILM NUMBER: 568078 BUSINESS ADDRESS: STREET 1: ONE JOHN DEERE PLACE CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097658000 </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 January 31, 2000 -------------------------- Commission file no: 1-4121 -------------------------- DEERE & COMPANY Delaware 36-2382580 (State of incorporation) (IRS employer identification no.) One John Deere Place 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, 2000, 234,039,275 shares of common stock, $1 par value, of the registrant were outstanding. - ---------------------------------------------------------------- Page 1 of 21 Pages. Index to Exhibits: Page 19 <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY CONSOLIDATED STATEMENT OF CONSOLIDATED INCOME (Deere & Company and Consolidated Subsidiaries) Millions of dollars except per Three Months Ended share amounts January 31 (Unaudited) 2000 1999 Net Sales and Revenues Net sales of equipment $1,880.0 $1,973.2 Finance and interest income 303.4 259.0 Insurance and health care premiums 112.5 179.8 Investment income 9.1 18.7 Other income 34.3 27.8 Total 2,339.3 2,458.5 Costs and Expenses Cost of goods sold 1,552.5 1,653.8 Research and development expenses 102.6 95.9 Selling, administrative and general expenses 315.4 301.8 Interest expense 146.8 134.1 Insurance and health care claims and benefits 90.3 153.9 Other operating expenses 71.9 42.7 Total 2,279.5 2,382.2 Income of Consolidated Group Before Income Taxes 59.8 76.3 Provision for income taxes 20.8 26.5 Income of Consolidated Group 39.0 49.8 Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates Credit .1 .4 Other (1.4) (.5) Total (1.3) (.1) Net Income $ 37.7 $ 49.7 Per Share: Net income - basic $ .16 $ .21 Net income - diluted $ .16 $ .21 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 STATEMENT OF CONSOLIDATED INCOME (Deere & Company with Financial Services on the Equity Basis) Millions of dollars except per Three Months Ended share amounts January 31 (Unaudited) 2000 1999 Net Sales and Revenues Net sales of equipment $1,880.0 $1,973.2 Finance and interest income 25.0 21.8 Insurance and health care premiums Investment income 6.6 Other income 22.5 15.5 Total 1,934.1 2,010.5 Costs and Expenses Cost of goods sold 1,556.8 1,658.5 Research and development expenses 102.6 95.9 Selling, administrative and general expenses 239.4 207.8 Interest expense 36.8 39.9 Insurance and health care claims and benefits Other operating expenses 7.6 (2.2) Total 1,943.2 1,999.9 Income of Consolidated Group Before Income Taxes (9.1) 10.6 Provision for income taxes (4.0) 3.8 Income of Consolidated Group (5.1) 6.8 Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates Credit 41.0 41.6 Other 1.8 1.3 Total 42.8 42.9 Net Income $ 37.7 $ 49.7 <PAGE> DEERE & COMPANY FINANCIAL SERVICES STATEMENT OF CONSOLIDATED INCOME Millions of dollars except per Three Months Ended share amounts January 31 (Unaudited) 1999 1998 Net Sales and Revenues Net sales of equipment Finance and interest income $ 282.9 $ 240.7 Insurance and health care premiums 117.6 186.6 Investment income 2.5 18.7 Other income 19.2 20.7 Total 422.2 466.7 Costs and Expenses Cost of goods sold Research and development expenses Selling, administrative and general expenses 76.9 95.2 Interest expense 114.5 97.6 Insurance and health care claims and benefits 90.3 155.7 Other operating expenses 71.6 52.5 Total 353.3 401.0 Income of Consolidated Group Before Income Taxes 68.9 65.7 Provision for income taxes 24.7 22.7 Income of Consolidated Group 44.2 43.0 Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates Credit .1 .4 Other .1 Total .2 .4 Net Income $ 44.4 $ 43.4 Page 2 <PAGE> DEERE & COMPANY CONSOLIDATED CONDENSED CONSOLIDATED (Deere & Company and BALANCE SHEET Consolidated Subsidiaries) Millions of dollars January 31 October 31 January 31 (Unaudited) 2000 1999 1999 Assets Cash and short-term investments $ 297.5 $ 295.5 $ 325.5 Cash deposited with unconsolidated subsidiaries Cash and cash equivalents 297.5 295.5 325.5 Marketable securities 115.5 315.5 870.8 Receivables from unconsolidated subsidiaries and affiliates 20.4 30.2 48.4 Trade accounts and notes receivable - net 3,180.1 3,251.1 3,828.8 Financing receivables - net 6,998.4 6,742.6 6,696.7 Other receivables 258.1 273.9 519.3 Equipment on operating leases - net 1,752.7 1,654.7 1,256.5 Inventories 1,781.0 1,294.3 1,614.7 Property and equipment - net 1,751.3 1,782.3 1,674.3 Investments in unconsolidated subsidiaries and affiliates 166.0 151.5 173.8 Intangible assets - net 294.1 295.1 212.0 Prepaid pension costs 621.4 619.9 662.3 Other assets 199.3 185.5 103.5 Deferred income taxes 625.8 598.1 400.2 Deferred charges 82.8 88.0 116.4 Total $18,144.4 $17,578.2 $18,503.2 Liabilities and Stockholders' Equity Short-term borrowings $ 5,493.0 $ 4,488.2 $ 5,871.2 Payables to unconsolidated subsidiaries and affiliates 31.5 15.5 31.9 Accounts payable and accrued expenses 2,327.7 2,432.8 2,359.5 Insurance and health care claims and reserves 60.7 55.4 402.9 Accrued taxes 120.0 144.8 141.7 Deferred income taxes 61.8 63.0 18.3 Long-term borrowings 3,457.2 3,806.2 3,275.7 Retirement benefit accruals and other liabilities 2,497.7 2,478.0 2,373.5 Total liabilities 14,049.6 13,483.9 14,474.7 Common stock, $1 par value (issued shares at January 31, 2000 - 265,878,758) 1,855.4 1,850.4 1,788.5 Common stock in treasury (1,460.4) (1,469.4) (1,479.9) Unamortized restricted stock compensation (21.5) (21.3) (25.1) Retained earnings 3,841.5 3,855.3 3,824.3 Total 4,215.0 4,215.0 4,107.8 Accumulated other comprehensive income (loss) (120.2) (120.7) (79.3) Stockholders' equity 4,094.8 4,094.3 4,028.5 Total $18,144.4 $17,578.2 $18,503.2 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. <PAGE> DEERE & COMPANY EQUIPMENT OPERATIONS CONDENSED CONSOLIDATED (Deere & Company with Financial BALANCE SHEET Services on the Equity Basis) Millions of dollars January 31 October 31 January 31 (Unaudited) 2000 1999 1999 Assets Cash and short-term investments $ 116.1 $ 111.7 $ 80.3 Cash deposited with 117.4 92.8 unconsolidated subsidiaries 116.1 229.1 173.1 Cash and cash equivalents 205.3 Marketable securities Receivables from unconsolidated subsidiaries and affiliates 280.6 266.0 227.4 Trade accounts and notes receivable - net 3,180.1 3,251.1 3,828.8 Financing receivables - net 89.2 118.4 83.4 Other receivables 122.8 129.4 42.2 Equipment on operating leases - net 1.8 2.6 Inventories 1,781.0 1,294.3 1,614.7 Property and equipment - net 1,706.2 1,738.8 1,625.7 Investments in unconsolidated subsidiaries and affiliates 1,431.6 1,362.8 1,693.9 Intangible assets - net 293.8 294.8 204.8 Prepaid pension costs 621.4 619.9 662.3 Other assets 104.0 95.7 73.9 Deferred income taxes 620.1 592.9 379.1 Deferred charges 76.3 80.8 85.5 Total $10,425.0 $10,281.9 $10,694.8 Liabilities and Stockholders' Equity Short-term borrowings $ 933.9 $ 642.2 $ 2,076.2 Payables to unconsolidated subsidiaries and affiliates 60.5 15.5 31.9 Accounts payable and accrued expenses 1,706.8 1,891.9 1,473.8 Insurance and health care claims and reserves Accrued taxes 105.7 138.1 136.3 Deferred income taxes 7.4 7.2 5.5 Long-term borrowings 1,040.9 1,036.1 601.2 Retirement benefit accruals and other liabilities 2,475.0 2,456.6 2,341.4 Total liabilities 6,330.2 6,187.6 6,666.3 Common stock, $1 par value (issued shares at January 31, 2000 - 265,878,758) 1,855.4 1,850.4 1,788.5 Common stock in treasury (1,460.4) (1,469.4) (1,479.9) Unamortized restricted stock compensation (21.5) (21.3) (25.1) Retained earnings 3,841.5 3,855.3 3,824.3 Total 4,215.0 4,215.0 4,107.8 Accumulated other comprehensive income (loss) (120.2) (120.7) (79.3) Stockholders' equity 4,094.8 4,094.3 4,028.5 Total $10,425.0 $10,281.9 $10,694.8 <PAGE> DEERE & COMPANY FINANCIAL SERVICES CONDENSED CONSOLIDATED BALANCE SHEET Millions of dollars January 31 October 31 January 31 (Unaudited) 2000 1999 1999 Assets Cash and short-term investments $ 181.4 $ 183.8 $ 245.2 Cash deposited with unconsolidated subsidiaries Cash and cash equivalents 181.4 183.8 245.2 Marketable securities 115.5 110.1 870.8 Receivables from unconsolidated subsidiaries and affiliates 29.1 4.8 6.7 Trade accounts and notes receivables - net Financing receivables - net 6,909.3 6,624.2 6,613.2 Other receivables 135.3 144.5 477.1 Equipment on operating leases - net 1,750.9 1,652.2 1,256.5 Inventories Property and equipment - net 45.1 43.5 48.6 Investments in unconsolidated subsidiaries and affiliates 11.1 9.9 20.9 Intangible assets - net .3 .3 7.2 Prepaid pension costs Other assets 95.2 89.8 29.6 Deferred income taxes 5.6 5.2 21.0 Deferred charges 6.6 7.2 30.9 Total $9,285.4 $8,875.5 $9,627.7 Liabilities and Stockholders' Equity Short-term borrowings $4,559.1 $3,846.0 $3,795.0 Payables to unconsolidated subsidiaries and affiliates 260.2 358.1 278.5 Accounts payable and accrued expenses 620.9 540.8 885.6 Insurance and health care claims and reserves 60.7 55.4 402.9 Accrued taxes 14.3 6.8 5.4 Deferred income taxes 54.4 55.8 12.8 Long-term borrowings 2,416.3 2,770.1 2,674.6 Retirement benefit accruals and other liabilities 22.7 21.3 32.1 Total liabilities 8,008.6 7,654.3 8,086.9 Common stock, $1 par value (issued shares at January 31, 2000 - 265,878,758) 241.4 229.1 247.5 Common stock in treasury Unamortized restricted stock compensation Retained earnings 1,045.1 1,005.6 1,284.5 Total 1,286.5 1,234.7 1,532.0 Accumulated other comprehensive income (loss) (9.7) (13.5) 8.8 Stockholders' equity 1,276.8 1,221.2 1,540.8 Total $9,285.4 $8,875.5 $9,627.7 Page 3 <PAGE> DEERE & COMPANY CONSOLIDATED CONDENSED STATEMENT OF (Deere & Company and CONSOLIDATED CASH FLOWS Consolidated Subsidiaries) Three Months Ended January 31 Millions of dollars (Unaudited) 2000 1999 Cash Flows from Operating Activities Net income $ 37.7 $ 49.7 Adjustments to reconcile net income to net cash provided by (used for) operating activities (454.3) (446.8) Net cash provided by (used for) operating activities (416.6) (397.1) Cash Flows from Investing Activities Collections of financing receivables 1,794.8 1,598.4 Proceeds from sales of financing receivables 71.3 102.1 Proceeds from maturities and sale of marketable securities 215.5 37.3 Proceeds from sales of equipment on operating leases 61.7 38.1 Cost of financing receivables acquired (2,007.8) (2,042.2) Purchases of marketable securities (19.4) (33.8) Purchases of property and equipment (37.3) (54.9) Cost of operating leases acquired (209.5) (125.2) Acquisitions of businesses, net of cash acquired (14.9) Other 69.1 71.8 Net cash provided by (used for) operating activities (76.5) (408.4) Cash Flows from Financing Activities Increase (decrease) in short-term borrowings 733.2 541.7 Change in intercompany receivables/payables Proceeds from long-term borrowings 162.7 675.0 Principal payments on long-term borrowings (353.5) (297.5) Proceeds from issuance of common stock 4.5 .4 Repurchases of common stock (46.1) Dividends paid (51.4) (51.7) Other Net cash provided by financing activities 495.5 821.8 Effect of Exchange Rate Changes on Cash (.4) (.5) Net Increase (Decrease) in Cash and Cash Equivalents 2.0 15.8 Cash and Cash Equivalents at Beginning of Period 295.5 309.7 Cash and Cash Equivalents at End of Period $ 297.5 $ 325.5 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 with CONSOLIDATED CASH FLOWS Financial Services on the Equity Basis) Three Months Ended January 31 Millions of dollars (Unaudited) 2000 1999 Cash Flows from Operating Activities Net income $ 37.7 $ 49.7 Adjustments to reconcile net income to net cash provided by (used for) operating activities (601.8) (566.4) Net cash provided by (used for) operating activities (564.1) (516.7) Cash Flows from Investing Activities Collections of financing receivables 30.0 7.5 Proceeds from sales of financing receivables Proceeds from maturities and sale of marketable securities 202.8 Proceeds from sales of equipment on operating leases .1 Cost of financing receivables acquired (.3) (9.0) Purchases of marketable securities Purchases of property and equipment (34.7) (50.9) Cost of operating leases acquired (.3) Acquisitions of businesses, net of cash acquired (13.8) Other 1.8 3.5 Net cash provided by (used for) investing activities 185.6 (48.9) Cash Flows from Financing Activities Increase (decrease) in short-term borrowings 276.6 561.2 Change in intercompany receivables/payables 36.4 17.6 Proceeds from long-term borrowings 50.0 Principal payments on long-term borrowings Proceeds from issuance of common stock 4.5 .4 Repurchases of common stock (46.1) Dividends paid (51.4) (51.7) Other (.1) Net cash provided by financing activities 266.1 531.3 Effect of Exchange Rate Changes on Cash (.6) (.5) Net Increase (Decrease) in Cash and Cash Equivalents (113.0) (34.8) Cash and Cash Equivalents at Beginning of Period 229.1 207.9 Cash and Cash Equivalents at End of Period $116.1 $173.1 <PAGE> DEERE & COMPANY FINANCIAL SERVICES CONDENSED STATEMENT OF Three Months Ended CONSOLIDATED CASH FLOWS January 31 Millions of dollars (Unaudited) 2000 1999 Cash Flows from Operating Activities Net income $ 44.4 $ 43.4 Adjustments to reconcile net income to net cash provided by (used for) operating activities 108.1 81.2 Net cash provided by (used for) operating activities 152.5 124.6 Cash Flows from Investing Activities Collections of financing receivables 1,764.8 1,590.8 Proceeds from sales of financing receivables 71.3 102.2 Proceeds from maturities and sale of marketable securities 12.7 37.3 Proceeds from sales of equipment on operating leases 61.6 38.1 Cost of financing receivables acquired (2,007.4) (2,033.2) Purchases of marketable securities (19.4) (33.8) Purchases of property and equipment (2.6) (4.0) Cost of operating leases acquired (209.2) (125.2) Acquisitions of businesses, net of cash acquired (1.1) Other 67.2 68.3 Net cash provided by (used for) investing activities (262.1) (359.5) Cash Flows from Financing Activities Increase (decrease) in short-term borrowings 456.6 (19.5) Change in intercompany receivables/payables (153.8) (64.4) Proceeds from long-term borrowings 162.7 625.0 Principal payments on long-term borrowings (353.5) (297.5) Proceeds from issuance of common stock Repurchases of common stock Dividends paid (5.0) (5.0) Other Net cash provided by financing activities 107.0 238.6 Effect of Exchange Rate Changes on Cash .2 Net Increase (Decrease) in Cash and Cash Equivalents (2.4) 3.7 Cash and Cash Equivalents at Beginning of Period 183.8 241.5 Cash and Cash Equivalents at End of Period $181.4 $245.2 Page 4 <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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates. (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, construction equipment, commercial and consumer equipment and special technologies 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. The insurance operations were sold in the fourth quarter of 1999. CONSOLIDATED - These data represent the consolidation of the Equipment Operations and Financial Services. 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 2000 1999 Balance, beginning of period $3,855.3 $3,839.5 Net income 37.7 49.7 Dividends declared (51.5) (50.7) Other (14.2) Balance, end of period $3,841.5 $3,824.3 Page 5 <PAGE> (4) An analysis of the cumulative adjustment follows in millions of dollars: Three Months Ended January 31 2000 1999 Balance, beginning of period $(107.4) $(80.5) Translation adjustment 9.4 (7.4) Income taxes applicable to translation adjustments (4.0) (1.7) Balance, end of period $(102.0) $(89.6) (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 a "first-in, first-out" (FIFO) method, estimated inventories by major classification in millions of dollars would have been as follows: January 31 October 31 January 31 2000 1999 1999 Raw Materials and supplies $ 375 $ 257 $ 341 Work-in-process 459 370 555 Finished machines and parts 2,004 1,721 1,776 Total FIFO value 2,838 2,348 2,672 Adjustment to LIFO basis 1,057 1,054 1,057 Inventories $1,781 $1,294 $1,615 (6) At January 31, 2000, the net unpaid balance of all retail notes previously sold by the Financial Services operations was $2,348 million and the Company's maximum exposure under all related recourse provisions was $169 million. At January 31, 2000, the Company had commitments of approximately $84 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 2000 1999 Dividends declared $.22 $.22 Dividends paid $.22 $.22 Page 6 <PAGE> (8) Worldwide net sales and revenues, operating profit and identifiable assets by segment in millions of dollars follow: Three Months Ended January 31 % 2000 1999 Change Net sales: Agricultural equipment* $ 1,035 $ 1,157 - 11 Construction equipment 338 387 - 13 Commercial and consumer equipment 493 429 + 15 Other 14 Total net sales 1,880 1,973 - 5 Credit revenues 301 261 + 15 Other revenues 158 225 - 30 Total net sales and revenues** $ 2,339 $ 2,459 - 5 Operating profit***: Agricultural equipment $ 14 $ 18 - 22 Construction equipment 11 25 - 56 Commercial and consumer equipment 9 12 - 25 Credit 64 65 - 2 Other (9) (3) +200 Total operating profit** 89 117 - 24 Interest, corporate expenses-net and income taxes (51) (67) - 24 Net income $ 38 $ 50 - 24 Identifiable assets: Agricultural equipment $ 4,188 $ 4,921 - 15 Construction equipment 832 935 - 11 Commercial and consumer equipment 2,294 1,859 + 23 Credit 9,076 8,385 + 8 Other 320 1,252 - 74 Corporate 1,434 1,151 + 25 Total assets $18,144 $18,503 - 2 * Additional intersegment sales of agricultural equipment $ 21 $ 27 - 22 ** Includes overseas equipment operations as follows: Net sales $ 551 $ 572 - 4 Operating profit 33 54 - 39 *** Operating profit is income before interest expense, foreign exchange gains and losses, income taxes and certain corporate expenses. However, operating profit of the credit segment includes the effect of interest expense. Page 7 <PAGE> (9) A reconciliation of basic and diluted net income per share in millions, except per share amounts, follows: Three Months Ended January 31 2000 1999 Net income $37.7 $ 49.7 Average shares outstanding 233.9 231.7 Basic net income per share $ .16 $ .21 Average shares outstanding 233.9 231.7 Effect of dilutive securities: Stock options 2.4 .9 Other .1 Total potential shares outstanding 236.3 232.7 Diluted net income per share $ .16 $ .21 Stock options to purchase 2.9 million shares during the first quarter of 2000 and 4.3 million shares during the first quarter of 1999 were outstanding, but not included in the above diluted per share computation because the options' exercise prices were greater than the average market price of the Company's common stock during the period. (10) 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, software licensing, 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. (11) Comprehensive income, which includes all changes in the Company's equity during the period except transactions with stockholders, was as follows in millions of dollars: Three Months Ended January 31 2000 1999 Net income $37.7 $49.7 Other comprehensive income (loss), net of tax: Change in cumulative translation adjustment 5.4 (9.1) Unrealized gain (loss) on marketable securities (4.9) 4.5 Comprehensive income $38.2 $45.1 Page 8 <PAGE> (12) In December 1999, the Company granted options to employees for the purchase of 5.2 million shares of common stock at an exercise price of $41.47 per share. At January 31, 2000, options for 17.0 million shares were outstanding at option prices in a range of $13.63 to $82.19 per share and a weighted-average exercise price of $39.56 per share. A total of 2.8 million shares remained available for the granting of future options. (13) On December 13, 1999, the Company announced an agreement to acquire Timberjack Group, headquartered in Helsinki, Finland for approximately $600 million. Subject to regulatory approvals, the transaction is expected to close in the year 2000. Timberjack Group, a leading manufacturer of forestry equipment, reported annual sales of $580 million in 1998. This acquisition will broaden the forestry product line and customer base for the company's construction equipment segment. (14) In the first quarter of 2000, the Company invested $21 million for a 41 percent interest in Nortrax, a joint venture to assist in the consolidation, development and management of the Company's construction equipment dealers. This acquisition did not have a material effect on the Company's financial position or results of operations. Page 9 <PAGE> Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Deere & Company's first-quarter net income was $37.7 million, or $.16 per share, compared with $49.7 million, or $.21 per share, in last year's first quarter. Depressed agricultural commodity prices continued to severely affect demand for agricultural equipment during the period. Production schedules in agricultural and construction equipment were at planned low levels during the quarter, reflecting improved order-fulfillment processes in construction equipment and the balancing of agricultural equipment production with present levels of demand. In addition, the first quarter has historically been the seasonally weakest period for the industry. Worldwide net sales and revenues for the quarter decreased 5 percent, to $2,339 million, compared with $2,459 million last year. Net equipment sales were $1,880 million for the quarter, compared with $1,973 million last year. Overseas net sales for the quarter were $551 million, compared with $572 million the previous year. Excluding the impact of the stronger U.S. dollar, overseas sales for the quarter would have shown a 4 percent increase over last year. Overall, the Company's physical volume of sales decreased 3 percent for the period. Worldwide equipment operations had an operating profit of $20 million for the first quarter of 2000, compared with $51 million last year. Lower sales, an adverse sales mix and product development costs of the newly formed special technologies group, partially offset by lower pension costs, affected this year's results. . Operating profit of the worldwide agricultural equipment segment for the first quarter of 2000 was $14 million, compared with $18 million last year. Results for the quarter reflected the impact of lower sales, as well as cost reductions and improved efficiencies from the restructuring activities of these operations. Significantly, North American used goods receivables continued to decline during the quarter. Overseas agricultural equipment sales, excluding the impact of the stronger U.S. dollar for the quarter, were slightly higher than last year. The overseas operations continued to be positive contributors to the segment's results. . Operating profit of the worldwide construction equipment segment for the quarter was $11 million, compared with $25 million last year. Lower sales and production volumes affected this year's quarterly results, due to full implementation of the estimate-to-cash program, anticipated lower demand and a reversal of sales and cost of sales related to Company equipment held in inventory by a recently established joint venture. . Operating profit of the worldwide commercial and consumer equipment segment for the quarter was $9 million, compared with $12 million last year. Although the segment's sales continued to increase, operations were adversely affected by higher selling and administrative costs related to growth, as well as by inefficiencies and costs related to the relocation of the handheld product operations. . Net income of the Company's credit operations was $41 million in the first quarter of 2000, compared with $42 million in last year's first quarter. This quarter's results were affected by higher operating costs and lower income from the sale of retail notes, partially offset by higher income from a larger average receivable and lease portfolio. Total revenues of the credit operations increased 16 percent from $261 Page 10 <PAGE> million in the first quarter of 1999 to $302 million in the current quarter. The average balance of receivables and leases financed was 10 percent higher in the first quarter, compared with the same period last year. Interest expense increased 18 percent in the current quarter, compared with 1999, as a result of an increase in average borrowings and higher borrowing rates. The credit operations' consolidated ratio of earnings to fixed charges was 1.55 to 1 for the first quarter this year, compared with 1.63 to 1 in 1999. . The Company's other businesses had operating losses of $9 million for the first quarter, compared with operating losses of $3 million last year. Current-year results reflected goodwill amortization and higher costs related to the development of new products of the special technologies group. Partially offsetting these factors was higher operating profit of the health care operations. Additional information on business segments is presented in Note 8 to the interim financial statements. Insurance and health care premiums have decreased to $113 million in the first quarter this year, compared to $180 million in the same period last year, while corresponding claims and benefits expenses have also decreased to $90 million this year, compared to $154 million last year, due to the sale of the insurance subsidiaries in the fourth quarter of 1999. Other operating expenses have increased to $72 million this year, compared to $43 million last year, primarily as a result of an increase in the depreciation of equipment on operating leases due to the growth in the credit operations' portfolio. MARKET CONDITIONS AND OUTLOOK . AGRICULTURAL EQUIPMENT. In January, the USDA lowered its estimates of carryover stocks, following a change in the assessment of the size of the 1999 corn crop and increased usage. Although grain and oilseed prices have improved slightly on this news and on concerns about dryness in certain areas of the United States, prices remain at low levels and demand for farm equipment remains very weak. At this time, the Company continues to expect that industry retail sales of farm machinery in North America will be off approximately 5 to 10 percent this year, compared with 1999 levels. Similar declines are expected in other major markets. . CONSTRUCTION EQUIPMENT. The market for these products remains extremely competitive. In addition, the Federal Reserve continues its efforts to slow the economy through a series of increases in short-term interest rates. In this environment, the Company continues to expect construction industry sales to be down 5 to 10 percent for the year. Retail sales of the Company's products, however, are expected to be higher in the remainder of the year due to an expanded product line. Additionally, production for the year 2000 is expected to benefit from tracking more closely with retail demand than was the case in 1999 when dealers were reducing their inventories. . COMMERCIAL AND CONSUMER EQUIPMENT. Continuing a trend of strong gains, retail demand for the Company's commercial and consumer equipment is expected to achieve further growth this year, assuming normal weather patterns and a continuation of current economic conditions. These operations should continue to benefit from market share growth, positive customer response to recently introduced products and international expansion. . CREDIT OPERATIONS. Credit is expected to continue benefiting from a larger receivable and lease portfolio this year. However, higher growth expenditures, lower gains on the sale of retail notes and continued weakness in the agricultural economy are expected to keep pressure on margins and have an adverse effect on this year's results. Page 11 <PAGE> Based on these conditions, the Company continues to expect its worldwide physical volume of sales to increase by approximately 10 percent for the year 2000. Second-quarter physical volumes are expected to be about 15 percent higher than in the comparable 1999 period. The Company's results are clearly benefiting from an aggressive and timely response to market conditions, as well as from the pursuit of its growth and quality initiatives. In spite of a market that continues to be challenging, the Company is on track to achieve improved results this year. YEAR 2000 No public infrastructure problems or any facilities related problems were encountered by John Deere locations during the rollover to the year 2000. After extensive system verification and testing, the Company's systems are operating normally. The Company is not aware of any significant issues related to the Year 2000 problem. The total cost of the modifications and upgrades to date has been approximately $46 million since the beginning of 1997 and the future costs are not expected to be significant. These costs were expensed as incurred and did not include the cost of scheduled replacement software. Other major systems projects were not deferred due to the Year 2000 compliance projects. EURO CONVERSION The Company is well advanced in the process of identification, implementation and testing of its systems to adopt the euro currency in its operations affected by this change. The Company's affected suppliers, distribution network and financial institutions have been contacted and the Company does not believe the currency change will significantly impact these relationships. As a result, the Company expects to have its systems ready to process the euro conversion during the transition period from January 1, 1999 through January 1, 2002. The cost of information systems modifications, effects on product pricing and purchase contracts, and the impact on foreign currency financial instruments, including derivatives, are not expected to be material. SAFE HARBOR STATEMENT SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Statements under the "Market Conditions and Outlook" and "Euro Conversion" headings and other statements herein that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. Forward-looking statements relating to the Company's 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 conditions, real estate values, animal diseases, crop pests, harvest yields 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; levels of new and used field inventories; production difficulties, including capacity and supply constraints; dealer practices; labor relations; interest and currency exchange rates; technological difficulties; accounting standards; and other risks and uncertainties. The impact and timing of the previously announced Timberjack acquisition is uncertain, including the impact of post-merger integration costs and the amortization of intangibles. Page 12 <PAGE> The number of housing starts is especially important to sales of construction equipment. Sales of commercial and consumer equipment during the spring are affected by the severity and timing of spring weather patterns. The Company's outlook is based upon assumptions relating to the factors described above, which are sometimes based upon estimates and data prepared by government agencies. These estimates and data are often revised. 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 and other filings 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 three months of 2000, negative cash flows from operating activities of $564 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 a decrease in trade receivables and from net income. The resulting net cash requirement for operating activities, along with payment of dividends and purchases of property and equipment, were provided primarily from an increase in borrowings and sales of marketable securities. Negative cash flows from operating activities in the first three months of 1999 of $517 million resulted primarily from a decrease in accounts payable and accrued expenses and an increase in Company-owned inventories. Partially offsetting these operating cash outflows were positive cash flows from a decrease in trade receivables and from net income. The resulting net cash requirement for operating activities, along with payment of dividends, purchases of property and equipment and repurchases of common stock, were provided primarily from an increase in borrowings. Trade accounts and notes receivable result mainly from sales to dealers of equipment that is being carried in their inventories. Trade receivables decreased $71 million during the first three months of 2000 and $649 million, compared to one year ago. Trade receivables for agricultural equipment declined from a year ago primarily due to production schedules being set below the levels of retail demand, and construction equipment receivables were lower as dealers reduced their inventories. Commercial and consumer equipment trade receivables were higher than a year ago primarily due to higher sales volumes. North American agricultural equipment and construction equipment trade receivables decreased $700 million and $136 million, respectively, compared to a year ago. North American commercial and consumer equipment receivables increased $179 million and other equipment receivables increased $12 million, compared with the levels 12 months earlier. Total overseas trade receivables were $4 million lower than a year ago due to the impact of weaker foreign currency exchange rates. The ratios of worldwide trade accounts and notes receivable to the last 12 months' net sales were 33 percent at January 31, 2000, compared to 34 percent at October 31, 1999 and 33 percent at January 31, 1999. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 11 percent, 12 percent and 7 percent at January 31, 2000, October 31, 1999 and January 31, 1999, respectively. Page 13 <PAGE> Company inventories at January 31, 2000 increased by $487 million during the first three months and $166 million during the past 12 months, primarily reflecting a seasonal increase in the first quarter and the higher sales volumes and start-up of new facilities of the commercial and consumer equipment segment. Also contributing to a higher inventory level was the financial consolidation of the Company's agricultural equipment operations in Brazil during the third quarter of 1999. Most of the Company's inventories are valued on the last-in, first-out (LIFO) basis. Inventories valued on an approximate current cost basis increased by 6 percent from a year ago. Total interest-bearing debt of the Equipment Operations was $1,975 million at January 31, 2000, compared with $1,678 million at the end of fiscal year 1999, and $2,677 million at January 31, 1999. The ratio of total debt to total capital (total interest- bearing debt and stockholders' equity) was 33 percent, 29 percent and 40 percent at January 31, 2000, October 31, 1999 and January 31, 1999, respectively. FINANCIAL SERVICES The Financial Services' credit operations 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 operations periodically sell substantial amounts of retail notes. During the first quarter of 2000, the aggregate cash provided from operating and financing activities was used primarily to increase financing receivables and leases. Cash provided from Financial Services operating activities was $153 million in the current quarter. Cash provided by financing activities totaled $107 million in the first three months of 2000, primarily resulting from $112 million of proceeds from total borrowings, which was partially offset by payment of a $5 million dividend to the Equipment Operations. Cash used for investing activities totaled $262 million in the current quarter, primarily due to the cost of financing receivables and leases acquired exceeding collections of financing receivables, sales of retail notes and sales of equipment on operating leases. In the first quarter of 1999, the aggregate cash provided from operating and financing activities was used primarily to increase financing receivables and leases. Cash provided from Financial Services operating activities was $125 million in the first quarter of 1999. Cash provided by financing activities totaled $239 million in the first three months of 1999, primarily resulting from $244 million of proceeds from total borrowings, which was partially offset by payment of a $5 million dividend to the Equipment Operations. Cash used for investing activities totaled $360 million in the first quarter of 1999, primarily due to the cost of financing receivables and leases acquired exceeding collections of financing receivables and sales of retail notes. Marketable securities held by Financial Services have decreased $755 million, compared to a year ago. The insurance subsidiaries, including their investment portfolio, were sold in the fourth quarter of 1999. In addition, the marketable securities transferred from the insurance subsidiaries to Deere & Company before the sale were liquidated during the first quarter of 2000. The remaining marketable securities consist of those held by the health care subsidiaries. Financing receivables and leases held by the credit operations 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. These receivables and leases increased by $384 million in the first three months of 2000 and $791 million during the past 12 months due to the cost of financing receivables and leases acquired exceeding collections Page 14 <PAGE> and sales of retail notes, and the acquisitions of certain credit operations during these periods. Total acquisitions of financing receivables and leases were 3 percent higher in the first three months of 2000, compared with the same period last year. Acquisition volumes of leases, revolving charge accounts and wholesale notes were all higher in the first three months of 2000, compared to the same period last year. Financing receivables and leases administered by the credit operations, which include receivables previously sold, amounted to $11,008 million at January 31, 2000, compared with $10,992 million at October 31, 1999 and $9,820 million at January 31, 1999. At January 31, 2000, the unpaid balance of all retail notes previously sold was $2,348 million, compared with $2,716 million at October 31, 1999 and $1,951 million at January 31, 1999. Total outside interest-bearing debt of the credit operations was $6,975 million at January 31, 2000, compared with $6,616 million at the end of fiscal year 1999 and $6,470 million at January 31, 1999. Total outside borrowings increased during the first three months of 2000 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 operations' ratio of total interest-bearing debt to stockholder's equity was 6.0 to 1 at January 31, 2000, compared with 6.0 to 1 at October 31, 1999 and 6.2 to 1 at January 31, 1999. During the first quarter of 2000, the credit operations issued $150 million and retired $292 million medium-term notes. The credit operations also issued $13 million and retired $62 million of other miscellaneous long-term debt. 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 operations. Worldwide lines of credit totaled $6,054 million at January 31, 2000, $3,189 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank 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. Stockholder's equity was $4,095 million at January 31, 2000, compared with $4,094 million at October 31, 1999 and $4,029 million at January 31, 1999. During the first quarter of 2000, the net income and other minor changes in equity were mostly offset by dividends declared. The Board of Directors at its meeting on February 23, 2000 declared a quarterly dividend of 22 cents per share payable May 1, 2000 to stockholders of record on March 31, 2000. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the Company's most recent annual report filed on Form 10-K (Item 7A). There has been no material change in this information. Page 15 <PAGE> PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note (10) to the Interim Financial Statements. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company issued 118,088 shares of stock during the quarter in connection with an acquisition. These shares were not registered under the Securities Act of 1933 (the "Securities Act") in reliance upon the exemption provided by Section 4 (2) of the Securities Act for transactions by an issuer not involving a public offering. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of stockholders held February 23, 2000: a. the following directors were elected for terms expiring at the annual meeting in 2003: Votes Votes For Withheld --------- -------- Crandall C. Bowles 194,844,740 3,590,070 Leonard A. Hadley 194,841,204 3,593,606 Arthur L. Kelly 194,870,703 3,564,107 Thomas H. Patrick 194,857,431 3,577,379 John R. Block, Regina E. Herzlinger and Arnold R. Weber continue to serve as directors of the Company for terms expiring at the annual meeting in 2002. Hans W. Becherer, Antonio Madero B., John R. Stafford and John R. Walter continue to serve as directors of the Company for terms expiring at the annual meeting in 2001. b. pursuant to a nomination from the floor, Steve Baugher received 372 votes for his election as a director. c. the John Deere Omnibus Equity and Incentive Plan was approved: Shares Voted Shares Voted Against Shares Broker For Proposal Proposal Abstaining Non-Votes ------------ ------------ ---------- --------- 162,597,146 13,281,348 1,132,012 21,424,304 Page 16 <PAGE> d. the performance goals under the John Deere Performance Bonus Plan were re-approved: Shares Voted For Shares Voted Against Shares Proposal Proposal Abstaining ---------------- -------------------- ---------- 190,720,572 6,595,615 1,118,623 e. the performance goals under the John Deere Equity Incentive Plan were re-approved: Shares Voted For Shares Voted Against Shares Proposal Proposal Abstaining ---------------- -------------------- ---------- 192,512,267 4,772,171 1,150,372 f. a stockholder proposal from the floor to establish a committee to review situations involving dissatisfied customers was not approved: Shares Voted For Shares Voted Against Shares Proposal Proposal Abstaining ---------------- -------------------- ---------- 632 198,434,178 0 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 24, 1998 (Item 7). Current Report on Form 8-K dated December 13, 1999 (Item 7). Page 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. DEERE & COMPANY Date: March 13, 2000 By: s/ NATHAN J. JONES Nathan J. Jones Senior Vice President Principal Financial Officer and Principal Accounting Officer Page 18 <PAGE> INDEX TO EXHIBITS Number - ------ 2 Not applicable 3 Not applicable 4 Not applicable 10 Not applicable 11 Not applicable 12 Computation of ratio of earnings to fixed charges 15 Not applicable 18 Not applicable 19 Not applicable 22 Not applicable 23 Not applicable 24 Not applicable 27 Financial data schedule 99 Not applicable Page 19 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <TEXT> EXHIBIT 12 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Three Months Year Ended Ended January 31, October 31, 2000 1999 1999 (In thousands of dollars) Earnings: Income of consolidated group before income taxes and changes in accounting $ 59,761 $ 76,315 $365,135 Dividends received from less- than-fifty percent owned affiliates 394 5,734 Fixed charges excluding capitalized interest 150,617 137,187 571,949 Total earnings $210,378 $213,896 $942,818 Fixed charges: Interest expense of con- solidated group including capitalized interest $146,780 $134,497 $557,740 Portion of rental charges deemed to be interest 3,837 3,113 15,347 Total fixed charges $150,617 $137,610 $573,087 Ratio of earnings to fixed charges* 1.40 1.55 1.65 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. <PAGE> DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended October 31, 1998 1997 (In thousands of dollars) Earnings: Income of consolidated group before income taxes and changes in accounting $1,560,032 $1,507,070 Dividends received from less- than-fifty percent owned affiliates 5,555 3,591 Fixed charges excluding capitalized interest 531,817 433,673 Total earnings $2,097,404 $1,944,334 Fixed charges: Interest expense of con- solidated group including capitalized interest $ 521,418 $ 422,588 Portion of rental charges deemed to be interest 12,451 11,497 Total fixed charges $ 533,869 $ 434,085 Ratio of earnings to fixed charges* 3.93 4.48 <PAGE> DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended October 31, 1996 1995 (In thousands of dollars) Earnings: Income of consolidated group before income taxes and changes in accounting $1,286,634 $1,092,751 Dividends received from less- than-fifty percent owned affiliates 7,937 2,023 Fixed charges excluding capitalized interest 410,764 399,056 Total earnings $1,705,335 $1,493,830 Fixed charges: Interest expense of con- solidated group including capitalized interest $ 402,168 $ 392,408 Portion of rental charges deemed to be interest 8,596 6,661 Total fixed charges $ 410,764 $ 399,069 Ratio of earnings to fixed charges* 4.15 3.74 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <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-31-2000 <PERIOD-START> NOV-01-1999 <PERIOD-END> JAN-31-2000 <EXCHANGE-RATE> 1.0 <CASH> 298 <SECURITIES> 116 <RECEIVABLES> 10,587 <ALLOWANCES> 130 <INVENTORY> 1,781 <CURRENT-ASSETS> 0 <PP&E> 4,890 <DEPRECIATION> 3,139 <TOTAL-ASSETS> 18,144 <CURRENT-LIABILITIES> 0 <BONDS> 3,457 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,855 <OTHER-SE> 2,239 <TOTAL-LIABILITY-AND-EQUITY> 18,144 <SALES> 1,880 <TOTAL-REVENUES> 2,339 <CGS> 1,553 <TOTAL-COSTS> 1,817 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 11 <INTEREST-EXPENSE> 147 <INCOME-PRETAX> 60 <INCOME-TAX> 21 <INCOME-CONTINUING> 38 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 38 <EPS-BASIC> .16 <EPS-DILUTED> .16 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

DRI

https://www.sec.gov/Archives/edgar/data/940944/0000940944-00-000009.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, T5jTlw51OoMwljGOE+HEPWeCmJcNHiBt/F6MjQZxkl6H9thVpHNI9DjNlpSgeUdV 1Z69zvb0q3DkvNx2xeQAtA== <SEC-DOCUMENT>0000940944-00-000009.txt : 20000202 <SEC-HEADER>0000940944-00-000009.hdr.sgml : 20000202 ACCESSION NUMBER: 0000940944-00-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991128 FILED AS OF DATE: 20000112 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: 0526 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13666 FILM NUMBER: 506154 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>QUARTERLY REPORT ON 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 November 28, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .............. to ............... ------------------- 1-13666 Commission File Number ------------------- DARDEN RESTAURANTS, INC. (Exact name of registrant as specified in its charter) Florida 59-3305930 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 5900 Lake Ellenor Drive, Orlando, Florida 32809 (Address of principal executive offices) (Zip Code) 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 December 31, 1999: 128,142,791 (excluding 37,521,855 shares held in treasury). ================================================================================ <PAGE> DARDEN RESTAURANTS, INC. TABLE OF CONTENTS Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Earnings 3 Consolidated Balance Sheets 5 Consolidated Statements of Changes in Stockholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Index to Exhibits 17 2 <PAGE> PART I FINANCIAL INFORMATION Item 1. Financial Statements DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales....................................................... $ 848,231 $ 791,168 Costs and Expenses: Cost of sales: Food and beverages..................................... 271,802 257,616 Restaurant labor....................................... 280,058 265,753 Restaurant expenses.................................... 127,162 120,688 ---------- ---------- Total Cost of Sales.................................. $ 679,022 $ 644,057 Selling, general and administrative...................... 94,208 86,357 Depreciation and amortization............................ 31,771 31,311 Interest, net............................................ 5,265 4,786 ---------- ---------- Total Costs and Expenses........................... $ 810,266 $ 766,511 ---------- ---------- Earnings before Income Taxes................................ 37,965 24,657 Income Taxes................................................ (13,511) (8,738) ---------- ---------- Net Earnings................................................ $ 24,454 $ 15,919 ========== ========== Net Earnings per Share: Basic ................................................... $ 0.19 $ 0.11 ========== ========== Diluted.................................................. $ 0.18 $ 0.11 ========== ========== Average Number of Common Shares Outstanding: Basic ................................................... 130,800 138,700 ========== ========== Diluted.................................................. 134,500 144,100 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 3 <PAGE> DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales....................................................... $ 1,777,622 $ 1,677,225 Costs and Expenses: Cost of sales: Food and beverages..................................... 570,630 554,031 Restaurant labor....................................... 575,177 548,304 Restaurant expenses.................................... 259,283 252,675 ----------- ----------- Total Cost of Sales ................................. $ 1,405,090 $ 1,355,010 Selling, general and administrative...................... 188,358 171,143 Depreciation and amortization............................ 63,141 62,323 Interest, net............................................ 9,841 10,221 ----------- ----------- Total Costs and Expenses........................... $ 1,666,430 $ 1,598,697 ----------- ----------- Earnings before Income Taxes................................ 111,192 78,528 Income Taxes................................................ (39,425) (27,430) ----------- ----------- Net Earnings................................................ $ 71,767 $ 51,098 =========== =========== Net Earnings per Share: Basic ................................................... $ 0.55 $ 0.37 =========== =========== Diluted.................................................. $ 0.53 $ 0.35 =========== =========== Average Number of Common Shares Outstanding: Basic ................................................... 131,500 139,200 =========== =========== Diluted.................................................. 135,500 145,000 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 4 <PAGE> DARDEN RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) <TABLE> <CAPTION> (Unaudited) - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 May 30, 1999 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................................ $ 19,947 $ 40,960 Receivables.............................................. 4,564 20,256 Refundable income taxes, net............................. 4,347 Inventories.............................................. 215,261 144,115 Net assets held for disposal............................. 29,466 35,269 Prepaid expenses and other current assets................ 19,743 21,475 Deferred income taxes.................................... 57,544 65,662 ----------- ----------- Total Current Assets................................... $ 350,872 $ 327,737 Land, Buildings and Equipment............................... 1,491,353 1,461,535 Other Assets................................................ 102,909 104,388 ----------- ----------- Total Assets......................................... $ 1,945,134 $ 1,893,660 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable......................................... $ 120,396 $ 144,725 Short-term debt.......................................... 138,700 23,500 Current portion of long-term debt........................ 2,386 2,386 Accrued payroll.......................................... 64,985 74,265 Accrued income taxes..................................... 16,544 Other accrued taxes...................................... 22,806 25,965 Other current liabilities................................ 222,617 234,830 ----------- ----------- Total Current Liabilities.............................. $ 571,890 $ 522,215 Long-term Debt.............................................. 311,370 314,065 Deferred Income Taxes....................................... 74,581 72,086 Other Liabilities........................................... 21,156 21,258 ----------- ----------- Total Liabilities...................................... $ 978,997 $ 929,624 ----------- ----------- Stockholders' Equity: Common stock and surplus................................. $ 1,344,990 $ 1,328,796 Retained earnings........................................ 244,548 178,008 Treasury stock........................................... (549,333) (466,902) Accumulated other comprehensive income................... (11,980) (12,115) Unearned compensation.................................... (62,088) (63,751) ----------- ----------- Total Stockholders' Equity............................. $ 966,137 $ 964,036 ----------- ----------- Total Liabilities and Stockholders' Equity........... $ 1,945,134 $ 1,893,660 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 5 <PAGE> DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Twenty-Six Weeks Ended November 28, 1999 and November 29, 1998 (In Thousands) (Unaudited) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Total and Retained Treasury Comprehensive Unearned Stockholders' Surplus Earnings Stock Income Compensation Equity - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at May 30, 1999.................... $1,328,796 $178,008 $(466,902) $(12,115) $(63,751) $ 964,036 Comprehensive income: Net earnings............................ 71,767 71,767 Other comprehensive income, foreign currency adjustment................... 135 135 ---------- Total comprehensive income.......... 71,902 Cash dividends declared.................... (5,227) (5,227) Stock option exercises (816 shares)........ 7,479 7,479 Issuance of restricted stock (179 shares), net of forfeiture adjustments........... 2,529 (2,536) (7) Earned compensation........................ 1,449 1,449 ESOP note receivable repayments............ 2,750 2,750 Income tax benefit credited to equity...... 4,109 4,109 Proceeds from issuance of equity put options................................. 1,139 1,139 Purchases of common stock for treasury (4,199 shares).......................... (83,473) (83,473) Issuance of treasury stock under Employee Stock Purchase Plan (110 shares)........ 938 1,042 1,980 - ---------------------------------------------------------------------------------------------------------------------------- Balance at November 28, 1999 $1,344,990 $244,548 $(549,333) $(11,980) $(62,088) $ 966,137 - ---------------------------------------------------------------------------------------------------------------------------- <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Total and Retained Treasury Comprehensive Unearned Stockholders' Surplus Earnings Stock Income Compensation Equity - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at May 31, 1998.................... $1,286,191 $ 48,327 $(239,876) $(11,749) $(63,048) $1,019,845 Comprehensive income: Net earnings............................ 51,098 51,098 Other comprehensive income, foreign currency adjustment................... (1,526) (1,526) ---------- Total comprehensive income.......... 49,572 Cash dividends declared.................... (5,531) (5,531) Stock option exercises (1,710 shares)...... 14,700 14,700 Issuance of restricted stock (303 shares), net of forfeiture adjustments........... 3,595 (3,567) 28 Earned compensation........................ 934 934 ESOP note receivable repayments............ 250 250 Income tax benefit credited to equity...... 5,158 5,158 Proceeds from issuance of equity put options................................. 2,184 2,184 Purchases of common stock for treasury (5,325 shares).......................... (86,695) (86,695) - ---------------------------------------------------------------------------------------------------------------------------- Balance at November 29, 1998 $1,311,828 $ 93,894 $(326,571) $(13,275) $(65,431) $1,000,445 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 6 <PAGE> DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings.............................................. $ 24,454 $ 15,919 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization........................... 31,771 31,311 Amortization of unearned compensation and loan costs.... 1,343 1,090 Change in current assets and liabilities................ (65,972) 2,102 Change in other liabilities ............................ (178) 297 Loss on disposal of land, buildings and equipment....... 362 264 Deferred income taxes................................... 5,538 7,955 Other, net.............................................. 146 256 ---------- ---------- Net Cash Provided by (Used by) Operating Activities... $ (2,536) $ 59,194 ---------- ---------- Cash Flows--Investment Activities Purchases of land, buildings and equipment................ (66,329) (31,091) Purchases of intangibles.................................. (778) (566) Increase in other assets.................................. (265) (428) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)...... 5,646 8,863 ---------- ---------- Net Cash Used by Investment Activities................ $ (61,726) $ (23,222) ---------- ---------- Cash Flows--Financing Activities Proceeds from issuance of common stock.................... 3,075 4,819 Income tax benefit credited to equity..................... 748 1,525 Dividends paid............................................ (5,227) (5,531) Purchases of treasury stock............................... (56,048) (34,069) ESOP note receivable repayment............................ 2,150 250 Increase (decrease) in short-term debt.................... 111,700 (19,000) Repayment of long-term debt............................... (2,150) (250) Proceeds from issuance of equity put options.............. 1,358 Payment of loan costs..................................... (324) ---------- ---------- Net Cash Provided by (Used by) Financing Activities... $ 53,924 $ (50,898) ---------- ---------- Decrease in Cash and Cash Equivalents........................ (10,338) (14,926) Cash and Cash Equivalents - Beginning of Period.............. 30,285 27,990 ---------- ---------- Cash and Cash Equivalents - End of Period.................... $ 19,947 $ 13,064 ========== ========== Cash Flow from Changes in Current Assets and Liabilities Receivables............................................... 17,962 (3,123) Refundable income taxes, net.............................. (4,347) Inventories............................................... (22,769) 8,065 Prepaid expenses and other current assets................. (3,416) 847 Accounts payable.......................................... (35,806) 17,365 Accrued payroll........................................... 1,039 (1,024) Accrued income taxes...................................... (18,923) (22,776) Other accrued taxes....................................... (3,767) (2,471) Other current liabilities................................. 4,055 5,219 ---------- ---------- Change in Current Assets and Liabilities.............. $ (65,972) $ 2,102 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 7 <PAGE> DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings.............................................. $ 71,767 $ 51,098 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization........................... 63,141 62,323 Amortization of unearned compensation and loan costs.... 2,749 2,189 Change in current assets and liabilities................ (116,456) 22,092 Change in other liabilities ............................ (102) 563 (Gain) loss on disposal of land, buildings and equipment..... 576 (602) Deferred income taxes................................... 10,613 12,479 Other, net.............................................. 527 (318) ---------- ---------- Net Cash Provided by Operating Activities............. $ 32,815 $ 149,824 ---------- ---------- Cash Flows--Investment Activities Purchases of land, buildings and equipment................ (106,931) (55,455) Purchases of intangibles.................................. (1,361) (1,074) Decrease (increase) in other assets....................... 1,006 (635) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)...... 12,719 21,688 ---------- ---------- Net Cash Used by Investment Activities................ $ (94,567) $ (35,476) ---------- ---------- Cash Flows--Financing Activities Proceeds from issuance of common stock.................... 9,321 14,700 Income tax benefit credited to equity..................... 4,109 5,158 Dividends paid............................................ (5,227) (5,531) Purchases of treasury stock............................... (83,473) (86,695) ESOP note receivable repayment............................ 2,750 250 Increase (decrease) in short-term debt.................... 115,200 (64,600) Repayment of long-term debt............................... (2,756) (255) Proceeds from issuance of equity put options.............. 1,139 2,184 Payment of loan costs..................................... (324) ---------- ---------- Net Cash Provided By (Used by) Financing Activities... $ 40,739 $ (134,789) ---------- ---------- Decrease in Cash and Cash Equivalents........................ (21,013) (20,441) Cash and Cash Equivalents - Beginning of Period.............. 40,960 33,505 ---------- ---------- Cash and Cash Equivalents - End of Period.................... $ 19,947 $ 13,064 ========== ========== Cash Flow from Changes in Current Assets and Liabilities Receivables............................................... 15,692 1,088 Refundable income taxes, net.............................. (4,347) Inventories............................................... (71,146) 45,287 Prepaid expenses and other current assets................. (5,626) 1,231 Accounts payable.......................................... (24,329) (11,169) Accrued payroll........................................... (9,280) (14,035) Accrued income taxes...................................... (16,544) (693) Other accrued taxes....................................... (3,159) (1,129) Other current liabilities................................. 2,283 1,512 ---------- ---------- Change in Current Assets and Liabilities.............. $ (116,456) $ 22,092 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 8 <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 twenty-six weeks ended November 28, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ended May 28, 2000. 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 30, 1999. See Note 5 related to reclassification made to May 30, 1999 balance sheet. The accounting policies used in preparing these consolidated financial statements are the same as those described in our annual report on Form 10-K. Note 2. Consolidated Statements of Cash Flows During the thirteen and twenty-six weeks ended November 28, 1999, Darden paid $1,263 and $9,165 respectively, for interest (net of amount capitalized) and $30,265 and $46,539 respectively, for income taxes. During the thirteen and twenty-six weeks ended November 29, 1998, Darden paid $0 and $8,673, respectively, for interest (net of amount capitalized) and $20,545 and $10,494, respectively, for income taxes. Note 3. Net Earnings Per Share Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares outstanding. Options to purchase 2,641,171 and 64,032 shares of common stock were excluded from the calculation of diluted EPS for the thirteen weeks ended November 28, 1999 and November 29, 1998, respectively, because their exercise prices exceeded the average market price of common shares for the period. Options to purchase 2,629,941 and 29,109 shares of common stock were excluded from the calculation of diluted EPS for the twenty-six weeks ended November 28, 1999 and November 29, 1998, respectively, for the same reason. Note 4. Accounts Receivable In the second quarter of fiscal 2000, the Company changed its contractual terms with a national storage and distribution company. Under the new contractual terms, Darden inventory items are no longer sold to and repurchased from the distribution company. Note 5. Restructuring Liability In 1997, the Company recorded restructuring charges of $70,900 in connection with the closing of certain restaurant properties. The related liabilities are included in other current liabilities in the accompanying balance sheet and were established to accrue for estimated carrying costs of buildings and equipment prior to disposal, employee severance costs, lease buy-out provisions and other costs associated with the restructuring action. All restaurant closings under this restructuring action have been completed. The remaining restructuring actions, including disposal of the closed owned properties and the lease buy-outs related to the closed leased properties, are expected to be substantially completed during 2001. 9 <PAGE> DARDEN RESTAURANTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) (Dollar Amounts in Thousands, Except per Share Data) Note 5. Restructuring Liability - Continued A summary of restructuring liability activity for the six months ended November 28, 1999 is as follows: Balance at May 30, 1999............................. $ 37,139 Non-cash Adjustment ------------------- Reclassification of asset impairment (described below)............................... (12,000) Cash Payments ------------- Carrying costs and employee severance payments.... (1,746) Lease payments including lease buy-outs........... (3,663) -------- Balance at November 28, 1999........................ $ 19,730 ======== Asset impairment charges of $12 million included in the May 30, 1999 restructuring liability have been reclassified to reduce the carrying value of land for all periods presented. This reclassification relates to asset impairment charges recorded in 1997 for long-lived assets associated with Canadian restaurants. 10 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 twenty-six weeks ended November 28, 1999 and November 29, 1998. <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, November 29, November 28, November 29, 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Sales..................................... 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Cost of sales: Food and beverages................... 32.1 32.6 32.1 33.0 Restaurant labor..................... 33.0 33.6 32.3 32.7 Restaurant expenses.................. 15.0 15.2 14.6 15.1 ------ ------ ------ ------ Total Cost of Sales................ 80.1% 81.4% 79.0% 80.8% Selling, general and administrative.... 11.1 10.9 10.6 10.2 Depreciation and amortization.......... 3.7 4.0 3.6 3.7 Interest, net.......................... 0.6 0.6 0.6 0.6 ------ ------ ------ ------ Total Costs and Expenses......... 95.5% 96.9% 93.8% 95.3% ------ ------ ------ ------ Earnings before Income Taxes.............. 4.5 3.1 6.2 4.7 Income Taxes.............................. (1.6) (1.1) (2.2) (1.7) ------ ------ ------ ------ Net Earnings.............................. 2.9% 2.0% 4.0% 3.0% ====== ====== ====== ====== </TABLE> Financial Condition and Results of Operations For the fiscal 2000 second quarter ended November 28, 1999, earnings after tax were $24.5 million or 18 cents per diluted share, compared to earnings after tax of $15.9 million or 11 cents per diluted share in the second quarter of fiscal 1999. The increase in second quarter earnings was primarily attributable to strong same-restaurant sales at both Red Lobster and Olive Garden. Sales of $848.2 million for the second quarter were 7.2% higher than last year's second quarter. For the first six months of fiscal 2000, net earnings were $71.8 million or 53 cents per diluted share, compared to $51.1 million or 35 cents per diluted share in the same fiscal 1999 period. Sales approximating $1.78 billion for the first six months of fiscal 2000 were 6.0% higher than last year. Food and beverage costs for the quarter were 32.1% of sales, compared to 32.6% of sales last year primarily attributable to reduced product costs. Restaurant labor decreased to 33.0% of sales compared to last year's 33.6% due primarily to efficiencies resulting from higher sales volumes. Restaurant expenses, also benefiting from higher sales volumes, decreased to 15.0% of sales compared to 15.2% last year. The increase in second quarter selling, general and administrative expense to 11.1% of sales compared to 10.9% of sales last year was primarily attributable to increased marketing expenses and additional labor costs associated with new concept expansion and development. Depreciation and amortization expense as a percentage of sales decreased to 3.7% from 4.0% last year primarily as a result of higher sales volumes. The effective tax rate for the second quarter of fiscal 2000 was 35.6% compared to 35.4% in last year's second quarter. The increase in the effective tax rate reflects a higher level of expected pre-tax income for fiscal 2000. Food and beverage costs for the first six months of fiscal 2000 were 32.1% of sales, down from last year's 33.0% primarily attributable to reduced product costs, pricing, and a lower margin promotion run by Red Lobster during the first quarter last year. Restaurant labor decreased to 32.3% of sales compared to last year's 32.7% primarily due to efficiencies resulting from higher sales volumes. Restaurant expenses decreased to 14.6% of sales compared to 15.1% last year primarily as a result of higher sales volumes and the fixed component of these expenses which are not impacted by higher sales volumes. The increase in first half selling, general and 11 <PAGE> administrative expense to 10.6% of sales compared to 10.2% of sales last year was attributable to increased marketing expenses and additional labor costs associated with new concept expansion and development. Depreciation and amortization expense as a percentage of sales decreased to 3.6% from 3.7% last year. The effective tax rate for the first six months of fiscal 2000 was 35.5% compared to 34.9% last year due to a higher level of expected pre-tax income for the year. Inventories totaled $215.3 million as of November 28, 1999, up from $144.1 million at May 30, 1999. The increase resulted primarily from purchases of seafood during the first quarter of fiscal 2000 at prices which the Company believes were favorable. This additional seafood is expected to be used during the current fiscal year. Inventories also increased, and accounts receivable and accounts payable decreased, due to changes made in the second quarter of fiscal 2000 to contractual terms with our national storage and distribution company. Short-term debt totaled $138.7 million as of November 28, 1999, up from $23.5 million at May 30, 1999. The increase resulted primarily from increased share repurchase activity due to favorable Company stock prices over the first half of fiscal 2000 as well as the increased inventory levels discussed above. Division Results Red Lobster sales of $461.9 million were 6.3% above last year's second quarter. Same-restaurant sales in the United States were up 8.2% for the quarter, marking the eighth consecutive quarter of same-restaurant sales increases. Second quarter operating profits were substantially improved over the prior year due primarily to favorable food and beverage costs and restaurant expenses as a percentage of sales. Through the first six months of fiscal 2000, Red Lobster's sales increased 3.9% to $984.4 million and same-restaurant sales in the United States increased by 5.9%. These results were achieved even though Red Lobster operated 26 fewer restaurants at the end of the second quarter compared to last year and did not repeat its high volume "Bottomless Crab" promotion that helped generate high sales and traffic volumes in the first quarter of last year. Olive Garden continued its positive momentum in the second quarter of fiscal 2000 with a 6.8% increase in sales to $376.0 million. Same-restaurant sales in the United States increased 6.8%, marking the twenty-first consecutive quarter of same-restaurant sales increases. Second quarter operating profits were substantially improved over the prior year primarily due to increased sales and lower restaurant labor expenses as a percentage of sales. Through the first six months of fiscal 2000, Olive Garden sales increased 7.3% to $772.0 million and same-restaurant sales in the United States increased by 7.5%. Bahama Breeze continues to produce strong sales at each of its eight restaurants. Four additional restaurants are currently under construction, all of which have expected fiscal 2000 opening dates. Darden's latest test concept, Smokey Bones BBQ and Hometown Sports Bar, opened its first restaurant on September 13, 1999 in Orlando, FL. This restaurant's sales have exceeded management's initial expectations. 12 <PAGE> The table below details the number of restaurants open at the end of the second quarter of fiscal 2000, compared with the number open at the end of May 1999 and the end of last fiscal year's second quarter. NUMBER OF RESTAURANTS <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- November 28, 1999 May 30, 1999 November 29, 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Red Lobster - USA........................... 618 635 642 Red Lobster - Canada........................ 32 34 34 ----- ----- ----- Total.................................. 650 669 676 Olive Garden - USA.......................... 458 459 459 Olive Garden - Canada....................... 5 5 5 ----- ----- ----- Total.................................. 463 464 464 Bahama Breeze............................... 8 6 3 ----- ----- ----- Smokey Bones................................ 1 0 0 ----- ----- ----- Total.................................. 1,122 1,139 1,143 ===== ===== ===== </TABLE> Year 2000 The total cost to the Company of Year 2000 activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. As of November 28, 1999, the Company had spent approximately $3.3 million on Year 2000 issues. This amount does not include the costs incurred to develop and install new systems resulting from the Company's seafood inventory accounting system project which was already contemplated for replacement. The total cost to the Company of addressing Year 2000 issues has been estimated to be less than $5 million. This amount was based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. While there can be no guarantee that these estimates will be achieved, and actual results could differ from these estimates, management now anticipates that the total cost to the Company of addressing Year 2000 issues will be well under $5 million. As of the filing date of this report, the Company's business and operations have not been materially impacted by Year 2000 matters. For a more in-depth discussion of Year 2000, reference is made to the Company's Annual Report on Form 10-K for the fiscal year ended May 30, 1999. Forward-Looking Statements Certain information included in this report and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or written statements made or to be made by the Company) may contain statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include information relating to current expansion plans, business development activities, and Year 2000 compliance. Such forward-looking information is based on assumptions concerning important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to real estate development and construction activities, the issuance and renewal of licenses and permits for restaurant development and operation, economic conditions, changes in federal or state laws or the administration of such laws, and the Year 2000 readiness of suppliers, banks, vendors and others having a direct or indirect business relationship with the Company. 13 <PAGE> PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Information contained on pages 4 through 15 of the Company's Proxy Statement dated August 10, 1999, filed with the Securities and Exchange Commission as of August 13, 1999, describing matters submitted to a vote at the Annual Meeting of Shareholders on September 23, 1999, is incorporated by reference in this report. (a) The Annual Meeting of Shareholders was held on September 23, 1999. (b) The name of each director elected at the meeting is provided in Item 4(c) of this report. There are no other directors with a term of office that continued after the Annual Meeting. All nominees described in the Proxy Statement, referenced above, were elected. (c) At the Annual Meeting, the Shareholders took the following actions: (i) Elected the following eleven directors: Bradley D. Blum For 120,413,476 Withheld 621,431 Daniel B. Burke For 120,381,876 Withheld 653,031 Odie C. Donald For 120,398,466 Withheld 636,441 Julius Erving, II For 120,300,698 Withheld 734,209 Joe R. Lee For 120,407,911 Withheld 626,996 Richard E. Rivera For 120,398,224 Withheld 636,683 Michael D. Rose For 120,381,383 Withheld 653,524 Hector de J. Ruiz For 120,382,402 Withheld 652,505 Maria A. Sastre For 120,354,113 Withheld 680,793 Jack A. Smith For 120,348,963 Withheld 685,944 Blaine Sweatt, III For 120,406,374 Withheld 628,532 (ii) Approved appointment of KPMG LLP as independent auditor. For 119,993,008 Against 313,346 Abstain 728,553 14 <PAGE> (iii) Approved the Darden Restaurants, Inc. Amended and Restated Stock Option and Long-Term Incentive Plan of 1995, as further described in that portion of the Proxy Statement referenced above. For 103,083,739 Against 10,329,040 Abstain 1,159,965 Broker Non-Vote 6,642,163 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed Charges Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K. On September 24, 1999, the Company filed a current report on Form 8-K to announce first quarter financial results for fiscal year 2000, the appointment of Bob Mock to President of Smokey Bones BBQ and Hometown Sports Bar, and the appointment of Dave Pickens to Executive Vice President of Operations of Olive Garden. 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. DARDEN RESTAURANTS, INC. Dated: January 11, 2000 By: /s/ Paula J. Shives ----------------------------------- Paula J. Shives Senior Vice President, General Counsel and Secretary Dated: January 11, 2000 By: /s/ Clarence Otis, Jr. ----------------------------------- Clarence Otis, Jr. Senior Vice President, Chief Financial Officer (Principal financial officer) 16 <PAGE> INDEX TO EXHIBITS Exhibit Number Exhibit Title Page 12 Computation of Ratio of Consolidated Earnings to Fixed Charges 18 27 Financial Data Schedule 19 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 12 <TEXT> Exhibit 12 DARDEN RESTAURANTS, INC. COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES (Dollar Amounts in Thousands) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 28, November 29, November 28, November 29, 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Consolidated Earnings from Operations Before Income Taxes..................... $ 37,965 $ 24,657 $ 111,192 $ 78,528 Plus Fixed Charges......................... 10,488 9,921 20,353 20,447 Less Capitalized Interest.................. (458) (260) (899) (520) ---------- ---------- ---------- ---------- Consolidated Earnings from Operations Before Income Taxes Available to Cover Fixed Charges..................... $ 47,995 $ 34,318 $ 130,646 $ 98,455 ========== ========== ========== ========== Ratio of Consolidated Earnings to Fixed Charges................................. 4.58 3.46 6.42 4.82 ========== ========== ========== ========== - -------------------------------------------------------------------------------------------------------------------- </TABLE> 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATE SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the consolidated financial statements of Darden Restaurants, Inc. 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-28-2000 <PERIOD-END> NOV-28-1999 <CASH> 19,947 <SECURITIES> 0 <RECEIVABLES> 4,914 <ALLOWANCES> (350) <INVENTORY> 215,261 <CURRENT-ASSETS> 350,872 <PP&E> 2,459,692 <DEPRECIATION> (968,339) <TOTAL-ASSETS> 1,945,134 <CURRENT-LIABILITIES> 571,890 <BONDS> 313,756 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,344,990 <OTHER-SE> (378,853) <TOTAL-LIABILITY-AND-EQUITY> 1,945,134 <SALES> 1,777,622 <TOTAL-REVENUES> 1,777,622 <CGS> 570,630 <TOTAL-COSTS> 1,405,090 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 62 <INTEREST-EXPENSE> 9,841 <INCOME-PRETAX> 111,192 <INCOME-TAX> 39,425 <INCOME-CONTINUING> 71,767 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 71,767 <EPS-BASIC> 0.55 <EPS-DILUTED> 0.53 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

EMR

https://www.sec.gov/Archives/edgar/data/32604/0000032604-00-000002.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, Ez0zTYHuAlYieYB9SDWDyOw7IBt6bx5bmIk8nRmne5BiWhHrevqb3EngId5letBB sMNUOTihi5EOH0GeXI1PVg== <SEC-DOCUMENT>0000032604-00-000002.txt : 20000215 <SEC-HEADER>0000032604-00-000002.hdr.sgml : 20000215 ACCESSION NUMBER: 0000032604-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: SEC FILE NUMBER: 001-00278 FILM NUMBER: 541116 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 <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 December 31, 1999 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, 1999: 431,069,512 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, 1999 AND 1998 (Dollars in millions except per share amounts; unaudited) Three Months Ended December 31, --------------------- 1999 1998 -------- -------- Net sales $3,543.3 3,426.7 -------- -------- Costs and expenses: Cost of sales 2,288.8 2,211.6 Selling, general and administrative expenses 701.9 691.4 Interest expense 52.0 44.9 Other deductions, net 4.6 6.4 -------- -------- Total costs and expenses 3,047.3 2,954.3 -------- -------- Income before income taxes 496.0 472.4 Income taxes 171.1 170.0 -------- -------- Net earnings $ 324.9 302.4 ======== ======== Basic earnings per common share $ .75 .69 ======== ======== Diluted earnings per common share $ .75 .69 ======== ======== Cash dividends per common share $ .3575 .325 ======== ======== See accompanying notes to consolidated financial statements. _________________________________________________________________________ NOTE: Diluted earnings per common share, excluding goodwill amortization $ .82 .75 ======== ======== 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 1999 1999 ------ --------- -------- CURRENT ASSETS Cash and equivalents $ 339.5 266.1 Receivables, less allowances of $60.7 and $60.5 2,487.6 2,516.3 Inventories 1,953.1 1,921.1 Other current assets 421.6 420.9 --------- -------- Total current assets 5,201.8 5,124.4 --------- -------- PROPERTY, PLANT AND EQUIPMENT, NET 3,142.8 3,154.4 --------- -------- OTHER ASSETS Goodwill 4,208.3 4,263.0 Other 1,076.3 1,081.7 --------- -------- Total other assets 5,284.6 5,344.7 --------- -------- $13,629.2 13,623.5 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Short-term borrowings and current maturities of long-term debt $ 2,065.3 1,953.7 Accounts payable 890.4 1,068.8 Accrued expenses 1,191.6 1,304.8 Income taxes 362.4 263.1 --------- -------- Total current liabilities 4,509.7 4,590.4 --------- -------- LONG-TERM DEBT 1,400.8 1,317.1 --------- -------- OTHER LIABILITIES 1,529.9 1,535.5 --------- -------- STOCKHOLDERS' EQUITY Preferred stock of $2.50 par value per share. Authorized 5,400,000 shares; issued - none -- -- Common stock of $.50 par value per share. Authorized 1,200,000,000 shares; issued 476,677,006 shares 238.3 238.3 Additional paid in capital 20.5 23.9 Retained earnings 7,974.1 7,803.7 Accumulated other nonstockholder changes in equity (314.0) (271.6) Cost of common stock in treasury, 45,607,494 shares and 43,632,708 shares (1,730.1) (1,613.8) --------- -------- Total stockholders' equity 6,188.8 6,180.5 --------- -------- $13,629.2 13,623.5 ========= ======== 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, 1999 AND 1998 (Dollars in millions; unaudited) 1999 1998 -------- -------- OPERATING ACTIVITIES Net earnings $ 324.9 302.4 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 163.5 152.4 Changes in operating working capital (169.2) (150.0) Other (16.0) (29.2) -------- -------- Net cash provided by operating activities 303.2 275.6 -------- -------- INVESTING ACTIVITIES Capital expenditures (125.6) (136.8) Purchases of businesses, net of cash and equivalents acquired (4.6) (468.0) Other, net (1.9) .8 -------- -------- Net cash used in investing activities (132.1) (604.0) -------- -------- FINANCING ACTIVITIES Net increase in short-term borrowings 147.9 495.6 Proceeds from long-term debt 81.5 175.1 Principal payments on long-term debt (7.5) (6.0) Dividends paid (154.5) (142.4) Net purchases of treasury stock (159.3) (94.3) -------- -------- Net cash (used in) provided by financing activities (91.9) 428.0 -------- -------- Effect of exchange rate changes on cash and equivalents (5.8) 12.4 -------- -------- INCREASE IN CASH AND EQUIVALENTS 73.4 112.0 Beginning cash and equivalents 266.1 209.7 -------- -------- ENDING CASH AND EQUIVALENTS $ 339.5 321.7 ======== ======== See accompanying notes to consolidated financial statements. 4 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q Notes to Consolidated Financial Statements (Unaudited) 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 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, 1999. 2. Other Financial Information (Dollars in millions) December 31, September 30, 1999 1999 -------- -------- Inventories ----------- Finished products $ 836.5 871.5 Raw materials and work in process 1,116.6 1,049.6 -------- -------- $1,953.1 1,921.1 ======== ======== Property, plant and equipment, net ---------------------------------- Property, plant and equipment, at cost $6,439.1 6,377.8 Less accumulated depreciation 3,296.3 3,223.4 -------- -------- $3,142.8 3,154.4 ======== ======== Other assets, other ------------------- Equity and other investments $ 227.7 235.1 Retirement plans 281.3 271.3 Leveraged leases 183.6 185.5 Other 383.7 389.8 -------- -------- $1,076.3 1,081.7 ======== ======== Other liabilities ----------------- Minority interest $ 297.6 297.2 Postretirement plans, excl. current portion 315.3 313.1 Deferred taxes 333.0 333.9 Other 584.0 591.3 -------- -------- $1,529.9 1,535.5 ======== ======== 5 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q 3. Business Segment Information Summarized information about the Company's operations by business segment for the three months ended December 31, 1999 and 1998, follows (dollars in millions): Earnings Before Interest and Sales Income Taxes ---------------- ------------- 1999 1998 1999 1998 -------- ------- ----- ----- Process Control $ 712.3 633.7 56.3 70.0 Industrial Automation 858.9 847.7 111.3 109.3 Electronics and Telecommunications 583.5 486.2 71.7 42.2 HVAC 540.9 525.2 79.0 74.7 Appliance and Tools 910.5 874.8 146.9 142.4 -------- ------- ----- ----- 3,606.1 3,367.6 465.2 438.6 Divested businesses 24.5 151.3 .4 9.1 Eliminations/Interest and other (87.3) (92.2) 30.4 24.7 -------- ------- ----- ----- Net sales/Income before income taxes $3,543.3 3,426.7 496.0 472.4 ======== ======= ===== ===== Divested businesses include F.G. Wilson and other smaller businesses. Intersegment sales of the Appliance and Tools segment were $70 million for the three months ended December 31, 1999 and 1998. Interest and other for the three months ended December 31, 1999 and 1998, respectively, include accounting method differences of $44.5 million and $40.6 million; interest income, corporate and other of $37.9 million and $29.0 million; and interest expense. 4. During the second quarter of fiscal 2000, the Company acquired Jordan Telecommunication Products, Inc. (renamed Emerson Telecommunication Products) for approximately $985 million. Emerson Telecom is a global provider of fiber optic conduit systems, CATV components, power protection systems, cellular site structures, custom cables and connectors for wireline, wireless and data communications equipment. Also in the second quarter, the Company announced an agreement to acquire Ericsson Energy Systems, a global provider of power supplies, power systems, switching equipment, climate control and energy management systems, and site monitoring services to the telecommunications industry, for approximately $725 million. This transaction is subject to regulatory approval and other customary conditions. The Company also announced its decision to sell its interest in Vermont American to its joint venture partner, Robert Bosch GmbH. 6 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q 5. As reflected in the financial statements, nonstockholder changes in equity for the three months ended December 31, 1999, were $282.5 million, comprised of net earnings of $324.9 million and foreign currency translation adjustments of $(42.4) million. The corresponding amount for the three months ended December 31, 1998, was $371.7 million, comprised of net earnings of $302.4 million and foreign currency translation adjustments of $69.3 million. 6. The weighted average number of common shares outstanding (in millions) was 430.4 and 436.0 for the three months ended December 31, 1999 and 1998, respectively. The weighted average number of shares outstanding assuming dilution (in millions) was 434.5 and 440.6 for the three months ended December 31, 1999 and 1998, respectively. Dilutive shares primarily relate to stock plans. 7 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES Form 10-Q Items 2 and 3. 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 2000 were the highest for any first quarter in the Company's history. Net sales for the quarter ended December 31, 1999, were $3,543.3 million, an increase of 3.4 percent over net sales of $3,426.7 million for the quarter ended December 31, 1998. These results reflect continued improvement in international markets and robust demand worldwide in the electronics and telecommunications business. Excluding the impact of currency and divestitures, sales increased 9 percent, reflecting underlying growth and the contribution of acquisitions. The process control business reported a 12 percent increase in sales, driven by the Westinghouse Process Control and Daniel Industries acquisitions, which have increased the Company's presence in the power, water and wastewater, and natural gas markets. Underlying sales declined, reflecting reductions in capital spending by customers during 1999. Sales in the industrial automation business increased because of the Kato and Magnetek alternator operations acquisitions. Underlying sales declined modestly as last year's capital reductions for industrial products extended into the fourth calendar quarter. Sales in the electronics and telecommunications business increased 20 percent, due to very strong underlying growth, particularly in the United States. The European and Asian markets also experienced solid growth. The ongoing high demand is being driven by the rapid expansion of the Internet infrastructure and telecommunications markets. The heating, ventilating and air conditioning business achieved solid underlying sales growth, reflecting strength in Europe, Asia and Latin America. Growth in the United States was modest, due in part to select customers' efforts to reduce off-season inventory. This activity does not affect overall consumer demand. The appliance and tools business realized a solid increase in underlying sales across all areas, attributable to continued strength in the U.S. home construction and repair markets. Sales to home centers increased substantially, as The Home Depot continues to embrace the Company's RIDGID- branded products as its professional tools offering. Cost of sales for the first quarter was $2,288.8 million, or 64.6 percent of sales, compared with $2,211.6 million, or 64.5 percent of sales, for the first quarter of 1999. Selling, general and administrative expenses for the three months ended December 31, 1999, were $701.9 million, or 19.8 percent of sales, compared to $691.4 million, or 20.2 percent of sales, for the same period a year ago. 8 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q Earnings before interest and income taxes increased 5.9 percent. The consolidated operating margin increased 0.3 points reflecting the impact of cost reduction efforts and productivity improvement programs. Earnings before interest and income taxes in the process control business decreased in the first quarter of 2000, primarily due to underlying sales declines reflecting reductions in capital spending by customers. Earnings of the electronics and telecommunications business increased by 70 percent compared to the first quarter of 1999, reflecting robust underlying sales growth and improved operating margins. 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, 1999 1999 --------- --------- Working capital (in millions) $ 692.1 $ 534.0 Current ratio 1.2 to 1 1.1 to 1 Total debt to total capital 35.9% 34.6% Net debt to net capital 33.5% 32.7% The Company's interest coverage ratio (earnings before income taxes and interest expense, divided by interest expense) was 10.5 times for the quarter ended December 31, 1999, compared to 11.5 times for the same period one year earlier. The decrease in the interest coverage ratio reflects higher average borrowings resulting from share repurchases and acquisitions, partially offset by earnings growth. Cash and equivalents increased by $73.4 million during the three months ended December 31, 1999. Cash flow provided by operating activities of $303.2 million and an increase in borrowings of $221.9 million were used primarily to fund net treasury stock purchases of $159.3 million, pay dividends of $154.5 million, and fund capital expenditures of $125.6 million. The Company is in a strong financial position, continues to generate strong operating cash flow, 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, 1999. 9 <PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q PART II. OTHER INFORMATION Item 5. Other Information. On February 3, 2000, the Company announced that George W. Tamke, vice chairman and co-chief executive officer of the Company, informed the Board of Directors and Chairman and Chief Executive Officer Charles F. Knight that he is resigning to pursue other opportunities. 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. Form 10-Q for the quarter ended March 31, 1997, Exhibit 3(a). 3(b) Bylaws of Emerson Electric Co., as amended through November 3, 1998, incorporated by reference to Emerson Electric Co. 1998 Form 10-K, Exhibit 3(b). 12 Ratio of Earnings to Fixed Charges 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, 1999. 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 11, 2000 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) 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>RATIO OF EARNINGS TO FIXED CHARGES <TEXT> <PAGE> EXHIBIT 12 EMERSON ELECTRIC CO. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES THREE MONTHS ENDED DECEMBER 31, 1999 (Dollars in millions) Earnings: Income before income taxes <F1> $503.0 Fixed charges 69.4 ------ Earnings, as defined $572.4 ====== Fixed charges: Interest expense $ 54.6 One-third of all rents 14.8 ------ Total fixed charges $ 69.4 ====== Ratio of Earnings to Fixed Charges 8.2x ====== <F1> Represents income before income taxes and minority interests in the income of consolidated subsidiaries with fixed charges. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <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, 1999, FILED WITH THE COMPANY'S 2000 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-30-2000 <PERIOD-END> DEC-31-1999 <CASH> 339,500 <SECURITIES> 0 <RECEIVABLES> 2,548,300 <ALLOWANCES> 60,700 <INVENTORY> 1,953,100 <CURRENT-ASSETS> 5,201,800 <PP&E> 6,439,100 <DEPRECIATION> 3,296,300 <TOTAL-ASSETS> 13,629,200 <CURRENT-LIABILITIES> 4,509,700 <BONDS> 1,400,800 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 238,300 <OTHER-SE> 5,950,500 <TOTAL-LIABILITY-AND-EQUITY> 13,629,200 <SALES> 3,543,300 <TOTAL-REVENUES> 3,543,300 <CGS> 2,288,800 <TOTAL-COSTS> 2,288,800 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 52,000 <INCOME-PRETAX> 496,000 <INCOME-TAX> 171,100 <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 324,900 <EPS-BASIC> .75 <EPS-DILUTED> .75 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

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https://www.sec.gov/Archives/edgar/data/846909/000092701600000115/0000927016-00-000115-d1.html

<HTML> <HEAD> <TITLE>FORM 10-Q</TITLE> </HEAD> <BODY BGCOLOR="#FFFFFF"> <P ALIGN=CENTER>================================================================ =============================================</P> <P ALIGN=CENTER><FONT FACE="Times Roman">SECURITIES AND EXCHANGE COMMISSION</FONT><FONT FACE="Courier" SIZE="-1"> <A NAME="link1"></A> <BR> </FONT><FONT FACE="Times Roman">Washington, D.C. 20549</FONT></P> <P ALIGN=CENTER><B><FONT FACE="Times Roman">Form 10-Q</FONT></B></P> <P ALIGN=CENTER><FONT FACE="Times Roman">[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) <BR> </FONT><FONT FACE="Times Roman">OF THE SECURITIES EXCHANGE ACT OF 1934</FONT></P> <P ALIGN=CENTER><B><FONT FACE="Times Roman">For the Quarter Ended November 30, 1999</FONT></B></P> <P ALIGN=CENTER><FONT FACE="Times Roman">[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) <BR> </FONT><FONT FACE="Times Roman">OF THE SECURITIES EXCHANGE ACT OF 1934</FONT></P> <P ALIGN="center"><FONT FACE="Times Roman">Commission File Number 1-10228</FONT></P> <P ALIGN="center"><B><U><FONT FACE="Times Roman">CABLETRON SYSTEMS, INC.</FONT></U></B> <BR> <FONT FACE="Times Roman">(Exact name of registrant as specified in its charter)</FONT></P> <TABLE WIDTH="100%" BORDER="0"> <TR> <TD WIDTH="49%"> <DIV ALIGN="center"><U><FONT FACE="Times Roman">Delaware</FONT></U></DIV> </TD> <TD WIDTH="51%"> <DIV ALIGN="center"><U><FONT FACE="Times Roman"> </FONT></U><FONT FACE="Courier" SIZE="-1"> </FONT><FONT FACE="Times Roman"> <U>04-2797263</U></FONT></DIV> </TD> </TR> <TR> <TD WIDTH="49%" HEIGHT="20"> <DIV ALIGN="center"><FONT FACE="Times Roman">(State or other jurisdiction of </FONT></DIV> </TD> <TD WIDTH="51%" HEIGHT="20"> <DIV ALIGN="center"><FONT FACE="Times Roman">(I.R.S. Employer</FONT></DIV> </TD> </TR> <TR> <TD WIDTH="49%" HEIGHT="20"> <DIV ALIGN="center"><FONT FACE="Times Roman">incorporation or organization)</FONT></DIV> </TD> <TD WIDTH="51%" HEIGHT="20"> <DIV ALIGN="center"><FONT FACE="Times Roman">identification no.)</FONT></DIV> </TD> </TR> </TABLE> <P ALIGN="left">&nbsp;</P> <P ALIGN="center"><FONT FACE="Times Roman"><U>35 Industrial Way, Rochester, New Hampshire 03867 <BR> </U></FONT><FONT FACE="Times Roman">(Address of principal executive offices and Zip Code)</FONT></P> <P ALIGN=CENTER><FONT FACE="Times Roman">Registrant's telephone number, including area code: (603) 332-9400</FONT></P> <P><FONT FACE="Times Roman">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. </FONT></P> <P ALIGN=CENTER><FONT FACE="Times Roman">YES - <U>X</U> NO -</FONT></P> <P><FONT FACE="Times Roman">As of December 31, 1999 there were 182,256,788 shares of the Registrant's common stock outstanding.</FONT></P> <P><FONT FACE="Times Roman">This document contains 27 pages </FONT></P> <P><FONT FACE="Times Roman">Exhibit index on page 27</FONT></P> <P><FONT FACE="Times Roman">====================================================================== ========================================</FONT></P> <P> </P> <P ALIGN=CENTER><FONT FACE="Times Roman">INDEX <A NAME="link2"></A> </FONT></P> <P ALIGN=CENTER>[LOGO OF CABLETRON SYSTEMS]</P> <UL> <TABLE> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81><FONT FACE="Times Roman">Page(s)</FONT> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <HR NOSHADE ALIGN="center" WIDTH="60%" SIZE="1"> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link1">Facing Page</A> </FONT></P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">1</FONT></P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link2">Index</A> </FONT> </P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">2</FONT></P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman">PART I. FINANCIAL INFORMATION </FONT></P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&#160; </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman">Item 1. Consolidated Financial Statements</FONT></P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&#160; </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link3">Consolidated Balance Sheets - November 30, 1999 (unaudited) and </A> </FONT> <A HREF="#link3"> <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT FACE="Times Roman">February 28, 1999</FONT></A> </P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">3</FONT></P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link4">Consolidated Statements of Operations - Three and nine months ended <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </A> </FONT> <A HREF="#link4"><FONT FACE="Times Roman">November 30, 1999 and 1998 (unaudited)</FONT></A> </P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">4</FONT></P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link5">Consolidated Statements of Cash Flows - Nine months ended </A> </FONT> <A HREF="#link5"> <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT FACE="Times Roman">&nbsp;November 30, 1999 and 1998 (unaudited)</FONT></A> </P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">5</FONT></P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link6">Notes to Consolidated Financial Statements - </A> </FONT> <A HREF="#link6"> <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT FACE="Times Roman">&nbsp;November 30, 1999 (unaudited)</FONT></A> </P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">6 - 11</FONT></P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link7">Item 2. Management's Discussion and Analysis of Financial </A> </FONT> <A HREF="#link7"> <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT FACE="Times Roman">&nbsp;Condition and Results of Operations</FONT></A> </P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">12-24</FONT></P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link8">Item 7a. Quantitative and Qualitative Disclosures about Market Risk</A> </FONT></P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P>24</P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman">PART II. OTHER INFORMATION</FONT></P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&#160; </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link9">Item 6. Exhibits and Reports on Form 8-K </A> </FONT></P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">25</FONT></P> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" WIDTH=710> <P><FONT FACE="Times Roman"> <A HREF="#link10">Signatures </A> </FONT></P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=81> <P><FONT FACE="Times Roman">26</FONT></P> </TD> </TR> </TABLE> </UL> <P><FONT SIZE="2"> <A NAME=""> </A> </FONT></P> <P>PART I. FINANCIAL INFORMATION</P> <P>Item 1. Consolidated Financial Statements <A NAME="link3"></A> <BR> <B>CABLETRON SYSTEMS, INC.</B></P> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR NOWRAP> <TD COLSPAN="6"><B>CONSOLIDATED BALANCE SHEETS</B></TD> </TR> <TR NOWRAP> <TD COLSPAN="6">(in thousands, except per share amounts) </TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TH COLSPAN="2"> <DIV ALIGN="center"><B>(unaudited) <BR> </B> <B><U>November 30, 1999 </U></B></DIV> </TH> <TH WIDTH="2%" VALIGN="bottom">&nbsp;</TH> <TH VALIGN="bottom" COLSPAN="2"> <DIV ALIGN="center"><B><U>February 28, 1999 </U></B></DIV> </TH> </TR> <TR NOWRAP> <TD WIDTH="55%">Assets </TD> <TD WIDTH="16%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Current Assets: </TD> <TD WIDTH="16%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Cash and cash equivalents </TD> <TD WIDTH="16%"> <DIV ALIGN="right">$238,929</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">$159,422</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Short-term investments </TD> <TD WIDTH="16%"> <DIV ALIGN="right">123,629</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">113,932</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Accounts receivable, net </TD> <TD WIDTH="16%"> <DIV ALIGN="right">195,230</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">216,793</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Inventories, net </TD> <TD WIDTH="16%"> <DIV ALIGN="right">178,529</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">229,512 </DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Deferred income taxes </TD> <TD WIDTH="16%"> <DIV ALIGN="right">86,331</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">60,252</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Prepaid expenses and other assets</TD> <TD WIDTH="16%"> <DIV ALIGN="right">37,837</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">60,510</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Total current assets </TD> <TD WIDTH="16%"> <DIV ALIGN="right">860,485</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">840,421</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Long-term investments </TD> <TD WIDTH="16%"> <DIV ALIGN="right">187,485</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">202,984</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Long-term deferred income taxes </TD> <TD WIDTH="16%"> <DIV ALIGN="right">147,739</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">135,197</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Property, plant and equipment, net</TD> <TD WIDTH="16%"> <DIV ALIGN="right">152,854</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">188,479</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Intangible assets, net </TD> <TD WIDTH="16%"> <DIV ALIGN="right">173,837</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">199,419</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Total assets</TD> <TD WIDTH="16%"> <DIV ALIGN="right">$1,522,400</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">$1,566,500</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="2"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="2"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Liabilities and Stockholders' Equity </TD> <TD WIDTH="16%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Current Liabilities:</TD> <TD WIDTH="16%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Accounts payable</TD> <TD WIDTH="16%"> <DIV ALIGN="right">$57,917</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">$121,580</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Current portion of long-term obligation</TD> <TD WIDTH="16%"> <DIV ALIGN="right">-</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">129,747</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Deferred revenue </TD> <TD WIDTH="16%"> <DIV ALIGN="right">160,389</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">94,023</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Accrued expenses</TD> <TD WIDTH="16%"> <DIV ALIGN="right">135,190</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">124,126</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Total current liabilities </TD> <TD WIDTH="16%"> <DIV ALIGN="right">353,496</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">469,476</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Long-term deferred income taxes</TD> <TD WIDTH="16%"> <DIV ALIGN="right">11,473</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">7,191 </DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Total liabilities</TD> <TD WIDTH="16%"> <DIV ALIGN="right">364,969</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">476,667</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="2"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="2"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Stockholders' Equity:</TD> <TD WIDTH="16%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%"> Preferred stock, $1.00 par value. Authorized <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2,000 shares; none issued </TD> <TD WIDTH="16%" VALIGN="bottom"> <DIV ALIGN="right">---</DIV> </TD> <TD WIDTH="6%" VALIGN="bottom">&nbsp;</TD> <TD WIDTH="2%" VALIGN="bottom">&nbsp;</TD> <TD WIDTH="15%" VALIGN="bottom"> <DIV ALIGN="right">---</DIV> </TD> <TD WIDTH="6%" VALIGN="bottom">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%"> Common stock $0.01 par value. Authorized <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;240,000 shares; issued and outstanding <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;181,584 and 172,184, respectively </TD> <TD WIDTH="16%" VALIGN="bottom"> <DIV ALIGN="right">1,816</DIV> </TD> <TD WIDTH="6%" VALIGN="bottom">&nbsp;</TD> <TD WIDTH="2%" VALIGN="bottom">&nbsp;</TD> <TD WIDTH="15%" VALIGN="bottom"> <DIV ALIGN="right">1,722</DIV> </TD> <TD WIDTH="6%" VALIGN="bottom">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Additional paid-in capital </TD> <TD WIDTH="16%"> <DIV ALIGN="right">587,973</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">551,232</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Retained earnings </TD> <TD WIDTH="16%"> <DIV ALIGN="right">569,569</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">536,487</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <DIV ALIGN="right">1,159,358</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">1,089,441</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Accumulated other comprehensive income</TD> <TD WIDTH="16%"> <DIV ALIGN="right">(1,927</DIV> </TD> <TD WIDTH="6%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">392</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Total stockholders' equity </TD> <TD WIDTH="16%"> <DIV ALIGN="right">1,157,431</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">1,089,833</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="1"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">Total liabilities and stockholders' equity</TD> <TD WIDTH="16%"> <DIV ALIGN="right">$1,522,400</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right">$1,566,500</DIV> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="2"> </TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="85%" SIZE="2"> </TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD WIDTH="55%">&nbsp;</TD> <TD WIDTH="16%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> <TD WIDTH="2%">&nbsp;</TD> <TD WIDTH="15%">&nbsp;</TD> <TD WIDTH="6%">&nbsp;</TD> </TR> <TR NOWRAP> <TD COLSPAN="6"> <DIV ALIGN="center">See accompanying notes to consolidated financial statements.</DIV> </TD> </TR> </TABLE> <P ALIGN="center"><FONT FACE="Clarendon Condensed" SIZE=1></FONT></P> <P><FONT SIZE="2"> <A NAME="TopOfPage"> </A> </FONT> </P> <P><B>CABLETRON SYSTEMS, INC. <BR> </B><B>CONSOLIDATED STATEMENTS OF OPERATIONS <A NAME="link4"></A> <BR> </B>(in thousands, except per share amounts)</P> <P>&nbsp;</P> <TABLE BORDER="0" CELLPADDING="0" CELLSPACING="0" WIDTH="100%"> <TR NOWRAP> <TD>&nbsp;</TD> <TH>&nbsp;</TH> <TH COLSPAN="4"> <DIV ALIGN="center"><B>(unaudited)</B> </DIV> </TH> <TH>&nbsp;</TH> <TH>&nbsp;</TH> <TH>&nbsp;</TH> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TH COLSPAN="3"> <DIV ALIGN="center">Three months ended <BR> November 30, </DIV> </TH> <TH> <DIV ALIGN="center"></DIV> </TH> <TH COLSPAN="3">Nine months ended <BR> November 30, </TH> <TH>&nbsp;</TH> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TH VALIGN="bottom"> <DIV ALIGN="center">1999 <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </DIV> </TH> <TH VALIGN="bottom">&nbsp;</TH> <TH VALIGN="bottom"> <DIV ALIGN="center">1998 <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </DIV> </TH> <TH VALIGN="bottom">&nbsp;</TH> <TH VALIGN="bottom"> <DIV ALIGN="center">1999 <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </DIV> </TH> <TH VALIGN="bottom">&nbsp;</TH> <TH VALIGN="bottom"> <DIV ALIGN="center">1998 <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </DIV> </TH> <TH>&nbsp;</TH> </TR> <TR VALIGN="bottom" NOWRAP> <TD>&nbsp;</TD> <TD>&nbsp;</TD> <TD>&nbsp;</TD> <TD>&nbsp;</TD> <TD>&nbsp;</TD> <TD>&nbsp;</TD> <TD>&nbsp;</TD> <TD>&nbsp;</TD> <TD>&nbsp;</TD> </TR> <TR VALIGN="bottom" NOWRAP> <TD>Net sales </TD> <TD> <DIV ALIGN="right">$371,653</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">$329,868</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">$1,077,825</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">$1,066,206</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR VALIGN="bottom" NOWRAP> <TD>Cost of sales </TD> <TD> <DIV ALIGN="right">199,136</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">203,241</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">607,442</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">618,153</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR VALIGN="top" NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> </TR> <TR VALIGN="bottom" NOWRAP> <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit </TD> <TD> <DIV ALIGN="right">172,517</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">126,627</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">470,383</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">448,053</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR VALIGN="top" NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>Operating expenses: </TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;Research and development </TD> <TD> <DIV ALIGN="right">44,716</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">51,484</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">142,312</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">159,634</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;Selling, general and administrative</TD> <TD> <DIV ALIGN="right">100,089</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">113,883</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">295,890</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">320,799</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;Amortization of intangible assets</TD> <TD> <DIV ALIGN="right">7,473</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">6,937</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">22,302</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">19,626</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR VALIGN="bottom" NOWRAP> <TD>&nbsp;&nbsp;Special charges </TD> <TD> <DIV ALIGN="right">--- </DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">67,350 </DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">23,736</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">217,350</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR VALIGN="top" NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total operating expenses </TD> <TD> <DIV ALIGN="right">152,278</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">239,654</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">484,240</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">717,409</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income (loss) from &nbsp;operations </TD> <TD> <DIV ALIGN="right">20,239</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">(113,027</DIV> </TD> <TD>)</TD> <TD> <DIV ALIGN="right"> (13,857</DIV> </TD> <TD>)</TD> <TD> <DIV ALIGN="right">(269,356</DIV> </TD> <TD>)</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>Other income </TD> <TD> <DIV ALIGN="right">39,082</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">--- </DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">49,109</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">---&nbsp;</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>Interest income, net </TD> <TD> <DIV ALIGN="right">4,152</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">3,493</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">12,052</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">11,413</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income (loss) before income </TD> <TD> <DIV ALIGN="right">63,473</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">(109,534</DIV> </TD> <TD>)</TD> <TD> <DIV ALIGN="right">47,304</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">(257,943</DIV> </TD> <TD>)</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>Income tax expense (benefit) </TD> <TD> <DIV ALIGN="right">20,875</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">(25,057</DIV> </TD> <TD>)</TD> <TD> <DIV ALIGN="right">14,222</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">(25,291</DIV> </TD> <TD>)</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net income (loss) </TD> <TD> <DIV ALIGN="right">$42,598</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">($84,477</DIV> </TD> <TD>)</TD> <TD> <DIV ALIGN="right">$33,082</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">($232,652</DIV> </TD> <TD>)</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>Net income (loss) per share: </TD> <TD>&nbsp;</TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;Basic </TD> <TD> <DIV ALIGN="right">$0.24</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">($0.50</DIV> </TD> <TD>)</TD> <TD> <DIV ALIGN="right">$0.19</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">($1.40</DIV> </TD> <TD>)</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;&nbsp;Diluted </TD> <TD> <DIV ALIGN="right">$0.22</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">($0.50</DIV> </TD> <TD>)</TD> <TD> <DIV ALIGN="right">$0.18</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">($1.40</DIV> </TD> <TD>)</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>Weighted average number of shares outstanding: </TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right"></DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>Basic </TD> <TD> <DIV ALIGN="right">180,504</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">169,658</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">175,901</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">165,884</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>Diluted </TD> <TD> <DIV ALIGN="right">189,561</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">169,658</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">186,501</DIV> </TD> <TD>&nbsp;</TD> <TD> <DIV ALIGN="right">165,884</DIV> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> <TD> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD>&nbsp;</TD> </TR> <TR NOWRAP> <TD COLSPAN="9"> <P ALIGN="center">See accompanying notes to consolidated financial statements. </P> </TD> </TR> </TABLE> <P>&nbsp;</P> <P>&nbsp;</P> <P><FONT SIZE="2"> </FONT> </P> <P>&nbsp;</P> <P ALIGN="left"><B>CABLETRON SYSTEMS, INC. <BR> </B> CONSOLIDATED STATEMENTS OF CASH FLOWS <A NAME="link5"></A> </P> <P>(in thousands)</P> <TABLE WIDTH="100%" BORDER="0"> <TR> <TD HEIGHT="20" WIDTH="72%">&nbsp;</TD> <TH HEIGHT="20" COLSPAN="4"> <DIV ALIGN="center">(Unaudited)</DIV> <DIV ALIGN="center">Nine months ended</DIV> <DIV ALIGN="center">November 30, </DIV> </TH> </TR> <TR> <TD HEIGHT="20" WIDTH="72%">&nbsp;</TD> <TH HEIGHT="20" COLSPAN="2"> <DIV ALIGN="center">1999</DIV> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TH> <TH HEIGHT="20" COLSPAN="2">1998 <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TH> </TR> <TR> <TD HEIGHT="20" WIDTH="72%">Cash flows from operating activities: </TD> <TD HEIGHT="20" WIDTH="15%">&nbsp;</TD> <TD HEIGHT="20" WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD HEIGHT="20" WIDTH="11%">&nbsp;</TD> <TD HEIGHT="20" WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net income (loss) </TD> <TD WIDTH="15%"> <DIV ALIGN="right">$33,082</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">($232,652 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Adjustments to reconcile net income (loss) to net </TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;cash used in operating activities: </TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Depreciation and amortization </TD> <TD WIDTH="15%"> <DIV ALIGN="right">83,734 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">75,048 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Provision for losses on accounts receivable </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(1,838 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">3,929 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred taxes </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(18,995</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">3,328 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Asset impairment </TD> <TD WIDTH="15%"> <DIV ALIGN="right">7,869 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">--- </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Purchased research and development from acquisition </TD> <TD WIDTH="15%"> <DIV ALIGN="right">--- </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">217,350 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other income (non-cash) </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(22,987</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">--- </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other </TD> <TD WIDTH="15%"> <DIV ALIGN="right">2,364</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">1,593 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Changes in assets and liabilities: </TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts receivable </TD> <TD WIDTH="15%"> <DIV ALIGN="right">28,924 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">25,259</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventories </TD> <TD WIDTH="15%"> <DIV ALIGN="right">63,338 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">75,444 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prepaid expenses and other assets </TD> <TD WIDTH="15%"> <DIV ALIGN="right">47,313 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(24,471</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts payable and accrued expenses </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(77,679</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(39,113</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred revenue </TD> <TD WIDTH="15%"> <DIV ALIGN="right">66,366</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">9,817 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Current portion of long-term obligation </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(129,747</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(131,217 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">Net cash provided by operating activities </TD> <TD WIDTH="15%"> <DIV ALIGN="right">81,744 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(15,685</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">Cash flows from investing activities: </TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capital expenditures </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(30,218</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(35,840</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Proceeds from sale of fixed assets </TD> <TD WIDTH="15%"> <DIV ALIGN="right">--- </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">24,531 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Acquisitions of businesses, net of cash acquired </TD> <TD WIDTH="15%"> <DIV ALIGN="right">--- </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(32,193</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Purchases of available-for-sale securities </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(89,622 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(82,375 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Purchases of held-to-maturity securities </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(197,490</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(69,596</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Maturities of marketable securities </TD> <TD WIDTH="15%"> <DIV ALIGN="right">290,895 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">126,888 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">Net cash used in investing activities </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(26,435</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(68,585 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">Cash flows from financing activities: </TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Proceeds from stock option exercise </TD> <TD WIDTH="15%"> <DIV ALIGN="right">17,059 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">1,593 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Common stock issued to ESPP </TD> <TD WIDTH="15%"> <DIV ALIGN="right">7,709 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">5,384 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">Net cash provided by financing activities </TD> <TD WIDTH="15%"> <DIV ALIGN="right">24,768 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">6,977 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">Effect of exchange rate changes on cash </TD> <TD WIDTH="15%"> <DIV ALIGN="right">(570 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(519</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">Net increase (decrease) in cash and cash equivalents </TD> <TD WIDTH="15%"> <DIV ALIGN="right">79,507 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">(77,812</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD WIDTH="72%">Cash and cash equivalents, at beginning of period </TD> <TD WIDTH="15%"> <DIV ALIGN="right">159,422</DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right">207,078 </DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%" HEIGHT="15">&nbsp;</TD> <TD WIDTH="15%" HEIGHT="15"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%" HEIGHT="15"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%" HEIGHT="15"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"> </TD> <TD WIDTH="1%" HEIGHT="15"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%" HEIGHT="15">Cash and cash equivalents, at end of period </TD> <TD WIDTH="15%" HEIGHT="15"> <DIV ALIGN="right">$238,929 </DIV> </TD> <TD WIDTH="1%" HEIGHT="15"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%" HEIGHT="15"> <DIV ALIGN="right">$129,266 </DIV> </TD> <TD WIDTH="1%" HEIGHT="15"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD WIDTH="72%">&nbsp;</TD> <TD WIDTH="15%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="1%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD COLSPAN="5"> <DIV ALIGN="center">See accompanying notes to consolidated financial statements. </DIV> </TD> </TR> </TABLE> <P>&nbsp;</P> <P>&nbsp;</P> <P>&nbsp;</P> <P> </P> <P><B><FONT FACE="Times Roman">CABLETRON SYSTEMS, INC. <BR> </FONT></B><FONT FACE="Times Roman">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) <A NAME="link6"></A> </FONT></P> <P><FONT FACE="Times Roman">1. Basis of Presentation </FONT></P> <P><FONT FACE="Times Roman">The accompanying unaudited consolidated 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 28, 1999.</FONT></P> <P><FONT FACE="Times Roman">Certain prior period balances have been reclassified to conform to the current period presentation. </FONT></P> <P><FONT FACE="Times Roman">2. New Accounting Standards</FONT></P> <P><FONT FACE="Times Roman">In December 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 98-9, &quot;Modification of Software Revenue Recognition&quot; which requires recognition of revenue using specific methods and amends SOP 98-4 (Deferral of the Effective Date of a Provision of SOP 97-2) and amends certain paragraphs of SOP 97-2. The Company adopted SOP 98-9 for its year ending February 28, 2000, beginning on March 1, 1999. The adoption of SOP 98-9 did not have a material impact on the Company's results of operations for the three and nine months ended November 30, 1999.</FONT></P> <P><FONT FACE="Times Roman">In June 1998, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard No. 133, &quot;Accounting for Derivative Instruments and Hedging Activities&quot; (SFAS 133) which requires companies to record derivative instruments on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for the Company's first quarter of fiscal year ending February 28, 2002. Management is currently evaluating the potential effects of this pronouncement on its consolidated financial statements. At this time, management does not expect the impact to be significant.</FONT></P> <P><FONT FACE="Times Roman">3. Inventories </FONT></P> <TABLE WIDTH="67%" BORDER="0"> <TR> <TD WIDTH="56%"><FONT FACE="Times Roman">Inventories consist of: </FONT></TD> <TD WIDTH="22%"><B></B></TD> <TD WIDTH="22%">&nbsp;</TD> </TR> <TR> <TD WIDTH="56%"><FONT FACE="Times Roman">(in thousands)</FONT></TD> <TD WIDTH="22%">&nbsp;</TD> <TD WIDTH="22%">&nbsp;</TD> </TR> <TR> <TD WIDTH="56%">&nbsp;</TD> <TH WIDTH="22%"> <DIV ALIGN="center"><FONT FACE="Times Roman">&nbsp;November &nbsp;30, <BR> <U>1999</U></FONT> </DIV> </TH> <TH WIDTH="22%"> <DIV ALIGN="center"><FONT FACE="Times Roman">February 28, <BR> <U>1999</U></FONT></DIV> </TH> </TR> <TR> <TD WIDTH="56%">&nbsp;</TD> <TD WIDTH="22%"> <DIV ALIGN="center"><FONT FACE="Times Roman">&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;</FONT> </DIV> </TD> <TD WIDTH="22%"> <DIV ALIGN="center"><FONT FACE="Times Roman">&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> </DIV> </TD> </TR> <TR> <TD WIDTH="56%"><FONT FACE="Times Roman">Raw materials</FONT></TD> <TD WIDTH="22%"> <DIV ALIGN="right"><FONT FACE="Times Roman">$&#160;&#160; &#160;40,049</FONT></DIV> </TD> <TD WIDTH="22%"> <DIV ALIGN="right"><FONT FACE="Times Roman">$&#160;&#160; &#160;64,603</FONT></DIV> </TD> </TR> <TR> <TD WIDTH="56%"><FONT FACE="Times Roman">Work in process</FONT></TD> <TD WIDTH="22%"> <DIV ALIGN="right"><FONT FACE="Times Roman">10,368</FONT></DIV> </TD> <TD WIDTH="22%"> <DIV ALIGN="right"><FONT FACE="Times Roman">16,033</FONT></DIV> </TD> </TR> <TR> <TD WIDTH="56%"><FONT FACE="Times Roman">Finished goods</FONT></TD> <TD WIDTH="22%"> <DIV ALIGN="right"><FONT FACE="Times Roman">128,112</FONT></DIV> </TD> <TD WIDTH="22%"> <DIV ALIGN="right"><FONT FACE="Times Roman">148,876</FONT></DIV> </TD> </TR> <TR> <TD WIDTH="56%">&nbsp;</TD> <TD WIDTH="22%"> <HR NOSHADE ALIGN="right" WIDTH="65%" SIZE="1"> </TD> <TD WIDTH="22%"> <HR NOSHADE ALIGN="right" WIDTH="65%" SIZE="1"> </TD> </TR> <TR> <TD WIDTH="56%"><FONT FACE="Times Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Total inventories</FONT></TD> <TD WIDTH="22%"> <DIV ALIGN="right"><FONT FACE="Times Roman">$ &#160;178,529</FONT></DIV> </TD> <TD WIDTH="22%"> <DIV ALIGN="right"><FONT FACE="Times Roman">$ &#160;229,512</FONT></DIV> </TD> </TR> <TR> <TD WIDTH="56%">&nbsp;</TD> <TD WIDTH="22%"> <HR NOSHADE ALIGN="right" WIDTH="65%" SIZE="2"> </TD> <TD WIDTH="22%"> <HR NOSHADE ALIGN="right" WIDTH="65%" SIZE="2"> </TD> </TR> </TABLE> <P>&nbsp;</P> <P><P><P><P><P><FONT FACE="Times Roman">4. Business Combinations</FONT></P> <P><FONT FACE="Times Roman">NetVantage, Inc.</FONT></P> <P><FONT FACE="Times Roman">On September 25, 1998, Cabletron acquired NetVantage, Inc., (&quot;NetVantage&quot;) a publicly held manufacturer of ethernet workgroup switches. Under the terms of the Merger Agreement, Cabletron issued 6.4 million shares of Cabletron common stock to the shareholders of NetVantage in exchange for all of the outstanding shares of stock of NetVantage. In addition, Cabletron assumed 1,309,000 options, valued at approximately $4.8 million.</FONT></P> <P><FONT FACE="Times Roman"> </FONT></P> <P><FONT FACE="Times Roman">Cabletron recorded the cost of the acquisition at approximately $77.8 million, including direct costs of $4.2 million. This acquisition has been accounted for under the purchase method of accounting. The cost represents 6.4 million shares at $9.9375 per share, in addition to assumed options and direct acquisition costs. Based on an independent appraisal, approximately $29.4 million of the purchase price was allocated to in-process research and development. Accordingly, Cabletron recorded special charges of $29.4 million for this in-process research and development, at the date of acquisition. The excess of cost over the estimated fair value of net assets acquired of $35.6 million was allocated to goodwill and other intangible assets and is being amortized on a straight-line basis over a period of 5 - 10 years. Cabletron's consolidated results of operations include the operating results of NetVantage from the acquisition date.</FONT></P> <P><FONT FACE="Times Roman">FlowPoint Corp.</FONT></P> <P><FONT FACE="Times Roman">On September 9, 1998, Cabletron acquired all of the outstanding stock of FlowPoint Corp., (&quot;FlowPoint&quot;) a privately held manufacturer of digital subscriber line router networking products. Prior to the agreement, Cabletron owned 42.8% of the outstanding shares of stock. Pursuant to the terms of the agreement, $20.6 million was paid in 4 installments, within 9 months after the merger date. The first installment was paid in the form of cash while the remaining 3 installments were paid in the form of Cabletron common stock. In addition, Cabletron assumed 494,000 options, valued at approximately $2.7 million.</FONT></P> <P><FONT FACE="Times Roman">Cabletron recorded the cost of the acquisition at approximately $25.0 million, including direct costs of $0.4 million. This acquisition has been accounted for under the purchase method of accounting. Based on an independent appraisal, approximately $12.0 million of the purchase price was allocated to in-process research and development. Accordingly, Cabletron recorded special charges of $12.0 million for this in-process research and development, at the date of acquisition. The excess of cost over the estimated fair value of net assets acquired of $11.9 million was allocated to goodwill and other intangible assets, and is being amortized on a straight-line basis over a period of 5 - 10 years. Cabletron's consolidated results of operations include the operating results of FlowPoint from the acquisition date. (See Note 12)</FONT></P> <P><FONT FACE="Times Roman">DSLAM division of Ariel Corporation</FONT></P> <P><FONT FACE="Times Roman">On September 1, 1998, Cabletron acquired the assets and assumed certain liabilities of the DSLAM division of Ariel Corporation (&quot;Ariel&quot;), a privately held designer and manufacturer of digital subscriber line network access products. Under the terms of the agreement, Cabletron paid $33.5 million and assumed certain liabilities.</FONT></P> <P><FONT FACE="Times Roman">Cabletron recorded the cost of the acquisition at approximately $45.1 million, including fees and expenses of $1.1 million related to the acquisition, which consisted of cash payments of $33.5 million and other assumed liabilities. This acquisition has been accounted for under the purchase method of accounting. Based on an independent appraisal, approximately $26.0 million of the purchase price was allocated to in-process research and development. Accordingly, Cabletron recorded special charges of approximately $26.0 million ($15.8 million, net of tax) for this in-process research and development, at the date of acquisition. The excess of cost over the estimated fair value of net assets acquired of $18.2 million was allocated to goodwill, and is being amortized on a straight-line basis over a period of 10 years. Cabletron's consolidated results of operations include the operating results of the DSLAM division of Ariel Corporation from the acquisition date.</FONT></P> <P><FONT FACE="Times Roman">Yago Systems, Inc.</FONT></P> <P><FONT FACE="Times Roman">On March 17, 1998, Cabletron acquired Yago Systems, Inc. (&quot;Yago&quot;), a privately held manufacturer of wire speed routing and layer-4 switching products and solutions. Under the terms of the merger agreement, Cabletron issued 6.0 million shares of Cabletron common stock to the shareholders of Yago in exchange for all of the outstanding shares of Yago, not then owned by Cabletron. Prior to the closing of the acquisition, Cabletron held approximately twenty-five percent of Yago's capital stock, calculated on a fully diluted basis. Cabletron also agreed, pursuant to the terms of the merger agreement, to issue up to 5.5 million shares of Cabletron common stock to the former shareholders of Yago in the event the shares originally issued in the transaction did not attain a market value of $35 per share eighteen months after the closing of the transaction. On September 8, 1999, Cabletron issued approximately 5.4 million shares of Cabletron common stock to the former shareholders of Yago, pursuant to the terms of the merger agreement.</FONT></P> <P><FONT FACE="Times Roman">Cabletron recorded the cost of the acquisition at approximately $165.7 million, including direct costs of $2.6 million. This acquisition has been accounted for under the purchase method of accounting. The cost represents 11.5 million shares at $14.1875 per share, in addition to direct acquisition costs. Based on an independent appraisal, $150.0 million of the purchase price was allocated to in-process research and development. Accordingly, Cabletron recorded special charges of $150.0 million for this in-process research and development, at the date of acquisition. The excess of cost over net assets acquired was allocated to goodwill and other intangible assets. A total of $16.3 million was allocated to goodwill and other</FONT></P> <P></P> <P>&nbsp;</P> <P ALIGN="JUSTIFY">intangible assets and is being amortized on a straight-line basis over a period of 5 - 10 years. Cabletron's consolidated results of operations include the operating results of Yago from the acquisition date.</P> <P>5. EPS Reconciliation </P> <P ALIGN="JUSTIFY">The reconciliation of the numerators and denominators of the basic and diluted income (loss) per common share computations for the Company's reported net income (loss) is as follows:</P> <P ALIGN="JUSTIFY"></P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=0 WIDTH=100%> <TR> <TD WIDTH="0%" VALIGN="TOP" HEIGHT=18> <P></P> </TD> <TD WIDTH="0%" VALIGN="TOP" HEIGHT=18> <P></P> </TD> <TD WIDTH="43%" VALIGN="TOP" HEIGHT=18> <P></P> </TD> <TH VALIGN="TOP" COLSPAN=3 HEIGHT=18> <P ALIGN="CENTER">Three months ended <BR> November 30, </TH> <TH VALIGN="TOP" HEIGHT=18 WIDTH="8%"> <P ALIGN="CENTER">&nbsp; </TH> <TH VALIGN="TOP" COLSPAN=3 HEIGHT=18>Nine months ended <BR> November 30, </TH> <TH VALIGN="TOP" HEIGHT=18 WIDTH="2%">&nbsp;</TH> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3 HEIGHT=17> <P>(in thousands, except per share amounts) </TD> <TH WIDTH="11%" VALIGN="TOP" HEIGHT=17> <P ALIGN="CENTER"><U>1999 </U> </TH> <TH WIDTH="3%" VALIGN="TOP" HEIGHT=17>&nbsp;</TH> <TH WIDTH="11%" VALIGN="TOP" HEIGHT=17> <P ALIGN="CENTER"><U>1998</U> </TH> <TH WIDTH="8%" VALIGN="TOP" HEIGHT=17>&nbsp;</TH> <TH WIDTH="10%" VALIGN="TOP" HEIGHT=17> <P ALIGN="CENTER"><U>1999 </U> </TH> <TH WIDTH="3%" VALIGN="TOP" HEIGHT=17> <P></P> </TH> <TH WIDTH="9%" VALIGN="TOP" HEIGHT=17> <P ALIGN="CENTER"><U>1998 </U> </TH> <TH WIDTH="2%" VALIGN="TOP" HEIGHT=17>&nbsp;</TH> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT=28> <P>Net income (loss) </TD> <TD WIDTH="11%" HEIGHT=28> <P ALIGN="RIGHT"> $&nbsp;&nbsp;&nbsp;42,598 </TD> <TD WIDTH="3%" HEIGHT=28>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=28> <P ALIGN="RIGHT"> $&nbsp;&nbsp;(84,477 </TD> <TD WIDTH="8%" HEIGHT=28> <DIV ALIGN="left">) </DIV> </TD> <TD WIDTH="10%" HEIGHT=28> <P ALIGN="RIGHT"> $&nbsp;&nbsp;&nbsp;33,082 </TD> <TD WIDTH="3%" HEIGHT=28> <P></P> </TD> <TD WIDTH="9%" HEIGHT=28> <P ALIGN="RIGHT"> $&nbsp;&nbsp;(232,652 </TD> <TD WIDTH="2%" HEIGHT=28>)</TD> </TR> <TR VALIGN="top"> <TD COLSPAN=3 HEIGHT=17>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=17> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="3%" HEIGHT=17>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=17> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="8%" HEIGHT=17> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" HEIGHT=17> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="3%" HEIGHT=17>&nbsp;</TD> <TD WIDTH="9%" HEIGHT=17> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="2%" HEIGHT=17>&nbsp;</TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT=17> <P>Weighted average shares outstanding - basic </TD> <TD WIDTH="11%" HEIGHT=17> <P ALIGN="RIGHT">180,504 </TD> <TD WIDTH="3%" HEIGHT=17>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=17> <P ALIGN="RIGHT">169,658 </TD> <TD WIDTH="8%" HEIGHT=17> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" HEIGHT=17> <P ALIGN="RIGHT">175,901 </TD> <TD WIDTH="3%" HEIGHT=17> <P></P> </TD> <TD WIDTH="9%" HEIGHT=17> <P ALIGN="RIGHT">165,884 </TD> <TD WIDTH="2%" HEIGHT=17>&nbsp;</TD> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3 HEIGHT=18> <P>Dilutive effect: </TD> <TD WIDTH="11%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="3%" VALIGN="top" HEIGHT=18>&nbsp;</TD> <TD WIDTH="11%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="8%" VALIGN="top" HEIGHT=18> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="3%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="9%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="2%" VALIGN="top" HEIGHT=18>&nbsp;</TD> </TR> <TR> <TD WIDTH="0%" VALIGN="TOP" HEIGHT=21> <P></P> </TD> <TD VALIGN="bottom" COLSPAN=2 HEIGHT=21> <P>Contingent shares per acquisition agreement </TD> <TD WIDTH="11%" VALIGN="bottom" HEIGHT=21> <P ALIGN="RIGHT">--- </TD> <TD WIDTH="3%" VALIGN="bottom" HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" VALIGN="bottom" HEIGHT=21> <P ALIGN="RIGHT">--- </TD> <TD WIDTH="8%" VALIGN="bottom" HEIGHT=21> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" VALIGN="bottom" HEIGHT=21> <P ALIGN="RIGHT">3,611 </TD> <TD WIDTH="3%" VALIGN="bottom" HEIGHT=21> <P></P> </TD> <TD WIDTH="9%" VALIGN="bottom" HEIGHT=21> <P ALIGN="RIGHT"> --- </TD> <TD WIDTH="2%" VALIGN="bottom" HEIGHT=21>&nbsp;</TD> </TR> <TR> <TD WIDTH="0%" VALIGN="TOP" HEIGHT=18> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2 HEIGHT=18> <P>Net additional common shares upon </TD> <TD WIDTH="11%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="3%" VALIGN="top" HEIGHT=18>&nbsp;</TD> <TD WIDTH="11%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="8%" VALIGN="top" HEIGHT=18> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="3%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="9%" VALIGN="top" HEIGHT=18> <P></P> </TD> <TD WIDTH="2%" VALIGN="top" HEIGHT=18>&nbsp;</TD> </TR> <TR> <TD WIDTH="0%" VALIGN="TOP" HEIGHT=20> <P></P> </TD> <TD WIDTH="0%" VALIGN="TOP" HEIGHT=20> <P></P> </TD> <TD WIDTH="43%" VALIGN="bottom" HEIGHT=20> <P>exercise of common stock options </TD> <TD WIDTH="11%" VALIGN="bottom" HEIGHT=20> <P ALIGN="RIGHT">&nbsp; &nbsp;9,057 </TD> <TD WIDTH="3%" VALIGN="bottom" HEIGHT=20>&nbsp;</TD> <TD WIDTH="11%" VALIGN="bottom" HEIGHT=20> <P ALIGN="RIGHT">&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;--- </TD> <TD WIDTH="8%" VALIGN="bottom" HEIGHT=20> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" VALIGN="bottom" HEIGHT=20> <P ALIGN="RIGHT">&nbsp;&nbsp; &nbsp;6,989 </TD> <TD WIDTH="3%" VALIGN="bottom" HEIGHT=20> <P></P> </TD> <TD WIDTH="9%" VALIGN="bottom" HEIGHT=20> <P ALIGN="RIGHT">&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;--- </TD> <TD WIDTH="2%" VALIGN="bottom" HEIGHT=20>&nbsp;</TD> </TR> <TR VALIGN="top"> <TD COLSPAN=3 HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="8%" HEIGHT=21> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="9%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="2%" HEIGHT=21>&nbsp;</TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT=21> <P>Weighted average shares outstanding - diluted </TD> <TD WIDTH="11%" HEIGHT=21> <P ALIGN="RIGHT">189,561 </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <P ALIGN="RIGHT">169,658 </TD> <TD WIDTH="8%" HEIGHT=21> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" HEIGHT=21> <P ALIGN="RIGHT">186,501 </TD> <TD WIDTH="3%" HEIGHT=21> <P></P> </TD> <TD WIDTH="9%" HEIGHT=21> <P ALIGN="RIGHT">165,884 </TD> <TD WIDTH="2%" HEIGHT=21>&nbsp;</TD> </TR> <TR VALIGN="top"> <TD COLSPAN=3 HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="8%" HEIGHT=21> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="9%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="2%" HEIGHT=21>&nbsp;</TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT=21> <P>Net income (loss) per share - basic </TD> <TD WIDTH="11%" HEIGHT=21> <P ALIGN="RIGHT"> $&nbsp;&nbsp;&nbsp;0.24 </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <P ALIGN="RIGHT"> $&nbsp;&nbsp;(0.50 </TD> <TD WIDTH="8%" HEIGHT=21> <DIV ALIGN="left">) </DIV> </TD> <TD WIDTH="10%" HEIGHT=21> <P ALIGN="RIGHT"> $&nbsp;&nbsp;&nbsp;0.19 </TD> <TD WIDTH="3%" HEIGHT=21> <P></P> </TD> <TD WIDTH="9%" HEIGHT=21> <P ALIGN="RIGHT"> $&nbsp;&nbsp;&nbsp;(1.40 </TD> <TD WIDTH="2%" HEIGHT=21>) </TD> </TR> <TR VALIGN="top"> <TD COLSPAN=3 HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="8%" HEIGHT=21> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="9%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="2%" HEIGHT=21>&nbsp;</TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT=21> <P>Net income (loss) per share - diluted </TD> <TD WIDTH="11%" HEIGHT=21> <P ALIGN="RIGHT"> $&nbsp;&nbsp;&nbsp;0.22 </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <P ALIGN="RIGHT"> $&nbsp;&nbsp;(0.50 </TD> <TD WIDTH="8%" HEIGHT=21> <DIV ALIGN="left">)</DIV> </TD> <TD WIDTH="10%" HEIGHT=21> <P ALIGN="RIGHT"> $&nbsp;&nbsp;&nbsp;0.18 </TD> <TD WIDTH="3%" HEIGHT=21> <P></P> </TD> <TD WIDTH="9%" HEIGHT=21> <P ALIGN="RIGHT"> $&nbsp;&nbsp;&nbsp;(1.40 </TD> <TD WIDTH="2%" HEIGHT=21>)</TD> </TR> <TR VALIGN="top"> <TD COLSPAN=3 HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="11%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="8%" HEIGHT=21> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="10%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="3%" HEIGHT=21>&nbsp;</TD> <TD WIDTH="9%" HEIGHT=21> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="2%" HEIGHT=21>&nbsp;</TD> </TR> </TABLE> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">For the three and nine months ended November 30, 1998, stock options to purchase shares of common stock totaling 4.0 million and 2.4 million, respectively, were outstanding but were not included in the calculation of diluted earnings per share since the effect was anti-dilutive. In addition, the effect of the 5.4 million shares that were issued, in September 1999, related to the acquisition of Yago, for the three and nine months ended November 30, 1998, was not included since the effect was anti-dilutive.</P> <P>6. Comprehensive Income (Loss)</P> <P> The Company's total comprehensive income (loss) was as follows: </P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=0 WIDTH=100%> <TR> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=18> <P></P> </TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=18> <P></P> </TD> <TD WIDTH="34%" VALIGN="TOP" HEIGHT=18> <P></P> </TD> <TH VALIGN="TOP" COLSPAN=3 HEIGHT=18> <P ALIGN="CENTER">Three months ended <BR> November 30, </TH> <TH WIDTH="5%" VALIGN="TOP" HEIGHT=18> <P></P> </TH> <TH VALIGN="TOP" COLSPAN=4 HEIGHT=18> <P ALIGN="CENTER">Nine months ended <BR> November 30, </TH> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3 HEIGHT=20> <P>(in thousands) </TD> <TH WIDTH="12%" VALIGN="TOP" HEIGHT=17> <P ALIGN="CENTER">&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;<U>1999 </U> </TH> <TH WIDTH="2%" VALIGN="TOP" HEIGHT=17> <DIV ALIGN="left"></DIV> </TH> <TH WIDTH="12%" VALIGN="TOP" HEIGHT=17> <P ALIGN="CENTER">&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;<U>1998</U> </TH> <TH WIDTH="5%" VALIGN="TOP" HEIGHT=17> <P ALIGN="left"></P> </TH> <TH WIDTH="12%" VALIGN="TOP" HEIGHT=17> <P ALIGN="CENTER">&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;<U>1999 </U> </TH> <TH WIDTH="2%" VALIGN="TOP" HEIGHT=17> <P ALIGN="left"></P> </TH> <TH WIDTH="11%" VALIGN="TOP" HEIGHT=17> <P ALIGN="CENTER">&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;<U>1998 </U> </TH> <TH WIDTH="4%" VALIGN="TOP" HEIGHT=17> <DIV ALIGN="left"></DIV> </TH> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT=20> <P>Net income (loss) </TD> <TD WIDTH="12%" HEIGHT=20> <P ALIGN="RIGHT">$&nbsp;42,598 </TD> <TD WIDTH="2%" HEIGHT=20> <P ALIGN="left"></P> </TD> <TD WIDTH="12%" HEIGHT=20> <P ALIGN="RIGHT">$&nbsp;(84,477 </TD> <TD WIDTH="5%" HEIGHT=20> <P ALIGN="left">) </P> </TD> <TD WIDTH="12%" HEIGHT=20> <P ALIGN="RIGHT">$&nbsp;33,082 </TD> <TD WIDTH="2%" HEIGHT=20> <P ALIGN="left"></P> </TD> <TD WIDTH="11%" HEIGHT=20> <P ALIGN="RIGHT"> $&nbsp;(232,652 </TD> <TD WIDTH="4%" HEIGHT=20> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT=18> <P>Other comprehensive income (loss): </TD> <TD WIDTH="12%" HEIGHT=18> <P></P> </TD> <TD WIDTH="2%" HEIGHT=18> <P ALIGN="left"></P> </TD> <TD WIDTH="12%" HEIGHT=18> <P></P> </TD> <TD WIDTH="5%" HEIGHT=18> <P ALIGN="left"></P> </TD> <TD WIDTH="12%" HEIGHT=18> <P></P> </TD> <TD WIDTH="2%" HEIGHT=18> <P ALIGN="left"></P> </TD> <TD WIDTH="11%" HEIGHT=18> <P></P> </TD> <TD WIDTH="4%" HEIGHT=18> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="3%" HEIGHT=18> <P></P> </TD> <TD COLSPAN=2 HEIGHT=18> <P>Unrealized gain/(loss) on </TD> <TD WIDTH="12%" HEIGHT=18> <P></P> </TD> <TD WIDTH="2%" HEIGHT=18> <P ALIGN="left"></P> </TD> <TD WIDTH="12%" HEIGHT=18> <P></P> </TD> <TD WIDTH="5%" HEIGHT=18> <P ALIGN="left"></P> </TD> <TD WIDTH="12%" HEIGHT=18> <P></P> </TD> <TD WIDTH="2%" HEIGHT=18> <P ALIGN="left"></P> </TD> <TD WIDTH="11%" HEIGHT=18> <P></P> </TD> <TD WIDTH="4%" HEIGHT=18> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="3%" HEIGHT=18> <P></P> </TD> <TD WIDTH="3%" HEIGHT=18> <P></P> </TD> <TD WIDTH="34%" HEIGHT=18> <P>available-for-sale securities </TD> <TD WIDTH="12%" HEIGHT=18> <P ALIGN="RIGHT">(213 </TD> <TD WIDTH="2%" HEIGHT=18> <P ALIGN="left">) </P> </TD> <TD WIDTH="12%" HEIGHT=18> <P ALIGN="RIGHT">---&nbsp; </TD> <TD WIDTH="5%" HEIGHT=18> <P ALIGN="left"></P> </TD> <TD WIDTH="12%" HEIGHT=18> <P ALIGN="RIGHT">(1,252 </TD> <TD WIDTH="2%" HEIGHT=18> <P ALIGN="left">) </P> </TD> <TD WIDTH="11%" HEIGHT=18> <P ALIGN="RIGHT">--- </TD> <TD WIDTH="4%" HEIGHT=18> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="3%" HEIGHT=21> <P></P> </TD> <TD COLSPAN=2 HEIGHT=21> <P>Foreign currency translation adjustment </TD> <TD WIDTH="12%" HEIGHT=21> <P ALIGN="RIGHT">&nbsp;&nbsp;&nbsp;&nbsp;(328 </TD> <TD WIDTH="2%" HEIGHT=21> <P ALIGN="left">) </P> </TD> <TD WIDTH="12%" HEIGHT=21> <P ALIGN="RIGHT">&nbsp;&nbsp;(2,641 </TD> <TD WIDTH="5%" HEIGHT=21> <P ALIGN="left">) </P> </TD> <TD WIDTH="12%" HEIGHT=21> <P ALIGN="RIGHT">&nbsp;&nbsp;(1,067 </TD> <TD WIDTH="2%" HEIGHT=21> <P ALIGN="left">) </P> </TD> <TD WIDTH="11%" HEIGHT=21> <P ALIGN="RIGHT">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;(577 </TD> <TD WIDTH="4%" HEIGHT=21> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3 HEIGHT=24>&nbsp;</TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=24> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="2%" VALIGN="TOP" HEIGHT=24> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=24> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="5%" VALIGN="TOP" HEIGHT=24> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=24> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="2%" VALIGN="TOP" HEIGHT=24> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%" VALIGN="TOP" HEIGHT=24> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=24> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT=24> <P>Total comprehensive income (loss) </TD> <TD WIDTH="12%" HEIGHT=24> <P ALIGN="RIGHT">$&nbsp;42,057 </TD> <TD WIDTH="2%" HEIGHT=24> <P ALIGN="left"></P> </TD> <TD WIDTH="12%" HEIGHT=24> <P ALIGN="RIGHT">$(87,118 </TD> <TD WIDTH="5%" HEIGHT=24> <P ALIGN="left">) </P> </TD> <TD WIDTH="12%" HEIGHT=24> <P ALIGN="RIGHT">$&nbsp;30,763 </TD> <TD WIDTH="2%" HEIGHT=24> <P ALIGN="left"></P> </TD> <TD WIDTH="11%" HEIGHT=24> <P ALIGN="RIGHT">$&nbsp;(233,229 </TD> <TD WIDTH="4%" HEIGHT=24> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3 HEIGHT=24>&nbsp;</TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=24> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="2%" VALIGN="TOP" HEIGHT=24> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=24> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="5%" VALIGN="TOP" HEIGHT=24> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=24> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="2%" VALIGN="TOP" HEIGHT=24> <DIV ALIGN="left"></DIV> </TD> <TD WIDTH="11%" VALIGN="TOP" HEIGHT=24> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=24> <DIV ALIGN="left"></DIV> </TD> </TR> </TABLE> <P>7. Restructuring Charges </P> <P ALIGN="JUSTIFY">In the first quarter of fiscal 2000, the Company announced a global restructuring initiative and recorded special charges of </P> <P ALIGN="JUSTIFY"> </P> <P ALIGN="JUSTIFY">$23.7 million in the quarter ended May 31, 1999. The restructuring charge consisted of approximately $7.9 million related to asset impairments, $11.6 million related to employee termination and severance costs, and $4.2 million related to exit costs, primarily long-term lease commitments. These charges were taken to reflect the closure of the manufacturing facility in Ohio which was completed in July 1999, the planned closure of 40 sales offices worldwide (37 closed through November 30, 1999), the planned consolidation and outsourcing of certain manufacturing operations, the write-off of certain assets that were not required subsequent to the restructuring and the planned net reduction of approximately 1,000 individuals from the Company's global workforce. The reduction in the global workforce is expected to be principally of manufacturing and distribution personnel and other targeted headcounts impacting most functions within the Company. These actions are expected to be completed prior to May 31, 2000. As of November 30, 1999, approximately 407 employees were terminated in accordance with the plan. </P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The following table summarizes the recorded accruals and uses of the restructuring initiative from inception through November 30, 1999:</P> <P ALIGN="JUSTIFY"></P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=0 WIDTH=100%> <TR> <TD WIDTH="39%" VALIGN="TOP"> <P ALIGN="JUSTIFY">(in thousands) </TD> <TH WIDTH="14%" VALIGN="bottom"> <P ALIGN="CENTER">Asset <BR> <U>Impairments</U> </P> </TH> <TH WIDTH="16%" VALIGN="bottom"> <P ALIGN="CENTER">Severance <BR> <U>Benefits</U> </P> </TH> <TH WIDTH="15%" VALIGN="bottom"> <P ALIGN="CENTER">Exit <BR> <U>Costs</U> </P> </TH> <TH WIDTH="16%" VALIGN="bottom"> <P ALIGN="CENTER"></P> <P ALIGN="CENTER"><U>Total</U> </TH> </TR> <TR> <TD WIDTH="39%" VALIGN="TOP"> <P ALIGN="JUSTIFY">Total charge </TD> <TD WIDTH="14%" VALIGN="TOP"> <P ALIGN="center">&nbsp;&nbsp;&nbsp;&nbsp;$ 7,869&nbsp;&nbsp; </TD> <TD WIDTH="16%" VALIGN="TOP"> <P ALIGN="center">&nbsp;$ 11,657 </TD> <TD WIDTH="15%" VALIGN="TOP"> <P ALIGN="center">$&nbsp;4,210 </TD> <TD WIDTH="16%" VALIGN="TOP"> <P ALIGN="center">$&nbsp;23,736 </TD> </TR> <TR> <TD WIDTH="39%" VALIGN="TOP"> <P ALIGN="JUSTIFY">Cash payments since inception </TD> <TD WIDTH="14%" VALIGN="TOP"> <P ALIGN="center">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;--- </TD> <TD WIDTH="16%" VALIGN="TOP"> <P ALIGN="center">&nbsp;&nbsp;&nbsp; &nbsp;(6,097) </TD> <TD WIDTH="15%" VALIGN="TOP"> <P ALIGN="center">&nbsp;&nbsp;&nbsp;(611) </TD> <TD WIDTH="16%" VALIGN="TOP"> <P ALIGN="center">&nbsp;&nbsp;&nbsp; &nbsp;(6,708) </TD> </TR> <TR> <TD WIDTH="39%" VALIGN="TOP"> <P ALIGN="JUSTIFY">Non-cash items since inception </TD> <TD WIDTH="14%" VALIGN="TOP"> <P ALIGN="center">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;(7,647) </TD> <TD WIDTH="16%" VALIGN="TOP"> <P ALIGN="center"> &nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;--- </TD> <TD WIDTH="15%" VALIGN="TOP"> <P ALIGN="center">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;--- </TD> <TD WIDTH="16%" VALIGN="TOP"> <P ALIGN="center">&nbsp;&nbsp;&nbsp; &nbsp;(7,647) </TD> </TR> <TR> <TD WIDTH="39%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="14%" VALIGN="bottom"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="16%" VALIGN="bottom"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="15%" VALIGN="bottom"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> <TD WIDTH="16%" VALIGN="bottom"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="1"> </TD> </TR> <TR> <TD WIDTH="39%" VALIGN="TOP"> <P ALIGN="JUSTIFY">&nbsp;&nbsp;&nbsp;Accrual balance as of November 30, 1999 </TD> <TD WIDTH="14%" VALIGN="bottom"> <P ALIGN="center">&nbsp;$&nbsp;&nbsp;&nbsp; &nbsp;222 </TD> <TD WIDTH="16%" VALIGN="bottom"> <P ALIGN="center">$&nbsp;&nbsp;&nbsp;5,560 </TD> <TD WIDTH="15%" VALIGN="bottom"> <P ALIGN="center">$&nbsp;3,599 </TD> <TD WIDTH="16%" VALIGN="bottom"> <P ALIGN="center">&nbsp;&nbsp;$&nbsp;9,381 </TD> </TR> <TR> <TD WIDTH="39%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="14%" VALIGN="bottom"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="16%" VALIGN="bottom"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="15%" VALIGN="bottom"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="16%" VALIGN="bottom"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> </TR> </TABLE> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">8. Segment and Geographical Information</P> <P ALIGN="JUSTIFY">The Company provides a broad product line and services for the computer networking industry. Substantially all revenues result from the sales of hardware and software products and professional services (training, installation, maintenance, etc.). The Company's reportable segments are based on geographic area. All intercompany revenues and expenses are eliminated in computing revenues and operating income. Operating income excludes other income, interest income, interest expense, taxes and special charges. Long-lived assets consist primarily of the net book value of property, plant and equipment, goodwill and long-term investments. Goodwill and the long-term investments were attributable to the United States segment. The Other segment includes Canada and Latin America.</P> <P ALIGN="JUSTIFY">All revenue amounts are based on product shipment destination and asset balances are based on location. The operating income (loss) amounts for the nine month period ended November 30, 1999 exclude the $23.7 million charge related to the restructuring initiative announced during the period. The United States operating income in the three month period ended November 30, 1998 excludes the $67.4 million of special charges related to the acquisitions of NetVantage, FlowPoint and Ariel that were completed during the quarter ended November 30, 1998. The United States operating income in the nine month period ended November 30, 1998 excludes the $150.0 million of special charges related to the Yago acquisition that was completed during the quarter ended May 31, 1998 and the $67.4 million of special charges related to the acquisitions of NetVantage, FlowPoint and Ariel that were completed during the quarter ended November 30, 1998</P> <P>&nbsp;</P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=100%> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="16%"> <P></P> </TD> <TH VALIGN="TOP"> <P ALIGN="CENTER">&nbsp; <P></P> <P></P> </TH> <TH VALIGN="TOP" COLSPAN="3">Three months ended <BR> November 30,</TH> <TH VALIGN="TOP" WIDTH="2%"> <P></P> </TH> <TH VALIGN="TOP" COLSPAN="3"> <P ALIGN="CENTER">Nine months ended <BR> November 30, <P></P> </TH> <TH VALIGN="TOP" WIDTH="8%">&nbsp;</TH> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3> <P>(in thousands) </TD> <TH VALIGN="TOP" WIDTH="10%">&nbsp;</TH> <TH VALIGN="TOP" WIDTH="16%"> <P ALIGN="CENTER"><U>1999</U> </TH> <TH VALIGN="TOP" WIDTH="1%"> <P></P> </TH> <TH VALIGN="TOP" WIDTH="15%"> <P ALIGN="CENTER"><U>1998</U> </TH> <TH VALIGN="TOP" WIDTH="2%"> <P></P> </TH> <TH VALIGN="TOP" WIDTH="13%"> <P ALIGN="CENTER"><U>1999</U> </TH> <TH VALIGN="TOP" WIDTH="2%"> <P></P> </TH> <TH VALIGN="TOP" COLSPAN="2"> <P ALIGN="CENTER"><U>1998</U> </TH> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="16%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%">&nbsp;</TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=5> <P>Sales to unaffiliated customers (trade): <P></P> </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="13%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="13%"> <P></P> </TD> <TD WIDTH="8%">&nbsp;</TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%" HEIGHT="2"> <P></P> </TD> <TD WIDTH="18%" HEIGHT="2" COLSPAN="2"> <P></P> <P>United States </TD> <TD WIDTH="10%" HEIGHT="2">&nbsp;</TD> <TD WIDTH="16%" HEIGHT="2"> <P ALIGN="right"> $ 237,587 </TD> <TD WIDTH="1%" HEIGHT="2"> <P></P> </TD> <TD WIDTH="15%" HEIGHT="2"> <P ALIGN="right"> $ 195,493 </TD> <TD WIDTH="2%" HEIGHT="2"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%" HEIGHT="2"> <P ALIGN="right"> $ 703,977 </TD> <TD WIDTH="2%" HEIGHT="2"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%" HEIGHT="2"> <P ALIGN="right"> $ 626,606 </TD> <TD WIDTH="8%" HEIGHT="2"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="18%" COLSPAN="2"> <P></P> <P>Europe </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right">91,218 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right">95,780 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right">262,479 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right">321,435 </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="18%" COLSPAN="2"> <P></P> <P>Pac Rim </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right">27,396 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right">29,769 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right">80,250 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right">88,110 </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="18%" COLSPAN="2"> <P></P> <P>Other </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right">15,452 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right">8,826 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right">31,119 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right">30,055 </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="16%"> <P></P> </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3> <P>Total trade sales </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right"> $ 371,653 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right"> $ 329,868 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> $ 1,077,825 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> $ 1,066,206 </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="16%"> <P></P> </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3> <P>Operating income (loss): </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right"></P> </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right"></P> </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right"></P> </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right"></P> </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD COLSPAN=2> <P>United States </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right"> $ 8,093 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right"> $ (50,614 </TD> <TD WIDTH="2%"> <P ALIGN="left">)</P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> $ 12,758 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> $ (79,129 </TD> <TD WIDTH="8%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD COLSPAN=2> <P>Europe </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right"> 10,771 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right"> 8,534 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> (926 </TD> <TD WIDTH="2%"> <P ALIGN="left">) </P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> 36,309 </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD COLSPAN=2> <P>Pac Rim </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right"> 50 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right"> (467 </TD> <TD WIDTH="2%"> <P ALIGN="left">) </P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> (628 </TD> <TD WIDTH="2%"> <P ALIGN="left">) </P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> (2,691 </TD> <TD WIDTH="8%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD COLSPAN=2> <P>Other </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right"> 1,325 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right"> (3,130 </TD> <TD WIDTH="2%"> <P ALIGN="left">) </P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> (1,325 </TD> <TD WIDTH="2%"> <P ALIGN="left">) </P> </TD> <TD WIDTH="13%"> <P ALIGN="right"> (6,495 </TD> <TD WIDTH="8%"> <DIV ALIGN="left">) </DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="16%"> <P></P> </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3> <P>Total operating income (loss) </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right">$ 20,239 </TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <P ALIGN="right">$ (45,677 </TD> <TD WIDTH="2%"> <P ALIGN="left">)</P> </TD> <TD WIDTH="13%"> <P ALIGN="right">$ 9,879 </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <P ALIGN="right">$ (52,006 </TD> <TD WIDTH="8%"> <DIV ALIGN="left">)</DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="16%"> <P></P> </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="16%"> <P></P> </TD> <TH VALIGN="TOP" WIDTH="10%">&nbsp;</TH> <TH VALIGN="TOP" WIDTH="16%"> <P ALIGN="CENTER">November 30, </TH> <TH VALIGN="TOP" WIDTH="1%"> <P></P> </TH> <TH VALIGN="TOP" WIDTH="15%"> <P ALIGN="CENTER">February 28, </TH> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="16%"> <P></P> </TD> <TH VALIGN="TOP" WIDTH="10%">&nbsp;</TH> <TH VALIGN="TOP" WIDTH="16%"> <P ALIGN="CENTER"><U>1999</U> </TH> <TH VALIGN="TOP" WIDTH="1%"> <P></P> </TH> <TH VALIGN="TOP" WIDTH="15%"> <P ALIGN="CENTER"><U>1999</U> </TH> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3> <P>Assets: </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2> <P>United States </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right"> $ 1,307,432 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> $ 1,326,929 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2> <P>Europe </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right">151,235 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> 173,937 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2> <P>Pac Rim </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right">38,241 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> 37,586 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2> <P>Other </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right">23,787 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> 28,048 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="16%"> <P></P> </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%">&nbsp; </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%">&nbsp; </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3> <P>Total assets </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right"> $ 1,520,695 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> $ 1,566,500 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="16%"> <P></P> </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%">&nbsp; </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%">&nbsp; </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3> <P>Long-lived assets: </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right"></P> </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2> <P>United States </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right"> $ 381,303 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> $ 438,864 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2> <P>Europe </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right">17,578 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> 19,453 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2> <P>Pac Rim </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right">4,642 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> 5,828 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" WIDTH="2%"> <P></P> </TD> <TD VALIGN="TOP" COLSPAN=2> <P>Other </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right">2,611 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> 2,503 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="16%"> <P></P> </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="1"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%">&nbsp; </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%">&nbsp; </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR> <TD VALIGN="TOP" COLSPAN=3> <P>Total long-lived assets </TD> <TD VALIGN="TOP" WIDTH="10%">&nbsp;</TD> <TD VALIGN="TOP" WIDTH="16%"> <P ALIGN="right"> $ 406,134 </TD> <TD VALIGN="TOP" WIDTH="1%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="15%"> <P ALIGN="right"> $ 466,648 </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD VALIGN="TOP" WIDTH="13%"> <P></P> </TD> <TD VALIGN="TOP" WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="2%"> <P></P> </TD> <TD WIDTH="16%"> <P></P> </TD> <TD WIDTH="10%">&nbsp;</TD> <TD WIDTH="16%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="1%"> <P></P> </TD> <TD WIDTH="15%"> <HR NOSHADE ALIGN="right" WIDTH="100%" SIZE="2"></TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%">&nbsp; </TD> <TD WIDTH="2%"> <P ALIGN="left"></P> </TD> <TD WIDTH="13%">&nbsp; </TD> <TD WIDTH="8%"> <DIV ALIGN="left"></DIV> </TD> </TR> </TABLE> <P ALIGN="left">9. Other Income</P> <P ALIGN="JUSTIFY">Other income in the three months ended November 30, 1999 includes a $1.1 million realized gain from the sale of a minority stock investment and income related to the restructuring of the Company's relationship with Compaq of $38.0 million. In addition to the aforementioned items, other income, in the nine months ended November 30, 1999, also includes $10.0 million of realized gain on the exchange of a minority stock investment. The gain related to the exchange of a minority stock investment was computed as the difference between the book value of the Company's investment and the market value of the acquiror's securities received in exchange.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY"> </P> <P ALIGN="JUSTIFY"> 10. Supplemental Information</P> <P ALIGN="JUSTIFY">Supplemental Cash Flow Information and Noncash Investing and Financing Activities are as follows:<HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"><P ALIGN="JUSTIFY"></P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=0 WIDTH=660> <TR VALIGN="bottom"> <TD COLSPAN=3 HEIGHT="37"> <P ALIGN="JUSTIFY">(in thousands) </P> </TD> <TD WIDTH="19%" HEIGHT="37"></TD> <TH COLSPAN=2 HEIGHT="37"> Nine Months Ended <BR> November 30, </TH> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%">&nbsp;</TD> <TD WIDTH="5%">&nbsp;</TD> <TD WIDTH="39%">&nbsp;</TD> <TD WIDTH="19%">&nbsp;</TD> <TH WIDTH="16%"> <P ALIGN="CENTER"><U>1999 </U> </TH> <TH WIDTH="16%"> <P ALIGN="CENTER"><U>1998</U> </TH> </TR> <TR VALIGN="bottom"> <TD COLSPAN=3> <P ALIGN="JUSTIFY">Cash paid during the period for: </TD> <TD WIDTH="19%">&nbsp;</TD> <TD WIDTH="16%">&nbsp;</TD> <TD WIDTH="16%">&nbsp;</TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%">&nbsp;</TD> <TD COLSPAN=2> <P ALIGN="JUSTIFY">Income taxes </TD> <TD WIDTH="19%">&nbsp;</TD> <TD WIDTH="16%"> <P ALIGN="right">$5,121 </TD> <TD WIDTH="16%"> <P ALIGN="right">$ 10,220 </TD> </TR> <TR> <TD WIDTH="5%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="5%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="39%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="16%" VALIGN="top"> <DIV ALIGN="right"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </DIV> </TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=5> <P ALIGN="JUSTIFY">Supplemental schedule of non-cash investing and financing activities: </TD> <TD WIDTH="16%"> <DIV ALIGN="right"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%">&nbsp;</TD> <TD COLSPAN=2> <P ALIGN="JUSTIFY">Acquisitions: </TD> <TD WIDTH="19%">&nbsp;</TD> <TD WIDTH="16%"> <DIV ALIGN="right"></DIV> </TD> <TD WIDTH="16%"> <DIV ALIGN="right"></DIV> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="39%" HEIGHT=18> <P ALIGN="JUSTIFY">Cash paid </TD> <TD WIDTH="19%" HEIGHT=18> <P></P> </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">--- </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">$ 38,656 </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="39%" HEIGHT=18> <P ALIGN="JUSTIFY">Less cash acquired </TD> <TD WIDTH="19%" HEIGHT=18> <P></P> </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">--- </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right"> 6,463 </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="39%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="19%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="39%" HEIGHT=18> <P ALIGN="JUSTIFY">Net cash paid for acquisitions </TD> <TD WIDTH="19%" HEIGHT=18> <P></P> </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">--- </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">$ 32,193 </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="39%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="19%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="39%" HEIGHT=18> <P ALIGN="JUSTIFY">Fair value of assets acquired </TD> <TD WIDTH="19%" HEIGHT=18> <P></P> </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">--- </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">$ 30,322 </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="39%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="19%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="39%" HEIGHT=18> <P ALIGN="JUSTIFY">Liabilities assumed </TD> <TD WIDTH="19%" HEIGHT=18> <P></P> </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">--- </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">$ 16,081 </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="39%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="19%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="5%" HEIGHT=18> <P></P> </TD> <TD WIDTH="39%" HEIGHT=18> <P ALIGN="JUSTIFY">Stock issued </TD> <TD WIDTH="19%" HEIGHT=18> <P></P> </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">--- </TD> <TD WIDTH="16%" HEIGHT=18> <P ALIGN="right">$226,989 </TD> </TR> <TR VALIGN="bottom"> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="5%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="39%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="19%" HEIGHT=18>&nbsp;</TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> <TD WIDTH="16%" HEIGHT=18 VALIGN="top"> <HR NOSHADE ALIGN="right" WIDTH="80%" SIZE="2"> </TD> </TR> </TABLE> <P ALIGN="JUSTIFY">11. Compaq Agreement</P> <P ALIGN="JUSTIFY">On February 7, 1998, the Company acquired certain assets of the Network Products Group of Digital Equipment Corporation. With this acquisition, Digital entered into a reseller agreement with the Company pursuant to which Digital committed to purchase from the Company a minimum amount of product bearing the Digital brand name. The reseller agreement was scheduled to expire on June 30, 2001. On June 11, 1998, Digital was acquired by Compaq Computer Corporation ("Compaq"). On May 25, 1999, Compaq entered into an OEM agreement with the Company pursuant to which Compaq committed to purchase from the Company a minimum amount of networking product bearing the Compaq brand name as well as product bearing the Digital brand name. The OEM agreement contained, among other things, a pricing rebate that compensated the Company for Compaq purchase shortfalls. The OEM agreement was scheduled to expire on June 30, 2001.</P> <P ALIGN="JUSTIFY">On September 20, 1999, as a result of Compaq's decision to exit certain non-core businesses, including the business of reselling Compaq and Digital branded network products, Compaq and the Company agreed to terminate the OEM agreement and enter into a new alliance agreement. Under the alliance agreement, the two companies intend to transition sales of legacy Digital branded products from Compaq and its resellers to the Company. Further, the two companies have agreed to expand the relationship between the Company and Compaq's professional services organization and Cabletron will continue to resell, and Compaq is expected to continue servicing, Digital branded products. Further, Compaq is continuing as a reseller of Cabletron-branded networking hardware and Cabletron's Spectrum network management software. In terminating the OEM agreement, Compaq agreed to pay the Company approximately $80.0 million, in November 1999, as a final purchase of Compaq and Digital branded products in the Company's manufacturing pipeline. As of November 30, 1999, $36.3 million of such product pipeline was accepted by Compaq and recorded in sales by the Company for the three months ended November 30, 1999. The difference between the $85.0 million and the $36.3 million of recorded sales has been classified as deferred revenue and will be recorded in sales as the additional product pipeline is accepted by Compaq. Any excess between the $85.0 million and the sales value of product accepted by Compaq will be recorded in other income.</P> <P ALIGN="JUSTIFY">In addition, Compaq paid the Company $25.0 million to eliminate Compaq's quarterly purchase commitments going forward. This $25.0 million has been recorded in other income since the payment is not refundable under any circumstances.</P> <P ALIGN="JUSTIFY">Additionally, as part of the transition from the OEM agreement, Compaq has returned to the Company certain networking product inventory, previously purchased and paid for, that can be reworked and resold as Cabletron branded product. The Company has no further obligation to compensate Compaq for this returned product. The original cost, less estimated rework, of this inventory is $13.0 million and has been recorded as other income.</P> <P ALIGN="JUSTIFY">As part of the alliance agreement, Compaq has agreed to continue to act as a reseller of Cabletron hardware and software products over the next two years; pursuant to this agreement, Compaq issued $34.0 million of prepaid purchase orders for Company product of which $5.0 million has been shipped by November 30, 1999. The remaining $29.0 million has been recorded as deferred revenue as of November 30, 1999 and will be recorded in sales as Compaq accepts the product over the next two-year period.</P> <P ALIGN="JUSTIFY">In addition, the parties have agreed to pursue a strategic alliance focused on Cabletron's Spectrum network management software. Compaq, in furtherance of this alliance, has committed to make a $14.0 million equity investment in Cabletron's recently formed subsidiary, Aprisma Management Technologies, Inc. ("Aprisma"), which markets Spectrum products. </P> <P ALIGN="JUSTIFY">12. Subsequent Event</P> <P ALIGN="JUSTIFY">On November 22, 1999, the Company and Efficient Networks, Inc. ("Efficient") entered into a definitive agreement for Cabletron to sell its FlowPoint division to Efficient in exchange for 7,200,000 shares of Efficient common stock and 6,300 shares of Efficient preferred stock. The common stock is subject to various restrictions. The preferred stock is subject to various restrictions and is automatically convertible into 6,300,000 shares of common stock upon the approval of Efficient shareholders. In the event that the preferred stock is not converted into common stock, it is redeemable over five years. In addition to the sale of FlowPoint, Cabletron and Efficient formed an OEM alliance providing for Cabletron to resell the Efficient and FlowPoint product lines. The transaction closed on December 17, 1999.</P> <P><FONT SIZE="2"></FONT></P> <P><FONT FACE="Times Roman">ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS <A NAME="link7"></A> </FONT></P> <P><U><FONT FACE="Times Roman">Results of the Three Months ended November 30, 1999 vs Three Months ended November 30, 1998</FONT></U></P> <P><FONT FACE="Times Roman">Cabletron Systems' worldwide net sales in the third quarter of fiscal 2000 (the three-month period ended November 30, 1999) were $371.7 million, an increase of 12.7% from net sales of $329.9 million for the third quarter of fiscal 1999. Sales increased primarily as a result of increased sales of the Company's switched technology products. Secondarily, overall sales increased as a result of increased sales to Compaq in connection with the transition from an OEM agreement between Compaq and the Company, with minimum purchase commitments, to an alliance agreement. As part of the transition, Compaq purchased $36.3 million of existing Digital and Compaq branded inventory in the Company's manufacturing pipeline and paid the Company $11.7 million as a pricing rebate for Compaq's failure to meet its minimum purchase commitments in the quarter. Worldwide sales of switched products increased approximately $51.6 million, or 27.0%, to $243.0 million in the third quarter of fiscal 2000 compared to $191.4 million in the third quarter of fiscal 1999. The increase in sales of switched products was principally due to an increase in the Company's flagship SmartSwitch Router products, which offset declining sales in older switched products. Sales have also increased as the Company has experienced success in penetrating the WAN segment of the layer 3 switching market. The overall increase was achieved despite a $21.2 million decrease in sales of shared media products to $11.8 million in the third quarter of fiscal 2000 compared to $33.0 million in the same quarter of fiscal 1999, a decline of approximately 64.1%. The Company expects sales of its shared media products to remain relatively flat during the next few quarters as customers maintain their pre-existing systems. Sales of Spectrum and other miscellaneous products were relatively flat at $41.4 million in the third quarter of fiscal 2000 as compared to $40.9 million in the same quarter of fiscal 1999. An increase in sales of Spectrum products and other software was largely offset by decreases in sales of older software products. Revenues from professional services increased $10.9 million, or 16.9%, to $75.4 million in the third quarter of fiscal 2000 as compared to $64.5 million in the same quarter of fiscal 1999. This increase was primarily a result of increased sales related to maintenance and consulting services. As a result of terminating Compaq's minimum purchase commitments, the Company believes that purchases by Compaq will be flat to down over the next two quarters compared to Compaq's recent purchase levels. Under the alliance agreement, ongoing revenue to Compaq is dependent principally on the successful transition of Digital resellers and customers to the Company, the continued enhancement of the Company's relationship with Compaq's professional services organization and the purchase of Cabletron products for Compaq's internal use. These revenue sources have more risk then the minimum purchase commitments which previously existed. Further, the new revenue sources are subject to execution risk in obtaining such sales. In sum, there is a risk that as a result of terminating Compaq's minimum purchase commitments, Compaq's purchases of the Company's products will decline substantially over the next two quarters. This would have a material adverse impact on the Company's results of operations.</FONT></P> <P><FONT FACE="Times Roman">Net sales within the United States (domestic) were $237.6 million or 63.9% of total net sales in the third quarter of fiscal 2000 compared to $195.5 million or 59.3% of total net sales in the third quarter of fiscal 1999, an increase of $42.1 million or 21.5%. Domestic sales of switched technology products increased by approximately $35.0 million or 32.3%. This increase was largely attributable to a significant increase in sales of SmartSwitch routers being partially offset by decreases in sales of other older switch products. Sales in the United States also increased because a majority of Compaq's purchases of products in the Company's manufacturing pipeline were in the United States.</FONT></P> <P><FONT FACE="Times Roman">Net sales in Europe were $91.2 million or 24.5% of total net sales in the third quarter of fiscal 2000 compared to $95.8 million or 29.0% of total net sales in the third quarter of fiscal 1999, a decrease of $4.6 million or 4.8%. European sales of switched technology products increased by approximately $10.1 million or 17.8%. The increase in sales of switched products was more than offset by decreases in shared media product sales, services and non-Spectrum software.</FONT></P> <P><FONT FACE="Times Roman">Net sales in Pac Rim were $27.4 million or 7.4% of total net sales in the third quarter of fiscal 2000 compared to $29.8 million or 9.0% of total net sales in the third quarter of fiscal 1999, a decrease of $2.4 million or 8.0%. Pac Rim sales of switched technology products remained relatively flat. Sales of software products increased, but the increase was offset by decreases in shared media product sales and services. Sales of shared media products are now minimal.</FONT></P> <P><FONT FACE="Times Roman">Net sales in Other regions were $15.5 million or 4.2% of total net sales in the third quarter of fiscal 2000 compared to $8.9 million or 2.7% of total net sales in the third quarter of fiscal 1999, an increase of $6.6 million or 75.1%. Service and switched sales in Mexico and Brazil continue to represent a majority of the sales in the Other region. Sales of switched technology more than doubled compared to the third quarter of the prior fiscal year.</FONT></P> <P><FONT FACE="Times Roman">Gross profit as a percentage of net sales in the third quarter of fiscal 2000 increased to 46.4% from 38.4% for the third quarter of fiscal 1999. The increase reflects the Company's success at better managing its product offerings which resulted in lower obsolescence reserves. Gross profit in the third quarter of fiscal 2000 was also positively impacted from higher margins on total Compaq sales from pricing rebates. The third quarter of fiscal 1999 gross profit percent was negatively impacted due to higher than normal obsolescence recognition of slower moving products and the discontinuance of older products. </FONT></P> <P><FONT FACE="Times Roman">Research and development (&quot;R&amp;D&quot;) expenses in the third quarter of fiscal 2000 decreased 13.1% to $44.7 million from $51.5 million in the third quarter of fiscal 1999. The decrease in research and development spending reflected savings achieved through the elimination of staff and facilities from various R&amp;D departments and the refocused efforts on core projects. Research and development spending as a percentage of net sales decreased to 12.0% from 15.6%. The Company expects to continue to invest in R&amp;D at the current percent of sales.</FONT></P> <P><FONT FACE="Times Roman">Selling, general and administrative (&quot;SG&amp;A &quot;) expenses in the third quarter of fiscal 2000 decreased 12.1% to $100.1 million from $113.9 million in the third quarter of fiscal 1999. This decrease was largely due to the reduction in the amortization of stay bonuses and incentive payments to employees added through earlier acquisitions.</FONT></P> <P><FONT FACE="Times Roman">Amortization of intangible assets increased 7.7% to $7.5 million, in the third quarter of fiscal 2000, from $6.9 million, in the third quarter of fiscal 1999. The increase in amortization expense was due to acquisitions completed during the third quarter of fiscal 1999 being amortized over a full quarter in fiscal 2000 as compared to a partial quarter during fiscal 1999.</FONT></P> <P><FONT FACE="Times Roman">The Company's worldwide operating income was $20.2 million for the third quarter of fiscal 2000 compared to worldwide operating loss of $113.0 million in the third quarter of fiscal 1999. Operating income improved due to the absence of special charges, lower operating expenses and an increase in sales and gross profit. Excluding the $67.4 million of special charges related to in-process research and development in connection with the acquisitions of Ariel, FlowPoint and NetVantage during the third quarter of fiscal 1999, domestic income from operations increased by $58.7 million, during the third quarter of fiscal 2000, largely due to higher sales, gross profit improvement and lower operating expenses. In Europe, income from operations increased $2.2 million, between the third quarter of fiscal 2000 and the comparable quarter of fiscal 1999, primarily due to improved gross profit percent being partially offset by higher operating expenses. An increase of $0.5 million, between the third quarter of fiscal 2000 and the third quarter of fiscal 1999, of income from operations, resulted in the Pac Rim, largely due to improved gross profit percentage. The loss from operations of the Other region improved by $4.5 million, between the third quarter of fiscal 2000 and the third quarter of fiscal 1999, to income from operations of $1.3 million, primarily due to higher sales. </FONT></P> <P><FONT FACE="Times Roman">Other income in the third quarter of fiscal 2000 related to the transitioning of the Company's relationship with Compaq, $38.0 million, and a realized gain on the sale of a minority stock investment, $1.1 million. The $38.0 million represents a $25.0 million lump sum payment made by Compaq to eliminate their quarterly minimum purchase commitments under an OEM agreement and $13.0 million related to product previously purchased and paid for that was returned to the Company. The Company has no further obligation to compensate Compaq for this returned product. The gain on the sale of the minority investment was computed as the difference between the book value of the Company's investment and the cash received.</FONT></P> <P><FONT FACE="Times Roman">Net interest income in the third quarter of fiscal 2000 increased $0.7 million to $4.2 million, as compared to $3.5 million in the same quarter of fiscal 1999. The increase was due to higher average invested balances.</FONT></P> <P><FONT FACE="Times Roman">The Company's effective tax rate was 32.9% for the quarter ended November 30, 1999 compared to a tax benefit rate of 22.9% for the quarter ended November 30, 1998. The lower rate for the quarter ended November 30, 1998 was a result of the use of certain tax credits related to special charges incurred, during that period. The Company expects the effective tax rate of future quarters, exclusive of special charges, to be approximately 31.0%.</FONT></P> <P><U><FONT FACE="Times Roman">Results of the Nine Months ended November 30, 1999 vs Nine Months ended November 30, 1998</FONT></U></P> <P><FONT FACE="Times Roman">Cabletron Systems' worldwide net sales in the nine-month period ended November 30, 1999 were $1,077.8 million, an increase of 1.1% from net sales of $1,066.2 million for the nine-month period ended November 30, 1998. Sales have continued to increase sequentially throughout fiscal 2000 as the Company continues to develop and introduce newer switched technology products. Worldwide sales of switched products increased approximately $102.9 million, or 17.4%, to $695.6 million in the first nine months of fiscal 2000 compared to $592.7 million in the first nine months of fiscal 1999. The increase in sales of switched products was largely due to the SmartSwitch Router products which were introduced during the first three months of fiscal 1999. Overall sales remained relatively flat despite the increase in sales of switched products, due to a $84.6 million decrease in sales of shared media products to $55.2 million in the first nine months of fiscal 2000 compared to $139.8 million in the same period of fiscal 1999, a decline of approximately 60.5%. The Company expects sales of its shared media products to stabilize throughout the next several months as customers maintain their existing shared media systems. Sales of software and other miscellaneous products decreased $5.3 million to $126.3 million in the first nine months of fiscal 2000 as compared to $131.6 million in the same period of fiscal 1999. An increase in sales of Spectrum software was more than offset by decreased sales of older software products and other miscellaneous products. Sales from professional services decreased $1.4 million, or 0.7%, to $200.7 million in the first nine months of fiscal 2000 as compared to $202.1 million in the comparable period of fiscal 1999. The change in professional services sales was due mainly to the timing of performing service work and installations. As a result of terminating Compaq's minimum purchase commitments, the Company believes that purchases by Compaq will be flat to down over the next several months compared to Compaq's recent purchase levels. Under the alliance agreement, ongoing revenue to Compaq is dependent principally on the successful transition of Digital resellers and customers to the Company, the continued enhancement of the Company's relationship with Compaq's professional services organization and the purchase of Cabletron products for Compaq's internal use. These revenue sources have more risk then the minimum purchase commitments which previously existed. Further, the new revenue sources are subject to execution risk in obtaining such sales. In sum, there is a risk that as a result of terminating Compaq's minimum purchase commitments, Compaq's purchases of the Company's products will decline substantially over the next several months. This would have a material adverse impact on the Company's results of operations.</FONT></P> <P><FONT FACE="Times Roman">Domestic net sales increased $77.4 million or 12.3% from $626.6 million or 58.8% of total net sales in the nine month period ended November 30, 1998 to $704.0 million or 65.3% of total net sales for the nine month period ended November 30, 1999. Domestic sales of switched technology products increased by approximately $102.6 million or 30.2%. The increase was principally related to increased sales of SmartSwitch routers being partially offset by decreased sales of some of the older smartswitching products and shared media products.</FONT></P> <P><FONT FACE="Times Roman">Net sales in Europe were $262.5 million or 24.4% of total net sales in the first nine months of fiscal 2000 compared to $321.4 million or 30.1% of total net sales in the first nine months of fiscal 1999. European sales of switched technology products increased by $9.5 million or 5.3%. Overall sales decreased due to a 67.9% decrease in sales of shared media products and decreases in sales of software products and professional services.</FONT></P> <P><FONT FACE="Times Roman">Net sales in Pac Rim were $80.2 million or 7.4% of total net sales in the first nine months of fiscal 2000 compared to $88.1 million or 8.3% of total net sales in the first nine months of fiscal 1999. Pac Rim sales of switched technology products increased by approximately $8.7 million or 16.9%. Overall sales decreased primarily as a result of decreased sales across all remaining product lines more than offsetting the increase in sales of switched technology products.</FONT></P> <P><FONT FACE="Times Roman">Net sales in the Other region were $31.1 million or 2.9% of total net sales in the first nine months of fiscal 2000 compared to $30.1 million or 2.8% of total net sales in the first nine months of fiscal 1999. The increase was a result of increased sales of switched technology products being partially offset by decreased sales across all remaining product lines in Mexico and Brazil.</FONT></P> <P><FONT FACE="Times Roman">Gross profit as a percentage of net sales in the first nine months of fiscal 2000 increased to 43.6% from 42.0% for the first nine months of fiscal 1999. The increase was primarily due to a continuous shift in the Company's product mix towards higher margin, newer switched technology products and software sales and lower inventory obsolescence.</FONT></P> <P><FONT FACE="Times Roman">Research and development expenses in the first nine months of fiscal 2000 decreased 10.9% to $142.3 million from $159.6 million in the same period of fiscal 1999. The decrease in research and development spending reflected the savings achieved through the elimination of staff and facilities from various R&amp;D departments and the refocused efforts on core projects. Research and development spending as a percentage of net sales decreased to 13.2% from 15.0%.</FONT></P> <P><FONT FACE="Times Roman">Selling, general and administrative expenses in the first nine months of fiscal 2000 decreased 7.8% to $295.9 million from $320.8 million in the same period of fiscal 1999. This decrease was a result of the reduction in the amortization of stay bonuses and incentive payments to employees added through earlier acquisitions, limited reductions in many expense categories as a result of the Company's cost reduction initiatives and the operational efficiencies achieved.</FONT></P> <P><FONT FACE="Times Roman">Amortization of intangible assets increased 13.6% to $22.3 million, in the first nine months of fiscal 2000, from $19.6 million, in the first nine months of fiscal 1999. The increase in amortization expense was due to acquisitions completed during fiscal 1999 being amortized for a full nine months. </FONT></P> <P><FONT FACE="Times Roman">The Company's worldwide loss from operations was $13.9 million for the first nine months of fiscal 2000 compared to $269.4 million in the comparable period of fiscal 1999. Excluding the impact of a special charge of $23.7 million related to the restructuring initiative, income from operations was $9.9 million for the first nine months of fiscal 2000 and excluding the impact of a special charges of $217.4 million related to purchased in-process research and development, loss from operations was $52.0 million for the comparable period of fiscal 1999. The improvement from operations, excluding special charges, was due to lower operating expenses and higher gross profit margins during the first nine months of fiscal 2000 than the comparable period of fiscal 1999. During the first nine months of fiscal 2000, domestic income from operations increased by $91.9 million, as compared to domestic loss from operations for the first nine months of fiscal 1999, largely due to higher sales and lower R&amp;D costs. In Europe, a loss from operations of $0.9 million resulted during the first nine months of fiscal 2000 as compared to income from operations of $36.3 million for the first nine months of fiscal 1999, a decrease of $37.2 million. The decrease in Europe was primarily due to lower sales and the related gross profit. In the Pac Rim, a loss from operations of $0.6 million during the first nine months of fiscal 2000 as compared to a loss from operations of $2.7 million during the comparable period of fiscal 1999, an improvement of $2.1 million. The loss in the Pac Rim was mainly due to lower sales. The loss from operations of the Other region improved by $5.2 million between the first nine months of fiscal 2000 and the comparable period of fiscal 1999 primarily due to increased sales of higher margin products. </FONT></P> <P><FONT FACE="Times Roman">Special charges of $23.7 million were recorded in the first nine months of fiscal 2000 that related to the restructuring initiative that was undertaken during March 1999. These charges were taken to reflect the closure of the manufacturing facility in Ohio which was closed during the nine months ended November 30, 1999, the planned closure of 40 sales offices worldwide (37 closed through November 30, 1999), the planned consolidation and outsourcing of certain manufacturing operations, the write-off of certain assets that were not required subsequent to the restructuring and reduction of the Company's global workforce. The reduction in the global workforce is expected to be principally manufacturing and distribution personnel and other targeted headcounts impacting most functions within the Company. The exit costs which the Company expects to incur relate primarily to long-term lease commitments which will be paid out over a few years. This initiative is intended to reduce the expense structure of the Company; lower cost of goods sold; increase cash reserves; provide higher return on assets and revenue per employee; enable aggressive asset reduction and consolidation initiatives and increase net income. These actions are expected to be completed prior to May 31, 2001. There is no assurance that the Company will achieve the intended benefits of the restructuring initiative. The benefits are subject to numerous risks that could impair the Company's ability to realize the expected benefits as soon as expected, or ever. These risks include the possibility that the Company may encounter delays in consolidating certain facilities and in implementing planned workforce reductions; there may be additional unforeseen costs associated with relocations and employee severance and the need to maintain certain essential but underutilized facilities. These initiatives will require the dedication of management and other resources, which may result in a temporary disruption of the Company's business activities. Any such disruption could have a material adverse effect on the Company's results of operations. During the first nine months of fiscal 1999, the Company recorded special charges of $217.4 million for in-process research and development, in connection with the acquisitions of Yago, Ariel, FlowPoint and NetVantage. For additional information related to the acquisitions, refer to the section titled Business Combinations.</FONT></P> <P><FONT FACE="Times Roman">Other income in the first nine months of fiscal 2000 related to the Company's relationship with Compaq, $38.0 million, a realized gain on the sale of a minority stock investment, $1.1 million, and the gain on the exchange of a minority stock investment, $10.0 million. The $38.0 million represents a $25.0 million lump sum payment made by Compaq to eliminate their quarterly minimum purchase commitments under an OEM agreement and $13.0 million related to product previously purchased and paid for that was returned to the Company. The Company has no further obligation to compensate Compaq for this returned product. The gain on the sale of the minority investment was computed as the difference between the book value of the Company's investment and the cash received. The gain on the exchange of a minority stock investment was computed as the difference between the book value of the Company's investment and the market value of the acquiror's securities received in exchange.</FONT></P> <P><FONT FACE="Times Roman">Net interest income in the first nine months of fiscal 2000 increased $0.7 million to $12.1 million as compared to $11.4 million during the first nine months of fiscal 1999. The increase was due to higher average invested balances during the last three months of the period.</FONT></P> <P><FONT FACE="Times Roman">Excluding the net effects of the amortization of intangibles, special charges and other income, the Company's effective tax rate was 29.7% for the nine month period ended November 30, 1999 compared to 36.6% for the nine month period ended November 30, 1998. The Company did not record any tax benefit associated with the $150.0 million of special charges, recorded in the nine month period ended November 30, 1998, as these charges related to non-deductible in-process research and development. The Company expects the effective tax rate of future quarters, exclusive of special charges, to be approximately 31.0%.</FONT></P> <P><I><U><FONT FACE="Times Roman">Liquidity and Capital Resources </FONT></U></I></P> <P><FONT FACE="Times Roman">Cash, cash equivalents, short and long-term investments increased to $550.0 million at November 30, 1999 from $476.3 million at February 28, 1999. Net cash provided by operating activities was $81.7 million in the nine month period ended November 30, 1999, compared to net cash used by operating activities of $15.7 million in the comparable period of fiscal 1999. The net cash provided by operating activities for the nine months ended November 30, 1999 was primarily due to Compaq's cash payments to the Company as a result of transitioning to the alliance agreement, fewer prepayments and lower inventory. The Company expects cash provided by operating activities to increase as there will be no product credits available to Compaq.</FONT></P> <P><FONT FACE="Times Roman">Net cash used in investing activities was $26.4 million in the nine-month period ended November 30, 1999, compared to $68.6 million in the comparable period of fiscal 1999. This improvement was a result of lower capital expenditures, no acquisitions of businesses during the nine months ended November 30, 1999 and net proceeds from maturities/purchases of securities. The Company expects to record cash from investing activities, as it monetizes its Efficient stock holdings over time.</FONT></P> <P><FONT FACE="Times Roman">Net accounts receivable decreased $21.6 million, to $195.2 million at November 30, 1999 from $216.8 million at February 28, 1999. Average days sales outstanding were 47 and 57 days at November 30, 1999 and February 28, 1999, respectively. The change in the average day sales outstanding was primarily due to the timing of sales and the prepayment of certain sales to Compaq. The Company expects future average days sales outstanding to be more in the range of the February 28, 1999 rate.</FONT></P> <P><FONT FACE="Times Roman">Worldwide inventories at November 30, 1999 were $178.5 million, or 81 days of sales, compared to $229.5 million, or 107 days of sales at the end of the prior fiscal year. Inventory turnover was 4.5 turns at November 30, 1999, compared to 3.4 turns at February 28, 1999. Inventory levels decreased due to additional focus on supply chain management and by streamlining the product offerings to be more in line with the Company's core products.</FONT></P> <P><FONT FACE="Times Roman">Capital expenditures for the first nine months of fiscal 2000 were $30.2 million compared to $35.8 million for the same period of the preceding year. Fewer expenditures were required, in fiscal 2000, as the Company closed and consolidated facilities. Capital expenditures were principally related to purchases of computer and computer related equipment.</FONT></P> <P><FONT FACE="Times Roman">Current liabilities at November 30, 1999 were $353.5 million compared to $469.5 million at the end of the prior fiscal year. This decrease was mainly due to lower accounts payable and Compaq's use of its product credits. As of November 30, 1999, no product credits remained compared to $129.7 million of product credits at February 28, 1999.</FONT></P> <P><FONT FACE="Times Roman">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.</FONT></P> <P><I><U><FONT FACE="Times Roman">Business Combinations</FONT></U></I></P> <P><FONT SIZE="2"></FONT></P> <P><I><FONT FACE="Times Roman">NetVantage, Inc.</FONT></I></P> <P><FONT FACE="Times Roman">On September 25, 1998, Cabletron acquired NetVantage, Inc., a publicly held manufacturer of ethernet workgroup switches. Under the terms of the Merger Agreement, Cabletron issued 6.4 million shares of Cabletron common stock to the shareholders of NetVantage in exchange for all of the outstanding shares of stock of NetVantage.</FONT></P> <P><FONT FACE="Times Roman">Cabletron recorded the cost of the acquisition at approximately $77.8 million, including direct costs of the acquisition. The cost represents 6.4 million shares at $9.9375 per share, in addition to direct acquisition costs. Cabletron's consolidated results of operations include the operating results of NetVantage, Inc. from the acquisition date.</FONT></P> <P><FONT FACE="Times Roman">In connection with the acquisition of NetVantage, the Company recorded special charges of $29.4 million for in-process research and development projects. The valuation of the IPR&amp;D incorporated the guidance on IPR&amp;D valuation methodologies promulgated by the SEC. These methodologies incorporate the notion that cash flows attributable to development efforts, including the effort to be completed on the development effort underway, and development of future versions of the product that have not yet been undertaken, should be excluded in the valuation of IPR&amp;D. This allocation represents risk-adjusted cash flows related to the incomplete products. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the R&amp;D in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date.</FONT></P> <P><FONT FACE="Times Roman">The Company used independent third-party appraisers to assess and allocate values to the in-process research and development. The values assigned to these assets were determined by identifying significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of NetVantage's next-generation Ethernet technologies.</FONT></P> <P><FONT FACE="Times Roman">The nature of the efforts to develop the acquired in-process technology into commercially viable products principally relate to the completion of all planning, designing, prototyping, high-volume verification, and testing activities that are necessary to establish that the proposed technologies meet their design specifications including functional, technical, and economic performance requirements.</FONT></P> <P><FONT FACE="Times Roman">The value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors.</FONT></P> <P><FONT FACE="Times Roman">For purposes of the IPR&amp;D valuation, the total revenues attributable to NetVantage were projected to exceed $250 million within 5 years, assuming the successful completion and market acceptance of the major R&amp;D efforts. As of the valuation date, NetVantage had a few existing products, which lacked the technological breadth and depth necessary in the evolving networking equipment market. Accordingly, it was estimated that the significant revenue growth in the first several years would be primarily related to the in-process technologies. The estimated revenues for the in-process projects were expected to peak in 2004 and then decline as other new products and technologies were expected to enter the market. To date, actual revenues have been substantially similar to those projected.</FONT></P> <P><FONT FACE="Times Roman">Cost of sales was estimated based on NetVantage's internally generated projections and discussions with management regarding anticipated gross margin improvements. Due to the market opportunities in the network equipment arena and NetVantage's unique technology architecture, substantial gross margins were projected through the forecast period. Cost of sales as a percentage of sales was forecasted to remain constant at 57.5%. SG&amp;A expenses (including depreciation) as a percentage of sales was projected to decline slightly in 2001 and then remain constant at 23%. R &amp;D expenditures as a percentage of sales were projected to decline slightly in 2000 and remain constant at 10% over the projection period.</FONT></P> <P><FONT FACE="Times Roman">The rates utilized to discount the net cash flows to their present value were based on venture capital rates of return. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, a discount rate of 25.0 percent was determined to be appropriate for the in-process R&amp;D. These discount rates are commensurate with NetVantage's stage of development; the uncertainties in the economic estimates described above; the inherent uncertainty surrounding the successful development of the purchased in-process technology; the useful life of such technology; the profitability levels of such technology; and, the uncertainty of technological advances that were unknown at the time of the acquisition. </FONT></P> <P><FONT FACE="Times Roman">The forecasts used by the Company in valuing in-process research and development were based upon assumptions the Company believes to be reasonable but which are inherently uncertain and unpredictable. The Company's assumptions may be incomplete or inaccurate, and unanticipated events and circumstances are likely to occur. For these reasons, actual results may vary from the projected results.</FONT></P> <P><FONT FACE="Times Roman">The Company believes that the foregoing assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from the projected results.</FONT></P> <P><FONT FACE="Times Roman">NetVantage's in-process research and development value is comprised of several significant individual on-going projects. Remaining development efforts for these projects include various phases of design, development and testing. Anticipated completion dates for the projects in progress are estimated to occur over the next year. The Company began recognizing the economic benefits from the technologies in the fourth quarter of fiscal year 1999. Funding for such projects was estimated to be obtained from internally generated sources. The estimated expenditures to complete these projects appear to be reasonable as compared to actual expenditures incurred. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur.</FONT></P> <P><FONT FACE="Times Roman">Management expects to continue their support of these efforts and believes the Company has a reasonable chance of successfully completing the R&amp;D programs. However, there is risk associated with the completion of the projects and there is no assurance that any will meet with either technological or commercial success.</FONT></P> <P><I><FONT FACE="Times Roman">FlowPoint Corp.</FONT></I></P> <P><FONT FACE="Times Roman">On September 9, 1998, Cabletron acquired FlowPoint, Corp., a privately held manufacturer of digital subscriber line router networking products. Prior to the Agreement, Cabletron owned 42.8% of the outstanding shares of FlowPoint stock. Pursuant to the terms of the agreement, $20.6 million was paid in 4 installments, within 9 months after the merger date. The first installment was paid in the form of cash while the remaining 3 installments were paid in the form of Cabletron common stock. In addition, Cabletron assumed 494,000 options, valued at approximately $2.7 million.</FONT></P> <P><FONT FACE="Times Roman">Cabletron recorded the cost of the acquisition at approximately $25.0 million, including direct costs of the acquisition. Cabletron's consolidated results of operations include the operating results of FlowPoint, Corp. from the acquisition date.</FONT></P> <P><FONT FACE="Times Roman">In connection with the acquisition of FlowPoint, the Company recorded special charges of $12.0 million for in-process research and development projects. The valuation of the IPR&amp;D incorporated the guidance on IPR&amp;D valuation methodologies promulgated by the SEC. These methodologies incorporate the notion that cash flows attributable to development efforts, including the effort to be completed on the development effort underway, and development of future versions of the product that have not yet been undertaken, should be excluded in the valuation of IPR&amp;D. This allocation represents risk-adjusted cash flows related to the incomplete products. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the R&amp;D in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date.</FONT></P> <P><FONT FACE="Times Roman">The Company used independent third-party appraisers to assess and allocate values to the in-process research and development. The value assigned to these assets were determined by identifying significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of FlowPoint's next-generation Router technologies.</FONT></P> <P><FONT FACE="Times Roman">The nature of the efforts to develop the acquired in-process technology into commercially viable products principally relate to the completion of all planning, designing, prototyping, high-volume verification, and testing activities that are necessary to establish that the proposed technologies meet their design specifications including functional, technical, and economic performance requirements.</FONT></P> <P><FONT FACE="Times Roman">The value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development is based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors.</FONT></P> <P><FONT FACE="Times Roman">For purposes of the in-process R&amp;D valuation, the total revenues attributable to FlowPoint were projected to exceed $150 million within 5 years, assuming the successful completion and market acceptance of the major R&amp;D efforts. As of the valuation date, FlowPoint had a few existing products, which lacked the technological breadth and depth necessary in the evolving networking equipment market. Accordingly, for purposes of the in-process R&amp;D valuation, it was estimated that significant revenue growth in the first several years would be primarily related to the in-process technologies. The estimated revenues for the in-process projects were projected to peak in 2007 and then decline as other new products and technologies were expected to enter the market.</FONT></P> <P><FONT FACE="Times Roman">Cost of sales was estimated based on FlowPoint's internally generated projections and discussions with management regarding anticipated gross margin improvements. Due to the market opportunities in the network equipment arena and FlowPoint's unique technology architecture, substantial gross margins were projected through the forecast period. Cost of sales as a percentage of sales was forecasted to decline until 2003 and then remain constant at 55%. SG&amp;A expenses (including depreciation) as a percentage of sales were projected to remain constant at 23%. R&amp;D expenditures as a percentage of sales were projected to decline significantly from 30% in 1999 to 10% in 2001 and remain constant at 10% thereafter.</FONT></P> <P><FONT FACE="Times Roman">The rates utilized to discount the net cash flows to their present value were based on venture capital rates of return. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, a discount rate of 27.5 percent was determined to be appropriate for the in-process R&amp;D. These discount rates were commensurate with FlowPoint's stage of development; the uncertainties in the economic estimates described above; the inherent uncertainty surrounding the successful development of the purchased in-process technology; the useful life of such technology; the profitability levels of such technology; and, the uncertainty of technological advances that were unknown at the time of the acquisition.</FONT></P> <P><FONT FACE="Times Roman">The forecasts used by the Company in valuing in-process research and development were based upon assumptions the Company believed was reasonable but which are inherently uncertain and unpredictable. The Company's assumptions may be incomplete or inaccurate, and unanticipated events and circumstances are likely to occur. For these reasons, actual results may vary from the projected results.</FONT></P> <P><FONT FACE="Times Roman">The Company believes that the foregoing assumptions used in the forecasts were reasonable at the time of the acquisition. Subsequent to the end of the third quarter of fiscal 2000, the Company sold its FlowPoint division. </FONT></P> <P><I><FONT FACE="Times Roman">DSLAM division of Ariel Corporation</FONT></I></P> <P><FONT FACE="Times Roman">On September 1, 1998, Cabletron acquired the assets and liabilities of the DSLAM division of Ariel Corporation ( &quot;Ariel&quot;). Cabletron recorded the cost of the acquisition at approximately $45.1 million, including fees, expenses and other costs related to the acquisition. Cabletron's consolidated results of operations include the operating results of the DSLAM division of Ariel Corporation from the acquisition date.</FONT></P> <P><FONT FACE="Times Roman">In connection with the acquisition of Ariel, the Company allocated $26.0 million ($15.8 million, net of tax) of the purchase price to in-process research and development projects. The valuation of the in-process research and development (&quot;IPR&amp;D&quot;) incorporated the guidance on IPR&amp;D valuation methodologies promulgated by the Securities and Exchange Commission (&quot;SEC&quot;). These methodologies incorporate the notion that cash flows attributable to development efforts, including the effort to be completed on the development effort underway, and development of future versions of the product that have not yet been undertaken, should be excluded in the valuation of IPR&amp;D. This allocation represents risk-adjusted cash flows related to the incomplete products. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development ( &quot;R&amp;D&quot;) in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date.</FONT></P> <P><FONT FACE="Times Roman">The Company used independent third-party appraisers to assess and allocate values to the in-process research and development. The value assigned to these assets was determined by identifying significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of Ariel's next-generation DSLAM technology.</FONT></P> <P><FONT FACE="Times Roman">The nature of the efforts to develop the acquired in-process technology into commercially viable products principally relate to the completion of all planning, designing, prototyping, high-volume verification, and testing activities that are necessary to establish that the proposed technologies meet their design specifications including functional, technical, and economic performance requirements.</FONT></P> <P><FONT FACE="Times Roman">The value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development is based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors.</FONT></P> <P><FONT FACE="Times Roman">For purposes of the IPR&amp;D valuation, the total revenues attributable to Ariel were projected to exceed $195 million within 5 years, assuming the successful completion and market acceptance of the major R&amp;D efforts. As of the valuation date, Ariel had no existing products and accordingly all revenue growth in the first several years are related to the in-process technologies. For purposes of the IPR&amp;D valuation, it was estimated that revenues for the in-process projects would peak in 2004 and then decline as other new products and technologies were expected to enter the market.</FONT></P> <P><FONT FACE="Times Roman">Cost of sales was estimated based on Ariel's internally generated projections and discussions with management regarding anticipated gross margin improvements. Due to the market opportunities in the network equipment arena and Ariel's unique technology architecture, substantial gross margins were estimated through the forecast period. Cost of sales as a percentage of sales was forecasted to decline until 2001 and then remain constant at 55%. SG&amp;A expenses (including depreciation) as a percentage of sales were projected to decline slightly until 2003 and then remain constant at 26%. R&amp;D expenditures as a percentage of sales were projected to remain constant at 8% over the projection period. </FONT></P> <P><FONT FACE="Times Roman">The rates utilized to discount the net cash flows to their present value were based on venture capital rates of return. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, a discount rate of 27.5 percent was determined to be appropriate for the in-process R&amp;D. These discount rates were commensurate with Ariel's stage of development; the uncertainties in the economic estimates described above; the inherent uncertainty surrounding the successful development of the purchased in-process technology; the useful life of such technology; the profitability levels of such technology; and, the uncertainty of technological advances that were unknown at the time of acquisition.</FONT></P> <P><FONT FACE="Times Roman">The forecasts used by the Company in valuing in-process research and development were based upon assumptions the Company believed was reasonable but which are inherently uncertain and unpredictable. The Company's assumptions may be incomplete or inaccurate, and unanticipated events and circumstances are likely to occur. For these reasons, actual results may vary from the projected results.</FONT></P> <P><FONT FACE="Times Roman">The Company believes that the foregoing assumptions used in the forecasts were reasonable at the time of the acquisition. The Company has scaled back the Ariel operation and as a result of the sale of FlowPoint (which was engaged in similar technology) is presently evaluating the strategic options regarding the Ariel technology. The Company expects to complete its evaluation before February 29, 2000.</FONT></P> <P><I><FONT FACE="Times Roman">Yago Systems, Inc.</FONT></I></P> <P><FONT FACE="Times Roman">In connection with the acquisition of YAGO, the Company allocated $150.0 million of the purchase price to in-process research and development projects. This allocation represents the estimated fair value based on risk-adjusted cash flows related to the incomplete products. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development ( &quot;R&amp;D&quot;) in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. </FONT></P> <P><FONT FACE="Times Roman">The Company used independent third-party appraisers to assess and allocate values to the in-process research and development. The value assigned to these assets were determined by identifying significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of YAGO's next-generation switching router family of products and technologies.</FONT></P> <P><FONT FACE="Times Roman">At the time of its acquisition, YAGO was a development stage company that had spent approximately $5.6 million on research and development focused on the development of advanced gigabit switching technology. In fact, all of Yago's efforts since the company's inception had been directed towards the introduction of an advanced gigabit layer-2, layer-3, and layer-4 switching and router product family. YAGO had no developed products or technology and had not generated any revenues as of its acquisition date. At the time, YAGO was testing the technology related to the MSR8000, its first product to be released, and was developing its MSR16000/8600 family of products. These two primary development efforts were made up of six significant research and development components, which were ongoing at the acquisition date. These component efforts included continued MSR8000 development and testing, research and development of the MSR2000 (a desktop version of the MSR8000), development of the MSR8600, development of Wide Area Network interfaces for its switching products, routing software research and development, and device management software research and development.</FONT></P> <P><FONT FACE="Times Roman">At the time of YAGO's acquisition, the Company believed that the MSR product family of switching routers would set a new standard for performance and functionality by delivering wire-speed layer-2, layer-3 and layer-4 functionality. Designed for the enterprise and ISP backbone markets, upon completion of their development, the MSR products were intended to offer large table capacity, a multi-gigabit non-blocking backplane, low latency and seamless calling. YAGO also intended to develop its MSR products to be interoperable with other standard-based routers and switches. As of the acquisition date, management expected the development of the MSR product family would be the only mechanism to fuel YAGO's revenue growth and profitability in the future. Despite the incomplete state of YAGO's technology, the Company felt that the projected size and growth of the market for the MSR product, YAGO's demonstrated promise in the development of the MSR product family and the consideration paid by Cabletron's competitors to acquire companies comparable to YAGO all warranted the consideration paid by Cabletron for YAGO.</FONT></P> <P><FONT FACE="Times Roman">The nature of the efforts to develop the acquired in-process technology into commercially viable products principally related to the completion of all planning, designing, prototyping, high-volume verification, and testing activities that were necessary to establish that the proposed technologies met their design specifications including functional, technical, and economic performance requirements. Anticipated completion dates for the projects in progress were expected to occur over the two years following the acquisition and the Company expected to begin generating the economic benefits from the technologies in the second half of 1998. Funding for such projects was expected to be obtained from internally generated sources. Expenditures to complete the MSR technology were expected to total approximately $10.0 million over the two-year period.</FONT></P> <P><FONT FACE="Times Roman">To date, YAGO's results have not differed significantly from the forecast assumptions. YAGO released a fully featured MSR8000 in July 1998. The Company's R&amp;D expenditures since the YAGO acquisition have not differed materially from expectations. The Company continues to work toward the completion of the projects underway at YAGO at the time of the acquisition. Most of the projects are on schedule (within 2 to 3 months of planned releases). The risks associated with these efforts are still considered significant and no assurance can be made that YAGO's upcoming products will meet market expectations.</FONT></P> <P><FONT FACE="Times Roman">The value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors.</FONT></P> <P><FONT FACE="Times Roman">In the model used to value in-process research and development in the YAGO acquisition, as of March 17, 1998, total revenues attributable to YAGO were projected to exceed $900 million in 2002, assuming the successful completion and market acceptance of the major R&amp;D efforts. As of the valuation date, YAGO had no existing products and accordingly all revenue growth in the first several years were related to the in-process technologies. The estimated revenues for the in-process were projected to peak in 2003 and then decline as other new products and technologies were projected to enter the market.</FONT></P> <P><FONT FACE="Times Roman">Cost of sales was estimated based on YAGO's internally generated projections and discussions with management regarding anticipated gross margin improvements. Due to the market opportunities in the Gigabit Ethernet arena and YAGO's unique product architecture substantial gross margins were expected through 2000. Thereafter, gross margins were expected to gradually decline as competition increased. Cost of sales was projected to average approximately 47.5 percent through 2003. SG &amp;A expenses (including depreciation), was projected to remain constant as a percentage of sales at approximately 23 percent. R&amp;D expenditures were projected to decrease as a percentage of sales as the in-process projects were completed. R&amp;D expenditures were expected to peak in 1998 at 7.1 percent of sales, decline, and then level out at 5.0 percent of sales in 2000 and thereafter.</FONT></P> <P><FONT FACE="Times Roman">The rates utilized to discount the net cash flows to their present value were based on venture capital rates of return. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, discount rates of 45.0 to 50.0 percent were used for the business enterprise and for the in-process R &amp;D. The Company believes these rates were appropriate because they were commensurate with YAGO's stage of development; the uncertainties in the economic estimates described above; the inherent uncertainty surrounding the successful development of the purchased in-process technology; the useful life of such technology; the profitability levels of such technology; and, the uncertainty of technological advances that are unknown at this time.</FONT></P> <P><FONT FACE="Times Roman">The forecasts used by the Company in valuing in-process research and development were based upon assumptions the Company believes to be reasonable but which are inherently uncertain and unpredictable. No assurance can be given that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. The Company's assumptions may be incomplete or inaccurate, and unanticipated events and circumstances are likely to occur. For these reasons, actual results may vary from the projected results.</FONT></P> <P><FONT FACE="Times Roman">Management expects to continue their support of these efforts and believes the Company has a reasonable chance of successfully completing the R&amp;D programs. However, there is risk associated with the completion of the projects and there is no assurance that any will meet with either technological or commercial success. The Company believes as it did at the time of the YAGO acquisition, that if YAGO does not successfully complete its outstanding in-process research and development efforts, Cabletron's future operating results would be materially adversely impacted and the value of the in-process research and development might never be realized.</FONT></P> <P><FONT FACE="Times Roman">Year 2000</FONT></P> <P><FONT FACE="Times Roman">The Company initiated a Year 2000 project (the Project) to analyze the impact of the Year 2000 date change on the Company's family of networking products and its mission-critical business processes. &quot;Mission-critical&quot; business processes are those functions whose loss would cause an immediate stoppage of or significant impairment to the Company's operations. Implementation of the Project is supervised by a dedicated Year 2000 Project Management Office, which reports its progress to an Executive Steering Committee. Each operating division of the Company is applying procedures specific to it that are part of the overall Project. Cabletron also has engaged outside consultants and external resources to help formulate and evaluate the Project.</FONT></P> <P><FONT FACE="Times Roman">The Company used a five phase approach to address and evaluate Year 2000 issues: 1) conducting an inventory of Year 2000 items; 2) assigning priorities to identified items and assessing the effects of Year 2000 problems on the mission-critical functions of the Company; 3) remediation of systems, software and embedded systems not Year 2000 ready; 4) testing mission-critical systems; and 5) designing and implementing contingency plans.</FONT></P> <P><FONT FACE="Times Roman">The Project has identified four areas of exposure within the Company with respect to the Year 2000: the internal information technology systems used to run the Company's business; production, manufacturing, design and engineering equipment and facilities; the Company's Key Suppliers; and Cabletron Products.</FONT></P> <P><FONT FACE="Times Roman">Based on the information available at the time of this filing, Cabletron has not experienced any significant Year 2000-related issues that would have an adverse effect on the Company's business operations and financial condition. There can be no assurance, however, that all potential Year 2000-related issues have been discovered. </FONT></P> </FONT> <P><FONT FACE="Times Roman">Internal Information Technology Systems</FONT></P> <P><FONT FACE="Times Roman">The Company has completed testing its internal information technology, including its main financial, manufacturing and order processing systems. To date, no date-related errors have been reported since the date change to the year 2000. However, the failure of any internal system to achieve Year 2000 readiness could disrupt the Company's ability to conduct its business or record transactions, which could adversely affect results of operations or financial condition.</FONT></P> <P><FONT FACE="Times Roman">Equipment and Facilities</FONT></P> <P><FONT FACE="Times Roman">The Company has completed the remediation and testing phases of its mission-critical equipment, including manufacturing, designing and engineering equipment. Failure of equipment caused by a Year 2000 problem could result in disruptions in the Company's manufacturing, design, production and shipping capabilities and could adversely affect the Company's results of operations and financial condition.</FONT></P> <P><FONT FACE="Times Roman">The Company has also completed assessing and remediating the Year 2000 readiness of the facilities it occupies, with priority being placed on the facilities it owns and the leased property that house large numbers of Cabletron employees. These facilities are critical to operations and any delays in achieving Year 2000 readiness with respect to these facilities could adversely affect the Company's results of operations or financial condition.</FONT></P> <P><FONT FACE="Times Roman">To date, the Company has not experienced any Year 2000-related failures in its mission-critical equipment or facilities.</FONT></P> <P><FONT FACE="Times Roman">Key Suppliers</FONT></P> <P><FONT FACE="Times Roman">Outside suppliers that provide mission-critical services and supplies (&quot;Key Suppliers&quot;) have the potential to adversely affect the Company's business. The Company assessed its mission critical suppliers and sent surveys to all of its identified Key Suppliers. The evaluation process included compliance inquiries and reviews of published materials and websites, and discussions of Year 2000 readiness plans. To date, the Company has not experienced any Year 2000-related failures in its receipt of products or services from its Key Suppliers. Even where assurances were received from third parties, there remains a risk that failure of systems and products of other companies on which Cabletron relies could have a material adverse effect on the Company. Further, if these Key Suppliers fail to address the Year 2000 issue adequately for the products they provide to Cabletron, critical materials, products and services may not be delivered in a timely manner, which could adversely affect the Company's results of operations or financial condition. Consequently, the Company continues to monitor and assess the potential impact of the Year 2000 on the products and services provided by Key Suppliers.</FONT></P> <P><FONT FACE="Times Roman">Cabletron Products</FONT></P> <P><FONT FACE="Times Roman">The Company has conducted extensive work regarding the status of its current, developing and installed base of products. To date, the Company is not aware of any date processing errors regarding compliant Cabletron products. The Company has published a list of its major products indicating their Year 2000 compliance status. This list is available on the Company's World Wide Web page (http://www.cabletron.com/year-2000) and is updated periodically. The Company believes that substantially all of its current hardware products are Year 2000 compliant. The Company believes that its older hardware products that are not Year 2000 compliant will continue to perform all essential and material functions after the year 2000 but may, in limited circumstances, incorrectly report the date of events (i.e., events on the network that are reported to a network management software package) after the year 2000. The Company believes that its current versions of Spectrum (Version 5.0), its network management platform, is Year 2000 compliant. Older versions of Spectrum are not Year 2000 compliant. The Company is offering upgrades for some, but not all, of the non-compliant products (both hardware and software) previously sold by the Company. For those non-compliant products with no upgrade available, the Company is offering customers the opportunity to purchase equipment offering equivalent functionality. Given that most non-compliant products previously sold will continue to perform their standard functions, the Company expects that many customers will decide not to replace those products. Despite the Company's efforts to date to identify the Year 2000 compliance of its current and installed base of products and the effects of any non-compliance, the Company cannot be sure that it has identified all areas of non-compliance or that any solutions it implements to address the non-compliance will prove satisfactory. Further, since all customer situations cannot be anticipated, particularly those involving third party products, the Company may experience an increase in warranty and other claims as a result of the Year 2000 transition. For these reasons, the impact of customer claims could have a material adverse impact on the Company's results of operations or financial condition.</FONT></P> <P><FONT FACE="Times Roman">As used in this section, &quot;Year 2000 compliant &quot; means, with respect to information technology, that the information technology, where applicable, accurately processes date/time data (including, but not limited to, calculating, comparing, and sequencing) from, into, and between the twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year calculations, to the extent that other information technology, used in combination with the information technology being acquired, properly exchanges date/time data with it.</FONT></P> <P><FONT FACE="Times Roman">Costs</FONT></P> <P><FONT FACE="Times Roman">The Company has incurred approximately $11.8 million of costs, through early December, and estimates it will incur an additional $1 to 2 million, of which approximately 25% of the total costs will be for capital expenditures, in connection with its Year 2000 efforts. The Company believes that a majority of its Year 2000 costs have already been incurred. The Company has not included in the total cost estimate any costs associated with potential Year 2000 litigation exposure since these costs are not estimable. If significant new non-compliance issues are identified, the Company's results of operations or financial condition could be materially adversely affected. </FONT></P> <P><FONT FACE="Times Roman">Contingency Plans</FONT></P> <P><FONT FACE="Times Roman">Contingency plans have been developed in mission-critical areas, to ensure that any potential material business interruptions caused by the Year 2000 issue are mitigated. The Company has also prepared business resumption contingency plans and millennium event plans to prepare for potential systems failures at critical dates, failures of critical third parties and any other anticipated events that could arise with the date change. Contingency plans will be updated as the Project continues to refine and assess risk.</FONT></P> <P><FONT FACE="Times Roman">The foregoing statements are based upon management's best estimates at the present time which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. The Company has taken and will continue to take corrective action to mitigate any significant Year 2000 problems. There can be no guarantee that the Company will not experience significant business disruptions or loss of business due to the Year 2000 issue. Specific factors may later become known which could result in a material adverse impact on the Company's results of operations or financial condition.</FONT></P> <P><FONT FACE="Times Roman">New Accounting Pronouncements</FONT></P> <P><FONT FACE="Times Roman">In December 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 98-9, &quot;Modification of Software Revenue Recognition&quot; which requires recognition of revenue using specific methods and amends SOP 98-4 (Deferral of the Effective Date of a Provision of SOP 97-2) and amends certain paragraphs of SOP 97-2. The Company adopted SOP 98-9 for its year ending February 28, 2000, beginning on March 1, 1999. The adoption of SOP 98-9 did not have a material impact on the Company's results of operations for the three and six months ended August 31, 1999.</FONT></P> <P><FONT FACE="Times Roman">In June 1998, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard No. 133, &quot;Accounting for Derivative Instruments and Hedging Activities&quot; (SFAS 133) which requires companies to record derivative instruments on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 will be effective for the Company's first quarter of fiscal year ending February 28, 2002. Management is currently evaluating the potential effects of this pronouncement on its consolidated financial statements. At this time, management does not expect the impact to be significant.</FONT></P> <P><FONT FACE="Times Roman">ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk <A NAME="link8"></A> </FONT></P> <P><FONT FACE="Times Roman">The Company continues to be exposed to changes in interest rates and foreign currency exchange rates, which may adversely affect its results of operations and financial position. Refer to the Company's Form 10-K for the year ended February 28, 1999 for additional information regarding quantitative and qualitative disclosures about market risk. PART II. OTHER INFORMATION </FONT></P> <P><FONT FACE="Times Roman">Item 6. Exhibits and Reports on Form 8-K. <A NAME="link9"></A> </FONT></P> <P><FONT FACE="Times Roman">[a]. None. 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. <A NAME="link10"></A> </FONT></P> <P> </TABLE> <TABLE> <TR> <TD VALIGN="TOP" WIDTH=483>&#160; </TD> <TD VALIGN="TOP" WIDTH=356> <P><U><FONT FACE="Times Roman">CABLETRON SYSTEMS, INC. <BR> </FONT></U><FONT FACE="Courier">(</FONT><FONT FACE="Times Roman">Registrant)</FONT></P> </TD> </TR> <TR> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=450>&nbsp;</TD> <TD VALIGN="TOP" WIDTH=419>&nbsp;</TD> </TR> <P> <TR> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=450> <P><U><FONT FACE="Times Roman">January 18, 2000 <BR> </FONT></U><FONT FACE="Times Roman">Date</FONT></P> </TD> <TD VALIGN="TOP" WIDTH=419> <P><FONT FACE="Times Roman">/s/ <U>Piyush Patel</U></FONT> <BR> &nbsp;&nbsp;&nbsp; <FONT FACE="Times Roman">Piyush Patel</FONT> <BR> &nbsp;&nbsp;&nbsp; <FONT FACE="Times Roman">Chairman, President, and</FONT> <BR> &nbsp;&nbsp;&nbsp; <FONT FACE="Times Roman">Chief Executive Officer</FONT></P> </TD> </TR> <TR> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=418>&nbsp;</TD> <TD VALIGN="TOP" WIDTH=421>&nbsp;</TD> </TR> <P> <TR> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=450> <P><U><FONT FACE="Times Roman">January 18, 2000 <BR> </FONT></U><FONT FACE="Times Roman">Date</FONT></P> </TD> <TD VALIGN="TOP" WIDTH=421> <P><FONT FACE="Times Roman">/s/ <U>David J. Kirkpatrick</U></FONT> <BR> &nbsp;&nbsp;&nbsp; <FONT FACE="Times Roman">David J. Kirkpatrick</FONT> <BR> &nbsp;&nbsp;&nbsp; <FONT FACE="Times Roman">Corporate Executive Vice President of</FONT> <BR> &nbsp;&nbsp;&nbsp;&nbsp;<FONT FACE="Times Roman">Finance and Chief Financial Officer</FONT></P> </TD> </TR> </TABLE> <P><FONT SIZE="2"></FONT></P> <P ALIGN="center">EXHIBIT INDEX</P> <P>&nbsp;</P> <P><P><P><P><P><UL> </TABLE> <TABLE> <TR> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=46> <P><FONT FACE="Times Roman">Exhibit <BR> </FONT><U><FONT FACE="Times Roman">No.</FONT></U></P> </TD> <TD VALIGN="bottom" WIDTH=592> <P><U><FONT FACE="Times Roman">Exhibit</FONT></U></P> </TD> <TD ALIGN="CENTER" VALIGN="bottom" WIDTH=218> <P><U><FONT FACE="Times Roman">Page(s)</FONT></U></P> </TD> </TR> <TR> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=46>&nbsp;</TD> <TD VALIGN="TOP" WIDTH=592>&nbsp;</TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=218>&nbsp;</TD> </TR> <TR> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=46> <P><FONT FACE="Times Roman">11.1</FONT></P> </TD> <TD VALIGN="TOP" WIDTH=592> <P><FONT FACE="Times Roman">Included in notes to consolidated financial statements</FONT></P> </TD> <TD ALIGN="CENTER" VALIGN="TOP" WIDTH=218> <P><FONT FACE="Times Roman">--</FONT></P> </TD> </TR> </TABLE> </UL> </BODY> </HTML>

2000

0QTR1

FDX

https://www.sec.gov/Archives/edgar/data/1048911/0000912057-00-001304.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, QQzKoWOOqvf8ewdIb5/8aL6M7eKghWcdiaD7caXU+jlsNzCPc7by56e6y9lnDhPX TWEF5vSzonSjS5vSeWpuHw== <SEC-DOCUMENT>0000912057-00-001304.txt : 20000202 <SEC-HEADER>0000912057-00-001304.hdr.sgml : 20000202 ACCESSION NUMBER: 0000912057-00-001304 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FDX CORP CENTRAL INDEX KEY: 0001048911 STANDARD INDUSTRIAL CLASSIFICATION: AIR COURIER SERVICES [4513] IRS NUMBER: 621721435 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-39483 FILM NUMBER: 507509 BUSINESS ADDRESS: STREET 1: 942 SOUTH SHADY GROVE ROAD CITY: MEMPHIS STATE: TN ZIP: 38120- BUSINESS PHONE: 9013693600 MAIL ADDRESS: STREET 1: 6075 POPLAR AVENUE CITY: MEMPHIS STATE: TN ZIP: 38119 </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 QUARTER ENDED NOVEMBER 30, 1999, 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: 333-39483 FDX CORPORATION (Exact name of registrant as specified in its charter) Delaware 62-1721435 (State of incorporation) (I.R.S. Employer Identification No.) 942 South Shady Grove Road Memphis, Tennessee 38120 (Address of principal (Zip Code) executive offices) (901) 818-7200 (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. Common Stock Outstanding Shares at December 31, 1999 Common Stock, par value $.10 per share 289,956,501 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ <PAGE> FDX CORPORATION INDEX PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> PAGE <S> <C> Condensed Consolidated Balance Sheets November 30, 1999 and May 31, 1999.............................. 3-4 Condensed Consolidated Statements of Income Three and Six Months Ended November 30, 1999 and 1998........... 5 Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, 1999 and 1998..................... 6 Notes to Condensed Consolidated Financial Statements................. 7-12 Review of Condensed Consolidated Financial Statements by Independent Public Accountants............................... 13 Report of Independent Public Accountants............................. 14 Management's Discussion and Analysis of Results of Operations and Financial Condition......................................... 15-22 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 23 Item 6. Exhibits and Reports on Form 8-K............................ 23 EXHIBIT INDEX........................................................ E-1 </TABLE> - 2 - <PAGE> FDX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS - ------ <TABLE> <CAPTION> November 30, 1999 May 31, (Unaudited) 1999 ------------ ----------- (In thousands) <S> <C> <C> Current Assets: Cash and cash equivalents......................................$ 517,893 $ 325,323 Receivables, less allowances of $80,327,000 and $68,305,000.................................. 2,378,934 2,153,166 Spare parts, supplies and fuel................................. 277,559 291,922 Deferred income taxes.......................................... 322,129 290,721 Prepaid expenses and other..................................... 72,949 79,896 ----------- ----------- Total current assets....................................... 3,569,464 3,141,028 Property and Equipment, at Cost..................................... 14,478,808 13,719,907 Less accumulated depreciation and amortization................. 7,609,418 7,160,690 ----------- ----------- Net property and equipment................................. 6,869,390 6,559,217 Other Assets: Goodwill....................................................... 439,575 344,002 Other.......................................................... 659,798 603,964 ----------- ----------- Total other assets......................................... 1,099,373 947,966 ----------- ----------- $11,538,227 $10,648,211 =========== =========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. - 3 - <PAGE> FDX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' INVESTMENT - ---------------------------------------- <TABLE> <CAPTION> November 30, 1999 May 31, (Unaudited) 1999 ----------- ----------- (In thousands) <S> <C> <C> Current Liabilities: Short-term borrowings...............................................$ 200,000 $ - Current portion of long-term debt................................... 7,576 14,938 Accrued salaries and employee benefits.............................. 698,315 740,492 Accounts payable.................................................... 1,119,505 1,133,952 Accrued expenses.................................................... 973,858 895,375 ----------- ----------- Total current liabilities....................................... 2,999,254 2,784,757 Long-Term Debt, Less Current Portion..................................... 1,849,989 1,359,668 Deferred Income Taxes.................................................... 299,702 293,462 Other Liabilities........................................................ 1,748,896 1,546,632 Commitments and Contingencies (Notes 7 and 8) Common Stockholders' Investment: Common Stock, $.10 par value; 800,000,000 shares authorized, 298,573,887 and 297,987,200 issued.......................................... 29,857 29,799 Additional paid-in capital.......................................... 1,065,446 1,061,312 Retained earnings .................................................. 3,945,348 3,615,797 Treasury stock, at cost............................................. (352,726) (1,281) Deferred compensation and other..................................... (24,487) (17,247) Accumulated other comprehensive income.............................. (23,052) (24,688) ----------- ----------- Total common stockholders' investment........................... 4,640,386 4,663,692 ----------- ----------- $11,538,227 $10,648,211 =========== =========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. - 4 - <PAGE> FDX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, -------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ---------- ----------- ---------- (In thousands, except per share amounts) <S> <C> <C> <C> <C> Revenues ........................................ $4,570,104 $4,209,237 $8,890,081 $8,291,539 Operating Expenses: Salaries and employee benefits ............. 1,873,804 1,756,999 3,704,637 3,505,115 Purchased transportation.................... 437,409 397,142 827,717 768,363 Rentals and landing fees.................... 393,512 347,717 760,219 679,228 Depreciation and amortization............... 285,360 252,196 562,622 502,373 Maintenance and repairs..................... 278,092 236,367 533,361 484,077 Fuel ....................................... 225,101 153,710 409,561 303,141 Other....................................... 772,291 728,119 1,503,622 1,428,412 ---------- ---------- ---------- ---------- 4,265,569 3,872,250 8,301,739 7,670,709 ---------- ---------- ---------- ---------- Operating Income................................. 304,535 336,987 588,342 620,830 Other Income (Expense): Interest, net............................... (26,589) (24,853) (47,197) (50,087) Other, net.................................. 4,982 270 4,663 (2,991) ---------- ---------- ---------- ---------- (21,607) (24,583) (42,534) (53,078) ---------- ---------- ---------- ---------- Income Before Income Taxes....................... 282,928 312,404 545,808 567,752 Provision for Income Taxes....................... 111,745 129,648 215,591 235,617 ---------- ---------- ---------- ---------- Net Income....................................... $ 171,183 $ 182,756 $ 330,217 $ 332,135 ========== ========== ========== ========== Earnings per common share: Basic....................................... $ .58 $ .62 $ 1.12 $ 1.13 ========== ========== ========== ========== Assuming dilution........................... $ .57 $ .61 $ 1.10 $ 1.11 ========== ========== ========== ========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. - 5 - <PAGE> FDX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six Months Ended November 30, ---------------------- 1999 1998 --------- --------- (In thousands) <S> <C> <C> Net Cash Provided by Operating Activities.......................... $ 676,454 $ 887,115 Investing Activities: Purchases of property and equipment........................... (838,586) (964,163) Proceeds from disposition of property and equipment: Sale-leaseback transactions............................... - 80,995 Reimbursements of A300 and MD11 deposits.................. 24,377 25,130 Other dispositions........................................ 142,979 154,087 Acquisition of business....................................... (115,768) - Other, net.................................................... (13,848) (692) --------- --------- Net cash used in investing activities.............................. (800,846) (704,643) Financing Activities: Short-term borrowings, net.................................... 200,000 422,512 Proceeds from debt issuances.................................. 497,120 - Principal payments on debt.................................... (12,564) (167,690) Proceeds from stock issuances................................. 12,662 5,753 Purchase of treasury stock.................................... (369,508) - Other, net.................................................... (10,748) (8,169) --------- --------- Net cash provided by financing activities.......................... 316,962 252,406 --------- --------- Net increase in cash and cash equivalents.......................... 192,570 434,878 Cash and cash equivalents at beginning of period................... 325,323 229,565 --------- --------- Cash and cash equivalents at end of period......................... $ 517,893 $ 664,443 ========= ========= Cash payments for: Interest (net of capitalized interest)........................ $ 51,251 $ 56,798 ========= ========= Income taxes.................................................. $ 210,859 $ 202,257 ========= ========= Non-cash investing and financing activities: Fair value of assets surrendered under exchange agreements (with two airlines)..................... $ 19,450 $ 26,006 Fair value of assets acquired under exchange agreements......................................... 18,903 14,300 --------- --------- Fair value of assets surrendered in excess of assets acquired................................... $ 547 $ 11,706 ========= ========= </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. - 6 - <PAGE> FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim financial statements of FDX Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended May 31, 1999. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the consolidated financial position of the Company as of November 30, 1999 and the consolidated results of its operations for the three and six-month periods ended November 30, 1999 and 1998, and its consolidated cash flows for the six-month periods ended November 30, 1999 and 1998. Operating results for the three and six-month periods ended November 30, 1999 are not necessarily indicative of the results that may be expected for the year ending May 31, 2000. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, which is effective for fiscal years beginning after June 15, 2000. The Statement requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. The impact, if any, on earnings, comprehensive income and financial position of the adoption of SFAS No. 133 will depend on the amount, timing and nature of any agreements entered into by the Company. Management has not yet completed its estimate of the effect of adoption of this Statement. The Company has entered into contracts on behalf of its subsidiary Federal Express Corporation ("FedEx"), that are designed to limit FedEx's exposure to fluctuations in jet fuel prices. Under these contracts, the Company makes (or receives) payments based on the difference between a fixed price and the market price of jet fuel, as determined by an index of spot market prices representing various geographic regions. The difference is recorded as an increase or decrease in fuel expenses. As of early January 2000, contracts in place to fix the price of jet fuel cover a small percentage of the estimated gallons of usage for the third quarter of 2000 and approximately 40 percent of the estimated usage for the fourth quarter of 2000. Through early January 2000, contracts covering 2001 fix the price of approximately one-third of the estimated requirements for jet fuel. Certain prior period amounts have been reclassified to conform to the current presentation. (2) ACQUISITION On September 10, 1999, the Company's FDX Logistics subsidiary acquired the assets of GeoLogistics Air Services, Inc., an airfreight forwarder servicing freight shipments between the United States and Puerto Rico, for approximately $116,000,000 in cash in a business combination accounted for as a purchase. This - 7 - <PAGE> FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) ACQUISITION (CONTINUED) business is operating under the name Caribbean Transportation Services, Inc. ("CTS"). Its operating results are included in the operations of the Company from the date of acquisition. The excess of purchase price over the estimated fair value of the net assets acquired ($103,000,000) has been recorded as goodwill and is being amortized ratably over 15 years. Pro forma results would not differ materially from reported results in any of the periods presented. (3) COMPREHENSIVE INCOME The following table provides a reconciliation of net income reported in the Company's consolidated financial statements to comprehensive income (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------------ ----------------------- 1999 1998 1999 1998 -------- -------- --------- -------- <S> <C> <C> <C> <C> Net income....................................... $171,183 $182,756 $330,217 $332,135 Other comprehensive income: Unrealized gain (loss) on available-for-sale securities ............... 969 -- (3,062) -- Tax effect.................................... (378) -- 1,194 -- -------- -------- -------- -------- Net of tax.................................. 591 -- (1,868) -- Foreign currency translation adjustments................................. 2,912 20,583 4,236 3,762 Tax effect.................................... (577) (3,284) (732) 92 -------- -------- ------- -------- Net of tax.................................. 2,335 17,299 3,504 3,854 -------- -------- ------- -------- Comprehensive income.......................... $174,109 $200,055 $331,853 $335,989 ======== ======== ======== ======== </TABLE> (4) FINANCING ARRANGEMENTS At November 30, 1999, short-term borrowings comprise funds drawn on a credit agreement executed on October 13, 1999. The interest rate on these borrowings is 7.21%. Principal and interest are payable on January 28, 2000, at which time the facility will be terminated. During the second quarter, the Company issued $500,000,000 of commercial paper which was outstanding at November 30, 1999. Interest rates on these borrowings approximate 6.6%. The commercial paper is reflected in Long-Term Debt based on the Company's ability and intent to refinance this instrument with long-term debt. The Company has a $1,000,000,000 revolving credit agreement with domestic and foreign banks. The revolving credit agreement comprises two parts. The first part provides for a commitment of $800,000,000 through January 27, 2003. The second part provides for a 364-day commitment of $200,000,000. This portion of the agreement, originally set to expire on January 14, 2000, was amended October 15, 1999 to expire October 13, 2000. Interest rates on borrowings under this agreement are generally determined by maturities selected and prevailing market conditions. Commercial paper borrowings, which are backed by unused - 8 - <PAGE> FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (4) FINANCING ARRANGEMENTS (CONTINUED) commitments under this revolving credit agreement, and the short-term borrowings under the credit agreement described above reduce the amount available under the revolving credit agreement. At November 30, 1999, $300,000,000 of the commitment amount was available. (5) COMPUTATION OF EARNINGS PER SHARE The calculation of basic and diluted earnings per share for the three and six-month periods ended November 30, 1999 and 1998 was as follows (in thousands, except per share amounts): <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------------ ---------------------- 1999 1998 1999 1998 --------- --------- -------- --------- <S> <C> <C> <C> <C> Net income applicable to common stockholders.................................. $171,183 $182,756 $330,217 $332,135 ======== ======== ======== ======== Average shares of common stock outstanding................................... 293,415 295,107 295,793 294,987 ======== ======== ======== ======== Basic earnings per share......................... $ .58 $ .62 $ 1.12 $ 1.13 ======== ======== ======== ======== Average shares of common stock outstanding................................... 293,415 295,107 295,793 294,987 Common equivalent shares: Assumed exercise of outstanding dilutive options............................. 12,906 10,749 13,056 11,733 Less shares repurchased from proceeds of assumed exercise of options................................... (8,240) (8,004) (7,888) (8,423) -------- -------- -------- -------- Average common and common equivalent shares............................. 298,081 297,852 300,961 298,297 ======== ======== ======== ======== Earnings per share, assuming dilution............................. $ .57 $ .61 $ 1.10 $ 1.11 ======== ======== ======== ======== </TABLE> In September 1999, the Company's Board of Directors approved a plan that authorized the purchase of up to 15,000,000, or approximately five percent, of the Company's outstanding shares of common stock. As of November 30, 1999, the Company had acquired 8,856,500 shares under the plan at an average cost of $40.56 per share and reissued 181,184 of these shares to fund employee benefits. The remaining shares (8,675,316) are being held in treasury for general corporate purposes. - 9 - <PAGE> FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (6) BUSINESS SEGMENT INFORMATION FDX is a global transportation and logistics provider whose operations are primarily represented by FedEx, the world's largest express transportation company, and RPS, a business-to-business ground small-package carrier. These operating companies comprise the Company's reportable segments. Other operating companies included in the FDX portfolio are Viking Freight, Inc., a less-than-truckload carrier operating principally in the western United States; Roberts Express, Inc., a critical-shipment carrier; and FDX Logistics, Inc., a contract logistics provider. Amounts included in Other in the following table also include certain unallocated corporate items. The following table provides a reconciliation of reportable segment revenues and operating income to the Company's consolidated financial statement totals (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------------------- ---------------------- 1999 1998 1999 1998 --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenue FedEx.................................... $3,736,027 $3,482,236 $7,322,833 $6,899,419 RPS...................................... 521,062 480,836 996,958 921,417 Other.................................... 313,015 246,165 570,290 470,703 ---------- ---------- ---------- ---------- $4,570,104 $4,209,237 $8,890,081 $8,291,539 ========== ========== ========== ========== Operating income FedEx.................................... $ 211,216 $ 250,939 $ 420,159 $ 470,011 RPS...................................... 65,637 61,236 116,150 109,819 Other.................................... 27,682 24,812 52,033 41,000 ---------- ---------- ---------- --------- $ 304,535 $ 336,987 $ 588,342 $ 620,830 ========== ========== ========== ========== </TABLE> (7) COMMITMENTS As of November 30, 1999, the Company's purchase commitments for the remainder of 2000 and annually thereafter under various contracts are as follows (in thousands): <TABLE> <CAPTION> Aircraft- Aircraft Related(1) Other(2) Total -------- ---------- ---------- -------- <S> <C> <C> <C> <C> 2000 (remainder) $ 11,500 $158,500 $309,000 $479,000 2001 245,800 324,200 97,500 667,500 2002 242,800 337,500 11,400 591,700 2003 439,600 461,300 7,600 908,500 2004 235,200 188,500 7,600 431,300 </TABLE> (1) Primarily aircraft modifications, rotables, spare parts and spare engines. (2) Primarily vehicles, facilities, computers and other equipment. FedEx is committed to purchase three DC10s, 30 MD11s and 75 Ayres ALM 200s to be delivered through 2007. Deposits and progress payments of $5,717,000 have been made toward these purchases. FedEx has entered into agreements with two airlines to acquire 53 DC10 aircraft (44 of which had been received as of November 30, 1999), spare parts, aircraft engines and other equipment, and maintenance services in exchange for a combination of aircraft engine noise reduction kits and cash. Delivery of these aircraft began in 1997 and will continue through 2001. Additionally, these - 10 - <PAGE> FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (7) COMMITMENTS (CONTINUED) airlines may exercise put options through December 31, 2003, requiring FedEx to purchase up to 22 additional DC10s along with additional aircraft engines and equipment. During the six-month period ended November 30, 1999, FedEx acquired five A300s and one MD11 under operating leases. These aircraft were included as purchase commitments as of May 31, 1999. At the time of delivery, FedEx sold its rights to purchase these aircraft to third parties who reimbursed FedEx for its deposits on the aircraft and paid additional consideration. FedEx then entered into operating leases with each of the third parties who purchased the aircraft from the manufacturer. Lease commitments added since May 31, 1999 for the five A300s and one MD11 are as follows (in thousands): <TABLE> <S> <C> 2000 $ 17,700 2001 33,800 2002 32,500 2003 32,900 2004 34,600 Thereafter 740,400 </TABLE> (8) LEGAL PROCEEDINGS There were two separate class-action lawsuits against FedEx generally alleging that FedEx breached its contract with the plaintiffs in transporting packages shipped by them. These lawsuits alleged that FedEx continued to collect a 6.25% federal excise tax on the transportation of property shipped by air after the excise tax expired on December 31, 1995, until it was reinstated in August of 1996. The plaintiffs sought certification as a class action, damages, an injunction to enjoin FedEx from continuing to collect the excise tax referred to above, and an award of attorneys' fees and costs. One case was filed in Circuit Court of Greene County, Alabama. On October 6, 1999, the Greene County Circuit Court dismissed all claims against FedEx by entering summary judgment. Time for appeal has expired and this decision is final. The other case, which was filed in the Supreme Court of New York, New York County, and contained allegations and requests for relief substantially similar to the Alabama case, was dismissed with prejudice on FedEx's motion on October 7, 1997. The court found that there was no breach of contract and that the other causes of action were preempted by federal law. The plaintiffs appealed the dismissal. This case originally alleged that FedEx continued to collect the excise tax on the transportation of property shipped by air after the tax expired on December 31, 1996. The New York complaint was later amended to cover the first expiration period of the tax (December 31, 1995 through August 27, 1996) covered in the original Alabama complaint. The dismissal was affirmed by the appellate court on March 2, 1999. On December 20, 1999, the highest appellate court in New York denied the plaintiffs' request to appeal the dismissal of the excise tax class action. The plaintiffs may ask for re-argument within thirty days, but the Company believes it is very unlikely any such request would be granted. The air transportation excise tax expired on December 31, 1995, was reenacted by Congress effective August 27, 1996, and expired again on December 31, 1996. The excise tax was then reenacted by Congress effective March 7, 1997. The expiration of the tax relieved FedEx of its obligation to pay the tax during the periods of expiration. The Taxpayer Relief Act of 1997, signed by President Clinton in August 1997, extended the tax for ten years through September 30, 2007. - 11 - <PAGE> FDX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (8) LEGAL PROCEEDINGS (CONTINUED) In the opinion of management, the aggregate liability, if any, with respect to the above mentioned suits and any other claims arising in the normal course of business will not materially adversely affect the financial position or results of operations of the Company. - 12 - <PAGE> REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BY INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP, independent public accountants, has performed a review of the condensed consolidated balance sheet of the Company as of November 30, 1999, and the related condensed consolidated statements of income for the three and six-month periods ended November 30, 1999 and 1998 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 1999 and 1998, included herein, as indicated in their report thereon included on page 14. - 13 - <PAGE> REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of FDX Corporation: We have reviewed the accompanying condensed consolidated balance sheet of FDX Corporation and subsidiaries as of November 30, 1999 and the related condensed consolidated statements of income for the three and six-month periods ended November 30, 1999 and 1998 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 1999 and 1998. 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. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of FDX Corporation and subsidiaries as of May 31, 1999 and the related consolidated statements of income, changes in stockholders' investment and comprehensive income and cash flows for the year then ended. In our report dated June 29, 1999, we expressed an unqualified opinion on those financial statements, which are not presented herein. In our opinion, the accompanying condensed consolidated balance sheet of FDX Corporation and subsidiaries as of May 31, 1999, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Arthur Andersen LLP ----------------------- Arthur Andersen LLP Memphis, Tennessee December 15, 1999 - 14 - <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Consolidated results Operating results for the second quarter ended November 30, 1999 continue to reflect higher fuel prices and lower than expected volume growth in U.S. domestic markets at Federal Express Corporation ("FedEx"), the Company's largest business segment. Strong package volume growth in certain international markets contributed positively to earnings for the second quarter and year-to-date periods. Higher fuel costs and recent trends in domestic and international package volume growth are expected to continue for the remainder of 2000. Cost controls to restrain short-term spending combined with productivity enhancements have been implemented in light of lower volume growth. Also, the FedEx sales force is being realigned to include a greater emphasis on small and medium-sized customers and to target growth in higher-yielding packages. Management believes these changes in tandem with other actions currently under consideration will improve the long-term growth of the Company's share of the express package market, which has eroded slightly in the current fiscal year. Certain capital spending projects are also being delayed; however, the Company plans to continue to make strategic capital investments in support of its long-term growth goals. Increased fuel prices negatively affected second quarter operating income by $55 million and year-to-date operating income by $82 million compared to the comparable periods in the prior year. In order to offset most of the effects of substantially higher fuel costs during the second half of the fiscal year, FedEx announced on December 30, 1999 that it would impose a fuel surcharge of 3% on most FedEx U.S. domestic and international services effective February 1, 2000. The surcharge will apply to all shipments tendered within the United States and all U.S. export shipments, where legally and contractually possible. The Company has also entered into contracts designed to limit the Company's exposure to further increases in fuel prices. Other income and expense declined in the second quarter as a slight increase in interest expense was more than offset by gains on the sales of equipment. The effective tax rate was 39.5% for both the second quarter and first half of 2000 versus 41.5% in the comparable prior year periods, reflecting stronger results from international operations. Actual results for the remainder of 2000 may vary depending upon many factors such as economic growth rates, rates of volume growth in the U.S. domestic markets at both of the Company's principal business segments, the actions of competitors, the spot prices of aviation and diesel fuel (which have continued to increase in the early part of the Company's third quarter), the extent to which the Company enters into additional contracts designed to limit its exposure to fluctuations in jet fuel prices, the amount and duration of the fuel surcharge and any other pricing actions and the impact those actions may have on demand for the Company's services. - 15 - <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FEDERAL EXPRESS CORPORATION The following table compares revenues and operating income (in millions) and selected statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- Three Months Ended Percent Six Months Ended Percent 1999 1998 Change 1999 1998 Change ---- ---- ------ ----- ------ ------ <S> <C> <C> <C> <C> <C> <C> Revenues: Package: U.S. overnight $1,844 $1,777 + 4 $3,677 $3,556 + 3 U.S. deferred 588 558 + 5 1,147 1,102 + 4 International Priority (IP) 881 762 +15 1,699 1,487 +14 ------ ------ ------ ------ Total package revenue 3,313 3,097 + 7 6,523 6,145 + 6 Freight: U.S. 144 107 +35 274 207 +32 International 127 139 - 9 253 272 - 7 ------ ------ ------ ------ Total freight revenue 271 246 +10 527 479 +10 Other 152 139 +10 273 275 - ------ ------ ------ ------ Total revenues $3,736 $3,482 + 7 $7,323 $6,899 + 6 ====== ====== ====== ====== Operating income $ 211 $ 251 -16 $ 420 $ 470 -11 ====== ====== ====== ====== Package statistics: Average daily packages: U.S. overnight 2,011 1,954 + 3 1,981 1,916 + 4 U.S. deferred 913 895 + 2 876 864 + 1 IP 323 285 +13 310 275 +13 ------ ------ ------ ------ Composite 3,247 3,134 + 4 3,167 3,055 + 4 Revenue per package (yield): U.S. overnight $14.56 $14.44 + 1 $14.50 $14.38 + 1 U.S. deferred 10.22 9.89 + 3 10.24 9.89 + 4 IP 43.31 42.45 + 2 42.88 41.96 + 2 Composite 16.20 15.69 + 3 16.09 15.59 + 3 Freight statistics: Average daily pounds: U.S. 5,072 4,480 +13 4,810 4,199 +15 International 2,574 2,719 - 5 2,539 2,669 - 5 ------ ------ ------ ------ Composite 7,646 7,199 + 6 7,349 6,868 + 7 Revenue per pound (yield): U.S. $ .45 $ .38 +18 $ .45 $ .38 +18 International .78 .81 - 4 .78 .79 - 1 Composite .56 .54 + 4 .56 .54 + 4 ============================================================================================================= </TABLE> - 16 - <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FEDERAL EXPRESS CORPORATION (CONTINUED) Revenues While total revenue increased at FedEx by 7% in the second quarter and 6% for the first half of the year, growth rates in U.S. domestic overnight package volume continued to lag behind the levels that management expected. However, strong revenue growth in high-yielding IP services, especially in Asia and Europe, continued in the second quarter and is expected to remain at current levels for the remainder of the fiscal year. U.S deferred package revenue growth was near management expectations for the quarter and the year-to-date periods as management continues to restrict the growth of these lower-yielding services. List price increases, including an average 2.8% domestic rate increase in March 1999 and FedEx's ongoing yield-management program also contributed to the slight increase in yields in the current quarter. In order to stimulate U.S. domestic revenue growth in higher-yielding package products, FedEx is realigning its sales force. The changes will include a greater emphasis on small and medium-sized customers and modifications to the sales incentive program to target higher-yielding packages. Actual results, however, may vary depending on a number of factors, including the impact of competitive pricing changes, customer responses to yield-management initiatives and the fuel surcharge, changing customer demand patterns, actions by FedEx's competitors, regulatory conditions for aviation rights and economic conditions. Total freight revenue also continued to increase in the current quarter and for the year-to-date period due to higher average daily pounds and yields in U.S. freight, offset by declines in international freight pounds and yields. Other revenue included charter services, sales of engine noise reduction kits, Canadian domestic revenue, logistics services and other. Operating Income Operating income declined in the second quarter and year-to-date periods due to higher fuel costs and lower than expected growth in U.S. package services. Fuel expenses increased 44% and 34% for the quarter and year-to-date periods, respectively. For the quarter, average cost per gallon for aircraft fuel increased 38% and gallons consumed increased 8%. Year to date, average cost per gallon increased 29% and gallons consumed increased 7%. The Company has entered into contracts designed to limit its exposure to jet fuel price fluctuations. As of early January 2000, contracts in place to fix the price of jet fuel cover a small percentage of the estimated gallons of usage for the third quarter of 2000 and approximately 40% of the estimated usage for the fourth quarter of 2000. Through early January 2000, contracts covering 2001 fix the price of approximately one-third of the estimated requirements for jet fuel. In order to offset most of the effects of substantially higher fuel costs during the second half of the fiscal year, FedEx announced on December 30, 1999 that it would impose a fuel surcharge of 3% on most FedEx U.S. domestic and international services effective February 1, 2000. The surcharge will apply to all shipments tendered within the United States and all U.S. export shipments, where legally and contractually possible. Also, FedEx continues to execute cost containment and productivity enhancement programs which management believes could reduce anticipated second half 2000 operating expenses by up to $75 million. These cost reductions are expected to be achieved by lowering discretionary spending and limiting staffing additions, but will not affect plans for strategic spending in support of long-term growth goals. The actual impact of the fuel surcharge and management's cost containment plans on operating income will depend on a number of factors such as the impact of competitive pricing changes, customer responses - 17 - <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FEDERAL EXPRESS CORPORATION (CONTINUED) to yield-management initiatives, changing customer demand patterns, actions by FedEx's competitors and general economic conditions. Rentals and landing fees increased due to an increase in aircraft and facilities leases entered into based on planned volume growth. Aircraft lease expense for the quarter and year-to-date periods rose 16% and 15%, respectively. As of November 30, 1999, FedEx had 102 wide-bodied aircraft under operating lease compared with 93 as of November 30, 1998. Management expects year-over-year increases in lease expense to continue if the Company enters into additional aircraft rental agreements during 2000 and thereafter. Maintenance and repairs increased 18% in the second quarter and 11% year to date compared to the prior year periods. Given FedEx's increasing fleet size and age and variety of aircraft types, management believes that maintenance and repairs expense will continue to increase for the remainder of 2000. In part, this higher expense will likely be attributed to scheduled maintenance and repairs expense and a greater number of routine cycle checks resulting from fleet usage and certain Federal Aviation Administration directives. Salaries and employee benefits increased only 6% in the second quarter and 5% for the year-to-date period as higher costs in connection with the agreement with the Fedex Pilots Association that became effective May 31, 1999 were offset by improved productivity and lower provisions for incentive compensation. Contributions from the sales of engine noise reduction kits declined $14 million for the quarter and $28 million year to date. Management expects similar declines for each of the remaining quarters of the year. RPS, INC. The following table compares revenues and operating income (in millions) and selected package statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------- Three Months Ended Percent Six Months Ended Percent 1999 1998 Change 1999 1998 Change ---- ---- ------ ---- ----- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $521 $481 + 8 $997 $922 + 8 - -------------------------------------------------------------------------------------------------------------- Operating income $ 66 $ 61 + 7 $116 $110 + 6 - -------------------------------------------------------------------------------------------------------------- Average daily packages 1,541 1,464 + 5 1,453 1,386 + 5 Revenue per package (yield) $ 5.45 $ 5.30 + 3 $ 5.49 $ 5.28 + 4 ============================================================================================================== </TABLE> Revenues RPS revenues grew 8% for both the quarter and the first half of the year reflecting yield increases and higher average daily packages. Yields were positively impacted by a rate increase of 2.3% in February 1999 and a better mix of higher-yielding packages. Weather conditions in the eastern United States during the second quarter negatively affected package volume. RPS continues to expand capacity in order to accommodate volume growth, while maintaining or improving yields. RPS recently opened two additional hub facilities and will continue to expand package processing capacity to - 18 - <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) RPS, INC. (CONTINUED) meet its aggressive growth plans. Actual results will depend on the impact of competitive pricing changes, customer responses to yield-management initiatives and changing customer demand patterns. Operating Income Operating income for the quarter and the first half of the year reflect higher operating costs during periods of investment in capacity expansion and technology. The effects of these higher costs were partially mitigated by improved yield, effective cost controls and lower provisions for incentive compensation. Depreciation expense increased 18% for the second quarter and first half periods as new terminal facilities were opened late in 1999 and throughout the first half of 2000. In the first quarter of 2000, RPS began testing new delivery services to residential areas. To date, the tests have been favorable and the Company currently expects to offer the new services by the spring of calendar 2000 to approximately 50% of the U. S. population. Year-to-date costs associated with this test have been minimal, but will accelerate as the test progresses. If the services are implemented there will be additional start-up and capital costs associated with the implementation. The actual results of these new services, if they are ultimately offered, will depend upon a number of factors such as consumer demand for and satisfaction with the RPS product, the service coverage and brand awareness of the RPS product, competitive pricing, the extent of the Company's ability to penetrate the business-to-consumer electronic commerce market and the ability to attract and retain qualified contractors for the delivery network. OTHER OPERATIONS Other operations include Viking Freight, Inc. ("Viking"), a regional less than truckload freight carrier operating in the western United States; Roberts Express, Inc. ("Roberts"), a critical shipment carrier; FDX Logistics, Inc. ("Logistics"), a contract logistics provider; and certain unallocated corporate items. Other operations also include the results of Caribbean Transportation Services, Inc. from the time of its acquisition by Logistics in September, 1999. Revenue and operating income from other operations increased 27% and 12% for the quarter and 21% and 27% year to date compared to the prior year periods. The increase in revenue is due to substantially higher revenues at Roberts and Logistics, combined with double-digit revenue growth at Viking. The increase in operating income is due to strong earnings at Roberts and Viking, offset by the results at Logistics. Viking posted an operating margin of 10.8% for the second quarter and 10.4% for the year-to-date period. FINANCIAL CONDITION Liquidity Cash and cash equivalents totaled $518 million at November 30, 1999. Management believes that cash flow from operations, the Company's commercial paper program, the revolving bank credit facility and other borrowing arrangements will adequately meet the Company's working capital and stock repurchase program needs for the foreseeable future. On September 27, 1999, the Company's Board of Directors approved a plan that authorizes the purchase of up to 15 million, or approximately 5%, of the Company's outstanding shares of common stock. Through November 30, 1999, the - 19 - <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FINANCIAL CONDITION (CONTINUED) Company had acquired 8,856,500 shares under the plan at an average cost of $40.56 per share and reissued 181,184 shares to fund employee benefits. The purchase of these treasury shares was funded principally through the issuance of commercial paper. Shares held in treasury will be used for general corporate purposes. Capital Resources The Company's operations are capital intensive, characterized by significant investments in aircraft, vehicles, computer and telecommunications equipment, package handling facilities and sort equipment. The amount and timing of capital additions depend on various factors including volume growth, domestic and international economic conditions, new or enhanced services, geographical expansion of services, competition, availability of satisfactory financing and actions of regulatory authorities. Capital expenditures for the first six months of 2000 totaled $839 million and included aircraft, aircraft modifications, vehicles and ground support equipment, customer automation and computer equipment and facilities. In 1999 expenditures primarily included one MD11, aircraft modifications, vehicles and ground support equipment and customer automation and computer equipment. As a result of lower than expected U.S. domestic volume growth at FedEx, the Company has reduced planned capital expenditures for 2000 by $200 million. For information on the Company's purchase commitments, see Note 7 of Notes to Condensed Consolidated Financial Statements. Management believes that the capital resources available to the Company provide flexibility to access the most efficient markets for financing its capital acquisitions, including aircraft, and are adequate for the Company's future capital needs. Market Risk Sensitive Instruments and Positions There have been no material changes in the Company's market risk sensitive instruments and positions since its disclosure in its Annual Report on Form 10-K for the year ended May 31, 1999. Euro Currency Conversion On January 1, 1999, 11 of the 15 member countries of the European Union fixed conversion rates between their existing sovereign currencies ("legacy currencies") and a single currency called the euro. On January 4, 1999, the euro began trading on currency exchanges and became available for non-cash transactions. The legacy currencies will remain legal tender through December 31, 2001. Beginning January 1, 2002, euro-denominated bills and coins will be introduced, and by July 1, 2002, legacy currencies will no longer be legal tender. The Company established euro task forces to develop and implement euro conversion plans. The work of the task forces in preparing for the introduction of the euro and the phasing out of the various legacy currencies includes numerous facets such as converting information technology systems, adapting billing and payment systems and modifying processes for preparing financial reports and records. Since January 1, 1999, the Company's subsidiaries have been able to quote rates to customers, generate billings and accept payments, in both euro and legacy currencies. Based on the work of the Company's euro task forces to date, the Company believes that the introduction of the euro, any price transparency - 20 - <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) FINANCIAL CONDITION (CONTINUED) brought about by its introduction and the phasing out of the legacy currencies will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Costs associated with the euro project are being expensed as incurred and are being funded entirely by internal cash flows. YEAR 2000 COMPLIANCE Introduction The Company's operating subsidiaries rely heavily on sophisticated information technology ("IT") for their business operations. For example, FedEx maintains electronic connections with approximately two million customers via its proprietary products and technologies. The Company's Year 2000 ("Y2K") computer compliance issues were, therefore, broad and complex. The FedEx Y2K Project Office, which was established in 1996, coordinates and supports FedEx's continuing Y2K compliance effort. The Company also used a major international consulting firm to assist its subsidiaries in their Y2K program management. The Company's Y2K compliance efforts focused on business-critical areas including its IT systems, non-IT systems and interfaces with third parties. Hardware, software, systems, technologies and applications were considered "business-critical" if a failure either would have had a material adverse impact on the Company's business, financial condition or results of operations or would have involved a safety risk to employees or customers. In the Company's previous filings with the Securities and Exchange Commission on Form 10-Q and 10-K, extensive descriptions and definitions of business-critical items were presented. State of Readiness Nothing has come to the Company's attention which would cause it to believe that its Y2K compliance effort was not successful. While the Company will continue to monitor for Y2K related problems, to date no significant Y2K issues have been encountered. Costs to Address Y2K Compliance Since 1996, the Company has incurred approximately $108 million on Y2K compliance ($15 million in the first half of 2000), which includes internal and external software/hardware analysis, repair, vendor and supplier assessments, risk mitigation planning, and related costs. The Company currently expects that it will incur additional total costs of approximately $12 million on Y2K matters, including depreciation of $6 million. Remaining Y2K expenditures will include project management of the corporate contingency effort and the command and control center, further system audit and validation, and project management to ensure compliance of new systems development. The Company classifies costs as Y2K for reporting purposes if they remedy only Y2K risks or result in the formulation of contingency plans and would otherwise be unnecessary in the normal course of business. The Company's Y2K compliance effort is being funded entirely by internal cash flows. For the fiscal year ending May 31, 2000, Y2K expenditures are expected to be less than 10% of the Company's total IT expense budget. Although there are opportunity costs to the Company's Y2K compliance effort, management believes that no significant information technology projects have been deferred due to this work. Contingency Planning and Risks FedEx's key contingency plans addressed the activities to be performed in preparation for and during a Y2K-related failure that could have an immediate and - 21 - <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) YEAR 2000 COMPLIANCE (CONTINUED) significant impact on normal operations. Possible failures were identified and contingency plans were formulated. These plans included items such as alternative operating locations, alternative procedures for mission critical functions and procedures for company-wide communications. These are in addition to the Company's operational contingency plans for the pick-up, delivery and movement of packages. FedEx created a Y2K contingency command and control center that links to its other operations command and control centers. Key command and control personnel were on site commencing December 31, 1999. Other contingency plans for FedEx and the Company's other operating subsidiaries, including those covering vendor and supplier issues, continue to be in place to minimize Y2K-related risks including those that vendors and suppliers might pose if they are behind in their own Y2K efforts. * * * STATEMENTS IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" OR MADE BY MANAGEMENT OF THE COMPANY THAT CONTAIN MORE THAN HISTORICAL INFORMATION MAY BE CONSIDERED FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995), WHICH ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS BECAUSE OF IMPORTANT FACTORS IDENTIFIED IN THIS SECTION. - 22 - <PAGE> PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Note 8 Legal Proceedings in Part I is hereby incorporated by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. <TABLE> <CAPTION> Exhibit Number Description of Exhibit -------- ----------------------- <S> <C> 3.1 Amended and Restated Certificate of Incorporation of FDX Corporation, as amended. 10.1 Extension Agreement dated as of October 15, 1999 to Credit Agreement dated as of December 10, 1998 among the Company and First National Bank of Chicago, individually and as agent, and certain lenders. 12.1 Computation of Ratio of Earnings to Fixed Charges. 15.1 Letter re Unaudited Interim Financial Statements. 27 Financial Data Schedule (electronic filing only). </TABLE> (b) Reports on Form 8-K. During the quarter ended November 30, 1999, the Registrant filed one Current Report on Form 8-K dated September 27, 1999. The report was filed under Item 5, Other Events, and Item 7, Financial Statements and Exhibits, and contained a press release announcing the authorization of the repurchase of up to 15 million shares of the Company's common stock. - 23 - <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. FDX CORPORATION (Registrant) Date: January 12, 2000 /S/ JAMES S. HUDSON ------------------------------------------- JAMES S. HUDSON CORPORATE VICE PRESIDENT STRATEGIC FINANCIAL PLANNING & CONTROL (PRINCIPAL ACCOUNTING OFFICER) - 24 - <PAGE> EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description of Exhibit - ------- ---------------------- <S> <C> 3.1 Amended and Restated Certificate of Incorporation of FDX Corporation, as amended. 10.1 Extension Agreement dated as of October 15, 1999 to Credit Agreement dated as of December 10, 1998 among the Company and First National Bank of Chicago, individually and as agent, and certain lenders. 12.1 Computation of Ratio of Earnings to Fixed Charges. 15.1 Letter re Unaudited Interim Financial Statements. 27 Financial Data Schedule (electronic filing only). </TABLE> E-1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.1 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 3.1 <TEXT> <PAGE> Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION of FDX CORPORATION FDX Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies that the Corporation was originally incorporated under the name "Fast Holding Inc." on October 2, 1997, and that its original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on the same date. The Corporation further certifies that this Amended and Restated Certificate of Incorporation amends, integrates and restates the provisions previously filed with the Secretary of State of the State of Delaware. ARTICLE FIRST: The name of the corporation is FDX CORPORATION. ARTICLE SECOND: The address of its registered office in the State of Delaware is Corporation Service Company, 1013 Centre Road, City of Wilmington, County of New Castle, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. ARTICLE THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 404,000,000 shares consisting of 4,000,000 shares of Series Preferred Stock, no par value (herein called the "Series Preferred Stock"), and 400,000,000 shares of Common Stock, par value $0.10 per share (herein called the "Common Stock"). The following is a statement of the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of stock of the Corporation: I. SERIES PREFERRED STOCK 1. CONDITIONS OF ISSUANCE. Series Preferred Stock may be issued from time to time and in such amounts and for such consideration as may be determined by the Board of Directors of the Corporation. The designation and relative rights and preferences of each series, except to the extent such designations and relative rights and preferences may be required by Delaware law or this Amended and Restated Certificate of Incorporation, shall be such as are fixed by the Board of Directors and stated in a resolution or resolutions adopted by the Board of Directors authorizing such series (herein called the "Series Resolution"). A Series Resolution authorizing any series shall fix: A. The designation of the series, which may be by distinguishing number, letter or title; B. The number of shares of such series; C. The divided rate or rates of such shares, the date at which dividends, if declared, shall be payable, and whether or not such dividends are to be cumulative, in which case such Series Resolution shall state the date or dates from which dividends shall be cumulative; <PAGE> D. The amounts payable on shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up; E. The redemption rights and price or prices, if any, for the shares of such series; F. The terms and amount of any sinking fund or analogous fund providing for the purchase or redemption of the shares of such series, if any; G. The voting rights, if any, granted to the holders of the shares of such series in addition to those required by Delaware law or this Amended and Restated Certificate of Incorporation; H. Whether the shares of such series shall be convertible into shares of the Corporation's Common Stock or any other class of the Corporation's capital stock, and if convertible, the conversion price or prices, any adjustment thereof and any other terms and conditions upon which such conversion shall be made; I. Any other rights, preferences, restrictions or conditions relative to the shares of such series astray be permitted by Delaware law or this Amended and Restated Certificate of Incorporation. 2. RESTRICTIONS. In no event, so long as any Series Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, Common Stock, other than a dividend or distribution payable in shares of such Common Stock, nor (without the written consent of such number of the holders of the outstanding Series Preferred Stock as shall have been specified in the Series Resolution authorizing the issuance of such outstanding Series Preferred Stock) shall any shares of Common Stock be purchased or redeemed by the Corporation, nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any Common Stock, unless in each instance full dividends on all outstanding shares of the Series Preferred Stock for all past dividend periods shall have been paid and the full dividend on all outstanding shares of the Series Preferred Stock for the current dividend period shall have been paid or declared and sufficient funds for the payment thereof set apart and any arrears in the mandatory redemption of the Series Preferred Stock shall have been made good. 3. PRIORITY. Series Preferred Stock, with respect to both dividends and distribution of assets on liquidation, dissolution or winding up, shall rank prior to the Common Stock. 4. VOTING RIGHTS. Holders of Series Preferred Stock shall have no right to vote for the election of Directors of the Corporation or on any other matter unless a vote of such class is required by Delaware law, this Amended and Restated Certificate of Incorporation or a Series Resolution. 5. FILING OF AMENDMENTS. The Board of Directors shall adopt amendments to this Amended and Restated Certificate of Incorporation fixing, with respect to each series of Series Preferred Stock, the matters described in paragraph 1 of this Subdivision I. II. COMMON STOCK All shares of Common Stock shall be identical and shall entitle the holders thereof to the same rights and privileges. 1. DIVIDENDS. When and as dividends are declared upon the Common Stock, whether payable in cash, in property or in shares of stock of the Corporation, the holders of Common Stock shall be entitled to share equally, share for share, in such dividends. 2 <PAGE> 2. VOTING RIGHTS. The holders of Common Stock shall have the sole right to vote for the election of Directors of the Corporation or on any other matter unless required by Delaware law, this Amended and Restated Certificate of Incorporation or a Series Resolution. The holders of Common Stock shall be entitled to one vote for each share held. III. OTHER PROVISIONS 1. No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any pre-emptive right to purchase or subscribe for any unissued stock of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any right to purchase stock of any class or series, but any such unissued stock, additional authorized issue of shares of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, whether such holders or others, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. 2. Shares of Common Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. ARTICLE FIFTH: Certain Business Combinations 1. HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS. In addition to any affirmative vote of holders of a class or series of capital stock of the Corporation required by law or this Amended and Restated Certificate of Incorporation, and except as otherwise expressly provided in paragraph 2 of this ARTICLE FIFTH, a Business Combination (as hereinafter defined) with or upon a proposal by a Related Person (as hereinafter defined) shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors (the "Voting Stock"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. 2. WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of paragraph 1 of this ARTICLE FIFTH shall not be applicable to a particular Business Combination and such Business Combination shall require only such affirmative vote as is required by law and other provisions of this Amended and Restated Certificate of Incorporation, if all of the conditions specified in either of the following paragraphs (A) or (B) are met: (A) Approval by Directors. The Business Combination has been approved by a majority of the Continuing Directors (as hereinafter defined). (B) Price and Procedure Conditions. All of the following conditions shall have been met: (1) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealer's fees) paid by the Related Person for any shares of Common Stock acquired by it (a) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (b) in the transaction in which it became a Related Person, whichever is higher; or 3 <PAGE> (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Related Person became a Related Person (such latter date is referred to in this ARTICLE FIFTH as the "Determination Date"), whichever is higher; or (2) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Shares of any other class or series of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this-paragraph 2(B)(2) shall be required to be met with respect to every class of outstanding Voting Stock whether or not the Related Person has previously acquired any shares of a particular class of Voting Stock): (i) (if applicable) the highest per share price (including any broker commissions, transfer taxes and soliciting dealers' fees), paid by the Related Person for any shares of such class or series of Voting Stock acquired by it (a) within the two-year period immediately prior to the Announcement Date or (b) in the transaction in which it became a Related Person, whichever is higher; (ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (iii) the Fair Market Value per share of such class or series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (3) The consideration to be received by holders of a particular class or series of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Related Person has previously paid for shares of such class of Voting Stock. If the Related Person has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration given for such class or series of Voting Stock in the Business Combination shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it. (4) No Extraordinary Event (as hereinafter defined) shall have occurred after the Related Person became a Related Person and prior to the consummation of the Business Combination. (5) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) is mailed to public stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required pursuant to such Act or subsequent provisions). 3. CERTAIN DEFINITIONS. For purposes of this ARTICLE FIFTH: (A) A "person" shall mean any individual, firm, corporation or other entity. (B) The term "Business Combination" shall mean any of the following transactions, when entered into by the Corporation or a subsidiary of the Corporation with, or upon a proposal by, a Related Person or any other corporation (whether or not itself a Related Person which is, or after such transaction would be, an Affiliate (as hereinafter defined) of a Related Person: 4 <PAGE> (1) the merger or consolidation of the Corporation or any subsidiary of the Corporation; or (2) the sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one or a series of transactions) of any assets of the Corporation or any subsidiary of the Corporation having an aggregate Fair Market Value of $5,000,000 or more; (3) the issuance or transfer by the Corporation or any subsidiary of the Corporation (in one or a series of transactions) of securities of the Corporation or that subsidiary having an aggregate Fair Market Value of $5,000,000 or more; or (4) the adoption of a plan or proposal for the liquidation or dissolution of the Corporation; or (5) the reclassification of securities (including a reverse stock split), recapitalization, consolidation or any other transaction (whether or not involving a Related Person) which has the direct or indirect effect of increasing the voting power, whether or not then exercisable, of a Related Person in any class or series of capital stock of the Corporation or any subsidiary of the Corporation; or (6) any agreement, contract or other arrangement providing directly or indirectly for the foregoing. (C) The term "Related Person" shall mean any person (other than the Corporation, a subsidiary of the Corporation or any profit sharing, employee stock ownership or other employee benefit plan of the Corporation or a subsidiary of the Corporation or any trustee of or fiduciary with respect to any such plan acting in such capacity) which: (1) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock, or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or (3) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Related Person, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (D) A person shall be a "beneficial owner" of any Voting Stock: (1) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (2) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or (3) which are beneficially owned, directly or indirectly by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. 5 <PAGE> For the purposes of determining whether a person is a Related Person pursuant to subparagraph (C) of this paragraph 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subparagraph (D) of this paragraph 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (E) The term "Continuing Director" shall mean any member of the Board of Directors who is not affiliated with a Related Person and who was a member of the Board of Directors immediately prior to the time that the Related Person became a Related Person, and any successor to a Continuing Director who is not affiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors. (F) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect on August 1, 1984. (G) The term "Extraordinary Event" shall mean, as to any Business Combination and Related Person, any of the following events that is not approved by a majority of the Continuing Directors: (1) any failure to declare and pay at the regular date therefor any full quarterly dividend (whether or not cumulative) on outstanding Preferred or Preference Stock; or (2) any reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock); or (3) any failure to increase the annual rate of dividends paid on the Common Stock as necessary to reflect any reclassification, (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock; or (4) any Related Person shall become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which resulted in such Related Person becoming a Related Person; or (5) the receipt by the Related Person, after such Person has become a Related Person, of a direct or indirect benefit (except proportionately as a shareholder) from any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation or any subsidiary of the Corporation, whether in anticipation of or in connection with the Business Combination or otherwise. (H) "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board of Directors in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board of Directors in good faith. 6 <PAGE> (I) In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in subparagraphs B(1) and (2) of paragraph 2 of this ARTICLE FIFTH shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. 4. POWERS OF THE BOARD OF DIRECTORS. A majority of all Continuing Directors shall have the power to make all determinations with respect to this ARTICLE FIFTH, on the basis of information known to them after reasonable inquiry, including, without limitation, the transactions that are Business Combinations, the persons who are Related Persons, the number of shares of Voting Stock owned by any person, the time at which a Related Person becomes a Related Person and the Fair Market Value of any assets, securities or other property, and any such determinations of such Directors shall be conclusive and binding. 5. NO EFFECT ON FIDUCIARY OBLIGATIONS OF RELATED PERSONS. Nothing contained in this ARTICLE FIFTH shall be construed to relieve any Related Person from any fiduciary obligation imposed by law. 6. AMENDMENT OR REPEAL. The affirmative vote of the holders of not less than 80% of the total voting power of the Voting Stock of the Corporation, voting together as a single class, shall be required in order to amend, repeal or adopt any provision inconsistent with this ARTICLE FIFTH. ARTICLE SIXTH: In addition to any affirmative vote of holders of a class or series of capital stock of the Corporation required by law or this Amended and Restated Certificate of Incorporation, unless the Business Combination (as defined in ARTICLE FIFTH of this Amended and Restated Certificate of Incorporation) has been approved by a majority of the Continuing Directors (as defined in ARTICLE FIFTH of this Amended and Restated Certificate of Incorporation), a Business Combination with or upon a proposal by a Related Person (as defined in ARTICLE FIFTH of this Amended and Restated Certificate of Incorporation) shall require the affirmative vote of the holders of not less than a majority of the Voting Stock (as defined in ARTICLE FIFTH of this Amended and Restated Certificate of Incorporation) beneficially owned by stockholders other than such Related Person. Such affirmative vote shall be required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law or in any agreement with any national securities exchange or otherwise. The affirmative vote of the holders, other than the Related Person proposing the amendment, repeal or adoption of any provision inconsistent with this ARTICLE SIXTH, of not less than a majority of the Voting Stock of the Corporation, voting together as a single class, shall be required in order to amend, repeal or adopt any provision inconsistent with this ARTICLE SIXTH. ARTICLE SEVENTH: The corporation is to have perpetual existence. ARTICLE EIGHTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: The Board of Directors shall have power to make, alter, amend and repeal the By-laws (except so far as the By-laws adopted by the stockholders shall otherwise provide). Any By-laws made by the Directors under the powers conferred hereby may be altered, amended or repealed by the Directors or by the stockholders. Notwithstanding the foregoing and anything contained in this Amended and Restated Certificate of Incorporation to the contrary, Sections 5 and 11 of Article II of the By-laws shall not be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of at least 80% of the voting power of all the shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class, shall be required to alter, amend, adopt any provision inconsistent with or repeal this ARTICLE EIGHTH. 7 <PAGE> To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation. To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. By a majority of the whole Board, to designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The By-laws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in the By-laws of the Corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Amended and Restated Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-laws of the Corporation; and, unless the resolution or By-laws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. When and as authorized by the stockholders in accordance with statute, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of, any other corporation or corporations, as its Board of Directors shall deem expedient and for the best interests of the Corporation. ARTICLE NINTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors and/or of the stockholders/or class stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. ARTICLE TENTH: Meetings of stockholders may be held within or without the State of Delaware, as the By-laws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-laws of the Corporation. Elections of Directors need not be by written ballot unless the By-laws of the Corporation shall so provide. ARTICLE ELEVENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 8 <PAGE> ARTICLE TWELFTH: Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Except as otherwise required by law and subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class, shall be required to alter, amend, adopt any provision inconsistent with or repeal this ARTICLE TWELFTH. ARTICLE THIRTEENTH: No Director shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, provided that this ARTICLE THIRTEENTH shall not eliminate or limit the liability of a Director (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware Code or any amendment or successor provision thereto, or (iv) for any transaction from which the Director derived an improper personal benefit. This ARTICLE THIRTEENTH shall not eliminate or limit the liability of a Director for any act or omission occurring prior to the date when this ARTICLE THIRTEENTH becomes effective. Neither the amendment nor repeal of this ARTICLE THIRTEENTH, nor the adoption of any provision of the Amended and Restated Certificate of Incorporation inconsistent with this ARTICLE THIRTEENTH shall eliminate or reduce the effect of this ARTICLE THIRTEENTH with respect to any matter occurring, or any cause of action, suit or claim that, but for this ARTICLE THIRTEENTH, would accrue or arise prior to such amendment, repeal or adoption of an inconsistent provision. * * * * This Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Section 242 and 245 of the General Corporation Law of the State of Delaware. The Board of Directors of the Corporation approved the Corporation's Amended and Restated Certificate of Incorporation as set forth herein pursuant to a Consent in Lieu of Meeting of the Board of Directors effective as of December 2, 1997. Federal Express Corporation, the holder of all of the outstanding stock of the Corporation, acting by written consent pursuant to Section 228(a) of the General Corporation Law of the State of Delaware, approved the Amended and Restated Certificate of Incorporation as set forth herein as of December 2, 1997. FDX CORPORATION By: /S/GEORGE W. HEARN George Hearn President ATTEST: /S/SCOTT E. HANSEN Scott E. Hansen Vice President and Secretary 9 <PAGE> CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF FDX CORPORATION FDX Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment to the Amended and Restated Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The resolutions setting forth the proposed amendment are as follows: RESOLVED, that an amendment to the Corporation's Amended and Restated Certificate of Incorporation doubling the number of authorized shares of common stock is hereby declared to be advisable and that the officers of the Corporation are hereby directed to submit such amendment to the stockholders of the Corporation for approval at their next annual meeting. FURTHER RESOLVED, that the Amended and Restated Certificate of Incorporation of the Corporation be amended by changing the first sentence of Article Fourth thereof so that, as amended, said first sentence of Article Fourth shall be and read in its entirety as follows: ARTICLE FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 804,000,000 shares consisting of 4,000,000 shares of Series Preferred Stock, no par value (herein called the "Series Preferred Stock"), and 800,000,000 shares of Common Stock, par value $0.10 per share (herein called the "Common Stock"). SECOND: That thereafter, at the annual meeting of stockholders of the Corporation, duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. <PAGE> IN WITNESS WHEREOF, FDX Corporation has caused this Certificate of Amendment to be signed by George W. Hearn, its Corporate Vice President and Corporate Counsel, this 6th day of October, 1999. FDX CORPORATION By: /S/GEORGE W. HEARN -------------------------------------- George W. Hearn Corporate Vice President and Corporate Counsel 11 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 10.1 <TEXT> <PAGE> EXECUTION COPY Exhibit 10.1 EXTENSION AGREEMENT DATED AS OF OCTOBER 15, 1999 THIS EXTENSION AGREEMENT (the "Agreement") is made as of October 15, 1999 by and among FDX Corporation, a Delaware corporation (the "Borrower"), the Lenders and Bank One, NA, having its principal office in Chicago, Illinois and formerly known as The First National Bank of Chicago, in its capacity as agent ("Agent"). Defined terms used herein and not otherwise defined herein shall have the meanings given to them in that certain Credit Agreement dated as of January 15, 1998, as amended, by and among the Borrower, the Lenders, Banc One Capital Markets, Inc., formerly known as First Chicago Capital Markets, Inc., as Arranger, J.P. Morgan Securities Inc., as Co-Arranger and Syndication Agent, Chase Securities Inc., as Co-Arranger and Documentation Agent, and the Agent (as amended, the "Credit Agreement"). WITNESSETH WHEREAS, the Borrower, the Lenders and the Agent are parties to the Credit Agreement; WHEREAS, the Borrower, the Lenders and the Agent have agreed to extend the Tranche B Facility Termination Date on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the Agent agree as follows: 1. EXTENSION OF TRANCHE B FACILITY TERMINATION DATE. Notwithstanding any of the notice requirements of Section 2.19 of the Credit Agreement but otherwise subject to such Section 2.19, each of the Lenders consents to the extension of the Tranche B Facility Termination Date to October 13, 2000, and waives its right under such Section 2.19 to revoke such consent. 2. CONDITIONS OF EFFECTIVENESS. This Agreement shall become effective as of the date set forth above when the Agent shall have received: (i) a counterpart of this Agreement executed by the Borrower, the Agent and each Lender; (ii) a counterpart of the Acknowledgment attached hereto as EXHIBIT A executed by Guarantor; and (iii) such documents evidencing corporate existence, action and authority of the Borrower and the Guarantors as the Agent may reasonably request. 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower represents and warrants that: 1 <PAGE> (a) This Agreement, and the Credit Agreement as previously executed and amended and as amended hereby, constitute legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and subject also to the availability of equitable remedies if equitable remedies are sought. (b) Upon the effectiveness of this Agreement, the Borrower reaffirms all covenants, representations and warranties made in the Credit Agreement. (c) No Default or Unmatured Default has occurred and is continuing. 4. EFFECT ON CREDIT AGREEMENT. (a) Each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended above, the Credit Agreement and all other Loan Documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders, nor constitute a waiver of any provision of the Credit Agreement or any other Loan Documents, instruments and agreements executed and/or delivered in connection therewith. 5. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 6. HEADINGS. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 7. COUNTERPARTS. This Agreement may be executed by one or more of the parties to the Agreement on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 2 <PAGE> IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written. FDX CORPORATION By: /s/Charles M. Buchas, Jr. ---------------------------------------------- Name: Charles M. Buchas, Jr. -------------------------------------------- Title: Corporate Vice President and Treasurer ------------------------------------------- BANK ONE, NA, having its principal office in Chicago, Illinois, as Agent By: /s/Kenneth J. Kramer ---------------------------------------------- Name: Kenneth J. Kramer -------------------------------------------- Title: First Vice President ------------------------------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/Dennis Wilczek ---------------------------------------------- Name: Dennis Wilczek -------------------------------------------- Title: Associate ------------------------------------------- THE CHASE MANHATTAN BANK By: /s/Matthew H. Massie ---------------------------------------------- Name: Matthew H. Massie -------------------------------------------- Title: Managing Director ------------------------------------------- 3 <PAGE> KBC BANK N.Z., GRAND CAYMAN BRANCH By: /s/Robert Snauffer ---------------------------------------------- Name: Robert Snauffer -------------------------------------------- Title: First Vice President ------------------------------------------- By: /s/Raymond F. Murray ---------------------------------------------- Name: Raymond F. Murray -------------------------------------------- Title: First Vice President ------------------------------------------- BANK OF AMERICA, N.A., formerly known as BANK OF AMERICA NATIONAL TRUST ND SAVINGS ASSOCIATION, and successor-by-merger to NATIONSBANK, N.A. By: /s/Sharon Burks Horos ---------------------------------------------- Name: Sharon Burks Horos -------------------------------------------- Title: Vice President ------------------------------------------- BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: /s/Joseph P. Devoe ---------------------------------------------- Name: Joseph P. Devoe -------------------------------------------- Title: Vice President ------------------------------------------- CITICORP USA, INC. By: /s/Arthur Deffaa ---------------------------------------------- Name: Arthur Deffaa -------------------------------------------- Title: Managing Director ------------------------------------------- 4 <PAGE> COMMERZBANK AKTIENGESELLSCHAFT By: /s/Harry P. Yergey ---------------------------------------------- Name: Harry P. Yergey -------------------------------------------- Title: Senior Vice President & Manager ------------------------------------------- By: /s/Subash R. Viswanathan ---------------------------------------------- Name: Subash R. Viswanathan -------------------------------------------- Title: Vice President ------------------------------------------- THE FUJI BANK, LIMITED By: /s/Raymond Ventura ---------------------------------------------- Name: Raymond Ventura -------------------------------------------- Title: Vice President & Manager ------------------------------------------- MELLON BANK, N.A. By: /s/Mark F. Johnston ---------------------------------------------- Name: Mark F. Johnston -------------------------------------------- Title: Vice President ------------------------------------------- KEYBANK NATIONAL ASSOCIATION By: /s/Mark A. LoSchiavo ---------------------------------------------- Name: Mark A. LoSchiavo -------------------------------------------- Title: Assistant Vice President ------------------------------------------- FIRST AMERICAN NATIONAL BANK By: /s/S. Floyd Harvey, III ---------------------------------------------- Name: S. Floyd Harvey, III -------------------------------------------- Title: SVP ------------------------------------------- 5 <PAGE> BANK OF HAWAII By: /s/Brenda Testerman ---------------------------------------------- Name: Brenda Testerman -------------------------------------------- Title: Vice President ------------------------------------------- THE BANK OF NEW YORK By: /s/Ann Marie Hughes ---------------------------------------------- Name: Ann Marie Hughes -------------------------------------------- Title: Vice President ------------------------------------------- THE BANK OF NOVA SCOTIA By: /s/F.C.H. Ashby ---------------------------------------------- Name: F.C.H. Ashby -------------------------------------------- Title: Senior Manager Loan Operations ------------------------------------------- CREDIT SUISSE FIRST BOSTON By: /s/Thomas G. Muoio ---------------------------------------------- Name: Thomas G. Muoio -------------------------------------------- Title: Vice President ------------------------------------------- By: /s/Robert N. Finney ---------------------------------------------- Name: Robert N. Finney -------------------------------------------- Title: Managing Director ------------------------------------------- DEUTSCHE VERKEHRS BANK By: /s/Justin Patrick ---------------------------------------------- Name: Justin Patrick -------------------------------------------- Title: Vice President ------------------------------------------- By: /s/ ---------------------------------------------- Name: -------------------------------------------- Title: Asst V President ------------------------------------------- 6 <PAGE> THE SANWA BANK, LIMITED By: /s/P. Bartlett Wu ---------------------------------------------- Name: P. Bartlett Wu -------------------------------------------- Title: Vice President ------------------------------------------- SUNTRUST BANK, NASHVILLE, N.A. By: /s/Renee D. Drake ---------------------------------------------- Name: Renee D. Drake -------------------------------------------- Title: Vice President ------------------------------------------- THE SUMITOMO BANK, LIMITED By: /s/C. Michael Garrido ---------------------------------------------- Name: C. Michael Garrido -------------------------------------------- Title: Senior Vice President ------------------------------------------- BANCA COMMERCIALE ITALIANA By: /s/Charles Dougherty ---------------------------------------------- Name: Charles Dougherty -------------------------------------------- Title: Vice President ------------------------------------------- By: /s/Tiziano Gallonetto ---------------------------------------------- Name: Tiziano Gallonetto -------------------------------------------- Title: Assistant Vice President ------------------------------------------- THE NORTHERN TRUST COMPANY By: /s/James F.T. Monhart ---------------------------------------------- Name: James F.T. Monhart -------------------------------------------- Title: Senior Vice President ------------------------------------------- 7 <PAGE> WACHOVIA BANK, N.A. By: /s/Elizabeth Witherspoon ---------------------------------------------- Name: Elizabeth Witherspoon -------------------------------------------- Title: Assistant Vice President ------------------------------------------- FIRST UNION NATIONAL BANK By: /s/Beverly J. Coller ---------------------------------------------- Name: Beverly J. Coller -------------------------------------------- Title: Vice President ------------------------------------------- 8 <PAGE> EXHIBIT A TO EXTENSION AGREEMENT DATED AS OF OCTOBER 15, 1999 FOR CREDIT AGREEMENT DATED AS OF JANUARY 15, 1998 ACKNOWLEDGMENT Each of the undersigned hereby (i) acknowledges receipt of a copy of the Extension Agreement dated as of October 15, 1999, relating to the Credit Agreement dated as of January 15, 1998 by and among the Borrower, the Lenders, Banc One Capital Markets, Inc., formerly known as First Chicago Capital Markets, Inc., as Arranger, J.P. Morgan Securities Inc., as Co-Arranger and Syndication Agent, Chase Securities Inc., as Co-Arranger and Documentation Agent, and the Agent, as amended (as amended, the "Credit Agreement"), (ii) reaffirms the terms and conditions of that certain Guaranty dated as of January 27, 1998 (the "Guaranty") and (iii) acknowledges and agrees that the Guaranty (A) remains in full force and effect and (B) is hereby ratified and confirmed. FEDERAL EXPRESS CORPORATION By: /s/Robert D. Henning ---------------------------------------------- Name: Robert D. Henning -------------------------------------------- Title: Vice President and Treasurer ------------------------------------------- RPS, INC. By: /s/Daniel J. Sullivan ---------------------------------------------- Name: Daniel J. Sullivan -------------------------------------------- Title: President and Chief Executive Officer ------------------------------------------- CALIBER SYSTEM, INC. By: /s/Donald C. Brown ---------------------------------------------- Name: Donald C. Brown -------------------------------------------- Title: President ------------------------------------------- 9 <PAGE> VIKING FREIGHT, INC. By: /s/Douglas G. Duncan ---------------------------------------------- Name: Douglas G. Duncan -------------------------------------------- Title: President and Chief Executive Officer ------------------------------------------- ROBERTS EXPRESS, INC. By: /s/R. Bruce Simpson ---------------------------------------------- Name: R. Bruce Simpson -------------------------------------------- Title: President ------------------------------------------- Dated as of October 15, 1999 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12.1 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 12.1 <TEXT> <PAGE> EXHIBIT 12.1 FDX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED MAY 31, NOVEMBER 30, ----------------------------------------------------------- -------------------- 1995 1996 1997 1998 1999 1998 1999 ---------- ---------- -------- ---------- ---------- -------- --------- (In thousands, except ratios) Earnings: <S> <C> <C> <C> <C> <C> <C> <C> Income before income taxes.............. $ 693,564 $ 702,094 $425,865 $ 899,518 $1,061,064 $567,752 $ 545,808 Add back: Interest expense, net of capitalized interest................ 130,923 109,249 110,080 135,696 110,590 54,606 54,773 Amortization of debt issuance costs...................... 2,493 1,628 1,328 1,481 9,249 431 595 Portion of rent expense representative of interest factor..................... 333,971 393,775 439,729 508,325 570,789 279,980 306,158 ---------- ---------- -------- ---------- ---------- -------- --------- Earnings as adjusted.................... $1,160,951 $1,206,746 $977,002 $1,545,020 $1,751,692 $902,769 $907,334 ---------- ---------- -------- ---------- ---------- -------- --------- ---------- ---------- -------- ---------- ---------- -------- --------- Fixed Charges: Interest expense, net of capitalized interest.................. $ 130,923 $ 109,249 $110,080 $ 135,696 $ 110,590 $ 54,606 $ 54,773 Capitalized interest.................... 27,381 44,654 45,717 33,009 38,880 20,960 17,097 Amortization of debt issuance costs........................ 2,493 1,628 1,328 1,481 9,249 431 595 Portion of rent expense representative of interest factor....................... 333,971 393,775 439,729 508,325 570,789 279,980 306,158 ---------- ---------- -------- ---------- ---------- -------- --------- $ 494,768 $ 549,306 $596,854 $ 678,511 $ 729,508 $355,977 $378,623 ---------- ---------- -------- ---------- ---------- -------- --------- ---------- ---------- -------- ---------- ---------- -------- --------- Ratio of Earnings to Fixed Charges...... 2.3 2.2 1.6 2.3 2.4 2.5 2.4 ---------- ---------- -------- ---------- ---------- -------- --------- ---------- ---------- -------- ---------- ---------- -------- --------- </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15.1 <SEQUENCE>5 <DESCRIPTION>EXHIBIT 15.1 <TEXT> <PAGE> EXHIBIT 15.1 December 15, 1999 FDX Corporation 942 South Shady Grove Road Memphis, Tennessee 38120 We are aware that FDX Corporation will be incorporating by reference in its previously filed Registration Statements No. 333-45037, 333-71065, and 333-74701 its Report on Form 10-Q for the quarter ended November 30, 1999, which includes our report dated December 15, 1999 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered part of these registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP ----------------------- Arthur Andersen LLP </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>6 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME ON PAGES 3-5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDING NOVEMBER 30, 1999 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-31-2000 <PERIOD-START> JUN-01-1999 <PERIOD-END> NOV-30-1999 <CASH> 517,893 <SECURITIES> 0 <RECEIVABLES> 2,459,261 <ALLOWANCES> 80,327 <INVENTORY> 277,559 <CURRENT-ASSETS> 3,569,464 <PP&E> 14,478,808 <DEPRECIATION> 7,609,418 <TOTAL-ASSETS> 11,538,227 <CURRENT-LIABILITIES> 2,999,254 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 29,857 <OTHER-SE> 4,610,529 <TOTAL-LIABILITY-AND-EQUITY> 11,538,227 <SALES> 0 <TOTAL-REVENUES> 8,890,081 <CGS> 0 <TOTAL-COSTS> 8,301,739 <OTHER-EXPENSES> (4,663) <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 47,197 <INCOME-PRETAX> 545,808 <INCOME-TAX> 215,591 <INCOME-CONTINUING> 330,217 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 330,217 <EPS-BASIC> 1.12 <EPS-DILUTED> 1.10 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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GAS

https://www.sec.gov/Archives/edgar/data/1004155/0001004155-00-000003.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, S3l6+eXx9giZzZoBCY+JQIinNUxON+IuA44SILjVMyxnl77vYqdXAgjvFo9l4XJu GrCStp8Gsl2RI8KwsupkrQ== <SEC-DOCUMENT>0001004155-00-000003.txt : 20000215 <SEC-HEADER>0001004155-00-000003.hdr.sgml : 20000215 ACCESSION NUMBER: 0001004155-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: SEC FILE NUMBER: 001-14174 FILM NUMBER: 542252 BUSINESS ADDRESS: STREET 1: 817 WEST PEACHTREE ST STREET 2: 10TH FLOOR CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045849470 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 <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 December 31, 1999 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) 817 West Peachtree Street, N.E. Suite 1000 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, 1999. Common Stock, $5.00 Par Value Shares Outstanding at December 31, 1999 56,952,069 <PAGE> AGL RESOURCES INC. Quarterly Report on Form 10-Q For the Quarter Ended December 31, 1999 Table of Contents Item Page Number Number PART I - FINANCIAL INFORMATION 1 Financial Statements (Unaudited) Condensed Statements of Consolidated Income 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 3 Quantitative and Qualitative Disclosure About Market Risk 24 PART II - OTHER INFORMATION 1 Legal Proceedings 25 4 Submission of Matters to a Vote of Security Holders 25 5 Other Information 25 6 Exhibits and Reports on Form 8-K 26 SIGNATURE 27 Page 2 of 27 Pages <PAGE> PART I -- FINANCIAL INFORMATION Item 1. Financial Statements AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Three Months 1999 1998 --------- -------- Operating Revenues ................................... $ 182.3 $ 323.9 Cost of Sales ........................................ 54.6 187.0 - ----------------------------------------------------------------------------- Operating Margin ................................ 127.7 136.9 Other Operating Expenses ............................. 94.2 89.2 - ----------------------------------------------------------------------------- Operating Income ................................ 33.5 47.7 Other Income (Loss) .................................. 6.9 (7.9) - ----------------------------------------------------------------------------- Income Before Interest and Income Taxes ......... 40.4 39.8 Interest Expense and Preferred Stock Dividends Interest expense ................................ 12.2 14.2 Dividends on preferred stock of subsidiary ...... 1.5 1.5 - ----------------------------------------------------------------------------- Total interest expense and preferred stock dividends ............................ 13.7 15.7 - ----------------------------------------------------------------------------- Income Before Income Taxes ...................... 26.7 24.1 Income Taxes ......................................... 9.6 8.2 - ----------------------------------------------------------------------------- Net Income ...................................... $ 17.1 $ 15.9 ============================================================================= Earnings (Loss) per Common Share Basic ........................................... $ 0.30 $ 0.28 Diluted ......................................... $ 0.30 $ 0.28 Weighted Average Number of Common Shares Outstanding Basic ........................................... 56.9 57.4 Diluted ......................................... 57.0 57.7 Cash Dividends Paid Per Share of Common Stock .................................... $ 0.27 $ 0.27 See notes to condensed consolidated financial statements. Page 3 of 27 Pages <PAGE> AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS) (Unaudited) December September 31, 30, ASSETS 1999 1999 Current Assets Cash and cash equivalents ................... $ 4.2 $ 32.9 Receivables (less allowance for uncollectible accounts of $5.7 at December 31, 1999 and $4.3 at September 30, 1999) ......... 51.4 50.7 Inventories Natural gas stored underground .......... 20.6 47.3 Liquefied natural gas ................... 3.0 6.7 Other ................................... 11.4 12.9 Deferred purchased gas adjustment ........... 1.1 2.8 Other ....................................... 3.9 4.2 - ------------------------------------------------------------------------------ Total current assets .................... 95.6 157.5 - ------------------------------------------------------------------------------ Property, Plant and Equipment Utility plant ............................... 2,300.4 2,274.3 Less accumulated depreciation .............. 772.4 757.1 - ------------------------------------------------------------------------------ Utility plant - net ..................... 1,528.0 1,517.2 - ------------------------------------------------------------------------------ Nonutility property ......................... 118.1 116.7 Less accumulated depreciation .............. 37.9 35.0 - ------------------------------------------------------------------------------ Nonutility property - net ............... 80.2 81.7 - ------------------------------------------------------------------------------ Total property, plant and equipment - net 1,608.2 1,598.9 - ------------------------------------------------------------------------------ Deferred Debits and Other Assets Unrecovered environmental response costs .... 146.4 150.2 Investments in joint ventures ............... 41.8 28.2 Other ....................................... 38.4 34.5 - ------------------------------------------------------------------------------ Total deferred debits and other assets .. 226.6 212.9 - ------------------------------------------------------------------------------ Total Assets ...................................... $ 1,930.4 $ 1,969.3 ============================================================================== See notes to condensed consolidated financial statements. Page 4 of 27 Pages <PAGE> AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS) (Unaudited) December September 31, 30, LIABILITIES AND CAPITALIZATION 1999 1999 Current Liabilities Accounts payable - trade ........................ $ 34.6 $ 31.3 Short-term debt ................................. 59.0 1.5 Customer deposits ............................... 2.2 7.4 Interest ........................................ 12.6 26.0 Taxes ........................................... 28.7 30.1 Gas cost credits ................................ 2.0 37.9 Current portion of long-term debt ............... 10.0 50.0 Other ........................................... 28.2 38.7 - ------------------------------------------------------------------------------- Total current liabilities ................... 177.3 222.9 - ------------------------------------------------------------------------------- Accumulated Deferred Income Taxes ..................... 216.1 211.3 - ------------------------------------------------------------------------------- Long-Term Liabilities Accrued environmental response costs ............ 102.4 102.4 Accrued postretirement benefits costs ........... 32.9 32.4 Deferred credits ................................ 49.8 49.2 Other ........................................... 6.0 5.3 - ------------------------------------------------------------------------------- Total long-term liabilities ................. 191.1 189.3 - ------------------------------------------------------------------------------- Capitalization Long-term debt .................................. 610.0 610.0 Subsidiary obligated mandatorily redeemable preferred securities ........................ 74.3 74.3 Common stockholders' equity, $5 par value, shares issued of 57.8 at December 31, 1999 and September 30, 1999 ...................... 677.6 675.9 Less: Shares held in treasury, at cost 0.8 shares at December 31, 1999 and 0.7 shares at September 30, 1999 ........ (16.0) (14.4) - ------------------------------------------------------------------------------- Total capitalization ........................ 1,345.9 1,345.8 - ------------------------------------------------------------------------------- Total Liabilities and Capitalization .................. $ 1,930.4 $1,969.3 =============================================================================== See notes to condensed consolidated financial statements. Page 5 of 27 Pages <PAGE> AGL RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998 (IN MILLIONS) (UNAUDITED) Three Months 1999 1998 Cash Flows from Operating Activities Net income ................................................ $ 17.1 $ 15.9 Adjustments to reconcile net income to net cash flow from operating activities Depreciation and amortization ....................... 21.2 21.0 Deferred income taxes ............................... 4.8 4.0 Other ............................................... (0.4) (0.3) Changes in certain assets and liabilities Receivables ......................................... (0.7) (92.9) Inventories ......................................... 31.9 35.5 Accounts payable .................................... 3.3 22.6 Gas cost credits .................................... (35.9) -- Accrued interest .................................... (13.4) (11.2) Other current liabilities ........................... (10.5) 10.0 Other-net ........................................... (6.8) (1.6) - -------------------------------------------------------------------------------- Net cash flow from operating activities ..................................... 10.6 3.0 - -------------------------------------------------------------------------------- Cash Flows from Financing Activities Net borrowings of debt .................................... 17.5 36.5 Sale of common stock, net of expenses and noncash dividends (2.4) 1.3 Sale of treasury shares ................................... 2.9 -- Purchase of treasury shares ............................... (4.5) -- Dividends paid on common stock ............................ (13.0) (12.9) - -------------------------------------------------------------------------------- Net cash flow from financing activities ..................................... 0.5 24.9 - -------------------------------------------------------------------------------- Cash Flows from Investing Activities Utility plant expenditures ................................ (33.7) (25.5) Non-utility property expenditures ......................... (1.6) (3.9) Cash provided to joint ventures ........................... (9.4) -- Other ..................................................... 4.9 0.6 - -------------------------------------------------------------------------------- Net cash used in investing activities ..................................... (39.8) (28.8) - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents ........................... (28.7) (0.9) Cash and cash equivalents at beginning of period ............................ 32.9 0.9 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period .................................. $ 4.2 $ -- ================================================================================ Cash Paid During the Period for Interest .................................................. $ 26.0 $ 25.5 Income taxes .............................................. $ 2.9 $ 0.1 Page 6 of 27 Pages <PAGE> AGL RESOURCES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL AGL Resources Inc. is the holding company for Atlanta Gas Light Company ("AGLC") and its wholly- owned subsidiary, Chattanooga Gas Company ("Chattanooga"), which are both natural gas local distribution utilities. Additionally, AGL Resources Inc. owns or has an interest in several non-utility subsidiaries and joint ventures. AGL Resources Inc. and its subsidiaries are collectively referred to as "AGL Resources." In the opinion of management, the unaudited condensed consolidated financial statements included herein reflect all normal recurring adjustments necessary for a fair statement of the results of the interim periods reflected. These interim financial statements and notes are condensed as permitted by the instructions to Form 10-Q, and should be read in conjunction with the financial statements and the notes included in the annual report on Form 10-K of AGL Resources for the fiscal year ended September 30, 1999. Due to the seasonal nature of a portion of AGL Resources' businesses, the results of operations for the three-month period are not necessarily indicative of results of operations for a twelve-month period. Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. Those estimates and assumptions affect various matters, including: - - Reported amounts of assets and liabilities in our Condensed Consolidated Balance Sheets as of the dates of the financial statements; - - Disclosure of contingent assets and liabilities as of the dates of the financial statements; and - - Reported amounts of revenues and expenses in our Condensed Statements of Consolidated Income during the reported periods. Those estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are beyond management's control. Consequently, actual amounts could differ from our estimates. Certain amounts in financial statements of prior years have been reclassified to conform to the presentation of the current year. 2. OVERVIEW OF THE TRANSITION FROM A REGULATED TO A COMPETITIVE BUSINESS ENVIRONMENT Pursuant to Georgia's 1997 Natural Gas Competition and Deregulation Act ("Deregulation Act"), AGLC unbundled various components of its services to end-use customers. Historically, only large, interruptible commercial and industrial customers had the option of purchasing natural gas from suppliers other than AGLC and transporting such natural gas through AGLC's distribution system for delivery. The Deregulation Act enabled AGLC to unbundle its delivery service and other related services from the sale of natural gas for all customers, thus allowing firm residential and small commercial customers to purchase natural gas and other services from suppliers other than AGLC. Effective October 1, 1999, virtually all of AGLC's 1.4 million customers in Georgia were purchasing natural gas from marketers who were approved and certificated ("certificated marketers") by the Georgia Public Service Commission ("GPSC"). As a result of the Deregulation Act, AGLC has become primarily a provider of delivery service and other related services. Page 7 of 27 Pages <PAGE> 2. OVERVIEW OF THE TRANSITION FROM A REGULATED TO A COMPETITIVE BUSINESS ENVIRONMENT (CONTINUED) As a result of the transition to competition, numerous changes have occurred with respect to the services being offered by AGLC and with respect to the manner in which AGLC prices and accounts for those services. Consequently, AGLC's future revenues and expenses will not follow historical patterns due to the provision of delivery services to end-use customers which are priced based upon straight fixed variable ("SFV") rates. The effect of SFV rates is to spread evenly throughout the year AGLC's recovery of its delivery service costs. Although, when compared to corresponding quarters of prior years, the effect of SFV rates is to shift utility delivery service revenues among quarters, AGLC's annual delivery service revenues should remain relatively consistent with annual delivery service revenues of prior years. AGLC continues to provide intrastate delivery service through its existing pipeline system to end-use customers in Georgia, but has exited the natural gas sales function. AGLC's delivery of natural gas remains subject to the GPSC's continued regulation of delivery rates, safety, access to AGLC's system, and quality of service for all aspects of delivery service. Certificated marketers, including AGL Resources' marketing affiliate, SouthStar Energy Services LLC ("SouthStar"), compete to sell natural gas to end-use customers at market-based prices. AGLC allocates delivery capacity to certificated marketers in proportion to the number and size of residential and small commercial customers served by each certificated marketer. Delivery capacity that is not used on any day to serve residential and small commercial customers is made available to large, interruptible commercial and industrial customers. Similarly, AGLC has allocated to certificated marketers the majority of the pipeline storage services that it has under contract, along with a corresponding amount of inventory. During the transition to competition, AGLC continued to provide gas sales service to customers who had not yet switched to a certificated marketer. Pursuant to a joint stipulation agreement with the GPSC, AGLC implemented a rate structure for gas sales that ensured AGLC's recovery of its purchased gas costs incurred from October 6, 1998 through September 30, 1999, without creating any significant income or loss. The joint stipulation agreement provided for a true-up for any profit or loss outside of a specified range during fiscal 1999. During December 1999, as contemplated by the joint stipulation agreement, AGLC paid $33 million in over-collected purchased gas costs to the GPSC. Since AGLC paid the $33 million to the GPSC, the GPSC subsequently will coordinate with the certificated marketers to provide customers with a credit on their marketer's bill. To be eligible for the refund credit, the customer must have been on AGLC's system on April 25, 1999, and still connected as of March 20, 2000. The average refund per customer is expected to be approximately $24 to $26. (See Gas Cost Credits in the Financial Condition section contained in Item 2 of Part I under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition.") Also during the transition to competition, AGLC continued to bill end-use customers who had not yet switched to certificated marketers for gas sales service and for certain ancillary services. These ancillary services included meter reading, billing, bill inquiry, payment processing, and collection services. Once an end-use customer switched to a certificated marketer for gas sales service, the Deregulation Act permitted AGLC to bill the marketer only for the AGLC-provided ancillary services actually used by the marketer. AGLC was unable, however, to eliminate all of the costs associated with the provision of ancillary services as quickly as customers switched to certificated marketers for natural gas sales, thereby creating an imbalance between revenues and expenses. Page 8 of 27 Pages <PAGE> 2. OVERVIEW OF THE TRANSITION FROM A REGULATED TO A COMPETITIVE BUSINESS ENVIRONMENT (CONTINUED) The Deregulation Act provides marketing standards and rules of business practice to ensure that the benefits of a competitive natural gas market are available to all customers on AGLC's system. It imposes on certificated marketers an obligation to serve end-use customers, and creates a universal service fund. The universal service fund provides a method to fund the recovery of certificated marketers' uncollectible accounts and enables AGLC to expand its facilities to serve the public interest. 3. EARNINGS PER COMMON SHARE AND COMMON STOCKHOLDERS' EQUITY Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur when common share equivalents are added to common shares outstanding. AGL Resources' only common share equivalents are stock options whose exercise prices were less than the average market price of the common shares for the respective periods. As of December 31, 1999 and 1998, respectively, options to purchase 2,657,818 and 22,252 shares of common stock were outstanding, and were not included in the computation of diluted earnings per common share because the exercise prices of those options were greater than the average market price of the common shares for the respective periods. On October 5, 1999, the Board of Directors of AGL Resources authorized a plan to repurchase up to 3.6 million shares (6.3% of total outstanding as of September 30, 1999) of AGL Resources common stock over a period ending no later than September 30, 2001. Open market purchases of the shares may be made from time to time, subject to availability, and the repurchased shares will be held in treasury. During the three months ended December 31, 1999, AGL Resources repurchased 258,900 shares of common stock for a total of $4.5 million pursuant to the above noted stock repurchase plan. During that same period, AGL Resources issued 158,476 shares of common stock under ResourcesDirect, a direct stock purchase and dividend reinvestment plan; the Retirement Savings Plus Plan; the Long-Term Incentive Plan; and the Non-Employee Directors Equity Compensation Plan. 4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. AGL Resources will adopt SFAS 133 on October 1, 2000. The impact of SFAS 133 on AGL Resources' consolidated financial statements is under review and is currently unknown. 5. ENVIRONMENTAL MATTERS Before natural gas was widely available in the Southeast, AGLC manufactured gas from coal and other fuels. Those manufacturing operations were known as "manufactured gas plants," or "MGPs" which AGLC ceased operating in the 1950s. Because of recent environmental concerns, AGLC is required to investigate possible environmental contamination at those plants and, if necessary, clean up any contamination. Page 9 of 27 Pages <PAGE> 5. ENVIRONMENTAL MATTERS (CONTINUED) AGLC has been associated with nine MGP sites in Georgia and three in Florida. Based on investigations to date, AGLC believes that some cleanup is likely at most of the sites. In Georgia, the state Environmental Protection Division supervises the investigation and cleanup of MGP sites. In Florida, the U.S. Environmental Protection Agency has that responsibility. For each of the MGP sites, AGLC has estimated its share of the likely costs of investigation and cleanup. AGLC currently estimates that its total future cost of investigating and cleaning up its MGP sites is between $102.4 million and $148.2 million. That range does not include other potential expenses, such as unasserted property damage or personal injury claims or legal expenses for which AGLC may be held liable but for which neither the existence nor the amount of such liabilities can be reasonably forecast. Within that range, AGLC cannot identify any single number as a "better" estimate of its likely future costs because its actual future investigation and cleanup costs will be affected by a number of contingencies that cannot be quantified at this time. Consequently, as of December 31, 1999, AGLC has recorded the lower end of the range, or $102.4 million, as a liability, which remains unchanged from September 30, 1999, and a corresponding regulatory asset. 6. SEGMENT INFORMATION AGL Resources is organized into two operating segments: Utility and Non-utility. Management evaluates segment performance based on net income, which includes the effects of corporate expense allocations. There were no material inter-segment sales during the quarters ended December 31, 1999 or 1998. <TABLE> <CAPTION> Three Months Ended December 31, 1999 December 31, 1998 (Millions of Dollars) Utility Non-utility Total Utility Non-utility Total ----------------------------------- ----------------------------------- <S> <C> <C> <C> <C> <C> <C> Operating Revenues $ 171.3 $ 11.0 $ 182.3 $ 317.2 $ 6.7 $ 323.9 Depreciation and Amortization 17.8 3.4 21.2 17.6 3.4 21.0 Interest Expense 11.9 0.3 12.2 13.0 1.2 14.2 Interest Income 0.1 0.2 0.3 - - - Equity in the Net Income (Loss) of Joint Ventures - 4.8 4.8 - (7.9) (7.9) Income Tax Expense (Benefit) 10.0 (0.4) 9.6 12.4 (4.2) 8.2 Net Income (Loss) 17.6 (0.5) 17.1 22.5 (6.6) 15.9 Capital Expenditures 33.7 1.6 35.3 25.5 3.9 29.4 </TABLE> <TABLE> <CAPTION> Balance as of December 31, 1999 September 30, 1999 -------------------------------------- -------------------------------------- (Millions of Dollars) Utility Non-utility Total Utility Non-utility Total <S> <C> <C> <C> <C> <C> <C> Identifiable Assets (A) $ 1,782.8 $ 105.8 $ 1,888.6 $ 1,798.6 $ 142.5 $ 1,941.1 Investments in Joint Ventures 0.4 41.4 41.8 0.4 27.8 28.2 (A) Identifiable assets are those assets used in each segment's operations. </TABLE> Page 10 of 27 Pages <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 allows public companies to provide cautionary remarks about forward-looking statements that they make in documents that are filed with the Securities and Exchange Commission. Forward-looking statements in our Management's Discussion and Analysis include statements about the following: - - Deregulation; - - Concentration of credit risk; - - Environmental investigations and cleanups; and - - Quantitative and qualitative disclosures about market risk. Important factors that could cause our actual results to differ substantially from those in the forward-looking statements include, but are not limited to, the following: - - Changes in price and demand for natural gas and related products; - - Impact of changes in state and federal legislation and regulation on both the gas and electric industries; - - Effects and uncertainties of deregulation and competition, particularly in markets where prices and providers historically have been regulated, unknown risks related to nonregulated businesses, and unknown issues such as the stability of certificated marketers; - - Concentration of credit risk in certificated marketers; - - Industry consolidation; - - Changes in accounting policies and practices; - - Interest rate fluctuations, financial market conditions, and economic conditions, generally; and - - Uncertainties about environmental issues and the related impact of such issues. Nature of Our Business AGL Resources Inc. is the holding company for: - - Atlanta Gas Light Company ("AGLC") and its wholly-owned subsidiary, Chattanooga Gas Company ("Chattanooga"), which are natural gas local distribution utilities; - - AGL Energy Services, Inc. ("AGLE"), a gas supply services company; and - - Several non-utility subsidiaries. AGL Resources and its subsidiaries are collectively referred to as "AGL Resources." Page 11 of 27 Pages <PAGE> AGLC conducts its primary business, the distribution of natural gas, in Georgia including Atlanta, Athens, Augusta, Brunswick, Macon, Rome, Savannah, and Valdosta. Chattanooga distributes natural gas in the Chattanooga and Cleveland areas of Tennessee. The Georgia Public Service Commission ("GPSC") regulates AGLC, and the Tennessee Regulatory Authority ("TRA") regulates Chattanooga. AGLE is a nonregulated company that bought and sold the natural gas that was supplied to AGLC's customers during the deregulation transition period to full competition in Georgia. Currently, AGLE buys and sells natural gas for Chattanooga's customers. AGLC comprises substantially all of AGL Resources' assets, revenues, and earnings. The operations and activities of AGLC, AGLE, and Chattanooga, collectively, are referred to as the "utility." The utility's total other operating expenses include costs allocated from AGL Resources Inc. AGL Resources currently owns or has an interest in the following non-utility businesses: - - SouthStar Energy Services LLC ("SouthStar"), a joint venture among a subsidiary of AGL Resources and subsidiaries of Dynegy, Inc. and Piedmont Natural Gas Company. SouthStar markets natural gas and related services to residential and small commercial customers in Georgia and to industrial customers in the Southeast. SouthStar began marketing natural gas to customers in Georgia during the first quarter of fiscal 1999 under the trade name "Georgia Natural Gas Services;" - - AGL Investments, Inc., which currently manages certain non-utility businesses including: - AGL Propane, Inc. ("Propane"), which engages in the sale of propane and related products and services in Georgia, Alabama, Tennessee and North Carolina; - Trustees Investments, Inc., which owns Trustees Gardens, a residential and retail development located in Savannah, Georgia; and - Utilipro, Inc. ("Utilipro"), in which AGL Resources has an 85% ownership interest and which engages in the sale of integrated customer care solutions and billing services to energy marketers in the United States and Canada; - - AGL Peaking Services, Inc., which owns a 50% interest in Etowah LNG Company LLC ("Etowah"), a joint venture with Southern Natural Gas Company. Etowah was formed for the purpose of constructing, owning, and operating a liquefied natural gas peaking facility. (The remainder of this page was intentionally left blank.) Page 12 of 27 Pages <PAGE> RESULTS OF OPERATIONS Three-Month Period Ended December 31, 1999 and 1998 In this section, the results of operations for the three-month periods ended December 31, 1999 and 1998 are compared. Operating Margin Analysis (Dollars in Millions) Three Months Ended 12/31/99 12/31/98 Favorable/(Unfavorable) -------- -------- ------------------------- Operating Revenues Utility $ 171.3 $ 317.2 $ (145.9) (46.0%) Non-utility 11.0 6.7 4.3 64.2% ------- ------- --------- ------- Total $ 182.3 $ 323.9 $ (141.6) (43.7%) ======= ======= ========= ======= Cost of Sales Utility $ 51.8 $ 184.9 $ 133.1 72.0% Non-utility 2.8 2.1 (0.7) (33.3%) ------- ------- --------- ------- Total $ 54.6 $ 187.0 $ 132.4 70.8% ======= ======= ========= ======= Operating Margin Utility $ 119.5 $ 132.3 $ (12.8) (9.7%) Non-utility 8.2 4.6 3.6 78.3% ------- ------- --------- ------- Total $ 127.7 $ 136.9 $ (9.2) (6.7%) ======= ======= ========= ======= OPERATING REVENUES Total operating revenues for the three months ended December 31, 1999 decreased to $182.3 million from $323.9 million for the same period last year, a decrease of 43.7%. UTILITY. Utility operating revenues decreased to $171.3 million for the three months ended December 31, 1999 from $317.2 million for the same period last year. The decrease of $145.9 million in utility operating revenues was primarily due to the following factors: - - Due to Georgia's 1997 Natural Gas Competition and Deregulation Act ("Deregulation Act"), Georgia customers began to switch from AGLC to certificated marketers for natural gas purchases beginning November 1, 1998. As of October 1, 1999, except for isolated circumstances, all of AGLC's approximately 1.4 million Georgia customers had switched to or had been assigned to certificated marketers. As a result, AGLC sold less gas. The reduction in gas sold resulted in a net decrease of $133.1 million in the utility's sales service revenues and a comparable decrease in the utility's gas costs. This decrease was primarily due to the following factors: - A decrease of $143.8 million in the cost of gas sold to end-use customers resulting from customer migration to certificated marketers. Historically, AGLC recovered its actual gas costs, including carrying costs related to storage gas inventories, from its customers; - A decrease of $12.5 million associated with reduced levels of gas sold outside of the utility's distribution system; and - These decreases were partially offset by an increase in revenues due to $22.2 million of sales of gas inventory to certificated marketers. Page 13 of 27 Pages <PAGE> - - A decrease of $14.7 million in delivery service revenue due to the loss of ancillary service revenues and certain transition revenues. Transition revenues decreased $10.8 million due to customer migration to certificated marketers. Additionally, AGLC's late payment fee revenue from end-use customers decreased $5.5 million. This decrease was primarily due to AGLC no longer billing end-use customers. NON-UTILITY. Non-utility operating revenues increased to $11.0 million for the three months ended December 31, 1999 from $6.7 million for the same period last year. The net increase of $4.3 million was primarily due to the following factors: - - An increase of $3.3 million in Utilipro's operating revenues. Utilipro engages in the sale of integrated customer care solutions to energy marketers. Utilipro's growth in revenue over the previous year is primarily due to the rapid customer growth experienced by Georgia's certificated marketers; and - - An increase of $1.3 million in Propane's operating revenues. The increase is due to weather that was 21% colder than during the same period last year. Additionally, the selling price per gallon increased compared with the same period in fiscal 1999. COST OF SALES Total cost of sales decreased to $54.6 million for the three months ended December 31, 1999 from $187.0 million for the same period last year, a decrease of 70.8%. UTILITY. The utility's cost of sales decreased to $51.8 million for the three months ended December 31, 1999 from $184.9 million for the same period last year. The decrease of $133.1 million in the utility's cost of sales was primarily due to the same factors as described above. (See Utility section under Operating Revenues.) This decrease was partially offset by an increase of $4.2 million in cost of gas sold in Chattanooga as a result of weather that was colder than the prior year. NON-UTILITY. Non-utility cost of sales increased to $2.8 million for the three months ended December 31, 1999 from $2.1 million for the same period last year. The increase was primarily due to an increase of $1.1 million in Propane's cost of gas resulting from more gallons of propane sold as compared to the same period last year. The increase in gallons sold was due to weather that was 21% colder than during the same period last year. OPERATING MARGIN Total operating margin decreased to $127.7 million for the three months ended December 31, 1999 from $136.9 million for the same period last year, a decrease of 6.7%. UTILITY. The utility's operating margin decreased to $119.5 million for the three months ended December 31, 1999 from $132.3 million for the same period last year. The decrease of $12.8 million was due primarily to a decrease of $14.7 million in delivery service revenue due to the loss of ancillary service revenues and certain transition revenues. Transition revenues decreased $10.8 million due to customer migration to certificated marketers. Additionally, AGLC's late payment fee revenue from end-use customers decreased $5.5 million. This decrease was primarily due to AGLC no longer billing end-use customers. This decrease was partially offset by an increase of $2.2 million due to continued customer growth. Page 14 of 27 Pages <PAGE> The utility's operating margin as a percentage of operating revenues increased to 69.8% for the three months ended December 31, 1999 from 41.7% for the same period last year. This increase was primarily due to decreased revenues from gas sales and a corresponding decrease in cost of gas resulting from deregulation. This transition from the gas sales to delivery service function should not effect AGLC's operating margin. However, since AGLC's costs associated with the revenues derived from providing delivery and other related services are included in total other operating expenses, AGLC's operating margin as a percentage of operating revenues has increased from the same period last year. NON-UTILITY. Non-utility operating margin increased to $8.2 million for the three months ended December 31, 1999 from $4.6 million for the same period last year, an increase of 78.3%. The increase is primarily due to an increase of $3.3 million in Utilipro's operating margin due to increased demand for customer care services and customer growth. Because it is a service company, expenses related to Utilipro are included in total other operating expenses. As a result, there is an increase in operating revenue without a similar increase in cost of sales, resulting in the increase in operating margin for the three months ended December 31, 1999 as compared with the same period last year. TOTAL OTHER OPERATING EXPENSES Total other operating expenses increased to $94.2 million for the three months ended December 31, 1999 from $89.2 million for the same period last year, an increase of 5.6%. Total Other Operating Expenses Analysis (Dollars in Millions) Three Months Ended 12/31/99 12/31/98 Favorable/(Unfavorable) -------- -------- -------------------------- Total Other Operating Expenses Utility $ 81.8 $ 84.6 $ 2.8 3.3% Non-utility 12.4 4.6 (7.8) (169.6%) ------- ------- --------- --------- Total $ 94.2 $ 89.2 $ (5.0) (5.6%) ======= ======= ========= ========= UTILITY. Utility total other operating expenses decreased $2.8 million as compared with the same period last year. The decrease was primarily due to a $3.8 million decrease in customer service expenses related to meter reading, billing, bill inquiry, payment processing and collection services resulting from the migration of customers to certificated marketers. The decrease was partially offset by an increase in depreciation expense of $0.5 million due to increased depreciable property. NON-UTILITY. Non-utility total other operating expenses increased $7.8 million as compared with the same period last year primarily due to the following factors: - - An increase of $4.4 million in Utilipro's operating expenses due to increased demand for services and strong customer growth as described above. (See Non-utility section under Operating Revenues.); and - - An increase of $2.0 million in operating expenses primarily due to charges related to management restructuring. Page 15 of 27 Pages <PAGE> OTHER INCOME/(LOSS) Other income totaled $6.9 million for the three months ended December 31, 1999, compared with other losses of $7.9 million for the same period last year. The increase in other income of $14.8 million is primarily due to the following factors: - - AGL Resources' portion of SouthStar's income increased to $4.8 million from a loss of $1.4 million, an increase of $6.2 million. The improved performance by SouthStar is primarily due to an increase in customers served and lower marketing expenses; and - - During the first quarter of fiscal 1999, AGL Resources recorded pre-tax losses related to its interests in Sonat Marketing Company L.P. ("Sonat Marketing") and Sonat Power Marketing L.P. ("Sonat Power Marketing") totaling approximately $6.5 million. AGL Resources sold its interests in Sonat Marketing and Sonat Power Marketing during the fourth quarter of fiscal 1999. INTEREST EXPENSE Interest expense decreased to $12.2 million for the three months ended December 31, 1999 from $14.2 million for the same period last year. The decrease of $2.0 million was primarily due to the following: - - A decrease of $1.0 million resulting from decreased amounts of short-term debt outstanding during the period; and - - A decrease of approximately $1.0 million on customer deposits as a result of customer migration to certificated marketers. INCOME TAXES Income tax expense increased to $9.6 million for the three months ended December 31, 1999 from $8.2 million for the same period last year. The increase in income taxes of $1.4 million was due primarily to the increase in income before income taxes compared to the same period last year. The effective tax rate (income tax expense expressed as a percentage of pretax income) for the three months ended December 31, 1999 was 36.0% as compared to 34.0% for the same period last year. (The remainder of this page was intentionally left blank.) Page 16 of 27 Pages <PAGE> FINANCIAL CONDITION SEASONALITY OF BUSINESS Historically, the utility business has been seasonal in nature, resulting in a substantial increase in accounts receivable from customers from September 30 to December 31 due to higher billings during colder weather. The utility used natural gas stored underground to serve its customers during periods of colder weather, resulting in a substantial decrease in gas inventories when comparing December 31 with September 30. As a result of deregulation, the seasonality of both expenses and revenues related to AGLC's Georgia operations has diminished as end-use customers have migrated to certificated marketers. (See Note 2. Overview of the Transition from a Regulated to a Competitive Business Environment.) Inventory of natural gas stored underground decreased $26.7 million during the three months ended December 31, 1999. Natural gas stored underground decreased primarily due to the assignment of most of AGLC's inventories to certificated marketers in accordance with deregulation. AGL Resources generally meets its liquidity requirements through operating cash flow and the issuance of short-term debt. Short-term debt is utilized to meet seasonal working capital requirements and to temporarily fund capital expenditures. Lines of credit with various banks provide for direct borrowings and are subject to annual renewal. Availability under the current lines of credit ranges up to $260 million. Short-term debt increased $57.5 million to $59.0 million as of December 31, 1999 from $1.5 million as of September 30, 1999. The increase in short-term debt is primarily due to the repayment of $40 million of AGLC's long-term debt, which matured during the quarter. AGL Resources expects to be less dependent on short-term debt since there is no need to replenish natural gas inventories which have been assigned to certificated marketers in accordance with deregulation. Operating cash flow increased to $10.6 million for the three months ended December 31, 1999 as compared to $3.0 million for the same period last year primarily due to assignment of inventories to certificated marketers and a decrease in gas accounts receivable due to the migration of customers to certificated marketers. These increases in operating cash flow were partially offset by a decrease in gas cost credits. Management believes available credit will be sufficient to meet working capital needs both on a short and long-term basis. However, capital needs depend on many factors and AGL Resources may seek additional financing through debt or equity offerings in the private or public markets at any time. TRANSITION TO COMPETITION UTILITY The regulated rate structure under which AGLC unbundled its gas sales and delivery service assumed that AGLC's costs associated with providing customer service decreased each time a customer switched to a certificated marketer for gas sales service, and such costs would be eliminated at the time the switch was made. In fact, a significant portion of the costs associated with customer service activities ("ancillary services"), including billing, bill inquiry, payment processing and collection services, could not be eliminated for a period of up to several months, during which AGLC continued to incur these expenses. Page 17 of 27 Pages <PAGE> The accelerated pace of customer migration to certificated marketers also required AGLC to incur additional customer service expenses, not originally provided for in regulated rates, in order to maintain a high level of customer service during the transition to competition. As a result, during fiscal 1999, AGLC increased its staffing of customer service representatives and increased other call center related expenses rather than reducing them. At September 30, 1999, approximately 18% of AGLC's Georgia customers had not been switched to certificated marketers. Such customers were switched on October 1, 1999, with the exception of approximately 15,000 customers who were switched during the first quarter of fiscal 2000. Therefore, as of October 1, 1999, almost all of AGLC's remaining customers were receiving service from certificated marketers. AGLC's annual delivery service revenues for fiscal 1999 associated with providing ancillary services and certain transition revenues were reduced by approximately $38.6 million as compared to fiscal 1998; however, associated costs were not reduced by the same amount, resulting in an adverse effect on net income. Transition revenues decreased $15.8 million due to customer migration to certificated marketers. The remaining decrease of $22.8 million was primarily due to the timing of the implementation of the new straight fixed variable ("SFV") rate structure for AGLC delivery service that became effective during the fourth quarter of fiscal 1998. The impact of the revenue and cost imbalance related to the transition to competition is expected to continue into fiscal 2000. AGLC is pursuing solutions to this revenue and cost imbalance aggressively, including reducing or eliminating costs as quickly as possible, consistent with prudent business practices, and increasing employee productivity at customer call centers. The Deregulation Act authorizes an electing distribution company, like AGLC, to recover prudently incurred costs that are found by the GPSC to be "stranded" as a result of the transition to competition, and necessary to provide a reasonable rate of return. On June 25, 1999, AGLC filed a request with the GPSC for an accounting order (the "Order"), which would allow AGLC to defer transition costs which are considered by AGLC to be "stranded." The Order, which was approved on October 19, 1999, allows AGLC to defer these costs if such costs are incurred from October 1, 1999 to September 30, 2000, and recovery is necessary in order for AGLC to earn the 11% return on common stockholders' equity approved by the GPSC in AGLC's last rate case. In order to be deferred, the cost must also be one that: - - AGLC is still incurring but, as a result of deregulation, is no longer receiving revenue from the rate or rates which were set based on that cost; - - Is prudently incurred; and - - Cannot be mitigated. As of December 31, 1999, AGLC has deferred $1.6 million in expenses related to deregulation. A regulatory asset in that amount has been established under the caption "Other Assets" on the Condensed Consolidated Balance Sheets. NON-UTILITY UTILIPRO. Utilipro engages in the sale of integrated customer care solutions to energy marketers. The accelerated pace of customer migration to certificated marketers has resulted in rapid customer growth and increased demand for Utilipro's services. For the three months ended December 31, 1999, Utilipro's operating revenues increased $3.3 million and total other operating expenses increased $4.4 million compared with the same period for the previous year. This trend of increasing operating revenues and expenses associated with increasing demand for customer service is expected to continue in fiscal 2000 as Utilipro continues to be in a start up mode. Therefore, management is considering several strategic options in connection with AGL Resources' investment in Utilipro. Page 18 of 27 Pages <PAGE> PROPANE. Management currently is evaluating strategic options related to AGL Resources' propane operations, and anticipates that during fiscal 2000 its propane operations will be either combined with propane operations of other unrelated third parties in order to gain scale or be sold. CONCENTRATION OF CREDIT RISK AGLC has concentration of credit risk related to the provision of services to certificated marketers. At September 30, 1998, AGLC billed approximately 1.4 million end-use customers in Georgia for its services. In contrast, at December 31, 1999, AGLC billed 15 certificated and active marketers in Georgia for services. These 15 certificated marketers, in turn, bill the 1.4 million end-use customers. As of December 31, 1999, 68.8% of AGL Resources' total gas receivables were due from 8 of the 15 certificated and active marketers and 5.6% were due from end-use customers in Georgia who migrated to certificated marketers late in fiscal 1999 or who were randomly assigned. Beginning October 1, 1999, only gas receivables primarily attributable to Chattanooga will be due from end-use customers. As a result, in fiscal 2000, a significantly higher percentage of AGL Resources' total gas receivables will be due from Georgia certificated marketers than was the case in prior years. Several factors mitigate the risks to AGL Resources of the increased concentration of credit that has resulted from deregulation. First, in order to obtain a certificate from the GPSC, a certificated marketer must demonstrate to the GPSC, among other things, that is possesses satisfactory financial and technical capability to render the certificated service. Second, AGLC has instituted certain practices and imposed certain requirements designed to reduce credit risk. These include: - - Pursuant to AGLC's tariff, each certificated marketer is required to maintain security for its obligations to AGLC in an amount equal to at least two times the marketer's estimated maximum monthly bill and in the form of a cash deposit, letter of credit, surety bond or guaranty from a creditworthy guarantor; and - - Intrastate delivery service is billed in advance rather than in arrears. AGLC also faces potential credit risk in connection with assignments to certificated marketers of interstate pipeline transportation and storage capacity. Although AGLC has assigned this capacity to the certificated marketers, in the event that the certificated marketers fail to pay the interstate pipelines for the capacity, the interstate pipelines would in all likelihood seek repayment from AGLC. This risk is mitigated somewhat by the fact that the interstate pipelines require the certificated marketers to maintain security for their obligations to the interstates arising out of the assigned capacity. On October 26, 1999, Peachtree Natural Gas, LLC ("Peachtree"), one of the five largest certificated marketers in Georgia based on customer count, filed for protection under Chapter 11 of the United States Bankruptcy Code. As of the date of Peachtree's bankruptcy filing, Peachtree owed AGLC approximately $14.3 million for pre-petition delivery service and other services and charges, and AGLC held $11 million of surety bonds as security for Peachtree's obligations. The amount owed to AGLC does not include amounts owed by Peachtree to interstate pipelines for assigned capacity. Based upon information filed by Peachtree in its bankruptcy proceeding, as of the date of Peachtree's filing, Peachtree owed interstate pipelines approximately $1.8 million for assigned capacity. In December 1999, Shell Energy Services Company, L.L.C. began serving the firm customers formerly served by Peachtree. AGLC has been paid in full for all post-petition delivery and other services provided by AGLC to Peachtree. Page 19 of 27 Pages <PAGE> CAPITAL EXPENDITURES Capital expenditures for construction of distribution facilities, purchase of equipment, and other general improvements were $35.3 million for the three-month period ended December 31, 1999 as compared to $29.4 million for the three-month period ended December 31, 1998. The increase of $5.9 million is primarily attributable to the capital expenditures incurred for the accelerated pipeline replacement plan. (See AGLC Pipeline Safety section under State Regulatory Activity.) Typically, funding for capital expenditures is provided through a combination of internal sources and the issuance of short-term debt. COMMON STOCK During the three months ended December 31, 1999, AGL Resources repurchased 258,900 shares of common stock for a total of $4.5 million pursuant to a previously announced stock repurchase plan. During that same period, AGL Resources issued 158,476 shares of common stock under ResourcesDirect, a direct stock purchase and dividend reinvestment plan; the Retirement Savings Plus Plan; the Long-Term Incentive Plan; and the Non-Employee Directors Equity Compensation Plan. RATIOS As of December 31, 1999, AGL Resources' capitalization ratios consisted of: - - 45.7% long-term debt; - - 5.5% preferred securities; and - - 48.8% common equity. GAS COST CREDITS Gas cost credits decreased to $2.0 million as of December 31, 1999 from $37.9 million as of September 30, 1999. The decrease is primarily due to a $33 million payment to the GPSC during December 1999, and payments totaling approximately $2.5 million to buyout and terminate remaining long-term gas supply contracts. In accordance with the January 26, 1999 joint stipulation agreement entered into with the GPSC, AGLC recognized profits of $1.0 million in fiscal 1999 and recorded a liability for the remaining over-collection of gas costs in accordance with SFV rates. (See Note 2. Overview of the Transition from a Regulated to a Competitive Business Environment.) Since AGLC paid the $33 million to the GPSC, the GPSC subsequently will coordinate with the certificated marketers to provide customers with a credit on their marketer's bill. To be eligible for the refund credit, the customer must have been on AGLC's system on April 25, 1999, and still connected as of March 20, 2000. The average refund per customer is expected to be approximately $24 to $26. (The remainder of this page was intentionally left blank.) Page 20 of 27 Pages <PAGE> STATE REGULATORY ACTIVITY FINAL RANDOM ASSIGNMENT During the quarter ended December 31, 1999, AGLC completed the remaining random assignment of customers to certificated marketers. Retail marketers now serve all firm customers on the AGLC system. This final round of random assignment was required due to the effects of timing and computer programming issues, which prevented several thousand accounts from being assigned under the routine procedures. REGULATORY ACCOUNTING AGL Resources has recorded regulatory assets and liabilities in its Condensed Consolidated Balance Sheets in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). In July 1997, the Emerging Issues Task Force ("EITF") concluded that once legislation is passed to deregulate a segment of a utility and that legislation includes sufficient detail for the enterprise to determine how the transition plan will affect that segment, SFAS 71 should be discontinued for that segment of the utility. The EITF consensus permits assets and liabilities of a deregulated segment to be retained if they are recoverable through a segment that remains regulated. The Deregulation Act authorizes an electing distribution company, like AGLC, to recover prudently incurred costs that are found by the GPSC to be "stranded" as a result of the transition to competition, and necessary to provide a reasonable rate of return. On June 25, 1999, AGLC filed a request with the GPSC for an accounting order (the "Order"), which would allow AGLC to defer transition costs which are considered by AGLC to be "stranded." The Order, which was approved on October 19, 1999, allows AGLC to defer these costs if such costs are incurred from October 1, 1999 to September 30, 2000, and recovery is necessary in order for AGLC to earn the 11% return on common stockholders' equity approved by the GPSC in AGLC's last rate case. In order to be deferred, the cost must also be one that: - - AGLC is still incurring but, as a result of deregulation, is no longer receiving revenue from the rate or rates which were set based on that cost; - - Is prudently incurred; and - - Cannot be mitigated. As of December 31, 1999, AGLC has deferred $1.6 million in expenses related to deregulation. A regulatory asset in that amount has been established under the caption "Other Assets" on the Condensed Consolidated Balance Sheets. AGLC PIPELINE SAFETY On January 8, 1998, the GPSC issued procedures and set a schedule for hearings about alleged pipeline safety violations. On July 21, 1998, the GPSC approved a settlement between AGLC and the Adversary Staff of the GPSC that details a 10-year replacement program for approximately 2,300 miles of cast iron and bare steel pipe. Over that 10-year period, AGLC will recover from customers, through billings to certificated marketers, the costs related to the program net of any cost savings from the replacement program. Page 21 of 27 Pages <PAGE> During the three months ended December 31, 1999, approximately 55 miles of pipe was replaced pursuant to the program. During that period, AGLC's capital expenditures and operation and maintenance expenses related to the pipeline replacement program were approximately $11.6 million and $2.2 million, respectively. All such amounts will be recovered through a combination of SFV rates and a regulatory mechanism. On October 1, 1999, AGLC began recovering costs of the program through the regulatory mechanism. The recovery for the first quarter of fiscal 2000 is approximately $0.5 million. ENVIRONMENTAL AGLC has been associated with nine MGP sites in Georgia and three in Florida. Based on investigations to date, AGLC believes that some cleanup is likely at most of the sites. AGLC currently estimates that its total future cost of investigating and cleaning up its MGP sites is between $102.4 million and $148.2 million. AGLC has two ways of recovering investigation and cleanup costs. First, the GPSC has approved an "Environmental Response Cost Recovery Rider." It allows the recovery of costs of investigation, testing, cleanup, and litigation. Because of that rider, AGLC has recorded a regulatory asset in the same amount as the recorded liability for investigation and cleanup. The second way AGLC can recover costs is by exercising the legal rights AGLC believes it has to recover a share of its costs from other potentially responsible parties, typically former owners or operators of the MGP sites. AGLC has been actively pursuing those recoveries. There were no material recoveries during the quarter ended December 31, 1999. FEDERAL REGULATORY ACTIVITY FERC ORDER 636: TRANSITION COSTS SETTLEMENT AGREEMENTS. The Federal Energy Regulatory Commission ("FERC") has required the utility, as well as other interstate pipeline customers, to pay transition costs associated with the separation of the suppliers' transportation and gas supply services. Based on its pipeline suppliers' filings with the FERC, the utility estimates the total portion of its transition costs from all its pipeline suppliers will be approximately $107.9 million. As of December 31, 1999, approximately $105.8 million of those costs had been incurred and were being recovered primarily from the utility's customers under rates charged for gas sales. AGLC's remaining costs will be recovered from certificated marketers. ENVIRONMENTAL MATTERS Before natural gas was widely available in the Southeast, AGLC manufactured gas from coal and other fuels. Those manufacturing operations were known as "manufactured gas plants", or "MGPs" which AGLC ceased operating in the 1950s. Because of recent environmental concerns, AGLC is required to investigate possible environmental contamination at those plants and, if necessary, clean up any contamination. AGLC has been associated with nine MGP sites in Georgia and three in Florida. Based on investigations to date, AGLC believes that some cleanup is likely at most of the sites. In Georgia, the state Environmental Protection Division supervises the investigation and cleanup of MGP sites. In Florida, the U.S. Environmental Protection Agency has that responsibility. Page 22 of 27 Pages <PAGE> For each of the MGP sites, AGLC has estimated its share of the likely costs of investigation and cleanup. AGLC currently estimates that its total future cost of investigating and cleaning up its MGP sites is between $102.4 million and $148.2 million. That range does not include other potential expenses, such as unasserted property damage or personal injury claims or legal expenses for which AGLC may be held liable but for which neither the existence nor the amount of such liabilities can be reasonably forecast. Within that range, AGLC cannot identify any single number as a "better" estimate of its likely future costs because its actual future investigation and cleanup costs will be affected by a number of contingencies that cannot be quantified at this time. Consequently, as of December 31, 1999, AGLC has recorded the lower end of the range, or $102.4 million, as a liability, which remains unchanged from September 30, 1999, and a corresponding regulatory asset. (See Environmental section under State Regulatory Activity.) YEAR 2000 READINESS DISCLOSURE AGL Resources' Year 2000 initiative defined and provided a continuing process for assessment, remediation planning, and plan implementation to achieve a level of readiness that would meet the computer-related challenges presented by the Year 2000 in a timely manner. Based on these efforts, AGL Resources considered its critical systems, critical electronic assets, relationships with key business partners, and contingency plans ready as of December 31, 1999. AGL Resources suffered no material consequences due to the Year 2000 issue. Through December 31, 1999, cumulative expenses in connection with AGL Resources' Year 2000 assessment, remediation planning, and plan implementation processes were approximately $7.7 million of which approximately $1.0 million was spent in the first quarter of fiscal 2000. AGL Resources expects to spend approximately $1.1 million for the Year 2000 initiative in fiscal 2000. These estimates include costs associated with the use of outside consultants as well as hardware and software costs. They also include direct costs associated with employees of AGL Resources' IS Department who work on the Year 2000 initiative. It does not include costs associated with employees of other departments such as Legal and Internal Audit, and of other business units, that are involved, on a limited basis, in the Year 2000 initiative. (The remainder of this page was intentionally left blank.) Page 23 of 27 Pages <PAGE> ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK All financial instruments and positions held by AGL Resources described below are held for purposes other than trading. INTEREST RATE RISK AGL Resources' exposure to market risk related to changes in interest rates relates primarily to its borrowing activities. A hypothetical 10% increase or decrease in interest rates related to AGL Resources' variable rate debt ($59.0 million outstanding as of December 31, 1999) would not have a material effect on results of operations or financial condition over the next 12 months. The fair value of AGL Resources' long-term debt and capital securities also are affected by changes in interest rates. A hypothetical 10% increase or decrease in interest rates would not have a material effect on the estimated fair value of AGL Resources' long-term debt or capital securities. Additionally, the fair value of outstanding long-term debt and capital securities has not materially changed since September 30, 1999. During the first quarter of fiscal 2000, AGL Resources paid-off $40.0 million of long-term debt. (The remainder of this page was intentionally left blank.) Page 24 of 27 Pages <PAGE> 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, 1999, and should be read in conjunction therewith. ITEM 1. LEGAL PROCEEDINGS With regard to legal proceedings, AGL Resources is a party, as both plaintiff and defendant, to a number of suits, claims and counterclaims on an ongoing basis. (See State Regulatory Activity, Federal Regulatory Activity, and Environmental Matters contained in Item 2 of Part I under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition.") 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Information related to State Regulatory Activity, Federal Regulatory Activity, and Environmental Matters is contained in Item 2 of Part I under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition." (The remainder of this page was intentionally left blank.) Page 25 of 27 Pages <PAGE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule. (b) Reports on Form 8-K. On October 6, 1999, AGL Resources filed a Current Report on Form 8-K dated October 5, 1999, containing : "Item 7 - Exhibits"; Exhibit 99 - Form of Press Release, dated October 5, 1999. On October 27, 1999, AGL Resources filed a Current Report on Form 8-K dated October 27, 1999, containing : "Item 7 - Exhibits"; Exhibit 99 - Form of Press Release, dated October 27, 1999. On November 19, 1999, AGL Resources filed a Current Report on Form 8-K dated November 18, 1999, containing : "Item 7 - Exhibits"; Exhibit 99 - Form of Press Release, dated November 18, 1999. (The remainder of this page was intentionally left blank.) Page 26 of 27 Pages <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. AGL Resources Inc. (Registrant) Date February 14, 2000 /s/ Donald P. Weinstein Donald P. Weinstein Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Page 27 of 27 Pages </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <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-30-2000 <PERIOD-START> OCT-01-1999 <PERIOD-END> DEC-31-1999 <BOOK-VALUE> PER-BOOK <TOTAL-NET-UTILITY-PLANT> 1,528 <OTHER-PROPERTY-AND-INVEST> 80 <TOTAL-CURRENT-ASSETS> 96 <TOTAL-DEFERRED-CHARGES> 226 <OTHER-ASSETS> 0 <TOTAL-ASSETS> 1,930 <COMMON> 273 <CAPITAL-SURPLUS-PAID-IN> 200 <RETAINED-EARNINGS> 189 <TOTAL-COMMON-STOCKHOLDERS-EQ> 662 <PREFERRED-MANDATORY> 74 <PREFERRED> 0 <LONG-TERM-DEBT-NET> 610 <SHORT-TERM-NOTES> 59 <LONG-TERM-NOTES-PAYABLE> 0 <COMMERCIAL-PAPER-OBLIGATIONS> 0 <LONG-TERM-DEBT-CURRENT-PORT> 10 <PREFERRED-STOCK-CURRENT> 0 <CAPITAL-LEASE-OBLIGATIONS> 0 <LEASES-CURRENT> 0 <OTHER-ITEMS-CAPITAL-AND-LIAB> 515 <TOT-CAPITALIZATION-AND-LIAB> 1,930 <GROSS-OPERATING-REVENUE> 182 <INCOME-TAX-EXPENSE> 10 <OTHER-OPERATING-EXPENSES> 94 <TOTAL-OPERATING-EXPENSES> 158 <OPERATING-INCOME-LOSS> 24 <OTHER-INCOME-NET> 7 <INCOME-BEFORE-INTEREST-EXPEN> 31 <TOTAL-INTEREST-EXPENSE> 12 <NET-INCOME> 19 <PREFERRED-STOCK-DIVIDENDS> 2 <EARNINGS-AVAILABLE-FOR-COMM> 17 <COMMON-STOCK-DIVIDENDS> 15 <TOTAL-INTEREST-ON-BONDS> 12 <CASH-FLOW-OPERATIONS> 11 <EPS-BASIC> 0.30 <EPS-DILUTED> 0.30 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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GIS

https://www.sec.gov/Archives/edgar/data/40704/0000040704-00-000002.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, V7IaJjARjpp9k54DrHe90VfMRujIo4MfrG00srtVV37PI16+31Q+wDRLmeN8G01b gHJQ9RZ4s2V1+CKC4kluHA== <SEC-DOCUMENT>0000040704-00-000002.txt : 20000218 <SEC-HEADER>0000040704-00-000002.hdr.sgml : 20000218 ACCESSION NUMBER: 0000040704-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991128 FILED AS OF DATE: 20000107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MILLS INC CENTRAL INDEX KEY: 0000040704 STANDARD INDUSTRIAL CLASSIFICATION: 2040 IRS NUMBER: 410274440 STATE OF INCORPORATION: DE FISCAL YEAR END: 0525 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01185 FILM NUMBER: 503278 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>FORM 10-Q FOR QUARTER ENDED 11/28/99 <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 28, 1999 / / 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) 764-2311 (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 23, 1999, General Mills had 301,127,887 shares of its $.10 par value common stock outstanding (excluding 107,178,777 shares held in treasury). <PAGE> Part I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> GENERAL MILLS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In Millions, Except per Share Data) Thirteen Weeks Ended Twenty-Six Weeks Ended November 28, November 29, November 28, November 29, 1999 1998 1999 1998 --------- --------- --------- --------- <S> <C> <C> <C> <C> Sales $1,817.2 $1,677.4 $3,390.8 $3,150.5 Costs and Expenses: Cost of sales 728.2 699.0 1,349.6 1,282.7 Selling, general and administrative 760.0 667.8 1,437.2 1,301.9 Interest, net 34.1 29.4 66.8 59.2 Unusual items - 51.6 - 51.6 ------- ------- ------- ------- Total Costs and Expenses 1,522.3 1,447.8 2,853.6 2,695.4 ------- ------- ------- ------- Earnings before Taxes and Earnings (Losses) from Joint Ventures 294.9 229.6 537.2 455.1 Income Taxes 104.3 83.7 191.6 166.8 Earnings (Losses) from Joint Ventures 3.1 (2.3) 6.6 .3 --------- ---------- --------- ----- Net Earnings $ 193.7 $ 143.6 $ 352.2 $ 288.6 ======= ======= ======= ======= Earnings per Share - Basic $ .64 $ .47 $ 1.16 $ .94 ======= ===== ======= ======= Average Number of Common Shares 303.5 305.8 303.9 307.0 ======= ======= ======= ======= Earnings per Share - Diluted $ .62 $ .46 $ 1.12 $ .92 ======= ======= ======= ======= Average Number of Common Shares - Assuming Dilution 313.1 313.5 313.7 314.1 ======= ======= ======= ======= Dividends per Share $ .275 $ .265 $ .550 $ .530 ======= ======= ======= ======== See accompanying notes to consolidated condensed financial statements. </TABLE> <TABLE> <CAPTION> GENERAL MILLS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In Millions) (Unaudited) (Unaudited) November 28, November 29, May 30, 1999 1998 1999 ---------- ---------- --------- <S> <C> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 70.4 $ 9.5 $ 3.9 Receivables 562.5 468.4 490.6 Inventories: Valued primarily at FIFO 200.5 206.5 172.2 Valued at LIFO (FIFO value exceeds LIFO by $32.0, $39.1 and $34.0, respectively) 296.8 231.9 254.5 Prepaid expenses and other current assets 80.4 77.4 83.7 Deferred income taxes 94.8 119.9 97.6 -------- ------- -------- Total Current Assets 1,305.4 1,113.6 1,102.5 -------- ------- -------- Land, Buildings and Equipment, at Cost 2,843.4 2,592.0 2,718.9 Less accumulated depreciation (1,469.5) (1,367.2) (1,424.2) -------- -------- -------- Net Land, Buildings and Equipment 1,373.9 1,224.8 1,294.7 Intangibles 830.3 621.4 722.0 Other Assets 1,084.7 1,061.0 1,021.5 -------- ------- -------- Total Assets $4,594.3 $4,020.8 $4,140.7 ======== ======== ======== LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 672.4 $ 638.8 $ 647.4 Current portion of long-term debt 98.7 196.4 90.5 Notes payable 893.7 396.0 524.4 Accrued taxes 167.2 137.0 135.0 Other current liabilities 259.7 282.5 303.0 -------- ------- -------- Total Current Liabilities 2,091.7 1,650.7 1,700.3 Long-term Debt 1,664.7 1,592.8 1,702.4 Deferred Income Taxes 296.2 282.3 288.9 Deferred Income Taxes - Tax Leases 100.5 120.2 111.3 Other Liabilities 184.5 177.5 173.6 -------- ------- -------- Total Liabilities 4,337.6 3,823.5 3,976.5 -------- ------- -------- Stockholders' Equity: Cumulative preference stock, none issued - - - Common stock, 408.3 shares issued 679.9 626.8 657.9 Retained earnings 2,013.1 1,749.1 1,827.4 Less common stock in treasury, at cost, shares of 105.8, 102.3 and 104.3, respectively (2,307.3) (2,071.5) (2,195.3) Unearned compensation (66.5) (73.0) (68.9) Accumulated other comprehensive income (62.5) (34.1) (56.9) -------- ------- -------- Total Stockholders' Equity 256.7 197.3 164.2 -------- ------- -------- Total Liabilities and Equity $4,594.3 $4,020.8 $4,140.7 ======== ======== ======== See accompanying notes to consolidated condensed financial statements. </TABLE> <PAGE> <TABLE> <CAPTION> GENERAL MILLS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In Millions) Twenty-Six Weeks Ended November 28, November 29, 1999 1998 <S> <C> <C> Cash Flows - Operating Activities: Net earnings $352.2 $288.6 Adjustments to reconcile earnings to cash flow: Depreciation and amortization 97.7 94.4 Deferred income taxes 12.1 12.1 Change in current assets and liabilities (113.4) (112.8) Unusual items - 51.6 Other, net (24.8) (22.5) ----- ----- Cash provided by continuing operations 323.8 311.4 Cash used by discontinued operations (1.4) (2.1) ----- ----- Net Cash Provided by Operating Activities 322.4 309.3 ----- ----- Cash Flows - Investment Activities: Purchases of land, buildings and equipment (132.7) (123.8) Investments in businesses, intangibles and affiliates, net of investment returns and dividends (201.9) (8.8) Purchases of marketable investments (5.5) (4.8) Proceeds from sale of marketable investments 5.9 17.7 Other, net 9.7 (11.6) ----- ----- Net Cash Used by Investment Activities (324.5) (131.3) ----- ----- Cash Flows - Financing Activities: Change in notes payable 369.7 129.2 Issuance of long-term debt 54.2 56.9 Payment of long-term debt (78.0) (52.5) Common stock issued 60.5 32.0 Purchases of common stock for treasury (162.9) (169.7) Dividends paid (167.2) (163.1) Other, net (7.7) (7.7) ----- ----- Net Cash Used by Financing Activities 68.6 (174.9) ----- ------ Increase in Cash and Cash Equivalents $ 66.5 $ 3.1 ====== ===== See accompanying notes to consolidated condensed financial statements. </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 28, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending May 28, 2000. These statements should be read in conjunction with the financial statements and footnotes included in our annual report for the year ended May 30, 1999. 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) Acquisitions On June 30, 1999, we acquired certain grain elevators and related assets from Koch Agriculture Company. On August 12, 1999, we acquired Gardetto's Bakery, Inc. of Milwaukee, Wisconsin. Gardetto's is a leading national marketer of baked snack mixes and flavored pretzels. The aggregate purchase price of these acquisitions, both of which were accounted for using the purchase method, totaled approximately $163 million, subject to adjustments. Goodwill associated with the Gardetto's acquisition is being amortized on a straight-line basis over 40 years. (3) Unusual Items In last year's second quarter, we recorded restructuring charges of $51.6 million pretax, $32.3 million after tax ($.10 per diluted share. The restructuring actions primarily reflected further streamlining of our supply chain as part of the broad consolidation of these activities announced in May 1998. Actions included consolidating manufacturing of certain products into fewer locations, and consolidating warehouse, distribution and sales activities across the company's packaged food, foodservice and milling operations. In addition, the second-quarter charge included our share of restructuring by Snack Ventures Europe, our joint venture with PepsiCo, to improve its manufacturing cost structure. Slightly more than half of the total charge reflected write-down of assets; the remaining cash portion was primarily related to severance and asset redeployment expenses. These restructuring activities were substantially completed by the end of fiscal 1999. (4) Statements of Cash Flows During the first six months, we made interest payments of $65.6 million (net of amount capitalized) and paid $132.0 million in income taxes. <PAGE> (5) Comprehensive Income The following table summarizes total comprehensive income for the periods presented (in millions): Thirteen Weeks Ended Twenty-Six Weeks Ended Nov. 28, Nov. 29, Nov. 28, Nov. 29, 1999 1998 1999 1998 Net Earnings $193.7 $143.6 $352.2 $288.6 Other comprehensive income (loss): Unrealized gain on securities (2.0) 1.3 (4.2) 4.0 Foreign currency translation adjustments .9 4.4 (1.4) 3.0 ------- ------- ------ ------ (1.1) 5.7 (5.6) 7.0 ------- ------- ------ ------ Total comprehensive income $192.6 $149.3 $346.6 $295.6 ====== ====== ====== ====== (6) Changes in Capital Stock On September 27, 1999, the Board of Directors declared a two-for-one stock split effected in the form of a 100 percent stock dividend whereby each shareholder received one additional share of General Mills common stock on November 8, 1999, for each share owned at the close of business on October 8, 1999. Prior year information throughout these financial statements is restated for the stock split, to present all data on a consistent and comparable basis. (7) Subsequent Event On December 15, 1999, we announced that we had signed an agreement to purchase Small Planet Foods, a leading producer of organic food products based in Sedro-Woolley, Washington. Small Planet's Cascadian Farm brand consists of organic frozen fruits, vegetables, juices and entrees while the company's Muir Glen line includes organic canned tomatoes, pasta sauces, salsa and condiments. Combined annual sales for these organic brands total approximately $60 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Continuing operations generated $12.4 million more cash in the first half of fiscal 2000 than in the same prior-year period. The increase in cash provided by operations as compared to last year was primarily caused by a $13.0 million increase in cash from operations, after adjustment for non-cash items. Fiscal 2000 fixed asset expenditures are estimated to be approximately $270 to $285 million. During the first six months, fixed asset expenditures totaled $132.7 million. Total capital investments, including investments in joint ventures, are estimated to be approximately $300 to $330 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. Activity through six months under this program consisted of the issuance of $49.0 million in notes and debt payments of $73.3 million. RESULTS OF OPERATIONS All per share references in the following discussion are based on diluted shares, except where indicated, and all prior year per share data have been restated for the two-for-one stock split effective November 8, 1999. Sales for the second quarter ended November 28, 1999, totaled $1,817 million, up 8 percent from the prior year. Earnings per share of 62 cents for the second quarter of fiscal 2000, were up 11 percent from 56 cents per share before unusual items earned in the same period last year. Basic earnings per share of 64 cents for the second quarter were up 10 percent from 58 cents before unusual items. After-tax earnings grew 10 percent to $193.7 million. First half sales of $3,391 million were up 8 percent from the first six months one year ago. Through six months, earnings per share totaled $1.12, up 10 percent from $1.02 earned before unusual items last year. Basic earnings per share of $1.16 for the first half were also up 10 percent from $1.05 before unusual items. Earnings after tax also grew 10 percent before unusual items to $352.2 million. General Mills' net earnings for last year's second quarter included a restructuring charge of $32.3 million after-tax, or 10 cents per diluted share, primarily related to streamlining supply chain activities (See Note (3) Unusual Items). Including this unusual item, earnings per share totaled 46 cents in last year's second quarter, and 92 cents in last year's first half. With the 8 percent increase in second-quarter shipments, General Mills' U.S. foods unit volume was up 7 percent through the first six months of fiscal 2000. This strong growth included incremental volume from three recently acquired businesses: Lloyd's refrigerated entrees (acquired January 1999); Farmhouse Foods side dishes (February 1999) and Gardetto's baked snack foods (August 1999). Excluding acquired businesses, General Mills' U.S. food volume was up 5 percent for the quarter and 4 percent through six months. Big G cereal unit volume grew 5 percent in the second quarter. This growth included good gains by major established brands including Cheerios, Lucky Charms and Golden Grahams. In addition, the quarter included significant volume from new products. Honey Nut Chex, which reached nationwide distribution in March 1999, continues to record consistently strong volume and market shares. Nesquik and Sunrise cereals, launched in the spring of 1999, contributed incremental volume. The second quarter also included shipments of Millenios cereal, a limited-time Cheerios variety, and the nationwide launch of Brown Sugar and Oat Total cereal, a new variety added to the Total brand franchise. Through six months, Big G's share of cereal category pound volume in all Nielsen-measured outlets was up 1.5 percentage points to 27 percent, and its share of category dollar sales increased to more than 32 percent. Combined unit volume for the company's other U.S. foods businesses grew 9 percent in the quarter. Second-quarter volume for Betty Crocker products declined 1 percent in total. The new Chicken Helper line continued to generate strong volume, but overall dinner mix shipments were lower due to sales declines in established Hamburger Helper varieties. A revised marketing program designed to restore dinner mix growth will be implemented in the second half. Volume for Betty Crocker desserts and family flour was also lower in the quarter, reflecting the impact of significantly higher competitive marketing spending. Total unit volume for the company's convenience foods businesses (snacks and yogurt) grew 18 percent in the second quarter. Snacks performance included double-digit growth for fruit snacks, powered by strong introductory shipments of Pokemon fruit rolls. Volume for Chex Mix snacks grew 17 percent in the quarter, and the recently acquired Gardetto's business contributed additional volume. Yogurt volume continued to grow at a double-digit pace, fueled by solid gains from established Yoplait product lines and the continued success of new Yoplait Go-Gurt, which reached nationwide distribution during the quarter. Combined dollar share for Yoplait and Colombo grew to a record 34 percent for the first half, up 4 percentage points. In addition to these retail business gains, second-quarter unit volume for established Foodservice businesses grew 6 percent, and including Gardetto's, Foodservice volume grew 13 percent. Unit volume for the company's international operations was up 6 percent in the second quarter and 4 percent through the first half. Cereal Partners Worldwide (CPW), the company's joint venture with Nestle, posted an 11 percent volume increase for the quarter, led by strong performance in the United Kingdom, France, Spain, Portugal and Mexico. CPW's combined share of its worldwide markets for calendar 1999 to date grew to 20 percent. Total volume for Snack Ventures Europe (SVE), the company's joint venture with PepsiCo, increased 4 percent in the second quarter, despite continued market weakness in Russia. In SVE's core western European markets only, volume growth was 6 percent. Through the first six months, international joint ventures contributed $6.6 million to General Mills' after-tax earnings, up from approximately breakeven in last year's first half. In Canada, second-quarter volume was up 1 percent overall, as 5 percent growth in cereal volume offset softness on certain Betty Crocker products. Honey Nut Chex cereal was successfully introduced during the quarter and General Mills' cereal share in Canada grew to 17 percent for the year-to-date. During the second quarter, General Mills repurchased 2.5 million shares of common stock under the company's ongoing program. Through the first six months of fiscal 2000, a total of 4.1 million shares have been repurchased at an average price of approximately $39 per share. Average diluted shares outstanding for the quarter totaled 313.1 million, compared to 313.5 million in the prior year. Interest expense of $34.1 million in the quarter was up from the prior year, reflecting higher rates and higher debt levels associated with acquisitions and share repurchase activity. Our effective tax rates (excluding unusual items) for the second quarter and first half of fiscal 2000 were 35.4 percent and 35.7 percent, respectively, compared to 36.6 percent and 36.7 percent in last year's second quarter and first half. Our reported tax rates for the first six months of fiscal 2000 and 1999 were 35.7 percent and 36.7 percent, respectively. YEAR 2000 We have devoted significant resources throughout the company to minimize the risk of potential disruption from year 2000 issues related to computers or other equipment with date-sensitive software and embedded chip systems. If we, or our significant customers, suppliers or other third parties fail to correct year 2000 issues during the year 2000 transition period, our ability to operate our businesses could be adversely affected. However, based on our assessment of operations through January 6, 2000, we have not experienced any significant year 2000 issues. We assessed, inventoried and classified year 2000 issues on all of our information systems infrastructure and non-technical assets (e.g., plant production equipment). Information systems that were year 2000 deficient were modified, upgraded or replaced and tested for compliance. All non-I.T. assets (including production equipment) were tested and certified year 2000 compliant. The costs of addressing internal system year 2000 issues totaled approximately $26 million, all of which have been incurred, and which were not material to our financial position, results of operations or cash flows. We have surveyed significant customers, suppliers and third parties critical to our business operations to determine their year 2000 compliance. Cross-functional planning teams assessed the associated risks and developed contingency plans including identifying and securing alternate suppliers, adjusting manufacturing schedules, stockpiling of certain materials and equipment, contracting additional staff, procuring backup generators, and other measures considered appropriate by management. We also established backup manual procedures similar to existing procedures developed for our disaster recovery plan. We will continue to modify these plans through the year 2000 transition period as additional information becomes available. <PAGE> PART II Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Stockholders was held on September 27, 1999. The voting results reported below do not reflect the stock split effected November 8, 1999 (see Item 6(b)). (b) All directors nominated were elected at the Annual Meeting. (c) For the election of directors, the results were as follows: Stephen R. Demeritt For 132,747,981 Withheld 337,708 Livio D. DeSimone For 132,730,919 Withheld 354,770 William T. Esrey For 132,684,436 Withheld 401,253 Raymond V. Gilmartin For 132,675,130 Withheld 410,559 Judith R. Hope For 132,662,702 Withheld 422,987 Robert L. Johnson For 132,587,424 Withheld 498,265 Heidi G. Miller For 132,597,810 Withheld 487,879 Michael D. Rose For 132,649,538 Withheld 436,151 Stephen W. Sanger For 132,738,444 Withheld 347,245 A. Michael Spence For 132,683,996 Withheld 401,693 Dorothy A. Terrell For 132,705,391 Withheld 380,298 Raymond G. Viault For 132,744,065 Withheld 341,624 C. Angus Wurtele For 132,607,690 Withheld 477,999 The ratification of the appointment of KPMG LLP as auditors for fiscal 2000 was approved: For: 132,745,000 Against: 177,780 Abstain: 162,909 <PAGE> Item 5. Other Information. 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 Relevant to Forward-Looking Information" in Item 1 of our Annual Report on Form 10-K for the fiscal year ended May 30, 1999, which lists important factors that could cause actual results to differ materially from those discussed in this report. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 11 Statement of Computation of Earnings per Share. Exhibit 12 Statement of Ratio of Earnings to Fixed Charges. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K On September 29, 1999, the Company filed a Form 8-K reporting the September 27, 1999, authorization by the Board of Directors for a 2-for-1 split of General Mills' common stock effected in the form of a 100% stock dividend. Each stockholder received one additional share of common stock for each share owned as of the close of business on October 8, 1999. One additional stock certificate was mailed to each such stockholder on November 8, 1999. The stock split does not result in any gain or loss for federal income tax purposes. 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 7, 2000 /s/ S. S. Marshall --------------- ---------------------------------- S. S. Marshall Senior Vice President, General Counsel Date January 7, 2000 /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 QUARTER FORM 10-Q, FISCAL 2000 <TEXT> Exhibit 11 GENERAL MILLS, INC. COMPUTATION OF EARNINGS PER SHARE (In Millions, Except per Share Data) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended November 28, November 29, November 28, November 29, 1999 1998 1999 1998 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net Earnings $193.7 $ 143.6 $352.2 $288.6 ====== ======= ====== ====== Average Number of Common Shares - Basic EPS (a) 303.5 305.8 303.9 307.0 Incremental Share Effect from: -Stock options (b) 9.5 7.6 9.7 7.0 -Restricted stock, stock rights and puts .1 .1 .1 .1 ------- ------- ------ -------- Average Number of Common Shares - Diluted EPS 313.1 313.5 313.7 314.1 ===== ===== ===== ===== Earnings per Share - Basic $.64 $.47 $1.16 $.94 ==== ==== ===== ==== Earnings per Share - Diluted $.62 $.46 $1.12 $.92 ==== ==== ===== ==== Notes to Exhibit 11: (a) Computed as the weighted average of net shares outstanding on stock-exchange trading days. (b) Incremental shares from stock options 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. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 12 TO 2ND QUARTER FORM 10-Q, FISCAL 2000 <TEXT> Exhibit 12 <TABLE> <CAPTION> RATIO OF EARNINGS TO FIXED CHARGES Twenty-Six Weeks Ended Fiscal Year Ended November 28, November 29, May 30, May 31, May 25, May 26, May 28, 1999 1998 1999 1998 1997 1996 1995 --------------------- ---------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Ratio of Earnings to Fixed Charges 7.77 7.32 6.67 5.63 6.54 6.94 4.10 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. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>FDS, 2ND QUARTER 10-Q, FISCAL 2000 <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 28, 1999, and is qualified in its entirety by reference to such financial statements. </LEGEND> <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-28-2000 <PERIOD-START> MAY-31-1999 <PERIOD-END> NOV-28-1999 <CASH> 70,400,000 <SECURITIES> 0 <RECEIVABLES> 562,500,000 <ALLOWANCES> 0 <INVENTORY> 497,300,000 <CURRENT-ASSETS> 1,305,400,000 <PP&E> 2,843,400,000 <DEPRECIATION> (1,469,500,000) <TOTAL-ASSETS> 4,594,300,000 <CURRENT-LIABILITIES> 2,091,700,000 <BONDS> 1,664,700,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 679,900,000 <OTHER-SE> (423,200,000) <TOTAL-LIABILITY-AND-EQUITY> 4,594,300,000 <SALES> 3,390,800,000 <TOTAL-REVENUES> 3,390,800,000 <CGS> 1,349,600,000 <TOTAL-COSTS> 1,349,600,000 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 66,800,000 <INCOME-PRETAX> 537,200,000 <INCOME-TAX> 191,600,000 <INCOME-CONTINUING> 352,200,000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 352,200,000 <EPS-BASIC> 1.16 <F1> <EPS-DILUTED> 1.12 <F1> <FN> On September 27, 1999, the company's board of directors declared a 2-for-1 split of General Mills common stock for shareholders of record on October 8, 1999, payable November 8, 1999. All share and per share data have been adjusted to reflect the stock split. Prior Financial Data Schedules have not been restated for the stock split. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

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https://www.sec.gov/Archives/edgar/data/46640/0000950128-00-000505.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, MLauwlgxsenj3dSq4IsbAGC4qQSrTvNlp+OGjYDh/8EpT+i9pYPfbB+YCcia3HxL +s0BvjFOk7fkUe8OY7cpfg== <SEC-DOCUMENT>0000950128-00-000505.txt : 20000314 <SEC-HEADER>0000950128-00-000505.hdr.sgml : 20000314 ACCESSION NUMBER: 0000950128-00-000505 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000126 FILED AS OF DATE: 20000313 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: SEC FILE NUMBER: 001-03385 FILM NUMBER: 567094 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>H.J. HEINZ COMPANY FORM 10-Q <TEXT> <PAGE> 1 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 26, 2000 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 26, 2000 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, 2000 was 352,229,397 shares. <PAGE> 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended ----------------------------------- January 26, 2000 January 27, 1999 FY 2000 FY 1999 ---------------- ---------------- (Unaudited) (In Thousands, Except per Share Amounts) <S> <C> <C> Sales....................................................... $2,294,637 $2,282,062 Cost of products sold....................................... 1,391,887 1,429,482 ---------- ---------- Gross profit................................................ 902,750 852,580 Selling, general and administrative expenses................ 566,176 586,191 ---------- ---------- Operating income............................................ 336,574 266,389 Interest income............................................. 8,598 5,993 Interest expense............................................ 61,594 63,522 Other expenses, net......................................... 15,665 7,634 ---------- ---------- Income before income taxes.................................. 267,913 201,226 Provision for income taxes.................................. 96,801 80,672 ---------- ---------- Net income.................................................. $ 171,112 $ 120,554 ========== ========== Net income per share--diluted............................... $ 0.47 $ 0.33 ========== ========== Average common shares outstanding--diluted.................. 361,741 368,476 ========== ========== Net income per share--basic................................. $ 0.48 $ 0.33 ========== ========== Average common shares outstanding--basic.................... 356,690 361,750 ========== ========== Cash dividends per share.................................... $ 0.3675 $ 0.3425 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------------ 2 <PAGE> 3 H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Nine Months Ended ----------------------------------- January 26, 2000 January 27, 1999 FY 2000 FY 1999 ---------------- ---------------- (Unaudited) (In Thousands, Except per Share Amounts) <S> <C> <C> Sales...................................................... $6,819,728 $6,832,694 Cost of products sold...................................... 4,147,788 4,175,262 ---------- ---------- Gross profit............................................... 2,671,940 2,657,432 Selling, general and administrative expenses............... 1,627,803 1,545,594 Gain on sale of Weight Watchers............................ 464,617 -- ---------- ---------- Operating income........................................... 1,508,754 1,111,838 Interest income............................................ 16,767 20,145 Interest expense........................................... 188,377 195,081 Other expenses, net........................................ 22,366 33,545 ---------- ---------- Income before income taxes................................. 1,314,778 903,357 Provision for income taxes................................. 521,500 337,684 ---------- ---------- Net income................................................. $ 793,278 $ 565,673 ========== ========== Net income per share--diluted.............................. $ 2.19 $ 1.54 ========== ========== Average common shares outstanding--diluted................. 361,741 368,476 ========== ========== Net income per share--basic................................ $ 2.22 $ 1.56 ========== ========== Average common shares outstanding--basic................... 356,690 361,750 ========== ========== Cash dividends per share................................... $ 1.0775 $ 1.00 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------------ 3 <PAGE> 4 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> January 26, 2000 April 28, 1999* FY 2000 FY 1999 ---------------- --------------- (Unaudited) (Thousands of Dollars) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................................... $ 140,027 $ 115,982 Short-term investments, at cost which approximates market... 4,189 7,139 Receivables, net............................................ 1,181,602 1,163,915 Inventories................................................. 1,678,410 1,409,651 Prepaid expenses and other current assets................... 192,124 190,091 ---------- ---------- Total current assets................................... 3,196,352 2,886,778 ---------- ---------- Property, plant and equipment............................... 4,315,944 4,073,975 Less accumulated depreciation............................... 1,914,754 1,902,951 ---------- ---------- Total property, plant and equipment, net............... 2,401,190 2,171,024 ---------- ---------- Goodwill, net............................................... 1,595,692 1,781,466 Trademarks, net............................................. 618,489 511,608 Other intangibles, net...................................... 156,181 177,290 Other non-current assets.................................... 990,697 525,468 ---------- ---------- Total other non-current assets......................... 3,361,059 2,995,832 ---------- ---------- Total assets........................................... $8,958,601 $8,053,634 ========== ========== </TABLE> *Summarized from audited fiscal year 1999 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 4 <PAGE> 5 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> January 26, 2000 April 28, 1999* FY 2000 FY 1999 ---------------- --------------- (Unaudited) (Thousands of Dollars) <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt............................................. $ 332,169 $ 290,841 Portion of long-term debt due within one year............... 271,087 613,366 Accounts payable............................................ 931,655 945,488 Salaries and wages.......................................... 48,771 74,098 Accrued marketing........................................... 205,344 182,024 Accrued restructuring costs................................. 111,286 147,786 Other accrued liabilities................................... 406,433 372,623 Income taxes................................................ 191,212 160,096 ---------- ---------- Total current liabilities.............................. 2,497,957 2,786,322 ---------- ---------- Long-term debt.............................................. 3,285,495 2,472,206 Deferred income taxes....................................... 301,770 310,799 Non-pension postretirement benefits......................... 200,188 208,102 Other liabilities........................................... 752,253 473,201 ---------- ---------- Total long-term debt and other liabilities............. 4,539,706 3,464,308 ---------- ---------- Shareholders' Equity: Capital stock............................................... 107,923 107,947 Additional capital.......................................... 307,818 277,652 Retained earnings........................................... 4,788,714 4,379,742 ---------- ---------- 5,204,455 4,765,341 Less: Treasury stock at cost (78,060,241 shares at January 26, 2000 and 71,968,652 shares at April 28, 1999).......... 2,717,131 2,435,012 Unearned compensation relating to the ESOP................ 8,840 11,728 Accumulated other comprehensive income.................... 557,546 515,597 ---------- ---------- Total shareholders' equity............................. 1,920,938 1,803,004 ---------- ---------- Total liabilities and shareholders' equity............. $8,958,601 $8,053,634 ========== ========== </TABLE> *Summarized from audited fiscal year 1999 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 5 <PAGE> 6 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended ----------------------------------- January 26, 2000 January 27, 1999 FY 2000 FY 1999 ---------------- ---------------- (Unaudited) (Thousands of Dollars) <S> <C> <C> Cash Provided by Operating Activities....................... $196,229 $475,372 -------- -------- Cash Flows from Investing Activities: Capital expenditures................................... (282,711) (211,785) Acquisitions, net of cash acquired..................... (372,217) (196,390) Proceeds from divestitures............................. 726,493 179,000 Purchases of short-term investments.................... (900,313) (718,279) Sales and maturities of short-term investments......... 890,168 706,721 Investment in The Hain Food Group, Inc................. (99,764) -- Other items, net....................................... 12,489 31,456 -------- -------- Cash used for investing activities................ (25,855) (209,277) -------- -------- Cash Flows from Financing Activities: Payments on long-term debt............................. (375,389) (54,395) Proceeds from commercial paper and short-term borrowings, net...................................... 510,148 214,484 Proceeds from long-term debt........................... 364,030 255,928 Dividends.............................................. (384,306) (361,726) Purchases of treasury stock............................ (297,486) (373,597) Exercise of stock options.............................. 26,099 70,765 Other items, net....................................... 10,020 32,030 -------- -------- Cash used for financing activities................ (146,884) (216,511) -------- -------- Effect of exchange rate changes on cash and cash equivalents............................................... 555 2,429 -------- -------- Net increase in cash and cash equivalents................... 24,045 52,013 Cash and cash equivalents at beginning of year.............. 115,982 96,300 -------- -------- Cash and cash equivalents at end of period.................. $140,027 $148,313 ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements. ------------------ 6 <PAGE> 7 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 to Shareholders for the fiscal year ended April 28, 1999 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 2000 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 26, 2000 April 28, 1999 ---------------- -------------- (Thousands of Dollars) <S> <C> <C> Finished goods and work-in-process..................... $1,328,961 $1,064,015 Packaging material and ingredients..................... 349,449 345,636 ---------- ---------- $1,678,410 $1,409,651 ========== ========== </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 U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable tax rates. During the first quarter of Fiscal 2000, the company reorganized certain of its foreign operations and as a result incurred a foreign income tax liability of $376.8 million, payable over five years. Because the company increased the tax basis in amortizable assets, cash flow is expected to be neutral over the next five years, with positive cash flow expected in each of the following four years. (6) Restructuring Charges Operation Excel In Fiscal 1999, the company announced a growth and restructuring initiative named "Operation Excel." The major components of Operation Excel include creating manufacturing centers of excellence, focusing the product portfolio, realigning the company's management teams and investing in growth initiatives. For more information regarding Operation Excel, please refer to the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. In the nine months ended January 26, 2000, as part of Operation Excel, the company recognized additional restructuring and related costs of $193.3 million pretax ($0.38 per share). [Note: All earnings per share amounts included in the Notes to Condensed Consolidated Financial Statements are presented on an after-tax diluted basis.] These costs were primarily consulting fees, employee training and relocation costs, equipment relocation costs and equip- 7 <PAGE> 8 ment commissioning costs associated with the implementation of Operation Excel initiatives ($131.2 million). Other costs recognized in the nine months ended January 26, 2000 consisted of employee termination and severance costs ($27.7 million), asset writedowns ($12.7 million) and exit costs ($21.7 million). These costs were primarily severance and exit costs for the relocation of the company's domestic seafood and pet food headquarters to Pittsburgh, Pennsylvania; additional severance accruals relating to the closure of the company's Ore-Ida head office in Boise, Idaho; and the closure of a chicken processing facility in New Zealand. During the nine months ended January 26, 2000, the company utilized $66.3 million of severance and exit cost accruals, principally for consolidating the company's U.S. frozen food headquarters; consolidating certain European administrative support functions; and downsizing the Puerto Rico tuna processing facility. The major components of the restructuring charges and implementation costs and the accrual balances as of January 26, 2000 were as follows: <TABLE> <CAPTION> Employee Termination Non-Cash and Accrued Asset Severance Exit Implementation (Millions of Dollars) Write-Downs Costs Costs Costs Total --------------------- ----------- ----------- ------- -------------- ------- <S> <C> <C> <C> <C> <C> Initial charge--Fiscal 1999................... $ 294.9 $159.4 $ 45.3 $ 53.2 $ 552.8 Amounts utilized--Fiscal 1999................. (294.9) (67.3) (9.8) (53.2) (425.2) ------- ------ ------ ------- ------- Accrued restructuring costs--April 28, 1999... -- 92.1 35.5 -- 127.6 Restructuring charges and implementation costs--Fiscal 2000.......................... 12.7 27.7 21.7 131.2 193.3 Amounts utilized--Fiscal 2000................. (12.7) (41.4) (24.9) (131.2) (210.2) ------- ------ ------ ------- ------- Accrued restructuring costs-- January 26, 2000............................ $ -- $ 78.4 $ 32.3 $ -- $ 110.7 ======= ====== ====== ======= ======= </TABLE> In total, the company has approved the closure or exit of 18 factories or businesses. To date, ten of these factories or businesses have been sold or closed. These actions will impact approximately 5,900 employees with a net reduction in the workforce of 4,100 after expansion of certain facilities. During Fiscal 1999, the company's workforce was reduced by approximately 200 employees. In the nine months ended January 26, 2000, the workforce was reduced by an additional 2,200 employees. The remaining factory closures and employee terminations are expected to take place within 12 months. Project Millennia During the fourth quarter of Fiscal 1997, the company announced a reorganization and restructuring program named "Project Millennia." The reorganization plan was designed to strengthen the company's core businesses and improve profitability and global growth. Key initiatives were focused on process changes and product line rationalizations. For more information regarding Project Millennia, please refer to the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. In the nine months ended January 26, 2000, the company utilized $19.5 million of severance and exit cost accruals. The utilization of the accruals related principally to the closure of a tuna processing facility in Australia; the closure of a tomato processing facility in Spain; and contractual lease commitments associated with the restructuring of the U.S. Weight Watchers meeting system, which were transferred to the buyer of the classroom business. 8 <PAGE> 9 The major components of the restructuring charges and implementation costs and the accrual balances as of January 26, 2000 were as follows: <TABLE> <CAPTION> Employee Termination Non-Cash and Accrued Asset Severance Exit Implementation (Millions of Dollars) Write-Downs Costs Costs Costs Total --------------------- ----------- ----------- ------- -------------- ------ <S> <C> <C> <C> <C> <C> Accrued restructuring costs--April 28, 1999.... $ -- $ 2.7 $17.4 $ -- $ 20.1 Amounts utilized--Fiscal 2000.................. -- (2.7) (16.8) -- (19.5) ---- ----- ----- ---- ------ Accrued restructuring costs--January 26, 2000......................................... $ -- $ -- $ 0.6 $ -- $ 0.6 ==== ===== ===== ==== ====== </TABLE> The remaining accruals of $0.6 million relate to contractual lease commitments in the U.S. (7) On September 29, 1999, the company completed the sale of the Weight Watchers classroom business for $735 million, which included $25 million of preferred stock. The transaction resulted in a pretax gain of $464.6 million ($0.72 per share). The company used a portion of the proceeds to retain a 6% equity interest in Weight Watchers International, Inc. The sale does not include Weight Watchers Smart Ones frozen meals, desserts and breakfast items, Weight Watchers from Heinz in the U.K. and a broad range of other Weight Watchers branded foods in Heinz's global core product categories. Pro forma results of the company, assuming this transaction had been made at the beginning of each period presented, would not be materially different from the results reported. During Fiscal 2000, the company also made other smaller divestitures. (8) On December 7, 1999, the company completed the acquisition of United Biscuit's European Frozen and Chilled Division, one of the leading frozen food businesses in the UK and Ireland, which produces frozen desserts and vegetarian/meat free products, frozen pizzas, frozen value-added potato products, and fresh sandwiches. Also during Fiscal 2000, the company completed the acquisitions of Thermo-Pac Inc., a U.S. leader in single-serve condiments, Quality Chef Foods, Inc., a leading manufacturer of frozen heat-and-serve soups, entrees and sauces, and obtained a 51% share of Remedia Limited, Israel's leading company in infant nutrition. All of the above acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition dates. Final allocations of the purchase prices are not expected to differ significantly from the preliminary allocations. Operating results of the businesses acquired have been included in the Consolidated Statements of Income from the respective acquisition dates forward. Pro forma results of the company, assuming all of the acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. (9) On September 27, 1999, the company and The Hain Food Group, Inc. announced an agreement to form a strategic alliance for the global production and marketing of natural and organic foods and soy-based beverages. The company's investment of $99.8 million gave it a 19.5% stake in Hain. Heinz will provide procurement, manufacturing and logistic expertise while Hain will provide marketing, sales and distribution services. Additionally, Hain acquired from the company the trademark for Earth's Best organic baby foods. (10) Segment Information During Fiscal 1999, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes previously issued segment reporting disclosure rules and requires the presentation of descriptive information about reportable segments that is consistent with the way in which management operates the company. SFAS No. 131 also requires disclosures 9 <PAGE> 10 about products and services, geographic areas and major customers. Previously reported segment and geographic information has been restated to conform with SFAS No. 131 requirements. The company's segments are primarily organized by geographical area. The composition of segments and measure of segment profitability is consistent with that used by the company's management. Descriptions of the company's reportable segments are as follows: North American Dry--This segment includes the company's North American dry grocery and foodservice operations. This segment consists of Heinz U.S.A., Heinz Pet Products, Star-Kist Seafood and Heinz Canada. This segment's operations include products in all of the company's core categories. North American Frozen--This segment consists of Heinz Frozen Food Company, which markets frozen potatoes, entrees and appetizers. Europe--This segment includes the company's operations in Europe and sells products in all of the company's core categories. Asia/Pacific--This segment includes the company's operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and India. This segment's operations include products in all of the company's core categories. Other Operating entities--This segment includes the company's Weight Watchers classroom business through September 29, 1999, the date of divestiture, as well as the company's operations in Africa, Venezuela and other areas which sell products in all of the company's core categories. The company's management evaluates performance based on several factors; however, the primary measurement focus is operating income excluding unusual costs and gains. Intersegment sales are accounted for at current market values. Items below the operating income line of the Consolidated Statements of Income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the company's management. 10 <PAGE> 11 <TABLE> <CAPTION> Three Months Ended Nine Months Ended ----------------------------------- ----------------------------------- January 26, 2000 January 27, 1999 January 26, 2000 January 27, 1999 FY 2000 FY 1999 FY 2000 FY 1999 ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) <S> <C> <C> <C> <C> Net external sales: North American Dry................... $1,032,721 $1,026,484 $3,027,501 $3,033,975 North American Frozen................ 227,086 243,515 694,595 722,140 Europe............................... 650,234 615,131 1,807,664 1,795,143 Asia/Pacific......................... 305,022 247,081 885,875 732,301 Other Operating Entities............. 79,574 149,851 404,093 549,135 ---------- ---------- ---------- ---------- Consolidated Totals.................. $2,294,637 $2,282,062 $6,819,728 $6,832,694 ========== ========== ========== ========== Intersegment sales: North American Dry................... $ 8,749 $ 9,837 $ 24,878 $ 24,106 North American Frozen................ 2,791 6,760 9,926 14,940 Europe............................... 326 1,223 2,244 3,825 Asia/Pacific......................... 938 -- 2,597 -- Other Operating Entities............. 1,635 1,834 4,161 4,717 Non-Operating (a).................... (14,439) (19,654) (43,806) (47,588) ---------- ---------- ---------- ---------- Consolidated Totals.................. $ -- $ -- $ -- $ -- ========== ========== ========== ========== Operating income (loss): North American Dry................... $ 184,832 $ 196,747 $ 552,777 $ 636,044 North American Frozen................ 37,305 (58,726) 113,319 41,240 Europe............................... 90,388 103,679 302,755 339,683 Asia/Pacific......................... 39,997 27,395 104,929 90,739 Other Operating Entities............. 6,742 29,164 531,149 83,126 Non-Operating (a).................... (22,690) (31,870) (96,175) (78,994) ---------- ---------- ---------- ---------- Consolidated Totals.................. $ 336,574 $ 266,389 $1,508,754 $1,111,838 ========== ========== ========== ========== Operating income (loss) excluding special items (b): North American Dry................... $ 223,047 $ 203,128 $ 661,818 $ 649,635 North American Frozen................ 42,745 46,693 134,545 132,982 Europe............................... 120,751 113,014 362,160 344,864 Asia/Pacific......................... 46,543 34,484 127,546 100,778 Other Operating Entities............. 7,150 33,231 66,940 84,255 Non-Operating (a).................... (22,101) (22,436) (65,586) (68,061) ---------- ---------- ---------- ---------- Consolidated Totals.................. $ 418,135 $ 408,114 $1,287,423 $1,244,453 ========== ========== ========== ========== </TABLE> - --------------- (a) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. (b) Three months ended January 26, 2000 - Excludes restructuring and implementation costs of Operation Excel as follows: North American Dry $38.2 million, North American Frozen $5.4 million, Europe $30.4 million, and Asia/ Pacific $6.5 million, Other Operating entities $0.4 million, and Non-Operating $0.6 million. Three months ended January 27, 1999 - Excludes restructuring costs for Operation Excel as follows: North American Dry $6.4 million, North American Frozen $105.4 million, Europe $9.3 million, Asia/Pacific $7.1 million, Other Operating entities $4.1 million and Non-Operating $9.4 million. Nine months ended January 26, 2000 - Excludes restructuring and implementation costs of Operation Excel as follows: North American Dry $89.0 million, North American Frozen $21.2 million, Europe $59.4 million, Asia/Pacific $22.6 million, Other Operating entities $0.4 million and Non-Operating $0.6 million; excludes costs related to Ecuador in North American Dry of $20.0 million; excludes the gain on the sale of the Weight Watchers weight control business in Other Operating entities of $464.6 million and excludes the Foundation Contribution in Non-Operating of $30.0 million. Nine months ended January 27, 1999 - Excludes implementation costs for Project Millennia as follows: North American Dry $7.2 million, North American Frozen $2.9 million, Europe $4.9 million, Asia/Pacific $3.0 million, Other Operating entities $2.8 million and Non-Operating $1.5 million; excludes the reversal of unutilized Project Millennia accruals for severance and exit costs in North American Frozen and Europe of $16.6 million and 11 <PAGE> 12 $9.1 million, respectively; excludes the gain on the sale of the bakery division in Other Operating entities of $5.7 million and excludes restructuring costs for Operation Excel as follows: North American Dry $6.4 million, North American Frozen $105.4 million, Europe $9.3 million, Asia/Pacific $7.1 million, Other Operating entities $4.1 million and Non-Operating $9.4 million. The company's revenues are generated via the sale of products in the following categories: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ----------------------------------- ----------------------------------- January 26, 2000 January 27, 1999 January 26, 2000 January 27, 1999 FY 2000 FY 1999 FY 2000 FY 1999 ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) <S> <C> <C> <C> <C> Ketchup, Condiments and Sauces....................... $ 577,838 $ 534,423 $1,770,007 $1,635,139 Frozen Foods................... 383,482 343,418 1,042,536 1,004,261 Tuna........................... 237,459 237,704 771,600 800,612 Soups, Beans and Pasta Meals... 331,106 313,044 877,536 831,650 Infant Foods................... 244,046 254,943 716,826 730,929 Pet Products................... 326,801 345,552 930,674 985,429 Other.......................... 193,905 252,978 710,549 844,674 ---------- ---------- ---------- ---------- Total...................... $2,294,637 $2,282,062 $6,819,728 $6,832,694 ========== ========== ========== ========== </TABLE> (11) The company's $2.30 billion credit agreement, which expires in September 2001, supports its commercial paper program. At January 26, 2000, the company had $1.90 billion of domestic commercial paper outstanding, all of which has been classified as long-term debt due to the long-term nature of the credit agreement. As of April 28, 1999, the company had $1.41 billion of domestic commercial paper outstanding and classified as long-term debt. On January 5, 2000, the company issued E300 million of 5% Notes due 2005. The proceeds were used to repay domestic commercial paper. (12) On September 8, 1999, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.36 3/4 per share from $0.34 1/4 per share, for an indicated annual rate of $1.47 per share. 12 <PAGE> 13 (13) The following table sets forth the computation of basic and diluted earnings per share in accordance with the provisions of SFAS No. 128. <TABLE> <CAPTION> Three Months Ended Nine Months Ended ----------------------------------- ----------------------------------- January 26, 2000 January 27, 1999 January 26, 2000 January 27, 1999 FY 2000 FY 1999 FY 2000 FY 1999 ---------------- ---------------- ---------------- ---------------- (In Thousands, Except per Share Amounts) <S> <C> <C> <C> <C> Net income per share--basic: Net income.................... $171,112 $120,554 $793,278 $565,673 Preferred dividends........... 7 7 21 23 -------- -------- -------- -------- Net income applicable to common stock................ $171,105 $120,547 $793,257 $565,650 ======== ======== ======== ======== Average common shares outstanding--basic.......... 356,690 361,750 356,690 361,750 ======== ======== ======== ======== Net income per share--basic... $ 0.48 $ 0.33 $ 2.22 $ 1.56 ======== ======== ======== ======== Net income per share--diluted: Net income.................... $171,112 $120,554 $793,278 $565,673 ======== ======== ======== ======== Average common shares outstanding................. 356,690 361,750 356,690 361,750 Effect of dilutive securities: Convertible preferred stock..................... 227 245 227 245 Stock options............... 4,824 6,481 4,824 6,481 -------- -------- -------- -------- Average common shares outstanding--diluted........ 361,741 368,476 361,741 368,476 ======== ======== ======== ======== Net income per share--diluted.............. $ 0.47 $ 0.33 $ 2.19 $ 1.54 ======== ======== ======== ======== </TABLE> (14) Comprehensive income for all periods presented consisted of net income, foreign currency translation adjustments and the adjustment to the minimum pension liability. The components of comprehensive income, net of related tax, for the periods presented are as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ----------------------------------- ----------------------------------- January 26, 2000 January 27, 1999 January 26, 2000 January 27, 1999 FY 2000 FY 1999 FY 2000 FY 1999 ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) <S> <C> <C> <C> <C> Net income................. $171,112 $120,554 $793,278 $565,673 Other comprehensive income (loss): Foreign currency translation adjustment........... (7,584) (15,218) (40,367) (39,955) Minimum pension liability adjustment........... (2,772) 2,681 (1,582) 4,474 -------- -------- -------- -------- Comprehensive income....... $160,756 $108,017 $751,329 $530,192 ======== ======== ======== ======== </TABLE> 13 <PAGE> 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OPERATION EXCEL In Fiscal 1999, the company announced a growth and restructuring initiative named "Operation Excel." The major components of Operation Excel include creating manufacturing centers of excellence, focusing the product portfolio, realigning the company's management teams and investing in growth initiatives. For more information regarding Operation Excel, please refer to the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. In the nine months ended January 26, 2000, as part of Operation Excel, the company recognized additional restructuring and related costs of $193.3 million pretax ($0.38 per share). [Note: All earnings per share amounts included in Management's Discussion and Analysis are presented on an after-tax diluted basis.] These costs were primarily consulting fees, employee training and relocation costs, equipment relocation costs and equipment commissioning costs associated with the implementation of Operation Excel initiatives ($131.2 million). Other costs recognized in the nine months ended January 26, 2000 consisted of employee termination and severance costs ($27.7 million), asset writedowns ($12.7 million) and exit costs ($21.7 million). These costs were primarily severance and exit costs for the relocation of the company's domestic seafood and pet food headquarters to Pittsburgh, Pennsylvania; additional severance accruals relating to the closure of the company's Ore-Ida head office in Boise, Idaho; and the closure of a chicken processing facility in New Zealand. See footnote 10 for a breakdown of Operation Excel restructuring and implementation costs by segment. During the nine months ended January 26, 2000, the company utilized $66.3 million of severance and exit cost accruals, principally for consolidating the company's U.S. frozen food headquarters; consolidating certain European administrative support functions; and downsizing the Puerto Rico tuna processing facility. See footnote 6 for further information. In total, the company has approved the closure or exit of 18 factories or businesses. To date, ten of these factories or businesses have been sold or closed. These actions will impact approximately 5,900 employees with a net reduction in the workforce of 4,100 after expansion of certain facilities. During Fiscal 1999, the company's workforce was reduced by approximately 200 employees. In the nine months ended January 26, 2000, the workforce was reduced by an additional 2,200 employees. The remaining factory closures and employee terminations are expected to take place within 12 months. Future Operation Excel initiatives will result in the recognition of additional restructuring charges and implementation costs. At its March meeting, the company's Board of Directors approved additional Operation Excel initiatives which will be recognized in the fourth quarter and implemented throughout Fiscal 2001. These initiatives envision additional net workforce reductions of approximately 1,500 employees and the closure of additional factories, including a pet food factory in El Paso, Texas and a food processing factory in Japan. The entire program will result in restructuring charges and implementation costs of approximately $1.1 billion. The expected pretax savings to be generated from all Operation Excel initiatives will be $60 million in Fiscal 2000 and are projected to grow to $145 million in Fiscal 2001 and $215 million in Fiscal 2002, with non-cash savings of less than $15 million in any year. The company is accelerating Operation Excel and anticipates that all restructuring charges will be recognized by the end of Fiscal 2001, a year earlier than previously planned. 14 <PAGE> 15 Successful execution of all Operation Excel initiatives, including the sale of the Weight Watchers classroom business, will help the company achieve the following targets over the next four years: - $240 million in annual ongoing pretax savings upon full implementation - Earnings per share growth of 10 to 12 percent per year on average - Sales growth of 4 to 5 percent per year on average - Gross margins of 42% - Return on invested capital of 40% - $2.5 billion of free cash flow PROJECT MILLENNIA During the fourth quarter of Fiscal 1997, the company announced a reorganization and restructuring program named "Project Millennia." The reorganization plan was designed to strengthen the company's core businesses and improve profitability and global growth. Key initiatives were focused on process changes and product line rationalizations. For more information regarding Project Millennia, please refer to the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. In the nine months ended January 26, 2000, the company utilized $19.5 million of severance and exit cost accruals. The utilization of the accruals related principally to the closure of a tuna processing facility in Australia; the closure of a tomato processing facility in Spain; and contractual lease commitments associated with the restructuring of the U.S. Weight Watchers meeting system, which were transferred to the buyer of the classroom business. See footnote 6 for further information. The remaining accruals of $0.6 million relate to contractual lease commitments in the U.S. THREE MONTHS ENDED JANUARY 26, 2000 AND JANUARY 27, 1999 RESULTS OF OPERATIONS For the three months ended January 26, 2000, sales increased $12.6 million or 0.6%, to $2,294.6 million from $2,282.1 million last year. Acquisitions increased sales 6.1% and favorable volume increased sales 2.6%. Sales were unfavorably impacted by divestitures of 5.3%, primarily the Weight Watchers classroom business, pricing of 1.6% and the impact of foreign exchange translation rates of 1.2%. North American Dry's sales increased $6.2 million or 0.6%. Favorable volume increased sales 3.0%, due to continued strong sales of ketchup and condiments, foodservice and tuna. The strengthening of the Canadian dollar increased sales 0.6%. Lower pricing, primarily in tuna and pet food, reduced sales 2.8%. In pet food, lower prices were a result of the company's decision to refocus its marketing to achieve more competitive price points on the shelf. Divestitures, net of acquisitions, reduced sales 0.2%. North American Frozen's sales decreased $16.4 million, or 6.7%. The divestiture of several non-core product lines reduced sales 4.4%, lower pricing reduced sales 1.3% and volume decreased 1.0%. Sales in Europe increased $35.1 million, or 5.7%. Acquisitions, net of divestitures, increased sales 11.8%, primarily due to the acquisition of the brands of United Biscuit's European Frozen and Chilled Division. Sales volume increased 2.3%, largely as a result of an increase in canned seafood 15 <PAGE> 16 sales. The unfavorable impact of foreign exchange translation rates reduced sales by 6.6% and lower pricing reduced sales 1.8%. Sales in Asia/Pacific increased $57.9 million, or 23.5%. The acquisition of ABC Sauces in Indonesia increased sales 14.5% and sales volume increased 6.1%, primarily in convenience meals. The favorable impact of foreign exchange translation rates, primarily in Japan and Australia, increased sales 3.2%. Lower pricing reduced sales 0.3%. Other Operating entities' sales decreased $70.3 million, or 46.9%. Divestitures, primarily the second quarter divestiture of the Weight Watchers classroom business, reduced sales 53.5%. The impact of foreign exchange translation rates reduced sales 0.4%. Favorable pricing increased sales 5.3% and sales volume increased 1.7%. The third quarters of both Fiscal 2000 and Fiscal 1999 were impacted by Operation Excel costs. This year's third quarter included Operation Excel implementation costs of $62.7 million pretax ($0.12 per share) and restructuring charges of $18.8 million pretax ($0.03 per share). Last year's third quarter included Operation Excel restructuring and implementation costs of $141.7 million pretax ($0.27 per share). The following tables provide a comparison of the company's reported results and the results excluding special items for the third quarters of Fiscal 2000 and Fiscal 1999. <TABLE> <CAPTION> Third Quarter Ended January 26, 2000 -------------------------------------------------------- (Dollars in millions except per share amounts) Gross Profit Operating Income Net Income Per Share - ---------------------------------------------- ------------ ---------------- ---------- --------- <S> <C> <C> <C> <C> Reported results....................................... $902.8 $336.6 $171.1 $0.47 Operation Excel restructuring........................ 3.2 18.8 12.0 0.03 Operation Excel implementation costs................. 17.5 62.7 44.1 0.12 ------ ------ ------ ----- Results excluding special items........................ $923.5 $418.1 $227.2 $0.63 ====== ====== ====== ===== </TABLE> <TABLE> <CAPTION> Third Quarter Ended January 27, 1999 -------------------------------------------------------- Gross Profit Operating Income Net Income Per Share ------------ ---------------- ---------- --------- <S> <C> <C> <C> <C> Reported results....................................... $852.6 $266.4 $120.6 $0.33 Operation Excel restructuring and implementation costs.............................................. 87.6 141.7 98.9 0.27 ------ ------ ------ ----- Results excluding special items $940.2 $408.1 $219.5 $0.60 ====== ====== ====== ===== </TABLE> (Note: Totals may not add due to rounding.) Gross profit increased $50.2 million, or 5.9%, to $902.8 million from $852.6 million, and the gross profit margin increased to 39.3% from 37.4%. Excluding the special items noted above, gross profit decreased $16.7 million, or 1.8%, to $923.5 million from $940.2 million, and the gross profit margin decreased to 40.2% from 41.2%. Additionally, removing the impact of the Weight Watchers classroom business in the prior year, gross profit increased 3.8%. Excluding special items, gross profit in the North American Dry segment increased $2.0 million, or 0.5%, due primarily to increases at Heinz U.S.A. and Canada, partially offset by lower pricing in tuna and pet food. The North American Frozen segment's gross profit decreased $10.4 million, or 8.9%, due primarily to the elimination of several non-core product lines as part of Operation Excel, lower pricing and a decrease in sales volume. Europe's gross profit increased $8.0 million, or 3.1%, due to increased sales volume and acquisitions, primarily United Biscuit's European Frozen and Chilled Division. The unfavorable impact of foreign exchange translation rates in Europe reduced gross profit by approximately $21 million. Asia/Pacific's gross profit increased $27.9 million, or 32.0%, due primarily to the acquisition of ABC Sauces in Indonesia, increased sales and favorable exchange. Other Operating entities' gross profit decreased $44.2 million, or 63.5%, due primarily to the divestiture of the Weight Watchers classroom business. Selling, general and administrative expenses ("SG&A") decreased $20.0 million, or 3.4%, to $566.2 million from $586.2 million last year, and decreased as a percentage of sales to 24.7% from 16 <PAGE> 17 25.7%. Excluding the special items noted above, SG&A decreased $26.7 million, or 5.0%, to $505.4 million from $532.1 million, and decreased as a percentage of sales to 22.0% from 23.3% last year. A decrease in marketing, due primarily to the divestiture of the Weight Watchers classroom business and the company's refocus of its pet food marketing to achieve more competitive price points on the shelf, was partially offset by an increase in selling and distribution expenses. Operating income increased $70.2 million, or 26.3%, to $336.6 million from $266.4 million. Excluding the special items noted above, operating income increased $10.0 million, or 2.5%, to $418.1 million from $408.1 million. Additionally, removing the impact of the Weight Watchers classroom business in the prior year, operating income increased 9.7%. North American Dry's operating income decreased $11.9 million, or 6.1%, to $184.8 million from $196.7 million. Excluding special items in both periods, operating income increased $19.9 million, or 9.8%, to $223.0 million from $203.1 million, as favorable results at Heinz U.S.A. and Canada were partially offset by lower pricing in tuna. North American Frozen's operating income increased $96.0 million. Excluding special items in both periods, operating income decreased $3.9 million, or 8.5%, to $42.7 million from $46.7 million. This decrease was a result of the continued roll-out of Boston Market meals in grocery, the elimination of several non-core product lines and poor performance on Budget Gourmet, partially offset by a reduction in selling and distribution, and general and administrative expenses as a result of the domestic consolidation of the frozen business. Europe's operating income decreased $13.3 million, or 12.8%, to $90.4 million from $103.7 million. Excluding special items in both periods, operating income increased $7.7 million, or 6.8%, to $120.8 million from $113.0 million, and increased 14.1% on a constant currency basis. This increase is largely due to increased sales and acquisitions, primarily United Biscuit's European Frozen and Chilled Division. Asia/Pacific's operating income increased $12.6 million, or 46.0%, to $40.0 million from $27.4 million. Excluding special items in both periods, operating income increased $12.1 million, or 35.0%, to $46.5 million from $34.5 million. This increase is primarily due to the Fiscal 1999 acquisition of ABC Sauces in Indonesia and improved performances throughout the segment. Other Operating entities' operating income decreased $22.4 million, or 76.9%, to $6.7 million from $29.2 million. Excluding special items in both periods, operating income decreased $26.1 million, or 78.5%, to $7.2 million from $33.2 million. This decrease is primarily attributable to the second quarter divestiture of the Weight Watchers classroom business. Other income and expenses increased $3.5 million to $68.7 million from $65.2 million last year. Net interest expense decreased $4.5 million, due primarily to the proceeds from the second quarter divestiture of the Weight Watchers classroom business. Other expenses, net, increased $8.0 million, largely due to currency losses in Europe. The effective tax rate for the third quarter of Fiscal 2000 was 36.1% compared to 40.1% last year. Excluding special items, the effective tax rate for the third quarter was 35.0% compared to 36.0% last year. Net income for the current quarter was $171.1 million compared to $120.6 million last year and diluted earnings per share was $0.47 compared to $0.33. Excluding the special items noted above, net income increased $7.7 million, or 3.5%, to $227.2 million from $219.5 million and diluted earnings per share increased 5.0% to $0.63 from $0.60 last year. Additionally, removing the impact of the Weight Watchers classroom business, net income increased 9.5% and diluted earnings per share increased 12.5%. 17 <PAGE> 18 NINE MONTHS ENDED JANUARY 26, 2000 AND JANUARY 27, 1999 RESULTS OF OPERATIONS For the nine months ended January 26, 2000, sales decreased $13.0 million, or 0.2%, to $6,819.7 million from $6,832.7 million last year. Sales were unfavorably impacted by divestitures of 3.8%, pricing of 1.7% and the impact of foreign exchange translation rates of 0.7%. Acquisitions increased sales by 4.0% and sales volume increased 2.0%. North American Dry's sales decreased slightly $6.5 million, or 0.2%. Lower pricing, mainly in tuna, reduced sales 2.4%. Sales volume was favorable by 1.8% as increases in ketchup, condiments, tuna and soup were partially offset by a decrease in pet food. The strengthening of the Canadian dollar increased sales by 0.3%, and acquisitions, net of divestitures, increased sales by 0.1%. North American Frozen's sales decreased $27.5 million, or 3.8%. Divestitures, net of acquisitions, decreased sales 3.8%, due primarily to the exit of several non-core product lines as part of Operation Excel. Lower pricing, primarily on Ore-Ida frozen potatoes, reduced sales 3.1%. Sales volume increased by 3.1%, largely due to Smart Ones and Ore-Ida frozen potatoes. Sales in Europe increased $12.5 million, or 0.7%. Acquisitions, net of divestitures, increased sales 6.3%, due primarily to the acquisitions of United Biscuit's European Frozen and Chilled Division, Sonnen Bassermann, Serv-A-Portion and Remedia Limited. Sales volume increased by 0.5% as increases in seafood, ketchup and condiments were partially offset by decreases in convenience meals. The unfavorable impact of foreign exchange translation rates reduced sales by 5.1% and lower pricing, primarily in seafood, reduced sales by 1.0%. Sales in Asia/Pacific increased $153.6 million, or 21.0%. Acquisitions, primarily ABC Sauces in Indonesia, increased sales 12.7%. The favorable impact of foreign exchange translation rates increased sales 5.4% and sales volume increased 3.0%. Lower pricing reduced sales 0.1%. Other Operating entities' sales decreased $145.0 million, or 26.4%. Divestitures reduced sales 29.6%, primarily due to the second quarter divestiture of the Weight Watchers classroom business and the Fiscal 1999 divestiture of the bakery products unit. The impact of foreign exchange translation rates reduced sales 0.7% and lower pricing reduced sales 0.7%. Sales volume increased 4.6%. The current year was favorably impacted by a number of special items which net to $239.5 million pretax ($0.26 per share), and are summarized in the tables below. During the second quarter of Fiscal 2000, the company completed the sale of the Weight Watchers classroom business for a pretax gain of $464.6 million ($0.72 per share). The company used part of this gain to fund a pretax contribution of $30.0 million ($0.05 per share) to the H. J. Heinz Company Foundation. Fiscal 2000 results also include Operation Excel implementation costs of $131.2 million pretax ($0.25 per share) and additional Operation Excel restructuring charges of $62.1 million pretax ($0.13 per share). In April of 1999, the company became aware of operational and accounting irregularities in its Ecuador tuna processing facility and expensed $10.0 million as an estimate of the losses. In the first quarter of Fiscal 2000, the company recognized an additional $20.0 million pretax ($0.05 per share) of expenses related to this facility and does not anticipate significant further losses. In addition, the company recognized, in Other Income, a pretax gain of $18.2 million ($0.03 per share) for the sale of an office building in the U.K. Last year's nine month results included the reversal of unutilized Project Millennia accruals of $25.7 million pretax ($0.04 per share), Project Millennia implementation costs of $22.3 million pretax ($0.04 per share), Operation Excel restructuring and implementation costs of $141.7 million pretax ($0.27 per share) and a pretax gain of $5.7 million from the sale of the bakery products unit. The following tables provide a comparison of the company's reported results and the results excluding special items for the nine months ended January 26, 2000 and January 27, 1999. 18 <PAGE> 19 All of the following special items have been previously disclosed, except for additional Operation Excel costs, which occurred in the third quarter of Fiscal 2000. <TABLE> <CAPTION> Nine Months Ended January 26, 2000 -------------------------------------------------------- (Dollars in millions except per share amounts) Gross Profit Operating Income Net Income Per Share - ---------------------------------------------- ------------ ---------------- ---------- --------- <S> <C> <C> <C> <C> Reported results....................................... $2,671.9 $1,508.8 $793.3 $2.19 Operation Excel restructuring........................ 15.3 62.1 48.6 0.13 Operation Excel implementation costs................. 46.6 131.2 89.7 0.25 Ecuador expenses..................................... 20.0 20.0 20.0 0.05 Gain on U.K. building sale........................... -- -- (11.8) (0.03) Foundation contribution.............................. -- 30.0 18.9 0.05 Gain on sale of Weight Watchers classroom business... -- (464.6) (259.7) (0.72) -------- -------- ------ ----- Results excluding special items........................ $2,753.9 $1,287.4 $698.9 $1.93 ======== ======== ====== ===== </TABLE> <TABLE> <CAPTION> Nine Months Ended January 27, 1999 -------------------------------------------------------- Gross Operating Net Per Profit Income Income Share ------------ ---------------- ---------- --------- <S> <C> <C> <C> <C> Reported results....................................... $2,657.4 $1,111.8 $565.7 $1.54 Operation Excel restructuring and implementation costs.............................................. 87.6 141.7 98.9 0.27 Project Millennia implementation costs............... 14.7 22.3 14.3 0.04 (Gain)/loss on sale of bakery products unit.......... -- (5.7) 0.6 -- Reversal of unutilized Project Millennia accruals.... (20.7) (25.7) (16.4) (0.04) -------- -------- ------ ----- Results excluding special items........................ $2,739.1 $1,244.5 $663.0 $1.80 ======== ======== ====== ===== </TABLE> (Note: Totals may not add due to rounding.) Gross profit increased $14.5 million, or 0.5%, to $2,671.9 million from $2,657.4 million last year and the gross profit margin increased to 39.2% from 38.9%. Excluding the special items noted above, gross profit increased $14.9 million, or 0.5%, to $2,753.9 million from $2,739.1 million, and the gross profit margin increased to 40.4% from 40.1%. Additionally, removing the impact of the Weight Watchers classroom business, gross profit increased 2.5%. Excluding special items, gross profit in the North American Dry segment increased $1.8 million, or 0.2%, due primarily to increases at Heinz U.S.A. and Canada, offset by decreases in pet food and tuna, largely due to lower pricing. The North American Frozen segment's gross profit decreased $22.5 million, or 6.5%, due primarily to the elimination of several non-core product lines as part of Operation Excel and lower pricing on Ore-Ida frozen potatoes. Europe's gross profit increased $21.5 million, or 3.0%, due largely to a favorable profit mix and acquisitions of United Biscuit's European Frozen and Chilled Division, Sonnen Bassermann, Remedia Limited and Serv-A-Portion. The unfavorable impact of foreign exchange translation rates in Europe reduced gross profit by approximately $41 million. Asia/Pacific's gross profit increased $71.7 million, or 27.8%, due to the acquisition of ABC Sauces in Indonesia, increased sales and favorable exchange. Other Operating entities' gross profit decreased $58.6 million, or 26.4%, due primarily to the divestitures of the Weight Watchers classroom business and the bakery products unit. Selling, general and administrative expenses increased $82.2 million, or 5.3%, to $1,627.8 million from $1,545.6 million last year, and increased as a percentage of sales to 23.9% from 22.6%. Excluding the special items noted above, SG&A decreased $28.1 million or 1.9%, to $1,466.5 million from $1,494.6 million, and decreased as a percentage of sales to 21.5% from 21.9% last year. A decrease in marketing, due primarily to the divestiture of the Weight Watchers classroom business and the company's refocus of its pet food marketing to achieve more competitive price points on the shelf, along with lower general and administrative expenses were partially offset by higher selling and distribution expenses. Operating income increased $396.9 million, or 35.7%, to $1,508.8 million from $1,111.8 million last year. Excluding the special items noted above, operating income increased $43.0 million, or 19 <PAGE> 20 3.5%, to $1,287.4 million from $1,244.5 million. Additionally, removing the impact of the Weight Watchers classroom business, operating income increased 4.9%. North American Dry's operating income decreased $83.3 million, or 13.1%, to $552.8 million from $636.0 million. Excluding special items in both periods, operating income increased $12.2 million or 1.9%, to $661.8 million from $649.6 million, as favorable results at Heinz U.S.A. and Canada were partially offset by lower pricing in tuna and pet food. North American Frozen's operating income increased $72.1 million to $113.3 million from $41.2 million. Excluding special items in both periods, operating income increased $1.6 million, or 1.2%, to $134.5 million from $133.0 million. The increase is attributable to a reduction in SG&A expenses resulting from the domestic consolidation of the frozen business, offset by the elimination of several non-core product lines as part of Operation Excel and lower pricing on Ore-Ida frozen potatoes. Europe's operating income decreased $36.9 million, or 10.9%, to $302.8 million from $339.7 million. Excluding special items in both periods, operating income increased $17.3 million, or 5.0%, to $362.2 million from $344.9 million, and increased approximately 10% on a constant currency basis. This increase is attributable to a favorable profit mix, and acquisitions of United Biscuit's European Frozen and Chilled Division, Sonnen Bassermann, Remedia Limited and Serv-A-Portion. The unfavorable impact of foreign exchange translation rates in Europe reduced operating income by approximately $17 million. Asia/Pacific's operating income increased $14.2 million, or 15.6%, to $104.9 million from $90.7 million. Excluding special items in both periods, operating income increased $26.8 million, or 26.6%, to $127.5 million from $100.8 million. This increase is primarily due to the acquisition of ABC Sauces in Indonesia and improved performances throughout the segment. Other Operating entities' operating income increased $448.0 million to $531.1 million from $83.1 million. Excluding special items in both periods, operating income decreased $17.3 million, or 20.6%, to $66.9 million from $84.3 million due primarily to the divestitures of the Weight Watchers classroom business and the bakery products unit. Other income and expenses totaled $194.0 million compared to $208.5 million last year. The decrease is primarily due to a gain on the sale of an office building in the U.K. of $18.2 million pretax ($0.03 per share). Net interest expense decreased $3.3 million, due primarily to the proceeds from the second quarter divestiture of the Weight Watchers classroom business. These decreases were partially offset by currency losses in Europe. The effective tax rate for the current year was 39.7% compared to 37.4% last year. Excluding special items, the effective tax rate for the current year was 35.0% compared to 36.0% last year. Net income for the current year was $793.3 million compared to $565.7 million last year and diluted earnings per share was $2.19 compared to $1.54 last year. Excluding the special items noted above, net income increased $35.9 million, or 5.4%, to $698.9 million from $663.0 million and diluted earnings per share increased 7.2% to $1.93 from $1.80 last year. Additionally, removing the impact of the Weight Watchers classroom business in both years, net income increased 6.2% and diluted earnings per share increased 8.0%. LIQUIDITY AND FINANCIAL POSITION Cash provided by operating activities totaled $196.2 million for the nine month period ended January 26, 2000, compared to $475.4 million last year. Cash required by investing activities totaled $25.9 million compared to $209.3 million last year. Cash provided by divestitures in the current period totaled $726.5 million, primarily resulting from the sale of the Weight Watchers classroom business. Cash provided by divestitures in the prior period totaled $179.0 million, primarily from the sale of the bakery products unit. Acquisi- 20 <PAGE> 21 tions in the current period required $372.2 million, due to the purchases of United Biscuit's European Frozen and Chilled Division, Quality Chef, Thermo-Pac, Inc. and Remedia Limited in Israel. Acquisitions in the prior period required $196.4 million, due mainly to the purchases of the College Inn brand of canned broths, the Eta brand of dressings and peanut butter in New Zealand, the convenience meals business of Sonnen Bassermann in Germany and the Vidalia O's frozen onion rings brand. Capital expenditures required $282.7 million in the current period compared to $211.8 million last year. During the current year, the company invested $99.8 million in The Hain Food Group, Inc. Financing activities required $146.9 million in the current period compared to $216.5 million last year. Dividend payments totaled $384.3 million compared to $361.7 million last year. Payments on long-term debt required $375.4 million compared to $54.4 million last year. Share repurchases totaled $297.5 million (6.8 million shares) versus $373.6 million (6.7 million shares) last year. Proceeds from commercial paper and short-term borrowings provided $510.1 million compared to $214.5 million last year. Proceeds from long-term debt provided $364.0 million versus $255.9 million in last year's comparable period. Cash provided from stock options exercised totaled $26.1 million compared to $70.8 million last year. In the nine months ended January 26, 2000, the cash requirements for Operation Excel were $333.9 million, consisting of capital expenditures ($136.4 million), severance and exit costs ($66.3 million) and implementation costs ($131.2 million). The cash requirements of Project Millennia in the nine months ended January 26, 2000 were $29.6 million, consisting of capital expenditures ($10.1 million) and severance and exit costs ($19.5 million). The company's $2.30 billion credit agreement, which expires in September 2001, supports its commercial paper program. At January 26, 2000, the company had $1.90 billion of domestic commercial paper outstanding, all of which has been classified as long-term debt due to the long-term nature of the credit agreement. As of April 28, 1999, the company had $1.41 billion of domestic commercial paper outstanding and classified as long-term debt. On January 5, 2000, the company issued E300 million of 5% Notes due 2005. The proceeds were used to repay domestic commercial paper. On September 8, 1999, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.36 3/4 per share from $0.34 1/4 per share, for an indicated annual rate of $1.47 per share. On March 8, 2000, the company's Board of Directors declared the quarterly dividend on the company's common stock of $0.36 3/4 per share, payable on April 10, 2000, to shareholders of record at the close of business on March 20, 2000. On September 29, 1999, the company completed the sale of its Weight Watchers classroom business for $735 million. This transaction resulted in a pretax gain of $464.6 million ($0.72 per share). This divestiture is part of the company's strategy to divest non-core businesses. Through the date of sale, this business contributed approximately $175 million to Fiscal 2000 sales. The company's financial position remains strong, enabling it to meet cash requirements for operations, capital expansion programs and dividends to shareholders. The company is on track to deliver its year-end target of 6 to 7% EPS growth, excluding special items. YEAR 2000 ISSUE The company completed "Operation Ready," its multi-year project to address the expected consequences of the Year 2000 computer-related issue. As of the date of this report, the company has not experienced any significant disruptions to its business nor is it aware of any significant Year 2000-related disruptions impacting its customers or suppliers. The company will continue to monitor its critical systems, but does not anticipate any significant impacts due to Year 2000 problems from its internal systems or from the activities of its suppliers and customers. 21 <PAGE> 22 EURO CONVERSION A single currency, the Euro, was introduced in Europe on January 1, 1999. Of the fifteen member countries of the European Union, eleven adopted the Euro as their legal currency on that date. Fixed conversion rates between the national currencies of these eleven countries and the Euro were established on that date. The national currencies are scheduled to remain legal tender as denominations of the Euro during the transition period ending December 31, 2001. During this transition period, parties may settle transactions using either the Euro or a participating country's national currency. At the current time, the company does not believe that the conversion to the Euro will have a material impact on its business or its financial condition. OTHER MATTERS On February 15, 2000, the company issued $300 million of 7.0% Notes due 2002. The proceeds were used to repay domestic commercial paper. On February 18, 2000, the company issued L125 million of 6.25% Notes due 2030. The proceeds were used for general corporate purposes, including to repay commercial paper borrowings which were incurred in connection with the acquisition of United Biscuit's European Frozen and Chilled Division in December 1999. On February 28, 2000, Heinz and Milnot Holding Corporation signed an agreement for Heinz to acquire Milnot, a leading producer of branded and private-label food products based in St. Louis. Milnot's largest subsidiary is Beech-Nut Nutrition Corporation, maker of the popular Beech-Nut brand of prepared baby foods. In addition to Milnot's Beech-Nut baby food business, Heinz will acquire the company's other branded and private-label businesses, including Milnot brand evaporated and sweetened condensed canned milk and Chilli Man brand canned chili. The transaction is subject to U.S. regulatory review. On March 1, 2000, Heinz announced that it signed an agreement for a joint venture with the Philippines' leading ketchup producer, Nutri Asia of Manila, Philippines. The transaction is subject to customary regulatory approvals in the Philippines and is expected to be completed in early May. The new joint venture will be named Heinz UFC Philippines. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. There have been no material changes in the company's market risk during the nine months ended January 26, 2000. For additional information, refer to pages 35-36 of the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. 22 <PAGE> 23 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 Note 8 to the Condensed Consolidated Financial Statements in Part I--Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part I--Item 2 of this Quarterly Report on Form 10-Q. This report contains forward-looking statements regarding the company's future performance. These forward-looking statements are based on management's views and assumptions, and involve unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These include, but are not limited to, sales, earnings and volume growth, competitive conditions, production costs, currency valuations (most notably the euro and the pound sterling), global economic and industry conditions, achieving cost savings programs, successful completion of Operation Excel and the other factors described in "Forward-Looking Statements" in the company's Form 10-K for the fiscal year ended April 28, 1999, as updated from time to time by the company in its subsequent filings with the SEC. 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. 12. Computation of Ratios 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 January 26, 2000. 23 <PAGE> 24 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 10, 2000 By: /s/ PAUL F. RENNE .......................................... Paul F. Renne Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 10, 2000 By: /s/ EDWARD J. MCMENAMIN .......................................... Edward J. McMenamin Vice President and Corporate Controller (Principal Accounting Officer) 24 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES <TEXT> <PAGE> 1 EXHIBIT 12 H. J. HEINZ COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES <TABLE> <CAPTION> Nine Months Ended Fiscal Years Ended ----------- -------------------------------------------------------------- January 26, April 28, April 29, April 30, May 1, May 3, 2000 1999 1998 1997 1996 1995 ----------- --------- --------- --------- ------ ------ <S> <C> <C> <C> <C> <C> <C> Fixed Charges: Interest expense*........................... $ 189,705 $ 260,743 $ 260,401 $ 277,818 $ 279,368 $ 212,123 Capitalized interest........................ -- -- 1,542 2,688 1,007 414 Interest component of rental expense........ 19,775 29,926 30,828 27,382 26,728 24,200 ---------- ---------- ---------- ---------- ---------- ---------- Total fixed charges....................... $ 209,480 $ 290,669 $ 292,771 $ 307,888 $ 307,103 $ 236,737 ---------- ---------- ---------- ---------- ---------- ---------- Earnings: Income before income taxes.................. $1,314,778 $ 835,131 $1,254,981 $ 479,064 $1,023,661 $ 938,007 Add: Interest expense*...................... 189,705 260,743 260,401 277,818 279,368 212,123 Add: Interest component of rental expense... 19,775 29,926 30,828 27,382 26,728 24,200 Add: Amortization of capitalized interest... 577 3,050 3,525 3,454 3,399 3,465 ---------- ---------- ---------- ---------- ---------- ---------- Earnings as adjusted...................... $1,524,835 $1,128,850 $1,549,735 $ 787,718 $1,333,156 $1,177,795 ---------- ---------- ---------- ---------- ---------- ---------- Ratio of earnings to fixed charges.......... 7.28 3.88 5.29 2.56 4.34 4.98 ========== ========== ========== ========== ========== ========== </TABLE> - --------------- * Interest expense includes amortization of debt expense and any discount or premium relating to indebtedness. </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 26, 2000 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-03-2000 <PERIOD-START> APR-29-1999 <PERIOD-END> JAN-26-2000 <CASH> 140,027 <SECURITIES> 4,189 <RECEIVABLES> 1,181,602 <ALLOWANCES> 0 <INVENTORY> 1,678,410 <CURRENT-ASSETS> 3,196,352 <PP&E> 4,315,944 <DEPRECIATION> 1,914,754 <TOTAL-ASSETS> 8,958,601 <CURRENT-LIABILITIES> 2,497,957 <BONDS> 3,285,495 <PREFERRED-MANDATORY> 0 <PREFERRED> 149 <COMMON> 107,774 <OTHER-SE> 1,813,015 <TOTAL-LIABILITY-AND-EQUITY> 8,958,601 <SALES> 6,819,728 <TOTAL-REVENUES> 6,819,728 <CGS> 4,147,788 <TOTAL-COSTS> 4,147,788 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 188,377 <INCOME-PRETAX> 1,314,778 <INCOME-TAX> 521,500 <INCOME-CONTINUING> 793,278 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 793,278 <EPS-BASIC> 2.22 <EPS-DILUTED> 2.19 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

HPQ

https://www.sec.gov/Archives/edgar/data/47217/0001012870-00-001379.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, AbTbiEHUKBGAddwY3wbl5VoxMEpn42AKnky4x9pECv37s6W1Gzp1+kIPpTSV4KRG 3uR60GfY4fwVswP7cIs2GA== <SEC-DOCUMENT>0001012870-00-001379.txt : 20000316 <SEC-HEADER>0001012870-00-001379.hdr.sgml : 20000316 ACCESSION NUMBER: 0001012870-00-001379 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000315 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: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04423 FILM NUMBER: 570866 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 20BL CITY: PALO ALTO STATE: CA ZIP: 94304 </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 January 31, 2000 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) <TABLE> <CAPTION> Delaware 94-1081436 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3000 Hanover Street, 94304 Palo Alto, California (Zip Code) (Address of principal executive offices) (650) 857-1501 (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 (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 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, 2000 ----- ------------------------------- <S> <C> Common Stock, $0.01 par value 1.000 billion shares </TABLE> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. -------- <C> <S> <C> Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheet January 31, 2000 (Unaudited) and October 31, 1999....... 3 Consolidated Condensed Statement of Earnings Three months ended January 31, 2000 and 1999 (Unaudited)............................................ 4 Consolidated Condensed Statement of Cash Flows Three months ended January 31, 2000 and 1999 (Unaudited)............................................ 5 Notes to Consolidated Condensed Financial Statements (Unaudited)............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)........ 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 19 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K........................ 20 Signature........................................................... 21 Exhibit Index....................................................... 22 </TABLE> 2 <PAGE> Item 1. Financial Statements. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (In millions except par value and number of shares) <TABLE> <CAPTION> January 31, October 31, 2000 1999 ----------- ----------- (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents............................ $ 2,985 $ 5,411 Short-term investments............................... 255 179 Accounts receivable.................................. 5,435 5,958 Financing receivables................................ 1,839 1,889 Inventory............................................ 5,100 4,863 Other current assets................................. 3,717 3,342 ------- ------- Total current assets............................... 19,331 21,642 ------- ------- Property, plant and equipment (less accumulated depreciation of $4,714 at January 31, 2000 and $4,587 at October 31, 1999)............................................. 4,336 4,333 Long-term investments and other assets................. 5,983 5,789 Net assets of discontinued operations.................. 4,261 3,533 ------- ------- Total assets....................................... $33,911 $35,297 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and short-term borrowings.............. $ 515 $ 3,105 Accounts payable..................................... 3,850 3,517 Employee compensation and benefits................... 1,210 1,287 Taxes on earnings.................................... 2,092 2,152 Deferred revenues.................................... 1,534 1,437 Other accrued liabilities............................ 3,089 2,823 ------- ------- Total current liabilities.......................... 12,290 14,321 ------- ------- Long-term debt......................................... 1,535 1,764 Other liabilities...................................... 780 917 Stockholders' equity: Preferred stock, $0.01 par value (300,000,000 shares authorized; none issued)............................ -- -- Common stock, $0.01 par value (4,800,000,000 shares authorized; 1,000,112,000 shares issued and outstanding at January 31, 2000 and 1,004,569,000 shares issued and outstanding at October 31, 1999).. 10 10 Additional paid-in capital........................... 881 -- Retained earnings.................................... 18,272 18,285 Accumulated comprehensive income..................... 143 -- ------- ------- Total stockholders' equity......................... 19,306 18,295 ------- ------- Total liabilities and stockholders' equity......... $33,911 $35,297 ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated condensed financial statements. 3 <PAGE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (Unaudited) (In millions except per share amounts) <TABLE> <CAPTION> Three months ended January 31, ------------------- 2000 1999 --------- --------- <S> <C> <C> Net revenue: Products................................................. $ 9,961 $ 8,773 Services................................................. 1,712 1,462 --------- --------- Total net revenue...................................... 11,673 10,235 --------- --------- Costs and expenses: Cost of products sold and services....................... 8,349 7,068 Research and development................................. 607 576 Selling, general and administrative...................... 1,765 1,494 --------- --------- Total costs and expenses............................... 10,721 9,138 --------- --------- Earnings from operations................................... 952 1,097 Interest income and other, net............................. 163 149 Interest expense........................................... 56 47 --------- --------- Earnings from continuing operations before taxes........... 1,059 1,199 Provision for taxes........................................ 265 317 --------- --------- Net earnings from continuing operations.................... 794 882 Net earnings from discontinued operations.................. -- 78 --------- --------- Net earnings............................................... $ 794 $ 960 ========= ========= Net earnings per share: Continuing operations Basic.................................................... $ 0.80 $ 0.87 Diluted.................................................. $ 0.77 $ 0.85 Net earnings per share: Discontinued operations Basic.................................................... $ -- $ 0.08 Diluted.................................................. $ -- $ 0.07 Net earnings per share: Total Basic.................................................... $ 0.80 $ 0.95 Diluted.................................................. $ 0.77 $ 0.92 Cash dividends declared per share.......................... $ 0.32 $ 0.32 Average number of shares and equivalents Basic.................................................... 999 1,011 Diluted.................................................. 1,043 1,049 </TABLE> The accompanying notes are an integral part of these consolidated condensed financial statements. 4 <PAGE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited) (In millions) <TABLE> <CAPTION> Three months ended January 31, -------------- 2000 1999 ------ ------ <S> <C> <C> Cash flows from operating activities: Net earnings from continuing operations...................... $ 794 $ 882 Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities: Depreciation and amortization.............................. 346 300 Deferred taxes on earnings................................. (413) 403 Change in assets and liabilities: Accounts and financing receivables....................... 404 (25) Inventory................................................ (237) (145) Accounts payable......................................... 333 (335) Taxes on earnings........................................ 217 (885) Other current assets and liabilities..................... (110) (35) Other, net............................................... (199) 72 ------ ------ Net cash provided by operating activities................ 1,135 232 ------ ------ Cash flows from investing activities: Investment in property, plant and equipment.................. (339) (217) Disposition of property, plant and equipment................. 76 144 Purchases of short-term investments.......................... (462) (475) Maturities of short-term investments......................... 472 492 Other, net................................................... -- 23 ------ ------ Net cash used in investing activities.................... (253) (33) ------ ------ Cash flows from financing activities: Increase (decrease) in notes payable and short-term borrowings.................................................. (2,495) 175 Issuance of long-term debt................................... 30 28 Payment of long-term debt.................................... (337) (529) Issuance of common stock under employee stock plans.......... 216 179 Repurchase of common stock................................... (929) (265) Dividends.................................................... (161) (162) ------ ------ Net cash used in financing activities.................... (3,676) (574) ------ ------ Net cash provided by discontinued operations................... 368 23 ------ ------ Decrease in cash and cash equivalents.......................... (2,426) (352) Cash and cash equivalents at beginning of period............... 5,411 4,046 ------ ------ Cash and cash equivalents at end of period..................... $2,985 $3,694 ====== ====== </TABLE> The accompanying notes are an integral part of these consolidated condensed financial statements. 5 <PAGE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of January 31, 2000 and October 31, 1999, the results of operations for the three-month periods ended January 31, 2000 and 1999, and the cash flows for the three-month periods ended January 31, 2000 and 1999. The results of operations for the three-month period ended January 31, 2000 are not necessarily indicative of the results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in the Hewlett-Packard Company 1999 Annual Report on Form 10-K. The preparation of financial statements in accordance 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. Note 2: Accumulated Comprehensive Income The accumulated comprehensive income line of stockholders' equity consists of unrealized gains and losses on available-for-sale securities. Unrealized gains and losses on available-for-sale securities were $143 million (net of taxes of $92 million) for the three-month period ended January 31, 2000. Note 3: Discontinued Operations On March 2, 1999, Hewlett-Packard Company (HP) announced its intention to launch a new company, subsequently named Agilent Technologies, Inc. (Agilent Technologies), through a distribution of Agilent Technologies' common stock to HP's stockholders in the form of a tax-free spin-off. Agilent Technologies is composed of HP's Measurement Systems Organization, which includes its test and measurement, semiconductor products, chemical analysis and healthcare solutions businesses. Effective July 31, 1999, HP's management and Board of Directors completed the plan of disposition for Agilent Technologies. HP's consolidated condensed financial statements for all periods present Agilent Technologies as a discontinued business segment in accordance with Accounting Principles Board Opinion No. 30. For the period from the July 31, 1999 measurement date through the spin-off, net earnings from Agilent Technologies are expected to exceed the estimated costs to effect the spin-off. The excess net earnings over these costs will be recognized once the net earnings realized exceed the total estimated costs of the spin-off. The net earnings are expected to exceed the total estimated costs in the second quarter of fiscal 2000. Net assets of discontinued operations are summarized below: <TABLE> <CAPTION> January 31, October 31, 2000 1999 ----------- ----------- (In millions) <S> <C> <C> Current assets.................................... $ 5,093 $ 3,538 Property, plant and equipment, net................ 1,408 1,387 Other assets...................................... 717 619 Current liabilities............................... (1,727) (1,681) Other liabilities................................. (1,230) (330) ------- ------- Net assets of discontinued operations............. $ 4,261 $ 3,533 ======= ======= </TABLE> 6 <PAGE> In the first quarter of fiscal 2000, HP provided net funding of approximately $1.1 billion to Agilent Technologies. In November 1999, Agilent Technologies closed an initial public offering of approximately 16% of its common stock and distributed the net proceeds of approximately $2.1 billion to HP. These transactions resulted in an increase to cash of approximately $1.0 billion, net assets of discontinued operations of approximately $0.4 billion and additional paid-in capital of approximately $1.4 billion. HP plans to distribute its remaining 84% interest in Agilent Technologies to HP's stockholders by July 31, 2000. Note 4: Earnings Per Share HP's basic earnings per share (EPS) is calculated based on net earnings available to common stockholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding or the conversion of debt. <TABLE> <CAPTION> Three months ended January 31, ------------------- 2000 1999 --------- --------- (In millions except per share data) <S> <C> <C> Numerator: Net earnings from continuing operations.............. $ 794 $ 882 Adjustment for interest expense, net of income tax effect.............................................. 6 6 --------- --------- Net earnings from continuing operations, adjusted.... 800 888 Net earnings from discontinued operations............ -- 78 --------- --------- Net earnings, adjusted............................. $ 800 $ 966 ========= ========= Denominator: Weighted-average shares outstanding.................. 999 1,011 Effect of dilutive securities: Dilutive options.................................... 33 27 Zero-coupon subordinated convertible notes due 2017............................................... 11 11 --------- --------- Dilutive potential common shares..................... 44 38 --------- --------- Weighted-average shares and dilutive potential common shares.............................................. 1,043 1,049 ========= ========= Net earnings per share: Continuing operations Basic................................................ $ 0.80 $ 0.87 Diluted.............................................. $ 0.77 $ 0.85 Net earnings per share: Discontinued operations Basic................................................ $ -- $ 0.08 Diluted.............................................. $ -- $ 0.07 Net earnings per share: Total Basic................................................ $ 0.80 $0.95 Diluted.............................................. $ 0.77 $0.92 Average number of shares and equivalents Basic................................................ 999 1,011 Diluted.............................................. 1,043 1,049 </TABLE> Note 5: Income Taxes 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. 7 <PAGE> Note 6: Inventory <TABLE> <CAPTION> January 31, October 31, 2000 1999 ----------- ----------- (In millions) <S> <C> <C> Finished goods....................................... $ 3,661 $3,581 Purchased parts and fabricated assemblies............ 1,439 1,282 ------- ------ $ 5,100 $4,863 ======= ====== </TABLE> Note 7: Supplemental Cash Flow Information <TABLE> <CAPTION> Three months ended January 31, -------------------- 2000 1999 --------- --------- (In millions) <S> <C> <C> Cash paid for income taxes, net...................... $ 315 $ 774 Cash paid for interest............................... 45 99 Non-cash transactions--issuance of common stock for employee benefit plans: Restricted stock................................... (73) (10) Employer matching contributions for TAXCAP and employee stock benefit plans...................... 26 31 </TABLE> Note 8: Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement, as amended, is effective for fiscal years beginning after June 15, 2000. HP will adopt the standard no later than the first quarter of fiscal year 2001 and is in the process of determining the impact that adoption will have on its consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The staff accounting bulletin is effective no later than the first quarter of HP's fiscal year 2001. HP is in the process of determining the impact that adoption will have on its consolidated financial statements. Note 9: Stockholders' Equity HP repurchases shares of its common stock under a systematic program to manage the dilution created by shares issued under employee stock plans and under a separate incremental plan authorizing purchases in the open market or in private transactions. During the first quarter of fiscal 2000, 8.9 million shares were repurchased under these plans for an aggregate price of $929 million. In the first quarter of fiscal 1999, 4.2 million shares were repurchased under these plans for $265 million. In November 1999, the Board of Directors authorized an additional $2.0 billion in repurchases under these two programs in the aggregate. As of January 31, 2000, HP had remaining authorization for future repurchases under the two programs of approximately $2.5 billion. Note 10: Segment Information HP is a leading global provider of computing and imaging solutions and services for business and home, and is focused on capitalizing on the opportunities of the Internet and the proliferation of electronic services. HP organizes its operations into four major businesses: Imaging and Printing Systems, Computing Systems, IT Services, and Measurement Systems, each of which comprises a reportable segment. The Measurement Systems business, now named Agilent Technologies, is reported as a discontinued operation. For further discussion, see Note 3 to the consolidated condensed financial statements. 8 <PAGE> The results of the reportable segments are derived directly from HP's management reporting system. These results are based on HP's method of internal reporting and are not necessarily in conformity with generally accepted accounting principles. Management measures the performance of each segment based on several metrics, including earnings from operations. These results are used, in part, to evaluate the performance of, and allocate resources to, each of the segments. The table below presents selected financial information for each continuing reportable segment: <TABLE> <CAPTION> Imaging and Printing Computing IT All Total Systems Systems Services Other Segments ----------- --------- -------- ----- -------- (In millions) <S> <C> <C> <C> <C> <C> For the three months ended January 31, 2000: Net revenue from external customers..................... $5,138 $5,062 $1,601 $ 26 $11,827 Intersegment net revenue....... 2 70 18 9 99 ------ ------ ------ ---- ------- Total net revenue............ 5,140 5,132 1,619 35 11,926 ====== ====== ====== ==== ======= Earnings (loss) from operations.................... $ 677 $ 177 $ 183 $ (1) $ 1,036 ====== ====== ====== ==== ======= For the three months ended January 31, 1999: Net revenue from external customers..................... $4,528 $4,348 $1,405 $ 23 $10,304 Intersegment net revenue....... 10 122 13 -- 145 ------ ------ ------ ---- ------- Total net revenue............ $4,538 $4,470 $1,418 $ 23 $10,449 ====== ====== ====== ==== ======= Earnings (loss) from operations.................... $ 643 $ 243 $ 227 $ (1) $ 1,112 ====== ====== ====== ==== ======= Assets: As of January 31, 2000......... $6,914 $6,217 $7,045 $ 14 $20,190 ====== ====== ====== ==== ======= As of October 31, 1999......... $7,304 $6,049 $6,976 $ 17 $20,346 ====== ====== ====== ==== ======= </TABLE> 9 <PAGE> The following is a reconciliation of segment information to HP consolidated totals: <TABLE> <CAPTION> Three months ended January 31, ------------------------ 2000 1999 ----------- ------------ (In millions) <S> <C> <C> Net revenue: Total segments........................................ $11,926 $10,449 Financing interest income reclassification............ (82) (69) Elimination of intersegment net revenue and other..... (171) (145) ------- ------- Total HP consolidated............................. $11,673 $10,235 ======= ======= Earnings from continuing operations before taxes: Total segment earnings from operations................ $ 1,036 $ 1,112 Net financing interest reclassification............... (39) (30) Interest income and other, net........................ 163 149 Interest expense...................................... (56) (47) Corporate and unallocated costs, and eliminations..... (45) 15 ------- ------- Total HP consolidated............................. $ 1,059 $ 1,199 ======= ======= <CAPTION> January 31, October 31, 2000 1999 ----------- ------------ (In millions) <S> <C> <C> Assets: Total segments........................................ $20,190 $20,346 Assets not allocated to segments: Cash and cash equivalents........................... 2,985 5,411 Short-term investments and long-term investments in debt securities.................................... 1,184 1,192 Other corporate..................................... 5,291 4,815 ------- ------- Total assets from continuing operations............... 29,650 31,764 Net assets of discontinued operations................. 4,261 3,533 ------- ------- Total HP consolidated............................. $33,911 $35,297 ======= ======= </TABLE> 10 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited). HEWLETT-PACKARD COMPANY AND SUBSIDIARIES The following discussion should be read in conjunction with the consolidated condensed financial statements and the related notes that appear elsewhere in this document. This document contains forward-looking statements that involve risks and uncertainties that could cause the results of HP and its consolidated subsidiaries to differ materially from those expressed or implied by such forward-looking statements. These risks include the timely development, production and acceptance of new products and services and their feature sets; the challenge of managing asset levels, including inventory; the flow of products into third-party distribution channels; the difficulty of keeping expense growth at modest levels while increasing revenues; risks associated with the proposed spin-off of Agilent Technologies, Inc. and the distribution of Agilent Technologies' shares; and other risks described from time to time in HP's Securities and Exchange Commission filings, including but not limited to the Annual Report on Form 10-K for the year ended October 31, 1999. Forward-looking statements reflect the current views of HP with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. HP does not intend to update these forward-looking statements. As more fully discussed in Note 3 to the consolidated condensed financial statements, on March 2, 1999, HP announced its intention to launch a new company, subsequently named Agilent Technologies, through a distribution of Agilent Technologies' common stock to HP's stockholders in the form of a tax- free spin-off. Agilent Technologies is composed of HP's Measurement Systems Organization, which includes its test and measurement, semiconductor products, chemical analysis and healthcare solutions businesses. Effective July 31, 1999, HP's management and Board of Directors completed the plan of disposition for Agilent Technologies. On November 23, 1999, Agilent Technologies closed an initial public offering (IPO) of approximately 16% of its common stock. HP plans to distribute its remaining 84% interest in Agilent Technologies to HP's stockholders by July 31, 2000. HP's consolidated financial statements for all periods present Agilent Technologies as a discontinued business segment in accordance with Accounting Principles Board Opinion No. 30. Unless otherwise indicated, the following discussion relates to HP's continuing operations. Results of Operations For the first quarter ended January 31, 2000, HP reported net revenue of $11.7 billion, an increase of 14% from the same period in fiscal 1999. The increase in net revenue was a result of solid growth across all business segments. Net revenue for the Computing Systems segment grew 15% in the first quarter of 2000 compared with a year ago, while the IT Services segment grew 14% and the Imaging and Printing Systems segment grew 13%. Overall, product sales for the first quarter increased 14%, while service revenue grew 17% over the corresponding period in fiscal 1999. International revenue grew 16% to $6.7 billion and U.S. revenue increased 12% to $5.0 billion from a year ago. Strong international growth was fueled primarily by the economic improvement in Asia. Fluctuations in currency rates had minimal impact on year-over-year revenue growth. Costs, expenses and earnings as a percentage of net revenue for the three months ended January 31 were as follows: <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> Cost of products sold and services............................. 71.5% 69.1% Research and development....................................... 5.2% 5.6% Selling, general and administrative............................ 15.1% 14.6% Earnings from operations....................................... 8.2% 10.7% Net earnings from continuing operations........................ 6.8% 8.6% </TABLE> 11 <PAGE> Cost of products sold and services as a percentage of net revenue was 71.5% in the first quarter of fiscal 2000 compared with 69.1% in the same period for fiscal 1999. The 2.4 percentage point increase in the cost of sales ratio was driven primarily by the Computing Systems and Imaging and Printing Systems segments. Total operating expenses, composed of research and development and selling, general and administrative expenses, were $2.4 billion, an increase of 15% for the first quarter of fiscal 2000 over the first quarter of fiscal 1999. Research and development expense increased 5% due primarily to an increase in spending related to new technologies in imaging and printing systems. Selling, general and administrative expenses increased 18% in the first quarter of fiscal 2000 over the corresponding period in fiscal 1999. This growth was attributable to higher selling expenses to support business growth, increased marketing expenses to support our corporate branding initiative and e-services strategy, and increased stock appreciation rights expense due to a 46% increase in HP stock price during the quarter. In addition, the increase reflected costs incurred to effect the spin-off of Agilent Technologies. These spin-off costs consisted primarily of retention incentives given to continuing HP employees involved in effecting the transaction. Interest income and other, net, increased $14 million in the first quarter of fiscal 2000 compared with the same period in fiscal 1999. The increase was attributable primarily to lower net currency losses, as well as higher interest income associated with investment balances. HP's tax rate was 25% in the first quarter of fiscal 2000, down from a tax rate of 26% for all of fiscal 1999. This decline was primarily the result of changes in the mix of our pre-tax earnings in various tax jurisdictions throughout the world. The tax rate was 26.5% for the first quarter of fiscal 1999. Net earnings from continuing operations decreased 10% to $794 million in the first quarter of fiscal 2000 compared with the same period in fiscal 1999. As a percentage of net revenue, net earnings from continuing operations were 6.8% in the first quarter of fiscal 2000, compared with 8.6% in the same quarter in fiscal 1999. Earnings from discontinued operations include the results of the businesses that comprise Agilent Technologies. For the period from the July 31, 1999 measurement date through the spin-off, net earnings from Agilent Technologies are expected to exceed the estimated costs to effect the spin-off. The excess net earnings over these costs will be recognized once the net earnings realized exceed the total estimated costs of the spin-off. The net earnings are expected to exceed the total estimated costs in the second quarter of fiscal 2000. Segment Information The following is a discussion of operating results for each of HP's business segments. A description of products and services for each segment can be found in the notes to the consolidated financial statements in the Hewlett-Packard Company 1999 Annual Report on Form 10-K. Quarterly financial data for each segment can be found in Note 10 to these consolidated condensed financial statements. The reportable segments disclosed in this Form 10-Q are based on HP's management organizational structure as of January 31, 2000. Future changes to this organizational structure may result in changes to the reportable segments disclosed. Imaging and Printing <TABLE> <CAPTION> Three months ended January 31, ------------------- 2000 1999 --------- --------- (In millions) <S> <C> <C> Net revenue................................................ $ 5,140 $ 4,538 Earnings from operations................................... $ 677 $ 643 </TABLE> 12 <PAGE> Imaging and Printing Systems' net revenue grew 13% for the quarter ended January 31, 2000 compared with the same period in 1999. Net revenue growth was driven primarily by strong sales of printer supplies. Despite strong printer hardware unit growth, revenue growth was constrained by declines in average selling prices and a shift to low-end products. Net revenue growth in printer supplies reflected continued growth in the installed base, growth in printing from the Internet and increased usage of newly introduced products. Net revenue growth in printer hardware was driven primarily by the solid performance of home printers, personal/workgroup office printers and scanning devices. HP Photosmart and all-in-one products contributed to revenue growth in the home printer category and personal/workgroup office printers benefited from strong performance in the personal and color laser platforms. Earnings from operations as a percentage of net revenue were 13.2% for the quarter ended January 31, 2000 compared with 14.2% for the same period in 1999. The 1.0 percentage point decrease was attributable primarily to higher component costs related to the strengthening Japanese Yen and a shift toward low-end home printers. These factors were partially offset by strong sales of higher-margin printer supplies. The decline in the earnings from operations ratio was also slightly impacted by investments made to develop next generation technologies and additional selling and marketing expenses to promote new imaging and printing products. Computing Systems <TABLE> <CAPTION> Three months ended January 31, ------------------- 2000 1999 --------- --------- (In millions) <S> <C> <C> Net revenue................................................ $ 5,132 $ 4,470 Earnings from operations................................... $ 177 $ 243 </TABLE> Computing Systems' net revenue increased 15% for the quarter ended January 31, 2000 when compared with the same period in 1999. Solid performance in certain PC and server products drove the overall growth. This performance was partially offset by a continued shift to low-margin products, declines in PC average selling prices, and the transition to a new enterprise storage strategy. Computing Systems' net revenue benefited from strong unit shipments of home and notebook PCs. Growth in home PCs was driven by the strong acceptance of new products launched during the quarter aided by the exit of two major competitors from the retail market. Notebook PCs continued to benefit from growth in the retail notebook line as well as strong sales of its base product portfolio. Very strong performance in entry-level UNIX(R)(/1/) servers and solid sales of high-end UNIX(R) servers favorably impacted revenue. PC servers also aided revenue growth over the prior year. Revenue growth was partially offset by the continued effects of the transition to a new high-end enterprise storage strategy and a slight decrease in business desktop PC revenue due to declining average selling prices. Earnings from operations as a percentage of net revenue were 3.4% for the quarter ended January 31, 2000 compared with 5.4% for the same period in 1999. The 2.0 percentage point decrease was attributable to higher memory costs for business desktop PCs and PC servers, as well as a continued shift to low-margin products and declines in average selling prices. The decline in the earnings from operations ratio was partially offset by a shift towards higher-margin enterprise storage products and lower operating expenses as a percentage of net revenue due to improved operational efficiencies. IT Services <TABLE> <CAPTION> Three months ended January 31, ------------------- 2000 1999 --------- --------- (In millions) <S> <C> <C> Net revenue................................................ $ 1,619 $ 1,418 Earnings from operations................................... $ 183 $ 227 </TABLE> - ------------ (/1/)UNIX(R) is a registered trademark of the Open Group 13 <PAGE> IT Services net revenue increased 14% for the quarter ended January 31, 2000 compared with the same period in 1999. Strong growth in several support and service programs as well as solid performance in financing contributed to the overall growth. The 14% growth in net revenue was driven primarily by strong performance in mission-critical, networking and customer services, as well as outsourcing services such as systems managment and enterprise resource planning (ERP). Financing revenue also grew reflecting strength in the UNIX(R) business. Earnings from operations as a percentage of net revenue were 11.3% for the quarter ended January 31, 2000 compared with 16.0% for the same period in 1999. The 4.7 percentage point decrease was attributable primarily to lower margins on our desktop financing business, competitive pricing and an increase in consulting hiring to support future growth. Additional investments in service and support technologies and marketing expenses related to our e-services initiatives also contributed to the decline in earnings from operations as a percentage of net revenue. Liquidity and Capital Resources. HP's financial position remained strong in the first quarter of fiscal 2000. Cash and cash equivalents and short-term investments were $3.2 billion at January 31, 2000 compared with $5.6 billion at October 31, 1999. During the first quarter of fiscal 2000, cash flows from operating activities were used to pay down short- and long-term debt, fund repurchases of HP's common stock and purchase property, plant and equipment. Operating activities generated $1.1 billion of cash in the first quarter of fiscal 2000 compared with $232 million in the corresponding period in fiscal 1999. The increase in cash generated in 2000 resulted primarily from the collection of receivables, favorable fluctuations in accounts payable and timing of tax payments. Inventory as a percentage of net revenue was 11.6% as of January 31, 2000 compared with 12.2% at the end of the first quarter of fiscal 1999 and 11.5% as of October 31, 1999, as progress in supply-chain management continued. Trade and financing receivables as a percentage of net revenue were 16.6% at January 31, 2000 compared with 16.1% in the corresponding period of fiscal 1999 and 18.5% as of October 31, 1999. The ratio at year-end reflected a relatively high level of receivables due to seasonal fluctuations. Capital expenditures were $339 million in the first three months of fiscal 2000 compared with $217 million for the corresponding period in fiscal 1999. Net property, plant and equipment as a percentage of net revenue was 9.9% as of January 31, 2000 compared with 11.8% at the end of the first quarter of fiscal 1999 and 10.2% at October 31, 1999. This result reflected the streamlining of operations through outsourcing and consolidating activities, improving space utilization and reducing asset intensity to build flexibility into our balance sheet. HP invests excess cash in short- and long-term investments, depending on our projected cash needs for operations, capital expenditures and other business purposes. We also supplement our internally generated cash flow with a combination of short- and long-term borrowings. Short- and long-term borrowings in the first quarter of fiscal 2000 decreased by $2.8 billion, as cash and net receipts from maturities of short-term investments were used to pay down short- and long-term debt. Long-term debt totaling $337 million matured as scheduled in the first quarter of fiscal 2000. At January 31, 2000, HP had an unused committed borrowing facility in place totaling $1.0 billion. HP repurchases shares of its common stock under a systematic program to manage the dilution created by shares issued under employee stock plans and under a separate incremental plan authorizing purchases in the open market or in private transactions. During the first quarter of fiscal 2000, 8.9 million shares were repurchased under these plans for an aggregate price of $929 million. In the first quarter of fiscal 1999, 4.2 million shares were repurchased under these plans for $265 million. In November 1999, the Board of Directors authorized an additional $2.0 billion in repurchases under these two programs in the aggregate. As of January 31, 2000, HP had remaining authorization for future repurchases under the two programs of approximately $2.5 billion. 14 <PAGE> In the first quarter of fiscal 2000, HP provided net funding of approximately $1.1 billion to Agilent Technologies. In November 1999, Agilent Technologies closed an initial public offering of approximately 16% of its common stock and distributed the net proceeds of approximately $2.1 billion to HP. Factors That Could Affect Future Results Competition. We encounter aggressive competition in all areas of our business. We have numerous competitors, ranging from some of the world's largest corporations to many relatively small and highly specialized firms. We compete primarily on the basis of technology, performance, price, quality, reliability, distribution and customer service and support. Product life cycles are short. To remain competitive, HP must be able to develop new products and periodically enhance our existing products. In particular, we anticipate that we will have to continue to lower the prices of many of our products to stay competitive and effectively manage financial returns with resulting reduced gross margins. In some of our markets, we may not be able to compete successfully against current and future competitors, and the competitive pressures we face could harm our business and prospects. New Product Introductions. If we cannot continue to rapidly develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability, we may lose market share and our future revenue and earnings may suffer. The process of developing new high technology products and services is complex and uncertain. We must accurately anticipate customers' changing needs and emerging technological trends. We consequently must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. After a product is developed, we must be able to manufacture sufficient volumes quickly at low enough costs. To do this we must accurately forecast volumes, mix of products and configurations. Additionally, the supply and timing of a new product or service must match customers' demand and timing for the particular product or service. Given the wide variety of systems, products and services that HP offers, the process of planning production and managing inventory levels becomes increasingly difficult. Reliance on Third Party Distribution Channels and Inventory Management. We use third-party distributors to sell our products, especially printers and personal computers, in order to accommodate changing customer preferences. As a result, the financial soundness of our wholesale and retail distributors, and our continuing relationships with these distributors, are important to HP's success. Some of these distributors may have insufficient financial resources and may not be able to withstand changes in business conditions. Our revenue and earnings could suffer if our distributors' financial condition or operations weaken or if our relationship with them deteriorates. Additionally, inventory management becomes increasingly complex as we continue to sell a significant mix of products through distributors. Third party distributors constantly adjust their product orders from us in response to: . The supply of our and our competitors' products available to the distributor, . The timing of new product introductions and relative features of the products, and . Seasonal fluctuations in end-user demand, such as back-to-school and holiday buying. Distributors may increase orders during times of product shortages, cancel orders if their inventory is too high or delay orders in anticipation of new products. If we have excess inventory, we may have to reduce our prices and write down inventory, which in turn could result in lower gross margins. Short Product Life Cycles. The short life cycles of many of our products pose a challenge for us to manage effectively the transition from existing products to new products. If we do not manage the transition effectively, our revenue and earnings could suffer. Among the factors that make a smooth transition from current products to new products difficult are delays in product development or manufacturing, variations in product costs and 15 <PAGE> delays in customer purchases of existing products in anticipation of new product introductions. Our revenue and earnings could also suffer due to the timing of product or service introductions by our suppliers and competitors. This is especially true when a competitor introduces a new product just before our own product introduction. Further, our new products may replace or compete with certain of our own current products. Intellectual Property. We generally rely upon patent, copyright, trademark and trade secret laws in the United States and in certain other countries, and agreements with our employees, customers and partners, to establish and maintain our proprietary rights in our technology and products. However, any of our intellectual proprietary rights could be challenged, invalidated or circumvented. Our intellectual property may not necessarily provide significant competitive advantages. Also, because of the rapid pace of technological change in the information technology industry, many of our products rely on key technologies developed by third parties, and we may not be able to continue to obtain licenses from these third parties. Third parties may claim that we are infringing their intellectual property. Even if we do not believe that our products are infringing third parties' intellectual property rights, the claims can be time-consuming and costly to defend and divert management's attention and resources away from our business. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. If we cannot or do not license the infringed technology or substitute similar technology from another source, our business could suffer. Reliance on Suppliers. Our manufacturing operations depend on our suppliers' ability to deliver quality components and products in time for us to meet critical manufacturing and distribution schedules. We sometimes experience a short supply of certain component parts as a result of strong demand in the industry for those parts. If shortages or delays persist, our operating results could suffer until other sources can be developed. In order to secure components for the production of new products, at times we make advance payments to suppliers, or we may enter into noncancelable purchase commitments with vendors. If the prices of these component parts then decrease after we have entered into binding price agreements, our earnings could suffer. Further, we may not be able to secure enough components at reasonable prices to build new products in a timely manner in the quantities and configurations needed. Conversely, a temporary oversupply of these parts could also affect our operating results. International. Sales outside the United States make up more than half of our revenues. A portion of our product and component manufacturing, along with key suppliers, are also located outside of the United States. Our future earnings or financial position could be adversely affected by a variety of international factors, including: . Changes in a country 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, . Differing technology standards, . Problems caused by the conversion of various European currencies to the Euro (see "Adoption of the Euro" section below), and . Natural disasters. Market Risk. We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales and assets and liabilities denominated in currencies other than the U.S. dollar. We are also exposed to interest rate risk inherent in our debt and investment portfolios. Our risk management strategy uses derivative financial instruments, including forwards, swaps and purchased options, to hedge certain foreign currency and interest rate exposures. Our intent is to offset gains and losses that occur on the underlying exposures, with gains and losses on the derivative contracts hedging these exposures. We do not enter into 16 <PAGE> derivatives for trading purposes. See also the "Financial Instruments--Off- Balance-Sheet Foreign Exchange Risk" and "Borrowings" notes to the consolidated financial statements in the Hewlett-Packard Company 1999 Annual Report on Form 10-K for more detailed information. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates applied to the hedging contracts and underlying exposures described above, and a hypothetical 10% adverse movement in interest rates applied to our debt and investment portfolios. As of January 31, 2000 and 1999, the analysis indicated that these hypothetical market movements would not have a material effect on HP's consolidated financial position, results of operations or cash flows. Actual gains and losses in the future may differ materially from that analysis, however, based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and HP's actual exposures and hedges. Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. In the normal course of business, HP frequently engages in discussions with third parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. Although completion of any one transaction is unlikely to have a material effect on our financial position, results of operations or cash flows taken as a whole, it may contribute to our financial results differing from the investment community's expectations in a given quarter. Divestiture of a part of our business may result in the cancellation of orders and charges to earnings. Acquisitions and strategic alliances may require us to integrate with a different company culture, management team and business infrastructure. We may also have to develop, manufacture and market products with our products in a way that enhances the performance of the combined business or product line. Depending on the size and complexity of an acquisition, our successful integration of the entity into HP depends on a variety of factors, including: . The hiring and retention of key employees, . Management of facilities in separate geographic areas, 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 divert our attention from other business operations. Earthquake. Our corporate headquarters, a portion of our research and development activities, other critical business operations and certain of our suppliers are located near major earthquake faults. The ultimate impact on HP, our significant suppliers and our general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. We are predominantly uninsured for losses and interruptions caused by earthquakes. Environmental. Some of our operations use substances regulated under various federal, state and international laws governing the environment. It is our policy to apply strict standards for environmental protection to sites inside and outside the U.S., even when not subject to local government regulations. We record a liability for environmental remediation and related costs when we consider the costs to be probable and the amount of the costs can be reasonably estimated. Environmental costs are presently not material to our results of operations or financial position. Profit Margin. Our profit margins vary somewhat among our products, customer groups and geographic markets. Consequently, our overall profitability in any given period is partially dependent on the product, customer and geographic mix reflected in that period's net revenue. Stock Price. HP's stock price, like that of other technology companies, can be volatile. Some of the factors that can affect our stock price are: . Our, or a competitor's, announcement of new products, services or technological innovations, . Quarterly increases or decreases in our earnings, 17 <PAGE> .Changes in revenue or earnings estimates by the investment community, and .Speculation in the press or investment community. General market conditions and domestic or international macroeconomic factors unrelated to our performance may also affect HP's stock price. For these reasons, investors should not rely on recent trends to predict future stock prices or financial results. In addition, following periods of volatility in a company's securities, securities class action litigation against a company is sometimes instituted. This type of litigation could result in substantial costs and the diversion of management time and resources. Earnings Fluctuations. Although we believe that we have the products and resources needed for continuing success, we cannot reliably predict future revenue and margin trends. Actual trends may cause us to adjust our operations, which could cause period-to-period fluctuations in our earnings. Planned Spin-off of Agilent Technologies. HP has announced that it intends to distribute to its stockholders all of the common stock of Agilent Technologies that HP owns by July 31, 2000, although HP is not obligated to do so. This distribution may not occur by that date or at all. Further, HP may not obtain the benefits we expect as a result of this distribution, such as greater strategic focus on our core computing and imaging and printing businesses. In addition, HP's consolidated financial statements do not reflect what the financial position, results of operations and cash flows of HP would have been had Agilent Technologies been a separate stand-alone entity during the periods presented. Year 2000 The information provided below constitutes a "Year 2000 Readiness Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure Act. HP passed a number of critical "Year 2000" dates (September 9, 1999; January 1, 2000; and February 29, 2000) with no significant issues anywhere in the world. Our customer-support operations reported that HP customers did not call about any consequential Year 2000 incidents. At HP sites, we did not experience any significant Year 2000-related issues that would have affected our ability to manufacture, ship, sell or service our products. HP had established a Year 2000 Program Office to coordinate the Year 2000 efforts of all of our business units, geographic organizations and functional departments around the world. This office also provided a single point of contact for information about our Year 2000 programs. HP embarked on a massive customer-outreach program to share information with millions of customers in face-to-face meetings, in mailings and via a web site. Our Year 2000 initiatives focused on four areas of potential impact: the products and services we provide to customers, our own internal information technology (IT) systems, our internal non-IT systems and processes, and the readiness of third parties with whom we have material business relationships. HP's Year 2000 program, at its peak, involved thousands of employees who worked diligently to make sure that customers and our own operations did not experience any significant Year 2000 problems. While we are encouraged by the success of our Year 2000 efforts and that of our customers and partners, we will continue to offer any needed Year 2000 support to customers. Plans are in place to close the Year 2000 Program Office and manage any outstanding Year 2000 support issues through our regular HP support and service activities around the world. Adoption of the Euro HP has established a dedicated task force to address the issues raised by the introduction of a European single currency, the Euro. The Euro's initial implementation was effective as of January 1, 1999, and the transition 18 <PAGE> period will continue through January 1, 2002. On January 1, 1999, we began converting our product prices from local currencies to Euros as required. We implemented system changes to give multi-currency capability to internal applications and to ensure that external partners' systems processing Euro conversions are compliant with the European Council regulations. In addition, we have implemented design changes to support display and printing of the Euro character by impacted HP products. The introduction and use of the Euro has not had a material effect on our foreign exchange and hedging activities or our use of derivative instruments, and we do not presently expect that it will. All costs associated with the conversion to the Euro are expensed to operations as incurred. While we will continue to evaluate the impact of the Euro over time, based on currently available information, we do not believe that the introduction of the Euro currency will have a material adverse impact on our consolidated financial condition, cash flows or results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. A discussion of HP's exposure to, and management of, market risk appears in Item 2 of this Form 10-Q under the heading "Factors That Could Affect Future Results." 19 <PAGE> PART II. OTHER INFORMATION 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 22 of this report. (b) Reports on Form 8-K: None. 20 <PAGE> 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) /s/ Robert P. Wayman By: _________________________________ Robert P. Wayman Executive Vice President Finance and Administration and Chief Financial Officer (Principal Financial Officer) Dated: March 15, 2000 21 <PAGE> HEWLETT-PACKARD COMPANY AND SUBSIDIARIES EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description ------- ----------- <C> <S> 1 Not applicable. 2 Master Separation and Distribution Agreement between Hewlett-Packard Company and Agilent Technologies, Inc. effective as of August 12, 1999, which appears as exhibit 2 to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference. 3(a) Registrant's Amended and Restated Certificate of Incorporation, which appears as exhibit 3(a) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1998, which exhibit is incorporated herein by reference. 3(b) Registrant's Amended By-Laws, which appears as exhibit 3(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference. 4 Indenture dated as of October 14, 1997 among Registrant and Chase Trust Company of California regarding Liquid Yield Option Notes due 2017 which appears as exhibit 4.2 to Registrant's Registration Statement on Form S-3 (Registration No. 333-44113), which exhibit is incorporated herein by reference. 5-8 Not applicable. 9 None. 10(a) Registrant's 1985 Incentive Compensation Plan, as amended, which appears as exhibit 10(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(b) Registrant's 1985 Incentive Compensation Plan, as amended, stock option agreement, which appears as exhibit 10(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(c) Registrant's Excess Benefit Retirement Plan, amended and restated as of November 1, 1994, which appears as exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1996, which exhibit is incorporated herein by reference.* 10(d) Registrant's 1990 Incentive Stock Option Plan, as amended, which appears as exhibit 10(d) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(e) Registrant's 1990 Incentive Stock Option Plan, as amended, stock option agreement, which appears as exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(f) Registrant's 1995 Incentive Stock Plan, as amended, which appears as exhibit 10(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(g) Registrant's 1995 Incentive Stock Plan, as amended, stock option and restricted stock agreements, which appears as exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(h) Registrant's 1997 Director Stock Plan which appears as exhibit 99 to Registrant's Form S-8 filed on March 7, 1997, which exhibit is incorporated herein by reference.* </TABLE> 22 <PAGE> <TABLE> <CAPTION> Exhibit Number Description ------- ----------- <C> <S> 10(i) Registrant's Executive Deferred Compensation Plan, Amended and Restated effective November 1, 1999, which appears as exhibit 10(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is incorporated herein by reference.* 10(j) VeriFone, Inc. Amended and Restated 1992 Non-Employee Directors' Stock Option Plan which appears as exhibit 99.1 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(k) VeriFone, Inc. Amended and Restated Incentive Stock Option Plan and form of agreement which appears as exhibit 99.2 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(l) VeriFone, Inc. Amended and Restated 1987 Supplemental Stock Option Plan and form of agreement which appears as exhibit 99.3 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(m) Enterprise Integration Technologies Corporation 1991 Stock Plan and form of agreement which appears as exhibit 99.4 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(n) VeriFone, Inc. Amended and Restated Employee Stock Purchase Plan which appears as exhibit 99.1 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.* 10(o) Registrant's 1998 Subsidiary Employee Stock Purchase Plan and the Subscription Agreement which appear as Appendices E and E-1 to Registrant's Proxy Statement dated January 12, 1998, respectively, which appendices are incorporated herein by reference.* 10(p) Transition Agreement, dated May 20, 1999, between Registrant and Lewis E. Platt which appears as exhibit 10(ee) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(q) Employment Agreement, dated May 20, 1999, between Registrant and Robert P. Wayman which appears as exhibit 10(ff) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(r) Employment Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina which appears as exhibit 10(gg) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(s) Executive Transition Program which appears as exhibit 10(hh) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(t) Incentive Stock Plan Stock Option Agreement (Non-Qualified), dated July 17, 1999, between Registrant and Carleton S. Fiorina which appears as exhibit 10(ii) to Registrant's Quarterly Report on Form 10- Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(u) Restricted Stock Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina which appears as exhibit 10(jj) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(v) Restricted Stock Unit Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina which appears as exhibit 10(kk) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.* 10(w) Registrant's 2000 Stock Plan which appears as Appendix A to Registrant's Proxy Statement dated January 18, 2000, which appendix is incorporated herein by reference.* 10(x) Registrant's 2000 Employee Stock Purchase Plan which appears as Appendix B to Registrant's Proxy Statement dated January 18, 2000, which appendix is incorporated herein by reference.* </TABLE> 23 <PAGE> <TABLE> <CAPTION> Exhibit Number Description ------- ----------- <C> <S> 10(y) Registrant's Pay-for-Results Plan which appears as Appendix C to Registrant's Proxy Statement dated January 18, 2000, which appendix is incorporated herein by reference.* 11-17 Not applicable. 18 None. 19-21 Not applicable. 22 None. 23-26 Not applicable. 27 Financial Data Schedule. 28 None. 99 Not applicable. </TABLE> - -------- * Indicates management contract or compensatory plan, contract or arrangement. 24 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <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-31-2000 <PERIOD-START> NOV-01-1999 <PERIOD-END> JAN-31-2000 <CASH> 2,985 <SECURITIES> 255 <RECEIVABLES> 7,274 <ALLOWANCES> 0 <INVENTORY> 5,100 <CURRENT-ASSETS> 19,331 <PP&E> 9,050 <DEPRECIATION> 4,714 <TOTAL-ASSETS> 33,911 <CURRENT-LIABILITIES> 12,290 <BONDS> 1,535 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 891 <OTHER-SE> 18,415 <TOTAL-LIABILITY-AND-EQUITY> 33,911 <SALES> 9,961 <TOTAL-REVENUES> 11,673 <CGS> 0 <TOTAL-COSTS> 8,349 <OTHER-EXPENSES> 2,372 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 56 <INCOME-PRETAX> 1,059 <INCOME-TAX> 265 <INCOME-CONTINUING> 794 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 794 <EPS-BASIC> 0.80 <EPS-DILUTED> 0.77 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

HRB

https://www.sec.gov/Archives/edgar/data/12659/0000950124-00-001265.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, I6uibZtRCeNeTO7mGFIIFx2iI/Xq65HvSA+x7HO5udKlRjNCtKcFKArpOSUObFPF A5dRVU+HRFGSxjXBhKX8Hg== <SEC-DOCUMENT>0000950124-00-001265.txt : 20000317 <SEC-HEADER>0000950124-00-001265.hdr.sgml : 20000317 ACCESSION NUMBER: 0000950124-00-001265 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000316 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: SEC FILE NUMBER: 001-06089 FILM NUMBER: 571424 BUSINESS ADDRESS: STREET 1: 4400 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, 2000 [ ] 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 1, 2000 was 98,382,049 shares. <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> PART I Financial Information Consolidated Balance Sheets January 31, 2000 and April 30, 1999 .................................................... 1 Consolidated Statements of Operations Three Months Ended January 31, 2000 and 1999 ........................................... 2 Nine Months Ended January 31, 2000 and 1999 ............................................ 3 Consolidated Statements of Cash Flows Nine Months Ended January 31, 2000 and 1999 ............................................ 4 Notes to Consolidated Financial Statements ................................................ 5 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 11 Quantitative and Qualitative Disclosures about Market Risk................................. 22 PART II Other Information.......................................................................... 23 SIGNATURES................................................................................................. 25 </TABLE> <PAGE> 3 H&R BLOCK, INC. CONSOLIDATED BALANCE SHEETS AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS <TABLE> <CAPTION> JANUARY 31, APRIL 30, 2000 1999 ---- ---- <S> <C> <C> ASSETS (UNAUDITED) (AUDITED) CURRENT ASSETS Cash and cash equivalents $ 248,490 $ 193,240 Marketable securities 33,074 56,881 Receivables from customers, brokers, dealers and clearing organizations, less allowance for doubtful accounts of $744 2,385,785 - Receivables, less allowance for doubtful accounts of $37,474 and $61,872 1,248,065 743,301 Prepaid expenses and other current assets 163,121 94,000 ----------- ----------- TOTAL CURRENT ASSETS 4,078,535 1,087,422 INVESTMENTS AND OTHER ASSETS Investments in marketable securities 294,792 170,528 Excess of cost over fair value of net tangible assets acquired, net of accumulated amortization 1,149,546 405,534 Other 178,903 132,470 ----------- ----------- 1,623,241 708,532 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization 219,594 114,222 ----------- ----------- $ 5,921,370 $ 1,910,176 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 2,094,939 $ 71,939 Accounts payable to customers, brokers and dealers 2,106,142 - Accounts payable, accrued expenses and deposits 182,842 168,641 Accrued salaries, wages and payroll taxes 80,558 161,590 Accrued taxes on earnings 6,784 151,659 Current portion of long-term debt 60,207 - ----------- ----------- TOTAL CURRENT LIABILITIES 4,531,472 553,829 LONG-TERM DEBT 356,283 249,725 OTHER NONCURRENT LIABILITIES 108,342 44,635 STOCKHOLDERS' EQUITY Common stock, no par, stated value $.01 per share 1,089 1,089 Additional paid-in capital 417,311 420,658 Retained earnings 963,212 1,130,909 Accumulated other comprehensive income (loss) (17,229) (23,400) ----------- ----------- 1,364,383 1,529,256 Less cost of 10,600,900 and 11,343,608 shares of common stock in treasury 439,110 467,269 ----------- ----------- 925,273 1,061,987 ----------- ----------- $ 5,921,370 $ 1,910,176 =========== =========== </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, ----------- 2000 1999 ---- ---- <S> <C> <C> REVENUES Service revenues $ 406,564 $ 213,156 Product revenues 81,941 60,110 Royalties 16,124 12,961 Other 7,878 5,255 ------------- ------------- 512,507 291,482 ------------- ------------- OPERATING EXPENSES Employee compensation and benefits 230,943 124,718 Occupancy and equipment 63,842 42,950 Interest 48,826 23,689 Depreciation and amortization 36,539 18,105 Marketing and advertising 39,221 17,824 Supplies, freight and postage 26,755 22,616 Other 80,085 49,930 ------------- ------------- 526,211 299,832 ------------- ------------- Operating loss (13,704) (8,350) OTHER INCOME Investment income, net 72 4,641 Other, net 109 (879) ------------- ------------- 181 3,762 Loss from continuing operations before income tax benefit (13,523) (4,588) Income tax benefit (6,448) (1,743) ------------- ------------- Net loss from continuing operations (7,075) (2,845) Net loss from discontinued operations (less applicable income tax benefit of ($175)) - (273) Net loss on sale of discontinued operations (less applicable income tax benefit of ($12,773)) - (19,978) ------------- ------------- Net loss $ (7,075) $ (23,096) ============= ============= Weighted average number of common shares outstanding 98,358 97,481 ============= ============= Basic and diluted net loss per share from continuing operations $ (.07) $ (.03) ============= ============= Basic and diluted net loss per share $ (.07) $ (.24) ============= ============= Dividends per share $ .275 $ .25 ============= ============= </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, ----------- 2000 1999 ---- ---- <S> <C> <C> REVENUES Service revenues $ 632,766 $ 308,466 Product revenues 176,182 111,906 Royalties 20,264 17,023 Other 14,801 10,273 ------------- ------------- 844,013 447,668 ------------- ------------- OPERATING EXPENSES Employee compensation and benefits 424,601 216,711 Occupancy and equipment 152,036 108,229 Interest 83,644 53,889 Depreciation and amortization 79,270 44,800 Marketing and advertising 59,076 30,088 Supplies, freight and postage 39,646 31,230 Other 156,701 87,631 ------------- ------------- 994,974 572,578 ------------- ------------- Operating loss (150,961) (124,910) OTHER INCOME Investment income, net 5,125 28,177 Other, net 359 (879) ------------- ------------- 5,484 27,298 Loss from continuing operations before income tax benefit (145,477) (97,612) Income tax benefit (56,591) (37,072) ------------- ------------- Net loss from continuing operations (88,886) (60,540) Net loss from discontinued operations (less applicable income tax benefit of ($953)) - (1,490) Net loss on sale of discontinued operations (less applicable income tax benefit of ($12,773)) - (19,978) ------------- ------------- Net loss $ (88,886) $ (82,008) ============= ============= Weighted average number of common shares outstanding 97,962 100,526 ============= ============= Basic and diluted net loss per share from continuing operations $ (.91) $ (.60) ============= ============= Basic and diluted net loss per share $ (.91) $ (.82) ============= ============= Dividends per share $ .80 $ .70 ============= ============= </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, ----------- 2000 1999 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (88,886) $ (82,008) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 79,270 44,800 Accretion of acquisition liabilities 7,266 - Net loss on sale of discontinued operations - 19,978 Other noncurrent liabilities 5,279 3,613 Changes in: Receivables from customers, brokers, dealers and clearing organizations (423,288) - Receivables (493,884) (217,181) Prepaid expenses and other current assets (54,171) (45,195) Accounts payable to customers, brokers and dealers 403,954 - Accounts payable, accrued expenses and deposits (56,815) 14,341 Accrued salaries, wages and payroll taxes (81,032) (42,816) Accrued taxes on earnings (144,933) (386,235) -------------- -------------- NET CASH USED IN OPERATING ACTIVITIES (847,240) (690,703) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (5,009) (227,381) Maturities of marketable securities 33,003 709,106 Purchases of property and equipment (68,855) (49,301) Payments made for business acquisitions, net of cash acquired (986,556) (90,618) Other, net (18,094) (23,738) -------------- -------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,045,511) 318,068 -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable (31,187,422) (7,301,430) Proceeds from issuance of notes payable 33,210,422 7,459,389 Dividends paid (78,811) (70,700) Payments to acquire treasury shares (32,366) (490,868) Proceeds from stock options exercised 36,178 63,728 -------------- -------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,948,001 (339,881) -------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 55,250 (712,516) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 193,240 900,856 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 248,490 $ 188,340 ============== ============== SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 87,168 $ 360,959 Interest paid 79,672 59,392 </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, 2000, the Consolidated Statements of Operations for the three and nine months ended January 31, 2000 and 1999, and the Consolidated Statements of Cash Flows for the nine months ended January 31, 2000 and 1999 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, 2000 and for all periods presented have been made. Reclassifications have been made to prior periods to conform with the current period 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 April 30, 1999 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 December 1, 1999, the Company, through a subsidiary, Block Financial Corporation, completed the purchase of all of the issued and outstanding shares of capital stock of Olde Financial Corporation and Financial Marketing Services, Inc. (collectively, Olde) for $850,000 in cash plus an estimated tangible book value payment of $37,100. An additional cash payment of $11,372 was made in the fourth quarter based on the aggregate consolidated net book value at the acquisition date, after a final independent audit of the balance sheet. The purchase agreement also provides for possible future consideration payable for up to five years after the acquisition based upon revenues generated from certain online brokerage services. Olde Discount Corporation, a wholly owned subsidiary of Olde Financial Corporation, based in Detroit, Michigan, offers brokerage and other financial services through its network of approximately 1,200 registered representatives located in 181 branch offices in 35 states. The transaction was accounted for as a purchase and, accordingly, Olde's results are included since the date of acquisition. The excess of cost over fair value of net tangible assets acquired at January 31, 2000 was $491,179, and will be adjusted for the additional payment made in the fourth quarter. Such is being amortized on a straight-line basis over 15 years, subject to completion of an asset valuation as of the purchase date. The acquisition was financed with short-term borrowings, and it is the intention of the Company that a portion of the acquisition will ultimately be financed with the issuance of approximately $500,000 in term debt in the fourth quarter of fiscal 2000. -5- <PAGE> 8 The following unaudited pro forma summary combines the consolidated results of operations of the Company and Olde as if the acquisition had occurred on May 1, 1999 and 1998, after giving effect to certain adjustments, including amortization of intangible assets, increased interest expense on the acquisition debt and the related income tax effects. The pro forma information is presented for informational purposes only and is not necessarily indicative of what would have occurred if the acquisition had been made as of those dates. In addition, the pro forma information is not intended to be a projection of future results. <TABLE> <CAPTION> Nine months ended ----------------- January 31, ----------- 2000 1999 ---- ---- <S> <C> <C> Revenues $ 1,158,919 $ 703,152 Net loss (102,969) (84,794) Basic and diluted net loss per share $ (1.05) $ (.84) </TABLE> 3. On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc. (RSM), completed the purchase of substantially all of the non-attest assets of McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh largest accounting and consulting firm with more than 70 offices located primarily in the Eastern, Midwestern, Northern and Southwestern United States. The purchase price was $240,000 in cash payments over the next four years and the assumption of certain pension liabilities with a present value of $52,728. The purchase agreement also provides for possible future contingent consideration based on a calculation of earnings in year two, three and four after the acquisition and will be treated as purchase price when paid. In addition, the Company made cash payments of $65,453 for outstanding accounts receivable and work-in-process that have been repaid to the Company as RSM collected these amounts in the ordinary course of business. The acquisition was accounted for as a purchase, and accordingly, RSM's results are included since the date of acquisition. The present value of the additional cash payments due over the next four years of $148,803 was treated as a noncash investing activity in the Consolidated Statement of Cash Flows for the nine months ended January 31, 2000. The excess of cost over the fair value of net tangible assets acquired was $240,535 and is being amortized on a straight-line basis over periods of up to 25 years. 4. Receivables consist of the following: <TABLE> <CAPTION> January 31, April 30, ----------- --------- 2000 1999 ---- ---- <S> <C> <C> (Unaudited) (Audited) Mortgage loans held for sale $ 621,578 $ 636,687 Participation in refund anticipation loans 356,659 51,074 Business services accounts receivable and work-in-process 122,397 33,015 Other 184,905 84,397 -------------- --------------- 1,285,539 805,173 Allowance for doubtful accounts 37,474 61,872 -------------- --------------- $ 1,248,065 $ 743,301 ============== =============== </TABLE> -6- <PAGE> 9 5. 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. 6. Basic and diluted net loss per share is computed using the weighted average number of shares outstanding during each period. Diluted net loss per share excludes the impact of common stock options outstanding of 8,464,234 shares and the conversion of 608 shares of preferred stock to common stock, as they are antidilutive. The weighted average shares outstanding for the nine months ended decreased to 97,962,000 from 100,526,000 last year, due to the purchase of treasury shares by the Company during fiscal 1999 and 2000. This decrease was partially offset by stock option exercises and the issuance of stock for acquisitions. 7. During the nine months ended January 31, 2000 and 1999, the Company issued 953,865 and 1,996,012 shares, respectively, pursuant to provisions for exercise of stock options under its stock option plans. In addition, the Company issued 475,443 shares of its common stock for an acquisition in the second quarter of fiscal 2000. The issuance of common stock for the acquisition was treated as a noncash investing activity in the Consolidated Statement of Cash Flows for the nine months ended January 31, 2000. During the nine months ended January 31, 2000, the Company acquired 721,800 shares of its common stock at an aggregate cost of $32,366. During the nine months ended January 31, 1999, the Company acquired 11,792,500 shares of its common stock at an aggregate cost of $490,868. 8. CompuServe Corporation (CompuServe), certain current and former officers and directors of CompuServe and the registrant are named defendants in six lawsuits pending before the state and Federal courts in Columbus, Ohio since 1996. All suits allege 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 its initial public offering in April 1996. One state lawsuit also alleges certain oral omissions and misstatements in connection with such offering. Relief sought in the lawsuits is unspecified, but includes pleas for rescission and damages. One Federal lawsuit names the lead underwriters of CompuServe's initial public offering as additional defendants and as representatives of a defendant class consisting of all underwriters who participated in such offering. The Federal suits were consolidated, the defendants filed a motion to dismiss the consolidated suits, the district court stayed all proceedings pending the outcome of the state court suits, and the United States Court of Appeals for the Sixth Circuit affirmed such stay. The four state court lawsuits allege violations of various state statutes and common law of negligent misrepresentation in addition to the 1933 Act claims. The state lawsuits were consolidated for discovery purposes and defendants filed a motion for summary judgment covering all four state lawsuits. As a part of the sale of its interest in CompuServe, the Company agreed to indemnify WorldCom, Inc. and CompuServe against 80.1% of any losses and expenses incurred by them with respect to these lawsuits. The defendants are vigorously defending these lawsuits. In the opinion of management, the ultimate resolution of these suits will not have a material adverse impact on the Company's consolidated financial position or results of operations. -7- <PAGE> 10 9. Summarized financial information for Block Financial Corporation, an indirect, wholly owned subsidiary of the Company, is presented below. <TABLE> <CAPTION> January 31, April 30, ----------- --------- 2000 1999 ---- ---- <S> <C> <C> (Unaudited) (Audited) Condensed balance sheets: Cash and cash equivalents $ 147,465 $ 16,026 Finance receivables, net 3,373,268 658,882 Other assets 1,233,689 448,010 -------------- --------------- Total assets $ 4,754,422 $ 1,122,918 ============== =============== Notes payable $ 2,090,802 $ 71,939 Long-term debt 249,763 249,725 Other liabilities 2,211,510 636,330 Stockholder's equity 202,347 164,924 -------------- --------------- Total liabilities and stockholder's equity $ 4,754,422 $ 1,122,918 ============== =============== </TABLE> <TABLE> <CAPTION> Three months ended Nine months ended ------------------ ----------------- January 31, January 31, ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Condensed statements of operations: Revenues $ 220,892 $ 110,472 $ 394,716 $ 217,699 Earnings from continuing operations 26,336 19,904 51,626 35,357 Net earnings (loss) 19,710 (8,026) 34,846 233 </TABLE> 10. As part of its interest rate risk management strategy, the Company may choose to hedge its interest rate risk related to its fixed rate mortgage or debt portfolios. The effectiveness of a hedge is measured by a historical and probable future high correlation of changes in the fair value of the hedging instruments with changes in the value of the hedged item. If correlation ceases to exist, hedge accounting is terminated and the gains or losses are recorded in revenues. The Company sells short FNMA mortgage-backed securities to certain broker-dealer counterparties. The position on certain or all of the fixed rate mortgages is closed, on standard Public Securities Association (PSA) settlement dates, when the Company enters into a forward commitment to sell those mortgages or decides to securitize the mortgages. Deferred gains on the FNMA securities hedging instrument amounted to $227 at January 31, 2000. There were no open FNMA hedging instruments at January 31, 2000. The contract value and market value of the forward commitment at January 31, 2000 were $130,000 and $130,171, respectively. In addition, the Company has hedged its interest rate risk related to the anticipated issuance of term debt in the fourth quarter of fiscal 2000 by utilizing treasury rate guarantees. The position on the treasury rate guarantees is closed on the anticipated bond issuance date. The contract value and the market value of these treasury rate guarantees as of January 31, 2000 were $300,000 and $297,873. These treasury rate guarantees expire on March 31, 2000. -8- <PAGE> 11 11. The Company's comprehensive income is comprised of net loss, foreign currency translation adjustments and the change in the net unrealized gain or loss on marketable securities. The adoption of SFAS 130 had no effect on the Company's consolidated financial statements. The components of comprehensive income (loss) during the three and nine months ended January 31, 2000 and 1999 were: <TABLE> <CAPTION> Three months ended Nine months ended ------------------ ----------------- January 31, January 31, ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net loss $ (7,075) $ (23,096) $ (88,886) $ (82,008) Change in net unrealized gain (loss) on mkt. securities (3,390) 2,113 1,867 3,945 Change in foreign currency translation adjustments 2,474 2,458 4,304 (6,447) ------------- ------------- -------------- --------------- Comprehensive income (loss) $ (7,991) $ (18,525) $ (82,715) $ (84,510) ============= ============= ============== =============== </TABLE> 12. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137). SFAS 137 delays the effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which will now be effective for the Company's fiscal year ending April 30, 2002. 13. In the second quarter of fiscal year 2000, management redefined its Mortgage operations segment to reflect the change in how the business is analyzed and evaluated. The redefined segment, Financial services, includes all of the previous mortgage activity along with the startup of the Company's new financial services operations and the acquisition of Olde. Financial services is primarily engaged in the origination, purchase, servicing, securitization and sale of nonconforming and conforming mortgage loans, as well as offering full-service investment opportunities to the general public. Mortgage origination services are offered through a network of mortgage brokers, through H&R Block Financial Centers and through H&R Block Mortgage Corporation retail offices. Financial planning and investment advice are offered through H&R Block Financial Centers and tax offices, and stock, bonds, mutual funds and other products and securities are offered through a nationwide network of registered representatives, including representatives located at H&R Block Financial Centers and tax offices. -9- <PAGE> 12 Information concerning the Company's operations by reportable operating segments for the three and nine months ended January 31, 2000 and 1999 is as follows: <TABLE> <CAPTION> Three months ended Nine months ended January 31, January 31, ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues: U.S. tax operations $ 237,851 $ 189,083 $ 270,649 $ 219,662 International tax operations 8,478 6,776 27,259 22,030 Financial services 182,419 79,350 353,376 185,005 Business services 82,806 15,341 190,165 18,205 Unallocated corporate 953 932 2,564 2,766 ------------ -------------- -------------- -------------- $ 512,507 $ 291,482 $ 844,013 $ 447,668 ============ ============== ============== ============== Earnings (loss) from continuing operations: U.S. tax operations $ (29,427) $ (18,845) $ (184,160) $ (137,977) International tax operations (7,134) (7,508) (15,299) (15,742) Financial services 43,976 24,189 83,733 48,043 Business services 2,156 (1) (169) (220) Unallocated corporate (5,226) (3,231) (12,003) (8,989) Interest exp - acquisition debt (18,472) (4,438) (29,952) (13,319) ------------ -------------- -------------- -------------- (14,127) (9,834) (157,850) (128,204) Investment income, net 72 4,641 5,125 28,177 Intercompany interest 532 605 7,248 2,415 ------------ -------------- -------------- -------------- Loss from continuing operations before income tax benefit $ (13,523) $ (4,588) $ (145,477) $ (97,612) ============ ============== ============== ============== January 31, April 30, ----------- --------- 2000 1999 ---- ---- IDENTIFIABLE ASSETS: U.S. tax operations $ 771,895 $ 268,650 International tax operations 56,937 55,684 Financial services 4,313,269 1,038,909 Business services 508,610 146,252 Unallocated corporate 270,659 400,681 -------------- -------------- $ 5,921,370 $ 1,910,176 ============== ============== </TABLE> -10- <PAGE> 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE INFORMATION CONTAINED IN THIS FORM 10-Q AND THE EXHIBITS HERETO MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH STATEMENTS ARE BASED UPON CURRENT INFORMATION, EXPECTATIONS, ESTIMATES AND PROJECTIONS REGARDING THE COMPANY, THE INDUSTRIES AND MARKETS IN WHICH THE COMPANY OPERATES, AND MANAGEMENT'S ASSUMPTIONS AND BELIEFS RELATING THERETO. WORDS SUCH AS "WILL," "PLAN," "EXPECT," "REMAIN," "INTEND," "ESTIMATE," "APPROXIMATE," AND VARIATIONS THEREOF AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE, ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND INVOLVE CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL OUTCOMES AND RESULTS COULD MATERIALLY DIFFER FROM WHAT IS EXPRESSED, IMPLIED OR FORECAST IN SUCH FORWARD-LOOKING STATEMENTS. SUCH DIFFERENCES COULD BE CAUSED BY A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED TO, THE UNCERTAINTY OF THE ENTRY BY THE COMPANY INTO ANY AGREEMENT REGARDING ANY SALE, JOINT VENTURE, OR OTHER STRATEGIC ACTION INVOLVING OPTION ONE MORTGAGE CORPORATION (OPTION ONE); THE UNCERTAINTY REGARDING THE COMPLETION OF ANY TRANSACTION INVOLVING OPTION ONE; THE UNCERTAINTY OF LAWS, LEGISLATION, REGULATIONS, SUPERVISION AND LICENSING BY FEDERAL, STATE AND LOCAL AUTHORITIES AND THEIR IMPACT ON ANY PROPOSED OR POSSIBLE TRANSACTION AND THE LINES OF BUSINESS IN WHICH THE COMPANY'S SUBSIDIARIES ARE INVOLVED; THE UNCERTAINTY THAT INCREASES IN THE NUMBER OF CLIENTS SERVED BY THE U.S. TAX OPERATIONS SEGMENT WILL CONTINUE AT THE RATES STATED FOR A PORTION OF THE U.S. TAX-FILING SEASON; UNFORESEEN COMPLIANCE COSTS; CHANGES IN ECONOMIC, POLITICAL OR REGULATORY ENVIRONMENTS; CHANGES IN COMPETITION AND THE EFFECTS OF SUCH CHANGES; THE INABILITY TO IMPLEMENT THE COMPANY'S STRATEGIES; CHANGES IN MANAGEMENT AND MANAGEMENT STRATEGIES; THE COMPANY'S INABILITY TO SUCCESSFULLY DESIGN, CREATE, MODIFY AND OPERATE ITS COMPUTER SYSTEMS AND NETWORKS; LITIGATION INVOLVING THE COMPANY; AND RISKS DESCRIBED FROM TIME TO TIME IN REPORTS AND REGISTRATION STATEMENTS FILED BY THE COMPANY AND ITS SUBSIDIARIES WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD TAKE THESE FACTORS INTO ACCOUNT IN EVALUATING ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 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 to a negative $452.9 million at January 31, 2000 from $533.6 million at April 30, 1999. The working capital ratio at January 31, 2000 is 0.90 to 1, compared to 1.96 to 1 at April 30, 1999. The decrease in working capital and the working capital ratio is due to the following: (1) purchase of Olde Financial Corporation (Olde) with short-term borrowings; (2) the increase in short-term borrowings to fund mortgage loan receivables which were funded with corporate cash at April 30, 1999 and; (3) the seasonal nature of the Company's U.S. tax -11- <PAGE> 14 operations 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 maintains a seasonal line of credit to support short-term borrowing facilities in Canada. The credit limit of this line fluctuates according to the amount of short-term borrowings outstanding during the year. The Company incurs short-term borrowings throughout the year to fund receivables associated with its mortgage loan and other financial services programs. These short-term borrowings in the U.S. are supported by a $1.89 billion back-up credit facility through November 2000, subject to renewal. An additional credit facility of $750 million was added in November 1999, which extends through April 2000, to support commercial paper that was issued to finance the acquisition of Olde. It's the Company's intention to ultimately finance a portion of the acquisition price with the issuance of approximately $500 million in term debt in the fourth quarter of fiscal 2000. The Company's capital expenditures, treasury share purchases and dividend payments during the first nine months were funded primarily through internally-generated funds and, to a lesser extent, short-term borrowings. At January 31, 2000, short-term borrowings used to fund mortgage loans and other programs increased to $2.1 billion from $71.9 million at April 30, 1999 due mainly to the funding of the acquisition of Olde and mortgage loan receivables which were previously funded with corporate cash. For the nine months ended January 31, 2000 and 1999, interest expense was $83.6 million and $53.9 million, respectively. The increase in interest expense is primarily attributable to interest expense related to the purchase of Olde and the non-attest assets of McGladrey & Pullen, LLP. In July 1996, the Company announced its intention to repurchase up to 10 million shares in the open market over a two-year period following the separation of CompuServe Corporation. At January 31, 2000, 7.7 million shares had been repurchased. The two-year period expired January 31, 2000. RESULTS OF OPERATIONS SIGNIFICANT EVENTS On July 21, 1999, the Company announced it was evaluating strategic alternatives for Option One, including a possible sale or joint venture with a business partner. There are no assurances that any transaction will take place. Option One is reported in the Financial services segment. On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc. (RSM), completed the purchase of substantially all of the non-attest assets of McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh largest accounting and consulting firm with more than 70 offices located primarily in the Eastern, Midwestern, Northern and Southwestern United States. The purchase price was $240.0 million in cash payments over the next four years and the assumption of certain pension liabilities with a present value of $52.7 million. In addition, the Company made cash payments of $65.5 million for outstanding accounts receivable -12- <PAGE> 15 and work-in-process balances that have been repaid to the Company as RSM collected these amounts in the ordinary course of business. The acquisition was accounted for as a purchase, and accordingly, RSM's results are included since the date of acquisition. On December 1, 1999, the Company, through a subsidiary, Block Financial Corporation, completed the purchase of all of the issued and outstanding shares of capital stock of Olde for $850.0 million in cash plus an estimated tangible book value payment of $37.1 million. An additional cash payment of $11.4 million was made in the fourth quarter based on the aggregate consolidated net book value at the acquisition date, after a final independent audit of the balance sheet. Olde Discount Corporation, a wholly owned subsidiary of Olde Financial Corporation, based in Detroit, Michigan, offers brokerage and other financial services through its network of approximately 1,200 registered representatives located in 181 branch offices in 35 states. The transaction was accounted for as a purchase and, accordingly, Olde's results are included since the date of acquisition. -13- <PAGE> 16 FISCAL 2000 COMPARED TO FISCAL 1999 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. THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY 31, 1999 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) -------------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> U.S. tax operations $ 237,851 $ 189,083 $ (29,427) $ (18,845) International tax operations 8,478 6,776 (7,134) (7,508) Financial services 182,419 79,350 43,976 24,189 Business services 82,806 15,341 2,156 (1) Unallocated corporate 953 932 (5,226) (3,231) Interest expense on acquisition debt - - (18,472) (4,438) --------------- -------------- -------------- ------------- $ 512,507 $ 291,482 (14,127) (9,834) =============== ============== Investment income, net 72 4,641 Intercompany interest 532 605 -------------- ------------- (13,523) (4,588) Income tax benefit (6,448) (1,743) -------------- ------------- Net loss from continuing operations (7,075) (2,845) Net loss from discontinued operations - (273) Net loss on sale of discontinued operations - (19,978) -------------- ------------- Net loss $ (7,075) $ (23,096) ============== ============= </TABLE> Consolidated revenues for the three months ended January 31, 2000 increased 75.8% to $512.5 million from $291.5 million reported last year. The increase is primarily due to acquisitions. Revenues from Financial services increased 129.9% over last year, due to the acquisition of Olde, and Business services increased $67.5 million over the prior year, due mainly to the acquisition of RSM. The consolidated pretax loss from continuing operations for the third quarter of fiscal 2000 increased to $13.5 million from $4.6 million in the third quarter of last year. The increase is attributable to increased losses from U.S. tax operations. These increases were partially offset by improved results from Financial services. -14- <PAGE> 17 The net loss from continuing operations was $7.1 million, or $.07 per share, compared to $2.8 million, or $.03 per share, for the same period last year. An analysis of operations by reportable operating segments follows. U.S. TAX OPERATIONS Revenues increased 25.8% to $237.9 million from $189.1 million last year, resulting primarily from increased revenues from higher tax preparation fees that are attributable to an increase in the number of clients served and price increases. During the first month of the U.S. tax-filing season, the number of clients served in company-owned offices increased 11.0%. Improved software sales also contributed to the increase. The pretax loss increased 56.2% to $29.4 million from $18.8 million in the third quarter of last year due to higher expenses related to increased competitive conditions for software sales and the startup of new e-commerce initiatives, as well as normal operational increases in compensation and benefits, rent and other facilities-related expenses and marketing and advertising related to tax services. An increase in the number of tax offices over the prior year also contributed to the increased expenses in tax services. These losses were partially offset by improved performance of Refund Anticipation Loans (RALs) due to lower bad debt expense, which is believed to primarily be a result of the IRS Debt Indicator Program. Due to the nature of this segment's business, the results for the first month of the tax-filing season are not necessarily indicative of expected results for the entire tax season. INTERNATIONAL TAX OPERATIONS Revenues increased 25.1% to $8.5 million compared to $6.8 million in the prior year's third quarter. The increase is principally attributable to higher check cashing and tax preparation fees in Canada and higher tax preparation fees in Australia. The pretax loss decreased 5.0% to $7.1 million from $7.5 million last year. The decrease is due to lower freight and postage and facilities-related expenses in Canada. The lower facilities-related expense is attributable to a decrease in the number of tax offices to 537 compared to 574 in the prior year. Improved results from Australia and the United Kingdom also contributed to the decreased loss. Due to the nature of this segment's business, third quarter operating results are not indicative of expected results for the entire fiscal year. FINANCIAL SERVICES Revenues increased 129.9% to $182.4 million from $79.4 million in the same period last year. The increase is primarily attributable to the acquisition of Olde on December 1, 1999. Olde contributed revenues for the two-month period of $92.8 million. Option One, which includes H&R Block Mortgage Corporation (formally Assurance Mortgage Corporation of America), also contributed $77.2 million to revenues, an 11.8% increase over the prior year. Option One originated and sold or securitized $1.4 billion in loans during the third quarter of fiscal 2000, compared to $930.2 million originated and $1.3 billion sold or securitized in the third quarter last year. -15- <PAGE> 18 Financial services pretax earnings of $44.0 million increased 81.8% this year compared to $24.2 million during the third quarter of fiscal 1999. The increase is mainly due to the acquisition of Olde, which contributed earnings of $25.7 million for the two-month period. Pretax earnings were reduced by losses related to the startup of financial services operations that offer financial planning services in H&R Block Financial Centers and tax offices. BUSINESS SERVICES Business services revenues of $82.8 million increased 439.8% from $15.3 million in the third quarter last year. The increase is primarily due to the acquisition of two regional and one national accounting firm, RSM, as well as several smaller market firms since the third quarter of fiscal 1999. Pretax earnings were $2.2 million compared to a loss of $1 thousand in the prior year, which includes goodwill amortization of $5.7 million and $1.1 million, respectively. Due to the nature of this segment's business, revenues are seasonal, while expenses are relatively fixed throughout the year. Results for the third quarter are not indicative of the expected results for the entire year. INVESTMENT INCOME, NET Net investment income decreased 98.4% to $72 thousand from $4.6 million last year. The decrease is due to less funds available for investment resulting from using corporate cash to fund acquisitions and mortgage loans held for sale. UNALLOCATED CORPORATE AND ADMINISTRATIVE The unallocated corporate and administrative pretax loss for the third quarter increased 61.7% to $5.2 million from $3.2 million in the comparable period last year. The increase is due to higher employee costs and consulting fees and the timing of charitable contributions. Also contributing to the increased loss from last year are lower earnings from the Company's captive insurance company. -16- <PAGE> 19 THREE MONTHS ENDED JANUARY 31, 2000 (THIRD QUARTER) COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1999 (SECOND QUARTER) (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) -------------------------------- -------------------------------- 3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr ------- ------- ------- ------- <S> <C> <C> <C> <C> U.S. tax operations $ 237,851 $ 19,723 $ (29,427) $ (83,663) International tax operations 8,478 14,713 (7,134) (1,644) Financial services 182,419 91,503 43,976 20,931 Business services 82,806 83,167 2,156 (2,134) Unallocated corporate 953 840 (5,226) (3,431) Interest expense on acquisition debt - - (18,472) (7,042) --------------- -------------- -------------- ------------- $ 512,507 $ 209,946 (14,127) (76,983) =============== ============== Investment income, net 72 2,402 Intercompany interest 532 2,424 -------------- ------------- (13,523) (72,157) Income tax benefit (6,448) (27,420) -------------- ------------- Net loss from continuing operations (7,075) (44,737) Net loss from discontinued operations - - Net loss on sale of discontinued operations - - -------------- ------------- Net loss $ (7,075) $ (44,737) ============== ============= </TABLE> Consolidated revenues for the three months ended January 31, 2000 increased 144.1% to $512.5 million from $209.9 million reported in the second quarter of fiscal 2000. The increase is primarily due to revenues from U.S. tax operations related to the beginning of the U.S. tax-filing season, as well as increased revenues from Financial services related to the acquisition of Olde on December 1, 1999. The consolidated pretax loss from continuing operations for the third quarter of fiscal 2000 decreased to $13.5 million from $72.2 million in the second quarter of this year. The decrease is attributable to U.S. tax operations, which incurred a pretax loss of $29.4 million this quarter compared to a pretax loss of $83.7 million in the second quarter, and improved results from Financial services. The net loss from continuing operations was $7.1 million, or $.07 per share, compared to $44.7 million, or $.46 per share, for the second quarter. An analysis of operations by reportable operating segments follows. -17- <PAGE> 20 U.S. TAX OPERATIONS Revenues increased $218.2 million to $237.9 million from $19.7 million in the second quarter. The pretax loss decreased 64.8% to $29.4 million from $83.7 million in the three months ended October 31, 1999. The improved results are due to the start of the U.S. tax-filing season. INTERNATIONAL TAX OPERATIONS Revenues decreased 42.4% to $8.5 million compared to the second quarter revenues of $14.7 million. The pretax loss increased 333.9% to $7.1 million from $1.6 million in the second quarter. The decreased results are due to the timing of the tax-filing seasons in Australia and Canada. The Australian tax season ends in October while the Canadian tax season begins in late January. FINANCIAL SERVICES Revenues increased 99.4% to $182.4 million from $91.5 million in the prior quarter. Pretax earnings increased 110.1% to $44.0 million from $20.9 million in the three months ended October 31, 1999. The improved results are primarily due to the acquisition of Olde on December 1, 1999, which contributed $92.8 million in revenues and $25.7 million in pretax earnings for the two months ended January 31. The increase in pretax earnings was partially reduced by losses related to the startup of financial services operations that offer financial planning services in H&R Block Financial Centers and tax offices. BUSINESS SERVICES Revenues decreased .4% to $82.8 million from $83.2 million in the three months ended October 31, 1999. Pretax earnings were $2.2 million, compared to a pretax loss of $2.1 million in the prior quarter. The improved results are mainly due to the improved results of RSM resulting from increased revenues, due to the start of the tax and accounting season, as well as a decrease in personnel training costs and lower bad debt expense. Additionally the onset of the accounting firms' tax and accounting season improved the results of a majority of the other firms. INVESTMENT INCOME, NET Net investment income decreased 97.0% to $72 thousand from $2.4 million in the second quarter of fiscal 2000. The decrease resulted from less funds available for investment due to the use of internal cash to fund operations. UNALLOCATED CORPORATE AND ADMINISTRATIVE The unallocated corporate and administrative pretax loss for the third quarter increased 52.3% to $5.2 million from $3.4 million in the second quarter. The increase is due to higher employee costs and consulting fees and the timing of charitable contributions. Improved results at the Company's captive insurance subsidiary partially offset the increased loss. -18- <PAGE> 21 NINE MONTHS ENDED JANUARY 31, 2000 COMPARED TO NINE MONTHS ENDED JANUARY 31, 1999 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) -------------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> U.S. tax operations $ 270,649 $ 219,662 $ (184,160) $ (137,977) International tax operations 27,259 22,030 (15,299) (15,742) Financial services 353,376 185,005 83,733 48,043 Business services 190,165 18,205 (169) (220) Unallocated corporate 2,564 2,766 (12,003) (8,989) Interest expense on acquisition debt - - (29,952) (13,319) --------------- -------------- -------------- ------------- $ 844,013 $ 447,668 (157,850) (128,204) =============== ============== Investment income, net 5,125 28,177 Intercompany interest 7,248 2,415 -------------- ------------- (145,477) (97,612) Income tax benefit (56,591) (37,072) -------------- ------------- Net loss from continuing operations (88,886) (60,540) Net loss from discontinued operations - (1,490) Net loss on sale of discontinued operations - (19,978) -------------- ------------- Net loss $ (88,886) $ (82,008) ============== ============= </TABLE> Consolidated revenues for the nine months ended January 31, 2000 increased 88.5% to $844.0 million from $447.7 million reported last year. The increase is primarily due to acquisitions in the Business and Financial services segments. Revenues from Business services increased $172.0 million over last year and Financial services increased $168.4 million over the nine-month period last year. U.S tax operations also contributed to the increase. The consolidated pretax loss from continuing operations for the first nine months of fiscal 2000 increased to $145.5 million from $97.6 million last year. The increase is attributable to higher losses from U.S. tax operations and lower investment income, which were reduced by increased earnings from Financial services, resulting from the Olde acquisition. The net loss from continuing operations was $88.9 million, or $.91 per share, compared to $60.5 million, or $.60 per share, for the same period last year. An analysis of operations by reportable operating segments follows. -19- <PAGE> 22 U.S. TAX OPERATIONS Revenues increased 23.2% to $270.6 million from $219.7 million last year, resulting primarily from higher tax preparation fees that are attributable to a 11.0% increase in clients served during the first month of the tax season and price increases. Revenues from software sales also contributed to the increase. The pretax loss increased 33.5% to $184.2 million from $138.0 million in the comparable period last year due to normal operational increases in compensation, rent and other facility-related expenses and consulting expenses related to tax services, increased competitive conditions related to software sales and the startup of e-commerce initiatives. In addition to the normal increases, the higher compensation is related to a change in the field manager compensation structure that shifts their compensation to salary incurred throughout the year from incentive bonuses incurred during the fourth quarter. Contributing to the increases in rent and other facility-related expenses is an increase in the amount of tax office space maintained under lease during this year's off-season, as well as an additional 282 tax offices this tax season compared to last year's tax season. The increased loss was partially offset by earnings from RALs due to lower bad debt expense, which is believed to primarily be a result of the IRS Debt Indicator Program. Due to the nature of this segment's business, the nine-month operating results are not indicative of expected results for the entire fiscal year. INTERNATIONAL TAX OPERATIONS Revenues increased 23.7% to $27.3 million compared to $22.0 million in the prior year. The increase is due to Australia and Canada operations. The increase in Australian revenues is due to higher tax preparation fees which is the result of an 8.5% increase in the number of tax returns prepared over the same period last year. The increase in Canadian revenues is due to higher check cashing, tax preparation and discounted return fees. The pretax loss decreased 2.8% to $15.3 million from $15.7 million last year. The decrease is due to improved results in Australia and the United Kingdom. These results were partially offset by increased losses from Canada operations. Due to the nature of this segment's business, the nine-month operating results are not indicative of expected results for the entire fiscal year. FINANCIAL SERVICES Revenues increased 91.0% to $353.4 million from $185.0 million in the same period last year. The increase is attributable to Olde, which was acquired on December 1, 1999, and Option One. Olde contributed revenues of $92.8 million. Option One, which includes H&R Block Mortgage Corporation (formally Assurance Mortgage Corporation of America), contributed revenues of $222.6 million for the nine months, a $64.8 million increase over the same period last year. Option One originated and sold or securitized $4.2 billion in loans during the first nine months of fiscal 2000, compared to $2.5 billion in the same period last year. The Company's other mortgage operations and Birchtree Financial, a broker-dealer, contributed to the improved revenues. -20- <PAGE> 23 Pretax earnings increased 74.3% to $83.7 million from $48.0 million in the prior year. The increase is primarily due to Olde, acquired December 1, 1999, which contributed earnings of $25.7 million and Option One, which contributed earnings of $63.5 million compared to earnings of $46.7 million last year. Earnings were reduced by losses related to the startup of financial services operations that offer financial planning services in H&R Block Financial Centers and tax offices. BUSINESS SERVICES Business services contributed revenues of $190.2 million compared to $18.2 million for the nine months ended January 31, 1999. The pretax loss decreased to $169 thousand compared to $220 thousand for the same period last year, which includes goodwill amortization of $12.7 million and $1.3 million, respectively. Business services was a new reportable operating segment in fiscal 1999 with only one regional accounting firm acquired during the first six months last year and an additional four acquired in the third quarter last year. However, in the nine-month period of fiscal 2000, there are seven regional accounting firms and several smaller market firms that have been included for the full nine months and a national accounting firm, RSM, that has been included for six months. Due to the nature of this segment's business, revenues are seasonal, while expenses are relatively fixed throughout the year. Results for the nine months are not indicative of the expected results for the entire fiscal year. INVESTMENT INCOME, NET Net investment income decreased 81.8% to $5.1 million from $28.2 million last year. The decrease is due to less funds available for investment resulting from internal cash used to fund acquisitions and operations instead of short-term borrowings. UNALLOCATED CORPORATE AND ADMINISTRATIVE The unallocated corporate and administrative pretax loss for the nine months increased 33.5% to $12.0 million from $9.0 million in the comparable period last year. The increase is a result of increased employee costs and consulting fees and the timing of charitable contributions. OTHER ISSUES YEAR 2000 The Company has completed preparation for the Year 2000, and to date has successfully managed the transition without any disruption of business. The Company had estimated the cost of the Year 2000 issue to be $3.9 million and actual results through January 31, 2000 were not materially different. While the Company does not anticipate problems, the Company could still encounter unanticipated issues related to the Year 2000. The Company will continue to monitor its computer systems, services, vendor and suppliers as needed throughout 2000 to address any such issues. -21- <PAGE> 24 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk from those reported at April 30, 1999. -22- <PAGE> 25 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. CompuServe Corporation (CompuServe), certain current and former officers and directors of CompuServe and the registrant are named defendants in six lawsuits pending before the state and Federal courts in Columbus, Ohio since 1996. All suits allege 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 its initial public offering in April 1996. One state lawsuit also alleges certain oral omissions and misstatements in connection with such offering. Relief sought in the lawsuits is unspecified, but includes pleas for rescission and damages. One Federal lawsuit names the lead underwriters of CompuServe's initial public offering as additional defendants and as representatives of a defendant class consisting of all underwriters who participated in such offering. The Federal suits were consolidated, the defendants filed a motion to dismiss the consolidated suits, the district court stayed all proceedings pending the outcome of the state court suits, and the United States Court of Appeals for the Sixth Circuit affirmed such stay. The four state court lawsuits allege violations of various state statutes and common law of negligent misrepresentation in addition to the 1933 Act claims. The state lawsuits were consolidated for discovery purposes and defendants filed a motion for summary judgment covering all four state lawsuits. As a part of the sale of its interest in CompuServe, the Company agreed to indemnify WorldCom, Inc. and CompuServe against 80.1% of any losses and expenses incurred by them with respect to these lawsuits. The defendants are vigorously defending these lawsuits. In the opinion of management, the ultimate resolution of these suits will not have a material adverse impact on the Company's consolidated financial position or results of operations. The lawsuits discussed herein were previously reported in the first and second quarter 2000 Forms 10-Q filed by the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits 10.1 Amendment No. 4 to the H&R Block Deferred Compensation Plan for Executives, as Amended and Restated. 10.2 Amendment No. 6 to the H&R Block Deferred Compensation Plan for Directors. 10.3 Executive's Agreement dated January 20, 1998, between H&R Block Tax Services, Inc. and Thomas L. Zimmerman. 10.4 Employment Agreement dated September 7, 1999, between HRB Management, Inc. and Jeffery W. Yabuki. 10.5 Employment Agreement dated January 26, 2000, between HRB Management, Inc. and Frank J. Cotroneo. 27 Financial Data Schedule -23- <PAGE> 26 b) Reports on Form 8-K A Form 8-K, Current Report, dated December 1, 1999, was filed on December 14, 1999, by the registrant reporting under "Item 2" the acquisition of Olde Financial Corporation on December 1, 1999. The registrant reported under "Item 7" that the financial statements of Olde Financial Corporation and the registrant's pro forma financial statements would be filed as soon as practicable, but no more than 60 days after that Current Report. The press release was included as Exhibit 99.1 to the Form 8-K. A Form 8-K/A, Current Report, dated December 1, 1999, was filed on February 14, 2000 by the registrant reporting under "Item 7" the audited financial statements of Olde Financial Corporation for the years ended December 31, 1998 and 1997, the unaudited financial statements of Olde Financial Corporation for the six months ended September 24, 1999 and September 25, 1998, and the unaudited pro forma balance sheet of the registrant as of October 31, 1999 and the statements of operations of the registrant for the year ended April 30, 1999 and the six months ended October 31, 1999. The consent of independent auditors was included as Exhibit 23.1 to the Form 8-K/A. -24- <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. H&R BLOCK, INC. ------------------------ (Registrant) DATE 03/16/00 BY /s/ Mark A. Ernst ---------------- ------------------------ Mark A. Ernst President and Chief Operating Officer DATE 03/16/00 BY /s/ Cheryl L. Givens ---------------- ------------------------ Cheryl L. Givens Vice President and Corporate Controller -25- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>2 <DESCRIPTION>H&R BLOCK DEFERRED COMPENSATION PLAN FOR EXECUTIVE <TEXT> <PAGE> 1 EXHIBIT 10.1 AMENDMENT NO. 4 TO THE H&R BLOCK DEFERRED COMPENSATION PLAN FOR EXECUTIVES, AS AMENDED AND RESTATED H&R Block, Inc. (the "Company") adopted the H&R Block Deferred Compensation Plan for Executives, as Amended and Restated (the "Plan"), effective as of January 1, 1999. The Company amended said Plan by Amendment No. 1 effective as of January 1, 1999, by Amendment No. 2 effective as of January 1, 2000, and by Amendment No. 3 effective as of September 8, 1999. 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. 4 is effective as of December 31, 1999. AMENDMENT 1. Section 4.1.2 of the Plan, as previously amended, is further amended by (a) adding the following words and punctuation after the words and punctuation "provided, however, that" and before the words "the maximum percentage" in the first paragraph of said Section: "(i) each participating Affiliate may elect before an Enrollment Period to have no Matching Contributions posted during the Plan Year (to which the enrollment period relates) to the Accounts of Participants employed by such Participating Affiliate, but such election is irrevocable and will automatically apply to all future Plan Years., and (ii)"; and (b) deleting the final sentence of the first paragraph of said Section. 2. Except as modified in this Amendment No. 4, the Plan 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: Chief Executive Officer ---------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2 <SEQUENCE>3 <DESCRIPTION>H&R BLOCK DEFERRED COMPENSATION PLAN FOR DIRECTORS <TEXT> <PAGE> 1 EXHIBIT 10.2 AMENDMENT NO. 6 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 August 1, 1987. The Company amended said Plan by Amendment No. 1 effective May 1, 1995; by Amendment No. 2 effective December 11, 1996; by Amendment No. 3 effective May 1, 1997; by Amendment No. 4 effective January 1, 1998; and by Amendment No. 5 effective in part on March 1, 1998 and in part on April 1, 1998. 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. 6 is effective as of December 8, 1999. AMENDMENT 1. Section 6.2.3 of the Plan, as previously amended, is further amended by replacing it with the following new Section 6.2.3: "6.2.3 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 (a) using an assumed interest rate equal to the rate of one-year United States Treasury notes for each Participant receiving payments of benefits prior to December 8, 1999, said rate to be determined once each Plan Year and to be the rate in effect as of the September 30 immediately preceding the payment period to which it applies, as published by Solomon Smith Barney Inc., or any successor thereto, or as determined by the Chief Financial Officer of the Company (the "Assumed Interest Rate"), and (b) using an assumed interest rate of zero percent (0%) for all other Participants. The amount of each level payment for each Calendar Year Payment Period shall be calculated by 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 preceding calendar year following November 30, and amortizing the difference over the remaining Overall Payment Period (x) using the Assumed Interest Rate for each participant receiving payments of benefits prior to December 8, 1999, and (y) using an assumed interest rate of zero percent (0%) for all other Participants. 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 calendar year immediately prior to the Remainder Payment Period, subtracting the benefit payments made during the portion of such preceding 1 <PAGE> 2 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." 2. Except as modified in this Amendment No. 6, 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: Chief Executive Officer ----------------------- 2 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3 <SEQUENCE>4 <DESCRIPTION>EXECUTIVE'S AGREEMENT <TEXT> <PAGE> 1 EXHIBIT 10.3 EXECUTIVE'S AGREEMENT THIS EXECUTIVE'S AGREEMENT ("AGREEMENT") is made and entered into as of the 20th day of January, 1998 ("Employment Date") between H&R BLOCK TAX SERVICES, INC., a Missouri corporation ("Company"), and Thomas L. Zimmerman ("Executive"). In consideration of the mutual covenants and consideration hereinafter set forth, the Company and the Executive (collectively, the "Parties") agree as follows: 1. Employment Executive is hereby employed by the Company as President-H&R Block Tax Services, Inc. The Company reserves the right, in its sole discretion, to change the title and/or job description of Executive at any time. 2. Term Unless terminated sooner as provided below, the term of this Agreement will end May 31 next following the Employment Date ("Initial Term"), but will extend automatically from year to year thereafter (each such year a "Renewal Term"); provided, however, that either Party may terminate this Agreement and every Renewal Term on any May 31, upon written notice given to the other Party at least 15 days prior to that May 31. 3. Salary Executive's salary for the Initial Term and each Renewal Term will be at an annual rate of $275,000 ("Salary"), payable in approximately equal semi-monthly installments commencing September 1, 1997. The Company may in its sole discretion and without the need to amend this Agreement increase Executive's Salary at any time. 4. Short Term Incentive Compensation. In addition to Salary as provided for in Section 3 above, Executive may be entitled to participate in a short term incentive compensation program, as any such program exists, in the Initial Term or any Renewal Terms. The existence of any such short term incentive compensation program, the factors upon which any such short term incentive compensation is contingent, and the circumstances under which it is paid may be determined by the Company from year to year. 5. Duties The duties of Executive are generally described in the job description provided to Executive on or before the Employment Date. The Company reserves the right to modify, delete, add, or otherwise change Executive's job responsibilities and job description, in its sole discretion, at any time. Executive shall perform such other duties, which may be beyond the scope of the job description, as are assigned to him or her by the Company from time to time. Executive shall devote his or her full productive time <PAGE> 2 and abilities to the efficient management of the Company and to carrying out his or her duties as specified above, and shall not participate in any conflicting activity. Executive must receive prior written consent of the Company before accepting any other employment during the term of this Agreement. Executive shall conduct all business in accordance with the law (including, but not limited to, state and federal wage and hour laws) and the H&R Block, Inc. Code of Business Ethics and Conduct, which Executive acknowledges having read and understood. Executive also understands that the Company's business is subject to governmental regulation, some of which may require Executive to submit to background investigation as a condition of the Company's participation in certain activities subject to such regulation. If Executive, the Company, H&R Block, Inc., and/or the other direct or indirect subsidiaries of H&R Block, Inc. (the Company, each such subsidiary and H&R Block, Inc. an "H&R Block Affiliate") are unable to participate, in whole or in part, in any such activity as the result of any action or inaction on the part of Executive, then this Agreement and Executive's employment may be terminated by the Company without notice. 6. Confidential Information The Company has spent many years developing its business and believes that its methods of operation are unique within its industry and constitute trade secrets and confidential business information. In the course of Executive's employment with the Company, Executive has and will be given access to trade secrets and confidential business information of the Company and H&R Block Affiliates, including, but not limited to: methods of operation and distribution; its Operations Manual and other similar manuals; procedures and processes related to electronic filing and refund anticipation loans; plans and strategies relating to marketing, advertising, the development of products and services, and other long and short term strategic plans; terms and conditions of contracts with any person or entity; forecasts; potential business acquisitions or dispositions; financial cost and price information; lists, names, addresses, telephone numbers or other identifying information of customers and/or employees of either the Company or any other H&R Block Affiliate; software; systems; and marketing databases. Executive acknowledges that he or she possesses or has access to such trade secrets and confidential business information, which could be used to substantially injure the Company and other H&R Block Affiliates in their present and future operations and expansions. Therefore, while this Agreement is in effect and for a period of two years thereafter, Executive shall not, without the Company's prior written authorization, directly or indirectly make known, divulge or communicate to any person or entity any trade secrets or confidential business information of the Company or any other H&R Block Affiliate, including, but not limited to, the items listed in the first and second sentences of this Section 6, or use such trade secrets and confidential business information for any reason other than to enable Executive to properly and completely perform his or her duties hereunder. The running of the two year period shall be suspended during any period of violation and/or any period of time required to enforce this covenant by litigation. Executive shall not, at any time during or after the term of this Agreement, without the Company's prior written authorization, make copies of, reproduce or remove 2 <PAGE> 3 from offices of any H&R Block affiliate any lists, computer disks, files, documents or other items containing names, addresses, or telephone numbers or other identifying information of one or more customers and/or employees of either the Company or any other H&R Block Affiliate or any other trade secrets or confidential business information of the Company or any other H&R Block Affiliate. Executive acknowledges that there are restrictions and limitations established by section 7216 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder, pertaining to the use and/or disclosure of confidential tax return information of the Company's customers. Executive will not at any time disclose or use any such confidential tax return information in violation of the law. 7. Covenant Against Competition During the term of this Agreement, Executive shall not, anywhere in the United States of America, directly or indirectly (whether as owner, employee, agent, partner, stockholder, officer, director or in any other capacity), solicit, accept or in any way establish or engage in any business for the preparation or electronic filing of tax returns or provision of other services or products that are offered in the offices operated by the Company and its subsidiaries. For a period of two years after termination of this Agreement, Executive shall not, directly or indirectly (whether as owner, employee, agent, partner, stockholder, officer, director or in any other capacity), solicit, accept or in any way establish or engage in any business for the preparation or electronic filing of tax returns or provision of other services or products that are offered in more than fifty percent of the offices operated by the Company and its subsidiaries. The running of the two year period shall be suspended during any period of violation and/or any period of time required to enforce this covenant by litigation. 8. Covenant Against Solicitation During the term of this Agreement and for a period of two years thereafter, Executive shall not, directly or indirectly solicit, divert or take away any of the employees, customers, third party contractors (or any contracts or arrangements therewith) or patronage of the Company or any H&R Block Affiliate anywhere within the United States of America. The running of the two year period shall be suspended during any period of violation and/or any period of time required to enforce this covenant by litigation. 9. Injunctive Relief Executive recognizes that because of his or her access to trade secrets and confidential business information and his or her substantial training and experience with the Company, irreparable injury to the Company and/or one or more H&R Block Affiliates would result from his or her violation of any provision of Sections 6, 7, or 8 of this Agreement. Executive therefore agrees that, in addition to and without limitation of any right the Company may have under this Agreement or under common law, any such violation shall be the proper subject matter for injunctive relief. The provisions of Sections 6, 7, 8, and 9 shall survive termination of this Agreement and shall be enforceable in accordance with their terms. 3 <PAGE> 4 10. Litigation In the event of litigation arising out of a breach of this Agreement by Executive, the ultimately prevailing party shall be entitled to payment by the ultimately nonprevailing party of its reasonable costs and attorneys' fees, including, but not limited to, such fees incurred during any such litigation on appeal. 11. Termination Upon Default The Company may, at any time, at its option, terminate this Agreement and the employment of Executive without notice in the event of: (a) Executive's misconduct that interferes with or prejudices the proper conduct of the Company's business or which may reasonably result in harm to the reputation of the Company and/or any other H&R Block Affiliate; or (b) Executive's disobedience, insubordination or failure to discharge his or her duties; or (c) Executive's breach of any of the provisions of Sections 6, 7, or 8 of this Agreement; or (d) Executive's suspension by the Internal Revenue Service from participation in the Electronic Filing Program; or (e) The inability of an H&R Block Affiliate to participate, in whole or in part, in any activity subject to governmental regulation as the result of any action or inaction on the part of Executive, as described in the last paragraph of Section 5 of this Agreement. In the event of a breach of a type not specifically enumerated in (a) through (e) of this Section 11 by Executive of any of his or her obligations under this Agreement or in the event of a failure by Executive to perform his or her duties in a manner which the Company, in its sole judgment, considers to be diligent and competent, and if such breach or failure continues for more than 10 days after notice from the Company or is not corrected to the satisfaction of the Company within said 10 day period, then the Company may, at its option, terminate this Agreement and the employment of Executive. If Executive's services are terminated pursuant to paragraphs (a), (b), (c), (d) or (e) of this Section 11, his or her compensation shall then automatically cease, except as to any short term incentive compensation to which he or she may be entitled on the date of termination. If Executive's services are terminated for any reason other than pursuant to paragraphs (a), (b), (c), (d) or (e) of this Section 11 or Section 12, upon Executive's execution of a release of all claims arising out of his or her employment (except claims for salary owed at the time of termination, any short term incentive compensation to which Executive may be entitled at the time of termination or pursuant to this Section 11, and any severance pay provided for in this Section 11), the Company shall pay to 4 <PAGE> 5 Executive (i) severance pay in the amount of one month's salary for each year of service with the Company or any other H&R Block Affiliate, up to a maximum of 12 months' salary, and (ii) if such termination occurs between November 1 and May 31 of any year, any short term incentive compensation to which Executive would have been entitled, had he or she continued to be employed through May 31 of such year. Any severance pay shall be based upon Executive's annual rate of Salary in effect on the date of termination. Any severance pay to which Executive is entitled pursuant to this paragraph shall be paid by the Company within 30 days after termination in a lump sum, and any short term incentive compensation to which Executive is entitled pursuant to this paragraph shall be paid by the Company within 30 days after the amount is calculated by the Company. 12. Death In the event of Executive's death, this Agreement shall terminate as of the last day of the month during which death occurs. Executive's compensation hereunder shall automatically cease upon the date of the termination of this Agreement, except as to any short term incentive compensation that he or she may be entitled on the date of termination. 13. Severability It is intended that each Section, paragraph, clause or provision (collectively, "Provisions") of this Agreement be viewed as separate and divisible, and that, in the event that any Provision is held to be void, invalid, unenforceable or restricted by law or by applicable court decision in any locality or state, such Provision shall be ineffective to the extent of such voidness, invalidity, unenforceability or restriction without in any way voiding, invalidating, rendering unenforceable, restricting or affecting the remaining Provisions, and without voiding, invalidating, rendering unenforceable, restricting or affecting such Provisions within states or localities where not prohibited, invalidated or restricted by law or court decree. Should any time or geographic restriction contained in Sections 6, 7, or 8 be deemed unreasonable and therefore unenforceable, such restrictions shall be reduced to enforceable limitations and the remaining Provisions shall continue to be in full force and effect. 14. Notices All notices required or desired to be given hereunder shall be in writing and shall be deemed served and delivered for all purposes if delivered in person or mailed, postage prepaid, to Executive at his or her last known address contained in Company records and to the Company at 4400 Main Street, Kansas City, Missouri 64111, or at such other place as either Party may designate to the other in writing from time to time. Any notice given by mail shall be deemed given as of the date it is so mailed and postmarked or received by nationally recognized overnight courier for delivery. 15. Binding Effect This Agreement is the entire agreement between the Parties, superseding and canceling any prior employment or Executive's agreement between them, oral or 5 <PAGE> 6 written. No amendment or supplement hereto shall be valid unless in writing and signed by the Parties. This Agreement shall be governed by the laws of the State of Missouri and is effective only when executed by the President of the Company and approved in writing by the President and Chief Executive Officer of H&R Block, Inc. The Parties have executed this Agreement in triplicate, as of the day and year first above written. H&R BLOCK TAX SERVICES, INC. By:/s/ Thomas L. Zimmerman /s/Thomas L. Zimmerman ----------------------- ---------------------- President Executive APPROVED: /s/ Frank L. Salizzoni 11-1-99 - -------------------------------------- President and Chief Executive Officer H&R Block, Inc. 6 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.4 <SEQUENCE>5 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> <PAGE> 1 EXHIBIT 10.4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 7th day of September, 1999, by and between HRB MANAGEMENT, INC., a Missouri corporation ("HRB") and Jeffery W. Yabuki ("Executive"). ARTICLE ONE EMPLOYMENT 1.01 - Agreement as to Employment. Effective September 7, 1999, or such other date as is mutually agreed upon by Executive and HRB in writing (the "Employment Date"), HRB hereby employs Executive as President, H&R Block International of H&R BLOCK, INC., a Missouri corporation ("Block") and the indirect parent corporation of HRB, and Executive hereby accepts such employment by HRB, subject to the terms of this Agreement. Subject to the terms of Section 1.06 of this Agreement, either party may terminate this Agreement for any reason, or no reason, by providing not less than 45 days' prior written notice of such termination to the other party, and, if such notice is properly given, this Agreement and Executive's employment hereunder shall terminate as of the close of business on the 45th day after such notice is deemed to have been given or such later date as is specified in such notice. Any termination of this Agreement shall not be effective as to those portions of this Agreement which, by their express terms as set forth below, require performance by either party following termination of this Agreement. 1.02 - Duties. (a) Executive is employed by HRB to serve as the President, H&R Block International of Block subject to the authority and direction of Block's Board of Directors (the "Board"), the Chief Executive Officer of Block, and the Chief Operating Officer of Block. Subject to the foregoing, the Executive shall have such authority and responsibility and duties as are normally associated with the principal officer of an operating segment of Block. (b) So long as he is employed under this Agreement, Executive agrees to devote his full business time and efforts exclusively on behalf of HRB and Block and to competently and diligently discharge his duties hereunder. Executive shall not be prohibited from engaging in such personal, charitable, or other nonemployment activities as do not interfere with his full-time employment hereunder and which do not violate the other provisions of this Agreement. Executive may, following approval by the Board of Directors of Block, become a member of the board of directors of a "for-profit" corporation or entity. Such approval will not be unreasonably withheld by the Board, but such approval may be withheld if the Board reasonably determines that such activity conflicts with Executive's duties hereunder, either in terms of <PAGE> 2 Executive's time to be devoted thereto or in terms of the relationship of such corporation's or entity's business to the present or future business then conducted or proposed to be conducted by Block and its subsidiaries, whether or not such business is directly competitive with the business of Block. Executive shall comply fully with all reasonable policies of HRB and Block as are from time to time in effect and applicable to his position. 1.03 - Compensation. (a) Base Salary. HRB shall pay to Executive during the period between the Employment Date and June 30, 2000, a minimum gross salary at an annual rate of $250,000 ("Base Salary"), payable semimonthly or at any other pay periods as HRB may use for its other executive employees. The Base Salary shall be reviewed for adjustment by the Board or appropriate committee thereof no less often than annually during the term of Executive's employment hereunder and, if adjusted by the Board, such adjusted amount shall become the "Base Salary" for purposes of this Agreement. (b) Short-Term Incentive Compensation. (i) As approved by the Compensation Committee of the Board, Executive shall participate in the H&R Block Short-Term Incentive Plan for the fiscal year ended April 30, 2000 and the discretionary short-term incentive program for such year. Under such Plan and program, the Executive shall have an aggregate target bonus for fiscal year 2000 of $137,500 and an opportunity to earn 200% of such target bonus. The payment of the actual award under the Plan (80% of target) shall be based upon the performance criteria determined by the Compensation Committee to be applicable to HRB participants for fiscal year 2000. The payment of the actual award under the discretionary program shall be based upon the performance of H&R Block International (10% of target) and Executive's individual performance (10%), as determined by the Chief Operating Officer of Block and approved by the Compensation Committee. For purposes of Executive's participation in such Plan and program for the fiscal year ending April 30, 2000, Executive's actual incentive compensation shall be prorated based upon the number of months during such year that he is actually employed by HRB. (ii) Executive shall be paid a $70,000 bonus upon completion of his employment by HRB from the Employment Date through April 30, 2000. 2 <PAGE> 3 (c) Stock Options. As approved by the Compensation Committee of the Board and the Board itself, Executive shall be granted (i) on the Employment Date a stock option under Block's 1993 Long-Term Executive Compensation Plan (the "1993 Plan") to purchase 40,000 shares of Block's common stock at a price per share equal to the closing price thereof on the New York Stock Exchange on the date of grant, such option to expire on the tenth anniversary of the date of grant; to vest and become exercisable as to 40% of the shares covered thereby on the third anniversary of the date of grant, as to an additional 30% of such shares on the fourth anniversary of the date of grant, and as to the remaining 30% of the shares on the fifth anniversary of the date of grant; to be an incentive stock option for the maximum number of shares permitted by Internal Revenue Code Section 422 and the regulations promulgated thereunder; and to otherwise be a nonqualified stock option; and (ii) a stock option to purchase a minimum of 22,000 shares under the 1993 Plan on the date of grant in fiscal year 2001 on which options are granted under the 1993 Plan to all or substantially all other senior executive officers of Block and its subsidiaries, such stock option to have terms and conditions consistent with the terms and conditions of options granted to such other senior executive officers except as provided in Section 1.06(a). Should HRB elect to change its fiscal year, such change shall not have a detrimental impact on Executive's stock option described in this Subsection 1.03(c)(2). In the event of a change in HRB's fiscal year, Executive shall be entitled to a pro rata adjustment of the minimum of 22,000 shares available for purchase by Executive under the 1993 Plan based on the number of months the fiscal year is extended. (d) Restricted Stock. As approved by the Compensation Committee of the Board and the Board itself, Executive shall be awarded promptly after the date of the commencement of his employment, 28,300 Restricted Shares of Block's common stock under the 1993 Plan. One-third of the 28,300 shares shall vest, respectively, on each of the first three anniversaries following such employment commencement date. Prior to the time such Restricted Shares are so vested, Executive shall be entitled to receive any cash dividends payable with respect to unvested Restricted Shares and vote such unvested Restricted Shares at any meeting of shareholders of Block. If the value of the Restricted Shares on the date of grant (determined by taking the average of the high and low reported sale price for Block Common Stock on such date and multiplying it by 28,300) does not equal or exceed $1,570,000, such number of Restricted Shares shall be increased to such number of Restricted Shares (rounded to the next highest 100 share increment) as shall first cause such fair market value equal to exceed $1,570,000. 3 <PAGE> 4 (e) Relocation Benefits. (i) HRB shall reimburse the Executive for reasonable packing, shipping, transportation costs and other expenses incurred by Executive in relocating himself, his family and personal property to the Greater Kansas City Area, in accordance with HRB's standard relocation policy. (ii) If, as a result of Executive's acceptance of employment hereunder, Executive must reimburse any prior employer for any relocation expenses paid by such prior employer, HRB will pay to Executive the amount of any such reimbursement. (iii) To the extent that Executive incurs taxable income related to any relocation benefits paid pursuant to this Agreement, HRB shall pay to Executive such additional amount as is necessary to "gross up" such benefits and cover the anticipated income tax liability resulting from such taxable income. 1.04 - Business Expenses. HRB shall promptly pay directly, or reimburse Executive for, all business expenses, to the extent such expenses are paid or incurred by Executive during the term hereof in accordance with Block policy in effect from time to time and to the extent such expenses are reasonable and necessary to the conduct by Executive of Block's business. 1.05 - Fringe Benefits. During the term of Executive's employment hereunder, HRB shall make available to Executive such insurance, sick leave, deferred compensation, short-term incentive compensation, bonuses, stock options (also referred to in Subsection 1.03(c) above), retirement, vacation and other like benefits as are approved by the Board or the Compensation Committee thereof and provided from time to time to the other executive-level employees of HRB, Block or Block's other subsidiaries. Executive shall be entitled to 20 days of paid vacation per year, commencing as of the date of this Agreement. 1.06 - Termination of Employment. (a) If, prior to the date of Executive's retirement from gainful employment, HRB terminates Executive's employment pursuant to Section 1.01 of this Agreement without "cause" (as defined in Subsection 1.06(b), below), or if Executive terminates his employment pursuant to Sections 1.01 of this Agreement with "good reason" (as defined in Subsection 1.06(c) below) then, upon any such termination of Executive's employment, (i) subject to Subsection 3.04(c), HRB shall pay to Executive compensation at an annual rate equal to the sum of (A) the annual rate of Base Salary in effect upon such 4 <PAGE> 5 termination, and (B) the aggregate short-term incentive compensation (under the H&R Block Short-Term Incentive Plan and any discretionary incentive program) paid by HRB to Executive for the last fiscal year completed before the fiscal year in which the termination of employment occurs (or, if such termination occurs prior to end of the fiscal year in which the Employment Date occurs, the amount of actual aggregate short-term incentive compensation to which Executive would have been entitled (with any discretionary incentive compensation calculated at target) had Executive remained employed through the last day of such fiscal year), such compensation to be paid throughout the two-year period following such termination at such periodic intervals as Base Salary would have been made had Executive remained employed by HRB hereunder; (ii) any portion of any option to purchase shares of Block common stock granted pursuant to Subsections 1.03(c) or 1.05 of this Agreement and held by Executive at the time of such termination of employment that is not yet vested in accordance with its terms, but would vest within two years after the date of such termination of employment, shall vest upon the date of such termination of employment to the extent that it would be vested at the end of such two-year period, and shall be exercisable to the extent so vested for a period of three months after such date of termination of employment; (iii) any Restricted Shares granted pursuant to Subsection 1.03(d) of this Agreement and held by Executive at the time of such termination of employment that are not yet vested (meaning the Shares are still subject to restrictions), but would vest within two years after the date of such termination of employment, shall vest upon the date of such termination of employment to the extent that they would be vested at the end of such two-year period, and all restrictions on any Restricted Shares so vested shall terminate; (iv) subject to Subsection 3.04(c), HRB shall, during the two-year period following such termination, continue Executive's health, life and disability insurance benefits, but only to the extent Executive does not obtain similar benefits paid for by a third party after such termination;(v) HRB shall pay to Executive, at such times as the same would have been paid Executive had he remained employed hereunder, a pro rata portion of any actual short-term incentive compensation to which he would have been entitled (with any discretionary incentive compensation calculated at target) pursuant to Subsection 1.03(b)(i) had he remained employed through the end of the fiscal year in which such termination occurs (such portion to be the actual short-term incentive compensation earned for the fiscal year during which such termination occurs as is proportionate to the portion of such fiscal year in which he is actively employed hereunder); and (vi) if not already paid, HRB shall pay to Executive the compensation specified in Subsection 1.03(b)(ii). (b) As used in this Agreement, the term "cause" shall refer only to any one or more of the following grounds: 5 <PAGE> 6 (i) Executive's commission of an act or Executive's omission to act, that, in either case, (A) is materially and demonstrably detrimental to the good will of Block or any subsidiary of Block, and (B) constitutes gross negligence (specifically defined to mean acting, or omitting to act in a situation where there is a duty to act, not inadvertently, but willfully and intentionally with a conscious indifference to the consequences of such act or omission)or willful misconduct by the Executive in the performance of his material duties to HRB or Block; or (ii) commission by Executive of any act of dishonesty or breach of trust resulting or intending to result in material personal gain or enrichment of Executive at the expense of Block or any subsidiary of Block; or (iii) Executive's conviction of a misdemeanor (involving an act of moral turpitude) or a felony. (c) As used in this Agreement, Executive's termination of employment for "good reason" shall mean termination of employment based on any one or more of the following: (i) An adverse change in Executive's status or position as an executive officer of Block, including, without limitation, (A) any adverse change in Executive's status or position as a result of a material diminution in Executive's duties, responsibilities or authority as of the date of this Agreement (or any status or position to which Executive may be promoted after the date hereof), or (B) the assignment to Executive of any duties or responsibilities which are inconsistent with Executive's status or position (except as may be related to a promotion or are intended to provide experience for a possible promotion to a position that is more senior than such status or position), or (C) any removal of Executive from or any failure to reappoint or reelect Executive to such positions (except in connection with an agreed upon promotion or the termination of Executive's employment for cause or by reason of Executive's disability or death); (ii) A reduction by HRB in Executive's Base Salary to an annual rate below $250,000 that is not mutually agreed upon by HRB and Executive. 6 <PAGE> 7 (iii) HRB's requiring (without Executive's agreement) Executive to be based anywhere outside the continental United States except for required travel on HRB or Block's business to an extent substantially consistent with the business travel obligations which Executive agreed to undertake on behalf of Block and HRB in connection with the position of President, H&R Block International prior to the date of this Agreement (or such obligations as Executive shall agree to undertake in connection with any promotion after the date of this Agreement); (iv) The failure by HRB or Block to obtain from any successor an assent to this Agreement contemplated by Section 4.04 of this Agreement; (v) Any purported termination by HRB of this Agreement or the employment of the Executive by HRB which is not expressly authorized by this Agreement or any breach of this Agreement by HRB (A)other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and (B) which is not remedied by HRB within a reasonable period of time not to exceed forty-five (45) days after HRB's receipt of written notice of the breach from the Executive; or (vi) Any refusal by HRB or Block to continue to allow Executive to attend to matters or engage in activities not directly related to the business of Block which, prior to the date of this Agreement or any time thereafter but prior to such refusal, Executive was permitted by the Board to attend to or engage in, provided that this Subsection 1.06(c)(v) shall not apply to any refusal resulting from a reasonable determination by the Board that such matters or activities conflict with Executive's duties hereunder, either in terms of Executive's time to be devoted thereto or in terms of the relationship of such matters or activities to the present or future business then conducted or proposed to be conducted by Block and its subsidiaries, whether or not such business is directly competitive with the business of Block. (d) In the event of Executive's death, Executive's employment under this Agreement shall terminate and Executive's estate shall be paid the benefits described in Subsections 1.06(a)(ii, iii, v, & vi) of this Agreement. In the event of Executive's total and permanent disability defined under any long-term disability plan maintained by HRB or Block for HRB executives, Executive shall be paid the benefits described in 7 <PAGE> 8 Subsections 1.06(a)(ii, iii, iv, v, & vi) of this Agreement, and shall also be paid his Base Salary pursuant to Subsection 1.06(a)(i) to the date of the determination of such disability. (e) The parties may terminate Executive's employment under this Agreement at any time by mutual written agreement. (f) The termination of Executive's employment under this Agreement for any reason (or no reason) by HRB or by Executive during the 180-day period following the date of the occurrence of a "Change of Control" of Block shall be considered a termination of Executive's employment without cause for purposes of this Agreement. For the purpose of this subsection, a "Change of Control" shall mean: (i) the acquisition, other than from Block, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the then outstanding voting securities of Block entitled to vote generally in the election of directors, but excluding, for this purpose, any such acquisition by Block or any of its subsidiaries, or any employee benefit plan (or related trust) of Block or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 50% of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the voting securities of Block immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the then outstanding voting securities of Block entitled to vote generally in the election of directors, as the case may be; or (ii) individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual or individuals becoming a director subsequent to the date hereof, whose election, or nomination for election by Block's shareholders, was approved by a vote of at least a majority of the Board (or nominating committee of the Board) shall be considered as though such individual were a member or members of the Incumbent Board, but excluding, for this 8 <PAGE> 9 purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of Block (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) approval by the shareholders of Block of (A) a reorganization, merger or consolidation of Block, in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the voting securities of Block immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 50% of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such reorganization, merger or consolidation, (B) a complete liquidation or dissolution of Block, voluntary or involuntary, or (C) the sale or other disposition of all or substantially all of the assets of Block. (g) Upon termination of Executive's employment under this Agreement, HRB shall have no further obligations under this Agreement and no further payments of Base Salary or other compensation or benefits shall be payable by HRB to Executive, except (i) as set forth in this Section 1.06, (ii) as required by the express terms of any written benefit plans or written arrangements maintained by HRB and applicable to Executive at the time of such termination of Executive's employment, (iii) as may be required by law, or (iv) as may be mutually agreed upon between the parties in a negotiated Employment Agreement Termination package. ARTICLE TWO CONFIDENTIALITY 2.01 - Background and Relationship of Parties. The parties acknowledge (for all purposes including, without limitation, Articles Two and Three of this Agreement) that Block and its subsidiaries have been and will be engaged in a continuous program of acquisition and development respecting their businesses, present and future, and that, in connection with Executive's employment by HRB, Executive will be expected to have access to all information of value to HRB and Block and that Executive's employment creates a relationship of confidence and trust between Executive and Block with respect to any information applicable to the businesses of Block and its subsidiaries. 9 <PAGE> 10 Executive will possess or have unfettered access to information that has been created, developed or acquired by Block and its subsidiaries or otherwise become known to Block and its subsidiaries and which has commercial value in the businesses in which Block and its subsidiaries have been and will be engaged and has not been publicly disclosed by Block. All information described above is hereinafter called "Proprietary Information". By way of illustration, but not limitation, Proprietary Information includes trade secrets, customer lists and information, employee lists and information, developments, systems, designs, know-how, marketing plans, product information, business and financial information and plans, strategies, forecasts, new products and services, financial statements, budgets, projections, prices and acquisition and disposition plans. Proprietary Information shall not include any portions of such information which are now or hereafter made public by third parties in a lawful manner or made public by parties hereto without violation of this Agreement. 2.02 - Proprietary Information is Property of Block. (a) All Proprietary Information shall be the sole property of Block (or the applicable subsidiary of Block) and its assigns, and Block (or the applicable subsidiary of Block) shall be the sole owner of all patents, copyrights, trademarks, names and other rights in connection therewith and without regard to whether Block (or any subsidiary of Block) is at any particular time developing or marketing the same. Executive hereby assigns to Block any rights Executive may have or may acquire in such Proprietary Information. At all times, Executive will keep in strictest confidence and trust all Proprietary Information and Executive will not use or disclose any Proprietary Information without the written consent of Block, except as may be necessary in the ordinary course of performing duties as an employee of HRB or an officer of Block or as may be required by law or the order of any court or governmental authority. (b) In the event of the termination of Executive's employment by HRB for any reason (including no reason), Executive shall promptly deliver to HRB all copies of all documents, notes, drawings, specifications, documentation, data and other materials of any nature belonging to Block or any subsidiary of Block and obtained during the course of Executive's employment with HRB. In addition, upon such termination, Executive will not remove from the premises of Block or any subsidiary of Block any of the foregoing or any reproduction of any of the foregoing or any Proprietary Information that is embodied in a tangible medium of expression. 10 <PAGE> 11 ARTICLE THREE NON-HIRING; NO CONFLICTS; NONCOMPETITION 3.01 - General. The parties hereto acknowledge that, during the course of Executive's employment by HRB, Executive shall have access to information valuable to HRB and Block concerning the key employees of Block and its subsidiaries ("Block Employees") and, in addition to Executive's access to such information, Executive may, during (and in the course of) Executive's employment by HRB, develop relationships with such Block Employees whereby information valuable to Block and its subsidiaries concerning the Block Employees was acquired by Executive. Such information includes, without limitation: the identity, skills and performance levels of the Block Employees, as well as compensation and benefits paid by Block to such Block Employees. 3.02 - Non-Hiring. During the period of Executive's employment hereunder and during the time Executive is receiving payments hereunder and for a period of one year after the later of: termination by HRB or Executive for any reason (or no reason) of such employment or cessation of such payments, the Executive will not knowingly recruit, solicit or hire any Block Employee or otherwise induce any such Block Employee to leave the employment of Block (or the applicable employer-subsidiary of Block) to become an employee of or otherwise be associated with any other party or with Executive or any company or business with which Executive is or may become associated. 3.03 - No Conflicts. Executive represents in good faith that, to the best of his knowledge, the performance by Executive of all the terms of this Agreement will not breach any agreement as to which Executive is or was a party and which requires Executive to keep any information in confidence or in trust. Executive has not brought and will not bring with him to HRB or Block nor will Executive use in the performance of employment responsibilities at HRB any proprietary materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from such former employer for their possession and use. Executive has not and will not breach any obligation of confidentiality that Executive may have to former employers and Executive shall fulfill all such obligations during his employment with HRB. 3.04 - Non-Competition. (a) During any period of Executive's employment with HRB, Executive shall not engage in, or own or control any interest in (except as a passive investor in publicly-held companies, 11 <PAGE> 12 holding less than one percent of its outstanding securities), or act as an officer, director or employee of, or consultant, advisor or lender to, any firm, corporation, institution or business which engages in any line of business which is competitive with any line of business of Block or any of its subsidiaries (or which Block or any subsidiary is engaged in evaluating or developing). (b) During the two-year period immediately following the termination of Executive's employment hereunder by HRB or Executive for any reason (including no reason) other than a termination for "cause," as defined in Subsection 1.06(b) of this Agreement, Executive will not, except as permitted by Subsection (c), below (i) own or control any interest in (except as a passive investor in publicly-held companies, holding less than one percent of its outstanding equity securities) any firm, corporation, institution or business that derives more than 40% of its revenues from tax and accounting services, or (ii) act as an officer, director or employee of, or consultant, advisor or lender to, any line of business of any firm, corporation, institution or business which line of business (A) is competitive with any line of business of Block or any of its subsidiaries, (B) is one in which Executive has or had significant management responsibilities prior to or at the time Executive's employment terminates, and (C) derives more than 40% of its revenues from tax and accounting services (any such line of business to be referred to in this Agreement as a "Competitive Line of Business" and the prohibited acts set forth in Subsections 3.04(b)(i) and (ii) to be referred to in this Agreement as the "Prohibited Acts"). The Prohibited Acts shall not preclude Executive from serving as an officer, director or employee of, or consultant, advisor or lender to, any firm, corporation, institution or business with respect to any line of business of such firm, corporation, institution or business that is not a Competitive Line of Business, provided that Executive shall not provide direct or indirect services, oversight, management, advice or loans to any Competitive Line of Business and the person or persons responsible for the day-to-day business of any such Competitive Line of Business shall not directly or indirectly report to Executive. (c) Notwithstanding the provisions of Subsection 3.04(b), above, (i) during the two-year period immediately following termination of Executive's employment hereunder by HRB for cause, Executive may engage in the Prohibited Acts, or any one of them, without HRB's prior written consent, and (ii) during the two-year period immediately following termination of Executive's employment hereunder by HRB without "cause," or Executive's termination of this Agreement for good reason, Executive may engage in the Prohibited Acts, or any one of them, only if HRB gives to Executive its prior written consent to such Prohibited Act. As of the effective date of any Prohibited Act to which HRB has consented, HRB shall have no further obligation to continue to 12 <PAGE> 13 pay compensation pursuant to Subsection 1.06(a)(i) of this Agreement and no further obligation to continue Executive's health, life and disability insurance benefits pursuant to Subsection 1.06(a)(iv) of this Agreement. 3.05 - Reasonableness of Restrictions. Executive and HRB acknowledge that the restrictions contained in this Agreement are reasonable, but should any provisions of any Article of this Agreement be determined to be invalid, illegal or otherwise unenforceable or unreasonable in scope by any court of competent jurisdiction, the validity, legality and enforceability of the other provisions of this Agreement shall not be affected thereby and the provision found invalid, illegal or otherwise unenforceable or unreasonable shall be considered by HRB and Executive to be amended as to scope of protection, time or geographic area (or any one of them, as the case may be) in whatever manner is considered reasonable by that court and, as so amended, shall be enforced. ARTICLE FOUR MISCELLANEOUS 4.01 - Third-Party Beneficiary. The parties hereto agree that Block is a third-party beneficiary as to the obligations imposed upon Executive under this Agreement and as to the rights and privileges to which HRB is entitled pursuant to this Agreement, and that Block is entitled to all of the rights and privileges associated with such third-party-beneficiary status. 4.02 - Entire Agreement. This Agreement constitutes the entire agreement and understanding between HRB and Executive concerning the subject matter hereof. No modification, amendment, termination or waiver of this Agreement shall be binding unless in writing and signed by Executive and a duly authorized officer of HRB. Failure of HRB, Block or Executive to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such terms, covenants and conditions. 4.03 - Specific Performance by Executive. The parties acknowledge that money damages alone will not adequately compensate HRB or Block or Executive for breach of any of the covenants and agreements herein and, therefore, in the event of the breach or threatened breach of any such covenant or agreement by either party, in addition to all other remedies available at law, in equity or otherwise, a wronged party shall be entitled to injunctive relief compelling specific performance of (or other compliance with) the terms hereof. 13 <PAGE> 14 4.04 - Successors and Assigns. This Agreement shall be binding upon Executive and the heirs, executors, assigns and administrators of Executive or his estate and property and shall inure to the benefit of HRB, Block and their successors and assigns. Executive may not assign or transfer to others the obligation to perform Executive's duties hereunder. Executive's estate, heirs, successors, representatives, assigns, conservators and/or trustees may seek enforcement, on behalf of Executive or his estate, of the obligations outlined in Section 1.06 of this Agreement. 4.05 - Withholding Taxes. From any payments due hereunder to Executive from HRB, there shall be withheld amounts reasonably believed by HRB to be sufficient to satisfy liabilities for federal, state and local taxes and other charges and customary withholdings. Executive remains primarily liable to such authorities for such taxes and charges to the extent not actually paid by HRB. This Section 4.05 shall not affect HRB's obligation to "gross up" any relocation benefits paid to Executive pursuant to Subsection 1.03(e)(iii). 4.06 - Indemnification. (a) To the fullest extent permitted by law and Block's Bylaws, HRB hereby indemnifies during and after the period of Executive's employment hereunder the Executive from and against all loss, costs, damages and expenses including, without limitation, legal expenses of counsel selected by HRB to represent the interests of Executive (which expenses HRB will, to the extent so permitted, advance to executive as the same are incurred) arising out of or in connection with the fact that Executive is or was a director, officer, employee or agent of HRB or Block or serving in such capacity for another corporation at the request of HRB or Block. Notwithstanding the foregoing, the indemnification provided in this Section 4.06 shall not apply to any loss, costs, damages and expenses arising out of or relating in any way to any employment of Executive by any former employer or the termination of any such employment. (b) In the event that Executive and HRB mutually agree that Executive has a valid claim or cause of action against a former employer to secure deferred compensation, awards or other benefits from such former employer, HRB shall reimburse Executive for any attorneys' fees, expenses and other costs incurred by Executive in his efforts to secure such benefits. Any net recovery (i.e., judgment, award or settlement amount paid to Executive by such former employer, less any attorneys' fees, expenses, federal, state and local income taxes and other costs not reimbursed by HRB) by Executive arising from such claim shall be remitted by Executive to HRB. 14 <PAGE> 15 (c) In the event that a former employer makes a claim against Executive arising out of or relating to its employment of Executive or the termination of such employment, Executive may, in his sole discretion, assert a counterclaim against the former employer seeking deferred compensation, awards or other benefits, with the understanding that any award to Executive, net of adverse awards, attorneys' fees, federal, state and local income taxes, costs and expenses, will be remitted by Executive to HRB. 4.07 - Notices. Notices hereunder shall be deemed delivered five days following deposit thereof in the United States mails (postage prepaid) addressed to Executive at: 240 Central Park South, Suite 23B, New York, New York 10019, with a copy to William J. Egan, Esq., 150 Edina Executive Plaza, 5200 Willson Road, Edina, Minnesota 55424; and to HRB at: 4400 Main Street, Kansas City, Missouri 64111; Attn: Mark A. Ernst, with a copy to James H. Ingraham, Esq., H&R Block, Inc., 4400 Main Street, Kansas City, Missouri 64111; or to such other address and/or person designated by either party in writing to the other party. 4.08 - Counterparts. This Agreement may be signed in counterparts and delivered by facsimile transmission confirmed promptly thereafter by actual delivery of executed counterparts. Executed as a sealed instrument under, and to be governed by, construed and enforced in accordance with, the laws of the State of Missouri. EXECUTIVE: Dated: 9-7-99 /s/ Jeffery W. Yabuki ------------ --------------------- Jeffery W. Yabuki Accepted and Agreed: HRB MANAGEMENT, INC., a Missouri corporation By:/s/Mark A. Ernst ------------------- Mark A. Ernst Executive Vice President Dated: 7 Sept 99 --------------- 15 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.5 <SEQUENCE>6 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> <PAGE> 1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 26th day of January 2000, by and between HRB MANAGEMENT, INC., a Missouri corporation ("HRB") and Frank J. Cotroneo ("Executive"). ARTICLE ONE EMPLOYMENT 1.01 - Agreement as to Employment. Effective February 21, 2000 or an earlier date as agreed upon by both parties (the "Employment Date"), HRB hereby employs Executive as Chief Financial Officer of H&R BLOCK, INC., a Missouri corporation ("Block") and the indirect parent corporation of HRB, and Executive hereby accepts such employment by HRB, subject to the terms of this Agreement. Subject to the terms of Section 1.06 of this Agreement, either party may terminate this Agreement for any reason, or no reason, by providing not less than 45 days' prior written notice of such termination to the other party, and, if such notice is properly given, this Agreement and Executive's employment hereunder shall terminate as of the close of business on the 45th day after such notice is deemed to have been given or such later date as is specified in such notice. Any termination of this Agreement shall not be effective as to those portions of this Agreement which, by their express terms as set forth below, require performance by either party following termination of this Agreement. 1.02 - Duties. (a) Executive is employed by HRB to serve as the Chief Financial Officer and Senior Vice President of Block subject to the authority and direction of Block's Board of Directors (the "Board"), the Chief Executive Officer of Block, and the Chief Operating Officer of Block. Subject to the foregoing, the Executive shall have such authority and responsibility and duties as are normally associated with the position of Chief Financial Officer. (b) So long as he is employed under this Agreement, Executive agrees to devote his full business time and efforts exclusively on behalf of HRB and Block and to competently and diligently discharge his duties hereunder. Executive shall not be prohibited from engaging in such personal, charitable, or other nonemployment activities as do not interfere with his full-time employment hereunder and which do not violate the other provisions of this Agreement. Executive shall comply fully with all reasonable policies of HRB and Block as are from time to time in effect and applicable to his position. (c) Except for the normal travel requirements associated with Executive's position, Executive shall perform his duties in Kansas City, Missouri; Kansas City, Kansas; and the surrounding suburbs (collectively the "Greater Kansas City Area"). <PAGE> 2 1.03 - Compensation. (a) Signing Bonus. HRB shall pay to Executive a $250,000 bonus on the Employment Date. If Executive voluntarily terminates his employment with HRB prior to the expiration of six months after the Employment Date, other than for "good reason" or following a "Change of Control" (each as defined below), Executive shall reimburse HRB the $250,000 on or before the 30th day after the effective date of such termination. (b) Base Salary. HRB shall pay to Executive a gross salary at an annual rate of $350,000 ("Base Salary"), payable semimonthly or at any other pay periods as HRB may use for its other executive employees. The Base Salary shall be reviewed for adjustment by the Board or appropriate committee thereof no less often than annually during the term of Executive's employment hereunder and, if adjusted by the Board, such adjusted amount shall become the "Base Salary" for purposes of this Agreement. (c) Short-Term Incentive Compensation. As approved by the Compensation Committee of the Board, Executive shall participate in the H&R Block Short-Term Incentive Plan and the discretionary short-term incentive program for fiscal year 2000. At the discretion of the Compensation Committee of the Board, for periods following fiscal year 2000, Executive may participate in such plan and program or any similar short-term incentive compensation plans or programs as may from time to time be approved by the Compensation Committee for senior executives of HRB or Block. Under such Plan and program, the Executive shall have an aggregate target bonus for fiscal year 2000 of $192,500 and an opportunity to earn 200% of such target bonus. The payment of the actual award under the Plan (80% of target) shall be based upon the performance criteria determined by the Compensation Committee to be applicable to HRB participants for fiscal year 2000. The payment of the actual award under the discretionary program shall be based upon the performance of departments that report to Executive (10% of target) and Executive's individual performance (10%), as determined by the Chief Executive Officer of Block and approved by the Compensation Committee. For purposes of Executive's participation in such Plan for the fiscal year ending April 30, 2000, Executive's actual incentive compensation shall be prorated based upon the number of months during such year that he is actually employed by HRB. Executive must remain employed through April 30, 2000 to receive payments under the Plan and program. (d) Stock Options. As approved by the Compensation Committee of the Board and the Board itself, Executive shall be granted (i) on the Employment Date a stock option under Block's 1993 Long-Term Executive Compensation Plan (the "1993 Plan") to purchase 20,000 shares of Block's common stock at a price per share equal to its closing price on the New York Stock Exchange on the date of grant, such option to expire on the tenth anniversary of the date of grant; to vest and become exercisable as to 40% of the shares covered thereby on the first anniversary of the date of grant, as to an additional 30% of such shares on the second anniversary of the date of grant, and as to the remaining 30% of the shares on the third anniversary of the date of grant; to be an incentive stock option for the maximum number of shares permitted by Internal 2 <PAGE> 3 Revenue Code Section 422 and the regulations promulgated thereunder; and to otherwise be a nonqualified stock option; and (ii) a stock option to purchase a minimum of 20,000 shares of Block's common stock at a price per share equal to its closing price on the New York Stock Exchange on the date in fiscal year 2001 on which options are granted under the 1993 Plan to all or substantially all other senior executive officers of Block and its subsidiaries, such stock option to have terms and conditions consistent with the terms and conditions of options granted to such other senioar executive officers except as provided in Section 1.06(a). A registration statement under the Securities Act of 1933 is in effect on the date hereof with respect to (i) the shares that may be transferred to Executive pursuant to the exercise of the stock options under the 1993 Plan and (ii) the Restricted Shares referred to in Section 1.03(e). Block shall use its best efforts to maintain such registration for so long as the stock options and the restrictions on the Restricted Shares remain outstanding. Executive will be allowed to use any "cashless exercise" procedure offered by HRB or Block to other employees of HRB or Block with respect to the exercise of stock options. (e) Restricted Stock. As approved by the Compensation Committee of the Board and the Board itself, Executive shall be awarded promptly after the Employment Date, 3,000 Restricted Shares of Block's common stock under the 1993 Plan. One-third of the 3,000 shares shall vest, respectively, on each of the first three anniversaries of the Employment Date. Prior to the time such Restricted Shares are so vested, (i) such Restricted Shares shall be nontransferable, and (ii) Executive shall be entitled to receive any cash dividends payable with respect to unvested Restricted Shares and vote such unvested Restricted Shares at any meeting of shareholders of Block. (f) Relocation Benefits. (i) HRB shall reimburse Executive for reasonable packing, shipping, transportation costs and other expenses incurred by Executive in relocating himself, his family and personal property to the Greater Kansas City Area, in accordance with HRB's Executive Relocation Program. (ii) To the extent that Executive incurs taxable income related to any relocation benefits paid pursuant to this Agreement, HRB shall pay to Executive such additional amount as is necessary to "gross up" such benefits and cover the anticipated income tax liability resulting from such taxable income. (iii) If Executive purchases a personal residence in the Greater Kansas City Area, needs a home mortgage loan to purchase such personal residence, and elects to borrow money through one of Block's subsidiaries for such purchase, HRB will provide a 75 basis points interest rate reduction from the normal rate of interest associated with the type of home mortgage loan Executive selects. 1.04 - Business Expenses. HRB shall promptly pay directly, or reimburse Executive for, all business expenses, to the extent such expenses are paid or incurred by Executive 3 <PAGE> 4 during the term hereof in accordance with Block policy in effect from time to time and to the extent such expenses are reasonable and necessary to the conduct by Executive of Block's business. 1.05 - Fringe Benefits. During the term of Executive's employment hereunder, HRB shall make available to Executive such insurance, sick leave, deferred compensation, short-term incentive compensation, bonuses, stock options (also referred to in Subsection 1.03(d) above), retirement, vacation, and other like benefits as are approved by the Board or the Compensation Committee thereof and provided from time to time to other senior executives of HRB, Block, or Block's other subsidiaries. 1.06 - Termination of Employment. (a) Termination Due to a Change of Control or Without Cause. (i) If Executive terminates Executive's employment under this Agreement for "good reason" or during the 180-day period following the date of the occurrence of a "Change of Control," or if HRB terminates Executive's employment under this Agreement for any reason other than for "cause" as defined below, then, upon any such termination of Executive's employment, (A) HRB shall pay to Executive compensation at an annual rate equal to the sum of (I) the annual rate of Base Salary in effect upon such termination, and (II) the aggregate short-term incentive compensation (under the H&R Block Short-Term Incentive Plan and any discretionary incentive program) paid by HRB to Executive for the last fiscal year completed before the fiscal year in which the termination of employment occurs (or, if such termination occurs prior to the end of the fiscal year in which the Employment Date occurs, the amount of actual aggregate short-term incentive compensation to which Executive would have been entitled (with any discretionary incentive compensation calculated at target) had Executive remained employed through the last day of such fiscal year), as determined on an annualized basis (if the short-term incentive compensation for the preceding fiscal year or the initial fiscal year of employment hereunder is computed on a prorated basis), such compensation to be paid throughout the one-year period following such termination at such periodic intervals as Base Salary would have been made had Executive remained employed by HRB hereunder; (B) any portion of any option to purchase shares of Block common stock granted pursuant to Subsections 1.03(d) or 1.05 of this Agreement and held by Executive at the time of such termination of employment that is not yet vested in accordance with its terms shall fully vest upon the date of such termination of employment, and shall be exercisable for a period of three months after such date of termination of employment; (C) any Restricted Shares granted pursuant to Subsection 1.03(e) of this Agreement and held by Executive at the time of such termination of employment that are not yet vested (meaning the Shares are still subject to restrictions) shall fully vest upon the date of such termination of employment, and all restrictions on any Restricted Shares so vested shall terminate; and (D) HRB shall, during the one-year period following such termination, continue Executive's health, basic life, and disability insurance benefits (such health insurance benefits to be provided by the payment by HRB (whether 4 <PAGE> 5 directly or by reimbursement) of Executive's premiums/contributions due as a result of Executive selecting continuation coverage (COBRA) under the plans providing such benefits) but only to the extent Executive does not obtain similar benefits paid for by a third party after such termination. (ii) For the purpose of this subsection, "good reason" shall mean: (A) Executive is made subject to the authority and direction of any person other than the Chief Executive Officer of Block, the Board, and Mark A. Ernst as Chief Operating Officer and/or President (a "Subordination Event"). If a Subordination Event occurs, Executive shall have 6 months from the date he has actual knowledge of such Subordination Event to terminate his employment for good cause for this reason. If Executive does not terminate his employment for this reason within such 6 month period, Executive waives his right to terminate his employment by reason of such Subordination Event; (B) Any material diminution in Executive's duties, responsibilities, or authority as set forth in this Agreement; and (C) Any other material breach of this Agreement by HRB which is not remedied by HRB within a reasonable period of time not to exceed 30 days after HRB's receipt of written notice of the breach from Executive. To the extent that this Agreement or any agreement referred to herein imposes an obligation on Block or otherwise requires that Block take (or refrain from taking) any action, any material breach of such obligation or requirement by Block shall be treated as a material breach of this Agreement by HRB. (iii) For the purpose of this subsection, a "Change of Control" shall mean: (A) the acquisition, other than from Block, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the then outstanding voting securities of Block entitled to vote generally in the election of directors, but excluding, for this purpose, any such acquisition by Block or any of its subsidiaries, or any employee benefit plan (or related trust) of Block or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 50% of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the voting securities of Block immediately prior to such acquisition in substantially the same proportion as their ownership, 5 <PAGE> 6 immediately prior to such acquisition, of the then outstanding voting securities of Block entitled to vote generally in the election of directors, as the case may be; or (B) individuals who, as of the date hereof, constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual or individuals becoming a director subsequent to the date hereof, whose election, or nomination for election by Block's shareholders, was approved by a vote of at least a majority of the Board (or nominating committee of the Board) shall be considered as though such individual were a member or members of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of Block (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (C) approval by the shareholders of Block of (I) a reorganization, merger or consolidation of Block, in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the voting securities of Block immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 50% of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such reorganization, merger or consolidation, (II) a complete liquidation or dissolution of Block, voluntary or involuntary, or (III) the sale or other disposition of all or substantially all of the assets of Block. (iv) For the purpose of this subsection, "cause" shall mean any one or more of the following grounds: (A) Executive's commission of an act materially and demonstrably detrimental to the good will of Block or any subsidiary of Block, which act constitutes reckless conduct or willful misconduct by the Executive in the performance of his material duties to Block; or (B) commission by Executive of any act of dishonesty or breach of trust resulting or intending to result in material personal gain or enrichment of Executive at the expense of Block or any subsidiary of Block; or (C) Executive's conviction of a misdemeanor (involving an act of moral turpitude) or a felony; or (D) for any reason (or no reason) at any time after the last day of Block's fiscal year during which Executive attains normal retirement age under 6 <PAGE> 7 Block's benefit plans; or (E) Executive's death or total and permanent disability. The term "total and permanent disability" shall have the meaning ascribed thereto under any long-term disability plan maintained by HRB or Block for HRB executives. Provided, however, that Executive shall receive not less than 25 days' advance notice of any termination for cause by reason of a ground or grounds described in paragraphs (A) or (B), and shall have the opportunity to meet with the Chief Executive Officer to discuss whether there are grounds for termination for cause. (b) Termination Due to Mutual Agreement. The parties may terminate Executive's employment under this Agreement at any time by mutual written agreement. (c) No Further Obligations. Upon termination of Executive's employment under this Agreement, HRB shall have no further obligations under this Agreement and no further payments of Base Salary or other compensation or benefits shall be payable by HRB to Executive, except (i) as set forth in this Section 1.06, (ii) as required by the express terms of any written benefit plans or written arrangements maintained by HRB and applicable to Executive at the time of such termination of Executive's employment, (iii) as may be required by law, or (iv) as may be mutually agreed upon between the parties in a negotiated Employment Agreement Termination package. ARTICLE TWO CONFIDENTIALITY 2.01 - Background and Relationship of Parties. The parties acknowledge (for all purposes including, without limitation, Articles Two and Three of this Agreement) that Block and its subsidiaries have been and will be engaged in a continuous program of acquisition and development respecting their businesses, present and future, and that, in connection with Executive's employment by HRB, Executive will be expected to have access to all information of value to HRB and Block and that Executive's employment creates a relationship of confidence and trust between Executive and Block with respect to any information applicable to the businesses of Block and its subsidiaries. Executive will possess or have unfettered access to information that has been created, developed, or acquired by Block and its subsidiaries or otherwise become known to Block and its subsidiaries and which has commercial value in the businesses in which Block and its subsidiaries have been and will be engaged and has not been publicly disclosed by Block. All information described above is hereinafter called "Proprietary Information." By way of illustration, but not limitation, Proprietary Information includes trade secrets, customer lists and information, employee lists and information, developments, systems, designs, know-how, marketing plans, product information, business and financial information and plans, strategies, forecasts, new products and services, financial statements, budgets, projections, prices, and acquisition and 7 <PAGE> 8 disposition plans. Proprietary Information shall not include any portions of such information which are now or hereafter made public by third parties in a lawful manner or made public by parties hereto without violation of this Agreement. 2.02 - Proprietary Information is Property of Block. (a) All Proprietary Information shall be the sole property of Block (or the applicable subsidiary of Block) and its assigns, and Block (or the applicable subsidiary of Block) shall be the sole owner of all patents, copyrights, trademarks, names, and other rights in connection therewith and without regard to whether Block (or any subsidiary of Block) is at any particular time developing or marketing the same. Executive hereby assigns to Block any rights Executive may have or may acquire in such Proprietary Information. At all times, Executive will keep in strictest confidence and trust all Proprietary Information and Executive will not use or disclose any Proprietary Information without the written consent of Block, except as may be necessary in the ordinary course of performing duties as an employee of HRB or an officer of Block or as may be required by law or the order of any court or governmental authority. Except as otherwise provided in Article Three of this Agreement, the foregoing shall not preclude Executive, after the termination of his employment under this Agreement, from contacting or doing business with any supplier, consultant, or other person with whom he became acquainted during his employment hereunder. (b) In the event of the termination of Executive's employment by HRB, Executive shall promptly deliver to HRB all copies of all documents, notes, drawings, specifications, documentation, data, and other materials of any nature belonging to Block or any subsidiary of Block and obtained during the course of Executive's employment with HRB. In addition, upon such termination, Executive will not remove from the premises of Block or any subsidiary of Block any of the foregoing or any reproduction of any of the foregoing or any Proprietary Information that is embodied in a tangible medium of expression. ARTICLE THREE NON-HIRING; NO CONFLICTS; NONCOMPETITION 3.01 - General. The parties hereto acknowledge that, during the course of Executive's employment by HRB, Executive shall have access to information valuable to HRB and Block concerning the key employees of Block and its subsidiaries ("Block Employees") and, in addition to Executive's access to such information, Executive may, during (and in the course of) Executive's employment by HRB, develop relationships with such Block Employees whereby information valuable to Block and its subsidiaries concerning the Block Employees was acquired by Executive. Such information includes, without limitation: the identity, skills, and performance levels of the Block Employees, as well as compensation and benefits paid by Block to such Block Employees. 3.02 - Non-Hiring. During the period of Executive's employment hereunder and 8 <PAGE> 9 during the time Executive is receiving payments hereunder and for a period of one year after the later of: termination by HRB or Executive of such employment or cessation of such payments, the Executive will not knowingly recruit, solicit, or hire any individual who is employed by Block or any of its subsidiaries at any time during the six-month period ending with the date of termination of Executive's employment hereunder, or otherwise induce any such employee to leave the employment of Block (or the applicable employer-subsidiary of Block) to become an employee of or otherwise be associated with any other party or with Executive or any company or business with which Executive is or may become associated. 3.03 - No Conflicts. Executive represents in good faith that, to the best of his knowledge, the performance by Executive of all the terms of this Agreement will not breach any agreement to which Executive is or was a party and which requires Executive to keep any information in confidence or in trust. Executive has not brought and will not bring with him to HRB or Block nor will Executive use in the performance of employment responsibilities at HRB any proprietary materials or documents of a former employer that are not generally available to the public, unless Executive has obtained express written authorization from such former employer for their possession and use. Executive has not and will not breach any obligation of confidentiality that Executive may have to former employers and Executive shall fulfill all such obligations during his employment with HRB. 3.04 - Non-Competition. (a) During any period of Executive's employment with HRB, Executive shall not engage in, or own or control any interest in (except as a passive investor in publicly-held companies, holding less than one percent of its outstanding securities), or act as an officer, director, or employee of, or consultant, advisor or lender to, any firm, corporation, institution, or business which engages in any line of business which is competitive with any line of business of Block or any of its subsidiaries (or which Block or any subsidiary is then engaged in evaluating or developing). (b) During the one-year period immediately following the termination of Executive's employment hereunder by HRB or Executive, Executive will not own or control any interest in (except as a passive investor in publicly-held companies, holding less than one percent of its outstanding equity securities) or act as an officer, director, or employee of, or consultant, advisor, or lender to, any firm, corporation, institution, or business which engages in any line of business which is competitive with any line of business of Block or any of its subsidiaries at the time Executive's employment terminates. (c) For purposes of subsection 3.04(b), as to Block, the term "line of business" shall not include any line of business the revenues of which constituted less than 25% of the consolidated revenues of Block for the fiscal year of Block completed on, or most recently completed prior to, the effective date of the termination of Executive's employment hereunder; and, as to any corporation, firm, institution, or business with which Executive proposes to become associated, as 9 <PAGE> 10 set forth in said subsection 3.04(b), any line of business which constituted less than 25% of the consolidated revenues of such corporation, firm, institution, or business. It is further agreed that, on the date hereof, the lines of business of Block (as determined without regard to the 25% of revenue requirement) consist of: tax return preparation and related services (to which is attributable more than 75% of Block's consolidated gross revenues for its fiscal year ended April 30, 1999); home mortgage origination and syndication; discount securities brokerage and related financial advisory services for individuals; tax return preparation and other personal productivity computer software and electronic income tax return preparation; and accounting and related consulting services. (d) Section 3.04(b) shall not apply following any termination of Executive's employment hereunder by HRB for cause, 3.05 - Reasonableness of Restrictions. Executive and HRB acknowledge that the restrictions contained in this Agreement are reasonable, but should any provisions of any Article of this Agreement be determined to be invalid, illegal, or otherwise unenforceable or unreasonable in scope by any court of competent jurisdiction, the validity, legality, and enforceability of the other provisions of this Agreement shall not be affected thereby and the provision found invalid, illegal, or otherwise unenforceable or unreasonable shall be considered by HRB and Executive to be amended as to scope of protection, time, or geographic area (or any one of them, as the case may be) in whatever manner is considered reasonable by that court and, as so amended, shall be enforced. ARTICLE FOUR MISCELLANEOUS 4.01 - Third-Party Beneficiary. The parties hereto agree that Block is a third-party beneficiary as to the obligations imposed upon Executive under this Agreement and as to the rights and privileges to which HRB is entitled pursuant to this Agreement, and that Block is entitled to all of the rights and privileges associated with such third-party-beneficiary status. 4.02 - Entire Agreement. This Agreement constitutes the entire agreement and understanding between HRB and Executive concerning the subject matter hereof. No modification, amendment, termination, or waiver of this Agreement shall be binding unless in writing and signed by Executive and a duly authorized officer of HRB. Failure of HRB, Block or Executive to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such terms, covenants, and conditions. 4.03 - Specific Performance by Executive. The parties acknowledge that money damages alone will not adequately compensate HRB or Block or Executive for breach of any of the covenants and agreements herein and, therefore, in the event of the breach or threatened breach of any such covenant or agreement by either party, in addition to all other remedies available at law, in equity or otherwise, a wronged party shall be entitled to injunctive relief compelling specific 10 <PAGE> 11 performance of (or other compliance with) the terms hereof. 4.04 - Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Executive and the heirs, executors, assigns and administrators of Executive or his estate and property and shall inure to the benefit of HRB, Block and their successors and assigns. Executive may not assign or transfer to others the obligation to perform Executive's duties hereunder. 4.05 - Withholding Taxes. From any payments due hereunder to Executive from HRB, there shall be withheld amounts required to be withheld to satisfy liabilities for federal, state, and local taxes and other charges and customary withholdings to which Executive consents. Executive remains primarily liable to such authorities for such taxes and charges to the extent not actually paid by HRB. This Section 4.05 shall not affect HRB's obligation to "gross up" any relocation benefits paid to Executive pursuant to Subsection 1.03(f)(ii). 4.06 - Indemnification. To the fullest extent permitted by law and Block's Bylaws, HRB hereby indemnifies during and after the period of Executive's employment hereunder the Executive from and against all loss, costs, damages, and expenses including, without limitation, legal expenses of counsel selected by HRB to represent the interests of Executive (which expenses HRB will, to the extent so permitted, advance to Executive as the same are incurred) arising out of or in connection with the fact that Executive is or was a director, officer, employee, or agent of HRB or Block or serving in such capacity for another corporation at the request of HRB or Block. Notwithstanding the foregoing, the indemnification provided in this Section 4.06 shall not apply to any loss, costs, damages, and expenses arising out of or relating in any way to any employment of Executive by any former employer or the termination of any such employment. 4.07 - Notices. Notices hereunder shall be deemed delivered five days following deposit thereof in the United States mails (registered or certified mail, return receipt requested and postage prepaid) addressed to Executive at: 72 Washington Post Drive, Wilton, CT 06897, with a copy to David E. Kahen, Esq., Roberts & Holland LLP, 825 Eighth Avenue, 37th Floor, New York, New York, 10019-7416; and to HRB at: 4400 Main Street, Kansas City, Missouri 64111; Attn: Mark A. Ernst, with a copy to James H. Ingraham, Esq., H&R Block, Inc., 4400 Main Street, Kansas City, Missouri 64111; or to such other address and/or person designated by either party in writing and in the same manner to the other party. 4.08 - Counterparts. This Agreement may be signed in counterparts and delivered by facsimile transmission confirmed promptly thereafter by actual delivery of executed counterparts. 11 <PAGE> 12 Executed as a sealed instrument under, and to be governed by, construed and enforced in accordance with, the laws of the State of Missouri. EXECUTIVE: Dated: 1/27/00 /s/ Frank J. Cotroneo ------------- -------------------------------- Frank J. Cotroneo Accepted and Agreed: HRB MANAGEMENT, INC., a Missouri corporation By: /s/ Mark A. Ernst ------------------------------- Mark A. Ernst, President Dated: 26 JAN 00 -------------- H&R BLOCK, INC., A Missouri Corporation (as to section 1.03(c) with respect to Fiscal Year 2000 only, and sections 1.03(d), 1.03(e), and 1.05) By: /s/ Mark A. Ernst ------------------------------- Mark A. Ernst, President Dated: 26 JAN 00 -------------- 12 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>7 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS 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-30-2000 <PERIOD-END> JAN-31-2000 <CASH> 248,490 <SECURITIES> 33,074 <RECEIVABLES> 3,633,850 <ALLOWANCES> 38,218 <INVENTORY> 0 <CURRENT-ASSETS> 4,078,535 <PP&E> 219,594<F1> <DEPRECIATION> 0 <TOTAL-ASSETS> 5,921,370 <CURRENT-LIABILITIES> 4,531,472 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,089 <OTHER-SE> 924,184 <TOTAL-LIABILITY-AND-EQUITY> 5,921,370 <SALES> 0 <TOTAL-REVENUES> 844,013 <CGS> 0 <TOTAL-COSTS> 994,974 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> (145,477) <INCOME-TAX> (56,591) <INCOME-CONTINUING> (88,886) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (88,886) <EPS-BASIC> (.91) <EPS-DILUTED> (.91) <FN> <F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

IKN

https://www.sec.gov/Archives/edgar/data/3370/0000950159-00-000047.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, EEtzHMpRg2k77GB2oGMUIMUXtXTiM6+pruft0+CPsO10qskCRBZMLY/GmKQNvOH7 NVbMiveaPCiK4TFQAPflBQ== <SEC-DOCUMENT>0000950159-00-000047.txt : 20000215 <SEC-HEADER>0000950159-00-000047.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950159-00-000047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IKON OFFICE SOLUTIONS INC CENTRAL INDEX KEY: 0000003370 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 230334400 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05964 FILM NUMBER: 538308 BUSINESS ADDRESS: STREET 1: PO BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6102968000 MAIL ADDRESS: STREET 1: PO BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: ALCO STANDARD CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ALCO CHEMICAL CORP DATE OF NAME CHANGE: 19680218 </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 31, 1999 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. - -------------------------------------------------------------------------------- (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.) P.O. 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 corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of January 31, 2000. Common Stock, no par value 149,907,907 shares <PAGE> INDEX IKON OFFICE SOLUTIONS, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets--December 31, 1999 (unaudited) and September 30, 1999 Consolidated Statements of Operations--Three months ended December 31, 1999 and 1998 (unaudited) Consolidated Statements of Cash Flows--Three months ended December 31, 1999 and 1998 (unaudited) Notes to Consolidated Financial Statements-- December 31, 1999 (unaudited) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition and Liquidity Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES <PAGE> IKON OFFICE SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS ( in thousands ) <TABLE> <CAPTION> December 31 September 30 1999 1999 ASSETS (unaudited) ----------- ----------- Current Assets <S> <C> <C> Cash and cash equivalents $ 73,584 $ 3,386 Restricted cash 69,028 29,625 Accounts receivable, net 753,659 725,308 Finance receivables, net 987,318 887,396 Inventories 397,691 338,947 Prepaid expenses and other current assets 127,776 111,386 Deferred taxes 138,515 137,853 ----------- ----------- Total current assets 2,547,571 2,233,901 ----------- ----------- Investments and Long-Term Receivables 8,660 24,313 Long-Term Finance Receivables, net 1,878,946 1,677,230 Equipment on Operating Rental, net 83,274 87,496 Property and Equipment, at cost 531,315 535,304 Less accumulated depreciation 289,596 275,489 ----------- ----------- 241,719 259,815 ----------- ----------- Goodwill, net 1,337,358 1,385,295 Other assets 134,556 133,263 ----------- ----------- $ 6,232,084 $ 5,801,313 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 96,314 $ 95,262 Current portion of long-term debt, finance subsidiaries 1,109,298 974,033 Notes payable 10,277 44,968 Trade accounts payable 166,309 169,763 Accrued salaries, wages and commissions 92,973 128,501 Accrued shareholder litigation settlement 112,695 117,652 Deferred revenues 202,455 205,654 Other accrued expenses 333,684 311,758 ----------- ----------- Total current liabilities 2,124,005 2,047,591 ----------- ----------- Long-Term Debt 715,466 718,814 Long-Term Debt, Finance Subsidiaries 1,468,246 1,029,176 Deferred Taxes 358,800 375,007 Other Long-Term Liabilities 167,460 170,185 Shareholders' Equity Common stock, no par value Authorized - 300,000 shares Issued December 31, 1999 - 149,787 shares; 1,011,760 1,008,392 September 30, 1999 - 149,271 shares Unearned compensation (8,332) (5,513) Retained earnings 402,334 464,150 Accumulated other comprehensive expense (6,737) (4,922) Common shares in treasury, at cost: December 31, 1999 - 34 shares; September 30, 1999 - 53 shares (918) (1,567) ----------- ----------- 1,398,107 1,460,540 ----------- ----------- $ 6,232,084 $ 5,801,313 =========== =========== </TABLE> See notes to consolidated financial statements <PAGE> IKON Office Solutions, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) <TABLE> <CAPTION> Three Months Ended December 31, 1999 1998 ----------- ----------- Revenues <S> <C> <C> Net sales $ 668,482 $ 707,719 Service and rentals 582,921 601,259 Finance income 81,097 87,439 ----------- ----------- 1,332,500 1,396,417 ----------- ----------- Costs and Expenses Cost of goods sold 451,092 471,746 Service and rental costs 345,438 349,881 Finance interest expense 39,452 32,680 Selling and administrative 438,223 468,963 Asset impairment charge 53,792 Restructuring charge 51,548 ----------- ----------- 1,379,545 1,323,270 ----------- ----------- Operating (loss) income (47,045) 73,147 Interest expense 15,994 19,547 ----------- ----------- (Loss) income before income tax (benefit) expense (63,039) 53,600 Income tax (benefit) expense (7,403) 24,924 =========== =========== Net (loss) income $ (55,636) $ 28,676 =========== =========== Basic and Diluted Earnings (Loss) Per Common Share $ (0.37) $ 0.19 =========== =========== Cash Dividends Per Share of Common Stock $ 0.04 $ 0.04 =========== =========== </TABLE> See notes to consolidated financial statements <PAGE> IKON OFFICE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <TABLE> <CAPTION> Three Months ended December 31 ------------------------------ 1999 1998 ------------------------------ Operating Activities <S> <C> <C> Net (loss) income $ (55,636) $ 28,676 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities Depreciation 35,715 34,342 Amortization 15,913 15,105 Provisions for losses on accounts receivable 12,335 10,567 Provision for deferred tax (benefit) expense (13,400) 10,000 Gain on asset securitizations (73) (16,676) Restructuring and asset impairment charge 105,340 Changes in operating assets and liabilities, net of effects from acquisitions: (Increase) decrease in accounts receivable (39,761) 19,080 (Increase) decrease in inventories (58,690) 15,058 Increase in prepaid expenses and other current assets (16,075) (11,966) Decrease in accounts payable, deferred revenues and accrued expenses (73,490) (86,295) Decrease in accrued shareholder litigation settlement (4,957) Decrease in accrued restructuring (4,241) Other (3,114) 4,551 --------- --------- Net cash (used in) provided by operating activities (100,134) 22,442 Cash flows from investing activities Proceeds from the sale of property and equipment 3,422 6,487 Cost of companies acquired, net of cash acquired (1,931) (15,880) Expenditures for property and equipment (22,674) (24,815) Expenditures for equipment on operating rental (7,312) (12,907) Finance receivables - additions (299,937) (305,843) Finance receivables - collections 276,226 221,727 Proceeds from sale of finance subsidiaries' lease receivables 10,533 281,135 Repurchase of finance subsidiary's lease receivables (275,000) Other (2,755) (6,398) --------- --------- Net cash (used in) provided by investing activities (319,428) 143,506 Cash flows from financing activities Short-term (repayments) borrowings, net (34,691) 76,763 Proceeds from issuance of long-term debt 3,299 27,162 Proceeds from option exercises and sale of treasury shares 75 1,250 Long-term debt repayments (5,622) (15,941) Finance subsidiaries' debt - issuance 945,069 2,181 Finance subsidiaries' debt - repayments (372,863) (240,373) Dividends paid (5,952) (5,881) Deposit to restricted cash (39,403) Purchase of treasury shares (152) (14) --------- --------- Net cash provided by (used in) financing activities 489,760 (154,853) Net increase in cash and cash equivalents 70,198 11,095 Cash and cash equivalents at beginning of year 3,386 963 --------- --------- Cash and cash equivalents at end of period $ 73,584 $ 12,058 ========= ========= </TABLE> See notes to consolidated financial statements. <PAGE> IKON OFFICE SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (Unaudited) Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements of IKON Office Solutions, Inc. and subsidiaries (the "Company", "we", or "our") 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 adjustments) 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/A for the year ended September 30, 1999. Certain prior year amounts have been reclassified to conform with the current year presentation. Note 2: Restructuring and Asset Impairment Charge In the first quarter of fiscal 2000, the Company announced plans to improve performance and efficiency and incurred a total pre-tax restructuring and asset impairment charge (the "charge") of $105.3 million ($78.5 million after-tax, or $0.52 per share on a basic and diluted basis). These actions address under-performance in certain Technology Services, Business Document Services, and Business Information Services locations; as well as the Company's desire to strategically position these businesses for integration and profitable growth. Plans include consolidating or disposing of certain under-performing and non-core locations; implementing productivity enhancements through the consolidation and centralization of activities in inventory management, purchasing, finance/accounting and other administrative functions; and consolidating real estate through the co-location of business units as well as the disposition of unproductive real estate. Savings from the above programs are anticipated to be approximately $15.0 million in fiscal 2000 and approximately $45 million on an annualized basis beginning in fiscal 2001. The pre-tax components of the charge are as follows: (dollars in thousands) Type of Charge Restructuring Charge: Severance $ 16,389 Contractual Commitments 37,403 -------- Total Restructuring Charge 53,792 -------- Asset Impairment Charge: Fixed Assets 12,668 Goodwill and Intangibles 38,880 -------- Total Asset Impairment Charge 51,548 -------- Total Charge $105,340 ======== The severance charge relates to the elimination of approximately 1,900 positions, while the charge for contractual commitments relates to lease commitments where the Company is exiting certain locations and/or businesses. <PAGE> IKON OFFICE SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1999 The Company commenced several actions specified under these initiatives in the first quarter of fiscal 2000. The following presents a reconciliation of the original components of the pre-tax restructuring charge to the balance remaining at December 31, 1999, which is included in other accrued expenses on the balance sheet: <TABLE> <CAPTION> <S> <C> <C> <C> <C> Balance Provision Balance September 30, Quarter 1 Quarter 1 December 31, (dollars in thousands) 1999 Fiscal 2000 Payments 1999 ------------------ ------------------ ------------------- ------------------ Severance $ -- $ 16,389 $ 2,319 $ 14,070 Contractual Commitments -- 37,403 1,922 35,481 ================== ================== =================== ================== Total $ -- $ 53,792 $ 4,241 $ 49,551 ================== ================== =================== ================== </TABLE> During the first quarter of fiscal 2000 approximately 150 employees were terminated and left the Company and 2 facilities were closed. Note 3: Asset Securitization In December 1999, our U.S. finance subsidiary sold $311.4 million in direct financing lease receivables for $247.6 million in cash and a retained interest in the remainder under our revolving asset securitization agreement. Our U.S. finance subsidiary had asset securitization agreements for $275 million of eligible direct financing lease receivables at September 30, 1999. On October 7, 1999 these leases were repurchased with a portion of the proceeds received from the issuance of lease-backed notes as described in Note 4. Note 4: Lease-Backed Notes On October 7, 1999, IKON Receivables, LLC (an affiliate of the U.S. finance subsidiary) publicly issued $699.6 million of lease-backed notes (the "Notes") under our $1.825 billion shelf registration statement. Class A-1 Notes totaling $235.3 million have a stated interest rate of 6.14%, Class A-2 Notes totaling $51.1 million have a stated interest rate of 6.31%, Class A3a Notes totaling $100 million have a stated interest rate of 6.59%, Class A3b Notes totaling $240.9 million have a variable rate of libor plus 0.36% (which we have fixed at 6.63% through an interest rate swap) and Class A-4 Notes totaling $72.3 million have a stated interest rate of 6.88%. Our U.S. finance subsidiary received approximately $697 million in net proceeds from the sale of the Notes and used $275 million of that amount to repurchase previously sold leases. The Notes are collateralized by a pool of office equipment leases or contracts and related assets and payments on the Notes are made from payments on the leases. <PAGE> IKON OFFICE SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1999 Note 5: Comprehensive Income Total comprehensive income is as follows (in thousands): <TABLE> <CAPTION> Three Months Ended December 31, 1999 1998 <S> <C> <C> Net (loss) income $(55,636) $28,676 Foreign currency translation adjustments (1,815) (465) Mark to market adjustment on the retained interest of lease receivables , net of tax 969 -------- ------- Total comprehensive (loss) income $(57,451) $29,180 ======== ======= </TABLE> Note 6: Earnings Per Share The following table sets forth the computation of basic and diluted earnings per common share (in thousands except for per share amounts): <TABLE> <CAPTION> Three Months Ended December 31, 1999 1998 Numerator: <S> <C> <C> Net (loss) income $ (55,636) $ 28,676 Denominator: Weighted average common shares 148,804 146,965 Contingently issuable common shares 475 1,384 --------- --------- Denominator for basic earnings per common share - weighted average common shares 149,279 148,349 Effect of dilutive securities: Additional contingently issuable common shares 522 Employee stock options 36 --------- --------- Dilutive potential common shares 558 Denominator for diluted earnings per common share - adjusted weighted average common shares and assumed conversions 149,279 148,907 ========= ========= Basic and diluted (loss) earnings per common share $ (0.37) $ 0.19 ========= ========= </TABLE> Options to purchase 9,406,800 shares of common stock at $5.94 per share to $56.42 per share were outstanding during the first quarter of fiscal 2000 and options to purchase 4,945,964 shares of common stock at $8.70 per share to $62.45 per share were outstanding during the first quarter of fiscal 1999 but were not included in the computation of diluted earnings per common share because the effect would be antidilutive. <PAGE> IKON OFFICE SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) DECEMBER 31, 1999 Note 7: Segment Reporting In the first quarter of fiscal 2000, we made the following change to our segment reporting: IKON Document Services (which was reported in Other in fiscal 1999) was split into Business Document Services ("BDS"), Legal Document Services ("LDS") and Business Imaging Services ("BIS"). BDS is included in IKON North America and LDS and BIS remain in Other. Prior year results have been reclassified to conform with the current-year presentation. The table below presents segment information for the quarter ended December 31, 1999 and 1998: <TABLE> <CAPTION> IKON Corporate (in thousands) North IKON and Quarter Ended December 31, 1999 America Europe Other Eliminations Total ----------------- ------------- ------------- --------------- --------------- <S> <C> <C> <C> <C> <C> Revenues, excluding finance income $ 941,843 $ 121,988 $ 187,572 $ 1,251,403 Finance income 75,658 5,439 81,097 Intersegment revenues 2,300 889 $ (3,189) Operating income (loss) before restructuring and asset impairment charges 106,805 5,280 (8,186) (45,604) 58,295 Restructuring and asset impairment charges (34,752) (4,286) (12,124) (54,178) (105,340) Operating income (loss) 72,053 994 (20,310) (99,782) (47,045) Interest expense (15,994) (15,994) Loss before income tax benefit (63,039) Quarter Ended December 31, 1998 Revenues, excluding finance income $ 976,165 $ 126,080 $ 206,733 $ 1,308,978 Finance income 82,202 5,237 87,439 Intersegment revenues 4,797 636 $ (5,433) Operating income (loss) 107,305 5,964 1,563 (41,685) 73,147 Interest expense (19,547) (19,547) Income before taxes 53,600 </TABLE> Note 8: Shareholder Lawsuit On November 24, 1999, subject to formal approval by the court, we reached a settlement with the plaintiffs in the series of purported class action complaints which were filed in the United States District Court for the Eastern District of Pennsylvania on behalf of our shareholders, and with the plaintiff in a companion derivative lawsuit. The plaintiffs alleged that during the period from January 24, 1996 to August 13, 1998, IKON and certain current and former principal officers and employee directors publicly disseminated false and misleading statements concerning our revenue, profitability and financial condition in violation of the federal securities laws. Under the settlement, we will pay $111 million. The court has preliminarily approved the settlement. The court will hold a hearing on the approval of the settlement agreement on April 11, 2000. We believe that the settlement also resolves substantially all aspects of a purported class action claim pending in federal court in Utah. The Utah action contains one claim purporting to be a class claim brought under the Employee Retirement Income Security Act of 1974 ("ERISA"). The plaintiffs seek to represent a class of persons who participated in our Retirement Savings Plan after January 1, 1994. The class allegations in the Utah action largely mirror the allegations made in the complaints filed in the Eastern District of Pennsylvania. To the extent that any of the putative ERISA class claim survives the settlement, the Company believes that said claim is without merit. We recorded a charge of $101.1 million in fiscal 1999 related to the settlement, which consists of the $111 million settlement plus $10.1 million of legal fees offset by $20 million of insurance proceeds. This does not include a $20 million insurance claim which we are pursuing against another <PAGE> insurance carrier. Reflecting payment of a portion of the legal fees, the balance sheet at December 31, 1999, includes $112.7 million in accrued shareholder litigation settlement and $16.5 million of insurance proceeds receivable (which is included in prepaid expenses and other current assets). In January 2000, we transferred $111 million into an escrow account to fund the settlement and we received $16.5 million of insurance proceeds. <PAGE> Item 2: Management's Discussion and Analysis of Results of Operations and Financial Condition and Liquidity The Company provides products and services to meet business communications needs, including copiers and printers, color solutions, distributed printing, outsourcing services, imaging and legal outsourcing solutions, as well as network design and consulting, application development and technology training. Results of Operations The discussion of the results of operations reviews the operations of the Company as reported in the Consolidated Statements of Operations. Three Months Ended December 31, 1999 Compared with the Three Months Ended December 31, 1998 Results of operations for the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999 were as follows: <TABLE> <CAPTION> Three Months Ended December 31 % 1999 1998 Change (in thousands) <S> <C> <C> <C> Revenues $1,332,500 $1,396,417 (4.6%) ========== ========== Operating income, excluding restructuring And asset impairment charges $58,295 $73,147 (20.2%) Restructuring and asset impairment charges (105,340) ---------- ---------- Operating (loss) income (47,045) 73,147 Interest expense (15,994) (19,547) ---------- ---------- (Loss) income before income tax (benefit) expense $(63,039) $53,600 ========== ========== </TABLE> The Company's first quarter revenues decreased by $63.9 million, or 4.6%, compared to the first quarter of fiscal 1999. The first quarter of fiscal 1999 included a $14.3 million gain from an asset securitization. Excluding the gain, overall revenue decreased by $49.6 million, or 3.6%, compared to the first quarter of fiscal 1999. The decrease in revenue resulted from fewer sales representatives as compared to the first quarter of 1999, greater than anticipated Year 2000 deferrals in Technology Services and the continued backlog status of some digital products. We began the year with 1,000 fewer sales representatives than the first quarter of fiscal 1999, and although 175 representatives were added during the quarter, they typically require three to six months to become fully productive. Net sales, which include equipment revenue, decreased by $39.2 million or 5.5%. Approximately one-third of the decrease was attributable to Year 2000 delays in purchasing equipment through our Technology Services businesses in both the U.S. and Europe. The remainder of the decrease resulted from the continued backlog status of some digital products and fewer sales representatives as compared to the first quarter of fiscal 1999. Service and rental revenue decreased by $18.3 million or 3.0%. This decrease resulted from the continued underperformance of, and Year 2000 impact on, our Technology Service and Business Document Service units. Finance income decreased by $6.3 million or 7.3%. Excluding the gain from an asset securitization in the first quarter of fiscal 1999, finance income increased by $8.0 million, or 10.9%, due to the recognition of deferred revenue items associated with last year's balance sheet financings. These items have been recognized in conjunction with subsequent financings that placed these securitizations back on the balance sheet. Gross margin was 37.3%, compared to 38.2%, excluding the asset securitization gain, in the first quarter of fiscal 1999. However, the gross margin in the first quarter of fiscal 2000 was relatively flat compared to the fourth quarter of fiscal 1999, despite the lower revenue base. Margins on <PAGE> equipment sales were relatively stable. Service margins on the traditional copier business have improved, but were offset by weak margins in our Technology and Business Document Service businesses resulting in flat service margins overall compared to the fourth quarter of fiscal 1999. In the first quarter of fiscal 2000, the Company announced plans to improve performance and efficiency and incurred a total pre-tax restructuring and asset impairment charge (the "charge") of $105.3 million ($78.5 million after-tax, or $0.52 per share on a basic and diluted basis). These actions address under-performance in certain Technology Services, Business Document Services, and Business Information Services locations; as well as the Company's desire to strategically position these businesses for integration and profitable growth. Plans include consolidating or disposing of certain under-performing and non-core locations; implementing productivity enhancements through the consolidation and centralization of activities in inventory management, purchasing, finance/accounting and other administrative functions; and consolidating real estate through the co-location of business units as well as the disposition of unproductive real estate. Savings from the above programs are anticipated to be approximately $15.0 million in fiscal 2000 and approximately $45 million on an annualized basis beginning in fiscal 2001. The pre-tax components of the charge are as follows: (dollars in thousands) Type of Charge Restructuring Charge: Severance $ 16,389 Contractual Commitments 37,403 ----------------- Total Restructuring Charge 53,792 ----------------- Asset Impairment Charge: Fixed Assets 12,668 Goodwill and Intangibles 38,880 ----------------- Total Asset Impairment Charge 51,548 ----------------- Total Charge $ 105,340 ================= The severance charge relates to the elimination of approximately 1,900 positions, while the charge for contractual commitments relates to lease commitments where the Company is exiting certain locations and/or businesses. The Company commenced several actions specified under these initiatives in the first quarter of fiscal 2000. The following presents a reconciliation of the original components of the pre-tax restructuring charge to the balance remaining at December 31, 1999, which is included in other accrued expenses on the balance sheet: <TABLE> <CAPTION> Balance Provision Balance September 30, Quarter 1 Quarter 1 December 31, (dollars in thousands) 1999 Fiscal 2000 Payments 1999 ------------------ ------------------ ------------------- ------------------ <S> <C> <C> <C> <C> Severance $ -- $ 16,389 $ 2,319 $ 14,070 Contractual Commitments -- 37,403 1,922 35,481 ================== ================== =================== ================== Total $ -- $ 53,792 $ 4,241 $ 49,551 ================== ================== =================== ================== </TABLE> During the first quarter of fiscal 2000 approximately 150 employees were terminated and left the Company and 2 facilities were closed. The Company's operating income decreased by $120.2 million compared to the last year's first quarter. Excluding restructuring and asset impairment charges in the first quarter of fiscal 2000 and the gain from the asset securitization in fiscal 1999, operating income decreased by $0.5 million to $58.3 million for the first quarter of fiscal 2000, compared to $58.8 million in the prior year. Our operating <PAGE> margin, excluding the restructuring and asset impairment charges in fiscal 2000, and gain on asset securitization in fiscal 1999, improved from 4.3% in the first quarter of fiscal 1999 to 4.4% in the first quarter of fiscal 2000 despite the decrease in our revenues. This resulted from improved management of selling and administrative costs. Selling and administrative expense as a percent of revenue, excluding the asset securitization gain in fiscal 1999, was 32.9% in the first quarter of fiscal 2000 compared to 33.9% in the first quarter of fiscal 1999. The decrease was the result of centralizing certain key functions, adopting new credit controls, and productivity improvements within our business segments. Interest expense decreased by $3.6 million in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999 as a result of lower average debt levels during the first quarter of fiscal 2000 as compared to fiscal 1999. There was a loss before taxes of $63.0 million in the first quarter of fiscal 2000 compared to income before taxes of $73.1 million in the first quarter of fiscal 1999. Excluding the restructuring and asset impairment charges in fiscal 2000 and the gain from the asset securitization in fiscal 1999, income before taxes increased by $3.0 million to $42.3 million in the first quarter of fiscal 2000 compared to $39.3 million in the prior year. The increase was primarily the result of the decrease in selling and administrative expenses and interest expense described above. The effective income tax rate for the first quarter of fiscal 2000, excluding the effect of the restructuring and asset impairment charges, is 46.0% compared to 46.5% for the comparable period in fiscal 1999. Diluted earnings per common share decreased from $.19 per share for the first quarter of fiscal 1999 to a loss of $.37 per share for the first quarter of fiscal 2000. Excluding the after-tax effect of the restructuring and asset impairment charges in fiscal 2000 and the gain on the asset securitization in fiscal 1999, diluted earnings per common share were $.15 in the first quarter of fiscal 2000 compared to $.13 in the first quarter of fiscal 1999. Review of Business Segments In the first quarter of fiscal 2000, we made the following change to our segment reporting: IKON Document Services (which was reported in Other in fiscal 1999) was split into Business Document Services ("BDS"), Legal Document Services ("LDS") and Business Imaging Services ("BIS"). BDS is included in IKON North America and LDS and BIS remain in Other. Prior year results have been reclassified to conform with the current-year presentation. IKON North America External revenues, excluding finance income, decreased by $34.4 million or 3.5% to $941.8 million in the first quarter of fiscal 2000 from $976.2 million in the first quarter of fiscal 1999. The decrease was primarily due to fewer sales representatives as compared to the first quarter of 1999 and the continued backlog status of some digital products. Although there were fewer sales representatives than the prior year, we are focusing on rebuilding our sales force. In the first quarter of fiscal 2000, 175 sales representatives were added to the sales force in key focus areas such as color, high volume and facilities management. Approximately 79% of our equipment revenues came from digital and color sales as compared to 69% in the fourth quarter of fiscal 1999 and 46% in the first quarter of fiscal 1999. Finance income increased by $7.8 million, or 11.5%, to $75.7 million in the first quarter of fiscal 2000 compared to $67.9 million in the first quarter of fiscal 1999, excluding the asset securitization gain. The increase was due to the recognition of deferred revenue items associated with last year's balance sheet financings. These items have been recognized in conjunction with subsequent financings that placed these securitizations back on the balance sheet. Despite the decrease in revenues, operating income (excluding the restructuring and asset impairment charges in the first quarter of fiscal 2000) increased by $13.8 million to $106.8 million in the first quarter of fiscal 2000 from $93.0 million in the first quarter of fiscal 1999, excluding the asset securitization gain. The increase was due mainly to the improved management of selling and administrative costs described above. IKON Europe External revenues, excluding finance income, decreased by $4.1 million, or 3.2%, to $122 million in the first quarter of fiscal 2000 from $126.1 million in the first quarter of fiscal 1999. <PAGE> Excluding the impact of foreign currency translation, revenues in our IKON Europe segment increased by 2.5% as compared to the first quarter of fiscal 1999 due mainly to an increase in traditional copier equipment revenues in the United Kingdom. Finance income increased by $0.2 million, or 3.9%, to $5.4 million in the first quarter of fiscal 2000 from $5.2 million in the first quarter of fiscal 1999 due to growth in the lease portfolio. Operating income (excluding the restructuring and asset impairment charges in the first quarter of fiscal 2000) decreased by $0.7 million, or 11.5%, to $5.3 million in the first quarter of fiscal 2000 from $6.0 million in the first quarter of fiscal 1999. The decrease is due to the mix of lower margin technology service operations and direct competition from equipment vendors. Other Other external revenues decreased by $19.1 million, or 9.3%, to $187.6 million in the first quarter of fiscal 2000 from $206.7 million in the first quarter of fiscal 1999. There was an operating loss before restructuring and asset impairment charges of $8.2 million in the first quarter of fiscal 2000 versus operating income of $1.6 million in the first quarter of fiscal 1999. The decrease in revenues and operating income was due to higher than anticipated Year 2000 delays, increased competition and Windows 2000 delays, as well as a restructuring in our Technology Services business. Impact of Year 2000 January 2000 Update. Through January 31, 2000, our operations are fully functioning and have not experienced any significant issues associated with the Year 2000 problem (as described below). State of Readiness. The Year 2000 issue arose from computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have date-sensitive software or embedded technology (non-IT systems) may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The potential for a problem exists with all computer hardware and software, as well as in products with embedded technology: copiers and fax machines; security and HVAC systems; voice/telephony systems; elevators, etc. We have a Year 2000 Corporate Compliance Team, which has prepared an international compliance program for us and is responsible for coordinating and inspecting compliance activities in all business units. The compliance program requires all business units and locations in every country to inventory potentially affected systems and products, assess risk, take any required corrective actions, test and certify compliance. Our Year 2000 Testing and Certification Guidelines delineate the Year 2000 compliance process, testing and quality assurance guidelines, certification and reporting processes and contingency planning. An independent consulting company has reviewed the compliance program. Our Year 2000 compliance program has five phases: (1) inventory of internal IT and non-IT systems; (2) risk assessment of the Year 2000 compliance issues associated with such internal IT and non-IT systems; (3) remediation of non-compliant systems; (4) testing and validation of remediated systems; and (5) implementation of remediated systems throughout the Company. The progress to date of each of these phases is as follows: (1) internal IT and non-IT systems have been inventoried; (2) appropriate risk assessments have been completed; (3) remediation of critical systems have been completed; (4) testing and validation of critical systems have been completed; and (5) Year 2000 compliant versions have been implemented in field operations. Product warranties and certifications were sought from vendors and suppliers. The Company has obtained "Year 2000 Statements" from national vendors including Canon, Oce, Ricoh and Sharp. Costs. We have used both internal and external resources to reprogram or replace, test and implement our IT and non-IT systems for Year 2000 modifications. We do not separately track the internal costs incurred on the Year 2000 project. Such costs are principally payroll and related costs for its internal IT personnel. The total cost of the Year 2000 project, excluding these internal costs, is approximately $7.4 million and is being funded through operating cash flows. Of the total estimated project cost, approximately $2.4 million is attributable to the purchase of new software and hardware <PAGE> and will be capitalized. Through January 31, 2000, we have incurred approximately $7.4 million ($5.0 million expensed and $2.4 million capitalized), related to our Year 2000 project. Risks. We believe, based on the information currently available to us, that the most reasonably likely worse case scenario that could be caused by technology failures relating to the Year 2000 could pose a significant threat not only to us, our customers and suppliers, but to all businesses. Risks include, but are not limited to: o Legal risks, including customer, supplier, employee or shareholder lawsuits over failure to deliver contracted services, product failure, or health and safety issues. o Loss of sales due to failure to meet customer quality expectations or inability to ship products. o Increased operational costs due to manual processing, data corruption or disaster recovery. o Inability to bill or invoice. We have taken steps to limit the scope of product and service warranties to customers to either the replacement of noncompliant products or to reimbursement of the cost of the product or service provided. With respect to products sold by us prior to the inclusion of such limited warranties, differing interpretations of the warranties included with such products will likely result in litigation against us. We are not able to assess the impact of such potential litigation at this time. We are engaged in the provision of certain Year 2000 services to customers, whereby we evaluate the Year 2000 compliance of customers' software and hardware, and work with customers to find solutions to Year 2000 problems. We have taken steps to limit its warranties with respect to our provision of such services. The cost of the project and the date on which we believe it will complete the Year 2000 modifications are based on our best estimates, which were derived using numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Contingency Plans. Our Guidelines require that contingency plans be developed and validated in the event that any critical system cannot be corrected and certified before the system's failure date. Contingency plans have been developed and completed. Financial Condition and Liquidity Net cash used in operating activities for the first quarter of fiscal 2000 was $100.1 million. During the same period, the Company used $319.4 million of cash in investing activities, which included net finance subsidiary use of $288.2 million, acquisition activity at a cash cost of $1.9 million, capital expenditures for property and equipment of $22.7 million and net capital expenditures for equipment on operating rental of $7.3 million. Cash provided by financing activities of $489.8 million, includes a $37.0 million net decrease in corporate debt, excluding the effects of acquisitions and a $572.2 million increase in finance subsidiaries debt. Debt, excluding finance subsidiaries, was $822.1 million at December 31, 1999, a decrease of $36.9 million from the debt balance at September 30, 1999 of $859.0 million. The debt to capital ratio, excluding finance subsidiaries, was 37.0% at December 31, 1999 and September 30, 1999. Excluding the impact of loans from our finance subsidiaries, our debt increased by $137 million at December 31, 1999 compared to September 30, 1999. The increase in the Company's assets was due mainly to the repurchase of $275 million of direct financing lease receivables and additional inventory purchases due to an anticipated price increase. Restricted cash on the balance sheet represents cash collected on certain lease receivables which must be used to repay the lease-backed notes. As of December 31, 1999, short-term borrowings under a $600 million credit agreement totaled $25 million. The Company also has $700 million available for either stock or debt offerings under its shelf registration statement. <PAGE> Finance subsidiaries debt increased by $574.3 million from September 30, 1999, as a result of the issuance of lease-backed notes offset by payments on medium term notes and bank borrowings. During the three months ended December 31, 1999, the U.S. finance subsidiary repaid $372.9 million of debt, $697.5 million of lease-backed notes were issued and there was $247.6 million of new bank borrowings. At December 31, 1999, $1.0 billion of medium term notes were outstanding with a weighted interest rate of 6.4%, while $1.3 billion remains available under this program. In December 1999, the U.S. finance subsidiary entered into a new asset securitization agreement under which it received cash of $247 million. In October 1999, a portion of the cash received from the issuance of the lease-backed notes was used to repurchase the direct financing leases related to its previously existing $275 million asset securitization program. In December 1999, our Canadian finance subsidiary sold CN$ 16.1 million in leases under the Canadian CN$175 million asset securitization agreement and received CN$14.4 million in cash. The Company filed a shelf registration for 10 million shares of common stock in April 1997. Shares issued under the registration statement are being used for acquisitions. Approximately 3.5 million shares have been issued under this shelf registration through December 31, 1999, leaving 6.5 million shares available for issuance. 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, stock repurchases and the remaining accrued costs associated with the Company's restructuring charge and shareholder litigation settlement. Pending Accounting Changes In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which establishes accounting and reporting standards for derivative instruments and hedging activities. It will require us to recognize all derivatives as either assets or liabilities and measure the instruments at fair value. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. We intend to adopt the standard on October 1, 2000. We do not believe the effect of adoption will be material. Item 3: Quanitative and Qualitative Disclosures About Market Risk Interest Rate Risk: Our exposure to market risk for changes in interest rates relates primarily to our long-term debt. We have no cash flow exposure due to interest rate changes for long-term debt obligations. We primarily enter into debt obligations to support general corporate purposes, including acquisitions, capital expenditures and working capital needs. Finance subsidiaries' long-term debt is used to fund the lease receivables portfolio. The carrying amounts for cash, accounts receivable, long-term receivables and notes payable reported in the consolidated balance sheets approximate fair value. Additional disclosures regarding interest rate risk are set forth in the Company's 1999 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. Foreign Exchange Risk: The Company does not have significant foreign exchange risk. Foreign denominated intercompany debt borrowed in one currency and repaid in another is fixed via currency swap agreements. <PAGE> Forward-Looking Information This document includes or incorporates by reference information which constitutes forward-looking statements within the meaning of the federal securities laws, including but not limited to, statements regarding: growth opportunities, productivity initiatives, and the impact of the Company's brand strategy, revenue, margin, and cost-savings projections, expected savings from the repositioning program, anticipated growth rates in the digital equipment and outsourcing industries; the financial and legal impact of the class action litigation settlement; the cost and completion date of the Company's Year 2000 remediation project (and the possible negative impact which might result from nonremediated systems of the Company and/or its vendors); the reorganization of the Company's business segments; and the Company's ability to finance its current operations and growth initiatives. Although the Company believes such forward-looking statements are reasonable, based on management's current plans and expectations, the statements are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results, and therefore, no assurances can be given that such statements will prove correct. These uncertainties and risks include, but are not limited to, risks and uncertainties relating to: conducting operations in a competitive environment and a changing industry (which includes technical services and products that are relatively new to the industry and to the Company); delays, difficulties, management transitions and employment issues associated with consolidations and/or changes in business operations; managing the integration of acquired businesses; existing and future vendor relationships; risks relating to currency exchange; economic, legal and political issues associated with international operations; potential Year 2000 deficiencies associated with the operation of IKON's internal systems and distributed products; the Company's ability to access capital and its debt service requirements (including sensitivity to fluctuation in interest rates); and general economic conditions. Certain additional risks and uncertainties are set forth in the Company's 1999 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission. As a consequence, future results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. <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. (27) Financial Data Schedule (b) Reports on Form 8-K On October 21, 1999, the registrant filed a Current Report on Form 8-K to file, under Item 5 of the form, information contained in its press release dated October 21, 1999 that the Company would not meet the First Call consensus estimate of $.22 per share earnings for the fiscal quarter and year ended September 30, 1999. Based on preliminary results the Company expects earnings to be in the range of $.13 to $.15 per share. On November 24, 1999, the registrant filed a Current Report on Form 8-K to file under Item 5 of the form, information announcing the registrant had reached an agreement to settle, subject to court approval, the securities class action and derivative lawsuits brought by its shareholders. On December 21, 1999, the registrant filed a Current Report on Form 8-K to file, under Item 4 of the form, information regarding the appointment of PricewaterhouseCoopers LLP as its independent auditors for the fiscal year ending September 30, 2000 to replace the firm of Ernst & Young LLP who were dismissed as auditors of the registrant effective with their completion of their audit of the registrant's financial statements for the fiscal year ended September 30, 1999. <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, 2000 /s/ William S. Urkiel -------------------- ---------------------- William S. Urkiel Senior Vice President and Chief Financial Officer </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 financial statements of IKON Office Solutions, Inc. and subsidiaries and is qualified in its entirety by reference to such financial statements. </LEGEND> <CIK> 0000003370 <NAME> IKON OFFICE SOLUTIONS, INC. <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-mos <FISCAL-YEAR-END> Sep-30-2000 <PERIOD-END> Dec-31-1999 <CASH> 73,584 <SECURITIES> 0 <RECEIVABLES> 802,805 <ALLOWANCES> 49,146 <INVENTORY> 397,691 <CURRENT-ASSETS> 2,547,571 <PP&E> 769,738 <F1> <DEPRECIATION> 444,745 <F2> <TOTAL-ASSETS> 6,232,084 <CURRENT-LIABILITIES> 2,124,005 <BONDS> 2,183,712 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 1,011,760 <OTHER-SE> 386,347 <TOTAL-LIABILITY-AND-EQUITY> 6,232,084 <SALES> 668,482 <TOTAL-REVENUES> 1,332,500 <CGS> 451,092 <TOTAL-COSTS> 835,982 <F3> <OTHER-EXPENSES> 543,563 <F4> <LOSS-PROVISION> 12,335 <INTEREST-EXPENSE> 15,994 <INCOME-PRETAX> (63,039) <INCOME-TAX> (7,403) <INCOME-CONTINUING> (55,636) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (55,636) <EPS-BASIC> (0.37) <EPS-DILUTED> (0.37) <FN> <F1> (1) Includes equipment on operating leases, at cost, of $238,423. <F2> (2) Includes accumulated depreciation for equipment on operating leases of $155,149. <F3> (3) Includes Finance Subsidiaries interest of $39,452. <F4> (4) Represents selling, general and administrative expenses and restructuring and asset impairment charge. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

JAVA

https://www.sec.gov/Archives/edgar/data/709519/0000891618-00-000642.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, KSmP3uPbdk3LE6u2r8KBCyUNH3XoTJDtZaXKDJBAzwF+pry+zVVfF5ye5gfO8rus R3YA6p4U2T85lZRb/+AD2g== <SEC-DOCUMENT>0000891618-00-000642.txt : 20000210 <SEC-HEADER>0000891618-00-000642.hdr.sgml : 20000210 ACCESSION NUMBER: 0000891618-00-000642 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991226 FILED AS OF DATE: 20000209 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: SEC FILE NUMBER: 000-15086 FILM NUMBER: 529175 BUSINESS ADDRESS: STREET 1: 901 SAN ANTONIO RD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 6509601300 MAIL ADDRESS: STREET 1: 901 SAN ANTONIO ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 </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 December 26, 1999 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) 901 SAN ANTONIO ROAD, PALO ALTO, CA 94303 (Address of principal executive offices with zip code) (650) 960-1300 (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 [ ] 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 26, 1999 Common Stock - $0.00067 par value 1,746,964,132 <PAGE> 2 INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> COVER PAGE 1 INDEX 2 PART I - FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Statements of Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 28 Item 4 - Submission of Matters to a Vote of Security Holders 29 Item 5 - Other Information 30 Item 6 - Exhibits and Reports on Form 8-K 31 SIGNATURES 32 </TABLE> 2 <PAGE> 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended ---------------------------- ----------------------------- December 26, December 27, December 26, December 27, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net revenues: Products $2,996,743 $2,403,252 $5,664,552 $4,577,526 Services 557,180 399,700 1,034,927 734,766 ---------- ---------- ---------- ---------- Total net revenues 3,553,923 2,802,952 6,699,479 5,312,292 ---------- ---------- ---------- ---------- Cost and expenses: Cost of sales - products 1,370,487 1,126,780 2,578,018 2,120,185 Cost of sales - services 349,315 225,710 653,961 453,810 Research and development 397,636 307,354 754,596 594,779 Selling, general and administrative 940,658 756,910 1,834,333 1,479,944 Purchased in-process research and development - 12,000 3,500 92,000 ---------- ---------- ---------- ---------- Total costs and expenses 3,058,096 2,428,754 5,824,408 4,740,718 Operating income 495,827 374,198 875,071 571,574 Interest income, net 31,585 20,666 60,130 36,406 ---------- ---------- ---------- ---------- Income before income taxes 527,412 394,864 935,201 607,980 Provision for income taxes 174,047 133,445 309,654 235,033 ---------- ---------- ---------- ---------- Net income $ 353,365 $ 261,419 $ 625,547 $ 372,947 ========== ========== ========== ========== Net income per common share - basic $ 0.22 $ 0.17 $ 0.40 $ 0.24 ========== ========== ========== ========== Net income per common share - diluted $ 0.21 $ 0.16 $ 0.37 $ 0.23 ========== ========== ========== ========== Shares used in the calculation of net income per share - basic 1,574,025 1,542,110 1,563,724 1,531,454 ========== ========== ========== ========== Shares used in the calculation of net income per share - diluted 1,691,417 1,633,670 1,677,086 1,618,298 ========== ========== ========== ========== </TABLE> See accompanying notes. 3 <PAGE> 4 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> December 26, June 30, 1999 1999 ------------ ----------- (unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 1,311,293 $ 1,100,761 Short-term investments 3,149,036 1,590,959 Accounts receivable, net 2,038,139 2,310,142 Inventories 559,152 307,873 Deferred tax assets 553,218 506,411 Other current assets 535,288 372,480 ----------- ----------- Total current assets 8,146,126 6,188,626 Property, plant and equipment, at cost 3,282,365 2,876,055 Accumulated depreciation and amortization (1,463,903) (1,262,427) ----------- ----------- 1,818,462 1,613,628 Other assets, net 1,471,714 696,581 ----------- ----------- $11,436,302 $ 8,498,835 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 9 $ 1,646 Accounts payable 673,474 755,797 Accrued liabilities 1,944,115 1,655,554 Income taxes payable 227,417 402,813 Other current liabilities 499,292 432,452 ----------- ----------- Total current liabilities 3,344,307 3,248,262 Long-term debt and other obligations 2,154,974 383,297 Total stockholders' equity 5,937,021 4,867,276 ----------- ----------- $11,436,302 $ 8,498,835 =========== =========== </TABLE> See accompanying notes. 4 <PAGE> 5 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) <TABLE> <CAPTION> Six Months Ended ------------------------------ December 26, December 27, 1999 1998 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 625,547 $ 372,947 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 356,628 315,514 Tax benefit of options exercised 260,902 96,740 Purchased in-process research and development 3,500 92,000 Net (increase) decrease in accounts receivable 278,408 (258,335) Net increase in inventories (251,279) (17,218) Net increase in other current and non-current assets (209,790) (88,670) Net increase (decrease) in accounts payable (83,079) 115,775 Net increase in other current and non-current liabilities 183,411 138,094 ---------- ---------- Net cash provided by operating activities 1,164,248 766,847 ---------- ---------- Cash flows from investing activities: Purchases of short-term investments (4,150,553) (941,865) Proceeds from sales of short-term investments 1,771,092 235,617 Proceeds from maturities of short-term investments 762,745 265,668 Acquisition of property, plant and equipment (432,051) (361,300) Acquisition of spare parts and other assets (44,727) (69,576) Purchases of long-term investments (48,184) - Payments for acquisitions, net of cash acquired (74,891) (31,269) ---------- ---------- Net cash used in investing activities (2,216,569) (902,725) ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock, net 31,986 93,355 Acquisition of treasury stock (389,343) (164,286) Proceeds from employee stock purchase plans 138,535 58,529 Net increase (reduction) in borrowings and other obligations 1,481,675 (3,634) ---------- ---------- Net cash provided by (used in) financing activities 1,262,853 (16,036) ---------- ---------- Net increase (decrease) in cash and cash equivalents 210,532 (151,914) Cash and cash equivalents, beginning of period 1,100,761 835,625 ---------- ---------- Cash and cash equivalents, end of period $1,311,293 $ 683,711 ========== ========== </TABLE> See accompanying notes. 5 <PAGE> 6 SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited) (in thousands) <TABLE> <CAPTION> Six Months Ended ----------------------------- December 26, December 27, 1999 1998 ------------ ------------ <S> <C> <C> Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 229 $ 778 Income taxes $225,699 $ 58,702 Supplemental schedule of non-cash investing activities: In conjunction with the Company's acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 86,413 $198,629 Cash paid for assets (75,103) (35,864) Stock issued (823) (142,028) -------- -------- Liabilities assumed $ 10,487 $ 20,737 ======== ======== </TABLE> See accompanying notes. 6 <PAGE> 7 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 with current year presentation. On October 19, 1999, Sun completed its merger with Forte Software, Inc. ("Forte"). This merger was accounted for as a pooling of interests and, accordingly, historical consolidated financial statements of the Company have been restated to include the financial position, results of operations and cash flows of Forte for all periods presented. On December 7, 1999, the Company effected a two-for-one split of its common stock paid in the form of a stock dividend. All share and per share data has been adjusted to reflect the split for all periods presented. While the quarterly financial information is unaudited, the financial statements included in this report reflect all adjustments (consisting 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 consolidated balance sheet as of June 30, 1999 has been derived from the audited consolidated financial statements at that date. The information included in this report should be read in conjunction with the 1999 Annual Report to Stockholders, which is incorporated by reference in the Company's 1999 Annual Report on Form 10-K. INVENTORIES Inventories are comprised of the following (in thousands): <TABLE> <CAPTION> December 26, 1999 June 30, 1999 ----------------- ------------- <S> <C> <C> Raw materials $201,924 $113,070 Work in process 66,292 51,183 Finished goods 290,936 143,620 -------- -------- $559,152 $307,873 ======== ======== </TABLE> OTHER ASSETS Other assets is comprised of the following (in thousands): <TABLE> December 26, 1999 June 30, 1999 ----------------- ------------- <S> <C> <C> Long-term investments $ 745,876 $ -- Intangible assets, net 234,284 205,431 Prepaid assets 249,151 286,732 Other 242,403 204,418 ---------- -------- $1,471,714 $696,581 ========== ======== </TABLE> Long-term investments consist of equity securities in public and non-public companies. 7 <PAGE> 8 INCOME TAXES The Company accounts for income taxes under the liability method 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. RECENT PRONOUNCEMENTS In June 1998, Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities" was issued and was effective for all fiscal years beginning after June 15, 1999. FAS 133 was subsequently amended by Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and will now be effective for fiscal years beginning after June 15, 2000, with early adoption permitted. FAS 133, as amended, requires the Company to recognize all derivatives as either assets or liabilities and to measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the derivative instruments. Upon adoption, the Company will be required to adjust hedging instruments to fair value in the balance sheet and recognize the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. The Company has not completed its assessment of the impact of FAS 133, as amended, on its consolidated financial position or results of operations and will adopt FAS 133 effective July 1, 2000. COMPREHENSIVE INCOME The components of comprehensive income, net of tax, are as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended ----------------------------- ------------------------------ December 26, December 27, December 26, December 27, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net income $ 353,365 $ 261,419 $ 625,547 $ 372,947 Change in unrealized gain (loss) on investments, net 382,687 (6,513) 390,131 (20,637) Change in cumulative translation adjustment 3,352 2,033 (5,539) 2,299 --------- --------- ---------- --------- Comprehensive income $ 739,404 $ 256,939 $1,010,139 $ 354,609 ========= ========= ========== ========= </TABLE> The components of accumulated other comprehensive income, net of related tax, at December 26, 1999 and June 30, 1999, are as follows: <TABLE> <CAPTION> December 26, 1999 June 30, 1999 ----------------- ------------- <S> <C> <C> Unrealized gains (losses) on securities $389,802 $ (329) Foreign currency translation adjustments (15,241) (9,702) -------- -------- Accumulated other comprehensive income $374,561 $(10,031) ======== ======== </TABLE> 8 <PAGE> 9 BUSINESS COMBINATIONS POOLING OF INTERESTS COMBINATION On October 19, 1999, the Company completed its merger with Forte Software, Inc. ("Forte"), a software company that designs, develops, markets and supports a set of products for developing, deploying and managing production applications in distributed environments, including client/server and the Internet. Under the terms of the merger agreement, the Company issued 12.7 million shares of Sun common stock (with a fair market value of $47.03 per share on such date) in exchange for all of Forte's common stock. In addition, Sun issued 2.7 million stock options in exchange for Forte's previously outstanding stock options. The number of Sun shares was calculated using an exchange ratio of 0.6 shares of Sun stock for each share of Forte common stock. The transaction was accounted for as a pooling of interests and, accordingly, the historical condensed consolidated financial statements of the Company have been restated to include the financial position, results of operations and cash flows of Forte for all periods presented. Pro forma results of operations have not been presented because the effect of the merger on the Company's financial statements was not material. PURCHASE COMBINATIONS The Company has completed a number of purchase acquisitions. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or an aggregate basis. The Company calculated amounts allocated to in-process research and development ("IPRD") using established valuation techniques and expensed such amounts in the quarter that each such acquisition was consummated because technological feasibility of the in-process technology had not been achieved and no alternate future uses had been established. The Company computed its valuations of IPRD for the above noted acquisitions using a discounted cash flow analysis on the anticipated income stream to be generated by the purchased technology. The excess purchase price over the estimated value of the net tangible assets was allocated to various intangible assets, consisting primarily of developed technology and goodwill, as well as other intangible assets, such as customer base and assembled workforce. The value of developed technology was based upon future discounted cash flows related to the existing product's projected income stream. The value of the customer base was determined based upon the value of existing relationships and the expected revenue stream. The value of the assembled workforce was based upon the cost to replace that workforce. Intangible assets, including goodwill, are being amortized over their estimated useful lives, ranging from two to five years. On October 18, 1999, the Company acquired all of the outstanding capital stock of NetBeans Ceska Republika a.s. ("NetBeans"), a Czech Republic joint stock company and a developer of cross-platform Java(TM) technology-based integrated development environments, by means of an asset purchase from NetBeans' parent holding company, NetBeans, Inc., a British Virgin Islands company. The total purchase price was approximately $9.0 million. This transaction was accounted for as a purchase, with the excess of the purchase price over the estimated fair value of tangible assets being allocated primarily to various intangible assets, including goodwill ($8.0 million), developed technology ($0.8 million) and other intangible assets ($0.2 million). There was no IPRD associated with this acquisition. On August 5, 1999, Sun acquired all of the outstanding capital stock of Star Division Corporation ("Star Division"), a company conducting development, engineering, and testing activities associated with the completion of a new enterprise application platform product, by means of a merger transaction pursuant to which all of the shares of Star Division were converted into the right to receive cash. The total purchase price for Star Division was approximately $59.5 million. Simultaneous with the acquisition of Star Division, Sun acquired 9 <PAGE> 10 certain assets and liabilities of Star Division Software-Entwicklung und Vertriebs GmbH ("Star Company"), a related party of Star Division, for total cash consideration of approximately $14 million. These transactions were accounted for as purchases, with the excess of the purchase price over the estimated fair value of net tangible assets being allocated primarily to various intangible assets, including goodwill ($69.7 million), developed technology ($3.3 million), distribution contracts ($1.1 million) and assembled workforce ($1 million). In addition to the intangible assets acquired, the Company recorded a $3.5 million charge, representing the write-off of IPRD. DEBT OFFERING On July 14, 1999, the shelf registration statement which Sun filed with the Securities and Exchange Commission (SEC) on June 18, 1999 became effective. The shelf registration statement registered senior and subordinated debt securities and common and preferred stock with an aggregate initial offering price of up to $3 billion. The securities registered by Sun were in addition to the $1 billion of securities previously registered and declared effective under a separate shelf registration statement filed with the SEC. On August 4, 1999, the Company issued $1.5 billion of unsecured senior debt securities in four tranches. The four tranches are comprised of the following notes (the "Senior Notes"): $200 million (due on August 15, 2002 and bearing interest at 7%), $250 million (due on August 15, 2004 and bearing interest at 7.35%), $500 million (due on August 15, 2006 and bearing interest at 7.5%), and $550 million (due on August 15, 2009 and bearing interest at 7.65%). Interest on the Senior Notes will be payable semi-annually. Sun may redeem all or any part of any tranche of the Senior Notes at any time at a price equal to 100% of the principal plus accrued and unpaid interest and an amount as determined by a quotation agent, which represents the present value of the remaining scheduled payments. Sun anticipates that the net proceeds from this offering will be used to fund expansion of the Company's business, including additional working capital, capital expenditures, acquisition of products, technologies and businesses and general corporate matters. Sun also entered into various interest rate swap agreements to modify the interest characteristics of the Senior Notes so that the interest associated with the Senior Notes effectively becomes variable. 10 <PAGE> 11 OPERATING SEGMENTS Although the Company has various divisions, only Computer Systems and Storage and Enterprise Services are considered reportable segments under the criteria of FAS 131. Products in the Computer Systems and Storage segment include a broad range of desktop systems, servers, storage, and network switches, incorporating the UltraSPARC (TM) processors and Solaris(TM) Operating Environment. In the Enterprise Services segment, the Company provides a full range of services and support to existing and new customers, including education, professional services, and systems integration. The Other segment consists of various software and other miscellaneous divisions, such as corporate, which did not meet the requirements individually for a reportable segment as defined by FAS 131. Information on reportable segments is as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Six Months Ended ----------------------------- ------------------------------ December 26, December 27, December 26, December 27, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues Computer Systems and Storage $2,691,837 $2,258,989 $5,176,051 $4,317,022 Enterprise Services 557,180 399,700 1,034,927 734,766 Other 304,906 144,263 488,501 260,504 ---------- ---------- ---------- ---------- Total $3,553,923 $2,802,952 $6,699,479 $5,312,292 ========== ========== ========== ========== Interdivision revenues Computer Systems and Storage $ - $ - $ - $ - Enterprise Services 93,343 78,682 175,663 155,159 Other (93,343) (78,682) (175,663) (155,159) ---------- ---------- ---------- ---------- Total $ - $ - $ - $ - ========== ========== ========== ========== Operating Income Computer Systems and Storage $ 549,662 $ 386,070 $1,045,257 $ 692,326 Enterprise Services 75,782 51,653 128,847 87,840 Other (129,617) (63,525) (299,033) (208,592) ---------- ---------- ---------- ---------- Total $ 495,827 $ 374,198 $ 875,071 $ 571,574 ========== ========== ========== ========== </TABLE> Segment assets have not changed materially from June 30, 1999. 11 <PAGE> 12 SUBSEQUENT EVENTS On January 31, 2000, the Company acquired all of the outstanding capital stock of Trustbase, Limited ("Trustbase"), a United Kingdom parent holding company of JCP Computer Services Limited, a developer of highly secure public key infrastructure enabling technology, by means of a stock purchase transaction pursuant to which all of the shares of Trustbase were converted into the right to receive cash. The total purchase price for Trustbase was approximately $18.2 million. This transaction will be accounted for as a purchase, with the excess of the purchase price over the estimated fair value of tangible assets being allocated to various intangible assets. 12 <PAGE> 13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth items from the Condensed Consolidated Statements of Income as a percentage of total net revenues: <TABLE> <CAPTION> Three Months Ended Six Months Ended --------------------------- --------------------------- December 26, December 27, December 26, December 27, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net revenues: Products 84.3% 85.7% 84.6% 86.2% Services 15.7 14.3 15.4 13.8 ----- ----- ----- ----- Total net revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- Cost of sales: Products 38.6 40.2 38.5 39.9 Services 9.8 8.1 9.7 8.6 ----- ----- ----- ----- Total cost of sales 48.4 48.3 48.2 48.5 ----- ----- ----- ----- Gross margin 51.6 51.7 51.8 51.5 ----- ----- ----- ----- Research and development 11.2 11.0 11.3 11.2 Selling, general and administrative 26.4 26.9 27.4 27.8 Purchased in-process research and development - 0.4 - 1.7 ----- ----- ----- ----- Operating income 14.0 13.4 13.1 10.8 ----- ----- ----- ----- Interest income, net 0.8 0.7 0.9 0.6 ----- ----- ----- ----- Income before income taxes 14.8 14.1 14.0 11.4 ----- ----- ----- ----- Provision for income taxes 4.9 4.8 4.7 4.4 ----- ----- ----- ----- Net income 9.9% 9.3% 9.3% 7.0% ===== ===== ===== ===== </TABLE> The following section contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements regarding Japanese macroeconomic trends, the impact on our gross margin from shifts in product mix, our expectations to invest in our services business, services gross margin expectations for fiscal year 2000, our expectations relating to future research and development and selling, general and administrative expenses in fiscal year 2000, our expectations to continue hiring personnel in certain areas, our expectations as to financial market risks, our expected effective income tax rate for fiscal 2000, our beliefs as to our liquidity and capital resources, as well as our expectations set forth in the section entitled "Purchased in-process research and development," including percentage of completion, expected product release dates, dates for which we expect to begin generating benefits from projects, expected product capabilities and product life cycles, costs and efforts to complete projects, growth rates, royalty rates, projected revenues, cost of revenue and operating expense information used by us to calculate discounted cash 13 <PAGE> 14 flows and discount rates and our expectations to continue and successfully complete product development as well as realize our expected economic return. These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in "Future Operating Results," identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors include, but are not limited to, adverse changes in general economic conditions, including adverse changes in the specific markets for our products, adverse business conditions, decreased or lack of growth in the computing industry, adverse changes in customer order patterns, increased competition, lack of acceptance of new products, pricing pressures, lack of success in technological advancements, risks associated with foreign operations (including the downturn of economic trends and unfavorable currency movements in the Asia Pacific marketplace), and risks associated with our efforts to comply with Year 2000 requirements. With respect to risks related to purchased in-process research and development identified above, such factors also include but are not limited to, delays in the development of in-process technologies or the release of products into the market, the complexity of the technology, our ability to successfully manage product introductions, lack of customer acceptance, competition and changes in technological trends, and market or general economic conditions. In addition, there can be no assurance that any of the new products discussed below will be completed, that such products will achieve either technological or commercial success or that we will receive any economic benefit from such products as a result of delays in the development of the technology, the complexity of the technology, or changes in customer needs. Other factors that may affect such results and financial condition are set forth in our 1999 Annual Report to Stockholders, which is incorporated by reference in our Form 10-K. RESULTS OF OPERATIONS NET REVENUES Our net revenues were $3,553.9 million for the second quarter of fiscal 2000 and $6,699.5 million for the first six months of fiscal 2000, representing an increase of 26.8% and 26.1%, respectively, over the corresponding periods of fiscal 1999. Our products net revenues for the second quarter of fiscal 2000 increased by $593.5 million or 24.7% to $2,996.7 million over the corresponding period of fiscal 1999. Net products revenues were $5,664.6 million for the six months ended December 26, 1999, an increase of $1,087.0 million or 23.7% over the corresponding period of fiscal 1999. Approximately half of the increase in products revenue for the second quarter and first six months of fiscal 2000 is due to continued strong demand for our enterprise and workgroup servers, as well as increased revenues generated by our storage products. As a result of the strong demand in our servers, high-end and low-end desktop system revenue as a percentage of products net revenues has declined for the three and six months ended December 26, 1999. Our services net revenues for the second quarter of fiscal 2000 increased by $157.5 million or 39.4% to $557.2 million, over the corresponding period of fiscal 1999. Net revenues from services were $1,034.9 million for the first six months ended December 26, 1999, an increase of $300.2 million or 40.9% over the corresponding period of fiscal 1999. The increases in services net revenues are primarily the result of: (1) an overall shift towards premium service and support contracts resulting from a larger installed base of high-end server products; (2) a larger installed service base related to increased product unit sales; and (3) increased revenues associated with our professional and educational services. Our domestic net revenues increased by 33.5% and 29.1% in the second quarter and first six months of fiscal 2000, respectively, over the corresponding periods of fiscal 1999. Our international net revenues grew 20.4% and 23.0% in the second quarter and the first six months of fiscal 2000, respectively, compared with the corresponding periods of fiscal 1999. In US dollars, European net revenues increased 15.9% and 19.2%, Rest of 14 <PAGE> 15 World (ROW) net revenues increased 40.9% and 32.7%, and Japanese net revenues increased 11.6% and 23.0%, in the second quarter and first six months of fiscal 2000, respectively, when compared with the corresponding periods of fiscal 1999. The increases in Europe are primarily due to continued market acceptance of our network computing products and services in Germany, France, and southern European countries, and to a lesser extent, from growth in northern European countries. Although we have experienced U.S. dollar revenue growth in the European marketplace on a year over year basis, there can be no assurance that such trends will continue. In particular, if capital spending declines in certain countries or industries, our results of operations and cash flow could suffer. The increases in ROW and Japan net revenues are attributable to increased demand across the Asia Pacific region for our products and services. Despite signs of recovery in the Japanese economy, we remain cautious with regard to the Japanese market. In addition, if the economic trends in Japan significantly worsen in a quarter or decline over an extended period of time, our results of operations and cash flows could suffer. A portion of our operations consists of manufacturing and sales activities outside of the U.S. As a result, our results of operations could be significantly adversely affected by factors such as changes in foreign currency exchange rates or economic conditions in the foreign markets in which we distribute our products. We are primarily exposed to changes in exchange rates on the Japanese yen, British pound, French franc and German mark. When the U.S. dollar strengthens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens against these currencies, 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 we are a net receiver of currencies other than the U.S. dollar and, as such, benefit from a weaker dollar, and are 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 adversely affect our consolidated sales and operating margins as expressed in U.S. dollars. To mitigate the short-term effect of changes in currency exchange rates on our non-U.S. dollar-based sales, product procurement, and operating expenses, we routinely hedge our net non-U.S. dollar-based exposures by entering into foreign exchange forward and option contracts. Currently, hedges of transactions do not extend beyond three months. Given the short term nature of our foreign exchange forward and option contracts, our exposure to risk associated with currency market movement on the instruments is not material. GROSS MARGIN Total gross margin was 51.6% and 51.8%, for the second quarter and the first six months of fiscal 2000, respectively, compared with 51.7% and 51.5% for the corresponding periods of fiscal 1999. Products gross margin was 54.3% and 54.5% in the second quarter and first six months of fiscal 2000, respectively, compared with 53.1% and 53.7% for the corresponding periods of fiscal 1999. The modest increases in products gross margin for the three and six months periods in fiscal 2000 reflect the effects of increased volumes of higher margin servers, partially offset by lower margin workstations. There could be a possible downward impact on our products gross margins should the mix of higher margin servers and lower margin workstations change. Services gross margin was 37.3% and 36.8% in the second quarter and first six months of fiscal 2000, respectively, compared with 43.5% and 38.2% for the corresponding periods of fiscal 1999. The decreases in services gross margin reflect the impact of building additional infrastructure, improvements in existing service delivery technologies and processes, and increased headcount. These additional costs are partially offset by: (1) increased market penetration in enterprise data center accounts; (2) an overall shift towards premium service and support contracts resulting from a larger installed base of high-end server products; (3) continued growth in professional services revenues; and (4) increased economies of scale in certain geographic markets. We expect 15 <PAGE> 16 to continue to invest in our services business through increased headcount, increased spares inventory and other infrastructure-related initiatives. We currently expect our services gross margin to be in the mid-to-high thirty percent range for the remainder of fiscal 2000. We continuously evaluate the competitiveness of our product and service offerings. These evaluations could result in repricing actions in the near term. Our future operating results would be adversely affected if such repricing actions were to occur and we were unable to mitigate the resulting margin pressure by maintaining a favorable mix of systems, software, service, and other products and by achieving component cost reductions, operating efficiencies and increasing volumes. RESEARCH AND DEVELOPMENT Our research and development (R&D) expenses increased to $397.6 million in the second quarter of fiscal 2000, compared with $307.4 million for the corresponding period of fiscal 1999. R&D expenses were $754.6 million for the first six months of fiscal 2000, compared with $594.8 million for the corresponding period in fiscal 1999. As a percentage of net revenues, R&D expenses were 11.2% and 11.3% for the second quarter and first six months of fiscal 2000, respectively, compared with 11.0% and 11.2% in the corresponding periods of fiscal 1999. Both the dollar and percentage increases in R&D expenses in the second quarter and first half of fiscal 2000 over the corresponding periods in fiscal 1999 reflect our continued development of a broad line of scaleable hardware products, including servers, workstations, and storage technologies, as well as software products which utilize the Java(TM) platform, Solaris Operating Environment software, Jini(TM) software, and SPARC(TM) microprocessors. Furthermore, R&D expenses have increased due to additional development of products acquired through acquisitions and increased compensation and compensation-related costs related to higher levels of R&D staffing. The increases in R&D spending reflect our belief that to maintain our competitive position in a market characterized by rapid rates of technological advancement, we must continue to invest significant resources in new systems, software, and microprocessor development, as well as continue to enhance existing products. While we expect the dollar amount of research and development expenses to increase during the remainder of fiscal 2000, R&D as a percentage of revenue for fiscal 2000 is expected to be in the range of 10.5%-11.0% of revenue. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses increased to $940.7 million, or by 24.3%, in the second quarter of fiscal 2000 compared with $756.9 million for the corresponding period of fiscal 1999. SG&A was $1,834.3 million for the six months ended December 26, 1999, an increase or $354.4 million, or 23.9%, in comparison to the corresponding period of fiscal 1999. As a percentage of net revenues, SG&A expenses decreased to 26.4% and 27.4% in the second quarter and first six months of fiscal 2000, respectively, from 26.9% and 27.8%, respectively, in the corresponding periods of fiscal 1999. The dollar increases in fiscal 2000 are primarily attributable to: (1) compensation resulting from higher levels of headcount, principally in the sales organization; (2) annual salary adjustments; and (3) marketing costs related to promotional programs. We also made additional investments aimed at improving our own business processes. As a result, in fiscal 2000 we expect SG&A expense to increase in dollar amount, as we continue to invest in efforts to achieve additional future operating efficiencies through the continual review and improvement of business processes. In addition, we expect to continue to hire personnel to drive demand-creation programs and to build service and support organizations. However, these investments in SG&A should not cause SG&A to increase as a percentage of revenue. 16 <PAGE> 17 PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT Purchased in-process research and development ("IPRD") of $3.5 million in the first half of fiscal 2000 represents the write-off of in-process technologies associated with our acquisitions of Star Division Corporation ("Star Division") and certain assets and liabilities of Star Division Software-Entwicklung und Vertriebs GmbH ("Star Company"), a related party of Star Division. Purchased IPRD of $92.0 million in the first half of fiscal 1999 represents the write-off of in-process technologies associated with our acquisitions of NetDynamics, Inc. ("NetDynamics"), i-Planet, Inc. ("i-Planet"), and Beduin Communications Incorporated ("Beduin"). All of these business combinations are known collectively as "Acquired Companies". At the date of each acquisition noted above, the projects associated with the IPRD efforts had not yet reached technological feasibility and the R&D in process had no alternative future uses. Accordingly, these amounts were expensed on the respective acquisition dates of each of the Acquired Companies. Also see Notes to Condensed Consolidated Financial Statements (Unaudited) - Business Combinations. Star Division Corporation and Star Division Software-Entwicklung und Vertriebs GmbH: On August 5, 1999, we acquired all of the outstanding capital stock of Star Division by means of a merger transaction pursuant to which all of the shares of Star Division were converted into the right to receive cash. The total purchase price for Star Division was approximately $59.5 million. Simultaneous with the acquisition of Star Division, we acquired certain assets and liabilities of Star Division Software-Entwicklung und Vertriebs GmbH, a related party of Star Division, for total cash consideration of approximately $14 million. (Collectively, these companies are referred to as the "Star Companies"). These transactions were accounted for as purchases, with the purchase price being allocated to tangible assets, intangible assets and IPRD. IPRD Overview - Star Companies: At the acquisition date (August 5, 1999), the Star Companies were conducting development, coding and testing activities associated with the completion of a new technology which would enable their most recent version of StarOffice to be utilized in a portal environment (the "Star Product Offering"). The Star Product Offering is an updated office productivity suite which will provide word processing, spreadsheet, graphics design, presentation and data base applications. The Star Product Offering was initially scheduled to be released at the end of calendar 1999. Key product features under development included: - Portal technology that will allow individuals to access office applications and data via the Internet from different types of devices including cell phones and personal data assistants. - Greater interoperability with other office applications. The Star Product Offering will allow corporate intranets and extranets, as well as service providers, to host an entire workplace, including applications, from a single location which would also be accessible via the Internet. - Improved functionality and performance across each office application. At the acquisition date, the Star Companies had made substantial progress in the areas of product definition, architecture design, and coding. Remaining efforts necessary to complete the Star Product Offering related primarily to additional coding, testing, and implementation. We anticipated that an early access/beta version of the Star Product Offering would be available in the second quarter of fiscal 2000, with a general availability version scheduled for release in the second half of fiscal 2000 at which time we expect to realize economic benefits associated with the Star Product Offering. 17 <PAGE> 18 Valuation Analysis - Star Companies: We calculated the value of the IPRD technology using a discounted cash flow analysis on the anticipated income streams. The discounted cash flow analysis was based upon our forecast of future revenues, cost of revenues, and operating expenses related to the product and technology acquired from the Star Companies which are intended to be used in our future software application products. We projected revenue to increase at a compound growth rate of approximately 31% from fiscal 2000 through 2009. We also expected revenues for the IPRD to peak in fiscal 2002 (as a percentage of revenue) and decline thereafter, as we expect to introduce new product technologies. These projections are based on our estimates of market size and growth, expected trends in technology, and the expected timing of new product introductions. Our assumptions with respect to operating expenses used in the valuation analysis included: (1) cost of goods sold, (2) SG&A expenses, and (3) R&D expenses. Selected operating expense assumptions we used were based on an evaluation of the Star Companies' overall business model, including both historical and expected direct expense levels (as appropriate), and an assessment of general industry metrics. We project that cost of revenues (expressed as a percentage of revenue) for the IPRD averages 20% over the projection period. We estimated SG&A (expressed as a percentage of revenue) for the IPRD averages 40% over the projection period. Maintenance R&D related to the IPRD was estimated to be approximately 2% of revenue over the projection period. The discount rate we selected for the IPRD was 23%. In the selection of the appropriate discount rate, we gave consideration to our weighted average cost of capital (WACC), as well as other factors, including the useful life of the technology, profitability levels of the technology, the uncertainty of technology advances that are known at the valuation date, and the stage of completion of the technology. The discount rate we used for the IPRD was determined to be greater than our WACC due to the fact that the technology had not yet reached technological feasibility as of the date of the valuation. The value of the IPRD reflects the relative value and contribution of the acquired research and development. We gave consideration to the R&D's stage of completion, the complexity of the work completed to date, the difficulty completing the remaining development, costs already incurred, and the projected cost to complete the project in determining the value assigned to IPRD. Comparison to Actual Results - Star Companies: At December 26, 1999, significant progress had been made on the development related to the Star Product Offering that was underway as of the acquisition date. The early access software version scheduled for release in the second half of fiscal 2000 was shipped in January 2000. At December 26, 1999, we had incurred approximately $3.9 million of the planned total cost to complete of $7.5 million, and no significant adjustments have been made in the economic assumptions or expectations which underlie our acquisition decision and related purchase accounting. We are continuing our development efforts related to the IPRD technology acquired. These development efforts are advancing at a rate consistent with our expectations. Given the uncertainties of the development and commercialization process, no assurance can be given that deviations from these estimates will not occur. We expect to continue the development of the Star Product Offering and believe that there is a reasonable chance of successfully completing such development. However, as there is risk associated with the completion of the in-process project and commercialization due to the remaining efforts to achieve technological feasibility, rapidly changing customer needs, complexity of technology and growing competitive pressures, there can be no assurance that the project will meet with commercial success. Failure to successfully develop and commercialize this in-process project would result in the loss of the expected 18 <PAGE> 19 economic return inherent in the fair value allocation. Additionally, the value of our intangible assets acquired may become impaired. Overall Status of Business Combinations Prior to Fiscal 2000: With respect to acquisitions completed prior to fiscal 2000, we believe that the projections we used in performing our valuations with respect to each acquisition are still valid in all material respects, however, there can be no assurance that the projected results will be achieved. We continue to make substantial progress related to the development and commercialization of acquired technologies. Although we have experienced delays in the completion of certain of our development efforts and their related commercialization, the total costs to complete such technologies have not materially increased, individually or in aggregate. We periodically evaluate our product development timeline and modify our overall business plan in response to various factors. Modifications to our business plan include the reallocation of resources among various alternative development projects. The impact of delays in the realization of economic benefits related to acquired technologies, individually or in aggregate, has not been material to our overall consolidated financial position or results of operations as of and for the six months ended December 26, 1999. We expect to continue the development of each project which has not yet been completed and believe that there is a reasonable chance of successfully completing such development efforts. However, as there is risk associated with the completion of the in-process projects, there can be no assurance that any project will meet with either technological or commercial success. Failure to successfully develop and commercialize these in-process projects would result in the loss of the expected economic return inherent in the fair value allocation. Additionally, the value of other intangible assets acquired may become impaired. INTEREST INCOME, NET Net interest income was $31.6 million and $60.1 million for the second quarter and first six months of fiscal 2000, respectively, compared with $20.7 million and $36.4 million, for the corresponding periods in fiscal 1999. Our cash and investment portfolio increased in August 1999 due to our issuance of $1.5 billion of unsecured senior debt securities. The increases in interest income, net, are primarily the result of higher interest earnings on a larger average portfolio of cash and short-term investments, partially offset by interest expense related to our issuance of $1.5 billion of unsecured debt securities. Our interest income and expenses are sensitive to changes in the general level of U.S. interest rates. In this regard, changes in the U.S. interest rates affect the interest earned on our cash equivalents and short-term investments, as well as interest paid on our borrowings. To mitigate the impact of fluctuations in U.S. interest rates on our unsecured debt securities, we have entered into interest rate swap transactions. INCOME TAXES Our effective income tax rate was 33.0% for the second quarter and first six months of fiscal 2000, respectively, excluding non-recurring tax charges of $1.2 million resulting from the write-off of IPRD associated with the acquisition of Star Division in the first quarter of fiscal 2000. Our effective income tax rate, including such charges for the second quarter and six months ended December 26, 1999, was 33.0% and 33.1%, respectively. Our effective income tax rate was 33.0% and 33.1% for the second quarter and first six months of fiscal 1999, respectively, excluding non-recurring tax charges of $3.2 million resulting from the write-off of IPRD associated with the acquisition of i-Planet in the second quarter of fiscal 1999 and of $30.4 million resulting from the write-off of IPRD associated with the acquisition of NetDynamics in the first quarter of fiscal 1999. Our 19 <PAGE> 20 effective rate including such charges for the second quarter and six months ended December 27, 1998 was 33.8% and 38.7%, respectively. We currently expect our effective income tax rate to remain at 33.0% for the rest of fiscal 2000. The expected tax rate excludes the impact of potential mergers and acquisitions. The tax effects of merger and acquisition transactions would be accounted for in the interim quarter in which the transactions occur. Our expected rate is based on current tax law and current estimates of earnings, and is subject to change. LIQUIDITY AND CAPITAL RESOURCES Our financial condition has improved as of December 26, 1999 when compared with June 30, 1999. During the first six months of fiscal 2000, operating activities generated $1,164.2 million in cash and cash equivalents. Non-cash expenses affecting cash provided by operating activities included depreciation and amortization expense of $356.6 million, tax benefit of options exercised of $260.9 million, and a charge for IPRD of $3.5 million in connection with the acquisition of the Star Companies. Accounts receivable decreased $278.4 million, primarily due to the timing of shipments and related collections. Inventories increased $251.3 million, primarily due to additional purchases of materials and supplies to support the increased product and service volumes. Other current and noncurrent assets increased $209.8 million primarily due to the timing of payments for income and other taxes and the recording of goodwill and other intangible assets related to our acquisitions. Accounts payable decreased $83.1 million, primarily due to the timing of purchases and related payments. Other current and noncurrent liabilities increased $183.4 million primarily due to increased compensation and compensation-related costs, as well as increases in sales and marketing costs. Our investing activities used $2,216.6 million of cash during the first six months of fiscal 2000, an increase of $1,313.8 million from the $902.7 million used during the corresponding period in fiscal 1999. The increase is primarily due to the purchases of short-term investments utilizing a portion of the proceeds available from our $1.5 billion debt offering. Purchases of short-term investments totaled $4,150.6 million, up $3,208.7 million, or 341%, from purchases made during the corresponding period in fiscal 1999. These purchases were offset by sales and maturities of $2,533.8 million, up $2,032.6 million, or 405%, from sales and maturities during the corresponding period in fiscal 1999. Also included in investing activities are purchases of long-term investments, capital spending for real estate development and capital additions to support increased headcount, primarily in our services, engineering and marketing organizations. During the first six months of fiscal 2000, our long-term investments increased from an immaterial amount to approximately $745.9 million. However, the increase in long-term investments is primarily due to unrealized gains on investments generated in the second quarter of fiscal 2000; the gains are the result of investments in several companies which have undergone public offerings. During the first six months of fiscal 2000, $1,262.9 million of cash was provided by financing activities, compared with $16.0 million used during the corresponding period in fiscal 1999. The increase in cash provided by financing activities is primarily due to our issuance of $1.5 billion of unsecured senior debt securities. Acquisition of treasury stock increased by $225.1 million to $389.3 million during the first six months of fiscal 2000, compared with $164.3 million during the corresponding period in fiscal 1999. This increase in acquisition of treasury stock partially offsets the increase in cash provided by financing activities in the first six months of fiscal 2000. At December 26, 1999, our primary sources of liquidity consisted of cash, cash equivalents and short-term investments of $4,460.3 million and a revolving credit facility ("Facility") with banks aggregating $500 million. The Facility is available subject to compliance with certain covenants. No amounts were outstanding under the Facility at December 26, 1999. 20 <PAGE> 21 On October 16, 1997, we filed a shelf registration statement with the Securities and Exchange Commission relating to the registration for public offering of senior and subordinated debt securities and common stock with an aggregate initial public offering price of up to $1 billion. On October 24, 1997, this shelf registration statement became effective. On June 18, 1999, we filed an additional shelf registration statement with the Securities and Exchange Commission relating to the registration for public offering of senior and subordinated debt securities and common and preferred stock with an aggregate initial public offering price of up to $3 billion. On July 14, 1999, this shelf registration statement became effective. As a result, we may choose to offer up to $4 billion, from time to time, of debt securities and common and preferred stock pursuant to Rule 415 in one or more separate series, in amounts, at prices and on terms to be set forth in the prospectus contained in these registration statements and in one or more supplements to the prospectus. On August 4, 1999, we issued $1.5 billion in unsecured debt securities in four tranches. The four tranches are comprised of the following notes (the "Senior Notes"): $200 million (due on August 15, 2002 and bearing interest at 7%), $250 million (due on August 15, 2004 and bearing interest at 7.35%), $500 million (due on August 15, 2006 and bearing interest at 7.5%), $550 million (due on August 15, 2009 and bearing interest at 7.65%). Sun also entered into various interest rate swap agreements to modify the interest characteristics of the Senior Notes so that the interest associated with the Senior Notes effectively becomes variable. Our exposure to interest rate risk on the international short-term borrowings is not material, given the short-term maturity of these instruments and our evaluation of the potential for rate changes associated with such instruments. We believe that the liquidity provided by existing cash and short-term investments and the borrowing arrangements described above will provide sufficient capital to meet our requirements through fiscal 2001. We believe the level of financial resources is a significant competitive factor in our industry and may choose at any time to raise additional capital through debt or equity financings to strengthen our financial position, facilitate growth and provide us with additional flexibility to take advantage of business opportunities that may arise. FUTURE OPERATING RESULTS IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS, OUR RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS, FEWER CUSTOMER ORDERS, REDUCED REVENUES, REDUCED MARGINS, REDUCED LEVELS OF PROFITABILITY AND LOSS OF MARKET SHARE. We compete in the hardware and software products and services markets. These markets are intensely competitive. If we fail to compete successfully in these markets, the demand for our products would decrease. Any reduction in demand could lead to a decrease in the prices of our products, fewer customer orders, reduced revenues, reduced margins, reduced levels of profitability, and loss of market share. These competitive pressures could seriously harm our business and operating results. Our competitors are some of the largest, most successful companies in the world. They include Hewlett Packard Company (HP), International Business Machines Corporation (IBM), Compaq Computer Corporation (Compaq), and EMC Corporation (EMC). Our future competitive performance depends on a number of factors, including our ability to: continually develop and introduce new products and services with better prices and performance than offered by our competitors; offer a wide range of products and solutions from small single-processor systems to large complex enterprise-level systems; offer solutions to customers that operate effectively within a computing environment that includes hardware and software from multiple vendors; offer products that are reliable and that ensure the security of data and information; create products for which third party software vendors will develop a wide range of applications; and offer high quality products and services. 21 <PAGE> 22 We also compete with systems manufacturers and resellers of systems based on microprocessors from Intel Corporation (Intel) and Windows NT operating system software from Microsoft Corporation (Microsoft). These competitors include Dell Computer Corporation (Dell), HP, and Compaq, in addition to Intel and Microsoft. This competition creates increased pressure, including pricing pressure, on our workstation and lower-end server product lines. We expect this competitive pressure to intensify considerably during our fiscal year 2000 and through fiscal year 2001 with the anticipated releases of new software products from Microsoft and new microprocessors from Intel. The computer systems that we sell are made up of many products and components, including workstations, servers, storage products, microprocessors, the Solaris Operating Environment and other software products. In addition, we sell some of these components separately and as add-ons to installed systems. If we are unable to offer products and services that compete successfully with the products and services offered by our competitors or that meet the complex needs of our customers, our business and operating results could be seriously harmed. In addition, if in responding to competitive pressures, we are forced to lower the prices of our products and services and we are unable to reduce our component costs or improve operating efficiencies, our business and operating results would be seriously harmed. Over the last three years, we have invested significantly in our storage products business with a view to increasing the sales of these products both on a stand-alone basis to customers using the systems of our competitors, and as part of the systems that we sell. The intelligent storage products business is intensely competitive. EMC is currently the leader in this market. To the extent we are unable to penetrate this market and compete effectively, our business and operating results could be seriously harmed. In addition, we will be making significant investments over the next few years to develop, market, and sell software products under our recent alliance with America Online, Inc. (AOL) and have agreed to significant minimum revenue commitments. These alliance products are targeted at the e-commerce market and are strategic to our ability to successfully compete in this market. If we are unable to successfully compete in this market, our business and operating results could be seriously harmed. THE PRODUCTS WE MAKE ARE VERY COMPLEX AND IF WE ARE UNABLE TO RAPIDLY AND SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS, WE WILL NOT BE ABLE TO SATISFY CUSTOMER DEMAND. We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products that our customers choose to buy. If we are unable to develop new products, our business and operating results would be seriously harmed. We must quickly develop, introduce, and deliver in quantity new, complex systems, software, and hardware products and components including our UltraSPARC microprocessors, the Solaris Operating Environment, our intelligent storage products, and other software products, such as those products under development or to be developed under our recent alliance with AOL. The development process for these complicated products is very uncertain. It requires high levels of innovation from both our product designers and our suppliers of the components used in our products. The development process is also lengthy and costly. If we fail to accurately anticipate our customers' needs and technological trends, or are otherwise unable to complete the development of a product on a timely basis, we will be unable to introduce new products into the market on a timely basis, if at all, and our business and operating results would be adversely affected. In addition, the successful development of software products under our alliance with AOL depends on many factors, including our ability to work effectively within the alliance on complex product development and any encumbrances that may arise from time to time that may prevent us from developing, marketing, or selling these alliance software products. If we are unable to successfully develop, market, or sell the alliance software products or other software products, our business and operating results could be seriously harmed. 22 <PAGE> 23 Software and hardware products such as ours may contain known as well as undetected errors, and these defects may be found following introduction and shipment of new products or enhancements to existing products. Although we attempt to fix errors that we believe would be considered critical by our customers prior to shipment, we may not be able to detect or fix all such errors, and this could result in lost revenues and delays in customer acceptance, and could be detrimental to our business and reputation. The manufacture and introduction of our new hardware and software products is also a complicated process. Once we have developed a new product we face the following challenges in the manufacturing process. We must be able to manufacture new products in high enough volumes so that we can have an adequate supply of new products to meet customer demand. We must be able to manufacture the new products at acceptable costs. This requires us to be able to accurately forecast customer demand so that we can procure the appropriate components at optimal costs. Forecasting demand requires us to predict order volumes, the correct mixes of our software and hardware products, and the correct configurations of these products. We must manage new product introductions so that we can minimize the impact of customers delaying purchases of existing products in anticipation of the new product release. We must also try to reduce the levels of older product and component inventories to minimize inventory write-offs. We may also decide to adjust prices of our existing products during this process in order to try to increase customer demand for these products. If we are introducing new products at the same time or shortly after the price adjustment, this will complicate our ability to anticipate customer demand for our new products. If we were unable to timely develop, manufacture, and introduce new products in sufficient quantity to meet customer demand at acceptable costs, or if we were unable to correctly anticipate customer demand for our new products, our business and operating results could be significantly harmed. OUR RELIANCE ON SINGLE SOURCE SUPPLIERS COULD DELAY PRODUCT SHIPMENTS AND INCREASE OUR COSTS. We depend on many suppliers for the necessary parts and components to manufacture our products. There are a number of vendors producing the parts and components that we need. However, there are some components that can only be purchased from a single vendor due to price, quality, or technology reasons. For example, we depend on Sony for various monitors, and on Texas Instruments for our SPARC microprocessors. If we were unable to purchase the necessary parts and components from a particular vendor and we had to find a new supplier for such parts and components, our new and existing product shipments could be delayed, severely affecting our business and operating results. OUR FUTURE OPERATING RESULTS DEPEND ON OUR ABILITY TO PURCHASE A SUFFICIENT AMOUNT OF COMPONENTS TO MEET THE DEMANDS OF OUR CUSTOMERS. We depend heavily on our suppliers to timely design, manufacture, and deliver the necessary components for our products. While many of the components we purchase are standard, we do purchase some components, specifically color monitors and custom memory integrated circuits such as SRAMS and VRAMS, that require long lead times to manufacture and deliver. Long lead times make it difficult for us to plan component inventory levels in order to meet the customer demand for our products. In addition, in the past, we have experienced shortages in certain of our components (specifically DRAMS and SRAMS). If a component delivery from a supplier is delayed, if we experience a shortage in one or more components or if we are unable to provide for adequate levels of component inventory, our new and existing product shipments could be delayed and our business and operating results could suffer. 23 <PAGE> 24 SINCE WE ORDER OUR COMPONENTS (AND IN SOME CASES COMMIT TO PURCHASE) FROM SUPPLIERS IN ADVANCE OF RECEIPT OF CUSTOMER ORDERS FOR OUR PRODUCTS WHICH INCLUDE THESE COMPONENTS, WE FACE A SUBSTANTIAL INVENTORY RISK. As part of our component inventory planning, we frequently pay certain suppliers well in advance of receipt of customer orders. For example, we often enter into noncancelable purchase commitments with vendors early in the manufacturing process of our microprocessors to make sure we have enough of these components for our new products to meet customer demand. Because the design and manufacturing process for these components is very complicated it is possible that we could experience a design or manufacturing flaw that could delay or even prevent the production of the components for which we have previously committed to pay. We also face the risk of ordering too many components, or conversely, not enough components, since the orders are based on the forecasts of customer orders rather than actual orders. If we cannot change or be released from the noncancelable purchase commitments, we could incur significant costs from the purchase of unusable components, due to a delay in the production of the components or as a result of inaccurately predicting component orders in advance of customer orders. Our business and operating results could be seriously harmed as a result of these increased costs. DELAYS IN PRODUCT DEVELOPMENT OR CUSTOMER ACCEPTANCE AND IMPLEMENTATION OF NEW PRODUCTS AND TECHNOLOGIES COULD SERIOUSLY HARM OUR BUSINESS. Delays in product development and customer acceptance and implementation of new products could seriously harm our business. Delays in the development and introduction of our products may occur for various reasons. For example, delays in software development could delay shipments of related new hardware products. Generally, the computer systems we sell to customers incorporate hardware and software products that we sell, such as the UltraSPARC microprocessor, the Solaris Operating Environment and intelligent storage products. Any delay in the development of the software and hardware included in our systems could delay our shipment of these systems. In addition, if customers decided to delay the adoption and implementation of new releases of our Solaris Operating Environment this could also delay customer acceptance of new hardware products tied to that release. Adopting a new release of an operating environment requires a great deal of time and money for a customer to convert its systems to the new release. The customer must also work with software vendors who port their software applications to the new operating system and make sure these applications will run on the new operating system. As a result, customers may decide to delay their adoption of a new release of an operating system because of the cost of a new system and the effort involved to implement it. IF WE ARE UNABLE TO CONTINUE GENERATING SUBSTANTIAL REVENUES FROM INTERNATIONAL SALES OUR BUSINESS COULD BE SUBSTANTIALLY HARMED. Currently, approximately half of our revenues come from international sales. Our ability to sell our products internationally is subject to the following risks: general economic and political conditions in each country could adversely affect demand for our products and services in these markets; currency exchange rate fluctuations could result in lower demand for our products, as well as currency translation losses; changes to and compliance with a variety of foreign laws and regulations may increase our cost of doing business in these jurisdictions; trade protection measures and import and export licensing requirements subject us to additional regulation and may prevent us from shipping products to a particular market, and increase our operating costs. 24 <PAGE> 25 WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER OF REASONS. Future operating results will continue to be subject to quarterly fluctuations based on a wide variety of factors, including: Seasonality. Our sequential quarterly operating results usually fluctuate downward in the first quarter of each fiscal year when compared to the immediately preceding fourth quarter. Increases in Operating Expenses. Our operating expenses will continue to increase as we continue to expand our operations. Our operating results could suffer if our revenues do not increase at least as fast as our expenses. Acquisitions/Alliances. If, in the future, we acquire technologies, products, or businesses, or we form alliances with companies requiring technology investments or revenue commitments (such as our recent alliance with AOL), we will face a number of risks to our business. The risks we may encounter include those associated with integrating or comanaging operations, personnel, and technologies acquired or licensed, and the potential for unknown liabilities of the acquired or combined business. Also, we will include amortization expense of acquired intangible assets in our financial statements for several years following these acquisitions. Our business and operating results on a quarterly basis could be harmed if our acquisition or alliance activities are not successful. Significant Customers. Only one of our customers accounted for more than 10% of our revenues in fiscal 1999 and fiscal 1998. Sales to this customer accounted for approximately 14% of our fiscal 1999 and 1998 revenues. Our business could suffer if this customer or another significant customer terminated its business relationship with us or significantly reduced the amount of business it did with us. OUR FAILURE OR THE FAILURE OF OUR BUSINESS PARTNERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD HARM OUR BUSINESS. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These code fields now need to be able to distinguish between years beginning with "19" from those beginning with "20". As a result, computer systems and/or software products may need to be upgraded to comply with such Year 2000 requirements. In this regard, we made custom coding enhancements and other necessary modifications to our mission-critical internal business systems, as well as to other internal business systems. We believe that such internal systems are now Year 2000 compliant. We also established a program to assess whether certain of our products are Year 2000 compliant. Under this program, we performed tests on Sun products listed on our price lists. To monitor this program and to help customers evaluate their Year 2000 issues, we created a web site at http://sun.com/y2000/cpl.html, which identified the following categories: products that were released Year 2000 compliant; products that required modifications to be Year 2000 compliant; products under review; products that are not Year 2000 compliant and need to be replaced with a Year 2000 compliant product; source code products that could be modified and implemented without our review; and products that do not process or manipulate date data or have no date-related technology. To date we have not experienced any material problems attributable to the inability to recognize dates beginning with the year 2000 in our products, services, systems, or internal systems. We believe that the costs associated with our Year 2000 efforts were not material and estimate such costs to be between $48 to $50 million, of which approximately $44 million has been spent through December 26, 1999. The aforementioned costs are estimates 25 <PAGE> 26 due in large part to the fact that we did not separately track the internal labor costs associated with Year 2000 compliance, unless such costs were incurred by individuals primarily devoted to Year 2000 compliance efforts. Although we believe that we have successfully modified our products, services, and systems as necessary to be Year 2000 compliant, we cannot be sure that our products do not contain undetected errors or defects associated with Year 2000 functions that may result in material costs to us. Our business could suffer if we fail to make our products, services, and systems Year 2000 compliant in time. In addition, some of our customers are running products that are not Year 2000 compliant and will require an upgrade or other remediation to become Year 2000 compliant. We provide limited warranties as to Year 2000 compliance on certain of our products and services. Except as specifically provided for in the limited warranties, we do not believe that we are legally responsible for costs incurred by customers to achieve Year 2000 compliance. We continue to take steps to identify affected customers, raise customer awareness related to noncompliance of our older products and encourage such customers to migrate to current products or product versions. It is possible that we may experience increased expenses, if we need to upgrade or perform other remediation on products that our customers are using that are not Year 2000 compliant. Our business may also materially suffer if customers become concerned about or are dissatisfied with our products and services as a result of Year 2000 issues. Although we have passed the rollover from December 31, 1999 to January 1, 2000, we still face risks to the extent that suppliers of products, services, and systems purchased by us or the suppliers of others with whom we transact business cannot timely provide us with products, components, services, or systems that meet Year 2000 requirements. To the extent that we were not able to test technology provided by third-party hardware or software vendors, we carried out audits and obtained Year 2000 compliance certifications from our major vendors that their products and internal systems, as applicable, are Year 2000 compliant. In the event that any such third parties cannot timely provide us with products, services, or systems that meet the Year 2000 requirements, our business could be harmed. Furthermore, a reasonably likely worst-case scenario would be if one of our major vendors experienced a material disruption in business, which caused us to experience a material disruption in business. If either our internal systems or the internal systems, products, or services of one or more of our major vendors (including banks, energy suppliers, and transportation providers) fail to achieve Year 2000 compliance, our business could be seriously harmed. We have developed contingency plans to deal with potential Year 2000 problems related to our internal systems that are deemed to be mission-critical and with respect to products and services provided by outside vendors. If these plans are not successful or if new Year 2000 problems not covered by our contingency plans emerge, our business and operating results may be seriously harmed. Although we believe that the cost of Year 2000 modifications for both internal use software and systems, as well as Sun's products, is not material, we cannot be sure that various factors relating to the Year 2000 compliance issues will not seriously harm our business or operating results. Even though we do not believe that we are legally responsible for our customers' Year 2000 compliance obligations, it is unclear whether different governments or governmental agencies may decide to allocate liability relating to Year 2000 compliance to us without regard to specific warranties or warranty disclaimers. Our business could suffer in any given quarter if any liability is allocated to us. Furthermore, we do not know how customer spending patterns may be affected by Year 2000 issues. A significant disruption of our financial management and control systems or a lengthy interruption in our operations caused by a Year 2000 related issue could also result in a material adverse impact on our operating results and financial condition. OUR ACQUISITION AND ALLIANCE ACTIVITIES COULD DISRUPT OUR ONGOING BUSINESS. We intend to continue to make investments in companies, products and technologies, either through acquisitions or investment alliances. For example, we have purchased several companies in the past and have also formed alliances, including our recent alliance with AOL. Acquisitions and alliance activities often involve potential 26 <PAGE> 27 risks, including: difficulty in assimilating the acquired operations and employees; difficulty in managing product codevelopment activities with our alliance partners; retaining the key employees of the acquired operation; disruption of our ongoing business; inability to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures; and lacking the experience to enter into new markets, products, or technologies. Some of these factors are beyond our control. Failure to manage these alliance activities effectively and to integrate entities or assets that we acquire could affect our operating results or financial condition. WE DEPEND ON KEY EMPLOYEES AND FACE COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our employees are vital to our success, and our key management, engineering, and other employees are difficult to replace. We generally do not have employment contracts with our key employees. Further, we do not maintain key person life insurance on any of our employees. The expansion of high technology companies in Silicon Valley and Colorado, as well as many other cities, has increased demand and competition for qualified personnel. We may not be able to attract, assimilate, or retain additional highly qualified employees in the future. These factors could harm our business. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Although we are exposed to financial market risks at December 26, 1999, including changes in interest rates, foreign currency exchange rates and marketable equity security prices, we do not believe any such exposures are material. Our interest rate risk exposure relates to our investment portfolio of cash and marketable securities, as well as our unsecured senior debt and related interest rate swaps. We are exposed to foreign currency exchange rate risk related to our foreign exchange option and forward contracts. We are exposed to equity market price risks on our portfolio of marketable equity securities. To reduce certain risks, we utilize derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. See further comments under the "Results of Operations" and "Liquidity and Capital Resources" headings in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2. 27 <PAGE> 28 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS 1. LEGAL PROCEEDINGS On October 7, 1997, we filed suit against Microsoft in the United States District Court for the Northern District of California alleging breach of contract, trademark infringement, false advertising, unfair competition, interference with prospective economic advantage and inducing breach of contract. We filed an amended complaint on October 14, 1997. Microsoft filed its answer, affirmative defenses and counterclaims to the amended complaint. The counterclaims include breach of contract, breach of the covenant of good faith and fair dealing, violation of the California Business & Professions Code and declaratory judgment. We believe that the counterclaims are without merit and/or that we have affirmative defenses and intend to vigorously defend ourselves with respect thereto. On March 24, 1998, the United States District Court judge ruled in our favor granting a preliminary injunction directing Microsoft to cease using our Java Compatible Logo(TM) on Microsoft products that failed to pass the applicable test suites from Sun. In addition, on May 12, 1998, we filed a second amended complaint alleging copyright infringement by Microsoft and motions requesting further preliminary injunctive relief directed against the planned release by Microsoft of additional products that failed to pass our applicable test suites. The Court held hearings and arguments on such motions on September 8, 9, and 10, 1998. On November 17, 1998, the District Court issued an Order granting, in substantial part, our request for preliminary injunctions. On December 15, 1998, Microsoft filed notice of its intent to appeal the District Court's Order and on December 18, 1998, Microsoft filed Motions with the District Court to extend the time for compliance with the Order and to clarify or modify the Order. On January 13, 1999, Microsoft filed an appeal to the District Court's Order issued on November 17, 1998. On January 22, 1999, Sun and Microsoft filed numerous motions for summary judgment with the District Court. On May 24, 1999, the District Court issued tentative rulings on three pending motions for summary judgment which were argued on June 24, 1999. An appellate argument before the Ninth Circuit Court of Appeals relating to the November 1998 preliminary injunction granted in our favor occurred on June 16, 1999. On August 23, 1999, a three-judge panel of the Ninth Circuit Court of Appeals issued an opinion and ruling on Microsoft's appeal to that Court of the November 1998 preliminary injunction issued by the District Court. The Ninth Circuit panel, in its ruling, found sufficient evidence in the record to support the District Court's conclusion that Sun is likely to prevail on the merits of its breach of contract claims against Microsoft. However, the panel vacated the copyright infringement-based injunction that the District Court had entered and remanded the case back to the District Court for further consideration. The Remand Order and the lifting of the injunction took effect on September 13, 1999. The District Court held a hearing regarding the Remand Order on October 15, 1999. On January 24, 2000, the District Court issued an Order reinstating, in substantial part, the Court's previous preliminary injunction. The District Court's Order was based upon a finding of unfair competition by Microsoft rather than on a basis of copyright infringement. We believe that the outcome of this matter will not have a material adverse impact on our financial condition, results of operations or cash flows in any given fiscal period. 28 <PAGE> 29 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 10, 1999 the Annual Meeting of Stockholders of the Company was held in Menlo Park, California. The share numbers contained in this Item 4 do not reflect the Company's two-for-one stock dividend paid on December 7, 1999. The results of voting of the 653,518,077 shares of Common Stock represented at the meeting or by proxy are described below. An election of directors was held with the following individuals being elected to the Board of Directors of the Company: <TABLE> <CAPTION> Name Shares Voted For Votes Withheld ---- ---------------- -------------- <S> <C> <C> Scott G. McNealy 650,130,165 3,387,912 James L. Barksdale 646,220,555 7,297,522 L. John Doerr 549,190,325 104,327,752 Judith L. Estrin 649,918,001 3,600,076 Robert J. Fisher 650,125,865 3,392,212 Robert L. Long 650,107,903 3,410,174 M. Kenneth Oshman 650,079,813 3,438,264 </TABLE> The seven nominees who received the highest number of votes (all of the above individuals) were elected to the Board of Directors. The stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of shares of Common Stock the Company is authorized to issue from 1,800,000,000 shares to 3,600,000,000 shares. There were 647,167,583 votes cast for the amendment, 3,968,250 votes cast against the amendment, 2,382,244 abstentions, and no broker nonvotes. The stockholders approved an amendment to the Company's 1990 Long-Term Equity Incentive Plan in order to increase the number of shares of Common Stock authorized for issuance thereunder by 37,000,000 shares of Common Stock to an aggregate of 275,800,000 shares. There were 414,880,424 votes cast for the amendment, 229,388,330 votes cast against the amendment, 9,249,323 abstentions, and no broker nonvotes. 29 <PAGE> 30 ITEM 5 - OTHER INFORMATION SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER The following is a summary of all sales of our Common Stock (on a pre-split basis) by our 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 26, 1999: <TABLE> <CAPTION> OFFICER/ NUMBER OF DIRECTOR DATE PRICE SHARES SOLD - -------- -------- --------- ----------- <S> <C> <C> <C> William T. Agnello 10/29/99 $105.7072 64,000 Lawrence W. Hambly 11/24/99 $129.8750 40,000 11/24/99 $128.8790 30,000 11/24/99 $131.8750 24,000 11/24/99 $130.9019 50,000 H. William Howard 10/20/99 $ 95.6250 20,000 James Judson 10/25/99 $ 93.1875 10,000 11/15/99 $121.2500 10,000 John S. McFarlane 11/2/99 $105.0000 10,000 11/15/99 $120.7500 10,000 Alton D. Page 11/12/99 $117.1556 10,000 11/24/99 $129.3125 10,000 Gregory M. Papadopoulos 10/29/99 $105.5859 24,000 Marissa Peterson 11/10/99 $114.0334 25,600 Frank A. Pinto 11/29/99 $135.7812 10,000 Michael L. Popov 11/1/99 $105.2500 24,000 11/12/99 $116.7633 8,000 John C. Shoemaker 11/3/99 $106.4232 32,000 Mark E. Tolliver 11/22/99 $128.0000 10,000 </TABLE> 30 <PAGE> 31 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K <TABLE> <CAPTION> (a) Exhibits <S> <C> 3.2 Registrant's Bylaws, as amended December 15, 1999. 3.5 Certificate of Amendment of Registrant's Restated Certificate of Incorporation effective November 12, 1999. 3.6 Amended Certificate of Designations effective November 12, 1999. 10.65 Registrant's 1990 Employee Stock Purchase Plan, as amended on November 10, 1999. 10.66(1) Registrant's 1990 Long-Term Equity Incentive Plan, as amended on August 11, 1999. 27.0 Financial Data Schedule for the period ended December 26, 1999. 27.1 Financial Data Schedule for the period ended September 26, 1999 (restated for pooling of interests merger with Forte Software, Inc.) 27.2 Financial Data Schedule for the period ended December 27, 1998 (restated for pooling of interests merger with Forte Software, Inc.) 27.3 Financial Data Schedule for the period ended September 27, 1998 (restated for pooling of interests merger with Forte Software, Inc.) </TABLE> (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 26, 1999. - ---------- (1) Incorporated by reference to Registrant's Registration Statement on Form S-8 file number 333-90907, filed with the Securities and Exchange Commission on November 12, 1999. 31 <PAGE> 32 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, Corporate Resources and Chief Financial Officer /s/ Michael L. Popov ---------------------------------------- Michael L. Popov Vice President and Corporate Controller, Chief Accounting Officer Dated: February 9, 2000 32 <PAGE> 33 EXHIBIT INDEX <TABLE> <S> <C> 3.2 Registrant's Bylaws, as amended December 15, 1999. 3.5 Certificate of Amendment of Registrant's Restated Certificate of Incorporation effective November 12, 1999. 3.6 Amended Certificate of Designations effective November 12, 1999. 10.65 Registrant's 1990 Employee Stock Purchase Plan, as amended on November 10, 1999. 10.66(1) Registrant's 1990 Long-Term Equity Incentive Plan, as amended on August 11, 1999. 27.0 Financial Data Schedule for the period ended December 26, 1999. 27.1 Financial Data Schedule for the period ended September 26, 1999 (restated for pooling of interests merger with Forte Software, Inc.) 27.2 Financial Data Schedule for the period ended December 27, 1998 (restated for pooling of interests merger with Forte Software, Inc.) 27.3 Financial Data Schedule for the period ended September 27, 1998 (restated for pooling of interests merger with Forte Software, Inc.) </TABLE> - ---------- (1) Incorporated by reference to Registrant's Registration Statement on Form S-8 file number 333-90907, filed with the Securities and Exchange Commission on November 12, 1999. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.2 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 3.2 <TEXT> <PAGE> 1 BYLAWS OF SUN MICROSYSTEMS, INC. (As adopted on December 14, 1990 and amended as of December 15, 1999) 1 <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> <C> ARTICLE I - CORPORATE OFFICES.......................................... 5 1.1 REGISTERED OFFICE........................................... 5 1.2 OTHER OFFICES............................................... 5 ARTICLE II - STOCKHOLDERS.............................................. 5 2.1 PLACE OF MEETINGS........................................... 5 2.2 ANNUAL MEETING.............................................. 5 2.3 SPECIAL MEETING............................................. 6 2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................ 7 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................ 7 2.6 QUORUM...................................................... 7 2.7 ADJOURNED MEETING; NOTICE................................... 8 2.8 CONDUCT OF BUSINESS......................................... 8 2.9 WAIVER OF NOTICE............................................ 8 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING..................................................... 8 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.................................................... 9 2.12 VOTING...................................................... 10 2.13 PROXIES..................................................... 10 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE....................... 11 2.15 INSPECTORS OF ELECTION...................................... 11 ARTICLE III - DIRECTORS................................................ 11 3.1 POWERS...................................................... 11 3.2 NUMBER OF DIRECTORS......................................... 11 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS..... 12 3.4 RESIGNATION AND VACANCIES................................... 12 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................... 13 3.6 REGULAR MEETINGS............................................ 13 3.7 SPECIAL MEETINGS; NOTICE.................................... 14 3.8 QUORUM...................................................... 14 3.9 WAIVER OF NOTICE............................................ 14 3.10 CONDUCT OF BUSINESS......................................... 14 3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING........... 14 3.12 FEES AND COMPENSATION OF DIRECTORS.......................... 15 3.13 APPROVAL OF LOANS TO OFFICERS............................... 15 3.14 REMOVAL OF DIRECTORS........................................ 15 ARTICLE IV - COMMITTEES................................................ 15 4.1 COMMITTEES OF DIRECTORS..................................... 15 </TABLE> 2 <PAGE> 3 <TABLE> <S> <C> <C> 4.2 COMMITTEE MINUTES........................................... 16 4.3 MEETINGS AND ACTION OF COMMITTEES........................... 16 ARTICLE V - OFFICERS................................................... 16 5.1 GENERAL MATTERS............................................. 16 5.2 APPOINTMENT OF OFFICERS..................................... 17 5.3 SUBORDINATE OFFICERS........................................ 17 5.4 REMOVAL AND RESIGNATION OF OFFICERS......................... 17 5.5 VACANCIES IN OFFICES........................................ 17 5.6 CHAIRMAN OF THE BOARD....................................... 17 5.7 CHIEF EXECUTIVE OFFICER..................................... 17 5.8 PRESIDENT................................................... 18 5.9 VICE PRESIDENTS............................................. 18 5.10 SECRETARY................................................... 18 5.11 CHIEF FINANCIAL OFFICER..................................... 18 5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.............. 19 5.13 AUTHORITY AND DUTIES OF OFFICERS............................ 19 ARTICLE VI - INDEMNITY................................................. 19 6.1 THIRD PARTY ACTIONS......................................... 19 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION............... 19 6.3 SUCCESSFUL DEFENSE.......................................... 20 6.4 DETERMINATION OF CONDUCT.................................... 20 6.5 PAYMENT OF EXPENSES IN ADVANCE.............................. 20 6.6 INDEMNITY NOT EXCLUSIVE..................................... 20 6.7 INSURANCE INDEMNIFICATION................................... 20 6.8 THE CORPORATION............................................. 21 6.9 EMPLOYEE BENEFIT PLANS...................................... 21 6.10 INDEMNITY FUND.............................................. 21 6.11 INDEMNIFICATION OF OTHER PERSONS............................ 21 6.12 SAVINGS CLAUSE.............................................. 21 6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.................................................... 22 ARTICLE VII - RECORDS AND REPORTS...................................... 22 7.1 MAINTENANCE AND INSPECTION OF RECORDS....................... 22 7.2 INSPECTION BY DIRECTORS..................................... 22 7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................ 22 ARTICLE VIII - GENERAL MATTERS......................................... 23 8.1 CHECKS...................................................... 23 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS............ 23 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES...................... 23 8.4 SPECIAL DESIGNATION ON CERTIFICATES......................... 23 8.5 LOST CERTIFICATES........................................... 24 </TABLE> 3 <PAGE> 4 <TABLE> <S> <C> <C> 8.6 CONSTRUCTION; DEFINITIONS.................................. 24 8.7 DIVIDENDS.................................................. 24 8.8 FISCAL YEAR................................................ 24 8.9 SEAL....................................................... 24 8.10 TRANSFER OF STOCK.......................................... 24 8.11 STOCK TRANSFER AGREEMENTS.................................. 25 8.12 REGISTERED STOCKHOLDERS.................................... 25 8.13 NOTICES.................................................... 25 ARTICLE I - AMENDMENTS................................................ 25 </TABLE> 4 <PAGE> 5 BYLAWS OF SUN MICROSYSTEMS, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of the stockholders of this corporation shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. Nominations of persons for election to the board of directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the board of directors or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in these Bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of the preceding sentence, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder proposal to be presented at an annual meeting must be delivered to the secretary of the corporation at the corporation's principal executive offices not less than 60 or more than 90 calendar days prior to the first anniversary of the date that the corporation first mailed its proxy statement to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been 5 <PAGE> 6 changed by more than 30 calendar days from the first anniversary date of the previous year's annual meeting, notice by the stockholder to be timely must be received no later than the close of business on the tenth day following the day on which public announcement of the date of such annual meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of director in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto) (the "Exchange Act") and Rule 14a-11 thereunder (or any successor thereto) (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and such beneficial owner, and (ii) the class and number of shares for the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding any provision herein to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.2. For purposes of Section 2.2 and 3.3 of these Bylaws "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by any executive officer of the corporation, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing to the secretary of the corporation, and shall set forth (a) as to each person whom such person or persons propose to nominate for election or reelection as a director at such meeting all information relating to such proposed nominee 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 Exchange Act (or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto)(including such proposed nominee's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business to be taken the meeting, a brief description of such business, the reasons for conducting such business and any material interest in such business of the person 6 <PAGE> 7 or persons calling such meeting and the beneficial owners, if any, on whose behalf such meeting is called; and (c) as to the person or persons calling such meeting and the beneficial owners, if any, on whose behalf the meeting is called (i) the name and address of such persons, as they appear on the corporation's books, and of such beneficial owners, and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such persons and such beneficial owners. No business may be transacted at such special meeting otherwise than specified in such notice or by or at the direction of the corporation's board of directors. The corporation's secretary shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5, that a meeting will be held at the time reasonably requested by the person or persons who called the meeting, not less than 60 nor more than 90 days after the receipt of the request. If the notice is not given within 20 days after the receipt of a valid request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held. Only such business shall be conducted at a special meeting of stockholders called by action of the board of directors as shall have been brought before the meeting pursuant to the corporation's notice of meeting. This Section 2.3 may not be amended to eliminate the right of one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent of the votes at a special meeting of stockholders to call such a special meeting of stockholders, unless holders of at least seventy-five percent of the shares entitled to vote thereon approve such an amendment. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the General Corporation Law of Delaware or the certificate of incorporation of the corporation). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such 7 <PAGE> 8 class or classes entitled to take action with respect to that vote on that matter, present in person or by proxy, shall constitute a quorum. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting, except as otherwise required by law. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, 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 that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) 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 stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS Such person as the board of directors may have designated or, in the absence of such a person, any executive officer of the corporation, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the secretary of the corporation, the secretary of the meeting shall be such person as the chairman appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. 2.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, 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, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, 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 stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or able to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation at its registered office in Delaware, its principal place of 8 <PAGE> 9 business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery to the corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the date the earliest dated consent is delivered to the corporation, a written consent or consents signed by a sufficient number of holders to take action are delivered to the corporation in the manner prescribed in the first paragraph of this section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof 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 change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall neither precede nor be more than ten (10) days after the date upon which such resolution is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take action by written consent shall, by written notice to the secretary, request the board of directors to fix a record date. The board of directors shall promptly, but in 9 <PAGE> 10 all events within ten (10) days after the date on which such noticed is received, adopt a resolution fixing the record date. If the board of directors has not fixed a record date within such time, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in the manner prescribed in the first paragraph of Section 2.10 of these Bylaws. If the board of directors has not fixed a record date within such time and prior action by the board of directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the board of directors adopts the resolution taking such prior action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.12 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Each stockholder shall have one (1) vote for every share of stock entitled to vote that is registered in his or her name on the record date for the meeting (as determined in accordance with Section 2.11 of these Bylaws), except as otherwise provided herein or required by law. At a stockholders' meeting at which directors are to be elected, each stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) if the candidates' names have been properly placed in nomination (in accordance with these Bylaws) prior to commencement of the voting and the stockholder requesting cumulative voting has given notice prior to commencement of the voting of the stockholder's intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he may see fit. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or provided herein, all other matters shall be determined by a majority of the votes cast affirmatively or negatively. 2.13 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or 10 <PAGE> 11 dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written or electronic proxy, filed in accordance with the procedure established for the meeting or taking of action in writing, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 2.13 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. An electronic proxy (which may be transmitted via telephone, e-mail, the Internet or such other electronic means as the Board of Directors may determine from time to time) shall be deemed executed if the Company receives an appropriate electronic transmission from the stockholder or the stockholder's attorney-in-fact along with a pass code or other indentifier which reasonably establishes the stockholder or the stockholder's attorney-in-fact as the sender of such transmission. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 2.15 INSPECTORS OF ELECTION The corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. 11 <PAGE> 12 ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the Certificate of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be no less than five (5) or more than nine (9). The exact number of directors shall be eight (8), until changed, within the limits specified above, by a Bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by an adopted amendment to this Bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated number of directors minus one (1). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Nominations for election to the board of directors of the corporation at an annual meeting of stockholders may be made by the board or on behalf of the board by a nominating committee appointed by the board, or by any stockholder of the corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by or on behalf of the board, shall be made by notice in writing received by the secretary of the corporation at the corporation's principal executive offices not less than 60 or more than 90 calendar days prior to the first anniversary of the date that the corporation first mailed its proxy statement to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the first anniversary date of the previous year's annual meeting, notice by the stockholder to be timely must be received no later than the close of business on the tenth day following the day on which public announcement (as defined in Section 2.2) of the date of such annual meeting is first made. Such notice shall set forth as to each proposed nominee who is not an incumbent director (i) the name, age, business address and, if 12 <PAGE> 13 known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of such nominee, (iii) the number of shares of stock of the corporation beneficially owned by each such nominee and by the nominating stockholder, and (iv) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934. The chairman of the annual meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure. If such determination and declaration is made, the defective nomination shall be disregarded. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, only a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these Bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled only by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 13 <PAGE> 14 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the board of directors and publicized among all directors. A notice of each regular meeting shall not be required. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by any executive officer of the corporation, or by one-third of the directors then in office (rounded up to the nearest whole number) and shall be held at a place, on a date and at a time as such officer or such directors shall fix. Notice of the place, date and time of special meetings, unless waived, shall be given to each director by mailing written notice not less than two (2) days before the meeting or by sending a facsimile transmission of the same not less than two (2) hours before the time of the holding of the meeting. If the circumstances warrant, notice may also be given personally or by telephone not less than two (2) hours before the time of the holding of the meeting. Oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 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 that meeting. 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, 14 <PAGE> 15 signed by the person entitled to notice, 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, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, 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 directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 CONDUCT OF BUSINESS At any meeting of the board of directors, business shall be transacted in such order and manner as the board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. 3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.12 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these Bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.13 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.14 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that, so long as shareholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. No reduction of the authorized number of directors shall have the effect of removing any 15 <PAGE> 16 director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, a supplemental resolution of the board of directors, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 3.5 (place of meetings and 16 <PAGE> 17 meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.11 (action without a meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 GENERAL MATTERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, a chief executive officer, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the board of directors may from time to time determine. Officers appointed by the board of directors shall constitute executive officers of the corporation. Officers appointed by the president or chief executive officer shall be subordinate officers, unless otherwise specified by the board of directors. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified 17 <PAGE> 18 in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors if such officer was appointed by the board of directors, or by such other person as appointed by the board of directors to fill such vacancy. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these Bylaws. If there is no chief executive officer or president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these Bylaws. 5.7 CHIEF EXECUTIVE OFFICER Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer of the corporation shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these Bylaws. 5.8 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board or the chief executive officer, if there be such officers, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these Bylaws. 5.9 VICE PRESIDENTS In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president and chief executive officer. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these Bylaws, the president, chief executive officer or the chairman of the board. 5.10 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all 18 <PAGE> 19 meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these Bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these Bylaws. 5.11 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys 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. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the chief executive officer, president and directors, whenever they request it, an account of all his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the Bylaws. 5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, any executive officer of this corporation, or any other person designated by the board of directors, shall be authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 5.13 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. 19 <PAGE> 20 ARTICLE VI INDEMNITY 6.1 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 (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, or that such director or officer is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise (collectively "Agent"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by him in connection with such action, suit or proceeding 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, and, with respect to any criminal action or proceeding, had 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 interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION 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 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 an Agent (as defined in Section 6.1) 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 manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery 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 which the Delaware Court of Chancery or such other court shall deem proper. 6.3 SUCCESSFUL DEFENSE To the extent that an Agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, 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. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made 20 <PAGE> 21 by the corporation only as authorized in the specific case upon a determination that the indemnification of the Agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.l and 6.2. Such determination shall be made (1) by the board of directors or the executive committee by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article VI. 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided or granted pursuant to the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain on behalf any person who is or was an Agent of the corporation, or is or was serving at the request of the corporation, as a director, officer, employee or agent 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 VI. 6.8 THE CORPORATION For purposes of this Article VI, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors and officers, so that any person who is or was a director or Agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall 21 <PAGE> 22 include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. 6.10 INDEMNITY FUND Upon resolution passed by the board, the corporation may establish a trust or other designated account, grant a security interest or use other means (including, without limitation, a letter of credit), to ensure the payment of certain of its obligations arising under this Article VI and/or agreements which may be entered into between the company and its officers and directors from time to time. 6.11 INDEMNIFICATION OF OTHER PERSONS The provisions of this Article VI shall not be deemed to preclude the indemnification of any person who is not an agent (as defined in Section 6.1), but whom the corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware or other-wise. The corporation may, in its sole discretion, indemnify an employee, trustee or other agent as permitted by the General Corporation Law of the State of Delaware. The corporation shall indemnify an employee, trustee or other agent where required by law. 6.12 SAVINGS CLAUSE If this article or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each agent against expenses (including attorney's fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the corporation, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated, or by any other applicable law. 6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number of class of shares held by each stockholder, a copy of these Bylaws as 22 <PAGE> 23 amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the 23 <PAGE> 24 corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertified shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman of or vice-chairman of the board of directors, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has 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 he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case or uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law or Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or 24 <PAGE> 25 destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation 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 in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS 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 and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its hooks as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, 25 <PAGE> 26 except as otherwise provided by the laws of Delaware. 8.13 NOTICES Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery, by mail, postage paid, or by facsimile transmission. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his last known address as it appears on the books of the corporation. The time when such notice shall be deemed received, if hand delivered, or dispatched, if sent by mail or facsimile, transmission, shall be the time of the giving of the notice. ARTICLE IX AMENDMENTS Any of these Bylaws may be altered, amended or repealed by the affirmative vote of a majority of the board of directors or, with respect to Bylaw amendments placed before the stockholders for approval and except as otherwise provided herein or required by law, by the affirmative vote of the holders of seventy-five percent of the shares of the corporation's stock entitled to vote in the election of directors, voting as one class. 26 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.5 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 3.5 <TEXT> <PAGE> 1 EXHIBIT 3.5 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF SUN MICROSYSTEMS, INC. Michael E. Lehman and Michael H. Morris, certify that: 1. They are the Vice-President, Corporate Resources and Chief Financial Officer and Vice President, General Counsel and Secretary, respectively, of Sun Microsystems, Inc., a Delaware corporation (the "Corporation"). 2. That Section (a) of Article 4 of the Restated Certificate of Incorporation of the Corporation now reads: "The Corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock". The total number of shares which the Corporation shall have authority to issue is One Billion Eight Hundred Ten Million (1,810,000,000), of which One Billion Eight Hundred Million (1,800,000,000) shall be Common Stock with a par value of $0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock with a par value of $0.001 per share." is amended to read as follows: "The Corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock". The total number of shares which the Corporation shall have authority to issue is Three Billion Six Hundred Ten Million (3,610,000,000), of which Three Billion Six Hundred Million (3,600,000,000) shall be Common Stock with a par value of $0.00067 per share and Ten Million (10,000,000) shall be Preferred Stock with a par value of $0.001 per share." 3. The foregoing Certificate of Amendment of the Restated Certificate of Incorporation has been duly approved by the Board of Directors. 4. The foregoing Certificate of Amendment of the Restated Certificate of Incorporation has been duly approved by the required vote of stockholders in accordance with Section 242 of the Delaware Corporations Code. The total number of outstanding shares of Common Stock of the Corporation is 780,552,918. No shares of Preferred Stock are outstanding. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding Common Stock. 1 <PAGE> 2 We further declare under penalty of perjury under the laws of the State of Delaware that the matters set forth in the foregoing Certificate of Amendment are true and correct of our own knowledge. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and the Certificate of Amendment to be signed by Michael E. Lehman, Vice President, Corporate Resources and Chief Financial Officer and attested by Michael H. Morris, Vice President, General Counsel and Secretary this 10th day of November, 1999. SUN MICROSYSTEMS, INC. /s/ MICHAEL E. LEHMAN [Corporate Seal] ------------------------------------ Michael E. Lehman ATTEST: /s/ MICHAEL H. MORRIS ------------------------------------ Michael H. Morris 2 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.6 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 3.6 <TEXT> <PAGE> 1 EXHIBIT 3.6 AMENDED CERTIFICATE OF DESIGNATIONS OF RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A PARTICIPATING PREFERRED STOCK OF SUN MICROSYSTEMS, INC. Michael E. Lehman and Michael H. Morris, certify that: 1. They are the Vice President, Corporate Resources and Chief Financial Officer and Vice President, General Counsel and Secretary, respectively, of Sun Microsystems, Inc., a Delaware corporation (the "Corporation"). 2. Section I. of Item 2. of the Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred Stock ("Certificate") now reads: "Section I. Designation and Amount. The shares of such series shall be designated as "SERIES A PARTICIPATING PREFERRED STOCK." The Series A Participating Preferred Stock shall have a par value of $0.001 per share, and the number of shares constituting such series shall be 3,000,000. is amended to read as follows: Section I. Designation and Amount. The shares of such series shall be designated as "SERIES A PARTICIPATING PREFERRED STOCK." The Series A Participating Preferred Stock shall have a par value of $0.001 per share, and the number of shares constituting such series shall be 4,000,000." 3. Pursuant to Section 151 of the Delaware Corporations Code, the foregoing Amended Certificate has been duly approved by the Board of Directors. We further declare under penalty of perjury under the laws of the State of Delaware that the matters set forth in the foregoing Certificate of Amendment are true and correct of our own knowledge. Executed at Palo Alto, California on November 10, 1999. /s/ MICHAEL E. LEHMAN --------------------------------------------- Michael E. Lehman Vice President, Corporate Resources and Chief Financial Officer /s/ MICHAEL H. MORRIS --------------------------------------------- Michael H. Morris Vice President, General Counsel and Secretary </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.65 <SEQUENCE>5 <DESCRIPTION>EXHIBIT 10.65 <TEXT> <PAGE> 1 EXHIBIT 10.65 SUN MICROSYSTEMS, INC. 1990 EMPLOYEE STOCK PURCHASE PLAN (LAST AMENDED NOVEMBER 10, 1999) The following constitute the provisions of the 1990 Employee Stock Purchase Plan of Sun Microsystems, Inc. 1. Purpose. The purpose of the Plan is to provide Employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated 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 Code. 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) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Committee" shall mean a Committee designated by the Board to administer the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board and any references herein to the Committee shall be construed as references to the Board. (d) "Common Stock" shall mean the Common Stock, $0.00067 par value (as adjusted from time to time), of the Company. (e) "Company" shall mean Sun Microsystems, Inc., a Delaware corporation. (f) "Compensation", unless otherwise determined by the Committee, shall mean regular straight time gross earnings, variable compensation for field sales personnel, certain incentive bonuses, payments for overtime, shift premium, lead pay and automobile allowances, but shall exclude other compensation. (g) "Designated Subsidiary" shall mean any Subsidiary which has been designated by the Committee from time to time in its sole discretion as eligible to participate in the Plan. (h) "Employee" shall mean, subject to Section 11(c), any individual whose customary employment with the Company or any Designated Subsidiary is at least 20 hours per week and more than five months in any calendar year. (i) "Enrollment Date" shall mean the first day of each Offering Period. (j) "Exercise Date" shall mean the last day of each Exercise Period. (k) "Exercise Period" shall mean a period commencing on an Enrollment Date or on the day after an Exercise Date and which is of such duration as the Committee shall determine. (l) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (i) the last reported sale of the Common Stock of the Company on the NASDAQ National Market System or, if no such reported sale takes place on any such day, the average of the closing bid and asked prices, or (ii) if such Common Stock shall then be listed on a national securities exchange, the last reported sale price or, if no such reported sale takes place on any such day, 1 <PAGE> 2 the average of the closing bid and asked prices on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or (iii) if such Common Stock shall not be quoted on such National Market System nor listed or admitted to trading on a national securities exchange, then the average of the closing bid and asked prices, as reported by The Wall Street Journal for the over-the-counter market, or (iv) if none of the foregoing is applicable, then the fair market value of a share of Common Stock shall be determined by the Committee in its discretion. (m) "Offering Period" shall mean the period beginning with the date an option is granted under the Plan and ending with the date determined by the Committee. During the term of the Plan, the duration of each Offering Period shall be determined from time to time by the Committee, provided that no Offering Period may exceed 27 months in duration. If determined by the Committee, an Offering Period may include one or more Exercise Periods. (n) "Plan" shall mean this 1990 Employee Stock Purchase Plan. (o) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (p) "Reserves" shall mean 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 not yet placed under option. (q) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or by a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or by a Subsidiary. (r) "Trading Day" shall mean a day on which national stock exchanges and the National Association of Securities Dealers Automated Quotation (NASDAQ) System are open for trading. 3. Stock Subject to the Plan. (a) Subject to the provisions of Section 13 of the Plan, the total number of shares reserved and available for issuance pursuant to the Plan shall be 111,600,000. The shares may be either authorized but unissued or reacquired Common Stock. (b) The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant. 4. Eligibility. (a) Any Employee as defined in Section 2 who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (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 (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary of the Company, or (ii) which permits his or her rights to purchase stock in any calendar year under all employee stock purchase plans of the Company and 2 <PAGE> 3 its Subsidiaries to exceed $25,000 worth of stock (determined at the Fair Market Value of the shares at the time such option is granted). 5. Offering Periods. The Plan shall be implemented by consecutive Offering Periods, each consisting of such number of Exercise Periods as the Committee shall determine, and shall continue until terminated in accordance with Section 20 hereof. The first Offering Period shall commence on a date to be determined by the Committee. The Committee shall have the power to change the duration of Offering Periods and Exercise Periods with respect to future offerings without stockholder approval if such change is announced at least 15 days prior to the scheduled beginning of the first Offering Period and Exercise Period to be affected. 6. Participation. (a) An eligible Employee may become a participant in any Offering Period under the Plan only by completing a subscription agreement authorizing payroll deductions in form and substance satisfactory to the Committee and filing it with the Company during the open enrollment period prior to the applicable Enrollment Date, unless a later time for filing the subscription agreement is set by the Committee for all eligible Employees with respect to a given Offering Period. (b) Payroll deductions for a participant shall commence on the first payday following the Enrollment Date and shall continue until terminated by the participant as provided in Section 11. 7. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made (under this Plan and all employee stock purchase plans of the Company) on each payday during the Offering Period in an amount not exceeding a total of 10% (or such other percentage as the Committee may determine) of the Compensation which he or she receives on each payday during the Offering Period, and the aggregate of such payroll deductions (under this Plan and all employee stock purchase plans of the Company) during the Offering Period shall not exceed a total of 10% (or such other percentage as the Committee may determine) of the participant's Compensation during said Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and will be withheld in whole percentages only. 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 11. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 11. To increase or decrease the rate of payroll deductions (within the limitations of Section 7(a)), (i) with respect to the next Offering Period, a participant must complete and file with the Company during the open enrollment period prior to the Enrollment Date for such Offering Period, or (ii) with respect to the next Exercise Period within the same Offering Period, a participant must complete and file with the Company prior to the commencement of the new Exercise Period within such Offering Period, a new subscription agreement authorizing a change in payroll deduction rate. Except in the case of authorized leaves of absence (which shall be governed by Section 11(c) below), such change in rate shall be effective at the beginning of the next Offering Period or Exercise Period, as the case may be, following the Company's receipt of the new subscription agreement. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 3 <PAGE> 4 423(b)(8) of the Code and Section 4(b) herein, a participant's payroll deductions may be decreased to 0% by the Company at such time during any Exercise Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Exercise Period which is scheduled to end in a subsequent calendar year, unless terminated by the participant as provided in Section 11. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of by the participant, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but will not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefit attributable to sale or early disposition by the participant of Common Stock under the Plan. 8. Grant of Option. On the Enrollment Date of each Offering Period, each eligible participant in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to the number of shares of the Company's Common Stock determined by dividing such participant's payroll deductions accumulated prior to or on such Exercise Date and retained in the participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall a participant be permitted to purchase during any Offering Period more than the number of shares determined to be the maximum permissible number (the "Option Cap") by the Committee with respect to the Offering Period prior to the Enrollment Date. In the event that the Committee does not establish an Option Cap prior to the Enrollment Date, the Option Cap shall be the number of shares determined by dividing $100,000 by the Fair Market Value of a share of the Company's Common Stock on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 4(b), 7(d) and 13 hereof. Exercise of the option shall occur as provided in Section 9, unless the participant has withdrawn pursuant to Section 11, and such option shall expire on the last day of the Offering Period. 9. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 11 below, his or her option for the purchase of shares will be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares will be purchased. Any payroll deductions remaining in a participant's account which are not sufficient to purchase a full share and any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 10. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of either a certificate representing the shares purchased upon exercise of his or her option or other evidence of purchase. 11. Withdrawal; Termination of Employment. (a) A participant may withdraw all (but not less than all) the payroll deductions 4 <PAGE> 5 credited to his or her account and not yet used to exercise his or her option under the Plan at any time prior to the close of an Exercise Period by giving written notice to the Company in form and substance satisfactory to the Committee. Such notice shall state whether the participant is withdrawing only from the applicable Exercise Period or entirely from the Offering Period. All of the participant's payroll deductions credited to his or her account will be paid to such participant as promptly as practicable after receipt of notice of withdrawal and such participant's option for the current Offering Period or Exercise Period (as specified in the notice) will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Offering Period or Exercise Period, as applicable. If a participant withdraws from an Offering Period, payroll deductions will not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement during the open enrollment period preceding the commencement of a subsequent Offering Period. If a participant withdraws from an Exercise Period, payroll deductions will not resume at the beginning of any succeeding Exercise Period within the same Offering Period unless written notice is delivered to the Company in form and substance satisfactory to the Committee within the open enrollment period preceding the commencement of the Exercise Period directing the Company to resume payroll deductions. (b) Upon a participant's ceasing to be an Employee for any reason or upon termination of a participant's employment relationship (as described in Section 2(g)), the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option will be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15, and such participant's option will be automatically terminated. (c) In the event an Employee's customary employment with the Company or any Designated Subsidiary is reduced below 20 hours per week or 5 months per calendar year during an Offering Period, 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 such participant and such participant's option terminated; provided that (i) if an Employee shall take an unpaid leave of absence approved by the Company of more than 30 days during an Offering Period in which the Employee is a participant, and the Employee's right to re-employment is not guaranteed by statute, he or she will be deemed to have withdrawn from the applicable Exercise Period on the 31st day of such leave, (ii) if an Employee shall take a paid leave of absence approved by the Company of more than 90 days during an Offering Period in which the Employee is a participant, and the Employee's right to re-employment is not guaranteed by statute, he or she will be deemed to have withdrawn from the applicable Exercise Period on the earlier of (aa) the 91st day if the Employee is paid for the entire 90 day leave, or (bb) the last day upon which the Employee is paid provided he or she is paid for at least 30 days; and (iii) if an Employee shall take a paid or unpaid leave of absence of any duration during an Offering Period, and the Employee's right to re-employment is guaranteed by statute, he or she shall not be deemed to have withdrawn from the applicable Exercise Period and his or her option for the purchase of shares will be exercised in accordance with Section 9 hereof. On the date, if any, upon which the Employee shall be deemed to have withdrawn from the applicable Exercise Period, the payroll deductions credited to his or her account will be returned to him or her, but he or she shall continue to be a participant in the applicable Offering Period during such authorized leave of absence until and 5 <PAGE> 6 unless such authorized leave of absence terminates without his or her returning to his or her employment with the Company. (d) A participant's withdrawal from an Exercise Period (but not from the Offering Period) will not have any effect upon his or her ability to participate in subsequent Exercise Periods during the same Offering Period. However, a participant's withdrawal from an Offering Period makes him or her ineligible for future participation in that Offering Period. Withdrawal from an Exercise Period or from an Offering Period will not have any effect upon a participant's eligibility to participate in a succeeding Offering Period of the Plan or in any similar plan which may hereafter be adopted by the Company, provided that a participant may elect to participate in a succeeding Offering Period only during the open enrollment period for such Offering Period and may not participate concurrently in more than one Offering Period. (e) Notwithstanding the foregoing, unless otherwise determined by the Committee, if the Fair Market Value on the Enrollment Date of an Offering Period in which a participant is enrolled (the "Current Offering Period") is greater than the Fair Market Value on the Enrollment Date of a succeeding Offering Period (the "Succeeding Offering Period"), the participant's enrollment in the Current Offering Period automatically will be terminated immediately following the exercise of his or her option under the Current Offering Period on the Exercise Date that occurs immediately prior to the Enrollment Date of the Succeeding Offering Period, and the participant automatically will be enrolled in the Succeeding Offering Period, unless the participant elects to remain in the former Offering Period by delivery to the Company of a written notice in form and substance satisfactory to the Committee. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan, as set forth in Section 3 hereof, is subject to adjustment upon changes in capitalization of the Company as provided in Section 19. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan (an "over-subscription"), the Committee shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. For Offering Periods commencing on or after May 1, 2000, if the Committee determines that the on-going operation of the Plan may result in unfavorable financial accounting consequences, the Committee may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (i) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (iii) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 14. Administration. The Plan shall be administered by the Board or a Committee of members of the Board appointed by the Board. The Board or its Committee shall have full and 6 <PAGE> 7 exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its Committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary 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 an Exercise Date on which the option is exercised but prior to delivery to such participant 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 exercise of the option. (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. 16. 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 15 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 from an Offering Period in accordance with Section 11. 17. 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 funds from such payroll deductions. 18. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization. Subject to any required action by the stockholders of the Company, the Reserves, as well as the price per share of Common Stock covered by each outstanding 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, reverse stock split, stock dividend, combination or reclassification of 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 Committee, 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 7 <PAGE> 8 convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. In the event of the proposed dissolution or liquidation of the Company, the Exercise Period and the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. 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 option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Committee determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Period (and, if applicable, the Exercise Period) then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Committee shortens the Offering Period (and the Exercise Period, if applicable) then in progress in lieu of assumption or substitution in the event of a merger or sale of assets, the Committee shall notify each participant in writing, at least 10 days prior to the New Exercise Date, that the Exercise Date for his or her option has been changed to the New Exercise Date and that his or her option will be exercised automatically on the New Exercise Date, unless prior to such date he or she has withdrawn from the Offering Period or the Exercise Period as provided in Section 11. 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 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 of Common Stock 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 of Common Stock); 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 (as defined in Section 424(e) of the Code), the Committee may, with the consent of the successor corporation and the participant, provide for the 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. The Committee 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, in the event the Company effects one or more reorganizations, re-capitalizations, 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. 20. Amendment or Termination. (a) The Board may at any time and for any reason amend or terminate the Plan. Except as provided in Section 19, no such termination can affect options previously granted, provided that the Plan (and any Offering Period thereunder) may be terminated by the Board on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 19, no amendment may make any change in any option theretofore granted which adversely affects the rights of any 8 <PAGE> 9 participant. To the extent necessary and desirable to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as is required thereby. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Committee shall be entitled to change the Offering Periods, establish the exchange ratio applicable to amounts withheld in a currency other than United States dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Committee determines in its sole discretion advisable which are consistent with the Plan. 21. 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. 22. 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 of the United States or other country or jurisdiction, 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 quotation system upon which the shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect for a term of 20 years unless sooner terminated under Section 20. 9 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.0 <SEQUENCE>6 <DESCRIPTION>EX-27.0 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-2000 <PERIOD-START> JUL-01-1999 <PERIOD-END> DEC-26-1999 <CASH> 1,311,293 <SECURITIES> 3,149,036 <RECEIVABLES> 2,038,139 <ALLOWANCES> 0 <INVENTORY> 559,152 <CURRENT-ASSETS> 8,146,126 <PP&E> 3,282,365 <DEPRECIATION> 1,463,903 <TOTAL-ASSETS> 11,436,302 <CURRENT-LIABILITIES> 3,344,307 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 5,937,021 <TOTAL-LIABILITY-AND-EQUITY> 11,436,302 <SALES> 5,664,552 <TOTAL-REVENUES> 6,699,479 <CGS> 2,578,018 <TOTAL-COSTS> 3,231,979 <OTHER-EXPENSES> 2,592,429 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 935,201 <INCOME-TAX> 309,654 <INCOME-CONTINUING> 625,547 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 625,547 <EPS-BASIC> 0.40 <EPS-DILUTED> 0.37 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>7 <DESCRIPTION>EX-27.1 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> RESTATED TO REFLECT MERGER WITH FORTE SOFTWARE, INC. ON OCTOBER 19, 1999, ACCOUNTED FOR AS A POOLING OF INTERESTS. </LEGEND> <RESTATED> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> JUN-30-2000 <PERIOD-START> JUL-01-1999 <PERIOD-END> SEP-26-1999 <CASH> 1,945,232 <SECURITIES> 2,196,962 <RECEIVABLES> 2,179,158 <ALLOWANCES> 0 <INVENTORY> 405,870 <CURRENT-ASSETS> 7,743,380 <PP&E> 3,091,218 <DEPRECIATION> 1,364,970 <TOTAL-ASSETS> 10,218,755 <CURRENT-LIABILITIES> 3,155,589 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 5,181,361 <TOTAL-LIABILITY-AND-EQUITY> 10,218,755 <SALES> 2,667,809 <TOTAL-REVENUES> 3,145,556 <CGS> 1,207,531 <TOTAL-COSTS> 1,512,177 <OTHER-EXPENSES> 1,254,135 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 407,789 <INCOME-TAX> 135,607 <INCOME-CONTINUING> 272,182 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 272,182 <EPS-BASIC> 0.17 <EPS-DILUTED> 0.16 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.2 <SEQUENCE>8 <DESCRIPTION>EX-27.2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> RESTATED TO REFLECT MERGER WITH FORTE SOFTWARE, INC. ON OCTOBER 19, 1999, ACCOUNTED FOR AS A POOLING OF INTERESTS. </LEGEND> <RESTATED> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-1999 <PERIOD-START> JUL-01-1998 <PERIOD-END> DEC-27-1998 <CASH> 683,711 <SECURITIES> 917,016 <RECEIVABLES> 2,128,204 <ALLOWANCES> 0 <INVENTORY> 363,664 <CURRENT-ASSETS> 4,815,502 <PP&E> 2,600,235 <DEPRECIATION> 1,141,377 <TOTAL-ASSETS> 6,638,897 <CURRENT-LIABILITIES> 2,369,390 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 4,155,149 <TOTAL-LIABILITY-AND-EQUITY> 6,638,897 <SALES> 4,577,526 <TOTAL-REVENUES> 5,312,292 <CGS> 2,120,185 <TOTAL-COSTS> 2,573,995 <OTHER-EXPENSES> 2,166,723 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 607,980 <INCOME-TAX> 235,033 <INCOME-CONTINUING> 372,947 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 372,947 <EPS-BASIC> 0.24 <EPS-DILUTED> 0.23 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.3 <SEQUENCE>9 <DESCRIPTION>EX-27.3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> RESTATED TO REFLECT MERGER WITH FORTE SOFTWARE, INC. ON OCTOBER 19, 1999, ACCOUNTED FOR AS A POOLING OF INTERESTS. </LEGEND> <RESTATED> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> JUN-30-1999 <PERIOD-START> JUL-01-1998 <PERIOD-END> SEP-27-1998 <CASH> 773,343 <SECURITIES> 698,030 <RECEIVABLES> 1,787,466 <ALLOWANCES> 0 <INVENTORY> 384,385 <CURRENT-ASSETS> 4,394,854 <PP&E> 2,466,620 <DEPRECIATION> 1,060,166 <TOTAL-ASSETS> 6,134,364 <CURRENT-LIABILITIES> 2,210,655 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 3,830,613 <TOTAL-LIABILITY-AND-EQUITY> 6,134,364 <SALES> 2,174,274 <TOTAL-REVENUES> 2,509,340 <CGS> 993,405 <TOTAL-COSTS> 1,221,505 <OTHER-EXPENSES> 1,090,459 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 213,116 <INCOME-TAX> 101,588 <INCOME-CONTINUING> 111,528 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 111,528 <EPS-BASIC> 0.07 <EPS-DILUTED> 0.07 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

JCI

https://www.sec.gov/Archives/edgar/data/833444/0000912057-00-005887.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, NVE2r03YT8JjlD0rfSEV/7RS7IgFow+5GSCvtFk7/6A2cMYtemVT7n54xZlJf9R8 FJny0opvCf9p7HZMxeR6gg== <SEC-DOCUMENT>0000912057-00-005887.txt : 20000214 <SEC-HEADER>0000912057-00-005887.hdr.sgml : 20000214 ACCESSION NUMBER: 0000912057-00-005887 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TYCO INTERNATIONAL LTD /BER/ CENTRAL INDEX KEY: 0000833444 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 000000000 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13836 FILM NUMBER: 537077 BUSINESS ADDRESS: STREET 1: 90 PITTS BAY ROAD STREET 2: THE ZURICH CENTRE SECOND FLOOR CITY: PEMROKE HM 08 BERMU STATE: D0 BUSINESS PHONE: 4412928674 MAIL ADDRESS: STREET 1: C/O TYCO INTERNATIONAL (US) INC STREET 2: ONE TYCO PARK CITY: EXETER STATE: NH ZIP: 03833 FORMER COMPANY: FORMER CONFORMED NAME: ADT LIMITED DATE OF NAME CHANGE: 19930601 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>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 DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 001-13836 (COMMISSION FILE NUMBER) ------------------------------ TYCO INTERNATIONAL LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) <TABLE> <S> <C> BERMUDA NOT APPLICABLE (JURISDICTION OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER) THE ZURICH CENTRE, SECOND FLOOR, 90 PITTS BAY ROAD, PEMBROKE, HM 08, BERMUDA (ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) 441-292-8674* (REGISTRANT'S TELEPHONE NUMBER) </TABLE> ------------------------ 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 common shares outstanding as of February 3, 2000 was 1,691,070,917. ------------------------ * The executive offices of the Registrant's principal United States subsidiary, Tyco International (US) Inc., are located at One Tyco Park, Exeter, New Hampshire 03833. The telephone number there is (603) 778-9700. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> TYCO INTERNATIONAL LTD. INDEX TO FORM 10-Q <TABLE> <CAPTION> PAGE -------- <S> <C> PART I--FINANCIAL INFORMATION: Item 1--Financial Statements Consolidated Balance Sheets--December 31, 1999 (unaudited) and September 30, 1999.................................. 1 Consolidated Statements of Operations for the Quarters ended December 31, 1999 and 1998 (unaudited)............ 2 Consolidated Statements of Cash Flows for the Quarters ended December 31, 1999 and 1998 (unaudited)............ 3 Notes to Consolidated Financial Statements (unaudited).... 4-12 Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 13-21 Item 3--Quantitative and Qualitative Disclosures About Market Risk............................................... 21 PART II--OTHER INFORMATION: Item 1--Legal Proceedings................................... 22 Item 4--Submission of Matters to a Vote of Security Holders................................................... 25 Item 6--Exhibits and Reports on Form 8-K.................... 26 </TABLE> <PAGE> PART I--FINANCIAL INFORMATION ITEM 1--FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (UNAUDITED) DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------- -------------- (IN MILLIONS, EXCEPT SHARE DATA) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 1,230.1 $ 1,762.0 Receivables, less allowance for doubtful accounts of $361.0 at December 31, 1999 and $329.8 at September 30, 1999.................................................... 5,022.0 4,582.3 Contracts in process...................................... 416.2 536.6 Inventories............................................... 3,069.8 2,849.1 Deferred income taxes..................................... 622.1 711.6 Prepaid expenses and other current assets................. 778.0 721.2 --------- --------- 11,138.2 11,162.8 --------- --------- PROPERTY, PLANT AND EQUIPMENT: Land...................................................... 520.2 386.8 Buildings................................................. 2,410.2 2,414.0 Subscriber systems........................................ 2,822.5 2,703.3 Machinery and equipment................................... 7,552.2 7,005.3 Leasehold improvements.................................... 263.5 224.4 Construction in progress.................................. 468.6 573.0 Accumulated depreciation.................................. (6,152.7) (5,984.4) --------- --------- 7,884.5 7,322.4 --------- --------- GOODWILL AND OTHER INTANGIBLE ASSETS, NET................... 13,985.2 12,158.9 LONG-TERM INVESTMENTS....................................... 406.8 269.7 DEFERRED INCOME TAXES....................................... 629.3 668.8 OTHER ASSETS................................................ 762.8 779.0 --------- --------- TOTAL ASSETS............................................ $34,806.8 $32,361.6 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Loans payable and current maturities of long-term debt.... $ 973.3 $ 1,012.8 Accounts payable.......................................... 2,878.3 2,530.8 Accrued expenses and other current liabilities............ 3,303.5 3,599.7 Contracts in process--billings in excess of costs......... 1,090.5 977.9 Deferred revenue.......................................... 267.0 258.8 Income taxes.............................................. 862.5 798.0 Deferred income taxes..................................... 0.8 1.0 --------- --------- 9,375.9 9,179.0 --------- --------- LONG-TERM DEBT, LESS CURRENT MATURITIES..................... 10,514.6 9,109.4 OTHER LONG-TERM LIABILITIES................................. 1,264.2 1,236.4 DEFERRED INCOME TAXES....................................... 494.7 504.2 SHAREHOLDERS' EQUITY: Preference shares, $1 par value, 125,000,000 authorized, none issued............................................... -- -- Common shares, $0.20 par value, 2,500,000,000 shares authorized; 1,693,171,973 shares outstanding at December 31, 1999 and 1,690,175,338 shares outstanding at September 30, 1999, net of 19,944,274 and 11,432,678 shares owned by subsidiaries at December 31, 1999 and September 30, 1999, respectively.............................................. 338.6 338.0 Capital in excess: Share premium............................................. 4,917.0 4,881.5 Contributed surplus, net of deferred compensation of $30.5 at December 31, 1999 and $30.7 at September 30, 1999.... 3,700.5 3,607.6 Accumulated earnings........................................ 4,725.5 3,955.6 Accumulated other comprehensive loss........................ (524.2) (450.1) --------- --------- 13,157.4 12,332.6 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $34,806.8 $32,361.6 ========= ========= </TABLE> See notes to consolidated financial statements (unaudited). 1 <PAGE> CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> FOR THE QUARTERS ENDED DECEMBER 31, --------------------- 1999 1998 --------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> NET SALES................................................... $6,638.8 $5,213.5 Cost of sales............................................... 4,191.9 3,401.6 Selling, general and administrative expenses................ 1,242.9 1,083.1 Merger, restructuring and other non-recurring (credits) charges, net.............................................. (129.6) 603.7 Charges for the impairment of long-lived assets............. 99.0 76.0 -------- -------- OPERATING INCOME............................................ 1,234.6 49.1 Interest expense, net....................................... (164.7) (123.5) -------- -------- Income (loss) before income taxes and extraordinary items... 1,069.9 (74.4) Income taxes................................................ (278.5) (33.3) -------- -------- Income (loss) before extraordinary items.................... 791.4 (107.7) Extraordinary items, net of taxes........................... (0.2) (2.4) -------- -------- NET INCOME (LOSS)........................................... $ 791.2 $ (110.1) ======== ======== BASIC EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary items.................. $ 0.47 $ (0.07) Extraordinary items, net of taxes......................... -- -- Net income (loss)......................................... 0.47 (0.07) DILUTED EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary items.................. $ 0.46 $ (0.07) Extraordinary items, net of taxes......................... -- -- Net income (loss)......................................... 0.46 (0.07) WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic..................................................... 1,693.2 1,622.0 Diluted................................................... 1,716.8 1,622.0 </TABLE> See notes to consolidated financial statements (unaudited). 2 <PAGE> CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> FOR THE QUARTERS ENDED DECEMBER 31, --------------------- 1999 1998 --------- --------- (IN MILLIONS) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ 791.2 $ (110.1) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Merger, restructuring and other non-recurring (credits) charges, net............................................ (123.2) 299.7 Charges for the impairment of long-lived assets........... 99.0 76.0 Depreciation.............................................. 250.7 247.5 Goodwill and other intangible amortization................ 123.9 66.3 Deferred income taxes..................................... 124.3 (98.5) Other non-cash items...................................... 17.8 67.3 Changes in assets and liabilities, net of the effects of acquisitions: Accounts receivable and contracts in process............ 31.6 (223.1) Inventories............................................. (18.2) (138.2) Prepaid expenses and other current assets............... (4.9) (81.1) Accounts payable, accrued expenses and other current liabilities........................................... (498.1) (345.4) Income taxes............................................ 64.7 88.9 Deferred revenue........................................ 11.1 10.7 Other................................................... 3.2 (93.9) --------- --------- Net cash provided by (used in) operating activities... 873.1 (233.9) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment................... (420.5) (308.1) Purchase of leased property................................. -- (234.0) Acquisition of businesses, net of cash acquired............. (1,734.2) (831.8) (Increase) decrease in investments.......................... (134.1) 11.0 Other....................................................... 34.8 (3.5) --------- --------- Net cash used in investing activities................. (2,254.0) (1,366.4) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds on long-term debt and lines of credit.............. 1,247.6 1,621.2 Proceeds from exercise of options........................... 35.8 96.4 Dividends paid.............................................. (21.4) (75.0) Purchase of treasury shares................................. (413.0) (20.1) --------- --------- Net cash provided by financing activities............. 849.0 1,622.5 --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (531.9) 22.2 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,762.0 1,072.9 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,230.1 $ 1,095.1 ========= ========= </TABLE> See notes to consolidated financial statements (unaudited). 3 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The unaudited consolidated financial statements presented herein include the consolidated accounts of Tyco International Ltd. (the "Company" or "Tyco"), a company incorporated in Bermuda, and its subsidiaries. The financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States. These statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. The consolidated financial statements have not been examined by independent accountants in accordance with generally accepted auditing standards, but in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to summarize fairly the Company's financial position and results of operations. Certain prior period amounts have been reclassified to conform with the current period presentation. 2. ACQUISITIONS During the first quarter of fiscal 2000, the Company purchased businesses in each of its four business segments for an aggregate cost of $2,415.9 million, consisting of $1,620.9 million in cash, net of cash acquired, the issuance of approximately 15.5 million common shares valued at $670.4 million and the assumption of $124.6 million in debt. In addition, $113.3 million of cash was paid during the quarter for purchase accounting liabilities related to current and prior years' acquisitions. The cash portions of the acquisition costs were funded utilizing cash on hand and borrowings under the Company's commercial paper program. Each acquisition was accounted for as a purchase, and the results of operations of the acquired companies have been included in the consolidated results of the Company from their respective acquisition dates. In connection with the fiscal 2000 acquisitions, the Company recorded purchase accounting liabilities of $57.4 million for transaction costs and the costs of integrating the acquired companies within the various Tyco business segments. Details regarding these purchase accounting liabilities are set forth below. At the time each purchase acquisition is made, the Company records each asset acquired and each liability assumed at its estimated fair value, which amount is subject to future adjustment when appraisals or other further information is obtained. The excess of (a) the total consideration paid for the acquired company over (b) the fair value of assets acquired less liabilities assumed and purchase accounting liabilities recorded is recorded as goodwill. As a result of acquisitions completed in fiscal 2000, and adjustments to the fair values of assets and liabilities and purchase accounting liabilities recorded for acquisitions completed prior to fiscal 2000, approximately $2,117.1 million in goodwill and other intangibles was recorded by the Company. Fiscal 2000 purchase acquisitions include, among others, the acquisitions of General Surgical Innovations, Inc. ("GSI"), AFC Cable Systems, Inc. ("AFC Cable") and Siemens Electromechanical Components GmbH & Co. KG ("Siemens EC") in November 1999 and Praegitzer Industries, Inc. ("Praegitzer") in December 1999. GSI, a manufacturer and distributor of balloon dissectors and related devices for minimally invasive surgery, was purchased through the issuance of approximately 2.7 million Tyco common shares valued at $107.6 million and is being integrated within the Healthcare and Specialty Products segment. AFC Cable, a manufacturer of prewired armor cable, was purchased through the issuance of approximately 12.8 million Tyco common shares valued at $562.8 million and is being integrated within the Flow Control Products and Services segment. Siemens EC, a world market leader for relays and one of the world's leading providers of components to the communications, automotive, consumer and general industry sectors, was purchased for $1,165.8 million in cash and is being integrated within the Telecommunications and Electronics segment. Praegitzer, a provider of printed circuit board and interconnect 4 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) 2. ACQUISITIONS --(CONTINUED) solutions to OEMs and contract manufacturers in the communications, computer, industrial and consumer electronics industries, was purchased for $72.2 million in cash and is being integrated within the Telecommunications and Electronics segment. The following table summarizes activity with respect to purchase accounting liabilities in fiscal 2000 ($ in millions): <TABLE> <CAPTION> SEVERANCE FACILITIES OTHER -------------------- --------------------- -------- NUMBER OF NUMBER OF EMPLOYEES RESERVE FACILITIES RESERVE RESERVE TOTAL --------- -------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Total reserve balance at September 30, 1999.... 3,390 $217.3 101 $282.7 $ 70.3 $ 570.3 Fiscal 2000 acquisition reserves............... 431 13.3 13 21.9 22.2 57.4 Changes in estimates........................... 87 24.9 57 47.0 21.4 93.3 Reversal to goodwill........................... -- (4.1) -- (12.6) -- (16.7) Fiscal 2000 utilization........................ (1,418) (59.0) (61) (36.6) (25.1) (120.7) ------ ------ --- ------ ------ ------- Ending balance at December 31, 1999............ 2,490 $192.4 110 $302.4 $ 88.8 $ 583.6 ====== ====== === ====== ====== ======= </TABLE> In connection with the fiscal 2000 acquisitions, primarily AFC Cable and Praegitzer, the Company formulated certain plans at the date of each acquisition for workforce reductions and the closure and consolidation of an aggregate of 13 facilities. The Company has communicated with the employees of the acquired companies to announce the terminations and benefit arrangements, even though all individuals have not been specifically told of their terminations. The costs of employee termination benefits relate to the elimination of 316 positions in the United States and 115 positions in Europe, consisting primarily of manufacturing and distribution, administrative, sales and marketing, and technical personnel. Facilities designated for closure include 10 facilities in the United States and 3 facilities in Europe, consisting primarily of manufacturing plants and sales offices. At December 31, 1999, 124 employees had been terminated and 2 facilities had been closed or consolidated related to fiscal 2000 acquisitions. Changes in estimates recorded during the quarter ended December 31, 1999 relate primarily to revisions associated with finalizing the exit plan for Raychem Corporation, which was acquired in August 1999. These changes in estimates resulted in additional purchase accounting liabilities of $93.3 million and a corresponding increase in goodwill and deferred tax assets. These revisions include the elimination of an additional 87 employees, related primarily to manufacturing plants and administrative offices in the United States and Europe. Additional facilities designated for closure include 20 facilities in Europe, 18 facilities in the Asia-Pacific region, 16 facilities in the United States and 3 facilities in Latin America, consisting primarily of sales and administrative offices and manufacturing plants. In addition, during fiscal 2000 the Company reduced its estimate of purchase accounting liabilities by $16.7 million, primarily because costs on facility shutdowns for acquisitions consummated prior to fiscal 2000 were less than anticipated. Goodwill and related deferred tax assets were reduced by an equivalent amount. The Company has not yet finalized its business integration plans for recent acquisitions and accordingly, purchase accounting liabilities are subject to revision in future quarters. In addition, the Company is still in the process of obtaining information to finalize estimates for the fair values of assets acquired and liabilities assumed. At December 31, 1999, a total of $583.6 million purchase accounting reserves remained on the Consolidated Balance Sheet, of which $452.1 million are included in accrued expenses and other current 5 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) 2. ACQUISITIONS --(CONTINUED) liabilities and $131.5 million are included in other long-term liabilities. The Company expects that the termination of employees and consolidation of facilities related to all such acquisitions will be substantially complete within two years of the related dates of acquisition, except for certain long-term contractual obligations. The following unaudited pro forma data summarize the results of operations for the periods indicated as if the fiscal 2000 acquisitions had been completed as of the beginning of the periods presented. The pro forma data give effect to actual operating results prior to the acquisitions and adjustments to interest expense, goodwill amortization and income taxes. No effect has been given to cost reductions or operating synergies in this presentation. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisitions had occurred as of the beginning of the periods presented or that may be obtained in the future. <TABLE> <CAPTION> FOR THE QUARTERS ENDED DECEMBER 31, --------------------- 1999 1998 --------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> Net sales................................................ $6,851.6 $5,547.2 Income (loss) before extraordinary items................. 757.0 (131.2) Net income (loss)........................................ 756.8 (133.6) Net income (loss) per common share: Basic.................................................. 0.45 (0.08) Diluted................................................ 0.44 (0.08) </TABLE> 6 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) 3. LONG-TERM DEBT Long-term debt is as follows: <TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- (IN MILLIONS) <S> <C> <C> Commercial paper program.................................... $ 2,974.4 $ 1,392.0 International overdrafts and demand loans................... 133.7 184.9 Floating rate private placement notes due 2000.............. 499.6 499.4 0.57% Yen denominated private placement notes due 2000...... 89.6 89.7 8.25% senior notes due 2000................................. 9.5 9.5 Floating rate private placement notes due 2001.............. 499.2 499.1 6.5% public notes due 2001.................................. 299.4 299.3 6.125% public notes due 2001................................ 748.4 748.1 6.875% private placement notes due 2002..................... 992.9 992.2 5.875% public notes due 2004................................ 397.9 397.7 6.375% public notes due 2004................................ 104.7 104.6 6.375% public notes due 2005................................ 744.0 743.7 6.125% public notes due 2008................................ 395.1 394.9 7.2% notes due 2008......................................... 398.8 398.8 7.25% senior notes due 2008................................. 8.2 8.2 6.125% public notes due 2009................................ 394.2 394.1 Zero coupon Liquid Yield Option Notes ("LYONs") due 2010.... 34.7 49.1 International bank loans, repayable through 2013............ 206.5 208.2 6.25% public Dealer Remarketable Securities due 2013........ 759.4 760.1 9.5% public debentures due 2022............................. 49.0 49.0 8.0% public debentures due 2023............................. 50.0 50.0 7.0% public notes due 2028.................................. 492.4 492.4 6.875% public notes due 2029................................ 780.7 780.5 Financing lease obligation.................................. 65.5 69.5 Other....................................................... 360.1 507.2 --------- --------- Total debt.................................................. 11,487.9 10,122.2 Less current portion........................................ 973.3 1,012.8 --------- --------- Long-term debt.............................................. $10,514.6 $ 9,109.4 ========= ========= </TABLE> The extraordinary items of $0.2 million and $2.4 million in the quarters ended December 31, 1999 and 1998, respectively, were related to the write-off of net unamortized deferred financing costs related to the early extinguishment of debt. Under a bank credit agreement entered into by Tyco International Group S.A. ("TIG"), a wholly-owned subsidiary of the Company, and guaranteed by the Company, the Company is required to meet certain covenants. None of these covenants is considered restrictive to the operations of the Company. 7 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) 4. EARNINGS (LOSS) PER COMMON SHARE The reconciliations between basic and diluted earnings (loss) per common share are as follows: <TABLE> <CAPTION> FOR THE QUARTER ENDED FOR THE QUARTER ENDED DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------------------- ------------------------------- PER SHARE PER SHARE INCOME SHARES AMOUNT LOSS SHARES AMOUNT -------- -------- --------- -------- -------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> BASIC INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary items..... $791.4 1,693.2 $0.47 $(107.7) 1,622.0 $(0.07) Stock options................................ -- 18.8 -- -- Exchange of LYONs debt....................... 0.4 4.8 -- -- ------ ------- ------- ------- DILUTED INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary items plus assumed conversions........................ $791.8 1,716.8 $0.46 $(107.7) 1,622.0 $(0.07) ====== ======= ======= ======= </TABLE> The computation of diluted income per common share in the quarter ended December 31, 1999 excludes the effect of the assumed exercise of approximately 27.8 million stock options that were outstanding as of December 31, 1999 because the effect would be anti-dilutive. The computation of diluted loss per common share in the quarter ended December 31, 1998 excludes the effect of the assumed exercise of all outstanding stock options and warrants for approximately 96.6 million shares and the assumed exchange of outstanding LYONs for approximately 13.0 million shares because the effect would be anti-dilutive. 5. SHAREHOLDERS' EQUITY Tyco paid a quarterly cash dividend of $0.0125 per common share in the first quarter of fiscal 2000 and fiscal 1999. Prior to its merger with Tyco, AMP paid a dividend of $0.27 per share in the quarter ended December 31, 1998. In November 1999, the Board of Directors authorized the Company to reacquire up to 20 million of its common shares in the open market. 6. MERGER, RESTRUCTURING AND OTHER NON-RECURRING (CREDITS) CHARGES The following table summarizes activity with respect to merger, restructuring and other non-recurring (credits) charges in fiscal 2000 ($ in millions): <TABLE> <CAPTION> SEVERANCE FACILITIES OTHER -------------------- --------------------- -------- NUMBER OF NUMBER OF EMPLOYEES RESERVE FACILITIES RESERVE RESERVE TOTAL --------- -------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Total reserve balance at September 30, 1999... 7,914 $100.4 67 $160.3 $192.6 $ 453.3 Fiscal 2000 restructuring charges............. 33 0.6 2 0.8 13.0 14.4 Revisions in estimates........................ (3,044) (39.7) (12) (30.2) (67.7) (137.6) Fiscal 2000 utilization....................... (1,233) (13.9) (13) (11.6) (52.7) (78.2) ------ ------ --- ------ ------ ------- Ending balance at December 31, 1999........... 3,670 $ 47.4 44 $119.3 $ 85.2 $ 251.9 ====== ====== === ====== ====== ======= </TABLE> During the quarter ended December 31, 1999, the Company recorded a net merger, restructuring and other non-recurring credit of $123.2 million. The net credit of $123.2 million is comprised of a credit of $137.6 million representing a revision of estimates for accrued merger, restructuring and other 8 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) 6. MERGER, RESTRUCTURING AND OTHER NON-RECURRING (CREDITS) CHARGES --(CONTINUED) non-recurring charges recorded in prior periods, offset by restructuring and other non-recurring charges of $14.4 million. The $137.6 million credit is comprised of revisions of $83.8 million related primarily to the merger with AMP Incorporated (``AMP") and costs associated with AMP's profit improvement plan; $38.3 million related to the Company's 1997 restructuring plans; and $15.5 million related primarily to the merger with United States Surgical Corporation ("USSC"). The changes in estimates of the restructuring plan at AMP were attributable primarily to increased demand for certain of AMP's products which was not anticipated at the time of the merger and to recent acquisitions such as Siemens EC. Therefore, the Company has determined not to close several facilities and not to terminate approximately 3,000 employees, whose costs were provided for in previous AMP restructuring plans. In addition, certain restructuring activities at AMP were completed for amounts lower than originally anticipated. The changes in estimates of the Company's 1997 restructuring plans and the USSC restructuring plans were due primarily to the completion of activities for amounts lower than originally recorded. The charges of $14.4 million consist of $7.9 million related to the Company's exiting the USSC interventional cardiology business, of which $6.4 million is included in cost of sales, and $6.5 million related to the restructuring of AMP's Brazilian operations. During the quarter ended December 31, 1998, the Company recorded merger, restructuring and other non-recurring charges of $617.0 million, of which $13.3 million is included in cost of sales. The $617.0 million charge consists of $434.9 million primarily related to the merger with USSC and $182.1 million related to AMP's profit improvement plan. At December 31, 1999, a total of $251.9 million merger, restructuring and other non-recurring reserves remained on the Consolidated Balance Sheet, of which $207.7 million are included in accrued expenses and other current liabilities and $44.2 million are included in other long-term liabilities. The Company currently anticipates that the restructuring activities to which all of the above charges relate will be substantially completed within fiscal 2000, except for certain long-term contractual obligations. 7. CHARGES FOR THE IMPAIRMENT OF LONG-LIVED ASSETS During the quarter ended December 31, 1999, the Healthcare and Specialty Products segment recorded charges of $99.0 million primarily related to an impairment in goodwill and other intangible assets associated with the Company exiting the interventional cardiology business of USSC. During the quarter ended December 31, 1998, the Healthcare and Specialty Products segment recorded charges of $76.0 million primarily related to the write-down of property, plant and equipment, principally administrative facilities, associated with the consolidation of facilities in USSC's operations in the United States and Europe as a result of its merger with the Company. 9 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) 8. COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) and its components are as follows: <TABLE> <CAPTION> FOR THE QUARTERS ENDED DECEMBER 31, ---------------------- 1999 1998 -------- -------- (IN MILLIONS) <S> <C> <C> Net income (loss)......................................... $791.2 $(110.1) Unrealized (loss) gain on securities, net of taxes...... (0.8) 1.9 Minimum pension liability, net of taxes................. -- (12.8) Foreign currency translation adjustment, net of taxes... (73.3) 28.1 ------ ------- Total comprehensive income (loss)......................... $717.1 $ (92.9) ====== ======= </TABLE> 9. CONSOLIDATED SEGMENT DATA Selected information for the Company's four industry segments is as follows: <TABLE> <CAPTION> FOR THE QUARTERS ENDED DECEMBER 31, ----------------------- 1999 1998 -------- -------- (IN MILLIONS) <S> <C> <C> NET SALES: Telecommunications and Electronics.................. $2,739.2 $1,804.0 Healthcare and Specialty Products................... 1,563.8 1,342.8 Fire and Security Services.......................... 1,449.7 1,259.7 Flow Control Products and Services.................. 886.1 807.0 -------- -------- $6,638.8 $5,213.5 ======== ======== OPERATING INCOME: Telecommunications and Electronics.................. $ 649.0(1) $ 4.1 (4) Healthcare and Specialty Products................... 282.1(2) (217.7)(5) Fire and Security Services.......................... 271.0(3) 196.9 Flow Control Products and Services.................. 170.7 129.2 -------- -------- 1,372.8 112.5 Less: Corporate expenses.............................. (54.3) (19.0) Goodwill amortization expense.................... (83.9) (44.4) -------- -------- $1,234.6 $ 49.1 ======== ======== </TABLE> - ------------------------ (1) Includes a restructuring charge of $6.5 million related to AMP's Brazilian operations and a credit of $83.8 million primarily representing a revision of estimates of merger, restructuring and other non-recurring accruals related to the merger with AMP and AMP's profit improvement plan. (2) Includes restructuring and other non-recurring charges of $7.9 million, of which $6.4 million is included in cost of sales, and charges for the impairment of long-lived assets of $99.0 million related to exiting USSC's interventional cardiology business. Also includes a credit of $26.9 million representing a revision in estimates of merger, restructuring and other non-recurring accruals, consisting of $15.5 million related primarily to the merger with USSC and $11.4 million related to the Company's 1997 restructuring accruals. 10 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) 9. CONSOLIDATED SEGMENT DATA --(CONTINUED) (3) Includes a credit of $26.9 million representing a revision in estimates related to the Company's 1997 restructuring accruals. (4) Includes merger, restructuring and other non-recurring charges of $182.1 million, of which $13.3 million is included in cost of sales, primarily related to the merger with AMP and AMP's profit improvement plan. (5) Includes merger, restructuring and other non-recurring charges of $434.9 million and charges for the impairment of long-lived assets of $76.0 million, primarily related to the merger with USSC. 10. INVENTORIES Inventories are classified as follows: <TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- (IN MILLIONS) <S> <C> <C> Purchased materials and manufactured parts.......... $ 918.5 $ 719.1 Work in process..................................... 892.9 774.2 Finished goods...................................... 1,258.4 1,355.8 -------- -------- $3,069.8 $2,849.1 ======== ======== </TABLE> 11. TYCO INTERNATIONAL GROUP S.A. TIG indirectly owns a substantial portion of the operating subsidiaries of Tyco. During fiscal 1999, TIG issued public debt securities, which are fully and unconditionally guaranteed by the Company. The Company has not included separate financial statements and footnotes for TIG because of the full and unconditional guarantee by Tyco and the Company's belief that such information is not material to holders of the debt securities. The following presents consolidated summary financial information for TIG and its subsidiaries, as if TIG and its current organizational structure were in place for all periods presented. <TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- (IN MILLIONS) <S> <C> <C> Total current assets................................ $ 7,390.2 $ 7,618.4 Total non-current assets............................ 26,873.3 24,008.4 Total current liabilities........................... 6,713.5 6,845.1 Total non-current liabilities....................... 12,793.4 10,553.9 </TABLE> <TABLE> <CAPTION> FOR THE QUARTERS ENDED DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN MILLIONS) <S> <C> <C> Net sales................................................ $4,508.7 $3,819.2 Gross profit............................................. 1,670.2 1,466.2 Income (loss) before extraordinary items(1).............. 454.3 (184.4) Net income (loss)(2)..................................... 454.1 (186.8) </TABLE> - ------------------------ (1) Income before extraordinary items in the quarter ended December 31, 1999 includes restructuring and other non-recurring charges of $7.9 million, of which $6.4 million is included in cost of sales, and 11 <PAGE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) 11. TYCO INTERNATIONAL GROUP S.A. --(CONTINUED) charges for the impairment of long-lived assets of $99.0 million related to exiting USSC's interventional cardiology business. Also included are credits of $15.5 million representing a revision of estimates of merger, restructuring and other non-recurring accruals related primarily to the merger with USSC and $38.3 million related to the Company's 1997 restructuring plans. Loss before extraordinary items in the quarter ended December 31, 1998 includes merger, restructuring and other non-recurring charges of $434.9 million and charges for the impairment of long-lived assets of $76.0 million, primarily related to the merger with USSC. (2) Extraordinary items were primarily comprised of losses on the write-off of net unamortized deferred financing costs relating to the early extinguishment of debt. 12. SUBSEQUENT EVENTS On January 14, 2000, the Company announced that it had entered into an agreement to sell its ADT Automotive business to Manheim Auctions, Inc., a wholly-owned subsidiary of Cox Enterprises, Inc., for approximately $1 billion in cash. The sale is subject to customary regulatory review and, when complete, is expected to generate a one-time gain to the Company of approximately $300 million. On January 17, 2000, the Company announced that its undersea fiber optics business will design, build, install, operate and maintain its own global undersea fiber optic communications network. Upon its completion, the system, to be known as the TyCom Global Network-TM-, is expected to be the largest and most advanced global undersea telecommunications fiber optic network. The Company intends to offer up to 20 percent of its undersea fiber optic cable business for sale in an initial public offering. On January 18, 2000, the Company announced that the Board of Directors of the Company had authorized the expenditure of up to an additional $2.0 billion to repurchase shares of the Company. The timing and actual amount of the repurchases will be subject to market conditions and other factors. On February 11, 2000, TIG renewed the $3.4 billion portion of its credit facility with a group of commercial banks, giving it the right to borrow up to $4.5 billion until February 9, 2001, with the option to extend the facility for one additional year and to increase the $4.5 billion up to $5.0 billion. The additional $0.5 billion portion of TIG's credit facility continues to be available until February 12, 2003. The Company plans to principally use the $4.5 billion portion of the credit facility to fully support borrowings under its commercial paper program, which it intends to increase to $4.5 billion. 12 <PAGE> ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Information for all periods presented below reflects the grouping of the Company's businesses into four business segments consisting of Telecommunications and Electronics, Healthcare and Specialty Products, Fire and Security Services, and Flow Control Products and Services. OVERVIEW Sales increased 27.3% during the quarter ended December 31, 1999 to $6,638.8 million from $5,213.5 million in the quarter ended December 31, 1998. Income (loss) before extraordinary items was $791.4 million in the quarter ended December 31, 1999, as compared to $(107.7) million in the quarter ended December 31, 1998. Income before extraordinary items for the quarter ended December 31, 1999 included an after-tax net credit of $7.1 million ($24.2 million pre-tax) consisting of a credit of $99.1 million ($137.6 million pre-tax) representing a revision of estimates of merger, restructuring and other non-recurring accruals, offset by restructuring and impairment charges of $92.0 million ($113.4 million pre-tax) primarily related to the exiting of USSC's interventional cardiology business. Loss before extraordinary items for the quarter ended December 31, 1998 included an after-tax charge of $550.5 million ($693.0 million pre-tax) related to the merger with USSC and costs associated with AMP's profit improvement plan. The following table details the Company's sales and earnings in the quarters ended December 31, 1999 and 1998. <TABLE> <CAPTION> (UNAUDITED) FOR THE QUARTERS ENDED DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN MILLIONS) <S> <C> <C> Net sales................................................... $6,638.8 $5,213.5 ======== ======== Operating income, before certain credits (charges)(i)(ii)... $1,294.3 $ 786.5 Merger, restructuring and other non-recurring credits (charges), net............................................ 123.2 (617.0) Impairment of long-lived assets............................. (99.0) (76.0) Amortization of goodwill.................................... (83.9) (44.4) -------- -------- Operating income............................................ 1,234.6 49.1 Interest expense, net....................................... (164.7) (123.5) -------- -------- Pre-tax income (loss) before extraordinary items............ 1,069.9 (74.4) Income taxes................................................ (278.5) (33.3) -------- -------- Income (loss) before extraordinary items.................... 791.4 (107.7) Extraordinary items, net of taxes........................... (0.2) (2.4) -------- -------- Net income (loss)........................................... $ 791.2 $ (110.1) ======== ======== </TABLE> - ------------------------ (i) This amount is the sum of the operating income of the Company's four business segments set forth in the segment discussion below, less certain corporate expenses, and is before merger, restructuring and other non-recurring credits (charges), charges for the impairment of long-lived assets, and amortization of goodwill. (ii) Restructuring charges in the amount of $6.4 million and $13.3 million related to the write-down of inventory have been deducted as part of cost of sales in the Consolidated Statements of Operations for the quarters ended December 31, 1999 and 1998, respectively. However, they have not been deducted as part of cost of sales for the purpose of calculating operating income before certain credits 13 <PAGE> (charges) in this table. These charges are instead included in the total merger, restructuring and other non-recurring credits (charges). The Company has taken recent merger, restructuring and other non-recurring charges and charges for the impairment of long-lived assets with respect to AMP and USSC. Under the Company's restructuring and integration programs, the Company terminates employees and closes facilities made redundant. The reduction in manpower and facilities comes from the manufacturing, distribution and administrative functions. In addition, the Company discontinues or disposes of product lines which do not fit the long-term strategy of the respective businesses. The Company does not separately track the impact on financial results of the restructuring and integration programs. However, the Company estimates that its overall cost structure will be reduced by approximately $1 billion on an annualized basis due to the impact associated with these charges. As of December 31, 1999, the Company believes that approximately $800 million of benefits on an annualized basis have been realized. The significant decreases have been to selling, general and administrative expenses and to cost of sales. The restructuring plans will continue to improve the cost structure over the remainder of fiscal 2000. The effect of the merger, restructuring and other non-recurring charges and charges for the impairment of long-lived assets taken in fiscal 2000 on the ongoing operations will not be material. Operating income improved in all segments in the quarter ended December 31, 1999 as compared to the quarter ended December 31, 1998. The operating improvements are the result of both increased revenues and enhanced margins. Increased revenues resulted from organic growth and from acquisitions. The Company enhances its margins through improved productivity and cost reductions in the ordinary course of business, unrelated to acquisition or divestiture activities. The Company regards charges that it incurs to reduce costs in the ordinary course of business as recurring charges, which are reflected in cost of sales and in selling, general and administrative expenses in the Consolidated Statements of Operations. When the Company makes acquisitions, the sales and operating results of the acquired companies are included in the financial results of Tyco from the dates of their acquisition. The acquired companies are immediately integrated within the Company's existing operations. Consequently, the Company does not separately track the operating results of acquired companies. The discussion following the tables below includes an estimated quarter to quarter sales comparison that excludes the effects of indicated acquisitions. SALES AND OPERATING INCOME TELECOMMUNICATIONS AND ELECTRONICS The following table sets forth sales and operating income and margins on the basis described above for the Telecommunications and Electronics segment: <TABLE> <CAPTION> (UNAUDITED) FOR THE QUARTERS ENDED DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- ($ IN MILLIONS) <S> <C> <C> Sales................................................ $ 2,739.2 $ 1,804.0 Operating income, before certain credits (charges)... $ 571.7 $ 186.2 Operating margins, before certain credits (charges).......................................... 20.9% 10.3% Operating income, after certain credits (charges).... $ 649.0 $ 4.1 Operating margins, after certain credits (charges)... 23.7% 0.2% </TABLE> The 51.8% increase in sales in the quarter ended December 31, 1999 over the quarter ended December 31, 1998 for the Telecommunications and Electronics segment resulted in part from acquisitions. These included: the acquisition in May 1999 of Telecomunicaciones Marinas, S.A. ("Temasa"), 14 <PAGE> included in Tyco Submarine Systems Ltd. ("TSSL"); the acquisition in August 1999 of Raychem Corporation ("Raychem"), included in Tyco Electronics; the acquisition in November 1999 of Siemens Electromechanical Components GmbH & Co. KG ("Siemens EC"), included in Tyco Electronics; and the acquisition in December 1999 of Praegitzer Industries, Inc. ("Praegitzer"), included in the Tyco Printed Circuit Group. Excluding the impact of Temasa, Raychem, Siemens EC and Praegitzer, sales increased an estimated 17.7%, reflecting strong organic growth in sales in the quarter ended December 31, 1999 at each of AMP, TSSL and the Tyco Printed Circuit Group. The substantial increase in operating income and margins, before certain credits (charges), in the quarter ended December 31, 1999 compared with the quarter ended December 31, 1998 was due to improved margins at AMP, the acquisition of Raychem, and higher sales volume at TSSL and the Tyco Printed Circuit Group. The improved operating margins at AMP in the quarter ended December 31, 1999 resulted from increased volume, improved pricing and continuing cost reduction programs following the merger. In addition to the items discussed above, the substantial increase in operating income and margins was due to a merger, restructuring and other non-recurring net credit of $77.3 million in the quarter ended December 31, 1999 compared with a merger, restructuring and other non-recurring charge of $182.1 million in the quarter ended December 31, 1998. On January 17, 2000, the Company announced that its undersea fiber optics business will design, build, install, operate and maintain its own global undersea fiber optic communications network. Upon its completion, the system, to be known as the TyCom Global Network-TM- ("TGN"), is expected to be the largest and most advanced global undersea telecommunications fiber optic network. During the construction phase of TGN, sales and operating profits of TSSL may decrease from current levels. HEALTHCARE AND SPECIALTY PRODUCTS The following table sets forth sales and operating income (loss) and margins on the basis described above for the Healthcare and Specialty Products segment: <TABLE> <CAPTION> (UNAUDITED) FOR THE QUARTERS ENDED DECEMBER 31, --------------------- 1999 1998 --------- --------- ($ IN MILLIONS) <S> <C> <C> Sales................................................ $ 1,563.8 $ 1,342.8 Operating income, before certain credits (charges)... $ 362.1 $ 293.2 Operating margins, before certain credits (charges).......................................... 23.2% 21.8% Operating income (loss), after certain credits (charges).......................................... $ 282.1 $ (217.7) Operating margins, after certain credits (charges)... 18.0% (16.2)% </TABLE> The 16.5% increase in sales in the quarter ended December 31, 1999 over the quarter ended December 31, 1998 was primarily the result of organic growth in both Tyco Healthcare and Tyco Plastics. Tyco Healthcare's organic growth was especially strong outside the United States. In addition, sales increased in the quarter ended December 31, 1999 due to the effects of acquisitions, which included: Graphic Controls Corporation and Sunbelt Plastics, both acquired in November 1998 and included in results for all of the quarter ended December 31, 1999 but only part of the quarter ended December 31, 1998; Batts Inc., acquired in April 1999; and General Surgical Innovations, Inc. ("GSI"), acquired in November 1999. Excluding the impact of these acquisitions, sales increased an estimated 9.4%. The 23.5% increase in operating income, before certain credits (charges), and higher operating margins, before certain credits (charges), in the quarter ended December 31, 1999 compared to the quarter 15 <PAGE> ended December 31, 1998 was principally due to increased sales volume and improved margins at Tyco Healthcare, especially outside the United States. Increased profits in the quarter ended December 31, 1999 also reflected higher sales volume at Tyco Plastics and ADT Automotive. In addition to the items discussed above, the substantial increase in operating income and margins was due to net charges of $80.0 million in the quarter ended December 31, 1999 compared with charges of $510.9 million in the quarter ended December 31, 1998. The net charges in the quarter ended December 31, 1999 consist of merger, restructuring and other non-recurring charges of $7.9 million and charges for the impairment of long-lived assets of $99.0 million, partially offset by a merger, restructuring and other non-recurring credit of $26.9 million. On January 14, 2000, the Company announced that it had entered into an agreement to sell its ADT Automotive business to Manheim Auctions, Inc., a wholly-owned subsidiary of Cox Enterprises, Inc., for approximately $1 billion in cash. The sale is subject to customary regulatory review and, when complete, is expected to generate a one-time gain to the Company of approximately $300 million. FIRE AND SECURITY SERVICES The following table sets forth sales and operating income and margins on the basis described above for the Fire and Security Services segment: <TABLE> <CAPTION> (UNAUDITED) FOR THE QUARTERS ENDED DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- ($ IN MILLIONS) <S> <C> <C> Sales................................................ $ 1,449.7 $ 1,259.7 Operating income, before certain credits............. $ 244.1 $ 196.9 Operating margins, before certain credits............ 16.8% 15.6% Operating income, after certain credits.............. $ 271.0 $ 196.9 Operating margins, after certain credits............. 18.7% 15.6% </TABLE> The 15.1% increase in sales in the quarter ended December 31, 1999 over the quarter ended December 31, 1998 reflects increased worldwide sales in the electronic security services business and higher sales volume in fire protection operations in North America and the Asia-Pacific region. The increases were due primarily to a higher volume of recurring service revenues and, to a lesser extent, the effects of acquisitions in the security services business. These acquisitions included: Entergy Security Corporation ("Entergy"), acquired in January 1999, and Alarmguard Holdings ("Alarmguard"), acquired in February 1999. Excluding the impact of Entergy and Alarmguard, the sales increase for the segment in the quarter ended December 31, 1999 was an estimated 12.1%. The 24.0% increase in operating income, before certain credits, in the quarter ended December 31, 1999 over the quarter ended December 31, 1998 reflects increased service volume in fire protection operations worldwide and security operations in the United States. The increase in operating margins in the quarter ended December 31, 1999 was principally due to higher margins associated with recurring monitoring revenue in the United States security business and, to a lesser extent, improved margins worldwide in the fire protection business. In addition to the items discussed above, operating income and margins increased due to a merger, restructuring and other non-recurring credit of $26.9 million in the quarter ended December 31, 1999. 16 <PAGE> FLOW CONTROL PRODUCTS AND SERVICES The following table sets forth sales and operating income and margins on the basis described above for the Flow Control Products and Services segment: <TABLE> <CAPTION> (UNAUDITED) FOR THE QUARTERS ENDED DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- ($ IN MILLIONS) <S> <C> <C> Sales.................................................. $ 886.1 $ 807.0 Operating income....................................... $ 170.7 $ 129.2 Operating margins...................................... 19.3% 16.0% </TABLE> The 9.8% sales increase in the quarter ended December 31, 1999 over the quarter ended December 31, 1998 reflects increased demand for valve products in Europe, increased sales at Allied Tube and Conduit and Earth Tech and the impact of acquisitions. These acquisitions included: certain subsidiaries in the metals processing division of Glynwed International plc, acquired in March 1999; Central Sprinkler Corporation, acquired in August 1999; and AFC Cable Systems, Inc. ("AFC Cable"), acquired in November 1999. During August 1999, the Company completed the sale of certain businesses within this segment, including The Mueller Company and portions of Grinnell Supply Sales and Manufacturing. Excluding the impact of these acquisitions and divestitures, sales increased an estimated 11.0%. The 32.1% increase in operating income in the quarter ended December 31, 1999 over the quarter ended December 31, 1998 was primarily due to increased volume in worldwide valve operations, Allied Tube and Conduit and Earth Tech. Also, royalty and licensing fee income from certain intellectual property associated with the divested businesses offset a portion of the operating income lost from the divestitures. FOREIGN CURRENCY The effect of changes in foreign exchange rates during the quarter ended December 31, 1999 as compared to the quarter ended December 31, 1998 was not material to the Company's sales and operating income. CORPORATE EXPENSES Corporate expenses were $54.3 million in the quarter ended December 31, 1999 compared to $19.0 million in the quarter ended December 31, 1998. This increase was due principally to higher compensation expense under the Company's equity-based incentive compensation plans and an increase in corporate staffing to support and monitor the Company's expanding businesses and operations. AMORTIZATION OF GOODWILL Amortization of goodwill, a non-cash charge, increased to $83.9 million in the quarter ended December 31, 1999 from $44.4 million in the quarter ended December 31, 1998, due to an increase in goodwill resulting from acquisitions. INTEREST EXPENSE, NET Interest expense, net, increased to $164.7 million in the quarter ended December 31, 1999, compared to $123.5 million in the quarter ended December 31, 1998. The increase was due to higher average debt balances resulting from borrowings to finance acquisitions, slightly offset by lower average interest rates. The increase in borrowings was mitigated in part by the use of free cash flow to pay for certain acquisitions and to make payments on a portion of long-term debt, including debt tender offers. 17 <PAGE> EXTRAORDINARY ITEMS Extraordinary items in the quarters ended December 31, 1999 and 1998 included after-tax losses amounting to $0.2 million and $2.4 million, respectively, related to the write-off of net unamortized deferred financing costs in connection with the early extinguishment of debt. INCOME TAX EXPENSE The effective income tax rate, excluding the impact of merger, restructuring and other non-recurring credits (charges) and charges for the impairment of long-lived assets, was 25.0% during the quarter ended December 31, 1999, as compared to 28.4% in the quarter ended December 31, 1998. The decrease in the effective income tax rate was primarily due to higher earnings in tax jurisdictions with lower income tax rates. LIQUIDITY AND CAPITAL RESOURCES The following table shows the sources of the Company's cash flow from operating activities and the use of a portion of that cash in the Company's operations in the quarter ended December 31, 1999. Management refers to the net amount of cash generated from operating activities less capital expenditures and dividends as "free cash flow." <TABLE> <CAPTION> (UNAUDITED) QUARTER ENDED DECEMBER 31, 1999 ------------- (IN MILLIONS) <S> <C> Operating income, before certain credits (charges).......... $1,294.3(1) Depreciation and amortization............................... 290.7(2) Net increase in deferred income taxes....................... 124.3 Less: Net increase in working capital........................... (355.5) Interest expense (net).................................... (164.7) Income tax expense........................................ (278.5) Restructuring expenditures................................ (58.3)(3) Other (net)............................................... 20.8 -------- Cash flow from operating activities......................... 873.1 Less: Capital expenditures...................................... (420.5) Dividends paid............................................ (21.4) -------- Free cash flow.............................................. $ 431.2 ======== </TABLE> - ------------------------ (1) This amount is the sum of the operating income of the four business segments as set forth above, less certain corporate expenses, and is before merger, restructuring and other non-recurring credits (charges), charges for the impairment of long-lived assets and goodwill amortization. (2) This amount is the sum of depreciation of tangible property ($250.7 million) and amortization of intangible assets other than goodwill ($40.0 million). (3) This amount is cash paid out for merger, restructuring and other non-recurring charges. In addition, during the quarter ended December 31, 1999, the Company paid out $113.3 million in cash that was charged against reserves established in connection with acquisitions accounted for under the purchase accounting method. This amount is included in "Acquisition of businesses, net of cash acquired" in the Consolidated Statement of Cash Flows. 18 <PAGE> In the quarter ended December 31, 1999, the Company established restructuring and other non-recurring reserves of $14.4 million primarily related to the exiting of USSC's interventional cardiology business and the restructuring of AMP's Brazilian operations. At September 30, 1999, there existed merger, restructuring and other non-recurring reserves of $453.3 million. During the quarter ended December 31, 1999, the Company paid out $58.3 million in cash and incurred $19.9 million in non-cash charges that were charged against these reserves. Also in the quarter ended December 31, 1999, the Company determined that $137.6 million of merger, restructuring and other non-recurring reserves established in prior years was not needed and recorded a credit to the merger, restructuring and other non-recurring charges line item in the Consolidated Statement of Operations. The changes in estimates of the restructuring plan at AMP were attributable primarily to increased demand for certain of AMP's products which was not anticipated at the time of the merger and to recent acquisitions such as Siemens EC. Therefore, the Company has determined not to close several facilities and not to terminate approximately 3,000 employees, whose costs were provided for in previous AMP restructuring plans. In addition, certain restructuring activities at AMP were completed for amounts lower than originally anticipated. The changes in estimates of the Company's 1997 restructuring plans and the USSC restructuring plans were due primarily to the completion of activities for amounts lower than originally recorded. At December 31, 1999, there remained $251.9 million of merger, restructuring and other non-recurring reserves on the Company's Consolidated Balance Sheet, of which $207.7 million is included in current liabilities and $44.2 million is included in long-term liabilities. During the quarter ended December 31, 1999, the Company made acquisitions at an aggregate cost of $2,415.9 million. Of this amount, $1,620.9 million was paid in cash (net of cash acquired), $670.4 million was paid in the form of Tyco common shares, and the Company assumed $124.6 million in debt. In connection with these acquisitions, the Company established purchase accounting reserves of $57.4 million for transaction and integration costs. In addition, purchase accounting liabilities of $93.3 million and a corresponding increase to goodwill and deferred tax assets were recorded during the quarter ended December 31, 1999 representing changes in estimates related to acquisitions consummated prior to fiscal 2000, primarily the acquisition of Raychem in August 1999. At the beginning of fiscal 2000, purchase accounting reserves were $570.3 million as a result of purchase accounting transactions made in prior years. During the quarter ended December 31, 1999, the Company paid out $113.3 million in cash and incurred $7.4 million in non-cash charges against the reserves established during and prior to this quarter. Also, in the quarter ended December 31, 1999, the Company determined that $16.7 million of purchase accounting reserves related to acquisitions prior to fiscal 2000 were not needed and reversed that amount against goodwill. At December 31, 1999, there remained $583.6 million in purchase accounting reserves on the Company's Consolidated Balance Sheet, of which $452.1 million is included in current liabilities and $131.5 million is included in long-term liabilities. The net change in working capital, net of the effects of acquisitions and divestitures, was an increase of $355.5 million in the quarter ended December 31, 1999. These changes are set forth in detail in the Consolidated Statement of Cash Flows. The increase in working capital accounts is attributable to the higher level of business activity as reflected in the increased sales over the prior quarter and the payment of fiscal 1999 year-end bonuses. Management focuses on maximizing the cash flow from its operating businesses and attempts to keep the working capital employed in the businesses to the minimum level required for efficient operations. In addition, during the quarter ended December 31, 1999, the Company received proceeds of $35.8 million from the exercise of common share options and used $413.0 million of cash to purchase its own common shares. In November 1999, the Board of Directors authorized the Company to reacquire up to 20 million of its common shares in the open market. Such share reacquisition is substantially complete. In January 2000, the Company announced that the Board of Directors of the Company has authorized the expenditure of up to an additional $2.0 billion to repurchase shares of the Company. The timing and actual amount of the repurchases will be subject to market conditions and other factors. 19 <PAGE> The source of the cash used for acquisitions in fiscal 2000 was primarily an increase in total debt and cash flows from operations. Goodwill and other intangible assets were $13,985.2 million at December 31, 1999, compared to $12,158.9 million at September 30, 1999. At December 31, 1999, the Company's total debt was $11,487.9 million, as compared to $10,122.2 million at September 30, 1999. This increase resulted principally from borrowings under the Company's commercial paper program. For further detail on debt activity, see Note 3 to the Consolidated Financial Statements. On February 11, 2000, TIG renewed the $3.4 billion portion of its credit facility with a group of commercial banks, giving it the right to borrow up to $4.5 billion until February 9, 2001, with the option to extend the facility for one additional year and to increase the $4.5 billion up to $5.0 billion. The additional $0.5 billion portion of TIG's credit facility continues to be available until February 12, 2003. The Company plans to principally use the $4.5 billion portion of the credit facility to fully support borrowings under its commercial paper program, which it intends to increase to $4.5 billion. Shareholders' equity was $13,157.4 million, or $7.77 per share, at December 31, 1999, compared to $12,332.6 million, or $7.30 per share, at September 30, 1999. The increase in shareholders' equity was due primarily to net income of $791.2 million and the issuance of a total of approximately 15.5 million common shares valued at $670.4 million for the acquisitions of GSI and AFC Cable in November 1999. This increase was partially offset by the Company's repurchase of its common shares discussed above. Total debt as a percent of total capitalization (total debt and shareholders' equity) was 47% at December 31, 1999 and 45% at September 30, 1999. Net debt (total debt less cash and cash equivalents) as a percent of total capitalization was 42% at December 31, 1999 and 37% at September 30, 1999. The Company believes that its cash flow from operations, together with its existing credit facilities and other credit arrangements, is adequate to fund its operations. The Company intends to offer up to 20 percent of its undersea fiber optics business for sale in an initial public offering, a portion of the proceeds of which will be used to finance part of the build out of the TGN. See Part II, Item 1 ``Legal Proceedings--IDT Litigation" for a discussion of a complaint filed containing allegations with respect to the TGN. In January 2000, the Company announced that it had entered into an agreement to sell its ADT Automotive business for cash proceeds of approximately $1 billion. BACKLOG At December 31, 1999, the Company had a backlog of unfilled orders of approximately $7,491.4 million, compared to a backlog of approximately $7,581.1 million at September 30, 1999. Backlog by industry segment is as follows (unaudited): <TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- (IN MILLIONS) <S> <C> <C> Telecommunications and Electronics.................. $5,009.3 $4,974.5 Flow Control Products and Services.................. 1,306.2 1,516.5 Fire and Security Services.......................... 1,027.7 986.6 Healthcare and Specialty Products................... 148.2 103.5 -------- -------- $7,491.4 $7,581.1 ======== ======== </TABLE> Within the Telecommunications and Electronics segment, backlog increased principally due to an increase in backlog at Tyco Electronics, primarily resulting from the acquisition of Siemens EC, offset slightly by a decrease in backlog at TSSL due to the timing of contracts. The backlog may decrease in future periods as the TSSL business begins working on the TGN. Within the Flow Control Products and Services segment, backlog decreased primarily due to a decrease at Earth Tech resulting from the timing of contracts. Within the Fire and Security Services segment, backlog increased principally due to an increase 20 <PAGE> in backlog at the Company's fire protection operations in Asia and, to a lesser extent, the worldwide security and European fire protection businesses. Within the Healthcare and Specialty Products segment, the increase resulted principally from an increase in demand for the products sold by Ludlow Technical Products. YEAR 2000 COMPLIANCE The Company's Year 2000 compliance programs and systems modifications were completed on time, and the conversion process was successful. The Company's business has not been adversely affected due to the failure of key third parties to successfully complete the Year 2000 conversion. Although there can be no assurance that all of the Company's material third-party relationships had successful conversion programs, management does not expect that any such failure would have a material adverse effect on the financial position, results of operations or liquidity of the Company. The costs of the Company's Year 2000 program to date have not been material, and the Company knows of no further required modifications to its information technology or embedded technology systems that would have a material impact on its financial position, results of operations or liquidity. FORWARD LOOKING INFORMATION Certain statements in this report are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward looking statements involve risks and uncertainties. In particular, any statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission, or in the Company's communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding the consummation and benefits of future acquisitions, as well as expectations with respect to future sales, earnings, cash flows, operating efficiencies, product expansion, backlog, financings and share repurchases, are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which may cause actual results, performance or achievements to differ materially from anticipated results, performances or achievements. Factors that might affect such forward looking statements include, among other things, overall economic and business conditions; the demand for the Company's goods and services; competitive factors in the industries in which the Company competes; changes in government regulation; changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); results of litigation; interest rate fluctuations and other capital market conditions, including foreign currency rate fluctuations; economic and political conditions in international markets, including governmental changes and restrictions on the ability to transfer capital across borders; the ability to achieve anticipated synergies and other cost savings in connection with acquisitions; the timing, impact and other uncertainties of future acquisitions; and the successful completion of Year 2000 conversion programs by the Company's material customers and suppliers. ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk from changes in interest rates, foreign currency exchange rates and commodity prices has not changed materially from its exposure as of the most recent year ended September 30, 1999. 21 <PAGE> PART II--OTHER INFORMATION ITEM 1--LEGAL PROCEEDINGS SEC INQUIRY As previously reported in a Current Report on Form 8-K filed on December 9, 1999, Tyco has been cooperating with the staff of the Securities and Exchange Commission, which is conducting an inquiry relating to charges and reserves taken by Tyco in connection with the Company's acquisitions. Tyco is providing documents and information to the staff of the SEC in response to these requests and is continuing to cooperate on a voluntary basis. SECURITIES LITIGATION As of February 7, 2000, the Company is aware of 39 purported class action lawsuits that have been filed against the Company and certain directors, officers and employees of the Company with respect to alleged violations of securities laws. All of the actions essentially duplicate one another, pleading essentially the same allegations. The actions claim violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, specifically alleging, among other things, that the Company used misleading accounting methods in its reporting of certain acquisitions, which allegedly resulted in the purchase of the Company's common shares by purported class members at artificially inflated prices, and that certain directors, officers and employees sold common shares during the class period, at inflated prices and on the basis of inside information. The actions seek compensatory and other damages, and costs and expenses associated with the litigation. Nine of the actions were filed in the Southern District of New York; 12 were filed in the Southern District of Florida; 16 were filed in the District of New Hampshire and two were filed in the Eastern District of Pennsylvania. On December 23, 1999, the Company moved before the Judicial Panel on Multidistrict Litigation to transfer and consolidate the pre-trial proceedings of the cases that had been filed as of that date to the District of New Hampshire. On January 19, 2000, certain of the plaintiffs responded to the Company's motion before the Judicial Panel on Multidistrict Litigation, some of whom urged the Panel to transfer and consolidate the cases in the Southern District of Florida. On January 26, 2000, the Company filed its Reply to the plaintiffs that responded. The 39 cases which the Company seeks to have consolidated are: District of New Hampshire RONALD T. CENFETELLI, JR. V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. C-99-570-JD (filed December 9, 1999) ROSALIND POPLACK AND HENRY COLE V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. C-99-573-JD (filed December 10, 1999) MATTHEW B. HAYES V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. C-99-576-JD (filed December 10, 1999) ROLAND LARTIGUE V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. C-99-579-JD (filed December 13, 1999) CAROL BLOOM V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. C-99-580-B (filed December 13, 1999) MILLICENT TOBEY V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. C-99-586-JD (filed December 14, 1999) ANDREA O'BRIEN V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. C-99-587-B (filed December 14, 1999) 22 <PAGE> BRUCE RANGNOW V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. C-99-589-JD (filed December 16, 1999) LARRY FISCHER AND HERBERT R. SILVER V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. C-99-590-B (filed December 16, 1999) HOWARD S. GOLDSMITH V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. C-99-603-JD (filed December 22, 1999) JOSEPH C. BARTON V. TYCO INTERNATIONAL LTD, L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. C-99-610-JD (filed December 28, 1999) ROY CECCATO V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. C-99-613-JM (filed December 28, 1999) RALPH BELCASTRO, CARMELLA BELCASTRO, AND RONALD B. FOX, AS EXECUTOR OF THE ESTATE OF LILLIAN HERSHKOWITZ V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. C-00-32-JD (filed January 19, 2000) THE SHINDLER FAMILY TRUST V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. C-00- 33-JM (filed January 18, 2000) HOWARD M. LEVY, HOWARD M. LEVY PROFIT SHARING PLAN, TERRI LACOFF, MICHAEL J. FEDAK, ROBERT MCKINNEY, HILLARY WEISS AND WILLIAM WEISS, WILLIAM WEISS IRA, AND LYMAN R. MOSS V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. C-00-38-JD (filed January 21, 2000) HAROLD LANDAU V. L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 00-56-B (filed February 7, 2000) Southern District of New York STEPHEN GREENBERG V. TYCO INTERNATIONAL LTD., MARK H. SWARTZ AND DENNIS L. KOZLOWSKI, No. 99 CIV 11930 (filed December 9, 1999) LETTY BOST V. TYCO INTERNATIONAL LTD., MARK H. SWARTZ AND DENNIS L. KOZLOWSKI, No. 99 CIV 11967 (filed December 10, 1999) JULES BRODY V. TYCO INTERNATIONAL LTD., MARK H. SWARTZ AND DENNIS L. KOZLOWSKI, No. 99 CIV 12047 (filed December 14, 1999) MEYER MINTZ V. TYCO INTERNATIONAL LTD., MARK H. SWARTZ AND DENNIS L. KOZLOWSKI, No. 99 CIV 12061 (filed December 14, 1999) ALBERT COHEN V. TYCO INTERNATIONAL LTD., MARK H. SWARTZ AND DENNIS L. KOZLOWSKI, No. 99 CIV 12083 (filed December 15, 1999) JERRY KRIM V. TYCO INTERNATIONAL LTD., MARK H. SWARTZ AND DENNIS L. KOZLOWSKI, No. 99 CIV 12259 (filed December 21, 1999) MICHAEL EDMUND V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI, MARK H. SWARTZ, MICHAEL A. ASHCROFT, PHILIP M. HAMPTON, MARK A. BELNICK, NEIL R. GARVEY AND ROBERT P. MEAD, No. 99 CIV 12288 (filed December 21, 1999) JAMES HENRY V. TYCO INTERNATIONAL LTD., MARK H. SWARTZ AND DENNIS L. KOZLOWSKI, No. 99 CIV 12291 (filed December 20, 1999) SHEPLEY SMITH V. TYCO INTERNATIONAL LTD., MARK H. SWARTZ AND DENNIS L. KOZLOWSKI, No. 99 CIV 12461 (filed December 28, 1999) 23 <PAGE> Southern District of Florida JONATHAN POLANSKY V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 99-9048-CIV-Ryskamp (filed December 9, 1999) CHAIM SCHARF V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 99-9052-CIV-Hurley (filed December 10, 1999) DANIEL H. ROH V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 99-9053-CIV-Hurley (filed December 10, 1999) RICHARD EHRLICH V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 99-9054-CIV-Ryskamp (filed December 10, 1999) HERMAN MERMELSTEIN AND DONALD GOLDSTEIN V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 99-CV-9056 (filed December 10, 1999) GEORGE KOUTROUMANIS V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 99-9067-CIV-Hurley (filed December 15, 1999) HAROLD LADD V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 00 CV 8021 (filed January 7, 2000) PETER M. HICKS AND JOANNE RYAN V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 00 CV 8037 (filed January 10, 2000) MARGE BREIT REVOCABLE TRUST V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 00 CV 8057 (filed January 14, 2000) RONALD E. TIGNER V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 00-CV-8086 (filed January 24, 2000) GEORGE BOWLES V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK SWARTZ, No. 00-8085-CIV-Ferguson (filed January 24, 2000) MARCIA BECKER, VINCENT ST. JOHN, ROBERT PRISCO AND STEPHAN L. SWAGER V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 00-8105-CIV-ZLOCH (filed January 31, 2000) Eastern District of Pennsylvania HAROLD BARON V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 99-CV-6385 (filed December 15, 1999) JANET POLIS V. TYCO INTERNATIONAL LTD., L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, No. 99-CV-6396 (filed December 15, 1999) On January 18, 2000, an initial conference was held before the Honorable Judge Jed S. Rakoff of the Southern District of New York for the 9 cases filed in that district. At that conference the New York actions were consolidated. The Company believes that these claims are without merit and intends to defend vigorously against them. IDT LITIGATION On January 31, 2000, a complaint was filed in the United States District Court for the District of New Jersey asserting claims against two subsidiaries of the Company. The claims arise out of negotiations conducted by the Company's Luxembourg subsidiary, Tyco Group S.a.r.l. ("Tyco Group"), with a Belgian corporation, IDT Europe B.V.B.A. concerning the possible formation of a joint venture for the development of an undersea fiber optic telecommunications system which the complaint alleges was to be 24 <PAGE> substantially similar to the proposed TyCom Global Network. The plaintiff alleges that Tyco Group breached a Memorandum of Understanding dated November 9, 1999, (which expired in December 1999), and alleged implied covenants of good faith and fair dealing, in various ways, including by failing to negotiate in good faith to complete and finalize various agreements relating to the proposed joint venture. The plaintiff seeks, among other relief such as attorneys fees and costs, specific performance of Tyco Group's alleged obligation to negotiate and execute such agreements and compensatory damages of $1 billion. The plaintiff also alleges that Tyco Group tortiously interfered with another agreement, and with contractual relations, business relations and fiduciary duties relating to that agreement, which plaintiff claims it had with Tyco Submarine Systems, Ltd. ("TSSL"), the other Company subsidiary named in the complaint, and seeks compensatory damages of $1 billion, punitive damages of $3 billion and temporary and permanent injunctive relief prohibiting Tyco Group from undertaking any business activity inconsistent with the Memorandum of Understanding. Similar breach of contract and breach of implied covenant of good faith and fair dealing claims are asserted against TSSL in connection with that agreement, as to which the plaintiff seeks the same injunctive relief and compensatory damages. The Company's subsidiaries believe that the complaint is without merit and intend to defend the action vigorously. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1999 Annual General Meeting of Shareholders ("the Meeting") of the Company was held on November 3, 1999. All Company proposals submitted at the Meeting were passed, shareholder proposals 1 and 2 were not passed and shareholder proposal 3 was passed, as described below. The following is a brief description of each matter voted upon at the Meeting. All amounts have been restated to give effect to the two-for-one stock split distributed on October 21, 1999. COMPANY PROPOSAL 1. To re-elect the Board of Directors of the Company and to approve an increased limit for director remuneration: The following is a tabulation of the votes submitted in respect of Company Proposal 1; proxy votes giving discretion to the chairman of the Meeting have been included in the "Number of Votes For" column. <TABLE> <CAPTION> NUMBER OF NUMBER OF VOTES AGAINST NUMBER OF VOTES FOR OR WITHHELD ABSTENTIONS ------------- ------------- ----------- <S> <C> <C> <C> L. Dennis Kozlowski.................... 1,365,961,125 12,555,071 2,044,192 Michael A. Ashcroft.................... 1,365,822,665 12,691,539 2,046,184 Joshua M. Berman....................... 1,366,076,409 12,439,490 2,044,489 Richard S. Bodman...................... 1,365,942,855 12,574,391 2,043,142 John F. Fort, III...................... 1,343,893,606 34,621,221 2,045,561 Stephen W. Foss........................ 1,366,087,987 12,429,435 2,042,966 Philip M. Hampton...................... 1,366,000,646 12,514,174 2,045,568 James S. Pasman, Jr.................... 1,366,013,221 12,502,160 2,045,007 W. Peter Slusser....................... 1,365,845,093 12,669,511 2,045,784 Frank E. Walsh, Jr..................... 1,366,075,478 12,440,986 2,043,924 </TABLE> COMPANY PROPOSAL 2. To re-appoint PricewaterhouseCoopers as the independent auditors and to authorize the Board of Directors to fix the auditors' remuneration: A total of 1,377,871,718 shares were voted for and 1,770,921 shares were voted against the re-appointment and authorization. There were 917,752 abstentions. 25 <PAGE> COMPANY PROPOSAL 3. To consider a policy statement concerning independent directors: A total of 1,269,307,794 shares were voted for and 66,737,721 shares were voted against the Company's policy statement concerning independent directors. There were 44,508,572 abstentions and 6,304 broker non-votes. SHAREHOLDER PROPOSAL 1. To consider a shareholder proposal concerning independent Directors: A total of 152,993,473 shares were voted for and 1,025,094,165 shares were voted against the shareholder proposal. There were 46,505,857 abstentions and 155,966,896 broker non-votes. SHAREHOLDER PROPOSAL 2. To consider changing the Company's jurisdiction of incorporation from Bermuda to Delaware: A total of 81,381,190 shares were voted for and 1,133,544,209 shares were voted against the shareholder proposal. There were 9,668,097 abstentions and 155,966,895 broker non-votes. SHAREHOLDER PROPOSAL 3. To consider refraining from adopting any future shareholder rights plans without shareholder approval: A total of 853,951,694 shares were voted for and 362,137,092 shares were voted against the shareholder proposal. There were 8,504,703 abstentions and 155,966,902 broker non-votes. ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K Current Report on Form 8-K filed on October 22, 1999 announcing fourth quarter earnings for fiscal 1999 and the distribution of a two-for-one stock split. Current Report on Form 8-K filed on November 9, 1999 containing Amendment No. 1 to the Agreement and Plan of Merger, dated as of August 23, 1999 by and among General Acquisition, Tyco Acquisition Corp. XXIII (successor by assignment to General Sub Acquisition Corp.), a Delaware corporation and a wholly-owned subsidiary of General Acquisition, and General Surgical Innovations, Inc. Current Report on Form 8-K filed on November 22, 1999 containing Amendment No. 1 to the Agreement and Plan of Merger, dated as of August 31, 1999 by and among Tyco (NV), Tyco Acquisition Corp. XXII, a Delaware corporation and a wholly-owned subsidiary of Tyco (NV), and AFC Cable Systems, Inc., a Delaware corporation. Current Report on Form 8-K filed on December 9, 1999 containing Tyco's press release announcing the SEC's nonpublic informal inquiry relating to charges and reserves taken in connection with the Company's acquisitions. Current Report on Form 8-K filed on December 10, 1999 disclosing wire reports of purported stockholder class actions seeking damages against the Company and certain of its officers. Current Report on Form 8-K filed on January 20, 2000 containing press releases announcing first quarter earnings for fiscal 2000, approval by the Board of Directors to repurchase up to an additional $2.0 billion of common shares and Tyco's plans to build its own advanced global undersea fiber optic network. 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 hereunto duly authorized. <TABLE> <S> <C> TYCO INTERNATIONAL LTD. /s/ MARK H. SWARTZ ---------------------------------------------- Mark H. Swartz Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Date: February 11, 2000 </TABLE> 27 <PAGE> TYCO INTERNATIONAL LTD. The Zurich Centre Second Floor 90 Pitts Bay Road Pembroke, HM 08, Bermuda February 11, 2000 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Quarterly Report on Form 10-Q Gentlemen and Ladies: We are transmitting for filing pursuant to Item 101(a)(iii) of Regulation S-T, our Quarterly Report on Form 10-Q which contains the Company's Consolidated Financial Statements at December 31, 1999 and September 30, 1999 and for the quarters ended December 31, 1999 and 1998. Very truly yours, /s/ MARK H. SWARTZ - -------------------------------------- Mark H. Swartz Executive Vice President and Chief Financial Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT OF TYCO INTERNATIONAL LTD. AS OF AND FOR THE QUARTER ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <CURRENCY> U.S. DOLLARS <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-2000 <PERIOD-START> OCT-01-1999 <PERIOD-END> DEC-31-1999 <EXCHANGE-RATE> 1 <CASH> 1,230,100 <SECURITIES> 0 <RECEIVABLES> 5,634,900 <ALLOWANCES> 361,000 <INVENTORY> 3,069,800 <CURRENT-ASSETS> 11,138,200 <PP&E> 14,037,200 <DEPRECIATION> 6,152,700 <TOTAL-ASSETS> 34,806,800 <CURRENT-LIABILITIES> 9,375,900 <BONDS> 10,514,600 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 338,600 <OTHER-SE> 12,818,800 <TOTAL-LIABILITY-AND-EQUITY> 34,806,800 <SALES> 6,638,800 <TOTAL-REVENUES> 6,638,800 <CGS> 4,191,900 <TOTAL-COSTS> 4,191,900 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 7,200 <INTEREST-EXPENSE> 182,400 <INCOME-PRETAX> 1,069,900 <INCOME-TAX> 278,500 <INCOME-CONTINUING> 791,400 <DISCONTINUED> 0 <EXTRAORDINARY> (200) <CHANGES> 0 <NET-INCOME> 791,200 <EPS-BASIC> 0.47 <EPS-DILUTED> 0.46 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

KLAC

https://www.sec.gov/Archives/edgar/data/319201/0000891618-00-000899.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, OZjjd8iqVun8UJVCcS8ILw1egBiuCIOwrMisO4mDK9B53dXpO+kGGJwhG7QOujaK DuTxrU5NqhyxapWqs2tbug== <SEC-DOCUMENT>0000891618-00-000899.txt : 20000215 <SEC-HEADER>0000891618-00-000899.hdr.sgml : 20000215 ACCESSION NUMBER: 0000891618-00-000899 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KLA TENCOR CORP CENTRAL INDEX KEY: 0000319201 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 042564110 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09992 FILM NUMBER: 541485 BUSINESS ADDRESS: STREET 1: 160 RIO ROBLES CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4084344200 MAIL ADDRESS: STREET 1: 160 RIO ROBLES CITY: SAN JOSE STATE: CA ZIP: 95161-9055 FORMER COMPANY: FORMER CONFORMED NAME: KLA INSTRUMENTS CORP DATE OF NAME CHANGE: 19920703 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <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: December 31, 1999 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 0-9992 KLA-TENCOR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-2564110 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 160 Rio Robles San Jose, California 95134 (Address of principal executive offices) (Zip Code) (408) 875-3000 (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 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 31, 2000 there were 183,602,096 shares of the registrant's Common Stock, $0.001 par value, outstanding. <PAGE> 2 INDEX <TABLE> <CAPTION> Page Number ------ <S> <C> <C> PART I FINANCIAL INFORMATION Item 1 Financial Statements (unaudited) Condensed Consolidated Balance Sheets at June 30, 1999 and December 31, 1999 ............................. 3 Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended December 31, 1998 and 1999 ........................................................ 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1998 and 1999 ............. 5 Notes to Condensed Consolidated Financial Statements............. 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk.......... 16 PART II OTHER INFORMATION Item 1 Legal Proceedings................................................... 17 Item 4 Submission of Matters to a Vote of Security Holders................. 17 Item 6 Exhibits and Reports on Form 8-K.................................... 17 SIGNATURES 18 </TABLE> 2 <PAGE> 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KLA-TENCOR CORPORATION CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> June 30, December 31, 1999 1999 ---------- ------------ <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 271,488 $ 354,918 Short-term investments 59,574 91,215 Accounts receivable, net 280,070 316,625 Inventories 195,679 222,233 Other current assets 135,530 150,797 ---------- ---------- Total current assets 942,341 1,135,788 Land, property and equipment, net 168,335 170,674 Marketable securities 424,121 407,788 Other assets 50,103 64,292 ---------- ---------- Total assets $1,584,900 $1,778,542 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 14,567 $ 15,145 Accounts payable 35,249 37,898 Other current liabilities 302,501 358,528 ---------- ---------- Total current liabilities 352,317 411,571 ---------- ---------- Stockholders' equity: Common stock and capital in excess of par value 504,352 551,411 Retained earnings 723,048 811,799 Accumulated other comprehensive income 5,183 3,761 ---------- ---------- Total stockholders' equity 1,232,583 1,366,971 ---------- ---------- Total liabilities and stockholders' equity $1,584,900 $1,778,542 ========== ========== </TABLE> See accompanying notes to condensed consolidated unaudited financial statements. 3 <PAGE> 4 KLA-TENCOR CORPORATION CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS (In thousands, except per share data) <TABLE> <CAPTION> Three months ended Six months ended December 31, December 31, 1998 1999 1998 1999 --------- --------- -------- -------- <S> <C> <C> <C> <C> Revenues $ 193,371 $ 330,757 $398,601 $603,746 Costs and operating expenses: Costs of goods sold 104,909 153,373 217,564 289,490 Engineering, research and development 38,470 55,624 81,396 102,342 Selling, general and administrative 49,966 60,148 102,539 113,562 Non-recurring acquisition, restructuring and other charges 42,700 62 42,700 (5,938) --------- --------- -------- -------- Total costs and operating expenses 236,045 269,207 444,199 499,456 --------- --------- -------- -------- Income (loss) from operations (42,674) 61,550 (45,598) 104,290 Interest income and other, net 14,083 6,850 31,146 19,556 --------- --------- -------- -------- Income (loss) before income taxes (28,591) 68,400 (14,452) 123,846 Provision (benefit) for income taxes (10,994) 19,151 (7,035) 35,095 --------- --------- -------- -------- Net income (loss) $ (17,597) $ 49,249 $ (7,417) $ 88,751 ========= ========= ======== ======== Earnings (loss) per share: Basic $ (0.10) $ 0.27 $ (0.04) $ 0.49 ========= ========= ======== ======== Diluted $ (0.10) $ 0.26 $ (0.04) $ 0.47 ========= ========= ======== ======== Weighted average number of shares: Basic 174,926 180,607 174,828 179,307 ========= ========= ======== ======== Diluted 174,926 190,780 174,828 189,352 ========= ========= ======== ======== </TABLE> See accompanying notes to condensed consolidated unaudited financial statements. 4 <PAGE> 5 KLA-TENCOR CORPORATION CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOW (In thousands) <TABLE> <CAPTION> Six Months Ended December 31, 1998 1999 --------- --------- <S> <C> <C> Cash flows from operating activities: Net income (loss) $ (7,417) $ 88,751 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 21,721 28,525 Deferred income taxes -- (321) Restructuring charges 35,000 (7,838) Non-recurring acquisition charges 7,700 1,900 Net gain on sale of marketable securities (11,119) (3,323) Changes in assets and liabilities: Accounts receivable, net 40,353 (15,778) Inventories 21,976 (26,128) Other assets (627) (61,350) Accounts payable (23,690) 1,764 Other current liabilities (31,679) 56,363 --------- --------- Net cash provided by operating activities 52,218 62,565 --------- --------- Cash flows from investing activities: Purchases of property and equipment, net (10,173) (25,642) Net sales (purchases) of available for sale securities (43,265) 25,267 Acquisition of assets and technology (12,522) (6,900) --------- --------- Net cash used in investing activities (65,960) (7,275) --------- --------- Cash flows from financing activities: Issuance of common stock, net 18,710 54,690 Stock repurchases (20,648) (7,565) Net payments under debt obligations (4,483) (2,729) --------- --------- Net cash provided by (used in) financing activities (6,421) 44,396 --------- --------- Effect of exchange rate changes on cash and cash equivalents (18,181) (16,256) --------- --------- Net increase (decrease) in cash and cash equivalents (38,344) 83,430 Cash and cash equivalents at beginning of period 215,970 271,488 --------- --------- Cash and cash equivalents at end of period $ 177,626 $ 354,918 ========= ========= Supplemental cash flow disclosures: Income taxes paid, net of refunds $ 6,415 $ 2,039 ========= ========= Interest paid $ 996 $ 166 ========= ========= </TABLE> See accompanying notes to condensed consolidated unaudited financial statements. 5 <PAGE> 6 KLA-TENCOR CORPORATION NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS NOTE 1. In the opinion of management, the accompanying condensed consolidated unaudited financial statements include all adjustments (consisting only of normal recurring accruals) necessary for their fair presentation in accordance with generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ materially from those amounts. The results for the three-month period ended December 31, 1999 are not necessarily indicative of results to be expected for the entire year. This financial information 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 June 30, 1999. Certain items previously reported in specific financial statement captions have been reclassified to conform to the presentation of the three-month period ended December 31, 1999. NOTE 2. Inventories (in thousands): <TABLE> <CAPTION> June 30, December 31, 1999 1999 -------- ------------ <S> <C> <C> Customer service parts $ 41,276 $ 45,300 Raw materials 45,906 48,781 Work-in-process 52,913 79,976 Demonstration equipment 37,469 37,562 Finished goods 18,115 10,614 -------- -------- $195,679 $222,233 ======== ======== </TABLE> NOTE 3. The Company has adopted a plan to repurchase shares of its Common Stock on the open market for the purpose of partially offsetting dilution created by employee stock options and stock purchase plans. During the six month period ended December 31, 1999, the Company repurchased 188,000 shares of its Common Stock at a cost of $7.6 million. NOTE 4. For the three- and six-month periods ended December 31, 1998 and 1999, the components of comprehensive income, net of tax, are as follows (in thousands): <TABLE> <CAPTION> Three months ended Six months ended December 31, December 31, 1998 1999 1998 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income (loss) $(17,597) $ 49,249 $ (7,417) $ 88,751 -------- -------- -------- -------- Foreign currency translation adjustments 3,790 1,344 4,972 3,572 Unrealized gains (losses) on investments (4,759) (1,420) (5,741) (4,994) -------- -------- -------- -------- Other comprehensive loss (969) (76) (769) (1,422) -------- -------- -------- -------- Total comprehensive income (loss) $(18,566) $ 49,173 $ (8,186) $ 87,329 ======== ======== ======== ======== </TABLE> NOTE 5. Basic earnings (loss) per share, is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in 6 <PAGE> 7 the same manner and also gives effect to all dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options. During the three- and six- month periods ended December 31, 1998, diluted loss per share was calculated using the weighted average number of shares outstanding during the periods. Options outstanding during the periods were excluded from the computation of diluted loss per share because the effect in periods with a net loss would be anti-dilutive. During the three- and six- month periods ended December 31, 1999, options to purchase 94,900 and 83,430 shares at a weighted average price of $46.30 and $44.60 were not included in the computation of diluted EPS because the exercise price was greater than the average market price of common shares. The reconciling difference between the computation of basic and diluted earnings per share for the three- and six- month periods ended December 31, 1999, is the inclusion of the dilutive effect of stock options issued to employees under employee stock option plans. For shareholders of record on January 4, 2000, the Company effected a 2:1 stock split of its Common Stock in the form of a 100 percent stock dividend. The stock dividend was paid on January 18, 2000. All share and per share amounts have been adjusted to reflect this transaction retroactively. NOTE 6. In November 1998, the Company entered into a restructuring plan associated with the downturn in the semiconductor industry. The total pre-tax restructuring charge was $35 million. The plan included consolidation of facilities, write-down of assets associated with affected programs and reductions in the Company's global workforce. The Company expects to continue to utilize the restructuring reserves during the remainder of fiscal 2000 as the program is completed. During the three- and six-month periods ended December 31, 1999, the Company determined that $1.8 and $7.8 million respectively of the restructuring reserve established during the three-month period ended December 31, 1998 would not be utilized because of a change in management's plans for utilization of certain facilities resulting from an increase in demand for the Company's products. Accordingly, the restructuring reserve reversal was included in the determination of income from operations for the three- and six-month periods ended December 31, 1999. Restructuring and related charges for the period from November 1998 until December 31, 1999 were as follows (in thousands): <TABLE> <CAPTION> Severance Facilities Inventory and Benefits Other Total -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Restructuring provision $ 12,491 $ 9,721 $ 8,126 $ 4,662 $ 35,000 Write-down of assets (2,035) (6,729) --- (3,168) (11,932) Cash expenditures (2,328) (409) (2,672) (1,000) (6,409) Restructuring reserve reversal (5,721) (279) --- --- (6,000) -------- -------- -------- -------- -------- Balance at September 30, 1999 2,407 2,304 5,454 494 10,659 Write-down of assets --- (1,420) --- (494) (1,914) Cash expenditure (143) --- (376) --- (519) Restructuring reserve reversal (1,257) --- (581) --- (1,838) -------- -------- -------- -------- -------- Balance at December 31, 1999 $ 1,007 $ 884 $ 4,497 $ --- $ 6,388 ======== ======== ======== ======== ======== </TABLE> NOTE 7. On November 30, 1999, KLA-Tencor acquired software developer ACME Systems, Inc. (ACME). ACME is a leading supplier of yield engineering analysis software used to correlate parametric electrical test and wafer sort yield data with in-line Work In Process (WIP) 7 <PAGE> 8 and Metrology data. The acquisition was accounted for as a purchase. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in KLA-Tencor's condensed consolidated balance sheet as of December 31, 1999 and the results of operations from November 30, 1999 through December 31, 1999 were included in the Company's condensed consolidated statement of operations. KLA-Tencor acquired ACME for a total of $6.9 million in cash. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed based on management estimates The in-process research and development charge of $1.9 million was determined by KLA-Tencor management, utilizing valuation methodologies approved by the Securities and Exchange Commission ("SEC"). However, there can be no assurance that the SEC will not take issue with assumptions used in KLA-Tencor's valuation model and require KLA-Tencor to revise the amount allocated to in-process research and development. To determine the value of the in-process technology, the expected future cash flow attributable to the in-process technology was discounted, taking into account the percentage of completion, utilization of pre-existing technology, risks related to the characteristics and applications of the technology, existing and future markets, and technological risk associated with completing the development of the technology. The valuation approach used was a form of discounted cash flow approach commonly known as the "percentage of completion" approach whereby the cash flows from the technology are multiplied by the percentage of completion of the in-process technology. NOTE 8. In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 137 (SFAS No. 137), "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 amends Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities," to defer its effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments including standalone instruments, such as forward currency exchange contracts and interest rate swaps or embedded derivatives and requires that these instruments be marked-to-market on an ongoing basis. These market value adjustments are to be included either in the income statement or stockholders' equity, depending on the nature of the transaction. The Company is required to adopt SFAS No. 133 in the first quarter of its fiscal year ending June 30, 2001. The effect of SFAS No. 133 is not expected to be material to the Company's financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles (GAAP) to revenue recognition in financial statements. The Company is required to adopt SAB 101 in the quarter beginning after December 15, 1999. Although the Company believes its revenue recognition policies are in accordance with GAAP, the Company is currently studying SAB 101 and has not determined its impact on the Company's financial statements. NOTE 9. A discussion regarding certain pending legal proceedings is included in Footnote 9 of the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended June 30, 1999. The information provided therein remains unchanged. Although the outcome of these claims cannot be predicted with certainty, management does not believe that any of these legal matters will have a material adverse effect on the Company's financial condition. Were an unfavorable ruling to occur, there exists the possibility of a material impact on the net income of the period in which the ruling occurs. 8 <PAGE> 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Current Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the of Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion and in the Company's Annual Report on Form 10-K for the year ended June 30, 1999. Generally, the words "anticipate", "expect", "intend", "believe" and similar expressions identify forward- looking statements. The information included in this Quarterly Report is as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included here. RESULTS OF OPERATIONS Revenues were $331 million and $604 million for the three- and six-month periods ended December 31, 1999, compared to $193 million and $399 million for the same periods of the prior fiscal year, representing an increase of 71% and 51% for the respective periods. The increase in revenues was primarily attributable to increased capital spending by major semiconductor manufacturers. We experienced increased revenues across all product lines as a result of the increased capital spending by major semiconductor manufacturers. Gross margins were 54% and 52% of revenues for the three- and six-month periods ended December 31, 1999, compared to 46% and 45% of revenues for the same periods in the prior fiscal year. Gross margins increased primarily due to increased capacity utilization resulting from higher unit volume as well as faster growth of higher margin product revenue compared to lower margin service revenue. Engineering, research and development (R&D) expenses were $56 million and $102 million for the three- and six-month periods ended December 31, 1999, compared to $38 million and $81 million for the same periods in the prior fiscal year. As a percentage of revenues, R&D expenses decreased to 17% for the three- and six-month periods ended December 31, 1999, compared to 20% for the same periods in the prior fiscal year. Our investment in R&D represents a continued commitment to product development in new and emerging market segments and enhancements to existing products for 0.13 micron, copper development and 300mm wafers. Selling, general and administrative expenses were $60 million and $114 million for the three- and six-month periods ended December 31, 1999, compared to $50 million and $103 million for the same periods in the prior fiscal year. As a percentage of revenues, selling, general and administrative expenses were 18% and 19% for the three- and six-month periods ended December 31, 1999, compared to 26% for the same periods in the prior fiscal year. Aggregate selling, general and administrative expenses increased over prior periods due to increases in our sales and marketing infrastructure, including hiring additional sales people. During the three- and six-month periods ended December 31, 1999, we determined that $1.8 and $7.8 million, respectively, of the $35 million restructuring reserve established during the three-month period ended December 31, 1998 would not be utilized because of a change in management's plans for utilization of certain facilities resulting from an increase in demand for our products. Accordingly, the restructuring reserve reversal was included in the determination of income from operations for the three- and six-month periods ended December 31, 1999. Non-recurring acquisition charges were $1.9 million for the three-month period ended December 31, 1999, compared to $7.7 million for the same period in the prior fiscal year. The current-year charge resulted from the acquisition of ACME Systems, Inc. 9 <PAGE> 10 Interest income and other, net, decreased to $7 million and $20 million for the three- and six-month periods ended December 31, 1999, compared to $14 million and $31 million in the same periods in the prior fiscal year. The decrease was due primarily to a smaller gain on sale of marketable securities as the Company deferred a previously planned sale of stock in a supplier company. Our effective tax rate for the three- and six-month periods ended December 31, 1999, was 28% on pretax income excluding nonrecurring income created by the reversal of our prior fiscal year restructuring reserves. This rate is consistent with the rate applied to recurring income during the prior fiscal year. The tax rate on the nonrecurring income was 35%, which is consistent with the tax rate applied when the restructuring reserve and related charges were recorded during the three-month period ended December 31, 1998. The overall tax rate was 28% and 28.3% for the three- and six-month periods ended December 31, 1999. We anticipate a tax rate of approximately 28% for the balance of the fiscal year ending June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES During the six-month period ended December 31, 1999, cash, cash equivalents, short-term investments and marketable securities balances increased to $854 million from $755 million. Net cash provided by operations for the six-month period ended December 31, 1999 was $62 million, compared to $52 million of net cash from operations for the same period of the prior fiscal year. This change primarily resulted from increased net income before non-cash charges and an increase in other liabilities offset by an increase in accounts receivable and inventory. Capital expenditures of $26 million were for manufacturing and engineering equipment and leasehold improvements necessary for our operations. Common stock issued through our employee stock purchase program and through stock option exercises during the six-month period ended December 31, 1999 provided $55 million. Working capital increased to $724 million as of December 31, 1999, compared to $590 million at June 30, 1999, primarily due to a shift of our investment portfolio from marketable securities into short term investments and cash equivalents and to an increase in accounts receivable due to increased sales. We believe that existing liquid capital resources and funds generated from operations combined with the ability, if necessary, to borrow funds will be adequate to meet our operating and capital requirements and obligations through the foreseeable future. However, we can give no assurances that we will continue to generate sufficient funds from operations or that we will be able to borrow funds on reasonable terms in the future, if necessary. RISK FACTORS Fluctuations in Operating Results and Stock Price Our operating results have varied widely in the past and our future operating results will continue to be subject to quarterly variations based upon a wide variety of factors including those listed in this section and throughout this Quarterly Report. In addition, future operating results may not follow any past trends. The factors we believe make our results more likely to fluctuate and difficult to predict include: - the cyclical nature of the semiconductor industry; - the reduction in the price and profitability of our products; - our timing of new product introductions; - our ability to develop and implement new technologies; - the change in customers' schedules for fulfillment of orders; - the cancellation of contracts by major customers; - the shortage of qualified workers in the areas we operate; and 10 <PAGE> 11 - our ability to manage our manufacturing requirements. Operating results also could be affected by sudden changes in customer requirements, currency exchange rate fluctuations and other economic conditions affecting customer demand and the cost of operations in one or more of the global markets in which we do business. As a result of these or other factors, we could fail to achieve our expectations as to future revenues, gross profit and income from operations. Our failure to meet the performance expectations set and published by external sources could result in a sudden and significant drop in the price of our stock, particularly on a short-term basis, and could negatively impact the value of any investment in our stock. Semiconductor Equipment Industry Volatility The semiconductor equipment industry is highly cyclical. The purchasing decisions of our customers are highly dependent on the economies of both the local markets in which they are located and the semiconductor industry worldwide. The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict. This cyclical nature of our marketplace impacts our ability to accurately project our future revenue and expense levels. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle, we must be in a position to adjust our cost and expense structure to the prevailing market condition and to continue to motivate and retain our key employees. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. Failure to respond to industry cycles would adversely affect our business. During the most recent down cycle, the semiconductor industry experienced excess production capacity that caused semiconductor manufacturers to decrease capital spending. We generally do not have long-term volume production contracts with our customers and we do not control the timing or volume of orders placed by our customers. Whether and to what extent our customers place orders for any specific products and the mix and quantities of products included in those orders are factors beyond our control. Insufficient orders will result in under-utilization of our manufacturing facilities and infrastructure and will negatively impact our operating results and financial condition. Technological Change and Customer Requirements Success in the semiconductor equipment industry depends, in part, on continual improvement of existing technologies and rapid innovation of new solutions. For example, the semiconductor industry continues to shrink the size of semiconductor devices and recently has begun to commercialize the process of copper-based interconnects. These and other evolving customer needs require us to respond with continued development programs and to cut back or discontinue older programs which may no longer have industry-wide support. Technical innovations are inherently complex and require long development cycles and appropriate professional staffing. Our competitive advantage and future business success depend on our ability to predict accurately evolving industry standards, develop and introduce new products which successfully address changing customer needs, win market acceptance of these new products and manufacture these new products in a timely and cost-effective manner. If we do not develop and introduce new products and technologies in a timely manner in response to changing market conditions or customer requirements, our business could be seriously harmed. In this environment, we must continue to make significant investments in research and development in order to enhance the performance and functionality of our products, to keep pace with competitive products and to satisfy customer demands for improved performance, features and functionality. There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs associated with such products or 11 <PAGE> 12 enhancements or that we will be able to secure the financial resources necessary to fund future development. Substantial research and development costs typically are incurred before we confirm the technical feasibility and commercial viability of a product, and not all development activities result in commercially viable products. In addition, we cannot ensure that these products or enhancements will receive market acceptance or that we will be able to sell these products at prices that are favorable to us. Our business will be adversely affected if we are unable to sell our products at favorable prices or if our products are not accepted by the market in which we operate. Competition Our industry includes large manufacturers with substantial resources to support customers worldwide. Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. Some of our competitors are diversified companies with greater financial resources and more extensive research, engineering, manufacturing, marketing and customer service and support capabilities than we can provide. We face competition from companies whose strategy is to provide a broad array of products, some of which compete with the products and services that we offer. These competitors may bundle their products in a manner that may discourage customers from purchasing our products. In addition, we face competition from smaller emerging semiconductor equipment companies whose strategy is to provide a portion of the products and services which we offer, using innovative technology to sell products into specialized markets. Loss of competitive position could negatively impact our prices, customer orders, revenues, gross margins, and market share, any of which would negatively impact our operating results and financial condition. Our failure to compete successfully with these other companies would seriously harm our business. International Trade and Economic Conditions Ours is an increasingly global market. A significant percentage of our revenues are derived from outside the United States and we expect that international revenues will continue to represent a substantial percentage of our revenues. Our international revenues and operations are affected by economic conditions specific to each country and region. Although economies in the Asia Pacific region have stabilized to some degree, compared to early-to-mid fiscal 1999, and certain countries such as Taiwan have relatively healthy economies, we remain cautious about general macroeconomic developments in the Asia Pacific region, particularly Japan. Japan's economy is important to the overall financial health of the region. If the economies in the Asia Pacific region stagnate or deteriorate, the economies of other regions could also be impaired. Because of our significant dependence on international revenues, a continued or additional decline in the economies of any of the countries or regions in which we do business would negatively affect our operating results. Managing global operations and sites located throughout the world presents challenges associated with, among other things, cultural diversity and organizational alignment. Moreover, each region in the global semiconductor equipment market exhibits unique characteristics that can cause capital equipment investment patterns to vary significantly from period to period. Periodic local or international economic downturns, trade balance issues, political instability and fluctuations in interest and currency exchange rates could negatively impact our business and results of operations. Although we attempt to manage near term currency risks through the use of hedging instruments, there can be no assurance that such efforts will be adequate. Intellectual Property Obsolescence and Infringement Our success is dependent in part on our technology and other proprietary rights. We own various United States and international patents and have additional pending patent applications relating to some of our products and technologies. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents, or that, issued patents will be of sufficient scope or strength to provide meaningful 12 <PAGE> 13 protection or commercial advantage to us. Other companies and individuals, including our larger competitors, may develop technologies that are similar or superior to our technology or design around the patents we own. We also maintain trademarks on certain of our products and services and claim copyright protection for certain proprietary software and documentation. However, we can give no assurance that our trademarks and copyrights will be upheld or successfully deter infringement by third parties. While patent, copyright and trademark protection for our intellectual property is important, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel. We attempt to protect our trade secret and other proprietary information through agreements with our customers, suppliers, employees and consultants and through other security measures. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. We also maintain exclusive and non-exclusive licenses with third parties for strategic technology used in certain products. However, these employees, consultants and third parties may breach these agreements, and we may not have adequate remedies for wrongdoing. In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States. As is typical in the semiconductor equipment industry, from time to time we have received communications from other parties asserting the existence of patent rights, copyrights, trademark rights or other intellectual property rights which they believe cover certain of our products, processes, technologies or information. Our customary practice is to evaluate such assertions and consider whether to seek licenses where appropriate. Based on industry practice and prior experience, we believe that licenses or other rights, if necessary, will be available on commercially reasonable terms for existing or future claims. Nevertheless, we cannot ensure that licenses can be obtained, or if obtained will be on acceptable terms or that litigation or other administrative proceedings will not occur. Our inability to obtain necessary licenses or other rights on reasonable terms could seriously harm our operating results and financial condition. Key Suppliers We use a wide range of materials in the production of our products including custom electronic and mechanical components, and we use numerous suppliers to supply materials. We generally do not have guaranteed supply arrangements with our suppliers. Because of the variability and uniqueness of customers orders, we do not maintain an extensive inventory of materials for manufacturing. We seek to minimize the risk of production and service interruptions and/or shortages of key parts by selecting and qualifying alternative suppliers for key parts, monitoring the financial stability of key suppliers, and maintaining appropriate inventories of key parts. Although we make reasonable efforts to ensure that parts are available from multiple suppliers, key parts may be available only from a single supplier or a limited group of suppliers. There can be no assurance that our business will not be harmed if we do not receive sufficient parts to meet our production requirements in a timely and cost-effective manner. Operations at our primary manufacturing facilities and our assembly subcontractors are subject to disruption for a variety of reasons, including work stoppages, fire, earthquake, flooding or other natural disasters. Such disruption could cause delays in shipments of products to our customers. We cannot ensure that alternate production capacity would be available if a major disruption were to occur, or that if it were available, it could be obtained on favorable terms. Such a disruption could result in cancellation of orders or loss of customers and could seriously harm our business. 13 <PAGE> 14 Key Employees Our employees are vital to our success, and our key management, engineering and other employees are difficult to replace. We generally do not have employment contracts with our key employees. Further, we do not maintain key person life insurance on any of our employees. The expansion of high technology companies worldwide has increased demand and competition for qualified personnel. We may not be able to attract, assimilate or retain qualified employees in the future. These factors could seriously harm our business. Acquisitions We seek to develop new technologies from both internal and external sources. As part of this effort, we may make acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. Acquisitions involve numerous risks, including management issues and costs in connection with integration of the operations, technologies, and products of the acquired companies, possible write-downs of impaired assets, and the potential loss of key employees of the acquired companies. The inability to manage these risks effectively could seriously harm our business. Litigation We have in the past been involved in litigation relating to the infringement by us of other parties' patents and intellectual property rights. This type of litigation tends to be expensive and requires significant management time and attention. In addition, if we lose in this type of litigation, a court could require us to pay substantial damages and/or royalties, prohibiting us from using essential technologies. For these and other reasons, this type of litigation could have a material adverse effect on our business, financial condition and results of operations. Also, although we may seek to obtain a license under a third party's intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms or at all. Euro Conversion A new European currency was implemented commencing in January 1999 to replace the separate currencies of eleven western European countries. This requires changes in our operations as we modify systems and commercial arrangements to deal with the new currency. Modifications are necessary in operations such as payroll, benefits and pension systems, contracts with suppliers and customers, and internal financial reporting systems. During the three-year transition period in which transactions may also be made in the old currencies, we must maintain dual currency processes for our operations. We have identified the issues created by this problem and the cost of this effort is not expected to have a material effect on our business or results of operations. We cannot be assured, however, that all problems will be foreseen and corrected or that no material disruption of our business will occur as a result of this currency change. Year 2000 Issue The Year 2000 computer issue presented risks for us as it did for other companies. However, based on currently available information, we have not experienced material Year 2000 issues, related either to internal systems or to products sold by us to customers. The Year 2000 problem arose from the use of a two-digit field to identify years in computer programs, and the assumption of a single century - the 1900s. Any program so created may have read, or attempted to have read, "00" as the year 1900. There are two other related issues which could also lead to incorrect calculations or failure: some systems' programming assigns special meaning to certain dates and the year 2000 is a leap year. Accordingly, some computer hardware and software, including programs embedded within machinery and parts, needed to be modified prior to the year 2000 in order to remain functional. We use a significant number of computer software programs and operating systems in our internal operations, including applications used in our financial, product development, order management and manufacturing systems, as well as in the products we manufacture and sell. Additionally, we were dependent upon our critical 14 <PAGE> 15 suppliers, contract manufacturers, other vendors, and customers to determine if their operations, products, services and payments they provide were Year 2000 ready. The inability of computer software programs to accurately recognize, interpret and process date codes designating the year 2000 and beyond could have caused errors or operating problems that would have disrupted business operations. If this would have occurred in our internal systems it could have adversely affected our ability to process orders, to forecast production requirements or to issue invoices. A significant failure of our computer integrated manufacturing systems that monitor and control factory equipment would have disrupted manufacturing operations and caused a delay in the completion and shipping of products. Similarly, if our critical suppliers' or customers' systems or products failed because of a Year 2000 malfunction, their disruption could have negatively impacted our operating results. Finally, if our own products had malfunctioned as a result of a failure in date recognition, we could have experienced increased warranty claims and litigation, which could have harmed our business. To avoid these kinds of disruptions, KLA-Tencor commenced a broad-ranging Year 2000 readiness program during fiscal 1997. The Year 2000 project was established to ensure that all of our company-wide systems, components, infrastructure, critical suppliers and products would operate in such a manner that business would be uninterrupted into and beyond the year 2000. The three main goals of our Year 2000 readiness program were: internal information and operating systems; our supply chain; and external product readiness. The first focus area was our internal information and operating systems. This internal Year 2000 readiness project included three major activities: - Inventory collection and categorization, which included identification of all our systems and items that needed to be addressed for year 2000 readiness and creation of a master list categorized by critical need; - Assessment, in which each functional group evaluated the readiness of systems inventoried; including as necessary, researching vendor documentation, direct vendor contact, code search, and/or execution of a detailed test plan; and - Remediation or correction of the problems found, which included vendor provided application patches, correction of bugs as necessary and needed upgrades of software and hardware. As of December 31, 1999 we had completed the activities of this project. The second area of emphasis in our Year 2000 readiness program was to ensure our supply chain was prepared. Manufacturing divisions identified over 400 key suppliers that needed to be evaluated. As of December 31, 1999 we were able to classify all our key suppliers as low risk with respect to Year 2000 readiness. The final area of focus for our Year 2000 readiness program was our external products. KLA-Tencor has over 18,000 installed tools at our customers' sites. We know that Year 2000 readiness was a major issue for our customers, who faced important logistical issues in assuring their continued operations. Our field service engineers audited the majority of our tools for their configuration to determine what needed to be done to bring our products, including older out-of-warranty products, to a state of readiness for the Year 2000. As of December 31, 1999, we completed the activities of this project. The costs of our Year 2000 readiness program were primarily associated with the use of existing internal resources and incremental external spending. We estimate we incurred approximately $9 million of incremental external spending directly associated with this program through December 31, 1999. Based on currently available information, we have not incurred costs that related to any 15 <PAGE> 16 of our significant third party service provider's failure to achieve Year 2000 readiness. We did not separately identify the costs incurred for our Year 2000 readiness program that were the result of use of internal resources and therefore, these costs are not included in the above estimates. Based on currently available information, we have not experienced Year 2000 issues, related either to internal systems or products sold by us to customers, nor do we anticipate any additional Year 2000 issues, specifically those related to some programming assigning special meaning to certain dates or to the year 2000 being a leap year. However, a significant disruption of our financial management and control systems or a lengthy interruption in our manufacturing operations caused by a Year 2000-related issue could result in a material adverse impact on our operating results and financial condition. Additionally, we have not experienced a disruption of our operations caused by a supplier's Year 2000-related issues. However, a significant disruption of our operations caused by a supplier's Year 2000-related issue, or our customer's concerns about Year 2000 readiness of our product could seriously harm our business. We believe that Year 2000 readiness was achieved by January 1, 2000. However, we cannot assure our readiness programs successfully detected and corrected all potential year 2000 associated problems. Furthermore, we cannot assure that our internal systems and products sold by us to customers have run all combinations of all software programs that could be affected by Year 2000 computer issues. The costs of bringing our products and systems to a state of compliance with the year 2000 were not material and we do not anticipate future costs, if any, will have a material impact on our financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposures as set forth in its Annual Report on Form 10-K for the year ended June 30, 1999 have not changed significantly. 16 <PAGE> 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A discussion regarding certain pending legal proceedings is included in Footnote 9 of the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended June 30, 1999. The information provided therein remains unchanged. Although the outcome of these claims cannot be predicted with certainty, management does not believe that any of these legal matters will have a material adverse effect on the Company's financial condition. Were an unfavorable ruling to occur, there exists the possibility of a material impact on the net income of the period in which the ruling occurs. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of KLA-Tencor Corporation was held on November 16, 1999 at the Company's offices in Milpitas, California. Of the 89,491,136 shares outstanding as of September 20, 1999, the record date, 77,810,728 shares (86%) were present or represented by proxy at the meeting. 1. The table below presents the results of the election to the Company's board of directors. <TABLE> <CAPTION> Votes Votes For Withheld ---------- --------- <S> <C> <C> Kenneth Levy 74,131,725 3,679,003 Samuel Rubinovitz 74,132,338 3,678,390 Jon D. Tompkins 74,127,083 3,683,645 Lida Urbanek 74,136,006 3,674,722 </TABLE> 2. The stockholders ratified the appointment of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ended June 30, 2000. This proposal received 77,590,110 votes for, 26,023 votes against, with 198,475 abstaining and 3,880 broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <S> <C> 27.1 Financial Data Schedule. </TABLE> (b) Form 8-K None 17 <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. KLA-TENCOR CORPORATION (Registrant) February 11, 2000 /s/ John H. Kispert - ------------------------ -------------------------------------- (Date) John H. Kispert Vice President, Finance and Accounting 18 <PAGE> 19 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Description - ------- ----------- <S> <C> 27.1 Financial Data Schedule. </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 27.1 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET AND THE ACCOMPANYING NOTES TO THE 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> JUN-30-2000 <PERIOD-START> JUL-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 354,918 <SECURITIES> 499,003 <RECEIVABLES> 316,625 <ALLOWANCES> 0 <INVENTORY> 222,233 <CURRENT-ASSETS> 1,135,788 <PP&E> 341,085 <DEPRECIATION> 170,411 <TOTAL-ASSETS> 1,778,542 <CURRENT-LIABILITIES> 411,571 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 551,411 <OTHER-SE> 811,799 <TOTAL-LIABILITY-AND-EQUITY> 1,778,542 <SALES> 603,746 <TOTAL-REVENUES> 603,746 <CGS> 289,490 <TOTAL-COSTS> 499,456 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 144 <INCOME-PRETAX> 123,846 <INCOME-TAX> 35,095 <INCOME-CONTINUING> 88,751 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 88,751 <EPS-BASIC> 0.49 <EPS-DILUTED> 0.47 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

LU

https://www.sec.gov/Archives/edgar/data/1006240/0000950116-00-000226.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, FPdTZHaz7m136c2NYd45L1RRpJ0VEp+xwu77L9uEi3AautvJ9kme2T4tyjlio9Og UKJiCp3p3VVeJFKZ1NUStw== <SEC-DOCUMENT>0000950116-00-000226.txt : 20000214 <SEC-HEADER>0000950116-00-000226.hdr.sgml : 20000214 ACCESSION NUMBER: 0000950116-00-000226 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11639 FILM NUMBER: 535633 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 <TEXT> <PAGE> 1 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, 1999 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, 2000, 3,187,478,055 common shares were outstanding. <PAGE> 2 Form 10-Q - Part I PART 1 - 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, 1999 1998 Revenues............................. $ 9,905 $ 9,842 Costs................................ 5,259 4,630 Gross margin......................... 4,646 5,212 Operating Expenses: Selling, general and administrative expenses ........... 1,969 1,937 Research and development expenses ... 978 1,013 In-process research and development expenses............ - 296 Total operating expenses............. 2,947 3,246 Operating income..................... 1,699 1,966 Other income - net .................. 255 116 Interest expense..................... 98 78 Income before income taxes........... 1,856 2,004 Provision for income taxes........... 606 768 Income before cumulative effect of accounting change................ 1,250 1,236 Cumulative effect of accounting change (net of income taxes of $842)....... - 1,308 Net income .......................... $ 1,250 $ 2,544 Earnings per common share - basic: Income before cumulative effect of accounting change............... $ 0.40 $ 0.40 Cumulative effect of accounting change ............................ - 0.43 Net income .......................... $ 0.40 $ 0.83 Earnings per common share - diluted: Income before cumulative effect of accounting change............... $ 0.38 $ 0.39 Cumulative effect of accounting change ............................ - 0.41 Net income........................... $ 0.38 $ 0.80 Dividends declared per common share................... $ 0.04 $ 0.04 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, 1999 1999 ASSETS Cash and cash equivalents.............. $ 2,219 $ 1,880 Receivables less allowances of $381 at December 31, 1999 and $376 at September 30, 1999 ....... 10,143 10,563 Inventories............................ 5,380 5,064 Contracts in process, net of contract billings of $5,584 at December 31, 1999 and $5,565 at September 30, 1999.................... 1,164 1,103 Deferred income taxes - net............ 1,504 1,609 Other current assets................... 1,168 2,065 Total current assets................... 21,578 22,284 Property, plant and equipment, net of accumulated depreciation of $7,693 at December 31, 1999 and $7,474 at September 30, 1999......... 6,986 6,895 Prepaid pension costs.................. 6,078 6,175 Capitalized software development costs. 506 470 Other assets........................... 3,486 3,426 TOTAL ASSETS........................... $38,634 $39,250 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, 1999 1999 LIABILITIES Accounts payable....................... $ 2,162 $ 2,901 Payroll and benefit-related liabilities.......................... 1,321 2,338 Postretirement and postemployment benefit liabilities.................. 103 137 Debt maturing within one year.......... 2,672 2,871 Other current liabilities.............. 3,659 3,661 Total current liabilities.............. 9,917 11,908 Postretirement and postemployment benefit liabilities.................. 6,013 6,305 Long-term debt ........................ 3,832 4,167 Other liabilities...................... 2,793 2,934 Total liabilities ..................... 22,555 25,314 Commitments and contingencies 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: 6,000,000,000 Issued and outstanding shares: 3,178,657,861 at December 31, 1999 3,142,537,636 at September 30, 1999... 32 31 Additional paid-in capital............. 9,032 7,994 Guaranteed ESOP obligation............. (30) (33) Retained earnings...................... 7,296 6,188 Accumulated other comprehensive income (loss)......................... (251) (244) Total shareowners' equity.............. 16,079 13,936 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $38,634 $39,250 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, 1999 1998 Operating Activities Net income............................... $ 1,250 $ 2,544 Adjustments to reconcile net income to net cash provided by(used in) operating activities: Cumulative effect of accounting change - (1,308) Depreciation and amortization......... 505 347 Provision for uncollectibles.......... 38 (14) Tax benefit from stock options........ 456 93 Deferred income taxes................. 102 206 Purchased in-process research and development......................... - 21 Adjustment to conform pooled companies' fiscal years............. 11 170 Decrease(increase)in accounts receivable ......................... 14 (2,269) Increase in inventories and contracts in process............ (309) (425) (Decrease)increase in accounts payable............................. (719) 356 Changes in other operating assets and liabilities..................... (654) (473) Other adjustments for noncash items - net......................... (570) (249) Net cash provided by(used in) operating activities.................... 124 (1,001) Investing Activities Capital expenditures .................... (587) (347) Proceeds from the sale or disposal of property, plant and equipment.......... 2 28 Purchases of equity investments.......... (65) (17) Sales of equity investments.............. 680 1 Purchase of investment securities........ - (13) Sales or maturity of investment securities................... 22 13 Acquisitions of businesses, net of cash acquired.................... (39) (115) Dispositions of businesses............... 9 57 Other investing activities - net......... 1 22 Net cash provided by(used in) investing activities.................... 23 (371) 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, 1999 1998 Financing Activities Repayments of long-term debt ............ (375) (8) Issuance of long-term debt............... - 496 Proceeds from issuance of common stock..... 557 147 Dividends paid........................... (62) (54) Increase in short-term borrowings - net....................... 83 1,041 Net cash provided by financing activities................... 203 1,622 Effect of exchange rate changes on cash........................ (11) 10 Net increase in cash and cash equivalents....................... 339 260 Cash and cash equivalents at beginning of year................... 1,880 1,252 Cash and cash equivalents at end of period....................... $ 2,219 $ 1,512 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. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by Lucent Technologies Inc. ("Lucent" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission 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. On October 15, 1999, Lucent merged with International Network Services ("INS"). Each share of INS common stock was converted into the right to receive 0.8473 shares of Lucent common stock. Lucent issued approximately 49.3 million shares in exchange for all of the outstanding shares of INS. In addition, Lucent assumed outstanding employee stock options covering approximately 16 million shares. On November 3, 1999, the Company merged with Excel Switching Corporation. Each share of Excel common stock was converted into the right to receive 0.558 shares of Lucent common stock. Lucent issued approximately 22.3 million shares in exchange for all of the outstanding shares of Excel. These mergers have been accounted for as "pooling-of-interests" and the consolidated financial statements of Lucent were restated for all periods prior to the mergers to include the accounts and operations of INS and Excel. Before merging with Lucent, INS had a June 30 fiscal year end and Excel had a December 31 fiscal year end. The unaudited consolidated statement of income for the quarter ended December 31, 1998 was derived by combining the historical results of Lucent for the quarter ended December 31, 1998, with the historical results of operations of INS for the quarter ended September 30, 1998 and with the historical results of operations of Excel for the quarter ended December 31, 1998. The unaudited consolidated balance sheet at September 30, 1999 was derived by combining the historical financial position of Lucent at September 30, 1999, with the historical financial position of INS at June 30, 1999, and with the historical financial position of Excel at September 30, 1999, respectively. The unaudited consolidated statement of cash flows for the quarter ended December 31, 1998 was derived by combining the historical cash flows of Lucent for the quarter ended December 31, 1998, with the historical cash flows of INS for the quarter ended September 30, 1998. Intercompany transactions for the periods presented were not material. Excel's results of operations for the three months ended December 31, 1998, were included in Lucent's results of operations for the year ended September 30, 1998 and were also included in Lucent's consolidated results of operations for the year ended September 30, 1999. Excel's revenue and net loss for the three months ended December 31, 1998 were $37 and $1, respectively. As a result, the consolidated balance sheet of Lucent at September 30, 1999, includes an adjustment to retained earnings to eliminate the loss recognized by Excel for the three months ended December 31, 1998. In addition, information from the statement of cash flows for Excel for the three months ended December 31, 1998, has been excluded from the consolidated statements of cash flows for the quarter ended December 31, 1998, since Excel's activity for this period has been included in the consolidated statements of cash flows for the year ended September 30, 1998. <PAGE> 8 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) In order to conform the fiscal year ends for INS and Lucent, INS's results of operations and cash flows for the three months ended September 30, 1999, will not be reflected in Lucent's financial statements for the quarter ended December 31, 1999. INS's revenue and net income for the three months ended September 30. 1999 were $100 and $11, respectively. The consolidated balance sheet of Lucent at December 31, 1999, includes an adjustment to retained earnings to reflect the income recognized by INS for the three months ended September 30, 1999. On November 12, 1999, Lucent merged with Xedia Corporation, a developer of high-performance Internet access routers for wide area networks. Under the terms of the merger agreement, the outstanding Xedia capital stock and warrants were converted into the right to receive approximately 3.9 million shares of Lucent common stock. The transaction was accounted for as a pooling-of-interests. Lucent has not restated for this transaction in its financial statements due to immateriality. The preparation of financial statements during interim periods requires management to make numerous estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses. Estimates and assumptions are reviewed periodically and the effect of revisions is reflected in the results of operations of the interim periods in which changes are determined to be necessary. For the quarter ended December 31, 1998, improved performance on multi-year contracts and the resolution of certain contingencies had a positive impact on the reported results of operations. 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 Lucent's Form 10-K for the year ended September 30, 1999, and the audited restated consolidated financial statements and notes thereto included in Exhibit 99.1 of the Company's Form 8-K (dated February 10, 2000) for the year ended September 30, 1999. The financial statements presented have been restated to reflect the two-for-one split of Lucent's common stock which became effective on April 1, 1999. Certain prior period amounts have been reclassified to conform to the current period presentation. 2. ACCOUNTING CHANGE - EMPLOYEE BENEFIT PLANS Effective October 1, 1998, Lucent changed its method for calculating the market-related value of plan assets used in determining the expected return-on-asset component of annual net pension and postretirement benefit costs. Under the previous accounting method, the calculation of the market-related value of plan assets included only interest and dividends immediately, while all other realized and unrealized gains and losses were amortized on a straight-line basis over a five-year period. The new method used to calculate market-related value includes immediately <PAGE> 9 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) an amount based on Lucent's historical asset returns and amortizes the difference between that amount and the actual return on a straight-line basis over a five-year period. The new method is preferable under Statement of Financial Accounting Standards No. 87 because it results in calculated plan asset values that are closer to current fair value, thereby lessening the accumulation of unrecognized gains and losses, while still mitigating the effects of annual market value fluctuations. The cumulative effect of this accounting change related to periods prior to fiscal year 1999 of $2,150 ($1,308 after-tax, or $0.43 and $0.41 for the quarter ended December 31, 1998 per basic and diluted share, respectively) is a one-time, non-cash credit to fiscal 1999 earnings. 3. COMPREHENSIVE INCOME Comprehensive Income represents net income plus the results of non-shareowners' equity changes. However, it does not affect net income or total shareowners' equity. The components of comprehensive income, net of tax, are as follows: Three Months Ended December 31, 1999 1998 -------------------- Net income........................... $ 1,250 $ 2,544 Other comprehensive income(loss): Foreign currency translation adjustments...................... (52) 51 Unrealized holding gains arising during the period........ 45 11 ------- ------- Comprehensive income................. $ 1,243 $ 2,606 ------- ------- <PAGE> 10 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) The after-tax components of accumulated other comprehensive income(loss) are as follows: <TABLE> <CAPTION> Total Accumulated Foreign Minimum Other Currency Unrealized Pension Comprehensive Translation Holding Liability Income/ Adjustment Gains Adjustment (Loss) ----------- -------- ---------- --------- <S> <C> <C> <C> <C> Accumulated other comprehensive income(loss) at September 30, 1999............ $ (313) $ 79 $ (10) $ (244) Current period change.......... (52) 163 - 111 Reclassification adjustment (net of tax of $76)........... - (118) - (118) Accumulated other comprehensive ------- ------- ------- ------- income(loss)at December 31, 1999............ $ (365) $ 124 $ (10) $ (251) ------- ------- ------- ------- </TABLE> The foreign currency translation adjustments are not currently adjusted for income taxes since they relate to indefinite investments in non-United States subsidiaries. 4. SUPPLEMENTARY BALANCE SHEET INFORMATION Inventories at December 31, 1999 and September 30, 1999 were as follows: December 31, September 30, 1999 1999 -------------- --------------- Completed goods ............... $ 3,062 $ 2,951 Work in process and raw materials................ 2,318 2,113 -------- -------- Total inventories ............. $ 5,380 $ 5,064 -------- -------- <PAGE> 11 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) 5. EARNINGS PER COMMON SHARE Basic earnings per common share was calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. Earnings per share amounts for the periods presented have been restated to reflect the two-for-one split of Lucent's common stock, which became effective on April 1, 1999. The following table reconciles the number of shares utilized in the earnings per share calculations for the three month periods ended December 31, 1999 and 1998: Three Months Ended December 31, 1999 1998 ---------------------- Net income ....................... $1,250 $2,544 Earnings per common share - basic: Income before cumulative effect of accounting change............ $ 0.40 $ 0.40 Cumulative effect of accounting change......................... - 0.43 Net income ...................... $ 0.40 $ 0.83 Earnings per common share - diluted: Income before cumulative effect of accounting change........... $ 0.38 $ 0.39 Cumulative effect of accounting change......................... - 0.41 Net income ...................... $ 0.38 $ 0.80 <PAGE> 12 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) Three Months Ended December 31, 1999 1998 ---------------------- Number of Shares (in millions) - ---------------------------------- Common shares - basic............. 3,154.5 3,077.5 Effect of dilutive securities: Stock options.................... 108.1 87.9 Other............................ 5.4 6.9 Common shares - diluted........... 3,268.0 3,172.3 Options excluded from the computation of earnings per share - diluted since option exercise price was greater than the average market price of the common shares for the period...... 0.8 11.2 6. OPERATING SEGMENTS Lucent adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," beginning with the 1999 Annual Report. This standard requires disclosure of segment information on the same basis used internally for evaluating segment performance and for deciding how to allocate resources to segments. Lucent operates in the global telecommunications networking industry and has three reportable operating segments: Service Provider Networks ("SPN"), Enterprise Networks ("Enterprise"), and Microelectronics and Communications Technologies ("MCT"). SPN provides public networking systems and software to telecommunications service providers and public network operators around the world. Enterprise develops, manufactures, markets and services advanced communications products and data networking systems for business customers. MCT designs and manufactures high-performance integrated circuits, power systems and optoelectronic components for applications in the communications and computing industries. MCT also includes network products, new ventures and intellectual property. The three reportable operating segments are strategic market units that offer distinct products and services. These segments were determined based on the customers and the markets that Lucent serves. Each market unit is managed separately as each operation requires different technologies and marketing strategies. Intersegment transactions that occur are based on current market prices and all intersegment profit is eliminated in consolidation. <PAGE> 13 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) Performance measurement and resource allocation for the reportable operating segments are based on many factors. The primary financial measure used is Operating income, exclusive of goodwill and existing technology amortization, and of purchased in-process R&D and other costs from business acquisitions (acquisition/integration-related costs). Lucent employs shared-service concepts to realize economies of scale and efficient use of resources. The costs of shared services, and other corporate center operations managed on a common basis, are allocated to the segments based on usage, where possible, or other factors based on the nature of the activity. The following tables present Lucent's revenues and operating income by reportable operating segment: Three Months Ended December 31, 1999 1998 External Revenues ------------------ Service Provider Networks $ 6,216 $ 6,369 Enterprise Networks 2,005 1,929 Microelectronics and Communications Technologies 1,509 1,286 Total reportable segments 9,730 9,584 Other and corporate 175 258 Total External Revenues $ 9,905 $ 9,842 Intersegment Revenues Service Provider Networks $ 55 $ 42 Enterprise Networks 35 70 Microelectronics and Communications Technologies 283 302 Total reportable segments 373 414 Other and corporate (373) (414) Total Intersegment Revenues $ - $ - Total Revenues Service Provider Networks $ 6,271 $ 6,411 Enterprise Networks 2,040 1,999 Microelectronics and Communications Technologies 1,792 1,588 Total reportable segments 10,103 9,998 Other and corporate (198) (156) Total Revenues $ 9,905 $ 9,842 <PAGE> 14 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) Operating Income Service Provider Networks $ 1,210 $ 1,948 Enterprise Networks 185 90 Microelectronics and Communications Technologies 358 269 Total reportable segments (a) 1,753 2,307 Acquisition/integration-related costs (61) (296) Goodwill and existing technology amortization (64) (59) Other and corporate 71 14 Operating income 1,699 1,966 Other income--net 255 116 Interest expense (98) (78) Income before income taxes $ 1,856 $ 2,004 (a) Segment operating income excludes goodwill and existing technology amortization, and acquisition/integration-related costs. 7. COMMITMENTS AND CONTINGENCIES In the normal course of business, Lucent is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 1999 cannot be ascertained. While these matters could affect the operating results of any one quarter when resolved in future periods and while there can be no assurance with respect thereto, management believes that after final disposition, any monetary liability or financial impact to Lucent in addition to that provided for at December 31, 1999 would not be material to the annual consolidated financial statements. Lucent's current and historical operations are subject to a wide range of environmental protection laws. In the United States, these laws often require parties to fund remedial action regardless of fault. Lucent has remedial and investigatory activities underway at numerous current and former facilities. In addition, Lucent was named a successor to AT&T Corp. as a potentially responsible party ("PRP") at <PAGE> 15 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) numerous "Superfund" sites pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or comparable state statutes. Under the Separation and Distribution Agreement ("Separation and Distribution Agreement"), among Lucent, AT&T and NCR Corporation, dated as of February 1, 1996 as amended and restated, Lucent is responsible for all liabilities primarily resulting from or relating to the operation of Lucent's business as conducted at any time prior to or after the separation from AT&T of the businesses and operations transferred to form Lucent (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. It is often difficult to estimate the future impact of environmental matters, including potential 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. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites which typically range from 5 to 30 years. Reserves for estimated losses from environmental remediation are, depending on the site, based primarily upon internal or third party environmental studies, estimates as to the number, participation level and financial viability of any other PRPs, the extent of the contamination and the nature of required remedial actions. Accruals are adjusted as further information develops or circumstances change. The amounts provided for in Lucent's consolidated financial statements for 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. Any possible loss or range of possible loss that may be incurred in excess of that provided for at December 31, 1999 cannot be estimated. <PAGE> 16 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions Except Per Share Amounts) (Unaudited) 8. SUBSEQUENT EVENTS Agere, Inc. - ----------- On January 20, 2000, Lucent announced an agreement to acquire privately-held Agere, Inc., an Austin, Texas-based developer of programmable network processor technology, for about 8 million shares of Lucent's common stock. Based on Lucent's closing share price on January 19, 2000, the transaction would be worth approximately $415. Lucent expects to account for the acquisition under the purchase method of accounting. Lucent expects a significant portion of the purchase price to be allocated to goodwill, which will be amortized over 7 years. The purchase is expected to result in a one-time charge against earnings of an accounting write-off assigned to in-process research and development. The Company expects the acquisition to be completed in the quarter ending June 30, 2000. SpecTran Corporation - -------------------- On February 1, 2000, Lucent acquired the remainder of SpecTran, resulting in a total purchase price of approximately $68. VTC Inc. - ----------- On February 4, 2000, Lucent announced an agreement to acquire the products and technology, and the design, marketing and sales teams of privately-held VTC Inc., a Bloomington, Minnesota-based supplier of semiconductor components to computer hard disk drive manufacturers, for approximately $100 in cash. VTC also could receive up to an additional $50 over two years based on VTC meeting certain performance-based manufacturing goals. Lucent expects a significant portion of the purchase price to be allocated to goodwill and other intangible assets, which will be amortized over periods not to exceed 7 years. The purchase is expected to result in a one-time charge against earnings of an accounting write-off assigned to in-process research and development. The Company expects the acquisition to be completed in the quarter ending March 31, 2000. Ortel Corporation - ----------------- On February 7, 2000, Lucent announced an agreement to acquire Ortel Corporation, an Alhambra, California-based developer of optoelectronic components for cable TV networks, for about 52 million shares of Lucent's common stock. Based on Lucent's closing share price on February 4, 2000, the transaction would be worth approximately $2,950. Lucent expects to account for the acquisition under the purchase method of accounting. Lucent expects a significant portion of the purchase price to be allocated to goodwill and other intangible assets. The purchase is also expected to result in a one-time charge against earnings of an accounting write-off assigned to in-process research and development. The Company expects the acquisition to be completed in the quarter ending June 30, 2000. <PAGE> 17 Form 10-Q - Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION HIGHLIGHTS Lucent reported net income of $1,250 million, or $0.38 per share(diluted) for the quarter ended December 31, 1999, Lucent's first fiscal quarter of 2000. This compares with the year-ago quarterly net income of $2,544 million, or $0.80 per share(diluted). Included in the prior quarterly results is a $1,308 million (or $0.41 per share-diluted) cumulative effect of accounting change related to Lucent's pension and postretirement benefits (see Note 2). Lucent's income before the cumulative effect of the accounting change was $1,236 million (or $0.39 per share-diluted) for the quarter ended December 31, 1998. Net income for the quarter ended December 31, 1999 includes a gain of $189 million, pre-tax ($115 million, after-tax) associated with the sale of an equity investment and a pre-tax charge of $61 million ($40 million, after-tax) to operating expenses primarily associated with the mergers of International Network Services ("INS"), Excel Switching Corp. and Xedia Corporation. Net income for the quarter ended December 31, 1998 includes $296 million ($287 million, after-tax) of purchased in-process research and development expenses primarily related to the acquisitions of Stratus and Quadritek. On October 15, 1999, Lucent merged with INS, a global provider of network consulting and software solutions. Pursuant to the merger agreement, the outstanding INS stock was converted into the right to receive approximately 49.3 million shares of Lucent common stock. In addition, Lucent assumed outstanding employee stock options covering approximately 16 million shares of Lucent common stock. The transaction was accounted for as a pooling-of-interests. On November 3, 1999, Lucent merged with Excel, a provider of open switching solutions for telecom carriers. Under the terms of the agreement, the outstanding Excel stock was converted into the right to receive approximately 22.3 million shares of Lucent common stock. The transaction was accounted for as a pooling-of-interests. <PAGE> 18 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On November 12, 1999, Lucent merged with Xedia Corporation, a developer of high-performance Internet access routers for wide area networks. Under the terms of the agreement, the outstanding Xedia capital stock and warrants were converted into the right to receive approximately 3.9 million shares of Lucent common stock. The transaction was accounted for as a pooling-of-interests. Lucent has not restated for this transaction in its financial statements due to immateriality. On January 19, 2000, Lucent announced an agreement to sell certain assets related to the manufacturing portion of its consumer products business, subject to customary conditions and regulatory approval. Lucent expects to complete the transaction in the quarter ending March 31, 2000. On January 20, 2000, Lucent closed the sale of the leased-based portion of its consumer products business, which was the remaining portion of that business. These assets were previously reacquired from the venture formed by Lucent and Philips Electronics N.V. (the "PCC venture"), which ended in the quarter ended December 31, 1998. The transactions are not expected to have a material impact on the results of operations. On January 20, 2000, Lucent announced an agreement to acquire privately-held Agere, Inc., an Austin, Texas-based developer of programmable network processor technology, for about 8 million shares of Lucent's common stock. Based on Lucent's closing share price on January 19, 2000, the transaction would be worth approximately $415. Lucent expects to account for the acquisition under the purchase method of accounting. Lucent expects a significant portion of the purchase price to be allocated to goodwill, which will be amortized over 7 years. The purchase is expected to result in a one-time charge against earnings of an accounting write-off assigned to in-process research and development. The Company expects the acquisition to be completed in the quarter ending June 30, 2000. On February 1, 2000, Lucent acquired the remainder of SpecTran Corporation, a designer and manufacturer of specialty optical fiber and fiber-optic products. On July 21, 1999, Lucent began its cash tender offer for the outstanding shares of SpecTran. The tender offer expired on August 31, 1999, and Lucent thereafter accepted and paid for shares giving it a 61% interest in SpecTran. The acquisition was accounted for under the purchase method of accounting and resulted in a total purchase price of approximately $68 million. On February 4, 2000, Lucent announced an agreement to acquire the products and technology, and the design, marketing and sales teams of privately-held VTC Inc., a Bloomington, Minnesota-based supplier of semiconductor components to computer hard disk drive manufacturers, for approximately $100 in cash. VTC also could receive up to an additional $50 over two years based on VTC meeting certain performance-based manufacturing goals. Lucent expects a significant portion of the purchase price to be allocated to goodwill and other intangible assets, which will be amortized over periods not to exceed 7 years. The purchase is expected to result in a one-time charge against earnings of an accounting write-off assigned to in-process research and development. The Company expects the acquisition to be completed in the quarter ending March 31, 2000. <PAGE> 19 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On February 7, 2000, Lucent announced an agreement to acquire Ortel Corporation, an Alhambra, California-based developer of optoelectronic components for cable TV networks, for about 52 million shares of Lucent's common stock. Based on Lucent's closing share price on February 4, 2000, the transaction would be worth approximately $2,950. Lucent expects to account for the acquisition under the purchase method of accounting. Lucent expects a significant portion of the purchase price to be allocated to goodwill and other intangible assets. The purchase is also expected to result in a one-time charge against earnings of an accounting write-off assigned to in-process research and development. The Company expects the acquisition to be completed in the quarter ending June 30, 2000. KEY BUSINESS CHALLENGES Lucent continues to face significant competition and expects that the level of competition on pricing and product offerings will intensify. Lucent expects that new competitors will enter its markets as a result of the trend toward global expansion by U.S. and non-U.S. competitors as well as continued changes in technology and public policy. These competitors may include entrants from the telecommunications, software, data networking, cable television and semiconductor industries. Existing competitors have, and new competitors may have, strong financial capabilities, technological expertise, well-recognized brand names and a global presence. Such competitors may include Alcatel, Cisco Systems, Inc., Ericsson, Nortel Networks, and Siemens AG. Lucent's management periodically assesses market conditions and redirects the Company's resources to meet new challenges. Steps Lucent may take include acquiring or investing in new businesses and ventures, partnering with other companies, delivering new technologies, closing and consolidating facilities, disposing of assets, reducing work force levels and withdrawing from markets. <PAGE> 20 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Historically, revenues and earnings have been higher in the first fiscal quarter primarily because many of Lucent's large customers delay a disproportionate percentage of their capital expenditures until the fourth quarter of the calendar year (Lucent's first fiscal quarter). Lucent has taken measures to manage the seasonality of its business by changing the date on which its fiscal year ends to September 30 and its compensation programs for employees, resulting in a more uniform distribution of revenues and earnings among the four fiscal quarters. Lower software revenues in the first fiscal quarter of 2000 compared with the prior year quarter reflects an acceleration in the continuing trend by service providers to acquire software more evenly thoughout the year. In the past, these purchases occurred primarily in the quarter ending December 31. The purchasing behavior of Lucent's largest customers has increasingly been characterized by the use of fewer, larger contracts. These contracts typically involve longer negotiating cycles, require the dedication of substantial amounts of working capital and other resources, and in general require costs that may substantially precede the recognition of associated revenues. Moreover, in return for larger, longer-term purchase commitments, customers often demand more stringent acceptance criteria, which can also cause revenue recognition delays. Lucent has increasingly provided or arranged long-term financing for customers as a condition to obtain or bid on infrastructure projects. Certain multiyear contracts involve new technologies that may not have been previously deployed on a large-scale commercial basis. On its multiyear contracts, Lucent may incur significant initial cost overruns and losses that are recognized in the quarter in which they become ascertainable. Further, profit estimates on such contracts are revised periodically over the lives of the contracts, and such revisions can have a significant impact on reported earnings in any one quarter. Historically, a limited number of customers have provided a substantial portion of Lucent's total revenues. These customers include AT&T, which continues to be a significant customer, and the Regional Bell Operating Companies ("RBOCs"). The communications industry is experiencing a consolidation of both U.S. and non-U.S. companies. The loss of any of these customers, or any substantial reduction in orders by any of these customers, could materially adversely affect the Company's operating results. Changes in implementation plans by a number of customers inside and outside the United States led to delays in network deployments by enterprises and service providers in the first fiscal quarter of 2000. Lucent is diversifying its customer base and seeking out new types of customers globally. These new types of customers include competitive access providers and local exchange carriers, wireless service providers, cable television network operators and computer manufacturers. <PAGE> 21 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION REVENUES - THREE MONTHS ENDED DECEMBER 31, 1999 VERSUS THREE MONTHS ENDED DECEMBER 31, 1998 Total revenues increased 0.6% to $9,905 million in the quarter compared with the same quarter of 1998, due to increases in sales from Enterprise Networks and Microelectronics and Communications Technologies partially offset by decreases in sales from Service Provider Networks. For the quarter, sales within the United States increased by 5.4% compared with the same quarter in 1998 and sales outside the United States decreased 7.8% compared with the same quarter last year. Sales outside of the United States represented 32.8% of revenues for the current quarter as compared to 35.8% of revenues for the year-ago quarter. The following table presents Lucent's revenues by segment and the approximate percentage of total revenues for the three months ended December 31, 1999 and 1998: Three Months Ended December 31, Dollars in Millions -------------------------------- 1999 1998 ------- ------- Service Provider Networks $6,216 63% $6,369 65% Enterprise Networks 2,005 20 1,929 20 Microelectronics and Communications Technologies 1,509 15 1,286 13 Other and Corporate 175 2 258 2 Total Lucent $9,905 100% $9,842 100% Revenues from SERVICE PROVIDER NETWORKS decreased $153 million, or 2.4% in the quarter compared with the same quarter in 1998. Factors contributing to the lower than expected revenues included faster than anticipated shifts in customers' purchases of new optical systems, resulting in manufacturing capacity and deployment constraints; delays in network deployment plans by customers, particularly outside the United States, which led to lower switching and wireless revenues; and lower than expected software revenues, reflecting an acceleration in the continuing trend by service providers to acquire software more evenly throughout the year. The decrease was partially offset by increased sales of data networking systems for service providers, optical networking systems, and NetCare(R) Professional Services. <PAGE> 22 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues generated from service providers in the United States increased 6.5% for the quarter in comparison to the same quarter in 1998, and included revenue gains from sales to RBOCs and competitive local exchange carriers. Sales generated outside the United States decreased 15.7% over the year-ago quarter. The decline in revenues outside the United States primarily reflects lower revenues from the Europe/Middle East/Africa region. Revenues generated outside the United States represented 34.7% of revenues for the quarter compared with 40.2% for the same quarter of 1998. Revenues from ENTERPRISE NETWORKS increased $76 million, or 3.9% compared with the year-ago quarter. Increased sales of Definity(R) Enterprise Communication Servers, including those with Call Center applications, and NetCare(R) Professional Services contributed to the increased revenue for the quarter. The revenue gains were partially offset by decreased sales of Systimax(R) structured cabling systems. Revenues within the United States increased 2.5% for the quarter compared with the same quarter of 1998. Revenues generated outside the United States increased by 10.0%, with revenue growth in the Asia/Pacific and Europe/Middle East/Africa regions, as well as Canada. Revenues generated outside the United States represented 20.7% of revenues for the quarter compared with 19.6% in the same quarter in 1998. - -------------------------------------- (R) Registered trademark of Lucent <PAGE> 23 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from MICROELECTRONICS AND COMMUNICATIONS TECHNOLOGIES increased $223 million, or 17.3% compared with the year-ago quarter driven by sales of optoelectronic components, power systems, and fiber optic cable, as well as customized chips for high speed communications and data networking systems. Revenues within the United States increased 19.4% compared to the same quarter in 1998. Revenues generated outside the United States increased 15.0%. The growth in revenues outside the United States was driven by sales in the Caribbean/Latin America and the Europe/Middle-East/Africa regions. Revenues generated outside the United States represented 44.8% of sales for the quarter compared with 45.8% for the same quarter of 1998. Revenues from OTHER AND CORPORATE decreased $83 million compared with the year-ago quarter primarily due to lower revenues from the Company's consumer products business. COSTS AND GROSS MARGIN - THREE MONTHS ENDED DECEMBER 31, 1999 VERSUS THREE MONTHS ENDED DECEMBER 31, 1998 Total costs increased by $629 million, or 13.6% compared with the year-ago quarter in 1998 primarily due to a ramp-up of costs associated with the introduction and implementation of new products. As a percentage of revenue, gross margin decreased to 46.9% from 53.0% in the year-ago quarter. The decrease reflects the ramp-up of costs and a change in product mix, including lower software revenues. OPERATING EXPENSES - THREE MONTHS ENDED DECEMBER 31, 1999 VERSUS THREE MONTHS ENDED DECEMBER 31, 1998 Selling, general and administrative expenses as a percentage of revenues were 19.9% for the quarter, an increase of 0.2 percentage points compared with 19.7% for the same quarter in 1998. Selling, general and administrative expenses increased $32 million, or 1.7% compared with the same year-ago quarter. Included in the current quarter expense is $61 million ($40 million, after-tax) primarily associated with the mergers of INS, Excel and Xedia. Amortization expense associated with goodwill and existing technology was $64 million for the quarter compared with $59 million for the year-ago quarter. Excluding the amortization of goodwill and existing technology, selling, general and administrative expenses as a percentage of revenues were 19.2% for the quarter, an increase of 0.1 percentage points compared with 19.1% for the same quarter in 1998. <PAGE> 24 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Research and development expenses represented 9.9% of revenues for the quarter compared with 10.3% of revenues for the same quarter of 1998. Research and development expenses decreased $35 million during the quarter compared with the same quarter of 1998. This decrease was attributable to efficiencies in Lucent's research and development processes as well as increases in the capitalization of software expenses. There were no purchased in-process research and development expenses for the 1999 quarter compared with $296 million related primarily to the acquisitions of Stratus and Quadritek for the same quarter of 1998. OTHER INCOME - NET, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE MONTHS ENDED DECEMBER 31, 1999 VERSUS THREE MONTHS ENDED DECEMBER 31, 1998 Other income - net increased $139 million to $255 million from $116 million from the year-ago quarter. The increase consists primarily of gains from the sale of various equity securities, including a $189 million gain from the sale of an equity investment, partially offset by fees associated with certain customer financing transactions in the current quarter. Interest expense for the quarter increased $20 million to $98 million compared with the same quarter in 1998. The increase in interest expense is due to higher debt levels for the current quarter compared with the same quarter in 1998. The effective income tax rate of 32.7% for the quarter decreased from the 38.3% for the prior year quarter. Excluding the gain related to the sale of an equity investment of $189 million ($115 million, after-tax) and one-time merger-related costs in 1999 of $61 million ($40 million, after-tax) and the purchased in-process research and development expenses associated with the Stratus and XNT acquisitions in 1998, the effective income tax rate was 32.0% for the quarter compared with 33.8% in the prior year quarter. This decrease was primarily due to increased research and development tax credits. CASH FLOWS - THREE MONTHS ENDED DECEMBER 31, 1999 VERSUS THREE MONTHS ENDED DECEMBER 31, 1998 Cash provided by operating activities for the three months ended December 31, 1999 was $124 million compared with cash used in operating activities of $1,001 million in the same year-ago period. This increase in cash was primarily due to higher collections of receivables offset by liquidations of accounts payable. Cash provided by investing activities for the three months ended December 31, 1999 was $23 million compared with cash used in investing activities of $371 million in the same year-ago period. This increase in cash was primarily due to increased proceeds from the sales of equity investments as well as the cash settlement from the sale of an equity investment in the prior year. <PAGE> 25 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital expenditures were $587 million and $347 million for the three-month periods ended December 31, 1999 and 1998, respectively. Capital expenditures relate to expenditures for equipment and facilities used in manufacturing and research and development, including expansion of manufacturing capacity, and expenditures for efficiency efforts and non-U.S. growth. Cash provided by financing activities for the three months ended December 31, 1999 was $203 million compared with $1,622 million in the same year-ago period. This decrease in cash provided by financing activities was primarily due to decreased issuances of both short- and long-term debt partially offset by the increase in proceeds from the issuance of common stock. FINANCIAL CONDITION Total assets decreased $616 million, or 1.6%, from fiscal year-end 1999. This decrease was largely due to decreases in other current assets and receivables of $897 million and $420 million, respectively partially offset by increases in cash and inventories of $339 million and $316 million, respectively. Other current assets decreased due to lower notes receivable and the cash settlement from the sale of an equity investment. Receivables decreased due to lower sales volume and the impact of certain customer financing transactions. Total liabilities decreased $2,759 million, or 10.9% from fiscal year-end 1999. This decrease was due primarily to decreases in accounts payable and lower payroll and benefit liabilities due to the pay-out of year-end bonus. Working capital, defined as current assets less current liabilities, increased $1,285 million from September 30, 1999, primarily resulting from the decrease in accounts payable and payroll and benefit liabilities partially offset by a decrease in other current assets. The ratio of total debt to total capital (debt plus equity) was 28.8% at December 31, 1999 compared to 33.6% at September 30, 1999. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, Lucent maintained approximately $5.0 billion in credit facilities of which a significant portion is available to support Lucent's commercial paper program. At December 31, 1999, approximately $4.6 billion 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, short- and long-term debt financings and receivable securitizations will be adequate to satisfy its future cash requirements, although there can be no assurance that this will be the case. <PAGE> 26 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Network operators worldwide are requiring their suppliers to arrange or provide long-term financing for them as a condition of obtaining or bidding on infrastructure projects. These projects may require financing in amounts ranging from modest sums to more than a billion dollars. Lucent has increasingly provided or arranged long-term financing for customers. As market conditions permit, Lucent's intention is to lay off these long-term financing arrangements, which may include both commitments and drawn-down borrowings, to financial institutions and other investors. This enables Lucent to reduce the amount of its commitments and free up additional financing capacity. As of December 31, 1999, Lucent had made commitments or entered into agreements to extend credit to certain customers, including PCS and wireless operators, for an aggregate of approximately $8.4 billion. Excluding amounts that are not available because the customer has not yet satisfied the conditions precedent for borrowing, at December 31, 1999, approximately $2.4 billion in loan commitments was available for borrowing and undrawn and approximately $1.1 billion had been advanced and was outstanding. In addition, Lucent had made commitments to guarantee customer debt of about $1.4 billion at December 31, 1999. Excluding amounts not available for guarantee because conditions precedent have not been satisfied, approximately $500 million of guarantees was available and undrawn and about $650 million was outstanding on December 31, 1999. Lucent has determined that the receivables under these contracts are reasonably assured of collection based on various factors among which is the ability of Lucent to sell these loans and commitments. Lucent intends to continue pursuing opportunities for the sale of future loans and commitments. In connection with Lucent's commitment to provide financing for a customer, Lucent sold approximately $625 million of accounts receivable during September 1999. Lucent repurchased $408 million of these receivables and the previously reported arrangement was terminated during December 1999. In addition, Lucent established a new arrangement whereby its subsidiary sold $750 million of accounts receivable (including the repurchased receivables described above) to a consortium of banks with limited recourse. As a result of these transactions, receivables were reduced by $342 million and cash flows from operating activities were increased by $312 million. <PAGE> 27 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In addition to the above arrangements, Lucent will continue to provide or commit to financing where appropriate for its business. The ability of Lucent to arrange or provide financing for its customers will depend on a number of factors, including Lucent's capital structure and level of available credit, and its continued ability to lay off commitments and drawn-down borrowings on acceptable terms. Lucent believes that it will be able to access the capital markets on terms and in amounts that will be satisfactory to Lucent and that it will be able to obtain bid and performance bonds, to arrange or provide customer financing as necessary, and to engage in hedging transactions on commercially acceptable terms, although there can be no assurance that this will be the case. RISK MANAGEMENT Lucent is exposed to market risk from changes in foreign currency exchange rates and interest rates that could impact its results of operations, financial condition and cash flows. Lucent manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments that are used to hedge foreign currency and interest rate exposure are viewed as risk management tools and are not used for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage Lucent's exposure to nonperformance on such instruments. Certain securities held in Lucent's equity and investment portfolio are subject to equity price risk. Lucent generally does not hedge its equity price risk, however on occasion, may use equity derivative financial instruments which are subject to equity price risks to complement its investment strategies. Lucent has entered into an equity swap agreement, which among the terms included in the agreement, Lucent is obligated to pay to a third party in July 2000 and September 2000 any depreciation in the market value of certain equity securities sold during the three months ended December 31, 1999 or receive any appreciation in such market value. Any changes in the market value of this equity swap will be reflected in net income in subsequent quarters. Lucent uses foreign currency exchange contracts, and to a lesser extent foreign currency options, to reduce significant exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products to non-U.S. customers and purchases from non-U.S. suppliers will be adversely affected by changes in exchange rates. Foreign currency exchange contracts are designated for recorded, firmly committed or anticipated purchases and sales. The use of these derivative financial instruments allows Lucent to reduce its overall exposure to exchange rate movements, since the gains and losses on these contracts substantially offset losses and gains on the assets, liabilities and transactions being hedged. <PAGE> 28 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Lucent manages its ratio of fixed to floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this mix in a cost effective manner, Lucent, from time to time, enters into interest rate swap agreements, in which it agrees to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts. Lucent had no interest rate swap agreements in effect as of December 31, 1999 and September 30, 1999. Management does not foresee or expect any significant changes in its exposure to interest rate fluctuations or in how such exposure is managed in the near future. IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the purchase of Stratus, Lucent allocated $267 million to purchased in-process research and development. As part of the process of analyzing this acquisition, Lucent made a decision to buy technology that had not yet been commercialized rather than develop the technology internally. Lucent based this decision on factors such as the amount of time it would take to bring the technology to market. Lucent also considered Bell Labs' resource allocation and its progress on comparable technology, if any. Lucent management expects to use the same decision process in the future. Lucent estimated the fair value of in-process research and development using an income approach. This involved estimating the fair value of the in-process research and development using the present value of the estimated after-tax cash flows expected to be generated by the purchased in-process research and development, using risk-adjusted discount rates and revenue forecasts as appropriate. The selection of the discount rate was based on consideration of Lucent's weighted average cost of capital, as well as other factors, including the useful life of each technology, profitability levels of each technology, the uncertainty of technology advances that were known at the time, and the stage of completion of each technology. Lucent believes that the estimated in-process research and development amounts so determined represent fair value and do not exceed the amount a third party would pay for the projects. Where appropriate, Lucent deducted an amount reflecting the contribution of the core technology from the anticipated cash flows from an in-process research and development project. At the date of acquisition, the in-process research and development projects had not yet reached technological feasibility and had no alternative future uses. Accordingly, the value allocated to these projects was capitalized and immediately expensed at acquisition. If the projects are not successful or completed in a timely manner, management's product pricing and growth rates may not be achieved and Lucent may not realize the financial benefits expected from the projects. Set forth below is a description of the acquired in-process research and development projects of Stratus, including their status at the end of the quarter ended December 31, 1999. <PAGE> 29 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Stratus - ------- On October 20, 1998, Ascend completed the purchase of Stratus for $917 million. Stratus was a manufacturer of fault-tolerant computer systems. The allocation to in-process research and development of $267 million represented its estimated fair value using the methodology described above. The primary projects that made up the in-process research and development were as follows: HP-UX, Continuum 1248, Continuum 448, M708, SPHINX, HARMONY, LNP, CORE IN, Personal Number Portability (PN), Signaling System 7 (SS7) Gateway and Internet Gateway. Revenues attributable to the projects were estimated to be $84 million in 1999 and $345 million in 2000. Revenue was expected to peak in 2002 and decline thereafter through the end of the product's life (2009) as new product technologies were expected to be introduced by Lucent. Revenue growth was expected to decrease from 310% in 2000 to 6% in 2002, and be negative for the remainder of the projection period. At the acquisition date, costs to complete the research and development efforts related to the projects were expected to be $48 million. A risk-adjusted discount rate of 35% was utilized to discount projected cash flows. The actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisition, except as noted below. During fiscal 1999, the product development relating to the HARMONY, SPHINX, and Continuum 448 projects were discontinued due to management's reprioritization of product direction. In addition, it was decided that the development relating to the Continuum 1248 would cease by the quarter ending December 31, 1999. Consequently, Lucent did not realize the forecasted revenues from these projects. OTHER - Environmental Matters See discussion above in Note 7 to the Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Results of Operations and Financial Condition and other sections of this report contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industries in which Lucent operates, management's beliefs and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of Lucent. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. 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. Lucent undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. <PAGE> 30 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Future Factors include increasing price and products and services competition by non-U.S. and U.S. competitors, including new entrants; rapid technological developments and changes and the Company's ability to continue to introduce, manufacture and deploy competitive new products and services on a timely, cost-effective basis; the mix of products and services; the achievement of lower costs and expenses; customer demand for the Company's products and services; the ability to successfully integrate the operations and business of acquired companies; U.S. and non-U.S. governmental and public policy changes that may affect the level of new investments and purchases made by customers; changes in environmental and other U.S. and non-U.S. governmental regulations; protection and validity of patent and other intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in the increasing use of large, multiyear contracts; the cyclical nature of the Company's business; the outcome of pending and future litigation and governmental proceedings and continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support the Company's future business. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general U.S. and non-U.S. economic conditions, including interest rate and currency exchange rate fluctuations and other Future Factors. For a further description of Future Factors that could cause actual results to differ materially from such forward-looking statements, see below in this report including the other sections referred to and also see the discussion in Lucent's Form 10-K for the year ended September 30, 1999 in Item 1 in the section entitled "X. OUTLOOK- A. Forward Looking Statements" and the remainder of the OUTLOOK section. Competition: See discussion above under KEY BUSINESS CHALLENGES. <PAGE> 31 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Dependence on New Product Development The markets for the Company's principal products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and evolving methods of building and operating communications systems for network operators and business customers. The Company's operating results will depend to a significant extent on its ability to continue to introduce, manufacture and deploy new systems, products, software and services successfully on a timely basis and to reduce costs of existing systems, products, software and services. The success of these and other new offerings is dependent on several factors, including proper identification of customer needs, cost, timely completion and introduction, differentiation from offerings of the Company's competitors and market acceptance. In addition, new technological innovations generally require a substantial investment before any assurance is available as to their commercial viability, including, in some cases, certification by non-U.S. and U.S. standard-setting bodies. Reliance on Major Customers: See discussion above under KEY BUSINESS CHALLENGES. Readiness for Year 2000 Lucent's information technology systems, facilities and production infrastructure have not experienced any material adverse impacts as a result of the Year 2000 date transition. Similarly, there have been no material Year 2000 impacts reported with respect to the Company's products that were classified as Year 2000 ready. In addition, the Company experienced no material supply chain problems related to the date transition. <PAGE> 32 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION European Monetary Union - Euro: On January 1, 1999, eleven member countries of the European Union established fixed conversion rates between their existing sovereign currencies, and adopted the Euro as their new common legal currency. The legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. During the transition period, cash-less payments can be made in the Euro. Between January 1, 2002 and July 1, 2002, the participating countries will introduce Euro notes and coins and withdraw all legacy currencies so that they will no longer be available. Lucent has in place a joint European-United States team representing affected functions within the Company. This team is evaluating Euro related issues affecting the Company that include its pricing/marketing strategy, conversion of information technology systems, existing contracts and currency risk and risk management in the participating countries. The Euro conversion may affect cross-border competition by creating cross-border price transparency. Lucent will continue to evaluate issues involving introduction of the Euro as further accounting, tax and governmental legal and regulatory guidance is available. Based on current information and Lucent's current assessment, Lucent does not expect that the Euro conversion will have a material adverse effect on its business or financial condition. Employee Relations: On December 31, 1999, Lucent employed approximately 153,000 persons, including 77.2% located in the United States. Of these domestic employees, approximately 38% are represented by unions, primarily the Communications Workers of America ("CWA")and the International Brotherhood of Electrical Workers ("IBEW"). Lucent has agreements with the CWA and IBEW expiring May 31, 2003. Multi-Year Contracts: Lucent has 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 uncertainties affecting recognition of revenues, stringent acceptance criteria, implementation of new technologies and possible significant initial cost overruns and losses. See also discussion above under LIQUIDITY AND CAPITAL RESOURCES and KEY BUSINESS CHALLENGES. Seasonality: See discussion above under KEY BUSINESS CHALLENGES. Future Capital Requirements: See discussion above under FINANCIAL CONDITION and LIQUIDITY AND CAPITAL RESOURCES. <PAGE> 33 Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Growth Outside the U.S., Foreign Exchange and Interest Rates: Lucent intends to continue to pursue growth opportunities in markets outside the U.S. In many markets outside the U.S., long-standing relationships between potential customers of Lucent and their local providers, and protective regulations, including local content requirements and type approvals, create barriers to entry. In addition, pursuit of such growth opportunities outside the U.S. may require significant investments for an extended period before returns on such investments, if any, are realized. Such projects and investments could be adversely affected by reversals or delays in the opening of foreign markets to new competitors, exchange controls, currency fluctuations, investment policies, repatriation of cash, nationalization, social and political risks, taxation, and other factors, depending on the country in which such opportunity arises. Difficulties in foreign financial markets and economies, and of foreign financial institutions, could adversely affect demand from customers in the affected countries. See discussion above under RISK MANAGEMENT with respect to foreign exchange and interest rates. A significant change in the value of the dollar against the currency of one or more countries where Lucent sells products to local customers or makes purchases from local suppliers may materially adversely affect Lucent's results. Lucent attempts to mitigate any such effects through the use of foreign currency contracts, although there can be no assurances that such attempts will be successful. Lucent hedges certain foreign currency transactions. The decline in value of non-U.S. dollar currencies, may, if not reversed, adversely affect Lucent's ability to contract for product sales in U.S. dollars because Lucent's products may become more expensive to purchase in U.S. dollars for local customers doing business in the countries of the affected currencies. Legal Proceedings and Environmental: See discussion above in Note 7 to the Consolidated Financial Statements. RECENT PRONOUNCEMENTS Effective October 1, 1999, Lucent adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). As a result, certain costs of computer software developed or obtained for internal use have been capitalized and will be amortized over a three year period. The impact of adopting SOP 98-1 was a reduction of costs and operating expenses of $80 million during the three months ended December 31, 1999. <PAGE> 34 Form 10-Q - Part II Part II - Other Information Item 1. Legal Proceedings As of February 10, 2000, Lucent is aware of 12 purported class action lawsuits that have been filed against Lucent and certain of its officers, alleging violations of federal securities laws. All of the actions were filed in the United States District Court for the District of New Jersey on behalf of persons who allegedly purchased Lucent's common stock between late October 1999 and January 6, 2000. The actions essentially duplicate one another and plead substantially the same allegations, claiming violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and specifically alleging, among other things, that beginning in late October 1999 Lucent and certain of its officers misrepresented Lucent's financial condition and failed to disclose material facts that would have an adverse effect on Lucent's future earnings and prospects for growth. The actions seek compensatory and other damages, and costs and expenses associated with the litigation. Lucent believes these complaints are without merit and intends to defend the actions vigorously. 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: Current Report on Form 8-K dated October 15, 1999 was filed on October 29, 1999 pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits). Current Report on Form 8-K dated and filed on November 19, 1999 pursuant to Item 5 (Other Events). <PAGE> 35 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 11, 2000 /s/ James S. Lusk ------------------------------ James S. Lusk Senior Vice President and Controller (Principal Accounting Officer) <PAGE> 36 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>EXHIBIT 12 <TEXT> <PAGE> EX-12 Statement re: Computation of Ratios Exhibit 12 Form 10-Q For the Three Months Ended December 31, 1999 Lucent Technologies Inc. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the Three Months Ended December 31, 1999 Income Before Income Taxes............................. $ 1,856 Less Interest Capitalized during the Period........................................... 6 Less Undistributed Earnings of Less than 50% Owned Affiliates..................................... 0 Add Fixed Charges...................................... 171 Total Earnings ........................................ $ 2,021 Fixed Charges Total Interest Expense Including Capitalized Interest.. $ 115 Interest Portion of Rental Expense..................... 56 Total Fixed Charges................................ $ 171 Ratio of Earnings to Fixed Charges..................... 11.8 </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 unaudited balance sheet of Lucent at December 31, 1999 and the unaudited consolidated statement of income for the three month period ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. </LEGEND> <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-30-2000 <PERIOD-START> OCT-1-1999 <PERIOD-END> DEC-31-1999 <CASH> 2,219 <SECURITIES> 0 <RECEIVABLES> 10,524 <ALLOWANCES> 381 <INVENTORY> 5,380 <CURRENT-ASSETS> 21,578 <PP&E> 14,679 <DEPRECIATION> 7,693 <TOTAL-ASSETS> 38,634 <CURRENT-LIABILITIES> 9,917 <BONDS> 3,832 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 32 <OTHER-SE> 16,047 <TOTAL-LIABILITY-AND-EQUITY> 38,634 <SALES> 9,905 <TOTAL-REVENUES> 9,905 <CGS> 5,259 <TOTAL-COSTS> 5,259 <OTHER-EXPENSES> 978 <LOSS-PROVISION> 38 <INTEREST-EXPENSE> 98 <INCOME-PRETAX> 1,856 <INCOME-TAX> 606 <INCOME-CONTINUING> 1,250 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 1,250 <EPS-BASIC> 0.40 <EPS-DILUTED> 0.38 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

MCK

https://www.sec.gov/Archives/edgar/data/927653/0000944209-00-000219.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, DGoIaGilmWa1Y8NHRDa/Qs+JDxTOLFCH1X1Z/+0axIGYyfjceygYyJxvStHY6SaI ZHutdSPlSixnusVRMqR/mQ== <SEC-DOCUMENT>0000944209-00-000219.txt : 20000215 <SEC-HEADER>0000944209-00-000219.hdr.sgml : 20000215 ACCESSION NUMBER: 0000944209-00-000219 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCKESSON HBOC INC CENTRAL INDEX KEY: 0000927653 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 943207296 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13252 FILM NUMBER: 543437 BUSINESS ADDRESS: STREET 1: ONE POST ST STREET 2: MCKESSON PLAZA CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4159838300 MAIL ADDRESS: STREET 1: ONE POST ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 FORMER COMPANY: FORMER CONFORMED NAME: MCKESSON CORP DATE OF NAME CHANGE: 19950209 FORMER COMPANY: FORMER CONFORMED NAME: SP VENTURES INC DATE OF NAME CHANGE: 19940728 </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 quarter ended December 31, 1999 [_] 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 1-13252 ---------------- McKESSON HBOC, INC. (Exact name of Registrant as specified in its charter) <TABLE> <C> <S> Delaware 94-3207296 (State or other jurisdiction of incorporation (IRS Employer Identification No.) or organization) One Post Street, San Francisco, California 94104 (Address of principal executive offices) (Zip Code) (415) 983-8300 (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. <CAPTION> Class Outstanding at December 31, 1999 ----- -------------------------------- <C> <S> Common stock, $.01 par value 281,745,630 shares </TABLE> - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- <PAGE> McKESSON HBOC, INC. TABLE OF CONTENTS <TABLE> <CAPTION> Item Page ---- ----- PART I. FINANCIAL INFORMATION <C> <S> <C> 1. Condensed Financial Statements Consolidated Balance Sheets December 31, 1999 and March 31, 1999............................ 3-4 Statements of Consolidated Income Three and nine month periods ended December 31, 1999 and 1998... 5 Statements of Consolidated Cash Flows Nine month periods ended December 31, 1999 and 1998............. 6 Financial Notes.................................................. 7-14 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Review................................................. 15-23 3. Quantitative and Qualitative Disclosures about Market Risk....... 23 PART II. OTHER INFORMATION 1. Legal Proceedings................................................ 24 6. Exhibits and Reports on Form 8-K................................. 24 </TABLE> 2 <PAGE> PART I. FINANCIAL INFORMATION McKESSON HBOC, INC. CONSOLIDATED BALANCE SHEETS (unaudited) <TABLE> <CAPTION> December 31, March 31, 1999 1999 ------------ --------- (in millions) <S> <C> <C> ASSETS Current Assets Cash and cash equivalents............................. $ 204.8 $ 233.7 Marketable securities (Notes 3 and 7)................. 195.4 28.2 Receivables........................................... 2,730.1 2,552.0 Inventories........................................... 4,060.0 3,522.5 Prepaid expenses...................................... 136.2 116.4 --------- -------- Total............................................... 7,326.5 6,452.8 Property, Plant and Equipment Land.................................................. 33.0 37.0 Buildings, machinery and equipment.................... 1,103.7 1,029.1 --------- -------- Total............................................... 1,136.7 1,066.1 Accumulated depreciation.............................. (587.5) (536.5) --------- -------- Net................................................. 549.2 529.6 Capitalized Software.................................... 117.5 106.9 Notes Receivable........................................ 134.9 73.0 Goodwill and Other Intangibles.......................... 1,283.9 1,200.6 Net Assets of Discontinued Operations (Note 2).......... 228.1 179.4 Other Assets (Note 7)................................... 565.8 477.7 --------- -------- Total Assets........................................ $10,205.9 $9,020.0 ========= ======== </TABLE> (Continued) See Financial Notes. 3 <PAGE> McKESSON HBOC, INC. CONSOLIDATED BALANCE SHEETS (unaudited) <TABLE> <CAPTION> December 31, March 31, 1999 1999 ------------ --------- (in millions, except par value) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Drafts payable........................................ $ 257.7 $ 417.7 Accounts payable--trade............................... 3,922.2 3,131.7 Deferred revenue...................................... 322.1 408.6 Short-term borrowings................................. 249.3 16.7 Current portion of long-term debt..................... 191.7 195.3 Salaries and wages.................................... 89.1 93.0 Taxes................................................. 209.8 90.8 Interest and dividends................................ 51.1 34.7 Other................................................. 353.0 356.3 --------- -------- Total............................................... 5,646.0 4,744.8 Postretirement Obligations and Other Noncurrent Liabilities............................................ 277.5 258.6 Long-Term Debt (Note 3)................................. 914.8 939.2 McKesson HBOC-Obligated Mandatorily Redeemable Convertible Preferred Securities of Subsidiary Grantor Trust Whose Sole Assets are Junior Subordinated Debentures of McKesson HBOC (Note 4)................... 195.7 195.6 Stockholders' Equity Common stock (400.0 shares authorized, 282.2 issued as of December 31, 1999, and 281.1 issued as of March 31, 1999; par value $0.01)........................... 2.8 2.8 Additional paid-in capital............................ 1,754.8 1,725.7 Other capital......................................... (99.7) (107.7) Retained earnings..................................... 1,711.4 1,465.0 Accumulated other comprehensive loss (Note 8)......... (70.7) (57.7) ESOP notes and guarantees............................. (99.9) (115.5) Treasury shares, at cost.............................. (26.8) (30.8) --------- -------- Total Stockholders' Equity.......................... 3,171.9 2,881.8 --------- -------- Total Liabilities and Stockholders' Equity.......... $10,205.9 $9,020.0 ========= ======== </TABLE> (Concluded) See Financial Notes. 4 <PAGE> McKESSON HBOC, INC. STATEMENTS OF CONSOLIDATED INCOME (unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, ------------------ -------------------- 1999 1998 1999 1998 -------- -------- --------- --------- (in millions, except per share amounts) <S> <C> <C> <C> <C> REVENUES............................. $9,890.9 $8,287.5 $27,429.1 $21,720.0 -------- -------- --------- --------- COSTS AND EXPENSES Cost of sales...................... 9,325.8 7,677.0 25,718.2 20,005.1 Selling, distribution, research and development and administration (Notes 5 and 7)................... 538.8 499.5 1,440.1 1,410.7 Interest........................... 28.9 31.4 87.1 89.2 -------- -------- --------- --------- Total............................ 9,893.5 8,207.9 27,245.4 21,505.0 -------- -------- --------- --------- GAIN ON EQUITY INVESTMENTS (Note 7).. 263.2 -- 263.2 -- -------- -------- --------- --------- INCOME BEFORE INCOME TAXES AND DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUST.................... 260.6 79.6 446.9 215.0 INCOME TAXES......................... (98.5) (33.0) (169.5) (87.7) DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUST.................... (1.5) (1.5) (4.6) (4.6) -------- -------- --------- --------- INCOME AFTER TAXES Continuing operations.............. 160.6 45.1 272.8 122.7 Discontinued operations (Note 2)... 6.2 5.6 23.4 23.4 -------- -------- --------- --------- Net Income....................... $ 166.8 $ 50.7 $ 296.2 $ 146.1 ======== ======== ========= ========= EARNINGS PER COMMON SHARE (Note 9) Diluted: Continuing operations.............. $ 0.56 $ 0.16 $ 0.96 $ 0.44 Discontinued operations............ 0.02 0.02 0.08 0.08 -------- -------- --------- --------- Total............................ $ 0.58 $ 0.18 $ 1.04 $ 0.52 ======== ======== ========= ========= Basic: Continuing operations.............. $ 0.57 $ 0.16 $ 0.97 $ 0.45 Discontinued operations............ 0.02 0.02 0.08 0.08 -------- -------- --------- --------- Total............................ $ 0.59 $ 0.18 $ 1.05 $ 0.53 ======== ======== ========= ========= DIVIDENDS PER COMMON SHARE........... $ 0.06 $ 0.125 $ 0.18 $ 0.375 SHARES ON WHICH EARNINGS PER COMMON SHARE WERE BASED Diluted............................ 288.8 289.7 289.8 289.3 Basic.............................. 281.4 275.2 281.1 274.1 </TABLE> See Financial Notes. 5 <PAGE> McKESSON HBOC, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited) <TABLE> <CAPTION> Nine Months Ended December 31, ------------------ 1999 1998 -------- -------- Operating Activities (in millions) <S> <C> <C> Income from continuing operations......................... $ 272.8 $ 122.7 Adjustments to reconcile to net cash provided (used) by operating activities: Depreciation............................................. 86.3 76.8 Amortization............................................. 73.2 54.8 Provision for bad debts.................................. 92.3 54.9 Deferred taxes on income................................. (19.7) 37.9 Other non-cash items..................................... (119.2) 109.4 -------- -------- Total................................................... 385.7 456.5 -------- -------- Effects of changes in: Receivables.............................................. (314.5) (435.3) Inventories.............................................. (538.8) (666.0) Accounts and drafts payable.............................. 583.9 655.0 Taxes.................................................... 102.6 30.0 Deferred revenue......................................... (32.7) (48.9) Other.................................................... 2.3 (66.2) -------- -------- Total................................................... (197.2) (531.4) -------- -------- Net cash provided (used) by continuing operations....... 188.5 (74.9) Discontinued operations................................... (25.3) (23.0) -------- -------- Net cash provided (used) by operating activities........ 163.2 (97.9) -------- -------- Investing Activities Purchases of marketable securities........................ (161.7) (33.8) Maturities of marketable securities....................... 157.0 109.3 Property acquisitions..................................... (106.1) (140.7) Properties sold........................................... 8.5 17.5 Acquisitions of businesses, less cash and short-term investments acquired..................................... (123.7) (275.3) Other..................................................... (153.3) (183.9) -------- -------- Net cash used by investing activities................... (379.3) (506.9) -------- -------- Financing Activities Proceeds from issuance of debt............................ 772.3 948.4 Repayment of debt......................................... (564.7) (275.0) Dividends paid on preferred securities of subsidiary trust.................................................... (7.5) (7.5) Capital stock transactions Issuances................................................ 24.8 149.9 ESOP notes and guarantees................................ 15.6 0.1 Dividends paid........................................... (50.6) (59.4) Other.................................................... (2.7) (1.7) -------- -------- Net cash provided by financing activities............... 187.2 754.8 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents....... (28.9) 150.0 -------- -------- Cash and Cash Equivalents at beginning of period........... 233.7 564.4 -------- -------- Cash and Cash Equivalents at end of period................. $ 204.8 $ 714.4 ======== ======== </TABLE> See Financial Notes 6 <PAGE> McKESSON HBOC, INC. FINANCIAL NOTES (unaudited) 1. Interim Financial Statements In the opinion of McKesson HBOC, Inc. (the "Company"), these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of its financial position as of December 31, 1999, the results of its operations for the three and nine months ended December 31, 1999 and 1998 and its cash flows for the nine months ended December 31, 1999 and 1998. The results of operations for the three and nine months ended December 31, 1999 and 1998 are not necessarily indicative of the results for the full years. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto included in the Company's 1999 Consolidated Financial Statements which have previously been filed with the Securities and Exchange Commission (the "SEC"). 2. Acquisitions and Divestitures On November 2, 1999, the Company completed the acquisition of Abaton.com, a provider of internet-based clinical applications for use by physician practices, pharmacy benefit managers, benefit payors, laboratories and pharmacies, for approximately $95 million in cash and the assumption of approximately $8 million of employee stock incentives. Goodwill and other intangibles related to the acquisition of $101 million are being amortized on a straight-line basis over periods ranging from three to seven years. A charge of $1.5 million was recorded in the third quarter to write off the portion of the purchase price of Abaton.com allocated to in-process technology for which technological feasibility had not been established as of the acquisition date and for which there were no alternative uses. The Company received an independent valuation which utilized a discounted cash flow methodology by product line to assist in valuing in-process and existing technologies as of the acquisition date. On January 11, 2000, the Company announced it had signed a definitive agreement to sell its wholly-owned subsidiary, McKesson Water Products Company, (the "Water Products Business"), to Groupe DANONE for $1.1 billion in cash. The sale is contingent upon regulatory approval and is expected to be completed in the first calendar quarter of 2000. The net assets and results of operations of the Water Products Business have been reclassified as a discontinued operation. Prior year amounts have been restated. The net assets of discontinued operations at December 31, 1999 and March 31, 1999 were as follows: <TABLE> <CAPTION> December 31, March 31, 1999 1999 ------------ --------- (in millions) <S> <C> <C> Total assets........................................ $281.9 $243.7 Total liabilities................................... (53.8) (64.3) ------ ------ Net assets.......................................... $228.1 $179.4 ====== ====== </TABLE> Assets of discontinued operations consist primarily of receivables, inventory, property, plant and equipment and goodwill of the Water Products Business. Liabilities of discontinued operations consist primarily of accounts payable and other accrued liabilities of the Water Products Business. 7 <PAGE> McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) (unaudited) The results of discontinued operations were as follows: <TABLE> <CAPTION> Nine Months Ended December 31, ----------------- 1999 1998 -------- -------- (in millions) <S> <C> <C> Revenues............................................... $ 307.6 $ 267.2 ======== ======== Income from discontinued operations before income taxes................................................. $ 39.5 $ 38.0 Income taxes........................................... 16.1 14.6 -------- -------- Income from discontinued operations.................... $ 23.4 $ 23.4 ======== ======== </TABLE> 3. Marketable Securities The December 31, 1999 marketable securities balance includes $19.8 million held in trust as exchange property for the Company's $32.4 million principal amount of 4.5% exchangeable subordinated debentures which remain outstanding. 4. Convertible Preferred Securities In February 1997, a wholly-owned subsidiary trust of the Company issued 4 million shares of preferred securities to the public and 123,720 common securities to the Company, which are convertible at the holder's option into McKesson HBOC common stock. The proceeds of such issuances were invested by the trust in $206,186,000 aggregate principal amount of the Company's 5% Convertible Junior Subordinated Debentures due in 2027 (the "Debentures"). The Debentures represent the sole assets of the trust. The Debentures mature on June 1, 2027, bear interest at the rate of 5%, payable quarterly, and are redeemable by the Company beginning in March 2000 at 103.5% of the principal amount thereof. Holders of the securities are entitled to cumulative cash distributions at an annual rate of 5% of the liquidation amount of $50 per security. Each preferred security is convertible at the rate of 1.3418 shares of McKesson HBOC common stock, subject to adjustment in certain circumstances. If not converted, the preferred securities will be redeemed upon repayment of the Debentures, and are callable by the Company at 103.5% of the liquidation amount beginning in March 2000. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities (the "Guarantee"). The Guarantee, when taken together with the Company's obligations under the Debentures and in the indenture pursuant to which the Debentures were issued and the Company's obligations under the Amended and Restated Declaration of Trust governing the subsidiary trust, provides a full and unconditional guarantee of amounts due on the preferred securities. The Debentures and related trust investment in the Debentures have been eliminated in consolidation and the preferred securities are reflected as outstanding in the accompanying consolidated financial statements. 8 <PAGE> McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) (unaudited) 5. Charges in Continuing Operations On January 12, 1999, McKesson Corporation ("McKesson") completed the acquisition of HBO & Company ("HBOC"), a leading health care information technology company, by exchanging 177 million shares of McKesson common stock for all of the issued and outstanding common stock of HBOC. The transaction was accounted for as a pooling of interests. In April 1999, the Company discovered improper accounting practices at HBOC (see Financial Note 11). In July, the Audit Committee of the Company's Board of Directors completed an investigation into such matters (the "Investigation"), which resulted in the restatement of the Company's historical consolidated financial statements related to HBOC (pre-merger) in fiscal 1999, 1998, and 1997. In fiscal 2000, the Company incurred costs in connection with the investigation and the resulting restatement of the historical consolidated financial statements. In the quarter and nine months ended December 31, 1999, the Company recorded charges totaling $2.4 million and $17.4 million, respectively, for accounting and legal fees and other costs incurred in connection with the restatement of prior years' financial results and $0.7 million and $3.6 million, respectively, in acquisition-related costs. In addition, the Company recorded charges of $32.3 million for severance and other costs associated with former employees in the nine months ended December 31, 1999. In the quarter and nine months ended December 31, 1999, the Health Care Supply Management segment incurred charges for receivable reserves and asset impairments totaling $30.3 million related primarily to a prior year implementation of a contract system. This charge was partially offset by a $5.7 million net reduction in restructuring reserves for prior year plans (see Financial Note 6). Also, during the quarter and nine months, the Health Care Information Technology segment recorded gains totaling $263.2 million on the sale of equity investments and exchange of WebMD shares for Healtheon/WebMD shares, that was recognized upon the completion of the merger of the two companies in November 1999. These gains were offset, in part, by a charge of $68.5 million for a change in estimate of requirements for accounts receivable and customer reserves and $9.8 million of expense related to the donation of Healtheon/WebMD shares to the McKesson HBOC Foundation. In addition, $2.6 million of prior year reserves for acquisition-related activities were reversed due to a change in requirements. Prior year results include charges associated with acquisitions in the Health Care Supply Management and Health Care Information Technology segments of $26.5 million and $33.8 million, respectively, in the quarter and $100.2 million and $41.4 million, respectively, in the nine months ended December 31, 1998. These charges include transaction costs, employee benefit change in control provisions, employee severance, restructuring, integration and system installation costs associated with acquisition-related activities. The nine months ended December 31, 1998 also includes charges of $4.9 million for the terminated merger with AmeriSource Corporation. 6. Restructuring and Asset Impairments In fiscal 1999, the Company identified six pharmaceutical distribution centers and several smaller medical/surgical distribution centers in the Health Care Supply Management segment for closure, of which one pharmaceutical distribution center was shut down by fiscal year end. During the quarter ended December 31, 1999, management reassessed these plans, resulting in the decision to retain one of the six pharmaceutical distribution centers identified for closure in fiscal 1999 and to reduce the number of medical/surgical distribution center closures. Also during the quarter, the Company announced and completed the closure of one additional pharmaceutical distribution center. These changes resulted in the net reduction of $5.7 million in restructuring reserves. During the nine months ended December 31, 1999, the Company completed the closures of three pharmaceutical distribution centers, including the additional distribution center mentioned above. This resulted 9 <PAGE> McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) (unaudited) in the termination of approximately 100 employees and the payment of $1.0 million in severance. In addition, the realignment of the sales organization was completed and certain back office functions were eliminated resulting in the termination of approximately 90 employees and the payment of $2.2 million in severance. Also, the Company completed the closures of two medical/surgical distribution centers and paid $0.8 million in severance to approximately 90 employees who were terminated in fiscal 1999 and 2000 related to the elimination of duplicate functions. The Company plans to continue the closure activities associated with the pharmaceutical distribution centers and other medical/surgical distribution centers throughout fiscal 2001. At December 31, 1999, assets associated with the restructuring plans, primarily distribution center buildings and improvements, totaled $10.4 million, net of asset valuation reserves. In the Health Care Information Technology segment, approximately 550 employees were terminated in fiscal 1999; $9.9 million of severance was paid in the nine month period ended December 31, 1999, to approximately 330 of the employees who were terminated in fiscal 1999. Agreements for certain employees of the Health Care Information Technology segment provide for payments through fiscal 2002. A reconciliation of the reserves for the restructuring plans from March 31, 1999 to December 31, 1999, by operating segment follows: <TABLE> <CAPTION> Health Care Health Care Information Supply Management Technology --------------------------------- --------------------- Asset Other Exit- Other Exit- Severance Impairments Related Severance Related Total --------- ----------- ----------- --------- ----------- ------ (in millions) <S> <C> <C> <C> <C> <C> <C> Balance, March 31, 1999................... $10.6 $ 35.0 $19.0 $12.2 $ 0.6 $ 77.4 Adjustments............. (0.8) 1.7 (6.6) (5.7) Severance amounts paid during the period...... (4.0) (9.9) (13.9) Asset dispositions...... (10.0) (10.0) Other costs paid during the period............. (2.0) (0.3) (2.3) ----- ------ ----- ----- ----- ------ Balance, December 31, 1999................... $ 5.8 $ 26.7 $10.4 $ 2.3 $ 0.3 $ 45.5 ===== ====== ===== ===== ===== ====== </TABLE> The remaining balances at December 31, 1999 relate primarily to charges recorded in fiscal 1999, with the exception of $6.9 million of asset valuation reserves and $1.0 million of exit-related reserves associated with the fiscal 1997 plan. The reserves for other exit-related items consist of costs for preparing facilities for disposal, lease costs and property taxes required subsequent to termination of operations. 7. Gain on Equity Investments As a result of the November 11, 1999 merger between Healtheon Corporation and WebMD, Inc., the Company received 4.5 million shares of Healtheon/WebMD common stock and 8.4 million warrants to purchase Healtheon/WebMD common stock in exchange for its shares and warrants of WebMD. The Company recorded the Healtheon/WebMD shares received at the November 11, 1999 closing market price and the warrants at fair value using the Black-Scholes valuation method. In December 1999, the Company sold 2.0 million Healtheon/WebMD common shares and donated 250,000 Healtheon/WebMD common shares to the McKesson HBOC Foundation. The fair value of the Company's remaining investment in Healtheon/WebMD common stock, which has been classified as a trading security under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," totaled $86.9 million at December 31, 1999, based on a closing price of $37 1/2. The Company sold its remaining Healtheon/WebMD common shares in January 2000. The fair value of the Company's warrants to purchase Healtheon/WebMD common stock, which have been classified as available-for-sale under SFAS 115 and included in other assets, was $75.5 million at December 31, 1999. The warrants have exercise prices ranging from $11.14 to $50.86 and 10 <PAGE> McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) (unaudited) expire on September 1, 2004. As a result of the above transactions, during the quarter ended December 31, 1999, the Company recognized gains related to the investment in Healtheon/WebMD of $242.9 million, of which $74.5 million was realized. In addition, other equity investments were sold during the quarter ended December 31, 1999, which resulted in a gain of $20.3 million, and an expense of $9.8 million was recorded in selling, distribution, research and development and administrative expenses to reflect the donation of the Healtheon/WebMD shares to the McKesson HBOC Foundation. 8. Comprehensive Income Comprehensive income is defined as all changes in stockholders' equity from non-owner sources. As such, it includes net income and amounts arising from unrecognized pension costs, unrealized gains or losses on marketable securities classified as available for sale which are recorded directly to stockholders' equity and foreign currency translations. Total comprehensive income for the three and nine months ended December 31, 1999 and 1998 is as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, -------------------- ------------------ 1999 1998 1999 1998 --------- --------- -------- -------- (in millions) <S> <C> <C> <C> <C> Net income........................ $ 166.8 $ 50.7 $ 296.2 $ 146.1 Unrealized gain (loss) on marketable securities............ (10.0) -- (9.9) 0.1 Foreign currency translation adjustments...................... (1.6) (2.3) (3.1) (5.3) --------- -------- -------- -------- $ 155.2 $ 48.4 $ 283.2 $ 140.9 ========= ======== ======== ======== </TABLE> 9. Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations for income from continuing operations: <TABLE> <CAPTION> Three Months Ended ----------------------------------------------- December 31, 1999 December 31, 1998 ----------------------- ----------------------- Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- (in millions, except per share amounts) <S> <C> <C> <C> <C> <C> <C> Basic EPS Income from continuing operations................... $160.6 281.4 $0.57 $45.1 275.2 $0.16 ===== ===== Effect of Dilutive Securities Options to purchase common stock........................ -- 1.9 -- 8.7 Trust convertible preferred securities................... 1.5 5.4 1.5 5.4 Restricted stock.............. -- 0.1 -- 0.4 ------ ----- ----- ----- Diluted EPS Income available to common stockholders plus assumed conversions.................. $162.1 288.8 $0.56 $46.6 289.7 $0.16 ====== ===== ===== ===== ===== ===== </TABLE> 11 <PAGE> McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) (unaudited) <TABLE> <CAPTION> Nine Months Ended ----------------------------------------------- December 31, 1999 December 31, 1998 ----------------------- ----------------------- Income Shares Per Share Income Shares Per Share ------ ------ --------- ------ ------ --------- (in millions, except per share amounts) <S> <C> <C> <C> <C> <C> <C> Basic EPS Income from continuing operations................... $272.8 281.1 $0.97 $122.7 274.1 $0.45 ===== ===== Effect of Dilutive Securities Options to purchase common stock........................ -- 3.2 -- 9.4 Trust convertible preferred securities................... 4.6 5.4 4.6 5.4 Restricted stock.............. -- 0.1 -- 0.4 ------ ----- ------ ----- Diluted EPS Income available to common stockholders plus assumed conversions.................. $277.4 289.8 $0.96 $127.3 289.3 $0.44 ====== ===== ===== ====== ===== ===== </TABLE> 10. New Accounting Pronouncements The Company adopted Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" as of April, 1, 1998. The impact of the adoption was not material to the Company's consolidated financial position, results of operations or cash flows. In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133" which defers the effective date of SFAS No. 133 until the Company's fiscal year 2002. The Company is currently evaluating what impact, if any, SFAS No. 133 may have on its consolidated financial statements. 11. Litigation In its Annual Report on Form 10-K/A for fiscal year ended March 31, 1999 and its Form 10-Q filed November 15, 1999, the Company reported on numerous legal proceedings arising out of the Company's announcement on April 28, 1999 regarding accounting improprieties at HBOC. On November 2, 1999, the United States District Court for the Northern District of California issued an order consolidating fifty-three class actions alleging violations of the federal securities laws into one action entitled In re McKesson HBOC, Inc. Securities Litigation (the "Consolidated Action"). By order dated December 23, 1999, the court appointed the New York State Common Retirement Fund as Lead Plaintiff and designated two law firms as Lead Counsel. The court's order of December 23, 1999, also consolidated an individual action into the Consolidated Action. By stipulation, Lead Plaintiff has until February 25, 2000, to file a consolidated complaint, after which the Company will be required to respond. In addition, an action entitled Chang v. McKesson HBOC, Inc. et al., (No. C-99-5075 (CAL)), an action alleging violations of the Employee Retirement Income Security Act, was filed in the Northern District and has been coordinated with the Consolidated Action. 12 <PAGE> McKESSON HBOC, INC. FINANCIAL NOTES--(Continued) (unaudited) In American Healthcare Fund II, L.P., et al, v. HBO & Company and McKesson HBOC, Inc. (No. 99-CV-1762) (Col. St. Ct.), the Company has filed a motion to dismiss and the plaintiffs have filed a motion for partial summary judgment, both of which are currently pending before the court. On December 9, 1999, an action entitled Adler v. McKesson HBOC, Inc. et al. (Ga. Sup. Ct. No. 99-C-7980-3) ("Adler") was filed in Georgia Superior Court for Gwinnett County. Plaintiff in Adler, a purported HBOC shareholder, asserts a claim for common law fraud arising out of McKesson HBOC's need to restate its financial statements. On February 8, 1999, the Company answered the complaint in Adler, filed a motion to stay the case in favor of the Consolidated Action, and filed a motion to dismiss or in the alternative to require that HBOC be added as a party. In Kelly v. McKesson HBOC, Inc., et al. (No. 99C-09-265 WCC) (Del. Supr. Ct.), the Company has filed a motion to dismiss and plaintiffs have filed a motion for partial summary judgment, both of which are pending before the court. In two other Delaware actions, Carroll v. McKesson HBOC, Inc., et al. (Del. Chancery Ct. No. 17454) and Kelly v. McKesson HBOC, Inc. et al. (Del. Chancery Ct. No. 17282 NC), plaintiffs have filed notices of dismissal without prejudice. As previously reported, the United States Attorney's Office for the Northern District of California and the San Francisco District Office of the SEC have also commenced investigations in connection with the matters relating to the restatement of previously reported amounts for HBOC described in Financial Note 5. These investigations are ongoing. The Company does not believe it is feasible to predict or determine the outcome or resolution of these proceedings, or to estimate the amounts of, or potential range of loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against the Company or settlements, that could require substantial payments by the Company which could have a material adverse impact on the Company's financial position, results of operations and cash flows. Except for the matters discussed above, there have not been any significant changes with respect to the litigation matters described in Financial Note 19 to the Company's Annual Report on Form 10-K/A for the fiscal year ended March 31, 1999 and in Financial Note 10 to the Form 10-Q filed on November 15, 1999. 13 <PAGE> McKESSON HBOC, INC. FINANCIAL NOTES--(Concluded) (unaudited) 12. Segment Information The Company's chief operating decision makers who determine the allocation of resources and evaluate the financial performance of the operating segments are the Co-Chief Executive Officers. In evaluating financial performance, management focuses on operating profit as a segment's measure of profit or loss. Operating profit is income before interest expense, corporate interest income, taxes on income and allocation of certain corporate revenues and expenses. During the third quarter, the Company added the new e-Health business segment following its acquisition of Abaton.com (see Financial Note 2). There have been no other changes in the segments reported or the basis of measurement of segment profit or loss from that which was reported in the Company's 1999 Annual Report on Form 10-K/A, except for the reclassification of the Water Products segment as a discontinued operation (see Financial Note 2). Financial information relating to the Company's continuing operations reportable segments for the three and nine months ended December 31, 1999 and 1998, and as of December 31, 1999 and March 31, 1999, is presented below: <TABLE> <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, -------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (in millions) <S> <C> <C> <C> <C> Revenues Health Care Supply Management.... $ 9,594.1 $ 7,897.8 $26,497.5 $20,555.5 Health Care Information Technology...................... 292.8 380.8 921.9 1,135.5 e-Health......................... 0.2 -- 0.2 -- Corporate........................ 3.8 8.9 9.5 29.0 --------- --------- --------- --------- Total.......................... $ 9,890.9 $ 8,287.5 $27,429.1 $21,720.0 ========= ========= ========= ========= Operating profit Health Care Supply Management.... $ 112.7 $ 103.8 $ 365.1 $ 241.8 Health Care Information Technology...................... 213.8 13.3 299.8 73.9 e-Health......................... (6.4) -- (6.4) -- --------- --------- --------- --------- Total.......................... 320.1 117.1 658.5 315.7 Interest--net.................... (27.1) (23.9) (81.5) (63.8) Corporate and other.............. (32.4) (13.6) (130.1) (36.9) --------- --------- --------- --------- Income from continuing operations before income taxes and dividends on preferred securities of subsidiary trust......................... $ 260.6 $ 79.6 $ 446.9 $ 215.0 ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> December 31, March 31, 1999 1999 ------------ --------- (in millions) <S> <C> <C> Segment assets Health Care Supply Management......................... $ 7,959.5 $6,889.7 Health Care Information Technology.................... 1,375.9 1,357.3 e-Health.............................................. 102.9 -- Corporate (including net assets of discontinued operations).......................................... 767.6 773.0 --------- -------- Total............................................... $10,205.9 $9,020.0 ========= ======== </TABLE> 14 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW Segment Results The revenues and operating profits of the Company by business segment are as follows: <TABLE> <CAPTION> Nine Months Ended Three Months Ended December 31, December 31, --------------------------------------- ---------------------------------- 1999 1998 % Chg. 1999 1998 % Chg. ----------- ----------- ------- --------- --------- ------ REVENUES (dollars in millions) <S> <C> <C> <C> <C> <C> <C> Health Care Supply Management Pharmaceutical Distribution & Services U.S. Health Care(1)... $ 8,278.9 $ 6,778.5 22.1 $22,751.4 $17,431.0 30.5 International......... 610.6 489.1 24.8 1,713.8 1,483.7 15.5 ----------- ----------- --------- --------- Total Pharmaceutical Distribution & Services............. 8,889.5 7,267.6 22.3 24,465.2 18,914.7 29.3 Medical/Surgical Distribution & Services.............. 704.6 630.2 11.8 2,032.3 1,640.8 23.9 ----------- ----------- --------- --------- Total Health Care Supply Management.... 9,594.1 7,897.8 21.5 26,497.5 20,555.5 28.9 ----------- ----------- --------- --------- Health Care Information Technology Software............... 53.6 79.9 (32.9) 153.4 238.5 (35.7) Services............... 217.7 248.7 (12.5) 699.3 728.9 (4.1) Hardware............... 21.5 52.2 (58.8) 69.2 168.1 (58.8) ----------- ----------- --------- --------- Total Health Care Information Technology........... 292.8 380.8 (23.1) 921.9 1,135.5 (18.8) ----------- ----------- --------- --------- e-Health................ 0.2 -- 0.2 -- Corporate............... 3.8 8.9 9.5 29.0 ----------- ----------- --------- --------- Total................... $ 9,890.9 $ 8,287.5 19.3 $27,429.1 $21,720.0 26.3 =========== =========== ========= ========= OPERATING PROFIT Health Care Supply Management............. $ 112.7 (3) $ 103.8 (7) $ 365.1 (3) $ 241.8 (7) Health Care Information Technology............. 213.8 (4) 13.3 (8) 299.8 (4) 73.9 (8) e-Health................ (6.4)(5) -- (6.4)(5) -- ----------- ----------- --------- --------- Total................... 320.1 117.1 658.5 315.7 Interest--net(2)........ (27.1) (23.9) (81.5) (63.8) Corporate and other..... (32.4)(6) (13.6) (130.1)(6) (36.9) ----------- ----------- --------- --------- Income from continuing operations before income taxes and dividends on preferred securities of subsidiary trust....... $ 260.6 $ 79.6 $ 446.9 $ 215.0 =========== =========== ========= ========= </TABLE> - ------- (1) Includes sales to customers' warehouses of $2,346.2 million and $2,206.0 million in the quarter and $6,647.3 million and $4,806.9 million in the nine months ended December 31, 1999 and 1998, respectively. (2) Interest expense is shown net of corporate interest income. (3) Includes charges of $30.3 million for receivable reserves and asset impairments related primarily to a prior year implementation of a contract system, partially offset by a $5.7 million net reduction in prior year restructuring reserves. (4) Includes net gains totaling $256.0 million primarily on the sale of equity investments and a gain on the exchange of WebMD shares for Healtheon/WebMD shares that was recognized upon the completion of the merger of the two companies in November 1999, offset, in part, by a charge of $68.5 million for a change in estimate of requirements for accounts receivable and customer reserves. (5) Includes a charge of $1.5 million for the write-off of purchased in- process technology associated with the November 1999 acquisition of Abaton.com. (6) Includes accounting and legal fees and other costs totaling $2.4 million and $17.4 million incurred in the quarter and nine months ended December 31, 1999 in connection with the restatement of prior year financial results. Also includes $0.7 million and $3.6 million incurred in the quarter and nine months ended December 31, 1999 in acquisition-related costs. In addition, the nine months ended December 31, 1999 includes $32.3 million in severance and other costs associated with former employees. (7) Includes charges of $26.5 million and $100.2 million in the quarter and nine months ended December 31, 1998 associated with acquisitions including transaction costs, employee benefit change in control provisions, restructuring, integration and system installation costs associated with acquisition-related activities. The nine months ended December 31, 1998 also includes charges of $4.9 million for the terminated merger transaction with AmeriSource Corporation. (8) Includes charges associated with acquisitions of $33.8 million and $41.4 million in the quarter and nine months ended December 31, 1998 for transaction costs, severance and asset impairments. 15 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Factors Affecting Forward Looking Statements In addition to historical information, management's discussion and analysis includes certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Some of the forward-looking statements can be identified by the use of forward looking words such as "believes", "expects", "anticipates", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates", or "anticipates", or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These include, but are not limited to the factors discussed under "Year 2000" and "Additional Factors That May Affect Future Results" of this "Financial Review." These and other risks and uncertainties are described herein or in the Company's other public documents. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview of Results Net income for the third quarter increased to $166.8 million, $0.58 per diluted share, from $50.7 million, $0.18 per diluted share, in the prior year. For the nine month period, net income increased to $296.2 million, $1.04 per diluted share, compared to $146.1 million, $0.52 per diluted share, in the prior year. The results for the quarter and nine months ended December 31, 1999 include after-tax special items that increased net income by $100.1 million and $69.2 million, respectively. The special items consist predominantly of a net after- tax gain of $159.1 million from the exchange, sale and donation of certain Health Care Information Technology equity investments offset, in part, by charges in the Company's operating business segments and at Corporate. These charges totaled $59.0 million and $89.9 million after-tax in the quarter and nine months ended December 31, 1999 and relate primarily to charges for receivable-related reserves, asset impairments, severance and other costs associated with former employees and professional fees associated with the restatement of prior year financial results. The prior year's results include after-tax charges of $41.0 million in the quarter and $96.6 million in the nine months associated with completed and terminated acquisitions including transaction costs, employee benefit change in control provisions, employee severance, restructuring, integration and system installation costs. The effective income tax rate applicable to continuing operations for the nine months ended December 31, 1999 differed from the effective income tax rate for the comparable prior year period primarily due to certain nondeductible transaction expenses included in the prior year charges noted above. Health Care Supply Management The Health Care Supply Management segment includes the operations of the Company's U.S. pharmaceutical distribution and services businesses, its international pharmaceutical operations (Canada and Mexico), and its medical/surgical distribution and services business. This segment accounted for 97% of consolidated revenues for the three and nine month periods ended December 31, 1999. 16 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Pharmaceutical Distribution & Services revenues increased by 22% to $8.9 billion in the quarter and 29% to $24.5 billion in the nine months, reflecting growth in the U.S. direct delivery business of 30% in the quarter and 28% in nine months, an increase in U.S. sales to customers' warehouses of 6% and 38%, respectively, and an increase in international revenues of 25% and 16%, respectively. Internal growth in the U.S. direct delivery business was 30% and 27% in the quarter and nine months, respectively. Medical/Surgical Distribution & Services revenues increased 12% to $704.6 million in the quarter and 24% to $2,032.3 million in the nine month period. Fiscal 2000 revenues included $111.5 million in the quarter and $310.1 million in the nine months from Red Line HealthCare which was acquired in a purchase transaction in November 1998. The internal growth rate in the Medical/Surgical Distribution & Services business was 4% in the quarter and 9% in the nine months. Health Care Supply Management operating profit increased $8.9 million to $112.7 million in the quarter and by $123.3 million to $365.1 million in the nine months. The quarter ended December 31, 1999 included $30.3 million in charges for receivable reserves and asset impairments related primarily to a prior year implementation of a contract system, partially offset by a $5.7 million reduction in prior year restructuring reserves. In addition, the quarter included $0.3 million in additional amortization expense resulting from a reduction in the goodwill life related to the prior year acquisition of MedManagement to 20 years from 40 years, effective October 1, 1999. The prior year's results included charges of $26.5 million in the quarter and $100.2 million in the nine month period, associated with acquisitions including transaction costs, employee benefit change in control provisions and restructuring, integration and system installation costs. The nine months ended December 31, 1998 also included charges of $4.9 million for the terminated merger transaction with AmeriSource Corporation. Excluding the effect of such charges, operating profit for the Health Care Supply Management segment increased by 5% and 12% in the third quarter and nine months, respectively. Operating profit as a percent of revenues (calculated excluding sales to customers' warehouses and the previously discussed charges) declined 40 basis points to 1.89% in the third quarter and 24 basis points to 1.96% in the nine months, compared to the respective prior year margins. The period-to- period comparisons were negatively affected by receivable-related charges, the continued competitive pressures that affected both new and renewed customer agreements and a shift in the pharmaceutical distribution mix to faster- growing customer segments. The receivable-related charges in the third quarter ended December 31, 1999 decreased the operating margin by 17 basis points. Health Care Information Technology The Health Care Information Technology segment includes revenues from software sales, services business and hardware sales. This segment accounted for 3% of consolidated revenues for the quarter and nine month periods ended December 31, 1999. Management believes that the overall decline in revenues of 23% in the quarter and 19% in the nine month period reflects the continued general, industry-wide slowdown in sales of health care information technology software and hardware products resulting from delays in purchasing decisions that are attributed both to Year 2000 issues and general market conditions. Also contributing to the decline in the nine months ended December 31, 1999, was the disruption to this business caused by the completed Audit Committee Investigation (see Financial Note 5) and Health Care Information Technology senior management changes made during the current year. Operating profit increased by $200.5 million to $213.8 million in the quarter and by $225.9 million to $299.8 million in the nine months. The current year results included net gains totaling $256.0 million primarily from the sales and donation of equity investments and a gain on the exchange of the Company's WebMD shares 17 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) for Healtheon/WebMD shares that was recognized upon the completion of the merger of the two companies in November 1999. The gains were offset, in part, by a charge of $68.5 million for a change in estimate of requirements for receivable and customer reserves associated with resolving customer satisfaction issues relating to certain product installations. The operating profit margin, excluding the impact of the items discussed above, declined to 8.98% in the quarter ended December 31, 1999 compared to 12.37% for the prior year quarter, and increased to 12.18% in the nine month period ended December 31, 1999 compared to 10.15% in the prior year comparable period. The decline in the quarter is attributed to lower sales of software and services, and increased expenses to enhance customer support. The favorable comparison in the nine month period reflects a high level of bad debt provisions and other expense items in the prior year. Management is currently conducting an assessment of the entire Health Care Information Technology product portfolio, which it expects to complete in the fourth quarter ending March 31, 2000. Following the completion of this assessment, management expects to streamline its product offerings to eliminate redundancies, focus on current and anticipated customer needs and implement new technologies. As a result, the Company expects to record additional charges associated with impaired assets and related expenses in the fourth quarter. Management expects an increased level of contract negotiations and sales activity as the effects of Year 2000 issues diminish. However, management does not expect a meaningful rebound in software sales until late in the 2000 calendar year. Revenue may be augmented by the recognition of certain revenues previously reversed as a result of the Audit Committee Investigation and resulting restatement (see Financial Note 5). e-Health The e-Health segment became a reportable segment in the current quarter following the completion of the Company's acquisition of Abaton.com in November 1999 (see Financial Note 2). Revenues for the e-Health segment were $0.2 million for the quarter. The e-Health segment incurred an operating loss of $6.4 million in the quarter, which included a $1.5 million charge for the write-off of purchased in-process technology associated with the acquisition of Abaton.com. Other Corporate expense included pre-tax charges of $3.1 million and $53.3 million in the quarter and nine months ended December 31, 1999, respectively, consisting of professional fees incurred in connection with the previously discussed Audit Committee Investigation and resulting restatement of prior year financial statements, severance benefits and other costs associated with former employees and other acquisition-related costs. Corporate expense also reflects higher expenses for certain employee benefits (required to maintain a desired level of benefits to employees despite a decline in the stock price), affiliation costs incurred in the nine months, and transaction costs associated with the Company's committed receivables sales facility. Discontinued Operations Income from discontinued operations was $23.4 million in the current year and prior year nine month periods respectively. These amounts represent the results from the Company's Water Products Business which was reclassified to discontinued operations in the current quarter as a result of the signing of a definitive agreement to sell the Water Products Business to Group DANONE for $1.1 billion in cash (see Financial Note 2). Liquidity and Capital Resources Cash and marketable securities available for sale were $400.2 million at December 31, 1999 and $261.9 million at March 31, 1999. The December 31, 1999 marketable securities balance includes $19.8 million that is currently restricted and held in trust as exchange property in connection with the Company's outstanding exchangeable debentures. 18 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Interest expense, net of corporate interest income, increased to $27.1 million in the third quarter and to $81.5 million in the nine month period compared to $23.9 million and $63.8 million in the prior year respective periods. The increases from the prior year reflect increased average working capital to support strong Health Care Supply Management growth, cash used for acquisitions and lower cash flows from the Health Care Information Technology segment. Stockholders' equity was $3.2 billion at December 31, 1999, and the net debt-to-capital ratio was 22% at both December 31, 1999 and March 31, 1999. The net debt-to-capital ratio for both periods was computed by reducing the outstanding debt amount by the cash and marketable securities balances. In October 1999, Duff & Phelps, an agency that rates the Company's debt, lowered the Company's senior debt rating to BBB+ from A-, and reaffirmed the Company's commercial paper rating of D-2. In December 1999, Standard & Poors lowered the Company's senior debt rating to BBB from BBB+ and reaffirmed the commercial paper rating of A-2. The Company's ratings from Moodys of Baa1 for senior debt and P-2 for commercial paper remain unchanged from those disclosed in the Company's 1999 Annual Report on Form 10-K. The Company's ratings from Standard & Poors and Moodys are on negative credit outlook and credit watch, respectively. Common shares outstanding increased to 281.7 million at December 31, 1999 from 280.6 million at March 31, 1999 due primarily to shares issued under employee benefit plans. Average diluted shares declined to 288.8 million in the third quarter of fiscal 2000 from 289.7 million in the comparable prior year period due to a lower effect of dilutive securities as a result of the stock price decline (see Financial Note 9). YEAR 2000 The "Year 2000 Issue" refers to the fact that some computer hardware, software and embedded firmware are designed to read and store dates using only the last two digits of the year. Such applications may fail or cause errors in the Year 2000. The Company incurred costs of approximately $16 million in the nine months ended December 31, 1999, and $14 million in fiscal 1999 for a total project cost of less than $40 million, associated with modifications to the Company's existing systems to make them Year 2000 ready, related testing and outside consulting. As of February 14, 2000, the Company has not incurred any significant business disruption as a result of the Year 2000 Issue. However, while no such occurrence has developed, problems due to the Year 2000 Issue, including those experienced by the Company's customers, suppliers and other third parties on which the Company relies, could arise in the future. The Company does not expect to incur significant additional costs related to the Year 2000 Issue; however, should such problems arise, the Company could incur additional costs. The Health Care Information Technology segment may experience an increase in warranty claims relating to (i) malfunctions in Company products which have not been upgraded, either because the Company has discontinued support for such products and has therefore not provided the necessary enhancement or because the customer has not installed an enhancement made available by the Company or (ii) malfunctions resulting from Year 2000 problems in third-party hardware or software used in connection with the operation of Company software products. Although such warranty claims are generally subject to contractual liability limitations, the Company is not able to accurately assess or estimate the possible impact of such claims. Management believes that the costs of work by customers related to Year 2000 issues have caused some Health Care Information Technology customers and prospective customers to defer current projects or prospective decisions regarding the acquisition of new software. The Company will continue to monitor its own Year 2000 compliance and that of its customers, supplies and other third parties on which its relies. 19 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS The following additional factors may affect the Company's future results: Adverse judgments regarding the restatement of the Company's historical financial statements may cause it to incur material losses. Subsequent to the Company's April 28, 1999 restatement announcement, and as of December 31, 1999, fifty-nine class action lawsuits, three derivative actions, and seven individual actions have been filed against the Company, and certain current or former officers and directors of the Company in federal and state courts (see Financial Note 11, "Litigation"). In addition, the United States Attorney's Office for the Northern District of California and the San Francisco District Office of the SEC have also commenced investigations in connection with the matters relating to the restatement of previously reported amounts. The Company does not believe it is feasible to predict or determine the outcome or resolution of these proceedings, or to estimate the amount of, or potential range of, loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against the Company or settlements that could require substantial payments by the Company which could cause it to incur material losses. The restatement of the Company's earnings may negatively impact the management of the Company's business. The effect of the pending litigation and government investigations relating to the previously announced financial restatement could present challenges in attracting and retaining quality employees and managers. Such difficulties could impair the Company's ability to manage the Company's business. The Company's business could be hindered if it is unable to complete and integrate acquisitions successfully. An element of the Company's business is to pursue strategic acquisitions that either expand or complement its business. The Company routinely reviews such potential acquisition opportunities and has historically engaged in numerous acquisitions. Integration of acquisitions, including the merger that created McKesson HBOC, Inc., involves a number of special risks. Such risks include: . the diversion of management's attention to the assimilation of the operations of businesses the Company has acquired; . difficulties in the integration of operations and systems and the realization of potential operating synergies; . difficulties in the integration of any acquired companies operating in a different sector of the health care industry; . delays or difficulties in opening and operating larger distribution centers in a larger and more complex distribution network; . the assimilation and retention of the personnel of the acquired companies; . challenges in retaining the customers of the combined businesses; and . potential adverse effects on operating results. 20 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) If the Company is unable to successfully complete and integrate strategic acquisitions in a timely manner, its business and the Company's growth strategies could be negatively affected. The Company's issuance of equity to finance acquisitions could have a potential dilutive effect on its stock. The Company anticipates that it will finance acquisitions, at least partly by incurring debt or by the issuance of additional securities. The use of equity financing, rather than debt, for acquisitions would dilute the ownership of the Company's then current stockholders. Changes in the United States healthcare environment could have a material negative impact on the Company's revenues. The Company's products and services are intended to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. In recent years, the healthcare industry has changed significantly in an effort to reduce costs. These changes include increased use of managed care, cuts in Medicare, consolidation of pharmaceutical and medical/surgical supply distributors, and the development of large, sophisticated purchasing groups. The Company expects the healthcare industry to continue to change significantly in the future. Some of these changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing the delivery or pricing of healthcare services or mandated benefits, may cause healthcare industry participants to greatly reduce the amount of the Company's products and services they purchase or the price they are willing to pay for the Company's products and services. Changes in pharmaceutical manufacturers' pricing or distribution policies could also significantly reduce the Company's income. Due to the diverse range of health care supply management and health care information technology products and services the Company offers, such changes may adversely impact the Company while not affecting some of the Company's competitors that offer a more narrow range of products and services. Substantial defaults in payment or a material reduction in purchases of the Company's products by some large customers could have a significant negative impact on the Company's financial condition, results of operations and liquidity. The Company's recent strategy has been to build relationships with large customers that are achieving rapid growth. During the fiscal year ended March 31, 1999, sales to the Company's ten largest customers accounted for approximately 45% of the Company's sales. A growing portion of the Company's increased sales in fiscal 2000 has been to a limited number of these large customers. Consequently, the Company's sales and credit concentration have significantly increased. Accordingly, any defaults in payment or a material reduction in purchases of the Company's products by these large customers could have a significant negative impact on the Company's financial condition, results of operations and liquidity. The ability of the Health Care Information Technology business to attract and retain customers due to challenges in integrating software products, technological advances and Year 2000 concerns may significantly reduce the Company's revenues. The Company's Health Care Information Technology business delivers enterprise-wide patient care, clinical, financial, managed care, payor and strategic management software solutions, as well as networking technologies, electronic commerce, outsourcing and other services to health care organizations throughout the United States and certain foreign countries. Challenges in integrating software products used by the Health Care Information Technology business with those of its customers could impair the Company's ability to attract and retain customers and may reduce its revenues or increase its expenses. 21 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW--(Continued) Future advances in the health care information systems industry could lead to new technologies, products or services that are competitive with the products and services offered by the Health Care Information Technology business. Such technological advances could also lower the cost of such products and services or otherwise result in competitive pricing pressure. The success of the Health Care Information Technology business will depend, in part, on its ability to be responsive to technological developments and challenges, including pricing pressures and changing business models. In addition, to remain competitive in the evolving health care information systems marketplace, the Health Care Information Technology business must develop new products on a timely basis. The failure to develop competitive products and to introduce new products on a timely basis could curtail the ability of the Health Care Information Technology business to attract and retain customers and thereby significantly reduce the Company's net income. Finally, management believes that the costs of work by customers related to Year 2000 Issues have caused some Health Care Information Technology customers and prospective customers to defer current projects or prospective decisions regarding the acquisition of new software. These Year 2000 concerns by existing and potential new customers may adversely affect sales of the Company's products. Proprietary technology protections may not be adequate and proprietary rights may infringe on rights of third parties. The Company relies on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other contractual provisions and technical measures to protect its proprietary rights in its products. There can be no assurance that these protections will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Although the Company believes that its products and other proprietary rights do not infringe upon the proprietary rights of third parties, from time to time third parties have asserted infringement claims against the Company and there can be no assurance that third parties will not assert infringement claims against the Company in the future. Additionally, the Company may find it necessary to initiate litigation to protect the Company's trade secrets, to enforce its patent, copyright and trademark rights, and to determine the scope and validity of the proprietary rights of others. These types of litigation can be costly and time consuming. These litigation expenses or any damage payments resulting from adverse determinations of third party claims could be significant and could result in material losses to the Company. Potential product liability claims arising from Health Care Information Technology business products could result in material losses to the Company. Some products of the Health Care Information Technology business provide information for use by health care providers in providing health care to patients. Although the Company has not experienced any material claims to date, any failure of the Company's Health Care Information Technology business products to provide accurate and timely information could result in claims against it. The Company maintains insurance to protect against claims associated with the use of such products, but there can be no assurance that the Company's insurance coverage would adequately cover any claims asserted against it. If its insurance coverage is not adequate, the Company may be required to pay the damages which could result in material losses to it. System errors and warranties in the Health Care Information Technology business's products could cause unforeseen liabilities. The Company's Health Care Information Technology business's systems are very complex. As with complex systems offered by others, the Company's systems may contain errors, especially when first introduced. The Health Care Information Technology business's systems are intended to provide information for health care 22 <PAGE> McKESSON HBOC, INC. FINANCIAL REVIEW--(Concluded) providers in providing health care to patients. Therefore, users of its products have a greater sensitivity to system errors than the market for software products generally. Failure of a client's system to perform in accordance with its documentation could constitute a breach of warranty and could require the Company to incur additional expense in order to make the system comply with the documentation. If such failure is not timely remedied, it could constitute a material breach under a contract allowing the client to cancel the contract. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company believes there has been no material change in its exposure to risks associated with fluctuations in interest and foreign currency exchange rates discussed in the Company's 1999 Annual Report on Form 10-K/A. 23 <PAGE> PART II. OTHER INFORMATION Item 1. Legal Proceedings Financial Note 11 to the Company's unaudited condensed consolidated financial statements contained in Part I of this Quarterly Report on Form 10-Q is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended December 31, 1999. 24 <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. McKESSON HBOC, INC. Dated: February 14, 2000 By /s/ Heidi E. Yodowitz ----------------------------------- Heidi E. Yodowitz Senior Vice President and Controller and Acting Chief Financial Officer 25 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <CIK> 0000927653 <NAME> McKESSON HBOC, INC. <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAR-31-2000 <PERIOD-START> APR-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 204,800 <SECURITIES> 195,400 <RECEIVABLES> 3,069,300 <ALLOWANCES> 339,200 <INVENTORY> 4,060,000 <CURRENT-ASSETS> 7,326,500 <PP&E> 1,136,700 <DEPRECIATION> 587,500 <TOTAL-ASSETS> 10,205,900 <CURRENT-LIABILITIES> 5,646,000 <BONDS> 914,800 <PREFERRED-MANDATORY> 195,700 <PREFERRED> 0 <COMMON> 2,800 <OTHER-SE> 3,169,100 <TOTAL-LIABILITY-AND-EQUITY> 10,205,900 <SALES> 27,429,100 <TOTAL-REVENUES> 27,429,100 <CGS> 25,718,200 <TOTAL-COSTS> 27,245,400 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 87,100 <INCOME-PRETAX> 446,900 <INCOME-TAX> 169,500 <INCOME-CONTINUING> 272,800 <DISCONTINUED> 23,400 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 296,200 <EPS-BASIC> 1.05 <EPS-DILUTED> 1.04 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

MDP

https://www.sec.gov/Archives/edgar/data/65011/0000065011-00-000004.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, EgI+nauHfpUujy5Rqo/1xHAtVYNdNlqU5MKXv6a+KuA3Og9W5sEJcKq9sj+apdvf c7ZFUOYWmP81meT6rg+Zwg== <SEC-DOCUMENT>0000065011-00-000004.txt : 20000215 <SEC-HEADER>0000065011-00-000004.hdr.sgml : 20000215 ACCESSION NUMBER: 0000065011-00-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: SEC FILE NUMBER: 001-05128 FILM NUMBER: 539063 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>12/31/99 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, 1999 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, 2000 Common Stock, $1 par value 40,476,963 Class B Stock, $1 par value 10,959,002 ---------- Total Common and Class B Stock 51,435,965 ========== - 1 - <PAGE> Part I - FINANCIAL INFORMATION Item 1. Financial Statements Meredith Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) December 31 June 30 Assets 1999 1999 - ------------------------------------------------------------------------------ (In thousands) Current assets: Cash and cash equivalents $ 18,081 $ 11,029 Receivables, net 153,664 138,723 Inventories 33,940 33,511 Subscription acquisition costs 37,723 41,396 Broadcast rights 26,417 14,644 Other current assets 20,771 16,872 ---------- ---------- Total current assets 290,596 256,175 Property, plant and equipment 299,651 294,310 Less accumulated depreciation (136,983) (134,554) ---------- ---------- Net property, plant and equipment 162,668 159,756 Subscription acquisition costs 31,308 31,182 Broadcast rights 16,419 10,230 Other assets 31,091 29,248 Goodwill and other intangibles (at original cost less accumulated amortization of $134,814 on December 31 and $120,445 on June 30) 922,438 936,805 ---------- ---------- Total assets $1,454,520 $1,423,396 ========== ========== See accompanying Notes to Interim Consolidated Financial Statements. - 2 - <PAGE> (Unaudited) December 31 June 30 Liabilities and Stockholders' Equity 1999 1999 - ------------------------------------------------------------------------------ (In thousands except share data) Current liabilities: Current portion of long-term debt $ 45,000 $ 45,000 Current portion of long-term broadcast rights payable 31,979 21,123 Accounts payable 30,630 55,018 Accrued taxes and expenses 86,179 87,229 Unearned subscription revenues 137,194 135,745 ---------- ---------- Total current liabilities 330,982 344,115 Long-term debt 485,000 485,000 Long-term broadcast rights payable 18,459 13,449 Unearned subscription revenues 94,160 90,276 Deferred income taxes 41,486 33,578 Other noncurrent liabilities 47,174 43,673 ---------- ---------- Total liabilities 1,017,261 1,010,091 ---------- ---------- Temporary equity: Put option agreements Common stock, 1,389,140 shares outstanding at December 31 and 1,535,140 shares at June 30 57,910 53,147 ---------- ---------- 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 39,187,571 at December 31 (excluding 27,747,819 shares held in treasury) and 39,220,509 at June 30 (excluding 27,362,776 shares held in treasury). 39,187 39,220 Class B stock, par value $1 per share, convertible to common stock Authorized 15,000,000 shares; issued and outstanding 10,966,673 at December 31 and 11,063,708 at June 30. 10,967 11,064 Retained earnings 333,114 312,553 Accumulated other comprehensive income (751) (625) Unearned compensation (3,168) (2,054) ---------- ---------- Total stockholders' equity 379,349 360,158 ---------- ---------- Total liabilities and stockholders' equity $1,454,520 $1,423,396 ========== ========== 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 ------------------- ------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------ (In thousands except per share) Revenues: Advertising $157,882 $150,600 $314,653 $293,538 Circulation 68,530 69,066 137,817 136,567 All other 39,717 35,258 74,063 70,656 -------- -------- -------- -------- Total revenues 266,129 254,924 526,533 500,761 -------- -------- -------- -------- Operating costs and expenses: Production, distribution and edit 108,361 102,267 216,358 209,170 Selling, general & administrative 93,083 94,836 193,830 189,823 Depreciation and amortization 13,078 10,018 26,021 20,060 -------- -------- -------- -------- Total operating costs and expenses 214,522 207,121 436,209 419,053 -------- -------- -------- -------- Income from operations 51,607 47,803 90,324 81,708 Gain from disposition -- -- -- 2,375 Interest income 147 132 437 170 Interest expense (9,181) (3,875) (18,049) (7,686) -------- -------- -------- -------- Earnings before income taxes 42,573 44,060 72,712 76,567 Income taxes 17,114 18,637 29,230 32,333 -------- -------- -------- -------- Net earnings $ 25,459 $ 25,423 $ 43,482 $ 44,234 ======== ======== ======== ======== Basic earnings per share $ 0.49 $ 0.48 $ 0.84 $ 0.84 ======== ======== ======== ======== Basic average shares outstanding 51,596 52,304 51,684 52,411 ======== ======== ======== ======== Diluted earnings per share $ 0.48 $ 0.47 $ 0.82 $ 0.82 ======== ======== ======== ======== Diluted average shares outstanding 53,303 53,849 53,338 54,021 ======== ======== ======== ======== Dividends paid per share $ 0.075 $ 0.070 $ 0.150 $ 0.140 ======== ======== ======== ======== See accompanying Notes to Interim Consolidated Financial Statements. - 4 - <PAGE> Meredith Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended December 31 1999 1998 - --------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net earnings $ 43,482 $ 44,234 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 26,021 20,060 Amortization of broadcast rights 16,020 15,651 Payments for broadcast rights (18,670) (14,778) Gain from disposition, net of taxes -- (1,425) Changes in assets and liabilities: Accounts receivable (14,941) (1,040) Inventories (429) (10,686) Supplies and prepayments (1,719) (1,289) Subscription acquisition costs 3,547 6,052 Accounts payable (24,388) (28,440) Accruals 1,377 4,050 Unearned subscription revenues 5,333 (878) Deferred income taxes 5,404 1,776 Other noncurrent liabilities 3,207 2,864 -------- -------- Net cash provided by operating activities 44,244 36,151 -------- -------- Cash flows from investing activities: Proceeds from dispositions -- 9,922 Additions to property, plant, and equipment (14,881) (8,311) Changes in investments and other (1,757) (2,075) -------- -------- Net cash (used) by investing activities (16,638) (464) -------- -------- Cash flows from financing activities: Repayment of long-term debt -- (8,000) Short-term debt incurred, net -- 5,000 Debt acquisition costs -- (377) Proceeds from common stock issued 1,712 1,628 Purchases of company stock (14,908) (31,054) Dividends paid (7,751) (7,335) Other 393 192 -------- -------- Net cash (used) by financing activities (20,554) (39,946) -------- -------- Net increase (decrease) in cash and cash equivalents 7,052 (4,259) Cash and cash equivalents at beginning of year 11,029 4,953 -------- -------- Cash and cash equivalents at end of period $ 18,081 $ 694 ======== ======== See accompanying Notes to Interim Consolidated Financial Statements. - 5 - <PAGE> MEREDITH CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Accounting Policies a. General 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. Readers are referred to the company's Form 10-K for the year ended June 30, 1999 for complete financial statements and related notes. Certain prior-year amounts have been reclassified to conform with current-year presentation. b. 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 amounts reported in the financial statements. Actual results could differ from those estimates. c. Goodwill and other intangibles The unamortized portion of intangible assets consists of the following: (unaudited) December 31 June 30 1999 1999 (In thousands) ----------- ----------- Federal Communications Commission (FCC) licenses $434,647 $440,385 Goodwill 265,825 270,367 Television network affiliation agreements 205,360 208,407 All other 16,606 17,646 -------- -------- Total unamortized portion of intangible assets $922,438 $936,805 ======== ======== - 6 - <PAGE> MEREDITH CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) 2. Comprehensive Income Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The company's comprehensive income includes foreign currency translation adjustments in addition to net earnings. Total comprehensive income (in thousands) for the three-month periods ended December 31, 1999 and 1998, was $25,465 and $25,515, respectively. Total comprehensive income for the six- month periods ended December 31, 1999 and 1998, was $43,356 and $44,532, respectively. 3. Inventories Major components of inventories are summarized below. Of total inventory values shown, approximately 46 percent are under the LIFO method at December 31, 1999 and June 30, 1999. (unaudited) December 31 June 30 1999 1999 (In thousands) ----------- ----------- Raw materials $ 19,547 $ 17,686 Work in process 15,700 16,569 Finished goods 6,252 5,965 ------- ------- 41,499 40,220 Reserve for LIFO cost valuation (7,559) (6,709) ------- ------- Total $ 33,940 $ 33,511 ======== ======== - 7 - <PAGE> MEREDITH CORPORATION AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) 4. Earnings per share The following table presents the calculations of earnings per share: (unaudited) (unaudited) Three Months Six Months Ended December 31 Ended December 31 ------------------ ------------------ 1999 1998 1999 1998 (In thousands except per share) ------- ------- ------- ------- Net earnings $25,459 $25,423 $43,482 $44,234 ======= ======= ======= ======= Basic average shares outstanding 51,596 52,304 51,684 52,411 Dilutive effect of stock options 1,707 1,545 1,654 1,610 ------- ------- ------- ------- Diluted average shares outstanding 53,303 53,849 53,338 54,021 ======= ======= ======= ======= Basic earnings per share $ .49 $ .48 $ .84 $ .84 ======= ======= ======= ======= Diluted earnings per share $ .48 $ .47 $ .82 $ .82 ======= ======= ======= ======= Antidilutive options excluded from the above calculations totaled 580,000 options at December 31, 1999 (with a weighted average exercise price of $40.95) and 550,000 options at December 31, 1998 (with a weighted average exercise price of $41.18). Options to purchase 83,000 shares were exercised during the six months ended December 31, 1999 (51,000 options were exercised in the six months ended December 31, 1998). - 8 - <PAGE> MEREDITH CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued (Unaudited) 5. Segment information (unaudited) (unaudited) Three Months Six Months Ended December 31 Ended December 31 ------------------- ------------------- 1999 1998 1999 1998 (In thousands) -------- -------- -------- -------- Revenues Publishing $189,545 $182,858 $382,785 $373,674 Broadcasting 76,584 72,066 143,748 127,087 -------- -------- -------- -------- Total revenues $266,129 $254,924 $526,533 $500,761 ======== ======== ======== ======== Intersegment revenues are not material. Operating profit Publishing $ 33,440 $ 26,762 $ 62,077 $ 51,581 Broadcasting 21,471 25,915 34,777 38,975 Unallocated corporate expense (3,304) (4,874) (6,530) (8,848) -------- -------- -------- -------- Income from operations $ 51,607 $ 47,803 $ 90,324 $ 81,708 ======== ======== ======== ======== Depreciation and amortization Publishing $ 2,884 $ 2,843 $ 5,763 $ 5,694 Broadcasting 9,666 6,699 19,188 13,379 Unallocated corporate 528 476 1,070 987 -------- -------- -------- -------- Total depreciation and amortization $ 13,078 $ 10,018 $ 26,021 $ 20,060 ======== ======== ======== ======== EBITDA Publishing $ 36,324 $ 29,605 $ 67,840 $ 57,275 Broadcasting 31,137 32,614 53,965 52,354 Unallocated corporate (2,776) (4,398) (5,460) (7,861) -------- -------- -------- ------- Total EBITDA $ 64,685 $ 57,821 $116,345 $101,768 ======== ======== ======== ======== EBITDA is defined as earnings from continuing operations before interest, taxes, depreciation and amortization. EBITDA is often used to analyze and compare companies on the basis of operating performance and cash flow. EBITDA is not adjusted for all noncash expenses or for working capital, capital expenditures and other investment requirements. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. - 9 - <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion presents the key factors that have affected the company's business in the second quarter and first six months of fiscal 2000 and fiscal 1999. This commentary should be read in conjunction with the consolidated financial statements presented elsewhere in this report and with the company's Form 10-K for the year ended June 30, 1999. All per-share amounts refer to diluted earnings per share and are computed on a post-tax basis. This section contains, and management's public commentary from time to time may contain, certain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. Readers are referred to the company's Form 10-K for the year ended June 30, 1999, for a discussion of such factors. Results of Operations Three Months Six Months Ended December 31 Ended December 31 ------------------- ------------------- 1999 1998 1999 1998 (In thousands except per share) -------- -------- -------- -------- Total revenues $266,129 $254,924 $526,533 $500,761 ======== ======== ======== ======== Income from operations $ 51,607 $ 47,803 $ 90,324 $ 81,708 ======== ======== ======== ======== Earnings before nonrecurring items $ 25,459 $ 25,423 $ 43,482 $ 42,809 ======== ======== ======== ======== Net earnings $ 25,459 $ 25,423 $ 43,482 $ 44,234 ======== ======== ======== ======== Diluted earnings per share before nonrecurring items $ 0.48 $ 0.47 $ 0.82 $ 0.79 ======== ======== ======== ======== Diluted earnings per share $ 0.48 $ 0.47 $ 0.82 $ 0.82 ======== ======== ======== ======== - 10 - <PAGE> Net earnings of $25.5 million, or 48 cents per diluted share, were recorded in the quarter ended December 31, 1999, compared to net earnings of $25.4 million, or 47 cents per diluted share, in the prior-year second quarter. For the six months ended December 31, 1999, net earnings were $43.5 million, or 82 cents per diluted share, compared to earnings before nonrecurring items of $42.8 million, or 79 cents per diluted share, in the prior-year period. Net earnings for the six months ended December 31, 1998, included a post-tax gain of $1.4 million, or 3 cents per diluted share, from the sale of the Better Homes and Gardens Real Estate Service. Fiscal 2000 diluted earnings per share before nonrecurring items increased 2 percent for the second quarter and 4 percent for the six-month period compared to the prior-year periods. Management estimates that the acquisition of WGNX- Atlanta on March 1, 1999 diluted earnings per share by 5 cents per share in the quarter and 13 cents per share in the six months ended December 31, 1999. This estimate includes the after-tax effects of the station's operating profit after amortization of acquired intangibles and interest expense on debt incurred to finance the acquisition. The weighted-average diluted number of shares outstanding declined slightly in both periods compared to the prior-year periods primarily due to company share repurchases. Second quarter revenues increased 4 percent and year-to-date revenues were up 5 percent from the comparative prior-year periods. Adjusting for the impacts of the March 1999 acquisition of WGNX-TV in Atlanta and the November 1998 closing of Country America magazine, comparable revenues increased 2 percent in the second quarter and 4 percent in the six-month period. Increased magazine advertising, integrated marketing and consumer book revenues contributed to the growth in both periods. In the year-to-date period, circulation revenues also increased. These increases were partially offset by the absence of nearly $6 million in prior year second quarter broadcasting political advertising due to the biennial nature of political elections. Second quarter and year-to-date operating costs increased 4 percent from the respective prior-year periods. The increases resulted primarily from the acquisition of WGNX-Atlanta and higher costs associated with news expansion in the broadcasting operations. Lower costs resulting from management's expense control efforts partially offset the increases. The operating profit margin rose from 18.8 percent of revenues in the prior-year second quarter to 19.4 percent in the current-year quarter. For the six months ended December 31, 1999, the operating profit margin was 17.2 percent compared to 16.3 percent in the prior-year period. Net interest expense increased in both the quarter and the six-month period as a result of debt incurred for the acquisition of WGNX-Atlanta. The effective tax rate declined in both the quarter and the six-month period due to lower effective state rates and the diminished impact of nondeductible items because of an increase in projected earnings. Although the financial impact is not significant, internet activity of the company's Web sites remains strong. Page views, visits, registrations and unique visitors to the sites continue to increase. According to Media Metrix, - 11 - <PAGE> the company's Web sites had more than 1 million unique visitors in November 1999. Traffic continues to increase at BHG.com, with 774,000 unique visitors in November 1999 versus 680,000 in October and 553,000 in September. Publishing - ---------- Three Months Six Months Ended December 31 Ended December 31 ------------------- ------------------- (In thousands) 1999 1998 1999 1998 -------- -------- -------- -------- Revenues -------- Advertising $ 82,955 $ 80,115 $174,354 $170,538 Circulation 68,530 69,066 137,817 136,567 Other 38,060 33,677 70,614 66,569 -------- -------- -------- -------- Total revenues $189,545 $182,858 $382,785 $373,674 ======== ======== ======== ======== Operating profit $ 33,440 $ 26,762 $ 62,077 $ 51,581 ======== ======== ======== ======== Publishing revenues increased 4 percent in the second quarter and 2 percent in the six-month period compared to the respective prior-year periods. Excluding the impact of the closing of Country America magazine, revenues increased 5 percent in the quarter and 4 percent in the six-month period primarily reflecting growth in advertising, book and integrated marketing revenues. Magazine advertising revenues grew 5 percent in the quarter and 4 percent in the year-to-date period excluding the Country America impact. The second quarter increase resulted from growth at Better Homes and Gardens, MORE and the special interest publications as well as the addition of advertising revenues from Shop Online 1-2-3. Shop Online 1-2-3 is an Internet buying guide that was distributed as a supplement to 5 million subscribers of 10 Meredith titles. It focused on holiday gift shopping. In the six months ended December 31, 1999, Better Homes and Gardens, MORE, Crayola Kids, Traditional Home and Midwest Living magazines all reported higher advertising revenues compared to the prior-year period largely due to higher net revenues per advertising page. In both periods the increases were partially offset by lower advertising revenues at Ladies Home Journal and Country Home magazines resulting primarily from fewer advertising pages. Total magazine ad pages increased slightly in both periods. Looking forward to the company's fiscal third quarter, management currently expects comparable advertising pages to increase in the high-single digit range on a percentage basis with stronger net revenues per page. This is based on current information and could change during the quarter. Magazine circulation revenues increased in both the quarter and the fiscal year-to-date period excluding the Country America impact. The increases reflected the addition of revenues from a new title currently being tested - Hometown Cooking magazine, a larger subscriber base for MORE magazine and an additional issue of Country Home magazine in the six-month time period. Increased newsstand sales of the special interest publications also contributed. - 12 - <PAGE> Other publishing revenues grew 13 percent in the quarter and 6 percent in the six-month period primarily due to increased sales volumes in the consumer book and integrated marketing areas. Publishing operating profit was up 25 percent in the fiscal 2000 second quarter and 20 percent for the fiscal year-to-date versus the comparable prior-year periods. The improvement resulted from higher advertising revenues, lower paper and processing costs, lower departmental spending and increased contribution from the integrated marketing and book publishing operations. Individual titles reporting strong growth included Better Homes and Gardens, Midwest Living, Renovation Style, MORE and the special interest publications. The addition of Shop Online 1-2-3 also contributed to the operating profit improvement. Looking forward, management may accelerate subscription promotion mailings into fiscal 2000 and early fiscal 2001 to more effectively manage circulation efforts. Major suppliers increased paper prices from 5 to 7 percent, depending on the grade of paper, on October 1, 1999. However, because of the timing of price changes over the last year, the average cost of paper in the fiscal second quarter and the six months ended December 31, 1999 was less than in the respective prior-year periods. Management expects the third quarter average price of paper to be flat with the prior year and believes there may be further upward price movement in calendar 2000. The United States Postal Service recently filed a rate case proposing a 15 percent increase in the cost of mailing periodicals. Management views this increase as excessive and plans to work diligently, in part through trade organizations such as Magazine Publishers Association, to attempt to moderate the proposed increase, which is anticipated to be effective in January 2001. Broadcasting - ------------ Three Months Six Months Ended December 31 Ended December 31 ------------------- ------------------- (In thousands) 1999 1998 1999 1998 -------- -------- -------- -------- Revenues -------- Advertising $ 74,927 $ 70,485 $140,299 $123,000 Other 1,657 1,581 3,449 4,087 -------- -------- -------- -------- Total revenues $ 76,584 $ 72,066 $143,748 $127,087 ======== ======== ======== ======== Operating profit $ 21,471 $ 25,915 $ 34,777 $ 38,975 ======== ======== ======== ======== Revenues increased 6 percent in the fiscal 2000 second quarter and 13 percent in the six months ended December 31, 1999 compared to the prior-year periods primarily due to the March 1999 acquisition of WGNX-Atlanta. Comparable revenues (excluding WGNX-TV) declined 6 percent in the second quarter and increased 2 percent in the six-month period. The decline in second quarter revenues reflected the absence of nearly $6 million in net political - 13 - <PAGE> advertising revenues in the current quarter due to the biennial nature of political elections. Excluding the political advertising impact, comparable revenues increased 2 percent in the quarter and 8 percent in the year-to-date period. In the quarter, strong revenue growth, excluding political advertising, was reported at KVVU-Las Vegas, WFSB-Hartford/New Haven, and WNEM-Flint/Saginaw/Bay City. However, softness in national advertising sales at WOFL-Orlando, KPDX-Portland and WHNS-Greenville largely offset these gains. In the year-to-date period, nearly all of the stations reported increased revenues when excluding the impact of political advertising. Management believes news expansion activities, ratings gains and the strength of the company's branded cross-promotional efforts drove the improvements. In addition, prior-year first quarter advertising revenues at all stations were affected by softness in national advertising and reduced ad spending by General Motors and local automobile dealers due to the GM labor dispute. Operating profits decreased 17 percent in the second quarter and 11 percent for the six months ended December 31, 1999 compared to the prior-year periods. Excluding the impact of newly acquired WGNX-Atlanta, comparable broadcasting operating profit decreased 19 percent for the quarter and 7 percent for the year-to-date period. The second quarter decline was attributable to the absence of political advertising revenues as operating costs were held virtually flat with the prior-year quarter. In the six-month period, increased costs for news expansions, sales activities and programming more than offset the slight revenue increase. Looking forward to the fiscal third quarter, advertising bookings are currently pacing down in the low to mid-single digit range versus the prior-year quarter. The broadcast industry continues to experience month-to-month volatility. The pacings data is based on current information and actual results could differ. Liquidity and Capital Resources Percent Six months ended December 31 1999 1998 Change - ---------------------------- --------- --------- ------- (In thousands) Net earnings $ 43,482 $ 44,234 (2)% ========= ========= ==== Cash flows from operations $ 44,244 $ 36,151 22 % ========= ========= ==== Cash flows from investing $(16,638) $ (464) nm ========= ========= ==== Cash flows from financing $(20,554) $ (39,946) 49 % ========= ========= ==== Net cash flows (use) $ 7,052 $ (4,259) nm ========= ========= ==== EBITDA $ 116,345 $ 101,768 14 % ========= ========= ==== nm - not meaningful - 14 - <PAGE> Cash and cash equivalents increased by $7.1 million in the first six months of fiscal 2000 compared to a decrease in cash of $4.3 million in the comparable prior-year period. The change reflected higher cash flows from operations and lower spending for stock repurchases in the current period. These factors were partially offset by increased use of cash for capital expenditures in the current period. In addition, prior-year first quarter results included proceeds from the disposition of the company's real estate operations. The increase in operating cash flows reflected higher earnings before depreciation and amortization and favorable changes in working capital requirements. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is often used to analyze and compare companies on the basis of operating performance and cash flow. EBITDA for the first six months of fiscal 2000 increased 14 percent from the prior-year period due to improved operating results. EBITDA is not adjusted for all noncash expenses or for working capital changes, capital expenditures or other investment requirements. EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. At December 31, 1999, debt outstanding consisted of $330 million outstanding under two variable-rate unsecured amortizing term loans and $200 million outstanding in fixed-rate unsecured senior notes. Funds for the payment of interest and principal on the debt are expected to be provided by cash generated from future operating activities. The debt agreements include certain financial covenants related to debt levels and coverage ratios. As of December 31, 1999, the company was in compliance with all debt covenants. Meredith uses interest rate swap contracts to manage interest cost and risk associated with possible increases in variable interest rates. The company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments. Management does not expect any counterparties to fail to meet their obligations given the strong creditworthiness of the counterparties to the agreements. The weighted-average interest rate on debt outstanding at December 31, 1999 was approximately 6.5 percent. In the first six months of fiscal 2000, the company spent $14.9 million to repurchase an aggregate of 405,000 shares of Meredith Corporation common stock at then current market prices in conjunction with the company's ongoing stock repurchase program. This compares with spending of $31.1 million for the repurchase of 750,000 shares in the comparable prior-year period. The current period totals include the repurchase of 146,000 shares under put option agreements entered into on August 1, 1998. As of December 31, 1999, the company had put option agreements to repurchase approximately 1.4 million shares. On November 8, 1999, the board authorized the repurchase of up to 1 million additional shares subject to market conditions. At December 31, 1999, approximately 2.4 million shares could be repurchased under existing authorizations by the board of directors. The company expects to continue to repurchase shares from time to time in the foreseeable future, subject to market conditions. The status of the company's stock repurchase program is reviewed at each quarterly board of directors meeting. - 15 - <PAGE> Dividends paid in the first six months of fiscal 2000 were $7.8 million, or 15 cents per share, compared with $7.3 million, or 14 cents per share, in the prior-year period. In January 2000, the board of directors increased the quarterly dividend by 7 percent (one-half cent per share) to 8.0 cents per share effective with the dividend payable on March 15, 2000. On an annual basis, the effect of this quarterly dividend increase would be to increase dividends paid by approximately $1.0 million at the current number of shares outstanding. Spending for property, plant and equipment increased to $14.9 million in the first six months of fiscal 2000 from $8.3 million in the prior-year period. The increase primarily resulted from higher current-year spending for the construction of a new broadcasting facility at KPDX-Portland, equipment for broadcasting news expansion and the conversion to digital technology at several television stations. Total capital expenditures in fiscal 2000 are expected to increase more than 50 percent from the fiscal 1999 spending level. Funds for capital expenditures are expected to be provided by available cash, including cash from operating activities or, if necessary, borrowings under credit agreements. At this time, management expects that cash on hand, internally-generated cash flow and debt from credit agreements will provide funds for any additional operating and recurring cash needs (e.g., working capital, cash dividends) for foreseeable periods. Year 2000 - --------- The Year 2000 issue, common to most companies, concerns the inability of information and noninformation systems to recognize and process date-sensitive information after 1999 due to the use of only the last two digits to refer to a year. This problem could have affected information systems (software and hardware) and other equipment that relies on microprocessors. Management undertook significant efforts to identify, remediate and test applicable systems and equipment. In addition, management monitored the progress of material third parties in their efforts to become Year 2000 ready. Readers are referred to the company's Form 10-K for the year ended June 30, 1999, for a more complete description of these efforts. As of the date of this filing, the company has not experienced any material adverse consequences related to Year 2000 failures of the company's or material third parties' systems or equipment. While management does not expect any future material issues related to Year 2000 problems to occur, the company will continue to monitor these issues and the related costs if they occur. Through December 31, 1999, the company has spent approximately $3.25 million to address Year 2000 issues. Total costs to address Year 2000 issues are currently estimated not to exceed $3.5 million. The spending consists primarily of costs for the remediation of internal systems and broadcasting equipment. Funds for these costs have been, and any future costs are expected to be, provided by the operating cash flows of the company. The majority of the internal system remediation efforts relate to staff costs of on-staff systems engineers and, therefore, were not incremental costs. - 16 - <PAGE> Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is subject to certain market risks as a result of the use of financial instruments. The market risk inherent in the company's financial instruments subject to such risks is the potential market value loss arising from adverse changes in interest rates and/or the potential effect of changes in the market price of company common stock on the company's liquidity. Readers are referred to the company's Form 10-K for the year ended June 30, 1999 for a more complete discussion of these risks. The company uses interest rate swap contracts to effectively fix the interest rate on a substantial portion of its bank debt. Therefore, there is no material earnings or liquidity risk associated with the interest rate swap contracts. The fair market value of the interest rate swaps is the estimated amount, based on discounted cash flows, the company would pay or receive to terminate the swap contracts. A 10 percent decrease in interest rates would result in a fair market value of $1.2 million compared to the current fair market value of $4.1 million at December 31, 1999. At December 31, 1999, the company had put option agreements which may require the company to repurchase up to 1.4 million common shares. The risk to the company of an increase in share price is from a liquidity perspective. Based on the December 31, 1999 closing price, a 10 percent increase in share price would cause the potential repurchase cost for these put options to increase by $5.8 million. There has been no material change in the market risk associated with program rights payable since June 30, 1999. 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 8, 1999, 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, Mary Sue Coleman, Frederick B. Henry, Joel W. Johnson, William T. Kerr, Richard S. Levitt, E. T. Meredith III, and Nicholas L. Reding. - 17 - <PAGE> (c)(1) Proposal 1: Election of four Class I directors for terms expiring in 2002. Each nominee was elected in uncontested elections by the votes cast as follows: Number of shareholder votes* ---------------------------- For Withheld ----------- ---------- Class I directors Robert E. Lee 126,006,767 479,652 Philip A. Marineau 125,928,877 557,542 Jack D. Rehm 125,962,144 524,275 Christina A. Gold 125,849,738 636,681 *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: Reaffirmation of previously approved business criteria, classes of eligible participants and maximum annual incentives awarded under the Company's Supplement to its Management Incentive Plan. Proposal 2 was approved by the votes cast as follows: For Against Abstain ---------- ---------- ---------- 124,548,588 1,241,799 696,032 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27) Financial Data Schedule 99) Additional financial information from the Company's second quarter press release dated January 18, 2000. (b) Reports on Form 8-K No Form 8-K was filed during the quarter ended December 31, 1999. - 18 - <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 (Stephen M. Lacy) Stephen M. Lacy Vice President - Chief Financial Officer (Principal Financial and Accounting Officer) Date: February 14, 2000 - 19 - <PAGE> Index to Exhibits Exhibit Number Item ------- ----------------------------------------------------------- 27 Financial Data Schedule 99 Additional financial information from the Company's second quarter press release dated January 18, 2000. E-1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FDS FOR 12/31/99 10-Q <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the Consolidated Balance Sheet at December 31, 1999 and the Consolidated Statement of Earnings for the six months ended December 31, 1999 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-30-2000 <PERIOD-END> DEC-31-1999 <CASH> 18,081 <SECURITIES> 0 <RECEIVABLES> 153,664 <ALLOWANCES> 0 <INVENTORY> 33,940 <CURRENT-ASSETS> 290,596 <PP&E> 299,651 <DEPRECIATION> 136,983 <TOTAL-ASSETS> 1,454,520 <CURRENT-LIABILITIES> 330,982 <BONDS> 485,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 50,154 <OTHER-SE> 329,195 <TOTAL-LIABILITY-AND-EQUITY> 1,454,520 <SALES> 526,533 <TOTAL-REVENUES> 526,533 <CGS> 216,358 <TOTAL-COSTS> 216,358 <OTHER-EXPENSES> 26,021 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 18,049 <INCOME-PRETAX> 72,712 <INCOME-TAX> 29,230 <INCOME-CONTINUING> 43,482 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 43,482 <EPS-BASIC> .84 <EPS-DILUTED> .82 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 99 FOR 12/31/99 10-Q <TEXT> Exhibit 99 ---------- MEREDITH CORPORATION FISCAL 2000 SECOND QUARTER EARNINGS PER SHARE AT-A-GLANCE (Note: All figures are adjusted for stock splits) - -- The chart below depicts comparable quarterly and fiscal-year diluted earnings per share (EPS) before nonrecurring items and discontinued operations. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Fiscal Year -------- -------- -------- -------- ----------- F1993 .06 .09 .10 .10 .35 F1994 .08 .13 .16 .13 .50 F1995 .14 .19 .18 .20 .71 F1996 .17 .22 .24 .28 .91 F1997 .22 .31 .33 .36 1.22 F1998 .27 .40 .37 .42 1.46 F1999 .32 .47 .41 .44 1.64 F2000 .34 .48 - -- Net earnings for the fiscal 2000 second quarter ended December 31, 1999, were 48 cents per share, compared to 47 cents per share in the prior-year second quarter. - -- For the first half of fiscal 2000, earnings were 82 cents per share. For the first half of fiscal 1999, earnings before nonrecurring items were 79 cents per share. - -- Fiscal 2000 second quarter and year-to-date earnings include dilution of 5 cents per share and 13 cents per share, respoectively, from the March 1, 1999, acquisition of WGNX-TV (CBS,Atlanta). </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

MEE

https://www.sec.gov/Archives/edgar/data/37748/0001095811-00-000571.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, M5u2Vmdn9OauO1NcRIBtu4OLR7+51mUzK1Ql3n/Ya5IzU93qa/0gxBN6Wttf5xZt K4tzGI2miSXJAKSKb5vtSA== <SEC-DOCUMENT>0001095811-00-000571.txt : 20000317 <SEC-HEADER>0001095811-00-000571.hdr.sgml : 20000317 ACCESSION NUMBER: 0001095811-00-000571 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000316 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: SEC FILE NUMBER: 001-07775 FILM NUMBER: 571703 BUSINESS ADDRESS: STREET 1: ONE ENTERPRISE DRIVE CITY: ALISO VIEJO STATE: CA ZIP: 92656-2606 BUSINESS PHONE: 949 349-2000 MAIL ADDRESS: STREET 1: 3353 MICHELSON DRIVE CITY: IRVINE STATE: CA ZIP: 92698 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 (JANUARY 31, 2000) <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, 2000 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 incorporation or organization) I.D. No.) One Enterprise Drive, Aliso Viejo, CA 92698 - -------------------------------------------------------------------------------- (Address of principal executive offices) (949) 349-2000 - -------------------------------------------------------------------------------- (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, 2000 there were 76,368,610 shares of common stock outstanding. <PAGE> 2 FLUOR CORPORATION FORM 10-Q JANUARY 31, 2000 <TABLE> <CAPTION> TABLE OF CONTENTS PAGE - ----------------- ---- <S> <C> <C> Part I: Financial Information Condensed Consolidated Statement of Earnings for the Three Months Ended January 31, 2000 and 1999 .............................................. 2 Condensed Consolidated Balance Sheet at January 31, 2000 and October 31, 1999 ....................................................... 3 Condensed Consolidated Statement of Cash Flows for the Three Months Ended January 31, 2000 and 1999 ........................................ 5 Notes to Condensed Consolidated Financial Statements ................... 6 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 10 Changes in Backlog ..................................................... 19 Part II: Other Information ...................................................... 20 Signatures ...................................................................... 21 </TABLE> 1 <PAGE> 3 PART I: FINANCIAL INFORMATION FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF EARNINGS Three Months Ended January 31, 2000 and 1999 UNAUDITED <TABLE> <CAPTION> $ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 - -------------------------------------------------------------------------------------- <S> <C> <C> REVENUES $2,998,519 $3,384,065 COSTS AND EXPENSES Cost of revenues 2,897,758 3,291,204 Corporate administrative and general expense 16,828 9,558 Interest expense 13,108 13,004 Interest income (3,291) (4,600) ---------- ---------- Total Costs and Expenses 2,924,403 3,309,166 ---------- ---------- EARNINGS BEFORE INCOME TAXES 74,116 74,899 INCOME TAX EXPENSE 21,864 23,818 ---------- ---------- NET EARNINGS $ 52,252 $ 51,081 ========== ========== EARNINGS PER SHARE BASIC $ .69 $ .68 ========== ========== DILUTED $ .69 $ .68 ========== ========== DIVIDENDS PER COMMON SHARE $ .25 $ .20 ========== ========== SHARES USED TO CALCULATE BASIC EARNINGS PER SHARE 75,602 75,119 ========== ========== DILUTED EARNINGS PER SHARE 76,149 75,633 ========== ========== </TABLE> See Accompanying Notes. 2 <PAGE> 4 FLUOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, 2000 and October 31, 1999 UNAUDITED <TABLE> <CAPTION> JANUARY 31, OCTOBER 31, $ IN THOUSANDS 2000 1999* - ---------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 148,130 $ 209,614 Accounts and notes receivable 818,262 850,557 Contract work in progress 393,485 416,285 Deferred taxes 107,737 105,502 Inventories and other current assets 365,726 328,213 ---------- ---------- Total current assets 1,833,340 1,910,171 ---------- ---------- Property, Plant and Equipment (net of accumulated depreciation, depletion and amortization of $1,284,171 and $1,245,644, respectively) 2,271,129 2,222,953 Investments and goodwill, net 299,287 283,936 Other 466,033 469,057 ---------- ---------- $4,869,789 $4,886,117 ========== ========== </TABLE> - -------------- * Amounts at October 31, 1999 have been derived from audited financial statements. (Continued On Next Page) 3 <PAGE> 5 FLUOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, 2000 and October 31, 1999 UNAUDITED <TABLE> <CAPTION> JANUARY 31, OCTOBER 31, $ IN THOUSANDS 2000 1999* - ---------------------------------------------------------------------------------------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Trade accounts payable $ 729,508 $ 793,465 Short-term debt 347,994 247,911 Advance billings on contracts 509,978 565,373 Accrued salaries, wages and benefit plans 267,585 321,148 Other accrued liabilities 267,104 276,413 ---------- ---------- Total current liabilities 2,122,169 2,204,310 ---------- ---------- Long-term debt due after one year 318,150 317,555 Deferred taxes 168,982 162,210 Other noncurrent liabilities 633,283 620,670 Contingencies and Commitments Shareholders' Equity Capital stock Preferred - authorized 20,000,000 shares without par value; none issued Common - authorized 150,000,000 shares of $.625 par value; issued and outstanding - 76,372,541 shares and 76,034,296 shares, respectively 47,733 47,521 Additional capital 232,222 217,844 Retained earnings 1,408,570 1,375,338 Unamortized executive stock plan expense (28,433) (21,579) Accumulated other comprehensive income (32,887) (37,752) ---------- ---------- Total shareholders' equity 1,627,205 1,581,372 ---------- ---------- $4,869,789 $4,886,117 ========== ========== </TABLE> - -------------- * Amounts at October 31, 1999 have been derived from audited financial statements. See Accompanying Notes. 4 <PAGE> 6 FLUOR CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended January 31, 2000 and 1999 UNAUDITED <TABLE> <CAPTION> $ IN THOUSANDS 2000 1999 - ------------------------------------------------------------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 52,252 $ 51,081 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation, depletion and amortization 73,805 77,917 Deferred taxes 3,340 469 Changes in operating assets and liabilities, excluding effects of business acquisitions/dispositions (157,847) (51,277) Other, net 1,831 (27,997) --------- --------- Cash (utilized) provided by operating activities (26,619) 50,193 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (132,129) (135,057) Proceeds from sale of subsidiary -- 36,300 Proceeds from sale of property, plant and equipment 21,323 42,272 Investments, net (13,045) (4,502) Other, net 1,234 (4,629) --------- --------- Cash utilized by investing activities (122,617) (65,616) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term borrowings 114,814 (41,135) (Payments on) proceeds from issuance of note payable to affiliate (14,506) 38,500 Cash dividends paid (19,020) (15,159) Stock options exercised 5,811 1,854 Other, net 653 (933) --------- --------- Cash provided (utilized) by financing activities 87,752 (16,873) --------- --------- Decrease in cash and cash equivalents (61,484) (32,296) Cash and cash equivalents at beginning of period 209,614 340,544 --------- --------- Cash and cash equivalents at end of period $ 148,130 $ 308,248 ========= ========= </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, 1999 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, 2000 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, 2000 and its consolidated results of operations and cash flows for the three months ended January 31, 2000 and 1999. Certain 1999 amounts have been reclassified to conform with the 2000 presentation. (2) Inventories comprise the following: January 31, October 31, $ in thousands 2000 1999 ---------------------------------------------------------------- Equipment for sale/rental $119,714 $131,781 Coal 76,698 72,070 Supplies and other 54,271 44,267 -------- -------- $250,683 $248,118 ======== ======== (3) Short-term debt comprises the following: January 31, October 31, $ in thousands 2000 1999 ---------------------------------------------------------------- Commercial paper $244,060 $113,746 Note payable to affiliate 98,873 113,379 Loan notes -- 15,500 Trade notes payable 5,061 5,286 -------- -------- $347,994 $247,911 ======== ======== 6 <PAGE> 8 FLUOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED (4) Total comprehensive income represents the net change in shareholders' equity during a period from sources other than transactions with shareholders and as such, includes net earnings. For the Company, the only other component of total comprehensive income is the change in the cumulative foreign currency translation adjustments recorded in shareholders' equity. The components of comprehensive income, net of related tax, are as follows: Three months ended January 31, --------------------------- ($ in thousands) 2000 1999 --------------------------------------------------------------------- Net earnings $ 52,252 $ 51,081 Foreign currency translation adjustment 4,865 226 -------- -------- Comprehensive income $ 57,117 $ 51,307 ======== ======== (5) Cash paid for interest was $8.8 million and $7.5 million for the three month periods ended January 31, 2000 and 1999, respectively. Income tax payments, net of receipts, were $12.0 million and $21.5 million during the three month periods ended January 31, 2000 and 1999, respectively. (6) The Company has a forward purchase contract for 1,850,000 shares of its common stock. The contract matures in October 2000 and gives the Company the ultimate choice of settlement option, either physical settlement or net share settlement. As of January 31, 2000, the contract settlement cost per share exceeded the current market price per share by $12.10. Although the ultimate choice of settlement option resides with the Company, if the price of the Company's common stock falls to certain levels, as defined in the contract, the holder of the contract has the right to require the Company to settle the contract. 7 <PAGE> 9 FLUOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED (7) In March 1999, the Company announced a new strategic direction, including a reorganization of the operating units and administrative functions of its engineering and construction segment. In connection with this reorganization, the Company recorded in the second quarter of fiscal year 1999 a special provision of $136.5 million pre-tax to cover direct and other reorganization related costs, primarily for personnel, facilities and asset impairment adjustments. In October 1999, $19.3 million of the special provision was reversed into earnings as a result of lower than anticipated severance costs for personnel reductions in certain overseas offices. Both the actual number of employee terminations as well as the cost per employee were lower than originally estimated. To date, the Company has eliminated slightly more than 5,000 jobs with additional separations to be completed by the end of the third quarter. No offices were closed during the quarter; however, the Company anticipates closing two additional offices by July 31, 2000. The following table summarizes the status of the Company's reorganization plan as of January 31, 2000: <TABLE> <CAPTION> Lease Personnel Asset Termination ($ in millions) Costs Impairments Costs Other Total ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at October 31, 1999 $25.2 $23.4 $ 9.7 $ 0.2 $58.5 Cash expenditures (2.8) -- (1.6) -- (4.4) Non-cash activities (0.2) (0.4) -- (0.2) (0.8) ----- ----- ----- ----- ----- Balance at January 31, 2000 $22.2 $23.0 $ 8.1 $ -- $53.3 ===== ===== ===== ===== ===== </TABLE> The special provision liability as of January 31, 2000 is included in other accrued liabilities. The liability for personnel costs and asset impairments will be substantially utilized by July 31, 2000. The liability associated with abandoned lease space will be amortized as an offset to lease expense over the remaining life of the respective leases starting on the date of abandonment. 8 <PAGE> 10 FLUOR CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED (8) In the fourth quarter of 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). The statement establishes new standards for the way that business enterprises report information about operating segments as well as the related disclosures about products and services, geographical areas and major customers. The adoption of SFAS No. 131 did not affect the consolidated results of operations or financial position of the Company, but it did affect the business segments that are disclosed. Prior year disclosures have been restated to conform to the new basis of reporting. Operating Information by Segment - For the three months ended January 31, 2000 and 1999: <TABLE> <CAPTION> Fluor Fluor Fluor Global Massey Signature ($ in millions) Daniel Services Coal Services Total -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 2000 External revenues $1,969.6 $764.1 $260.1 $ 4.7 $2,998.5 Operating profit (loss) $ 40.9 $ 28.1 $ 31.6 $(1.0) $ 99.6 1999 External revenues $2,445.1 $664.3 $274.6 -- $3,384.0 Operating profit $ 39.8 $ 17.3 $ 38.7 -- $ 95.8 </TABLE> Reconciliation of Segment Information to Consolidated Amounts - For the three months ended January 31, 2000 and 1999: ($ in millions) 2000 1999 --------------------------------------------------------------------- Operating Profit Total segment operating profit $ 99.6 $ 95.8 Corporate administrative and general expense (16.8) (9.6) Interest (expense) income, net (9.8) (8.4) Other items, net 1.1 (2.9) ------ ------ Earnings before taxes $ 74.1 $ 74.9 ====== ====== 9 <PAGE> 11 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, 1999 annual report on Form 10-K. For purposes of reviewing this document "operating profit" is calculated as revenues less cost of revenues excluding: corporate administrative and general expense; interest expense; interest income; domestic and foreign income taxes; gain or loss on discontinued operations; the cumulative effect of a change in accounting principles; and certain other miscellaneous non-operating income and expense items which are immaterial. FORWARD-LOOKING INFORMATION Statements regarding the Company's expectations for future performance or results, including estimated and projected operating profits and earnings, expectations regarding office closures and projected reductions in employment levels and overhead expenses, expectations regarding its resolution of any "Year 2000" issues, expectations regarding continued weakness in new contract awards and expectations regarding the issuance of long-term debt are forward looking. Statements regarding industry and competitive trends are also forward looking. Forward-looking statements reflect current analysis of existing information. Caution must be exercised in relying on forward-looking statements. Due to known and unknown risks, actual results may differ materially from expected or projected results. Factors potentially contributing to such differences include, among others: o Cost overruns on contracts and other contract performance risk o The uncertain timing of awards and revenues under contracts o Conditions affecting the domestic and international coal market, including competition in the global market for steel and weather conditions o Global economic and political conditions o Unforeseen impediments to the Company's access to capital markets o Year 2000 readiness o Unforeseen impediments to the realization of the Company's strategic initiatives There is also a risk that future results may be impacted by currently unforeseen impediments to the realization of revenues or other payments that have been recognized through accruals prior to actual receipt. Failure to realize such accrued amounts may result in a charge against future earnings. Additional information concerning these and other factors can be found in press releases as well as the Company's public periodic filings with the Securities and Exchange Commission, including the discussion under the heading "Item 1. Business - Other Matters - Company Business Risks" in the Company's Form 10-K for its fiscal year ended October 31, 1999. Such filings are available publicly and upon request from Fluor's Investor Relations Department: (949) 349-3909. The Company disclaims any intent or obligation to update its forward-looking statements. 10 <PAGE> 12 RECENT EVENTS On February 22, 2000, the Company announced that it will be changing its fiscal year end to a calendar year effective January 1, 2001. The change is being made to better align the Company with its clients, suppliers and the financial markets. On February 23, 2000, the Company announced that it will close its Marlton, New Jersey facility, eliminating more than 300 jobs. The closure reflects the Company's continuing efforts to capitalize on new market opportunities and create greater operational efficiencies. The Company expects to phase out all Marlton operations by July 1, 2000. On March 8, 2000, the Company's Board of Directors approved a stock buyback program authorizing the repurchase of up to 7.5 million shares of its common stock. The repurchase program will begin immediately and will be funded from operating cash flow and supplemented by short-term credit facilities as repurchase opportunities arise. RESULTS OF OPERATIONS Revenues for the three month period ended January 31, 2000 decreased 11 percent, compared with the same period of 1999. Despite this decline, net earnings for the three month period ended January 31, 2000 were $52.3 million compared with $51.1 million for the same period of 1999, an increase of 2 percent. The increase in net earnings was the result of improved operating profit in the Fluor Daniel and Fluor Global Services segments, the settlement of a dispute with a major service provider that resulted in an after-tax gain of $2.9 million and a lower effective tax rate. These items were offset by lower operating profit in the Massey segment, increased net interest expense and higher corporate administrative and general expense. The Company anticipates a slightly weaker second quarter followed by a stronger second half, as operating profit improvements become more broadly based across all business segments. The Company continues to anticipate a modest earnings growth in 2000 as compared to 1999, excluding the impact of the special provision. FLUOR DANIEL Revenues for the Fluor Daniel segment declined by 19 percent for the three month period ended January 31, 2000 compared with the same period of 1999, primarily due to a reduction in work performed which is consistent with the downward trend in new awards experienced during 1999 and 1998. Operating profit for the three months ended January 31, 2000 nonetheless increased 3 percent to $40.9 million, compared with $39.8 million during the same period of 1999, due to improvements in both overhead cost management and project margins. 11 <PAGE> 13 New awards for the three months ended January 31, 2000 were $1.4 billion compared with $1.5 billion for the three months ended January 31, 1999. Approximately 51 percent of first quarter 2000 new awards were for projects located outside the United States. The slight decrease in 2000 new awards as compared to 1999 reflects the increased focus on project selectivity and deferred capital spending in the chemicals industry, offset by growth in the power sector. The following table sets forth backlog for each of the segment's business units: January 31, October 31, January 31, $ in millions 2000 1999 1999 - ------------------------------------------------------------------------ Chemicals & Life Sciences $1,682 $1,964 $3,259 Oil, Gas & Power 3,053 2,583 2,497 Mining 395 657 1,256 Manufacturing 1,028 1,170 1,503 Infrastructure 340 396 458 ------ ------ ------ Total backlog $6,498 $6,770 $8,973 ====== ====== ====== United States $2,818 $2,870 $3,231 International 3,680 3,900 5,742 ------ ------ ------ Total backlog $6,498 $6,770 $8,973 ====== ====== ====== The decrease in total backlog is consistent with the reduced levels of new awards in the prior two years. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, deferrals and revised project scope and cost, both upward and downward. FLUOR GLOBAL SERVICES Revenues for the Fluor Global Services segment increased by 15 percent for the three month period ended January 31, 2000 compared with the same period of 1999, primarily due to increases in the Fluor Federal Services, Telecommunications and Operations & Maintenance business units. Operating profit for the three months ended January 31, 2000 increased 62 percent to $28.1 million, compared with $17.3 million during the same period of 1999, reflecting improved operating results in several business units. New awards for the three months ended January 31, 2000 were $1.0 billion compared with $.2 billion for the three months ended January 31, 1999. Approximately 52 percent of first quarter 2000 new awards were for projects located outside the United States. The increase in 2000 new awards as compared to 1999 reflects a $465 million telecommunications award as well as increased Operations & Maintenance awards. 12 <PAGE> 14 The following table sets forth backlog for each of the segment's business units: January 31, October 31, January 31, $ in millions 2000 1999 1999 - ------------------------------------------------------------------------ Fluor Federal Services $ 518 $ 710 $ 647 Telecommunications 852 525 171 Operations & Maintenance 1,355 1,127 1,265 Consulting Services and Other 15 10 8 ------ ------ ------ Total backlog $2,740 $2,372 $2,091 ====== ====== ====== United States $2,086 $2,137 $1,827 International 654 235 264 ------ ------ ------ Total backlog $2,740 $2,372 $2,091 ====== ====== ====== The increase in total backlog is consistent with the growth in new awards. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, deferrals and revised project scope and cost, both upward and downward. COAL Revenues decreased 5 percent for the three month period ended January 31, 2000 compared with the same period in 1999. The decrease was primarily due to the combination of a reduction in volume for the higher priced metallurgical coal and a decline in prices. Metallurgical coal volume decreased by 19 percent during the quarter ended January 31, 2000 compared with the same period in 1999. This decrease was largely offset by an increase in lower priced steam coal sales. Steam and metallurgical coal prices have both declined by approximately 4 percent during the current fiscal year. The metallurgical coal market continues to be adversely affected by a weak coal export market. Demand is weak for U.S. coal exported to foreign markets as the U.S. Dollar remains strong. Additionally, the market for steam coal, which is used to fire electric-generating plants, continues to be impacted by high customer inventory levels resulting from recent mild winters and competition from western coals, which continue to penetrate the traditional eastern coal market areas. Operating profit for the three months ended January 31, 2000 was $31.6 million compared with $38.7 million for the same period in 1999. The decline was the combined result of the continued difficult market conditions and a number of operating disruptions, including severe geologic conditions and a roof fall at a longwall mine. FLUOR SIGNATURE SERVICES The Fluor Signature Services segment, which was created to provide business and administrative support services to the operating units with distinct profit-and-loss accountability, officially began operations at the start of fiscal 2000. External revenues during the quarter totaled $4.7 million and were primarily for safety-related services. The segment reported a slight operating loss of $1 million during the first quarter. 13 <PAGE> 15 STRATEGIC REORGANIZATION COSTS The Company continues to implement its reorganization plan initiated in March 1999. To date, slightly more than 5,000 jobs have been eliminated with additional separations to be completed by the end of the third quarter. No offices were closed during the quarter; however, the Company anticipates closing two additional offices by July 31, 2000. The special provision liability as of January 31, 2000 totaled $53.3 million and is comprised as follows: $22.2 million for personnel costs; $23.0 million for asset impairments; and $8.1 million for lease termination costs. The remaining liability for personnel costs and asset impairments will be substantially utilized by July 31, 2000. The remaining liability associated with abandoned lease space will be amortized as an offset to lease expense over the remaining life of the respective leases starting on the date of abandonment. OTHER During the three months ended January 31, 2000 the Company recognized a gain of $4.7 million ($2.9 million after-tax) relating to the settlement of a dispute with a major service provider. This gain is included in cost of revenues, but was not allocated to a specific business segment. Net interest expense for the three months ended January 31, 2000 increased compared with the same period of 1999 primarily due to a decline in interest income resulting from lower average cash balances outstanding during the quarter. Corporate administrative and general expense in the first quarter ended January 31, 2000 was higher compared with the same period in 1999 as the result of development costs associated with the Company's several knowledge management and global sales development programs. Costs related to the Company's Enterprise Resource Management system, Knowledge@Work, totaled $4.3 million during the first quarter of 2000. The Company's effective tax rate decreased approximately 2 percentage points for the three month period ended January 31, 2000 as compared with the same period of 1999. This decrease was the result of the successful implementation of a number of tax reduction initiatives. FINANCIAL POSITION AND LIQUIDITY At January 31, 2000, the Company had cash and cash equivalents of $148.1 million and a total debt to total capital ratio of 29.0 percent. At January 31, 1999, the Company had cash and cash equivalents of $308.2 million and a total debt to total capital ratio of 31.7 percent. Cash flow utilized by operating activities was $26.6 million during the three month period ended January 31, 2000, compared with cash flow generated from operations of $50.2 million during the same period in 1999. The decrease in cash generated from operating activities is primarily due to reductions in current liabilities during the current quarter. 14 <PAGE> 16 Cash utilized by investing activities totaled $122.6 million during the three month period ended January 31, 2000 compared with $65.6 million during the same period in 1999. Capital expenditures were down slightly, reflecting a decrease of $24 million for Massey Coal partially offset by increases in Fluor Global Services (primarily for AMECO) and for Knowledge@Work. Proceeds from the sale of property, plant and equipment were lower in 2000 compared with 1999, reflecting the cyclical nature of the equipment sale/rental business. The Company also completed the sale of its ownership interest in Fluor Daniel GTI, Inc. during the first quarter of 1999 and received proceeds totaling $36.3 million. Cash provided by financing activities totaled $87.8 million during the three month period ended January 31, 2000 compared with the same period in 1999 during which time the Company utilized cash from financing activities of $16.9 million. During 2000 the Company increased its short-term borrowings by $114.8 million, representing an increase in commercial paper of $130.3 million offset by a reduction in loan notes of $15.5 million. In addition, the Company reduced its note payable to affiliate by $14.5 million during the three month period ended January 31, 2000. Dividends paid during the first quarter of 2000 were $19.0 million ($.25 per share) compared with $15.2 million ($.20 per share) for the comparable period in 1999. The Company has on hand and access to sufficient sources of funds to meet its anticipated operating needs. Significant short- and long-term lines of credit are maintained with banks which, along with cash on hand, provide adequate operating liquidity. Liquidity is also provided by the Company's commercial paper program. FINANCIAL INSTRUMENTS The Company has a forward purchase contract for 1,850,000 shares of its common stock. The contract matures in October 2000 and gives the Company the ultimate choice of settlement option, either physical settlement or net share settlement. As of January 31, 2000, the contract settlement cost per share exceeded the current market price per share by $12.10. Although the ultimate choice of settlement option resides with the Company, if the price of the Company's common stock falls to certain levels, as defined in the contract, the holder of the contract has the right to require the Company to settle the contract. The Company utilizes forward exchange contracts to hedge foreign currency transactions entered into in the ordinary course of business and not to engage in currency speculation. At January 31, 2000 and October 31, 1999, the Company had forward foreign exchange contracts of less than eighteen months duration, to exchange principally Euros, Australian Dollars, Canadian Dollars, Dutch Guilders and German Marks for U.S. Dollars. The total gross notional amount of these contracts at January 31, 2000 and October 31, 1999 was $100 million and $124 million, respectively. Forward contracts to purchase foreign currency represented $99 million and $122 million and forward contracts to sell foreign currency represented $1 million and $2 million, at January 31, 2000 and October 31, 1999, respectively. 15 <PAGE> 17 THE YEAR 2000 ISSUE - READINESS DISCLOSURE - UPDATE The Year 2000 issue is the result of computer systems and other equipment with processors that use only two digits to identify a year rather than four. If not corrected, many computer applications and date sensitive equipment could fail or create erroneous results before, during and after the Year 2000. The Company utilizes information technology ("IT") systems, such as, computer networking systems and non-IT devices, which may contain embedded circuits, such as those which may be found in building security equipment. Both IT systems and non-IT devices are subject to potential failure due to the Year 2000 issue. The Company developed and implemented a plan to achieve Year 2000 readiness (the "Y2K Program"). The Y2K Program was implemented through (1) identification and assessment, (2) remediation and testing and (3) contingency planning. Transitioning into Year 2000, the Company did not experience any material issues and all of its computer systems are operating normally. The Company will continue to monitor its systems on an ongoing basis for the immediate future. As of March 16, 2000, the Company has not been made aware of any Year 2000 disruptions for which it is responsible at any of its various project sites throughout the world. With respect to systems and equipment provided to clients, the Company does not control the upgrades, additions and/or changes made by its clients or by others for its clients, to those systems and equipment. Accordingly, the Company does not provide any assurances or current information about Year 2000 capabilities with respect to past projects. Each project is performed under an agreement with the Company's client, which describes the extent of the Company's obligations and warranties and the limitations that may apply. The Company used both internal and external resources in its Y2K Program. The Company estimates that, from 1996 to date, it has spent approximately $26 million on the Year 2000 issue, including $.6 million during the first quarter of fiscal year 2000. The estimate was derived utilizing numerous assumptions, including the assumption that the Company has completed its Y2K Program, and any further Y2K activities will be provided by its third party suppliers without cost to the Company. The Company estimates its direct costs for the Y2K Program (costs necessary to assess and remediate existing systems) are approximately $15 million. In addition, the Company has accelerated its program of replacing out-of-date personal computers and operating systems, regardless of whether or not such computers and systems were Year 2000 compliant. The costs associated with those replacements are estimated at $11 million. The Y2K Program has been funded under the Company's general IT and operating budgets. The Year 2000 expenditures have been expensed and deducted from income when incurred, except for costs incurred to acquire new software developed or obtained to replace old software, which may be capitalized and amortized under generally accepted accounting principles. The above amounts are the Company's best estimate given other systems initiatives that were ongoing irrespective of the Y2K Program (such as the migration to Windows NT and related hardware upgrades). The Company has developed contingency plans to address the Year 2000 issues that may pose a significant risk to its ongoing operations and existing projects, including, but not limited to, the Year 2000 compliance of systems and equipment provided by suppliers. Due to the large number 16 <PAGE> 18 of variables involved with estimating resultant lost revenues should there be a third party failure, the Company cannot provide an estimate of damage if any of the scenarios were to occur. There can be no assurance that any contingency plans implemented by the Company would be adequate to meet the Company's needs without materially impacting its operations, that any such plan would be successful or that the Company's results of operations would not be materially and adversely affected by the delays and inefficiencies inherent in conducting operations in an alternative manner. The Company believes that its most reasonably likely worst case Year 2000 scenarios would relate to problems with the equipment and systems supplied by third parties. If such equipment or systems were to fail at any location, the Company's operations at that location could be shut down or disrupted until compliant equipment or systems could be supplied. Depending on the location and the delivery time of compliant equipment or systems, the Company could suffer delays in fulfilling its commitments. The Company expects to mitigate that risk through the use of alternate suppliers. However, delays could materially adversely impact the Company's receipt of payments due from customers. Further, there is the possibility that significant litigation may occur due to business and equipment failures caused by the Year 2000 issue. It is uncertain whether, or to what extent, the Company may be affected by such litigation. No assurance can be given that the Company will achieve all aspects of Year 2000 readiness and the failure to achieve Year 2000 readiness could materially and adversely affect the Company's results from operations. EURO CONVERSION - UPDATE Given the nature and size of the Company's European operations, the Company does not perceive the conversion to the Euro as a significant risk area. The Company's businesses operate under long-term contracts, typically denominated in U.S. Dollars, compared with more traditional retail or manufacturing environments. If required, the Company is currently able to bid, price and negotiate contracts using the Euro. The Company's treasury function is also capable of operating with the Euro. Specifically, the Company is able to: establish bank accounts; obtain financing; obtain bank guarantees or letters of credit; trade foreign currency; and hedge transactions. The Company's ongoing Euro conversion effort will be primarily concentrated in the systems area. Conversion to the Euro impacts the Company's subsidiaries in The Netherlands, Germany, Belgium and Spain. All subsidiaries use a standard accounting system and all reside in the same database. The Company's conversion plan is to maintain the legacy database for historical reference and to create a new database with the Euro as the base currency. The new database will permit transactions to take place in both legacy currencies and the Euro as well as perform prescribed rounding calculations. The new Euro-based database is available and testing is in progress. Full conversion is anticipated to be complete by the start of fiscal year 2001. The Company has not incurred and it does not expect to incur any significant costs from the continued conversion to the Euro, including any currency risk, which could significantly affect the Company's business, financial condition and results of operations. 17 <PAGE> 19 The Company has not experienced any significant operational disruptions to date and does not currently expect the continued conversion to the Euro to cause any significant operational disruptions, including the impact of systems operated by others. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes new standards for recording derivatives in interim and annual financial statements. This statement, as amended, is effective for the Company's fiscal year 2001. Management does not anticipate that the adoption of the new statement will have a significant impact on the results of operations or the financial position of the Company. 18 <PAGE> 20 FLUOR CORPORATION CHANGES IN CONSOLIDATED BACKLOG Three Months Ended January 31, 2000 and 1999 UNAUDITED $ in millions 2000 1999 - ------------- --------- --------- Backlog - beginning of period $ 9,142.0 $12,645.3 New awards 2,363.9 1,700.9 Adjustments and cancellations, net 281.8 (391.5) Work Performed (2,549.0) (2,890.2) --------- --------- Backlog - end of period $ 9,238.7 $11,064.5 ========= ========= 19 <PAGE> 21 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 10.1 Special Retention Program between Fluor Corporation and James C. Stein dated September 24, 1999. 27.1 Financial Data Schedule as of and for the three months ended January 31, 2000. (b) Reports on Form 8-K. None. 20 <PAGE> 22 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 16, 2000 /s/ R. F. Hake ----------------------------------------- R. F. Hake, Executive Vice President and Chief Financial Officer /s/ V. L. Prechtl ----------------------------------------- V. L. Prechtl, Vice President and Controller 21 <PAGE> 23 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Special Retention Program between Fluor Corporation and James C. Stein dated September 24, 1999. 27.1 Financial Data Schedule as of and for the three months ended January 31, 2000. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>2 <DESCRIPTION>SPECIAL RETENTION PROGRAM <TEXT> <PAGE> 1 EXHIBIT 10.1 September 24, 1999 Mr. Jim Stein President and Chief Executive Officer Fluor Global Services Dear Jim, It is my pleasure to inform you that at the December 1998 Organization and Compensation Committee meeting, the Board of Directors of Fluor Corporation (the "Company") selected you to participate in a Retention Program. The amount of the retention award was $2,750,000. At your request the award has been structured as follows: AWARD AMOUNT: $2,750,000 RETENTION PERIOD: October 1, 1998 through October 31, 2001 RETENTION AGREEMENT: The Award Amount is divided between the following two components: HOUSING You have previously been provided with a personal loan of $1,006,841 secured by a deed of trust on your residence. The loan provides for an interest rate of 4.52%, compounded annually with a balloon payment of the entire amount due on termination of employment. The loan presently states that it is subject to acceleration in the event of your termination of employment for any reason prior to October 31, 2001. The Company will forgive the loan including accrued interest in its entirety (a) if you remain continuously employed by the Company until October 31, 2001, or (b) if your employment terminates prior to that date due to (i) death, (ii) permanent and total disability, (iii) a Company-initiated termination for any reason other than for-cause or (iv) following a Change of Control. If your employment with the Company terminates for <PAGE> 2 Jim Stein September 24, 1999 Page 2 any other reason prior to October 31, 2001 (including, without limitation, your voluntary termination or a termination for cause) then this loan shall remain in effect in accordance with its terms. For purposes hereof, the term "Change of Control" shall be deemed to have occurred if, (a) a third person, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, acquires shares of the Company having 25% or more of the votes that may be cast for the election of directors of the Company or (b) as a result of any cash tender or exchange offer, merger or other business combination, or any combination of the preceding (a "transaction"), the persons who are the directors of the Company before the transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor thereto. ACCRUAL TO EXECUTIVE DEFERRAL COMPENSATION PROGRAM ("EDCP") You may earn $1,743,159, said amount to be adjusted as provided below, if you remain continuously employed by the Company until on or after October 31, 2001 (the "EDCP Accrual"). During the period from October 1, 1998 to the date upon which the EDCP Accrual vests (if at all), you will also be entitled to invest the EDCP Accrual by selecting one or more of the crediting options contained in the EDCP. Thereafter, the amount of your EDCP Accrual, if vested, shall be adjusted based upon the investment return that you would have otherwise received had the EDCP Accrual been actually earned as of October 1, 1998 and credited in your EDCP account based upon your chosen crediting option through the date of vesting. If no crediting option is indicated, the EDCP Accrual will be automatically credited as if you chose the Money Market crediting option under the EDCP. The EDCP Accrual, as adjusted, will vest and be credited to your existing Company EDCP account (a) if you remain continuously employed by the Company until October 31, 2001 <PAGE> 3 Jim Stein September 24, 1999 Page 3 or (b) if your employment terminates prior to that date due to (i) death, (ii) permanent and total disability, (iii) a Company-initiated termination other than on a for-cause basis or (iv) following a Change of Control. If in the event your employment terminates for any reason prior to any such vesting date for any other reason (including, without limitation, your voluntary termination or a termination for cause), then the EDCP Accrual, as adjusted, will be forfeited. Please indicate your acknowledgment of the terms of the letter by signing in the space provided and returning the original to me for your employee records. You should also retain a copy for your file. If you should have any questions, please give me a call at (949) 349-5435. Sincerely, Philip J. Carroll AGREED BY: AGREED BY: - ----------------------------------- --------------------------------------- PHILIP J. CARROLL DATE JAMES C. STEIN DATE </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-2000 <PERIOD-START> NOV-01-1999 <PERIOD-END> JAN-31-2000 <CASH> 148,130 <SECURITIES> 0 <RECEIVABLES> 818,262 <ALLOWANCES> 0 <INVENTORY> 250,683 <CURRENT-ASSETS> 1,833,340 <PP&E> 3,555,300 <DEPRECIATION> 1,284,171 <TOTAL-ASSETS> 4,869,789 <CURRENT-LIABILITIES> 2,122,169 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 47,733 <OTHER-SE> 1,579,472 <TOTAL-LIABILITY-AND-EQUITY> 4,869,789 <SALES> 0 <TOTAL-REVENUES> 2,998,519 <CGS> 0 <TOTAL-COSTS> 2,897,758 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 13,108 <INCOME-PRETAX> 74,116 <INCOME-TAX> 21,864 <INCOME-CONTINUING> 52,252 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 52,252 <EPS-BASIC> .69 <EPS-DILUTED> .69 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

MOLX

https://www.sec.gov/Archives/edgar/data/67472/0000067472-00-000002.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, Rl+T/zvxoRS2yKEnyLY4ke2QPc9yXMn1lUyctrbma6mR5cZtNA5ZrbMx322rZ51b BCd9qnUgch7dODtLxtQGJw== <SEC-DOCUMENT>0000067472-00-000002.txt : 20000214 <SEC-HEADER>0000067472-00-000002.hdr.sgml : 20000214 ACCESSION NUMBER: 0000067472-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOLEX INC CENTRAL INDEX KEY: 0000067472 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC CONNECTORS [3678] IRS NUMBER: 362369491 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07491 FILM NUMBER: 533325 BUSINESS ADDRESS: STREET 1: 2222 WELLINGTON CT CITY: LISLE STATE: IL ZIP: 60532 BUSINESS PHONE: 6305274253 MAIL ADDRESS: STREET 1: 2222 WELLINGTON COURT CITY: LISLE STATE: IL ZIP: 60532 </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, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission File Number 0-7491 MOLEX INCORPORATED (Exact name of registrant as specified in its charter) Delaware 36-2369491 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2222 Wellington Court, Lisle, Illinois 60532 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 630-969-4550 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 (applicable only to corporate registrants). At December 31, 1999 as restated for the January 2000 stock dividend: Common Stock 98,275,285 shares Class A Common Stock 97,741,934 shares Class B Common Stock 94,255 shares MOLEX INCORPORATED FORM 10-Q DECEMBER 31, 1999 INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Information - Unaudited Condensed Consolidated Balance Sheets -- 2 December 31, 1999 and June 30, 1999 Condensed Consolidated Statements of Income -- 3 Three and Six Months Ended December 31, 1999 and 1998 Condensed Consolidated Statements of Cash Flows -- 4 Six Months Ended December 31, 1999 and 1998 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosure About Market Risk 11 PART II - OTHER INFORMATION 12 MOLEX INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited - In Thousands) <TABLE> <CAPTION> ASSETS Dec. 31, June 30, 1999 1999 _________ _________ <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 194,124 $ 182,992 Marketable securities 76,742 83,874 Accounts receivable - net 450,575 391,120 Inventories 234,294 188,861 Other current assets 20,735 34,491 Total current assets 976,470 881,338 PROPERTY, PLANT AND EQUIPMENT - NET 906,418 809,602 GOODWILL 135,521 137,378 OTHER ASSETS 138,563 73,694 $2,156,972 $1,902,012 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 205,877 $ 156,556 Accrued expenses 142,846 130,969 Other current liabilities 23,805 54,916 Total current liabilities 372,528 342,441 DEFERRED ITEMS 15,516 6,968 ACCRUED POSTRETIREMENT BENEFITS 40,675 30,706 LONG-TERM DEBT 23,355 20,148 MINORITY INTEREST 1,601 1,212 SHAREHOLDERS' EQUITY Common stock 8,432 8,415 Paid-in capital 238,792 233,806 Retained earnings 1,583,297 1,491,337 Treasury stock (218,946) (193,317) Deferred unearned compensation (19,564) (21,996) Cumulative translation and other adjustments 111,286 (17,708) Total shareholders' equity 1,703,297 1,500,537 $2,156,972 $1,902,012 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. MOLEX INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited - In Thousands Except per Share Data) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1999 1998 1999 1998 <S> <C> <C> <C> <C> NET REVENUE $543,009 $429,718 $1,034,879 $839,610 COST OF SALES 333,554 253,121 632,001 497,437 Gross Profit 209,455 176,597 402,878 342,173 OPERATING EXPENSES: Selling 41,681 35,452 79,585 69,264 Administrative 91,667 75,561 182,894 151,675 Total Operating Expenses 133,348 111,013 262,479 220,939 Income from Operations 76,107 65,584 140,399 121,234 OTHER INCOME: Foreign currency transaction loss (999) (2,388) (1,637) (2,655) Interest income, net 2,396 1,374 4,047 4,822 Total Other Income/(Loss) 1,397 (1,014) 2,410 2,167 INCOME BEFORE INCOME TAXES 77,504 64,570 142,809 123,401 INCOME TAXES 23,386 20,697 43,194 40,355 NET INCOME $ 54,118 $ 43,873 $ 99,615 $ 83,046 EARNINGS PER COMMON SHARE: BASIC $0.28 $0.23 $0.51 $0.43 DILUTED $0.27 $0.22 $0.50 $0.42 CASH DIVIDENDS PER COMMON SHARE $0.020 $0.012 $0.040 $0.024 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING THE PERIOD: BASIC 196,158 194,161 196,215 194,451 DILUTED 198,074 195,656 197,976 195,777 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. MOLEX INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - In Thousands) <TABLE> <CAPTION> SIX MONTHS ENDED Dec. 31, Dec. 31, 1999 1998 <S> <C> <C> CASH AND CASH EQUIVALENTS, Beginning of Period $182,992 $205,262 CASH AND CASH EQUIVALENTS PROVIDED FROM (USED FOR): Operations: Net income 99,615 83,046 Add (deduct) non-cash items included in net income: Depreciation and amortization 93,626 78,615 Amortization of deferred unearned compensation 3,254 3,552 Other charges to net income 6,380 2,611 Current items: Accounts receivable (41,888) (3,547) Inventories (39,733) (6,519) Other current assets 11,572 (3,313) Accounts payable 36,170 (30,473) Accrued expenses 6,056 5,324 Other current liabilities (21,876) (7,778) NET CASH PROVIDED FROM OPERATIONS 153,176 121,518 Investments: Purchases of property, plant and equipment (150,204) (103,146) Proceeds from sale of property, plant and equipment 5,777 2,010 Proceeds from sale of marketable securities 2,053,535 2,522,536 Purchases of marketable securities (2,046,403)(2,538,887) (Increase)/decrease in other assets 13,228 (21,701) NET CASH USED FOR INVESTMENTS (124,067) (139,188) Financing: Increase in long-term debt 4,457 - Decrease in long-term debt (1,250) - Cash dividends paid (6,280) (4,596) Purchase of treasury stock (26,256) (31,480) Reissuance of treasury stock 1,212 1,192 Exercise of stock options 2,862 2,603 NET CASH USED FOR FINANCING (25,255) (32,281) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 7,278 38,462 CASH AND CASH EQUIVALENTS, End of Period $194,124 $193,773 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. MOLEX INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Condensed Consolidated Financial Statements The condensed consolidated financial statements have been prepared from the Company's books and records without audit and are subject to year-end adjustments. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of information for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Molex Incorporated 1999 Annual Report to Shareholders and the 1999 Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. (2) Earnings per Common Share On January 28, 2000 the Board of Directors of Molex Incorporated declared a twenty-five percent (25%) stock dividend. The dividend is payable on March 6, 2000 to shareholders of record on February 14, 2000. One quarter (1/4) share of Common Stock will be paid for each share of Common Stock and each share of Class B Common Stock outstanding, and one quarter (1/4) share of Class A Common Stock will be paid for each share of Class A Common Stock outstanding. All shares outstanding, earnings and dividends have been retroactively restated for the stock split effected in the form of a stock dividend. The reconciliation of common shares outstanding to dilutive common shares outstanding is as follows as restated for the January 2000 stock dividend: <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, 1999 1998 1999 1998 <S> <C> <C> <C> <C> Weighted average shares outstanding - basic 196,158 194,161 196,215 194,451 Dilutive effect of stock options 1,916 1,495 1,761 1,326 Weighted average shares outstanding - diluted 198,074 195,656 197,976 195,777 </TABLE> (3) Comprehensive Income Comprehensive income includes all non-shareowner changes in equity and consists of net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. Total comprehensive income, in thousands of dollars, is as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, 1999 1998 1999 1998 <S> <C> <C> <C> <C> Net income $ 54,118 $43,873 $ 99,615 $ 83,046 Currency translation and other adjustments 81,741 52,645 128,994 78,462 Total comprehensive income $135,859 $96,518 $228,609 $161,508 </TABLE> 4) Inventories Inventories are valued at the lower of first-in, first-out cost or market. Inventories, in thousands of dollars, consist of the following: Dec. 31, June 30, 1999 1999 Raw Materials $ 36,921 $ 46,767 Work in Process 88,628 58,893 Finished Goods 108,745 83,201 $234,294 $188,861 (5) New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Originally effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, it has since been delayed one year. It establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company is assessing the impact this statement will have on its statement of financial position and the results of its operations. MOLEX INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated net revenues were $543.0 million for the quarter ended December 31, 1999, increasing 26.4 percent in US dollars and 25.8 percent in local currencies over the same period last year. For the six months ended December 31, 1999, net revenues rose to $1,034.9 million from $839.6 million in the corresponding period last year, resulting in US dollar growth of 23.3 percent and local currency growth of 20.9 percent. This growth included the revenue of the Cardell acquisition, without which the US dollar revenue growth for the current quarter and year-to-date periods would have been 20.3 percent and 16.7 percent, respectively. The strengthening of other currencies against the US dollar caused net revenues to increase $2.6 million and $20.1 million for the quarter and year-to-date periods, respectively. Management believes that Molex continues to grow at a rate higher than the worldwide connector market. All geographic regions experienced sales growth for the quarter as well as the six months ended December 31, 1999. Net revenue in the Americas region increased 36.1 percent in both US dollars and local currencies over the prior year quarter. Year-to-date net revenue growth over last year was 31.6 percent in US dollars and 31.5 percent in local currencies. Excluding the sales of the Cardell acquisition, net revenue rose 21.3 percent and 16.0 percent for the quarter and year-to-date periods, respectively. Growth in the region was a result of strong demand in all major markets, including business through distributors. Quarterly net revenue in the Far East North increased 36.6 percent in US dollars and 20.9 percent in local currencies compared to the prior year. For the six months ended December 31, 1999, revenue grew 34.8 percent in US dollars and 14.7 percent in local currencies over last year. Revenue growth was supported by strong demand in the Japanese market for DVDs, LCDs, CD-Roms, games, mobile phones, PCs and printers. Strength in the Korean automotive, home electronics and telecommunications markets also contributed to the growth. Far East South net revenue for the quarter increased 10.1 percent in US dollars and 10.6 percent in local currencies over the prior year. For the year-to-date period, revenue rose 10.8 percent in US dollars and 9.4 percent in local currencies over last year due to increased demand in the personal computer and computer-peripheral product markets. In Europe, net revenue grew 4.5 percent in US dollars and 18.9 percent in local currencies over the prior year quarter. For the six months ended December 31, 1999, the revenue growth over the comparable prior year period was 3.3 percent in US dollars and 14.3 percent in local currencies. Strength in the telecommunications and fiber optic markets contributed to the growth. For the six months ended December 31, 1999, 62.6 percent of Molex's worldwide net revenue was generated from its international operations. International operations are subject to currency fluctuations and government actions. Molex monitors its currency exposure in each country and continues to implement strategies to respond to changing economic environments. Due to the uncertainty of the foreign exchange markets, Molex cannot reasonably predict future trends related to foreign currency fluctuations. Foreign currency fluctuations have impacted results in the past and may impact results in the future. Gross profit as a percent of net revenue was 38.6 percent for the quarter ended December 31, 1999 compared to 41.1 percent last year. For the six months ended December 31, 1999, the gross profit percentage was 38.9 percent, down from 40.8 percent in the prior year period. This year's margins were impacted by inclusion of the results of the Cardell division, which currently has a lower gross profit margin than the overall Molex gross margin, higher operating costs to meet customer demands and an unplanned reduction in margins on value-added products. Selling and administrative expenses were $133.3 million and $262.5 million, respectively, for the quarter and six month period ended December 31, 1999 as compared with $111.0 million and $220.9 million, respectively, for the corresponding periods in the prior year. As a percent of net revenue, selling and administrative expenses for the quarter were 24.6 percent compared with 25.8 percent in the prior year, and for the year-to-date period were 25.4 percent compared with 26.3 percent in the prior year. Also included in selling and administrative expenses are research and development expenditures, which for the six months ended December 31, 1999, increased as a percent of net revenue to 6.2 percent from 6.1 percent in the prior year period. Interest income, net of interest expense, was $2.4 million in the quarter ended December 31, 1999 compared with $1.4 million in the prior year and was $4.1 million for the six months ended December 31, 1999 as compared with $4.8 million a year ago. The year-to-date decline is primarily due to a lower level of short-term investments than in the prior year as well as an increased level of debt. The effective tax rate was 30.0 percent for the quarter ended December 31, 1999 compared with 32.1 percent in the prior year period and was 30.1 percent for the six month period compared with 32.7 percent last year. The reduction was caused by the Company implementing a more aggressive repatriation strategy, Japanese tax rate reductions, and the continuing effort to reduce the overall tax burden through better planning. Net income for the quarter was $54.1 million or 28 cents per basic and 27 cents per diluted share, a 23.4 percent increase compared with $43.9 million or 23 cents per basic and 22 cents per diluted share for the same quarter last fiscal year. Net income for the six months ended December 31, 1999 was $99.6 million or 51 cents per basic and 50 cents per diluted share, as compared with net income of $83.0 million or 43 cents per basic and 42 cents per diluted share, for the same period in the prior year. Excluding the effects of currency translation, net income increased 20.7 percent for the quarter and 15.1 percent for the six months ended December 31, 1999 from the comparable prior year periods. LIQUIDITY AND CAPITAL RESOURCES Molex's balance sheet continues to be exceptionally strong. Working capital at December 31, 1999 was $603.9 million, an increase from $538.9 million at June 30, 1999. During the six months ended December 31, 1999, the Company purchased an aggregate of 937,500 shares of treasury stock at an aggregate cost of $26.3 million. This is in accordance with authorization by the Board of Directors allowing for the purchase of up to $50 million of Company stock during the current fiscal year. Management believes that the Company's current liquidity and financial flexibility are adequate to support its continued growth. YEAR 2000 Molex recognized the importance of, and gave high priority to, the Year 2000 issue. The Company completed an assessment of its business and other information systems, as well as the non-information system aspects of its business that could have been impacted by the Year 2000 issue. The Global Information System (GIS), which is Year 2000 compliant, covered more than 80 percent of the Company's business while the legacy business systems in the remaining operations were remediated. The Company did not experience and was not aware of any material operational problems with its information systems posed by the Year 2000 issue, but will continue to closely monitor its systems. While the GIS implementation addressed many of the Company's Year 2000 issues, the Company does not consider the GIS implementation costs to be related to the Year 2000 issue as such costs are a strategic expenditure to enhance future operations and would be incurred regardless of the Year 2000 issue. Total costs related to the GIS project are expected to reach $60 million once complete. Part of the risk inherent in the Year 2000 issue resulted from the general uncertainty of the readiness of material third-party relationships. To date, the Company has not been impacted and is not aware of any Year 2000 issues experienced by its suppliers and customers. Although the Company cannot know or foresee every eventuality that suppliers and customers may face that could impact its operations, the Company will remain actively involved in a broad-structured contingency planning effort to mitigate the impact of potential failures in any of its critical third-party relationships. The Company cannot estimate the cost it may incur as a result of the failure of third parties to address their Year 2000 issues, and there can be no assurance that there will not be a material adverse effect on the Company if third parties did not convert their systems in a timely manner and in a way that is compatible with the Company's systems. However, management believes that the likelihood of such a significant failure is low. OUTLOOK The outlook for the remainder of fiscal 2000 is encouraging, based on improved business levels for the first half. Due to the uncertainty of the foreign currency exchange markets, Molex cannot reasonably predict future trends related to foreign currency fluctuations. Foreign currency fluctuations have impacted the Company's results in the past and may impact results in the future. To further expand the Company's global presence, offer innovative products at an accelerated pace, and improve internal productivity, Molex plans to invest approximately $231 million in capital expenditures and approximately $129 million in research and development for the fiscal year ending June 30, 2000. Management believes the Company is well positioned to continue growing faster than the overall connector industry. The Company continues to emphasize expansion in rapidly growing industry segments, product lines and geographic regions. Molex remains committed to providing high quality products and a full range of services to its customers worldwide. FORWARD LOOKING STATEMENT This document contains various forward looking statements. Statements that are not historical are forward looking statements and are subject to various risks and uncertainties which could cause actual results to vary materially from those stated. Such risks and uncertainties include: economic conditions in various regions, product and price competition, raw material prices, foreign currency exchange rates, technology changes, patent issues, litigation results, legal and regulatory developments, and other risks and uncertainties described in documents filed with the Securities and Exchange Commission. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk associated with changes in foreign currency exchange rates, interest rates and certain commodity prices. The Company mitigates its foreign currency exchange rate risk principally through the establishment of local production facilities in the markets it serves and invoicing of customers in the same currency as the source of the products. Molex also monitors its foreign currency exposure in each country and implements strategies to respond to changing economic and political environments. Examples of these strategies include the prompt payment of intercompany balances utilizing a global netting system, the establishing of contra-currency accounts in several international subsidiaries, development of natural hedges and occasional use of foreign exchange contracts. One of the Company's subsidiaries utilizes derivative commodity futures contracts to hedge against fluctuations in commodity price fluctuations. Such commodity futures contracts are limited to a maximum duration of eighteen months. A formalized treasury risk management policy has been implemented by the Company which describes the procedures and controls over derivative financial and commodity instruments. Under the policy, the Company does not use derivative financial or commodity instruments for trading purposes and the use of such instruments are subject to strict approval levels by senior officers. Typically, the use of such derivative instruments is limited to hedging activities related to specific foreign currency cash flows or inventory purchases. The Company's exposure related to such transactions is, in the aggregate, not material to the Company's financial position, results of operations and cash flows. Interest rate exposure is principally limited to the $76.7 million of marketable securities owned by the Company. Such securities are debt instruments which generate interest income for the Company on temporary excess cash balances. The Company does not actively manage the risk of interest rate fluctuations, however, such risk is mitigated by the relatively short term, less than twelve months, nature of these investments. Part II - Other Information Items 1-4. Not Applicable Item 5. Other Information On January 28, 2000, Martin P. Slark was appointed as a Director of Molex Incorporated. Mr. Slark is the Executive Vice President of the Company. His appointment expands the Molex Board to eleven directors. On February 4, 2000, Molex announced that it has entered into a definitive asset purchase agreement pursuant to which it has agreed to acquire substantially all of the assets and assume certain liabilities of the Beau Interconnect Division of Axsys Technologies. Beau is a leading manufacturer of electronic interconnect devices in many industrial and commercial markets. The closing of the transaction is subject to the satisfaction or waiver of various conditions, but is currently expected to occur in the first calender quarter of 2000. Item 6. Not applicable S I G N A T U R E S 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. MOLEX INCORPORATED -------------------- (Registrant) Date February 11, 2000 /s/ ROBERT B. MAHONEY ----------------- -------------------- Robert B. Mahoney Corporate Vice President, Treasurer and Chief Financial Officer Date February 11, 2000 /s/ LOUIS A. HECHT ----------------- -------------------- Louis A. Hecht Corporate Secretary and General Counsel </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-30-2000 <PERIOD-END> DEC-31-1999 <CASH> 194124 <SECURITIES> 76742 <RECEIVABLES> 472182 <ALLOWANCES> 21607 <INVENTORY> 234294 <CURRENT-ASSETS> 976470 <PP&E> 1961867 <DEPRECIATION> 1055449 <TOTAL-ASSETS> 2156972 <CURRENT-LIABILITIES> 372528 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 247224 <OTHER-SE> 1456073 <TOTAL-LIABILITY-AND-EQUITY> 2156972 <SALES> 1034879 <TOTAL-REVENUES> 1034879 <CGS> 632001 <TOTAL-COSTS> 894480 <OTHER-EXPENSES> 262479 <LOSS-PROVISION> 1637 <INTEREST-EXPENSE> (4047) <INCOME-PRETAX> 142809 <INCOME-TAX> 43194 <INCOME-CONTINUING> 99615 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 99615 <EPS-BASIC> 0.51 <EPS-DILUTED> 0.50 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

MSFT

https://www.sec.gov/Archives/edgar/data/789019/0001032210-00-000218.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, Dyq5Zg+4F3TYYuOsnSooqYYMpegSaAGkDFn4R8PjJ90x8UET0oxIRkE0SjhvmGdN K6CBWNfh6fL80in7s/Brvg== <SEC-DOCUMENT>0001032210-00-000218.txt : 20000214 <SEC-HEADER>0001032210-00-000218.hdr.sgml : 20000214 ACCESSION NUMBER: 0001032210-00-000218 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: SEC FILE NUMBER: 000-14278 FILM NUMBER: 534418 BUSINESS ADDRESS: STREET 1: ONE MICROSOFT WAY #BLDG 8 STREET 2: NORTH OFFICE 2211 CITY: REDMOND STATE: WA ZIP: 98052 BUSINESS PHONE: 4258828080 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 DATED 12/31/1999 <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 December 31, 1999 [_] 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: (425) 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, 2000 was 5,204,853,333. ================================================================================ <PAGE> MICROSOFT CORPORATION FORM 10-Q For the Quarter Ended December 31, 1999 INDEX <TABLE> <CAPTION> Part I. Financial Information Item 1. Financial Statements Page ---- <S> <C> a) Income Statements for the Three and Six Months Ended December 31, 1998 and 1999.... 1 b) Balance Sheets as of June 30, 1999 and December 31, 1999........................ 2 c) Cash Flows Statements for the Six Months Ended December 31, 1998 and 1999.............. 3 d) Stockholders' Equity Statements for the Three and Six Months Ended December 31, 1998 and 1999.... 4 e) Notes to Financial Statements.................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 10 Part II. Other Information Item 1. Legal Proceedings.................................................. 14 Item 4. Submission of Matters to a Vote of Security Holders................ 14 Item 6. Exhibits and Reports on Form 8-K................................... 14 Signature.......................................................................... 15 </TABLE> <PAGE> Part I. Financial Information Item 1. Financial Statements MICROSOFT CORPORATION Income Statements (In millions, except earnings per share)(Unaudited) - -------------------------------------------------------------------------------- Three Months Ended Six Months Ended Dec. 31 Dec. 31 1998 1999 1998 1999 - --------------------------------------------------------------------------- Revenue $5,195 $6,112 $9,388 $11,496 Operating expenses: Cost of revenue 788 756 1,437 1,468 Research and development 715 911 1,366 1,745 Sales and marketing 794 1,027 1,482 1,930 General and administrative 149 506 248 649 Other expenses (income) 35 (6) 59 19 - --------------------------------------------------------------------------- Total operating expenses 2,481 3,194 4,592 5,811 - --------------------------------------------------------------------------- Operating income 2,714 2,918 4,796 5,685 Investment income 337 773 598 1,170 Gains on sales 0 0 160 156 - --------------------------------------------------------------------------- Income before income taxes 3,051 3,691 5,554 7,011 Provision for income taxes 1,068 1,255 1,888 2,384 - --------------------------------------------------------------------------- Net income $1,983 $2,436 $3,666 $ 4,627 - --------------------------------------------------------------------------- Earnings per share (1): Basic $ 0.40 $ 0.47 $ 0.73 $ 0.90 - --------------------------------------------------------------------------- Diluted $ 0.36 $ 0.44 $ 0.67 $ 0.84 - --------------------------------------------------------------------------- (1) Earnings per share amounts for the three and six months ended December 31, 1998 have been restated to reflect a two-for-one stock split in March 1999. See accompanying notes. - -------------------------------------------------------------------------------- 1 <PAGE> MICROSOFT CORPORATION Balance Sheets (In millions) - -------------------------------------------------------------------------------- June 30 Dec. 31 1999 1999 (1) - -------------------------------------------------------------------------------- Assets Current assets: Cash and short-term investments $17,236 $17,843 Accounts receivable 2,245 3,284 Other 752 893 - -------------------------------------------------------------------------------- Total current assets 20,233 22,020 Property and equipment 1,611 1,739 Equity and other investments 14,372 19,801 Other assets 940 1,533 - -------------------------------------------------------------------------------- Total assets $37,156 $45,093 - -------------------------------------------------------------------------------- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 874 $ 1,233 Accrued compensation 396 533 Income taxes payable 1,607 2,103 Unearned revenue 4,239 4,259 Other 1,602 2,376 - -------------------------------------------------------------------------------- Total current liabilities 8,718 10,504 - -------------------------------------------------------------------------------- Commitments and contingencies Stockholders' equity: Convertible preferred stock - shares authorized 100; outstanding 13 and 0 980 0 Common stock and paid-in capital - shares authorized 12,000; outstanding 5,020 and 5,177 13,844 18,878 Retained earnings 13,614 15,711 - -------------------------------------------------------------------------------- Total stockholders' equity 28,438 34,589 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $37,156 $45,093 - -------------------------------------------------------------------------------- (1) Unaudited See accompanying notes. - -------------------------------------------------------------------------------- 2 <PAGE> MICROSOFT CORPORATION Cash Flows Statements (In millions)(Unaudited) - -------------------------------------------------------------------------------- Six Months Ended Dec. 31 1998 1999 - ------------------------------------------------------------------------------- Operations Net income $ 3,666 $ 4,627 Depreciation and amortization 356 765 Gains on sales (160) (156) Unearned revenue 2,371 2,638 Recognition of unearned revenue from prior periods (1,707) (2,618) Other current liabilities 719 61 Accounts receivable (486) (1,030) Other current assets (24) (149) - ------------------------------------------------------------------------------- Net cash from operations 4,735 4,138 - ------------------------------------------------------------------------------- Financing Common stock issued 614 913 Common stock repurchased (772) (4,852) Put warrant proceeds 355 472 Preferred stock dividends (14) (13) Stock option income tax benefits 1,218 2,636 - ------------------------------------------------------------------------------- Net cash from (used for) financing 1,401 (844) - ------------------------------------------------------------------------------- Investing Additions to property and equipment (241) (371) Cash proceeds from sale of Softimage, Inc. 79 0 Purchases of investments (10,220) (18,759) Maturities of investments 1,199 950 Sales of investments 5,263 14,923 - ------------------------------------------------------------------------------- Net cash used for investing (3,920) (3,257) - ------------------------------------------------------------------------------- Net change in cash and equivalents 2,216 37 Effect of exchange rates on cash and equivalents 58 20 Cash and equivalents, beginning of period 3,839 4,975 - ------------------------------------------------------------------------------- Cash and equivalents, end of period 6,113 5,032 Short-term investments, end of period 13,124 12,811 - ------------------------------------------------------------------------------- Cash and short-term investments, end of period $19,237 $17,843 - ------------------------------------------------------------------------------- See accompanying notes. - -------------------------------------------------------------------------------- 3 <PAGE> MICROSOFT CORPORATION <TABLE> <CAPTION> Stockholders' Equity Statements (In millions)(Unaudited) - ----------------------------------------------------------------------------------- Three Months Ended Six Months Ended Dec. 31 Dec. 31 1998 1999 1998 1999 - ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Convertible preferred stock Balance, beginning of period $ 980 $ 980 $ 980 $ 980 Conversion of preferred to common stock 0 (980) 0 (980) - ----------------------------------------------------------------------------------- Balance, end of period 980 0 980 0 - ----------------------------------------------------------------------------------- Common stock and paid-in capital Balance, beginning of period 9,161 15,878 8,025 13,844 Common stock issued 536 1,525 870 2,092 Common stock repurchased (11) (128) (25) (166) Proceeds from sale of put warrants 130 182 355 472 Stock option income tax benefits 627 1,421 1,218 2,636 - ----------------------------------------------------------------------------------- Balance, end of period 10,443 18,878 10,443 18,878 - ----------------------------------------------------------------------------------- Retained earnings Balance, beginning of period 8,983 14,482 7,622 13,614 - ----------------------------------------------------------------------------------- Net income 1,983 2,436 3,666 4,627 Net unrealized investments gains 390 2,485 540 2,141 Translation adjustments and other 63 4 106 28 - ----------------------------------------------------------------------------------- Comprehensive income 2,436 4,925 4,312 6,796 Preferred stock dividends (7) (6) (14) (13) Common stock repurchased (257) (3,690) (765) (4,686) - ----------------------------------------------------------------------------------- Balance, end of period 11,155 15,711 11,155 15,711 - ----------------------------------------------------------------------------------- Total stockholders' equity $22,578 $34,589 $22,578 $34,589 - ----------------------------------------------------------------------------------- </TABLE> See accompanying notes. - -------------------------------------------------------------------------------- 4 <PAGE> 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, cash flows, and stockholders' equity 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, revenue, 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 1999 Form 10-K. Stock Split In March 1999, 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 Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding preferred shares using the "if-converted" method, assumed net-share settlement of common stock structured repurchases, and outstanding stock options using the "treasury stock" method. The components of basic and diluted earnings per share were as follows: EARNINGS PER SHARE <TABLE> <CAPTION> (In millions, except earnings per share) - ---------------------------------------------------------------------------------------- Three Months Ended Six Months Ended Dec. 31 Dec. 31 1998 1999 1998 1999 - --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net income (A) $1,983 $2,436 $3,666 $4,627 Preferred stock dividends (7) (6) (14) (13) - --------------------------------------------------------------------------------------- Net income available for common shareholders (B) $1,976 $2,430 $3,652 $4,614 - --------------------------------------------------------------------------------------- Average outstanding shares of common stock (C) 4,998 5,163 4,978 5,146 Dilutive effect of: Common stock under structured repurchases 22 0 19 0 Preferred stock 20 12 22 13 Employee stock options 420 363 428 374 - --------------------------------------------------------------------------------------- Common stock and common stock equivalents (D) 5,460 5,538 5,447 5,533 - --------------------------------------------------------------------------------------- Earnings per share: Basic (B/C) $ 0.40 $ 0.47 $ 0.73 $ 0.90 - --------------------------------------------------------------------------------------- Diluted (A/D) $ 0.36 $ 0.44 $ 0.67 $ 0.84 - --------------------------------------------------------------------------------------- </TABLE> - -------------------------------------------------------------------------------- 5 <PAGE> Unearned Revenue A portion of Microsoft's revenue is earned ratably over the product life cycle or, in the case of subscriptions, over the period of the license agreement. End users receive certain elements of the Company's products over a period of time. These elements include browser technologies and technical support. Consequently, Microsoft's earned revenue reflects the recognition of the fair value of these elements over the product's life cycle. The percentage of revenue recognized ratably ranges from approximately 15% to 25% of Windows desktop operating systems and approximately 10% to 20% of desktop applications, depending on the terms and conditions of the license and prices of the elements. Product life cycles are currently estimated at three years for Windows operating systems and 18 months for desktop applications. The Company also sells subscriptions to certain products via maintenance and certain organization license agreements. At December 31, 1999, unearned revenue was $4.26 billion. Windows Platforms products unearned revenue was $2.40 billion and unearned revenue associated with Productivity Applications and Developer products totaled $1.70 billion. Unearned revenue for other miscellaneous programs totaled $161 million at December 31, 1999. Stockholders' Equity During the first half of fiscal 2000, the Company repurchased 54.7 million shares of Microsoft common stock in the open market. In January 2000, the Company announced the termination of its stock buyback program. To enhance its stock repurchase program, Microsoft sold 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, 1999, 163 million warrants were outstanding with strike prices ranging from $69 to $78 per share. The put warrants expire between June 2000 and December 2002. The outstanding put warrants permit a net-share settlement at the Company's option and do not result in a put warrant liability on the balance sheet. During 1996, Microsoft issued 12.5 million shares of 2.75% convertible exchangeable principal-protected preferred stock. Net proceeds of $980 million were used to repurchase common shares. The Company's convertible preferred stock matured on December 15, 1999. Each preferred share was converted into 1.1273 common shares. Operational Transactions In November 1999, Expedia, Inc. completed an initial public offering of its common stock. Expedia, which is majority-owned by Microsoft, is a leading provider of branded online travel services for leisure and small business travelers. Expedia's financial results and financial condition are consolidated with the operations of Microsoft. In September 1999, the Company sold the entertainment city guide portion of MSN(TM) Sidewalk(R) to Ticketmaster Online-CitySearch, Inc. (TMCS) for a combination of TMCS stock and warrants with a value of $223 million. The transaction also included a distribution agreement. Microsoft recognized a gain of $156 million on the sale and will recognize amounts related to the distribution arrangement over the term of the agreement. In November 1998, Microsoft acquired LinkExchange, Inc., a leading provider of online marketing services to web site owners and small and medium-sized businesses. Microsoft paid $265 million in stock. The Company did not record an in-process technology write-off in connection with the purchase of LinkExchange. In August 1998, the Company sold a wholly-owned subsidiary, Softimage, Inc. to Avid Technology, Inc. Microsoft received cash of $79 million and securities valued at $85 million. A pretax gain of $160 million was recognized in the first quarter of fiscal 1999. Subsequent Events In January 2000, the Company merged with Visio Corporation in a transaction that will be accounted for as a pooling of interests. Microsoft issued 14 million shares in exchange for the outstanding stock of Visio. - -------------------------------------------------------------------------------- 6 <PAGE> Contingencies On October 7, 1997, Sun Microsystems, Inc. ("Sun") brought suit against Microsoft in the U.S. District Court for the Northern District of California. Sun's complaint alleges several claims against Microsoft, all related to the parties' relationship under a March 11, 1996 Technology License and Distribution Agreement (Agreement) concerning certain Java programming language technology. The Complaint seeks: a preliminary and permanent injunction against Microsoft distributing certain products with the Java Compatibility logo, and against distributing Internet Explorer 4.0 browser technology unless certain alleged obligations are met; an order compelling Microsoft to perform certain alleged obligations; an accounting; termination of the Agreement; and an award of damages, including compensatory, exemplary, and punitive damages, and liquidated damages of $35 million for the alleged source code disclosure. On March 24, 1998, the Court entered an order enjoining Microsoft from using the Java Compatibility logo on Internet Explorer 4.0 and the Microsoft Software Developers Kit (SDK) for Java 2.0. Microsoft has taken steps to fully comply with the order. On November 17, 1998, the Court entered an order granting Sun's request for a preliminary injunction, holding that Sun had established a likelihood of success on its copyright infringement claims, because Microsoft's use of Sun's technology in its products was beyond the scope of the parties' license agreement. The Court ordered Microsoft to make certain changes in its products that include Sun's Java technology and to make certain changes in its Java software development tools. The Court also enjoined Microsoft from entering into any licensing agreements that were conditioned on exclusive use of Microsoft's Java Virtual Machine. Microsoft appealed that ruling to the 9th Circuit Court of Appeals on December 16, 1998. Microsoft complied with the ruling and did not seek a stay of the injunction pending appeal. On December 18, 1998, Microsoft filed a motion requesting an extension of the 90-day compliance period for certain Microsoft products, which was granted in part in January 1999. Microsoft filed a motion on February 5, 1999, seeking clarification of the Court's order that Microsoft would not be prevented from engaging in independent development of Java technology under the order. The Court granted that motion. On July 23, 1999 the Court also granted Microsoft's motion to increase the bond on the preliminary injunction from $15 million to $35 million. On January 22, 1999, Microsoft and Sun filed a series of summary judgment motions regarding the interpretation of the contract and other issues. On May 20, 1999, the Court issued tentative rulings on three of the motions. In the preliminary rulings, the Court (1) granted Sun's motion for summary judgment that prior versions of Internet Explorer 4.0, Windows 98, Windows NT, Visual J++ (R) 6.0 development system, and the SDK for Java infringe Sun's copyrights, because they contain Sun's program code but do not pass Sun's compatibility tests and, therefore, Microsoft's use of Sun's technology is outside the scope of the Agreement and unlicensed; (2) granted Microsoft's motion that the Agreement authorizes Microsoft to distribute independently developed Java Technology that is not subject to the compatibility obligations in the Agreement; and (3) denied Sun's motion for summary judgment on the meaning of certain provisions of the Agreement, tentatively adopting Microsoft's interpretation that Sun is required to deliver certain new Java Technology, called "Supplemental Java Classes," in working order on Microsoft's then existing and commercially distributed virtual machine. On June 24, 1999, the Court heard oral argument on the three tentative rulings. No final orders have been issued. On August 23,1999 the 9th Circuit Court of Appeals vacated the November 1998 preliminary injunction and remanded the case to the district Court for further proceedings. Sun immediately filed two motions to reinstate and expand the scope of the earlier injunction on the basis of copyright infringement and unfair competition. Oral argument on these motions was held on October 16, 1999. On January 25, 2000, the Court issued rulings on the two motions, denying Sun's motion to reinstate the preliminary injunction on the basis of copyright infringement and granting, in part, Sun's motion to reinstate the preliminary injunction based on unfair competition. Microsoft is in compliance with the terms of the partially reinstated preliminary injunction and will not need to undertake any further action to comply with the terms of the injunction. No other hearing or trial dates have been set. On May 18, 1998, the Antitrust Division of the U.S. Department of Justice (DOJ) and a group of 20 state Attorneys General filed two antitrust cases against Microsoft in the U.S. District Court for the District of Columbia. The DOJ complaint alleges violations of Sections 1 and 2 of the Sherman Act. The DOJ complaint seeks declaratory relief as to the violations it asserts and preliminary and permanent injunctive relief regarding: the inclusion of Internet browsing software (or other software products) as part of Windows; the terms of agreements regarding non-Microsoft Internet browsing software (or other software products); taking or threatening "action adverse" in consequence of a person's failure to license or distribute Microsoft Internet browsing software (or other software - -------------------------------------------------------------------------------- 7 <PAGE> product) or distributing competing products or cooperating with the government; and restrictions on the screens, boot-up sequence, or functions of Microsoft's operating system products. The state Attorneys General allege largely the same claims and various pendent state claims. The states seek declaratory relief and preliminary and permanent injunctive relief similar to that sought by the DOJ, together with statutory penalties under the state law claims. The foregoing description is qualified in its entirety by reference to the full text of the complaints and other papers on file in those actions, case numbers 98-1232 and 98-1233. On May 22, 1998, Judge Jackson consolidated the two actions. The judge granted Microsoft's motion for summary judgment as to the states' monopoly leverage claim and permitted the remaining claims to proceed to trial. Trial began on October 19, 1998 and ended with closing arguments on September 21, 1999. The Court will first rule on factual issues, and will then rule on legal conclusion On November 5, 1999, Judge Jackson issued his Findings of Fact. The Conclusions of Law in the case are not expected until sometime in 2000. The judge also directed the parties to participate in a mediation process, which is ongoing. Microsoft believes the claims are without merit and is defending against them vigorously. In other ongoing investigations, the DOJ and several state Attorneys General have requested information from Microsoft concerning various issues. A number of antitrust class action lawsuits have been initiated against Microsoft. Microsoft believes the claims are without merit and will vigorously defend the cases. The Securities and Exchange Commission is conducting a non-public investigation into the Company's accounting reserve practices. 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. - -------------------------------------------------------------------------------- 8 <PAGE> Segment Information (In millions) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Productivity Windows Applications Consumer Reconciling Three Months Ended Dec. 31 Platforms and Developer and Other Amounts Consolidated - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 1998 Revenue $2,271 $2,277 $587 $ 60 $5,195 Operating income (loss) 1,538 1,392 (201) (15) 2,714 - -------------------------------------------------------------------------------------------------- 1999 Revenue $2,412 $2,624 $721 $355 $6,112 Operating income (loss) 1,584 1,376 (300) 258 2,918 - -------------------------------------------------------------------------------------------------- <CAPTION> Productivity Windows Applications Consumer Reconciling Six Months Ended Dec. 31 Platforms and Developer and Other Amounts Consolidated - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 1998 Revenue $4,315 $4,095 $1,029 $(51) $ 9,388 Operating income (loss) 2,944 2,471 (415) (204) 4,796 - -------------------------------------------------------------------------------------------------- 1999 Revenue $4,609 $5,054 $1,382 $451 $11,496 Operating income (loss) 3,068 2,796 (398) 219 5,685 - -------------------------------------------------------------------------------------------------- </TABLE> The Company's organizational structure and fundamental approach to business reflect the needs of its customers. As such, Microsoft has three major segments: Windows Platforms; Productivity Applications and Developer; and Consumer and Other. Windows Platforms includes the Business and Enterprise Division, which is primarily responsible for developing and marketing Windows NT and Windows 2000. Windows Platforms also includes the Consumer Windows Division, which develops and markets Windows 98 and Windows 95. Productivity Applications and Developer includes the Business Productivity Division, which is responsible for developing and marketing desktop applications, server applications, and developer tools. Consumer and Other products and services include primarily learning, entertainment, and PC input device products; WebTV and PC online access; and portal and vertical properties and e-commerce platforms. Assets of the segment groups are not relevant for management of the businesses nor for disclosure. The Company's financial reporting systems present various data for management to run the business, including profit and loss (P&L) statements prepared on a basis not consistent with generally accepted accounting principles. Reconciling items include certain elements of unearned revenue, the treatment of certain channel inventory amounts and estimates, and revenue from product support, consulting, and training and certification of system integrators. Additionally, the internal P&Ls use accelerated methods of depreciation and amortization. In fiscal 2000, the Company's internal P&Ls included the Black-Scholes value of employee stock option grants, amortized over the remaining months of the fiscal year of the grant. Prior year disclosures have been restated for consistent presentation. - -------------------------------------------------------------------------------- 9 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for intelligent devices, personal computers (PCs), and servers; server applications for client/server environments; knowledge worker productivity applications; and software development tools. The Company's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. Microsoft also licenses consumer software programs; sells PC input devices; trains and certifies system integrators; and researches and develops advanced technologies for future software products. Revenue Revenue of $6.11 billion in the December quarter of fiscal 2000 increased 18% over the second quarter of fiscal 1999. The revenue growth reflected strong licensing of Microsoft(R) Office 2000. Partially offsetting this growth was moderate growth for Windows(R) operating systems, due to soft corporate demand for PCs and software combined with the expected slowness of demand for Windows NT(R) Server and Windows NT Workstation in anticipation of the launch of Windows 2000. On a year to date basis, revenue in the first half of fiscal 2000 totaled $11.50 billion, an increase of 22% over the first two quarters of fiscal 1999. 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 organizational license programs 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 and BackOffice, are less than the sum of the prices for the individual programs included in these suites when such programs are licensed separately. An increased percentage of products and programs included elements that were billed but unearned and recognized ratably, such as Microsoft Windows, Microsoft Office, maintenance, and other subscription models. See accompanying notes to financial statements. Business Divisions Microsoft has three major segments: Productivity Applications and Developer; Windows Platforms; and Consumer and Other. Productivity Applications and Developer products include desktop applications such as Microsoft Office, server applications such as Microsoft Exchange Server and Microsoft SQL Server(TM), and software developer tools. Revenue increased 28% to $2.80 billion in the December quarter. For the first half of fiscal 2000, revenue of $5.25 billion grew 34% over the first half of fiscal 1999. Revenue from Microsoft Office integrated suites, including the Premium, Professional, Small Business, and Standard Editions was very strong, reflecting healthy demand for Microsoft Office 2000. Revenue included the recognition of $64 million in the second quarter and $150 million in the first quarter of previously unearned revenue, due to fulfillment of the Microsoft Office 2000 Technology Guarantee. Microsoft SQL Server 7.0 revenue continued to be robust. Revenue from Microsoft Exchange Server and software developer tools was steady. Windows Platforms products include primarily Windows 98, Windows NT Workstation, and Windows NT Server. Revenue of $2.44 billion in the second quarter represented growth of 6% over the prior year. Windows-based desktop operating systems revenue grew slightly. Units licensed through the PC OEM channel reflected slower growth of corporate PC purchases. Additionally, consumer PC purchases through traditional retail channels were moderate and revenue from retail versions of Windows 98 decreased. This decrease reflected the strong comparable quarter of the prior year which included significant revenue from Windows 98 after its launch in June 1998. Windows NT Workstation and Windows NT Server revenue growth slowed, reflecting customer anticipation of the next version of the operating system, Windows 2000. On a year to date basis, Windows Platforms revenue of $4.69 billion grew 11% over the prior year. First quarter OEM revenue of Windows was relatively strong, particularly for Windows NT Workstation. Revenue from retail packaged product versions of Windows 98 decreased in the first quarter, reflecting the strong comparable quarter of the prior year which included significant revenue from Windows 98 after its launch in June 1998. Windows NT Server revenue growth was robust during the first quarter. Consumer and Other products include learning and entertainment software; PC input devices; training and certification fees; consulting; and online services such as Expedia. Revenue in the December quarter was $872 - -------------------------------------------------------------------------------- 10 <PAGE> million, up 23% from the comparable quarter of fiscal 1999. Consumer and Other revenue of $1.56 billion grew 26% over the first half of the prior year. Learning and entertainment software posted superb growth, reflecting strong consumer Holiday demand. Hardware product revenue grew moderately. Online advertising and access revenue rose substantially. Distribution Channels Microsoft distributes its products primarily through OEM licenses, organizational licenses, and retail packaged products. OEM channel revenue represents license fees from original equipment manufacturers who pre-install Microsoft products, primarily on PCs. Microsoft has three major geographic sales and marketing organizations: the South Pacific and Americas Region; the Europe, Middle East, and Africa Region; and the Asia Region. Sales of organizational licenses and packaged products via these channels are primarily to and through distributors and resellers. OEM second quarter revenue of $1.87 billion represented an increase of 4% over the comparable quarter of fiscal 1999. There were several reasons for the relatively low growth rate. The second quarter of fiscal 1999 was an unusually high-growth quarter for OEM revenue, having grown 48% over the comparable quarter of fiscal 1998. PC shipment growth was moderate in the December quarter of fiscal 2000, with particular slowness in corporate PC demand. Average revenue per license declined slightly, due in part to a mix shift to high-volume multi- national PC manufacturers from low-volume system builders. Additionally, demand for Windows NT Workstation moderated in anticipation of the launch of Windows 2000 Professional Version. OEM revenue of $3.61 billion in the first two quarters of fiscal 2000 increased 14% over the first two quarters of fiscal 1999. OEM revenue grew 27% in the first quarter of fiscal 2000, reflecting strong PC growth and increased penetration of higher-value NT Workstation. South Pacific and Americas Region revenue in the December quarter increased 26% to $2.21 billion. Revenue for the first half of fiscal 2000 grew 21% over the first half of fiscal 1999 to $4.08 billion. Several products had strong revenue growth, including Office; SQL Server; learning and entertainment software; and online services. Organizational licensing activity was moderate. Revenue growth was moderate in the South Pacific, the United States and Canada, and Latin America. Europe, Middle East, and Africa Region second quarter revenue of $1.43 billion was up 14% compared to the second quarter of fiscal 1999. For the first two quarters of fiscal 2000, revenue in the region totaled $2.61 billion, an increase of 22% over the prior year Microsoft Office exhibited the highest absolute revenue growth of the Company's products in the region. Revenue growth, measured in constant dollars, was moderate in the United Kingdom, France, and Germany. Weakening local currencies negatively impacted translated revenue compared to the prior year. Second quarter revenue in the region would have grown 22% if foreign exchange rates were constant with those of a year ago. First quarter revenue in the region would have grown 35% if foreign exchange rates were constant with those of a year ago. Asia Region revenue in the December quarter of $606 million increased 56% from the second quarter of the prior year. On a year to date basis, revenue in the Asia region was $1.20 billion, up 68% from the comparable period. The growth in the region reflected improved local economic conditions and strong revenue from localized versions of Microsoft Office 2000, particularly in Japan. Revenue grew strongly in most countries in the Asia Region. Translated international revenue is affected by foreign exchange rates. The impact of foreign exchange rates on revenue was negative in the December quarter compared to a year ago, as European currencies were very weak versus the U.S. dollar, offset partially by stronger Japanese yen versus the U.S. dollar. Had the rates from the prior year been in effect in the second quarter of fiscal 2000, translated international revenue billed in local currencies would have been $35 million higher. In the September quarter, the strong Japanese yen more than offset weak European currencies and added $64 million to translated revenue. Certain manufacturing, selling, distribution, and support costs are disbursed in local currencies, and a portion of international revenue is hedged, thus offsetting a portion of the translation exposure. Operating Expenses Microsoft encourages broad-based employee ownership of Microsoft stock through an employee stock option (ESO) program in which most employees are eligible to participate. Microsoft follows Accounting Principals Board Opinion 25 (APB 25) to account for ESOs, which generally does not require income statement recognition of options granted at the market price on the date of issuance, and discloses the Black-Scholes value of option grants. A new interpretation of APB 25 requires recognition of the FICA and Medicare expense paid on option exercises. Other - -------------------------------------------------------------------------------- 11 <PAGE> events can also trigger recording expense, such as using the lowest price in the 30 days following an employee's start date to establish the strike price, accelerating the vesting of options, and converting ESOs from one company to another, as occurred with the initial public offering of Expedia, a majority-owned subsidiary of Microsoft. These costs were reflected in each operating expense line item in the income statement and totaled $170 million in the second quarter and $100 million in the first quarter of fiscal 2000. Cost of revenue as a percent of revenue was 12.4% in the second quarter, down from 15.2% in the second quarter of the prior year. For the first half of fiscal 2000, the percentage was 12.8%, down from 15.3% for the first half of fiscal 1999. The percentage decrease resulted primarily from the trend in mix shift to organizational licenses and lower costs associated with WebTV(R) Networks' operations. Research and development expenses increased 27% from the second quarter of the prior year to $911 million. For the first two quarters of fiscal 2000, research and development expenses increased 28% to $1.75 billion from the first two quarters of fiscal 1999. These increases were driven primarily by higher development headcount-related costs, including various charges related to employee stock options. Sales and marketing expenses were $1.03 billion in the December quarter, which represented 16.8% of revenue, compared to 15.3% in the second quarter of the prior year. On a year to date basis, sales and marketing expenses were $1.93 billion, up 30% over the comparable period of the prior year. Sales and marketing expenses as a percent of revenue increased due primarily to both higher relative marketing costs and certain employee stock option expenses. General and administrative costs were $506 million in the second quarter compared to $149 million in the December quarter of the prior year. For the first two quarters of fiscal 2000, general and administrative costs were $649 million, compared to $248 million in the first two quarters of fiscal 1999. The second quarter of fiscal 2000 included a charge for the settlement of the lawsuit with Caldera, Inc. General and administrative costs also included increased legal fees and certain stock option-related charges. Other expenses and income include miscellaneous items, including gains on foreign exchange and the recognition of Microsoft's share of joint venture activities, including Transpoint and the MSNBC entities. Investment Income, Gains on Sales, and Income Taxes Second quarter investment income increased to $773 million from $337 million in the second quarter of the prior year. Year to date investment income totaled $1.17 billion in fiscal 2000, compared to $598 million in fiscal 1999. The increase was due principally to realized gains of approximately $400 million in the second quarter and $50 million in the first quarter. The larger investment portfolio generated by cash from operations also contributed to the increase in investment income. Realized gains in the second quarter of fiscal 1999 were approximately $70 million. During the first quarter of fiscal 2000, Microsoft sold the entertainment city guide portion of MSN(TM) Sidewalk(R) to Ticketmaster Online-CitySearch, Inc. (TMCS) for a combination of TMCS stock and warrants. Microsoft recognized a gain of $156 million. During the first quarter of fiscal 1999, Microsoft sold its Softimage, Inc. subsidiary to Avid Technology, Inc for a pretax gain of $160 million. The effective tax rate for fiscal 2000 is 34%. Excluding the tax impact of the gain on the sale of Softimage, the effective tax rate for fiscal 1999 was 35%. Financial Condition The Company's cash and short-term investment portfolio totaled $17.84 billion at December 31, 1999. 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 also invests in equities, primarily strategic technology companies. The Company has made large-scale investments in access providers, including cable, telephony, and wireless communications companies. During the first quarter of fiscal 2000, the Company purchased $400 million of Rogers Communications convertible preferred securities and warrants. In connection with AT&T's proposed merger with MediaOne Group, Inc., the Company agreed to acquire MediaOne's interest in Telewest Communications plc, a leading provider of cable television and - -------------------------------------------------------------------------------- 12 <PAGE> residential and business cable telephony services in the United Kingdom, subject to certain regulatory approvals and other conditions. Microsoft and National Broadcasting Company (NBC) operate two MSNBC joint ventures: a 24-hour cable news and information channel, and an online news service. Microsoft is paying $220 million over a five-year period that ends in 2001 for its interest in the cable venture and one-half of the operational funding of both joint ventures. Microsoft guarantees a portion of MSNBC debt. Microsoft has no material long-term debt and has $100 million of standby multicurrency lines of credit to support foreign currency hedging and cash management. Stockholders' equity at December 31, 1999 was $34.59 billion. Microsoft will continue to invest in sales, marketing, and product support infrastructure. Additionally, research and development activities will include investments in existing and advanced areas of technology, including using cash to acquire technology. Cash will also be used to fund ventures and strategic opportunities. Additions to property and equipment will continue, including new facilities and computer systems for R&D, sales and marketing, support, and administrative staff. Commitments for constructing new buildings were $300 million on December 31, 1999. Since fiscal 1990, Microsoft repurchased 764 million common shares while 1.90 billion shares were issued under the Company's employee stock option and purchase plans. Microsoft enhanced its repurchase program by selling put warrants. In January 2000, the Company announced the termination of its stock buyback program. The market value of all outstanding stock options was $81 billion as of December 31, 1999. During December 1996, Microsoft issued 12.5 million shares of 2.75% convertible exchangeable preferred stock. Net proceeds of $980 million were used to repurchase common shares. The Company's convertible preferred stock matured on December 15, 1999. Each preferred share was converted into 1.1273 common shares. Management believes existing cash and short-term investments together with funds generated from operations will be sufficient to meet operating requirements for the next 12 months. The Company's cash and short-term investments are available for strategic investments, mergers and acquisitions, and other potential large- scale cash needs that may arise. Microsoft has not paid cash dividends on its common stock. - -------------------------------------------------------------------------------- 13 <PAGE> 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 10, 1999, the following proposals were adopted by the margins indicated: 1. To elect a Board of Directors to hold office until their successors are elected and qualified. Number of Shares For Withheld William H. Gates 4,488,312,569 21,695,760 Paul G. Allen 4,488,088,199 21,920,130 Richard A. Hackborn 4,488,518,818 21,489,511 David F. Marquardt 4,383,706,485 126,301,844 William G. Reed, Jr. 4,488,313,322 21,695,007 Jon A. Shirley 4,481,013,698 28,994,631 2. To approve the adoption of the 1999 Stock Option Plan for Non-Employee Directors, including the reservation of 2,000,000 shares of common stock thereunder. For 3,235,830,137 Against 1,251,971,667 Abstain 22,203,713 Broker Non-vote 2,812 Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 27. Financial Data Schedule (B) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter ended December 31, 1999. Items 2, 3, and 5 are not applicable and have been omitted. - -------------------------------------------------------------------------------- 14 <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. Microsoft Corporation Date: February 11, 2000 By: /s/ John G. Connors ----------------------------------------- John G. Connors Senior Vice President, Finance and Administration; Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) - -------------------------------------------------------------------------------- 15 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <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 STATEMENT. </LEGEND> <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> JUN-30-2000 <PERIOD-START> JUL-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 17,843 <SECURITIES> 0 <RECEIVABLES> 3,284 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 22,020 <PP&E> 3,897 <DEPRECIATION> 2,158 <TOTAL-ASSETS> 45,093 <CURRENT-LIABILITIES> 10,504 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 18,878 <OTHER-SE> 15,711 <TOTAL-LIABILITY-AND-EQUITY> 45,093 <SALES> 11,496 <TOTAL-REVENUES> 11,496 <CGS> 1,468 <TOTAL-COSTS> 1,468 <OTHER-EXPENSES> 4,343 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 7,011 <INCOME-TAX> 2,384 <INCOME-CONTINUING> 4,627 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 4,627 <EPS-BASIC> 0.90 <EPS-DILUTED> 0.84 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

MU

https://www.sec.gov/Archives/edgar/data/723125/0001012870-00-000127.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, SlsGSeGVOmsTJlvxozcQ7Ga943oZPkJ9TO3huUSpqNE+unLokCMOhB6fg7geAlMG 6P9EwgrQV3kMeG+deamxpQ== <SEC-DOCUMENT>0001012870-00-000127.txt : 20000202 <SEC-HEADER>0001012870-00-000127.hdr.sgml : 20000202 ACCESSION NUMBER: 0001012870-00-000127 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991202 FILED AS OF DATE: 20000114 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: SEC FILE NUMBER: 001-10658 FILM NUMBER: 507582 BUSINESS ADDRESS: STREET 1: 8000 S FEDERAL WAY STREET 2: PO BOX 6 CITY: BOISE STATE: ID ZIP: 83716-9632 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, DC 20549 ___________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 2, 1999 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 83716-9632 (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 January 10, 2000, was 254,422,506 shares of Common Stock and 15,810,277 shares of Class A Common Stock. <PAGE> Part I. FINANCIAL INFORMATION Item 1. Financial Statements - ----------------------------- MICRON TECHNOLOGY, INC. Consolidated Balance Sheets (Dollars in millions, except for par value) <TABLE> <CAPTION> December 2, September 2, As of 1999 1999 - ---------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> ASSETS Cash and equivalents $ 441.6 $ 294.6 Liquid investments 1,444.8 1,318.9 Receivables 916.4 692.6 Inventories 504.1 365.7 Prepaid expenses 27.2 38.3 Deferred income taxes 93.4 119.9 -------- -------- Total current assets 3,427.5 2,830.0 Product and process technology, net 206.4 212.6 Property, plant and equipment, net 3,828.7 3,799.6 Other assets 118.8 123.0 -------- -------- Total assets $7,581.4 $6,965.2 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 883.6 $ 705.4 Deferred income 48.4 23.4 Equipment purchase contracts 64.2 81.5 Current portion of long-term debt 108.8 111.7 -------- -------- Total current liabilities 1,105.0 922.0 Long-term debt 1,501.5 1,527.5 Deferred income taxes 323.9 309.1 Other liabilities 81.4 74.2 -------- -------- Total liabilities 3,011.8 2,832.8 -------- -------- Minority interests 183.5 168.3 Commitments and contingencies Common Stock, $0.10 par value, authorized 1.0 billion shares, issued and outstanding 254.1 million and 252.2 million shares, respectively 25.4 25.2 Class A Common Stock, $0.10 par value, authorized 32 million shares, issued and outstanding 15.8 million shares 1.6 1.6 Additional capital 1,973.6 1,894.0 Retained earnings 2,386.8 2,045.4 Accumulated other comprehensive loss (1.3) (2.1) -------- -------- Total shareholders' equity 4,386.1 3,964.1 -------- -------- Total liabilities and shareholders' equity $7,581.4 $6,965.2 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 1 <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Operations (Dollars in millions, except for per share data) (Unaudited) <TABLE> <CAPTION> December 2, December 3, For the quarter ended 1999 1998 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> Net sales $1,584.4 $ 793.6 -------- ------- Costs and expenses: Cost of goods sold 770.7 677.7 Selling, general and administrative 167.6 103.0 Research and development 91.7 67.7 Other operating expense, net 22.4 7.8 -------- ------- Total costs and expenses 1,052.4 856.2 -------- ------- Operating income (loss) 532.0 (62.6) Interest income 23.2 -- Interest expense (31.7) (7.9) Other non-operating income, net 9.6 1.0 -------- ------- Income (loss) before income taxes and minority interests 533.1 (69.5) Income tax (provision) benefit (186.2) 27.6 Minority interests in net income (5.6) (4.3) -------- ------- Net income (loss) $ 341.3 $ (46.2) ======== ======= Earnings (loss) per share: Basic $ 1.27 $ (0.19) Diluted 1.19 (0.19) Number of shares used in per share calculations: Basic 269.2 245.7 Diluted 297.4 245.7 </TABLE> See accompanying notes to consolidated financial statements. 2 <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Cash Flows (Dollars in millions) (Unaudited) <TABLE> <CAPTION> December 2, December 3, For the three months ended 1999 1998 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 341.3 $ (46.2) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 229.5 189.5 Change in assets and liabilities, net of effects of acquisition Decrease (increase) in receivables (212.7) 112.3 Increase in inventories (138.5) (36.4) Increase in accounts payable and accrued expenses, net of plant and equipment payables 219.7 65.8 Other 109.4 (29.4) ---------- ---------- Net cash provided by operating activities 548.7 255.6 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of available-for-sale and held-to-maturity securities (737.7) (1,273.5) Proceeds from sales and maturities of securities 623.0 211.5 Expenditures for property, plant and equipment (219.8) (117.5) Other 1.4 (1.5) ---------- ---------- Net cash used for investing activities (333.1) (1,181.0) CASH FLOWS FROM FINANCING ACTIVITIES Payments on equipment purchase contracts (86.5) (73.9) Proceeds from issuance of common stock 51.9 519.1 Repayments of debt (34.3) (28.3) Cash received in conjunction with acquisition -- 681.1 Proceeds from issuance of debt -- 34.0 Other 0.3 2.3 ---------- ---------- Net cash provided by (used for) financing activities (68.6) 1,134.3 ---------- ---------- Net increase in cash and equivalents 147.0 208.9 Cash and equivalents at beginning of period 294.6 558.8 ---------- ---------- Cash and equivalents at end of period $ 441.6 $ 767.7 ========== ========== SUPPLEMENTAL DISCLOSURES Interest paid, net of amounts capitalized $ (35.0) $ (6.9) Income taxes refunded, net 86.4 183.2 Noncash investing and financing activities: Equipment acquisitions on contracts payable and capital leases 71.1 18.3 Cash received in conjunction with acquisition: Fair value of assets acquired $ -- $ 949.3 Liabilities assumed -- (138.0) Debt issued -- (836.0) Stock issued -- (656.4) ---------- ---------- $ -- $ 681.1 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 3 <PAGE> MICRON TECHNOLOGY, INC. Consolidated Statements of Comprehensive Income (Loss) (Dollars in millions) (Unaudited) <TABLE> <CAPTION> December 2, December 3, For the quarter ended 1999 1998 - --------------------------------------------------------------------------------------- <S> <C> <C> Net income (loss) $ 341.3 $ (46.2) Foreign currency translation adjustment -- (0.2) Unrealized gain on investments 0.7 -- ------- ------- Total comprehensive income (loss) $ 342.0 $ (46.4) ======= ======= </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 (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. Micron Technology, Inc. and its wholly-owned subsidiaries are collectively hereinafter referred to as "MTI." Micron Electronics, Inc., an approximately 61% owned subsidiary of the Company, is hereinafter referred to as "MEI." Recently issued accounting standards include Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," issued by the AICPA in March 1998 and Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," issued by the FASB in June 1998. SOP 98-1 requires companies to capitalize certain costs of computer software developed or obtained for internal use. The Company, which previously capitalized costs of purchased internal-use computer software and expensed costs of internally developed internal-use software as incurred, adopted the standard in the first quarter of 2000 for developmental costs incurred in that quarter and thereafter. The adoption did not have a material impact on the Company's results of operations. SFAS No. 133 requires that all derivatives be recorded as either assets or liabilities in the balance sheet and marked to market on an ongoing basis. SFAS No. 133 applies to all derivatives including stand-alone instruments, such as forward currency exchange contracts and interest rate swaps, or embedded derivatives, such as call options contained in convertible debt investments. Along with the derivatives, the underlying hedged items are also to be marked to market on an ongoing basis. These market value adjustments are to be included either in the statement of operations or as a component of comprehensive income, depending on the nature of the transaction. Implementation of SFAS No. 133 is required for the Company by the first quarter of 2001. The implementation of SFAS 133 is not expected to have a significant impact on the Company's future results of operations or financial position. These unaudited interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Form 10-K for the year ended September 2, 1999. <TABLE> <CAPTION> 2. Supplemental balance sheet information December 2, September 2, 1999 1999 - ---------------------------------------------------------------------------- Receivables - ---------------------------------------------------------------------------- <S> <C> <C> Trade receivables $ 854.4 $ 542.4 Income taxes receivable 11.6 100.8 Allowance for returns and discounts (31.0) (38.2) Allowance for doubtful accounts (12.4) (9.8) Other receivables 93.8 97.4 ------- ------- $ 916.4 $ 692.6 ======= ======= </TABLE> 5 <PAGE> Notes to Consolidated Financial Statements, continued <TABLE> Inventories - ---------------------------------------------------------------------------- <S> <C> <C> Finished goods $ 197.3 $ 136.3 Work in progress 246.9 173.6 Raw materials and supplies 76.9 71.5 Allowance for obsolescence (17.0) (15.7) ------- ------- $ 504.1 $ 365.7 ======= ======= </TABLE> <TABLE> Product and process technology - ---------------------------------------------------------------------------- <S> <C> <C> Product and process technology, at cost $ 328.7 $ 325.2 Less accumulated amortization (122.3) (112.6) -------- -------- $ 206.4 $ 212.6 ======== ======== </TABLE> <TABLE> Property, plant and equipment - ------------------------------------------------------------------------------ <S> <C> <C> Land $ 41.8 $ 42.2 Buildings 1,193.1 1,172.4 Equipment 4,203.8 4,074.4 Construction in progress 767.7 726.0 --------- ---------- 6,206.4 6,015.0 Less accumulated depreciation and amortization (2,377.7) (2,215.4) --------- ---------- $ 3,828.7 $ 3,799.6 ========= ========== </TABLE> As of December 2, 1999, property, plant and equipment included total unamortized costs of $708.3 million for the Company's semiconductor memory manufacturing facility in Lehi, Utah, of which $647.6 million has not been placed in service and is not being depreciated. Timing of the completion of the remainder of the Lehi facility is dependent upon market conditions. Market conditions which the Company expects to evaluate include, but are not limited to, worldwide market supply of and demand for semiconductor products and the Company's operations, cash flows and alternative uses of capital. The Company continues to evaluate the carrying value of the facility and as of December 2, 1999, it was determined to have no impairment. Depreciation expense was $213.6 million and $181.1 million for the first quarter of 2000 and 1999, respectively. <TABLE> <CAPTION> December 2, September 2, 1999 1999 - ---------------------------------------------------------------------------- Accounts payable and accrued expenses - ---------------------------------------------------------------------------- <S> <C> <C> Accounts payable $465.6 $453.1 Salaries, wages and benefits 150.9 95.4 Interest payable 26.6 33.9 Taxes payable other than income 52.9 33.4 Product and process technology payable 17.8 24.0 Income taxes payable 126.2 13.7 Other 43.6 51.9 ------ ------ $883.6 $705.4 ====== ====== </TABLE> 6 <PAGE> Notes to Consolidated Financial Statements, continued <TABLE> <CAPTION> Debt - ---------------------------------------------------------------------------------------------------- <S> <C> <C> Convertible subordinated notes payable, due October 2005, with an effective yield to maturity of 8.4%, net of unamortized discount of $62.7 million $ 677.3 $ 675.2 Convertible subordinated notes payable, due July 2004, interest rate of 7.0% 500.0 500.0 Subordinated notes payable, due October 2005, with an effective yield to maturity of 10.7%, net of unamortized discount of $36.9 million 173.1 171.9 Notes payable in periodic installments through July 2015, weighted average interest rate of 7.35% and 7.37%, respectively 228.9 259.0 Capitalized lease obligations payable in monthly installments through August 2004, weighted average interest rate of 7.69% and 7.52%, respectively 31.0 33.1 -------- -------- 1,610.3 1,639.2 Less current portion (108.8) (111.7) -------- -------- $1,501.5 $1,527.5 ======== ======== </TABLE> The convertible subordinated notes due October 2005 (the "Convertible Notes") with an effective yield to maturity of 8.4% have a face value of $740 million and a stated interest rate of 6.5%. The Convertible Notes are convertible into shares of the Company's common stock at $60 per share. The Company may call for the early redemption of the Convertible Notes between October 2000 and October 2002 if the price of the Company's common stock is at least $78 per share for a specified trading period. Subsequent to October 2002, the Convertible Notes are redeemable by the Company at an initial price of 103% which declines to 100% of the principal amount depending on the date of redemption. The Convertible Notes have not been registered with the Securities and Exchange Commission, however the holder has certain registration rights. The 7.0% convertible subordinated notes due July 2004 are convertible into shares of the Company's common stock at $67.44 per share. The Company may call for the early redemption of the notes through July 2001 if the price of the Company's common stock is at least $87.67 per share for a specified trading period. Subsequent to July 2001, the notes are redeemable by the Company at an initial price of 103% which declines to 100% of the principal amount depending on the date of redemption. The subordinated notes due October 2005 with a yield to maturity of 10.7% have a face value of $210 million and stated interest rate of 6.5%. MEI has a $100 million unsecured credit agreement expiring in June 2001. Under the credit agreement, MEI is subject to certain financial and other covenants including certain financial ratios and limitations on the amount of dividends paid by MEI. As of December 2, 1999, MEI had no borrowings outstanding under the agreement. MTI terminated its secured revolving credit agreement effective December 2, 1999. 3. Other operating expense, net Other operating expense for the first quarter of 2000 includes a net pre- tax charge of $18.2 million from the write down and disposal of semiconductor operations equipment. 7 <PAGE> Notes to Consolidated Financial Statements, continued 4. Other non-operating income, net Other non-operating income for the first quarter of 2000 includes a $9.7 million gain on the contribution by MTI of 1.9 million shares of MEI Common Stock (the "Contribution") to the Micron Technology Foundation. The Contribution decreased MTI's ownership interest in MEI from approximately 63% to 61%. Selling, general and administrative expense in the first quarter of 2000 reflects an $18.7 million charge for the market value of the stock contributed. 5. Income tax provision (benefit) The effective tax rate for the first quarter of 2000 and 1999 approximated 35% and 40%, respectively. The reduction in the effective tax rate is principally a result of favorable tax treatment on permanently reinvested earnings from certain of the Company's foreign operations. 6. Earnings (loss) per share Basic earnings per share is calculated using the average number of common shares outstanding. Diluted earnings per share is computed on the basis of the average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock method" and convertible debentures using the "if-converted" method. Diluted earnings per share further assumes the conversion of MTI's convertible subordinated notes for the periods in which they were outstanding, unless such assumed conversion would not be dilutive. <TABLE> <CAPTION> December 2, December 3, For the quarter ended 1999 1998 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net income (loss) available for common shareholders, Basic $341.3 $ (46.2) ====== ======= Net income (loss) available for common shareholders, Diluted $355.0 $ (46.2) ====== ======= Weighted average common stock outstanding - Basic 269.2 245.7 Net effect of dilutive stock options 8.4 -- Net effect of dilutive convertible subordinated notes 19.8 -- ------ ------- Adjusted weighted average common stock - Diluted 297.4 245.7 ====== ======= Basic income (loss) per share $ 1.27 $ (0.19) ====== ======= Diluted income (loss) per share $ 1.19 $ (0.19) ====== ======= </TABLE> The average shares listed below were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented: <TABLE> <CAPTION> December 2, December 3, For the quarter ended 1999 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Employee stock plans 0.9 27.4 8.4% convertible subordinated notes payable due 2005 -- 8.8 7.0% convertible subordinated notes payable due 2004 -- 7.4 </TABLE> 8 <PAGE> Notes to Consolidated Financial Statements, continued 7. Acquisition On September 30, 1998, MTI completed the acquisition (the "Acquisition") of substantially all of the memory operations of Texas Instruments Incorporated ("TI") for a net purchase price of approximately $832.8 million. The Acquisition was consummated through the issuance of debt and equity securities. In connection with the transaction, MTI issued 28.9 million shares of MTI common stock, $740 million principal amount of Convertible Notes and $210 million principal amount of subordinated notes. In addition to TI's net memory assets, MTI received $681.1 million in cash. The Acquisition was accounted for as a business combination using the purchase method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. MTI and TI also entered into a ten-year, royalty- free, life-of-patents, patent cross license that commenced on January 1, 1999. MTI made royalty payments to TI under a prior cross license agreement for operations through December 31, 1998. The following unaudited pro forma information presents the consolidated results of operations of the Company for the first quarter of 1999 as if the Acquisition had taken place at the beginning of fiscal 1999: <TABLE> <CAPTION> December 3, For the quarter ended 1998 - ------------------------------------------------------------------- <S> <C> Net sales $ 848.9 Net loss (63.4) Basic loss per share (0.23) Diluted loss per share (0.23) </TABLE> These pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the Acquisition occurred on the dates indicated, or which may result in the future. 8. Equity investment On October 19, 1998, Intel Corporation ("Intel") invested $500 million in the Company and as a result holds approximately 15.8 million shares of MTI's non-voting Class A Common Stock. The Class A Common Stock represented approximately 6% of MTI's outstanding common stock as of December 2, 1999. The Class A Common Stock will automatically be converted into MTI's common stock, subject to certain adjustments, upon a transfer to a holder other than Intel or a 90% owned subsidiary of Intel. As of December 2, 1999, the Class A Common Stock was convertible into common stock on a one-to-one basis. The Class A Common Stock issued to Intel has not been registered under the Securities Act of 1933, as amended, and is therefore subject to certain restrictions on resale. MTI and Intel entered into a securities rights and restrictions agreement which provides Intel with certain registration rights and places certain restrictions on Intel's voting rights and other activities with respect to the shares of MTI Class A Common Stock or common stock. Intel also has the right to designate a director nominee, acceptable to MTI's Board of Directors. Pursuant to its agreement with Intel, MTI committed to the development of direct Rambus(R) DRAM ("RDRAM") and to make available to Intel a certain percentage of its semiconductor memory output over a five-year period, subject to certain limitations. 9. Joint Ventures MTI has interests in two joint venture wafer fabrication facilities: TECH Semiconductor Singapore Pte. Ltd. ("TECH") and KMT Semiconductor Limited ("KMT"). TECH, which operates in Singapore, is a joint venture among MTI, the Singapore Economic Development Board, Canon Inc. and Hewlett-Packard Company. KMT, 9 <PAGE> Notes to Consolidated Financial Statements, continued which operates in Japan, is a joint venture between MTI and Kobe Steel, Ltd. TECH and KMT are collectively referred to herein as the "JVs". Subject to certain terms and conditions, MTI has agreed to purchase the entire output of the JVs. MTI is a party to various agreements with the JVs whereby MTI provides technology, engineering support, training and information system support to the JVs. MTI also performs assembly and test services on product manufactured by the JVs. All transactions with the JVs are recognized as part of the net cost of products obtained from the JVs. The net cost of products purchased from the JVs, including the amortization on the value of the JV supply agreements, amounted to $113.6 million and $62.1 million for KMT and TECH, respectively, for the first quarter of 2000, and $24.3 million and $8.5 million for the first quarter of 1999. Receivables from KMT and TECH were $15.1 million and $54.6 million and payables were $76.8 million and $36.1 million, respectively, as of December 2, 1999. As of September 2, 1999, receivables from KMT and TECH were $19.1 million and $47.2 million and payables were $24.4 million and $32.0 million, respectively. 10. Operating Segment Information The Company has two reportable segments based on the nature of its operations and products offered to customers: semiconductor operations and PC operations. The semiconductor operations segment's primary product is DRAM. The PC operations segment's primary products include desktop and notebook PC systems, multiprocessor network servers and hardware services. Segment operating results are measured based on operating income (loss). Intersegment sales primarily reflect sales of memory products from the semiconductor operations segment to the PC operations segment and, to a lesser extent, sales of computers from the PC operations segment to the semiconductor operations segment. Intersegment sales are measured based on contract prices as internally reported. Sales to two of the Company's major PC OEM customers each approximated 15% of the Company's net sales of semiconductor memory products in the first quarter of 2000. 10 <PAGE> Notes to Consolidated Financial Statements, continued <TABLE> <CAPTION> December 2, December 3, For the quarter ended 1999 1998 - ------------------------------------------------------------------------------- Net Sales - ------------------------------------------------------------------------------- <S> <C> <C> Semiconductor operations External $1,321.9 $426.8 Intersegment 17.6 10.7 -------- ------ $1,339.5 $437.5 PC operations External $ 262.4 $363.6 Intersegment 1.2 .6 -------- ------ $ 263.6 $364.2 All other - external $ 0.1 $ 3.2 Total segments $1,603.2 $804.9 Elimination of intersegment (18.8) (11.3) -------- ------ Total consolidated net sales $1,584.4 $793.6 ======== ====== <CAPTION> Operating income (loss) - ------------------------------------------------------------------------------- <S> <C> <C> Semiconductor operations $ 564.9 $ (57.0) PC operations (31.2) 2.0 All other (1.8) (7.4) ------- ------- Total segments $ 531.9 $ 62.4) Elimination of intersegment 0.1 (0.2) ------- ------- Total consolidated operating income (loss) $ 532.0 $ (62.6) ======= ======= </TABLE> Segment assets consist of assets that are identified to reportable segments and reviewed by the chief operating decision-makers. Included in segment assets are cash, investments, accounts receivable, inventory and property, plant and equipment. <TABLE> <CAPTION> December 2, September 2, Segment assets as of 1999 1999 - ----------------------------------------------------------------------------- <S> <C> <C> Semiconductor operations $6,704.2 $6,001.9 PC operations 510.0 533.9 All other 15.3 15.5 -------- -------- 7,229.5 6,551.3 Elimination of intersegment (87.0) (74.8) -------- -------- $7,142.5 $6,476.5 ======== ======== <CAPTION> Reconciliation to total assets - ------------------------------------------------------------------------------ <S> <C> <C> Total segment assets $7,142.5 $6,476.5 Prepaid expenses 27.2 38.3 Deferred taxes 93.4 119.9 Product and process technology 206.4 212.6 Other assets (net of segment assets) 111.9 117.9 -------- -------- Total consolidated assets $7,581.4 $6,965.2 ======== ======== </TABLE> 11 <PAGE> Notes to Consolidated Financial Statements, continued 11. Commitments and contingencies As of December 2, 1999, the Company had commitments of approximately $911.1 million for equipment purchases and $65.1 million for the construction of buildings. The Company has from time to time received, and may in the future receive, communications alleging that its products or its processes 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 alleged 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 a party to various other legal actions arising out of the normal course of business, none of which are expected to have a material adverse effect on the Company's financial position or results of operations. 12 <PAGE> Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- Micron Technology, Inc. and its subsidiaries (hereinafter referred to collectively as the "Company") principally design, develop, manufacture and market semiconductor memory products and personal computer ("PC") systems. Micron Technology, Inc. and its wholly-owned subsidiaries are hereinafter referred to collectively as "MTI."The Company's PC operations are operated through Micron Electronics, Inc. ("MEI"), a 61% owned, publicly-traded subsidiary of MTI. The following discussion contains trend information and other forward- looking statements (including, for example, statements regarding future operating results, future capital expenditures and facility expansion, new product introductions, technological developments, acquisitions and the effect thereof and industry trends) 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 include, but are not limited to, those identified in "Certain Factors." This discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended September 2, 1999. All period references are to the Company's fiscal periods ended December 2, 1999, September 2, 1999, or December 3, 1998, unless otherwise indicated. All per share amounts are presented on a diluted basis unless otherwise stated. Results of Operations <TABLE> <CAPTION> First Quarter ---------------------------------------------------- 2000 1999 ---------------------------------------------------- (dollars in millions, except per share data) <S> <C> <C> <C> <C> Net sales: Semiconductor operations $1,339.5 84.5% $ 437.5 55.1% PC operations 263.6 16.6% 364.2 45.9% All other 0.1 0.0% 3.2 0.4% Intersegment (18.8) (1.1)% (11.3) (1.4)% -------- ----- ------- ----- Consolidated net sales $1,584.4 100.0% $ 793.6 100.0% ======== ===== ======= ===== Operating income (loss): Semiconductor operations $ 564.9 $ (57.0) PC operations (31.2) 2.0 All other (1.8) (7.4) Intersegment 0.1 (0.2) -------- ------- Consolidated operating income (loss) $ 532.0 $ (62.6) ======== ======= Net income (loss) $ 341.3 $ (46.2) ======== ======= Earnings (loss) per share $ 1.19 $ (0.19) ======== ======= </TABLE> The net loss for the fourth quarter of 1999 was $17 million, or $0.07 per share, on net sales of $1,081 million. Intersegment sales represent sales between different segments of the Company and are eliminated to arrive at consolidated net sales. Intersegment sales for the first quarter of 2000 and 1999 are primarily comprised of sales from the Company's semiconductor operations segment to the Company's PC operations segment. (See "Notes to Consolidated Financial Statements - Operating Segment Information.") 13 <PAGE> Net Sales Consolidated net sales for the first quarter of 2000 were higher by 100% compared to the first quarter of 1999, principally due to an increase in the volume of megabits of memory sold. The increase in net sales for the first quarter of 2000 as compared to the first quarter of 1999 was partially offset by a decline in both the volume and average price per unit of PC systems sold. Average selling prices per megabit of semiconductor memory generally declined during the second half of 1999 but recovered during the first quarter of 2000 to reach average selling prices similar to those in the first quarter of 1999. Consolidated net sales for the first quarter of 2000 increased by 47% compared to the fourth quarter of 1999, principally due to a 70% increase in average selling prices per megabit of memory. Net sales from semiconductor operations for the first quarter of 2000 increased by 206% as compared to the first quarter of 1999 due primarily to a 227% increase in total megabits of semiconductor memory sold. This increase in shipments was made possible by an increase in product available from continued improvements in manufacturing efficiencies through ongoing transitions to successive reduced die size ("shrink") versions of existing memory products, shifts in the Company's mix of semiconductor memory products to higher average density products and additional output from the ramp of the Company's international operations and joint ventures. Net sales from semiconductor operations increased by 63% in the first quarter of 2000 as compared to the fourth quarter of 1999, primarily due to an approximate 70% increase in the average selling prices of semiconductor memory products. The Company expects average selling prices for semiconductor memory products to decrease in the second quarter of 2000 as compared to the first quarter. The level of megabit sales remained relatively constant comparing the first quarter of 2000 with the fourth quarter of 1999. The level of megabit sales achieved in the first quarter was made possible primarily by production gains while the level of megabit sales in the fourth quarter was attributable in part to a reduction in finished goods inventory. Finished goods inventory levels at the end of the first quarter of 2000 were higher than at the end of the fourth quarter of 1999, but remained constant in terms of weeks of production. The Company's primary memory product in the first quarter of 2000 was the 64 Meg Synchronous DRAM ("SDRAM"), which comprised approximately 70% of the net sales of semiconductor memory for the period. The 64 Meg SDRAM comprised approximately 56% and 70% of the net sales of semiconductor memory for the first and fourth quarters of 1999, respectively. Net sales from the Company's PC operations for the first quarter of 2000 decreased by approximately 28% as compared to the first quarter of 1999 primarily due to a 26% decrease in unit sales and to a lesser extent due to a 9% decrease in overall average selling prices for the Company's PC systems. The decrease in unit sales for the first quarter of 2000 as compared to the first quarter of 1999 is primarily due to lower consumer and government PC unit sales, together with a 44% reduction in notebook shipments. The significant decline in the consumer business was due in part to the Company's ongoing effort to focus its PC business resources on increasing the levels of sales in the small business, commercial and government sectors, which efforts have not yet resulted in the expected increase in sales. The decline in government sector sales reflects increased pricing competition and lower than usual purchases by federal government agencies. The decline in overall average selling prices is primarily attributed to price competition in the market served by the Company's desktop product line. Net sales from PC operations for the first quarter of 2000 decreased by approximately 2% as compared to the fourth quarter of 1999 primarily due to a 4% decrease in unit sales. The decrease in unit sales is primarily due to a 16% decrease in notebook shipments. Gross Margin <TABLE> <CAPTION> First Quarter ------------------------------ 2000 % Change 1999 ------------------------------ <S> <C> <C> <C> Gross margin $813.7 602.1% $115.9 as a % of net sales 51.4% 14.6% </TABLE> 14 <PAGE> The increase in the Company's consolidated gross margin for the first quarter of 2000 as compared to the first quarter of 1999 is attributable to reductions in the Company's per megabit costs in its semiconductor operations. The Company's consolidated gross margin percentage for the fourth quarter of 1999 was 21%. The increase in gross margin for the first quarter of 2000 as compared to the fourth quarter of 1999 resulted primarily from an approximate 70% increase in average selling prices for the Company's semiconductor memory products. The gross margin percentage for the Company's semiconductor operations for the first quarter of 2000 was 58%, compared to 14% for the first quarter of 1999. The gross margin increase was due to comparative decreases in per megabit costs which were achieved primarily through continued improvements in manufacturing efficiencies and improved cost on products purchased from MTI's joint ventures. Decreases in per megabit manufacturing costs were achieved principally through transitions to shrink versions of existing products and shifts in the Company's mix of semiconductor memory products to a higher average density. The gross margin percentage on sales of semiconductor memory products for the fourth quarter of 1999 was 23%. The increase in gross margin percentage for semiconductor memory products sold in the first quarter of 2000 as compared to the fourth quarter of 1999 was primarily the result of the 70% increase in average selling prices per megabit of memory. Subject to certain terms and conditions, MTI has agreed to purchase the entire output from two joint venture wafer fabrication facilities, TECH Semiconductor Singapore Pte. Ltd. ("TECH") and KMT Semiconductor Limited ("KMT"). TECH and KMT are collectively referred to herein as the "JVs." The cost of products purchased from the JVs is subject to significant fluctuations, based in part on MTI's average selling prices. The Company expects the cost of products purchased from the JVs to be higher in the second quarter of 2000 than in the first quarter. MTI is a party to various agreements with the JVs whereby MTI provides technology, engineering support, training and information systems support to the JVs. MTI also performs assembly and test services on product manufactured by the JVs. All transactions with the JVs are recognized as part of the net cost of products purchased from the JVs and as such can impact the Company's gross margin percentage. The Company expects the gross margin on products purchased from the JVs to be lower in the second quarter of 2000 than in the first quarter. The gross margin percentage for the Company's PC operations for the first quarter of 2000 was 14%, compared with 15% and 18%, respectively, in the first and fourth quarters of 1999. The decrease for the PC operations gross margin percentage comparing the first quarter of 2000 to the first quarter of 1999 is due to the 9% decrease in average selling prices for the Company's PC systems. The decrease in PC operations gross margin percentage for the first quarter of 2000 as compared to the fourth quarter of 1999 is primarily due to increased costs for materials and increased pricing pressure in the government sector. Selling, General and Administrative <TABLE> <CAPTION> First Quarter ------------------------------ 2000 % Change 1999 ------------------------------ <S> <C> <C> <C> Selling, general and administrative $167.6 62.7% $103.0 as a % of net sales 10.6% 13.0% </TABLE> Selling, general and administrative expenses increased in the first quarter of 2000 as compared to the first and fourth quarters of 1999 primarily as a result of a $19 million charge for the market value of MEI common stock contributed by MTI to the Micron Technology Foundation, a higher level of performance based compensation costs for the Company's semiconductor operations and increased advertising expense for the Company's PC operations. Additionally, the increase in selling, general and administrative expense for the first quarter of 2000 as compared to the first quarter of 1999 reflects a higher level of personnel expense for an increased number of administrative 15 <PAGE> employees associated with semiconductor and PC operations. Selling, general and administrative expenses for the first quarter of 2000 increased by 26% as compared to the fourth quarter of 1999. The Company expects selling, general and administrative expenses to remain at approximately the same level as the first quarter of 2000 for the remainder of the year. Research and Development <TABLE> <S> <C> First Quarter ----------------------------- 2000 % Change 1999 ----------------------------- Research and development $91.7 35.5% $67.7 as a % of net sales 5.8% 8.5% </TABLE> Substantially all the Company's research and development efforts relate to its semiconductor operations. Research and development expenses vary primarily with personnel costs, the cost of advanced equipment dedicated to new product and process development and the number of development wafers processed. Research and development efforts are focused on .15 micron line widths process technology, which is the primary determinant in transitioning to next generation and future products. Simultaneous research and development efforts across multiple products prepare the Company for future product introductions and allow current products to utilize the advanced process technology to achieve higher performance at lower production costs. Application of advanced process technology currently is concentrated on design of shrink versions of the Company's 64 Meg and 128 Meg SDRAMs and on design and development of the Company's 256 Meg and 512 Meg SDRAMs, Rambus(R) DRAM ("RDRAM"), Double Data Rate ("DDR") SDRAM, Flash and SRAM memory products. Other research and development efforts are currently devoted to the design and development of embedded memory products, system-on-a-chip ("SOC") solutions, and memory technology enablement. Other Operating Expense, net Other operating expense for the first quarter of 2000 includes a net pre- tax charge of $18 million from the write down and disposal of semiconductor operations equipment. Other Non-Operating Income, net Other non-operating income for the first quarter of 2000 includes a $10 million gain on the contribution by MTI of 1.9 million shares of MEI Common Stock (the "Contribution") to the Micron Technology Foundation. The Contribution decreased MTI's ownership interest in MEI from approximately 63% to 61%. Selling, general and administrative expense in the first quarter of 2000 reflects a $19 million charge for the market value of the stock contributed. Income Tax Provision (Benefit) The effective tax rates for the first quarter of 2000 and 1999 approximated 35% and 40%, respectively. The reduction in the effective tax rate is principally a result of favorable tax treatment on permanently reinvested earnings from certain of the Company's foreign operations. Taxes on earnings of certain foreign operations and domestic subsidiaries not consolidated for tax purposes may cause the effective tax rate to vary significantly from period to period. Recently Issued Accounting Standards Recently issued accounting standards include Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," issued by the AICPA in March 1998 and Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," issued by the FASB in June 1998. 16 <PAGE> SOP 98-1 requires companies to capitalize certain costs of computer software developed or obtained for internal use. The Company, which previously capitalized costs of purchased internal-use computer software and expensed costs of internally developed internal-use software as incurred, adopted the standard in the first quarter of 2000 for developmental costs incurred in that quarter and thereafter. The adoption did not have a material impact on the Company's results of operations. SFAS No. 133 requires that all derivatives be recorded as either assets or liabilities in the balance sheet and marked to market on an ongoing basis. SFAS No. 133 applies to all derivatives including stand-alone instruments, such as forward currency exchange contracts and interest rate swaps, or embedded derivatives, such as call options contained in convertible debt investments. Along with the derivatives, the underlying hedged items are also to be marked to market on an ongoing basis. These market value adjustments are to be included either in the statement of operations or as a component of comprehensive income, depending on the nature of the transaction. Implementation of SFAS No. 133 is required for the Company by the first quarter of 2001. The implementation of SFAS 133 is not expected to have a significant impact on the Company's future results of operations or financial position. Liquidity and Capital Resources As of December 2, 1999, the Company had cash and liquid investments totaling $1.9 billion, representing an increase of $273 million during the first three months of 2000. The Company's principal source of liquidity during the first three months of 2000 was net cash flow from operations of $549 million. The principal use of funds during the first three months of 2000 was $220 million for property, plant and equipment expenditures. The Company believes that in order to develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, it must continue to invest in manufacturing technology, facilities and capital equipment, research and development, and product and process technology. The Company currently estimates it will spend approximately $1.5 billion in fiscal 2000 for purchases of equipment and for construction and improvement of buildings, of which it has spent approximately $291 million to date. As of December 2, 1999, the Company had entered into contracts extending into fiscal 2001 for approximately $911 million for equipment purchases and approximately $65 million for the construction of facilities. As of December 2, 1999, approximately $363 million of the Company's consolidated cash and liquid investments were held by MEI. Cash generated by MEI is not readily available to finance operations or other expenditures of MTI's semiconductor memory operations. MEI has a $100 million unsecured credit agreement, expiring June 2001 which contains certain restrictive covenants pertaining to MEI, including certain financial ratios and limitations on the amount of dividends declared or paid by the Company. As of December 2, 1999, MEI had no borrowings outstanding under the agreement. MTI terminated its secured revolving credit agreement effective December 2, 1999. Year 2000 The Company did not experience an interruption of its operations as a consequence of the transition from the year 1999 to the year 2000. The Company incurred aggregate incremental costs of approximately $6.4 million to complete its Year 2000 compliance programs. 17 <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 September 2, 1999, 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 semiconductor industry has a history of declining average sales prices as products mature. Long-term average decreases in sales prices for semiconductor memory products have approximated 30% on an annualized basis; however, significant fluctuations from this rate have occurred from time to time, including in recent periods. 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. Growth in worldwide supply outpaced growth in worldwide demand in recent years, resulting in a significant decrease in average selling prices for the Company's semiconductor memory products. The semiconductor industry in general and the DRAM market in particular, experienced a severe downturn from mid 1996 through 1999. Average per megabit prices declined approximately 37% comparing 1999 to 1998, following a 60% decline comparing 1998 to 1997 and a 75% decline comparing 1997 to 1996. Although the Company experienced improvements in average per megabit prices in the first quarter of 2000 as compared to the fourth quarter of 1999, the Company is unable to predict future prices for its products. In the event that average selling prices decline at a faster rate than the rate at which the Company is able to decrease per unit manufacturing costs, the Company's operations, cash flows and financial condition could be adversely affected. The Company and its competitors are seeking improved yields, smaller die size and fewer mask levels in their product designs. These improvements could result in a significant increase in worldwide supply of semiconductor memory devices which could lead to further downward pressures on prices. The increase in worldwide semiconductor memory production resulting from the Company's full utilization of its international wafer fabrication operations and the transfer of its product and process technology to these operations may result in further downward pricing pressure on semiconductor memory products. In addition, consolidation by competitors in the semiconductor memory industry could provide competitors with greater capital resources and create the potential for greater worldwide investment in semiconductor memory capacity, which could exert further downward pressure on prices. Recent evidence of improved economic conditions in Asia could increase capital flows to that region and result in increased investment by Asian DRAM manufacturers to finance technology advancements and expansion projects, potentially increasing worldwide supply and leading to further downward pricing pressure. The PC market continues to consume the majority of the Company's semiconductor production. In the first quarter of 2000, approximately 87% of the Company's sales of semiconductor memory products were sold into the PC or peripheral markets. DRAMs are the most widely used semiconductor memory component in most PC systems. Should the rate of growth for PC industry units decrease or the rate of growth in the amount of memory per PC system decrease, the growth rate for sales of 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 marketing or inventory management strategies or end user demand, which are significant factors that influence prices for the Company's semiconductor memory products. Over the past several years, the Company's productivity gains have continued to increase its semiconductor memory output. In recent periods, the Company has sold this additional semiconductor memory output by increasing its market share with several of its larger OEM customers and through sales to a broader customer base including accounts of lesser size and potentially lesser financial stability. In the event the Company is unable to further increase its market share with OEM customers, broaden its customer base, or if the Company experiences 18 <PAGE> reductions in the level of OEM orders, the Company's results of operations and cash flows could be adversely affected. The Company's semiconductor operations experience intense competition from a number of companies, including Hyundai Electronics Industries Co., Ltd., Infineon Technologies AG, NEC Corporation and Samsung Semiconductor, Inc. Some of the Company's competitors are very large corporations or conglomerates which may have greater resources and a better ability to withstand downturns in the semiconductor memory market. Additional mergers or consolidation in the industry could put the Company at a further disadvantage with respect to such competitors. The semiconductor memory industry is characterized by frequent product introductions and enhancements. 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. As the semiconductor industry transitions to higher bandwidth products including DDR SDRAM and RDRAM, the Company may encounter difficulties in achieving the semiconductor manufacturing efficiencies that it has historically achieved. The Company's productivity levels, die per wafer yields and in particular, backend assembly and test equipment requirements are expected to be affected by a transition to higher bandwidth products, likely resulting in higher per megabit production costs. There can be no assurance that the Company will successfully transition to these products or that it will be able to achieve its historical rate of cost per megabit reductions. The Company is engaged in ongoing efforts to enhance its production processes to reduce per unit costs by reducing the die size of existing products. The result of such efforts has generally led to significant increases in megabit production. There can be no assurance that the Company will be able to maintain or approximate the rate of increase in megabit production at a level approaching that experienced in recent years 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 latest shrink versions of existing devices or new generation devices to commercial volumes. The raw materials utilized by the Company's semiconductor operations generally must meet exacting product specifications. The Company generally uses multiple sources of supply, but the number of suppliers capable of delivering certain raw materials is very limited. The availability of raw materials, such as silicon wafers, photolithography reticles, certain chemicals, lead frames and molding compound, may decline due to the increase in worldwide semiconductor manufacturing. Although shortages have occurred from time to time and lead times in the industry have been extended on occasion, to date the Company has not experienced any significant interruption in operations as a result of a difficulty in obtaining raw materials for its semiconductor operations. Interruption of any one raw material source could adversely affect the Company's operations. Moreover, interruption of manufacturing due to any cause could materially adversely affect the Company's results of operations. Subject to certain terms and conditions, MTI has agreed to purchase the entire output of the JVs. Historically, the JVs have required external financing to fund operations and to transition to the latest generation technologies in a timely or efficient manner. The JVs are also dependent on certain key personnel and on a limited number of sources for certain raw materials. In the event either of the JVs are unable to secure required external financing, experience a loss of key personnel, or incur significant interruption in the delivery of raw materials, the Company would experience a reduction in supply of product from the JVs. Any reduction of supply, regardless of cause, could adversely affect the Company's results of operations and cash flows. The JVs also rely on Texas Instruments Incorporated ("TI") computer networks and information technology services purchased from TI. If unforeseen difficulties are encountered in transitioning the JVs away from TI's software, hardware or services or if TI fails to perform its service agreement with the JVs before the JVs are ready to transition to new systems, JV production could be impacted and the Company's results of operations could be adversely affected. The semiconductor and PC industries have experienced a substantial amount of litigation regarding patent and other intellectual property rights. From time to time, third parties have asserted, and may in the future assert, 19 <PAGE> that the Company's products or its processes infringe product or process technology rights held by such parties. 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. The Company is unable to predict whether these license agreements can be obtained or renewed on terms acceptable to the Company. The Company is currently involved in litigation to enforce patents held by the Company and to defend the Company against claimed infringement of the rights of others. Adverse determinations that the Company's manufacturing processes or products have infringed the product or process rights held by others could subject the Company to significant liabilities to 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. The Company's PC operations, through MEI, participate in a highly competitive industry characterized by intense pricing pressure, generally low gross margin percentages, rapid technological advances in hardware and software, frequent introduction of new products and rapidly declining component costs. Many of the Company's PC competitors have experienced greater growth rate, have greater brand name recognition and market share, offer broader product lines and have substantially greater financial, technical, marketing and other resources than the Company. The Company's PC competitors may also benefit from component volume purchasing and product and process technology license arrangements that are more favorable in terms of pricing and availability than the Company's arrangements. In addition, the Company may be at a relative cost disadvantage to certain of its competitors as a result of the Company's U.S. dollar denominated purchases of PC components during a period of relative weakening of the U.S. dollar. The failure of the Company to compete effectively in the PC market could have a material adverse effect on the Company's results of operations and financial position. The Company's PC operations compete with a number of PC manufacturers, which sell their products primarily through direct channels, including Dell Computer Corporation and Gateway 2000, Inc. The Company also competes with PC manufacturers, such as Apple Computer, Inc., Compaq Computer Corporation, Hewlett-Packard Company, International Business Machines Corporation ("IBM"), NEC Corporation and Toshiba Corporation among others. Several of these manufacturers, which have traditionally sold their products through national and regional distributors, dealers and value added resellers and retail stores now sell their products through the direct channel. In addition, the Company expects to face increased competition in the U.S. direct sales market from foreign PC suppliers and from foreign and domestic suppliers of PC products that decide to implement, or devote additional resources to, a direct sales strategy. In order to gain an increased share of the United States PC direct sales market, these competitors may effect a pricing strategy that is more aggressive than the current pricing in the direct sales market or may have pricing strategies influenced by relative fluctuations in the U.S. dollar compared to other currencies. The Company continues to experience significant pressure on its PC operating results as a result of intense competition in the PC industry and consumer expectations of more powerful PC systems at lower prices. MEI's e-services initiatives are designed around four key areas: web hosting, e-commerce, connectivity and computer hardware and desktop management. The offering of e-services increases the complexity of the Company's PC operations and may place a significant strain on MEI's operating, financial and managerial resources. There can be no assurance that MEI's resources will be adequate to support these initiatives. Furthermore, web hosting and connectivity are areas that are extremely competitive and subject to rapid changes in technology. A large number of companies, including Verio Inc. and Concentric Network Corporation, offer e-services similar to those provided by the Company. Large diversified companies such as Intel Corporation ("Intel"), IBM and AT&T Corp. have indicated their intent to enter into the e-services market, which will intensify the competition. Many of these competitors have greater financial resources, strategic relationships, brand recognition and a larger customer base than MEI, any or all of which may prove critical for success in the e-service market. There can be no assurance that the Company will successfully compete in this market or that its efforts to succeed in this market will not diminish its ability to compete effectively in the PC market. 20 <PAGE> MEI's past operating results have been, and its future operating results may be, subject to seasonality and other fluctuations, on a quarterly and an annual basis, as a result of a wide variety of factors, including, but not limited to, industry competition, MEI's ability to accurately forecast demand and selling prices for its PC products, fluctuating market pricing for PCs, seasonal government purchasing cycles, inventory obsolescence, MEI's ability to effectively manage inventory levels, changes in product mix, manufacturing and production constraints, fluctuating component costs, the effects of product reviews and industry awards, critical component availability, seasonal cycles common in the PC industry, the timing of new product introductions by MEI and its competitors and global market and economic conditions. MEI's operating results could have a material impact on the Company's consolidated operating results. The Company is dependent upon a limited number of key management and technical personnel. In addition, the Company's future success will depend in part upon its ability to attract and retain highly qualified personnel in its worldwide operations particularly as it adds different product types to its product line, which require parallel design efforts and significantly increase the need for highly skilled technical personnel. The Company competes for such personnel with other companies, academic institutions and government entities. The Company has experienced, and expects to continue to experience, recruitment of its existing personnel by other employers. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel. Any loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on the Company's business and results of operations. International sales comprised approximately 39% and 27% of the Company's consolidated net sales in the first quarter of 2000 and 1999, respectively. The Company expects international sales to continue to increase as a result of increased production by its international operations. International sales and operations are subject to a variety of risks, including those arising from fluctuations in currency exchange rates, import tariffs and export duties, changes to import and export regulations, possible restrictions on the repatriation and other transfer of funds, longer customer payment terms, greater difficulty in collecting accounts receivable, the burdens and costs of compliance with a variety of international laws and regulations, and, in certain instances, political and economic instability. While to date these factors have not had a significant adverse impact on the Company's results of operations, there can be no assurance that there will not be such an impact in the future. The only portion of the Company's workforce subject to collective bargaining agreements is based in Italy. The Company has experienced minimal interruptions in work flow as a result of union activity. While to date such interruptions have not had a material impact on the Company's business or results of operations, there can be no assurance that a future interruption, if any, would not have an adverse effect on the Company's business or results of operations. Historically, the Company has reinvested substantially all cash flow from its semiconductor operations in capacity expansion and enhancement 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. If for any extended period of time 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. There can be no assurance that, if needed, 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 could 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. Cash generated by MEI is not readily available to finance operations or other expenditures of MTI's semiconductor operations. As of December 2, 1999, TI and Intel held an aggregate of 44,743,369 shares of common stock, representing 17% of the Company's total outstanding common stock. These shares have not been registered with the Securities and Exchange Commission ("SEC"), however TI and Intel each have registration rights. Until such time as TI and Intel substantially reduce their holdings of Company common stock, the Company may be hindered in obtaining new equity capital. As of December 2, 1999, the Company also had outstanding $500 million of convertible subordinated notes that were issued in an SEC registered offering in June 1997 that are convertible into 7,413,997 shares of common stock. TI holds notes with a face value of $740 million which are convertible into 12,333,333 21 <PAGE> shares of common stock. TI's resale of these notes could limit the Company's ability to raise capital through the issuance of additional convertible debt instruments. 22 <PAGE> Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- Substantially all of the Company's liquid investments and long-term debt are at fixed interest rates; therefore, the fair value of these instruments is affected by changes in market interest rates. However, substantially all of the Company's liquid investments mature within one year. As a result, the Company believes that the market risk arising from its holdings of financial instruments is minimal. As of December 2, 1999, the Company held aggregate cash and receivables in foreign currency valued at approximately US $164 million and aggregate foreign currency payables valued at approximately US $255 million (including long-term liabilities denominated in Euros valued at approximately US $129 million). Foreign currency receivables and payables are comprised primarily of Euros, Singapore Dollars and British Pounds. 23 <PAGE> Part II. OTHER INFORMATION 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 ------ ------------------------------------------------------------ 3.7 By-laws of the Registrant, as amended 27 Financial Data Schedule (b) The registrant did not file any reports on Form 8-K during the fiscal quarter ended December 2, 1999. 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. Micron Technology, Inc. ----------------------------------------------------- Registrant) Dated: January 13, 2000 /s/ Wilbur G. Stover, Jr. ----------------------------------------------------- Wilbur G. Stover, Jr., Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 25 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.7 <SEQUENCE>2 <DESCRIPTION>BY-LAWS OF THE REGISTRANT, AS AMENDED <TEXT> <PAGE> EXHIBIT 3.7 BYLAWS OF MICRON TECHNOLOGY, INC. ARTICLE I OFFICES SECTION 1. The registered office shall be 100 West Tenth Street, in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. All meetings of the stockholders shall be held at the principal office of the corporation in the City of Boise, State of Idaho, or at such other place either within or without the State of Delaware as shall be designated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2. Annual meetings of stockholders shall be held on such day and such hour as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such meeting, the stockholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. SECTION 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. SECTION 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Board of Directors, the Chairman of the Board, the president, or by the holders of shares entitled to cast not less than twenty percent (20%) of the votes at the meeting. Such request shall state the purpose or purposes of the proposed meeting. SECTION 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. <PAGE> SECTION 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. SECTION 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty 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 stockholder of record entitled to vote at the meeting. SECTION 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of the question. SECTION 10. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, regardless of class, but no proxy shall be voted on or after three years from its date, unless the proxy provides for a longer period. Vote may be viva voice or by ballot; provided, however, that elections for directors must be by ballot upon demand by a shareholder at the meeting and before the voting begins. At all elections of directors of the corporation each stockholder having voting power shall be entitled to exercise the right of cumulative voting as provided in the Certificate of Incorporation. SECTION 11. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, of a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS SECTION 1. The authorized number of directors of the corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. SECTION 2. The directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of the shareholders held for that purpose. All directors shall hold office until the expiration of the term for which elected and until their respective successors are elected, except in the case of death, resignation or removal of any director. A director need not be a shareholder. SECTION 3. 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 late 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. <PAGE> SECTION 4. The entire Board of Directors or any individual director may be removed from office, prior to the expiration of their or his term of office only in the manner and within the limitations provided by the General Corporation Law of Delaware. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. SECTION 5. A vacancy in the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail at any annual or special meeting of shareholders at which any director or directors are elected to elect the full authorized number of directors to be voted for at that meeting. Vacancies in the Board of Directors 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. Each director so elected shall hold office until the expiration of the term for which he was elected and until his successor is elected at an annual or a special meeting of the shareholders, or until his death, resignation or removal. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. SECTION 6. The business of the corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or these Bylaws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS SECTION 7. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. SECTION 8. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. SECTION 9. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. SECTION 10. Special meetings of the Board may be called by the president on two days' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the Chairman of the Board or two directors. SECTION 11. At all meetings of the Board a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. <PAGE> SECTION 12. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 13. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS SECTION 14. The Board of Directors may, by resolution passed by a majority of the authorized number of directors, appoint an executive committee consisting of two or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The executive committee, to the extent provided in the resolution of the Board of Directors and subject to any limitation by statute, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but it shall not have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, it shall not have the power or authority to declare a dividend or to authorize the issuance of stock. SECTION 15. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate such other committees, each consisting of 2 or more directors, as it may from time to time deem advisable to perform such general or special duties as may from time to time be delegated to any such committee by the Board of Directors, subject to the limitations imposed by statute or by the Certificate of Incorporation or by these Bylaws. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. COMPENSATION OF DIRECTORS SECTION 17. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance of each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV NOTICES SECTION 1. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. <PAGE> SECTION 2. Whenever any notice is required to be given under the provisions of the Delaware statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS SECTION 1. The officers of the corporation shall be chosen by the Board of Directors, and shall be a president, a vice-president, a secretary, and a treasurer. The Board of Directors may also choose additional vice-presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. SECTION 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, one or more vice-presidents, a secretary and a treasurer. SECTION 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. SECTION 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. SECTION 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. THE CHAIRMAN OF THE BOARD SECTION 6. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws. THE PRESIDENT SECTION 7. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and in the absence of the Chairman of the Board or if there be none, at all meetings of the Board of Directors. He shall be ex officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or by these Bylaws. SECTION 8. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. <PAGE> THE VICE-PRESIDENTS SECTION 9. In the absence of the president or in the event of his inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. SECRETARY AND ASSISTANT SECRETARY SECTION 10. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be placed. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. SECTION 11. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS SECTION 12. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. SECTION 13. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. SECTION 14. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. SECTION 15. If the assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. <PAGE> ARTICLE VI CERTIFICATE OF STOCK SECTION 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the chairman or vice chairman of the Board of Directors, or the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face of back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 2. 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 have 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 he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES SECTION 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issues by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit to that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum 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, stolen or destroyed. TRANSFER OF STOCK SECTION 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation 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 upon its books. FIXING RECORD DATE SECTION 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, 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 change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any such other action. A <PAGE> determination of shareholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS SECTION 6. 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 and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, 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 the laws of Delaware. SECTION 7. The accounting books and records, and minutes of proceedings of the shareholders and the Board of Directors and committees of the Board shall be open to inspection upon written demand made upon the corporation by any shareholder or the holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to his interest as a shareholder, or as the holder of such voting trust certificate. The record of shareholders shall also be open to inspection by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. Such inspection may be made in person or by an agent or attorney, and shall include the right to copy and to make extracts. ARTICLE VII GENERAL PROVISIONS DIVIDENDS SECTION 1. Dividends upon the capital stock of the corporation, subject to the provision of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 2. Before payment of any dividend, there may be set aside out of funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS SECTION 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR SECTION 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL SECTION 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. <PAGE> INDEMNIFICATION SECTION 6. The corporation shall indemnify its officers, directors, employees and agents to the extent permitted by the General Corporation Law of Delaware. ARTICLE VIII AMENDMENTS SECTION 1. These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the stockholders or by the Board of Directors at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the Certificate of Incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal Bylaws. I, Nancy A. Stanger, the secretary of Micron Technology, Inc., a Delaware corporation, hereby certify: The foregoing bylaws, comprising 14 pages, were adopted as the bylaws of Micron Technology on May 21, 1984. DATED: May 25, 1984 Nancy A. Stanger Nancy A. Stanger SEAL <PAGE> CERTIFICATE OF FIRST AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. We, the undersigned, being the President and Secretary, respectively, of MICRON TECHNOLOGY, INC., a corporation organized and existing under the laws of the State of Delaware, do hereby certify that a meeting of the Board of Directors of this Corporation was held on December 17, 1984 and an amendment to the Bylaws of MICRON TECHNOLOGY, INC. was unanimously adopted. The amendment adopted was pursuant to a Resolution reading as follows: RESOLVED: The Board hereby approves that the second paragraph of Article II Section 10 of the Bylaws of the Company be amended to read as follows: "At all elections of directors of the corporation each stockholder having voting power shall be entitled to exercise the right of cumulative voting as provided in the Certificate of Incorporation. However, no stockholder shall be entitled to cumulate votes for a candidate or candidates unless such candidate's name or candidate's names have been placed in nomination prior to the voting and a stockholder has given notice at the meeting prior to the voting of the stockholder's intention to cumulate votes. If any stockholder has given such notice, all stockholders may cumulate their votes for candidates in nomination." IN WITNESS WHEREOF, we have hereunto set our hands and the seal of the Corporation this 5th day of July, 1985. MICRON TECHNOLOGY, INC. BY: Joseph L. Parkinson Joseph L. Parkinson, President (SEAL) BY: Cathy L. Smith Cathy L. Smith, Secretary STATE OF IDAHO ) ) ss. County of Ada ) On this 5th day of July, 1985, before me, the undersigned, personally appeared JOSEPH L. PARKINSON and CATHY L. SMITH, known to me to be the President and Secretary, respectively, of MICRON TECHNOLOGY, INC., the corporation that executed the instrument or the persons who executed the instrument on behalf of said corporation, and acknowledged to me that such corporation executed the same. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal in said County the day and year first above written. Jill L. Henson Notary Public for Idaho Residing at Boise <PAGE> CERTIFICATE OF SECOND AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on March 3, 1986: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of said corporation effective as of the 3rd day of March, 1986. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE THIRD AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on November 24, 1986: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 24th day of November, 1986. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF FOURTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on September 28, 1987: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 28th day of September, 1987. Cathy L. Smith Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF FIFTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on March 28, 1988: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 28th day of March, 1988. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF SIXTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on October 3, 1988: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 17th day of October, 1988. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF SEVENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on September 25, 1989: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 28th day September, 1989. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF EIGHTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on October 30, 1989: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 30th day of October, 1989. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF NINTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on August 27, 1990: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 27th day of August, 1990. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF TENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on September 24, 1990: RESOLVED: Article III, Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 24th day of September, 1990. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF ELEVENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on July 27, 1992: RESOLVED: Article III Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 27th day of July, 1992. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF TWELFTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc. a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on May 23, 1994: RESOLVED: Article III, Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section I may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 23rd day of May, 1994. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF THIRTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc. a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on September 1, 1994: RESOLVED: Article III, Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eleven. The number of directors provided in this Section I may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 1st day of September, 1994. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF FOURTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Cathy L. Smith, Corporate Secretary of Micron Technology, Inc. a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on October 27, 1994: RESOLVED: Article III, Section 1 of the Bylaws of this corporation are hereby amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be ten. The number of directors provided in this Section I may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 27th day of October, 1994. Cathy L. Smith Corporate Secretary (SEAL) <PAGE> CERTIFICATE OF FIFTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolution was adopted by the Board of Directors on February 5, 1996: RESOLVED, that pursuant to Article VIII, Section 1 of the Company's Bylaws, the Board hereby amends Article V, Section 1 of the Bylaws to read in its entirety as follows: The officers of the corporation shall be chosen by the Board of Directors, and shall be a president or chief executive officer, a secretary, and a treasurer. The Board of Directors may also choose additional officers, including a president, vice president(s), and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 7th day of February, 1996. Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF SIXTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on September 30, 1996: RESOLVED, that Article II, Section 10 of the Bylaws of this Company be amended to read as follows: SECTION 10. At all elections of directors of the corporation each stockholder having voting power shall be entitled to exercise the right of cumulative voting as provided in the Certificate of Incorporation. However, no stockholder shall be entitled to cumulate votes for a candidate or candidates unless such candidate's name or candidates' names have been placed in nomination prior to the voting and a stockholder has given written notice to Secretary of the corporation of the stockholder's intention to cumulate votes at least 15 days prior to the date of the meeting. If any stockholder has given such notice, all stockholders may cumulate their votes for candidates in nomination. RESOLVED FURTHER, that Article II of the Bylaws of this Company be amended to add Section 12, which will read in its entirety as follows: SECTION 12. Advance Notice of Stockholder Nominees and Stockholder Business (a) To be properly brought before an annual meeting or special meeting, nominations for the election of directors or other business must be (i) specified in the notice of 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 stockholder. (b) For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive office of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder 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 conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the securities Exchange Act of 1934, as amended (the "Exchange Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders' meeting, stockholders must provide notice as required by the regulations promulgated under the Exchange Act. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 12. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 12, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. <PAGE> (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) 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 stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). 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 in accordance with the provisions of paragraph (b) of this Section 12. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is 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 the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 12. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws; and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. RESOLVED FURTHER, that Article III, Section 1 of the Bylaws of this Company be amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be seven. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affixed the corporate seal of said corporation effective as of the 30th day of September, 1996. /s/ Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF SEVENTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on June 30, 1997: RESOLVED, that Article III, Section 1 of the Bylaws of this Company be amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affix the corporate seal of said corporation effective as of the 30th day of June, 1997. /s/ Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF EIGHTEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on April 14, 1998: RESOLVED, that Article III, Section 1 of the Bylaws of this Company be amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be nine. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affix the corporate seal of said corporation effective as of the 20th day of July, 1998. /s/ Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF NINETEENTH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on November 23, 1998: RESOLVED, that Article III, Section 1 of the Bylaws of this Company be amended to read as follows: SECTION 1. The authorized number of directors of the Corporation shall be eight. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand and affix the corporate seal of said corporation effective as of the 23rd day of November, 1998. /s/ Jan R. Reimer Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF TWENTIETH AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on June 16, 1999: RESOLVED, that pursuant to Article VIII, Section 1 of the Company's Bylaws, the Board hereby amends Article III, Sections 14 and 15 of the Bylaws to read in their entirety as follows: "SECTION 14. The Board of Directors may, by resolution passed by a majority of the authorized number of directors, appoint an executive committee consisting of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The executive committee, to the extent provided in the resolution of the Board of Directors and subject to any limitation by statute, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but it shall not have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, it shall not have the power of authority to declare a dividend or to authorize the issuance of stock. SECTION 15. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate such other committees, each consisting of one or more directors, as it may from time to time deem advisable to perform such general or special duties as may from time to time be delegated to any such committee by the Board of Directors, subject to the limitations imposed by statute or the Certificate of Incorporation or by these Bylaws. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee." RESOLVED FURTHER, that any and all actions taken prior to the adoption of the foregoing resolution by the "Employee Option Committee" of the Board are hereby ratified, confirmed, approved and adopted as actions of the Company. IN WITNESS WHEREOF, I hereunto set my hand and affix the corporate seal of said corporation effective as of the 16th day of June, 1999. /s/ Jan R. Reimer ----------------- Assistant Secretary (SEAL) <PAGE> CERTIFICATE OF TWENTY-FIRST AMENDMENT TO THE BYLAWS OF MICRON TECHNOLOGY, INC. I, Jan R. Reimer, Assistant Secretary of Micron Technology, Inc., a Delaware corporation, hereby certify that the following resolutions were adopted by the Board of Directors on November 23, 1999: RESOLVED, that pursuant to Article VIII, Section 1 of the Company's Bylaws, the Board hereby amends Article III, Section 1 of the Bylaws to read in its entirety as follows: SECTION 1. The authorized number of directors of the Corporation shall be seven. The number of directors provided in this Section 1 may be changed by a Bylaw duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote or by a resolution of the Board of Directors. RESOLVED FURTHER, that the Board hereby amends Article II, Section 12 of the Company's Bylaws to read in its entirely as follows: SECTION 12. Advance Notice of Stockholder Nominees and Stockholder Business (a) To be properly brought before an annual meeting or special meeting, nominations for the election of directors or other business must be (i) specified in the notice of 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 stockholder. (b) For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive office of the corporation not less than one hundred twenty (120) calendar days in advance of the date of the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder 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 conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders' meeting, stockholders must provide notice as required by the regulations promulgated under the Exchange Act. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 12. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 12, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. <PAGE> (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) 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 stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). 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 in accordance with the provisions of paragraph (b) of this Section 12. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is 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 the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 12. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws; and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. IN WITNESS WHEREOF, I hereunto set my hand and affix the corporate seal of said corporation effective as of the 23rd day of November, 1999. /s/ Jan R. Reimer ----------------- Assistant Secretary (SEAL) </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 ACCOMPANYING FINANCIAL STATEMENTS 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> AUG-31-2000 <PERIOD-START> SEP-03-1999 <PERIOD-END> DEC-02-1999 <CASH> 442 <SECURITIES> 1,445 <RECEIVABLES> 960 <ALLOWANCES> (43) <INVENTORY> 504 <CURRENT-ASSETS> 3,428 <PP&E> 6,206 <DEPRECIATION> (2,378) <TOTAL-ASSETS> 7,581 <CURRENT-LIABILITIES> 1,105 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 27 <OTHER-SE> 4,359 <TOTAL-LIABILITY-AND-EQUITY> 7,581 <SALES> 1,584 <TOTAL-REVENUES> 1,584 <CGS> 771 <TOTAL-COSTS> 1,052 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> (9) <INCOME-PRETAX> 528 <INCOME-TAX> (186) <INCOME-CONTINUING> 0 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 341 <EPS-BASIC> 1.27 <EPS-DILUTED> 1.19 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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https://www.sec.gov/Archives/edgar/data/808450/0000808450-00-000001.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, Di6KkkeeBFdoqQEosnlMfPxxh/n1x7zO8Yss+5uJ3hU8hOin/vZxl1QHsQef+GYQ M2uB82P9mBPeERQapt28hQ== <SEC-DOCUMENT>0000808450-00-000001.txt : 20000317 <SEC-HEADER>0000808450-00-000001.hdr.sgml : 20000317 ACCESSION NUMBER: 0000808450-00-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000316 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: SEC FILE NUMBER: 001-09618 FILM NUMBER: 570921 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362000 MAIL ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DRIVE 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, 2000 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 NAVISTAR INTERNATIONAL CORPORATION ---------------------------------- (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 February 29, 2000, the number of shares outstanding of the registrant's common stock was 61,885,758. <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, 2000 and January 31, 1999............................. 3 Statement of Financial Condition January 31, 2000, October 31, 1999 and January 31, 1999............................. 4 Statement of Cash Flow Three Months Ended January 31, 2000 and January 31, 1999............................. 5 Notes to Financial Statements............................... 6 Supplemental Financial Information.......................... 10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.......................... 12 Part II. Other Information: Item 1. Legal Proceedings............................ 17 Item 6. Exhibits and Reports on Form 8-K............. 17 Signature .................................................. 18 <PAGE> PAGE 3 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. Financial Statements STATEMENT OF INCOME (Unaudited) - ------------------------------------------------------------------------------ Millions of dollars, except per share data - ------------------------------------------------------------------------------ Navistar International Corporation and Consolidated Subsidiaries ------------------------- Three Months Ended January 31 ---------------------- 2000 1999 -------- -------- Sales and revenues Sales of manufactured products.................. $ 2,086 $ 1,837 Finance and insurance revenue................... 69 62 Other income ................................. 11 25 -------- -------- Total sales and revenues..................... 2,166 1,924 -------- -------- Costs and expenses Cost of products and services sold.............. 1,748 1,544 Postretirement benefits......................... 48 49 Engineering and research expense................ 71 58 Sales, general and administrative expense....... 124 126 Interest expense................................ 35 32 Other expense ................................. 27 16 -------- -------- Total costs and expenses..................... 2,053 1,825 -------- -------- Income before income taxes............... 113 99 Income tax expense....................... 43 38 -------- -------- Net income ..................................... $ 70 $ 61 ======== ======== Earnings per share Basic ...................................... $ 1.12 $ .92 Diluted...................................... $ 1.10 $ .91 Average shares outstanding (millions) Basic ...................................... 62.6 66.4 Diluted...................................... 63.7 67.1 - ---------------------------------------------------------------------------- See Notes to Financial Statements. <PAGE> PAGE 4 STATEMENT OF FINANCIAL CONDITION (Unaudited) - ------------------------------------------------------------------------------- Millions of dollars - ------------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries ----------------------------------- January 31 October 31 January 31 2000 1999 1999 ----------- ---------- ---------- ASSETS Current assets Cash and cash equivalents......... $ 461 $ 243 $ 187 Marketable securities............. 145 138 175 Receivables, net.................. 1,358 1,550 1,343 Inventories....................... 703 625 560 Deferred tax asset, net........... 226 229 188 Other assets...................... 87 57 42 -------- --------- -------- Total current assets.................... 2,980 2,842 2,495 -------- --------- -------- Marketable securities................... 71 195 385 Finance and other receivables, net...... 777 1,268 759 Property and equipment, net............. 1,518 1,475 1,134 Investments and other assets............ 179 207 120 Prepaid and intangible pension assets... 284 274 241 Deferred tax asset, net................ 635 667 688 -------- --------- -------- Total assets............................ $ 6,444 $ 6,928 $ 5,822 ======== ========= ======== LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Current liabilities Current maturities of long-term debt................... $ 199 $ 192 $ 103 Accounts payable, principally trade 1,051 1,399 1,095 Other liabilities.................. 732 911 686 -------- -------- -------- Total current liabilities................ 1,982 2,502 1,884 -------- -------- -------- Debt: Manufacturing operations........... 460 445 465 Financial services operations...... 1,646 1,630 1,424 Postretirement benefits liability........ 627 634 873 Other liabilities........................ 412 426 356 -------- -------- -------- Total liabilities.................. 5,127 5,637 5,002 -------- -------- -------- Commitments and contingencies Shareowners' equity Series D convertible junior preference stock...................... 4 4 4 Common stock (75.3 million shares issued) 2,139 2,139 2,139 Retained earnings (deficit).............. (234) (297) (769) Accumulated other comprehensive loss..... (192) (197) (340) Common stock held in treasury, at cost (13.2 million, 12.1 million and 9.1 million shares held)...... (400) (358) (214) -------- -------- -------- Total shareowners' equity.......... 1,317 1,291 820 -------- -------- -------- Total liabilities and shareowners' equity $ 6,444 $ 6,928 $ 5,822 ======== ======== ======== - ----------------------------------------------------------------------------- See Notes to Financial Statements. <PAGE> PAGE 5 STATEMENT OF CASH FLOW (Unaudited) - ------------------------------------------------------------------------------- For the Three Months Ended January 31 (Millions of dollars) - ------------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries ------------------------- 2000 1999 -------- -------- Cash flow from operations Net income........................................... $ 70 $ 61 Adjustments to reconcile net income to cash used in operations: Depreciation and amortization................. 49 49 Deferred income taxes......................... 28 39 Other, net.................................... (15) (14) Change in operating assets and liabilities: Receivables................................... 232 (116) Inventories................................... (84) (63) Prepaid and other current assets.............. (23) (13) Accounts payable.............................. (156) (166) Other liabilities............................. (189) (105) -------- -------- Cash used in operations.......................... (88) (328) -------- -------- Cash flow from investment programs Purchases of retail notes and lease receivables...... (274) (316) Collections/sales of retail notes and lease receivables.............................. 522 518 Purchases of marketable securities................... (152) (127) Sales or maturities of marketable securities......... 268 241 Capital expenditures................................. (68) (44) Property and equipment leased to others.............. (14) (23) Investment in affiliates............................. 12 (5) Capitalized interest and other....................... 5 (9) -------- -------- Cash provided by investment programs............. 299 235 -------- -------- Cash flow from financing activities Issuance of debt..................................... 60 68 Principal payments on debt........................... (25) (92) Net increase (decrease) in notes and debt outstanding under bank revolving credit facility and commercial paper programs ............ 15 (86) Purchases of common stock............................ (43) - -------- -------- Cash provided by (used in) financing activities........................... 7 (110) -------- -------- Cash and cash equivalents Increase (decrease) during the period............ 218 (203) At beginning of the year......................... 243 390 -------- -------- Cash and cash equivalents at end of the period....... $ 461 $ 187 ======== ======== - ------------------------------------------------------------------------------- See Notes to Financial Statements. <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). Effective February 23, 2000, Transportation changed its name to International Truck and Engine Corporation. As used hereafter, "company" or "Navistar" refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called "manufacturing operations"), and financial services. The consolidated financial statements include the results of the company'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 1999 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 1999 amounts have been reclassified to conform with the presentation used in the 2000 financial statements. Note B. Supplemental Cash Flow Information Consolidated interest payments during the first three months of 2000 and 1999 were $29 million and $31 million, respectively. Consolidated tax payments made during the first three months of 2000 were $26 million, and were not material for the same period last year. 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 United States federal 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 2000 1999 1999 - ------------------------------------------------------------------------------- Finished products................... $ 372 $ 285 $ 278 Work in process..................... 55 95 85 Raw materials and supplies.......... 276 245 197 -------- --------- --------- Total inventories................... $ 703 $ 625 $ 560 ======== ========= ========= Note E. Financial Instruments In November 1999, Navistar Financial Corporation (NFC) sold $533 million of fixed rate retail notes, net of unearned finance income, through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC, on a variable rate basis to two multi-seller asset-backed commercial paper conduits sponsored by a major financial institution. The gain on the sale was not material. NFC entered into an interest rate swap agreement to hedge the future cash flows of the amounts due from the sale of receivables. Under the terms of the agreement, NFC will make or receive payments based on changes in interest rates. In January 2000, NFC sold $300 million of variable funding certificates, through Navistar Financial Securities Corporation, a wholly owned subsidiary of NFC, to a conduit sponsored by a major financial institution. The variable funding certificates mature in 2001. In March 2000, NFC sold $475 million of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, sold notes to investors. The gain on the sale was not material. As of January 31, 2000, NFC was a party to a total of $400 million of forward treasury locks and $75 million of forward starting swaps related to the anticipated March 2000 sale of retail receivables. NFC closed these positions and the resulting gain was not material. In the second quarter of 2000, NFC entered into a total of $200 million of forward treasury locks in anticipation of a July 2000 sale of retail receivables. Any gain or loss will be included in the gain or loss on the sale of receivables recognized in July 2000. As of January 31, 2000, the company held German mark and Japanese yen forward contracts with respective notional amounts of $49 million and $18 million related to committed capital equipment purchases. The company held Canadian dollar forward contracts with notional amounts of $41 million and other derivative contracts with notional amounts of $16 million. The unrealized net loss on these contracts was not material. <PAGE> PAGE 8 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note F. Earnings Per Share Earnings per share was computed as follows: Three Months Ended January 31 Millions of dollars, ----------------------- except share and per share data 2000 1999 - ------------------------------------------- -------- -------- Net income................................. $ 70 $ 61 ======== ======== Average shares outstanding (millions) Basic................................... 62.6 66.4 Dilutive effect of options outstanding and other dilutive securities......... 1.1 .7 -------- -------- Diluted................................. 63.7 67.1 ======== ======== Earnings per share Basic.................................. $ 1.12 $ .92 Diluted................................ $ 1.10 $ .91 Unexercised employee stock options to purchase .2 million and .3 million shares of Navistar common stock during the three months ended January 31, 2000 and 1999, respectively, were excluded from the computation of diluted shares outstanding because the exercise prices were greater than the average market price of Navistar common stock. Note G. Comprehensive Income Navistar's total comprehensive income was as follows: Three Months Ended January 31 ----------------------- Millions of dollars 2000 1999 - -------------------------------------------- -------- -------- Net income................................... $ 70 $ 61 Other comprehensive income (loss)............ 5 (9) -------- -------- Total comprehensive income........... $ 75 $ 52 ======== ======== <PAGE> PAGE 9 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note H. Segment Data Reportable operating segment data is as follows: Financial Millions of dollars Truck Engine Services Total - ------------------------- -------- -------- -------- -------- For the quarter ended January 31, 2000 ----------------------------------------------- External revenues....... $ 1,683 $ 403 $ 72 $ 2,158 Intersegment revenues... - 169 21 190 -------- -------- -------- -------- Total revenues..... $ 1,683 $ 572 $ 93 $ 2,348 ======== ======== ======== ======== Segment profit.......... $ 50 $ 58 $ 25 $ 133 For the quarter ended January 31, 1999 ----------------------------------------------- External revenues...... $ 1,477 $ 360 $ 71 $ 1,908 Intersegment revenues.. - 158 16 174 --------- --------- -------- -------- Total revenues.... $ 1,477 $ 518 $ 87 $ 2,082 ========= ========= ======== ======== Segment profit......... $ 46 $ 49 $ 29 $ 124 Reconciliation to the consolidated financial statements for the quarters ended January 31 is as follows: Millions of dollars 2000 1999 - ---------------------------------------------- -------- -------- Segment sales and revenues.................... $ 2,348 $ 2,082 Other income.................................. 8 16 Intercompany.................................. (190) (174) -------- -------- Consolidated sales and revenues............... $ 2,166 $ 1,924 ======== ======== Segment profit................................ $ 133 $ 124 Corporate items............................... (20) (31) Manufacturing net interest income............. - 6 -------- -------- Consolidated pretax income.................... $ 113 $ 99 ======== ======== <PAGE> PAGE 10 Navistar International Corporation and Consolidated Subsidiaries Supplemental Financial Information (Unaudited) The following supplemental financial information is provided based upon the continuing interest of certain shareholders and creditors. Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars: Three Months Ended January 31 ---------------------- Condensed Statement of Income 2000 1999 - ----------------------------------------------- -------- -------- Sales of manufactured products................. $ 2,086 $ 1,837 Other income................................... 8 19 -------- -------- Total sales and revenues................... 2,094 1,856 -------- -------- Cost of products sold.......................... 1,739 1,534 Postretirement benefits........................ 48 49 Engineering and research expense............... 71 58 Sales, general and administrative expense...... 109 115 Other expense.................................. 43 35 --------- --------- Total costs and expenses................... 2,010 1,791 --------- --------- Income before income taxes Manufacturing operations................... 84 65 Financial services operations.............. 29 34 --------- -------- Income before income taxes............. 113 99 Income tax expense..................... 43 38 --------- -------- Net income..................................... $ 70 $ 61 ========= ======== January 31 October 31 January 31 Condensed Statement of Financial Condition 2000 1999 1999 - ------------------------------------------ ---------- ---------- ---------- Cash, cash equivalents and marketable securities............... $ 468 $ 386 $ 593 Inventories............................... 678 604 542 Property and equipment, net............... 1,231 1,188 897 Equity in nonconsolidated subsidiaries.... 387 377 342 Other assets.............................. 1,062 1,527 884 Deferred tax asset, net................... 861 896 876 -------- -------- -------- Total assets...................... $ 4,687 $ 4,978 $ 4,134 ======== ======== ======== Accounts payable, principally trade....... $ 1,245 $ 1,386 $ 1,063 Postretirement benefits liability......... 786 776 937 Other liabilities......................... 1,339 1,525 1,314 Shareowners' equity....................... 1,317 1,291 820 -------- -------- -------- Total liabilities and shareowners' equity......... $ 4,687 $ 4,978 $ 4,134 ======== ======== ======== <PAGE> PAGE 11 Navistar International Corporation and Consolidated Subsidiaries Supplemental Financial Information (Unaudited) 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 2000 1999 - ----------------------------------------------------- -------- -------- Cash flow from operations Net income........................................... $ 70 $ 61 Adjustments to reconcile net income to cash used in operations: Depreciation and amortization................. 35 38 Deferred income taxes......................... 28 39 Equity in earnings of investees, net of dividends received......................... (11) (14) Other, net.................................... (18) (3) Change in operating assets and liabilities........... (448) (294) -------- -------- Cash used in operations.............................. (344) (173) -------- -------- Cash flow from investment programs Purchases of marketable securities................... (95) (110) Sales or maturities of marketable securities......... 252 221 Capital expenditures................................. (68) (44) Receivable from financial services operations........ 500 (101) Investment in affiliates............................. 12 (5) Capitalized interest and other....................... 5 (9) -------- -------- Cash provided by (used in) investment programs....... 606 (48) -------- -------- Cash (used in) provided by financing activities...... (25) 22 -------- -------- Cash and cash equivalents Increase (decrease) during the period................ 237 (199) At beginning of the year............................. 167 351 -------- -------- Cash and cash equivalents at end of the period....... $ 404 $ 152 ======== ======== <PAGE> PAGE 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Certain statements under this caption that are not purely historical constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. These forward-looking statements are based on current management expectations as of the date made. The company assumes no obligation to update any forward-looking statements. 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 caption "Business Environment." The company reported net income of $70 million, or $1.10 per diluted common share for the first quarter ended January 31, 2000, primarily reflecting higher sales of manufactured products. Net income was $61 million, or $0.91 per diluted common share, for the comparable quarter last year. The company's manufacturing operations reported income before income taxes of $84 million compared with pretax income of $65 million in the first quarter of 1999. The truck segment's profit for the first quarter of 2000 increased 9% and revenue increased 14% compared to the same period last year. The engine segment's profit increased for the first three months of 2000 by 18% compared to a revenue increase of 10%. The truck and engine segments' profit and revenue increases are attributable to increases in shipments of trucks and mid-range diesel engines to other original equipment manufacturers (OEMs). The financial services segment's profit for the first quarter of 2000 decreased $4 million from the same period last year, primarily due to a first quarter 1999 legal settlement in favor of an insurance subsidiary of the company. Navistar Financial Corporation's (NFC's) pretax income increased $4 million, partially offsetting the impact of this settlement. Sales and Revenues. United States (U.S.) and Canadian industry retail sales of Class 5 through 8 trucks totaled 113,300 units in the first quarter of 2000, which is 8% higher than the 105,100 units sold during this period in 1999. Class 8 heavy truck sales of 69,300 units during the first quarter of 2000 were 12% higher than the 1999 level of 61,900 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, increased 2% to 44,000 units. Industry sales of school buses, which accounted for 17% of the medium truck market, decreased 13% to 7,500 units. Sales and revenues for the first quarter of 2000 totaled $2,166 million, 13% higher than the $1,924 million reported for the comparable quarter in 1999. Sales of manufactured products for the first quarter of 2000 totaled $2,086 million compared with $1,837 million reported for the same period in 1999. <PAGE> PAGE 13 Although the company's retail deliveries in the combined U.S. and Canadian Class 5 through 8 truck market increased 4%, market share for the first quarter of 2000 decreased to 26.3% from 27.2% for the same period last year. (Sources: Ward's Communications and the Canadian Vehicle Manufacturers Association.) Shipments of mid-range diesel engines by the company to OEMs during the first quarter of 2000 totaled 71,600 units, a 23% increase from the same period of 1999. This increase resulted from higher shipments to Ford Motor Company to meet consumer demand for the light trucks and vans which use this engine. The engine segment's revenues increased at a lower rate than units shipped due to a shift in warranty administration between Navistar and its customers. Finance and insurance revenue of $69 million in the first quarter of 2000 increased 11% from 1999, primarily as a result of increased wholesale and lease financing activities. Other income for 1999 included a $10 million legal settlement in favor of an insurance subsidiary of the company. Costs and expenses. Manufacturing gross margin was 16.6% of sales for the first quarter of 2000 consistent with 16.5% for the same period in 1999. Engineering and research expense increased $13 million from the first quarter of 1999 to $71 million due to the company's continuing investment in its next generation vehicle (NGV) program. Other expense includes finance charges, insurance claims and underwriting fees, and costs associated with the company's investment in dealer operations. Liquidity and Capital Resources Cash flow is generated from the manufacture and sale of trucks and mid-range diesel engines and their associated service parts as well as from product financing and insurance coverage provided to the company's dealers and retail customers by the financial services segment. The company's current debt ratings have made sales of finance receivables the most economic source of funding for NFC. Insurance operations are self-funded. The company had working capital of $998 million at January 31, 2000, compared to $340 million at October 31, 1999. Cash used in operations during the first quarter of 2000 totaled $88 million primarily from a net change in operating assets and liabilities of $220 million partially offset by net income of $70 million, $28 million of noncash deferred taxes and $34 million of other noncash items, principally depreciation. The net change in operating assets and liabilities included a $189 million decrease in other liabilities primarily due to the payment of the company's profit sharing and performance incentive awards for fiscal 1999, a $156 million decrease in accounts payable due to the timing of payments related to the company's next generation diesel (NGD) program and cyclically lower production in the first quarter, and an increase in inventories primarily due to the timing of shipments to customers and an increase in used truck inventory. These were partially offset by a $232 million decrease in accounts receivable, primarily due to a net decrease in wholesale note and account balances. <PAGE> PAGE 14 Investment programs provided $299 million in cash primarily reflecting a net decrease in retail notes and lease receivables of $248 million and a net decrease in marketable securities of $116 million. These were partially offset by a $14 million net increase in property and equipment leased to others and $68 million of capital expenditures primarily for the NGV and NGD programs. Cash provided by financing activities resulted from a net increase of $15 million in notes and debt outstanding under the bank revolving credit facility and other commercial paper programs. Cash was also provided by a $35 million net increase in long-term debt which included $17 million of borrowings under the Mexican credit facility. These were offset by purchases of $43 million of common stock during the first quarter. Subsequent to January 31, 2000, approximately $13 million of cash was used to purchase common stock through March 10, 2000. NFC has traditionally obtained funds to provide financing to the company's dealers and retail customers from sales of finance receivables, commercial paper, short and long-term bank borrowings, medium and long-term debt and equity capital. As of January 31, 2000, NFC's funding consisted of sold finance receivables of $2,887 million, bank and other borrowings of $1,265 million, subordinated debt of $100 million, capital lease obligations of $341 million and equity of $289 million. Through the asset-backed markets, NFC has been able to fund fixed rate retail note receivables at rates offered to companies with investment grade ratings. During the first quarter of 2000, NFC sold $533 million of retail notes through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC, on a variable rate basis to two multi-seller asset- backed commercial paper conduits sponsored by a major financial institution. NFC entered into an interest rate swap agreement to hedge the future cash flows of the amounts due from the sale of receivables. Under the terms of the agreement, NFC will make or receive payments based on changes in interest rates. As of January 31, 2000, the remaining shelf registration available to NFRRC for the public issuance of asset-backed securities was $2,257 million. In January 2000, NFC sold $300 million of variable funding certificates, through Navistar Financial Securities Corporation (NFSC), a wholly owned subsidiary of NFC, to a conduit sponsored by a major financial institution. The variable funding certificates mature in 2001. In March 2000, NFC sold $475 million of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, sold notes to investors. The gain on the sale was not material. As of January 31, 2000, NFC was a party to a total of $400 million of forward treasury locks and $75 million of forward starting swaps related to the anticipated March 2000 sale of retail receivables. NFC closed these positions and the resulting gain was not material. In the second quarter of 2000, NFC entered into a total of $200 million of forward treasury locks in anticipation of a July 2000 sale of retail receivables. Any gain or loss will be included in the gain or loss on the sale of receivables recognized in July 2000. <PAGE> PAGE 15 At January 31, 2000, available funding under NFC's bank revolving credit facility and the asset-backed commercial paper facility was $100 million, of which $25 million was used to back short-term debt. The remaining $75 million, when combined with unrestricted cash and cash equivalents, made $136 million available to fund the general business purposes of NFC. Also, as of January 31, 2000, NFSC had a revolving wholesale note trust that provides for the funding of $900 million of eligible wholesale notes. As of January 31, 2000, the company held German mark and Japanese yen forward contracts with respective notional amounts of $49 million and $18 million related to committed capital equipment purchases. The company held Canadian dollar forward contracts with notional amounts of $41 million and other derivative contracts with notional amounts of $16 million. The unrealized net loss on these contracts was not material. Cash flow from the company's manufacturing operations, financial services operations and financing capacity is sufficient to cover planned investment in the business. The company had outstanding capital commitments of $463 million at January 31, 2000, primarily for the NGV and NGD programs. In February 2000, Standard and Poor's raised the company's and NFC's senior debt ratings from BB+ to BBB-, and raised the company's and NFC's subordinated debt ratings from BB- to BB+. 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 and capital expenditures. Management believes that collections on the outstanding receivables portfolios as well as funds available from various sources will permit the financial services operations to meet the financing requirements of the company's dealers and customers. Year 2000 As described in the 1999 Annual Report on Form 10-K, the company had instituted a corporate-wide Year 2000 readiness project to identify all systems which would require modification or replacement, and to establish appropriate remediation and contingency plans to avoid an impact on the company's ability to continue to provide its products and services. Through the date of this report, the company has not experienced any significant Year 2000 problems but will continue to monitor its critical systems over the next several months. In the event that significant issues arise, the company's contingency plans remain in place. The company's total cost of the Year 2000 project, which is funded through operating cash flows, is estimated to be $32 million including $26 million of estimated expense and $6 million of capital expenditures. Approximately $25 million has been expensed and approximately $6 million has been capitalized through January 31, 2000. The remaining costs are estimated to be incurred through the remainder of fiscal year 2000. <PAGE> PAGE 16 Business Environment Sales of Class 5 through 8 trucks have historically been 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. The decrease in the number of new truck orders is in line with the company's expectations and has decreased the company's order backlog to a more normal level of 44,000 units at January 31, 2000 from 65,600 units at January 31, 1999. The company continually evaluates order receipts and backlog throughout the year and balances production with demand as appropriate. An industry-wide slowdown in orders for heavy trucks has resulted in a schedule change at the company's Chatham Assembly Plant that will result in the layoff of approximately 400 employees. This is expected to be fully implemented in March 2000 and is not expected to have a material impact on the company's financial statements. <PAGE> PAGE 17 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 December 22, 1999, Commission File No. 1-9618. Item 6. Exhibits and reports on Form 8-K 10-Q Page --------- (a) Exhibits: 3. Articles of Incorporation and By-Laws E-1 4. Instruments Defining The Rights E-2 of Security Holders, Including Indentures 10. Material Contracts E-4 (b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months ended January 31, 2000. <PAGE> PAGE 18 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/ Mark T. Schwetschenau - ----------------------------------- Mark T. Schwetschenau Vice President and Controller (Principal Accounting Officer) March 15, 2000 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3 <SEQUENCE>2 <TEXT> PAGE 1 EXHIBIT 3 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- ARTICLES OF INCORPORATION AND BY-LAWS The following documents of Navistar International Corporation are incorporated herein by reference: 3.1 Restated Certificate of Incorporation of Navistar International Corporation effective July 1, 1993, filed as Exhibit 3.2 to Annual Report on Form 10-K dated October 31, 1993, which was filed on January 27, 1994, Commission File No. 1-9618, and amended as of May 4, 1998. 3.2 The By-Laws of Navistar International Corporation effective April 14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K dated October 31, 1995, which was filed on January 26, 1996, on Commission File No. 1-9618. 3.3 Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A of Navistar International Corporation. Filed as Exhibit 3.3 to Form 10-Q dated June 11, 1999. Commission File No. 1-9618. E-1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4 <SEQUENCE>3 <TEXT> PAGE 1 EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES The following instruments of Navistar International Corporation and its principal subsidiary Navistar International Transportation Corp. and its principal subsidiary Navistar Financial Corporation defining the rights of security holders are incorporated herein by reference. 4.1 Indenture, dated as of May 30, 1997, by and between Navistar Financial Corporation and The Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes due 2002 for $100,000,000. Filed on Registration No. 333-30167. 4.2 $125,000,000 Credit Agreement dated as of November 26, 1997, as amended by Amendment No. 1 dated as of February 4, 1998, and as amended by Amendment No. 2 dated as of July 10, 1998, among Navistar International Corporation Mexico, S.A. de C.V., Navistar International Corporation, certain banks, certain Co-Arranger banks, Bank of Montreal, as Paying Agent, and Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero, as Peso Agent and Collateral Agent. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.3 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, for 7% Senior Notes due 2003 for $100,000,000. Filed on Registration No. 333-47063. 4.4 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, for 8% Senior Subordinated Notes due 2008 for $250,000,000. Filed on Registration No. 333-47063. 4.5 $45,000,000 Revolving Credit Agreement dated as of June 5, 1998 as amended by Amendment No. 1 dated as of January 1, 1999, and as amended by Amendment No. 2 dated as of April 9, 1999, as amended by Amendment No. 3 dated as of July 1999, among Arrendadora Financiera Navistar S.A. de C.V., Servicios Financieros Navistar S.A. de C.V. and Navistar Comercial S.A. de C.V. and The First National Bank of Chicago. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.6 $200,000,000 Mexican Peso Revolving Credit Agreement dated as of October 20, 1998 as amended by Amendment No. 1 dated as of November 12, 1999, among Arrendadora Financiera Navistar S.A. de C.V., Servicios Financieros Navistar S.A. de C.V. and Navistar Comercial S.A. de C.V. and Comerica Bank. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). E-2 <PAGE> PAGE 2 EXHIBIT 4 (CONTINUED) NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.7 $8,000,000 Mexican Peso Revolving Credit Agreement dated as of October 9, 1998 by and between Arrendadora Financiera Navistar S.A. de C.V. and Banco Bilbao Vizcaya. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.8 $27,000,000 Mexican Peso Revolving Credit Agreement dated as of October 9, 1998 by and between Servicios Financieros Navistar S.A. de C.V. and Banco Bilbao Vizcaya. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.9 Rights Agreement dated as of April 20, 1999 between Navistar International Corporation and Harris Trust and Savings Bank, as Rights Agent, including the form of Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A attached thereto as Exhibit A, and the form of Rights Certificate attached thereto as Exhibit B. Filed as Exhibit 1.1 to the company's Registration Statement on Form 8-A, dated April 20, 1999. Commission File No. 1-9618. 4.10 $53,000,000, Revolving Credit Agreement dated as of July 9, 1999 as amended by Amendment No. 1 dated as of September 15, 1999, among Arrendadora Financiera Navistar S.A. de C.V., Servicios Financieros Navistar S.A. de C.V. and Navistar Comercial S.A. de C.V. and Banco Nacional de Mexico, S.A. de C.V. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.11 $20,000,000 Credit Agreement dated as of August 10, 1999 by and between Arrendadora Financiera Navistar S.A. de C.V. and Bancomer. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). 4.12 $200,000,000 Mexican Peso Revolving Credit Agreement dated as of August 10, 1999 by and between Servicios Financieros Navistar S.A. de C.V. and Bancomer. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b)(4)(iii). ===== Instruments defining the rights of holders of other unregistered long-term debt of Navistar and its subsidiaries have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. E-3 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10 <SEQUENCE>4 <TEXT> PAGE 1 EXHIBIT 10 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES --------------------------------- MATERIAL CONTRACTS The following documents of Navistar International Corporation and its affiliate Navistar Financial Corporation are incorporated herein by reference. 10.22 Trust Agreement dated as of March 9, 2000, between Navistar Financial Retail Receivables Corporation, as Seller, and Chase Manhattan Bank Delaware, as Owner Trustee, with respect to Navistar Financial 2000-A Owner Trust. Filed on Registration No. 333-62445. 10.23 Indenture dated as of March 9, 2000, between Navistar Financial 1999-A Owner Trust and The Bank of New York, as Indenture Trustee, with respect to Navistar Financial 2000-A Owner Trust. Filed on Registration No. 333-62445. E-4 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>5 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> OCT-31-2000 <PERIOD-END> JAN-31-2000 <CASH> 461 <SECURITIES> 216 <RECEIVABLES> 2169 <ALLOWANCES> 34 <INVENTORY> 703 <CURRENT-ASSETS> 2980 <PP&E> 2577 <DEPRECIATION> 1059 <TOTAL-ASSETS> 6444 <CURRENT-LIABILITIES> 1982 <BONDS> 2106 <PREFERRED-MANDATORY> 0 <PREFERRED> 4 <COMMON> 2139 <OTHER-SE> (826) <TOTAL-LIABILITY-AND-EQUITY> 6444 <SALES> 2086 <TOTAL-REVENUES> 2166 <CGS> 1748 <TOTAL-COSTS> 2053 <OTHER-EXPENSES> 48 <LOSS-PROVISION> 2 <INTEREST-EXPENSE> 35 <INCOME-PRETAX> 113 <INCOME-TAX> 43 <INCOME-CONTINUING> 70 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 70 <EPS-BASIC> 1.12 <EPS-DILUTED> 1.10 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

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NKE

https://www.sec.gov/Archives/edgar/data/320187/0000320187-00-000003.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, BdddxH+aumveJJbpoIQJury6a0i9uinuXIsXmdn6zRlWTTfyyAL70nnE7+QYLkni hq7r4PH3fIu2gL950FUt5Q== <SEC-DOCUMENT>0000320187-00-000003.txt : 20000202 <SEC-HEADER>0000320187-00-000003.hdr.sgml : 20000202 ACCESSION NUMBER: 0000320187-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 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: SEC FILE NUMBER: 001-10635 FILM NUMBER: 508048 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, 1999 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, 1999 were: _________________ Class A 100,468,351 Class B 175,536,825 ----------- 276,005,176 =========== PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements NIKE, Inc. CONDENSED CONSOLIDATED BALANCE SHEET Nov. 30, May 31, 1999 1999 ________ _______ (in millions) ASSETS Current assets: Cash and equivalents $ 253.0 $ 198.1 Accounts receivable 1,510.0 1,540.1 Inventories (Note 4) 1,251.7 1,199.3 Deferred income taxes 109.6 120.6 Income taxes receivable - 15.9 Prepaid expenses 161.3 190.9 ________ ________ Total current assets 3,285.6 3,264.9 Property, plant and equipment 2,355.0 2,001.3 Less accumulated depreciation 806.0 735.5 ________ ________ 1,549.0 1,265.8 Identifiable intangible assets and goodwill 417.3 426.6 Deferred income taxes and other assets 307.5 290.4 ________ ________ $5,559.4 $5,247.7 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 50.2 $ 1.0 Notes payable 568.9 419.1 Accounts payable 491.4 373.2 Accrued liabilities 576.3 653.6 Income taxes payable 100.0 - ________ ________ Total current liabilities 1,786.8 1,446.9 Long-term debt 472.4 386.1 Deferred income taxes and other liabilities 87.6 79.8 Commitments and contingencies (Note 7) -- -- Redeemable preferred stock 0.3 0.3 Shareholders' equity: Common stock at stated value: Class A convertible-100.5 and 101.7 shares outstanding 0.2 0.2 Class B-175.5 and 181.6 shares outstanding 2.7 2.7 Capital in excess of stated value 352.7 334.1 Accumulated other comprehensive income (84.4) (68.9) Retained earnings 2,941.1 3,066.5 ________ ________ 3,212.3 3,334.6 ________ ________ $5,559.4 $5,247.7 ======== ======== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENT OF INCOME <S> <C> <C> <C> <C> Three Months Ended Six Months Ended November 30, November 30, __________________ _________________ 1999 1998 1999 1998 ____ ____ ____ ____ (in millions, except per share data) Revenues $2,059.7 $1,913.0 $4,560.8 $4,417.9 _________ _________ _________ _________ Costs and expenses: Cost of sales 1,238.0 1,229.6 2,772.6 2,792.3 Selling and administrative 624.8 531.9 1,251.4 1,184.5 Interest 6.7 10.1 16.7 24.3 Other expense 16.8 6.7 23.7 11.2 Restructuring Charge - 20.9 - 20.9 _________ _________ _________ __________ 1,886.3 1,799.2 4,064.4 4,033.2 _________ _________ _________ __________ Income before income taxes 173.4 113.8 496.4 384.7 Income taxes 65.9 44.9 188.6 151.9 _________ __________ _________ __________ Net income $ 107.5 $ 68.9 $ 307.8 $ 232.8 ========= ========== ========= ========== Basic earnings per common share $ 0.39 $ 0.24 $ 1.10 $ 0.82 (Note 3) ========= ========= ========= ========== Diluted earnings per common share $ 0.38 $ 0.24 $ 1.09 $ 0.80 (Note 3) ========= ========= ========= ========== Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24 ========= ========= ========= ========== </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement. NIKE, Inc. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended November 30, _________________ 1999 1998 ____ ____ (in millions) Cash provided (used) by operations: Net income $ 307.8 $232.8 Income charges (credits) not affecting cash: Depreciation 91.0 102.0 Deferred income taxes (.8) (18.4) Amortization and other 20.4 16.8 Changes in other working capital components 161.0 337.9 _______ _______ Cash provided by operations 579.4 671.1 _______ _______ Cash provided (used) by investing activities: Additions to property, plant and equipment (358.6) (173.6) Disposals of property, plant and equipment 12.0 11.7 Increase in other assets (13.8) (26.7) Increase (decrease) in other liabilities 3.5 (6.4) _______ _______ Cash used by investing activities (356.9) (195.0) _______ _______ Cash provided (used) by financing activities: Additions to long-term debt 109.0 - Reductions in long-term debt including current portion (1.4) (0.9) Increase (decrease) in notes payable 149.8 (48.6) Proceeds from exercise of options 27.2 9.3 Repurchase of stock (371.1) (194.0) Dividends - common and preferred (67.5) (68.6) _______ _______ Cash provided (used) by financing activities (154.0) (302.8) _______ _______ Effect of exchange rate changes on cash (13.6) (27.3) Net increase in cash and equivalents 54.9 146.0 Cash and equivalents, May 31, 1999 and 1998 198.1 108.6 _______ _______ Cash and equivalents, November 30, 1999 and 1998 $ 253.0 $254.6 ======= ======= 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 six (6) months ended November 30, 1999 are not necessarily indicative of results to be expected for the entire year. Year 2000 costs: Costs associated with the Company's efforts around Year 2000 issues are expensed as incurred, unless they relate to the purchase of hardware and software, and software development, in which case they are capitalized. Capitalized software and hardware costs are depreciated from three to five years. NOTE 2 - Comprehensive Income: __________________ Comprehensive income, net of taxes, is as follows: Three Months Ended Six Months Ended November 30, November 30, __________________ _________________ 1999 1998 1999 1998 ____ ____ ____ ____ (in millions) Net Income $107.5 $ 68.9 $307.8 $232.8 Change in Cumulative Translation Adjustment (4.0) (3.6) (15.5) (8.7) _______ _______ _______ _______ Total Comprehensive Income $103.5 $ 65.3 $292.3 $224.1 ======= ======= ======= ======= NOTE 3 - Net income per common share: ___________________________ Basic and diluted earnings per share are calculated in accordance with SFAS 128, "Earnings per Share." This standard requires that basic earnings per share be calculated using the average common shares outstanding. Diluted earnings per share are calculated by taking into consideration the dilutive effect of issued and outstanding stock options. The following represents a reconciliation from basic earnings per share to diluted earnings per share: Three Months Ended Six Months Ended November 30, November 30 __________________ ___________________ 1999 1998 1999 1998 ____ ____ ____ _____ (in millions, except per share data) Determination of shares: Average common shares outstanding 277.3 283.0 279.2 284.9 Assumed conversion of stock options 3.9 4.7 4.2 4.9 ______ ______ ______ _____ Diluted average common shares outstanding 281.2 287.7 283.4 289.8 ====== ====== ====== ====== Basic earnings per common share $ 0.39 $ 0.24 $ 1.10 $ 0.82 ====== ====== ====== ====== Diluted earnings per common share $ 0.38 $ 0.24 $ 1.09 $ 0.80 ====== ====== ====== ====== NOTE 4 - Inventories: ___________ Inventories by major classification are as follows: Nov. 30, May 31, 1999 1999 ________ ________ (in millions) Finished goods $1,177.7 $1,132.7 Work-in-progress 59.2 44.8 Raw materials 14.8 21.8 ________ ________ $1,251.7 $1,199.3 ======== ======== NOTE 5 - Operating Segments: The Company's major operating segments are defined by geographic regions for subsidiaries participating in NIKE Brand sales activity. Other Brands as shown below represent activity for non-NIKE brand subsidiaries (Cole-Haan Holdings, Inc., Bauer NIKE Hockey, Inc., and NIKE IHM, Inc.) and are considered immaterial for individual disclosure. Where applicable, "Corporate and Other" represents items necessary to reconcile to the consolidated financial statements which generally include corporate activity and corporate eliminations. The segments are evidence of the structure of the enterprise's internal organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, production, marketing and selling of sports and fitness footwear, apparel, and equipment. Net revenues as shown below represent sales to external customers for each segment. Intercompany revenues have been eliminated and are immaterial for separate disclosure. The Company evaluates performance of individual operating segments based on Contribution Profit before Corporate Allocations, Interest Expense and Income Taxes. On a consolidated basis, this amount represents Income Before Taxes less Interest Expense as shown in the Consolidated Statement of Income. Other reconciling items for Contribution Profit represent corporate costs that are not allocated to the operating segments for management reporting and intercompany eliminations for specific income statement items. Accounts receivable, inventory, and fixed assets for operating segments are regularly reviewed and therefore provided: <TABLE> <CAPTION> <S> <C> <C> <C> <C> Three Months Ended Six Months Ended November 30, November 30, __________________ __________________ 1999 1998 1999 1998 ____ ____ ____ ____ Net Revenue USA $1,078.6 $1,054.6 $2,410.3 $2,411.7 EURORE 484.7 430.2 1,202.5 1,111.1 ASIA PACIFIC 242.6 196.9 433.5 388.3 AMERICAS 145.1 119.7 288.7 272.3 OTHER BRANDS 108.7 111.6 225.8 234.5 _________ _________ _________ _________ $2,059.7 $1,913.0 $4,560.8 $4,417.9 ========= ========= ========= ========= Contribution Profit USA $ 197.4 $ 179.2 $ 472.3 $ 465.8 EUROPE 63.6 31.4 215.5 158.4 ASIA PACIFIC 44.3 9.8 68.4 17.5 AMERICAS 22.8 20.2 43.2 47.2 OTHER BRANDS 19.8 9.5 39.8 14.6 CORPORATE & OTHER (167.8) (126.2) (326.1) (294.5) _________ _________ _________ _________ $ 180.1 $ 123.9 $ 513.1 $ 409.0 ========= ========= ========= ========= Nov 30, May 31, 1999 1999 _________ __________ Accounts Receivable, net USA $ 536.1 $ 578.2 EUROPE 484.9 551.6 ASIA PACIFIC 180.0 141.5 AMERICAS 140.5 119.2 OTHER BRANDS 135.6 104.6 CORPORATE & OTHER 32.9 45.0 _________ _________ $1,510.0 $1,540.1 ========= ========= Inventories, net USA $ 666.3 $ 565.5 EUROPE 265.0 316.3 ASIA PACIFIC 97.1 81.5 AMERICAS 65.1 73.1 OTHER BRANDS 127.5 137.5 CORPORATE & OTHER 30.7 25.4 _________ _________ $1,251.7 $1,199.3 ======== ========= Property, Plant and Equipment, net USA $ 279.8 $ 293.0 EUROPE 281.3 271.4 ASIA PACIFIC 400.4 148.0 AMERICAS 20.6 21.5 OTHER BRANDS 109.7 111.7 CORPORATE & OTHER 457.2 420.2 _________ _________ $1,549.0 $1,265.8 ========= ========= </TABLE> Note 6 - Restructuring Charges: 1998 Charge During the fourth quarter of fiscal 1998 the Company recorded a restructuring charge of $129.9 million as a result of certain of the Company's actions to better align its cost structure with expected revenue growth rates. The restructuring activities (shown below in tabular format) primarily related to: 1) the elimination of job responsibilities company-wide, resulting in costs to sever employees and related asset write-downs and lease abandonments related to the affected employees; 2) the relocation of, and elimination of, certain job responsibilities of the Asia Pacific headquarters in Hong Kong, resulting in reduction in workforce, lease abandonments and other costs of downsizing the Hong Kong headquarters; 3) the downsizing of the Company's Japan distribution center, resulting in the write-down of assets no longer in use; 4) the cancellation of certain non-strategic long-term endorsement contracts, resulting in one-time termination fees; and 5) the decision to exit certain manufacturing operations of the Bauer subsidiary, resulting in the reduction in manufacturing related jobs, the write-down of assets no longer in use, and the estimated loss on divestiture of certain manufacturing plants. Employees were terminated from almost all areas of the Company, including marketing, sales and administrative areas. The total number of employees terminated was 1,208, with 1,203 having left the Company as of November 30, 1999. No increases to the 1998 restructuring charge have been made. A total of $15 million of the restructuring charge was reversed in fiscal year 1999. During the first two quarters of fiscal year 2000 continuing cash payments were made against the reserve liability as shown in the table below. The remaining accrual will be relieved throughout fiscal 2000, as leases expire and severance payments, some of which are paid on a monthly basis, are completed. Detail of the 1998 restructuring charge is as follows: <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> (in millions) FY98 FY99 DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE CASH CHARGE BALANCE AT BALANCE AT 5/31/99 11/30/99 ___________________________________________________________________________________________________________ ELIMINATION OF JOB RESPONSIBILITES COMPANY- WIDE $(49.8) $46.5 $ (3.3) $ 1.7 $(1.6) Severance packages cash (29.1) 28.2 (0.9) 0.5 (0.4) Lease cancellations & commitments cash (10.8) 8.4 (2.4) 1.2 (1.2) Write-down of assets non-cash (9.6) 9.6 - - - Other cash (0.3) 0.3 - - - ___________________________________________________________________________________________________________ DOWNSIZING THE ASIA PACIFIC HEADQUARTERS IN HONG KONG $(13.1) $13.0 $(0.1) $0.1 $ - Severance packages cash (4.6) 4.6 - - - Lease cancellations & commitments cash (5.5) 5.4 (0.1) 0.1 - Write-down of assets non-cash (3.0) 3.0 - - - ____________________________________________________________________________________________________________ DOWNSIZING THE JAPAN DISTRIBUTION CENTER $(31.6) $30.5 $(1.1) $1.1 $ - Write-off of assets non-cash (12.5) 12.5 - - - Software development costs cash/non (19.1) 18.0 (1.1) 1.1 - cash ____________________________________________________________________________________________________________ CANCELLATION OF ENDORSEMENT CONTRACTS cash $(5.6) $5.3 $(0.3) $ - $(0.3) ____________________________________________________________________________________________________________ EXITING CERTAIN MANUFACTURING OPERATIONS AT BAUER $(22.7) $21.7 $(1.0) $0.6 $(0.4) Write-down of assets non-cash (14.7) 14.7 - - - Divestiture of manufacturing facilities non-cash (5.2) 5.2 - - - Lease cancellations & commitments cash (1.6) 0.9 (0.7) 0.3 (0.4) Severance packages cash (1.2) 0.9 (0.3) 0.3 - ____________________________________________________________________________________________________________ OTHER $(7.1) $6.4 $(0.7) $0.2 $(0.5) Cash cash (0.6) 0.6 - - - Non-cash non-cash (6.5) 5.8 (0.7) 0.2 (0.5) ____________________________________________________________________________________________________________ Effect of foreign currency translation - $0.2 $0.2 $(0.3) $(0.1) ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ TOTAL $(129.9) $123.6 $(6.3) $3.4 $(2.9) ____________________________________________________________________________________________________________ </TABLE 1999 Charge During fiscal 1999, a $60.1 million charge was taken due to further cost realignment programs. The charge (shown below in tabular format) was primarily for costs of severing employees, including severance packages, lease abandonments and the write down of assets no longer in use. Employees were terminated in Europe, Asia Pacific, and in the United States, and included employees affected by the Company's shift to outsourcing certain of its information technology functions. The original number of employees to be terminated was 1,291. As of November 30, 1999, 13 employees have found positions elsewhere in the Company and 1,105 have left the Company, leaving 173 still to be terminated. Due to the change in the number of employees that will be terminated, $0.3 million of the reserve was reversed during the second quarter. Also included in the charge was a $20.2 write-off of certain assets related to the change in strategies around the Company's warehouse distribution facilities in the United States. The remaining accrual balance will be relieved throughout fiscal 2000 and early 2001, as leases expire and severance payments are completed. Detail of the 1999 restructuring charge is as follows: </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> (in millions) FY99 FY99 DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE CASH CHARGE BALANCE AT BALANCE AT 5/31/99 11/30/99 ____________________________________________________________________________________________________________ ELIMINATION OF JOB RESPONSIBILITES $(39.9) $21.9 $(18.0) $9.4 $(8.6) Severance packages cash (28.0) 11.7 (16.3) 8.5 (7.8) Lease cancellations & commitments cash (2.4) 1.6 (0.8) 0.5 (0.3) Write-down of assets non-cash (7.8) 7.8 - - - Other cash/non- (1.7) 0.8 (0.9) 0.4 (0.5) cash ____________________________________________________________________________________________________________ CHANGE IN WAREHOUSE DISTRIBUTION STRATEGY $(20.2) $20.2 $ - $ - $ - Write-down of assets non-cash (20.2) 20.2 - - - ____________________________________________________________________________________________________________ Effect of foreign currency translation - $0.1 $0.1 $(0.9) $(0.8) ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ TOTAL $(60.1) $42.2 $(17.9) $8.5 $(9.4) ____________________________________________________________________________________________________________ <Table/ NOTE 7 - Commitments and contingencies: _____________________________ At November 30, 1999, the Company had letters of credit outstanding totalling $47.4 million. These letters of credit were issued for the purchase of inventory. 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 for the second quarter of fiscal year 2000 was $107.5 million, an increase of 56% over the prior year's second quarter. Year-to-date net income increased 32% over the prior year, to $307.8 million. Excluding last year's second quarter net pre-tax restructuring charge of $20.9 million, net income increased 32% and 25% for the quarter and year-to-date, respectively. Quarterly earnings were driven by an increase in revenues of 8%, representing our first consolidated revenue increase in two years, a 420 basis point increase in gross margin percentage, due to better margins on close-out sales relative to the prior year, offset by an increase in selling and administrative costs as percentage of revenues. In addition, earnings improved as our effective tax rate fell to 38.0% from 39.5% in the prior year. Diluted earnings per share increased 58% to $0.38, and 36% to $1.09, for the quarter and year-to-date, respectively, slightly better than net income, as a result of share repurchases. Consolidated revenues increased 8% to $2.1 billion in the second quarter compared to the prior year and increased 3% year-to-date to $4.6 billion. Had the dollar remained constant with that of the prior year, revenues would have increased 9% for the quarter and 4% for the year. NIKE brand revenue increases were experienced in all regions during the second quarter. By region, the U.S. increased 2%, Europe increased 13% (22% in constant dollars), Asia Pacific increased 23% (9% in constant dollars) and Americas and Africa increased 21% (28% in constant dollars). Our consolidated footwear revenues increased 16% (18% in constant dollars) while apparel was down 4% (3% in constant dollars), primarily as a result of the U.S. apparel business which was down 10%. U.S. NIKE brand footwear revenues increased over the prior year 9% and 5% for the second quarter and year-to-date, respectively. U.S. footwear represents more than 35% of our total revenues. Major categories showing revenue increases for the quarter included Running, up 23% (19% year-to-date), basketball, up 22% (10% year-to-date), Cross Training, up 8% (6% year-to-date), and Kids, up 22% (5% year-to-date). A notable category that experienced a revenue reduction for the quarter was Brand Jordan, down 42% (down 3% year-to- date). U.S. NIKE brand apparel business decreased 10% in the second quarter and 11% year-to-date. All apparel categories experienced reductions except our largest single category, Branded Athletic, which increased 8% (down 3% year-to- date). Revenue growth continued outside the U.S. In constant dollars, our footwear business in Europe was up 29% for the quarter (17% year-to-date), and apparel was up 15% (12% year-to-date). Of the major markets in the region, the United Kingdom increased 37% for the quarter (19% year-to-date), France increased 12% (19% year-to-date), Italy increased 17% (21% year-to-date), while Spain was flat and Germany was down 3% for the quarter (down 1% and 3%, year-to- date, respectively). In constant dollars, revenues in our Asia Pacific region were up 9% for the quarter and were flat on a year-to-date basis. Our footwear business in the second quarter increased 29% (17% year-to-date), offset by a decrease in apparel of 9%, (down 17% year-to-date). The significant decrease in apparel was primarily due to the high volume of closeout product sold during the prior year to reduce high inventory levels, which are not present this year. The most significant market in that region for us is Japan, which increased 35% in constant dollars for the quarter (19% year-to-date). In addition, Korea doubled its revenues in the second quarter compared with the prior year (up 25% year-to- date), primarily as a result of the lower revenues experienced in the prior year due to the significant economic issues affecting the region at that time. Revenue of the combined Americas and Africa regions increased 28% in constant dollars for the quarter (11% year-to-date), with footwear increasing 48% for the quarter, (20% year-to-date) and apparel decreasing 5%, (down 11% for the quarter). Other Brands business decreased 3% for the quarter and was down 4% for the year. </TABLE> <TABLE> <CAPTION> The breakdown of revenues follows: <S> <C> <C> <C> <C> <C> <C> Three Months Ended Six Months Ended November 30, November 30, ___________________ _________________ % % 1999 1998 change 1999 1998 change ______ ______ _______ ______ ______ _______ (in millions) U.S.A. REGION FOOTWEAR $722.9 $665.9 9% $1,663.9 $1,583.3 5% APPAREL 307.0 343.0 -10% 639.0 717.7 -11% EQUIPMENT AND OTHER 48.7 45.7 7% 107.4 110.7 -3% _______ _______ ________ ________ TOTAL U.S.A. 1,078.6 1,054.6 2% 2,410.3 2,411.7 0% EUROPE REGION FOOTWEAR 235.4 197.7 19% 610.7 551.9 11% APPAREL 231.7 215.7 7% 560.2 526.5 6% EQUIPMENT AND OTHER 17.6 16.8 5% 31.6 32.7 -3% _______ _______ ________ ________ TOTAL EUROPE 484.7 430.2 13% 1,202.5 1,111.1 8% ASIA PACIFIC REGION FOOTWEAR 129.9 90.7 43% 253.1 197.1 28% APPAREL 105.8 101.4 4% 168.3 180.7 -7% EQUIPMENT AND OTHER 6.9 4.8 44% 12.1 10.5 15% _______ _______ ________ ________ TOTAL ASIA PACIFIC 242.6 196.9 23% 433.5 388.3 12% AMERICAS REGION FOOTWEAR 102.0 73.7 38% 202.6 176.3 15% APPAREL 41.0 42.5 -4% 79.7 89.5 -11% EQUIPMENT AND OTHER 2.1 3.5 -40% 6.4 6.5 -2% _______ _______ ________ ________ TOTAL AMERICAS 145.1 119.7 21% 288.7 272.3 6% _______ _______ ________ ________ TOTAL NIKE BRAND 1,951.0 1,801.4 8% 4,335.0 4,183.4 4% OTHER & OTHER BRANDS 108.7 111.6 -3% 225.8 234.5 -4% _______ _______ ________ ________ TOTAL REVENUES $2,059.7 $1,913.0 8% $4,560.8 $4,417.9 3% ======== ======== ======== ======== Consolidated gross margins as a percentage of revenues increased significantly in the second quarter and for the year compared with the prior year. As with the first quarter of this fiscal year, the quality of our revenues improved significantly relative to a year ago. While our total closeout sales were about the same as last year, the margins generated on those sales were greatly improved primarily as a result of the significant inventory liquidation efforts in place around the world last year. This quarter was the first in over a year that reflected the total margin impact of those efforts. In addition, virtually all of our revenue increases for the quarter were from in-line product sales that carried higher margins. The increase in margins can also be attributed to the leveraging of fixed warehousing and distribution costs over increasing revenue volumes, and increased comparative pricing margins on both in-line and closeout product sales. Selling and administrative expenses increased $93 million over last year's second quarter, an increase of 17%, representing 30.3% of revenues compared with 27.8% in the prior year. For the year, selling and administrative expenses increased $67 million or 6%. A significant portion of the quarter on quarter increase relates to incremental and certain one-time expenses. Incremental spending relates to infrastructure investments such as our Supply Chain and NIKE.com initiatives, incentive compensation enhancements that tie to our revenue and earnings growth goals and additional costs incurred to support an expanded corporate headquarters. One-time charges reflect increases to our bad debt reserves in the U.S. and certain transition costs of moving our employees in the U.S. and Europe into larger and expanded centralized campuses. In Europe, these moves reflect the centralization of certain shared services from individual country locations to our European headquarters. In addition, increased demand creation spending accounted for a portion of the increase, particularly in print and TV advertising in the U.S. and Europe. Growth of our retail operations around the world also increased our selling and administrative costs. Over the last 12 months, we have added four new NIKEtowns, four new in- line stores and 31 new factory outlet stores. The return on our investment in retail is demonstrated in our improved margins on closeout sales discussed above. Our spending can be characterized as being directed at growing our infrastructure to meet the demands of the future. Investments in NIKE.com and Supply Chain are clear examples of this. Interest expense decreased in the second quarter and year-to-date, compared to last year, primarily due to our restructured operating agreement with Nissho Iwai Corporation, resulting in improved interest rates. Offsetting this was increased interest due to higher levels of short and long term debt, as discussed under Liquidity and Capital Resources section below. Other expense increased over the prior year, for both the quarter and year- to-date, mainly due to increased profit share expense, costs associated with moving and outsourcing certain operations in the U.S., foreign currency transaction losses, and other one-time non-operating charges. Our tax expense for the first six months of this fiscal year decreased to an effective rate of 38%, compared to 39.5% last year. The drop was primarily due to reduced state taxes and the utilization of tax loss carryforwards of certain foreign operations that have recently turned profitable. Worldwide futures and advance orders for NIKE brand athletic footwear and apparel scheduled for delivery between December 1999 and April 2000 totaled $3.8 billion, 4% higher than such orders for the same period last year. These orders and the percentage change in these orders are not necessarily indicative of the change in revenues that we will experience for subsequent periods. This is due to potential shifts in the mix of advance orders in relation to at-once orders and varying cancellation rates. Finally exchange rate fluctuations will also cause differences in the comparisons. Restructuring charges 1998 Charge During the fourth quarter of fiscal 1998 the Company recorded a restructuring charge of $129.9 million as a result of certain of the Company's actions to better align its cost structure with expected revenue growth rates. The restructuring activities (shown below in tabular format) primarily related to: 1) the elimination of job responsibilities company-wide, resulting in costs to sever employees and related asset write-downs and lease abandonments related to the affected employees; 2) the relocation of, and elimination of, certain job responsibilities of the Asia Pacific headquarters in Hong Kong, resulting in reduction in workforce, lease abandonments and other costs of downsizing the Hong Kong headquarters; 3) the downsizing of the Company's Japan distribution center, resulting in the write-down of assets no longer in use; 4) the cancellation of certain non-strategic long-term endorsement contracts, resulting in one-time termination fees; and 5) the decision to exit certain manufacturing operations of the Bauer subsidiary, resulting in the reduction in manufacturing related jobs, the write-down of assets no longer in use, and the estimated loss on divestiture of certain manufacturing plants. Employees were terminated from almost all areas of the Company, including marketing, sales and administrative areas. The total number of employees terminated was 1,208, with 1,203 having left the Company as of November 30, 1999. No increases to the 1998 restructuring charge have been made. A total of $15 million of the restructuring charge was reversed in fiscal year 1999. During the first two quarters of fiscal year 2000 continuing cash payments were made against the reserve liability as shown in the table below. The remaining accrual will be relieved throughout fiscal 2000, as leases expire and severance payments, some of which are paid on a monthly basis, are completed. Detail of the 1998 restructuring charge is as follows: </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> (in millions) FY98 FY99 DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE CASH CHARGE BALANCE AT BALANCE AT 5/31/99 11/30/99 ___________________________________________________________________________________________________________ ELIMINATION OF JOB RESPONSIBILITES COMPANY- WIDE $(49.8) $46.5 $ (3.3) $ 1.7 $(1.6) Severance packages cash (29.1) 28.2 (0.9) 0.5 (0.4) Lease cancellations & commitments cash (10.8) 8.4 (2.4) 1.2 (1.2) Write-down of assets non-cash (9.6) 9.6 - - - Other cash (0.3) 0.3 - - - ___________________________________________________________________________________________________________ DOWNSIZING THE ASIA PACIFIC HEADQUARTERS IN HONG KONG $(13.1) $13.0 $(0.1) $0.1 $ - Severance packages cash (4.6) 4.6 - - - Lease cancellations & commitments cash (5.5) 5.4 (0.1) 0.1 - Write-down of assets non-cash (3.0) 3.0 - - - ____________________________________________________________________________________________________________ DOWNSIZING THE JAPAN DISTRIBUTION CENTER $(31.6) $30.5 $(1.1) $1.1 $ - Write-off of assets non-cash (12.5) 12.5 - - - Software development costs cash/non (19.1) 18.0 (1.1) 1.1 - cash ____________________________________________________________________________________________________________ CANCELLATION OF ENDORSEMENT CONTRACTS cash $(5.6) $5.3 $(0.3) $ - $(0.3) ____________________________________________________________________________________________________________ EXITING CERTAIN MANUFACTURING OPERATIONS AT BAUER $(22.7) $21.7 $(1.0) $0.6 $(0.4) Write-down of assets non-cash (14.7) 14.7 - - - Divestiture of manufacturing facilities non-cash (5.2) 5.2 - - - Lease cancellations & commitments cash (1.6) 0.9 (0.7) 0.3 (0.4) Severance packages cash (1.2) 0.9 (0.3) 0.3 - ____________________________________________________________________________________________________________ OTHER $(7.1) $6.4 $(0.7) $0.2 $(0.5) Cash cash (0.6) 0.6 - - - Non-cash non-cash (6.5) 5.8 (0.7) 0.2 (0.5) ____________________________________________________________________________________________________________ Effect of foreign currency translation - $0.2 $0.2 $(0.3) $(0.1) ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ TOTAL $(129.9) $123.6 $(6.3) $3.4 $(2.9) ____________________________________________________________________________________________________________ </TABLE 1999 Charge During fiscal 1999, a $60.1 million charge was taken due to further cost realignment programs. The charge (shown below in tabular format) was primarily for costs of severing employees, including severance packages, lease abandonments and the write down of assets no longer in use. Employees were terminated in Europe, Asia Pacific, and in the United States, and included employees affected by the Company's shift to outsourcing certain of its information technology functions. The original number of employees to be terminated was 1,291. As of November 30, 1999, 13 employees have found positions elsewhere in the Company and 1,105 have left the Company, leaving 173 still to be terminated. Due to the change in the number of employees that will be terminated, $0.3 million of the reserve was reversed during the second quarter. Also included in the charge was a $20.2 write-off of certain assets related to the change in strategies around the Company's warehouse distribution facilities in the United States. The remaining accrual balance will be relieved throughout fiscal 2000 and early 2001, as leases expire and severance payments are completed. Detail of the 1999 restructuring charge is as follows: </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> (in millions) FY99 FY99 DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE CASH CHARGE BALANCE AT BALANCE AT 5/31/99 11/30/99 ____________________________________________________________________________________________________________ ELIMINATION OF JOB RESPONSIBILITES $(39.9) $21.9 $(18.0) $9.4 $(8.6) Severance packages cash (28.0) 11.7 (16.3) 8.5 (7.8) Lease cancellations & commitments cash (2.4) 1.6 (0.8) 0.5 (0.3) Write-down of assets non-cash (7.8) 7.8 - - - Other cash/non- (1.7) 0.8 (0.9) 0.4 (0.5) cash ____________________________________________________________________________________________________________ CHANGE IN WAREHOUSE DISTRIBUTION STRATEGY $(20.2) $20.2 $ - $ - $ - Write-down of assets non-cash (20.2) 20.2 - - - ____________________________________________________________________________________________________________ Effect of foreign currency translation - $0.1 $0.1 $(0.9) $(0.8) ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ TOTAL $(60.1) $42.2 $(17.9) $8.5 $(9.4) ____________________________________________________________________________________________________________ <Table/> Euro Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union established permanent, fixed conversion rates between their existing currencies and the European Union's new common currency, the euro. During the transition period ending December 31, 2001, public and private parties may pay for goods and services using either the euro or the participating country's legacy currency. Beginning January 1, 2002, euro denominated bills and coins will be issued, with the legacy currencies being completely withdrawn from circulation on June 30, 2002. We have had a dedicated project team working on euro strategy since January 1998. We are in the process of making modifications to information technology systems including marketing, order management, purchasing, invoicing, payroll, and cash management. Many of our systems are already euro compliant. Our plan is to have most systems converted to euro compliance by the end of calendar year 2000, well ahead of the end of the transitional period. We believe the introduction of the euro may create a move towards a greater level of price harmonization, although differing country costs and value added tax rates will continue to result in price differences at a retail level. We have a process in place to analyze price trends among countries. Currency exchange and hedging costs could be reduced, due to the introduction of the euro. The costs of implementing the euro are generally related to modification of existing systems, and are estimated to be approximately $14 million. These costs will be expensed as incurred. We believe that the conversion to the euro will not be material to our financial condition or results of operations. Year 2000 Readiness Disclosure Since May 1997, a corporate-wide project team has overseen, monitored, and performed the remediation or replacement of date-sensitive computer software programs and systems that might fail because the programs use two digits rather than four to define the applicable year (the "Year 2000" issue). The risks to NIKE, and our mitigation efforts and contingency plans have been described in our most recent annual and quarterly reports on Forms 10-K and 10-Q. Those disclosures are still current. The following information updates those disclosures. We have completed all major Year 2000 projects. With the passage of most critical dates, including the commencement of NIKE's 2000 fiscal year, and January 1, 2000, we and our significant suppliers and customers have experienced no significant disruptions due to the Year 2000 issue. Based on this experience, we currently expect no significant disruptions in the future as a result of the Year 2000 issue or the fact that 2000 is a leap year. Accordingly, the Year 2000 issue has not had, and is not currently expected to have, any material adverse effect on our financial condition, results of operations or liquidity. Our total costs related to the Year 2000 issue will be approximately $100 million, of which approximately $98 million have been incurred as of November 30, 1999. Of the $98 million, approximately $41 million were external expenses, $18 million internal costs and $39 million replacement projects. Approximately $10 million of the non-replacement expenses will be capitalized; the remainder has been expensed as incurred. NIKE has funded Year 2000 costs through operating cash flows. This information is subject to the same risks and uncertainties outlined in prior disclosures. The above section, even if incorporated by reference into other documents or disclosures, is a Year 2000 Readiness Disclosure as defined under the Year 2000 Information and Readiness Disclosure Act of 1998. Liquidity and Capital Resources The Company's financial position remained strong at November 30, 1999. Compared to May 31, 1999, shareholders' equity decreased slightly to $3.2 billion. Working capital decreased 18% to $1.5 billion and the current ratio was 1.84:1 at November 30, 1999 compared to 2.26:1 at May 31, 1999. Cash provided by operations was $579 million for the first half of fiscal 2000, a decrease of $92 million compared to last year. The changes in working capital components primarily drove this decrease, offset by increased net income. The reduction in the change in working capital relative to a year ago is primarily due to the effects of the slow down in the business experienced during the first half of last year. As a result, inventory and accounts receivable levels in the prior year had been significantly reduced during the first half of last year, generating positive cash flows, while this year our business is improving, reflecting more comparable inventory and receivable levels to fiscal year end. The reduction in inventories during the first half of last year were a result of our efforts to liquidate high closeout levels around the world to more normalized levels. In addition, the timing of income tax payments has positively affected working capital as of November 30, 1999. During the first quarter of this fiscal year, we restructured our operating arrangement with Nissho Iwai Corporation, which allows us, among other things, to take over the financing of inventory purchases previously performed by Nissho. This will have the effect of placing USA inventory on our balance sheet fifteen to twenty-five days earlier than in the past. Although the net working capital impact of this new arrangement is minimal, as of November 30, 1999, approximately $110 million of inventory was in transit to the U.S. and on our books, compared to zero at May 31, 1999. In addition, we are now responsible for issuing letters of credit for the purchase of inventories, which used to be performed by Nissho. At November 30, 1999, we had letters of credit outstanding of $47.4 million for the purchase of inventory. Additions to property, plant and equipment for the first half of fiscal 2000 were $359 million. Approximately $246 million related to the purchase of our distribution facility in Japan, discussed below. The other significant expenditures were related to the continued expansion of our world headquarters and additions to computer equipment and software. During the first quarter of fiscal 2000, we finalized the purchase of our distribution facility in Japan from Nissho. We financed the purchase by assuming Nissho's Japanese development bank loans, along with some short-term debt that we currently intend to roll to long-term within the next few months. This is the primary reason for the increase in notes payable and long-term debt compared to May 31, 1999. Management believes that significant funds generated by operations, together with access to sufficient sources of funds, will adequately meet its anticipated operating, global infrastructure expansion and capital needs. Significant short and long-term lines of credit are maintained with banks, which, along with cash on hand, provide adequate operating liquidity. Liquidity is also provided by the Company's commercial paper program, under which there was $390 outstanding at November 30, 1999. Dividends per share of common stock for the second quarter of fiscal 2000 remained at $.12 per share, the same level as the previous year. As of November 30, 1999, the Company purchased a total of 15.8 million shares of NIKE's Class B common stock for $731 million in the open market since the $1 billion share repurchase program was approved in December 1997. During the first six months of fiscal year 2000, the Company purchased a total of 7.2 million shares for $375 million. Funding has, and is expected to continue to, come from operating cash flow in conjunction with short-term borrowings. The timing and the amount of shares purchased will be dictated by working capital needs and stock market conditions. Special Note Regarding Forward-Looking Statements and Reports Analyst Reports Certain written and oral statements made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the Securities and Exchange Commission, press releases, conferences, or otherwise, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("the Act"). Forward- looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "project," "will be," "will continue," "will result," or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel, and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic footwear, apparel, and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for NIKE products; the size, timing and mix of purchases of NIKE's products; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance "futures" orders may not be indicative of future revenues due to the changing mix of futures and at-once orders; the ability of NIKE to sustain, manage or forecast its growth and inventories; new product development and introduction; the ability to secure and protect trademarks, patents, and other intellectual property; performance and reliability of products; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors; business disruptions; disruptions due to Year 2000 noncompliance by NIKE, its suppliers or customers (or their suppliers or customers); increased costs of freight and transportation to meet delivery deadlines; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, import duties, tariffs, quotas and political and economic instability; changes in government regulations; liability and other claims asserted against NIKE; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports. The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely impact NIKE's business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on NIKE's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward- looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE. 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, 1999. 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 fiscal quarter ended August 31, 1995). 3.2 Third Restated Bylaws, as amended (incorporated by reference from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal 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). 4.3 Form of Indenture between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference from Exhibit 4.01 to Amendment No. 1 to Registration Statement No. 333-15953 filed by the Company on November 26, 1996). 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 (incorporated by reference from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended 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 22, 1997).* 10.6 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).* 10.7 NIKE, Inc. Long-Term Incentive Plan (incorporated by reference from the Company's definitive proxy statement filed in connection with its annual meeting of shareholders held on September 22, 1997).* 10.8 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).* 12.1 Computation of Ratio of Earnings to Charges. 27 Financial Data Schedule. * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fiscal quarter ending November 30, 1999. 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/Donald W. Blair ________________________ Donald W. Blair Chief Financial Officer DATED: January 14, 2000 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12.1 <SEQUENCE>2 <TEXT> NIKE, INC. COMPUTATION OF RATIO OF EARNINGS TO CHARGES Six Months Ended November 30, __________________ 1999 1998 ____ ____ (in millions) Net income $307.8 $232.8 Income taxes 188.6 151.9 ______ ______ Income before income taxes 496.4 384.7 ______ _____ Add fixed charges Interest expense (A) 18.4 27.5 Interest component of leases (B) 24.0 20.9 ______ ______ Total fixed charges 42.4 48.4 ______ ______ Earnings before income taxes and fixed charges (C) $537.1 $429.9 ====== ====== Ratio of earnings to total fixed charges 12.67 8.88 ====== ====== (A) Interest expense includes 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>3 <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, 1999 FORM 10-Q 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> MAY-31-2000 <PERIOD-END> NOV-30-1999 <CASH> 253 <SECURITIES> 0 <RECEIVABLES> 1596 <ALLOWANCES> 86 <INVENTORY> 1252 <CURRENT-ASSETS> 3286 <PP&E> 2355 <DEPRECIATION> 806 <TOTAL-ASSETS> 5559 <CURRENT-LIABILITIES> 1787 <BONDS> 472 <COMMON> 3 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <OTHER-SE> 3209 <TOTAL-LIABILITY-AND-EQUITY> 5559 <SALES> 4561 <TOTAL-REVENUES> 4561 <CGS> 2773 <TOTAL-COSTS> 2773 <OTHER-EXPENSES> 1255 <LOSS-PROVISION> 20 <INTEREST-EXPENSE> 17 <INCOME-PRETAX> 496 <INCOME-TAX> 189 <INCOME-CONTINUING> 308 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 308 <EPS-BASIC> 1.10 <EPS-DILUTED> 1.09 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

NOVL

https://www.sec.gov/Archives/edgar/data/758004/0000758004-00-000002.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, CmJwWuhigUHio9foEzANW8RqiQP1brzQUXCysYeTULuItHrDjo4S5eJxRex5ge3S 3aTsGOOFvINJc4XPqt+Jbw== <SEC-DOCUMENT>0000758004-00-000002.txt : 20000316 <SEC-HEADER>0000758004-00-000002.hdr.sgml : 20000316 ACCESSION NUMBER: 0000758004-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000315 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: SEC FILE NUMBER: 000-13351 FILM NUMBER: 570167 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 <DESCRIPTION>QUARTERLY REPORT ON FORM 10Q <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 Fiscal Quarter Ended January 31, 2000 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.) 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 29, 2000 there were 329,428,357 shares of the Registrant's Common Stock outstanding. <PAGE> PART I. FINANCIAL INFORMATION, ITEM 1. FINANCIAL STATEMENTS NOVELL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS <TABLE> <S> <C> <C> Jan. 31, Oct. 31, DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA 2000 1999 - ------------------------------------------------------------------------------------------------------------------- (Unaudited) ASSETS CURRENT ASSETS Cash and short-term investments $ 947,515 $ 895,404 Receivables, less allowances ($37,830 - January; $36,318 - October) 236,857 284,510 Inventories 4,028 3,753 Prepaid expenses 43,954 47,738 Deferred and refundable income taxes -- 60,266 OTHER CURRENT ASSETS 33,465 43,945 - ------------------------------------------------------------------------------------------------------------------- Total current assets 1,265,819 1,335,616 Property, plant and equipment, net 341,816 347,012 Long-term investments 375,752 229,114 OTHER ASSETS 35,622 30,577 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 2,019,009 $ 1,942,319 =================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 57,523 $ 85,037 Accrued compensation 61,747 62,778 Accrued marketing liabilities 11,056 11,449 Other accrued liabilities 47,395 50,133 Income taxes payable 37,490 57,085 Deferred taxes 10,451 -- DEFERRED REVENUE 180,706 173,150 - ------------------------------------------------------------------------------------------------------------------- Total current liabilities 406,368 439,632 Minority interests 11,629 10,446 SHAREHOLDERS' EQUITY Common stock, par value $.10 per share Authorized - 600,000,000 shares Issued - 327,700,063 shares-January 326,593,911 shares-October 32,771 32,659 Additional paid-in capital -- -- Retained earnings 1,468,646 1,432,624 Accumulated other comprehensive income 109,285 35,189 OTHER (9,690) (8,231) - ------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 1,601,012 1,492,241 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 2,019,009 $ 1,942,319 =================================================================================================================== </TABLE> See notes to consolidated unaudited condensed financial statements. <PAGE> NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME <TABLE> <S> <C> <C> FISCAL QUARTER ENDED Dollars in thousands, Jan. 31, Jan. 31, EXCEPT PER SHARE DATA 2000 1999 - ------------------------------------------------------------------------------------------------------------------ NET SALES $ 316,043 $ 285,806 COST OF SALES 76,921 64,126 - ------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 239,122 221,680 OPERATING EXPENSES Sales and marketing 114,130 105,386 Product development 58,677 55,604 GENERAL AND ADMINISTRATIVE 19,785 24,395 - ------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 192,592 185,385 - ------------------------------------------------------------------------------------------------------------------- Income from operations 46,530 36,295 OTHER INCOME (EXPENSE) Investment income 17,558 9,763 OTHER, NET (1,817) (5,922) - ------------------------------------------------------------------------------------------------------------------- OTHER INCOME, NET 15,741 3,841 - ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES 62,271 40,136 INCOME TAXES 17,436 11,238 - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 44,835 $ 28,898 =================================================================================================================== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 326,906 337,441 Diluted 342,105 351,522 =================================================================================================================== NET INCOME PER SHARE Basic $ 0.14 $ 0.09 Diluted $ 0.13 $ 0.08 =================================================================================================================== </TABLE> See notes to consolidated unaudited condensed financial statements. <PAGE> NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS <TABLE> <S> <C> <C> THREE MONTHS ENDED ----------------------- Jan. 31, Jan. 31, DOLLARS IN THOUSANDS 2000 1999 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 44,835 $ 28,898 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Depreciation and amortization 18,505 16,940 Stock plans' income tax benefits 29,677 13,347 Decrease in receivables 47,653 40,485 (Increase) decrease in inventories (275) 825 Decrease (increase) in prepaid expenses 3,784 (24) Decrease in deferred and refundable income taxes 19,442 15,499 Decrease (increase) in other current assets 10,480 (19,763) (DECREASE) IN CURRENT LIABILITIES, NET (33,264) (13,059) - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 140,837 83,148 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock, net 37,164 27,293 REPURCHASE OF COMMON STOCK (88,781) (76,843) - ------------------------------------------------------------------------------------------------------------------- NET CASH USED BY FINANCING ACTIVITIES (51,617) (49,550) - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (10,674) (12,215) Purchases of short-term investments (294,999) (643,484) Maturities of short-term investments 280,750 492,629 Sales of short-term investments 163,507 153,969 Expenditures for other long-term investments (130,009) (1,749) Increase in restricted cash (16,629) (40,278) OTHER 15,594 1,567 ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 7,540 (49,561) - -------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 96,760 (15,963) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 274,269 155,493 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD 371,029 139,530 SHORT-TERM INVESTMENTS - END OF PERIOD 576,486 875,892 - ------------------------------------------------------------------------------------------------------------------- CASH AND SHORT-TERM INVESTMENTS - END OF PERIOD $ 947,515 $ 1,015,422 =================================================================================================================== SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES: Issuance of restricted stock for acquisitions $ 10,656 $ -- </TABLE> See notes to consolidated unaudited condensed financial statements. <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 1999 Annual Report to Shareholders. These financial statements do include all normal recurring adjustments that 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. Certain reclassifications, none of which affected net income, have been made to the prior years' amounts in order to conform to the current years' presentation. B. 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 comprehensive income. Fair market values are based on quoted market prices at the end of the period, where available; if quoted market prices are not available, then fair market values are based on quoted market prices of comparable instruments. Municipal securities included in short-term investments have contractual maturities from 1-7 years. Money market preferreds have contractual maturities of less than 180 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. <TABLE> <S> <C> <C> <C> <C> Gross Gross Fair Cost at Unrealized Unrealized Market Value at (DOLLARS IN THOUSANDS) JAN. 31, 2000 GAINS LOSSES JAN. 31, 2000 ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS Cash $ 319,807 $ - $ - $ 319,807 MONEY MARKET FUND 51,222 - - 51,222 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS 371,029 - - 371,029 - ------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS Municipal securities 289,418 - (3,345) 286,073 Money market mutual funds 5,173 - - 5,173 Money market preferreds 31,502 1 (3) 31,500 Mutual funds 76,872 61 (794) 76,139 EQUITY SECURITIES 7,431 170,170 - 177,601 - ------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS 410,396 170,232 (4,142) 576,486 - ------------------------------------------------------------------------------------------------------------------- CASH AND SHORT-TERM INVESTMENTS $ 781,425 $ 170,232 $ (4,142) $ 947,515 - ------------------------------------------------------------------------------------------------------------------- </TABLE> <PAGE> <TABLE> <S> <C> <C> <C> <C> Gross Gross Fair Cost at Unrealized Unrealized Market Value at (DOLLARS IN THOUSANDS) OCT. 31, 1999 GAINS LOSSES OCT. 31, 1999 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS Cash $ 186,689 $ - $ - $ 186,689 MONEY MARKET FUND 87,580 - - 87,580 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS 274,269 - - 274,269 - ------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS Municipal securities 411,938 3 (2,393) 409,548 Money market mutual funds 93,894 - - 93,894 Money market preferreds 33,000 - - 33,000 Mutual funds 15,873 - (102) 15,771 EQUITY SECURITIES 4,949 64,619 (646) 68,922 - ------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS 559,654 64,622 (3,141) 621,135 - ------------------------------------------------------------------------------------------------------------------- CASH AND SHORT-TERM INVESTMENTS $ 833,923 $ 64,622 $ (3,141) $ 895,404 - ------------------------------------------------------------------------------------------------------------------- </TABLE> During the first three months of fiscal 2000 the Company realized gains of $7 million and realized losses of $1 million on the sale of securities compared to realized gains of $13 million and realized losses of $15 million in the first three months of fiscal 1999. C. INCOME TAXES The Company's estimated effective tax rate for the first three months of fiscal 2000 was 28.0%, the same as in the first three months of fiscal 1999. The Company paid cash amounts for income taxes of $2 million in the first three months of fiscal 2000 and fiscal 1999. D. 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, 2000 borrowings, letter of credit acceptances or commitments of approximately $1.3 million were outstanding under such line. The Company also has a $10 million line of credit with another bank which is not subject to a loan agreement. At January 31, 2000 standby letters of credit of approximately $0.5 million were outstanding under this line of credit. In fiscal 1997, the Company entered into agreements to lease buildings being constructed on land owned by the Company in San Jose, California and in Provo, Utah. The lessor has committed to fund up to $218 million for construction of the buildings. The leases are for a period of seven years and can be renewed for two additional five year periods, by either the lender or the Company, subject to the approval of the other party. Rent obligations commenced during the second quarter of fiscal 1999 for San Jose and will commence upon the Company's occupation of the Provo building in the second quarter of fiscal 2000. Annual rent under each agreement is determined by taking the portion of the committed amount actually utilized and associated capitalized interest accrued during the construction period multiplied by the secured interest rate. If the Company does not purchase the buildings, or arrange for the sale of the buildings, at the end of the lease, the Company will guarantee the lessor no more than 85% of the residual value of the buildings. The guaranteed residual value at January 31, 2000, was approximately $185 million. In addition, the agreement calls for the Company to maintain a specific level of restricted cash to serve as collateral for the leases and maintain compliance with certain financial covenants. The value of restricted cash held as collateral at January 31, 2000 was approximately $203 million, and is included in long-term investments. In February 1998, a suit was filed against Novell and certain of its officers and directors, alleging violation of federal securities laws. The lawsuit was brought as a purported class action on behalf of purchasers of Novell common stock from November 1, 1996 through April 22, 1997. The case is in its preliminary stages. Novell believes that the case is without merit, and intends to vigorously defend against the allegations. While there can be no assurance as to the ultimate disposition of the case, Novell does not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows. 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. E. SEGMENT INFORMATION The Company operates in one business segment, directory-enabled networking software and services. The Company's products are sold throughout the world. In the United States, products are sold through direct, OEM, reseller, and distributor channels. Internationally, products are marketed through distributors who sell to dealers and end users. Performance of the Company is evaluated by the Company's chief decision makers, the Chief Executive Officer and Executive Council, based on total Company results. Revenue is evaluated based on geographic region and by product category. Separate financial information is not available by product category in regards to asset allocation, expense allocation, or profitability. Novell's products can be categorized into the following four areas, all within the directory-enabled networking software and services segment. o Directory-enabled server platforms, which includes NetWare 4 and NetWare 5 o Directory-enabled applications products, which include NetWare for SAA host connectivity products, BorderManager, NDS integration and high availability service products, as well as collaboration and management products including GroupWise, ManageWise, and ZENworks o Service, education and consulting revenue, which is generated from customer service, educational products and courses, and consulting for network solutions o Pre-directory product revenue consisting of NetWare 3, non-directory-enabled infrastructure products and UNIX royalties REVENUE BY PRODUCT CATEGORY <TABLE> <S> <C> <C> FISCAL QUARTER ENDED -------------------------- Jan. 31, Jan. 31, DOLLARS IN THOUSANDS 2000 1999 - ---------------------------------------------------------------------------------------------------------- Directory-enabled server platforms $ 154,321 $ 145,818 Directory-enabled applications 79,740 72,763 Service, education and consulting 50,424 36,859 Other 31,558 30,366 --------- --------- Total net sales $ 316,043 $ 285,806 ========= ========= </TABLE> Sales outside the U.S. are comprised of sales to international customers in Europe, the Middle East, Canada, South America, and Asia Pacific. Other than sales in Ireland, international sales were not material individually in any other international location. Intercompany sales between geographic areas are accounted for at prices representative of unaffiliated party transactions. "U.S. operations" include shipments to customers in the U.S., licensing to OEMs, and exports of finished goods directly to international customers, primarily in Canada, South America, and Asia. For the first three months of fiscal 2000 and fiscal 1999, sales to international customers were approximately $150 million and $130 million, respectively. In the first three months of fiscal 2000 and fiscal 1999, 66% and 72%, 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 10% of total revenue in the first three months of fiscal 2000 and 13% of total revenue in the first three months of fiscal 1999, no customer accounted for more than 10% of total revenue in any period. F. NET INCOME PER SHARE <TABLE> <S> <C> <C> FISCAL QUARTER ENDED --------------------------- Jan. 31, Jan. 31, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 - ---------------------------------------------------------------------------------------------------------- Basic net income per share computation NET INCOME $ 44,835 $ 28,898 - ---------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 326,906 337,441 - ---------------------------------------------------------------------------------------------------------- Basic net income per share $ 0.14 $ 0.09 ========================================================================================================== Diluted net income per share computation NET INCOME $ 44,835 $ 28,898 - ---------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 326,906 337,441 Incremental shares attributable to exercise of OUTSTANDING OPTIONS (TREASURY STOCK METHOD) 15,199 14,081 - ---------------------------------------------------------------------------------------------------------- TOTAL 342,105 351,522 - ---------------------------------------------------------------------------------------------------------- Diluted net income per share $ 0.13 $ 0.08 ========================================================================================================== </TABLE> G. COMPREHENSIVE INCOME The components of comprehensive income, net of tax, for the three months ended January 31, 2000 and 1999 were as follows: <TABLE> <S> <C> <C> FISCAL QUARTER ENDED -------------------------- Jan. 31, Jan. 31, DOLLARS IN THOUSANDS 2000 1999 - ---------------------------------------------------------------------------------------------------------- Net income $ 44,835 $ 28,898 Change in net unrealized gain on investments 74,646 27,332 CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT (550) (124) - ----------------------------------------------------------------------------------------------------------- Comprehensive income $ 118,931 $ 56,106 ========================================================================================================== </TABLE> <PAGE> The components of accumulated other comprehensive income, net of related tax, at January 31, 2000 and 1999, are as follows: <TABLE> <S> <C> <C> FISCAL QUARTER ENDED -------------------------- Jan. 31, Oct. 31, DOLLARS IN THOUSANDS 2000 1999 - ---------------------------------------------------------------------------------------------------------- Unrealized gain on investment $ 112,408 $ 62,108 CUMULATIVE TRANSLATION ADJUSTMENT (3,123) (820) - ----------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income $ 109,285 $ 61,288 ========================================================================================================== </TABLE> <PAGE> H. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133). SFAS 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS 133 requires all companies to recognize derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after July 1, 2000. The Company is currently assessing the potential impact SFAS 133 will have on the statement of financial position of the Company. <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results may differ materially from the results discussed in such forward-looking statements as a result of a number of factors, which include, but are certainly not limited to, those set forth below in the sections entitled "Future Results," "Year 2000," and "Euro Conversion." Readers should carefully review the risk factors described in other documents that the Company files from time to time with the Commission, including the Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q to be filed by the Company in Fiscal 2000. INTRODUCTION Novell is the world's leading provider of directory-enabled networking software. Novell solutions give businesses total control of their private networks and the Internet, simplifying the management of user access and identity. Novell's worldwide channel, consulting, developer, education, and technical support programs are the most extensive in the network computing industry. RESULTS OF OPERATIONS NET SALES <TABLE> <S> <C> <C> <C> Q1 Q1 2000 CHANGE 1999 ------------------------------------------------------------------------------------ Net sales (millions) $316 11% $286 ==================================================================================== </TABLE> Novell's products can be categorized into the following four areas, all within the directory-enabled networking software services segment. oDirectory-enabled server platforms, which includes NetWare 4 and NetWare 5 oDirectory-enabled applications products, or Net Services Software, which include NetWare for SAA host connectivity products, BorderManager, NDS integration and high availability service products, as well as collaboration and management products including GroupWise, ManageWise, and ZENworks o Service, education and consulting revenue, which is generated from customer service, educational products and courses, and consulting for network solutions o Pre-directory product revenue consisting of NetWare 3, non-directory-enabled infrastructure products and UNIX royalties Revenue from the directory-enabled server platforms category increased $8.5 million or 6% in the first quarter of 2000 compared to the first quarter of 1999. This increase in revenue is due to strong customer acceptance of the Internet Protocol based NetWare 5, which more than offset the decline in sales of the older NetWare 4 products . Revenue from the directory-enabled applications products was $79.7 million in the first quarter of 2000 compared to $72.8 million in the first quarter of 1999. This 10% increase was driven by an increase in sales of ZENworks, BorderManager and NDS for NT and Solaris, somewhat offset by a decrease in NetWare for SAA. Service, education and consulting revenues were $50.4 million and $36.9 million in the first quarter of 2000 and 1999, respectively. The increase in the first quarter of 2000 was a result of increased directory-related consulting revenue and increased service revenue as a result of increased site licenses, and growth in consulting. Pre-directory products revenue was $31.6 million in the first quarter of 2000 compared to $30.4 million in the first quarter of 1999. The increase in the first quarter of 2000 was primarily the result of higher royalty revenue related to the UNIX royalties. Without this revenue, pre-directory products revenue would have decreased, as expected, due to increased sales of directory-enabled products and introductions of newer versions of non-directory products. International sales represented 48% of total sales in the first three months of 2000 compared to 45% in the first three months of 1999 due to stronger sales growth in each of the international regions. International sales increased 16% compared to a 6% increase in domestic revenues in the first three months of fiscal 2000 as compared to the same period of 1999 GROSS PROFIT <TABLE> <S> <C> <C> <C> Q1 Q1 2000 CHANGE 1999 ------------------------------------------------------------------------------------ Gross profit (millions) $239 8% $222 Percentage of net sales 76% 78% ===================================================================================== </TABLE> Gross profit as a percentage of sales decreased slightly in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999 due primarily to increased royalty costs, costs for services related to the consulting business, and training and education costs. OPERATING EXPENSES <TABLE> <S> <C> <C> <C> Q1 Q1 2000 CHANGE 1999 ------------------------------------------------------------------------------------ Sales and marketing (millions) $114 8% $105 PERCENTAGE OF NET SALES 36% 37% -------------------------------------------------------------------------------------- Product development (millions) $ 59 6% $ 56 PERCENTAGE OF NET SALES 19% 20% -------------------------------------------------------------------------------------- General and administrative (millions) $ 20 -19% $ 24 PERCENTAGE OF NET SALES 6% 9% -------------------------------------------------------------------------------------- Total operating expenses (millions) $193 4% $185 Percentage of net sales 61% 65% ====================================================================================== </TABLE> Sales and marketing expenses increased by $8.7 million, in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999. At the same time however, sales and marketing expenses decreased slightly as a percentage of net sales. 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 in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999. Product development expenses also decreased slightly as a percentage of net sales in the first quarter of 2000 due to increased sales levels and a more efficient product development organization focused on delivering new products consistent with the Company's strategy. General and administrative expenses decreased in total and as a percentage of net sales in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999. These decreases were primarily due to a continued focus on controlling costs as well as a higher revenue base. <PAGE> <TABLE> <S> <C> <C> <C> YTD YTD 2000 CHANGE 1999 ------------------------------------------------------------------------------------------------- Employees 5,338 15% 4,642 Annualized revenue per average employee (000's) $ 235 -5% $ 248 Annualized net income per average employee (000's) $ 33 33% $ 25 ================================================================================================= </TABLE> Headcount increased from the first quarter of 1999 to the first quarter of 2000, primarily due to increases in the education, consulting, worldwide sales, and product development areas. Headcount has increased in these areas to support the Company's growth in new product and services revenue. OTHER INCOME, NET <TABLE> <S> <C> <C> <C> Q1 Q1 2000 CHANGE 1999 ------------------------------------------------------------------------------------ Other income, net (millions) $ 16 310% $ 4 Percentage of net sales 5% 1% ===================================================================================== </TABLE> The primary component of other income, net is investment income, which was $17.6 million in the first quarter of fiscal 2000 compared to $9.8 million in the first quarter of fiscal 1999. In the first quarter of 2000, the Company realized capital losses of $0.9 million and realized capital gains of $6.7 million, compared to realized capital losses of $15.3 million and realized capital gains of $13.0 million in the first quarter of 1999. In addition to investment income, the Company recognized a gain on foreign currency in the first quarter of 2000 compared to a loss in the same period of 1999, and received more sublease income during the first quarter of 2000 INCOME TAXES <TABLE> <S> <C> <C> <C> Q1 Q1 2000 CHANGE 1999 ------------------------------------------------------------------------------------ Income taxes (millions) $ 17 55% $ 11 Percentage of net sales 6% 4% Effective tax rate 28% 28% ===================================================================================== </TABLE> The effective tax rate for fiscal 2000 is estimated to be 28%, the same as fiscal 1999. NET INCOME AND NET INCOME PER SHARE <TABLE> <S> <C> <C> <C> Q1 Q1 2000 CHANGE 1999 ------------------------------------------------------------------------------------ Net income (millions) $ 45 55% $ 29 Percentage of net sales 14% 10% Net income per share - basic $.14 $.09 Net income per share - diluted $.13 $.08 ==================================================================================== </TABLE> LIQUIDITY AND CAPITAL RESOURCES <TABLE> <S> <C> <C> <C> Q1 Q4 2000 CHANGE 1999 ------------------------------------------------------------------------------------------------- Cash and short-term investments (millions) $948 6% $895 Percentage of total assets 47% 46% ================================================================================================= </TABLE> Cash and short-term investments increased by $52 million at Jan. 31, 2000 from $895 million at October 31, 1999. During the quarter, cash and short-term investments increased due to $141 million provided from operating activities, $105 million from the sale of short-term investments, and $37 million from the issuance of common stock. These increases were offset by cash outflows of $114 million for purchases of long-term investments and other long term investing activities, $89 million for the repurchase of common stock, $17 million to increase collateral associated with certain long-term investments, and $11 million to purchase property, plant and equipment. The Company's investment portfolio includes equity securities with gross unrealized losses of $4 million and gross unrealized gains of $187 as of January 31, 2000. There are no individual securities with material unrealized losses at the end of the first quarter of 2000. The investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds, which incur 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. The Company's principal source of liquidity has been from operations. At January 31, 2000, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $18 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments, product development and flexibility in a dynamic and competitive operating environment. During the first three months of fiscal 2000, 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. The Company believes that 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 2000 are anticipated to be approximately $75 million, but could be reduced if the growth of the Company is less than presently anticipated. In July 1999, the Board of Directors authorized up to $500 million for the repurchase of additional outstanding shares of the Company's common stock through October 31, 2000. As of January 31, 2000, 12.7 million shares had been repurchased under this plan at a total cost of $288 million. 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 at reasonable prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; market fluctuations of investment securities; 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, such as those discussed above, as well as risks described in detail in the Company's fiscal 1999 report on Form 10-K. YEAR 2000 In the past, many information technology products were designed with two digit year codes that did not recognize century and millennium fields. As a result, these hardware and software products may not function or may give incorrect results beginning in the Year 2000. The Year 2000 issue is faced by substantially every company in the computer industry, as well as every company that relies on computer systems. To address this issue, such hardware and software products were upgraded or replaced to correctly process dates beginning in the Year 2000. The Company has a general contingency plan to address extreme events such as earthquake, flood, or serious equipment failures. The Company's Year 2000 contingency planning is an extension of this effort. Based on the Company's planning efforts, the worst-case Y2K-related scenarios that were identified include: o temporary loss of power--to address this risk Novell has its own power generation capability in critical locations; o temporary loss of voice and/or data communications or other utility services--to help minimize this risk Novell uses multiple telecommunications providers; o temporary inability to access key information systems due to a Y2K related failure--to address this risk Novell has identified manual procedures to at least partly facilitate needed processes until systems are restored; o temporary inability to ship products due to a Y2K issue with the systems of a key business partner--to minimize this risk Novell uses multiple partners. The Company's Year 2000 effort included Year 2000 testing for Novell products currently on, and some that were previously on, the Company's price list. Generally, for products that were identified as needing updates to address Year 2000 issues, the Company has prepared updates or has removed the product from its price list. Some of the Company's customers are using product versions that the Company will not support for Year 2000 issues; the Company is encouraging these customers to migrate to current product versions that are Year 2000 ready. The Company's total cost relating to these activities was not material to the Company's financial position, results of operations, or cash flows. The modifications were made on a timely basis. The Company did not experience a delay in, or increased costs associated with, the implementation of such modifications, nor did the Company experience problems due to suppliers inadequately preparing for the Year 2000 issue. The Company also did not experience an inability to deliver products or services to its customers. The Company's Year 2000 Web site at www.novell.com/year2000/ provides information on its products that are Year 2000 ready and general information on the Company's Year 2000 efforts. For third party products which the Company distributes with its products, the Company has sought Year 2000 readiness status from the product manufacturers. Customers who use these third-party products are directed to the product manufacturers for detailed Year 2000 status information. The Company believes that its current products, with any applicable updates, are prepared for Year 2000 date issues, and the Company plans to provide support for these products' Year 2000 date-related issues, as described in the Company's support policy statements. However, there can be no guarantee that one or more current Company products do not contain Year 2000 date issues that may result in material costs to the Company. Because it is in the business of selling software products, the Company's risk of being subjected to lawsuits relating to Year 2000 issues with its software products is likely to be greater than that of companies in other industries. Because computer systems may involve hardware, firmware and software components from different manufacturers, it may be difficult to determine which component in a computer system may cause a Year 2000 issue. As a result, the Company may be subjected to Year 2000 related lawsuits independent of whether its products and services are Year 2000 ready. The outcomes of any such lawsuits and the impact on the Company cannot be determined at this time. EURO CONVERSION On January 1, 1999, 11 of the 15 members of the European Union established fixed conversion rates among their existing sovereign currencies and adopted the euro as their common legal currency. At the end of a three-year transition period during which companies may choose to operate either in the euro or national currencies the legacy currencies will be eliminated. In June 1998, the Company formed a cross-functional team to assess the impact of the conversion on the Company's operations and to address associated issues. The Company is currently conducting transactions in the euro and expects to have all affected information systems fully converted by April 2001. Novell does not expect the euro conversion to have a material effect on its competitive position or financial results. <PAGE> ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity security prices. To mitigate these risks, the Company utilizes currency forward contracts and currency options. The Company does not use derivative financial instruments for speculative or trading purposes, and no derivative financial instruments were outstanding at January 31, 2000. The primary objective of the Company's investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities, substantially all of which either mature within the next twelve months or have characteristics of short-term investments. A hypothetical 50 basis point increase in interest rates would result in an approximate $4 million decrease (approximately 0.6%) in the fair value of the Company's available-for-sale securities. The Company hedges currency risks of investments denominated in foreign currencies with currency forward contracts. Gains and losses on these foreign currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to the Company. A substantial majority of the Company's revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, the Company does enter into transactions in other currencies, primarily Japanese yen and certain other Asian and European currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, the Company has established balance sheet hedging programs. Currency forward contracts and currency options are utilized in these hedging programs. The Company's hedging programs reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. If the Company did not hedge against foreign currency exchange rate movement, an adverse change of 10% in exchange rates would result in a decline in income before taxes of approximately $10 million. The Company is exposed to equity price risks on equity securities included in its portfolio of investments entered into for the promotion of business and strategic objectives. These investments are generally in small capitalization stocks in the high-technology industry sector. The Company typically does not attempt to reduce or eliminate its market exposure on these securities. A 10% adverse change in equity prices would result in an approximate $18 million decrease in the fair value of the Company's available-for-sale securities. All of the potential changes noted above are based on sensitivity analyses performed on the Company's financial position at January 31, 2000. Actual results may differ materially. <PAGE> PART II. OTHER INFORMATION <PAGE> 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 D of the Company's financial statements contained in Part I, Item 1 of this Form 10-Q. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 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, 2000. *Filed herewith. <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 15, 2000 /S/ DR. ERIC SCHMIDT -------------------- Dr. Eric Schmidt Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: March 15, 2000 /S/ DENNIS R. RANEY ------------------- Dennis R. Raney Chief Financial Officer (Principal Financial Officer) Date: March 15, 2000 /S/ RON FOSTER -------------- Ron Foster Vice President and Corporate Controller (Principal Accounting Officer) <PAGE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FDS -- JANUARY 31, 2000 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <PERIOD-TYPE> 3-mos <FISCAL-YEAR-END> Oct-31-2000 <PERIOD-END> Jan-31-2000 <CASH> 371,029 <SECURITIES> 576,486 <RECEIVABLES> 274,687 <ALLOWANCES> (37,830) <INVENTORY> 4,028 <CURRENT-ASSETS> 1,265,819 <PP&E> 698,256 <DEPRECIATION> (356,440) <TOTAL-ASSETS> 2,019,009 <CURRENT-LIABILITIES> 406,368 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 32,771 <OTHER-SE> 1,568,241 <TOTAL-LIABILITY-AND-EQUITY> 2,019,009 <SALES> 316,043 <TOTAL-REVENUES> 316,043 <CGS> 76,921 <TOTAL-COSTS> 76,921 <OTHER-EXPENSES> 239,122 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 62,271 <INCOME-TAX> 17,436 <INCOME-CONTINUING> 44,835 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 44,835 <EPS-BASIC> 0.14 <EPS-DILUTED> 0.13 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

NTAP

https://www.sec.gov/Archives/edgar/data/1002047/0000891618-00-001185.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, D514Xz5vPUNYBmkp3ziXcE3wFYrhP58Xy2vWVHQTqBfXPlgzjh4d+eAoCRTPyzne BPmpAlOs2BYOs0iOYqSAig== <SEC-DOCUMENT>0000891618-00-001185.txt : 20000302 <SEC-HEADER>0000891618-00-001185.hdr.sgml : 20000302 ACCESSION NUMBER: 0000891618-00-001185 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 20000128 FILED AS OF DATE: 20000229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK APPLIANCE INC CENTRAL INDEX KEY: 0001002047 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 770307520 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27130 FILM NUMBER: 557193 BUSINESS ADDRESS: STREET 1: 495 EAST JAVA DR CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4088226000 MAIL ADDRESS: STREET 1: 495 EAST JAVA DR CITY: SUNNYVALE STATE: CA ZIP: 94089 </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 28, 2000 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 0-27130 NETWORK APPLIANCE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 77-0307520 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 495 EAST JAVA DRIVE, SUNNYVALE, CALIFORNIA 94089 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 822-6000 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 registrant's class of common stock, as of the latest practicable date. <TABLE> <CAPTION> OUTSTANDING AT CLASS JANUARY 28, 2000 ----- ---------------- <S> <C> Common Stock............. 152,284,841 </TABLE> ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE NO. -------- <S> <C> PART I -- FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of January 28, 2000 and April 30, 1999 2 Condensed Consolidated Statements of Income for the three and nine-month periods ended January 28, 2000 and January 29, 1999 3 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended January 28, 2000 and January 29, 1999 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II--OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to Vote of Securityholders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURE 16 </TABLE> 1 <PAGE> 3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NETWORK APPLIANCE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> JANUARY 28, APRIL 30, 2000 1999 ----------- --------- (UNAUDITED) ** <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 231,416 $ 221,284 Short-term investments 58,636 5,800 Accounts receivable, net 99,674 57,163 Inventories 20,878 13,581 Prepaid expenses and other assets 9,653 7,384 Deferred taxes 27,171 10,134 --------- --------- Total current assets 447,428 315,346 PROPERTY AND EQUIPMENT, NET 33,646 19,271 DEPOSITS 7,170 7,000 OTHER ASSETS 5,672 4,730 --------- --------- $ 493,916 $ 346,347 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 21,991 $ 15,126 Income taxes payable 4,195 1,108 Accrued compensation and related benefits 24,328 15,189 Other accrued liabilities 8,769 7,633 Deferred revenue 18,465 11,474 --------- --------- Total current liabilities 77,748 50,530 LONG-TERM OBLIGATIONS 55 93 --------- --------- 77,803 50,623 --------- --------- SHAREHOLDERS' EQUITY: Common stock 312,144 240,093 Retained earnings 105,268 55,954 Cumulative other comprehensive loss (1,299) (323) --------- --------- Total shareholders' equity 416,113 295,724 --------- --------- $ 493,916 $ 346,347 ========= ========= </TABLE> ** Derived from audited consolidated financial statements. See accompanying notes to condensed consolidated financial statements. 2 <PAGE> 4 NETWORK APPLIANCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- --------------------------- JANUARY 28, JANUARY 29, JANUARY 28, JANUARY 29, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> NET SALES $ 151,290 $ 75,616 $ 379,281 $ 198,616 COST OF SALES 61,415 30,818 155,471 80,938 --------- --------- --------- --------- Gross Margin 89,875 44,798 223,810 117,678 --------- --------- --------- --------- OPERATING EXPENSES: Sales and marketing 40,194 19,831 99,626 51,830 Research and development 16,424 7,815 41,106 20,618 General and administrative 5,470 2,655 13,775 7,092 --------- --------- --------- --------- Total operating expenses 62,088 30,301 154,507 79,540 --------- --------- --------- --------- INCOME FROM OPERATIONS 27,787 14,497 69,303 38,138 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest Income 2,860 626 7,503 1,634 Other income (expense), net 49 (84) (350) 24 --------- --------- --------- --------- Total other income, net 2,909 542 7,153 1,658 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 30,696 15,039 76,456 39,796 PROVISION FOR INCOME TAXES 10,897 5,645 27,142 14,929 --------- --------- --------- --------- NET INCOME $ 19,799 $ 9,394 $ 49,314 $ 24,867 ========= ========= ========= ========= NET INCOME PER SHARE (1): Basic $ 0.13 $ 0.07 $ 0.33 $ 0.18 ========= ========= ========= ========= Diluted $ 0.11 $ 0.06 $ 0.29 $ 0.16 ========= ========= ========= ========= Pro Forma - Basic (Note 8) $ 0.07 $ 0.03 $ 0.17 $ 0.09 ========= ========= ========= ========= Pro Forma - Diluted (Note 8) $ 0.06 $ 0.03 $ 0.14 $ 0.08 ========= ========= ========= ========= SHARES USED IN PER SHARE CALCULATIONS (1): Basic 150,461 137,476 148,294 135,606 ========= ========= ========= ========= Diluted 175,168 157,864 170,316 153,358 ========= ========= ========= ========= Pro Forma - Basic (Note 8) 300,922 274,952 296,588 271,212 ========= ========= ========= ========= Pro Forma - Diluted (Note 8) 350,336 315,728 340,632 306,716 ========= ========= ========= ========= </TABLE> (1) Share and per share amounts have been adjusted to reflect the two-for-one stock split which was effective December 20, 1999. See accompanying notes to condensed consolidated financial statements. 3 <PAGE> 5 NETWORK APPLIANCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED --------------------------- JANUARY 28, JANUARY 29, 2000 1999 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 49,314 $ 24,867 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,732 7,091 Provision for doubtful accounts 996 873 Deferred income taxes (17,037) (4,683) Deferred rent (38) (47) Changes in assets and liabilities: Accounts receivable (43,667) (17,397) Inventories (9,623) (3,065) Prepaid expenses and other assets (3,379) (1,069) Accounts payable 6,865 (1,745) Income taxes payable 41,287 11,812 Accrued compensation and related benefits 9,139 3,187 Other accrued liabilities 1,136 3,385 Deferred revenue 6,991 3,279 --------- --------- Net cash provided by operating activities 52,716 26,488 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (62,636) (15,230) Redemptions of short-term investments 9,650 17,880 Purchases of property and equipment (22,472) (11,615) Payment/refund of deposits, net (170) (7,000) --------- --------- Net cash used in investing activities (75,628) (15,965) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock, net 33,044 12,048 --------- --------- Net cash provided by financing activities 33,044 12,048 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 10,132 22,571 CASH AND CASH EQUIVALENTS: Beginning of period 221,284 37,315 --------- --------- End of period $ 231,416 $ 59,886 ========= ========= NONCASH INVESTING AND FINANCING ACTIVITIES: Income tax benefit from employee stock transactions $ 38,200 $ 12,210 SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid net of refund $ 1,517 $ 7,031 </TABLE> See accompanying notes to condensed consolidated financial statements. 4 <PAGE> 6 NETWORK APPLIANCE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements have been prepared by Network Appliance, Inc. without audit and reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations for the interim periods. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all information and footnotes required by generally accepted accounting principles. The results of operations for the three and nine-month periods ended January 28, 2000 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods. The information included in this report should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended April 30, 1999 and the risk factors as set forth in our Annual Report on Form 10-K, including, without limitation, risks relating to fluctuating operating results, customer and market acceptance of new products, dependence on new products, rapid technological change, litigation, dependence on growth in the network file server market, expansion of international operations, product concentration, changing product mix, competition, management of expanding operations, dependence on high-quality components, dependence on proprietary technology, intellectual property rights, dependence on key personnel, volatility of stock price, shares eligible for future sale, effect of certain anti-takeover provisions, dilution and the Year 2000 Issue. Any party interested in reviewing these publicly available documents should contact the SEC or our Chief Financial Officer. 2. SIGNIFICANT ACCOUNTING POLICIES Fiscal Periods - We operate on a 52-week or 53-week year ending on the last Friday in April. Fiscal 2000 is a 52-week year. Fiscal 1999 was a 53-week year. The quarter ended January 28, 2000 includes 13 weeks of operating activity, compared to 13 weeks of activity for the corresponding period of the prior fiscal year. The nine-months ended January 28, 2000 includes 39 weeks of activity, compared to 40 weeks of activity for the corresponding period of the prior fiscal year. Foreign Currency Translation - In the first quarter of fiscal 2000, we determined that the functional currencies of certain of our foreign subsidiaries had changed from the local currencies to the Euro. Accordingly, assets and liabilities of such foreign subsidiaries are translated into the Euro at the exchange rates in effect as of the balance sheet date, and results of operations for each subsidiary are translated using average rates in effect for the period presented. Translation adjustments have been included within shareholders' equity as a cumulative other comprehensive loss. The effect of the change in functional currencies did not have a material impact on our consolidated financial position, results of operations or cash flows. 5 <PAGE> 7 NETWORK APPLIANCE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> JANUARY 28, APRIL 30, 2000 1999 ----------- --------- (IN THOUSANDS) <S> <C> <C> Purchased components $ 7,741 $ 5,316 Work in process 4,253 1,727 Finished goods 8,884 6,538 ------- ------- $20,878 $13,581 ======= ======= </TABLE> 4. NET INCOME PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------- ------------------------------- JANUARY 28, JANUARY 29, JANUARY 28, JANUARY 29, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (In thousands, except per share amounts) <S> <C> <C> <C> <C> NET INCOME (NUMERATOR): Net income, basic and diluted $ 19,799 $ 9,394 $ 49,314 $ 24,867 ============ ============ ============ ============ SHARES (DENOMINATOR): Weighted average common shares outstanding 150,536 137,624 148,395 136,288 Weighted average common shares outstanding subject to repurchase (75) (148) (101) (682) ------------ ------------ ------------ ------------ Shares used in basic computation 150,461 137,476 148,294 135,606 Weighted average common shares outstanding subject to repurchase 75 148 101 682 Common shares issuable upon exercise of stock options 24,632 20,240 21,921 17,070 ------------ ------------ ------------ ------------ Shares used in diluted computation 175,168 157,864 170,316 153,358 ============ ============ ============ ============ NET INCOME PER SHARE: Basic $ 0.13 $ 0.07 $ 0.33 $ 0.18 ============ ============ ============ ============ Diluted $ 0.11 $ 0.06 $ 0.29 $ 0.16 ============ ============ ============ ============ </TABLE> 6 <PAGE> 8 NETWORK APPLIANCE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. COMPREHENSIVE INCOME The components of comprehensive income, net of tax, are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------- ------------------------------- JANUARY 28, JANUARY 29, JANUARY 28, JANUARY 29, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> (IN THOUSANDS) Net income $ 19,799 $ 9,394 $ 49,314 $ 24,867 Change in cumulative translation adjustment (1,050) (105) (976) (123) ------------ ------------ ------------ ------------ Comprehensive income $ 18,749 $ 9,289 $ 48,338 $ 24,744 ============ ============ ============ ============ </TABLE> 6. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which defines derivatives, requires that all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Although we have not fully assessed the implications of this new statement, we do not believe adoption of this statement will have a material impact on our consolidated financial position, results of operations or cash flows. 7. COMMITMENTS In fiscal 1999, we executed agreements to acquire approximately 18 acres of land in Sunnyvale, California and to develop 393,000 square feet of buildings. We subsequently assigned our rights and obligations under all the agreements for the Sunnyvale facilities to a third-party entity and entered into three operating leases. The leases require monthly payments, which vary, based on the London Interbank Offered Rate (LIBOR) plus a spread (7.5% at January 28, 2000). The aggregate annual minimum rent commitment under one lease, which began in August 1999, is approximately $3.3 million. The lease payments under the other two operating leases are expected to commence in June 2000 and will also vary based on LIBOR plus a spread. The operating leases mentioned above require us to maintain specified financial covenants with which we were in compliance as of January 28, 2000. We have commitments related to operating lease arrangements, under which we have an option to purchase the properties for an aggregate of $190.0 million, or arrange for the sale of the properties to a third party for at least the option price with a contingent liability for any deficiency. 8. SUBSEQUENT EVENTS On February 10, 2000, the Board of Directors approved a two-for-one stock split of the Company's common stock to be distributed on or about March 22, 2000 to holders of record on March 10, 2000. Pro forma share and per-share amounts have been presented within the Condensed Consolidated Statements of Income to reflect the stock split. 7 <PAGE> 9 This Form 10-Q contains forward-looking statements about future results, which are subject to risks and uncertainties, including those discussed below. Our actual results may differ significantly from the results discussed in the forward-looking statements. We are subject to a variety of other additional risk factors, more fully described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of income data as a percentage of net sales for the periods indicated: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- JANUARY 28, JANUARY 29, JANUARY 28, JANUARY 29, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 40.6 40.8 41.0 40.8 ------ ------ ------ ------ Gross margin 59.4 59.2 59.0 59.2 ------ ------ ------ ------ Operating expenses: Sales and marketing 26.6 26.2 26.3 26.1 Research and development 10.8 10.3 10.8 10.4 General and administrative 3.6 3.5 3.6 3.5 ------ ------ ------ ------ Total operating expenses 41.0 40.0 40.7 40.0 ------ ------ ------ ------ Income from operations 18.4 19.2 18.3 19.2 Total other income, net 1.9 0.7 1.9 0.8 ------ ------ ------ ------ Income before income taxes 20.3 19.9 20.2 20.0 Provision for income taxes 7.2 7.5 7.2 7.5 ------ ------ ------ ------ Net income 13.1% 12.4% 13.0% 12.5% ====== ====== ====== ====== </TABLE> Net Sales -- Net sales increased by 100.1% to $151.3 million for the three-months ended January 28, 2000, from $75.6 million for the three-months ended January 29, 1999. Net sales increased by 91.0% to $379.3 million for the nine-months ended January 28, 2000, from $198.6 million for the nine-months ended January 29, 1999. Net sales growth was across all geographies, products and markets. This increase in net sales for both the three and nine-months ended January 28, 2000 was primarily attributable to a higher volume of units shipped, as compared to the corresponding periods of the prior fiscal year. Factors impacting unit growth include: - growth in the network attached storage market and increased market acceptance of the appliance concept; - acceleration in deployment of our products among Internet and enterprise related customers, particularly for E-business and database applications; - strong demand for our F700 filer product family utilizing primarily fibre-channel connectivity; - increased worldwide demand for our NetCache(TM) solutions; - increased worldwide shipment of NetApp(R) Cluster Failover solutions, which require another filer to take over in the event of a hardware failure; - increased demand for the SnapMirror(TM) software option, which requires multiple filers to provide remote mirroring of data for quick disaster recovery and backup at remote sites; - expansion of our direct sales force; and - sales to our two OEM partners. 8 <PAGE> 10 Net sales growth was also positively impacted by: - a higher average selling price due to the introduction of new software features: SnapMirror, SnapRestore(TM) and Cluster Failover, supporting mission-critical applications; - the increase in storage capacity; - increased add-on software revenue from multi-protocol solutions; and - higher software subscription and service revenues to support a growing installed base. Overall net sales growth was partially offset by declining unit sales of our older product family and declining average selling price of the caching product family due primarily to competitive pricing pressure. International net sales (including United States exports) grew by 50.0% and 79.9% for the three and nine-month periods ended January 28, 2000, as compared to the comparable period of the prior fiscal year. International net sales were $46.9 million, or 31.0% of total net sales, and $109.6 million, or 28.9% of total net sales, for the three and nine-month periods ended January 28, 2000, respectively. The increase in international sales for the three and nine-month periods ended January 28, 2000, was primarily a result of European sales growth, due to increased headcount in the direct sales force, increased indirect channel sales, increased shipments of filers, Cluster Failover solutions, NetCache appliances and increased sales of add-on software licenses. Asia Pacific net sales growth for the three and nine-month periods ended January 28, 2000, was also primarily driven by increased sales through resellers, increased headcount in the direct sales force, increased shipments of filers, NetCache appliances and increased sales of add-on software licenses, as compared to the corresponding periods of the prior fiscal year. We cannot assure you that our net sales will continue to increase in absolute dollars or at the rate at which they have grown in recent fiscal periods. Gross Margin -- Gross margin increased slightly to 59.4% for the three-months ended January 28, 2000 from 59.2% for the three-months ended January 29, 1999. Gross margin decreased to 59.0% for the nine-months ended January 28, 2000 from 59.2% for the nine-months ended January 29, 1999. Gross margin was favorably impacted by: - increased licensing of add-on software products such as: multi-protocol, Cluster Failover, SnapMirror and SnapRestore associated with new filers shipped; - growth in software subscription due primarily to a larger installed base; - increased manufacturing efficiencies; - the increase in product volume; and - lower costs of key components. Gross margin was negatively impacted by sales price reductions on storage products due to competitive pricing pressure from other storage vendors and increased investments in customer service personnel in areas such as logistics and professional services. Our gross margin has been and will continue to be affected by a variety of factors, including: - competition; - product configuration; - direct versus indirect sales; - the mix and average selling prices of products, including software licenses; - new product introductions and enhancements; and - the cost of components and manufacturing labor. Sales and Marketing -- Sales and marketing expenses consist primarily of salaries, commissions, advertising and promotional expenses and certain customer service and support costs. Sales and marketing 9 <PAGE> 11 expenses increased 102.7% to $40.2 million for the three-months ended January 28, 2000 from $19.8 million for the three-months ended January 29, 1999. Sales and marketing expenses increased 92.2% to $99.6 million for the nine-months ended January 28, 2000 from $51.8 million for the nine-months ended January 29, 1999. These expenses were 26.6% and 26.2% of net sales for the three-months ended January 28, 2000 and January 29, 1999, respectively, and were 26.3% and 26.1%, respectively, of net sales for the nine-month periods then ended. The increase in absolute dollars was primarily related to the continued worldwide expansion and increased headcount growth of our sales and customer service organizations, and increased commission expenses. During the quarter ended January 28, 2000, we launched an advertising campaign, which also contributed to absolute dollar increases in sales and marketing expenses. We expect to continue to increase our sales and marketing expenses in an effort to expand domestic and international markets, introduce new products, establish and expand new distribution channels and increase product and company awareness. We believe that our continued growth and profitability is dependent in part on the successful expansion of our international operations, and therefore, have committed significant resources to increase international sales. Research and Development -- Research and development expenses consist primarily of salaries and benefits, prototype expenses, non-recurring engineering charges and fees paid to outside consultants. Research and development expenses increased 110.2% to $16.4 million for the three-months ended January 28, 2000 from $7.8 million for the three-months ended January 29, 1999. These expenses represented 10.8% and 10.3% of net sales, respectively, for the three-months ended January 28, 2000 and January 29, 1999. For the nine-month periods, research and development expenses increased 99.4% to $41.1 million in fiscal 2000 from $20.6 million in fiscal 1999, and represented 10.8% and 10.4% of net sales, respectively, for those periods. Research and development expenses increased in absolute dollars, primarily as a result of increased headcount, ongoing support of current and future product development and enhancement efforts, prototyping expenses and non-recurring engineering charges associated with the development of new products and technologies. These new products included the F700 series filers, the Cluster Failover solutions, the C700 family, new enterprise software offerings and data management tools with SnapMirror, SnapRestore, SnapManager(TM) for Microsoft(R) Exchange and SecureAdmin(TM). New caching product introductions included Netcache software release 4.0 and Netcache 4.1, a streaming media appliance for Apple(R) Quicktime(TM), Microsoft(R) Windows Media(TM) and RealNetworks(R) Real System(TM) G2 users, delivering live broadcasting on the Internet. We believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. We intend to continuously expand our existing product offerings and introduce new products and expect that such expenditures will continue to increase in absolute dollars. For the three and nine-months ended January 28, 2000 and January 29, 1999, no software development costs were capitalized. General and Administrative -- General and administrative expenses increased 106.1% to $5.5 million for the three-months ended January 28, 2000, from $2.7 million for the three-months ended January 29, 1999. These expenses represented 3.6% and 3.5% of net sales for the three-months ended for such periods. For the nine-month periods, general and administrative expenses increased 94.2% to $13.8 million in fiscal 2000 from $7.1 million in fiscal 1999 and represented 3.6% and 3.5% of net sales for the nine-months ended for such periods. Increases in absolute dollars were primarily due to increased headcount, expenses associated with initiatives to implement enterprise-wide management information systems, increases in professional services, consulting fees and outside service fees. We believe that our general and administrative expenses will increase in absolute dollars as we continue to build our infrastructure. Total Other Income, net -- Total other income, net, was $2.9 million and $0.5 million for the three-months ended January 28, 2000 and January 29, 1999, respectively. During the nine-months ended January 28, 2000, total other income, net, was $7.2 million, as compared to $1.7 million in the corresponding period of the prior year. The increase was due primarily to interest income earned on the net proceeds from the March 1999 follow-on public offering, cash generated from operations, and net proceeds from stock option exercises. The nine months of fiscal 1999 included gains from foreign currency transactions as compared to the nine months of fiscal 2000, where gains or losses from foreign transactions have been largely mitigated primarily through our hedging program. 10 <PAGE> 12 Provision for Income Taxes -- Our effective tax rate was 35.5% for the three and nine-month periods ended January 28, 2000 compared to 37.5% for the three and nine-month periods ended January 29, 1999. The effective tax rates differed from the U.S. statutory rate of 35% primarily due to state taxes partially offset by earnings of foreign subsidiaries being taxed at lower rates. CERTAIN RISK FACTORS Although we have experienced significant revenue growth in recent periods, this growth may not be indicative of our future operating results. As a result, we believe that period-to-period comparisons of our results of operation are not necessarily meaningful and should not be relied upon as indicators of future performance. Many of the factors that could cause our quarterly operating results to fluctuate significantly in the future are beyond our control and include the following: - the level of competition in our target product markets; - the size, timing, and cancellation of significant orders; - product configuration and mix; - market acceptance of new products and product enhancements; - new product announcements or introductions by us or our competitors; - deferrals of customer orders in anticipation of new products or product enhancements; - changes in pricing by us or our competitors; - our ability to timely develop, introduce and market new products and enhancements; - supply constraints; - technological changes in our target product markets; - the levels of expenditure on research and development and expansion of our sales and marketing programs; - seasonality; and - general economic trends. In addition, sales for any future quarter may vary and accordingly be inconsistent with our plans. We generally operate with limited order backlog because our products are typically shipped shortly after orders are received. As a result, product sales in any quarter are generally dependent on orders booked and shipped in that quarter. Product sales are difficult to forecast because the network file server market is rapidly evolving and our sales cycle varies substantially from customer to customer. We conduct business internationally. International sales (including U.S. exports) were approximately 31.0% and 28.9% of total net sales for the three and nine-months ended January 28, 2000, respectively. Accordingly, our future operating results could be materially adversely affected by a variety of factors, some of which are beyond our control, including regulatory, political or economic conditions in a specific country or region, trade protection measures and other regulatory requirements and government spending patterns. Our international sales are denominated in U.S. dollars and in foreign currencies. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in foreign markets. For international sales and expenditures denominated in foreign currencies, we are subject to risks associated with currency fluctuations. We hedge risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward contracts to hedge trade and intercompany receivables and payables. All hedge contracts are marked to market through earnings every period. Additional risks inherent in our international business activities generally include, among others, longer accounts receivable payment cycles, difficulties in managing international operations and potentially adverse tax consequences. We cannot assure you that such factors will not materially adversely affect our future international sales and, consequently, our operating results. 11 <PAGE> 13 Although operating results have not been materially and adversely affected by seasonality in the past, because of the significant seasonal effects experienced within the industry, particularly in Europe, we cannot assure you that our future operating results will not be adversely affected by seasonality. We believe that continued growth and profitability will require successful expansion of our international operations and sales and therefore we have committed significant resources to such expansion. In order to successfully expand international sales in fiscal 2000 and subsequent periods, we must strengthen foreign operations, hire additional personnel and recruit additional international distributors and resellers. This will require significant management attention and financial resources and could materially adversely affect our operating results. To the extent that we are unable to effect these additions in a timely manner, our growth, if any, in international sales will be limited, and our operating results could be materially adversely affected. In addition, we cannot assure you that we will be able to maintain or increase international market demand for our products. LIQUIDITY AND CAPITAL RESOURCES As of January 28, 2000, as compared to the April 30, 1999 balances, our cash, cash equivalents and short-term investments increased by $63.0 million to $290.1 million. Working capital increased by $104.9 million to $369.7 million. We generated cash from operating activities totaling $52.7 million and $26.5 million for the nine-month periods ended January 28, 2000 and January 29, 1999, respectively. Net cash provided by operating activities for the nine-month period ended January 28, 2000 principally related to net income of $49.3 million, increases in accounts payable, income taxes payable, accrued compensation and related benefits, deferred revenue and other accrued liabilities, coupled with depreciation and amortization which are non-cash expenses, partially offset by increases in accounts receivable, inventories, prepaid expenses and other assets and deferred income taxes. We used $22.5 million and $11.6 million of cash during the nine-month periods ended January 28, 2000 and January 29, 1999, respectively, for capital expenditures. The increases were primarily attributed to upgrades of software and computer equipment purchases and furniture and fixtures for the Sunnyvale headquarters facility. We have used $53.0 million during the nine-month period ended January 28, 2000 and received net proceeds of $2.7 million during the nine-month period ended January 29, 1999, for net short-term investment redemptions. During the nine-month period of fiscal 2000, we received back our $2.5 million deposit in connection with the $36.0 million operating lease. In September 1999, we executed an agreement to acquire 9.9 acres of land in Sunnyvale, California and the accompanying 178,996 square foot building. Under terms of the agreement, we paid $2.7 million of the $23.4 million purchase price as a nonrefundable deposit. The agreement allows us to assign our rights and obligations to a third-party entity should we decide to enter into an operating lease. We intend to assign our rights and obligations to a third-party entity and enter into an operating lease provided we can obtain satisfactory leasing terms. Financing activities provided $33.0 million and $12.0 million during the nine-month periods ended January 28, 2000 and January 29, 1999, respectively. The increase in cash provided by financing activities for the nine-months ended January 28, 2000, compared to the corresponding period of the prior fiscal year, was due to an increased quantity of stock options exercised at a higher average exercise price and a greater number of employees participating in the employee stock purchase plan. In November 1999, we executed an agreement to acquire 27.8 acres of land in Sunnyvale, California and the accompanying 354,266 square feet of buildings. Under terms of the agreement, we paid $3.0 million of the $61.0 million purchase price as a nonrefundable deposit. In December 1999, we assigned our rights and obligations under the agreement to a third-party entity and in exchange received back our $3.0 million deposit in January 2000. We subsequently entered into a $62.0 million operating lease for this property. Our lease payments will vary based on LIBOR plus a spread. The lease is for five years and can be renewed for two five-year periods, subject to the approval of the third-party entity. At the expiration or termination of the lease, we have the option to either purchase the property for $62.0 million, or arrange for the sale of the property to a third party for at least $62.0 with a contingent liability for any 12 <PAGE> 14 deficiency. If the property is not purchased or sold as described above, we will be obligated for an additional lease payment of approximately $51.5 million. The lease also requires us to maintain specified financial covenants with which we were in compliance as at January 28, 2000. Excluding the commitment related to the aforementioned 178,996 square foot property, which we intend to assign to third parties and account for as operating leases, we currently have no significant commitments other than commitments under operating leases. We believe that our existing liquidity and capital resources, including the available amounts under our $5.0 million line of credit, are sufficient to fund our operations for at least the next twelve months. YEAR 2000 The Year 2000 issue refers to computer programs which use two digits rather than four to define a given year and which therefore might read a date using "00" as the year 1900 rather than the year 2000. As a result, many companies' systems and software may need to be upgraded or replaced in order to function correctly after December 31, 1999. Over the past year, we have been testing our computer systems and applications to evaluate Year 2000 problems, executing remediation activities to fix non-compliant systems and monitoring and testing products and systems. To date, we have not experienced any problems complying with the Year 2000 issue and have not been informed of any failures of our products from customers or Year 2000 disruptions from third party vendors. NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which defines derivatives, requires that all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Although we have not fully assessed the implications of this new statement, we do not believe adoption of this statement will have a material impact on our consolidated financial position, results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk related to fluctuations in interest rates and in foreign currency exchange rates. We use certain derivative financial instruments to manage these risks. We do not use derivative financial instruments for speculative or trading purposes. All financial instruments are used in accordance with management-approved policies. Market Interest Risk Short-term Investments - As of January 28, 2000, we had short-term investments of $58.6 million. These short-term investments consist of highly liquid investments with original maturities at the date of purchase between three and twelve months. These investments are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 10 percent increase in market interest rates from levels at January 28, 2000, would cause the fair value of these short-term investments to decline by an immaterial amount. Because we have the ability to hold these investments until maturity we would not expect any significant decline in value of our investments caused by market interest rate changes. Declines in interest rates over time will, however, reduce our interest income. Operating Lease Commitments - As of January 28, 2000, we have outstanding lease commitments to a third-party entity under operating lease agreements, which vary based on a monthly LIBOR rate plus a spread. However, a hypothetical 10 percent decrease in interest rates would not have a material impact on us. Increases in interest rates could, however, increase our rent expenses associated with future lease payments. We do not currently hedge against interest rate increases. However, our investment portfolio 13 <PAGE> 15 offers a natural hedge against interest rate risk from our operating lease commitments in the event of a significant increase in the market interest rate. The hypothetical changes and assumptions discussed above will be different from what actually occurs in the future. Furthermore, such computations do not anticipate actions that may be taken by management, should the hypothetical market changes actually occur over time. As a result, the effect on actual earnings in the future will differ from those described above. Foreign Currency Exchange Rate Risk - We hedge risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward contracts to hedge against the short-term impact of foreign currency fluctuations on certain assets and liabilities denominated in foreign currencies. All hedge instruments are marked to market through earnings every period. We believe that these forward contracts do not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts are offset by losses and gains on the underlying assets and liabilities. All contracts have a maturity of less than one year and we do not defer any gains and losses, as they are all accounted for through earnings every period. The following table provides information about our foreign exchange forward contracts outstanding on January 28, 2000, (in thousands): <TABLE> <CAPTION> BUY/ FOREIGN CONTRACT VALUE FAIR VALUE CURRENCY SELL CURRENCY AMOUNT USD IN USD - ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> EUR Sell 10,400 10,685 10,290 EUR Buy 2,000 2,011 1,979 GBP Sell 6,500 10,223 10,638 CHF Sell 4,300 2,646 2,636 CHF Buy 1,000 614 613 </TABLE> PART II. OTHER INFORMATION 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 14 <PAGE> 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS <TABLE> <S> <C> 10.43 Industrial Lease Agreement, dated December 20, 1999 between TRW Inc. and the Company in connection with 1347 Crossman Avenue in Sunnyvale, California 10.44 Industrial Lease Agreement, dated December 20, 1999 between TRW Inc. and the Company in connection with 1350 Geneva Drive in Sunnyvale, California 10.45 Industrial Lease Agreement, dated December 20, 1999 between TRW Inc. and the Company in connection with 1345 Crossman Avenue in Sunnyvale, California 10.46 Industrial Lease Agreement, dated December 20, 1999 between TRW Inc. and the Company in connection with 1330 Geneva Drive in Sunnyvale, California 10.47 Assignment of Agreement of Sale, dated December 20, 1999, by and between BNP Leasing and the Company 10.48 Purchase and Sale Agreement, dated November 16, 1999, by and between TRW Inc. and ESL Incorporated and the Company 10.49 Closing Certificate (Phase IV) and Agreement, dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.50 Lease Agreement (Phase IV - Land), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.51 Lease Agreement (Phase IV - Improvements ), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.52 Purchase Agreement (Phase IV - Land), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.53 Purchase Agreement (Phase IV - Improvements), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.54 Pledge Agreement (Phase IV - Land), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.55 Pledge Agreement (Phase IV - Improvements), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.56 Participation Agreement (Phase IV), dated December 20, 1999, by and between BNP Leasing Corporation and Banque Nationale De Paris 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedules 27.3 Restated Financial Data Schedules 27.4 Restated Financial Data Schedules 27.5 Restated Financial Data Schedules 27.6 Restated Financial Data Schedules </TABLE> (b) REPORTS ON FORM 8-K None 15 <PAGE> 17 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETWORK APPLIANCE, INC. (Registrant) /s/ JEFFRY R. ALLEN --------------------------------------------- Jeffry R. Allen Senior Vice President Finance and Operations, Chief Financial Officer and Secretary Date: February 29, 2000 16 <PAGE> 18 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION <S> <C> 10.43 Industrial Lease Agreement, dated December 20, 1999 between TRW Inc. and the Company in connection with 1347 Crossman Avenue in Sunnyvale, California 10.44 Industrial Lease Agreement, dated December 20, 1999 between TRW Inc. and the Company in connection with 1350 Geneva Drive in Sunnyvale, California 10.45 Industrial Lease Agreement, dated December 20, 1999 between TRW Inc. and the Company in connection with 1345 Crossman Avenue in Sunnyvale, California 10.46 Industrial Lease Agreement, dated December 20, 1999 between TRW Inc. and the Company in connection with 1330 Geneva Drive in Sunnyvale, California 10.47 Assignment of Agreement of Sale, dated December 20, 1999, by and between BNP Leasing and the Company 10.48 Purchase and Sale Agreement, dated November 16, 1999, by and between TRW Inc. and ESL Incorporated and the Company 10.49 Closing Certificate (Phase IV) and Agreement, dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.50 Lease Agreement (Phase IV - Land), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.51 Lease Agreement (Phase IV - Improvements ), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.52 Purchase Agreement (Phase IV - Land), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.53 Purchase Agreement (Phase IV - Improvements), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.54 Pledge Agreement (Phase IV - Land), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.55 Pledge Agreement (Phase IV - Improvements), dated December 20, 1999, by and between BNP Leasing Corporation and the Company 10.56 Participation Agreement (Phase IV), dated December 20, 1999, by and between BNP Leasing Corporation and Banque Nationale De Paris 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedules 27.3 Restated Financial Data Schedules 27.4 Restated Financial Data Schedules 27.5 Restated Financial Data Schedules 27.6 Restated Financial Data Schedules </TABLE> 17 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.43 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 10.43 <TEXT> <PAGE> 1 EXHIBIT 10.43 INDUSTRIAL LEASE (1347 Crossman Avenue) Effective Date: December ___, 1999 DEFINED TERMS Landlord: NETWORK APPLIANCE, INC., a California corporation Landlord's Address For Notice: 495 East Java Drive Sunnyvale, California 94089 Attention: Mr. Thomas Bryant Tenant: TRW INC., an Ohio corporation Tenant's Address For Notice: TRW Inc. 12011 Sunset Hills Road Reston, Virginia 20190 Attn: Ms. Marsha A. Klontz And to: TRW Electronic Systems 1330 Geneva Drive P.O. Box 3510 Sunnyvale, California 94088-3510 Project: Certain parcels of land situated in Santa Clara County, California consisting of 27.848 acres of land described as APN #110-42.2.2.6.7.8, having addresses of 1345 and 1346 Crossman Avenue and 1330 and 1350 Geneva Drive in Sunnyvale, California Building: 1347 Crossman Avenue, Sunnyvale, California Premises: The Building, together with the Property Property: That certain real property described in Exhibit A hereto Term: From the Commencement Date to June 30, 2001 Commencement Date: December ___, 1999 <PAGE> 2 Base Rent Per Month: Sixty-Nine Thousand One Hundred Forty-Three and 75/100 Dollars ($69,143.75) Lease Year: Shall refer to each three hundred sixty-five (365) day period during the Term commencing on the Commencement Date and on each anniversary thereof. Permitted Uses: General office purposes and no other uses shall be permitted without the prior written consent of Landlord. EXHIBITS A - Premises B - Estoppel Certificate The Defined Terms set forth above and the Exhibits attached hereto are incorporated into and made a part of the following Lease. Each reference in this Lease to any of the Defined Terms shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Defined Terms and the provisions of the Lease, the latter shall control. LANDLORD (_________) AND TENANT (_________) AGREE. initial initial <PAGE> 3 Table of Contents <TABLE> <CAPTION> Page ---- <S> <C> <C> 1. PREMISES.................................................................................................1 1.1. Premises........................................................................................1 1.2. Reserved Rights.................................................................................1 1.3. As-Is...........................................................................................1 2. TERM.....................................................................................................1 3. RENT.....................................................................................................1 3.1. Base Rent.......................................................................................1 3.2. Late Charge and Interest........................................................................1 3.3. Net Lease.......................................................................................2 4. UTILITIES................................................................................................2 5. TAXES....................................................................................................2 5.1. Real Property Taxes.............................................................................2 5.2. Definition of Real Property Taxes...............................................................2 5.3. Personal Property Taxes.........................................................................3 6. INSURANCE................................................................................................3 6.1. Landlord........................................................................................3 6.2. Tenant..........................................................................................3 6.3. General.........................................................................................4 6.4. Indemnity.......................................................................................4 6.5. Exemption of Landlord from Liability............................................................5 7. REPAIRS AND MAINTENANCE..................................................................................5 7.1. Tenant..........................................................................................5 7.2. Landlord........................................................................................5 8. ALTERATIONS..............................................................................................5 8.1. Trade Fixtures; Alterations.....................................................................5 8.2. Damage; Removal.................................................................................6 8.3. Liens...........................................................................................6 9. USE......................................................................................................6 10. ENVIRONMENTAL MATTERS....................................................................................7 10.1. Hazardous Materials.............................................................................7 10.2. Indemnification.................................................................................7 11. DAMAGE AND DESTRUCTION...................................................................................8 11.1. Casualty........................................................................................8 11.2. Tenant's Fault..................................................................................9 11.3. Uninsured Casualty..............................................................................9 </TABLE> i <PAGE> 4 <TABLE> <S> <C> <C> 11.4. Waiver..........................................................................................9 12. EMINENT DOMAIN...........................................................................................9 12.1. Total Condemnation..............................................................................9 12.2. Partial Condemnation............................................................................9 12.3. Award...........................................................................................9 12.4. Temporary Condemnation.........................................................................10 13. DEFAULT.................................................................................................10 13.1. Events of Defaults.............................................................................10 13.2. Remedies.......................................................................................11 13.3. Cumulative.....................................................................................12 14. ASSIGNMENT AND SUBLETTING...............................................................................12 15. ESTOPPEL, ATTORNMENT AND SUBORDINATION..................................................................13 15.1. Estoppel.......................................................................................13 15.2. Attornment.....................................................................................13 15.3. Subordination..................................................................................13 16. MISCELLANEOUS...........................................................................................14 16.1. General........................................................................................14 16.2. Signs..........................................................................................15 16.3. Waiver.........................................................................................15 16.4. Financial Statements...........................................................................15 16.5. Limitation of Liability........................................................................15 16.6. Notices........................................................................................15 16.7. Brokerage Commission...........................................................................15 16.8. Authorization..................................................................................16 16.9. Holding Over; Surrender........................................................................16 16.10. Joint and Several..............................................................................16 16.11. Covenants and Conditions.......................................................................16 16.12. Addenda........................................................................................16 </TABLE> ii <PAGE> 5 1. PREMISES. 1.1. Premises. Landlord hereby leases to Tenant the Premises as shown on Exhibit A attached hereto, but excluding any other portion of the Project. 1.2. Reserved Rights. Landlord reserves the right to enter the Premises upon reasonable notice to Tenant (except in case of an emergency) and/or to undertake the following: inspect the Premises and/or the performance by Tenant of the terms and conditions hereof. Landlord acknowledges and agrees that any such activities by Landlord on the Premises shall be subject to any reasonable security precautions created by Tenant as a result of any classified work performed by Tenant in the Building on behalf of the United States Government. 1.3. As-Is. Tenant acknowledges that Tenant has owned and occupied the Premises for an extensive period of time prior to the Commencement Date of this Lease and, as such, is familiar with the physical condition thereof. Tenant recognizes that Landlord would not lease the Premises except on an "as-is" basis and that Landlord has made no representations of any kind in connection with improvements or physical conditions on, or bearing on, the use or condition of the Premises. 2. TERM. The Term of the Lease shall commence ("Commencement Date") on the Commencement Date and expire on June 30, 2001. Tenant has determined that the Premises are acceptable for Tenant's use; and acknowledges that Landlord has made no representations or warranties in connection with the physical condition of the Premises or Tenant's use of the same upon which Tenant has relied directly or indirectly for any purpose. 3. RENT. 3.1 Base Rent. Tenant shall pay to Landlord, at such address as Landlord shall from time to time designate in writing to Tenant for the payment of Rent, the Base Rent, without notice, demand, offset or deduction, on the first day of each calendar month. Upon the execution of this Lease, Tenant shall pay to Landlord the first month's Base Rent. If the Term commences (or ends) on a date other than the first (or last) day of a month, Tenant shall pay on the Commencement Date or first day of the last month a pro rata portion of Base Rent, prorated on a per diem basis with respect to the portion of the month within the Term. All sums other than Base Rent which Tenant is obligated to pay under this Lease shall be deemed to be additional rent due hereunder, whether or not such sums are designated "additional rent." The term "Rent" means the Base Rent and all additional rent payable hereunder. 3.2 Late Charge and Interest. The late payment of any Rent will cause Landlord to incur additional costs, including administration and collection costs and processing and accounting expenses and increased debt service. If Landlord has not received any installment of Rent within five (5) days after such amount is due, Tenant shall pay a late charge of ten percent (10%) of the delinquent amount, which is agreed to represent a reasonable estimate of the costs incurred by Landlord. In addition, all such delinquent amounts shall bear interest from the date such amount was due until paid in full at a rate per annum ("Applicable Interest Rate") equal to the greater of (a) five percent (5%) per annum plus the then federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the 1 <PAGE> 6 month preceding the date of this Lease or (b) ten percent (10%); provided, in no event shall the Applicable Interest Rate exceed the maximum interest rate permitted by law which may be charged under such circumstances. Landlord and Tenant recognize that the damage which Landlord shall suffer as a result of Tenant's failure to pay such amounts is difficult to ascertain and said late charge and interest are the best estimate of the damage which Landlord shall suffer in the event of late payment. 3.3 Net Lease. Tenant acknowledges that the Rent shall be absolutely net and carefree to the Landlord, except as set forth herein. Landlord shall not be responsible for any costs, charges, expenses or outlays of any nature or kind whatsoever arising from or relating to the Premises, except as provided for herein. Tenant shall pay all such charges, impositions, costs and expenses of every nature and kind to Landlord's complete exoneration. 4. UTILITIES. Tenant shall pay all charges for heat, water, gas, electricity and any other utilities used on the Premises directly to the utility provider. Landlord shall not be liable to Tenant for interruption in or curtailment of any utility service, nor shall any such interruption or curtailment constitute constructive eviction or grounds for rental abatement. In the event the Premises is not separately metered, Landlord shall have the option, subject to Landlord's review and the terms of this Lease, to cause the Premises to be separately metered at Tenant's cost and expense. 5. TAXES. 5.1 Real Property Taxes. Tenant shall pay any and all of the Real Property Taxes for the Premises to the relevant taxing authority on or before the date due. Tenant shall provide Landlord with written evidence of such payment of taxes concomitantly with the payment thereof. 5.2 Definition of Real Property Taxes. "Real Property Taxes" shall be the sum of the following: all real property taxes, possessory interest taxes, business or license taxes or fees, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, housing fund assessments, open space charges, childcare fees, school fees or any other assessments, levies, fees or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen (including fees "in-lieu" of any such tax or assessment) which are assessed, levied, charged, confirmed or imposed by any public authority upon the Project (or any real property comprising any portion thereof) or its operations, together with all taxes, assessments or other fees imposed by any public authority upon or measured by any Rent or other charges payable hereunder, including any gross income tax or excise tax levied by the local governmental authority, the federal government or any other governmental body with respect to receipt of such rental, or upon, with respect to or by reason of the development, possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, or upon this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises, together with any tax imposed in substitution, partially or totally, of any tax previously included within the aforesaid definition or any additional tax the nature of which was previously included within the aforesaid definition, together with the costs and expenses (including attorneys fees) of challenging any of the foregoing or seeking the reduction in or abatement, redemption or return of any of the foregoing, 2 <PAGE> 7 but only to the extent of any such reduction, abatement, redemption or return. Nothing contained in this Lease shall require Tenant to pay any franchise, corporate, estate or inheritance tax of Landlord, or any income, profits or revenue tax or charge upon the net income of Landlord. 5.3 Personal Property Taxes. Prior to delinquency, Tenant shall pay all taxes and assessments levied upon trade fixtures, alterations, additions, improvements, inventories and other personal property located and/or installed on the Property by Tenant; and Tenant shall provide Landlord copies of receipts for payment of all such taxes and assessments. To the extent any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord. 6. INSURANCE. 6.1 Landlord. Landlord shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 6.1.1. Building. Insurance insuring the Building and the Landlord's interest in any betterments and improvements against fire and extended coverage (including "all risk" coverage, earthquake/volcanic action, flood and/or surface water insurance) for the full replacement cost of the Building, with deductibles and the form and endorsements of such coverage as is required by any synthetic lender of Landlord with an interest in the Building at the time, together with rental value insurance against loss of Rent in an amount equal to the amount of Rent for a period of at least twelve (12) months commencing on the date of loss. Tenant shall reimburse Landlord for the cost of such insurance for such period of time that is consistent with the Term of this Lease within ten (10) business days of receipt of request therefor, provided such request is accompanied by related invoices therefor. 6.2 Tenant. Tenant shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 6.2.1. Commercial General Liability Insurance (Occurrence Form). A policy of commercial general liability insurance (occurrence form) having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence providing coverage for, among other things, blanket contractual liability, premises, products/completed operations and personal and advertising injury coverage, with deletion of the exclusion for explosion, collapse or underground hazard, if applicable, and, if necessary, Tenant shall provide for restoration of the aggregate limit; 6.2.2. Automobile Liability Insurance. Comprehensive automobile liability insurance having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence and insuring Tenant against liability for claims arising out of ownership, maintenance, or use of any owned, hired or non-owned automobiles; 6.2.3. Workers' Compensation and Employer's Liability Insurance. Workers' compensation insurance having limits not less than those required by state statute and federal statute, if applicable, and covering all persons employed by Tenant in the conduct of its operations on the Premises (including the all states endorsement and, if applicable, the volunteers 3 <PAGE> 8 endorsement), together with employer's liability insurance coverage in the amount of at least One Million Dollars ($1,000,000); and 6.2.4. Property Insurance. "All risk" property insurance including boiler and machinery comprehensive form, if applicable, covering damage to or loss of any personal property, fixtures and equipment, including electronic data processing equipment, of Tenant (and coverage for the full replacement cost thereof including business interruption of Tenant) ("Tenant's Property"). 6.3 General. 6.3.2. Insurance Companies. Insurance required to be maintained by Tenant shall be written by companies licensed to do business in the state in which the Premises are located and having a "General Policyholders Rating" of at least A (or such higher rating as may be required by a lender having a lien on the Premises) as set forth in the most current issue of "Best's Insurance Guide." 6.3.2. Certificates of Insurance. Tenant shall deliver to Landlord certificates of insurance for all insurance required to be maintained by Tenant prior to the date of possession of the Premises. Tenant shall, at least ten (10) days prior to expiration of the policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to modification except after sixty (60) days prior written notice to the parties named as additional insureds in this Lease (except in the case of cancellation for nonpayment of premium in which case cancellation shall not take effect until at least (10) days' notice has been given to Landlord). If Tenant fails to maintain any insurance required in this Lease, Tenant shall be liable for all losses and cost resulting from said failure. 6.3.3. Additional Insureds. Landlord and any property management company of Landlord for the Premises shall be included as additional insureds, to the extent that the Tenant has an obligation under Section 6.4, under all of the policies required by Section 6.2.1. The policies required under Section 6.2.1 shall provide for severability of interest. 6.3.4. Primary Coverage. All insurance to be maintained by Tenant shall, except for workers' compensation and employer's liability insurance, be primary, without right of contribution from insurance of Landlord. The limits of insurance maintained by Tenant shall not limit Tenant's liability under this Lease. 6.3.5. Waiver of Subrogation. Landlord and Tenant each waives any right to recover against the other for claims for damages to its property covered by insurance. This provision is intended to waive fully, and for the benefit of Landlord and Tenant, any rights and/or claims which might give rise to a right of subrogation in favor of any insurance carrier. 6.4 Indemnity. Tenant shall indemnify, defend by counsel satisfactory to Landlord, and hold harmless Landlord from and against any and all claims arising from (i) Tenant's use of the Premises, the conduct of Tenant's business or any activity, work or things done, permitted or suffered by Tenant in or about the Premises, the Building or elsewhere and (ii) any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of 4 <PAGE> 9 this Lease, arising from any negligence of Tenant or any of Tenant's agents, contractors or employees, including all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises or the Building arising from any cause; and Tenant hereby waives all claims in respect thereof against Landlord except to the extent such claims are caused by Landlord's gross negligence or willful misconduct. 6.5 Exemption of Landlord from Liability. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Premises or the Building, nor shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents or contractors, whether such damage or injury is caused by fire, steam, electricity, gas, water or rain, or from the breakage, leakage or other defects of sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises, the Building or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Building. 7. REPAIRS AND MAINTENANCE. 7.1. Tenant. Tenant shall keep and maintain any and all portions of the Premises and the Building, including structural portions thereof, floors and floor coverings, interior plumbing, HVAC and other building system equipment, electrical wiring, fixtures and equipment in good repair and in a clean and safe condition, and repair and/or replace any and all of the foregoing in a good and workmanlike manner. Without limiting the foregoing, Tenant shall, at Tenant's sole expense, (a) immediately replace all broken glass in the Premises with glass equal to or in excess of the specification and quality of the original glass; and (b) repair any area damaged by Tenant, Tenant's agents, employees, invitees and visitors, including any damage caused by any roof penetration, whether or not such roof penetration was approved by Landlord. 7.2. Landlord. Landlord shall have no obligation whatsoever to maintain any portion of the Building or Premises. Tenant waives any right to repair at the expense of Landlord under any applicable governmental laws, ordinances, statutes, orders or regulations now or hereafter in effect respecting the Premises. 8. ALTERATIONS. 8.1. Trade Fixtures; Alterations. Tenant may install necessary trade fixtures, equipment and furniture in the Building, provided that such items are installed and are removable without structural damage to the Building. Tenant shall not make, or allow to be made, any alterations or physical additions in, about or to the Premises that affect the structural aspects of the Building, the Building roof or Building foundation without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall reimburse Landlord for all costs which Landlord may incur in connection with granting approval to Tenant for any such alterations and additions, including any costs or expenses which Landlord may 5 <PAGE> 10 incur in electing to have outside architects and engineers review said matters. If a Notice of Completion is required for such work, Tenant shall file it and provide Landlord with a copy. Tenant shall provide Landlord with a set of "as-built" drawings for any such work. 8.2. Damage; Removal. Tenant assumes the risk of damage to any of Tenant's fixtures, equipment, furniture or alterations. Tenant shall repair all damage to the Premises and/or Building caused by the installation or removal of such items. Upon the termination of this Lease, Tenant shall remove any or all alterations, additions, improvements and partitions made or installed by Tenant and restore the Premises to their condition existing prior to the construction of any such items; provided, however, Landlord may permit, upon written notice to Tenant (to the extent requested to do so by Tenant at the time notice thereof is given), any such items designated by Landlord to remain on the Premises, in which event they shall be and become the property of Landlord upon the termination of this Lease. All such removals and restoration shall be accomplished in a good and workmanlike manner and so as not to cause any damage to the Premises, the Building or the Project whatsoever. 8.3. Liens. Tenant shall promptly pay and discharge all claims for labor performed, supplies furnished and services rendered at the request of Tenant and shall keep the Premises free of all mechanics' and materialmen's liens in connection therewith. Tenant shall provide at least ten (10) days prior written notice to Landlord before any labor is performed, supplies furnished or services rendered on or at the Premises and Landlord shall have the right to post on the Premises notices of non-responsibility. If any lien is filed, Landlord may take such action as may be necessary to remove such lien and Tenant shall pay Landlord such amounts expended by Landlord together with interest thereon at the Applicable Interest Rate from the date of expenditure. 9. USE. The Premises shall be used only for the Permitted Uses and for no other uses and otherwise consistent with any applicable governmental laws, ordinances, statutes, orders and regulations and any declaration of covenants, conditions and restrictions or any supplement thereto which has been recorded in any official or public records with respect to the Project or any portion thereof. Tenant shall comply with all applicable governmental laws, ordinances, and statutes applicable to the Premises or Building. Tenant shall not commit waste, overload the floors or structure of the Building, subject the Premises or the Project to any use which would damage the same or raise or violate any insurance coverage, permit any unreasonable odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises, take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants, take any action which would abrogate any warranties, or use or allow the Premises to be used for any unlawful purpose. Tenant shall not use any parking spaces for the Project other than the parking spaces located on the Premises. Landlord shall not be responsible for non-compliance by any other tenant or occupant with any of the rules or regulations or any other terms or provisions of such tenant's or occupant's lease. Tenant shall promptly comply with the reasonable requirements of any board of fire insurance underwriters or other similar body now or hereafter constituted. 6 <PAGE> 11 10. ENVIRONMENTAL MATTERS. 10.1. Hazardous Materials. Tenant shall not cause, or allow any of Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees or subtenants (collectively, "Tenant's Parties") to cause or permit, any Hazardous Materials to be brought upon, stored, manufactured, generated, blended, handled, recycled, treated, disposed or used on, under or about the Premises, the Building or the Project, except for routine office and janitorial supplies and the Hazardous Materials listed on Schedule 1 hereto in usual and customary quantities stored, used and disposed of in accordance with all applicable Environmental Laws. As used herein, "Hazardous Materials" means any chemical, substance, material, controlled substance, waste or combination thereof which is hazardous to human health or safety or to the environment due to its radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity, carcinogenicity, mutagenicity or other harmful or potentially harmful properties or effects, including, without limitation, petroleum and petroleum products, asbestos, radon, polychlorinated biphenyls (PCBs) and all of those chemicals, substances, materials, controlled substances, wastes or combinations thereof which are listed, defined or regulated in any manner by any Environmental Law based upon, directly or indirectly, such properties or effects. As used herein, "Environmental Laws" means any and all federal, state or local environmental, health and/or safety-related laws, regulations, standards, ordinances, rules, codes, orders, decrees, directives, guidelines, permits or permit conditions, currently existing which are applicable to Tenant or the Premises. Tenant and Tenant's Parties shall comply with all Environmental Laws and promptly notify Landlord of the presence of any Hazardous Materials, other than as permitted above, on the Premises or any violation of any Environmental Law. Landlord shall have the right to inspect the Premises and to conduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions. If such tests indicate the presence of any environmental condition, Tenant shall reimburse Landlord for the cost of conducting such tests. The phrase "environmental condition" shall mean any condition relating to any Hazardous Materials, including surface water, groundwater, drinking water supply, land, surface or subsurface strata or the ambient air and includes air, land and water pollutants, being present at the Property in violation of Environmental Laws or in a manner which, in the reasonable opinion of the Landlord's environmental consultant, is substantially likely to cause health problems for occupants of the Premises or a future violation of Environmental Law. In the event of any such environmental condition, Tenant shall promptly take any and all steps necessary to rectify the same or shall, at Tenant's election, reimburse Landlord, upon demand, for the cost to Landlord of performing rectifying work. Upon the expiration or earlier termination of this Lease, Tenant shall remove any and all Hazardous Materials on, under or about the Premises. 10.2. Indemnification. Tenant shall indemnify, protect, defend (by counsel acceptable to Landlord) and hold harmless Landlord and its partners, directors, officers, employees, shareholders, lenders, agents, contractors and each of their respective successors and assigns (individually and collectively, "Indemnities") from and against any and all claims, judgments, causes of action, damages, penalties, fines, taxes, costs, liabilities, losses and expenses arising at any time during or after the Term as a result (directly or indirectly) of or in connection with (a) Tenant and/or Tenant's Parties' breach of any prohibition or provision of the preceding section, or (b) the presence of Hazardous Materials on, under or about the Premises or other properties as a result (directly or indirectly) of Tenant's and/or Tenant's Parties' activities, or failure to act 7 <PAGE> 12 when legally required to do so in connection with the Premises. This indemnity shall include the cost of any required or necessary repair, cleanup or detoxification, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the termination of this Lease. The written consent by Landlord to the presence of Hazardous Materials on, under or about the Premises shall not excuse Tenant from Tenant's obligation of indemnification pursuant hereto. Tenant's obligations pursuant to the foregoing indemnity shall survive the termination of this Lease. 11. DAMAGE AND DESTRUCTION. 11.1. Casualty. If the Building should be damaged or destroyed by fire or other casualty, Tenant shall give immediate written notice to Landlord. Within thirty (30) days after receipt thereof, Landlord shall notify Tenant whether such repairs can reasonably be made: (1) within thirty (30) days; (2) in more than thirty (30) days but in less than ninety (90) days; or (3) in more than ninety (90) days from the date of such notice. 11.1.1. Less Than 30 Days. If the Building should be damaged only to such extent that rebuilding or repairs can be reasonably completed within thirty (30) days, this Lease shall not terminate and, provided that insurance proceeds are available to fully repair the damage, Landlord shall repair the Building, except that Landlord shall not be required to rebuild, repair or replace any alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of Tenant. The Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and the Building are unfit for occupancy. 11.1.2. Greater Than 30 Days. If the Building should be damaged only to such extent that rebuilding or repairs can be reasonably completed in more than thirty (30) days but in less than ninety (90) days, then Landlord shall have the option of: (1) terminating the Lease effective upon the occurrence of such damage, in which event the Rent shall be abated from the date Tenant vacates the Building; or (2) electing to repair the Building, provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace any part of the alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of Tenant). The Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and the Building is unfit for occupancy. 11.1.3. Greater Than 90 Days. If the Building should be so damaged that rebuilding or repairs cannot be completed within ninety (90) days, either Landlord or Tenant may terminate by giving written notice within ten (10) days after notice from Landlord regarding the time period of repair; and this Lease and the Rent shall be abated from the date Tenant vacates the Building. In the event that neither party elects to terminate this Lease, Landlord shall promptly commence and diligently prosecute to completion the repairs to the Building , provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace any alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of 8 <PAGE> 13 Tenant). During the time when Landlord is prosecuting such repairs to completion, the Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and only during the period that the Building is unfit for occupancy. 11.2. Tenant's Fault. If any portion of the Building is damaged resulting from the fault, negligence or breach of this Lease by Tenant or any of Tenant's Parties, Rent shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost of the repair caused thereby to the extent such cost is not covered by insurance proceeds. 11.3. Uninsured Casualty. In the event that any portion of the Building is damaged and is not fully covered by insurance proceeds received by Landlord or in the event that the holder of any indebtedness secured by the Premises requires that the insurance proceeds be applied to such indebtedness, then Tenant shall have the right to terminate this Lease by delivering written notice of termination to Landlord within thirty (30) days after the date of notice to Tenant of any such event. In the event that Tenant does not elect to terminate this Lease, Landlord shall have the right to terminate this Lease by delivering written notice to Tenant within thirty (30) days after such election by Tenant or Tenant's failure to elect, as applicable, whereupon all rights and obligations shall cease and terminate hereunder. 11.4. Waiver. With respect to any damage or destruction which Landlord is obligated to repair or may elect to repair, Tenant waives all rights to terminate this Lease pursuant to rights otherwise presently or hereafter accorded by law. 12. EMINENT DOMAIN. 12.1. Total Condemnation. If all of the Premises is condemned by eminent domain, inversely condemned or sold in lieu of condemnation for any public or quasi-public use or purpose ("Condemned"), this Lease shall terminate as of the date of title vesting in such proceeding and Rent shall be adjusted to the date of termination. 12.2. Partial Condemnation. If any portion of the Premises is Condemned and such partial condemnation renders the Premises unusable for Tenant's business, or if a substantial portion of the Building is Condemned, this Lease shall terminate as of the date of title vesting or order of immediate possession in such proceeding and Rent shall be adjusted to the date of termination. If such partial condemnation does not render the Premises unusable for the business of Tenant or less than a substantial portion of the Building is Condemned, Landlord shall promptly restore the Premises to the extent of any condemnation proceeds recovered by Landlord, excluding the portion thereof lost in such condemnation, and this Lease shall continue in full force and effect except that after the date of such title vesting Rent shall be adjusted, as reasonably determined by Landlord. 12.3. Award. If the Premises are wholly or partially Condemned, Landlord shall be entitled to the entire award paid for such condemnation, and Tenant waives any claim to any part of the award from Landlord or the condemning authority; provided that Tenant shall have the right to recover from the condemning authority such compensation as may be separately awarded 9 <PAGE> 14 to Tenant in connection with costs in removing Tenant's merchandise, furniture, fixtures, leasehold improvements and equipment to a new location. 12.4. Temporary Condemnation. In the event of a temporary condemnation, this Lease shall remain in effect, Tenant shall continue to pay Rent and Tenant shall receive any award made for such condemnation. If a temporary condemnation remains in effect at the expiration or earlier termination of this Lease, Tenant shall pay Landlord the reasonable cost of performing any obligations required of Tenant with respect to the surrender of the Premises. If a temporary condemnation is for a period which extends beyond the Term, this Lease shall terminate as of the date of occupancy by the condemning authority and any such award shall be distributed in accordance with the preceding section. 13. DEFAULT. 13.1. Events of Defaults. The occurrence of any of the following events shall, at Landlord's option, constitute an "Event of Default": 13.1.1. Vacation or abandonment of the Premises for a period of thirty (30) consecutive days, and Tenant waives any right to notice Tenant may have under applicable law; 13.1.2. Failure to pay Rent on the date when due, the failure continuing for a period of five (5) days after payment is due; 13.1.3. Failure to perform Tenant's covenants hereunder (except default in the payment of Rent); provided, if such default is susceptible of cure and Tenant has promptly commenced the cure of such default and is diligently prosecuting such cure to completion, then the same must remain uncured for thirty (30) days after written notice thereof from Landlord; 13.1.4. The making of a general assignment by Tenant for the benefit of creditors, the filing of a voluntary petition by Tenant or the filing of an involuntary petition by any of Tenant's creditors seeking the rehabilitation, liquidation or reorganization of Tenant under any law relating to bankruptcy, insolvency or other relief of debtors and, in the case of an involuntary action, the failure to remove or discharge the same within sixty (60) days of such filing, the appointment of a receiver or other custodian to take possession of substantially all of Tenant's assets or this leasehold, Tenant's insolvency or inability to pay Tenant's debts or failure generally to pay Tenant's debts when due, any court entering a decree or order directing the winding up or liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking any action toward the dissolution or winding up of Tenant's affairs, the cessation or suspension of Tenant's use of the Premises, or the attachment, execution or other judicial seizure of substantially all of Tenant's assets or this leasehold; 13.1.5. The making of any material misrepresentation or omission by Tenant in any materials delivered by or on behalf of Tenant to Landlord pursuant to this Lease; or 13.1.6. A default by Tenant beyond any applicable notice and cure period pursuant to the terms of any lease entered into between Landlord and Tenant for space in the Project. 10 <PAGE> 15 13.2. Remedies. 13.2.1. Termination. In the event of the occurrence of any Event of Default, Landlord shall have the right to give a written termination notice to Tenant and, on the date specified in such notice, this Lease shall terminate unless on or before such date all arrears of Rent and all other sums payable by Tenant under this Lease and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other Events of Default at the time existing shall have been fully remedied to the satisfaction of Landlord. 13.2.1.1. Repossession. Following termination, without prejudice to other remedies Landlord may have, Landlord may (i) peaceably re-enter the Premises upon voluntary surrender by Tenant or remove Tenant therefrom and any other persons occupying the Premises, using such legal proceedings as may be available; (ii) repossess the Premises or relet the Premises or any part thereof for such term (which may be for a term extending beyond the Term), at such rental and upon such other terms and conditions as Landlord in Landlord's sole discretion shall determine, with the right to make reasonable alterations and repairs to the Premises; and (iii) remove all personal property therefrom. 13.2.1.2. Unpaid Rent. Landlord shall have all the rights and remedies of a landlord provided by applicable law, including the right to recover from Tenant: (a) the worth, at the time of award, of the unpaid Rent that had been earned at the time of termination, (b) the worth, at the time of award, of the amount by which the unpaid Rent that would have been earned after the date of termination until the time of award exceeds the amount of loss of rent 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 Term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided, and (d) any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. The phrase "worth, at the time of award," as used in (a) and (b) above, shall be computed at the greater of 10% per annum or 5% per annum plus the federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the month preceding the date of this Lease, and as used in (c) above, 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 1%. 13.2.2. Continuation. Even though an Event of Default may have occurred, 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 Rent as it becomes due, and Landlord, without terminating this Lease, may, during the period Tenant is in default, enter the Premises and relet the same, or any portion thereof, to third parties for Tenant's account and Tenant shall be liable to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises and like costs. Reletting may be for a period shorter or longer than the remaining Term. Tenant shall continue to pay the Rent on the date the same is due. No act by Landlord hereunder, including acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interest under this Lease, shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. In the event that Landlord elects to relet the 11 <PAGE> 16 Premises, the rent that Landlord receives from reletting shall be applied to the payment of, first, any indebtedness from Tenant to Landlord other than Base Rent and Additional Rent; second, all costs, including maintenance, incurred by Landlord in reletting; and, third, Base Rent and Tenant's Share of Increases under this Lease. After deducting the payments referred to above, any sum remaining from the rental Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. In no event shall Tenant be entitled to any excess rent received by Landlord. If, on the date Rent is due under this Lease, the rent received from the reletting is less than the Rent due on that date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all costs, including maintenance, Landlord incurred in reletting that remain after applying the rent received from reletting as provided hereinabove. So long as this Lease is not terminated, Landlord shall have the right to remedy any default of Tenant, to maintain or improve the Premises, to cause a receiver to be appointed to administer the Premises and new or existing subleases and to add to the Rent payable hereunder all of Landlord's reasonable costs in so doing, with interest at the Applicable Interest Rate from the date of such expenditure. 13.3. Cumulative. Each right and remedy of Landlord provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and shall not preclude Landlord from exercising any other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity, by statute or otherwise. No payment by Tenant of a lesser amount than the Rent nor any endorsement on any check or letter accompanying any check or payment as Rent shall be deemed an accord and satisfaction of full payment of Rent; and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies. 14. ASSIGNMENT AND SUBLETTING. Tenant shall not assign or sublet, whether voluntarily or involuntarily or by operation of law, the Premises or any part thereof without Landlord's prior written approval, which shall not be unreasonably withheld. The merger of Tenant with any other entity or the transfer of any controlling or managing ownership or beneficial interest in Tenant shall constitute an assignment hereunder. If Tenant desires to assign this Lease or sublet any or all of the Building, Tenant shall give Landlord written notice forty-five (45) days prior to the anticipated effective date of the assignment or sublease. Landlord shall then have a period of thirty (30) days following receipt of such notice and all related documents and agreements associated with the assignment or sublease, including without limitation, the financial statements of any proposed assignee or subtenant, to notify Tenant in writing that Landlord elects: (1) to permit Tenant to assign this Lease or sublet such space, subject however to Landlord's prior written approval of the proposed assignee or subtenant and of any related documents or agreements associated with the assignment or sublease received by Landlord hereunder or reasonably requested by Landlord; (2) to disapprove such proposed assignment or subletting or (3) to terminate this Lease as of the date specified in Landlord's notice thereof. If Landlord should fail to notify Tenant in writing of such election, Landlord shall be deemed to have elected option (2). This Lease may not be assigned by operation of law. Any purported assignment or subletting contrary to the provisions hereof shall be void. If Tenant receives rent or other consideration for any such transfer in excess of the Rent, or in case of the sublease of a portion of the Premises, in excess of such Rent that is fairly allocable to such portion, after appropriate adjustments to assure that all other payments required hereunder are appropriately taken into account, Tenant shall pay Landlord one hundred percent (100%) of the 12 <PAGE> 17 difference between each such payment of rent or other consideration and the Rent required hereunder. Landlord may, without waiving any rights or remedies, collect rent from the assignee, subtenant or occupant and apply the net amount collected to the Rent herein reserved and apportion any excess rent so collected in accordance with the terms of the preceding sentence. Tenant shall continue to be liable as a principal and not as a guarantor or surety to the same extent as though no assignment or subletting had been made. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to the Lease by assignees of Tenant without notifying Tenant or any successor of Tenant and without obtaining their consent. No permitted transfer shall be effective until there has been delivered to Landlord a counterpart of the transfer instrument in which the transferee agrees to be and remain jointly and severally liable with Tenant for the payment of Rent pertaining to the space and for the performance of all the terms and provisions of this Lease relating thereto arising on or after the date of the transfer. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Premises, the Building or the Project. 15. ESTOPPEL, ATTORNMENT AND SUBORDINATION. 15.1. Estoppel. Within ten (10) days after request by Landlord, Tenant shall deliver an estoppel certificate duly executed (and acknowledged if required by any lender), in the form attached hereto as Exhibit B, to any proposed mortgagee, purchaser or Landlord. Tenant's failure to deliver said statement in such time period shall be conclusive upon Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's performance and Tenant has no right of offset, counterclaim or deduction against Rent hereunder; and (c) no more than one period's Base Rent has been paid in advance. Landlord reserves the right to substitute a different form of estoppel certificate upon the request of any proposed mortgagee or purchaser. If any financier should require that this Lease be amended (other than in the description of the Premises, the Term, the Permitted Use, the Rent or as will substantially, materially and adversely affect the rights of Tenant), Landlord shall give written notice thereof to Tenant, which notice shall be accompanied by a Lease supplement embodying such amendments. Tenant shall, within ten (10) days after the receipt of Landlord's notice, execute the tendered Lease supplement. 15.2. Attornment. In the event of a foreclosure proceeding, the exercise of the power of sale under any mortgage or deed of trust or the termination of a ground lease, Tenant shall, if requested, attorn to the purchaser thereupon and recognize such purchaser as Landlord under this Lease; provided, however, Tenant's obligation to attorn to such purchaser shall be conditioned upon Tenant's receipt of a non-disturbance agreement. 15.3. Subordination. This Lease shall be subject and subordinate to all ground leases and the lien of all mortgages and deeds of trust which now or hereafter affect the Premises or the Project or Landlord's interest therein, or on or against all such ground leases, and all amendments thereto, all without the necessity of Tenant's executing further instruments to effect such subordination. If requested, Tenant shall execute whatever documentation may be required to further effect the provisions of this paragraph. 13 <PAGE> 18 16. MISCELLANEOUS. 16.1. General. 16.1.1. Entire Agreement. This Lease sets forth all the agreements between Landlord and Tenant concerning the Premises; and there are no agreements either oral or written other than as set forth herein. 16.1.2. Time of Essence. Time is of the essence of this Lease. 16.1.3. Attorneys' Fees. In any action which either party brings to enforce its rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys' fees, to be fixed by the court, and said costs and attorneys' fees shall be a part of the judgment in said action. 16.1.4. Severable. If any provision of this Lease or the application of any such provision shall be held by a court of competent jurisdiction to be invalid, void or unenforceable to any extent, the remaining provisions of this Lease and the application thereof shall remain in full force and effect and shall not be affected, impaired or invalidated. 16.1.5. Law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. 16.1.6. No Option. Submission of this Lease to Tenant for examination or negotiation does not constitute an option to lease, offer to lease or a reservation of, or option for, the Premises; and this document shall become effective and binding only upon the execution and delivery hereof by Landlord and Tenant. 16.1.7. Successors and Assigns. This Lease shall be binding upon and inure to the benefit of the successors and assigns of Landlord and, to the extent assignment is approved by Landlord, Tenant. 16.1.8. Third Party Beneficiaries. Nothing herein is intended to create any third party benefit. 16.1.9. Memorandum of Lease. Tenant shall not record this Lease or a short form memorandum hereof without Landlord's prior written consent. 16.1.10. Agency, Partnership or Joint Venture. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease or any acts of the parties hereto shall be deemed to create any relationship other than the relationship of landlord and tenant. 16.1.11. Merger. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation thereof or a termination by Landlord shall not work a merger and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 14 <PAGE> 19 16.2. Signs. All signs and graphics of every kind visible in or from public view or corridors, or the exterior of the Building or Premises shall be subject to Landlord's prior written approval and shall be subject to any applicable governmental laws, ordinances, and regulations and in compliance with Landlord's signage program. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises; and Tenant shall repair any injury or defacement, including without limitation, discoloration caused by such installation or removal. 16.3. Waiver. No waiver of any default or breach hereunder shall be implied from any omission to take action on account thereof, notwithstanding any custom and practice or course of dealing, and no waiver shall affect any default other than the default specified in the waiver and then said waiver shall be operative only for the time and to the extent therein stated. Waivers of any covenant shall not be construed as a waiver of any subsequent breach of the same. No waiver by either party of any provision under this Lease shall be effective unless in writing and signed by such party. 16.4. Financial Statements. Tenant shall provide to any lender, purchaser or Landlord, within ten (10) days after request, a current, accurate, certified financial statement for Tenant and Tenant's business prepared under generally accepted accounting principles consistently applied and such other certified financial information or tax returns as may be reasonably required by Landlord, purchaser or any lender of either. 16.5. Limitation of Liability. The obligations of Landlord under this Lease are not personal obligations of the individual partners, directors, officers, shareholders, agents or employees of Landlord; and Tenant shall look solely to the Building for satisfaction of any liability and shall not look to other assets of Landlord nor seek recourse against the assets of the individual partners, directors, officers, shareholders, agents or employees of Landlord. Whenever Landlord transfers its interest, Landlord shall be automatically released from further performance under this Lease and from all further liabilities and expenses hereunder and the transferee of Landlord's interest shall assume all liabilities and obligations of Landlord hereunder from the date of such transfer. 16.6. Notices. All notices to be given hereunder shall be in writing and mailed postage prepaid by certified or registered mail, return receipt requested, or delivered by personal or courier delivery, or sent by facsimile (immediately followed by one of the preceding methods), to Landlord's Address and Tenant's Address, or to such other place as Landlord or Tenant may designate in a written notice given to the other party. Notices shall be deemed served upon the earlier of receipt or three (3) days after the date of mailing. 16.7. Brokerage Commission. Tenant warrants to Landlord that Tenant's sole contact with Landlord or with the Premises in connection with this transaction has been directly with Landlord, and that no broker or finder can properly claim a right to a commission or a finder's fee based upon contacts between the claimant and Tenant. Tenant and Landlord, respectively, shall each indemnify, defend by counsel acceptable to the other, protect and hold each other harmless from and against any loss, cost or expense, including, but not limited to, attorneys' fees and costs, resulting from any claim for a fee or commission by any broker or finder in connection with the Premises and this Lease. 15 <PAGE> 20 16.8. Authorization. Tenant shall furnish to Landlord, within ten (10) days after written request, evidence satisfactory to Landlord that the person who executed this Lease on behalf of Tenant was duly authorized to do so. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant and that such execution is binding upon Tenant. 16.9. Holding Over; Surrender. 16.9.1. If Tenant holds over the Premises or any part thereof after expiration or the earlier termination of the Term, such holding over shall constitute a month-to-month tenancy, at a rent equal to the Base Rent in effect immediately prior to such holding over plus one hundred percent (100%) thereof. This paragraph shall not be construed as Landlord's permission for Tenant to hold over. Acceptance of Rent by Landlord following expiration or termination shall not constitute a renewal of this Lease. Without limiting the foregoing, if Tenant holds over the Premises or any part thereof after expiration or the earlier termination of the Term, Tenant shall indemnify, defend, protect and hold Landlord harmless from any and all claims (including claims of succeeding tenants), causes of action, expenses (including reasonable attorneys' fees), liabilities and lawsuits resulting from such a holdover. 16.9.2. Upon the termination of this Lease or Tenant's right to possession of the Premises, Tenant will surrender the Premises, together with all keys, in good condition and repair, reasonable wear and tear excepted. Conditions existing because of Tenant's failure to perform maintenance, repairs or replacements shall not be deemed "reasonable wear and tear." 16.10. Joint and Several. If Tenant consists of more than one person, the obligation of all such persons shall be joint and several. 16.11. Covenants and Conditions. Each provision to be performed by Tenant hereunder shall be deemed to be both a covenant and a condition. 16.12. Addenda. The Addenda attached hereto, if any, and identified with this Lease and initialed by the parties hereto are incorporated herein by this reference as if fully set forth herein. 16 <PAGE> 21 IN WITNESS WHEREOF, the parties have executed this Lease as of the date set forth above. "Landlord" NETWORK APPLIANCE, INC. a California corporation By: ___________________________________ Its: ___________________________________ "Tenant" TRW INC., an Ohio corporation By: ___________________________________ Its: ___________________________________ 17 <PAGE> 22 EXHIBIT A PREMISES 1 <PAGE> 23 EXHIBIT B ESTOPPEL CERTIFICATE ______________________ ______________________ ______________________ ______________________ Re: Lease dated _______________, 19___ ("Lease") by and between ________________________________ ("Landlord") and ______________________________ ("Tenant"). Gentlemen: Reference is made to the above-described Lease in which the undersigned is the Tenant. We understand that you are entering into a transaction with the Landlord which relates to, among other things, this Lease; and we hereby, as a material inducement for you to enter into such transaction with Landlord, represent that: 1. A true and correct copy of the Lease is attached hereto as Exhibit 1. 2. There are no modifications, amendments, supplements, arrangements, side letters or understandings, oral or written, of any sort, modifying, amending, altering, supplementing or changing the terms of the Lease except as follows: . 3. The Lease is in full force and effect, and the Lease has been duly executed and delivered by, and is a binding obligation of, the Tenant as set forth therein. 4. The undersigned acknowledges (a) that rent on the Lease has been paid up to and including _______________, 19___, (b) that monthly rent during the __________ (____) years of the term of the Lease is ____________________ Dollars ($____________) per month and (c) that rent has not been paid for any period after _______________, 19___, and shall not be paid for a period in excess of one (1) month in advance. 5. The improvements on the Premises are free from defects in design, materials and workmanship; and the improvements meet all governmental requirements, including, but not limited to, zoning and environmental requirements. 1 <PAGE> 24 6. The Lease is not in default, and Landlord has performed the obligations required to be performed by Landlord under the terms thereof through the date hereof. Dated: _______________, 19___ Very truly yours, "Tenant" _____________________________________, a ________________________________________ By: ___________________________________ Its: ___________________________________ 2 <PAGE> 25 SCHEDULE 1 HAZARDOUS MATERIALS 1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.44 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 10.44 <TEXT> <PAGE> 1 EXHIBIT 10.44 INDUSTRIAL LEASE (1350 Geneva) Effective Date: December ___, 1999 DEFINED TERMS Landlord: NETWORK APPLIANCE, INC., a California corporation Landlord's Address For Notice: 495 East Java Drive Sunnyvale, California 94089 Attention: Mr. Thomas Bryant Tenant: TRW INC., an Ohio corporation Tenant's Address For Notice: TRW Inc. 12011 Sunset Hills Road Reston, Virginia 20190 Attn: Ms. Marsha A. Klontz And to: TRW Electronic Systems 1330 Geneva Drive P.O. Box 3510 Sunnyvale, California 94088-3510 Project: Certain parcels of land situated in Santa Clara County, California consisting of 27.848 acres of land described as APN #110-42.2.2.6.7.8, having addresses of 1345 and 1346 Crossman Avenue and 1330 and 1350 Geneva Drive in Sunnyvale, California Building: 1350 Geneva, Sunnyvale, California Premises: The Building, together with the Property Property: That certain real property described in Exhibit A hereto Term: From the Commencement Date to June 30, 2002 Commencement Date: December ___, 1999 <PAGE> 2 Base Rent Per Month: Ninety-Nine Thousand Eight Hundred Thirty-Seven and 25/100 Dollars ($99,837.25) Lease Year: Shall refer to each three hundred sixty-five (365) day period during the Term commencing on the Commencement Date and on each anniversary thereof. Permitted Uses: General office purposes and no other uses shall be permitted without the prior written consent of Landlord. EXHIBITS A - Premises B - Estoppel Certificate The Defined Terms set forth above and the Exhibits attached hereto are incorporated into and made a part of the following Lease. Each reference in this Lease to any of the Defined Terms shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Defined Terms and the provisions of the Lease, the latter shall control. LANDLORD (_________) AND TENANT (_________) AGREE. initial initial <PAGE> 3 Table of Contents <TABLE> <CAPTION> Page ---- <S> <C> <C> 1. PREMISES.................................................................................................1 1.1. Premises........................................................................................1 1.2. Reserved Rights.................................................................................1 1.3. As-Is...........................................................................................1 2. TERM.....................................................................................................1 3. RENT.....................................................................................................1 3.1. Base Rent.......................................................................................1 3.2. Late Charge and Interest........................................................................1 3.3. Net Lease.......................................................................................2 4. UTILITIES................................................................................................2 5. TAXES....................................................................................................2 5.1. Real Property Taxes.............................................................................2 5.2. Definition of Real Property Taxes...............................................................2 5.3. Personal Property Taxes.........................................................................3 6. INSURANCE................................................................................................3 6.1. Landlord........................................................................................3 6.2. Tenant..........................................................................................3 6.3. General.........................................................................................4 6.4. Indemnity.......................................................................................4 6.5. Exemption of Landlord from Liability............................................................5 7. REPAIRS AND MAINTENANCE..................................................................................5 7.1. Tenant..........................................................................................5 7.2. Landlord........................................................................................5 8. ALTERATIONS..............................................................................................5 8.1. Trade Fixtures; Alterations.....................................................................5 8.2. Damage; Removal.................................................................................6 8.3. Liens...........................................................................................6 9. USE......................................................................................................6 10. ENVIRONMENTAL MATTERS....................................................................................7 10.1. Hazardous Materials.............................................................................7 10.2. Indemnification.................................................................................7 11. DAMAGE AND DESTRUCTION...................................................................................8 11.1. Casualty........................................................................................8 11.2. Tenant's Fault..................................................................................9 11.3. Uninsured Casualty..............................................................................9 </TABLE> i <PAGE> 4 <TABLE> <S> <C> <C> 11.4. Waiver..........................................................................................9 12. EMINENT DOMAIN...........................................................................................9 12.1. Total Condemnation..............................................................................9 12.2. Partial Condemnation............................................................................9 12.3. Award...........................................................................................9 12.4. Temporary Condemnation.........................................................................10 13. DEFAULT.................................................................................................10 13.1. Events of Defaults.............................................................................10 13.2. Remedies.......................................................................................11 13.3. Cumulative.....................................................................................12 14. ASSIGNMENT AND SUBLETTING...............................................................................12 15. ESTOPPEL, ATTORNMENT AND SUBORDINATION..................................................................13 15.1. Estoppel.......................................................................................13 15.2. Attornment.....................................................................................13 15.3. Subordination..................................................................................13 16. MISCELLANEOUS...........................................................................................14 16.1. General........................................................................................14 16.2. Signs..........................................................................................15 16.3. Waiver.........................................................................................15 16.4. Financial Statements...........................................................................15 16.5. Limitation of Liability........................................................................15 16.6. Notices........................................................................................15 16.7. Brokerage Commission...........................................................................15 16.8. Authorization..................................................................................16 16.9. Holding Over; Surrender........................................................................16 16.10. Joint and Several..............................................................................16 16.11. Covenants and Conditions.......................................................................16 16.12. Addenda........................................................................................16 </TABLE> ii <PAGE> 5 1. PREMISES. 1.1. Premises. Landlord hereby leases to Tenant the Premises as shown on Exhibit A attached hereto, but excluding any other portion of the Project. 1.2. Reserved Rights. Landlord reserves the right to enter the Premises upon reasonable notice to Tenant (except in case of an emergency) and/or to undertake the following: inspect the Premises and/or the performance by Tenant of the terms and conditions hereof. Landlord acknowledges and agrees that any such activities by Landlord on the Premises shall be subject to any reasonable security precautions created by Tenant as a result of any classified work performed by Tenant in the Building on behalf of the United States Government. 1.3. As-Is . Tenant acknowledges that Tenant has owned and occupied the Premises for an extensive period of time prior to the Commencement Date of this Lease and, as such, is familiar with the physical condition thereof. Tenant recognizes that Landlord would not lease the Premises except on an "as-is" basis and that Landlord has made no representations of any kind in connection with improvements or physical conditions on, or bearing on, the use or condition of the Premises. 2. TERM. The Term of the Lease shall commence ("Commencement Date") on the Commencement Date and expire on June 30, 2002. Tenant has determined that the Premises are acceptable for Tenant's use; and acknowledges that Landlord has made no representations or warranties in connection with the physical condition of the Premises or Tenant's use of the same upon which Tenant has relied directly or indirectly for any purpose. 3. RENT. 3.1. Base Rent. Tenant shall pay to Landlord, at such address as Landlord shall from time to time designate in writing to Tenant for the payment of Rent, the Base Rent, without notice, demand, offset or deduction, on the first day of each calendar month. Upon the execution of this Lease, Tenant shall pay to Landlord the first month's Base Rent. If the Term commences (or ends) on a date other than the first (or last) day of a month, Tenant shall pay on the Commencement Date or first day of the last month a pro rata portion of Base Rent, prorated on a per diem basis with respect to the portion of the month within the Term. All sums other than Base Rent which Tenant is obligated to pay under this Lease shall be deemed to be additional rent due hereunder, whether or not such sums are designated "additional rent." The term "Rent" means the Base Rent and all additional rent payable hereunder. 3.2. Late Charge and Interest. The late payment of any Rent will cause Landlord to incur additional costs, including administration and collection costs and processing and accounting expenses and increased debt service. If Landlord has not received any installment of Rent within five (5) days after such amount is due, Tenant shall pay a late charge of ten percent (10%) of the delinquent amount, which is agreed to represent a reasonable estimate of the costs incurred by Landlord. In addition, all such delinquent amounts shall bear interest from the date such amount was due until paid in full at a rate per annum ("Applicable Interest Rate") equal to the greater of (a) five percent (5%) per annum plus the then federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the 1 <PAGE> 6 month preceding the date of this Lease or (b) ten percent (10%); provided, in no event shall the Applicable Interest Rate exceed the maximum interest rate permitted by law which may be charged under such circumstances. Landlord and Tenant recognize that the damage which Landlord shall suffer as a result of Tenant's failure to pay such amounts is difficult to ascertain and said late charge and interest are the best estimate of the damage which Landlord shall suffer in the event of late payment. 3.3. Net Lease. Tenant acknowledges that the Rent shall be absolutely net and carefree to the Landlord, except as set forth herein. Landlord shall not be responsible for any costs, charges, expenses or outlays of any nature or kind whatsoever arising from or relating to the Premises, except as provided for herein. Tenant shall pay all such charges, impositions, costs and expenses of every nature and kind to Landlord's complete exoneration. 4. UTILITIES. Tenant shall pay all charges for heat, water, gas, electricity and any other utilities used on the Premises directly to the utility provider. Landlord shall not be liable to Tenant for interruption in or curtailment of any utility service, nor shall any such interruption or curtailment constitute constructive eviction or grounds for rental abatement. In the event the Premises is not separately metered, Landlord shall have the option, subject to Landlord's review and the terms of this Lease, to cause the Premises to be separately metered at Tenant's cost and expense. 5. TAXES. 5.1. Real Property Taxes. Tenant shall pay any and all of the Real Property Taxes for the Premises to the relevant taxing authority on or before the date due. Tenant shall provide Landlord with written evidence of such payment of taxes concomitantly with the payment thereof. 5.2. Definition of Real Property Taxes. "Real Property Taxes" shall be the sum of the following: all real property taxes, possessory interest taxes, business or license taxes or fees, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, housing fund assessments, open space charges, childcare fees, school fees or any other assessments, levies, fees or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen (including fees "in-lieu" of any such tax or assessment) which are assessed, levied, charged, confirmed or imposed by any public authority upon the Project (or any real property comprising any portion thereof) or its operations, together with all taxes, assessments or other fees imposed by any public authority upon or measured by any Rent or other charges payable hereunder, including any gross income tax or excise tax levied by the local governmental authority, the federal government or any other governmental body with respect to receipt of such rental, or upon, with respect to or by reason of the development, possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, or upon this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises, together with any tax imposed in substitution, partially or totally, of any tax previously included within the aforesaid definition or any additional tax the nature of which was previously included within the aforesaid definition, together with the costs and expenses (including attorneys fees) of challenging any of the foregoing or seeking the reduction in or abatement, redemption or return of any of the foregoing, 2 <PAGE> 7 but only to the extent of any such reduction, abatement, redemption or return. Nothing contained in this Lease shall require Tenant to pay any franchise, corporate, estate or inheritance tax of Landlord, or any income, profits or revenue tax or charge upon the net income of Landlord. 5.3. Personal Property Taxes. Prior to delinquency, Tenant shall pay all taxes and assessments levied upon trade fixtures, alterations, additions, improvements, inventories and other personal property located and/or installed on the Property by Tenant; and Tenant shall provide Landlord copies of receipts for payment of all such taxes and assessments. To the extent any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord. 6. INSURANCE. 6.1. Landlord. Landlord shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 6.1.1. Building. Insurance insuring the Building and the Landlord's interest in any betterments and improvements against fire and extended coverage (including "all risk" coverage, earthquake/volcanic action, flood and/or surface water insurance) for the full replacement cost of the Building, with deductibles and the form and endorsements of such coverage as is required by any synthetic lender of Landlord with an interest in the Building at the time, together with rental value insurance against loss of Rent in an amount equal to the amount of Rent for a period of at least twelve (12) months commencing on the date of loss. Tenant shall reimburse Landlord for the cost of such insurance for such period of time that is consistent with the Term of this Lease within ten (10) business days of receipt of request therefor, provided such request is accompanied by related invoices therefor. 6.2. Tenant. Tenant shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 6.2.1. Commercial General Liability Insurance (Occurrence Form). A policy of commercial general liability insurance (occurrence form) having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence providing coverage for, among other things, blanket contractual liability, premises, products/completed operations and personal and advertising injury coverage, with deletion of the exclusion for explosion, collapse or underground hazard, if applicable, and, if necessary, Tenant shall provide for restoration of the aggregate limit; 6.2.2. Automobile Liability Insurance. Comprehensive automobile liability insurance having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence and insuring Tenant against liability for claims arising out of ownership, maintenance, or use of any owned, hired or non-owned automobiles; 6.2.3. Workers' Compensation and Employer's Liability Insurance. Workers' compensation insurance having limits not less than those required by state statute and federal statute, if applicable, and covering all persons employed by Tenant in the conduct of its operations on the Premises (including the all states endorsement and, if applicable, the volunteers 3 <PAGE> 8 endorsement), together with employer's liability insurance coverage in the amount of at least One Million Dollars ($1,000,000); and 6.2.4. Property Insurance. "All risk" property insurance including boiler and machinery comprehensive form, if applicable, covering damage to or loss of any personal property, fixtures and equipment, including electronic data processing equipment, of Tenant (and coverage for the full replacement cost thereof including business interruption of Tenant) ("Tenant's Property"). 6.3. General. 6.3.1. Insurance Companies. Insurance required to be maintained by Tenant shall be written by companies licensed to do business in the state in which the Premises are located and having a "General Policyholders Rating" of at least A (or such higher rating as may be required by a lender having a lien on the Premises) as set forth in the most current issue of "Best's Insurance Guide." 6.3.2. Certificates of Insurance. Tenant shall deliver to Landlord certificates of insurance for all insurance required to be maintained by Tenant prior to the date of possession of the Premises. Tenant shall, at least ten (10) days prior to expiration of the policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to modification except after sixty (60) days prior written notice to the parties named as additional insureds in this Lease (except in the case of cancellation for nonpayment of premium in which case cancellation shall not take effect until at least (10) days' notice has been given to Landlord). If Tenant fails to maintain any insurance required in this Lease, Tenant shall be liable for all losses and cost resulting from said failure. 6.3.3. Additional Insureds. Landlord and any property management company of Landlord for the Premises shall be included as additional insureds, to the extent that the Tenant has an obligation under Section 6.4, under all of the policies required by Section 6.2.1. The policies required under Section 6.2.1 shall provide for severability of interest. 6.3.4. Primary Coverage. All insurance to be maintained by Tenant shall, except for workers' compensation and employer's liability insurance, be primary, without right of contribution from insurance of Landlord. The limits of insurance maintained by Tenant shall not limit Tenant's liability under this Lease. 6.3.5. Waiver of Subrogation. Landlord and Tenant each waives any right to recover against the other for claims for damages to its property covered by insurance. This provision is intended to waive fully, and for the benefit of Landlord and Tenant, any rights and/or claims which might give rise to a right of subrogation in favor of any insurance carrier. 6.4. Indemnity. Tenant shall indemnify, defend by counsel satisfactory to Landlord, and hold harmless Landlord from and against any and all claims arising from (i) Tenant's use of the Premises, the conduct of Tenant's business or any activity, work or things done, permitted or suffered by Tenant in or about the Premises, the Building or elsewhere and (ii) any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of 4 <PAGE> 9 this Lease, arising from any negligence of Tenant or any of Tenant's agents, contractors or employees, including all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises or the Building arising from any cause; and Tenant hereby waives all claims in respect thereof against Landlord except to the extent such claims are caused by Landlord's gross negligence or willful misconduct. 6.5. Exemption of Landlord from Liability. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Premises or the Building, nor shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents or contractors, whether such damage or injury is caused by fire, steam, electricity, gas, water or rain, or from the breakage, leakage or other defects of sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises, the Building or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Building. 7. REPAIRS AND MAINTENANCE. 7.1. Tenant. Tenant shall keep and maintain any and all portions of the Premises and the Building, including structural portions thereof, floors and floor coverings, interior plumbing, HVAC and other building system equipment, electrical wiring, fixtures and equipment in good repair and in a clean and safe condition, and repair and/or replace any and all of the foregoing in a good and workmanlike manner. Without limiting the foregoing, Tenant shall, at Tenant's sole expense, (a) immediately replace all broken glass in the Premises with glass equal to or in excess of the specification and quality of the original glass; and (b) repair any area damaged by Tenant, Tenant's agents, employees, invitees and visitors, including any damage caused by any roof penetration, whether or not such roof penetration was approved by Landlord. 7.2. Landlord. Landlord shall have no obligation whatsoever to maintain any portion of the Building or Premises. Tenant waives any right to repair at the expense of Landlord under any applicable governmental laws, ordinances, statutes, orders or regulations now or hereafter in effect respecting the Premises. 8. ALTERATIONS. 8.1. Trade Fixtures; Alterations. Tenant may install necessary trade fixtures, equipment and furniture in the Building, provided that such items are installed and are removable without structural damage to the Building. Tenant shall not make, or allow to be made, any alterations or physical additions in, about or to the Premises that affect the structural aspects of the Building, the Building roof or Building foundation without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall reimburse Landlord for all costs which Landlord may incur in connection with granting approval to Tenant for any such alterations and additions, including any costs or expenses which Landlord may 5 <PAGE> 10 incur in electing to have outside architects and engineers review said matters. If a Notice of Completion is required for such work, Tenant shall file it and provide Landlord with a copy. Tenant shall provide Landlord with a set of "as-built" drawings for any such work. 8.2. Damage; Removal. Tenant assumes the risk of damage to any of Tenant's fixtures, equipment, furniture or alterations. Tenant shall repair all damage to the Premises and/or Building caused by the installation or removal of such items. Upon the termination of this Lease, Tenant shall remove any or all alterations, additions, improvements and partitions made or installed by Tenant and restore the Premises to their condition existing prior to the construction of any such items; provided, however, Landlord may permit, upon written notice to Tenant (to the extent requested to do so by Tenant at the time notice thereof is given), any such items designated by Landlord to remain on the Premises, in which event they shall be and become the property of Landlord upon the termination of this Lease. All such removals and restoration shall be accomplished in a good and workmanlike manner and so as not to cause any damage to the Premises, the Building or the Project whatsoever. 8.3. Liens. Tenant shall promptly pay and discharge all claims for labor performed, supplies furnished and services rendered at the request of Tenant and shall keep the Premises free of all mechanics' and materialmen's liens in connection therewith. Tenant shall provide at least ten (10) days prior written notice to Landlord before any labor is performed, supplies furnished or services rendered on or at the Premises and Landlord shall have the right to post on the Premises notices of non-responsibility. If any lien is filed, Landlord may take such action as may be necessary to remove such lien and Tenant shall pay Landlord such amounts expended by Landlord together with interest thereon at the Applicable Interest Rate from the date of expenditure. 9. USE. The Premises shall be used only for the Permitted Uses and for no other uses and otherwise consistent with any applicable governmental laws, ordinances, statutes, orders and regulations and any declaration of covenants, conditions and restrictions or any supplement thereto which has been recorded in any official or public records with respect to the Project or any portion thereof. Tenant shall comply with all applicable governmental laws, ordinances, and statutes applicable to the Premises or Building. Tenant shall not commit waste, overload the floors or structure of the Building, subject the Premises or the Project to any use which would damage the same or raise or violate any insurance coverage, permit any unreasonable odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises, take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants, take any action which would abrogate any warranties, or use or allow the Premises to be used for any unlawful purpose. Tenant shall not use any parking spaces for the Project other than the parking spaces located on the Premises. Landlord shall not be responsible for non-compliance by any other tenant or occupant with any of the rules or regulations or any other terms or provisions of such tenant's or occupant's lease. Tenant shall promptly comply with the reasonable requirements of any board of fire insurance underwriters or other similar body now or hereafter constituted. 6 <PAGE> 11 10. ENVIRONMENTAL MATTERS. 10.1. Hazardous Materials. Tenant shall not cause, or allow any of Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees or subtenants (collectively, "Tenant's Parties") to cause or permit, any Hazardous Materials to be brought upon, stored, manufactured, generated, blended, handled, recycled, treated, disposed or used on, under or about the Premises, the Building or the Project, except for routine office and janitorial supplies and the Hazardous Materials listed on Schedule 1 hereto in usual and customary quantities stored, used and disposed of in accordance with all applicable Environmental Laws. As used herein, "Hazardous Materials" means any chemical, substance, material, controlled substance, waste or combination thereof which is hazardous to human health or safety or to the environment due to its radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity, carcinogenicity, mutagenicity or other harmful or potentially harmful properties or effects, including, without limitation, petroleum and petroleum products, asbestos, radon, polychlorinated biphenyls (PCBs) and all of those chemicals, substances, materials, controlled substances, wastes or combinations thereof which are listed, defined or regulated in any manner by any Environmental Law based upon, directly or indirectly, such properties or effects. As used herein, "Environmental Laws" means any and all federal, state or local environmental, health and/or safety-related laws, regulations, standards, ordinances, rules, codes, orders, decrees, directives, guidelines, permits or permit conditions, currently existing which are applicable to Tenant or the Premises. Tenant and Tenant's Parties shall comply with all Environmental Laws and promptly notify Landlord of the presence of any Hazardous Materials, other than as permitted above, on the Premises or any violation of any Environmental Law. Landlord shall have the right to inspect the Premises and to conduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions. If such tests indicate the presence of any environmental condition, Tenant shall reimburse Landlord for the cost of conducting such tests. The phrase "environmental condition" shall mean any condition relating to any Hazardous Materials, including surface water, groundwater, drinking water supply, land, surface or subsurface strata or the ambient air and includes air, land and water pollutants, being present at the Property in violation of Environmental Laws or in a manner which, in the reasonable opinion of the Landlord's environmental consultant, is substantially likely to cause health problems for occupants of the Premises or a future violation of Environmental Law. In the event of any such environmental condition, Tenant shall promptly take any and all steps necessary to rectify the same or shall, at Tenant's election, reimburse Landlord, upon demand, for the cost to Landlord of performing rectifying work. Upon the expiration or earlier termination of this Lease, Tenant shall remove any and all Hazardous Materials on, under or about the Premises. 10.2. Indemnification. Tenant shall indemnify, protect, defend (by counsel acceptable to Landlord) and hold harmless Landlord and its partners, directors, officers, employees, shareholders, lenders, agents, contractors and each of their respective successors and assigns (individually and collectively, "Indemnities") from and against any and all claims, judgments, causes of action, damages, penalties, fines, taxes, costs, liabilities, losses and expenses arising at any time during or after the Term as a result (directly or indirectly) of or in connection with (a) Tenant and/or Tenant's Parties' breach of any prohibition or provision of the preceding section, or (b) the presence of Hazardous Materials on, under or about the Premises or other properties as a result (directly or indirectly) of Tenant's and/or Tenant's Parties' activities, or failure to act 7 <PAGE> 12 when legally required to do so in connection with the Premises. This indemnity shall include the cost of any required or necessary repair, cleanup or detoxification, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the termination of this Lease. The written consent by Landlord to the presence of Hazardous Materials on, under or about the Premises shall not excuse Tenant from Tenant's obligation of indemnification pursuant hereto. Tenant's obligations pursuant to the foregoing indemnity shall survive the termination of this Lease. 11. DAMAGE AND DESTRUCTION. 11.1. Casualty. If the Building should be damaged or destroyed by fire or other casualty, Tenant shall give immediate written notice to Landlord. Within thirty (30) days after receipt thereof, Landlord shall notify Tenant whether such repairs can reasonably be made: (1) within thirty (30) days; (2) in more than thirty (30) days but in less than ninety (90) days; or (3) in more than ninety (90) days from the date of such notice. 11.1.1. Less Than 30 Days. If the Building should be damaged only to such extent that rebuilding or repairs can be reasonably completed within thirty (30) days, this Lease shall not terminate and, provided that insurance proceeds are available to fully repair the damage, Landlord shall repair the Building, except that Landlord shall not be required to rebuild, repair or replace any alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of Tenant. The Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and the Building are unfit for occupancy. 11.1.2. Greater Than 30 Days. If the Building should be damaged only to such extent that rebuilding or repairs can be reasonably completed in more than thirty (30) days but in less than ninety (90) days, then Landlord shall have the option of: (1) terminating the Lease effective upon the occurrence of such damage, in which event the Rent shall be abated from the date Tenant vacates the Building; or (2) electing to repair the Building, provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace any part of the alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of Tenant). The Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and the Building is unfit for occupancy. 11.1.3. Greater Than 90 Days. If the Building should be so damaged that rebuilding or repairs cannot be completed within ninety (90) days, either Landlord or Tenant may terminate by giving written notice within ten (10) days after notice from Landlord regarding the time period of repair; and this Lease and the Rent shall be abated from the date Tenant vacates the Building. In the event that neither party elects to terminate this Lease, Landlord shall promptly commence and diligently prosecute to completion the repairs to the Building , provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace any alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of 8 <PAGE> 13 Tenant). During the time when Landlord is prosecuting such repairs to completion, the Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and only during the period that the Building is unfit for occupancy. 11.2. Tenant's Fault. If any portion of the Building is damaged resulting from the fault, negligence or breach of this Lease by Tenant or any of Tenant's Parties, Rent shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost of the repair caused thereby to the extent such cost is not covered by insurance proceeds. 11.3. Uninsured Casualty. In the event that any portion of the Building is damaged and is not fully covered by insurance proceeds received by Landlord or in the event that the holder of any indebtedness secured by the Premises requires that the insurance proceeds be applied to such indebtedness, then Tenant shall have the right to terminate this Lease by delivering written notice of termination to Landlord within thirty (30) days after the date of notice to Tenant of any such event. In the event that Tenant does not elect to terminate this Lease, Landlord shall have the right to terminate this Lease by delivering written notice to Tenant within thirty (30) days after such election by Tenant or Tenant's failure to elect, as applicable, whereupon all rights and obligations shall cease and terminate hereunder. 11.4. Waiver. With respect to any damage or destruction which Landlord is obligated to repair or may elect to repair, Tenant waives all rights to terminate this Lease pursuant to rights otherwise presently or hereafter accorded by law. 12. EMINENT DOMAIN. 12.1. Total Condemnation. If all of the Premises is condemned by eminent domain, inversely condemned or sold in lieu of condemnation for any public or quasi-public use or purpose ("Condemned"), this Lease shall terminate as of the date of title vesting in such proceeding and Rent shall be adjusted to the date of termination. 12.2. Partial Condemnation. If any portion of the Premises is Condemned and such partial condemnation renders the Premises unusable for Tenant's business, or if a substantial portion of the Building is Condemned, this Lease shall terminate as of the date of title vesting or order of immediate possession in such proceeding and Rent shall be adjusted to the date of termination. If such partial condemnation does not render the Premises unusable for the business of Tenant or less than a substantial portion of the Building is Condemned, Landlord shall promptly restore the Premises to the extent of any condemnation proceeds recovered by Landlord, excluding the portion thereof lost in such condemnation, and this Lease shall continue in full force and effect except that after the date of such title vesting Rent shall be adjusted, as reasonably determined by Landlord. 12.3. Award. If the Premises are wholly or partially Condemned, Landlord shall be entitled to the entire award paid for such condemnation, and Tenant waives any claim to any part of the award from Landlord or the condemning authority; provided that Tenant shall have the right to recover from the condemning authority such compensation as may be separately awarded 9 <PAGE> 14 to Tenant in connection with costs in removing Tenant's merchandise, furniture, fixtures, leasehold improvements and equipment to a new location. 12.4. Temporary Condemnation. In the event of a temporary condemnation, this Lease shall remain in effect, Tenant shall continue to pay Rent and Tenant shall receive any award made for such condemnation. If a temporary condemnation remains in effect at the expiration or earlier termination of this Lease, Tenant shall pay Landlord the reasonable cost of performing any obligations required of Tenant with respect to the surrender of the Premises. If a temporary condemnation is for a period which extends beyond the Term, this Lease shall terminate as of the date of occupancy by the condemning authority and any such award shall be distributed in accordance with the preceding section. 13. DEFAULT. 13.1. Events of Defaults. The occurrence of any of the following events shall, at Landlord's option, constitute an "Event of Default": 13.1.1. Vacation or abandonment of the Premises for a period of thirty (30) consecutive days, and Tenant waives any right to notice Tenant may have under applicable law; 13.1.2. Failure to pay Rent on the date when due, the failure continuing for a period of five (5) days after payment is due; 13.1.3. Failure to perform Tenant's covenants hereunder (except default in the payment of Rent); provided, if such default is susceptible of cure and Tenant has promptly commenced the cure of such default and is diligently prosecuting such cure to completion, then the same must remain uncured for thirty (30) days after written notice thereof from Landlord; 13.1.4. The making of a general assignment by Tenant for the benefit of creditors, the filing of a voluntary petition by Tenant or the filing of an involuntary petition by any of Tenant's creditors seeking the rehabilitation, liquidation or reorganization of Tenant under any law relating to bankruptcy, insolvency or other relief of debtors and, in the case of an involuntary action, the failure to remove or discharge the same within sixty (60) days of such filing, the appointment of a receiver or other custodian to take possession of substantially all of Tenant's assets or this leasehold, Tenant's insolvency or inability to pay Tenant's debts or failure generally to pay Tenant's debts when due, any court entering a decree or order directing the winding up or liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking any action toward the dissolution or winding up of Tenant's affairs, the cessation or suspension of Tenant's use of the Premises, or the attachment, execution or other judicial seizure of substantially all of Tenant's assets or this leasehold; 13.1.5. The making of any material misrepresentation or omission by Tenant in any materials delivered by or on behalf of Tenant to Landlord pursuant to this Lease; or 13.1.6. A default by Tenant beyond any applicable notice and cure period pursuant to the terms of any lease entered into between Landlord and Tenant for space in the Project. 10 <PAGE> 15 13.2. Remedies. 13.2.1. Termination. In the event of the occurrence of any Event of Default, Landlord shall have the right to give a written termination notice to Tenant and, on the date specified in such notice, this Lease shall terminate unless on or before such date all arrears of Rent and all other sums payable by Tenant under this Lease and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other Events of Default at the time existing shall have been fully remedied to the satisfaction of Landlord. 13.2.1.1. Repossession. Following termination, without prejudice to other remedies Landlord may have, Landlord may (i) peaceably re-enter the Premises upon voluntary surrender by Tenant or remove Tenant therefrom and any other persons occupying the Premises, using such legal proceedings as may be available; (ii) repossess the Premises or relet the Premises or any part thereof for such term (which may be for a term extending beyond the Term), at such rental and upon such other terms and conditions as Landlord in Landlord's sole discretion shall determine, with the right to make reasonable alterations and repairs to the Premises; and (iii) remove all personal property therefrom. 13.2.1.2. Unpaid Rent. Landlord shall have all the rights and remedies of a landlord provided by applicable law, including the right to recover from Tenant: (a) the worth, at the time of award, of the unpaid Rent that had been earned at the time of termination, (b) the worth, at the time of award, of the amount by which the unpaid Rent that would have been earned after the date of termination until the time of award exceeds the amount of loss of rent 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 Term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided, and (d) any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. The phrase "worth, at the time of award," as used in (a) and (b) above, shall be computed at the greater of 10% per annum or 5% per annum plus the federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the month preceding the date of this Lease, and as used in (c) above, 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 1%. 13.2.2. Continuation. Even though an Event of Default may have occurred, 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 Rent as it becomes due, and Landlord, without terminating this Lease, may, during the period Tenant is in default, enter the Premises and relet the same, or any portion thereof, to third parties for Tenant's account and Tenant shall be liable to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises and like costs. Reletting may be for a period shorter or longer than the remaining Term. Tenant shall continue to pay the Rent on the date the same is due. No act by Landlord hereunder, including acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interest under this Lease, shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. In the event that Landlord elects to relet the 11 <PAGE> 16 Premises, the rent that Landlord receives from reletting shall be applied to the payment of, first, any indebtedness from Tenant to Landlord other than Base Rent and Additional Rent; second, all costs, including maintenance, incurred by Landlord in reletting; and, third, Base Rent and Tenant's Share of Increases under this Lease. After deducting the payments referred to above, any sum remaining from the rental Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. In no event shall Tenant be entitled to any excess rent received by Landlord. If, on the date Rent is due under this Lease, the rent received from the reletting is less than the Rent due on that date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all costs, including maintenance, Landlord incurred in reletting that remain after applying the rent received from reletting as provided hereinabove. So long as this Lease is not terminated, Landlord shall have the right to remedy any default of Tenant, to maintain or improve the Premises, to cause a receiver to be appointed to administer the Premises and new or existing subleases and to add to the Rent payable hereunder all of Landlord's reasonable costs in so doing, with interest at the Applicable Interest Rate from the date of such expenditure. 13.3. Cumulative. Each right and remedy of Landlord provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and shall not preclude Landlord from exercising any other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity, by statute or otherwise. No payment by Tenant of a lesser amount than the Rent nor any endorsement on any check or letter accompanying any check or payment as Rent shall be deemed an accord and satisfaction of full payment of Rent; and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies. 14. ASSIGNMENT AND SUBLETTING. Tenant shall not assign or sublet, whether voluntarily or involuntarily or by operation of law, the Premises or any part thereof without Landlord's prior written approval, which shall not be unreasonably withheld. The merger of Tenant with any other entity or the transfer of any controlling or managing ownership or beneficial interest in Tenant shall constitute an assignment hereunder. If Tenant desires to assign this Lease or sublet any or all of the Building, Tenant shall give Landlord written notice forty-five (45) days prior to the anticipated effective date of the assignment or sublease. Landlord shall then have a period of thirty (30) days following receipt of such notice and all related documents and agreements associated with the assignment or sublease, including without limitation, the financial statements of any proposed assignee or subtenant, to notify Tenant in writing that Landlord elects: (1) to permit Tenant to assign this Lease or sublet such space, subject however to Landlord's prior written approval of the proposed assignee or subtenant and of any related documents or agreements associated with the assignment or sublease received by Landlord hereunder or reasonably requested by Landlord; (2) to disapprove such proposed assignment or subletting or (3) to terminate this Lease as of the date specified in Landlord's notice thereof. If Landlord should fail to notify Tenant in writing of such election, Landlord shall be deemed to have elected option (2). This Lease may not be assigned by operation of law. Any purported assignment or subletting contrary to the provisions hereof shall be void. If Tenant receives rent or other consideration for any such transfer in excess of the Rent, or in case of the sublease of a portion of the Premises, in excess of such Rent that is fairly allocable to such portion, after appropriate adjustments to assure that all other payments required hereunder are appropriately taken into account, Tenant shall pay Landlord one hundred percent (100%) of the 12 <PAGE> 17 difference between each such payment of rent or other consideration and the Rent required hereunder. Landlord may, without waiving any rights or remedies, collect rent from the assignee, subtenant or occupant and apply the net amount collected to the Rent herein reserved and apportion any excess rent so collected in accordance with the terms of the preceding sentence. Tenant shall continue to be liable as a principal and not as a guarantor or surety to the same extent as though no assignment or subletting had been made. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to the Lease by assignees of Tenant without notifying Tenant or any successor of Tenant and without obtaining their consent. No permitted transfer shall be effective until there has been delivered to Landlord a counterpart of the transfer instrument in which the transferee agrees to be and remain jointly and severally liable with Tenant for the payment of Rent pertaining to the space and for the performance of all the terms and provisions of this Lease relating thereto arising on or after the date of the transfer. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Premises, the Building or the Project. 15. ESTOPPEL, ATTORNMENT AND SUBORDINATION. 15.1. Estoppel. Within ten (10) days after request by Landlord, Tenant shall deliver an estoppel certificate duly executed (and acknowledged if required by any lender), in the form attached hereto as Exhibit B, to any proposed mortgagee, purchaser or Landlord. Tenant's failure to deliver said statement in such time period shall be conclusive upon Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's performance and Tenant has no right of offset, counterclaim or deduction against Rent hereunder; and (c) no more than one period's Base Rent has been paid in advance. Landlord reserves the right to substitute a different form of estoppel certificate upon the request of any proposed mortgagee or purchaser. If any financier should require that this Lease be amended (other than in the description of the Premises, the Term, the Permitted Use, the Rent or as will substantially, materially and adversely affect the rights of Tenant), Landlord shall give written notice thereof to Tenant, which notice shall be accompanied by a Lease supplement embodying such amendments. Tenant shall, within ten (10) days after the receipt of Landlord's notice, execute the tendered Lease supplement. 15.2. Attornment. In the event of a foreclosure proceeding, the exercise of the power of sale under any mortgage or deed of trust or the termination of a ground lease, Tenant shall, if requested, attorn to the purchaser thereupon and recognize such purchaser as Landlord under this Lease; provided, however, Tenant's obligation to attorn to such purchaser shall be conditioned upon Tenant's receipt of a non-disturbance agreement. 15.3. Subordination. This Lease shall be subject and subordinate to all ground leases and the lien of all mortgages and deeds of trust which now or hereafter affect the Premises or the Project or Landlord's interest therein, or on or against all such ground leases, and all amendments thereto, all without the necessity of Tenant's executing further instruments to effect such subordination. If requested, Tenant shall execute whatever documentation may be required to further effect the provisions of this paragraph. 13 <PAGE> 18 16. MISCELLANEOUS. 16.1. General. 16.1.1. Entire Agreement. This Lease sets forth all the agreements between Landlord and Tenant concerning the Premises; and there are no agreements either oral or written other than as set forth herein. 16.1.2. Time of Essence. Time is of the essence of this Lease. 16.1.3. Attorneys' Fees. In any action which either party brings to enforce its rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys' fees, to be fixed by the court, and said costs and attorneys' fees shall be a part of the judgment in said action. 16.1.4. Severable. If any provision of this Lease or the application of any such provision shall be held by a court of competent jurisdiction to be invalid, void or unenforceable to any extent, the remaining provisions of this Lease and the application thereof shall remain in full force and effect and shall not be affected, impaired or invalidated. 16.1.5. Law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. 16.1.6. No Option. Submission of this Lease to Tenant for examination or negotiation does not constitute an option to lease, offer to lease or a reservation of, or option for, the Premises; and this document shall become effective and binding only upon the execution and delivery hereof by Landlord and Tenant. 16.1.7. Successors and Assigns. This Lease shall be binding upon and inure to the benefit of the successors and assigns of Landlord and, to the extent assignment is approved by Landlord, Tenant. 16.1.8. Third Party Beneficiaries. Nothing herein is intended to create any third party benefit. 16.1.9. Memorandum of Lease. Tenant shall not record this Lease or a short form memorandum hereof without Landlord's prior written consent. 16.1.10. Agency, Partnership or Joint Venture. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease or any acts of the parties hereto shall be deemed to create any relationship other than the relationship of landlord and tenant. 16.1.11. Merger. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation thereof or a termination by Landlord shall not work a merger and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 14 <PAGE> 19 16.2. Signs. All signs and graphics of every kind visible in or from public view or corridors, or the exterior of the Building or Premises shall be subject to Landlord's prior written approval and shall be subject to any applicable governmental laws, ordinances, and regulations and in compliance with Landlord's signage program. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises; and Tenant shall repair any injury or defacement, including without limitation, discoloration caused by such installation or removal. 16.3. Waiver. No waiver of any default or breach hereunder shall be implied from any omission to take action on account thereof, notwithstanding any custom and practice or course of dealing, and no waiver shall affect any default other than the default specified in the waiver and then said waiver shall be operative only for the time and to the extent therein stated. Waivers of any covenant shall not be construed as a waiver of any subsequent breach of the same. No waiver by either party of any provision under this Lease shall be effective unless in writing and signed by such party. 16.4. Financial Statements. Tenant shall provide to any lender, purchaser or Landlord, within ten (10) days after request, a current, accurate, certified financial statement for Tenant and Tenant's business prepared under generally accepted accounting principles consistently applied and such other certified financial information or tax returns as may be reasonably required by Landlord, purchaser or any lender of either. 16.5. Limitation of Liability. The obligations of Landlord under this Lease are not personal obligations of the individual partners, directors, officers, shareholders, agents or employees of Landlord; and Tenant shall look solely to the Building for satisfaction of any liability and shall not look to other assets of Landlord nor seek recourse against the assets of the individual partners, directors, officers, shareholders, agents or employees of Landlord. Whenever Landlord transfers its interest, Landlord shall be automatically released from further performance under this Lease and from all further liabilities and expenses hereunder and the transferee of Landlord's interest shall assume all liabilities and obligations of Landlord hereunder from the date of such transfer. 16.6. Notices. All notices to be given hereunder shall be in writing and mailed postage prepaid by certified or registered mail, return receipt requested, or delivered by personal or courier delivery, or sent by facsimile (immediately followed by one of the preceding methods), to Landlord's Address and Tenant's Address, or to such other place as Landlord or Tenant may designate in a written notice given to the other party. Notices shall be deemed served upon the earlier of receipt or three (3) days after the date of mailing. 16.7. Brokerage Commission. Tenant warrants to Landlord that Tenant's sole contact with Landlord or with the Premises in connection with this transaction has been directly with Landlord, and that no broker or finder can properly claim a right to a commission or a finder's fee based upon contacts between the claimant and Tenant. Tenant and Landlord, respectively, shall each indemnify, defend by counsel acceptable to the other, protect and hold each other harmless from and against any loss, cost or expense, including, but not limited to, attorneys' fees and costs, resulting from any claim for a fee or commission by any broker or finder in connection with the Premises and this Lease. 15 <PAGE> 20 16.8. Authorization. Tenant shall furnish to Landlord, within ten (10) days after written request, evidence satisfactory to Landlord that the person who executed this Lease on behalf of Tenant was duly authorized to do so. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant and that such execution is binding upon Tenant. 16.9. Holding Over; Surrender. 16.9.1. If Tenant holds over the Premises or any part thereof after expiration or the earlier termination of the Term, such holding over shall constitute a month-to-month tenancy, at a rent equal to the Base Rent in effect immediately prior to such holding over plus one hundred percent (100%) thereof. This paragraph shall not be construed as Landlord's permission for Tenant to hold over. Acceptance of Rent by Landlord following expiration or termination shall not constitute a renewal of this Lease. Without limiting the foregoing, if Tenant holds over the Premises or any part thereof after expiration or the earlier termination of the Term, Tenant shall indemnify, defend, protect and hold Landlord harmless from any and all claims (including claims of succeeding tenants), causes of action, expenses (including reasonable attorneys' fees), liabilities and lawsuits resulting from such a holdover. 16.9.2. Upon the termination of this Lease or Tenant's right to possession of the Premises, Tenant will surrender the Premises, together with all keys, in good condition and repair, reasonable wear and tear excepted. Conditions existing because of Tenant's failure to perform maintenance, repairs or replacements shall not be deemed "reasonable wear and tear." 16.10. Joint and Several. If Tenant consists of more than one person, the obligation of all such persons shall be joint and several. 16.11. Covenants and Conditions. Each provision to be performed by Tenant hereunder shall be deemed to be both a covenant and a condition. 16.12. Addenda. The Addenda attached hereto, if any, and identified with this Lease and initialed by the parties hereto are incorporated herein by this reference as if fully set forth herein. 16 <PAGE> 21 IN WITNESS WHEREOF, the parties have executed this Lease as of the date set forth above. "Landlord" NETWORK APPLIANCE, INC. a California corporation By: ___________________________________ Its: ___________________________________ "Tenant" TRW INC., an Ohio corporation By: ___________________________________ Its: ___________________________________ 17 <PAGE> 22 EXHIBIT A PREMISES 1 <PAGE> 23 EXHIBIT B ESTOPPEL CERTIFICATE _______________________ _______________________ _______________________ _______________________ Re: Lease dated _______________, 19___ ("Lease") by and between ________________________________ ("Landlord") and ______________________________ ("Tenant"). Gentlemen: Reference is made to the above-described Lease in which the undersigned is the Tenant. We understand that you are entering into a transaction with the Landlord which relates to, among other things, this Lease; and we hereby, as a material inducement for you to enter into such transaction with Landlord, represent that: 1. A true and correct copy of the Lease is attached hereto as Exhibit 1. 2. There are no modifications, amendments, supplements, arrangements, side letters or understandings, oral or written, of any sort, modifying, amending, altering, supplementing or changing the terms of the Lease except as follows: . 3. The Lease is in full force and effect, and the Lease has been duly executed and delivered by, and is a binding obligation of, the Tenant as set forth therein. 4. The undersigned acknowledges (a) that rent on the Lease has been paid up to and including _______________, 19___, (b) that monthly rent during the __________ (____) years of the term of the Lease is ____________________ Dollars ($____________) per month and (c) that rent has not been paid for any period after _______________, 19___, and shall not be paid for a period in excess of one (1) month in advance. 5. The improvements on the Premises are free from defects in design, materials and workmanship; and the improvements meet all governmental requirements, including, but not limited to, zoning and environmental requirements. 1 <PAGE> 24 6. The Lease is not in default, and Landlord has performed the obligations required to be performed by Landlord under the terms thereof through the date hereof. Dated: _______________, 19___ Very truly yours, "Tenant" _____________________________________, a ________________________________________ By: ___________________________________ Its: ___________________________________ 2 <PAGE> 25 SCHEDULE 1 HAZARDOUS MATERIALS 1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.45 <SEQUENCE>4 <DESCRIPTION>EXHIBIT 10.45 <TEXT> <PAGE> 1 EXHIBIT 10.45 INDUSTRIAL LEASE (1345 Crossman Avenue) Effective Date: December ___, 1999 DEFINED TERMS Landlord: NETWORK APPLIANCE, INC., a California corporation Landlord's Address For Notice: 495 East Java Drive Sunnyvale, California 94089 Attention: Mr. Thomas Bryant Tenant: TRW INC., an Ohio corporation Tenant's Address For Notice: TRW Inc. 12011 Sunset Hills Road Reston, Virginia 20190 Attn: Ms. Marsha A. Klontz And to: TRW Electronic Systems 1330 Geneva Drive P.O. Box 3510 Sunnyvale, California 94088-3510 Project: Certain parcels of land situated in Santa Clara County, California consisting of 27.848 acres of land described as APN #110-42.2.2.6.7.8, having addresses of 1345 and 1346 Crossman Avenue and 1330 and 1350 Geneva Drive in Sunnyvale, California Building: 1345 Crossman Avenue, Sunnyvale, California Premises: The Building, together with the Property Property: That certain real property described in Exhibit A hereto Term: From the Commencement Date to December 31, 2000 Commencement Date: December ___, 1999 <PAGE> 2 Base Rent Per Month: One Hundred Fifteen Thousand and No/100 Dollars ($115,000.00) Lease Year: Shall refer to each three hundred sixty-five (365) day period during the Term commencing on the Commencement Date and on each anniversary thereof. Permitted Uses: General office purposes and no other uses shall be permitted without the prior written consent of Landlord. EXHIBITS A - Premises B - Estoppel Certificate The Defined Terms set forth above and the Exhibits attached hereto are incorporated into and made a part of the following Lease. Each reference in this Lease to any of the Defined Terms shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Defined Terms and the provisions of the Lease, the latter shall control. LANDLORD (_________) AND TENANT (_________) AGREE. initial initial <PAGE> 3 Table of Contents <TABLE> <CAPTION> Page ---- <S> <C> <C> 1. PREMISES.................................................................................................1 1.1. Premises........................................................................................1 1.2. Reserved Rights.................................................................................1 1.3. As-Is...........................................................................................1 2. TERM.....................................................................................................1 3. RENT.....................................................................................................1 3.1. Base Rent.......................................................................................1 3.2. Late Charge and Interest........................................................................1 3.3. Net Lease.......................................................................................2 4. UTILITIES................................................................................................2 5. TAXES....................................................................................................2 5.1. Real Property Taxes.............................................................................2 5.2. Definition of Real Property Taxes...............................................................2 5.3. Personal Property Taxes.........................................................................3 6. INSURANCE................................................................................................3 6.1. Landlord........................................................................................3 6.2. Tenant..........................................................................................3 6.3. General.........................................................................................4 6.4. Indemnity.......................................................................................4 6.5. Exemption of Landlord from Liability............................................................5 7. REPAIRS AND MAINTENANCE..................................................................................5 7.1. Tenant..........................................................................................5 7.2. Landlord........................................................................................5 8. ALTERATIONS..............................................................................................5 8.1. Trade Fixtures; Alterations.....................................................................5 8.2. Damage; Removal.................................................................................6 8.3. Liens...........................................................................................6 9. USE......................................................................................................6 10. ENVIRONMENTAL MATTERS....................................................................................7 10.1. Hazardous Materials.............................................................................7 10.2. Indemnification.................................................................................7 11. DAMAGE AND DESTRUCTION...................................................................................8 11.1. Casualty........................................................................................8 11.2. Tenant's Fault..................................................................................9 11.3. Uninsured Casualty..............................................................................9 </TABLE> i <PAGE> 4 <TABLE> <S> <C> <C> 11.4. Waiver..........................................................................................9 12. EMINENT DOMAIN...........................................................................................9 12.1. Total Condemnation..............................................................................9 12.2. Partial Condemnation............................................................................9 12.3. Award...........................................................................................9 12.4. Temporary Condemnation.........................................................................10 13. DEFAULT.................................................................................................10 13.1. Events of Defaults.............................................................................10 13.2. Remedies.......................................................................................11 13.3. Cumulative.....................................................................................12 14. ASSIGNMENT AND SUBLETTING...............................................................................12 15. ESTOPPEL, ATTORNMENT AND SUBORDINATION..................................................................13 15.1. Estoppel.......................................................................................13 15.2. Attornment.....................................................................................13 15.3. Subordination..................................................................................13 16. MISCELLANEOUS...........................................................................................14 16.1. General........................................................................................14 16.2. Signs..........................................................................................15 16.3. Waiver.........................................................................................15 16.4. Financial Statements...........................................................................15 16.5. Limitation of Liability........................................................................15 16.6. Notices........................................................................................15 16.7. Brokerage Commission...........................................................................15 16.8. Authorization..................................................................................16 16.9. Holding Over; Surrender........................................................................16 16.10. Joint and Several..............................................................................16 16.11. Covenants and Conditions.......................................................................16 16.12. Addenda........................................................................................16 </TABLE> ii <PAGE> 5 1. PREMISES. 1.1. Premises. Landlord hereby leases to Tenant the Premises as shown on Exhibit A attached hereto, but excluding any other portion of the Project. 1.2. Reserved Rights. Landlord reserves the right to enter the Premises upon reasonable notice to Tenant (except in case of an emergency) and/or to undertake the following: inspect the Premises and/or the performance by Tenant of the terms and conditions hereof. Landlord acknowledges and agrees that any such activities by Landlord on the Premises shall be subject to any reasonable security precautions created by Tenant as a result of any classified work performed by Tenant in the Building on behalf of the United States Government. 1.3. As-Is. Tenant acknowledges that Tenant has owned and occupied the Premises for an extensive period of time prior to the Commencement Date of this Lease and, as such, is familiar with the physical condition thereof. Tenant recognizes that Landlord would not lease the Premises except on an "as-is" basis and that Landlord has made no representations of any kind in connection with improvements or physical conditions on, or bearing on, the use or condition of the Premises. 2. TERM. The Term of the Lease shall commence ("Commencement Date") on the Commencement Date and expire on December 31, 2000. Tenant has determined that the Premises are acceptable for Tenant's use; and acknowledges that Landlord has made no representations or warranties in connection with the physical condition of the Premises or Tenant's use of the same upon which Tenant has relied directly or indirectly for any purpose. 3. RENT. 3.1. Base Rent. Tenant shall pay to Landlord, at such address as Landlord shall from time to time designate in writing to Tenant for the payment of Rent, the Base Rent, without notice, demand, offset or deduction, on the first day of each calendar month. Upon the execution of this Lease, Tenant shall pay to Landlord the first month's Base Rent. If the Term commences (or ends) on a date other than the first (or last) day of a month, Tenant shall pay on the Commencement Date or first day of the last month a pro rata portion of Base Rent, prorated on a per diem basis with respect to the portion of the month within the Term. All sums other than Base Rent which Tenant is obligated to pay under this Lease shall be deemed to be additional rent due hereunder, whether or not such sums are designated "additional rent." The term "Rent" means the Base Rent and all additional rent payable hereunder. 3.2. Late Charge and Interest. The late payment of any Rent will cause Landlord to incur additional costs, including administration and collection costs and processing and accounting expenses and increased debt service. If Landlord has not received any installment of Rent within five (5) days after such amount is due, Tenant shall pay a late charge of ten percent (10%) of the delinquent amount, which is agreed to represent a reasonable estimate of the costs incurred by Landlord. In addition, all such delinquent amounts shall bear interest from the date such amount was due until paid in full at a rate per annum ("Applicable Interest Rate") equal to the greater of (a) five percent (5%) per annum plus the then federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the 1 <PAGE> 6 month preceding the date of this Lease or (b) ten percent (10%); provided, in no event shall the Applicable Interest Rate exceed the maximum interest rate permitted by law which may be charged under such circumstances. Landlord and Tenant recognize that the damage which Landlord shall suffer as a result of Tenant's failure to pay such amounts is difficult to ascertain and said late charge and interest are the best estimate of the damage which Landlord shall suffer in the event of late payment. 3.3. Net Lease. Tenant acknowledges that the Rent shall be absolutely net and carefree to the Landlord, except as set forth herein. Landlord shall nit be responsible for any costs, charges, expenses or outlays of any nature or kind whatsoever arising from or relating to the Premises, except as provided for herein. Tenant shall pay all such charges, impositions, costs and expenses of every nature and kind to Landlord's complete exoneration. 4. UTILITIES. Tenant shall pay all charges for heat, water, gas, electricity and any other utilities used on the Premises directly to the utility provider. Landlord shall not be liable to Tenant for interruption in or curtailment of any utility service, nor shall any such interruption or curtailment constitute constructive eviction or grounds for rental abatement. In the event the Premises is not separately metered, Landlord shall have the option, subject to Landlord's review and the terms of this Lease, to cause the Premises to be separately metered at Tenant's cost and expense. 5. TAXES. 5.1. Real Property Taxes. Tenant shall pay any and all of the Real Property Taxes for the Premises to the relevant taxing authority on or before the date due. Tenant shall provide Landlord with written evidence of such payment of taxes concomitantly with the payment thereof. 5.2. Definition of Real Property Taxes. "Real Property Taxes" shall be the sum of the following: all real property taxes, possessory interest taxes, business or license taxes or fees, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, housing fund assessments, open space charges, childcare fees, school fees or any other assessments, levies, fees or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen (including fees "in-lieu" of any such tax or assessment) which are assessed, levied, charged, confirmed or imposed by any public authority upon the Project (or any real property comprising any portion thereof) or its operations, together with all taxes, assessments or other fees imposed by any public authority upon or measured by any Rent or other charges payable hereunder, including any gross income tax or excise tax levied by the local governmental authority, the federal government or any other governmental body with respect to receipt of such rental, or upon, with respect to or by reason of the development, possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, or upon this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises, together with any tax imposed in substitution, partially or totally, of any tax previously included within the aforesaid definition or any additional tax the nature of which was previously included within the aforesaid definition, together with the costs and expenses (including attorneys fees) of challenging any of the foregoing or seeking the reduction in or abatement, redemption or return of any of the foregoing, 2 <PAGE> 7 but only to the extent of any such reduction, abatement, redemption or return. Nothing contained in this Lease shall require Tenant to pay any franchise, corporate, estate or inheritance tax of Landlord, or any income, profits or revenue tax or charge upon the net income of Landlord. 5.3. Personal Property Taxes. Prior to delinquency, Tenant shall pay all taxes and assessments levied upon trade fixtures, alterations, additions, improvements, inventories and other personal property located and/or installed on the Property by Tenant; and Tenant shall provide Landlord copies of receipts for payment of all such taxes and assessments. To the extent any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord. 6. INSURANCE. 6.1. Landlord. Landlord shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 6.1.1. Building. Insurance insuring the Building and the Landlord's interest in any betterments and improvements against fire and extended coverage (including "all risk" coverage, earthquake/volcanic action, flood and/or surface water insurance) for the full replacement cost of the Building, with deductibles and the form and endorsements of such coverage as is required by any synthetic lender of Landlord with an interest in the Building at the time, together with rental value insurance against loss of Rent in an amount equal to the amount of Rent for a period of at least twelve (12) months commencing on the date of loss. Tenant shall reimburse Landlord for the cost of such insurance for such period of time that is consistent with the Term of this Lease within ten (10) business days of receipt of request therefor, provided such request is accompanied by related invoices therefor. 6.2. Tenant. Tenant shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 6.2.1. Commercial General Liability Insurance (Occurrence Form). A policy of commercial general liability insurance (occurrence form) having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence providing coverage for, among other things, blanket contractual liability, premises, products/completed operations and personal and advertising injury coverage, with deletion of the exclusion for explosion, collapse or underground hazard, if applicable, and, if necessary, Tenant shall provide for restoration of the aggregate limit; 6.2.2. Automobile Liability Insurance. Comprehensive automobile liability insurance having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence and insuring Tenant against liability for claims arising out of ownership, maintenance, or use of any owned, hired or non-owned automobiles; 6.2.3. Workers' Compensation and Employer's Liability Insurance. Workers' compensation insurance having limits not less than those required by state statute and federal statute, if applicable, and covering all persons employed by Tenant in the conduct of its operations on the Premises (including the all states endorsement and, if applicable, the volunteers 3 <PAGE> 8 endorsement), together with employer's liability insurance coverage in the amount of at least One Million Dollars ($1,000,000); and 6.2.4. Property Insurance. "All risk" property insurance including boiler and machinery comprehensive form, if applicable, covering damage to or loss of any personal property, fixtures and equipment, including electronic data processing equipment, of Tenant (and coverage for the full replacement cost thereof including business interruption of Tenant) ("Tenant's Property"). 6.3. General. 6.3.1. Insurance Companies. Insurance required to be maintained by Tenant shall be written by companies licensed to do business in the state in which the Premises are located and having a "General Policyholders Rating" of at least A (or such higher rating as may be required by a lender having a lien on the Premises) as set forth in the most current issue of "Best's Insurance Guide." 6.3.2. Certificates of Insurance. Tenant shall deliver to Landlord certificates of insurance for all insurance required to be maintained by Tenant prior to the date of possession of the Premises. Tenant shall, at least ten (10) days prior to expiration of the policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to modification except after sixty (60) days prior written notice to the parties named as additional insureds in this Lease (except in the case of cancellation for nonpayment of premium in which case cancellation shall not take effect until at least (10) days' notice has been given to Landlord). If Tenant fails to maintain any insurance required in this Lease, Tenant shall be liable for all losses and cost resulting from said failure. 6.3.3. Additional Insureds. Landlord and any property management company of Landlord for the Premises shall be included as additional insureds, to the extent that the Tenant has an obligation under Section 6.4, under all of the policies required by Section 6.2.1. The policies required under Section 6.2.1 shall provide for severability of interest. 6.3.4. Primary Coverage. All insurance to be maintained by Tenant shall, except for workers' compensation and employer's liability insurance, be primary, without right of contribution from insurance of Landlord. The limits of insurance maintained by Tenant shall not limit Tenant's liability under this Lease. 6.3.5. Waiver of Subrogation. Landlord and Tenant each waives any right to recover against the other for claims for damages to its property covered by insurance. This provision is intended to waive fully, and for the benefit of Landlord and Tenant, any rights and/or claims which might give rise to a right of subrogation in favor of any insurance carrier. 6.4. Indemnity. Tenant shall indemnify, defend by counsel satisfactory to Landlord, and hold harmless Landlord from and against any and all claims arising from (i) Tenant's use of the Premises, the conduct of Tenant's business or any activity, work or things done, permitted or suffered by Tenant in or about the Premises, the Building or elsewhere and (ii) any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of 4 <PAGE> 9 this Lease, arising from any negligence of Tenant or any of Tenant's agents, contractors or employees, including all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises or the Building arising from any cause; and Tenant hereby waives all claims in respect thereof against Landlord except to the extent such claims are caused by Landlord's gross negligence or willful misconduct. 6.5. Exemption of Landlord from Liability. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Premises or the Building, nor shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents or contractors, whether such damage or injury is caused by fire, steam, electricity, gas, water or rain, or from the breakage, leakage or other defects of sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises, the Building or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Building. 7. REPAIRS AND MAINTENANCE. 7.1. Tenant. Tenant shall keep and maintain any and all portions of the Premises and the Building, including structural portions thereof, floors and floor coverings, interior plumbing, HVAC and other building system equipment, electrical wiring, fixtures and equipment in good repair and in a clean and safe condition, and repair and/or replace any and all of the foregoing in a good and workmanlike manner. Without limiting the foregoing, Tenant shall, at Tenant's sole expense, (a) immediately replace all broken glass in the Premises with glass equal to or in excess of the specification and quality of the original glass; and (b) repair any area damaged by Tenant, Tenant's agents, employees, invitees and visitors, including any damage caused by any roof penetration, whether or not such roof penetration was approved by Landlord. 7.2. Landlord. Landlord shall have no obligation whatsoever to maintain any portion of the Building or Premises. Tenant waives any right to repair at the expense of Landlord under any applicable governmental laws, ordinances, statutes, orders or regulations now or hereafter in effect respecting the Premises. 8. ALTERATIONS. 8.1. Trade Fixtures; Alterations. Tenant may install necessary trade fixtures, equipment and furniture in the Building, provided that such items are installed and are removable without structural damage to the Building. Tenant shall not make, or allow to be made, any alterations or physical additions in, about or to the Premises that affect the structural aspects of the Building, the Building roof or Building foundation without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall reimburse Landlord for all costs which Landlord may incur in connection with granting approval to Tenant for any such alterations and additions, including any costs or expenses which Landlord may 5 <PAGE> 10 incur in electing to have outside architects and engineers review said matters. If a Notice of Completion is required for such work, Tenant shall file it and provide Landlord with a copy. Tenant shall provide Landlord with a set of "as-built" drawings for any such work. 8.2. Damage; Removal. Tenant assumes the risk of damage to any of Tenant's fixtures, equipment, furniture or alterations. Tenant shall repair all damage to the Premises and/or Building caused by the installation or removal of such items. Upon the termination of this Lease, Tenant shall remove any or all alterations, additions, improvements and partitions made or installed by Tenant and restore the Premises to their condition existing prior to the construction of any such items; provided, however, Landlord may permit, upon written notice to Tenant (to the extent requested to do so by Tenant at the time notice thereof is given), any such items designated by Landlord to remain on the Premises, in which event they shall be and become the property of Landlord upon the termination of this Lease. All such removals and restoration shall be accomplished in a good and workmanlike manner and so as not to cause any damage to the Premises, the Building or the Project whatsoever. 8.3. Liens. Tenant shall promptly pay and discharge all claims for labor performed, supplies furnished and services rendered at the request of Tenant and shall keep the Premises free of all mechanics' and materialmen's liens in connection therewith. Tenant shall provide at least ten (10) days prior written notice to Landlord before any labor is performed, supplies furnished or services rendered on or at the Premises and Landlord shall have the right to post on the Premises notices of non-responsibility. If any lien is filed, Landlord may take such action as may be necessary to remove such lien and Tenant shall pay Landlord such amounts expended by Landlord together with interest thereon at the Applicable Interest Rate from the date of expenditure. 9. USE. The Premises shall be used only for the Permitted Uses and for no other uses and otherwise consistent with any applicable governmental laws, ordinances, statutes, orders and regulations and any declaration of covenants, conditions and restrictions or any supplement thereto which has been recorded in any official or public records with respect to the Project or any portion thereof. Tenant shall comply with all applicable governmental laws, ordinances, and statutes applicable to the Premises or Building. Tenant shall not commit waste, overload the floors or structure of the Building, subject the Premises or the Project to any use which would damage the same or raise or violate any insurance coverage, permit any unreasonable odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises, take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants, take any action which would abrogate any warranties, or use or allow the Premises to be used for any unlawful purpose. Tenant shall not use any parking spaces for the Project other than the parking spaces located on the Premises. Landlord shall not be responsible for non-compliance by any other tenant or occupant with any of the rules or regulations or any other terms or provisions of such tenant's or occupant's lease. Tenant shall promptly comply with the reasonable requirements of any board of fire insurance underwriters or other similar body now or hereafter constituted. 6 <PAGE> 11 10. ENVIRONMENTAL MATTERS. 10.1. Hazardous Materials. Tenant shall not cause, or allow any of Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees or subtenants (collectively, "Tenant's Parties") to cause or permit, any Hazardous Materials to be brought upon, stored, manufactured, generated, blended, handled, recycled, treated, disposed or used on, under or about the Premises, the Building or the Project, except for routine office and janitorial supplies and the Hazardous Materials listed on Schedule 1 hereto in usual and customary quantities stored, used and disposed of in accordance with all applicable Environmental Laws. As used herein, "Hazardous Materials" means any chemical, substance, material, controlled substance, waste or combination thereof which is hazardous to human health or safety or to the environment due to its radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity, carcinogenicity, mutagenicity or other harmful or potentially harmful properties or effects, including, without limitation, petroleum and petroleum products, asbestos, radon, polychlorinated biphenyls (PCBs) and all of those chemicals, substances, materials, controlled substances, wastes or combinations thereof which are listed, defined or regulated in any manner by any Environmental Law based upon, directly or indirectly, such properties or effects. As used herein, "Environmental Laws" means any and all federal, state or local environmental, health and/or safety-related laws, regulations, standards, ordinances, rules, codes, orders, decrees, directives, guidelines, permits or permit conditions, currently existing which are applicable to Tenant or the Premises. Tenant and Tenant's Parties shall comply with all Environmental Laws and promptly notify Landlord of the presence of any Hazardous Materials, other than as permitted above, on the Premises or any violation of any Environmental Law. Landlord shall have the right to inspect the Premises and to conduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions. If such tests indicate the presence of any environmental condition, Tenant shall reimburse Landlord for the cost of conducting such tests. The phrase "environmental condition" shall mean any condition relating to any Hazardous Materials, including surface water, groundwater, drinking water supply, land, surface or subsurface strata or the ambient air and includes air, land and water pollutants, being present at the Property in violation of Environmental Laws or in a manner which, in the reasonable opinion of the Landlord's environmental consultant, is substantially likely to cause health problems for occupants of the Premises or a future violation of Environmental Law. In the event of any such environmental condition, Tenant shall promptly take any and all steps necessary to rectify the same or shall, at Tenant's election, reimburse Landlord, upon demand, for the cost to Landlord of performing rectifying work. Upon the expiration or earlier termination of this Lease, Tenant shall remove any and all Hazardous Materials on, under or about the Premises. 10.2. Indemnification. Tenant shall indemnify, protect, defend (by counsel acceptable to Landlord) and hold harmless Landlord and its partners, directors, officers, employees, shareholders, lenders, agents, contractors and each of their respective successors and assigns (individually and collectively, "Indemnities") from and against any and all claims, judgments, causes of action, damages, penalties, fines, taxes, costs, liabilities, losses and expenses arising at any time during or after the Term as a result (directly or indirectly) of or in connection with (a) Tenant and/or Tenant's Parties' breach of any prohibition or provision of the preceding section, or (b) the presence of Hazardous Materials on, under or about the Premises or other properties as a result (directly or indirectly) of Tenant's and/or Tenant's Parties' activities, or failure to act 7 <PAGE> 12 when legally required to do so in connection with the Premises. This indemnity shall include the cost of any required or necessary repair, cleanup or detoxification, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the termination of this Lease. The written consent by Landlord to the presence of Hazardous Materials on, under or about the Premises shall not excuse Tenant from Tenant's obligation of indemnification pursuant hereto. Tenant's obligations pursuant to the foregoing indemnity shall survive the termination of this Lease. 11. DAMAGE AND DESTRUCTION. 11.1. Casualty. If the Building should be damaged or destroyed by fire or other casualty, Tenant shall give immediate written notice to Landlord. Within thirty (30) days after receipt thereof, Landlord shall notify Tenant whether such repairs can reasonably be made: (1) within thirty (30) days; (2) in more than thirty (30) days but in less than ninety (90) days; or (3) in more than ninety (90) days from the date of such notice. 11.1.1. Less Than 30 Days. If the Building should be damaged only to such extent that rebuilding or repairs can be reasonably completed within thirty (30) days, this Lease shall not terminate and, provided that insurance proceeds are available to fully repair the damage, Landlord shall repair the Building, except that Landlord shall not be required to rebuild, repair or replace any alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of Tenant. The Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and the Building are unfit for occupancy. 11.1.2. Greater Than 30 Days. If the Building should be damaged only to such extent that rebuilding or repairs can be reasonably completed in more than thirty (30) days but in less than ninety (90) days, then Landlord shall have the option of: (1) terminating the Lease effective upon the occurrence of such damage, in which event the Rent shall be abated from the date Tenant vacates the Building; or (2) electing to repair the Building, provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace any part of the alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of Tenant). The Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and the Building is unfit for occupancy. 11.1.3. Greater Than 90 Days. If the Building should be so damaged that rebuilding or repairs cannot be completed within ninety (90) days, either Landlord or Tenant may terminate by giving written notice within ten (10) days after notice from Landlord regarding the time period of repair; and this Lease and the Rent shall be abated from the date Tenant vacates the Building. In the event that neither party elects to terminate this Lease, Landlord shall promptly commence and diligently prosecute to completion the repairs to the Building , provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace any alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of 8 <PAGE> 13 Tenant). During the time when Landlord is prosecuting such repairs to completion, the Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and only during the period that the Building is are unfit for occupancy. 11.2. Tenant's Fault. If any portion of the Building is damaged resulting from the fault, negligence or breach of this Lease by Tenant or any of Tenant's Parties, Rent shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost of the repair caused thereby to the extent such cost is not covered by insurance proceeds. 11.3. Uninsured Casualty. In the event that any portion of the Building is damaged and is not fully covered by insurance proceeds received by Landlord or in the event that the holder of any indebtedness secured by the Premises requires that the insurance proceeds be applied to such indebtedness, then Tenant shall have the right to terminate this Lease by delivering written notice of termination to Landlord within thirty (30) days after the date of notice to Tenant of any such event. In the event that Tenant does not elect to terminate this Lease, Landlord shall have the right to terminate this Lease by delivering written notice to Tenant within thirty (30) days after such election by Tenant or Tenant's failure to elect, as applicable, whereupon all rights and obligations shall cease and terminate hereunder. 11.4. Waiver. With respect to any damage or destruction which Landlord is obligated to repair or may elect to repair, Tenant waives all rights to terminate this Lease pursuant to rights otherwise presently or hereafter accorded by law. 12. EMINENT DOMAIN. 12.1. Total Condemnation. If all of the Premises is condemned by eminent domain, inversely condemned or sold in lieu of condemnation for any public or quasi-public use or purpose ("Condemned"), this Lease shall terminate as of the date of title vesting in such proceeding and Rent shall be adjusted to the date of termination. 12.2. Partial Condemnation. If any portion of the Premises is Condemned and such partial condemnation renders the Premises unusable for Tenant's business, or if a substantial portion of the Building is Condemned, this Lease shall terminate as of the date of title vesting or order of immediate possession in such proceeding and Rent shall be adjusted to the date of termination. If such partial condemnation does not render the Premises unusable for the business of Tenant or less than a substantial portion of the Building is Condemned, Landlord shall promptly restore the Premises to the extent of any condemnation proceeds recovered by Landlord, excluding the portion thereof lost in such condemnation, and this Lease shall continue in full force and effect except that after the date of such title vesting Rent shall be adjusted, as reasonably determined by Landlord. 12.3. Award. If the Premises are wholly or partially Condemned, Landlord shall be entitled to the entire award paid for such condemnation, and Tenant waives any claim to any part of the award from Landlord or the condemning authority; provided that Tenant shall have the right to recover from the condemning authority such compensation as may be separately awarded 9 <PAGE> 14 to Tenant in connection with costs in removing Tenant's merchandise, furniture, fixtures, leasehold improvements and equipment to a new location. 12.4. Temporary Condemnation. In the event of a temporary condemnation, this Lease shall remain in effect, Tenant shall continue to pay Rent and Tenant shall receive any award made for such condemnation. If a temporary condemnation remains in effect at the expiration or earlier termination of this Lease, Tenant shall pay Landlord the reasonable cost of performing any obligations required of Tenant with respect to the surrender of the Premises. If a temporary condemnation is for a period which extends beyond the Term, this Lease shall terminate as of the date of occupancy by the condemning authority and any such award shall be distributed in accordance with the preceding section. 13. DEFAULT. 13.1. Events of Defaults. The occurrence of any of the following events shall, at Landlord's option, constitute an "Event of Default": 13.1.1. Vacation or abandonment of the Premises for a period of thirty (30) consecutive days, and Tenant waives any right to notice Tenant may have under applicable law; 13.1.1 Vacation or abandonment of the Premises for a period of thirty (30) consecutive days, and Tenant waives any right to notice Tenant may have under applicable law; 13.1.2. Failure to pay Rent on the date when due, the failure continuing for a period of five (5) days after payment is due; 13.1.3. Failure to perform Tenant's covenants hereunder (except default in the payment of Rent); provided, if such default is susceptible of cure and Tenant has promptly commenced the cure of such default and is diligently prosecuting such cure to completion, then the same must remain uncured for thirty (30) days after written notice thereof from Landlord; 13.1.4. The making of a general assignment by Tenant for the benefit of creditors, the filing of a voluntary petition by Tenant or the filing of an involuntary petition by any of Tenant's creditors seeking the rehabilitation, liquidation or reorganization of Tenant under any law relating to bankruptcy, insolvency or other relief of debtors and, in the case of an involuntary action, the failure to remove or discharge the same within sixty (60) days of such filing, the appointment of a receiver or other custodian to take possession of substantially all of Tenant's assets or this leasehold, Tenant's insolvency or inability to pay Tenant's debts or failure generally to pay Tenant's debts when due, any court entering a decree or order directing the winding up or liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking any action toward the dissolution or winding up of Tenant's affairs, the cessation or suspension of Tenant's use of the Premises, or the attachment, execution or other judicial seizure of substantially all of Tenant's assets or this leasehold; 13.1.5. The making of any material misrepresentation or omission by Tenant in any materials delivered by or on behalf of Tenant to Landlord pursuant to this Lease; or 13.1.6. A default by Tenant beyond any applicable notice and cure period pursuant to the terms of any lease entered into between Landlord and Tenant for space in the Project. 10 <PAGE> 15 13.2. Remedies. 13.2.1. Termination. In the event of the occurrence of any Event of Default, Landlord shall have the right to give a written termination notice to Tenant and, on the date specified in such notice, this Lease shall terminate unless on or before such date all arrears of Rent and all other sums payable by Tenant under this Lease and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other Events of Default at the time existing shall have been fully remedied to the satisfaction of Landlord. 13.2.1.1. Repossession. Following termination, without prejudice to other remedies Landlord may have, Landlord may (i) peaceably re-enter the Premises upon voluntary surrender by Tenant or remove Tenant therefrom and any other persons occupying the Premises, using such legal proceedings as may be available; (ii) repossess the Premises or relet the Premises or any part thereof for such term (which may be for a term extending beyond the Term), at such rental and upon such other terms and conditions as Landlord in Landlord's sole discretion shall determine, with the right to make reasonable alterations and repairs to the Premises; and (iii) remove all personal property therefrom. 13.2.1.2. Unpaid Rent. Landlord shall have all the rights and remedies of a landlord provided by applicable law, including the right to recover from Tenant: (a) the worth, at the time of award, of the unpaid Rent that had been earned at the time of termination, (b) the worth, at the time of award, of the amount by which the unpaid Rent that would have been earned after the date of termination until the time of award exceeds the amount of loss of rent 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 Term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided, and (d) any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. The phrase "worth, at the time of award," as used in (a) and (b) above, shall be computed at the greater of 10% per annum or 5% per annum plus the federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the month preceding the date of this Lease, and as used in (c) above, 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 1%. 13.2.2. Continuation. Even though an Event of Default may have occurred, 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 Rent as it becomes due, and Landlord, without terminating this Lease, may, during the period Tenant is in default, enter the Premises and relet the same, or any portion thereof, to third parties for Tenant's account and Tenant shall be liable to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises and like costs. Reletting may be for a period shorter or longer than the remaining Term. Tenant shall continue to pay the Rent on the date the same is due. No act by Landlord hereunder, including acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interest under this Lease, shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. In the event that Landlord elects to relet the 11 <PAGE> 16 Premises, the rent that Landlord receives from reletting shall be applied to the payment of, first, any indebtedness from Tenant to Landlord other than Base Rent and Additional Rent; second, all costs, including maintenance, incurred by Landlord in reletting; and, third, Base Rent and Tenant's Share of Increases under this Lease. After deducting the payments referred to above, any sum remaining from the rental Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. In no event shall Tenant be entitled to any excess rent received by Landlord. If, on the date Rent is due under this Lease, the rent received from the reletting is less than the Rent due on that date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all costs, including maintenance, Landlord incurred in reletting that remain after applying the rent received from reletting as provided hereinabove. So long as this Lease is not terminated, Landlord shall have the right to remedy any default of Tenant, to maintain or improve the Premises, to cause a receiver to be appointed to administer the Premises and new or existing subleases and to add to the Rent payable hereunder all of Landlord's reasonable costs in so doing, with interest at the Applicable Interest Rate from the date of such expenditure. 13.3. Cumulative. Each right and remedy of Landlord provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and shall not preclude Landlord from exercising any other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity, by statute or otherwise. No payment by Tenant of a lesser amount than the Rent nor any endorsement on any check or letter accompanying any check or payment as Rent shall be deemed an accord and satisfaction of full payment of Rent; and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies. 14. ASSIGNMENT AND SUBLETTING. Tenant shall not assign or sublet, whether voluntarily or involuntarily or by operation of law, the Premises or any part thereof without Landlord's prior written approval, which shall not be unreasonably withheld. The merger of Tenant with any other entity or the transfer of any controlling or managing ownership or beneficial interest in Tenant shall constitute an assignment hereunder. If Tenant desires to assign this Lease or sublet any or all of the Building, Tenant shall give Landlord written notice forty-five (45) days prior to the anticipated effective date of the assignment or sublease. Landlord shall then have a period of thirty (30) days following receipt of such notice and all related documents and agreements associated with the assignment or sublease, including without limitation, the financial statements of any proposed assignee or subtenant, to notify Tenant in writing that Landlord elects: (1) to permit Tenant to assign this Lease or sublet such space, subject however to Landlord's prior written approval of the proposed assignee or subtenant and of any related documents or agreements associated with the assignment or sublease received by Landlord hereunder or reasonably requested by Landlord; (2) to disapprove such proposed assignment or subletting or (3) to terminate this Lease as of the date specified in Landlord's notice thereof. If Landlord should fail to notify Tenant in writing of such election, Landlord shall be deemed to have elected option (2). This Lease may not be assigned by operation of law. Any purported assignment or subletting contrary to the provisions hereof shall be void. If Tenant receives rent or other consideration for any such transfer in excess of the Rent, or in case of the sublease of a portion of the Premises, in excess of such Rent that is fairly allocable to such portion, after appropriate adjustments to assure that all other payments required hereunder are appropriately taken into account, Tenant shall pay Landlord one hundred percent (100%) of the 12 <PAGE> 17 difference between each such payment of rent or other consideration and the Rent required hereunder. Landlord may, without waiving any rights or remedies, collect rent from the assignee, subtenant or occupant and apply the net amount collected to the Rent herein reserved and apportion any excess rent so collected in accordance with the terms of the preceding sentence. Tenant shall continue to be liable as a principal and not as a guarantor or surety to the same extent as though no assignment or subletting had been made. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to the Lease by assignees of Tenant without notifying Tenant or any successor of Tenant and without obtaining their consent. No permitted transfer shall be effective until there has been delivered to Landlord a counterpart of the transfer instrument in which the transferee agrees to be and remain jointly and severally liable with Tenant for the payment of Rent pertaining to the space and for the performance of all the terms and provisions of this Lease relating thereto arising on or after the date of the transfer. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Premises, the Building or the Project. 15. ESTOPPEL, ATTORNMENT AND SUBORDINATION. 15.1. Estoppel. Within ten (10) days after request by Landlord, Tenant shall deliver an estoppel certificate duly executed (and acknowledged if required by any lender), in the form attached hereto as Exhibit B, to any proposed mortgagee, purchaser or Landlord. Tenant's failure to deliver said statement in such time period shall be conclusive upon Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's performance and Tenant has no right of offset, counterclaim or deduction against Rent hereunder; and (c) no more than one period's Base Rent has been paid in advance. Landlord reserves the right to substitute a different form of estoppel certificate upon the request of any proposed mortgagee or purchaser. If any financier should require that this Lease be amended (other than in the description of the Premises, the Term, the Permitted Use, the Rent or as will substantially, materially and adversely affect the rights of Tenant), Landlord shall give written notice thereof to Tenant, which notice shall be accompanied by a Lease supplement embodying such amendments. Tenant shall, within ten (10) days after the receipt of Landlord's notice, execute the tendered Lease supplement. 15.2. Attornment. In the event of a foreclosure proceeding, the exercise of the power of sale under any mortgage or deed of trust or the termination of a ground lease, Tenant shall, if requested, attorn to the purchaser thereupon and recognize such purchaser as Landlord under this Lease; provided, however, Tenant's obligation to attorn to such purchaser shall be conditioned upon Tenant's receipt of a non-disturbance agreement. 15.3. Subordination. This Lease shall be subject and subordinate to all ground leases and the lien of all mortgages and deeds of trust which now or hereafter affect the Premises or the Project or Landlord's interest therein, or on or against all such ground leases, and all amendments thereto, all without the necessity of Tenant's executing further instruments to effect such subordination. If requested, Tenant shall execute whatever documentation may be required to further effect the provisions of this paragraph. 13 <PAGE> 18 16. MISCELLANEOUS. 16.1. General. 16.1.1. Entire Agreement. This Lease sets forth all the agreements between Landlord and Tenant concerning the Premises; and there are no agreements either oral or written other than as set forth herein. 16.1.2. Time of Essence. Time is of the essence of this Lease. 16.1.3. Attorneys' Fees. In any action which either party brings to enforce its rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys' fees, to be fixed by the court, and said costs and attorneys' fees shall be a part of the judgment in said action. 16.1.4. Severable. If any provision of this Lease or the application of any such provision shall be held by a court of competent jurisdiction to be invalid, void or unenforceable to any extent, the remaining provisions of this Lease and the application thereof shall remain in full force and effect and shall not be affected, impaired or invalidated. 16.1.5. Law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. 16.1.6. No Option. Submission of this Lease to Tenant for examination or negotiation does not constitute an option to lease, offer to lease or a reservation of, or option for, the Premises; and this document shall become effective and binding only upon the execution and delivery hereof by Landlord and Tenant. 16.1.7. Successors and Assigns. This Lease shall be binding upon and inure to the benefit of the successors and assigns of Landlord and, to the extent assignment is approved by Landlord, Tenant. 16.1.8. Third Party Beneficiaries. Nothing herein is intended to create any third party benefit. 16.1.9. Memorandum of Lease. Tenant shall not record this Lease or a short form memorandum hereof without Landlord's prior written consent. 16.1.10. Agency, Partnership or Joint Venture. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease or any acts of the parties hereto shall be deemed to create any relationship other than the relationship of landlord and tenant. 16.1.11. Merger. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation thereof or a termination by Landlord shall not work a merger and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 14 <PAGE> 19 16.2. Signs. All signs and graphics of every kind visible in or from public view or corridors, or the exterior of the Building or Premises shall be subject to Landlord's prior written approval and shall be subject to any applicable governmental laws, ordinances, and regulations and in compliance with Landlord's signage program. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises; and Tenant shall repair any injury or defacement, including without limitation, discoloration caused by such installation or removal. 16.3. Waiver. No waiver of any default or breach hereunder shall be implied from any omission to take action on account thereof, notwithstanding any custom and practice or course of dealing, and no waiver shall affect any default other than the default specified in the waiver and then said waiver shall be operative only for the time and to the extent therein stated. Waivers of any covenant shall not be construed as a waiver of any subsequent breach of the same. No waiver by either party of any provision under this Lease shall be effective unless in writing and signed by such party. 16.4. Financial Statements. Tenant shall provide to any lender, purchaser or Landlord, within ten (10) days after request, a current, accurate, certified financial statement for Tenant and Tenant's business prepared under generally accepted accounting principles consistently applied and such other certified financial information or tax returns as may be reasonably required by Landlord, purchaser or any lender of either. 16.5. Limitation of Liability. The obligations of Landlord under this Lease are not personal obligations of the individual partners, directors, officers, shareholders, agents or employees of Landlord; and Tenant shall look solely to the Building for satisfaction of any liability and shall not look to other assets of Landlord nor seek recourse against the assets of the individual partners, directors, officers, shareholders, agents or employees of Landlord. Whenever Landlord transfers its interest, Landlord shall be automatically released from further performance under this Lease and from all further liabilities and expenses hereunder and the transferee of Landlord's interest shall assume all liabilities and obligations of Landlord hereunder from the date of such transfer. 16.6. Notices. All notices to be given hereunder shall be in writing and mailed postage prepaid by certified or registered mail, return receipt requested, or delivered by personal or courier delivery, or sent by facsimile (immediately followed by one of the preceding methods), to Landlord's Address and Tenant's Address, or to such other place as Landlord or Tenant may designate in a written notice given to the other party. Notices shall be deemed served upon the earlier of receipt or three (3) days after the date of mailing. 16.7. Brokerage Commission. Tenant warrants to Landlord that Tenant's sole contact with Landlord or with the Premises in connection with this transaction has been directly with Landlord, and that no broker or finder can properly claim a right to a commission or a finder's fee based upon contacts between the claimant and Tenant. Tenant and Landlord, respectively, shall each indemnify, defend by counsel acceptable to the other, protect and hold each other harmless from and against any loss, cost or expense, including, but not limited to, attorneys' fees and costs, resulting from any claim for a fee or commission by any broker or finder in connection with the Premises and this Lease. 15 <PAGE> 20 16.8. Authorization. Tenant shall furnish to Landlord, within ten (10) days after written request, evidence satisfactory to Landlord that the person who executed this Lease on behalf of Tenant was duly authorized to do so. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant and that such execution is binding upon Tenant. 16.9. Holding Over; Surrender. 16.9.1. If Tenant holds over the Premises or any part thereof after expiration or the earlier termination of the Term, such holding over shall constitute a month-to-month tenancy, at a rent equal to the Base Rent in effect immediately prior to such holding over plus one hundred percent (100%) thereof. This paragraph shall not be construed as Landlord's permission for Tenant to hold over. Acceptance of Rent by Landlord following expiration or termination shall not constitute a renewal of this Lease. Without limiting the foregoing, if Tenant holds over the Premises or any part thereof after expiration or the earlier termination of the Term, Tenant shall indemnify, defend, protect and hold Landlord harmless from any and all claims (including claims of succeeding tenants), causes of action, expenses (including reasonable attorneys' fees), liabilities and lawsuits resulting from such a holdover. 16.9.2. Upon the termination of this Lease or Tenant's right to possession of the Premises, Tenant will surrender the Premises, together with all keys, in good condition and repair, reasonable wear and tear excepted. Conditions existing because of Tenant's failure to perform maintenance, repairs or replacements shall not be deemed "reasonable wear and tear." 16.10. Joint and Several. If Tenant consists of more than one person, the obligation of all such persons shall be joint and several. 16.11. Covenants and Conditions. Each provision to be performed by Tenant hereunder shall be deemed to be both a covenant and a condition. 16.12. Addenda. The Addenda attached hereto, if any, and identified with this Lease and initialed by the parties hereto are incorporated herein by this reference as if fully set forth herein. 16 <PAGE> 21 IN WITNESS WHEREOF, the parties have executed this Lease as of the date set forth above. "Landlord" NETWORK APPLIANCE, INC. a California corporation By: ___________________________________ Its: ___________________________________ "Tenant" TRW INC., an Ohio corporation By: ___________________________________ Its: ___________________________________ 17 <PAGE> 22 EXHIBIT A PREMISES 1 <PAGE> 23 EXHIBIT B ESTOPPEL CERTIFICATE ______________________ ______________________ ______________________ ______________________ Re: Lease dated _______________, 19___ ("Lease") by and between ________________________________ ("Landlord") and ______________________________ ("Tenant"). Gentlemen: Reference is made to the above-described Lease in which the undersigned is the Tenant. We understand that you are entering into a transaction with the Landlord which relates to, among other things, this Lease; and we hereby, as a material inducement for you to enter into such transaction with Landlord, represent that: 1. A true and correct copy of the Lease is attached hereto as Exhibit 1. 2. There are no modifications, amendments, supplements, arrangements, side letters or understandings, oral or written, of any sort, modifying, amending, altering, supplementing or changing the terms of the Lease except as follows: . 3. The Lease is in full force and effect, and the Lease has been duly executed and delivered by, and is a binding obligation of, the Tenant as set forth therein. 4. The undersigned acknowledges (a) that rent on the Lease has been paid up to and including _______________, 19___, (b) that monthly rent during the __________ (____) years of the term of the Lease is ____________________ Dollars ($____________) per month and (c) that rent has not been paid for any period after _______________, 19___, and shall not be paid for a period in excess of one (1) month in advance. 5. The improvements on the Premises are free from defects in design, materials and workmanship; and the improvements meet all governmental requirements, including, but not limited to, zoning and environmental requirements. 1 <PAGE> 24 6. The Lease is not in default, and Landlord has performed the obligations required to be performed by Landlord under the terms thereof through the date hereof. Dated: _______________, 19___ Very truly yours, "Tenant" _____________________________________, a ________________________________________ By: ___________________________________ Its: ___________________________________ 2 <PAGE> 25 SCHEDULE 1 HAZARDOUS MATERIALS 1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.46 <SEQUENCE>5 <DESCRIPTION>EXHIBIT 10.46 <TEXT> <PAGE> 1 EXHIBIT 10.46 INDUSTRIAL LEASE (1330 Geneva) Effective Date: December ___, 1999 DEFINED TERMS Landlord: NETWORK APPLIANCE, INC., a California corporation Landlord's Address For Notice: 495 East Java Drive Sunnyvale, California 94089 Attention: Mr. Thomas Bryant Tenant: TRW INC., an Ohio corporation Tenant's Address For Notice: TRW Inc. 12011 Sunset Hills Road Reston, Virginia 20190 Attn: Ms. Marsha A. Klontz And to: TRW Electronic Systems 1330 Geneva Drive P.O. Box 3510 Sunnyvale, California 94088-3510 Project: Certain parcels of land situated in Santa Clara County, California consisting of 27.848 acres of land described as APN #110-42.2.2.6.7.8, having addresses of 1345 and 1346 Crossman Avenue and 1330 and 1350 Geneva Drive in Sunnyvale, California Building: 1330 Geneva, Sunnyvale, California Premises: The Building, together with the Property Property: That certain real property described in Exhibit A hereto Term: From the Commencement Date to June 30, 2002 Commencement Date: December ___, 1999 <PAGE> 2 Base Rent Per Month: One Hundred Twenty-Three Thousand Four Hundred Twenty-Four and 90/100 Dollars ($123,424.90) Lease Year: Shall refer to each three hundred sixty-five (365) day period during the Term commencing on the Commencement Date and on each anniversary thereof. Permitted Uses: General office purposes and no other uses shall be permitted without the prior written consent of Landlord. EXHIBITS A - Premises B - Estoppel Certificate The Defined Terms set forth above and the Exhibits attached hereto are incorporated into and made a part of the following Lease. Each reference in this Lease to any of the Defined Terms shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Defined Terms and the provisions of the Lease, the latter shall control. LANDLORD (_________) AND TENANT (_________) AGREE. initial initial <PAGE> 3 Table of Contents <TABLE> <CAPTION> Page ---- <S> <C> <C> 1. PREMISES.................................................................................................1 1.1. Premises........................................................................................1 1.2. Reserved Rights.................................................................................1 1.3. As-Is...........................................................................................1 2. TERM.....................................................................................................1 3. RENT.....................................................................................................1 3.1. Base Rent.......................................................................................1 3.2. Late Charge and Interest........................................................................1 3.3. Net Lease.......................................................................................2 4. UTILITIES................................................................................................2 5. TAXES....................................................................................................2 5.1. Real Property Taxes.............................................................................2 5.2. Definition of Real Property Taxes...............................................................2 5.3. Personal Property Taxes.........................................................................3 6. INSURANCE................................................................................................3 6.1. Landlord........................................................................................3 6.2. Tenant..........................................................................................3 6.3. General.........................................................................................4 6.4. Indemnity.......................................................................................4 6.5. Exemption of Landlord from Liability............................................................5 7. REPAIRS AND MAINTENANCE..................................................................................5 7.1. Tenant..........................................................................................5 7.2. Landlord........................................................................................5 8. ALTERATIONS..............................................................................................5 8.1. Trade Fixtures; Alterations.....................................................................5 8.2. Damage; Removal.................................................................................6 8.3. Liens...........................................................................................6 9. USE......................................................................................................6 10. ENVIRONMENTAL MATTERS....................................................................................7 10.1. Hazardous Materials.............................................................................7 10.2. Indemnification.................................................................................7 11. DAMAGE AND DESTRUCTION...................................................................................8 11.1. Casualty........................................................................................8 11.2. Tenant's Fault..................................................................................9 11.3. Uninsured Casualty..............................................................................9 </TABLE> i <PAGE> 4 <TABLE> <S> <C> <C> 11.4. Waiver..........................................................................................9 12. EMINENT DOMAIN...........................................................................................9 12.1. Total Condemnation..............................................................................9 12.2. Partial Condemnation............................................................................9 12.3. Award...........................................................................................9 12.4. Temporary Condemnation.........................................................................10 13. DEFAULT.................................................................................................10 13.1. Events of Defaults.............................................................................10 13.2. Remedies.......................................................................................11 13.3. Cumulative.....................................................................................12 14. ASSIGNMENT AND SUBLETTING...............................................................................12 15. ESTOPPEL, ATTORNMENT AND SUBORDINATION..................................................................13 15.1. Estoppel.......................................................................................13 15.2. Attornment.....................................................................................13 15.3. Subordination..................................................................................13 16. MISCELLANEOUS...........................................................................................14 16.1. General........................................................................................14 16.2. Signs..........................................................................................15 16.3. Waiver.........................................................................................15 16.4. Financial Statements...........................................................................15 16.5. Limitation of Liability........................................................................15 16.6. Notices........................................................................................15 16.7. Brokerage Commission...........................................................................15 16.8. Authorization..................................................................................16 16.9. Holding Over; Surrender........................................................................16 16.10. Joint and Several..............................................................................16 16.11. Covenants and Conditions.......................................................................16 16.12. Addenda........................................................................................16 </TABLE> ii <PAGE> 5 1. PREMISES. 1.1. Premises. Landlord hereby leases to Tenant the Premises as shown on Exhibit A attached hereto, but excluding any other portion of the Project. 1.2. Reserved Rights. Landlord reserves the right to enter the Premises upon reasonable notice to Tenant (except in case of an emergency) and/or to undertake the following: inspect the Premises and/or the performance by Tenant of the terms and conditions hereof. Landlord acknowledges and agrees that any such activities by Landlord on the Premises shall be subject to any reasonable security precautions created by Tenant as a result of any classified work performed by Tenant in the Building on behalf of the United States Government. 1.3. As-Is. Tenant acknowledges that Tenant has owned and occupied the Premises for an extensive period of time prior to the Commencement Date of this Lease and, as such, is familiar with the physical condition thereof. Tenant recognizes that Landlord would not lease the Premises except on an "as-is" basis and that Landlord has made no representations of any kind in connection with improvements or physical conditions on, or bearing on, the use or condition of the Premises. 2. TERM. The Term of the Lease shall commence ("Commencement Date") on the Commencement Date and expire on June 30, 2002. Tenant has determined that the Premises are acceptable for Tenant's use; and acknowledges that Landlord has made no representations or warranties in connection with the physical condition of the Premises or Tenant's use of the same upon which Tenant has relied directly or indirectly for any purpose. 3. RENT. 3.1. Base Rent. Tenant shall pay to Landlord, at such address as Landlord shall from time to time designate in writing to Tenant for the payment of Rent, the Base Rent, without notice, demand, offset or deduction, on the first day of each calendar month. Upon the execution of this Lease, Tenant shall pay to Landlord the first month's Base Rent. If the Term commences (or ends) on a date other than the first (or last) day of a month, Tenant shall pay on the Commencement Date or first day of the last month a pro rata portion of Base Rent, prorated on a per diem basis with respect to the portion of the month within the Term. All sums other than Base Rent which Tenant is obligated to pay under this Lease shall be deemed to be additional rent due hereunder, whether or not such sums are designated "additional rent." The term "Rent" means the Base Rent and all additional rent payable hereunder. 3.2. Late Charge and Interest. The late payment of any Rent will cause Landlord to incur additional costs, including administration and collection costs and processing and accounting expenses and increased debt service. If Landlord has not received any installment of Rent within five (5) days after such amount is due, Tenant shall pay a late charge of ten percent (10%) of the delinquent amount, which is agreed to represent a reasonable estimate of the costs incurred by Landlord. In addition, all such delinquent amounts shall bear interest from the date such amount was due until paid in full at a rate per annum ("Applicable Interest Rate") equal to the greater of (a) five percent (5%) per annum plus the then federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the 1 <PAGE> 6 month preceding the date of this Lease or (b) ten percent (10%); provided, in no event shall the Applicable Interest Rate exceed the maximum interest rate permitted by law which may be charged under such circumstances. Landlord and Tenant recognize that the damage which Landlord shall suffer as a result of Tenant's failure to pay such amounts is difficult to ascertain and said late charge and interest are the best estimate of the damage which Landlord shall suffer in the event of late payment. 3.3. Net Lease. Tenant acknowledges that the Rent shall be absolutely net and carefree to the Landlord, except as set forth herein. Landlord shall nit be responsible for any costs, charges, expenses or outlays of any nature or kind whatsoever arising from or relating to the Premises, except as provided for herein. Tenant shall pay all such charges, impositions, costs and expenses of every nature and kind to Landlord's complete exoneration. 4. UTILITIES. Tenant shall pay all charges for heat, water, gas, electricity and any other utilities used on the Premises directly to the utility provider. Landlord shall not be liable to Tenant for interruption in or curtailment of any utility service, nor shall any such interruption or curtailment constitute constructive eviction or grounds for rental abatement. In the event the Premises is not separately metered, Landlord shall have the option, subject to Landlord's review and the terms of this Lease, to cause the Premises to be separately metered at Tenant's cost and expense. 5. TAXES. 5.1. Real Property Taxes. Tenant shall pay any and all of the Real Property Taxes for the Premises to the relevant taxing authority on or before the date due. Tenant shall provide Landlord with written evidence of such payment of taxes concomitantly with the payment thereof. 5.2. Definition of Real Property Taxes. "Real Property Taxes" shall be the sum of the following: all real property taxes, possessory interest taxes, business or license taxes or fees, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, housing fund assessments, open space charges, childcare fees, school fees or any other assessments, levies, fees or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen (including fees "in-lieu" of any such tax or assessment) which are assessed, levied, charged, confirmed or imposed by any public authority upon the Project (or any real property comprising any portion thereof) or its operations, together with all taxes, assessments or other fees imposed by any public authority upon or measured by any Rent or other charges payable hereunder, including any gross income tax or excise tax levied by the local governmental authority, the federal government or any other governmental body with respect to receipt of such rental, or upon, with respect to or by reason of the development, possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, or upon this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises, together with any tax imposed in substitution, partially or totally, of any tax previously included within the aforesaid definition or any additional tax the nature of which was previously included within the aforesaid definition, together with the costs and expenses (including attorneys fees) of challenging any of the foregoing or seeking the reduction in or abatement, redemption or return of any of the foregoing, 2 <PAGE> 7 but only to the extent of any such reduction, abatement, redemption or return. Nothing contained in this Lease shall require Tenant to pay any franchise, corporate, estate or inheritance tax of Landlord, or any income, profits or revenue tax or charge upon the net income of Landlord. 5.3. Personal Property Taxes. Prior to delinquency, Tenant shall pay all taxes and assessments levied upon trade fixtures, alterations, additions, improvements, inventories and other personal property located and/or installed on the Property by Tenant; and Tenant shall provide Landlord copies of receipts for payment of all such taxes and assessments. To the extent any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord. 6. INSURANCE. 6.1. Landlord. Landlord shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 6.1.1. Building. Insurance insuring the Building and the Landlord's interest in any betterments and improvements against fire and extended coverage (including "all risk" coverage, earthquake/volcanic action, flood and/or surface water insurance) for the full replacement cost of the Building, with deductibles and the form and endorsements of such coverage as is required by any synthetic lender of Landlord with an interest in the Building at the time, together with rental value insurance against loss of Rent in an amount equal to the amount of Rent for a period of at least twelve (12) months commencing on the date of loss. Tenant shall reimburse Landlord for the cost of such insurance for such period of time that is consistent with the Term of this Lease within ten (10) business days of receipt of request therefor, provided such request is accompanied by related invoices therefor. 6.2. Tenant. Tenant shall, at Tenant's expense, obtain and keep in force at all times the following insurance: 6.2.1. Commercial General Liability Insurance (Occurrence Form). A policy of commercial general liability insurance (occurrence form) having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence providing coverage for, among other things, blanket contractual liability, premises, products/completed operations and personal and advertising injury coverage, with deletion of the exclusion for explosion, collapse or underground hazard, if applicable, and, if necessary, Tenant shall provide for restoration of the aggregate limit; 6.2.2. Automobile Liability Insurance. Comprehensive automobile liability insurance having a combined single limit of not less than Two Million Dollars ($2,000,000) per occurrence and insuring Tenant against liability for claims arising out of ownership, maintenance, or use of any owned, hired or non-owned automobiles; 6.2.3. Workers' Compensation and Employer's Liability Insurance. Workers' compensation insurance having limits not less than those required by state statute and federal statute, if applicable, and covering all persons employed by Tenant in the conduct of its operations on the Premises (including the all states endorsement and, if applicable, the volunteers 3 <PAGE> 8 endorsement), together with employer's liability insurance coverage in the amount of at least One Million Dollars ($1,000,000); and 6.2.4. Property Insurance. "All risk" property insurance including boiler and machinery comprehensive form, if applicable, covering damage to or loss of any personal property, fixtures and equipment, including electronic data processing equipment, of Tenant (and coverage for the full replacement cost thereof including business interruption of Tenant) ("Tenant's Property"). 6.3. General. 6.3.1. Insurance Companies. Insurance required to be maintained by Tenant shall be written by companies licensed to do business in the state in which the Premises are located and having a "General Policyholders Rating" of at least A (or such higher rating as may be required by a lender having a lien on the Premises) as set forth in the most current issue of "Best's Insurance Guide." 6.3.2. Certificates of Insurance. Tenant shall deliver to Landlord certificates of insurance for all insurance required to be maintained by Tenant prior to the date of possession of the Premises. Tenant shall, at least ten (10) days prior to expiration of the policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to modification except after sixty (60) days prior written notice to the parties named as additional insureds in this Lease (except in the case of cancellation for nonpayment of premium in which case cancellation shall not take effect until at least (10) days' notice has been given to Landlord). If Tenant fails to maintain any insurance required in this Lease, Tenant shall be liable for all losses and cost resulting from said failure. 6.3.3. Additional Insureds. Landlord and any property management company of Landlord for the Premises shall be included as additional insureds, to the extent that the Tenant has an obligation under Section 6.4, under all of the policies required by Section 6.2.1. The policies required under Section 6.2.1 shall provide for severability of interest. 6.3.4. Primary Coverage. All insurance to be maintained by Tenant shall, except for workers' compensation and employer's liability insurance, be primary, without right of contribution from insurance of Landlord. The limits of insurance maintained by Tenant shall not limit Tenant's liability under this Lease. 6.3.5. Waiver of Subrogation. Landlord and Tenant each waives any right to recover against the other for claims for damages to its property covered by insurance. This provision is intended to waive fully, and for the benefit of Landlord and Tenant, any rights and/or claims which might give rise to a right of subrogation in favor of any insurance carrier. 6.4. Indemnity. Tenant shall indemnify, defend by counsel satisfactory to Landlord, and hold harmless Landlord from and against any and all claims arising from (i) Tenant's use of the Premises, the conduct of Tenant's business or any activity, work or things done, permitted or suffered by Tenant in or about the Premises, the Building or elsewhere and (ii) any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of 4 <PAGE> 9 this Lease, arising from any negligence of Tenant or any of Tenant's agents, contractors or employees, including all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises or the Building arising from any cause; and Tenant hereby waives all claims in respect thereof against Landlord except to the extent such claims are caused by Landlord's gross negligence or willful misconduct. 6.5. Exemption of Landlord from Liability. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Premises or the Building, nor shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents or contractors, whether such damage or injury is caused by fire, steam, electricity, gas, water or rain, or from the breakage, leakage or other defects of sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises, the Building or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Building. 7. REPAIRS AND MAINTENANCE. 7.1. Tenant. Tenant shall keep and maintain any and all portions of the Premises and the Building, including structural portions thereof, floors and floor coverings, interior plumbing, HVAC and other building system equipment, electrical wiring, fixtures and equipment in good repair and in a clean and safe condition, and repair and/or replace any and all of the foregoing in a good and workmanlike manner. Without limiting the foregoing, Tenant shall, at Tenant's sole expense, (a) immediately replace all broken glass in the Premises with glass equal to or in excess of the specification and quality of the original glass; and (b) repair any area damaged by Tenant, Tenant's agents, employees, invitees and visitors, including any damage caused by any roof penetration, whether or not such roof penetration was approved by Landlord. 7.2. Landlord. Landlord shall have no obligation whatsoever to maintain any portion of the Building or Premises. Tenant waives any right to repair at the expense of Landlord under any applicable governmental laws, ordinances, statutes, orders or regulations now or hereafter in effect respecting the Premises. 8. ALTERATIONS. 8.1. Trade Fixtures; Alterations. Tenant may install necessary trade fixtures, equipment and furniture in the Building, provided that such items are installed and are removable without structural damage to the Building. Tenant shall not make, or allow to be made, any alterations or physical additions in, about or to the Premises that affect the structural aspects of the Building, the Building roof or Building foundation without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall reimburse Landlord for all costs which Landlord may incur in connection with granting approval to Tenant for any such alterations and additions, including any costs or expenses which Landlord may 5 <PAGE> 10 incur in electing to have outside architects and engineers review said matters. If a Notice of Completion is required for such work, Tenant shall file it and provide Landlord with a copy. Tenant shall provide Landlord with a set of "as-built" drawings for any such work. 8.2. Damage; Removal. Tenant assumes the risk of damage to any of Tenant's fixtures, equipment, furniture or alterations. Tenant shall repair all damage to the Premises and/or Building caused by the installation or removal of such items. Upon the termination of this Lease, Tenant shall remove any or all alterations, additions, improvements and partitions made or installed by Tenant and restore the Premises to their condition existing prior to the construction of any such items; provided, however, Landlord may permit, upon written notice to Tenant (to the extent requested to do so by Tenant at the time notice thereof is given), any such items designated by Landlord to remain on the Premises, in which event they shall be and become the property of Landlord upon the termination of this Lease. All such removals and restoration shall be accomplished in a good and workmanlike manner and so as not to cause any damage to the Premises, the Building or the Project whatsoever. 8.3. Liens. Tenant shall promptly pay and discharge all claims for labor performed, supplies furnished and services rendered at the request of Tenant and shall keep the Premises free of all mechanics' and materialmen's liens in connection therewith. Tenant shall provide at least ten (10) days prior written notice to Landlord before any labor is performed, supplies furnished or services rendered on or at the Premises and Landlord shall have the right to post on the Premises notices of non-responsibility. If any lien is filed, Landlord may take such action as may be necessary to remove such lien and Tenant shall pay Landlord such amounts expended by Landlord together with interest thereon at the Applicable Interest Rate from the date of expenditure. 9. USE. The Premises shall be used only for the Permitted Uses and for no other uses and otherwise consistent with any applicable governmental laws, ordinances, statutes, orders and regulations and any declaration of covenants, conditions and restrictions or any supplement thereto which has been recorded in any official or public records with respect to the Project or any portion thereof. Tenant shall comply with all applicable governmental laws, ordinances, and statutes applicable to the Premises or Building. Tenant shall not commit waste, overload the floors or structure of the Building, subject the Premises or the Project to any use which would damage the same or raise or violate any insurance coverage, permit any unreasonable odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises, take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants, take any action which would abrogate any warranties, or use or allow the Premises to be used for any unlawful purpose. Tenant shall not use any parking spaces for the Project other than the parking spaces located on the Premises. Landlord shall not be responsible for non-compliance by any other tenant or occupant with any of the rules or regulations or any other terms or provisions of such tenant's or occupant's lease. Tenant shall promptly comply with the reasonable requirements of any board of fire insurance underwriters or other similar body now or hereafter constituted. 6 <PAGE> 11 10. ENVIRONMENTAL MATTERS. 10.1. Hazardous Materials. Tenant shall not cause, or allow any of Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees or subtenants (collectively, "Tenant's Parties") to cause or permit, any Hazardous Materials to be brought upon, stored, manufactured, generated, blended, handled, recycled, treated, disposed or used on, under or about the Premises, the Building or the Project, except for routine office and janitorial supplies and the Hazardous Materials listed on Schedule 1 hereto in usual and customary quantities stored, used and disposed of in accordance with all applicable Environmental Laws. As used herein, "Hazardous Materials" means any chemical, substance, material, controlled substance, waste or combination thereof which is hazardous to human health or safety or to the environment due to its radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity, carcinogenicity, mutagenicity or other harmful or potentially harmful properties or effects, including, without limitation, petroleum and petroleum products, asbestos, radon, polychlorinated biphenyls (PCBs) and all of those chemicals, substances, materials, controlled substances, wastes or combinations thereof which are listed, defined or regulated in any manner by any Environmental Law based upon, directly or indirectly, such properties or effects. As used herein, "Environmental Laws" means any and all federal, state or local environmental, health and/or safety-related laws, regulations, standards, ordinances, rules, codes, orders, decrees, directives, guidelines, permits or permit conditions, currently existing which are applicable to Tenant or the Premises. Tenant and Tenant's Parties shall comply with all Environmental Laws and promptly notify Landlord of the presence of any Hazardous Materials, other than as permitted above, on the Premises or any violation of any Environmental Law. Landlord shall have the right to inspect the Premises and to conduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions. If such tests indicate the presence of any environmental condition, Tenant shall reimburse Landlord for the cost of conducting such tests. The phrase "environmental condition" shall mean any condition relating to any Hazardous Materials, including surface water, groundwater, drinking water supply, land, surface or subsurface strata or the ambient air and includes air, land and water pollutants, being present at the Property in violation of Environmental Laws or in a manner which, in the reasonable opinion of the Landlord's environmental consultant, is substantially likely to cause health problems for occupants of the Premises or a future violation of Environmental Law. In the event of any such environmental condition, Tenant shall promptly take any and all steps necessary to rectify the same or shall, at Tenant's election, reimburse Landlord, upon demand, for the cost to Landlord of performing rectifying work. Upon the expiration or earlier termination of this Lease, Tenant shall remove any and all Hazardous Materials on, under or about the Premises. 10.2. Indemnification. Tenant shall indemnify, protect, defend (by counsel acceptable to Landlord) and hold harmless Landlord and its partners, directors, officers, employees, shareholders, lenders, agents, contractors and each of their respective successors and assigns (individually and collectively, "Indemnities") from and against any and all claims, judgments, causes of action, damages, penalties, fines, taxes, costs, liabilities, losses and expenses arising at any time during or after the Term as a result (directly or indirectly) of or in connection with (a) Tenant and/or Tenant's Parties' breach of any prohibition or provision of the preceding section, or (b) the presence of Hazardous Materials on, under or about the Premises or other properties as a result (directly or indirectly) of Tenant's and/or Tenant's Parties' activities, or failure to act 7 <PAGE> 12 when legally required to do so in connection with the Premises. This indemnity shall include the cost of any required or necessary repair, cleanup or detoxification, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the termination of this Lease. The written consent by Landlord to the presence of Hazardous Materials on, under or about the Premises shall not excuse Tenant from Tenant's obligation of indemnification pursuant hereto. Tenant's obligations pursuant to the foregoing indemnity shall survive the termination of this Lease. 11. DAMAGE AND DESTRUCTION. 11.1. Casualty. If the Building should be damaged or destroyed by fire or other casualty, Tenant shall give immediate written notice to Landlord. Within thirty (30) days after receipt thereof, Landlord shall notify Tenant whether such repairs can reasonably be made: (1) within thirty (30) days; (2) in more than thirty (30) days but in less than ninety (90) days; or (3) in more than ninety (90) days from the date of such notice. 11.1.1. Less Than 30 Days. If the Building should be damaged only to such extent that rebuilding or repairs can be reasonably completed within thirty (30) days, this Lease shall not terminate and, provided that insurance proceeds are available to fully repair the damage, Landlord shall repair the Building, except that Landlord shall not be required to rebuild, repair or replace any alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of Tenant. The Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and the Building are unfit for occupancy. 11.1.2. Greater Than 30 Days. If the Building should be damaged only to such extent that rebuilding or repairs can be reasonably completed in more than thirty (30) days but in less than ninety (90) days, then Landlord shall have the option of: (1) terminating the Lease effective upon the occurrence of such damage, in which event the Rent shall be abated from the date Tenant vacates the Building; or (2) electing to repair the Building, provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace any part of the alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of Tenant). The Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and the Building is unfit for occupancy. 11.1.3. Greater Than 90 Days. If the Building should be so damaged that rebuilding or repairs cannot be completed within ninety (90) days, either Landlord or Tenant may terminate by giving written notice within ten (10) days after notice from Landlord regarding the time period of repair; and this Lease and the Rent shall be abated from the date Tenant vacates the Building. In the event that neither party elects to terminate this Lease, Landlord shall promptly commence and diligently prosecute to completion the repairs to the Building , provided insurance proceeds are available to fully repair the damage (except that Landlord shall not be required to rebuild, repair or replace any alterations, partitions, fixtures, additions and other improvements which may have been placed in, on or about the Building by or for the benefit of 8 <PAGE> 13 Tenant). During the time when Landlord is prosecuting such repairs to completion, the Rent payable hereunder shall be abated proportionately from the date Tenant vacates the Building only to the extent rental abatement insurance proceeds are received by Landlord and only during the period that the Building is are unfit for occupancy. 11.2. Tenant's Fault. If any portion of the Building is damaged resulting from the fault, negligence or breach of this Lease by Tenant or any of Tenant's Parties, Rent shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost of the repair caused thereby to the extent such cost is not covered by insurance proceeds. 11.3. Uninsured Casualty. In the event that any portion of the Building is damaged and is not fully covered by insurance proceeds received by Landlord or in the event that the holder of any indebtedness secured by the Premises requires that the insurance proceeds be applied to such indebtedness, then Tenant shall have the right to terminate this Lease by delivering written notice of termination to Landlord within thirty (30) days after the date of notice to Tenant of any such event. In the event that Tenant does not elect to terminate this Lease, Landlord shall have the right to terminate this Lease by delivering written notice to Tenant within thirty (30) days after such election by Tenant or Tenant's failure to elect, as applicable, whereupon all rights and obligations shall cease and terminate hereunder. 11.4. Waiver. With respect to any damage or destruction which Landlord is obligated to repair or may elect to repair, Tenant waives all rights to terminate this Lease pursuant to rights otherwise presently or hereafter accorded by law. 12. EMINENT DOMAIN. 12.1. Total Condemnation. If all of the Premises is condemned by eminent domain, inversely condemned or sold in lieu of condemnation for any public or quasi-public use or purpose ("Condemned"), this Lease shall terminate as of the date of title vesting in such proceeding and Rent shall be adjusted to the date of termination. 12.2. Partial Condemnation. If any portion of the Premises is Condemned and such partial condemnation renders the Premises unusable for Tenant's business, or if a substantial portion of the Building is Condemned, this Lease shall terminate as of the date of title vesting or order of immediate possession in such proceeding and Rent shall be adjusted to the date of termination. If such partial condemnation does not render the Premises unusable for the business of Tenant or less than a substantial portion of the Building is Condemned, Landlord shall promptly restore the Premises to the extent of any condemnation proceeds recovered by Landlord, excluding the portion thereof lost in such condemnation, and this Lease shall continue in full force and effect except that after the date of such title vesting Rent shall be adjusted, as reasonably determined by Landlord. 12.3. Award. If the Premises are wholly or partially Condemned, Landlord shall be entitled to the entire award paid for such condemnation, and Tenant waives any claim to any part of the award from Landlord or the condemning authority; provided that Tenant shall have the right to recover from the condemning authority such compensation as may be separately awarded 9 <PAGE> 14 to Tenant in connection with costs in removing Tenant's merchandise, furniture, fixtures, leasehold improvements and equipment to a new location. 12.4. Temporary Condemnation. In the event of a temporary condemnation, this Lease shall remain in effect, Tenant shall continue to pay Rent and Tenant shall receive any award made for such condemnation. If a temporary condemnation remains in effect at the expiration or earlier termination of this Lease, Tenant shall pay Landlord the reasonable cost of performing any obligations required of Tenant with respect to the surrender of the Premises. If a temporary condemnation is for a period which extends beyond the Term, this Lease shall terminate as of the date of occupancy by the condemning authority and any such award shall be distributed in accordance with the preceding section. 13. DEFAULT. 13.1. Events of Defaults. The occurrence of any of the following events shall, at Landlord's option, constitute an "Event of Default": 13.1.1. Vacation or abandonment of the Premises for a period of thirty (30) consecutive days, and Tenant waives any right to notice Tenant may have under applicable law; 13.1.2. Failure to pay Rent on the date when due, the failure continuing for a period of five (5) days after payment is due; 13.1.3. Failure to perform Tenant's covenants hereunder (except default in the payment of Rent); provided, if such default is susceptible of cure and Tenant has promptly commenced the cure of such default and is diligently prosecuting such cure to completion, then the same must remain uncured for thirty (30) days after written notice thereof from Landlord; 13.1.4. The making of a general assignment by Tenant for the benefit of creditors, the filing of a voluntary petition by Tenant or the filing of an involuntary petition by any of Tenant's creditors seeking the rehabilitation, liquidation or reorganization of Tenant under any law relating to bankruptcy, insolvency or other relief of debtors and, in the case of an involuntary action, the failure to remove or discharge the same within sixty (60) days of such filing, the appointment of a receiver or other custodian to take possession of substantially all of Tenant's assets or this leasehold, Tenant's insolvency or inability to pay Tenant's debts or failure generally to pay Tenant's debts when due, any court entering a decree or order directing the winding up or liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking any action toward the dissolution or winding up of Tenant's affairs, the cessation or suspension of Tenant's use of the Premises, or the attachment, execution or other judicial seizure of substantially all of Tenant's assets or this leasehold; 13.1.5. The making of any material misrepresentation or omission by Tenant in any materials delivered by or on behalf of Tenant to Landlord pursuant to this Lease; or 13.1.6. A default by Tenant beyond any applicable notice and cure period pursuant to the terms of any lease entered into between Landlord and Tenant for space in the Project. 10 <PAGE> 15 13.2. Remedies. 13.2.1. Termination. In the event of the occurrence of any Event of Default, Landlord shall have the right to give a written termination notice to Tenant and, on the date specified in such notice, this Lease shall terminate unless on or before such date all arrears of Rent and all other sums payable by Tenant under this Lease and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other Events of Default at the time existing shall have been fully remedied to the satisfaction of Landlord. 13.2.1.1. Repossession. Following termination, without prejudice to other remedies Landlord may have, Landlord may (i) peaceably re-enter the Premises upon voluntary surrender by Tenant or remove Tenant therefrom and any other persons occupying the Premises, using such legal proceedings as may be available; (ii) repossess the Premises or relet the Premises or any part thereof for such term (which may be for a term extending beyond the Term), at such rental and upon such other terms and conditions as Landlord in Landlord's sole discretion shall determine, with the right to make reasonable alterations and repairs to the Premises; and (iii) remove all personal property therefrom. 13.2.1.2. Unpaid Rent. Landlord shall have all the rights and remedies of a landlord provided by applicable law, including the right to recover from Tenant: (a) the worth, at the time of award, of the unpaid Rent that had been earned at the time of termination, (b) the worth, at the time of award, of the amount by which the unpaid Rent that would have been earned after the date of termination until the time of award exceeds the amount of loss of rent 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 Term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided, and (d) any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. The phrase "worth, at the time of award," as used in (a) and (b) above, shall be computed at the greater of 10% per annum or 5% per annum plus the federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the month preceding the date of this Lease, and as used in (c) above, 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 1%. 13.2.2. Continuation. Even though an Event of Default may have occurred, 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 Rent as it becomes due, and Landlord, without terminating this Lease, may, during the period Tenant is in default, enter the Premises and relet the same, or any portion thereof, to third parties for Tenant's account and Tenant shall be liable to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises and like costs. Reletting may be for a period shorter or longer than the remaining Term. Tenant shall continue to pay the Rent on the date the same is due. No act by Landlord hereunder, including acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interest under this Lease, shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. In the event that Landlord elects to relet the 11 <PAGE> 16 Premises, the rent that Landlord receives from reletting shall be applied to the payment of, first, any indebtedness from Tenant to Landlord other than Base Rent and Additional Rent; second, all costs, including maintenance, incurred by Landlord in reletting; and, third, Base Rent and Tenant's Share of Increases under this Lease. After deducting the payments referred to above, any sum remaining from the rental Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. In no event shall Tenant be entitled to any excess rent received by Landlord. If, on the date Rent is due under this Lease, the rent received from the reletting is less than the Rent due on that date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all costs, including maintenance, Landlord incurred in reletting that remain after applying the rent received from reletting as provided hereinabove. So long as this Lease is not terminated, Landlord shall have the right to remedy any default of Tenant, to maintain or improve the Premises, to cause a receiver to be appointed to administer the Premises and new or existing subleases and to add to the Rent payable hereunder all of Landlord's reasonable costs in so doing, with interest at the Applicable Interest Rate from the date of such expenditure. 13.3. Cumulative. Each right and remedy of Landlord provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and shall not preclude Landlord from exercising any other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity, by statute or otherwise. No payment by Tenant of a lesser amount than the Rent nor any endorsement on any check or letter accompanying any check or payment as Rent shall be deemed an accord and satisfaction of full payment of Rent; and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies. 14. ASSIGNMENT AND SUBLETTING. Tenant shall not assign or sublet, whether voluntarily or involuntarily or by operation of law, the Premises or any part thereof without Landlord's prior written approval, which shall not be unreasonably withheld. The merger of Tenant with any other entity or the transfer of any controlling or managing ownership or beneficial interest in Tenant shall constitute an assignment hereunder. If Tenant desires to assign this Lease or sublet any or all of the Building, Tenant shall give Landlord written notice forty-five (45) days prior to the anticipated effective date of the assignment or sublease. Landlord shall then have a period of thirty (30) days following receipt of such notice and all related documents and agreements associated with the assignment or sublease, including without limitation, the financial statements of any proposed assignee or subtenant, to notify Tenant in writing that Landlord elects: (1) to permit Tenant to assign this Lease or sublet such space, subject however to Landlord's prior written approval of the proposed assignee or subtenant and of any related documents or agreements associated with the assignment or sublease received by Landlord hereunder or reasonably requested by Landlord; (2) to disapprove such proposed assignment or subletting or (3) to terminate this Lease as of the date specified in Landlord's notice thereof. If Landlord should fail to notify Tenant in writing of such election, Landlord shall be deemed to have elected option (2). This Lease may not be assigned by operation of law. Any purported assignment or subletting contrary to the provisions hereof shall be void. If Tenant receives rent or other consideration for any such transfer in excess of the Rent, or in case of the sublease of a portion of the Premises, in excess of such Rent that is fairly allocable to such portion, after appropriate adjustments to assure that all other payments required hereunder are appropriately taken into account, Tenant shall pay Landlord one hundred percent (100%) of the 12 <PAGE> 17 difference between each such payment of rent or other consideration and the Rent required hereunder. Landlord may, without waiving any rights or remedies, collect rent from the assignee, subtenant or occupant and apply the net amount collected to the Rent herein reserved and apportion any excess rent so collected in accordance with the terms of the preceding sentence. Tenant shall continue to be liable as a principal and not as a guarantor or surety to the same extent as though no assignment or subletting had been made. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to the Lease by assignees of Tenant without notifying Tenant or any successor of Tenant and without obtaining their consent. No permitted transfer shall be effective until there has been delivered to Landlord a counterpart of the transfer instrument in which the transferee agrees to be and remain jointly and severally liable with Tenant for the payment of Rent pertaining to the space and for the performance of all the terms and provisions of this Lease relating thereto arising on or after the date of the transfer. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Premises, the Building or the Project. 15. ESTOPPEL, ATTORNMENT AND SUBORDINATION. 15.1. Estoppel. Within ten (10) days after request by Landlord, Tenant shall deliver an estoppel certificate duly executed (and acknowledged if required by any lender), in the form attached hereto as Exhibit B, to any proposed mortgagee, purchaser or Landlord. Tenant's failure to deliver said statement in such time period shall be conclusive upon Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's performance and Tenant has no right of offset, counterclaim or deduction against Rent hereunder; and (c) no more than one period's Base Rent has been paid in advance. Landlord reserves the right to substitute a different form of estoppel certificate upon the request of any proposed mortgagee or purchaser. If any financier should require that this Lease be amended (other than in the description of the Premises, the Term, the Permitted Use, the Rent or as will substantially, materially and adversely affect the rights of Tenant), Landlord shall give written notice thereof to Tenant, which notice shall be accompanied by a Lease supplement embodying such amendments. Tenant shall, within ten (10) days after the receipt of Landlord's notice, execute the tendered Lease supplement. 15.2. Attornment. In the event of a foreclosure proceeding, the exercise of the power of sale under any mortgage or deed of trust or the termination of a ground lease, Tenant shall, if requested, attorn to the purchaser thereupon and recognize such purchaser as Landlord under this Lease; provided, however, Tenant's obligation to attorn to such purchaser shall be conditioned upon Tenant's receipt of a non-disturbance agreement. 15.3. Subordination. This Lease shall be subject and subordinate to all ground leases and the lien of all mortgages and deeds of trust which now or hereafter affect the Premises or the Project or Landlord's interest therein, or on or against all such ground leases, and all amendments thereto, all without the necessity of Tenant's executing further instruments to effect such subordination. If requested, Tenant shall execute whatever documentation may be required to further effect the provisions of this paragraph. 13 <PAGE> 18 16. MISCELLANEOUS. 16.1. General. 16.1.1. Entire Agreement. This Lease sets forth all the agreements between Landlord and Tenant concerning the Premises; and there are no agreements either oral or written other than as set forth herein. 16.1.2. Time of Essence. Time is of the essence of this Lease. 16.1.3. Attorneys' Fees. In any action which either party brings to enforce its rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys' fees, to be fixed by the court, and said costs and attorneys' fees shall be a part of the judgment in said action. 16.1.4. Severable. If any provision of this Lease or the application of any such provision shall be held by a court of competent jurisdiction to be invalid, void or unenforceable to any extent, the remaining provisions of this Lease and the application thereof shall remain in full force and effect and shall not be affected, impaired or invalidated. 16.1.5. Law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. 16.1.6. No Option. Submission of this Lease to Tenant for examination or negotiation does not constitute an option to lease, offer to lease or a reservation of, or option for, the Premises; and this document shall become effective and binding only upon the execution and delivery hereof by Landlord and Tenant. 16.1.7. Successors and Assigns. This Lease shall be binding upon and inure to the benefit of the successors and assigns of Landlord and, to the extent assignment is approved by Landlord, Tenant. 16.1.8. Third Party Beneficiaries. Nothing herein is intended to create any third party benefit. 16.1.9. Memorandum of Lease. Tenant shall not record this Lease or a short form memorandum hereof without Landlord's prior written consent. 16.1.10. Agency, Partnership or Joint Venture. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease or any acts of the parties hereto shall be deemed to create any relationship other than the relationship of landlord and tenant. 16.1.11. Merger. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation thereof or a termination by Landlord shall not work a merger and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 14 <PAGE> 19 16.2. Signs. All signs and graphics of every kind visible in or from public view or corridors, or the exterior of the Building or Premises shall be subject to Landlord's prior written approval and shall be subject to any applicable governmental laws, ordinances, and regulations and in compliance with Landlord's signage program. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises; and Tenant shall repair any injury or defacement, including without limitation, discoloration caused by such installation or removal. 16.3. Waiver. No waiver of any default or breach hereunder shall be implied from any omission to take action on account thereof, notwithstanding any custom and practice or course of dealing, and no waiver shall affect any default other than the default specified in the waiver and then said waiver shall be operative only for the time and to the extent therein stated. Waivers of any covenant shall not be construed as a waiver of any subsequent breach of the same. No waiver by either party of any provision under this Lease shall be effective unless in writing and signed by such party. 16.4. Financial Statements. Tenant shall provide to any lender, purchaser or Landlord, within ten (10) days after request, a current, accurate, certified financial statement for Tenant and Tenant's business prepared under generally accepted accounting principles consistently applied and such other certified financial information or tax returns as may be reasonably required by Landlord, purchaser or any lender of either. 16.5. Limitation of Liability. The obligations of Landlord under this Lease are not personal obligations of the individual partners, directors, officers, shareholders, agents or employees of Landlord; and Tenant shall look solely to the Building for satisfaction of any liability and shall not look to other assets of Landlord nor seek recourse against the assets of the individual partners, directors, officers, shareholders, agents or employees of Landlord. Whenever Landlord transfers its interest, Landlord shall be automatically released from further performance under this Lease and from all further liabilities and expenses hereunder and the transferee of Landlord's interest shall assume all liabilities and obligations of Landlord hereunder from the date of such transfer. 16.6. Notices. All notices to be given hereunder shall be in writing and mailed postage prepaid by certified or registered mail, return receipt requested, or delivered by personal or courier delivery, or sent by facsimile (immediately followed by one of the preceding methods), to Landlord's Address and Tenant's Address, or to such other place as Landlord or Tenant may designate in a written notice given to the other party. Notices shall be deemed served upon the earlier of receipt or three (3) days after the date of mailing. 16.7. Brokerage Commission. Tenant warrants to Landlord that Tenant's sole contact with Landlord or with the Premises in connection with this transaction has been directly with Landlord, and that no broker or finder can properly claim a right to a commission or a finder's fee based upon contacts between the claimant and Tenant. Tenant and Landlord, respectively, shall each indemnify, defend by counsel acceptable to the other, protect and hold each other harmless from and against any loss, cost or expense, including, but not limited to, attorneys' fees and costs, resulting from any claim for a fee or commission by any broker or finder in connection with the Premises and this Lease. 15 <PAGE> 20 16.8. Authorization. Tenant shall furnish to Landlord, within ten (10) days after written request, evidence satisfactory to Landlord that the person who executed this Lease on behalf of Tenant was duly authorized to do so. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant and that such execution is binding upon Tenant. 16.9. Holding Over; Surrender. 16.9.1. If Tenant holds over the Premises or any part thereof after expiration or the earlier termination of the Term, such holding over shall constitute a month-to-month tenancy, at a rent equal to the Base Rent in effect immediately prior to such holding over plus one hundred percent (100%) thereof. This paragraph shall not be construed as Landlord's permission for Tenant to hold over. Acceptance of Rent by Landlord following expiration or termination shall not constitute a renewal of this Lease. Without limiting the foregoing, if Tenant holds over the Premises or any part thereof after expiration or the earlier termination of the Term, Tenant shall indemnify, defend, protect and hold Landlord harmless from any and all claims (including claims of succeeding tenants), causes of action, expenses (including reasonable attorneys' fees), liabilities and lawsuits resulting from such a holdover. 16.9.2. Upon the termination of this Lease or Tenant's right to possession of the Premises, Tenant will surrender the Premises, together with all keys, in good condition and repair, reasonable wear and tear excepted. Conditions existing because of Tenant's failure to perform maintenance, repairs or replacements shall not be deemed "reasonable wear and tear." 16.10. Joint and Several. If Tenant consists of more than one person, the obligation of all such persons shall be joint and several. 16.11. Covenants and Conditions. Each provision to be performed by Tenant hereunder shall be deemed to be both a covenant and a condition. 16.12. Addenda. The Addenda attached hereto, if any, and identified with this Lease and initialed by the parties hereto are incorporated herein by this reference as if fully set forth herein. 16 <PAGE> 21 IN WITNESS WHEREOF, the parties have executed this Lease as of the date set forth above. "Landlord" NETWORK APPLIANCE, INC. a California corporation By: __________________________________ Its: __________________________________ "Tenant" TRW INC., an Ohio corporation By: __________________________________ Its: __________________________________ 17 <PAGE> 22 EXHIBIT A PREMISES 1 <PAGE> 23 EXHIBIT B ESTOPPEL CERTIFICATE ______________________ ______________________ ______________________ ______________________ Re: Lease dated _______________, 19___ ("Lease") by and between ________________________________ ("Landlord") and ______________________________ ("Tenant"). Gentlemen: Reference is made to the above-described Lease in which the undersigned is the Tenant. We understand that you are entering into a transaction with the Landlord which relates to, among other things, this Lease; and we hereby, as a material inducement for you to enter into such transaction with Landlord, represent that: 1. A true and correct copy of the Lease is attached hereto as Exhibit 1. 2. There are no modifications, amendments, supplements, arrangements, side letters or understandings, oral or written, of any sort, modifying, amending, altering, supplementing or changing the terms of the Lease except as follows: . 3. The Lease is in full force and effect, and the Lease has been duly executed and delivered by, and is a binding obligation of, the Tenant as set forth therein. 4. The undersigned acknowledges (a) that rent on the Lease has been paid up to and including _______________, 19___, (b) that monthly rent during the __________ (____) years of the term of the Lease is ____________________ Dollars ($____________) per month and (c) that rent has not been paid for any period after _______________, 19___, and shall not be paid for a period in excess of one (1) month in advance. 5. The improvements on the Premises are free from defects in design, materials and workmanship; and the improvements meet all governmental requirements, including, but not limited to, zoning and environmental requirements. 1 <PAGE> 24 6. The Lease is not in default, and Landlord has performed the obligations required to be performed by Landlord under the terms thereof through the date hereof. Dated: _______________, 19___ Very truly yours, "Tenant" ____________________________________, a _______________________________________ By: ___________________________________ Its: ___________________________________ 2 <PAGE> 25 SCHEDULE 1 HAZARDOUS MATERIALS 1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.47 <SEQUENCE>6 <DESCRIPTION>EXHIBIT 10.47 <TEXT> <PAGE> 1 EXHIBIT 10.47 ASSIGNMENT OF AGREEMENT OF SALE This ASSIGNMENT OF AGREEMENT OF SALE ("Assignment") is entered into this ___ day of December, 1999 (the "Effective Date"), by and between NETWORK APPLIANCE, INC., a California corporation ("Assignor") and BNP LEASING CORPORATION, a Delaware corporation ("Assignee"). RECITALS A. TRW Inc., an Ohio corporation, and ESL Incorporated, a California corporation (collectively, the "Seller"), as seller, and Assignor, as purchaser, are now parties to that certain Agreement of Sale dated November 16, 1999 (the "Agreement") for the purchase and sale of certain improved real property commonly known as 1345 and 1347 Crossman Avenue and 1330 and 1350 Geneva Avenue in Sunnyvale, California. The Agreement is attached hereto as Exhibit A. B. Pursuant to the terms of the Agreement, Assignor may assign Assignor's rights and obligations under the Agreement to a financing entity in connection with a synthetic lease transaction without the need for Seller's prior written consent. C. Assignor now desires to assign the Agreement to Assignee, and Assignee desires to accept the assignment of the Agreement and to assume Assignor's obligations under the Agreement for the purposes of a synthetic lease transaction. NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises of the parties, the parties hereto agree as follows: 1. ASSIGNMENT. As of the Effective Date, Assignor assigns and transfers to Assignee all of Assignor's rights, title and interest in and to the Agreement, and Assignee hereby accepts the assignment in accordance with the terms of this Assignment. 2. NO RELEASE. Notwithstanding anything to the contrary herein, Assignor shall remain liable for the terms and obligations relating to the "Purchaser" under the Agreement. 3. CHOICE OF LAW. This Assignment shall be construed and enforced in accordance with the laws of the State of California. 4. SUCCESSORS. This Assignment shall be binding on, and inure to the benefit of, the parties hereto, their successors in interest, and assigns. <PAGE> 2 5. COUNTERPARTS. This Assignment may be executed in one or more counterparts, each of which, when taken together, shall constitute one entire agreement. IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment as of the day and year first hereinabove written. "Assignor" NETWORK APPLIANCE, INC., a California corporation By: _________________________________ Name: _________________________________ Title: _________________________________ "Assignee" BNP LEASING CORPORATION, a Delaware corporation By: __________________________________ Name: Lloyd G. Cox Title: Vice President </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.48 <SEQUENCE>7 <DESCRIPTION>EXHIBIT 10.48 <TEXT> <PAGE> 1 EXHIBIT 10.48 THIS AGREEMENT OF SALE (this "Agreement") is made as of this _____ day of November 1999, by and between TRW Inc., an Ohio corporation and ESL Incorporated, a California corporation ("Sellers") and Network Appliance Inc., a California corporation ("Purchaser") and/or its assignee. RECITALS: A. Sellers are the owners of certain parcels of land situated in Santa Clara County, California consisting of 27.848 acres of land described as Santa Clara County, California APN #110-42.2.6.7.8 having civic addresses of 1345 and 1347 Crossman and 1330 and 1350 Geneva, Sunnyvale, California, ("the Property"), as more particularly shown and labeled on Exhibit "A". The Sellers' property is divided as follows: ESL Inc. offers approximately 8.11 acres, TRW Inc. offers approximately 19.738 acres. B. Sellers have agreed to sell to Purchaser and Purchaser has agreed to purchase from Sellers the Property, subject to and on the terms and conditions hereafter set forth. The Purchaser at some time in the future intends to demolish the buildings on the land. NOW, THEREFORE, for and in consideration of the mutual promises of the parties and of other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the parties intending to be legally bound agree as follows: 1. INCORPORATION BY REFERENCE The recitals hereinabove set forth together with all exhibits and schedules attached to this Agreement are hereby incorporated by reference as if more fully set forth in the body of this Agreement. 2. THE PROPERTY Sellers agree to sell, and Purchaser agrees to buy, the Property. As used in this Agreement, the term "Property" includes (i) the Land; (ii) all easements, hereditaments, and appurtenances presently belonging to or inuring to the benefit of or pertaining to the Land or to be created pursuant to this Agreement; (iii) all right, title and interest of Sellers in all transferable warranties, plans and specifications; (iv) all licenses, permits, certificates of occupancy issued to Seller by Federal, state or local municipal authorities relating to the use maintenance, occupancy or operation of the Property. 3. PURCHASE PRICE AND METHOD OF PAYMENT The Purchase Price for the Property shall be Sixty Million Dollars, ($60,000,000). The Purchase Price, (plus or minus prorations) shall be paid in the form of a wire transfer of good funds on the Date of Closing (as hereafter defined). The Purchaser at closing shall be entitled to a credit against the Purchase Price for the Deposit paid pursuant to Paragraph 4 of this Agreement. The purchase price for the ESL Incorporated property will be Seventeen Million, Four Hundred Seventy One Thousand, Two Hundred Thirty Dollars, ($17,471,230.00) and the 1 <PAGE> 2 purchase price for the TRW Inc. property will be Forty Two Million, Five Hundred Twenty Eight Thousand, Seven Hundred Seventy Dollars, ($42,528,770.00). 4. DEPOSIT Within five (5) business days of the Effective Date of this Agreement (as hereafter defined in Paragraph 26 (k)) Purchaser shall deliver to First American Title - San Jose, CA. ("Escrow Agent/Title Company") a deposit in the amount of Three Million Dollars ($3,000,000) in the form of a check which shall be promptly deposited by Escrow Agent into a separately designated interest bearing escrow account at a federally insured banking institution located in the State of California. The Deposit and all interest earned thereon shall be non-refundable except as otherwise expressly provided in this Agreement. Interest on the Deposit shall accrue to the benefit of Purchaser or to Sellers in the event of a forfeiture of the Deposit, pursuant to the terms of this Agreement. 5. FEASIBILITY STUDY PERIOD Purchaser shall have thirty (30) days after the later of: (i) the Effective Date hereof, or (ii) the date Seller provides Purchaser with copies of the documents described in Section 6 of this Agreement (the "Feasibility Period") to, at its option, cause engineering and/or feasibility studies to be conducted on said Property, in order to determine in Purchaser's sole discretion whether the Property is suitable for its intended purpose; provided, however, Seller and Purchaser agree that the Feasibility Period will end no later than 5:00pm on December 13, 1999. Purchaser shall have the right at its sole discretion within said Feasibility Period to terminate this Agreement by written notice to Sellers, and to forthwith receive a refund of its Deposit to Sellers with accrued interest thereon and all parties shall be relieved of further liability hereunder except for the indemnity obligations set forth below. During said Feasibility Period, consistent with security considerations, Purchaser and/or its agents shall have the right of access to the Property to conduct site, structural and environmental tests and/or mechanical inspections of the Property. Purchaser or its agents shall be entitled during normal business hours and with at least twenty-four (24) hours of advance notification to access the Property to insure proper inspection and completion of the feasibility studies hereunder. Purchaser shall give Sellers at least twenty-four (24) hours of advance notice of Purchaser's intended entry, including the name of Purchaser's consultants, if applicable, and a description of any tests and inspections to be performed on the Property. Sellers shall have the right to disapprove of Purchaser's consultants and/or the methods of the proposed tests and inspections, in which case Purchaser may propose alternative consultants and/or testing methods or terminate this Agreement; provided, however, Seller acknowledges that Purchaser may perform Phase II environmental testing on the Property. Purchaser shall provide Sellers with copies of any assessments, reports or test results obtained by Purchaser in connection with such tests and inspections. Until Escrow closes, Purchaser shall keep confidential any information regarding the Property contained in such reports and shall not disclose such information to any third party (other than consultants, attorneys, creditors, lenders, partners, members, officers, employees agents, accounts or exchange facilities engaged to review such reports) or agreed to by the parties hereto, except as required by law or court order. In the event this Agreement is terminated, Purchaser shall repair any damage resulting from such inspection. Purchaser agrees to indemnify and hold Sellers harmless from any loss, damage, cost or expense, including reasonable attorneys fees, occasioned by any acts of Purchaser or its agents 2 <PAGE> 3 while on the Property conducting any feasibility studies. The aforesaid indemnification shall survive closing or any earlier termination of this Agreement. 6. SELLERS' STUDIES AND EXAMINATION OF DOCUMENTS Sellers shall deliver to Purchaser within five (5) days of the Effective Date of this Agreement copies of all material governmental reports, and notices, environmental reports, soil tests, building plans, surveys, engineering reports, leases and any other documents relating to the property in Seller's possession or under Seller's control. At all reasonable times subsequent to ratification hereof and with reasonable advance notice, up to and including the Closing Date, Sellers shall (a) make available to Purchaser, its counsel, contractors, agents or employees for examination at all reasonable times all plans, surveys, documents and other writings with respect to the Property in Sellers' possession or control; (b) disclose and instruct its counsel and corporate officers and/or partners to disclose to Purchaser, its counsel and/or accountants all information pertaining to the Property which may be requested by Purchaser in writing hereunder; (c) afford any and all representatives of Purchaser reasonable access to the Property upon at least twenty-four (24) hours in advance notice for the right to conduct a complete inspection thereof, provided however, Purchaser shall not be granted access to attorney-client privileged materials; and (d) Sellers shall promptly give to Purchaser copies of any written notices which Sellers receive relating to the Property. 7. LEASE-BACK AGREEMENT Prior to the expiration of the feasibility period, Buyer agrees to enter into a lease agreement (the "Leases") with the Sellers for the buildings. The term of the Leases shall be A. 1345 Crossman - From close of escrow to December 31, 2000; B. 1330 Geneva - From close of escrow to June 30, 2002; C. 1347 Crossman - From close of escrow to June 30, 2001; D. 1350 Geneva - From close of escrow to June 30, 2002. Rent for the leases shall be $1.15/SF/Mo. All operating expenses associated with the property including but not limited to Real Estate taxes, landscape, parking lot maintenance, janitorial, general building maintenance and insurance will be paid for or performed by Sellers. The lease agreement(s) will be based upon the lease attached as Exhibit "B". Seller and Purchaser will agree on the particulars of the lease within five (5) business days of the Effective Date. 8. TITLE (a) As a condition to Closing, title to the Property at Closing shall be conveyed to Purchaser by grant deed subject only to the Permitted Exceptions (as hereinafter defined). The term "Permitted Exceptions" shall mean (i) the lien of real estate taxes not yet due and payable; (ii) all matters revealed in the Title Commitment obtained by Purchaser pursuant to subparagraph 3 <PAGE> 4 (b) hereof or of record as of such date (excluding mortgage, deeds of trust or other monetary liens encumbering the Property) and approved in writing by Purchaser; (iii) all matters disclosed by a survey which are approved by Purchaser, if any; (iv) all building, zoning, and other state, county or federal laws, codes and regulations (whether existing or proposed) affecting the Property; and (v) any title exception created directly or indirectly by any act or omission of Purchaser or its representatives, agents, employees or invitees. (b) Purchaser shall promptly obtain from a reputable title insurance company of its choice licensed to do business in the State of California (the "Title Company") a commitment to issue an ALTA title policy covering the Property and the improvements thereon, if any, which may state that it is subject to any matters that are disclosed by a survey of the Property ordered by Purchaser (the "Title Commitment"), together with true copies of all documents evidencing matters of record shown as exceptions to title thereon. Purchaser shall have the right to object, in its sole and absolute discretion, to any exceptions contained in the Title Commitment by giving written notice to Sellers and the Company prior to the expiration of the Feasibility Period stating the matters to which Purchaser disapproves and the reasons therefore. If Purchaser fails timely to provide such written objection, then Purchaser shall conclusively be deemed to have disapproved all matters affecting title to the Property and this Agreement shall terminate and the Deposit, together with all interest thereon shall be promptly returned to Purchaser. 9. CLOSING Provided Purchaser does not first terminate this Agreement pursuant to the provisions hereof, and the conditions precedent to Purchaser's obligation to close have been satisfied or waived by Purchaser, Sellers and Purchaser agree to proceed to full and final closing on the Property on a date selected by Purchaser and designated in writing to Sellers at least two (2) days in advance thereof which date shall occur no later than thirty (30) days after the end of the Feasibility Period (the "Closing Date" or "Date of Closing"). With respect to all time periods herein contained, time shall be of the essence. In no event shall the Closing take place after December 17,1999. 10. REPRESENTATIONS AND WARRANTIES (a) Sellers represent and warrant to Purchaser as of the Effective Date hereof that: (i) Sellers are corporations duly organized, validly existing and in good standing under the laws of the state of their incorporation, are qualified to do business in and are in good standing in the State of California and have duly authorized the execution and performance of this Agreement and the transactions contemplated herein. (ii) The persons executing this Agreement on behalf of Sellers represent and warrant to Purchaser in their individual capacities that they have the authority to enter into this Agreement and to bind Sellers in accordance with its terms without obtaining any 4 <PAGE> 5 further approvals or consents. (iii) Sellers have the right, power and authority to execute this Agreement and all other instruments and documents contemplated hereby and to perform any and all acts necessary or desirable to consummate the transactions contemplated hereby. The entering into this Agreement does not, and the consummation of the acts contemplated by this Agreement shall not, violate any agreements, documents or instruments to which Sellers are a party or by which it is bound, or any law, governmental order or decree to which Sellers are subject. (iv) There are no tenants or other parties in possession of any part of the Property, nor are there other parties who have a right to possession of or title to any part of the Property, except as set forth in Exhibit "C". (v) There are no licenses or contracts of any nature (including broker or commission fee arrangements) affecting or relating to the Property, except as set forth in Exhibit "D". (vi) There are no actions, suits pending or threatened condemnation or similar proceeding affecting any part of the Property. (vii) There are no actions, suits, proceedings or claims affecting any part of the Property, or affecting Sellers with respect to the ownership, occupancy, use or operation of any part of the Property, pending or threatened in or before any court, agency, commission, or board. (viii) Sellers have received no written notice from appropriate governmental authorities regarding, and Sellers have no knowledge of, any violation of applicable environmental, health, fire, building, safety or planning or zoning laws or ordinances. (ix) No petition in bankruptcy (voluntary or otherwise), assignment for the benefit of creditors, or petition seeking reorganization or arrangement or over action under Federal or State bankruptcy laws is pending or threatened against or contemplated by Sellers. (x) Sellers have never used the Property for storage, handling, manufacturing, discharge or disposal of hazardous materials or for industrial purposes, except for the storage, handling and use of reasonable quantities of hazardous materials used in the research and development of hardware products in compliance with all applicable laws, nor does Sellers have actual knowledge of a release of hazardous materials by a third party. 5 <PAGE> 6 (xi) Neither Sellers or any of the parties comprising Sellers are a "foreign person" within the meaning of the Foreign Investment in Real Property Tax Act, as amended "FIRPTA". Sellers are corporation(s) which maintain offices in the State of California, and will not disburse any proceeds due Sellers upon the Close of Escrow to an address outside the boundaries of the State of California, and will not use a financial intermediary (as defined in California Revenue and Taxation Code Section 18805(d)) for the receipt of proceeds from this transaction. At the time of closing the Sellers shall execute such instruments, certifications and/or affidavits as Purchaser or its title insurance company may deem necessary in order to comply with FIRPTA or other tax related disclosure and reporting requirements. Sellers' tax identification numbers set forth on the signature page of this Agreement are correct. (xii) Sellers have not received any notice, and have no actual knowledge, that the Property is in violation of any federal, state or local ordinance, law, rule, regulations order or requirement relating to Hazardous Materials. For purposes of this Agreement "Hazardous Materials" shall mean any "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder; any substance the presence of which on the Property is prohibited by any law similar to those set forth in this subparagraph, including the Clean Water Act (33 U.S.C. Sections 466 et seq.), ------- the Safe Drinking Water Act (14 U.S.C. Sections 1401-1450), the Hazardous Materials Transportation Act (49 U.S.C. Sections 1801 et seq.), the Toxic ------- Substance Control Act (15 U.S.C. Sections 2601-1629), the California Hazardous Waste Control Law (California Health and Safety Code Sections 25100-25600), and the Porter-Cologne Water Quality Control Act (California Health and Safety Code Sections 13000 et seq.); and any toxic or hazardous substances or ------- materials, whether products or wastes, including, without limitation, asbestos or PCBs. Hazardous Materials shall also include those asbestos-containing materials defined and described in Environmental Protection Agency Report No. 56/5085-024 (June, 1985) or any related successor report or other applicable government regulations defining or describing such asbestos-containing materials. (xiii) Except as set forth in Exhibit "E", at the Closing Date, there will 6 <PAGE> 7 be no outstanding contracts made by Sellers for the construction or repair of any Improvements to the Property that have not been fully paid for and Sellers shall cause to be discharged all mechanics' or materialmen's liens arising from any labor or materials furnished to the Property at Sellers' request prior to closing. (xiv) Prior to the Closing Date, Sellers shall not, without the prior written consent of Purchaser, enter into any contract with respect to the Property that will survive Closing. (xv) The existing insurance policies, or equivalent coverage, shall remain continuously in force through the Date of Closing. (xvi) Prior to the Closing Date, the Sellers: (i) shall not amend or terminate any agreement affecting to or relating to the Property without the prior written consent of Purchaser; (ii) shall maintain all insurance coverage carried by Sellers with respect to the Property as of the date hereof; (iii) shall continue to maintain the Property in substantially the same manner in which Seller is maintaining the Property as of the date hereof; (iv) shall not create or suffer to exist any easements, liens, deeds of trust or other security interests in the Property; and (v) shall pay before delinquency all taxes and assessments levied, imposed or assessed against the Property. (xvii) To Sellers knowledge the Property is connected to and serviced by adequate water, sewage disposal, gas, electricity and telephone facilities in accordance with all legal requirements, and to meet the requirements of normal usage thereof. All such utilities either enter the Property through adjoining public streets or, if they pass through an adjoining private parcel, they do so in accordance with valid public easements or valid and perpetual private easements; none of the easements, covenants or restrictions contained in any instruments of record affecting the Property has been violated; and the continued operation and maintenance of the Property for the purposes for which it is currently being operated and maintained will not constitute a violation thereof. To the best of the Sellers' knowledge, there are no assessments or contemplated assessments against the Property with respect to such utility services, any contemplated or intended public improvements or otherwise, except as disclosed by the public records of the county recorder's office of the county in which the Property is located. (xviii) To Sellers knowledge all due diligence materials and other information which Sellers have provided to Purchaser concerning the Property, is accurate and complete and does not contain any 7 <PAGE> 8 untrue statement of material fact nor does it omit to state any material fact necessary to make the statements contained therein not misleading. (xix) To Sellers knowledge the Property, and each part thereof, is in good condition and repair and free from any defects which impair the Sellers' use of the Property, including without limitation, erosion, drainage or soil problems and physical or mechanical defects which impair the Sellers' use of the Property. Without limitation of the foregoing, there are no defects or deficiencies which impair the Sellers' use of the Property in the heating, air conditioning, plumbing and other mechanical and electrical apparatus and appliances located on the Property, nor any defects which impair the Sellers' use of the Property in the roof, windows, exterior walls or structural components of the improvements on the Property, and there are no leaks in the roof or windows which impair the Sellers' use of the Property. (xx) Sellers are not in default of any of their obligations or liabilities pertaining to the Property; nor is there any state of facts or circumstances or condition or event which, after notice or lapse of time or both, would constitute or result in any such default. Except as specifically set forth in this Agreement, Sellers disclaim the making of any representations or warranties, express or implied, regarding the Property or matters affecting the Property, including the physical condition of the Property; title to or the boundaries of the Property, pest control matters; soil condition, hazardous wastes, toxic substances or other environmental matters; compliance with building, health, safety, land use and zoning laws, regulations and orders; structural and other engineering characteristics; traffic patterns; leasing status; economic performance; value and all other information pertaining to the Property. Purchaser acknowledges and agrees that Purchaser enters into this Agreement with the intention of making and relying upon its own investigation and evaluation of the value of the Property and of its physical, environmental, economic and legal condition, and that any information and materials (including, without limitation, any pro forma operating statements, market analyses, demographic studies and the like) relating to the Property are provided without representation or warranty, express or implied, to Purchaser to facilitate Purchaser's timely review, study and evaluation of the Property and not as a substitute for Purchaser's own investigation and evaluation of the value of the Property and of its physical, environmental, economic and legal condition. Purchaser acknowledges and agrees that, except to the extent, if any, specifically provided in this Agreement, no employee of Sellers, no agents of Sellers nor anyone acting or claiming to act on Sellers' behalf concerning the Property is authorized or empowered to make any representations or warranties on behalf of Sellers concerning the Property. Purchaser acknowledges and agrees that Purchaser will rely solely upon the advice of its own accounting, tax, legal, architectural, appraisal, engineering, environmental, property management and other 8 <PAGE> 9 advisors. Except for matters arising from or attributable to a material finding known to Sellers and not disclosed to Buyer, Purchaser is purchasing the Property in its "as is" condition on the Closing Date and will assume the risk that adverse physical, environmental, economic or legal conditions may not have been revealed by its inquiries and investigations. As used herein, "material" shall mean all substantive findings that would influence or tend to influence Buyer's decision to acquire the Property. Notwithstanding anything to the contrary provided herein, Purchaser shall have no right to pursue any action against Sellers pursuant to this paragraph 10(a) as a result of any of Sellers' representations and warranties being untrue, inaccurate or incorrect if Purchaser had actual knowledge at the time of closing that such representation or warranty was untrue, inaccurate or incorrect at the time of closing and Purchaser nevertheless elected to purchase the Property and close escrow hereunder. (b) Purchaser represents and warrants to Sellers as of the Effective Date hereof and as of the Closing Date that: (i) The execution and delivery of this Agreement by Purchaser and the consummation of the transactions contemplated hereby will not result in the breach of any terms or conditions of, or constitute a default under any contract, agreement, commitment, indenture, mortgage, note, bond, license or other instrument or obligation to which Purchaser is now a party or by which the Purchaser may be bound or affected. (ii) Purchaser has taken all actions and steps necessary to permit its execution hereof and at Closing will have taken all necessary action to permit its performance of its obligations hereunder. (iii) This Agreement is legally binding upon and enforceable against Purchaser in accordance with its terms. (iv) Purchaser is a California corporation, duly organized, validly existing and in good standing under the law of the state of its incorporation, has qualified to do business in and is in good standing in the State of California and has duly authorized the execution and performance of this Agreement and the transactions contemplated herein. (v) The persons executing this Agreement on behalf of Purchaser represent and warrant to Sellers in their individual capacities that they have the authority to enter into this Agreement and to bind Purchaser in accordance with its terms without obtaining any further approvals or consents. (vi) Purchaser has the right, power and authority to execute this Agreement and all other instruments and documents contemplated hereby and to 9 <PAGE> 10 perform any and all acts necessary or desirable to consummate the transactions contemplated hereby. The entering into this Agreement does not, and the consummation of the acts contemplated by this Agreement shall not, violate any law, governmental regulation, order or decree to which Purchaser is subject. 11. COSTS AND PRORATIONS (a) Utilities and real estate taxes shall be pro-rated as of the date leases terminate. To the extent practicable Sellers shall have all utility meters read to the date prior to termination and all applicable utilities shall be transferred into the name of Purchaser as of that date. The parties agree that items not susceptible to exact proration may be reprorated for a period of ninety (90) days following the lease terminations. (b) Sellers shall pay the costs for a CLTA Title policy, the Santa Clara County documentary transfer tax and the escrow fees. All other costs and charges of the escrow for the sale not otherwise provided for in this Paragraph 11(b) or elsewhere in this Agreement shall be allocated in accordance with the closing customs for Santa Clara County, California. 12. DAMAGE, CONDEMNATION OR DESTRUCTION OF PROPERTY PENDING CLOSING Risk of loss shall remain with Sellers until the recordation of the deed of conveyance. Sellers shall promptly notify Purchaser of any damage or destruction of all or any part of the Property or any condemnation or taking by eminent domain of any portions of the Property. In the event the damage or destruction exceeds Five Million and No/100 Dollars ($5,000,000.00). Purchaser shall have the right to terminate this Agreement without liability on its part and receive a refund of the Deposit, together with accrued interest thereon by so notifying Sellers within fifteen (15) days of Sellers notification to Purchaser of said condemnation, damages or destruction. If Purchaser elects to proceed with Closing, Sellers shall assign to Purchaser all condemnation awards or insurance proceeds payable to Sellers on account of such condemnation, damage or destruction, together with any deductibles attributable thereto, and the Purchase Price shall be equitably abated to the extent the awards and/or proceeds together with any deductibles attributable thereto, are less than the cost of repairing the Property incurred by Purchaser. 13. POSSESSION Sellers agree to deliver possession of the Property to Purchaser free of all tenancies or occupancy except for the leases provided for in Paragraph 7. 14. DELIVERIES AT CLOSING (a) At the Closing, Sellers shall deliver the following to Purchaser: (i) a Grant Deed dated as of the Closing Date conveying fee simple title to the Property to Purchaser, subject only to the Permitted 10 <PAGE> 11 Exceptions; (ii) to the extent available, plans and specifications for the Property; (iii) to the extent they are then in Sellers possession and not posted at the Property, all Permits issued for or with respect to the Property by governmental and quasi-governmental authorities having jurisdiction; (iv) an affidavit setting forth that all of the representations and warranties made by Sellers as set forth in Paragraph 10 (a) (i), (ii), (iii) (iv), (v), (vi), (vii), (viii), (ix), (xi), (xii), (xiii), xvii), (xviii), (xvix), and (xx)of this Agreement are correct as of the Closing Date; (v) a FIRPTA Affidavit; (vi) a California Withholding Exemption Certificate (Form 590RE) certifying that Sellers have a permanent place of business in California or are qualified to do business in California; (vii) any other documents required by this Agreement to be delivered by Sellers. (viii) leases based on the model in Exhibit B. (ix) an assignment document assigning all of Seller's interest in any intangible property. (b) At the Closing, Purchaser shall deliver the following to Sellers: (i) the full Purchase Price by wire transfer as adjusted for apportionment's, and less any amounts otherwise properly deducted pursuant to this Agreement; (ii) any other documents required by this Agreement to be delivered by Purchaser including such certifications, resolutions, affidavits or other documents as are required to be satisfied with respect to Purchaser's authority to purchase the Property as contemplated under this Agreement; (iii) leases based on the model in Exhibit B. 15. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS 11 <PAGE> 12 The obligation of Purchaser to purchase the Property and to perform the other covenants and obligations to be performed by it on the Closing Date shall be subject to the following conditions (all or any of which may be waived, in whole or in part, by Purchaser): (a) Sellers shall have delivered all items required under this Agreement by Closing. (b) The representations, warranties and covenants herein by Sellers shall be correct, complete and fully performed on and as of the Closing Date with the same force and effect, as though such representations, and warranties had been made on and as of such Closing Date. (c) On the Closing Date, no part of the Property shall previously have been acquired, by authority of any governmental agency in the exercise of its power of eminent domain or by private purchase in lieu thereof, nor on the Closing Date shall there be written notice of any such imminent acquisition or purchase of a portion of the Property which is more than de minimus. (d) On the Closing Date, the Title Company shall be committed to issue to Purchaser an ALTA title policy in the amount of the Purchase Price insuring Purchaser's fee title to the Property subject only to the Permitted Exceptions. (e) No proceeding shall be pending to change, redesignate or redefine the zoning classification of the Property so as to restrict or prevent the present and continued use of the Property which was not previously known to or discoverable by Purchaser during the Feasibility Period. (f) The Sellers shall have performed all of the covenants and agreements herein that the Sellers are required to perform on or before the Close of Escrow. (g) Buyer's inspection and approval of a survey of the Property. Upon failure of any of the conditions set forth in this Paragraph, Purchaser may, at its option, terminate this Agreement (whereupon the Deposit and any interest thereon will be returned to Purchaser), waive such failure or, if such failure constitutes a breach of this Agreement, pursue such remedies as are available to Purchaser under Paragraph 18 of this Agreement. 16. NOTICES Any notice required or permitted to be given under this Agreement shall be sent by hand delivery, certified mail, return receipt requested or by Emery Air Freight, Airborne Express, Federal Express, or other reputable overnight air courier service, in either case addressed to the parties as follows. If to Sellers: TRW Inc. 12011 Sunset Hills Road Reston, Virginia 20190 12 <PAGE> 13 Marsha A. Klontz, Esquire Telephone: 703-345-7070 Fax: 703-345-7075 And to: Mr. Bill Gibbs TRW Electromagnetic Systems 1330 Geneva Drive P.O. Box 3510 Sunnyvale, CA 94088-3510 Telephone: (408) 743-6020 Fax: (408) 743-4259 If to Buyer: Network Appliance Inc. c/o Thom Bryant 495 East Java Drive Sunnyvale, CA 94089 or in each case to such other address as any party hereto may from time to time designate to the other parties hereto by notice given pursuant to this Paragraph. 17. BROKERAGE Seller shall be responsible for any commission payable to its agents and Purchaser will be responsible for any commission payable to its agents. Sellers and Purchaser represent and warrant each to the other that such party has had no contact or dealings regarding the Property, or any communication in connection with the subject matter of this transaction, through any real estate broker of other person who can claim a right to a commission or finder's fee in connection with the sale contemplated herein, except for CPS, the Commercial Property Services Company and WWM, Weber Wood Medinger. If any other broker or finder makes a claim for a commission or finder's fee based upon any such contact, dealings or communication, the party through whom the broker or finder makes its claim shall be responsible for said commission and shall indemnify and save harmless the other from and against all liabilities and expenses (including without limitation, counsel fees and disbursements in defending against such liabilities), which may accrue by reason of, on account of, or growing out of or resulting from breach by such party of such warranty and representation. This indemnification shall survive closing or any earlier termination of this Agreement. 18. TERMINATION, DEFAULT AND REMEDIES (a) If (i) any of the representations and warranties made by the Sellers in Paragraph 10 shall be inaccurate or incorrect, (ii) the Sellers shall fail to perform any of the material covenants or agreements to be performed by it under this Agreement on or before the Date of Closing or (iii) the Purchaser shall be relieved of its obligations under this Agreement by operation of Paragraph 15 then, in any such event, the Purchaser shall have the right to terminate this Agreement by giving written notice to the Sellers and the Escrow Agent. The Escrow Agent 13 <PAGE> 14 shall return the Deposit together with accrued interest to the Purchaser, and neither party shall have any further liability to the other under this Agreement. If the Purchaser would have the right to terminate this Agreement by reason of an event described in clauses (i) or (ii), above, the Purchaser, in lieu of terminating this Agreement, shall have the right to pursue the remedy of specific performance. Purchaser hereby waives any right to seek monetary damages for any incidental or consequential damages allegedly caused by Sellers breach of this Agreement, except for Purchaser' reasonable out-of-pocket costs associated with the negotiation of this Agreement and the performance of Purchaser's due diligence review of the Property. In any event, Purchaser shall not be required to waive any rights to seek monetary damages for any breach of this Agreement by Sellers if the remedy of specific performance is not available or meaningful due to the actions of Sellers.. (b) IN THE EVENT THE SALE OF THE PROPERTY IS NOT CONSUMMATED BECAUSE OF A DEFAULT UNDER THIS AGREEMENT ON THE PART OF PURCHASER, SELLERS SHALL BE ENTITLED TO RETAIN THE DEPOSIT, TOGETHER WITH ANY INTEREST EARNED THEREON, AS LIQUIDATED DAMAGES AS ITS SOLE REMEDY IF THIS AGREEMENT IS TERMINATED AS A RESULT OF SUCH DEFAULT. THE PARTIES HAVE AGREED THAT SELLERS' ACTUAL DAMAGES, IN THE EVENT OF A DEFAULT BY PURCHASER, WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE. THEREFORE, BY PLACING THEIR INITIALS BELOW, THE PARTIES ACKNOWLEDGE THAT THE AMOUNT OF THE DEPOSIT HAS BEEN AGREED UPON, AFTER NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF SELLERS' DAMAGES AND AS SELLERS' EXCLUSIVE REMEDY AGAINST PURCHASER, AT LAW OR IN EQUITY, IN THE EVENT THAT THIS TRANSACTION DOES NOT CLOSE DUE TO A DEFAULT UNDER THIS AGREEMENT ON THE PART OF PURCHASER. THE FOREGOING PROVISIONS SHALL NOT, HOWEVER, LIMIT IN ANY WAY SELLERS' ENFORCEMENT OF THE INDEMNITIES PROVIDED IN PARAGRAPHS 5 AND 17 WHICH SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT. INITIALS: Sellers: ________________________ Purchaser: _______________________ 19. OBLIGATIONS OF SELLERS PENDING CLOSING (a) Between the Effective Date hereof and the Closing Date, Sellers will cause the Property to be maintained in its present order and condition, normal wear and tear excepted. Sellers' further covenants to keep in full force and effect until Closing casualty insurance insuring the Property for its full replacement cost. In the event of damage or destruction as set forth in Paragraph 12 of this Agreement the provisions of Paragraph 12 will apply. (b) Sellers shall notify Purchaser promptly, and Purchaser shall notify Sellers promptly, if either receives notice of any occurrence prior to the Closing Date which would make its representations, warranties or covenants contained herein not true in any material respect. (c) Through the Closing Date, Sellers will maintain the existing insurance policies, or equivalent coverage, with the same limits of coverage now carried with respect to 14 <PAGE> 15 the Property. (d) Sellers shall not withdraw, settle or otherwise compromise any protest or reduction proceeding affecting real estate taxes assessed against the Property for any fiscal period in which the closing is to occur or any subsequent fiscal period without the prior written consent of Purchaser, which consent shall not be unreasonably withheld or delayed. Real estate tax refunds and credits received after the Closing Date which are attributable to the fiscal tax year during which the Closing Date occurs shall be apportioned between Sellers and Purchaser after deducting the expenses of collection thereof, which obligation shall survive the closing. 20. SURVIVAL Each of the representations, warranties, covenants or other obligations set forth in this Agreement shall survive the Closing Date but shall fully cease and expire with respect to any claims not raised by the aggrieved party, by written notice to the other, within eighteen (18) months after the Closing Date. 21. LAND SALES DISCLOSURE ACT Sellers and Buyer intend that this sale of land comply with the exemption requirements of the Interstate Land Sales Full Disclosure act, as stated in 15 U.S.C. 1702(a)(8) and confirm that the conditions set forth in such section are met. 22. MUTUAL COVENANTS Absent an express statement to the contrary, wherever any consent or approval of a party is required hereunder, such party shall not unreasonably withhold such consent or approval. 23. REDEVELOPMENT COOPERATION Sellers' shall provide reasonable cooperation to Purchaser in connection with Purchaser's efforts to obtain governmental, quasi-governmental and third-party approvals, as Purchaser may deem appropriate to enable Purchaser to develop the Property, construct improvements thereon and operate its business from the Property; provided, however that Purchaser shall reimburse any reasonable cost of Sellers' cooperation, to the extent such cost has previously been approved in writing by Purchaser. 24. CONFIDENTIALITY Except for disclosures as may be required by law or court order, or disclosures to the parties' creditors, lenders, partners, members, officers, employees, agents, consultants, attorneys, accountants and exchange facilities, or disclosures agreed to by the parties hereto in writing Sellers and Purchaser agree that they shall keep in confidence this Agreement and each and every term and provision hereof, including, without limitation, the Purchase Price. 25. MISCELLANEOUS PROVISIONS 15 <PAGE> 16 (a) Binding Effect. This Agreement shall, be binding upon and inure to the benefit of the parties hereto, and their respective heirs, devisees, personal representative, successors and assigns. (b) Waiver, Modification. Failure by Purchaser or Sellers to insist upon or enforce any of its rights hereto shall not constitute a waiver thereof. (c) Assignment. This Agreement may not be assigned by either Purchaser or Seller without the prior written consent of the other party. Notwithstanding the foregoing , Purchaser may assign this Agreement to an entity in connection with a synthetic lease transaction without the need for the prior consent of the Sellers. (d) Governing Law. This Agreement shall be governed by and construed under the laws of the State of California. (e) Headings. The paragraph headings are herein used for convenience of reference only and shall not be deemed to vary the content of this Agreement or the covenants, agreements, representations and warranties herein set forth or the scope of any paragraph. (f) Counterparts. This Agreement may be executed in two or more counterpart originals; each counterpart original shall be for all purposes considered an original of this Agreement. (g) Partial Invalidity. If any provision of this Agreement shall be determined to be void by any court of competent jurisdiction, then such determination shall not affect any other provision hereof, all of which other provisions shall remain in full force and effect; and it is the intention of all the parties hereto that if any provision of this Agreement capable of two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the meaning which renders it valid. (h) Time. With respect to all time periods contained in this Agreement, it is expressly understood that time shall be of the essence. (i) Holidays, etc. Whenever the last day for the performance of any act required by either Sellers or Purchaser under this Agreement shall fall upon a Saturday, Sunday, or legal holiday, the date for the performance of any such act shall be extended to the next succeeding business day which is not a Saturday, Sunday or legal holiday. (j) Counsel Fees. If any action is brought by either party against the other party including, without limitation, any action with respect to the receipt of the Deposit as liquidated damages pursuant to Paragraph 18(b), the prevailing party shall be entitled to recover from the other party reasonable attorney's fees, costs and expense incurred in connection with the prosecution or defense of such action. (k) Effective Date. The Effective Date of this Agreement shall be the date 16 <PAGE> 17 that a fully ratified original of this Agreement is executed and delivered to Purchaser. (l) No Third-Party Beneficiary Rights. Purchaser and Sellers agree that this Agreement has been entered into solely for the benefit of Purchaser and Sellers and no other person or entity, it being the intention of Purchaser and Sellers that no person or entity not a party to this Agreement shall have any right or standing to (a) bring any action against Purchaser or Sellers based on this Agreement or (b) assume that any provision of this Agreement will be enforced or remain unmodified or unwaived, or (c) assert that it or he is or should be or was intended to be a beneficiary under any provision of this Agreement. (m) Exculpation. In the enforcement of its rights hereunder Sellers agree not to seek or obtain a money judgment or exercise any other right or remedy against any member, shareholder, officer, director or employee of Purchaser or any member of Purchaser and shall look solely to the Purchaser and the Deposit hereunder for the enforcement of all of its rights and remedies hereunder. In the enforcement of its rights hereunder Purchaser agrees not to seek or obtain a money judgment or exercise any other fight or remedy against any member, shareholder, officer, director or employee of Sellers and shall look solely to Sellers for the enforcement of all rights and remedies hereunder. (n) Further Assurance. In addition to the obligations performed under this Agreement by Sellers at Closing, Sellers and Purchaser shall perform, from time to time, such other acts, and shall execute, acknowledge and/or deliver such other instruments, documents and other materials as Purchaser or its counsel or Escrow Agent reasonably may request in order to consummate the transactions provided for in this Agreement and to vest title to the Property in Purchaser. WITNESS the following signature SELLERS: TRW Inc. By: ----------------------------------- Printed Name: ------------------------- Title: -------------------------------- Date: --------------------------------- Tax ID No.: 34-0575430 --------------------------- SELLERS: ESL Inc. By: ----------------------------------- Printed Name: ------------------------- Title: -------------------------------- 17 <PAGE> 18 Date: --------------------------------- Tax ID No.: 94-1566685 --------------------------- PURCHASER: Network Appliance, Inc. By: ----------------------------------- Printed Name: ------------------------- Title: -------------------------------- Date: --------------------------------- Tax ID No.: --------------------------- 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.49 <SEQUENCE>8 <DESCRIPTION>EXHIBIT 10.49 <TEXT> <PAGE> 1 EXHIBIT 10.49 ================================================================================ CLOSING CERTIFICATE (PHASE IV) AND AGREEMENT BETWEEN NETWORK APPLIANCE, INC., ("NAI") AND BNP LEASING CORPORATION ("BNPLC") DECEMBER ___, 1999 ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> 1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF NAI CONCERNING THE PROPERTY.............1 (A) Condition of the Property.....................................................1 (B) Title to the Property.........................................................2 (C) Title Insurance...............................................................2 (D) Environmental Representations.................................................2 (E) Cooperation by NAI and its Affiliates.........................................2 2 OTHER REPRESENTATIONS, WARRANTIES, COVENANTS AND ACKNOWLEDGMENTS OF NAI..............3 (A) No Default or Violation of Other Agreements...................................3 (B) No Suits......................................................................3 (C) Enforceability................................................................3 (D) Solvency......................................................................3 (E) Organization..................................................................4 (F) Existence.....................................................................4 (G) Not a Foreign Person..........................................................4 (H) Investment Company Act........................................................4 (I) ERISA.........................................................................4 (J) Use of Proceeds...............................................................4 (K) Omissions.....................................................................5 (L) Y2000 Issues..................................................................5 (M) Further Assurances............................................................5 (N) No Implied Representations or Promises by BNPLC...............................5 3 LIMITED COVENANTS AND REPRESENTATIONS BY BNPLC.......................................5 (A) Cooperation of BNPLC to Facilitate Use........................................5 (B) Actions Permitted by NAI Without BNPLC's Consent..............................7 (C) Waiver of Landlord's Liens....................................................7 (D) Estoppel Letter...............................................................7 (E) Limited Representations by BNPLC Concerning Accounting Matters................8 (F) Other Limited Representations by BNPLC........................................9 (1) No Default or Violation................................................9 (2) No Suits...............................................................9 (3) Enforceability.........................................................9 (4) Organization...........................................................9 (5) Existence..............................................................9 (6) Not a Foreign Person...................................................9 (7) Bankruptcy.............................................................9 4 OBLIGATIONS OF NAI UNDER OTHER OPERATIVE DOCUMENTS NOT LIMITED BY THIS AGREEMENT..........................................................................10 5 OBLIGATIONS OF NAI HEREUNDER NOT LIMITED BY OTHER OPERATIVE DOCUMENTS...............10 </TABLE> -i- <PAGE> 3 EXHIBITS AND SCHEDULES <TABLE> <S> <C> Exhibit A......................................................Legal Description Exhibit B.............................................Permitted Encumbrance List Exhibit C..............................................Development Document List Exhibit D.........................Standard Notice of Request for Action by BNPLC </TABLE> -ii- <PAGE> 4 CLOSING CERTIFICATE AND AGREEMENT This CLOSING CERTIFICATE AND AGREEMENT (this "AGREEMENT"), by and between NETWORK APPLIANCE, INC., a California corporation ("NAI"), and BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), is made and dated as of December ___, 1999 (the "EFFECTIVE DATE"). RECITALS A. Contemporaneously with the execution of this Agreement, BNPLC and NAI are executing a Common Definitions and Provisions Agreement (Phase IV - Improvements) (the "IMPROVEMENTS CDPA"), and a Common Definitions and Provisions Agreement (Phase IV - Land) (the "LAND CDPA"), each dated as of the Effective Date, which are each incorporated into and made a part of this Agreement for all purposes. Capitalized terms defined in the Improvements CDPA and used but not otherwise defined herein are intended in this Agreement to have the respective meanings ascribed to them in the Improvements CDPA. Any capitalized terms defined in the Land CDPA and used but not otherwise defined herein or in the Improvements CDPA are intended in this Agreement to have the respective meanings ascribed to them in the Land CDPA. As used in this Agreement, "PROPERTY" is intended to mean, collectively, the Property as defined in the Improvements CDPA and the Property as defined in the Land CDPA; "IMPROVEMENT DOCUMENTS" is intended to mean, collectively, the Operative Documents as defined in the Improvements CDPA; "LAND DOCUMENTS" is intended to mean the Operative Documents as defined in the Land CDPA; "OPERATIVE DOCUMENTS" is intended to mean the Improvement Documents and the Land Documents, collectively; "IMPROVEMENTS LEASE" is intended to mean the Lease as defined in the Improvements CDPA; "LEASES" is intended to mean the Improvements Lease and the Lease as defined in the Land CDPA, collectively; "PURCHASE AGREEMENTS" is intended to mean the Purchase Agreement as defined in the Improvements CDPA and the Purchase Agreement as defined in the Land CDPA, collectively; and "DESIGNATED SALE DATE" is intended to mean the earlier of the Designated Sale Date as defined in the Improvements CDPA or the Designated Sale Date as defined in the Land CDPA. B. As a condition to its execution of other Operative Documents, BNPLC requires the representations, warranties and covenants of NAI set out below. At the request of NAI and to facilitate the transactions contemplated in the other Operative Documents, BNPLC is acquiring the Land described in Exhibit A attached hereto from Seller and any interest of Seller in any existing Improvements thereon, subject to the Permitted Encumbrances described in Exhibit B attached hereto and with the understanding that development and use of such Land may be subject to or benefitted by the Development Documents described in Exhibit C attached hereto (if any). C. As a condition to its execution of other Operative Documents, NAI requires the representations and covenants of BNPLC set out below. 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 REPRESENTATIONS, WARRANTIES AND COVENANTS OF NAI CONCERNING THE PROPERTY. NAI represents, warrants and covenants as follows: (A) Condition of the Property. The Land as described in Exhibit A is the same as the land shown on the plat included as part of the survey titled "ALTA/ACSM LAND TITLE SURVEY FOR NETWORK APPLIANCE, 1345 CROSSMAN AVENUE, 1347 CROSSMAN AVENUE, 1330 GENEVA DRIVE, AND 1350 -1- <PAGE> 5 GENEVA DRIVE" made by Kier & Wright, Licensed Land Surveyor, dated December 2, 1999, as Job No. 97208-16, which survey was delivered to BNPLC at the request of NAI, and except as shown on the survey there are to the best of NAI's knowledge no easements or encroachments visible or apparent from an inspection of the Land. No significant encroachment of building Improvements exist across the boundaries of the Land described in Exhibit A, and no significant building Improvements that presently exist on the Land may be disturbed by reason of the exercise of easement or other rights created by any of the Permitted Encumbrances. Adequate provision has been made for the Land and the 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 Land and Improvements contemplated by the Improvements Lease have been completed and are serviceable. To the best of NAI's knowledge, no extraordinary circumstances (including any use of the Land as a habitat for endangered species) exists that would materially and adversely affect the use of any Improvements for their intended purposes or other reasonable future development of the Land. NAI is not aware of any latent or patent material defects or deficiencies in the Property that, either individually or in the aggregate, could materially and adversely affect the use or occupancy of the Property or the construction or use of Improvements as permitted by the Improvements Lease or could reasonably be anticipated to endanger life or limb. No part of the Land is within a flood plain as designated by any governmental authority. (B) Title to the Property. The deed that Seller is executing in favor of BNPLC pursuant to the Existing Contract shall vest in BNPLC good and marketable title to the Land and Improvements, subject only to the Permitted Encumbrances, the Development Documents and any Liens Removable by BNPLC. NAI shall not, without the prior consent of BNPLC, create, place or authorize, or through any act or failure to act, acquiesce in the placing of, any deed of trust, mortgage or other Lien, whether statutory, constitutional or contractual against or covering the Property or any part thereof (other than Permitted Encumbrances and Liens Removable by BNPLC), regardless of whether the same are expressly or otherwise subordinate to the Operative Documents or BNPLC's interest in the Property. (C) Title Insurance. Without limiting NAI's obligations under the preceding subparagraph, contemporaneously with the execution of this Agreement NAI shall provide to BNPLC a title insurance policy (or binder committing the applicable title insurer to issue a title insurance policy, without the payment of further premiums) in the amount of no less than $62,000,000, in form and substance satisfactory to BNPLC, written by one or more title insurance companies satisfactory to BNPLC and insuring BNPLC's fee estate in the Land and Improvements. (D) Environmental Representations. To the knowledge of NAI except as otherwise disclosed in the Environmental Report: (i) no Hazardous Substances Activity has occurred prior to the Effective Date; (ii) no owner or operator of the Property has reported or been required to report any release of any Hazardous Substances on or from the Property pursuant to any Environmental Law; and (iii) no owner or operator of the Property has received from any federal, state or local governmental authority any warning, citation, notice of violation or other communication regarding a suspected or known release or discharge of Hazardous Substances on or from the Property or regarding a suspected or known violation of Environmental Laws concerning the Property. Further, NAI represents that to its knowledge, the Environmental Report taken as a whole is not misleading or inaccurate in any material respect. (E) Cooperation by NAI and its Affiliates. If neither NAI nor an Applicable Purchaser purchases the Property pursuant to the Purchase Agreements on the Designated Sale Date, then after the Designated Sale Date: (1) if a use of the Property by BNPLC or any removal or modification of Improvements proposed by BNPLC would violate any Permitted Encumbrance, Development Document or Applicable Law unless NAI or any of its Affiliates, as an owner of adjacent property or otherwise, gave its consent or approval thereto or agreed to join in a modification of a Permitted Encumbrance or Development Document, then -2- <PAGE> 6 NAI shall, to the extent it can without violating Applicable Law, give and cause its Affiliates to give such consent or approval or join in such modification; (2) to the extent, if any, that any Permitted Encumbrance, Development Document or Applicable Law requires the consent or approval of NAI or any of its Affiliates or of the City of Sunnyvale or any other Person to a transfer of any interest in the Property by BNPLC or its successors or assigns, NAI will without charge give and cause its Affiliates to give such consent or approval and will cooperate in any way reasonably requested by BNPLC to assist BNPLC to obtain such consent or approval from the City or any other Person; and (3) NAI's obligations under this subparagraph 1(E) shall be binding upon any successor or assign of NAI with respect to the Land and other properties encumbered by the Permitted Encumbrances or subject to the Development Documents. 2 OTHER REPRESENTATIONS, WARRANTIES, COVENANTS AND ACKNOWLEDGMENTS OF NAI. NAI represents, warrants, covenants and acknowledges as follows: (A) No Default or Violation of Other Agreements. The execution, delivery and performance by NAI of this Agreement and the other Operative Documents do not and will not constitute a breach or default under any other material agreement or contract to which NAI is a party or by which NAI is bound or which affects the Property, and do not violate or contravene any law, order, decree, rule or regulation to which NAI is subject, and such execution, delivery and performance by NAI 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, NAI's property pursuant to the provisions of any such other material agreement. (B) No Suits. Other than as previously disclosed in NAI's most recent 10-K filings with the Securities and Exchange Commission (copies of which have been delivered to BNPLC), there are no judicial or administrative actions, suits, proceedings or investigations pending or, to NAI's knowledge, threatened that will adversely affect the Property or the validity or enforceability or priority of this Agreement or any other Operative Document, and NAI 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 use, occupancy or operation of the Property for the purposes contemplated in the Leases. No condemnation or other like proceedings are pending or, to NAI's knowledge, threatened against the Property. (C) Enforceability. The execution, delivery and performance of each of the Operative Documents by NAI are duly authorized, are not in contravention of or conflict with any term or provision of NAI's articles of incorporation or bylaws and do not, to NAI's knowledge, conflict with any Applicable Laws or require the consent or approval of any governmental body or other regulatory authority that has not heretofore been obtained; provided, some consents or approvals which are readily obtainable and which are required for NAI's performance under the Operative Documents may not have been heretofore obtained, but NAI shall obtain such consents or approvals as required in connection with its performance of the Operative Documents. Each of the Operative Documents are valid, binding and legally enforceable obligations of NAI except as such enforcement is affected by bankruptcy, insolvency and similar laws affecting the rights of creditors, generally, and equitable principles of general application. (D) Solvency. NAI is not "insolvent" on the date hereof (that is, the sum of NAI's absolute and contingent liabilities - including the obligations of NAI under this Agreement and the other Operative Documents - does not exceed the fair market value of NAI's assets) and has no outstanding liens, suits, garnishments or court actions which could render NAI insolvent or bankrupt. NAI's capital is adequate for the businesses in which NAI is engaged and intends to be engaged. NAI has not incurred (whether hereby or otherwise), nor does NAI intend to -3- <PAGE> 7 incur or believe that it will incur, debts which will be beyond its ability to pay as such debts mature. There has not been filed by or, to NAI's knowledge, against NAI 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 NAI or any significant portion of NAI'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 BNPLC relating to NAI are true, correct and complete in all material respects. No material adverse change has occurred in the financial position of NAI as reflected in NAI's financial statements covering the most recent fiscal period for which NAI's financial statements have been published. (E) Organization. NAI is duly incorporated and legally existing under the laws of the State of California. NAI has all requisite corporate power and has procured or will procure on a timely basis all governmental certificates of authority, licenses, permits, qualifications and similar documentation required to fulfill its obligations under this Agreement and the other Operative Documents. Further, NAI has the corporate power and adequate authority, rights and franchises to own NAI's property and to carry on NAI's business as now conducted and is duly qualified and in good standing in each state in which the character of NAI's business makes such qualification necessary (including 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 NAI and its Subsidiaries, taken as a whole. (F) Existence. So long as any of the Operative Documents continue in force, NAI shall continuously maintain its existence and its qualification to do business in the State of California. (G) Not a Foreign Person. NAI is not a "foreign person" within the meaning of Sections 1445 and 7701 of the Code (i.e. NAI 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). (H) Investment Company Act. NAI is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (I) ERISA. NAI is not and will not become an "employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA. The assets of NAI do not and will not in the future constitute "plan assets" of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101. NAI is not and will not become a "governmental plan" within the meaning of Section 3(32) of ERISA. Transactions by or with NAI are not subject to state statutes regulating investments of and fiduciary obligations with respect to governmental plans. Each Plan and, to the knowledge of NAI, any Multiemployer Plan, is in compliance with, and has been administered in compliance with, the applicable provisions of ERISA, the Code and any other applicable Federal or state law in all respects, the failure to comply with which would have a material adverse effect upon the properties, assets, operations or businesses of NAI and its Subsidiaries taken as a whole. As of the date hereof no event or condition is occurring or exists which would require a notice from NAI under subparagraph 15(c)(vi) of the Leases. (J) Use of Proceeds. In no event shall the funds advanced to NAI pursuant to the Operative Documents be used directly or indirectly for personal, family, household or agricultural purposes or for the purpose, whether immediate, incidental or ultimate, of purchasing, acquiring or carrying any "margin stock" or any "margin securities" (as such terms are defined respectively in Regulation U and Regulation G promulgated by the Board of Governors of the Federal Reserve System) or to extend credit to others directly or indirectly for the purpose of purchasing or carrying any such margin stock or margin securities. NAI represents and warrants that NAI is not engaged principally, or as one of NAI's important activities, in the business of extending credit to others for the purpose of purchasing or carrying such margin stock or margin securities. -4- <PAGE> 8 (K) Omissions. None of NAI's representations or warranties contained in this Agreement or any other Operative Document or any other document, certificate or written statement furnished to BNPLC by or on behalf of NAI 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) Y2000 Issues. As necessary to avoid any material adverse impact upon any activity significant to the business of NAI and its Subsidiaries, taken as whole, and as necessary to insure the full and prompt compliance with and performance of NAI's obligations under the Operative Documents, on or before June 30, 1999, the software and other processing capabilities of NAI and its Subsidiaries shall have the ability to correctly interpret and manipulate all data (in whatever form, including printed form, screen displays, financial records, calculations and loan-related data) so as to avoid errors in processing that may otherwise occur because of the inability of the software or other processing capabilities to recognize accurately the year 2000 or subsequent dates. (M) Further Assurances. NAI shall, on request of BNPLC, (i) 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 Agreement or any other Operative Document and to subject to this Agreement or any other Operative Document any property intended by the terms hereof or thereof to be covered hereby or thereby, including specifically, but without limitation, any renewals, additions, substitutions, replacements or appurtenances to the Property; (ii) execute, acknowledge, deliver, procure and record or file any document or instrument deemed advisable by BNPLC to protect its rights in and to the Property against the rights or interests of third persons; and (iii) 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 BNPLC to enable BNPLC to comply with the requirements or requests of any agency or authority having jurisdiction over it. Without limiting the forgoing, NAI shall cooperate with BNPLC as reasonably required to allow BNPLC to induce banks not affiliated with BNPLC to become Participants. Such cooperation will include the payment of fees ("UPFRONT SYNDICATION FEES") as provided under the heading "Upfront Fees for the Participants" in the letter from BNPLC to NAI dated October 20, 1999. Such cooperation will also include the execution of one or more modification agreements proposed by BNPLC to any of the Operative Documents, which agreements may change the Spread, Unsecured Spread, Commitment Fee Rate or may limit NAI's right to designate a new Collateral Percentage under Section 3.1 of the Pledge Agreement or may otherwise modify terms and conditions of the Operative Documents as requested by a prospective Participant; provided, however, that the form and substance of any such modification agreements is approved by NAI (which approval will not be unreasonably withheld); and, provided further, that NAI will have no obligation to join with BNPLC in executing any such modification agreement to satisfy a prospective Participant after the earlier of (1) the date that is one hundred twenty days after the Effective Date, or (2) the date upon which other banks not affiliated with BNPLC have become Participants with aggregate Percentages under (and as defined in) the Participation Agreement of no less than eighty percent (80%). (N) No Implied Representations or Promises by BNPLC. BNPLC AND BNPLC'S AGENTS HAVE MADE NO REPRESENTATIONS OR PROMISES WITH RESPECT TO THE PROPERTY EXCEPT AS EXPRESSLY SET FORTH IN THE OTHER OPERATIVE DOCUMENTS, AND NO RIGHTS, EASEMENTS OR LICENSES ARE BEING ACQUIRED BY NAI BY IMPLICATION OR OTHERWISE EXCEPT AS EXPRESSLY SET FORTH IN THE OTHER OPERATIVE DOCUMENTS. 3 LIMITED COVENANTS AND REPRESENTATIONS BY BNPLC. (A) Cooperation of BNPLC to Facilitate Use. So long as the Leases remain in force and NAI remains in possession of the Property, BNPLC shall take any action reasonably requested by NAI to facilitate the use of the Property permitted by the Leases; provided, however, that: -5- <PAGE> 9 (1) This subparagraph 3(A) shall not impose upon BNPLC the obligation to take any action that can be taken by NAI, NAI's Affiliates or anyone else other than BNPLC as the owner of the Property. (2) BNPLC shall not be required by this subparagraph 3(A) to make any payment to another Person unless BNPLC shall first have received funds from NAI, in excess of any other amounts due from NAI under any of the Operative Documents, sufficient to make the payment. (3) BNPLC shall have no obligations whatsoever under this subparagraph 3(A) at any time after an Event of Default shall have occurred and be continuing. (4) NAI must request any action to be taken by BNPLC pursuant to this subparagraph 3(A), and such request must be specific and in writing, if required by BNPLC at the time the request is made. A suggested form for such a request is attached as Exhibit D. (5) No action may be required of BNPLC pursuant to this subparagraph 3(A) that could constitute a violation of any Applicable Laws or compromise or constitute a waiver of BNPLC's rights under other provisions of this Agreement or any of the other Operative Documents or that for any other reason is reasonably objectionable to BNPLC. The actions BNPLC shall take pursuant to this subparagraph 3(A) if reasonably requested by NAI will include, subject to the conditions listed in the proviso above, executing or consenting to, or exercising or assisting NAI to exercise rights under any (I) grant of easements, licenses, rights of way, and other rights in the nature of easements encumbering the Land or the Improvements, (II) release or termination of easements, licenses, rights of way or other rights in the nature of easements which are for the benefit of the Land or Improvements or any portion thereof, (III) dedication or transfer of portions of the Land not improved with a building, for road, highway or other public purposes, (IV) agreements (other than with NAI or its Affiliates) for the use and maintenance of common areas, for reciprocal rights of parking, ingress and egress and amendments to any covenants and restrictions affecting the Land or any portion thereof, (V) documents required to create or administer a governmental special benefit district or assessment district for public improvements and collection of special assessments, (VI) instruments necessary or desirable for the exercise or enforcement of rights or performance of obligations under any Permitted Encumbrance or any contract, permit, license, franchise or other right included within the term "Property" (including, without limitation, under the Development Documents), (VII) modifications of Permitted Encumbrances or Development Documents, (VIII) [intentionally deleted], (IX) confirmations of NAI's rights under any particular provisions of the Operative Documents which NAI may wish to provide to a third party or (X) execution or filing of a tract or parcel map subdividing the Land into lots or parcels or to adjust boundary lines of the Land to facilitate construction thereon or on adjacent land which NAI leases from BNPLC. However, the determination of whether any such action is reasonably requested or reasonably objectionable to BNPLC may depend in whole or in part upon the extent to which the requested action shall result in a lien to secure payment or performance obligations against BNPLC's interest in the Property, shall cause a decrease in the value of the Property to less than forty-five percent (45%) of Stipulated Loss Value after any Qualified Prepayments that may result from such action are taken into account, or shall impose upon BNPLC any present or future obligations greater than the obligations BNPLC is willing to accept in reliance on the indemnifications provided by NAI under the Operative Documents. Any Losses incurred by BNPLC because of any action taken pursuant to this subparagraph 3(A) shall be covered by the indemnifications set forth in subparagraph 5(c) of the Leases. Further, for purposes of such indemnification, any action taken by BNPLC will be deemed to have been made at the request of NAI if made pursuant to any request of counsel to or any officer of NAI (or with their knowledge, and without their objection) in connection with the execution or administration of the Leases or the other Operative Documents. -6- <PAGE> 10 (B) Actions Permitted by NAI Without BNPLC's Consent. No refusal by BNPLC to execute or join in the execution of any agreement, application or other document requested by NAI pursuant to the preceding subparagraph 3(A) shall preclude NAI from itself executing such agreement, application or other document; provided, that in doing so NAI is not purporting to act for BNPLC and does not thereby create or expand any obligations or restrictions that encumber BNPLC's title to the Property. Further, subject to the other terms and conditions of the Leases and other Operative Documents, NAI shall be entitled to do any of the following in NAI's own name and to the exclusion of BNPLC without any notice to or consent of BNPLC, provided, that (i) the Leases remain in force, (ii) NAI remains in possession of the Property, (iii) no Event of Default has occurred and is continuing, and (iv) NAI is not purporting to act for BNPLC and does not thereby create or expand any obligations or restrictions that encumber BNPLC's title to the Property: (1) perform obligations arising under and exercise and enforce the rights of NAI or the owner of the Property under the Development Documents and Permitted Encumbrances; (2) perform obligations arising under and exercise and enforce the rights of NAI or the owner of the Property with respect to any other contracts or documents (such as building permits) included within the Personal Property; (3) recover and retain any monetary damages or other benefit inuring to NAI or the owner of the Property through the enforcement of any rights, contracts or other documents included within the Personal Property (including the Development Documents and Permitted Encumbrances); provided, that to the extent any such monetary damages may become payable as compensation for an adverse impact on value of the Property, the rights of BNPLC and NAI hereunder with respect to the collection and application of such monetary damages shall be the same as for condemnation proceeds payable because of a taking of all or any part of the Property; and (4) without limiting the foregoing, as tenant under the Improvements Lease, (i) collect and retain all rents paid under the Premises Leases; (ii) recover and retain any monetary damages or other benefit inuring to NAI or the owner of the Real Property through the enforcement of any rights under the Premises Leases (provided that this subsection (ii) shall not apply to any damages or benefits that are required by the terms of the Lease to be paid over to BNPLC); (iii) cancel or accept the surrender of any space under any Premises Lease; and (iv) enforce any guaranties or other collateral provided by Lessees under the Premises Leases and retain the proceeds thereof. (C) Waiver of Landlord's Liens. BNPLC waives any security interest, statutory landlord's lien or other interest BNPLC may have in or against computer equipment and other tangible personal property placed on the Land from time to time that NAI or its Affiliates own or lease from other lessors; provided, however, that BNPLC does not waive its interest in or rights with respect to equipment or other property included within the "Property" as described in Paragraph 7 of the Improvements Lease. Although computer equipment or other tangible personal property may be "bolted down" or otherwise firmly affixed to Improvements, it shall not by reason thereof become part of the Improvements if it can be removed without causing structural or other material damage to the Improvements and without rendering HVAC or other major building systems inoperative and if it does not otherwise constitute "Property" as provided in Paragraph 7 of the Improvements Lease. (D) Estoppel Letter. Upon thirty days written request by NAI at any time and from time to time prior to the Designated Sale Date, BNPLC shall provide a statement in writing certifying that the Operative Documents are unmodified and in full effect (or, if there have been modifications, that the Operative Documents are in full effect as modified, and setting forth such modifications), certifying the dates to which the rents payable by NAI under the Leases has been paid, stating whether BNPLC is aware of any default by NAI that may exist under the -7- <PAGE> 11 Leases and confirming BNPLC's agreements concerning landlord's liens and other matters set forth in subparagraph 3(C). It being intended that any such statement by BNPLC may be relied upon by anyone with whom NAI may intend to enter into an agreement for construction of the Improvements or other significant agreements concerning the Property. (E) Limited Representations by BNPLC Concerning Accounting Matters. BNPLC is not expected or required to represent or warrant that the Leases or the Purchase Agreements will qualify for any particular accounting treatment under GAAP. However, to permit NAI to determine for itself the appropriate accounting for the Leases and the Purchase Agreements, BNPLC does represent to NAI the following as of the Effective Date: (1) Equity capital invested in BNPLC is greater than three percent (3%) of the aggregate of all lease funding amounts (including participations) of BNPLC. Such equity capital investments constitute equity in legal form and are reflected as shareholders' equity in the financial statements and accounting records of BNPLC. (2) BNPLC is one hundred percent (100%) owned by French American Bank Corporation, which is one hundred percent (100%) owned by BNPLC's Parent. (3) BNPLC leases properties of substantial value to more than fifteen tenants. (4) All parties to whom BNPLC has any material obligations known to BNPLC are (and are expected to be) Affiliates of BNPLC's Parent, Participants, or participants with BNPLC in other leasing deals or loans made by BNPLC, or other tenants or borrowers in such other leasing deals or loans. (5) BNPLC has substantial assets in addition to the Property, assets which BNPLC believes to have a value far in excess of the value of the Property. (6) Other than any Funding Advances provided from time to time by Participants under the Participation Agreement, BNPLC expects to obtain all Funding Advances from Banque Nationale de Paris or other Affiliates of BNPLC, and to the extent that Banque Nationale de Paris or such other Affiliates themselves borrow or accept bank deposits to obtain the funds needed to provide such Funding Advances, the obligation to repay such funds shall not be limited, by agreement or corporate structure, to payments collected from NAI or otherwise recovered from the Property. (7) BNPLC has not obtained residual value insurance or a residual value guarantee from any third party to ensure the recovery of its investment in the Property. (8) BNPLC does not intend to take any action during the terms of the Leases that would change, or anticipate any change in, any of the facts listed above in this subparagraph. NAI shall have the right to ask BNPLC questions from time to time concerning BNPLC's financial condition, concerning matters relevant to the proper accounting treatment of the Leases on NAI's financial statements and accounting records (including the amount of BNPLC's equity capital as a percentage of the aggregate of all lease funding amounts [including participations] by BNPLC) or concerning BNPLC's ability to perform under the Leases or the Purchase Agreements, to which questions BNPLC shall promptly respond. Such response, however, may be limited to a statement that BNPLC will not provide requested information; provided, however, BNPLC must notify NAI in writing if at any time during the terms of the Leases BNPLC ceases to be 100% owned, directly or indirectly, by Banque Nationale de Paris, or if at any time during the terms of the Leases BNPLC believes it could not represent that the statements in clauses (1), (5) and (7) above continue to be accurate, whether because of a -8- <PAGE> 12 change in the capital structure of BNPLC, a purchase of residual value insurance with respect to the Property or otherwise. (F) Other Limited Representations by BNPLC. BNPLC represents that: (1) No Default or Violation. The execution, delivery and performance by BNPLC of this Agreement and the other Operative Documents do not and will not constitute a breach or default under any material contract or agreement to which BNPLC is a party or by which BNPLC is bound and do not, to the knowledge of BNPLC, violate or contravene any law, order, decree, rule or regulation to which BNPLC is subject. (As used in this subparagraph 3(F), "BNPLC'S KNOWLEDGE" means the present actual knowledge of Lloyd Cox, the current officer of BNPLC having primary responsibility for the negotiation of the Operative Documents.) (2) No Suits. There are no judicial or administrative actions, suits, proceedings or investigations pending or, to BNPLC's knowledge, threatened against BNPLC that are reasonably likely to affect BNPLC's interest in the Property or the validity, enforceability or priority of the Leases or the Purchase Agreements, and BNPLC 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 BNPLC or its interest in the Property. (3) Enforceability. The execution, delivery and performance of each of the Operative Documents by BNPLC are duly authorized, are not in contravention of or conflict with any term or provision of BNPLC's articles of incorporation or bylaws and do not, to BNPLC'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. Each of the Operative Documents are valid, binding and legally enforceable obligations of BNPLC 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, BNPLC makes no representation or warranty that conditions imposed by zoning ordinances or other state or local Applicable Laws to the purchase, ownership, lease or operation of the Property have been satisfied. (4) Organization. BNPLC is duly incorporated and legally existing under the laws of Delaware and is duly qualified to do business in the State of California. BNPLC has or will obtain on a timely basis, at NAI's expense to the extent so provided in the Leases, all requisite power and all governmental certificates of authority, licenses, permits, qualifications and other documentation necessary to own and lease the Property and to perform its obligations under the Operative Documents. (5) Existence. So long as NAI continues to have rights under the Leases or Purchase Agreements, BNPLC shall continuously maintain its existence and, to the extent required to comply with its obligations under the Operative Documents, its qualification to do business in the State of California. (6) Not a Foreign Person. BNPLC is not a "foreign person" within the meaning of Sections 1445 and 7701 of the Code (i.e., BNPLC 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). (7) Bankruptcy. BNPLC's capital is adequate for the businesses in which BNPLC is engaged and intends to be engaged. BNPLC has not incurred (whether hereby or otherwise), nor does BNPLC intend to incur or believe that it will incur, debts which will be beyond its ability to pay as such debts mature. There has not been filed by or, to BNPLC's knowledge, against BNPLC a petition in bankruptcy or -9- <PAGE> 13 a petition or answer seeking an assignment for the benefit of creditors, the appointment of a receiver, trustee, custodian or liquidator with respect to BNPLC or any significant portion of BNPLC's property, reorganization, arrangement, rearrangement, composition, extension, liquidation or dissolution or similar relief under the federal Bankruptcy Code or any state law. 4 OBLIGATIONS OF NAI UNDER OTHER OPERATIVE DOCUMENTS NOT LIMITED BY THIS AGREEMENT. Nothing contained in this Agreement shall limit, modify or otherwise affect any of NAI's obligations under the other Operative Documents, which obligations are intended to be separate, independent and in addition to, and not in lieu of, those established by this Agreement. 5 OBLIGATIONS OF NAI HEREUNDER NOT LIMITED BY OTHER OPERATIVE DOCUMENTS. Recognizing that but for this Agreement (including the representations of NAI set forth in Paragraphs 1 and 2) BNPLC would not acquire the Property or enter into the other Operative Documents, NAI agrees that BNPLC's rights for any breach of this Agreement (including a breach of such representations) shall not be limited by any provision of the other Operative Documents that would limit NAI's liability thereunder, including any provision therein that would limit NAI's liability in the event of a termination of the Leases or of any of NAI's rights or obligations under the Purchase Agreements. [The signature pages follow.] -10- <PAGE> 14 IN WITNESS WHEREOF, this Closing Certificate and Agreement is hereby executed in multiple originals as of the Effective Date above set forth. "NAI" NETWORK APPLIANCE, INC. By: --------------------------------- Name (print): -------------------- Title: --------------------------- <PAGE> 15 [Continuation of signature pages to Closing Certificate and Agreement dated to be effective December ___, 1999] "BNPLC" BNP LEASING CORPORATION By: --------------------------------- Lloyd G. Cox, Vice President <PAGE> 16 EXHIBIT A LEGAL DESCRIPTION The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75~8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14~51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75~08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14~51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 -1- <PAGE> 17 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 -2- <PAGE> 18 EXHIBIT B PERMITTED ENCUMBRANCES TRACT 1 and 2: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. LIMITATIONS, covenants, conditions, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded December 23, 1971 in Book 9640, page 443, Official Records. Assignments and Assumption, executed by Moffett Park Associates, a partnership to Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 4. AGREEMENT on the terms and conditions contained therein, For : Waiver of Construction Credits Between : Moffett Park Associates And : None Shown Recorded : September 28, 1976 in Book C307, page 346, Official Records. 5. EASEMENT for the purposes stated herein and incidents thereto Purpose : Construction, reconstruction, operation, repair, maintenance, replacement, relocation and enlargement of Public Utilities Granted to : The City of Sunnyvale, a municipal corporation Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : as follows: Being a portion of Parcel B as shown on that certain Parcel Map recorded August 28, 1974 in Book of Maps, at page 20, Santa Clara County Records; a strip of land 10 feet in width, measured at right angles lying Northerly and Easterly of and contiguous to the following described line; beginning at the intersection of the Westerly line of Crossman Road, 90 feet in width, with the Northerly line of Parcel A as shown on said Map; thence North 75~ 7' 58" West along said Northerly line of Parcel A 450.13 feet; thence leaving said Northerly line, North 30~ 7' 48" West 210.69 feet; thence North 75~ 8' 27" West 391.04 feet to a point on the Easterly line of the proposed Geneva Drive, 60 feet wide, said point being the terminus of said easement. 6. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. -1- <PAGE> 19 TRACT 3: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 4. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 5. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 6. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities Granted to : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : Southerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 7. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, -2- <PAGE> 20 familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. 8. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. (a) The fact that a chain link fence extends across the southerly boundary of said land. TRACT 4: 9. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 10. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 11. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 90, Official Records Affects : Westerly 5 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 12. EASEMENT recorded on that certain Map for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : July 7, 1994 in Book 657 of Maps, page 9, Official Records Affects : Westerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 13. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 14. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC -3- <PAGE> 21 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. TRACT 5: 15. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 16. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 17. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : The Northeasterly and Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 18. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : The Northeasterly and Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 19. EASEMENT for the purposes stated herein and incidents thereto Purpose : Sidewalk and sign easement Recorded : July 7, 1994, in Book 657 of Maps, page 9, Official Records Affects : The Northerly 2 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 20. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. 21. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : October 7, 1998, in Book 708 of Maps, pages 51-52, Official Records Affects : The Northerly 15 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. -4- <PAGE> 22 EXHIBIT C DEVELOPMENT DOCUMENTS - -NONE- -1- <PAGE> 23 EXHIBIT D NOTICE OF REQUEST FOR ACTION BY BNPLC BNP Leasing Corporation 12201 Merit Drive Suite 860 Dallas, Texas 75251 Attention: Lloyd G. Cox Re: Closing Certificate and Agreement dated as of December ___, 1999, between Network Appliance, Inc. and BNP Leasing Corporation Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Closing Certificate and Agreement referenced above. Pursuant to subparagraph 3(A) of the Closing Certificate and Agreement, NAI requests the following of BNPLC: [INSERT HERE A SPECIFIC DESCRIPTION OF THE ACTION REQUESTED - E.G., "PLEASE EXECUTE THE ENCLOSED APPLICATION FOR BUILDING PERMIT REQUIRED BY THE CITY OF SUNNYVALE IN CONNECTION WITH CONSTRUCTION OF CERTAIN IMPROVEMENTS WHICH ARE PART OF THE INITIAL CONSTRUCTION PROJECT."] PLEASE NOTE: SUBPARAGRAPH 3(A) OF THE CLOSING CERTIFICATE OBLIGATES BNPLC NOT TO UNREASONABLY REFUSE TO COMPLY WITH THE FOREGOING REQUEST, SUBJECT TO TERMS AND CONDITIONS SET FORTH IN THAT SUBPARAGRAPH. NAI HEREBY CERTIFIES TO BNPLC THAT AFTER CAREFUL CONSIDERATION NAI BELIEVES THAT ALL SUCH TERMS AND CONDITIONS ARE SATISFIED IN THE CASE OF THE FOREGOING REQUEST, AND NAI HEREBY RATIFIES AND CONFIRMS ITS OBLIGATION TO INDEMNIFY BNPLC AGAINST ANY LOSSES BNPLC MAY INCUR OR SUFFER BECAUSE OF ITS COMPLIANCE WITH SUCH REQUEST AS PROVIDED IN SUBPARAGRAPH 5(c) OF THE LEASE. NAI respectfully requests that BNPLC respond to this notice as soon as reasonably possible. Executed this _____ day of ______________, 19___. NETWORK APPLIANCE, INC. Name: ------------------------------- Title: ------------------------------ -1- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.50 <SEQUENCE>9 <DESCRIPTION>EXHIBIT 10.50 <TEXT> <PAGE> 1 EXHIBIT 10.50 ================================================================================ LEASE AGREEMENT (PHASE IV - LAND) BETWEEN BNP LEASING CORPORATION ("BNPLC") AND NETWORK APPLIANCE, INC. ("NAI") DECEMBER ___, 1999 (SUNNYVALE, CALIFORNIA) ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> 1. TERM.................................................................................2 (a) Scheduled Term................................................................2 (b) Intentionally Deleted.........................................................2 (c) Intentionally Deleted.........................................................2 (d) Election by NAI to Terminate After Accelerating the Designated Sale Date......2 (e) Extension of the Term.........................................................3 2. USE AND CONDITION OF THE PROPERTY....................................................3 (a) Use...........................................................................3 (b) Condition of the Property.....................................................3 (c) Consideration for and Scope of Waiver.........................................4 3. RENT.................................................................................4 (a) Base Rent Generally...........................................................4 (b) Impact of Collateral Upon Formulas............................................4 (c) Calculation of and Due Dates for Base Rent....................................4 (i) Amount Payable On the Base Rent Commencement Date......................4 (ii) Determination of Payment Due Dates, Generally..........................5 (iii) Special Adjustments to Base Rent Payment Dates and Periods.............5 (iv) Base Rent Formula for Periods During Which The Collateral Percentage is 100%.....................................................5 (v) Base Rent Formula for Periods During Which The Collateral Percentage is Greater Than Zero and Less Than 100%...................................6 (vi) Base Rent Formula for Periods During Which The Collateral Percentage is Zero................................................................7 (d) Additional Rent...............................................................7 (e) Intentionally Deleted.........................................................7 (f) Intentionally Deleted.........................................................7 (g) Intentionally Deleted.........................................................7 (h) Intentionally Deleted.........................................................7 (i) No Demand or Setoff...........................................................7 (j) Default Interest and Order of Application.....................................7 4. NATURE OF THIS AGREEMENT.............................................................8 (a) Net Lease Generally...........................................................8 (b) No Termination................................................................8 (c) Tax Reporting.................................................................9 (d) Characterization of this Land Lease...........................................9 5. PAYMENT OF EXECUTORY COSTS AND LOSSES RELATED TO THE PROPERTY........................9 (a) Impositions..................................................................10 (b) Increased Costs; Capital Adequacy Charges....................................10 (c) NAI's Payment of Other Losses; General Indemnification.......................11 (d) Exceptions and Qualifications to Indemnities.................................12 6. INTENTIONALLY DELETED...............................................................13 7. INTENTIONALLY DELETED...............................................................13 8. ENVIRONMENTAL.......................................................................13 (a) Environmental Covenants by NAI...............................................13 (b) Right of BNPLC to do Remedial Work Not Performed by NAI......................13 </TABLE> -i- <PAGE> 3 <TABLE> <S> <C> (c) Environmental Inspections and Reviews........................................14 (d) Communications Regarding Environmental Matters...............................14 9. INSURANCE REQUIRED AND CONDEMNATION.................................................15 (a) Liability Insurance..........................................................15 (b) Intentionally Deleted........................................................15 (c) Failure to Obtain Insurance..................................................15 (d) Condemnation.................................................................15 (e) Waiver of Subrogation........................................................15 10. APPLICATION OF INSURANCE AND CONDEMNATION PROCEEDS..................................16 (a) Collection and Application of Insurance and Condemnation Proceeds Generally..16 (b) Advances of Escrowed Proceeds to NAI.........................................16 (c) Application of Escrowed Proceeds as a Qualified Prepayment...................16 (d) Special Provisions Applicable After an Event of Default......................17 (e) NAI's Obligation to Restore..................................................17 (f) Takings of All or Substantially All of the Property on or after the Base Rent Commencement Date............................................................17 11. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF NAI CONCERNING THE PROPERTY.17 (a) Compliance with Covenants and Laws...........................................17 (b) Operation of the Property....................................................17 (c) Debts for Construction, Maintenance, Operation or Development................18 (d) Repair, Maintenance, Alterations and Additions...............................19 (e) Permitted Encumbrances and Development Documents.............................19 (f) Books and Records Concerning the Property....................................19 12. FINANCIAL COVENANTS AND OTHER COVENANTS INCORPORATED BY REFERENCE TO SCHEDULE 1.....20 13. FINANCIAL STATEMENTS AND OTHER REPORTS..............................................20 (a) Financial Statements; Required Notices; Certificates.........................20 14. ASSIGNMENT AND SUBLETTING BY NAI....................................................21 (a) BNPLC's Consent Required.....................................................21 (b) Standard for BNPLC's Consent to Assignments and Certain Other Matters........21 (c) Consent Not a Waiver.........................................................22 15. ASSIGNMENT BY BNPLC.................................................................22 (a) Restrictions on Transfers....................................................22 (b) Effect of Permitted Transfer or other Assignment by BNPLC....................22 16. BNPLC'S RIGHT OF ACCESS.............................................................22 17. EVENTS OF DEFAULT...................................................................23 18. REMEDIES............................................................................24 (a) Basic Remedies...............................................................24 (b) Notice Required So Long As the Purchase Option and NAI's Initial Remarketing Rights and Obligations Continue Under the Purchase Agreement........................26 (c) Enforceability...............................................................26 (d) Remedies Cumulative..........................................................26 19. DEFAULT BY BNPLC....................................................................27 20. QUIET ENJOYMENT.....................................................................27 21. SURRENDER UPON TERMINATION..........................................................27 22. HOLDING OVER BY NAI.................................................................27 23. INDEPENDENT OBLIGATIONS EVIDENCED BY THE OTHER OPERATIVE DOCUMENTS..................28 </TABLE> -ii- <PAGE> 4 EXHIBITS AND SCHEDULES <TABLE> <S> <C> Exhibit A....................................................................Legal Description Exhibit B...............................................................Insurance Requirements Exhibit C...........................................................LIBOR Period Election Form Schedule 1..........................................Financial Covenants and Other Requirements </TABLE> -iii- <PAGE> 5 LEASE AGREEMENT (PHASE IV - LAND) This LEASE AGREEMENT (PHASE IV - LAND) (this "LAND LEASE"), by and between BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), and NETWORK APPLIANCE, INC., a California corporation ("NAI"), is made and dated as of DECEMBER ___, 1999, the Effective Date. ("EFFECTIVE DATE" and other capitalized terms used and not otherwise defined in this Land Lease are intended to have the meanings assigned to them in the Common Definitions and Provisions Agreement (Phase IV - Land) executed by BNPLC and NAI contemporaneously with this Land Lease. By this reference, the Common Definitions and Provisions Agreement (Phase IV - Land) is incorporated into and made a part of this Land Lease for all purposes.) RECITALS Pursuant to the Existing Contract, which covers the Land described in Exhibit A, BNPLC is acquiring the Land and any appurtenances thereto from Seller contemporaneously with the execution of this Land Lease. In anticipation of BNPLC's acquisition of the Land under the Existing Contract, BNPLC and NAI have reached agreement as to the terms and conditions upon which BNPLC is willing to lease the Land to NAI, and by this Land Lease BNPLC and NAI desire to evidence such agreement. GRANTING CLAUSES BNPLC does hereby LEASE, DEMISE and LET unto NAI for the term hereinafter set forth all right, title and interest of BNPLC, now owned or hereafter acquired, in and to: (1) the Land; (2) all easements and other rights appurtenant to the Land, whether now owned or hereafter acquired by BNPLC; and (3) (A) any land lying within the right-of-way of any street, open or proposed, adjoining the Land, (B) any sidewalks and alleys adjacent to the Land and (C) any strips and gores between the Land and any abutting land not owned or leased by BNPLC. BNPLC's interest in all property described in clauses (1) through (3) above are hereinafter referred to collectively as the "REAL PROPERTY". The Real Property does not include any Improvements (now existing or those to be constructed as provided in the Other Lease Agreement) or BNPLC's rights appurtenant to the Improvements, it being understood that the Other Lease Agreement constitutes a separate lease of the Improvements and the appurtenances thereto, and only the Improvements and the appurtenances thereto, from BNPLC to NAI. To the extent, but only to the extent, that assignable rights or interests in, to or under the following have been or will be acquired by BNPLC under the Existing Contract or acquired by BNPLC pursuant to Paragraph 7 below, BNPLC also hereby grants and assigns to NAI for the term of this Land Lease the right to use and enjoy (and, in the case of contract rights, to enforce) such rights or interests of BNPLC: -1- <PAGE> 6 (a) the benefits, if any, conferred upon the owner of the Real Property by the Permitted Encumbrances (including the right to receive rents under and to otherwise enforce the Premises Leases) and Development Documents; and (b) any permits, licenses, franchises, certificates, and other rights and privileges against third parties related to the Real Property. Such rights and interests of BNPLC, whether now existing or hereafter arising, are hereinafter collectively called the "PERSONAL PROPERTY". The Real Property and the Personal Property are hereinafter sometimes collectively called the "PROPERTY." However, the leasehold estate conveyed hereby and NAI's rights hereunder are expressly made subject and subordinate to the terms and conditions of this Land Lease, to the Premises Leases and all other Permitted Encumbrances, and to any other claims or encumbrances not constituting Liens Removable by BNPLC. GENERAL TERMS AND CONDITIONS The Property is leased by BNPLC to NAI and is accepted and is to be used and possessed by NAI upon and subject to the following terms and conditions: 1. TERM. (a) Scheduled Term. The term of this Land Lease (the "TERM") shall commence on and include the Effective Date, and end on the first Business Day of January, 2005, unless sooner terminated as expressly herein provided. (b) Intentionally Deleted. (c) Intentionally Deleted. (d) Election by NAI to Terminate After Accelerating the Designated Sale Date. NAI shall be entitled to accelerate the Designated Sale Date (and thus accelerate the purchase of BNPLC's interest in the Property by NAI or by an Applicable Purchaser pursuant to the Purchase Agreement) by sending a notice to BNPLC as provided in clause (2) of the definition of "Designated Sale Date" in the Common Definitions and Provisions Agreement (Phase IV - Land). In the event, because of NAI's election to so accelerate the Designated Sale Date or for any other reason, the Designated Sale Date occurs before the end of the scheduled Term, NAI may terminate this Land Lease on or after the Designated Sale Date; provided, however, as a condition to any such termination by NAI, NAI must have done the following prior to the termination: (i) purchased or caused an Applicable Purchaser to purchase the Property pursuant to the Purchase Agreement and satisfied all of NAI's other obligations under the Purchase Agreement; (ii) paid to BNPLC all Base Rent and all other Rent due on or before or accrued through the Designated Sale Date; and (iii) paid any Breakage Costs caused by BNPLC's sale of the Property pursuant to the Purchase Agreement. -2- <PAGE> 7 (e) Extension of the Term. The Term may be extended at the option of NAI for two successive periods of five years each; provided, however, that prior to any such extension the following conditions must have been satisfied: (A) at least ninety days prior to the commencement of any such extension, BNPLC and NAI must have agreed in writing upon, and received the consent and approval of BNPLC's Parent and all other Participants to (1) a corresponding extension not only to the date for the expiration of the Term specified above in this Section, but also to the date specified in clause (1) of the definition of Designated Sale Date in the Common Definitions and Provisions Agreement (Phase IV - Land), and (2) an adjustment to the Rent that NAI 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 BNPLC and NAI, each in its sole and absolute discretion; (B) no Event of Default shall have occurred and be continuing at the time of NAI's exercise of its option to extend; and (C) immediately prior to any such extension, this Land Lease must remain in effect. With respect to the condition that BNPLC and NAI must have agreed upon the Rent required for any extension of the Term, neither NAI nor BNPLC is willing to submit itself to a risk of liability or loss of rights hereunder for being judged unreasonable. Accordingly, both NAI and BNPLC 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 NAI exercises its option to extend the Term as provided in this Paragraph, this Land Lease shall continue in full force and effect, and the leasehold estate hereby granted to NAI shall continue without interruption and without any loss of priority over other interests in or claims against the Property that may be created or arise after the date hereof and before the extension. 2. USE AND CONDITION OF THE PROPERTY. (a) Use. Subject to the Permitted Encumbrances, the Development Documents and the terms hereof, NAI may use and occupy the Property during the Term, but only for the following purposes. (i) maintaining and using Improvements on the Land for purposes expressly permitted by and described in Paragraph 2(a) of the Other Lease Agreement; and (ii) other lawful purposes approved in advance and in writing by BNPLC, which approval will not be unreasonably withheld (but NAI acknowledges that BNPLC's withholding of such approval shall be reasonable if BNPLC determines in good faith that (1) giving the approval may materially increase BNPLC's risk of liability for any existing or future environmental problem, or (2) giving the approval is likely to substantially increase BNPLC's administrative burden of complying with or monitoring NAI's compliance with the requirements of this Land Lease or other Operative Documents). Nothing in this subparagraph will prevent a tenant under a Premises Lease executed by NAI, as Landlord, prior to or concurrently with the Effective Date, from using the space covered thereby for purposes expressly authorized by the terms and conditions of such Premises Lease. (b) Condition of the Property. NAI ACKNOWLEDGES THAT IT HAS CAREFULLY AND FULLY INSPECTED THE PROPERTY AND ACCEPTS THE PROPERTY 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. NAI ALSO ACCEPTS THE PROPERTY WITHOUT ANY COVENANT, REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, BY BNPLC OR ITS AFFILIATES REGARDING THE TITLE THERETO OR THE RIGHTS OF ANY PARTIES IN POSSESSION OF ANY PART THEREOF, EXCEPT AS EXPRESSLY SET FORTH IN PARAGRAPH 20. BNPLC SHALL NOT BE RESPONSIBLE FOR ANY LATENT OR OTHER DEFECT OR CHANGE OF CONDITION IN THE PROPERTY OR FOR ANY VIOLATIONS WITH RESPECT THERETO OF APPLICABLE LAWS. FURTHER, THOUGH NAI MAY OBTAIN FROM THIRD PARTIES ANY FACILITIES OR SERVICES TO WHICH NAI -3- <PAGE> 8 IS ENTITLED BY REASON OF THE ASSIGNMENT AND LEASE OF PERSONAL PROPERTY SET FORTH ON PAGE 2 OF THIS LAND LEASE, BNPLC SHALL NOT BE REQUIRED TO FURNISH TO NAI ANY FACILITIES OR SERVICES OF ANY KIND, INCLUDING WATER, STEAM, HEAT, GAS, AIR CONDITIONING, ELECTRICITY, LIGHT OR POWER. (c) Consideration for and Scope of Waiver. The provisions of subparagraph 2.(b) above have been negotiated by BNPLC and NAI after due consideration for the Rent payable hereunder and are intended to be a complete exclusion and negation of any representations or warranties of BNPLC or its Affiliates, express or implied, with respect to the Property that may arise pursuant to any law now or hereafter in effect or otherwise, except as expressly set forth herein. However, such exclusion of representations and warranties by BNPLC is not intended to impair any representations or warranties made by other parties, the benefit of which may pass to NAI during the Term because of the definition of Personal Property and Property above. 3. RENT. (a) Base Rent Generally. On each Base Rent Date through the end of the Term, NAI shall pay BNPLC rent ("BASE RENT"). Each payment of Base Rent must be received by BNPLC no later than 10:00 a.m. (Pacific time) on the date it becomes due; if received after 10:00 a.m. (Pacific time) it will be considered for purposes of this Land Lease as received on the next following Business Day. At least five days prior to any Base Rent Date upon which an installment of Base Rent shall become due, BNPLC shall notify NAI in writing of the amount of each installment, calculated as provided below. Any failure by BNPLC to so notify NAI, however, shall not constitute a waiver of BNPLC's right to payment, but absent such notice NAI shall not be in default hereunder for any underpayment resulting therefrom if NAI, in good faith, reasonably estimates the payment required, makes a timely payment of the amount so estimated and corrects any underpayment within three Business Days after being notified by BNPLC of the underpayment. (b) Impact of Collateral Upon Formulas. To ease the administrative burden of this Land Lease and the Pledge Agreement, the formulas for calculating Base Rent set out below in subparagraph 3.(c) reflect a reduction in the Base Rent equal to the interest that would accrue on any Collateral provided in accordance with the requirements of the Pledge Agreement from time to time if the Accounts (as defined in the Pledge Agreement) bore interest at the Effective Rate. BNPLC has agreed to such reduction to provide NAI with the economic equivalent of interest on such Collateral, and in return NAI 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 below, 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 BNPLC or NAI to understate Base Rent or interest for financial reporting purposes. Accordingly, for purposes of any financial reports that this Land Lease requires of NAI from time to time, NAI may report Base Rent as if there had been no such reduction and as if the Collateral from time to time provided in accordance with the requirements of the Pledge Agreement had been maintained in Accounts bearing interest at the Effective Rate. (c) Calculation of and Due Dates for Base Rent. Payments of Base Rent shall be calculated and become due as follows: (i) Amount Payable On the Base Rent Commencement Date. The Base Rent payable for each day (including the Effective Date) prior to but not including the Base Rent Commencement Date shall be equal to (a) the sum of (1) the per annum interest rate, as determined by BNPLC, at which BNPLC can borrow funds overnight from BNPLC's Parent on that day, plus (2) the Unsecured Spread, multiplied by -4- <PAGE> 9 (b) the Initial Funding Advance, divided by (c) 360. All such Base Rent shall become due on the Base Rent Commencment Date. (ii) Determination of Payment Due Dates, Generally. For all Base Rent Periods subject to a LIBOR Period Election of one month or three months, Base Rent shall be due in one installment on the Base Rent Date upon which the Base Rent Period ends. For Base Rent Periods subject to a LIBOR Period Election of six months, Base Rent shall be payable in two installments, with the first installment becoming due on the Base Rent Date that occurs on the first Business Day of the third calendar month following the commencement of such Base Rent Period, and with the second installment becoming due on the Base Rent Date upon which the Base Rent Period ends. (iii) Special Adjustments to Base Rent Payment Dates and Periods. Notwithstanding the foregoing: a) Any Base Rent Period that begins before, and does not otherwise end before, a Failed Collateral Test Date shall end upon but not include such Failed Collateral Test Date, and such Failed Collateral Test Date shall constitute a Base Rent Date, upon which NAI must pay all accrued, unpaid Base Rent for the Base Rent Period just ended. b) Consistent with clause (3) of the definition of LIBOR Period Election in the Common Definitions and Provisions Agreement (Phase IV - Land), each successive Base Rent Date after any such Failed Collateral Test Date shall be the first Business Day of the first calendar month following the calendar month which includes the preceding Base Rent Date, so long as any Mandatory Collateral Period shall continue. c) In addition to Base Rent due on a Failed Collateral Test Date, NAI must pay the Breakage Costs, if any, resulting from any early ending of a Base Rent Period on the Failed Collateral Test Date pursuant to the preceding clause 3.(c)(iii)a). d) If NAI or any Applicable Purchaser purchases BNPLC's interest in the Property pursuant to the Purchase Agreement, any accrued unpaid Base Rent and all outstanding Additional Rent shall be due on the date of purchase in addition to the purchase price and other sums due BNPLC under the Purchase Agreement. (iv) Base Rent Formula for Periods During Which The Collateral Percentage is 100%. Each installment of Base Rent payable for any Base Rent Period during which the Collateral Percentage is one hundred percent (100%) shall equal: - Stipulated Loss Value on the first day of such Base Rent Period, times - the Secured Spread for the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, times - the number of days in the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, divided by - three hundred sixty. -5- <PAGE> 10 Assume, only for the purpose of illustration: that the Collateral Percentage for a hypothetical Base Rent Period is one hundred percent (100%); that prior to the first day of such Base Rent Period Qualified Prepayments have been received by BNPLC, leaving a Stipulated Loss Value of $20,000,000; that the Secured Spread is thirty basis points (30/100 of 1%); and that such Base Rent Period contains exactly thirty days. Under such assumptions, the Base Rent for the hypothetical Base Rent Period will equal: $20,000,000 x .30% x 30/360 = $5,000 (v) Base Rent Formula for Periods During Which The Collateral Percentage is Greater Than Zero and Less Than 100%. Each installment of Base Rent payable for any Base Rent Period during which the Collateral Percentage is greater than zero and less than one hundred percent (100%) shall equal: - Stipulated Loss Value on the first day of such Base Rent Period, times - the sum of: (A) the product of: (1) the Collateral Percentage for such Base Rent Period, times (2) the Secured Spread for the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, plus (B) the product of: (1) one minus the Collateral Percentage for such Base Rent Period, times (2) the sum of (a) the Effective Rate with respect to such Base Rent Period, plus (b) the Unsecured Spread for the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, times - the number of days in the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, divided by - three hundred sixty. Assume, only for the purpose of illustration: that the Collateral Percentage for a hypothetical Base Rent Period is forty percent (40%); that prior to the first day of such Base Rent Period Qualified Prepayments have been received by BNPLC, leaving a Stipulated Loss Value of $20,000,000; that the Effective Rate for the Base Rent Period is 6%; that the Secured Spread is thirty basis points (30/100 of 1%); that upon the commencement of such Base Rent Period the Unsecured Spread is one hundred fifty -6- <PAGE> 11 basis points (150/100 of 1%); and that such Base Rent Period contains exactly thirty days. Under such assumptions, the Base Rent for the hypothetical Base Rent Period will equal: $20,000,000 x {(40% x .30%) + ([1 - 40%] x [6% + 1.50%])} x 30/360 = $77,000 (vi) Base Rent Formula for Periods During Which The Collateral Percentage is Zero. Each installment of Base Rent payable for any Base Rent Period during which the Collateral Percentage is zero shall equal: - Stipulated Loss Value on the first day of such Base Rent Period, times - the sum of (a) the Effective Rate with respect to such Base Rent Period, plus (b) the Unsecured Spread for the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, times - the number of days in the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, divided by - three hundred sixty. Assume, only for the purpose of illustration: that the Collateral Percentage for a hypothetical Base Rent Period is zero percent (0%); that prior to the first day of such Base Rent Period Qualified Prepayments have been received by BNPLC, leaving a Stipulated Loss Value of $20,000,000; that the Effective Rate for the Base Rent Period is 6%; that the Unsecured Spread is one hundred fifty basis points (150/100 of 1%) upon the commencement of such Base Rent Period; and that such Base Rent Period contains exactly thirty days. Under such assumptions, the Base Rent for the hypothetical Base Rent Period will equal: $20,000,000 x (6% + 1.50%) x 30/360 = $125,000 (d) Additional Rent. All amounts which NAI is required to pay to or on behalf of BNPLC pursuant to this Land 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", and together Base Rent and Additional Rent are herein sometimes called "RENT"). (e) Intentionally Deleted. (f) Intentionally Deleted. (g) Intentionally Deleted. (h) Intentionally Deleted. (i) No Demand or Setoff. Except as expressly provided herein, NAI shall pay all Rent without notice or demand and without counterclaim, deduction, setoff or defense. (j) Default 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 -7- <PAGE> 12 contained will be construed as permitting the charging or collection of interest at a rate exceeding the maximum rate permitted under Applicable Laws. BNPLC shall be entitled to apply any amounts paid by or on behalf of NAI against any Rent then past due in the order the same became due or in such other order as BNPLC may elect. 4. NATURE OF THIS AGREEMENT. (a) "Net" Lease Generally. Subject only to the exceptions listed in subparagraph 5.(d) below, it is the intention of BNPLC and NAI that Base Rent and other payments herein specified shall be absolutely net to BNPLC and that NAI shall pay all costs, expenses and obligations of every kind relating to the Property or this Land Lease which may arise or become due, including: (i) any taxes payable by virtue of BNPLC's receipt of amounts paid to or on behalf of BNPLC in accordance with Paragraph 5; (ii) any amount for which BNPLC is or becomes liable with respect to the Permitted Encumbrances or the Development Documents; and (iii) any costs incurred by BNPLC (including Attorneys' Fees) because of BNPLC's acquisition or ownership of any interest in the Property or because of this Land Lease or the transactions contemplated herein. However, neither this subparagraph 4.(a) nor the indemnity in this subparagraph 5.(c)(i) shall be construed to make NAI liable for (I) an allocation of general overhead or internal administrative expenses of BNPLC or any other Interested Party or (II) any duplicate payment of the same Loss to both BNPLC and another Interested Party. (If, for example, BNPLC were required to make a $10 fine because of a failure of the Property to comply with Applicable Laws, and a Participant were required by the Participation Agreement to reimburse BNPLC for 20% of the $10, NAI would not be required by this subparagraph 4.(a) or by subparagraph 5.(c)(i) to pay both $10 to BNPLC and $2 to the Participant on account of the fine.) (b) No Termination. Except as expressly provided in this Land Lease itself, this Land Lease shall not terminate, nor shall NAI have any right to terminate this Land Lease, nor shall NAI be entitled to any abatement of the Rent, nor shall the obligations of NAI under this Land Lease be excused, for any reason whatsoever, including any of the following: (i) any damage to or the destruction of all or any part of the Property from whatever cause, (ii) the taking of the Property or any portion thereof by eminent domain or otherwise for any reason, (iii) the prohibition, limitation or restriction of NAI's use or development of all or any portion of the Property or any interference with such use by governmental action or otherwise, (iv) any eviction of NAI or of anyone claiming through or under NAI, (v) any default on the part of BNPLC under this Land Lease or under any other agreement to which BNPLC and NAI are parties, (vi) the inadequacy in any way whatsoever of the Property (it being understood that BNPLC has not made, does not make and will not make any representation express or implied as to the adequacy thereof), (vii) any latent or other defect in the Property or any change in the condition thereof or the existence with respect to the Property of any violations of Applicable Laws, or (viii) any other cause whether similar or dissimilar to the foregoing. It is the intention of the parties hereto that the obligations of NAI hereunder shall be separate and independent of the covenants and agreements of BNPLC, that Base Rent and all other sums payable by NAI hereunder shall continue to be payable in all events and that the obligations of NAI 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 Land Lease. Without limiting the foregoing, NAI waives to the extent permitted by Applicable Laws, except as otherwise expressly provided herein, all rights to which NAI 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 Land Lease or the Property or any part thereof or (ii) to any abatement, suspension, deferment or reduction of the Rent. However, nothing in this subparagraph 4.(b) shall be construed as a waiver by NAI of any right NAI may have at law or in equity to the following remedies, whether because of BNPLC's failure to remove a Lien Removable by BNPLC or because of any other default by BNPLC under this Land Lease that continues beyond the -8- <PAGE> 13 period for cure provided in Paragraph 19: (i) the recovery of monetary damages, (ii) injunctive relief in case of the violation, or attempted or threatened violation, by BNPLC of any of the express covenants, agreements, conditions or provisions of this Land Lease which are binding upon BNPLC (including the confidentiality provisions set forth in subparagraph 16.(c) below), or (iii) a decree compelling performance by BNPLC of any of the express covenants, agreements, conditions or provisions of this Land Lease which are binding upon BNPLC. (c) Tax Reporting. BNPLC and NAI shall report this Land Lease and the Purchase Agreement for federal income tax purposes as a conditional sale unless prohibited from doing so by the Internal Revenue Service. If the Internal Revenue Service shall challenge BNPLC's characterization of this Land Lease and the Purchase Agreement as a conditional sale for federal income tax reporting purposes, BNPLC shall notify NAI in writing of such challenge and consider in good faith any reasonable suggestions by NAI about an appropriate response. In any event, NAI shall (subject only to the limitations set forth in this subparagraph) indemnify and hold harmless BNPLC from and against all liabilities, costs, additional taxes (other than Excluded 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 BNPLC of the recharacterization. If BNPLC receives a written notice of any challenge by the Internal Revenue Service that BNPLC believes will be covered by this Paragraph, then BNPLC shall promptly furnish a copy of such notice to NAI. The failure to so provide a copy of the notice to NAI shall not excuse NAI from its obligations under this Paragraph; provided, that if none of the officers of NAI and none of the employees of NAI responsible for tax matters are aware of the challenge described in the notice and such failure by BNPLC renders unavailable defenses that NAI might otherwise assert, or precludes actions that NAI might otherwise take, to minimize its obligations hereunder, then NAI shall be excused from its obligation to indemnify BNPLC against liabilities, costs, additional taxes and other expenses, if any, which would not have been incurred but for such failure. For example, if BNPLC fails to provide NAI with a copy of a notice of a challenge by the Internal Revenue Service covered by the indemnities set out in this Land Lease and NAI is not otherwise already aware of such challenge, and if as a result of such failure BNPLC becomes liable for penalties and interest covered by the indemnities in excess of the penalties and interest that would have accrued if NAI had been promptly provided with a copy of the notice, then NAI will be excused from any obligation to BNPLC to pay the excess. (d) Characterization of this Land Lease. For purposes of determining the appropriate financial accounting for this Land Lease and for purposes of determining their respective rights and remedies under state law, BNPLC and NAI believe and intend that (i) this Land Lease constitutes a true lease, not a mere financing arrangement, enforceable in accordance with its express terms, and the preceding subparagraph is not intended to affect the enforcement of any other provisions of this Land Lease or the Purchase Agreement, and (ii) the Purchase Agreement shall constitute a separate and independent contract, enforceable in accordance with the express terms and conditions set forth therein. In this regard, NAI acknowledges that NAI asked BNPLC to participate in the transactions evidenced by this Land Lease and the Purchase Agreement as a landlord and owner of the Property, not as a lender. Although other transactions might have been used to accomplish similar results, NAI expects to receive certain material accounting and other advantages through the use of a lease transaction. Accordingly, and notwithstanding the reporting for income tax purposes described in the preceding subparagraph, NAI cannot equitably deny that this Land Lease and the Purchase Agreement should be construed and enforced in accordance with their respective terms, rather than as a mortgage or other security device, in any action brought by BNPLC to enforce this Land Lease or the Purchase Agreement. 5. PAYMENT OF EXECUTORY COSTS AND LOSSES RELATED TO THE PROPERTY. -9- <PAGE> 14 (a) Impositions. Subject only to the exceptions listed in subparagraph 5.(d) below, NAI shall pay or cause to be paid prior to delinquency all ad valorem taxes assessed against the Property and other Impositions. If requested by BNPLC from time to time, NAI shall furnish BNPLC with receipts showing payment of all Impositions prior to the applicable delinquency date therefor. Notwithstanding the foregoing, NAI may in good faith, by appropriate proceedings, contest the validity, applicability or amount of any asserted Imposition, and pending such contest NAI shall not be deemed in default under any of the provisions of this Land Lease because of the Imposition if (1) NAI diligently prosecutes such contest to completion in a manner reasonably satisfactory to BNPLC, and (2) NAI 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, in any event each such contest shall be concluded and the contested Impositions must be paid by NAI prior to the earlier of (i) the date that any criminal prosecution is instituted or overtly threatened against BNPLC or its directors, officers or employees because of the nonpayment thereof or (ii) the date any writ or order is issued under which any property owned or leased by BNPLC (including the Property) may be seized or sold or any other action is taken against BNPLC or against any property owned or leased by BNPLC because of the nonpayment thereof, or (iii) any Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a price to BNPLC (when taken together with any additional payments made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to the Break Even Price. (b) Increased Costs; Capital Adequacy Charges. Subject only to the exceptions listed in subparagraph 5.(d) below: (i) If after the Effective Date there shall be any increase in the cost to BNPLC's Parent or any other Participant agreeing to make or making, funding or maintaining advances to BNPLC in connection with the Property because of any Banking Rules Change, then NAI shall from time to time, pay to BNPLC for the account of BNPLC's Parent or such other Participant, as the case may be, additional amounts sufficient to compensate BNPLC'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 BNPLC'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 such increased cost, submitted to BNPLC and NAI by BNPLC's Parent or the other Participant, shall be conclusive and binding upon NAI, absent clear and demonstrable error. (ii) BNPLC's Parent or any other Participant may demand additional payments ("CAPITAL ADEQUACY CHARGES") if BNPLC's Parent or the other Participant determines that any Banking Rules Change 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 advances made or to be made to BNPLC to permit BNPLC to maintain BNPLC's investment in the Property. To the extent that BNPLC's Parent or another Participant demands Capital Adequacy Charges as compensation for the additional capital requirements reasonably allocable to such investment or advances, NAI shall pay to BNPLC for the account of BNPLC's Parent or the other Participant, as the case may be, the amount so demanded. Without limiting the foregoing, BNPLC and NAI hereby acknowledge and agree that the provisions for calculating Base Rent set forth herein reflect the assumption that the Pledge Agreement will cause a zero percent (0%) risk weight to be assigned to a percentage (equal to the Collateral Percentage) of the collective investment of BNPLC and the Participants in the Property pursuant to 12 Code of Federal Regulations, part 225, as from time to time supplemented or amended, or pursuant to any other similar or successor statute or regulation applicable to BNPLC and the -10- <PAGE> 15 Participants. If and so long as such risk weight is increased the assumed amount of zero percent (0%) because of a Banking Rules Change, Capital Adequacy Charges may be collected to yield the same rate of return to BNPLC, BNPLC's Parent and any other Participants (net of their costs of maintaining required capital) that they would have enjoyed from this Land Lease absent such increase. (iii) Any amount required to be paid by NAI under this subparagraph 5.(b) shall be due ten days after a demand for such payment is received by NAI. (c) NAI's Payment of Other Losses; General Indemnification. Subject only to the exceptions listed in subparagraph 5.(d) below: (i) All Losses (including Environmental Losses) asserted against or incurred or suffered by BNPLC or other Interested Parties at any time and from time to time by reason of, in connection with or arising out of (A) their ownership or alleged ownership of any interest in the Property or the Rents, (B) the use and operation of the Property, (C) the negotiation, administration or enforcement of the Operative Documents, (D) the making of the Initial Funding Advance, (E) the Premises Leases, (F) the breach by NAI of this Land Lease or any other document executed by NAI in connection herewith, (G) any failure of the Property or NAI itself to comply with Applicable Laws, (H) Permitted Encumbrances, (I) Hazardous Substance Activities, including those occurring prior to Effective Date, (J) any obligations under the Existing Contract related to the Property that survive the closing thereunder, or (K) any bodily or personal injury or death or property damage occurring in or upon or in the vicinity of the Property through any cause whatsoever, shall be paid by NAI, and NAI shall indemnify and defend BNPLC and other Interested Parties from and against all such Losses. (ii) THE INDEMNITIES AND RELEASES PROVIDED HEREIN FOR THE BENEFIT OF BNPLC AND OTHER INTERESTED PARTIES, INCLUDING THE INDEMNITY SET FORTH IN THE PRECEDING SUBPARAGRAPH 5.(c)(i), SHALL APPLY EVEN IF AND WHEN THE SUBJECT MATTERS OF THE INDEMNITIES AND RELEASES ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OR STRICT LIABILITY OF BNPLC OR ANOTHER INTERESTED PARTY. FURTHER, SUCH INDEMNITIES AND RELEASES WILL APPLY EVEN IF INSURANCE OBTAINED BY NAI OR REQUIRED OF NAI BY THIS LAND LEASE OR OTHER OPERATIVE DOCUMENTS IS NOT ADEQUATE TO COVER LOSSES AGAINST OR FOR WHICH THE INDEMNITIES AND RELEASES ARE PROVIDED. NAI'S LIABILITY, HOWEVER, FOR ANY FAILURE TO OBTAIN INSURANCE REQUIRED BY THIS LAND LEASE OR OTHER OPERATIVE DOCUMENTS WILL NOT BE LIMITED TO LOSSES AGAINST WHICH INDEMNITIES ARE PROVIDED HEREIN, IT BEING UNDERSTOOD THAT SUCH INSURANCE IS INTENDED TO DO MORE THAN PROVIDE A SOURCE OF PAYMENT FOR LOSSES AGAINST WHICH BNPLC AND OTHER INTERESTED PARTIES ARE ENTITLED TO INDEMNIFICATION BY THIS LAND LEASE. (iii) Costs and expenses for which NAI shall be responsible pursuant to this subparagraph 5.(c) will include appraisal fees, filing and recording fees, inspection fees, survey fees, taxes, brokerage fees and commissions, abstract fees, title policy fees, Uniform Commercial Code search fees, escrow fees and Attorneys' Fees incurred by BNPLC with respect to the Property, whether such costs and expenses are incurred at the time of execution of this Land Lease or at any time during the Term. -11- <PAGE> 16 (iv) NAI's obligations under this subparagraph 5.(c) shall survive the termination or expiration of this Land Lease. Any amount to be paid by NAI under this subparagraph 5.(c) shall be due ten days after a demand for such payment is received by NAI. (v) If an Interested Party notifies NAI of any claim or proceeding included in, or any investigation or allegation concerning, Losses for which NAI is responsible pursuant to this subparagraph 5.(c), NAI shall assume on behalf of the Interested Party and conduct with due diligence and in good faith the investigation and defense thereof and the response thereto with counsel selected by NAI, but satisfactory to the Interested Party; provided, that the Interested 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, proceeding, investigation or allegation involves both NAI and the Interested Party and the Interested Party shall have reasonably concluded that there are legal defenses available to it which are inconsistent with or in addition to those available to NAI, then the Interested Party shall have the right to select separate counsel to participate in the investigation and defense of and response to such claim, proceeding, investigation or allegation on its own behalf, and NAI shall pay or reimburse the Interested Party for all Attorney's Fees incurred by the Interested Party because of the selection of such separate counsel. If NAI fails to assume promptly (and in any event within fifteen days after being notified of the applicable claim, proceeding, investigation or allegation) the defense of the Interested Party, then the Interested Party may contest (or settle, with the prior consent of NAI, which consent will not be unreasonably withheld) the claim, proceeding, investigation or allegation at NAI's expense using counsel selected by the Interested Party. Moreover, if any such failure by NAI continues for forty-five days or more after NAI is notified of any such claim, proceeding, investigation or allegation, the Interested Party may elect not to contest or continue contesting the same and instead, in accordance with the written advice of counsel, settle (or pay in full) all claims related thereto without NAI's consent and without releasing NAI from any obligations to the Interested Party under this subparagraph 5.(c). (d) Exceptions and Qualifications to Indemnities. (i) BNPLC acknowledges and agrees that nothing in subparagraph 4.(a) or the preceding subparagraphs of this Paragraph 5 shall be construed to require NAI to pay or reimburse an Interested Party for (w) any costs or expenses incurred by BNPLC or any transferee to accomplish any Permitted Transfers described in clauses (2), (3), (4), (6) or (7) of the definition thereof in the Common Definitions and Provisions Agreement (Phase IV - Land), (x) Excluded Taxes, (y) Losses incurred or suffered by such Interested Party that are proximately caused by (and attributed by any applicable principles of comparative fault to) the Established Misconduct of that Interested Party, or (z) Losses incurred or suffered by Participants in connection with their negotiation or execution of the Participation Agreement or Pledge Agreement (or supplements making them parties thereto) or in connection with any due diligence they may undertake before entering into the Participation Agreement or Pledge Agreement. Further, without limiting BNPLC's rights (as provided in other provisions of this Land Lease and other Operative Documents) to include the following in the calculation of Stipulated Loss Value or the Break Even Price or collect Base Rent, a Supplemental Payment and other amounts, the calculation of which depends upon the Stipulated Loss Value or the Break Even Price, BNPLC acknowledges and agrees that nothing in subparagraph 4.(a) or the preceding subparagraphs of this Paragraph 5 shall be construed to require NAI to pay or reimburse an Interested Party for costs paid by BNPLC with the proceeds of the Initial Funding Advance as part of the Transaction Expenses. Further, if an Interested Party receives a written notice of Losses that such Interested Party believes are covered by the indemnity in subparagraph 5.(c)(i), then such Interested Party will be expected to promptly -12- <PAGE> 17 furnish a copy of such notice to NAI. The failure to so provide a copy of the notice to NAI shall not excuse NAI from its obligations under subparagraph 5.(c)(i); provided, that if NAI is unaware of the matters described in the notice and such failure renders unavailable defenses that NAI might otherwise assert, or precludes actions that NAI might otherwise take, to minimize its obligations, then NAI shall be excused from its obligation to indemnify such Interested Party (and any Affiliate of such Interested Party) against the Losses, if any, which would not have been incurred or suffered but for such failure. For example, if BNPLC fails to provide NAI with a copy of a notice of an obligation covered by the indemnity set out in subparagraph 5.(c)(i) and NAI is not otherwise already aware of such obligation, and if as a result of such failure BNPLC becomes liable for penalties and interest covered by the indemnity in excess of the penalties and interest that would have accrued if NAI had been promptly provided with a copy of the notice, then NAI will be excused from any obligation to BNPLC (or any Affiliate of BNPLC) to pay the excess. 6. INTENTIONALLY DELETED. 7. INTENTIONALLY DELETED. 8. ENVIRONMENTAL. (a) Environmental Covenants by NAI. NAI covenants that: (i) NAI shall not conduct or permit others to conduct Hazardous Substance Activities, except Permitted Hazardous Substance Use and Remedial Work. (ii) NAI shall not discharge or permit the discharge of anything on or from the Property that would require any permit under applicable Environmental Laws, other than (1) storm water runoff, (2) waste water discharges through a publicly owned treatment works, (3) discharges that are a necessary part of any Remedial Work, and (4) other similar discharges consistent with the definition herein of Permitted Hazardous Substance Use, in each case in strict compliance with Environmental Laws. (iii) Following any discovery that Remedial Work is required by Environmental Laws or otherwise believed by BNPLC to be reasonably required, and to the extent not inconsistent with the other provisions of this Land Lease, NAI shall promptly perform and diligently and continuously pursue such Remedial Work, in each case in strict compliance with Environmental Laws. (iv) If requested by BNPLC in connection with any Remedial Work required by this subparagraph, NAI shall retain independent environmental consultants acceptable to BNPLC to evaluate any significant new information generated during NAI's implementation of the Remedial Work and to discuss with NAI whether such new information indicates the need for any additional measures that NAI should take to protect the health and safety of persons (including employees, contractors and subcontractors and their employees) or to protect the environment. NAI shall implement any such additional measures to the extent required with respect to the Property by Environmental Laws or otherwise believed by BNPLC to be reasonably required and to the extent not inconsistent with the other provisions of this Land Lease. (b) Right of BNPLC to do Remedial Work Not Performed by NAI. If NAI's failure to cure any breach of the covenants set forth in subparagraph 8.(a) continues beyond the Environmental Cure Period (as defined below), BNPLC may, in addition to any other remedies available to it, conduct all or any part of the -13- <PAGE> 18 Remedial Work. To the extent that Remedial Work is done by BNPLC pursuant to the preceding sentence (including any removal of Hazardous Substances), the cost thereof shall be a demand obligation owing by NAI to BNPLC. As used in this subparagraph, "ENVIRONMENTAL CURE PERIOD" means the period ending on the earlier of: (1) one hundred eighty days after NAI is notified of the breach which must be cured within such period, (2) the date that any writ or order is issued for the levy or sale of any property owned by BNPLC (including the Property) because of such breach, (3) the date that any criminal action is instituted or overtly threatened against BNPLC or any of its directors, officers or employees because of such breach, or (4) any Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a net price to BNPLC (when taken together with any Supplemental Payment made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to Stipulated Loss Value. (c) Environmental Inspections and Reviews. BNPLC reserves the right to retain environmental consultants to review any report prepared by NAI or to conduct BNPLC's own investigation to confirm whether NAI is complying with the requirements of this Paragraph 8. NAI grants to BNPLC and to BNPLC's agents, employees, consultants and contractors the right to enter upon the Property at any time to inspect the Property and to perform such tests as BNPLC deems necessary or appropriate to review or investigate Hazardous Substances in, on, under or about the Property or any discharge or suspected discharge of Hazardous Substances into groundwater or surface water from the Property. NAI shall promptly reimburse BNPLC for the fees of its environmental consultants and the costs of any such inspections and tests. (d) Communications Regarding Environmental Matters. (i) NAI shall immediately advise BNPLC of (1) any discovery of any event or circumstance which would render any of the representations of NAI herein or in the Closing Certificate concerning environmental matters materially inaccurate or misleading if made at the time of such discovery and assuming that NAI was aware of all relevant facts, (2) any Remedial Work (or change in Remedial Work) required or undertaken by NAI or its Affiliates in response to any (A) discovery of any Hazardous Substances on, under or about the Property other than Permitted Hazardous Substances or (B) any claim for damages resulting from Hazardous Substance Activities, (3) NAI's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Property which could cause the Property or any part thereof to be subject to any ownership, occupancy, transferability or use restrictions under Environmental Laws, or (4) any investigation or inquiry of any failure or alleged failure by NAI to comply with Environmental Laws affecting the Property by any governmental authority responsible for enforcing Environmental Laws. In such event, NAI shall deliver to BNPLC within thirty days after BNPLC's request, a preliminary written environmental plan setting forth a general description of the action that NAI proposes to take with respect thereto, if any, to bring the Property into compliance with Environmental Laws or to correct any breach by NAI of this Paragraph 8, including any proposed Remedial 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 BNPLC may request. (ii) NAI shall provide BNPLC with copies of all material written communications with federal, state and local governments, or agencies relating to the matters listed in the preceding clause (i). NAI shall also provide BNPLC with copies of any correspondence from third Persons which threaten litigation over any significant failure or alleged significant failure of NAI to maintain or operate the Property in accordance with Environmental Laws. -14- <PAGE> 19 (iii) Prior to NAI's submission of a Material Environmental Communication to any governmental or regulatory agency or third party, NAI shall, to the extent practicable, deliver to BNPLC a draft of the proposed submission (together with the proposed date of submission), and in good faith assess and consider any comments of BNPLC regarding the same. Promptly after BNPLC's request, NAI shall meet with BNPLC to discuss the submission, shall provide any additional information requested by BNPLC and shall provide a written explanation to BNPLC addressing the issues raised by comments (if any) of BNPLC regarding the submission, including a reasoned analysis supporting any decision by NAI not to modify the submission in accordance with comments of BNPLC. 9. INSURANCE REQUIRED AND CONDEMNATION. (a) Liability Insurance. Throughout the Term NAI shall maintain commercial general liability insurance against claims for bodily and personal injury, death and property damage occurring in or upon or resulting from any occurrence in or upon the Property under one or more insurance policies that satisfy the requirements set forth in Exhibit B. NAI shall deliver and maintain with BNPLC for each liability insurance policy required by this Land Lease written confirmation of the policy and the scope of the coverage provided thereby issued by the applicable insurer or its authorized agent, which confirmation must also satisfy the requirements set forth in Exhibit B. (b) Intentionally Deleted. (c) Failure to Obtain Insurance. If NAI fails to obtain any insurance or to provide confirmation of any such insurance as required by this Land Lease, BNPLC shall be entitled (but not required) to obtain the insurance that NAI has failed to obtain or for which NAI has not provided the required confirmation and, without limiting BNPLC's other remedies under the circumstances, BNPLC may require NAI to reimburse BNPLC for the cost of such insurance and to pay interest thereon computed at the Default Rate from the date such cost was paid by BNPLC until the date of reimbursement by NAI. (d) Condemnation. Immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Property or any portion thereof, or any other similar governmental or quasi-governmental proceedings arising out of injury or damage to the Property or any portion thereof, each party shall notify the other (provided, however, BNPLC shall have no liability for its failure to provide such notice) of the pendency of such proceedings. NAI shall, at its expense, diligently prosecute any such proceedings and shall consult with BNPLC, its attorneys and experts and cooperate with them as 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 Property and all judgments, decrees and awards for injury or damage to the Property shall be paid to BNPLC as Escrowed Proceeds, and all such proceeds will be applied as provided in Paragraph 10. BNPLC is hereby authorized, in the name of NAI, at any time when an Event of Default shall have occurred and be continuing, or otherwise with NAI's prior consent, to execute and deliver valid acquittances for, and to appeal from, any such judgment, decree or award concerning condemnation of any of the Property. BNPLC 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. (e) Waiver of Subrogation. NAI, for itself and for any Person claiming through it (including any insurance company claiming by way of subrogation), waives any and every claim which arises or may arise in its favor against BNPLC or any other Interested Party and the officers, directors, and employees of the Interested Parties for any and all Losses, to the extent that NAI is compensated by insurance or would be compensated by the insurance policies contemplated in this Land Lease, but for any deductible or self-insured retention maintained -15- <PAGE> 20 under such insurance or but for a failure of NAI to maintain the insurance as required by this Land Lease. NAI agrees to have such insurance policies properly endorsed so as to make them valid notwithstanding this waiver, if such endorsement is required to prevent a loss of insurance. 10. APPLICATION OF INSURANCE AND CONDEMNATION PROCEEDS. (a) Collection and Application of Insurance and Condemnation Proceeds Generally. This Paragraph 10 shall govern the application of proceeds received by BNPLC or NAI during the Term from any third party (1) as compensation for any restriction placed upon the use or development of the Property or for the condemnation of the Property or any portion thereof, or (2) because of any judgment, decree or award for injury or damage to the Property (e.g.,damage resulting from a third party's release of Hazardous Materials onto the Property); excluding, however, any funds paid to BNPLC by BNPLC's Parent, by an Affiliate of BNPLC or by any Participant that is made to compensate BNPLC for any Losses BNPLC may suffer or incur in connection with this Land Lease or the Property. NAI will promptly pay over to BNPLC any insurance, condemnation or other proceeds covered by this Paragraph 10 which NAI may receive from any insurer, condemning authority or other third party. All proceeds covered by this Paragraph 10, including those received by BNPLC from NAI or third parties, shall be applied as follows: (i) First, proceeds covered by this Paragraph 10 will be used to reimburse BNPLC for any costs and expenses, including Attorneys' Fees, that BNPLC incurred to collect the proceeds. (ii) Second, the proceeds remaining after such reimbursement to BNPLC (hereinafter, the "REMAINING PROCEEDS") will be applied, as hereinafter more particularly provided, either as a Qualified Prepayment or to reimburse NAI or BNPLC for the actual out-of-pocket costs of repairing or restoring the Property. Until, however, any Remaining Proceeds received by BNPLC are applied by BNPLC as a Qualified Prepayment or applied by BNPLC to reimburse costs of repairs to or restoration of the Property pursuant to this Paragraph 10, BNPLC shall hold and maintain such Remaining Proceeds as Escrowed Proceeds in an interest bearing account, and all interest earned on such account shall be added to and made a part of such Escrowed Proceeds. (b) Advances of Escrowed Proceeds to NAI. Except as otherwise provided below in this Paragraph 10, BNPLC shall advance all Remaining Proceeds held by it as Escrowed Proceeds to reimburse NAI for the actual out-of-pocket cost to NAI of repairing or restoring the Property in accordance with the requirements of this Land Lease and the other Operative Documents as the applicable repair or restoration progresses and upon compliance by NAI with such terms, conditions and requirements as may be reasonably imposed by BNPLC. In no event, however, shall BNPLC be required to pay Escrowed Proceeds to NAI in excess of the actual out-of-pocket cost to NAI of the applicable repair or restoration, as evidenced by invoices or other documentation satisfactory to BNPLC, it being understood that BNPLC may retain and apply any such excess as a Qualified Prepayment. (c) Application of Escrowed Proceeds as a Qualified Prepayment. Provided no Event of Default shall have occurred and be continuing, BNPLC shall apply any Remaining Proceeds paid to it (or other amounts available for application as a Qualified Prepayment) as a Qualified Prepayment on any date that BNPLC is directed to do so by a notice from NAI; however, if such a notice from NAI specifies an effective date for a Qualified Prepayment that is less than five Business Days after BNPLC's actual receipt of the notice, BNPLC may postpone the date of the Qualified Prepayment to any date not later than five Business Days after BNPLC's receipt of the notice. In any event, except when BNPLC is required by the preceding sentence to apply Remaining Proceeds or other amounts as a Qualified Prepayment on a Base Rent Date, BNPLC may deduct Breakage Costs incurred in connection with any Qualified Prepayment from the Remaining Proceeds or other amounts available for -16- <PAGE> 21 application as the Qualified Prepayment, and NAI will reimburse BNPLC upon request for any such Breakage Costs that BNPLC incurs but does not deduct. (d) Special Provisions Applicable After an Event of Default. Notwithstanding the foregoing, when any Event of Default shall have occurred and be continuing, BNPLC shall be entitled to receive and collect all insurance, condemnation or other proceeds governed by this Paragraph 10 and to apply all Remaining Proceeds, when and to the extent deemed appropriate by BNPLC in its sole discretion, either (A) to the reimbursement of NAI or BNPLC for the out-of-pocket cost of repairing or restoring the Property, or (B) as Qualified Prepayments. (e) NAI's Obligation to Restore. Regardless of the adequacy of any Remaining Proceeds available to NAI hereunder, and notwithstanding other provisions of this Land Lease to the contrary, if the Property is damaged by fire or other casualty or less than all or substantially all of the Property is taken by condemnation, NAI must: (i) increase the value of the Property or the remainder thereof by restoring the same (in a manner consistent with the requirements and limitations imposed by this Land Lease and the other Operative Documents or otherwise acceptable to BNPLC), or decrease Stipulated Loss Value by tendering a payment to BNPLC for application as a Qualified Prepayment, as necessary to cause Current AS IS Market Value to be not less than sixty percent (60%) of Stipulated Loss Value; and (ii) restore the Property or the remainder thereof to a reasonably safe and sightly condition. (f) Takings of All or Substantially All of the Property on or after the Base Rent Commencement Date. In the event of any taking of all or substantially all of the Property on or after the Base Rent Commencement Date, BNPLC shall be entitled to apply all Remaining Proceeds as a Qualified Prepayment. In addition, if Stipulated Loss Value immediately prior to any such taking exceeds the sum of the Remaining Proceeds resulting from such condemnation, then BNPLC shall be entitled to recover the excess from NAI upon demand as an additional Qualified Prepayment, whereupon this Land Lease shall terminate. Any taking of so much of the Real Property as, in BNPLC's reasonable good faith judgment, makes it impracticable to restore or improve the remainder thereof as required by part (2) of the preceding subparagraph shall be considered a taking of substantially all the Property for purposes of this Paragraph 10. 11. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF NAI CONCERNING THE PROPERTY. NAI represents, warrants and covenants as follows: (a) Compliance with Covenants and Laws. The use of the Property permitted by this Land Lease complies, or will comply after NAI obtains available permits as the tenant under this Land Lease, in all material respects with all Applicable Laws. NAI has obtained or will promptly obtain all utility, building, health and operating permits as may be required by any governmental authority or municipality having jurisdiction over the Property for any construction upon or use of the Property permitted by this Land Lease. (b) Operation of the Property. During the Term, NAI shall operate the Property in a good and workmanlike manner and substantially in compliance with all Applicable Laws and will pay or cause to be paid all fees or charges of any kind in connection therewith. (If NAI does not promptly correct any failure of the Property to comply with Applicable Laws that is the subject of a written notice given to NAI or BNPLC by any governmental authority, then for purposes of the preceding sentence, NAI shall be considered not to have -17- <PAGE> 22 maintained the Property "substantially in accordance with Applicable Laws" whether or not the noncompliance would be substantial in the absence of the notice.) During the Term, NAI shall not use or occupy, or allow the use or occupancy of, the 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. During the Term, to the extent that any of the following would, individually or in the aggregate, materially and adversely affect the value of the Property or NAI's use, occupancy or operations on the Property, NAI shall not, without BNPLC's prior consent: (i) initiate or permit any zoning reclassification of the Property; (ii) seek any variance under existing zoning ordinances applicable to the Property; (iii) use or permit the use of the 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 Property; or (v) consent to the annexation of the Property to any municipality. If (A) a change in the zoning or other Applicable Laws affecting the permitted use or development of the Property shall occur after the Base Rent Commencement Date that reduces the value of the Property, or (B) conditions or circumstances on or about the Property are discovered after the Base Rent Commencement Date (such as the presence of an endangered species) which substantially impede development and thereby reduce the value of the Property, and if after any such reduction under clause (A) or (B) preceding the Current AS IS Market Value of the Property is less than sixty percent (60%) of Stipulated Loss Value, then NAI shall pay BNPLC upon request the amount by which Current AS IS Market Value is less than sixty percent (60%) of Stipulated Loss Value, for application as a Qualified Prepayment. During the Term, NAI shall not cause or permit any drilling or exploration for, or extraction, removal or production of, minerals from the surface or subsurface of the Property, and NAI shall not do any act whereby the market value of the Property may reasonably be expected to be materially lessened. During the Term, if NAI receives a written notice or claim from any federal, state or other governmental entity that the 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 Property because the Property does not comply with Applicable Law, NAI shall promptly furnish a copy of such notice or claim to BNPLC. Notwithstanding the foregoing, NAI may in good faith, by appropriate proceedings, contest the validity and applicability of any Applicable Law with respect to the Property, and pending such contest NAI shall not be deemed in default hereunder because of the violation of such Applicable Law, if NAI diligently prosecutes such contest to completion in a manner reasonably satisfactory to BNPLC, and if NAI promptly causes the 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 Property; provided, however, in any event such contest shall be concluded and the violation of such Applicable Law must be corrected by NAI and any claims asserted against BNPLC or the Property because of such violation must be paid by NAI, all prior to the earlier of (i) the date that any criminal prosecution is instituted or overtly threatened against BNPLC or any of its directors, officers or employees because of such violation, (ii) the date that any action is taken by any governmental authority against BNPLC or any property owned by BNPLC (including the Property) because of such violation, or (iii) a Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a price to BNPLC (when taken together with any additional payments made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to the Break Even Price. (c) Debts for Construction, Maintenance, Operation or Development. NAI shall cause all debts and liabilities incurred in the construction, maintenance, operation or development of the Property, including all debts and liabilities for labor, material and equipment and all debts and charges for utilities servicing the Property, to be promptly paid; provided, that nothing in this subparagraph will be construed to require NAI to remove Liens Removable by BNPLC. -18- <PAGE> 23 Notwithstanding the foregoing, NAI 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 NAI shall not be deemed in default under this subparagraph because of the contested lien if (1) within sixty days after being asked to do so by BNPLC, NAI bonds over to BNPLC's reasonable satisfaction all such contested liens against the Property alleged to secure an amount in excess of $500,000 (individually or in the aggregate), (2) NAI diligently prosecutes such contest to completion in a manner reasonably satisfactory to BNPLC, and (3) NAI 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 must be paid by NAI prior to the earlier of (i) the date that any criminal prosecution is instituted or overtly threatened against BNPLC or its directors, officers or employees because of the nonpayment thereof, (ii) the date that any writ or order is issued under which the Property or any other property in which BNPLC has an interest may be seized or sold or any other action is taken against BNPLC or any property in which BNPLC has an interest because of the nonpayment thereof, or (iii) a Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a price to BNPLC (when taken together with any additional payments made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to the Break Even Price. (d) Repair, Maintenance, Alterations and Additions. NAI shall keep the Property in good order, operating condition and appearance and shall cause all necessary repairs, renewals and replacements to be promptly made. NAI will not allow any of the Property to be materially misused, abused or wasted. NAI shall not, without the prior consent of BNPLC, make material new Improvements or alter Improvements in any material respect. Without limiting the foregoing, NAI will notify BNPLC before making any significant alterations to the Improvements. The parties acknowledge that NAI has proposed to BNPLC that additional Improvements be constructed on the Land in the future, and BNPLC has consented thereto, provided that (1) no Event of Default has occurred and is continuing, and (b) BNPLC is satisfied, in its sole discretion, that (i) the location, configuration, architectural style, and manner and type of construction of such additional Improvements shall not reduce the value of the Improvements taken as a whole and will otherwise be constructed in accordance with the requirements of this Lease, and (ii) such additional Improvements will comply with all Applicable Laws. (e) Permitted Encumbrances and Development Documents. NAI shall during the Term comply with and will cause to be performed all of the covenants, agreements and obligations imposed upon the owner of any interest in the Property by the Permitted Encumbrances (including the Premises Leases) or the Development Documents. Without limiting the foregoing, NAI shall cause all amounts to be paid when due, the payment of which is secured by any Lien against the Property created by the Permitted Encumbrances. Without the prior consent of BNPLC, NAI shall not enter into, initiate, approve or consent to any modification of any Permitted Encumbrance or Development Document that would create or expand or purport to create or expand obligations or restrictions which would encumber BNPLC's interest in the Property. (Whether BNPLC must give any such consent requested by NAI during the Term of this Land Lease shall be governed by subparagraph 3(A) of the Closing Certificate and Agreement.) (f) Books and Records Concerning the Property. NAI shall keep books and records that are accurate and complete in all material respects for the Property and, subject to Paragraph 16.(c), will permit all such books and records to be inspected and copied by BNPLC. This subparagraph shall not be construed as requiring NAI to regularly maintain separate books and records relating exclusively to the Property; provided, however, that -19- <PAGE> 24 upon request, NAI shall construct or abstract from its regularly maintained books and records information required by this subparagraph relating to the Property. 12. FINANCIAL COVENANTS AND OTHER COVENANTS INCORPORATED BY REFERENCE TO SCHEDULE 1. Throughout the Term of this Land Lease, NAI shall comply with the requirements of Schedule 1 attached hereto. 13. FINANCIAL STATEMENTS AND OTHER REPORTS. (a) Financial Statements; Required Notices; Certificates. Throughout the Term of this Land Lease, NAI shall deliver to BNPLC and to each Participant: (i) as soon as available and in any event within one hundred twenty days after the end of each fiscal year of NAI, a consolidated balance sheet of NAI and its Consolidated Subsidiaries as of the end of such fiscal year and a consolidated income statement and statement of cash flows of NAI 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 NAI, 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 BNPLC determines, in BNPLC's reasonable discretion, is unacceptable; (ii) as soon as available and in any event within sixty days after the end of each of the first three quarters of each fiscal year of NAI, the consolidated balance sheet of NAI and its Consolidated Subsidiaries as of the end of such quarter and the consolidated income statement and the consolidated statement of cash flows of NAI 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 the chief financial officer or controller of NAI (subject to year-end adjustments); (iii) together with the financial statements furnished in accordance with subparagraph 13.(a)(i) and 13.(a)(ii), a certificate of the chief financial officer or controller of NAI: (i) certifying that to the knowledge of NAI no Default or Event of Default under this Land 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 NAI set forth in the Operative Documents 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 Schedule 1; (iv) within five days after the end of each calendar month, a certificate of the chief financial officer or controller of NAI certifying that at the end of the preceding calendar month, NAI had sufficient cash and other assets described in Paragraph 1 of Part II of Schedule 1 to comply with the requirements of that paragraph; (v) promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which NAI sends to NAI'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 -20- <PAGE> 25 therefor) which NAI files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; (vi) upon request by BNPLC, a statement in writing certifying that the Operative Documents are unmodified and in full effect (or, if there have been modifications, that the Operative Documents are 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 NAI no Default or Event of Default under this Land Lease has occurred and is continuing or, if a Default or Event of Default under this Land Lease has occurred and is continuing, a brief statement as to the nature thereof; it being intended that any such statement by NAI may be relied upon by any prospective purchaser or mortgagee of the Property and by the Participants (vii) as soon as possible after, and in any event within ten days after NAI becomes aware that, any of the following has occurred, with respect to which the potential aggregate liability to NAI relating thereto is $500,000 or more, a notice signed by a senior financial officer of NAI setting forth details of the following and the response, if any, which NAI 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 PBGC by NAI or an ERISA Affiliate with respect to any of the following or the events or conditions leading up to the following): (A) the assertion, to secure any Unfunded Benefit Liabilities, of any Lien against the assets of NAI, against the assets of any Plan or Multiemployer Plan or against any interest of BNPLC or NAI in the Property, or (B) the taking of any action by the PBGC or any other governmental authority against NAI to terminate any Plan of NAI or any ERISA Affiliate of NAI or to cause the appointment of a trustee or receiver to administer any such Plan; and (viii) such other information respecting the condition or operations, financial or otherwise, of NAI, of any of its Subsidiaries or of the Property as BNPLC or any Participant through BNPLC may from time to time reasonably request. BNPLC is hereby authorized to deliver a copy of any information or certificate delivered to it pursuant to this subparagraph 13.(a) to BNPLC's Parent, to the Participants and to any regulatory body having jurisdiction over BNPLC or BNPLC's Parent or any Participant that requires or requests it. 14. ASSIGNMENT AND SUBLETTING BY NAI. (a) BNPLC's Consent Required. Without the prior consent of BNPLC, NAI shall not assign, transfer, mortgage, pledge or hypothecate this Land Lease or any interest of NAI hereunder and shall not sublet all or any part of the Property, by operation of law or otherwise; provided, that this provision will not be construed to prohibit (I) any sublease of space within Improvements expressly permitted by the Other Lease Agreement and (II) subject to subparagraph 14.(c) below, this provision shall not be construed to prohibit any Premises Lease described in the Other Common Definitions and Provisions Agreement or any transfer or sublease by a lessee thereunder which is authorized by the Premises Lease. (b) Standard for BNPLC's Consent to Assignments and Certain Other Matters. Consents and approvals of BNPLC which are required by this Paragraph 14 will not be unreasonably withheld or delayed, but NAI acknowledges that BNPLC's withholding of such consent or approval shall be reasonable if BNPLC determines in good faith that (1) giving the approval may materially increase BNPLC's risk of liability for any existing or future environmental problem, or (2) giving the approval is likely to increase BNPLC's administrative burden of complying with or monitoring NAI's compliance with the requirements of this Land Lease. -21- <PAGE> 26 (c) Consent Not a Waiver. No consent by BNPLC to a sale, assignment, transfer, mortgage, pledge or hypothecation of this Land Lease or NAI's interest hereunder, and no assignment or subletting of the Property or any part thereof in accordance with this Land Lease or otherwise with BNPLC's consent, shall release NAI from liability hereunder; and any such consent shall apply only to the specific transaction thereby authorized and shall not relieve NAI from any requirement of obtaining the prior consent of BNPLC to any further sale, assignment, transfer, mortgage, pledge or hypothecation of this Land Lease or any interest of NAI hereunder. 15. ASSIGNMENT BY BNPLC. (a) Restrictions on Transfers. Except by a Permitted Transfer, BNPLC shall not assign, transfer, mortgage, pledge, encumber or hypothecate this Land Lease or the other Operative Documents or any interest of BNPLC in and to the Property during the Term without the prior consent of NAI, which consent NAI may withhold in its sole discretion. Further, notwithstanding anything to the contrary herein contained, if withholding taxes are imposed on the rents and other amounts payable to BNPLC hereunder because of BNPLC's assignment of this Land Lease to any citizen of, or any corporation or other entity formed under the laws of, a country other than the United States, NAI shall not be required to compensate BNPLC or any such assignee for the withholding tax. If, in breach of this subparagraph, BNPLC transfer the Property or any part thereof by a conveyance or that does not constitute a Permitted Transfer, with the result that additional transfer taxes or other Impositions are assessed against the Property or the owner thereof, BNPLC shall be required to pay such additional transfer taxes or other Impositions. (b) Effect of Permitted Transfer or other Assignment by BNPLC. If, without breaching subparagraph 15.(a), BNPLC sells or otherwise transfers the Property and assigns all of its rights under this Land Lease and the other Operative Documents, then BNPLC shall thereby be released from any obligations arising after such assumption under this Land Lease or the other Operative Documents, and NAI shall look solely to each successor in interest of BNPLC for performance of such obligations. 16. BNPLC'S RIGHT OF ACCESS. (a) During the Term, BNPLC and BNPLC's representatives may (subject to subparagraph 16.(c)) enter the Property at any reasonable time after five Business Days advance written notice to NAI for the purpose of making inspections or performing any work BNPLC is authorized to undertake by the next subparagraph or for the purpose confirming whether NAI has complied with the requirements of this Land Lease or the other Operative Documents. (b) If NAI fails to perform any act or to take any action required of it by this Land Lease or the Closing Certificate, or to pay any money which NAI is required by this Land Lease or the Closing Certificate to pay, and if such failure or action constitutes an Event of Default or renders BNPLC or any director, officer, employee or Affiliate of BNPLC at risk of criminal prosecution or renders BNPLC's interest in the 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, BNPLC may, perform or cause to be performed such act or take such action or pay such money. Any expenses so incurred by BNPLC, and any money so paid by BNPLC, shall be a demand obligation owing by NAI to BNPLC. Further, BNPLC, 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 BNPLC to do any work which under any provision of this Land Lease NAI may be required to perform, and the performance thereof by BNPLC shall not constitute a waiver of NAI's default. BNPLC may during the progress of any such work permitted by BNPLC hereunder on or in the Property keep and store upon the Property all necessary materials, tools, and equipment. BNPLC shall not in any event be liable for inconvenience, annoyance, -22- <PAGE> 27 disturbance, loss of business, or other damage to NAI or the subtenants or invitees of NAI by reason of making such repairs or the performance of any such work on or in the Property, or on account of bringing materials, supplies and equipment into or through the Property during the course of such work (except for any liability in excess of the liability insurance limits established in Exhibit B resulting from death or injury or damage to the property of third parties caused by the Established Misconduct of BNPLC or its officers, employees, or agents in connection therewith), and the obligations of NAI under this Land Lease shall not thereby be excused in any manner. (c) NAI shall have no obligation to provide proprietary information (as defined in the next sentence) to BNPLC, except and to the extent that (1) BNPLC reasonably determines that BNPLC cannot accomplish the purposes of BNPLC's inspection of the Property or exercise of other rights granted pursuant to the various express provisions of this Land Lease and the other Operative Documents without evaluating such information. For purposes of this Land Lease "PROPRIETARY INFORMATION" includes NAI's intellectual property, trade secrets and other confidential information of value to NAI about, among other things, NAI's manufacturing processes, products, marketing and corporate strategies, but in no event will "proprietary information" include any disclosure of substances and materials (and their chemical composition) which are or previously have been present in, on or under the Property at the time of any inspections by BNPLC, nor will "proprietary information" include any additional disclosures reasonably required to permit BNPLC to determine whether the presence of such substances and materials has constituted a violation of Environmental Laws. In addition, under no circumstances shall NAI have any obligation to disclose to BNPLC or any other party any proprietary information of NAI (including, without limitation, any pending applications for patents or trademarks, any research and design and any trade secrets) except if and to the limited extent reasonably necessary to comply with the express provisions of this Land Lease or the other Operative Documents. 17. EVENTS OF DEFAULT. Each of the following events shall be an "EVENT OF DEFAULT" by NAI under this Land Lease: (a) NAI shall fail to pay when due any installment of Rent due hereunder and such failure shall continue for three (3) Business Days after NAI is notified in writing thereof. (b) NAI shall fail to cause any representation or warranty of NAI contained herein or in the Closing Certificate that was 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 Paragraph 17), or NAI shall fail to comply with any term, provision or covenant of this Land Lease or the Closing Certificate (other than as described in the other clauses of this Paragraph 17), and in either case shall not cure such failure prior to the earlier of (A) thirty days after written notice thereof is sent to NAI or (B) the date any writ or order is issued for the levy or sale of any property owned by BNPLC (including the Property) or any criminal prosecution is instituted or overtly threatened against BNPLC 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 prosecution is instituted or overtly threatened, the period within which such failure may be cured by NAI shall be extended for a further period (not to exceed an additional sixty days) as shall be necessary for the curing thereof with diligence, if (but only if) (x) such failure is susceptible of cure but cannot with reasonable diligence be cured within such thirty day period, (y) NAI shall promptly have commenced to cure such failure and shall thereafter continuously prosecute the curing thereof with reasonable diligence and (z) the extension of the period for cure will not, in any event, cause the period for cure to extend beyond five days prior to the expiration of this Land Lease. (c) NAI shall abandon the Property. -23- <PAGE> 28 (d) NAI or any Subsidiary shall fail to make any payment or payments of principal, premium or interest, of Debt of NAI described in the next sentence when due (taking into consideration the time NAI may have to cure such failure, if any, under the documents governing such Debt). As used in this clause 14(a)(v), "DEBT" shall include only Debt (as defined in the Common Definitions and Provisions Agreement (Phase IV - Land)) of NAI or any of its Subsidiaries now existing or arising in the future (a) payable to BNPLC or any Affiliate of BNPLC, or (B) payable to any other Person and with respect to which $3,000,000 or more is actually due and payable because of acceleration or otherwise. (e) NAI: (a) shall generally not, or be unable to, or shall admit in writing its inability to, pay its debts as such debts become due; or (b) shall make an assignment for the benefit of creditors, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (c) shall file any petition or application to commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (d) shall have had any such petition or application filed against it; or (e) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property; or (f) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of sixty days or more. (f) One or more final judgments, decrees or orders for the payment of money in excess of $3,000,000 in the aggregate shall be rendered against NAI and such judgments, decrees or orders shall continue unsatisfied and in effect for a period of thirty consecutive days without NAI's having obtained an agreement (or after the expiration or termination of an agreement) of the Persons entitled to enforce such judgment, decrees or orders not to enforce the same pending negotiations with NAI concerning the satisfaction or other discharge of the same. (g) NAI shall breach the requirements of Paragraph 12, which by reference to Schedule 1 establishes certain financial covenants and other requirements. (h) as of the effective date of this Land Lease, any of the representations or warranties of NAI contained in subparagraphs 2(A) - (J) of the Closing Certificate shall be false or misleading in any material respect. (i) NAI shall fail to pay the full amount of any Supplemental Payment required by the Purchase Agreement on the Designated Sale Date or shall fail to provide Collateral as and when due pursuant to the Pledge Agreement Documents. (j) NAI shall fail to comply with any term, provision or condition of the Pledge Agreements after the expiration of any applicable notice and cure period set forth in the Pledge Agreement. 18. REMEDIES. (a) Basic Remedies. At any time after an Event of Default and after BNPLC has given any notice required by subparagraph 18.(b), BNPLC shall be entitled at BNPLC's option (and without limiting BNPLC in the exercise of any other right or remedy BNPLC may have, and without any further demand or notice except as expressly described in this subparagraph 18.(a)), to exercise any one or more of the following remedies: (i) By notice to NAI, BNPLC may terminate NAI's right to possession of the Property. A notice given in connection with unlawful detainer proceedings specifying a time within which to cure a -24- <PAGE> 29 default shall terminate NAI's right to possession if NAI fails to cure the default within the time specified in the notice. (ii) Upon termination of NAI's right to possession and without further demand or notice, BNPLC may re-enter the Property in any manner not prohibited by Applicable Law and take possession of all improvements, additions, alterations, equipment and fixtures thereon and remove any persons in possession thereof. Any property on the Land may be removed and stored in a warehouse or elsewhere at the expense and risk of and for the account of NAI. (iii) Upon termination of NAI's right to possession, this Land Lease shall terminate and BNPLC may recover from NAI: 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 NAI 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 NAI proves could be reasonably avoided; and d) Any other amount necessary to compensate BNPLC for all the detriment proximately caused by NAI's failure to perform NAI's obligations under this Land Lease or which in the ordinary course of things would be likely to result therefrom, including the costs and expenses (including Attorneys' Fees, advertising costs and brokers' commissions) of recovering possession of the Property, removing persons or property therefrom, placing the Property in good order, condition, and repair, preparing and altering the Property for reletting, all other costs and expenses of reletting, and any loss incurred by BNPLC as a result of NAI's failure to perform NAI's obligations under the other Operative Documents. The "WORTH AT THE TIME OF AWARD" of the amounts referred to in subparagraph 18.(a)(iii)a) and subparagraph 18.(a)(iii)b) shall be computed by allowing interest at the Default Rate. The "WORTH AT THE TIME OF AWARD" of the amount referred to in subparagraph 18.(a)(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) BNPLC 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 if NAI has breached this Land Lease and abandoned the Property, this Land Lease shall continue in effect for so long as BNPLC does not terminate NAI's right to possession, and BNPLC may enforce all of BNPLC's rights and remedies under this Land Lease, including the right to recover the Rent as it becomes due under this Land Lease. NAI's right to possession shall not be deemed to have been terminated by -25- <PAGE> 30 BNPLC except pursuant to subparagraph 18.(a)(i) hereof. The following shall not constitute a termination of NAI's right to possession: a) Acts of maintenance or preservation or efforts to relet the Property; b) The appointment of a receiver upon the initiative of BNPLC to protect BNPLC's interest under this Land Lease; or c) Reasonable withholding of consent to an assignment or subletting, or terminating a subletting or assignment by NAI. (b) Notice Required So Long As the Purchase Option and NAI's Initial Remarketing Rights and Obligations Continue Under the Purchase Agreement. So long as NAI remains in possession of the Property and there has been no termination of the Purchase Option and NAI's Initial Remarketing Rights and Obligations as provided Paragraph 4 of the Purchase Agreement, BNPLC's right to exercise remedies provided in subparagraph 18.(a) will be subject to the condition precedent that BNPLC shall have notified NAI, at a time when an Event of Default shall have occurred and be continuing, of BNPLC's intent to exercise remedies provided in subparagraph 18.(a) at least sixty days prior to exercising the remedies. The condition precedent is intended to provide NAI with an opportunity to exercise the Purchase Option or NAI's Initial Remarketing Rights and Obligations before losing possession of the Property pursuant to subparagraph 18.(a). The condition precedent is not, however, intended to extend any period for curing an Event of Default. Accordingly, if an Event of Default has occurred, and regardless of whether any Event of Default is then continuing, BNPLC may proceed immediately to exercise remedies provided in subparagraph 18.(a) at any time after the earlier of (i) sixty days after BNPLC has given such a notice to NAI, (ii) any date upon which NAI relinquishes possession of the Property, or (iii) any termination of the Purchase Option and NAI's Initial Remarketing Rights and Obligations. (c) Enforceability. This Paragraph 18 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 BNPLC is intended to be exclusive of any other right or remedy, and each and every such right and remedy shall be cumulative and in addition to any other right or remedy given to BNPLC hereunder or now or hereafter existing in favor of BNPLC under Applicable Law or in equity. In addition to other remedies provided in this Land Lease, BNPLC shall be entitled, to the extent permitted by Applicable Law or in equity, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Land Lease, or to a decree compelling performance of any of the other covenants, agreements, conditions or provisions of this Land Lease to be performed by NAI, or to any other remedy allowed to BNPLC at law or in equity. Nothing contained in this Land Lease shall limit or prejudice the right of BNPLC to prove for and obtain in proceedings for bankruptcy or insolvency of NAI by reason of the termination of this Land 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 BNPLC under the Purchase Documents, and BNPLC shall not be required to give the sixty day notice described in subparagraph 18.(b) as a condition precedent to any acceleration of the Designated Sale Date or to taking any action to enforce the Purchase Documents. -26- <PAGE> 31 19. DEFAULT BY BNPLC. If BNPLC should default in the performance of any of its obligations under this Land Lease, BNPLC shall have the time reasonably required, but in no event less than thirty days, to cure such default after receipt of notice from NAI specifying such default and specifying what action NAI believes is necessary to cure the default. If NAI prevails in any litigation brought against BNPLC because of BNPLC's failure to cure a default within the time required by the preceding sentence, then NAI shall be entitled to an award against BNPLC for the monetary damages proximately caused to NAI by such default. Notwithstanding the foregoing, BNPLC's right to cure as provided in this Paragraph 19 will not in any event extend the time within which BNPLC must remove Liens Removable by BNPLC as required by Paragraph 20 beyond the Designated Sale Date. 20. QUIET ENJOYMENT. Provided NAI pays the Base Rent and all Additional Rent payable hereunder as and when due and payable and keeps and fulfills all of the terms, covenants, agreements and conditions to be performed by NAI hereunder, BNPLC shall not during the Term disturb NAI's peaceable and quiet enjoyment of the Property; however, such enjoyment shall be subject to the terms, provisions, covenants, agreements and conditions of this Land Lease, to Permitted Encumbrances, to Development Documents and to any other claims not constituting Liens Removable by BNPLC. If any Lien Removable by BNPLC is claimed against the Property, BNPLC will remove the Lien Removable by BNPLC promptly. Any breach by BNPLC of this Paragraph shall render BNPLC liable to NAI for any monetary damages proximately caused thereby, but as more specifically provided in subparagraph 4.(b) above, no such breach shall entitle NAI to terminate this Land Lease or excuse NAI from its obligation to pay Rent. 21. SURRENDER UPON TERMINATION. Unless NAI or an Applicable Purchaser purchases or has purchased BNPLC's entire interest in the Property pursuant to the terms of the Purchase Agreement and BNPLC's entire interest in the Improvements and other "Property" under (and as defined in) the Other Purchase Agreement, NAI shall, upon the termination of NAI's right to occupancy, surrender to BNPLC the Property, including Improvements constructed by NAI and fixtures and furnishings included in the Property, free of all Hazardous Substances (including Permitted Hazardous Substances) and tenancies and with all Improvements in substantially the same condition as of the date the same were initially completed, excepting only (i) ordinary wear and tear that occurs between the maintenance, repairs and replacements required by other provisions of this Land Lease or the Other Lease Agreement, and (ii) demolition, alterations and additions which are expressly permitted by the terms of this Land Lease or the Other Lease Agreement and which have been completed by NAI in a good and workmanlike manner in accordance with all Applicable Laws. Any movable furniture or movable personal property belonging to NAI or any party claiming under NAI, if not removed at the time of such termination and if BNPLC shall so elect, shall be deemed abandoned and become the property of BNPLC without any payment or offset therefor. If BNPLC shall not so elect, BNPLC may remove such property from the Property and store it at NAI's risk and expense. 22. HOLDING OVER BY NAI. Should NAI not purchase BNPLC's right, title and interest in the Property as provided in the Purchase Agreement, but nonetheless continue to hold the Property after the termination of this Land Lease without BNPLC's 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) Stipulated Loss Value on the day in question, times (ii) the Default Rate for such day; divided by (iii) three hundred and sixty; subject, however, to all of the terms, provisions, covenants and agreements on the part of NAI hereunder. No payments of money by NAI to BNPLC after the termination of this Land Lease shall reinstate, continue or extend the Term of this Land Lease and no extension of this Land Lease after the termination thereof shall be valid unless and until the same shall be reduced to writing and signed by both BNPLC and NAI. -27- <PAGE> 32 23. INDEPENDENT OBLIGATIONS EVIDENCED BY THE OTHER OPERATIVE DOCUMENTS. NAI acknowledges and agrees that nothing contained in this Land Lease shall limit, modify or otherwise affect any of NAI's obligations under the other Operative Documents, which obligations are intended to be separate, independent and in addition to, and not in lieu of, the obligations set forth herein. In the event of any inconsistency between the express terms and provisions of the Purchase Documents and the express terms and provisions of this Land Lease, the express terms and provisions of the Purchase Documents shall control. In the event of any inconsistency between the express terms and provisions of the Closing Certificate and the express terms and provisions of this Land Lease, the express terms and provisions of this Land Lease shall control; provided, nothing herein will limit or impair NAI's obligations under the Closing Certificate following any expiration of termination of this Land Lease. [The signature pages follow.] -28- <PAGE> 33 IN WITNESS WHEREOF, NAI and BNPLC have caused this Land Lease Agreement to be executed as of December ___, 1999. "NAI" NETWORK APPLIANCE, INC. By: --------------------------------- Name: ---------------------------- Title: --------------------------- <PAGE> 34 [Continuation of signature pages to Lease Agreement dated to be effective December ___, 1999] "BNPLC" BNP LEASING CORPORATION By: --------------------------------- Lloyd G. Cox, Vice President <PAGE> 35 Exhibit A LEGAL DESCRIPTION The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75 [Degrees] 8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14 [Degrees] 51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75 [Degrees] 08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14 [Degrees] 51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 <PAGE> 36 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 Exhibit A - Page 2 <PAGE> 37 Exhibit B INSURANCE REQUIREMENTS I. LIABILITY INSURANCE: A. NAI must maintain commercial general liability ("CGL") insurance on an occurrence basis, affording immediate protection to the limit of not less than $20,000,000 combined single limit for bodily and personal injury, death and property damage in respect of any one occurrence. The CGL insurance must be primary to, and shall receive no contribution from, any insurance policies or self-insurance programs otherwise afforded to or available to the Interested Parties, collectively or individually. Further, the CGL insurance must include blanket contractual liability coverage which insures contractual liability under the indemnifications set forth in this Land Lease (though such coverage or the amount thereof shall in no way limit such indemnifications). B. Any deductible or self-insured retention applicable to the CGL insurance shall not exceed $500,000. C. The forms of insurance policies (including endorsements) used to provide the CGL insurance required by this Land Lease, and the insurance company or companies providing the CGL insurance, must be acceptable to BNPLC. BNPLC shall have the right from time to time and at any time to review and approve such policy forms (including endorsements) and the insurance company or companies providing the insurance. Without limiting the generality of the foregoing, BNPLC may reasonably require (and unless and until NAI is otherwise notified by BNPLC, BNPLC does require) that such insurance be provided under forms and by companies consistent with the following: (1) Forms: CGL Insurance must be provided on Insurance Services Office ("ISO") forms CG 0001 1093 or CG 0001 0196 or equivalent substitute forms providing the same or greater coverage. (2) Rating Requirements: Insurance must be provided through insurance or reinsurance 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 VI or better. (3) Required Endorsements: CGL Insurance must be endorsed to provide or include: (a) in any policy containing a general aggregate limit, ISO form amendment "Aggregate Limits of Insurance Per Location" CG 2504 1185 or equivalent substitute form; (c) a waiver of subrogation, using ISO form CG 2404 1093 or equivalent substitute form (and under the commercial umbrella, if any), in favor of "BNP Leasing Corporation and other Interested Parties (as defined in the Common Definitions and Provisions Agreement (Phase IV - Land) between Network Appliance, Inc. and BNP Leasing Corporation dated December ___, 1999)"; (c) ISO additional insured form CG 2026 1185 or equivalent substitute form, without modification (and under the commercial umbrella, if any), designating as additional insureds "BNPLC and other Interested Parties, as defined in the Common Definitions and Provisions <PAGE> 38 Agreement (Phase IV - Land) between Network Appliance, Inc. and BNP Leasing Corporation dated December ___, 1999)"; and (d) provisions entitling BNPLC to 30 days' notice from the insurer prior to any cancellation, nonrenewal or material modification to the CGL coverage. (4) Other Insurance: Each policy to contain standard CGL "other insurance" wording, unmodified in any way that would make it excess over or contributory with the additional insured's own commercial general liability coverage. II. INTENTIONALLY DELETED. III. OTHER INSURANCE RELATED REQUIREMENTS: A. BNPLC must be notified in writing immediately by NAI of claims against NAI that might cause a reduction below seventy-five percent (75%) of any aggregate limit of any policy. B. Intentionally Deleted. C. NAI's CGL insurance must be evidenced by ACORD form 25 "Certificate of Insurance" completed and interlineated in a manner satisfactory to BNPLC to show compliance with the requirements of this Exhibit. Copies of endorsements to the CGL insurance must be attached to such form. D. Such evidence of required insurance must be delivered upon execution of this Land Lease and new certificate or evidence of insurance must be delivered no later than 10 days prior to expiration of existing policy. E. NAI shall not cancel, fail to renew, or make or permit any material reduction in any of the policies or certificates described in this Exhibit without the prior written consent of BNPLC. The certificates (ACORD forms 25) described in this Exhibit must contain the following express provision: "This is to certify that the policies of insurance described herein have been issued to the insured Network Appliance, Inc. for whom this certificate is executed and are in force at this time. In the event of cancellation, non-renewal, or material reduction in coverage affecting the certificate holder, at least sixty days prior notice shall be given to the certificate holder." F. The limits of liability under the liability insurance required by this Land Lease may be provided by a single policy of insurance or by a combination of primary and umbrella policies, but in no event shall the total limits of liability available for any one occurrence or accident be less than those required by this Exhibit. G. NAI shall provide copies, certified as complete and correct by an authorized agent of the applicable insurer, of all insurance policies required by this Exhibit within ten days after receipt of a request for such copies from BNPLC. Exhibit B - Page 2 <PAGE> 39 Exhibit C NOTICE OF LIBOR PERIOD ELECTION BNP Leasing Corporation 12201 Merit Drive Suite 860 Dallas, Texas 75251 Attention: Lloyd G. Cox Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: George Fung Re: Lease Agreement (Phase IV - Improvements) and Lease Agreement (Phase IV - - Land), both dated as of December ___, 1999, and both between Network Appliance, Inc., as tenant, and BNP Leasing Corporation, as landlord Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the two Lease Agreements referenced above. This letter constitutes notice to you that the LIBOR Period Election under both of the Lease Agreements shall be: ________________ month(s), beginning with the first Base Rent Period that commences on or after: --------------, ----. NOTE: YOU SHALL BE ENTITLED TO DISREGARD THIS NOTICE IF THE NUMBER OF MONTHS SPECIFIED ABOVE IS NOT A PERMITTED NUMBER UNDER THE DEFINITION OF "LIBOR PERIOD ELECTION" IN THE COMMON DEFINITIONS AND PROVISIONS AGREEMENTS REFERENCED IN THE LEASE AGREEMENTS, OR IF THE DATE SPECIFIED ABOVE CONCERNING THE COMMENCEMENT OF THE LIBOR PERIOD ELECTION IS LESS THAN TEN BUSINESS DAYS AFTER YOUR RECEIPT OF THIS NOTICE. HOWEVER, WE ASK THAT YOU NOTIFY US IMMEDIATELY IF FOR ANY REASON YOU BELIEVE THIS NOTICE IS DEFECTIVE. Executed this _____ day of ______________, 19___. Network Appliance, Inc. Name: ------------------------------- Title: ------------------------------ <PAGE> 40 [cc all Participants] Exhibit C - Page 2 <PAGE> 41 Schedule 1 FINANCIAL COVENANTS This Schedule 1 is attached to and made a part of (a) the Lease Agreement (Phase IV - Improvements) (the "IMPROVEMENTS LEASE") dated to be effective as of December ___, 1999 (the "EFFECTIVE DATE"), between BNP Leasing Corporation, a Delaware corporation ("BNPLC") and Network Appliance, Inc., a California corporation ("NAI"), (b) the Lease Agreement (Phase IV - Land) (the "LAND LEASE" and, together with the Improvements Lease, the "LEASES") dated to be effective as of the Effective Date, between BNPLC and NAI, (c) the Pledge Agreement (Phase IV - Improvements) (the "PLEDGE AGREEMENT (IMPROVEMENTS)") dated to be effective as of the Effective Date, among BNPLC, NAI, and Banque Nationale de Paris, as a Participant and as agent for any financial institutions that become Participants thereunder from time to time, and (d) the Pledge Agreement (Phase IV - Land) (collectively with the Pledge Agreement (Improvements), the "PLEDGE AGREEMENTS") dated to be effective as of the Effective Date, among BNPLC, NAI, and Banque Nationale de Paris, as a Participant and as agent for any financial institutions that become Participants thereunder from time to time. PART I - DEFINED TERMS In this Schedule 1, capitalized terms used but not defined herein shall have the meaning assigned to them in the Leases or the Common Definitions and Provisions Agreements referenced in the Leases; and the following capitalized terms shall have the following meanings: "ADJUSTED NET INCOME" means, for any fiscal period of NAI, the aggregate net income earned (or net losses incurred) during such period by NAI and its Subsidiaries (determined on a consolidated basis), plus any Permitted Non-Cash Charges deducted in determining such net income (or net loss). "ADJUSTED EBIT" means, for any accounting period, net income (or net loss) of NAI and its Subsidiaries (determined on a consolidated basis), plus the amounts (if any) which, in the determination of net income (or net loss) for such period, have been deducted for (a) interest expense, (b) income tax expense (c) rent expense under leases of property, and (d) Permitted Non-Cash Charges. "COLLATERAL TEST DATES" mean the Base Rent Commencement Date and the earlier of the following dates after each fiscal quarter of NAI that ends after the Base Rent Commencement Date : (1) the seventh Business Day after the release by NAI of its financial statements for the fiscal quarter; or (2) the first Business Day of the third calendar month following the end of the fiscal quarter. "CONSOLIDATED TANGIBLE NET WORTH" means the excess of (1) the total assets, other than Intangible Assets, of NAI and its Subsidiaries (determined on a consolidated basis) over (2) the total liabilities of NAI and its Subsidiaries (determined on a consolidated basis). "DEBT" as used in this Exhibit shall have the meaning assigned to it in the Common Definitions and Provisions Agreements, where "Debt" of any Person is defined to mean (without duplication of any item): (a) indebtedness of such Person for borrowed money; (b) indebtedness of such Person for the deferred purchase price of property or services (except trade payables and accrued expenses constituting current liabilities in the ordinary course of business); (c) the face amount of any outstanding letters of credit issued for the account of such Person; (d) obligations of such Person arising under acceptance facilities; (e) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to purchase, to provide funds for payment, to provide funds to invest in any Person, or otherwise to assure a <PAGE> 42 creditor against loss; (f) obligations of others secured by any Lien on property of such Person; (g) obligations of such Person as lessee under Capital Leases; and (h) the obligations of such Person, contingent or otherwise, under any lease of property or related documents (including a separate purchase agreement) which provide that such Person or any of its Affiliates must purchase or cause another Person to purchase any interest in the leased property and thereby guarantee a minimum residual value of the leased property to the lessor. For purposes of this definition, the amount of the obligations described in clause (h) of the preceding sentence with respect to any lease classified according to GAAP as an "operating lease," shall equal the sum of (1) the present value of rentals and other minimum lease payments required in connection with such lease [calculated in accordance with SFAS 13 and other GAAP relevant to the determination of the whether such lease must be accounted for as an operating lease or capital lease], plus (2) the fair value of the property covered by the lease; provided, however, that such amount shall not exceed the price, as of the date a determination of Debt is required hereunder, for which the lessee can purchase the leased property pursuant to any valid ongoing purchase option if, upon such a purchase, the lessee shall be excused from paying rentals or other minimum lease payments that would otherwise accrue after the purchase. "FIXED CHARGES" means, for any accounting period, the sum (without duplication of any item) of the following charges or costs incurred or paid by NAI and its Subsidiaries (determined on a consolidated basis): (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, plus (d) taxes payable during such period. "INTANGIBLE ASSETS" means assets of NAI and its Subsidiaries (determined on a consolidated basis) that are properly classified as "INTANGIBLE ASSETS" in accordance with GAAP and, in any event, shall include goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, and deferred charges (other than prepaid insurance, prepaid taxes and current deferred taxes to the extent any such prepaid or deferred items are classified on the balance sheet of NAI and its consolidated Subsidiaries as current assets in accordance with GAAP and with the concurrence of NAI's independent public accountants). "MANDATORY COLLATERAL PERIOD" means any period during which, notwithstanding any contrary designation of a Collateral Percentage by NAI under the Pledge Agreements, the Collateral Percentage for purposes of the Pledge Agreements shall be one hundred percent (100%), determined as set forth in Part III of this Schedule 1. "PERMITTED NON-CASH CHARGES" means the amounts (if any) which, in the determination of net income (or net loss) for any relevant fiscal period, have been deducted by NAI or its Subsidiaries for non-cash charges made to write down goodwill or research and development costs in connection with acquisitions permitted by this Schedule 1. "QUICK RATIO" means the ratio of: (A) the sum (without duplication of any item) of the following assets of NAI and its Subsidiaries (determined on a consolidated basis): Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any); plus unencumbered cash; plus unencumbered short term cash investments; plus other unencumbered marketable securities which are classified as short term investments in accordance with GAAP; plus unencumbered accounts receivable, computed net of reserves for uncollectible amounts as determined in accordance with GAAP, to (B) the sum (without duplication of any item) of (1) all liabilities of NAI and its Subsidiaries (determined on a consolidated basis) treated as current liabilities in accordance with GAAP, plus (2) Schedule 1 - Page 2 <PAGE> 43 other obligations included in total Debt of NAI and its Subsidiaries (determined on a consolidated basis), the payment of which is due on demand or will become due within one year after the date on which the applicable determination of Quick Ratio is required hereunder. "ROLLING FOUR QUARTER PERIOD" means a period of four consecutive fiscal quarters of NAI, the last of which quarters ends after December 31, 1999. PART II - FINANCIAL COVENANTS FOR LEASE AGREEMENT NAI covenants that it shall not at any time suffer or permit: 1. Minimum Unencumbered Cash and Cash Equivalents. The sum (without duplication of any item) of the unrestricted cash, Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any), unencumbered short term cash investments and unencumbered marketable securities classified as short term investments according to GAAP of NAI and its Subsidiaries (determined on a consolidated basis) to be less than total Debt of NAI and its Subsidiaries (determined on a consolidated basis). 2. Minimum Tangible Net Worth. Consolidated Tangible Net Worth to be less than the sum of: (a) ninety percent of the Consolidated Tangible Net Worth as of October 30, 1998; plus (b) seventy-five percent of NAI's net income (computed without deduction for net losses in any fiscal quarter) earned in each fiscal quarter since October 30, 1998; plus (c) one-hundred percent of the net proceeds of sales of stock in NAI or its Subsidiaries (other than sales to NAI or its Subsidiaries) after October 30, 1998; less (d) Permitted Non-Cash Charges for any period after October 30, 1998. 3. Minimum Quick Ratio. The Quick Ratio to be less than 1.50 to 1.00. 4. Minimum Fixed Charge Coverage. The ratio of (a) Adjusted EBIT for any Rolling Four Quarter Period to (b) Fixed Charges for the same Rolling Four Quarter Period, to be less than 1.50 to 1.00. 5. Minimum Profitability. Adjusted Net Income to be less than $1.00 in more than one fiscal quarter of any Rolling Four Quarter Period. 6. Maximum Leverage Ratio. the ratio of (a) total Debt of NAI and its Subsidiaries (determined on a consolidated basis) at the end of any Rolling Four Quarter Period to (b) the Adjusted EBIT for the same Four Quarter Rolling Period, to exceed 3.00 to 1.00. PART III - TESTS FOR MANDATORY COLLATERAL PERIODS If, as of the end of the latest fiscal quarter of NAI ending before any Collateral Test Date, NAI shall have both: (A) failed to maintain a ratio of (1) the sum (without duplication of any item) of Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any), unencumbered cash, unencumbered short term cash investments and unencumbered marketable securities classified as short term investments according to GAAP of NAI and its Subsidiaries (determined on a consolidated basis) to (2) all Debt of NAI and its Subsidiaries (determined on a consolidated basis), of at least 1.5 to 1.00; and Schedule 1 - Page 3 <PAGE> 44 (B) failed to maintain a ratio of (i) all Debt of NAI and its Subsidiaries (determined on a consolidated basis) to (ii) Consolidated Tangible Net Worth of NAI, of no more than 0.45 to 1.00; such Collateral Test Date shall constitute a "FAILED COLLATERAL TEST DATE" for purposes of the determination of Mandatory Collateral Periods. A Mandatory Collateral Period shall commence on each Failed Collateral Test, and such Mandatory Collateral Period shall continue until the second of any two subsequent CONSECUTIVE Collateral Test Dates, neither of which constitutes a Failed Collateral Test Date. For purposes of illustration only, assume that the following dates are consecutive Collateral Test Dates, some of which are Failed Collateral Test Dates and some of which are not, as indicated opposite each date: <TABLE> <CAPTION> Date Failed Collateral Test Date? ---- ---------------------------- <S> <C> February 15, 2001 Yes May 12, 2001 No August 16, 2001 Yes November 11, 2001 No February 18, 2002 No May 14, 2002 Yes August 18, 2002 Yes November 18, 2002 No February 15, 2003 No </TABLE> Under these assumptions, the entire period from February 15, 2001 to February 18, 2002 falls within one or more Mandatory Collateral Periods. Also, the entire period commencing May 14, 2002 and ending February 15, 2003 falls within one or more Mandatory Collateral Periods. The period from February 18, 2002 to May 14, 2002 does not constitute Mandatory Collateral Period. PART IV - OTHER COVENANTS Without limiting NAI's obligations under the other provisions of the Operative Documents, during the Term, NAI shall not, without the prior written consent of BNPLC in each case: A. Liens. Create, incur, assume or suffer to exist, or permit any of its Consolidated Subsidiaries to create, incur, assume or suffer to exist, any Lien, upon or with respect to any of its properties, now owned or hereafter acquired, provided that the following shall be permitted except to the extent that they would encumber any interest in the Property in violation of other provisions of the Operative Documents: 1. 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; 2. Liens imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than thirty (30) days, or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; Schedule 1 - Page 4 <PAGE> 45 3. Liens under workmen's compensation, unemployment insurance, social security or similar laws (other than ERISA); 4. 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; 5. judgment and other similar Liens against assets other than the Property or any part thereof in an aggregate amount not in excess of $3,000,000 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 by appropriate proceedings; 6. easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by NAI or any such Consolidated 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; 7. Liens securing obligations of such a Consolidated Subsidiary to NAI or to another such Consolidated Subsidiary; 8. Liens not otherwise permitted by this subparagraph A (and not encumbering the Property or any Collateral) incurred in connection with the incurrence of additional Debt or asserted to secure Unfunded Benefit Liabilities, provided that (a) the sum of the aggregate principal amount of all outstanding obligations secured by Liens incurred pursuant to this clause shall not at any time exceed five percent (5%) of Consolidated Tangible Net Worth at such time; and (b) such Liens do not constitute Liens against NAI's interest in any material Subsidiary or blanket Liens against all or substantially all of the inventory, receivables, general intangibles or equipment of NAI or of any material Subsidiary of NAI (for purposes of this clause, a "material Subsidiary" means any subsidiary whose assets represent a substantial part of the total assets of NAI and its Subsidiaries, determined on a consolidated basis in accordance with GAAP); and 9. Liens incurred in connection with any renewals, extensions or refundings of any Debt secured by Liens described in the preceding clauses of this subparagraph A, 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. B. Transactions with Affiliates. Enter into or permit any Subsidiary of NAI to enter into any material transactions (including, without limitation, the purchase, sale or exchange of property or the rendering of any service) with any Affiliates of NAI except on terms (1) that would not cause or result in a Default by NAI under the financial covenants set forth in Part II of this Schedule, and (2) that are no less favorable to NAI or the relevant Subsidiary than those that would have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. C. Compliance. Fail to preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; or fail to comply with the provisions of all documents pursuant to which NAI is organized and/or which govern NAI's continued existence and with the requirements of all laws, rules, regulations and orders of a governmental agency applicable to NAI and/or its business. Schedule 1 - Page 5 <PAGE> 46 D. Insurance. Fail to maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of NAI, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to BNPLC, or fail to deliver to BNPLC from time to time at BNPLC's request schedules setting forth all insurance then in effect. E. Facilities. fail to keep all properties useful or necessary to NAI's business in good repair and condition, or to from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. F. Taxes and Other Liabilities. Fail to pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as NAI may in good faith contest or as to which a bona fide dispute may arise, and (b) for which NAI has made provisions, to BNPLC's satisfaction, for eventual payment thereof in the event that NAI is obligated to make such payment. G. Capital Expenditures. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of twenty percent (20%) of NAI's total assets as of the end of the prior fiscal year. H. Merger, Consolidation, Transfer of Assets. Merge into or consolidate with any other entity (unless NAI is the surviving entity and remains in compliance of all provisions of the Operative Documents); or make any substantial change in the nature of NAI's business as conducted as of the date hereof; or sell, lease, transfer or otherwise dispose of all or a substantial or material portion of NAI's assets except in the ordinary course of its business. I. Loans, Advances, Investments. Make any loans or advances to or investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to BNPLC prior to, the date hereof, (b) loans to employees for travel advances, relocation loans and other loans in the ordinary course of business, (c) investments in accordance with NAI's investment policy, as in effect from time to time, (d) existing investments in subsidiaries and joint ventures which have been disclosed to BNPLC in writing prior to the date hereof, and new investments in subsidiaries and joint ventures in amounts up to an aggregated of $10,000,000.00, (e) loans to employees, officers, directors to finance or refinance the purchase of equity securities of NAI. J. Dividends, Distributions. Declare or pay any dividend or distribution either in cash, stock or any other property on NAI's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of NAI's stock now or hereafter outstanding. Schedule 1 - Page 6 <PAGE> 47 COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - LAND) BETWEEN BNP LEASING CORPORATION AND NETWORK APPLIANCE, INC. DATED AS OF DECEMBER ___, 1999 <PAGE> 48 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> ARTICLE I - LIST OF DEFINED TERMS: ACTIVE NEGLIGENCE.............................................................1 ADDITIONAL RENT...............................................................1 ADJUSTED EBIT.................................................................1 AFFILIATE.....................................................................2 APPLICABLE LAWS...............................................................2 APPLICABLE PURCHASER..........................................................2 ATTORNEYS' FEES...............................................................2 BANKING RULES CHANGE..........................................................2 BASE RATE.....................................................................2 BASE RENT.....................................................................2 BASE RENT COMMENCEMENT DATE...................................................2 BASE RENT DATE................................................................3 BASE RENT PERIOD..............................................................3 BNPLC.........................................................................4 BNPLC'S PARENT................................................................4 BREAKAGE COSTS................................................................4 BREAK EVEN PRICE..............................................................4 BUSINESS DAY..................................................................4 CAPITAL ADEQUACY CHARGES......................................................4 CAPITAL LEASE.................................................................5 CLOSING CERTIFICATE...........................................................5 CODE..........................................................................5 COLLATERAL....................................................................5 COLLATERAL PERCENTAGE.........................................................5 COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - LAND).................5 CURRENT AS IS MARKET VALUE....................................................5 DEBT..........................................................................6 DEFAULT.......................................................................6 DEFAULT RATE..................................................................6 DEPOSIT TAKER.................................................................7 DEPOSIT TAKER LOSSES..........................................................7 DESIGNATED SALE DATE..........................................................7 DEVELOPMENT DOCUMENTS.........................................................7 DIRECT PAYMENTS TO PARTICIPANTS...............................................7 EFFECTIVE DATE................................................................7 EFFECTIVE RATE................................................................8 ENVIRONMENTAL LAWS............................................................8 ENVIRONMENTAL CUTOFF DATE.....................................................8 ENVIRONMENTAL LOSSES..........................................................8 ENVIRONMENTAL REPORTS.........................................................9 ERISA.........................................................................9 </TABLE> (i) <PAGE> 49 <TABLE> <CAPTION> Page <S> <C> ERISA AFFILIATE...............................................................9 ESCROWED PROCEEDS.............................................................9 ESTABLISHED MISCONDUCT........................................................9 EUROCURRENCY LIABILITIES.....................................................10 EURODOLLAR RATE RESERVE PERCENTAGE...........................................10 EVENT OF DEFAULT.............................................................10 EXCLUDED TAXES...............................................................10 EXISTING CONTRACT............................................................10 FAILED COLLATERAL TEST DATE..................................................10 FED FUNDS RATE...............................................................10 GAAP.........................................................................11 HAZARDOUS SUBSTANCE..........................................................11 HAZARDOUS SUBSTANCE ACTIVITY.................................................11 IMPOSITIONS..................................................................11 IMPROVEMENTS.................................................................12 INITIAL FUNDING ADVANCE......................................................12 INTERESTED PARTY.............................................................12 ISSUE 97-1 NON-PERFORMANCE-RELATED SUBJECTIVE EVENT OF DEFAULT...............12 LAND.........................................................................12 LAND LEASE...................................................................13 LIBOR........................................................................13 LIBOR PERIOD ELECTION........................................................13 LIEN.........................................................................13 LIENS REMOVABLE BY BNPLC.....................................................14 LOSSES.......................................................................14 MANDATORY COLLATERAL PERIOD..................................................14 MATERIAL ENVIRONMENTAL COMMUNICATION.........................................14 MAXIMUM REMARKETING OBLIGATION...............................................14 MINIMUM EXTENDED REMARKETING PRICE...........................................15 MULTIEMPLOYER PLAN...........................................................15 NAI..........................................................................15 NAI'S EXTENDED REMARKETING PERIOD............................................15 NAI'S EXTENDED REMARKETING RIGHT.............................................15 NAI'S INITIAL REMARKETING RIGHTS AND OBLIGATIONS.............................15 OPERATIVE DOCUMENTS..........................................................15 OTHER COMMON DEFINITIONS AND PROVISIONS AGREEMENT............................15 OTHER LEASE AGREEMENT........................................................15 OTHER PURCHASE AGREEMENT.....................................................15 PARTICIPANT..................................................................15 PARTICIPATION AGREEMENT......................................................16 PBGC.........................................................................16 PERMITTED ENCUMBRANCES.......................................................16 PERMITTED HAZARDOUS SUBSTANCE USE............................................16 PERMITTED HAZARDOUS SUBSTANCES...............................................16 </TABLE> (ii) <PAGE> 50 <TABLE> Page <S> <C> PERMITTED TRANSFER...........................................................17 PERSON.......................................................................17 PERSONAL PROPERTY............................................................17 PLAN.........................................................................17 PLEDGE AGREEMENT.............................................................17 PREMISES LEASES..............................................................17 PRIME RATE...................................................................17 PROPERTY.....................................................................18 PURCHASE AGREEMENT...........................................................18 PURCHASE DOCUMENTS...........................................................18 PURCHASE OPTION..............................................................18 QUALIFIED AFFILIATE..........................................................18 QUALIFIED PREPAYMENTS........................................................18 REAL PROPERTY................................................................19 REMEDIAL WORK................................................................19 RENT.........................................................................19 RESIDUAL RISK PERCENTAGE.....................................................19 RESPONSIBLE FINANCIAL OFFICER................................................19 SALE CLOSING DOCUMENTS.......................................................19 SECURED SPREAD...............................................................19 SELLER.......................................................................19 STIPULATED LOSS VALUE........................................................19 SUBSIDIARY...................................................................19 SUPPLEMENTAL PAYMENT.........................................................19 TERM.........................................................................19 THIRD PARTY PRICE............................................................19 THIRD PARTY SALE NOTICE......................................................20 THIRD PARTY SALE PROPOSAL....................................................20 THIRD PARTY TARGET PRICE.....................................................20 TRANSACTION EXPENSES.........................................................20 UNFUNDED BENEFIT LIABILITIES.................................................20 UNSECURED SPREAD.............................................................20 VOLUNTARY RETENTION OF THE PROPERTY..........................................21 </TABLE> ARTICLE II - PROVISIONS USED IN COMMON: <TABLE> <S> <C> 1 NOTICES..................................................................21 2 SEVERABILITY.............................................................23 3 NO MERGER................................................................23 4 NO IMPLIED WAIVER........................................................23 5 ENTIRE AND ONLY AGREEMENTS...............................................24 6 BINDING EFFECT...........................................................24 7 TIME IS OF THE ESSENCE...................................................24 8 GOVERNING LAW............................................................24 </TABLE> (iii) <PAGE> 51 <TABLE> Page <S> <C> 9 PARAGRAPH HEADINGS.......................................................24 10 NEGOTIATED DOCUMENTS.....................................................24 11 TERMS NOT EXPRESSLY DEFINED IN AN OPERATIVE DOCUMENT.....................24 12 OTHER TERMS AND REFERENCES...............................................24 13 EXECUTION IN COUNTERPARTS................................................25 14 NOT A PARTNERSHIP, ETC...................................................25 </TABLE> (iv) <PAGE> 52 COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - LAND) This Common Definitions and Provisions Agreement (Phase IV - Land), by and between BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), and NETWORK APPLIANCE, INC., a California corporation ("NAI"), is dated as of December ___, 1999, the Effective Date. RECITALS Contemporaneously with the execution of this Common Definitions and Provisions Agreement (Phase IV - Improvements), NAI is executing the Closing Certificate (as defined below) in favor of BNPLC, and BNPLC and NAI are executing the Land Lease (as defined below) and the Purchase Agreement (as defined below), both of which concern the Property (as defined below). Each of the Closing Certificate, the Land Lease and the Purchase Agreement (together with this Common Definitions and Provisions Agreement (Phase IV - Land) and the Pledge Agreement [as defined below], the "OPERATIVE DOCUMENTS") are intended to create separate and independent obligations upon the parties thereto. However, NAI and BNPLC intend that all of the Operative Documents share certain consistent definitions and other miscellaneous provisions. To that end, the parties are executing this Common Definitions and Provisions Agreement (Phase II - - Land) and incorporating it by reference into each of the other Operative Documents. AGREEMENTS ARTICLE I - LIST OF DEFINED TERMS UNLESS A CLEAR CONTRARY INTENTION APPEARS, THE FOLLOWING TERMS SHALL HAVE THE RESPECTIVE INDICATED MEANINGS AS USED HEREIN AND IN THE OTHER OPERATIVE DOCUMENTS: "ACTIVE NEGLIGENCE" of any Person (including BNPLC) means, and is limited to, the negligent conduct on the Property (and not mere omissions) by such Person or by others acting and authorized to act on such Person's behalf in a manner that proximately causes actual bodily injury or property damage for which NAI does not carry (and is not obligated by the Land Lease to carry) insurance. "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 Land, the Improvements or any interest in any other Property or as a party to the transactions described in the Land Lease or the other Operative Documents or in the Other Lease Agreement or the Other Purchase Agreement, (2) any negligent failure of any other Interested 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 transactions described in the Land Lease or other Operative Documents or in the Other Lease Agreement or Other Purchase Agreement, or (3) the exercise in a lawful manner by BNPLC (or any party lawfully claiming through or under BNPLC) of any right or remedy provided in or under the Land Lease or the other Operative Documents or in the Other Lease Agreement or Other Purchase Agreement. "ADDITIONAL RENT" shall have the meaning assigned to it in subparagraph 3.(d) of the Land Lease. "ADJUSTED EBIT" shall have the meaning assigned to it in Part I of Schedule 1 attached to the Land Lease and to the Pledge Agreement. <PAGE> 53 "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. "APPLICABLE LAWS" means any or all of the following, to the extent applicable to NAI or the Property or the Land Lease or the other Operative Documents: restrictive covenants; zoning ordinances and building codes; flood disaster laws; health, safety and environmental laws and regulations; the Americans with Disabilities Act and other laws pertaining to disabled persons; and other laws, statutes, ordinances, rules, permits, regulations, orders, determinations and court decisions. "APPLICABLE PURCHASER" means any third party designated by NAI to purchase BNPLC's interest in the Property and in any Escrowed Proceeds as provided in the Purchase Agreement. "ATTORNEYS' FEES" means the expenses and reasonable fees of counsel to the parties incurring the same, excluding costs or expenses of in-house counsel (whether or not accounted for as general overhead or administrative expenses), but otherwise including 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 all such fees and expenses incurred with respect to appeals, arbitrations and bankruptcy proceedings, and whether or not any manner of proceeding is brought with respect to the matter for which such fees and expenses were incurred. "BANKING RULES CHANGE" means either: (1) the introduction of or any change in any law or regulation applicable to BNPLC, BNPLC's Parent or any other Participant, or in the generally accepted interpretation by the institutional lending community of any such law or regulation, or in the interpretation of any such law or regulation asserted by any regulator, court or other governmental authority (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) or (2) the compliance by BNPLC, BNPLC's Parent or any other Participant with any new guideline or new request from any central bank or other governmental authority (whether or not having the force of law). "BASE RATE" for any Base Rent Period means a rate equal to the higher of (1) the Prime Rate in effect on the first day of such period, or (2) the rate which is fifty basis points (50/100 of 1%) above the Fed Funds Rate for that period. "BASE RENT" means the rent payable by NAI pursuant to subparagraph 3.(a) of the Land Lease. "BASE RENT COMMENCEMENT DATE" shall mean the earlier of (1) the first Business Day of January, 2000, or (2) the "Base Rent Commencement Date" under and as defined in the Other Common Definitions and Provisions Agreement. "BASE RENT DATE" means a date upon which Base Rent must be paid under the Land Lease, all of which dates shall be the first Business Day of a calendar month. The first Base Rent Date shall be determined as follows: a) If a LIBOR Period Election of one month is in effect on the Base Rent Commencement Date, then the first Business Day of the first calendar month following the Base Rent Commencement Date shall be the first Base Rent Date. Common Definitions and Provisions Agreement (Phase IV - Land) - Page 2 <PAGE> 54 b) If the LIBOR Period Election in effect on the Base Rent Commencement Date is three months or six months, then the first Business Day of the third calendar month following the Base Rent Commencement Date shall be the first Base Rent Date. Each successive Base Rent Date after the first Base Rent Date shall be the first Business Day of the first or third calendar month following the calendar month which includes the preceding Base Rent Date, determined as follows: (1) If a LIBOR Period Election of one month is in effect on a Base Rent Date, then the first Business Day of the first calendar month following such Base Rent Date shall be the next following Base Rent Date. (2) If a LIBOR Period Election of three months or six months is in effect on a Base Rent Date, then the first Business Day of the third calendar month following such Base Rent Date shall be the next following Base Rent Date. Thus, for example, if the Base Rent Commencement Date falls on the first Business Day of January, 2000 and a LIBOR Period Election of two months commences on the Base Rent Commencement Date, then the first Base Rent Date shall be the first Business Day of March, 2000. "BASE RENT PERIOD" means a period for which Base Rent must be paid under the Land Lease, each of which periods shall correspond to the LIBOR Period Election for such period. The first Base Rent Period shall begin on and include the Base Rent Commencement Date, and each successive Base Rent Period shall begin on and include the Base Rent Date upon which the preceding Base Rent Period ends. Each Base Rent Period, including the first Base Rent Period, shall end on but not include the first or second Base Rent Date after the Base Rent Date upon which such period began, determined as follows: (1) If the LIBOR Period Election for a Base Rent Period is one month or three months, then such Base Rent Period shall end on the first Base Rent Date after the Base Rent Date upon which such period began. (2) If the LIBOR Period Election for a Base Rent Period is six months, then such Base Rent Period shall end on the second Base Rent Date after the Base Rent Date upon which such period began. The determination of Base Rent Periods can be illustrated by two examples: 1) If NAI makes a LIBOR Period Election of three months for a hypothetical Base Rent Period beginning on the first Business Day in January, 2001, then such Base Rent Period will end on but not include the first Base Rent Date after it begins; that is, such Base Rent Period will end on the first Business Day in April, 2001, the third calendar month after January, 2001. 2) If, however, NAI makes a LIBOR Period Election of six months for the hypothetical Base Rent Period beginning the first Business Day in January, 2001, then such Base Rent Period will end on but not include the second Base Rent Date after it begins; that is, the first Business Day in July, 2001. "BNPLC" means BNP Leasing Corporation, a Delaware corporation. Common Definitions and Provisions Agreement (Phase IV - Land) - Page 3 <PAGE> 55 "BNPLC'S PARENT" means BNPLC's Affiliate, Banque Nationale de Paris, a bank organized and existing under the laws of France and any successors of such bank. "BREAKAGE COSTS" means any and all costs, losses or expenses incurred or sustained by BNPLC's Parent (as a Participant or otherwise) or any other Participant, for which BNPLC's Parent or the Participant shall request reimbursement from BNPLC, because of the resulting liquidation or redeployment of deposits or other funds: (1) used to make or maintain the Initial Funding Advance upon application of a Qualified Prepayment or upon any sale of the Property pursuant to the Purchase Agreement, if such application or sale occurs on any day other than an Advance Date or the last day of a Base Rent Period; or (2) used to make or maintain the Initial Funding Advance upon the acceleration of the end of any Base Rent Period pursuant subparagraph 3.(c)(ii) of the Land Lease. Breakage Costs will include, for example, losses attributable to any decline in LIBOR as of the effective date of any application described in the clause (1) preceding, as compared to LIBOR used to determine the Effective Rate then in effect. Each determination by BNPLC's Parent or the applicable Participant of Breakage Costs shall, in the absence of clear and demonstrable error, be conclusive and binding upon NAI. "BREAK EVEN PRICE" shall have the meaning assigned to it in subparagraph 1(B)(1) of the Purchase Agreement. "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). "CAPITAL ADEQUACY CHARGES" means any additional amounts BNPLC's Parent or any other Participant requests BNPLC to pay as compensation for an increase in required capital as provided in subparagraph 5.(b)(ii) of the Land Lease. "CAPITAL LEASE" means any lease which has been or should be capitalized on the books of the lessee in accordance with GAAP or for federal income tax purposes. "CLOSING CERTIFICATE" means the Closing Certificate and Agreement dated as of December ___, 1999 executed by NAI in favor of BNPLC, as such Closing Certificate may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "CODE" means the Internal Revenue Code of 1986, as amended. "COLLATERAL" shall have the meaning assigned to it in the Pledge Agreement. "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 the Land 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 period, held by the Deposit Takers under (and as defined in) the Pledge Agreement subject to a Qualifying Common Definitions and Provisions Agreement (Phase IV - Land) - Page 4 <PAGE> 56 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 period. "QUALIFYING SECURITY INTEREST" means a first priority perfected security interest under the Pledge Agreement. "COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - LAND)" means this Agreement, which is incorporated by reference into each of the other Operative Documents. "CURRENT AS IS MARKET VALUE" means an amount equal to the fair market value of BNPLC's interest in the Property (or any applicable portion thereof), AS IS, WHERE IS AND WITH ALL FAULTS on the date in question. Whenever a determination of Current AS IS Market Value is required by the express terms of any Operative Document, it will be determined accordance with the following procedure unless BNPLC and NAI have otherwise agreed in writing upon a Current AS IS Market Value at that time: (A) BNPLC and NAI shall each, within ten days after written notice from either to the other, select an appraiser. If either BNPLC or NAI fails to select an appraiser within the required period, then the appraiser who has been timely selected shall conclusively determine the fair market value of the Property (or applicable portion thereof) in accordance with this definition within forty-five days after his or her selection. (B) Upon the selection of the two appraisers as provided above, such appraisers shall proceed to determine the fair market value of BNPLC's interest in the Property (or applicable portion thereof) in accordance with this clause (v). Such appraisals shall be submitted in writing no later than forty-five days after selection of the second appraiser. If the fair market value as determined by such appraisers is identical, such sum shall be Current AS IS Market Value. If the fair market value indicated by the lower appraisal differs from the fair market value indicated by the higher appraisal by less than five percent (5%) of the fair market value indicated by the higher appraisal, then Current AS IS Market 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 Current AS IS Market Value. (C) If the fair market value indicated by the lower appraisal differs from the fair market value indicated by the higher appraisal by more than five percent (5%) of the fair market value indicated by the higher appraisal, 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 fair market value of BNPLC's interest in the Property (or applicable portion thereof), such selection to be submitted in writing no later than ten days after selection of the third appraiser. Such selection shall be determinative of Current AS IS Market Value. (D) In making any such determination of fair market value, the appraisers shall assume that any improvements then located on the Property (or applicable portion thereof) or under construction thereon constitute the highest and best use, and that neither the Land Lease nor the Purchase Agreement add any value to the Property. Each appraiser selected hereunder shall be an independent MAI-designated appraiser with not less than ten years' experience in commercial real estate appraisal in Sunnyvale, California and surrounding areas. Common Definitions and Provisions Agreement (Phase IV - Land) - Page 5 <PAGE> 57 "DEBT" of any Person means (without duplication of any item): (a) indebtedness of such Person for borrowed money; (b) indebtedness of such Person for the deferred purchase price of property or services (except trade payables and accrued expenses constituting current liabilities in the ordinary course of business); (c) the face amount of any outstanding letters of credit issued for the account of such Person; (d) obligations of such Person arising under acceptance facilities; (e) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to purchase, to provide funds for payment, to provide funds to invest in any Person, or otherwise to assure a creditor against loss; (f) obligations of others secured by any Lien on property of such Person; (g) obligations of such Person as lessee under Capital Leases; and (h) the obligations of such Person, contingent or otherwise, under any lease of property or related documents (including a separate purchase agreement) which provide that such Person or any of its Affiliates must purchase or cause another Person to purchase any interest in the leased property and thereby guarantee a minimum residual value of the leased property to the lessor. For purposes of this definition, the amount of the obligations described in clause (h) of the preceding sentence with respect to any lease classified according to GAAP as an "operating lease," shall equal the sum of (1) the present value of rentals and other minimum lease payments required in connection with such lease [calculated in accordance with SFAS 13 and other GAAP relevant to the determination of the whether such lease must be accounted for as an operating lease or capital lease], plus (2) the fair value of the property covered by the lease; provided, however, that such amount shall not exceed the price, as of the date a determination of Debt is required hereunder, for which the lessee can purchase the leased property pursuant to any valid ongoing purchase option if, upon such a purchase, the lessee shall be excused from paying rentals or other minimum lease payments that would otherwise accrue after the purchase. "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. "DEFAULT RATE" means, for any period prior to the Designated Sale Date, a floating per annum rate equal to two percent (2%) above the Prime Rate, and for any period commencing on or after the Designated Sale Date, Default Rate shall mean a floating per annum rate equal to five percent (5%) above the Prime Rate. However, in no event will the "Default Rate" at any time exceed the maximum interest rate permitted by law. "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 first Business Day of January, 2005; or (2) any Business Day designated as such in an irrevocable, unconditional notice given by NAI to BNPLC; provided, that to be effective for purposes of this definition, any such notice from NAI to BNPLC must designate a Business Day that is more than thirty days after the date of such notice; and provided, further, to be effective for purposes of this definition, the notice must include an express, unconditional, unequivocal and irrevocable acknowledgment by NAI that because of NAI's election to accelerate the Designated Sale Date, the Maximum Remarketing Obligation will equal the Break Even Price under the Purchase Agreement; or (3) [intentionally deleted] Common Definitions and Provisions Agreement (Phase IV - Land) - Page 6 <PAGE> 58 (4) [intentionally deleted]; or (5) any Business Day designated as such in a notice given by BNPLC to NAI when any Event of Default has occurred and is continuing; provided, that to be effective for purposes of this definition, any such notice from BNPLC to NAI must designate a Business Day that is more than thirty days after the date of such notice. "DEVELOPMENT DOCUMENTS" means the contracts, ordinances and other documents described in Exhibit C attached to the Closing Certificate, as the same may be modified from time to time in accordance with the Land Lease and the Closing Certificate, and any applications, permits or certificates concerning or affecting the use or development of the Property that may be submitted, issued or executed from time to time as contemplated in such contracts, ordinances and other documents or that BNPLC may hereafter execute, approve or consent to at the request of NAI. "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 NAI by the collateral agent appointed pursuant to the Pledge Agreement from all or any part of the Collateral described therein. "EFFECTIVE DATE" means December ___, 1999. "EFFECTIVE RATE" means for each Base Rent Period, the per annum rate determined by dividing (A) LIBOR for such Base Rent Period, as the case may be, by (B) one hundred percent (100%) minus the Eurodollar Rate Reserve Percentage for such Base Rent 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 of the date of such change, as the case may be, without prior notice to NAI. If for any reason BNPLC 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 foregoing, then the "EFFECTIVE RATE" for that Base Rent Period shall equal any published index or per annum interest rate determined in good faith by BNPLC's Parent to be comparable to LIBOR 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 BNPLC's Parent's comparison of past eurodollar market rates to past yields on such Treasury obligations. Any determination by BNPLC of the Effective Rate under this definition shall, in the absence of clear and demonstrable error, be conclusive and binding upon NAI. "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 the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended, "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, "RCRA"). "ENVIRONMENTAL CUTOFF DATE" means the later of the dates upon which (i) the Land Lease terminates, or (ii) NAI surrenders possession and control of the Property and ceases to have interest in the Land or Improvements or rights with respect thereto under any of the Operative Documents. Common Definitions and Provisions Agreement (Phase IV - Land) - Page 7 <PAGE> 59 "ENVIRONMENTAL LOSSES" means Losses suffered or incurred by BNPLC or any other Interested Party, directly or indirectly, relating to or arising out of, based on or as a result of any of the following: (i) any Hazardous Substance Activity on or prior to the Environmental Cutoff Date; (ii) any violation on or prior to the Environmental Cutoff Date of any applicable Environmental Laws relating to the 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 that occurs or is alleged to have occurred on or prior to the Environmental Cutoff Date; 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 Interested 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 definition or any allegation of any such matters. For purposes of determining whether Losses constitute "Environmental Losses," as the term is used in the Land Lease, any actual or alleged Hazardous Substance Activity or violation of Environmental Laws relating to the Property will be presumed to have occurred prior to the Environmental Cutoff Date unless NAI establishes by clear and convincing evidence to the contrary that the relevant Hazardous Substance Activity or violation of Environmental Laws did not occur or commence prior to the Environmental Cutoff Date. "ENVIRONMENTAL REPORTS" means collectively the following reports (whether one or more), which were provided by NAI to BNPLC prior to the Effective Date: Phase I Environmental Site Assessment for 1330-1350 Geneva and 1345-1347 Crossman Avenue, Sunnyvale, California, dated November 1999 by Romig Consulting Engineers. "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. "ERISA AFFILIATE" means any Person who for purposes of Title IV of ERISA is a member of NAI's controlled group, or under common control with NAI, within the meaning of Section 414 of the Internal Revenue Code, and the regulations promulgated and rulings issued thereunder. "ESCROWED PROCEEDS" means, subject to the exclusions specified in the next sentence, any money that is received by BNPLC from time to time during the Term (and any interest earned thereon) from any party (1) under any property insurance policy as a result of damage to the Property, (2) as compensation for any restriction imposed by any governmental authority upon the use or development of the Property or for the condemnation of the Property or any portion thereof, (3) because of any judgment, decree or award for physical damage to the Property or (4) as compensation under any title insurance policy or otherwise as a result of any title defect or claimed title defect with respect to the Property; provided, however, in determining the amount of "Escrowed Proceeds" there shall be deducted all expenses and costs of every type, kind and nature (including Attorneys' Fees) incurred by BNPLC to collect such proceeds. Notwithstanding the foregoing, "Escrowed Proceeds" will not include (A) any payment to BNPLC by a Participant or an Affiliate of BNPLC that is made to compensate BNPLC for the Participant's or Affiliate's share of any Losses BNPLC may incur as a result of any of the events described in the preceding clauses (1) through (4), (B) any money or proceeds that have been applied as a Qualified Prepayment or to pay any Breakage Costs or other costs incurred in connection with a Qualified Prepayment, (C) any money or proceeds that, after no less than ten days notice to NAI, BNPLC returns or pays to a third party because of BNPLC's good faith belief that such return or payment is required by law, (D) any money or proceeds paid by BNPLC to NAI or offset against any amount owed by NAI, or (E) any money or proceeds used by BNPLC in accordance with the Land Lease for repairs or the restoration of the Property or to obtain development rights or the release of restrictions that will inure to the benefit of future owners or occupants of the Property. Until Escrowed Common Definitions and Provisions Agreement (Phase IV - Land) - Page 8 <PAGE> 60 Proceeds are paid to NAI pursuant to Paragraph 10 of the Land Lease, transferred to a purchaser under the Purchase Agreement as therein provided or applied as a Qualified Prepayment or as otherwise described in the preceding sentence, BNPLC shall keep the same deposited in one or more interest bearing accounts, and all interest earned on such account shall be added to and made a part of Escrowed Proceeds. "ESTABLISHED MISCONDUCT" of a Person means, and is limited to: (1) if the Person is bound by the Operative Documents or the Participation Agreement, a breach by such Person of the express provisions of the Operative Documents or the Participation Agreement, as applicable, that continues beyond any period for cure provided therein, and (2) conduct of such Person or its Affiliates that has been determined to constitute wilful misconduct or Active Negligence in or as a necessary element of a final judgment rendered against such Person by a court with jurisdiction to make such determination. Established Misconduct of one Interested Party shall not be attributed to a second Interested Party unless the second Interested Party is an Affiliate of the first. Negligence which does not constitute Active Negligence shall not in any event constitute Established Misconduct. For purposes of this definition, "conduct of a Person" will include (1) the conduct of an employee of that Person, but only to the extent that the employee is acting within the scope of his employment by that Person, as determined in or as a necessary element of a final judgment rendered against such Person by a court with jurisdiction to make such determination, and (2) the conduct of an agent of that Person (such as an independent environmental consultant engaged by that Person), but only to the extent that the agent is, as determined in or as a necessary element of a final judgment rendered against such Person by a court with jurisdiction to make such determination, (x) acting within the scope of the authority granted to him by such Person, (y) not acting with the consent or approval of or under the direction of NAI or NAI's Affiliates, employees or agents, and (z) not acting in good faith to mitigate Losses that such Person may suffer because of a breach or repudiation by NAI of the Land Lease or the Purchase Documents. "EUROCURRENCY LIABILITIES" shall have the meaning assigned to it in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "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 any emergency, supplemental or other marginal reserve requirement) for BNPLC's Parent 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. "EVENT OF DEFAULT" shall have the meaning assigned to it in subparagraph 17 of the Land Lease. "EXCLUDED TAXES" means (1) all federal, state and local income taxes upon Base Rent, any interest paid to BNPLC or any Participant pursuant to subparagraph 3.(j) of the Land Lease, and any additional compensation claimed by BNPLC pursuant to subparagraph 5.(b)(ii) of the Land Lease; (2) any transfer or change of ownership taxes assessed because of BNPLC's transfer or conveyance to any third party of any rights or interest in the Land Lease, the Purchase Agreement or the Property (other than any such taxes assessed because of any Permitted Transfer under clauses (1), (3), (4), (5), (6) or (7) of the definition of Permitted Transfer in this Agreement), (3) all federal, state and local income taxes upon any amounts paid as reimbursement for or to satisfy Losses incurred by BNPLC or any Participant to the extent such taxes are offset by a corresponding reduction of BNPLC's or the applicable Participant's income taxes because of BNPLC's or such Participant's deduction of the reimbursed Losses from its taxable income or because of any tax credits attributable thereto. If, however, a change in Applicable Laws after the Effective Date results in an increase in such taxes for any reason other than an increase in the Common Definitions and Provisions Agreement (Phase IV - Land) - Page 9 <PAGE> 61 applicable tax rates (e.g., a disallowance of deductions that would otherwise be available against payments described in clause (A) of this definition), then for purposes of the Operative Documents, the term "Excluded Taxes" will not include the increase in such taxes attributable to the change. "EXISTING CONTRACT" means the Agreement of Sale covering the Land between NAI and Seller, dated November 16, 1999. "FAILED COLLATERAL TEST DATE" means any date upon which commences a Mandatory Collateral Period as described in Part III of Schedule 1 attached to the Land Lease. "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 BNPLC's Parent from three Federal funds brokers of recognized standing selected by BNPLC's Parent. All determinations of the Fed Funds Rate by BNPLC's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon NAI. "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 13.(a) of the Land Lease (except for changes with which NAI's independent public accountants concur). "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 or substance," "infectious waste," "toxic substance," "toxic pollutant," or any other formulation intended to define, list or classify substances by reason of deleterious properties, including 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; 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. "HAZARDOUS SUBSTANCE ACTIVITY" means any actual, proposed or threatened use, storage, holding, release (including 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 Property, including 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 Property and any resulting residual Hazardous Substance contamination in, on or under the Property. "HAZARDOUS SUBSTANCE ACTIVITY" also means any existence of Hazardous Substances on the Property that would cause the Property or the owner or operator thereof to be in Common Definitions and Provisions Agreement (Phase IV - Land) - Page 10 <PAGE> 62 violation of, or that would subject the Property to any remedial obligations under, any Environmental Laws, including CERCLA and RCRA, assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances pertaining to the Property. "IMPOSITIONS" means 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 the Land Lease or which are imposed upon BNPLC or the Property because of the ownership, leasing, occupancy, sale or operation of the Property, or any part thereof or interest therein, or relating to or required to be paid by any of the Permitted Encumbrances or the Development Documents, excluding only Excluded Taxes. "IMPOSITIONS" shall include real estate taxes imposed because of a change of use or ownership of the Property on or prior to the date of any sale by BNPLC pursuant to the Purchase Agreement. "IMPROVEMENTS" means any and all (1) buildings and other real property improvements now or hereafter erected on the Land, and (2) equipment (e.g., HVAC systems, elevators and plumbing fixtures) attached to the buildings or other real property improvements, the removal of which would cause structural or other material damage to the buildings or other real property improvements or would materially and adversely affect the value or use of the buildings or other real property improvements. "INITIAL FUNDING ADVANCE" means the advance made by BNPLC's Parent (directly or through one or more of its Affiliates) to or on behalf of BNPLC on or prior to the Effective Date to cover the cost of BNPLC's acquisition of the Property and certain Transaction Expenses and other amounts described in this definition. The amount of the Initial Funding Advance may be confirmed by a separate closing certificate executed by NAI as of the Effective Date. To the extent that BNPLC does not itself use the entire Initial Funding Advance to pay Transaction Expenses incurred by BNPLC, the remainder thereof will be advanced to NAI, with the understanding that NAI shall use any such amount advanced for one or more of the following purposes: (1) the payment or reimbursement of Transaction Expenses incurred by NAI; (2) the maintenance of the Property; or (3) the payment of Rents next due. "INTERESTED PARTY" means each of (1) BNPLC, its Affiliates and its successors and assigns as to the Property or any part thereof or any interest therein, (2) BNPLC's Parent, and (3) any other Participants and their permitted successors and assigns under the Participation Agreement; provided, however, none of the following shall constitute an Interested Party: (a) any Person to whom BNPLC may transfer an interest in the Property by a conveyance that is not a Permitted Transfer and others that cannot lawfully claim an interest in the Property except through or under such a transfer by BNPLC, (b) NAI or any Person that cannot lawfully claim an interest in the Property except through or under a conveyance from NAI, or (c) any Applicable Purchaser under the Purchase Agreement and any Person that cannot lawfully claim an interest in the Property except through or under a conveyance from such Applicable Purchaser. "ISSUE 97-1 NON-PERFORMANCE-RELATED SUBJECTIVE EVENT OF DEFAULT" means an Event of Default that is unrelated to the Property or the use or maintenance thereof and that results solely from (A) a breach by NAI of a provision in any Operative Document, the occurrence of which breach cannot be objectively determined, or (B) any other event described in subparagraph 17.(e) of the Land Lease, the occurrence of which event cannot be objectively determined. For example, an Event of Default under subparagraph 17.(e) of the Land Lease resulting solely from a failure of NAI to "generally" pay its debts as such debts become due (in contrast to a failure of NAI to pay Rent to BNPLC as it becomes due under the Land Lease) would constitute an Issue 97-1 Non-performance-related Subjective Event of Default. In no event, however, will the term "Issue 97-1 Non-performance-related Subjective Event of Default" include an Event of Default resulting from (1) a failure of NAI to make any payment required to BNPLC under the Operative Documents, (2) a breach by NAI of the provisions set forth in Schedule 1 Common Definitions and Provisions Agreement (Phase IV - Land) - Page 11 <PAGE> 63 attached to the Land Lease (which set forth financial covenants), (3) any failure of NAI to use, maintain and insure the Property in accordance with the requirements of the Land Lease, or (4) any failure of NAI to pay the full amount of any Supplemental Payment on the Designated Sale Date as required by the Purchase Agreement. Except as provided in subparagraph 1(A)(2)(c)(i) of the Purchase Agreement, the characterization of any Event of Default as an Issue 97-1 Non-performance-related Subjective Event of Default will not affect the rights or remedies available to BNPLC because of the Event of Default. "LAND" means the land covered by the land described in Exhibit A attached to the Closing Certificate, the Land Lease and the Purchase Agreement. "LAND LEASE" means the Lease Agreement (Phase IV - Land") dated as of DECEMBER ___, 1999 between BNPLC, as landlord, and NAI, as tenant, pursuant to which NAI has agreed to lease BNPLC's interest in the Property, as such Lease Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "LIBOR" means, for purposes of determining the Effective Rate for each Base Rent Period, the rate determined by BNPLC'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 BNPLC'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. BNPLC shall instruct BNPLC'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, as the case may be, (ii) in an amount equal or comparable to the total (projected on the applicable date of determination by BNPLC's Parent) Stipulated Loss Value on the first day of such period, and (iii) for a time equal or comparable to the length of such period. If BNPLC'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. If for any reason BNPLC'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 foregoing, or if BNPLC's Parent shall determine that it is unlawful (or any central bank or governmental authority shall assert that it is unlawful) for BNPLC, BNPLC's Parent or any Participant to provide or maintain the Initial Funding Advance during any Base Rent Period for which Base Rent is computed by reference to LIBOR, then "LIBOR" for that period shall equal the Base Rate for that period. All determinations of LIBOR by BNPLC's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon NAI. "LIBOR PERIOD ELECTION" for any Base Rent Period means a period of one month, three months or six months as designated by NAI at least five Business Days prior to the commencement of such Base Rent Period by a notice given to BNPLC in the form of Exhibit C attached to the Land Lease. (For purposes of the Land Lease a LIBOR Period Election for any Base Rent Period shall also be considered the LIBOR Period Election in effect on the Base Rent Commencement Date or Base Rent Date upon which such Base Rent Period begins.) Any LIBOR Period Election so designated by NAI shall remain in effect for the entire Base Rent Period specified in NAI's notice to BNPLC (provided such Base Rent Period commences at least ten Business Days after BNPLC's receipt of the notice) and for all subsequent Base Rent Periods until a new designation becomes effective in accordance with the provisions set forth in this definition. Notwithstanding the foregoing, however: (1) NAI shall not be entitled to designate a LIBOR Period Election that would cause a Base Rent Period to extend beyond the end of the scheduled Term; (2) changes in the LIBOR Period Election shall become effective only upon the commencement of a new Base Rent Period; (3) for each Base Rent Period that occurs within any Mandatory Collateral Period, the LIBOR Period Election shall be one month; (4) no LIBOR Period Election designated by NAI hereunder shall be different Common Definitions and Provisions Agreement (Phase IV - Land) - Page 12 <PAGE> 64 than the LIBOR Period Election specified under (and as defined in) the Other Common Definitions and Provisions Agreement; and (5) if NAI fails to make a LIBOR Period Election consistent with the foregoing requirements for any Base Rent Period, or if an Event of Default shall have occurred and be continuing on the third Business Day preceding the commencement of any Base Rent Period, the LIBOR Period Election for such Base Rent Period shall be deemed to be one month. "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 lease in the nature thereof, any agreement to sell receivables with recourse, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). In addition, for purposes of subparagraph A.(8) of Part IV of Schedule 1 attached to the Land Lease, "Lien" includes any Liens under ERISA relating to Unfunded Benefit Liabilities of which NAI is required to notify BNPLC under subparagraph 13.(a)(vii) of the Land Lease (irrespective of whether NAI actually notifies BNPLC as required thereunder). "LIENS REMOVABLE BY BNPLC" means, and is limited to, Liens encumbering the Property that are asserted (1) other than as contemplated in the Operative Documents, by BNPLC itself, (2) by third parties lawfully claiming through or under BNPLC (which for purposes of the Land Lease shall include any judgment liens established against the Property because of a judgment rendered against BNPLC and shall also include any liens established against the Property to secure past due Excluded Taxes), or (3) by third parties lawfully claiming under a deed or other instrument duly executed by BNPLC; provided, however, Liens Removable by BNPLC shall not include (A) any Permitted Encumbrances or Development Documents (regardless of whether claimed through or under BNPLC), (B) the Operative Documents or any other document executed by BNPLC with the knowledge of (and without objection by) NAI's counsel contemporaneously with the execution and delivery of the Operative Documents, (C) Liens which are neither lawfully claimed through or under BNPLC (as described above) nor claimed under a deed or other instrument duly executed by BNPLC, (D) Liens claimed by NAI or claimed through or under a conveyance made by NAI, (E) Liens arising because of BNPLC's compliance with Applicable Law, the Operative Documents, Permitted Encumbrances, the Development Documents or any written request made by NAI, (F) Liens securing the payment of property taxes or other amounts assessed against the Property by any governmental authority, other than to secure the payment of past due Excluded Taxes or to secure damages caused by (and attributed by any applicable principles of comparative fault to) BNPLC's own Established Misconduct, (G) Liens resulting from or arising in connection with any breach by NAI of the Operative Documents; or (H) Liens resulting from or arising in connection with any Permitted Transfer that occurs more than thirty days after any Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a cash price to BNPLC (when taken together with any Supplemental Payment made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to the Break Even Price. "LOSSES" means the following: any and all losses, liabilities, damages (whether actual, consequential, punitive or otherwise denominated), demands, claims, administrative or legal proceedings, actions, judgments, causes of action, assessments, fines, penalties, costs and expenses (including 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. "MANDATORY COLLATERAL PERIOD" shall have the meaning assigned to it in Part I of Schedule 1 attached to the Land Lease and to the Pledge Agreement. Common Definitions and Provisions Agreement (Phase IV - Land) - Page 13 <PAGE> 65 "MATERIAL ENVIRONMENTAL COMMUNICATION" means a communication between NAI or its agents and a regulatory agency or third party, which causes, or potentially could cause (whether by implementation of or response to said communication), a material change in the scope, duration, or nature of any Remedial Work. "MAXIMUM REMARKETING OBLIGATION" shall have the meaning indicated in subparagraph 1(A)(2)(c) of the Purchase Agreement. "MINIMUM EXTENDED REMARKETING PRICE" shall have the meaning assigned to it in subparagraph 2(B) of the Purchase Agreement. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 3(37) of ERISA to which contributions have been made by NAI or any ERISA Affiliate during the preceding six years and which is covered by Title IV of ERISA. "NAI" means Network Appliance, Inc., a California corporation. "NAI'S EXTENDED REMARKETING PERIOD" shall have the meaning assigned to it in subparagraph 2(A) of the Purchase Agreement. "NAI'S EXTENDED REMARKETING RIGHT" shall have the meaning assigned to it in subparagraph 2(A) of the Purchase Agreement. "NAI'S INITIAL REMARKETING RIGHTS AND OBLIGATIONS" shall have the meaning assigned to it in subparagraph 1(A)(2) of the Purchase Agreement. "OPERATIVE DOCUMENTS" means the Closing Certificate, the Land Lease, the Purchase Agreement, the Pledge Agreement and this Common Definitions and Provisions Agreement (Phase IV - Land). "OTHER COMMON DEFINITIONS AND PROVISIONS AGREEMENT" means the Common Definitions and Provisions Agreement (Phase IV - Improvements), dated as of the June 16, 1999, between BNPLC and NAI, as such Common Definitions and Provisions Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "OTHER LEASE AGREEMENT" means the Lease Agreement (Phase IV - Improvements), dated as of June 16, 1999, between BNPLC and NAI, as such Lease Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "OTHER PURCHASE AGREEMENT" means the Purchase Agreement (Phase IV - Improvements), dated as of June 16, 1999, between BNPLC and NAI, as such Purchase Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "PARTICIPANT" means BNPLC's Parent and any other Person that, upon becoming a party to the Participation Agreement and the Pledge Agreement by executing supplements as contemplated therein, agrees from time to time to participate in all or some of the risks and rewards to BNPLC of the Land Lease and the Purchase Documents. As of the Effective Date, the only Participant is BNPLC's Parent, but BNPLC may agree after the Effective Date to share in risks and rewards of the Land Lease and the Purchase Documents with other Participants. However, no Person other than BNPLC's Parent and its Affiliates shall qualify as a Participant for Common Definitions and Provisions Agreement (Phase IV - Land) - Page 14 <PAGE> 66 purposes of the Operative Documents or other agreements concerning the Property to which NAI is a party unless such Person, during the continuance of an Event of Default or otherwise with NAI's prior written approval (which approval will not be unreasonably withheld), became a party to the Pledge Agreement and to the Participation Agreement by executing supplements to those agreements as contemplated therein. "PARTICIPATION AGREEMENT" means the Participation Agreement between BNPLC and BNPLC's Parent dated as of the June 16, 1999, pursuant to which BNPLC's Parent has agreed to participate in the risks and rewards to BNPLC of the Land Lease and the other Operative Documents, as such Participation Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "PERMITTED ENCUMBRANCES" means (i) the encumbrances and other matters affecting the Property that are set forth in Exhibit B attached to the Closing Certificate, (ii) any easement agreement or other document affecting title to the Property executed by BNPLC at the request of or with the consent of NAI (including the Other Lease Agreement, the Other Purchase Agreement and all documents executed by BNPLC pursuant to the Other Purchase Agreement), (iii) the Premises Leases, (iv) any Liens securing the payment of Impositions which are not delinquent or claimed to be delinquent or which are being contested in accordance with subparagraph 5.(a) of the Land Lease, and (iv) mechanics' and materialmen's liens for amounts not past due or claimed to be past due or which are being contested in accordance with subparagraph 11.(c) of the Land Lease. "PERMITTED HAZARDOUS SUBSTANCE USE" means the use, generation, 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, generation, storage and disposal shall not: (1) exceed that reasonably required for the operation of the Property for the purposes expressly permitted under subparagraph 2.(a) of the Land Lease; or (2) include any disposal, discharge or other release of Hazardous Substances from the Property in any manner that might allow such substances to reach 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 NAI 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 Property in a manner that requires a RCRA treatment, storage or disposal permit, including a landfill, incinerator or other waste disposal facility. "PERMITTED HAZARDOUS SUBSTANCES" means Hazardous Substances used and reasonably required for the use of the Property by NAI and its permitted subtenants and assigns for the purposes expressly permitted by subparagraph 2.(a) of the Land Lease, in either case 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 usual and customary office, laboratory and janitorial products. Common Definitions and Provisions Agreement (Phase IV - Land) - Page 15 <PAGE> 67 "PERMITTED TRANSFER" means any one or more of the following: (1) the creation or conveyance by BNPLC of rights and interests in favor of any Participant pursuant to the Participation Agreement; (2) the creation or conveyance of rights and interests in favor of or to Banque Nationale de Paris (through its San Francisco Branch or otherwise), as BNPLC's Parent, or any other Qualified Affiliate of BNPLC, provided that NAI must be notified before any such conveyance to Banque Nationale de Paris or another Qualified Affiliate of (A) any interest in the Property or any portion thereof by an assignment or other document which will be recorded in the real property records of San Mateo County, California or (B) BNPLC's entire interest in the Land and the Property; (3) any assignment or conveyance by BNPLC or its permitted successors or assigns to any present or future Participant of any lien or security interest against the Property (in contrast to a conveyance of BNPLC's fee estate in the Land and Improvements) or of any interest in Rent, payments required by or under the Purchase Documents or payments to be generated from the Property after the Term, provided that such assignment or conveyance is made expressly subject to the rights of NAI under the Operative Documents; (4) any agreement to exercise or refrain from exercising rights or remedies under the Operative Documents made by BNPLC with any present or future Participant; (5) any assignment or conveyance by BNPLC requested by NAI or required by any Permitted Encumbrance, by the Purchase Agreement, by the Existing Contract, by any other Development Contract or by Applicable Laws; or (6) any assignment or conveyance after a Designated Sale Date on which NAI shall not have purchased or caused an Applicable Purchaser to purchase BNPLC's interest in the Property and, if applicable, after the expiration of the thirty day cure period specified in Paragraph 4(D) of the Purchase Agreement. "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. "PERSONAL PROPERTY" shall have the meaning assigned to it on page 2 of the Land Lease. "PLAN" means any employee benefit or other plan established or maintained, or to which contributions have been made, by NAI or any ERISA Affiliate of NAI during the preceding six years and which is covered by Title IV of ERISA, other than a Multiemployer Plan. "PLEDGE AGREEMENT" means the Pledge Agreement (Phase IV - Land) dated as of the date hereof between BNPLC and NAI, pursuant to which NAI may pledge certificates of deposit as security for NAI's obligations under the Purchase Agreement (and for the corresponding obligations of BNPLC 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. "PREMISES LEASES" means the four subleases of space within the Improvements, each between NAI, as landlord, and TRW Inc., as tenant, executed of even date herewith, and any subleases or other transfers under and permitted by the terms of any such leases. "PRIME RATE" means the prime interest rate or equivalent charged by BNPLC's Parent in the United States of America as announced or published by BNPLC's Parent from time to time, which need not be the lowest interest rate charged by BNPLC's Parent. If for any reason BNPLC's Parent does not announce or publish a prime rate or equivalent, the prime rate or equivalent announced or published by either CitiBank, N.A. or any New York branch or office of Credit Commercial de France as selected by BNPLC shall be used to compute the rate described in the preceding sentence. 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 Effective Date without notice to NAI as of the effective time of each change in rates described in this definition. Common Definitions and Provisions Agreement (Phase IV - Land) - Page 16 <PAGE> 68 "PROPERTY" means the Personal Property and the Real Property, collectively. Any rights, titles and interests acquired by BNPLC under the Existing Contract, to the extent not covered by the Land Lease and thus not encompassed within this definition of Property, are intended to be covered by the Other Lease Agreement and encompassed within the term "Property" as defined in the Other Common Definitions and Provisions Agreement. "PURCHASE AGREEMENT" means the Purchase Agreement (Phase IV - Land) dated as of December ___, 1999 between BNPLC and NAI, as such Purchase Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "PURCHASE DOCUMENTS" means collectively (1) the Purchase Agreement, (2) the Memorandum of Purchase Agreement executed by BNPLC and NAI as of the Effective Date and recorded to provide notice of the Purchase Agreement; and (3) the Pledge Agreement and all financing statements, notices, acknowledgments and certificates of deposit executed or delivered from time to time by NAI, BNPLC or the other parties to the Pledge Agreement pursuant to and as expressly provided therein. "PURCHASE OPTION" shall have the meaning assigned to it in subparagraph 1(A)(1) of the Purchase Agreement. "QUALIFIED AFFILIATE" means any Person that is one hundred percent (100%) owned, directly or indirectly, by Banque Nationale de Paris or any successor of such bank; provided, that such Person can make (and has in writing made) the same representations to NAI that BNPLC has made in Paragraphs 3(D) and 3(E) of the Closing Certificate; and, provided, further, that such Person is not insolvent. "QUALIFIED PREPAYMENTS" means any payments received by BNPLC from time to time during the Term (1) under any property insurance policy as a result of damage to the Property, (2) as compensation for any restriction placed upon the use or development of the Property or for the condemnation of the Property or any portion thereof, (3) because of any judgment, decree or award for injury or damage to the 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 Property; provided, however, that (x) in determining the amount of "Qualified Prepayments", there shall be deducted all expenses and costs of every kind, type and nature (including taxes, Breakage Costs and Attorneys' Fees) incurred by BNPLC with respect to the collection or application of such payments, (y) "Qualified Prepayments" shall not include any payment to BNPLC by a Participant or an Affiliate of BNPLC that is made to compensate BNPLC for the Participant's or Affiliate's share of any Losses BNPLC may incur as a result of any of the events described in the preceding clauses (1) through (4) and (z) "Qualified Prepayments" shall not include any payments received by BNPLC that BNPLC has paid or is obligated to pay to NAI for the restoration or repair of the Property or that BNPLC is holding as Escrowed Proceeds pursuant to Paragraph 10 of the Land Lease or any other provision of the Land Lease. For purposes of computing the total Qualified Prepayments (and other amounts dependent upon Qualified Prepayments, such as Stipulated Loss Value) paid to or received by BNPLC as of any date, payments described in the preceding clauses (1) through (4) will be considered as Escrowed Proceeds, not Qualified Prepayments, until they are actually applied as Qualified Prepayments by BNPLC as provided in the Paragraph 10 of the Land Lease. "REAL PROPERTY" shall have the meaning assigned to it on page 1 of the Land Lease. "REMEDIAL WORK" means any investigation, monitoring, clean-up, containment, remediation, removal, payment of response costs, or restoration work and the preparation and implementation of any closure or other Common Definitions and Provisions Agreement (Phase IV - Land) - Page 17 <PAGE> 69 required remedial plans that any governmental agency or political subdivision requires or approves (or could reasonably be expected to require if it was aware of all relevant circumstances concerning the Property), whether by judicial order or otherwise, because of the presence of or suspected presence of Hazardous Substances in, on, under or about the Property or because of any prior Hazardous Substance Activity. Without limiting the generality of the foregoing, Remedial Work also means any obligations imposed upon or undertaken by NAI pursuant to Development Documents or any recommendations or proposals made therein. "RENT" means the Base Rent and all Additional Rent. "RESIDUAL RISK PERCENTAGE" means seventeen percent (17%). "RESPONSIBLE FINANCIAL OFFICER" means the chief financial officer, the controller, the treasurer or the assistant treasurer of NAI. "SALE CLOSING DOCUMENTS" shall have the meaning assigned to it in subparagraph 1(C) of the Purchase Agreement. "SECURED SPREAD" means thirty basis points (30/100 of 1%); provided, however, that for purposes of calculating the Base Rent for any Mandatory Collateral Period, the Secured Spread shall equal one-half of the Unsecured Spread for the same period. "SELLER" means, collectively, TRW Inc., an Ohio corporation, and ESL Incorporated, a California corporation. "STIPULATED LOSS VALUE" as of any date means the amount equal to the sum of the Initial Funding Advance, minus all funds actually received by BNPLC and applied as Qualified Prepayments on or prior to such date. Under no circumstances will any payment of Base Rent reduce Stipulated Loss Value. "SUBSIDIARY" means, with respect to any Person, any Affiliate of which at least a majority of the securities or other ownership interests having ordinary voting power then exercisable for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by such Person. "SUPPLEMENTAL PAYMENT" shall have the meaning assigned to it in subparagraph 1(A)(2)(c) of the Purchase Agreement. "TERM" shall have the meaning assigned to it in subparagraph 1.(a) of the Land Lease. "THIRD PARTY PRICE" shall have the meaning assigned to it in subparagraph 1(A)(2) of the Purchase Agreement. "THIRD PARTY SALE NOTICE" shall have the meaning assigned to it in subparagraph 2(C) of the Purchase Agreement. "THIRD PARTY SALE PROPOSAL" shall have the meaning assigned to it in subparagraph 2(C) of the Purchase Agreement. Common Definitions and Provisions Agreement (Phase IV - Land) - Page 18 <PAGE> 70 "THIRD PARTY TARGET PRICE" shall have the meaning assigned to it in subparagraph 2(C) of the Purchase Agreement. "TRANSACTION EXPENSES" means costs incurred in connection with the preparation and negotiation of the Operative Documents and related documents and the consummation of the transactions contemplated therein. "UNFUNDED BENEFIT LIABILITIES" means, with respect to any Plan or Multiemployer 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 or Multiemployer Plan exceeds the market value of all Plan or Multiemployer assets allocable to such benefit liabilities, as determined on the most recent valuation date of the Plan or Multiemployer Plan and in accordance with the provisions of ERISA for calculating the potential liability of NAI or any ERISA Affiliate of NAI under Title IV of ERISA. "UNSECURED SPREAD" means, for each period beginning on and including the Base Rent Commencement Date or a Base Rent Date and ending on but not including the next Base Rent Date, the amount established as described below in this definition on the date (in this definition, the "SPREAD TEST DATE") that is two Business Days prior to such period by reference to the ratio calculated by dividing (1) Adjusted EBIT for the then latest Rolling Four Quarters Period that ended prior to (and for which NAI has reported earnings as necessary to compute Adjusted EBIT) into (2) the total Debt of NAI and its Subsidiaries (determined on a consolidated basis) as of the end of such Rolling Four Quarters Period. The Unsecured Spread shall be established at the Level in the pricing grid below which corresponds to such ratio; provided, that: (a) for any period commencing on or prior to the first Business Day of February, 2000, the Unsecured Spread will be the amount indicated for Level III in the pricing grid below plus basis points; (b) promptly after earnings are reported by NAI for the latest quarter in any Rolling Four Quarters Period, NAI must notify BNPLC of any resulting change in the Unsecured Spread under this definition, and no reduction in the Unsecured Spread from one period to the next will be effective for purposes of the Operative Documents unless, prior to the Spread Test Date for the next period, NAI shall have provided BNPLC with a written notice setting forth and certifying the calculation under this definition that justifies the reduction; and (c) notwithstanding anything to the contrary in this definition, on any date when an Event of Default has occurred and is continuing, the Unsecured Spread shall equal the Default Rate less the Effective Rate. <TABLE> <CAPTION> LEVELS RATIO OF TOTAL DEBT TO ADJUSTED EBIT UNSECURED SPREAD ------ ------------------------------------ ---------------- <S> <C> <C> Level I less than 0.5 125.0 basis points Level II greater than or equal to 0.5, but 137.5 basis points less than 1.0 Level III greater than or equal to 1.0, but 150.0 basis points less than 1.5 </TABLE> Common Definitions and Provisions Agreement (Phase IV - Land) - Page 19 <PAGE> 71 <TABLE> <S> <C> <C> Level IV greater than or equal to 1.5, but 175.0 basis points less than 2.0 Level V greater than or equal to 2.0 200.0 basis points </TABLE> All determinations of the Unsecured Spread by BNPLC shall, in the absence of clear and demonstrable error, be binding and conclusive for purposes of the Land Lease. Further BNPLC may, but shall not be required, to rely on the determination of the Unsecured Spread set forth in any notice delivered by NAI as described above in clause (b) of this definition. "VOLUNTARY RETENTION OF THE PROPERTY" means an affirmative election made by BNPLC to keep the Property pursuant to, and under the circumstances described in, the second sentence of subparagraph 1(A)(2)(a) of the Purchase Agreement. ARTICLE II - RULES OF INTERPRETATION THE FOLLOWING PROVISIONS WILL APPLY TO AND GOVERN THE INTERPRETATION OF EACH OF THE OPERATIVE DOCUMENTS: 1 NOTICES. The provision of any Operative Document, or of any Applicable Laws with reference to the sending, mailing or delivery of any notice or demand under any Operative Document or with reference to the making of any payment required under any Operative Document, shall be deemed to be complied with when and if the following steps are taken: (i) All Rent and other amounts required to be paid by NAI to BNPLC shall be paid to BNPLC in immediately available funds by wire transfer to: Federal Reserve Bank of New York ABA 026007689 Banque Nationale de Paris /BNP/ BNP San Francisco /AC/ 14334000176 /Ref/ NAI Sunnyvale Synthetic Land Lease (Phase IV) or at such other place and in such other manner as BNPLC may designate in a notice to NAI. (ii) All Collateral required to be paid by NAI to the Agent shall be paid in immediately available funds by wire transfer to: Federal Reserve Bank of New York Common Definitions and Provisions Agreement (Phase IV - Land) - Page 20 <PAGE> 72 ABA 026007689 Banque Nationale de Paris /BNP/ BNP San Francisco /AC/ 14334000176 /Ref/ NAI Collateral Payment or at such other place and in such other manner as Agent may designate in a notice to NAI. (iii) All notices, demands, approvals, consents and other communications to be made under any Operative Document to or by the parties thereto must, to be effective for purpose of such Operative Document, be in writing. Notices, demands and other communications required or permitted under any Operative Document are to be sent to the addresses set forth below (or in the case of communications to Participants, at the addresses set forth in Schedule 1 to 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 (B) hereof shall be deemed received upon such personal service or upon dispatch by electronic means, and, if sent pursuant to clause (C) shall be deemed received five days following deposit in the mail. Address of BNPLC: BNP Leasing Corporation 12201 Merit Drive Suite 860 Dallas, Texas 75251 Attention: Lloyd G. Cox Telecopy: (972) 788-9191 With a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Gavin Holles Telecopy: (415) 296-8954 And for draw requests and funding notices, with a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: George Fung Telecopy: (415) 956-4230 Common Definitions and Provisions Agreement (Phase IV - Land) - Page 21 <PAGE> 73 Address of NAI: Network Appliance, Inc. Attn: Leslie Paulides 2770 San Thomas Expressway Santa Clara, CA 95051 Telecopy: (408) 367-3452 2 SEVERABILITY. If any term or provision of any Operative Document or the application thereof shall to any extent be held by a court of competent jurisdiction to be invalid and unenforceable, the remainder of such document, 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. 3 NO MERGER. There shall be no merger of the Land Lease or of the leasehold estate created by the Land Lease with any other interest in the Property by reason of the fact that the same person may acquire or hold, directly or indirectly, the Land Lease or the leasehold estate created hereby and any other interest in the Property, unless all Persons with an interest in the Property that would be adversely affected by any such merger specifically agree in writing that such a merger shall occur. There shall be no merger of the Purchase Agreement or of the purchase options or obligations created by the Purchase Agreement with any other interest in the Property by reason of the fact that the same person may acquire or hold, directly or indirectly, the Land Lease or the leasehold estate created hereby and any other interest in the Property, unless all Persons with an interest in the Property that would be adversely affected by any such merger specifically agree in writing that such a merger shall occur. 4 NO IMPLIED WAIVER. The failure of BNPLC or NAI 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 any Operative Document shall not be construed as a waiver or a relinquishment thereof for the future. The failure of Agent 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 the Pledge Agreement shall not be construed as a waiver or a relinquishment thereof for the future. The waiver of or redress for any breach of any Operative Document by any party thereto shall not prevent a similar subsequent act from constituting a violation. Any express waiver of any provision of any Operative Document shall affect only the term or condition specified in such waiver and only for the time and in the manner specifically stated therein. No waiver by any party to any Operative Document of any provision therein shall be deemed to have been made unless expressed in writing and signed by the party to be bound by the waiver. A receipt by BNPLC of any Rent with knowledge of the breach by NAI of any covenant or agreement contained in the Land Lease or any other Operative Document shall not be deemed a waiver of such breach. A receipt by Agent of any Collateral or other payment under the Pledge Agreement with knowledge of the breach by NAI of any covenant or agreement contained in the Pledge Agreement shall not be deemed a waiver of such breach. 5 ENTIRE AND ONLY AGREEMENTS. The Operative Documents supersede any prior negotiations and agreements between BNPLC, Agent and NAI concerning the Property or the Collateral, and no amendment or modification of any Operative Document shall be binding or valid unless expressed in a writing executed by all parties to such Operative Document. 6 BINDING EFFECT. Except to the extent, if any, expressly provided to the contrary in any Operative Document with respect to assignments thereof, all of the covenants, agreements, terms and conditions to Common Definitions and Provisions Agreement (Phase IV - Land) - Page 22 <PAGE> 74 be observed and performed by the parties to the Operative Documents shall be applicable to and binding upon their respective successors and, to the extent assignment is permitted thereunder, their respective assigns. 7 TIME IS OF THE ESSENCE. Time is of the essence as to all obligations of NAI and BNPLC and all notices required of NAI and BNPLC under the Operative Documents. 8 GOVERNING LAW. Each Operative Document shall be governed by and construed in accordance with the laws of the State of California without regard to conflict or choice of laws (subject, however, in the case of the Pledge Agreement to any contrary provisions of the "UCC," as defined in the Pledge Agreement). 9 PARAGRAPH HEADINGS. The paragraph and section headings contained in the Operative Documents are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several provisions thereof. 10 NEGOTIATED DOCUMENTS. All the parties to each Operative Document and their counsel have reviewed and revised or requested revisions to such Operative Document, and the usual rule of construction that any ambiguities are to be resolved against the drafting party shall not apply to the construction or interpretation of any Operative Documents or any amendments thereof. 11 TERMS NOT EXPRESSLY DEFINED IN AN OPERATIVE DOCUMENT. As used in any Operative Document, a capitalized term that is not defined therein or in this Common Definitions and Provisions Agreement (Phase IV - Land), but is defined in another Operative Document, shall have the meaning ascribed to it in the other Operative Document. 12 OTHER TERMS AND REFERENCES. Words of any gender used in each Operative Document 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 in any Operative Document to Paragraphs, subparagraphs, Sections, subsections or other subdivisions shall refer to the corresponding Paragraphs, subparagraphs, Sections, subsections or subdivisions of that Operative Document, unless specific reference is made to another document or instrument. References in any Operative Document to any Schedule or Exhibit shall refer to the corresponding Schedule or Exhibit attached to that Operative Document, which shall be made a part thereof by such reference. All capitalized terms used in each Operative Document 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 in the Operative Documents or, in the case of any other document to which BNPLC is a party or of which BNPLC is an intended beneficiary, without the consent of BNPLC. All accounting terms used but not specifically defined in any Operative Document shall be construed in accordance with GAAP. The words "this [Agreement]", "herein", "hereof", "hereby", "hereunder" and words of similar import when used in each Operative Document refer to that Operative Document as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Paragraph", "this subparagraph", "this Section", "this subsection" and similar phrases used in any operative document refer only to the Paragraph, subparagraph, Section, subsection or other subdivision described in which the phrase occurs. As used in the Operative Documents the word "or" is not exclusive. As used in the Operative Documents, the words "include", "including" and similar terms shall be construed as if followed by "without limitation to". 13 EXECUTION IN COUNTERPARTS. To facilitate execution, each Operative Document may be executed in as many identical counterparts as may be required. It shall not be necessary that the signature of, or Common Definitions and Provisions Agreement (Phase IV - Land) - Page 23 <PAGE> 75 on behalf of, each party, or that the signature of all persons required to bind any party, appear on each counterpart. All counterparts, taken together, shall collectively constitute a single instrument. It shall not be necessary in making proof of any Operative Document to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, each of the parties hereto. Any signature page to any counterpart may be detached from such counterpart without impairing the legal effect of the signatures thereon and thereafter attached to another counterpart identical thereto except having attached to it additional signature pages. 14 NOT A PARTNERSHIP, ETC. NOTHING IN ANY OPERATIVE DOCUMENT IS INTENDED TO CREATE ANY PARTNERSHIP, JOINT VENTURE, OR OTHER JOINT ENTERPRISE BETWEEN BNPLC AND NAI. NEITHER THE EXECUTION OF ANY OPERATIVE DOCUMENT NOR THE ADMINISTRATION THEREOF OR OTHER DOCUMENTS REFERENCED HEREIN BY BNPLC, NOR ANY OTHER RIGHT, DUTY OR OBLIGATION OF BNPLC UNDER OR PURSUANT TO ANY OPERATIVE DOCUMENT IS INTENDED TO BE OR TO CREATE ANY FIDUCIARY OBLIGATIONS OF BNPLC TO NAI. [The signature pages follows.] Common Definitions and Provisions Agreement (Phase IV - Land) - Page 24 <PAGE> 76 IN WITNESS WHEREOF, NAI and BNPLC have caused this Common Definitions and Provisions Agreement (Phase IV - Land) to be executed as of December ___, 1999. "NAI" NETWORK APPLIANCE, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ <PAGE> 77 [Continuation of signature pages to Common Definitions and Provisions Agreement (Phase IV - Land) dated to be effective December ___, 1999] "BNPLC" BNP LEASING CORPORATION By: --------------------------------- Lloyd G. Cox, Vice President </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.51 <SEQUENCE>10 <DESCRIPTION>EXHIBIT 10.51 <TEXT> <PAGE> 1 EXHIBIT 10.51 ================================================================================ LEASE AGREEMENT (PHASE IV - IMPROVEMENTS) BETWEEN BNP LEASING CORPORATION ("BNPLC") AND NETWORK APPLIANCE, INC. ("NAI") DECEMBER ___, 1999 (SUNNYVALE, CALIFORNIA) ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> <C> 1. TERM.................................................................................2 (a) Scheduled Term................................................................2 (b) [Intentionally deleted.]......................................................2 (c) [Intentionally deleted.]......................................................2 (d) Election by NAI to Terminate After Accelerating the Designated Sale Date......2 (e) Extension of the Term.........................................................3 2. USE AND CONDITION OF THE PROPERTY....................................................3 (a) Use...........................................................................3 (b) Condition of the Property.....................................................4 (c) Consideration for and Scope of Waiver.........................................4 3. RENT.................................................................................4 (a) Base Rent Generally...........................................................4 (b) Impact of Collateral Upon Formulas............................................4 (c) Calculation of and Due Dates for Base Rent....................................5 (i) Amount Payable On the Base Rent Commencement Date......................5 (ii) Determination of Payment Due Dates, After the Base Rent Commencement Date, Generally........................................................5 (iii) Special Adjustments to Base Rent Payment Dates and Periods.............5 (iv) Base Rent Formula for Periods During Which The Collateral Percentage is 100%................................................................6 (v) Base Rent Formula for Periods During Which The Collateral Percentage is Greater Than Zero and Less Than 100%................................6 (vi) Base Rent Formula for Periods During Which The Collateral Percentage is Zero................................................................7 (d) Additional Rent...............................................................8 (e) Arrangement Fee...............................................................8 (f) [intentionally deleted].......................................................8 (g) Administrative Agency Fees....................................................8 (h) [Intentionally deleted.]......................................................8 (i) [Intentionally deleted.]......................................................8 (j) No Demand or Setoff...........................................................8 (k) Default Interest and Order of Application.....................................8 4. NATURE OF THIS AGREEMENT.............................................................8 (a) Net Lease Generally...........................................................8 (b) No Termination................................................................9 (c) Tax Reporting.................................................................9 (d) Characterization of this Improvements Lease..................................10 5. PAYMENT OF EXECUTORY COSTS AND LOSSES RELATED TO THE PROPERTY.......................10 (a) Impositions..................................................................10 (b) Increased Costs; Capital Adequacy Charges....................................11 (c) NAI's Payment of Other Losses; General Indemnification.......................11 (d) Exceptions and Qualifications to Indemnities.................................13 6. INTENTIONALLY DELETED...............................................................13 7. STATUS OF PROPERTY ACQUIRED WITH FUNDS PROVIDED BY BNPLC............................14 8. ENVIRONMENTAL.......................................................................14 </TABLE> i <PAGE> 3 <TABLE> <CAPTION> Page ---- <S> <C> <C> (a) Environmental Covenants by NAI...............................................14 (b) Right of BNPLC to do Remedial Work Not Performed by NAI......................15 (c) Environmental Inspections and Reviews........................................15 (d) Communications Regarding Environmental Matters...............................15 9. INSURANCE REQUIRED AND CONDEMNATION.................................................16 (a) Liability Insurance..........................................................16 (b) Property Insurance...........................................................16 (c) Failure to Obtain Insurance..................................................16 (d) Condemnation.................................................................17 (e) Waiver of Subrogation........................................................17 10. APPLICATION OF INSURANCE AND CONDEMNATION PROCEEDS..................................17 (a) Collection and Application of Insurance and Condemnation Proceeds Generally..17 (b) Advances of Escrowed Proceeds to NAI.........................................18 (c) Application of Escrowed Proceeds as a Qualified Prepayment...................18 (d) Special Provisions Applicable After an Event of Default......................18 (e) NAI's Obligation to Restore..................................................18 (f) Takings of All or Substantially All of the Property on or after the Base Rent Commencement Date.......................................................18 11. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF NAI CONCERNING THE PROPERTY............................................................................19 (a) Compliance with Covenants and Laws...........................................19 (b) Operation of the Property....................................................19 (c) Debts for Construction, Maintenance, Operation or Development................20 (d) Repair, Maintenance, Alterations and Additions...............................20 (e) Permitted Encumbrances and Development Documents.............................21 (f) Books and Records Concerning the Property....................................21 12. FINANCIAL COVENANTS AND OTHER COVENANTS INCORPORATED BY REFERENCE TO SCHEDULE 1.....21 13. FINANCIAL STATEMENTS AND OTHER REPORTS..............................................21 (ai Financial Statements; Required Notices; Certificates.........................21 14. ASSIGNMENT AND SUBLETTING BY NAI....................................................23 (a) BNPLC's Consent Required.....................................................23 (b) Standard for BNPLC's Consent to Assignments and Certain Other Matters........23 (c) Consent Not a Waiver.........................................................23 15. ASSIGNMENT BY BNPLC.................................................................23 (a) Restrictions on Transfers....................................................23 (b) Effect of Permitted Transfer or other Assignment by BNPLC....................24 16. BNPLC'S RIGHT OF ACCESS.............................................................24 17. EVENTS OF DEFAULT...................................................................25 18. REMEDIES............................................................................26 (a) Basic Remedies...............................................................26 (b) Notice Required So Long As the Purchase Option and NAI's Initial Remarketing Rights and Obligations Continue Under the Purchase Agreement....................................................................27 (c) Enforceability...............................................................28 (d) Remedies Cumulative..........................................................28 19. DEFAULT BY BNPLC....................................................................28 20. QUIET ENJOYMENT.....................................................................28 21. SURRENDER UPON TERMINATION..........................................................29 22. HOLDING OVER BY NAI.................................................................29 23. INDEPENDENT OBLIGATIONS EVIDENCED BY THE OTHER OPERATIVE DOCUMENTS..................29 </TABLE> ii <PAGE> 4 EXHIBITS AND SCHEDULES Exhibit A......................................................Legal Description Exhibit B.................................................Insurance Requirements Exhibit C.............................................LIBOR Period Election Form Schedule 1............................Financial Covenants and Other Requirements (iii) <PAGE> 5 LEASE AGREEMENT (PHASE IV - IMPROVEMENTS) This LEASE AGREEMENT (PHASE IV- IMPROVEMENTS) (this "IMPROVEMENTS LEASE"), by and between BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), and NETWORK APPLIANCE, INC., a California corporation ("NAI"), is made and dated as of December ___, 1999, the Effective Date. ("EFFECTIVE DATE" and other capitalized terms used and not otherwise defined in this Improvements Lease are intended to have the meanings assigned to them in the Common Definitions and Provisions Agreement (Phase IV - Improvements) executed by BNPLC and NAI contemporaneously with this Improvements Lease. By this reference, the Common Definitions and Provisions Agreement (Phase IV - Improvements) is incorporated into and made a part of this Improvements Lease for all purposes.) RECITALS Pursuant to the Existing Contract, which covers the Land described in Exhibit A, BNPLC is acquiring the Land and the Improvements and any appurtenances thereto from Seller contemporaneously with the execution of this Improvements Lease. In anticipation of BNPLC's acquisition of the Improvements under the Existing Contract, BNPLC and NAI have reached agreement as to the terms and conditions upon which BNPLC is willing to lease the Improvements to NAI, and by this Improvements Lease BNPLC and NAI desire to evidence such agreement. GRANTING CLAUSES BNPLC does hereby LEASE, DEMISE and LET unto NAI for the term hereinafter set forth all right, title and interest of BNPLC, now owned or hereafter acquired, in and to: (1) any and all Improvements; and (2) all easements and other rights appurtenant to the Improvements, whether now owned or hereafter acquired by BNPLC. BNPLC's interest in all property described in clauses (1) and (2) above are hereinafter referred to collectively as the "REAL PROPERTY". The Real Property does not include the Land itself, it being understood that the Other Lease Agreement will constitute a separate lease of the Land and the appurtenances thereto, and only the Land and the appurtenances thereto, from BNPLC to NAI. To the extent, but only to the extent, that assignable rights or interests in, to or under the following have been or will be acquired by BNPLC under the Existing Contract or acquired by BNPLC pursuant to Paragraph 7 below, BNPLC also hereby grants and assigns to NAI for the term of this Improvements Lease the right to use and enjoy (and, in the case of contract rights, to enforce) such rights or interests of BNPLC: (a) any goods, equipment, furnishings, furniture and other tangible personal property of whatever nature that are located on the Land and all renewals or replacements of or substitutions for any of the foregoing; <PAGE> 6 (b) the benefits, if any, conferred upon the owner of the Real Property by the Permitted Encumbrances (including the right to receive rents under and to otherwise enforce the Premises Leases) and Development Documents; and (c) any permits, licenses, franchises, certificates, and other rights and privileges against third parties related to the Real Property. Such rights and interests of BNPLC, whether now existing or hereafter arising, are hereinafter collectively called the "PERSONAL PROPERTY". The Real Property and the Personal Property are hereinafter sometimes collectively called the "PROPERTY." However, the leasehold estate conveyed hereby and NAI's rights hereunder are expressly made subject and subordinate to the terms and conditions of this Improvements Lease, to the Premises Leases and all other Permitted Encumbrances, and to any other claims or encumbrances not constituting Liens Removable by BNPLC. GENERAL TERMS AND CONDITIONS The Property is leased by BNPLC to NAI and is accepted and is to be used and possessed by NAI upon and subject to the following terms and conditions: 1 TERM. (a) Scheduled Term. The term of this Improvements Lease (the "TERM") shall commence on and include the Effective Date, and end on the first Business Day of January, 2005, unless sooner terminated as expressly herein provided. (b) [Intentionally deleted.] (c) [Intentionally deleted.] (d) Election by NAI to Terminate After Accelerating the Designated Sale Date. NAI shall be entitled to accelerate the Designated Sale Date (and thus accelerate the purchase of BNPLC's interest in the Property by NAI or by an Applicable Purchaser pursuant to the Purchase Agreement) by sending a notice to BNPLC as provided in clause (2) of the definition of "Designated Sale Date" in the Common Definitions and Provisions Agreement (Phase IV - Improvements). In the event, because of NAI's election to so accelerate the Designated Sale Date or for any other reason, the Designated Sale Date occurs before the end of the scheduled Term, NAI may terminate this Improvements Lease on or after the Designated Sale Date; provided, however, as a condition to any such termination by NAI, NAI must have done the following prior to the termination: (i) purchased or caused an Applicable Purchaser to purchase the Property pursuant to the Purchase Agreement and satisfied all of NAI's other obligations under the Purchase Agreement; (ii) paid to BNPLC all Base Rent and all other Rent due on or before or accrued through the Designated Sale Date; and (iii) paid any Breakage Costs caused by BNPLC's sale of the Property pursuant to the Purchase Agreement. -2- <PAGE> 7 (e) Extension of the Term. The Term may be extended at the option of NAI for two successive periods of five years each; provided, however, that prior to any such extension the following conditions must have been satisfied: (A) at least ninety days prior to the commencement of any such extension, BNPLC and NAI must have agreed in writing upon, and received the consent and approval of BNPLC's Parent and all other Participants to (1) a corresponding extension not only to the date for the expiration of the Term specified above in this Section, but also to the date specified in clause (1) of the definition of Designated Sale Date in the Common Definitions and Provisions Agreement (Phase IV - Improvements), and (2) an adjustment to the Rent that NAI 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 BNPLC and NAI, each in its sole and absolute discretion; (B) no Event of Default shall have occurred and be continuing at the time of NAI's exercise of its option to extend; and (C) immediately prior to any such extension, this Improvements Lease must remain in effect. With respect to the condition that BNPLC and NAI must have agreed upon the Rent required for any extension of the Term, neither NAI nor BNPLC is willing to submit itself to a risk of liability or loss of rights hereunder for being judged unreasonable. Accordingly, both NAI and BNPLC 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 NAI exercises its option to extend the Term as provided in this Paragraph, this Improvements Lease shall continue in full force and effect, and the leasehold estate hereby granted to NAI shall continue without interruption and without any loss of priority over other interests in or claims against the Property that may be created or arise after the date hereof and before the extension. 2 USE AND CONDITION OF THE PROPERTY. (a) Use. Subject to the Permitted Encumbrances, the Development Documents and the terms hereof, NAI may use and occupy the Property during the Term, but only for the following purposes and other lawful purposes incidental thereto: (i) [intentionally deleted]; (ii) administrative and office space; (iii) activities related to NAI's research and development or production of products that are of substantially the same type and character as those regularly sold by NAI in the ordinary course of its business as of the Effective Date; (iv) cafeteria and other support facilities that NAI may provide to its employees; and (v) other lawful purposes (including NAI's research and development or production of products that are not of substantially the same type and character as those regularly sold by NAI in the ordinary course of its business as of the Effective Date) approved in advance and in writing by BNPLC, which approval will not be unreasonably withheld (but NAI acknowledges that BNPLC's withholding of such approval shall be reasonable if BNPLC determines in good faith that (1) giving the approval may materially increase BNPLC's risk of liability for any existing or future environmental problem, or (2) giving the approval is likely to substantially increase BNPLC's administrative burden of complying with or monitoring NAI's compliance with the requirements of this Improvements Lease or other Operative Documents). -3- <PAGE> 8 Nothing in this subparagraph will prevent a tenant under a Premises Lease executed by NAI, as Landlord, prior to or concurrently with the Effective Date, from using the space covered thereby for purposes expressly authorized by the terms and conditions of such Premises Lease. (b) Condition of the Property. NAI ACKNOWLEDGES THAT IT HAS CAREFULLY AND FULLY INSPECTED THE PROPERTY AND ACCEPTS THE PROPERTY 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. NAI ALSO ACCEPTS THE PROPERTY WITHOUT ANY COVENANT, REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, BY BNPLC OR ITS AFFILIATES REGARDING THE TITLE THERETO OR THE RIGHTS OF ANY PARTIES IN POSSESSION OF ANY PART THEREOF, EXCEPT AS EXPRESSLY SET FORTH IN PARAGRAPH 20. BNPLC SHALL NOT BE RESPONSIBLE FOR ANY LATENT OR OTHER DEFECT OR CHANGE OF CONDITION IN THE LAND OR IN IMPROVEMENTS, FIXTURES AND PERSONAL PROPERTY FORMING A PART OF THE PROPERTY OR FOR ANY VIOLATIONS WITH RESPECT THERETO OF APPLICABLE LAWS. FURTHER, THOUGH NAI MAY OBTAIN FROM THIRD PARTIES ANY FACILITIES OR SERVICES TO WHICH NAI IS ENTITLED BY REASON OF THE ASSIGNMENT AND LEASE OF PERSONAL PROPERTY SET FORTH ON PAGE 2 OF THIS IMPROVEMENTS LEASE, BNPLC SHALL NOT BE REQUIRED TO FURNISH TO NAI ANY FACILITIES OR SERVICES OF ANY KIND, INCLUDING WATER, STEAM, HEAT, GAS, AIR CONDITIONING, ELECTRICITY, LIGHT OR POWER. (c) Consideration for and Scope of Waiver. The provisions of subparagraph 2.(b) above have been negotiated by BNPLC and NAI after due consideration for the Rent payable hereunder and are intended to be a complete exclusion and negation of any representations or warranties of BNPLC or its Affiliates, express or implied, with respect to the Property that may arise pursuant to any law now or hereafter in effect or otherwise, except as expressly set forth herein. However, such exclusion of representations and warranties by BNPLC is not intended to impair any representations or warranties made by other parties, the benefit of which may pass to NAI during the Term because of the definition of Personal Property and Property above. 3. RENT. (a) Base Rent Generally. On the Base Rent Commencement Date and on each Base Rent Date through the end of the Term, NAI shall pay BNPLC rent ("BASE RENT"). Each payment of Base Rent must be received by BNPLC no later than 10:00 a.m. (Pacific time) on the date it becomes due; if received after 10:00 a.m. (Pacific time) it will be considered for purposes of this Improvements Lease as received on the next following Business Day. At least five days prior to any Base Rent Commencement Date or Base Rent Date upon which an installment of Base Rent shall become due, BNPLC shall notify NAI in writing of the amount of each installment, calculated as provided below. Any failure by BNPLC to so notify NAI, however, shall not constitute a waiver of BNPLC's right to payment, but absent such notice NAI shall not be in default hereunder for any underpayment resulting therefrom if NAI, in good faith, reasonably estimates the payment required, makes a timely payment of the amount so estimated and corrects any underpayment within three Business Days after being notified by BNPLC of the underpayment. (b) Impact of Collateral Upon Formulas. To ease the administrative burden of this Improvements Lease and the Pledge Agreement, the formulas for calculating Base Rent set out below in subparagraph 3.(c) reflect a reduction in the Base Rent equal to the interest that would accrue on any Collateral provided in accordance with the requirements of the Pledge Agreement from time to time if the Accounts (as -4- <PAGE> 9 defined in the Pledge Agreement) bore interest at the Effective Rate. BNPLC has agreed to such reduction to provide NAI with the economic equivalent of interest on such Collateral, and in return NAI 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 below, 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 BNPLC or NAI to understate Base Rent or interest for financial reporting purposes. Accordingly, for purposes of any financial reports that this Improvements Lease requires of NAI from time to time, NAI may report Base Rent as if there had been no such reduction and as if the Collateral from time to time provided in accordance with the requirements of the Pledge Agreement had been maintained in Accounts bearing interest at the Effective Rate. (c) Calculation of and Due Dates for Base Rent. Payments of Base Rent shall be calculated and become due as follows: (i) Amount Payable On the Base Rent Commencement Date. The Base Rent payable for each day (including the Effective Date) prior to but not including the Base Rent Commencement Date shall be equal to (a) the sum of (1) the per annum interest rate, as determined by BNPLC, at which BNPLC can borrow funds overnight from BNPLC's Parent on that day, plus (2) the Unsecured Spread, multiplied by (b) the Initial Funding Advance, divided by (c) 360. All such Base Rent shall become due on the Base Rent Commencement Date. (ii) Determination of Payment Due Dates, After the Base Rent Commencement Date, Generally. For all Base Rent Periods subject to a LIBOR Period Election of one month or three months, Base Rent shall be due in one installment on the Base Rent Date upon which the Base Rent Period ends. For Base Rent Periods subject to a LIBOR Period Election of six months, Base Rent shall be payable in two installments, with the first installment becoming due on the Base Rent Date that occurs on the first Business Day of the third calendar month following the commencement of such Base Rent Period, and with the second installment becoming due on the Base Rent Date upon which the Base Rent Period ends. (iii) Special Adjustments to Base Rent Payment Dates and Periods. Notwithstanding the foregoing: (a) Any Base Rent Period that begins before, and does not otherwise end before, a Failed Collateral Test Date shall end upon but not include such Failed Collateral Test Date, and such Failed Collateral Test Date shall constitute a Base Rent Date, upon which NAI must pay all accrued, unpaid Base Rent for the Base Rent Period just ended. (b) Consistent with clause (3) of the definition of LIBOR Period Election in the Common Definitions and Provisions Agreement (Phase IV - Improvements), each successive Base Rent Date after any such Failed Collateral Test Date shall be the first Business Day of the first calendar month following the calendar month which includes the preceding Base Rent Date, so long as any Mandatory Collateral Period shall continue. (c) In addition to Base Rent due on a Failed Collateral Test Date, NAI must pay the Breakage Costs, if any, resulting from any early ending of a Base Rent Period on the Failed Collateral Test Date pursuant to the preceding clause 3.(c)(iii)a). -5- <PAGE> 10 (d) If NAI or any Applicable Purchaser purchases BNPLC's interest in the Property pursuant to the Purchase Agreement, any accrued unpaid Base Rent and all outstanding Additional Rent shall be due on the date of purchase in addition to the purchase price and other sums due BNPLC under the Purchase Agreement. (iv) Base Rent Formula for Periods During Which The Collateral Percentage is 100%. Each installment of Base Rent payable for any Base Rent Period during which the Collateral Percentage is one hundred percent (100%) shall equal: - Stipulated Loss Value on the first day of such Base Rent Period, times - the Secured Spread for the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, times - the number of days in the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, divided by - three hundred sixty. Assume, only for the purpose of illustration: that the Collateral Percentage for a hypothetical Base Rent Period is one hundred percent (100%); that prior to the first day of such Base Rent Period Qualified Prepayments have been received by BNPLC, leaving a Stipulated Loss Value of $20,000,000; that the Secured Spread is thirty basis points (30/100 of 1%); and that such Base Rent Period contains exactly thirty days. Under such assumptions, the Base Rent for the hypothetical Base Rent Period will equal: $20,000,000 x .30% x 30/360 = $5,000 (v) Base Rent Formula for Periods During Which The Collateral Percentage is Greater Than Zero and Less Than 100%. Each installment of Base Rent payable for any Base Rent Period during which the Collateral Percentage is greater than zero and less than one hundred percent (100%) shall equal: - Stipulated Loss Value on the first day of such Base Rent Period, times - the sum of: (A) the product of: (1) the Collateral Percentage for such Base Rent Period, times (2) the Secured Spread for the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, plus (B) the product of: -6- <PAGE> 11 (1) one minus the Collateral Percentage for such Base Rent Period, times (2) the sum of (a) the Effective Rate with respect to such Base Rent Period, plus (b) the Unsecured Spread for the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, times - the number of days in the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, divided by - three hundred sixty. Assume, only for the purpose of illustration: that the Collateral Percentage for a hypothetical Base Rent Period is forty percent (40%); that prior to the first day of such Base Rent Period Qualified Prepayments have been received by BNPLC, leaving a Stipulated Loss Value of $20,000,000; that the Effective Rate for the Base Rent Period is 6%; that the Secured Spread is thirty basis points (30/100 of 1%); that upon the commencement of such Base Rent Period the Unsecured Spread is one hundred fifty basis points (150/100 of 1%); and that such Base Rent Period contains exactly thirty days. Under such assumptions, the Base Rent for the hypothetical Base Rent Period will equal: $20,000,000 x {(40% x .30%) + ([1 - 40%] x [6% + 1.50%])} x 30/360 = $77,000 (vi) Base Rent Formula for Periods During Which The Collateral Percentage is Zero. Each installment of Base Rent payable for any Base Rent Period during which the Collateral Percentage is zero shall equal: - Stipulated Loss Value on the first day of such Base Rent Period, times - the sum of (a) the Effective Rate with respect to such Base Rent Period, plus (b) the Unsecured Spread for the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, times - the number of days in the period from and including the preceding Base Rent Date to but not including the Base Rent Date upon which the installment is due, divided by - three hundred sixty. Assume, only for the purpose of illustration: that the Collateral Percentage for a hypothetical Base Rent Period is zero percent (0%); that prior to the first day of such Base Rent Period Qualified Prepayments have been received by BNPLC, leaving a Stipulated Loss Value of $20,000,000; that the Effective Rate for the Base Rent Period is 6%; that the Unsecured Spread is one hundred fifty basis points (150/100 of 1%) upon the commencement of such Base Rent Period; and that such Base Rent Period contains exactly thirty days. Under such assumptions, the Base Rent for the hypothetical Base Rent Period will equal: $20,000,000 x (6% + 1.50%) x 30/360 = $125,000 -7- <PAGE> 12 (d) Additional Rent. All amounts which NAI is required to pay to or on behalf of BNPLC pursuant to this Improvements 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", and together Base Rent and Additional Rent are herein sometimes called "RENT"). (e) Arrangement Fee. Upon execution and delivery of this Improvements Lease by BNPLC, an Arrangement Fee (the "ARRANGEMENT FEE") will be paid to BNPLC from the Initial Funding Advance (and thus be included in Stipulated Loss Value) in the amount provided in the letter dated as of October 20, 1999 from BNPLC to NAI. (f) [intentionally deleted]. (g) Administrative Agency Fees. Upon execution and delivery of this Improvements Lease by BNPLC, an administrative agency fee (an "ADMINISTRATIVE AGENCY FEE") will be paid to BNPLC from the Initial Funding Advance (and thus be included in Stipulated Loss Value) in the amount provided in the letter dated as of October 20, 1999 from BNPLC to NAI. Also, on each anniversary of the date hereof, NAI shall pay to BNPLC an administrative agency fee (also, an "ADMINISTRATIVE AGENCY FEE") in the amount set forth in the letter agreement dated as of October 20, 1999 from BNPLC to NAI. (h) [Intentionally deleted.] (i) [Intentionally deleted.] (j) No Demand or Setoff. Except as expressly provided herein, NAI shall pay all Rent without notice or demand and without counterclaim, deduction, setoff or defense. (k) Default 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. BNPLC shall be entitled to apply any amounts paid by or on behalf of NAI against any Rent then past due in the order the same became due or in such other order as BNPLC may elect. 4 NATURE OF THIS AGREEMENT. (a) "Net" Lease Generally. Subject only to the exceptions listed in subparagraph 5.(d) below, it is the intention of BNPLC and NAI that Base Rent, the Arrangement Fees, the Upfront Syndication Fees, Administrative Agency Fees, and other payments herein specified shall be absolutely net to BNPLC and that NAI shall pay all costs, expenses and obligations of every kind relating to the Property or this Improvements Lease which may arise or become due, including: (i) any taxes payable by virtue of BNPLC's receipt of amounts paid to or on behalf of BNPLC in accordance with Paragraph 5; (ii) any amount for which BNPLC is or becomes liable with respect to the Permitted Encumbrances or the Development Documents; and (iii) any costs incurred by BNPLC (including Attorneys' Fees) because of BNPLC's acquisition or ownership of any interest in the Property or because of this Improvements Lease or the transactions contemplated herein. However, neither this subparagraph 4.(a) nor the indemnity in this subparagraph 5.(c)(i) shall be construed to make NAI liable for (I) an allocation of general overhead or internal administrative expenses of BNPLC or any -8- <PAGE> 13 other Interested Party or (II) any duplicate payment of the same Loss to both BNPLC and another Interested Party. (If, for example, BNPLC were required to make a $10 fine because of a failure of the Property to comply with Applicable Laws, and a Participant were required by the Participation Agreement to reimburse BNPLC for 20% of the $10, NAI would not be required by this subparagraph 4.(a) or by subparagraph 5.(c)(i) to pay both $10 to BNPLC and $2 to the Participant on account of the fine.) (b) No Termination. Except as expressly provided in this Improvements Lease itself, this Improvements Lease shall not terminate, nor shall NAI have any right to terminate this Improvements Lease, nor shall NAI be entitled to any abatement of the Rent, nor shall the obligations of NAI under this Improvements Lease be excused, for any reason whatsoever, including any of the following: (i) any damage to or the destruction of all or any part of the Property from whatever cause, (ii) the taking of the Property or any portion thereof by eminent domain or otherwise for any reason, (iii) the prohibition, limitation or restriction of NAI's use or development of all or any portion of the Property or any interference with such use by governmental action or otherwise, (iv) any eviction of NAI or of anyone claiming through or under NAI, (v) any default on the part of BNPLC under this Improvements Lease or under any other agreement to which BNPLC and NAI are parties, (vi) the inadequacy in any way whatsoever of the design, construction, assembly or installation of any improvements, fixtures or tangible personal property included in the Property (it being understood that BNPLC has not made, does not make and will not make any representation express or implied as to the adequacy thereof), (vii) any latent or other defect in the Property or any change in the condition thereof or the existence with respect to the Property of any violations of Applicable Laws, or (viii) any other cause whether similar or dissimilar to the foregoing. It is the intention of the parties hereto that the obligations of NAI hereunder shall be separate and independent of the covenants and agreements of BNPLC, that Base Rent and all other sums payable by NAI hereunder shall continue to be payable in all events and that the obligations of NAI 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 Improvements Lease. Without limiting the foregoing, NAI waives to the extent permitted by Applicable Laws, except as otherwise expressly provided herein, all rights to which NAI 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 Improvements Lease or the Property or any part thereof or (ii) to any abatement, suspension, deferment or reduction of the Rent. However, nothing in this subparagraph 4.(b) shall be construed as a waiver by NAI of any right NAI may have at law or in equity to the following remedies, whether because of BNPLC's failure to remove a Lien Removable by BNPLC or because of any other default by BNPLC under this Improvements Lease that continues beyond the period for cure provided in Paragraph 19: (i) the recovery of monetary damages, (ii) injunctive relief in case of the violation, or attempted or threatened violation, by BNPLC of any of the express covenants, agreements, conditions or provisions of this Improvements Lease which are binding upon BNPLC (including the confidentiality provisions set forth in subparagraph 16.(c) below), or (iii) a decree compelling performance by BNPLC of any of the express covenants, agreements, conditions or provisions of this Improvements Lease which are binding upon BNPLC. (c) Tax Reporting. BNPLC and NAI shall report this Improvements Lease and the Purchase Agreement for federal income tax purposes as a conditional sale unless prohibited from doing so by the Internal Revenue Service. If the Internal Revenue Service shall challenge BNPLC's characterization of this Improvements Lease and the Purchase Agreement as a conditional sale for federal income tax reporting purposes, BNPLC shall notify NAI in writing of such challenge and consider in good faith any reasonable suggestions by NAI about an appropriate response. In any event, NAI shall (subject only to the limitations set forth in this subparagraph) indemnify and hold harmless BNPLC from and against all liabilities, costs, additional taxes (other than Excluded Taxes) and other expenses that may arise or become due because of such challenge or because of any resulting -9- <PAGE> 14 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 BNPLC of the recharacterization. If BNPLC receives a written notice of any challenge by the Internal Revenue Service that BNPLC believes will be covered by this Paragraph, then BNPLC shall promptly furnish a copy of such notice to NAI. The failure to so provide a copy of the notice to NAI shall not excuse NAI from its obligations under this Paragraph; provided, that if none of the officers of NAI and none of the employees of NAI responsible for tax matters are aware of the challenge described in the notice and such failure by BNPLC renders unavailable defenses that NAI might otherwise assert, or precludes actions that NAI might otherwise take, to minimize its obligations hereunder, then NAI shall be excused from its obligation to indemnify BNPLC against liabilities, costs, additional taxes and other expenses, if any, which would not have been incurred but for such failure. For example, if BNPLC fails to provide NAI with a copy of a notice of a challenge by the Internal Revenue Service covered by the indemnities set out in this Improvements Lease and NAI is not otherwise already aware of such challenge, and if as a result of such failure BNPLC becomes liable for penalties and interest covered by the indemnities in excess of the penalties and interest that would have accrued if NAI had been promptly provided with a copy of the notice, then NAI will be excused from any obligation to BNPLC to pay the excess. (d) Characterization of this Improvements Lease. For purposes of determining the appropriate financial accounting for this Improvements Lease and for purposes of determining their respective rights and remedies under state law, BNPLC and NAI believe and intend that (i) this Improvements Lease constitutes a true lease, not a mere financing arrangement, enforceable in accordance with its express terms, and the preceding subparagraph is not intended to affect the enforcement of any other provisions of this Improvements Lease or the Purchase Agreement, and (ii) the Purchase Agreement shall constitute a separate and independent contract, enforceable in accordance with the express terms and conditions set forth therein. In this regard, NAI acknowledges that NAI asked BNPLC to participate in the transactions evidenced by this Improvements Lease and the Purchase Agreement as a landlord and owner of the Property, not as a lender. Although other transactions might have been used to accomplish similar results, NAI expects to receive certain material accounting and other advantages through the use of a lease transaction. Accordingly, and notwithstanding the reporting for income tax purposes described in the preceding subparagraph, NAI cannot equitably deny that this Improvements Lease and the Purchase Agreement should be construed and enforced in accordance with their respective terms, rather than as a mortgage or other security device, in any action brought by BNPLC to enforce this Improvements Lease or the Purchase Agreement. 5. PAYMENT OF EXECUTORY COSTS AND LOSSES RELATED TO THE PROPERTY. (a) Impositions. Subject only to the exceptions listed in subparagraph 5.(d) below, NAI shall pay or cause to be paid prior to delinquency all ad valorem taxes assessed against the Property and other Impositions. If requested by BNPLC from time to time, NAI shall furnish BNPLC with receipts showing payment of all Impositions prior to the applicable delinquency date therefor. Notwithstanding the foregoing, NAI may in good faith, by appropriate proceedings, contest the validity, applicability or amount of any asserted Imposition, and pending such contest NAI shall not be deemed in default under any of the provisions of this Improvements Lease because of the Imposition if (1) NAI diligently prosecutes such contest to completion in a manner reasonably satisfactory to BNPLC, and (2) NAI 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, in any event each such contest shall be concluded and the contested Impositions must be paid by NAI prior to the earlier of (i) the date that any criminal prosecution is instituted or overtly threatened against BNPLC or its directors, officers or employees because of the nonpayment -10- <PAGE> 15 thereof or (ii) the date any writ or order is issued under which any property owned or leased by BNPLC (including the Property) may be seized or sold or any other action is taken against BNPLC or against any property owned or leased by BNPLC because of the nonpayment thereof, or (iii) any Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a price to BNPLC (when taken together with any additional payments made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to the Break Even Price. (b) Increased Costs; Capital Adequacy Charges. Subject only to the exceptions listed in subparagraph 5.(d) below: (i) If after the Effective Date there shall be any increase in the cost to BNPLC's Parent or any other Participant agreeing to make or making, funding or maintaining advances to BNPLC in connection with the Property because of any Banking Rules Change, then NAI shall from time to time, pay to BNPLC for the account of BNPLC's Parent or such other Participant, as the case may be, additional amounts sufficient to compensate BNPLC'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 BNPLC'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 such increased cost, submitted to BNPLC and NAI by BNPLC's Parent or the other Participant, shall be conclusive and binding upon NAI, absent clear and demonstrable error. (ii) BNPLC's Parent or any other Participant may demand additional payments ("CAPITAL ADEQUACY CHARGES") if BNPLC's Parent or the other Participant determines that any Banking Rules Change 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 advances made or to be made to BNPLC to permit BNPLC to maintain BNPLC's investment in the Property. To the extent that BNPLC's Parent or another Participant demands Capital Adequacy Charges as compensation for the additional capital requirements reasonably allocable to such investment or advances, NAI shall pay to BNPLC for the account of BNPLC's Parent or the other Participant, as the case may be, the amount so demanded. Without limiting the foregoing, BNPLC and NAI hereby acknowledge and agree that the provisions for calculating Base Rent set forth herein reflect the assumption that the Pledge Agreement will cause a zero percent (0%) risk weight to be assigned to a percentage (equal to the Collateral Percentage) of the collective investment of BNPLC and the Participants in the Property pursuant to 12 Code of Federal Regulations, part 225, as from time to time supplemented or amended, or pursuant to any other similar or successor statute or regulation applicable to BNPLC and the Participants. If and so long as such risk weight is increased the assumed amount of zero percent (0%) because of a Banking Rules Change, Capital Adequacy Charges may be collected to yield the same rate of return to BNPLC, BNPLC's Parent and any other Participants (net of their costs of maintaining required capital) that they would have enjoyed from this Improvements Lease absent such increase. (iii) Any amount required to be paid by NAI under this subparagraph 5.(b) shall be due ten days after a demand for such payment is received by NAI. (c) NAI's Payment of Other Losses; General Indemnification. Subject only to the exceptions listed in subparagraph 5.(d) below: (i) All Losses (including Environmental Losses) asserted against or incurred or suffered by BNPLC or other Interested Parties at any time and from time to time by reason of, in connection with or -11- <PAGE> 16 arising out of (A) their ownership or alleged ownership of any interest in the Property or the Rents, (B) the use and operation of the Property, (C) the negotiation, administration or enforcement of the Operative Documents, (D) the making of Funding Advances, (E) the Premises Leases; (F) the breach by NAI of this Improvements Lease or any other document executed by NAI in connection herewith, (G) any failure of the Property or NAI itself to comply with Applicable Laws, (H) Permitted Encumbrances, (I) Hazardous Substance Activities, including those occurring prior to Effective Date, (J) any obligations under the Existing Contract that survive the closing thereunder, or (K) any bodily or personal injury or death or property damage occurring in or upon or in the vicinity of the Property through any cause whatsoever, shall be paid by NAI, and NAI shall indemnify and defend BNPLC and other Interested Parties from and against all such Losses. (ii) THE INDEMNITIES AND RELEASES PROVIDED HEREIN FOR THE BENEFIT OF BNPLC AND OTHER INTERESTED PARTIES, INCLUDING THE INDEMNITY SET FORTH IN THE PRECEDING SUBPARAGRAPH 5.(c)(i), SHALL APPLY EVEN IF AND WHEN THE SUBJECT MATTERS OF THE INDEMNITIES AND RELEASES ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OR STRICT LIABILITY OF BNPLC OR ANOTHER INTERESTED PARTY. FURTHER, SUCH INDEMNITIES AND RELEASES WILL APPLY EVEN IF INSURANCE OBTAINED BY NAI OR REQUIRED OF NAI BY THIS IMPROVEMENTS LEASE OR OTHER OPERATIVE DOCUMENTS IS NOT ADEQUATE TO COVER LOSSES AGAINST OR FOR WHICH THE INDEMNITIES AND RELEASES ARE PROVIDED. NAI'S LIABILITY, HOWEVER, FOR ANY FAILURE TO OBTAIN INSURANCE REQUIRED BY THIS IMPROVEMENTS LEASE OR OTHER OPERATIVE DOCUMENTS WILL NOT BE LIMITED TO LOSSES AGAINST WHICH INDEMNITIES ARE PROVIDED HEREIN, IT BEING UNDERSTOOD THAT SUCH INSURANCE IS INTENDED TO DO MORE THAN PROVIDE A SOURCE OF PAYMENT FOR LOSSES AGAINST WHICH BNPLC AND OTHER INTERESTED PARTIES ARE ENTITLED TO INDEMNIFICATION BY THIS IMPROVEMENTS LEASE. (iii) Costs and expenses for which NAI shall be responsible pursuant to this subparagraph 5.(c) will include appraisal fees, filing and recording fees, inspection fees, survey fees, taxes, brokerage fees and commissions, abstract fees, title policy fees, Uniform Commercial Code search fees, escrow fees and Attorneys' Fees incurred by BNPLC with respect to the Property, whether such costs and expenses are incurred at the time of execution of this Improvements Lease or at any time during the Term. (iv ) NAI's obligations under this subparagraph 5.(c) shall survive the termination or expiration of this Improvements Lease. Any amount to be paid by NAI under this subparagraph 5.(c) shall be due ten days after a demand for such payment is received by NAI. (v) If an Interested Party notifies NAI of any claim or proceeding included in, or any investigation or allegation concerning, Losses for which NAI is responsible pursuant to this subparagraph 5.(c), NAI shall assume on behalf of the Interested Party and conduct with due diligence and in good faith the investigation and defense thereof and the response thereto with counsel selected by NAI, but satisfactory to the Interested Party; provided, that the Interested 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, proceeding, investigation or allegation involves both NAI and the Interested Party and the Interested Party shall have reasonably concluded that there are legal defenses available to it which are inconsistent with or in addition to those available to NAI, then the Interested Party shall have the right to select separate counsel to participate in the investigation and defense of and response to such claim, -12- <PAGE> 17 proceeding, investigation or allegation on its own behalf, and NAI shall pay or reimburse the Interested Party for all Attorney's Fees incurred by the Interested Party because of the selection of such separate counsel. If NAI fails to assume promptly (and in any event within fifteen days after being notified of the applicable claim, proceeding, investigation or allegation) the defense of the Interested Party, then the Interested Party may contest (or settle, with the prior consent of NAI, which consent will not be unreasonably withheld) the claim, proceeding, investigation or allegation at NAI's expense using counsel selected by the Interested Party. Moreover, if any such failure by NAI continues for forty-five days or more after NAI is notified of any such claim, proceeding, investigation or allegation, the Interested Party may elect not to contest or continue contesting the same and instead, in accordance with the written advice of counsel, settle (or pay in full) all claims related thereto without NAI's consent and without releasing NAI from any obligations to the Interested Party under this subparagraph 5.(c). (d) Exceptions and Qualifications to Indemnities. (vi) BNPLC acknowledges and agrees that nothing in subparagraph 4.(a) or the preceding subparagraphs of this Paragraph 5 shall be construed to require NAI to pay or reimburse an Interested Party for (w) any costs or expenses incurred by BNPLC or any transferee to accomplish any Permitted Transfers described in clauses (2), (3), (4), (6) or (7) of the definition thereof in the Common Definitions and Provisions Agreement (Phase IV - Improvements), (x) Excluded Taxes, (y) Losses incurred or suffered by such Interested Party that are proximately caused by (and attributed by any applicable principles of comparative fault to) the Established Misconduct of that Interested Party, or (z) Losses incurred or suffered by Participants in connection with their negotiation or execution of the Participation Agreement or Pledge Agreement (or supplements making them parties thereto) or in connection with any due diligence they may undertake before entering into the Participation Agreement or Pledge Agreement. Further, without limiting BNPLC's rights (as provided in other provisions of this Improvements Lease and other Operative Documents) to include the following in the calculation of the Stipulated Loss Value, and the Break Even Price (as applicable) or to collect Base Rent, a Supplemental Payment and other amounts, the calculation of which depends upon the Stipulated Loss Value, and the Break Even Price, BNPLC acknowledges and agrees that nothing in subparagraph 4.(a) or the preceding subparagraphs of this Paragraph 5 shall be construed to require NAI to pay or reimburse an Interested Party for costs paid by BNPLC with the proceeds of the Initial Funding Advance as part of the Transaction Expenses. Further, if an Interested Party receives a written notice of Losses that such Interested Party believes are covered by the indemnity in subparagraph 5.(c)(i), then such Interested Party will be expected to promptly furnish a copy of such notice to NAI. The failure to so provide a copy of the notice to NAI shall not excuse NAI from its obligations under subparagraph 5.(c)(i); provided, that if NAI is unaware of the matters described in the notice and such failure renders unavailable defenses that NAI might otherwise assert, or precludes actions that NAI might otherwise take, to minimize its obligations, then NAI shall be excused from its obligation to indemnify such Interested Party (and any Affiliate of such Interested Party) against the Losses, if any, which would not have been incurred or suffered but for such failure. For example, if BNPLC fails to provide NAI with a copy of a notice of an obligation covered by the indemnity set out in subparagraph 5.(c)(i) and NAI is not otherwise already aware of such obligation, and if as a result of such failure BNPLC becomes liable for penalties and interest covered by the indemnity in excess of the penalties and interest that would have accrued if NAI had been promptly provided with a copy of the notice, then NAI will be excused from any obligation to BNPLC (or any Affiliate of BNPLC) to pay the excess. 6. INTENTIONALLY DELETED. -13- <PAGE> 18 7. STATUS OF PROPERTY ACQUIRED WITH FUNDS PROVIDED BY BNPLC. All Improvements constructed during the term of this Improvements Lease shall be owned by BNPLC and shall constitute "Property" covered by this Improvements Lease. Further, to the extent heretofore or hereafter acquired (in whole or in part) with any portion of the Initial Funding Advance or with other funds for which NAI has received or hereafter receives reimbursement from the Initial Funding Advance, all furnishings, furniture, chattels, permits, licenses, franchises, certificates and other personal property of whatever nature shall have been acquired on behalf of BNPLC by NAI, shall be owned by BNPLC and shall constitute "Property" covered by this Improvements Lease, as shall all renewals or replacements of or substitutions for any such Property. NAI shall not authorize or permit the transfer of title to the Improvements or to any other such Property to pass through NAI or NAI's Affiliates before it is transferred to BNPLC from contractors, suppliers, vendors or other third Persons. Nothing herein shall constitute authorization of NAI by BNPLC to bind BNPLC to any construction contract or other agreement with a third Person, but any construction contract or other agreement executed by NAI for the acquisition or construction of Improvements or other components of the Property may provide for the transfer of title as required by the preceding sentence. Upon request of BNPLC, but not more often than once in any period of twelve consecutive months, NAI shall deliver to BNPLC an inventory describing all significant items of Personal Property (and, in the case of tangible personal property, showing the make, model, serial number and location thereof) other than Improvements, with a certification by NAI that such inventory is true and complete and that all items specified in the inventory are covered by this Improvements Lease free and clear of any Lien other than the Permitted Encumbrances or Liens Removable by BNPLC. 8. ENVIRONMENTAL. (a) Environmental Covenants by NAI. NAI covenants that: (i) NAI shall not conduct or permit others to conduct Hazardous Substance Activities, except Permitted Hazardous Substance Use and Remedial Work. (ii) NAI shall not discharge or permit the discharge of anything on or from the Property that would require any permit under applicable Environmental Laws, other than (1) storm water runoff, (2) waste water discharges through a publicly owned treatment works, (3) discharges that are a necessary part of any Remedial Work, and (4) other similar discharges consistent with the definition herein of Permitted Hazardous Substance Use, in each case in strict compliance with Environmental Laws. (iii) Following any discovery that Remedial Work is required by Environmental Laws or otherwise believed by BNPLC to be reasonably required, and to the extent not inconsistent with the other provisions of this Improvements Lease, NAI shall promptly perform and diligently and continuously pursue such Remedial Work, in each case in strict compliance with Environmental Laws. (iv) If requested by BNPLC in connection with any Remedial Work required by this subparagraph, NAI shall retain independent environmental consultants acceptable to BNPLC to evaluate any significant new information generated during NAI's implementation of the Remedial Work and to discuss with NAI whether such new information indicates the need for any additional measures that NAI should take to protect the health and safety of persons (including employees, contractors and subcontractors and their employees) or to protect the environment. NAI shall implement any such additional measures to the extent required with respect to the Property by Environmental Laws or otherwise believed by BNPLC to be reasonably required and to the extent not inconsistent with the other provisions of this Improvements Lease. -14- <PAGE> 19 (b) Right of BNPLC to do Remedial Work Not Performed by NAI. If NAI's failure to cure any breach of the covenants set forth in subparagraph 8.(a) continues beyond the Environmental Cure Period (as defined below), BNPLC may, in addition to any other remedies available to it, conduct all or any part of the Remedial Work. To the extent that Remedial Work is done by BNPLC pursuant to the preceding sentence (including any removal of Hazardous Substances), the cost thereof shall be a demand obligation owing by NAI to BNPLC. As used in this subparagraph, "ENVIRONMENTAL CURE PERIOD" means the period ending on the earlier of: (1) one hundred eighty days after NAI is notified of the breach which must be cured within such period, (2) the date that any writ or order is issued for the levy or sale of any property owned by BNPLC (including the Property) because of such breach, (3) the date that any criminal action is instituted or overtly threatened against BNPLC or any of its directors, officers or employees because of such breach, or (4) any Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a net price to BNPLC (when taken together with any Supplemental Payment made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to Stipulated Loss Value. (c) Environmental Inspections and Reviews. BNPLC reserves the right to retain environmental consultants to review any report prepared by NAI or to conduct BNPLC's own investigation to confirm whether NAI is complying with the requirements of this Paragraph 8. NAI grants to BNPLC and to BNPLC's agents, employees, consultants and contractors the right to enter upon the Property at any time to inspect the Property and to perform such tests as BNPLC deems necessary or appropriate to review or investigate Hazardous Substances in, on, under or about the Property or any discharge or suspected discharge of Hazardous Substances into groundwater or surface water from the Property. NAI shall promptly reimburse BNPLC for the fees of its environmental consultants and the costs of any such inspections and tests. (d) Communications Regarding Environmental Matters. (i) NAI shall immediately advise BNPLC of (1) any discovery of any event or circumstance which would render any of the representations of NAI herein or in the Closing Certificate concerning environmental matters materially inaccurate or misleading if made at the time of such discovery and assuming that NAI was aware of all relevant facts, (2) any Remedial Work (or change in Remedial Work) required or undertaken by NAI or its Affiliates in response to any (A) discovery of any Hazardous Substances on, under or about the Property other than Permitted Hazardous Substances or (B) any claim for damages resulting from Hazardous Substance Activities, (3) NAI's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Property which could cause the Property or any part thereof to be subject to any ownership, occupancy, transferability or use restrictions under Environmental Laws, or (4) any investigation or inquiry of any failure or alleged failure by NAI to comply with Environmental Laws affecting the Property by any governmental authority responsible for enforcing Environmental Laws. In such event, NAI shall deliver to BNPLC within thirty days after BNPLC's request, a preliminary written environmental plan setting forth a general description of the action that NAI proposes to take with respect thereto, if any, to bring the Property into compliance with Environmental Laws or to correct any breach by NAI of this Paragraph 8, including any proposed Remedial 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 BNPLC may request. (ii) NAI shall provide BNPLC with copies of all material written communications with federal, state and local governments, or agencies relating to the matters listed in the preceding clause -15- <PAGE> 20 (i). NAI shall also provide BNPLC with copies of any correspondence from third Persons which threaten litigation over any significant failure or alleged significant failure of NAI to maintain or operate the Property in accordance with Environmental Laws. (iii) Prior to NAI's submission of a Material Environmental Communication to any governmental or regulatory agency or third party, NAI shall, to the extent practicable, deliver to BNPLC a draft of the proposed submission (together with the proposed date of submission), and in good faith assess and consider any comments of BNPLC regarding the same. Promptly after BNPLC's request, NAI shall meet with BNPLC to discuss the submission, shall provide any additional information requested by BNPLC and shall provide a written explanation to BNPLC addressing the issues raised by comments (if any) of BNPLC regarding the submission, including a reasoned analysis supporting any decision by NAI not to modify the submission in accordance with comments of BNPLC. 9. INSURANCE REQUIRED AND CONDEMNATION. (a) Liability Insurance. Throughout the Term NAI shall maintain commercial general liability insurance against claims for bodily and personal injury, death and property damage occurring in or upon or resulting from any occurrence in or upon the Property under one or more insurance policies that satisfy the requirements set forth in Exhibit B. NAI shall deliver and maintain with BNPLC for each liability insurance policy required by this Improvements Lease written confirmation of the policy and the scope of the coverage provided thereby issued by the applicable insurer or its authorized agent, which confirmation must also satisfy the requirements set forth in Exhibit B. (b) Property Insurance. Throughout the Term NAI will keep all Improvements (including all alterations, additions and changes made to the Improvements) insured against fire and other casualty under one or more property insurance policies that satisfy the requirements set forth in Exhibit B. NAI shall deliver and maintain with BNPLC for each property insurance policy required by this Improvements Lease written confirmation of the policy and the scope of the coverage provided thereby issued by the applicable insurer or its authorized agent, which confirmation must also satisfy the requirements set forth in Exhibit B. If any of the Property is destroyed or damaged by fire, explosion, windstorm, hail or by any other casualty against which insurance shall have been required hereunder, (i) BNPLC may, but shall not be obligated to, make proof of loss if not made promptly by NAI after notice from BNPLC, (ii) each insurance company concerned is hereby authorized and directed to make payment for such loss directly to BNPLC for application as required by Paragraph 10, and (iii) BNPLC may settle, adjust or compromise any and all claims for loss, damage or destruction under any policy or policies of insurance (provided, that if any such claim is for less than $500,000, and if no Event of Default shall have occurred and be continuing, NAI shall have the right to settle, adjust or compromise the claim as NAI deems appropriate; and, provided further, that so long as no Event of Default shall have occurred and be continuing, BNPLC must provide NAI with at least forty-five days notice of BNPLC's intention to settle any such claim before settling it unless NAI shall already have approved of the settlement by BNPLC). If any casualty shall result in damage to or loss or destruction of the Property, NAI shall give immediate notice thereof to BNPLC and Paragraph 10 shall apply. (c) Failure to Obtain Insurance. If NAI fails to obtain any insurance or to provide confirmation of any such insurance as required by this Improvements Lease, BNPLC shall be entitled (but not required) to obtain the insurance that NAI has failed to obtain or for which NAI has not provided the required confirmation and, without limiting BNPLC's other remedies under the circumstances, BNPLC may require NAI to reimburse BNPLC for the cost of such insurance and to pay interest thereon computed at the Default Rate from the date such cost was paid by BNPLC until the date of reimbursement by NAI. -16- <PAGE> 21 (d) Condemnation. Immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Property or any portion thereof, or any other similar governmental or quasi-governmental proceedings arising out of injury or damage to the Property or any portion thereof, each party shall notify the other (provided, however, BNPLC shall have no liability for its failure to provide such notice) of the pendency of such proceedings. NAI shall, at its expense, diligently prosecute any such proceedings and shall consult with BNPLC, its attorneys and experts and cooperate with them as 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 Property and all judgments, decrees and awards for injury or damage to the Property shall be paid to BNPLC as Escrowed Proceeds, and all such proceeds will be applied as provided in Paragraph 10. BNPLC is hereby authorized, in the name of NAI, at any time after an Event of Default shall have occurred and be continuing, or otherwise with NAI's prior consent, to execute and deliver valid acquittances for, and to appeal from, any such judgment, decree or award concerning condemnation of any of the Property. BNPLC 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. (e) Waiver of Subrogation. NAI, for itself and for any Person claiming through it (including any insurance company claiming by way of subrogation), waives any and every claim which arises or may arise in its favor against BNPLC or any other Interested Party and the officers, directors, and employees of the Interested Parties for any and all Losses, to the extent that NAI is compensated by insurance or would be compensated by the insurance policies contemplated in this Improvements Lease, but for any deductible or self-insured retention maintained under such insurance or but for a failure of NAI to maintain the insurance as required by this Improvements Lease. NAI agrees to have such insurance policies properly endorsed so as to make them valid notwithstanding this waiver, if such endorsement is required to prevent a loss of insurance. 10. APPLICATION OF INSURANCE AND CONDEMNATION PROCEEDS. (a) Collection and Application of Insurance and Condemnation Proceeds Generally. This Paragraph 10 shall govern the application of proceeds received by BNPLC or NAI during the Term from any third party (1) under any property insurance policy as a result of damage to the Property (including proceeds payable under any insurance policy covering the Property which is maintained by NAI), (2) as compensation for any restriction placed upon the use or development of the Property or for the condemnation of the Property or any portion thereof, or (3) because of any judgment, decree or award for injury or damage to the Property; excluding, however, any funds paid to BNPLC by BNPLC's Parent, by an Affiliate of BNPLC or by any Participant that is made to compensate BNPLC for any Losses BNPLC may suffer or incur in connection with this Improvements Lease or the Property. NAI will promptly pay over to BNPLC any insurance, condemnation or other proceeds covered by this Paragraph 10 which NAI may receive from any insurer, condemning authority or other third party. All proceeds covered by this Paragraph 10, including those received by BNPLC from NAI or third parties, shall be applied as follows: (i) First, proceeds covered by this Paragraph 10 will be used to reimburse BNPLC for any costs and expenses, including Attorneys' Fees, that BNPLC incurred to collect the proceeds. (ii) Second, the proceeds remaining after such reimbursement to BNPLC (hereinafter, the "REMAINING PROCEEDS") will be applied, as hereinafter more particularly provided, either as a Qualified Prepayment or to reimburse NAI or BNPLC for the actual out-of-pocket costs of repairing or restoring the Property. Until, however, any Remaining Proceeds received by BNPLC are applied by BNPLC as a Qualified Prepayment or applied by BNPLC to reimburse costs of repairs to or restoration of the Property pursuant to this Paragraph 10, BNPLC shall hold and maintain such Remaining Proceeds as -17- <PAGE> 22 Escrowed Proceeds in an interest bearing account, and all interest earned on such account shall be added to and made a part of such Escrowed Proceeds. (b) Advances of Escrowed Proceeds to NAI. Except as otherwise provided below in this Paragraph 10, BNPLC shall advance all Remaining Proceeds held by it as Escrowed Proceeds to reimburse NAI for the actual out-of-pocket cost to NAI of repairing or restoring the Property in accordance with the requirements of this Improvements Lease and the other Operative Documents as the applicable repair or restoration progresses and upon compliance by NAI with such terms, conditions and requirements as may be reasonably imposed by BNPLC. In no event, however, shall BNPLC be required to pay Escrowed Proceeds to NAI in excess of the actual out-of-pocket cost to NAI of the applicable repair or restoration, as evidenced by invoices or other documentation satisfactory to BNPLC, it being understood that BNPLC may retain and apply any such excess as a Qualified Prepayment. (c) Application of Escrowed Proceeds as a Qualified Prepayment. Provided no Event of Default shall have occurred and be continuing, BNPLC shall apply any Remaining Proceeds paid to it (or other amounts available for application as a Qualified Prepayment) as a Qualified Prepayment on any date that BNPLC is directed to do so by a notice from NAI; however, if such a notice from NAI specifies an effective date for a Qualified Prepayment that is less than five Business Days after BNPLC's actual receipt of the notice, BNPLC may postpone the date of the Qualified Prepayment to any date not later than five Business Days after BNPLC's receipt of the notice. In any event, except when BNPLC is required by the preceding sentence to apply Remaining Proceeds or other amounts as a Qualified Prepayment on a Base Rent Date, BNPLC may deduct Breakage Costs incurred in connection with any Qualified Prepayment from the Remaining Proceeds or other amounts available for application as the Qualified Prepayment, and NAI will reimburse BNPLC upon request for any such Breakage Costs that BNPLC incurs but does not deduct. (d) Special Provisions Applicable After an Event of Default. Notwithstanding the foregoing, when any Event of Default shall have occurred and be continuing, BNPLC shall be entitled to receive and collect all insurance, condemnation or other proceeds governed by this Paragraph 10 and to apply all Remaining Proceeds, when and to the extent deemed appropriate by BNPLC in its sole discretion, either (A) to the reimbursement of NAI or BNPLC for the out-of-pocket cost of repairing or restoring the Property, or (B) as Qualified Prepayments. (e) NAI's Obligation to Restore. Regardless of the adequacy of any Remaining Proceeds available to NAI hereunder, and notwithstanding other provisions of this Improvements Lease to the contrary, if the Property is damaged by fire or other casualty or less than all or substantially all of the Property is taken by condemnation, NAI must: A) increase the value of the Property or the remainder thereof by restoring or improving the same (in a manner consistent with the requirements and limitations imposed by this Improvements Lease and the other Operative Documents or otherwise acceptable to BNPLC), or decrease Stipulated Loss Value by tendering a payment to BNPLC for application as a Qualified Prepayment, as necessary to cause Current AS IS Market Value to be not less than sixty percent (60%) of Stipulated Loss Value; and B) restore the Property or the remainder thereof to a reasonably safe and sightly condition. (f) Takings of All or Substantially All of the Property on or after the Base Rent Commencement Date. In the event of any taking of all or substantially all of the Property on or after the Base Rent Commencement Date, BNPLC shall be entitled to apply all Remaining Proceeds as a Qualified Prepayment. In addition, if Stipulated Loss Value immediately prior to any such taking exceeds the sum of the Remaining Proceeds -18- <PAGE> 23 resulting from such condemnation, then BNPLC shall be entitled to recover the excess from NAI upon demand as an additional Qualified Prepayment, whereupon this Improvements Lease shall terminate. Any taking of so much of the Real Property as, in BNPLC's reasonable good faith judgment, makes it impracticable to restore or improve the remainder thereof as required by part (2) of the preceding subparagraph shall be considered a taking of substantially all the Property for purposes of this Paragraph 10. 11. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF NAI CONCERNING THE PROPERTY. NAI represents, warrants and covenants as follows: (a) Compliance with Covenants and Laws. The use of the Property permitted by this Improvements Lease complies, or will comply after NAI obtains available permits as the tenant under this Improvements Lease, in all material respects with all Applicable Laws. NAI has obtained or will promptly obtain all utility, building, health and operating permits as may be required by any governmental authority or municipality having jurisdiction over the Property for any construction upon or use of the Property permitted by this Improvements Lease. (b) Operation of the Property. During the Term, NAI shall operate the Property in a good and workmanlike manner and substantially in compliance with all Applicable Laws and will pay or cause to be paid all fees or charges of any kind in connection therewith. (If NAI does not promptly correct any failure of the Property to comply with Applicable Laws that is the subject of a written notice given to NAI or BNPLC by any governmental authority, then for purposes of the preceding sentence, NAI shall be considered not to have maintained the Property "substantially in accordance with Applicable Laws" whether or not the noncompliance would be substantial in the absence of the notice.) During the Term, NAI shall not use or occupy, or allow the use or occupancy of, the 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. During the Term, to the extent that any of the following would, individually or in the aggregate, materially and adversely affect the value of the Property or NAI's use, occupancy or operations on the Property, NAI shall not, without BNPLC's prior consent: (i) initiate or permit any zoning reclassification of the Property; (ii) seek any variance under existing zoning ordinances applicable to the Property; (iii) use or permit the use of the 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 Property; or (v) consent to the annexation of the Property to any municipality. If (A) a change in the zoning or other Applicable Laws affecting the permitted use or development of the Property shall occur after the Base Rent Commencement Date that reduces the value of the Property, or (B) conditions or circumstances on or about the Property are discovered after the Base Rent Commencement Date (such as the presence of an endangered species) which substantially impede development and thereby reduce the value of the Property, and if after any such reduction under clause (A) or (B) preceding the Current AS IS Market Value of the Property is less than sixty percent (60%) of Stipulated Loss Value, then NAI shall pay BNPLC upon request the amount by which Current AS IS Market Value is less than sixty percent (60%) of Stipulated Loss Value, for application as a Qualified Prepayment. During the Term, NAI shall not cause or permit any drilling or exploration for, or extraction, removal or production of, minerals from the surface or subsurface of the Property, and NAI shall not do any act whereby the market value of the Property may reasonably be expected to be materially lessened. During the Term, if NAI receives a written notice or claim from any federal, state or other governmental entity that the 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 Property because the Property does not comply with Applicable Law, NAI shall promptly furnish a copy of such notice or claim to BNPLC. Notwithstanding the foregoing, NAI may in good faith, by appropriate proceedings, contest the validity and applicability of any Applicable Law with respect to the Property, and pending such contest NAI shall not be -19- <PAGE> 24 deemed in default hereunder because of the violation of such Applicable Law, if NAI diligently prosecutes such contest to completion in a manner reasonably satisfactory to BNPLC, and if NAI promptly causes the 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 Property; provided, however, in any event such contest shall be concluded and the violation of such Applicable Law must be corrected by NAI and any claims asserted against BNPLC or the Property because of such violation must be paid by NAI, all prior to the earlier of (i) the date that any criminal prosecution is instituted or overtly threatened against BNPLC or any of its directors, officers or employees because of such violation, (ii) the date that any action is taken by any governmental authority against BNPLC or any property owned by BNPLC (including the Property) because of such violation, or (iii) a Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a price to BNPLC (when taken together with any additional payments made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to the Break Even Price. (c) Debts for Construction, Maintenance, Operation or Development. NAI shall cause all debts and liabilities incurred in the construction, maintenance, operation or development of the Property, including all debts and liabilities for labor, material and equipment and all debts and charges for utilities servicing the Property, to be promptly paid; provided, that nothing in this subparagraph will be construed to require NAI to remove Liens Removable by BNPLC. Notwithstanding the foregoing, NAI 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 NAI shall not be deemed in default under this subparagraph because of the contested lien if (1) within sixty days after being asked to do so by BNPLC, NAI bonds over to BNPLC's reasonable satisfaction all such contested liens against the Property alleged to secure an amount in excess of $500,000 (individually or in the aggregate), (2) NAI diligently prosecutes such contest to completion in a manner reasonably satisfactory to BNPLC, and (3) NAI 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 must be paid by NAI prior to the earlier of (i) the date that any criminal prosecution is instituted or overtly threatened against BNPLC or its directors, officers or employees because of the nonpayment thereof, (ii) the date that any writ or order is issued under which the Property or any other property in which BNPLC has an interest may be seized or sold or any other action is taken against BNPLC or any property in which BNPLC has an interest because of the nonpayment thereof, or (iii) a Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a price to BNPLC (when taken together with any additional payments made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to the Break Even Price. (d) Repair, Maintenance, Alterations and Additions. NAI shall keep the Property in good order, operating condition and appearance and shall cause all necessary repairs, renewals and replacements to be promptly made. NAI will not allow any of the Property to be materially misused, abused or wasted, and NAI shall promptly replace any worn-out fixtures and Personal Property with fixtures and Personal Property comparable to the replaced items when new. NAI shall not, without the prior consent of BNPLC, (i) remove from the Property any fixture or Personal Property having significant value except such as are replaced by NAI by fixtures or Personal Property of equal suitability and value, free and clear of any lien or security interest (and for purposes of this clause "significant value" will mean any fixture or Personal Property that has a value of more than $100,000 or that, when considered together with all other fixtures and Personal Property removed and not replaced by NAI by items of equal suitability and value, has an aggregate value of $500,000 or more) or (ii) make material new -20- <PAGE> 25 Improvements or alter Improvements in any material respect. Without limiting the foregoing, NAI will notify BNPLC before making any significant alterations to the Improvements. The parties acknowledge that NAI has proposed to BNPLC that additional Improvements be constructed on the Land in the future, and BNPLC has consented thereto, provided that (1) no Event of Default has occurred and is continuing, and (b) BNPLC is satisfied, in its sole discretion, that (i) the location, configuration, architectural style, and manner and type of construction of such additional Improvements shall not reduce the value of the Improvements taken as a whole and will otherwise be constructed in accordance with the requirements of this Lease, and (ii) such additional Improvements will comply with all Applicable Laws. (e) Permitted Encumbrances and Development Documents. NAI shall during the Term comply with and will cause to be performed all of the covenants, agreements and obligations imposed upon the owner of any interest in the Property by the Permitted Encumbrances (including the Premises Leases) or the Development Documents. Without limiting the foregoing, NAI shall cause all amounts to be paid when due, the payment of which is secured by any Lien against the Property created by the Permitted Encumbrances. Without the prior consent of BNPLC, NAI shall not enter into, initiate, approve or consent to any modification of any Permitted Encumbrance or Development Document that would create or expand or purport to create or expand obligations or restrictions which would encumber BNPLC's interest in the Property. (Whether BNPLC must give any such consent requested by NAI during the Term of this Improvements Lease shall be governed by subparagraph 3(A) of the Closing Certificate and Agreement.) (f) Books and Records Concerning the Property. NAI shall keep books and records that are accurate and complete in all material respects for the Property and, subject to Paragraph 16.(c), will permit all such books and records (including 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 BNPLC. This subparagraph shall not be construed as requiring NAI to regularly maintain separate books and records relating exclusively to the Property; provided, however, that upon request, NAI shall construct or abstract from its regularly maintained books and records information required by this subparagraph relating to the Property. 12. FINANCIAL COVENANTS AND OTHER COVENANTS INCORPORATED BY REFERENCE TO SCHEDULE 1. Throughout the Term of this Improvements Lease, NAI shall comply with the requirements of Schedule 1 attached hereto. 13. FINANCIAL STATEMENTS AND OTHER REPORTS. (a) Financial Statements; Required Notices; Certificates. Throughout the Term of this Improvements Lease, NAI shall deliver to BNPLC and to each Participant: (i) as soon as available and in any event within one hundred twenty days after the end of each fiscal year of NAI, a consolidated balance sheet of NAI and its Consolidated Subsidiaries as of the end of such fiscal year and a consolidated income statement and statement of cash flows of NAI 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 NAI, 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 BNPLC determines, in BNPLC's reasonable discretion, is unacceptable; (ii) as soon as available and in any event within sixty days after the end of each of the first three -21- <PAGE> 26 quarters of each fiscal year of NAI, the consolidated balance sheet of NAI and its Consolidated Subsidiaries as of the end of such quarter and the consolidated income statement and the consolidated statement of cash flows of NAI 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 the chief financial officer or controller of NAI (subject to year-end adjustments); (iii) together with the financial statements furnished in accordance with subparagraph 13.(a)(i) and 13.(a)(ii), a certificate of the chief financial officer or controller of NAI: (i) certifying that to the knowledge of NAI no Default or Event of Default under this Improvements 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 NAI set forth in the Operative Documents 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 Schedule 1; (iv) within five days after the end of each calendar month, a certificate of the chief financial officer or controller of NAI certifying that at the end of the preceding calendar month, NAI had sufficient cash and other assets described in Paragraph 1 of Part II of Schedule 1 to comply with the requirements of that paragraph; (v) promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which NAI sends to NAI'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 NAI files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; (vi) upon request by BNPLC, a statement in writing certifying that the Operative Documents are unmodified and in full effect (or, if there have been modifications, that the Operative Documents are 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 NAI no Default or Event of Default under this Improvements Lease has occurred and is continuing or, if a Default or Event of Default under this Improvements Lease has occurred and is continuing, a brief statement as to the nature thereof; it being intended that any such statement by NAI may be relied upon by any prospective purchaser or mortgagee of the Property and by the Participants (vii) as soon as possible after, and in any event within ten days after NAI becomes aware that, any of the following has occurred, with respect to which the potential aggregate liability to NAI relating thereto is $500,000 or more, a notice signed by a senior financial officer of NAI setting forth details of the following and the response, if any, which NAI 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 PBGC by NAI or an ERISA Affiliate with respect to any of the following or the events or conditions leading up to the following): (A) the assertion, to secure any Unfunded Benefit Liabilities, of any Lien against the assets of NAI, against the assets of any Plan or Multiemployer Plan or against any interest of BNPLC or NAI in the Property, or (B) the taking of any action by the PBGC or any other governmental authority against NAI to terminate any Plan of NAI or any ERISA Affiliate of NAI or to cause the appointment of a trustee or receiver to administer any such Plan ; and -22- <PAGE> 27 (viii) such other information respecting the condition or operations, financial or otherwise, of NAI, of any of its Subsidiaries or of the Property as BNPLC or any Participant through BNPLC may from time to time reasonably request. BNPLC is hereby authorized to deliver a copy of any information or certificate delivered to it pursuant to this subparagraph 13.(a) to BNPLC's Parent, to the Participants and to any regulatory body having jurisdiction over BNPLC or BNPLC's Parent or any Participant that requires or requests it. 14. ASSIGNMENT AND SUBLETTING BY NAI. (a) BNPLC's Consent Required. Without the prior consent of BNPLC, NAI shall not assign, transfer, mortgage, pledge or hypothecate this Improvements Lease or any interest of NAI hereunder and shall not sublet all or any part of the Property, by operation of law or otherwise; provided, that subject to subparagraph 14.(c) below, (I) this provision shall not be construed to prohibit any Premises Lease described in the Common Definitions and Provisions Agreement (Phase IV - Improvements) or any transfer or sublease by a lessee thereunder which is authorized by the Premises Leases, and (II) so long as no Event of Default has occurred and is continuing: (1) NAI shall be entitled to sublet no more than forty-nine percent (49%) (computed on the basis of square footage) of the useable space in then existing and completed building Improvements, if any, so long as (i) any sublease by NAI is made expressly subject and subordinate to the terms hereof, and (ii) such sublease has a term equal to or less than the remainder of the then effective Term of this Improvements Lease; and (2) NAI shall be entitled to assign or transfer this Improvements Lease or any interest of NAI hereunder to an Affiliate of NAI if both NAI and its Affiliate confirm their joint and several liability hereunder by written notice given to BNPLC. (b) Standard for BNPLC's Consent to Assignments and Certain Other Matters. Consents and approvals of BNPLC which are required by this Paragraph 14 will not be unreasonably withheld or delayed, but NAI acknowledges that BNPLC's withholding of such consent or approval shall be reasonable if BNPLC determines in good faith that (1) giving the approval may materially increase BNPLC's risk of liability for any existing or future environmental problem, or (2) giving the approval is likely to increase BNPLC's administrative burden of complying with or monitoring NAI's compliance with the requirements of this Improvements Lease. (c) Consent Not a Waiver. No consent by BNPLC to a sale, assignment, transfer, mortgage, pledge or hypothecation of this Improvements Lease or NAI's interest hereunder, and no assignment or subletting of the Property or any part thereof in accordance with this Improvements Lease or otherwise with BNPLC's consent, shall release NAI from liability hereunder; and any such consent shall apply only to the specific transaction thereby authorized and shall not relieve NAI from any requirement of obtaining the prior consent of BNPLC to any further sale, assignment, transfer, mortgage, pledge or hypothecation of this Improvements Lease or any interest of NAI hereunder. 15. ASSIGNMENT BY BNPLC. (a) Restrictions on Transfers. Except by a Permitted Transfer, BNPLC shall not assign, transfer, mortgage, pledge, encumber or hypothecate this Improvements Lease or the other Operative Documents or any interest of BNPLC in and to the Property during the Term without the prior consent of NAI, which consent NAI may withhold in its sole discretion. Further, notwithstanding anything to the contrary herein contained, if withholding taxes are imposed on the rents and other amounts payable to BNPLC hereunder because of BNPLC's assignment of this Improvements Lease to any citizen of, or any corporation or other entity formed under the laws of, a country other than the United States, NAI shall not be required to compensate BNPLC or any such assignee -23- <PAGE> 28 for the withholding tax. If, in breach of this subparagraph, BNPLC transfer the Property or any part thereof by a conveyance or that does not constitute a Permitted Transfer, with the result that additional transfer taxes or other Impositions are assessed against the Property or the owner thereof, BNPLC shall be required to pay such additional transfer taxes or other Impositions. (b) Effect of Permitted Transfer or other Assignment by BNPLC. If, without breaching subparagraph 15.(a), BNPLC sells or otherwise transfers the Property and assigns all of its rights under this Improvements Lease and the other Operative Documents, then BNPLC shall thereby be released from any obligations arising after such assumption under this Improvements Lease or the other Operative Documents, and NAI shall look solely to each successor in interest of BNPLC for performance of such obligations. 16. BNPLC'S RIGHT OF ACCESS. (a) During the Term, BNPLC and BNPLC's representatives may (subject to subparagraph 16.(c)) enter the Property at any reasonable time after five Business Days advance written notice to NAI for the purpose of making inspections or performing any work BNPLC is authorized to undertake by the next subparagraph or for the purpose confirming whether NAI has complied with the requirements of this Improvements Lease or the other Operative Documents. (b) If NAI fails to perform any act or to take any action required of it by this Improvements Lease or the Closing Certificate, or to pay any money which NAI is required by this Improvements Lease or the Closing Certificate to pay, and if such failure or action constitutes an Event of Default or renders BNPLC or any director, officer, employee or Affiliate of BNPLC at risk of criminal prosecution or renders BNPLC's interest in the 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, BNPLC may, perform or cause to be performed such act or take such action or pay such money. Any expenses so incurred by BNPLC, and any money so paid by BNPLC, shall be a demand obligation owing by NAI to BNPLC. Further, BNPLC, 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 BNPLC to do any work which under any provision of this Improvements Lease NAI may be required to perform, and the performance thereof by BNPLC shall not constitute a waiver of NAI's default. BNPLC may during the progress of any such work permitted by BNPLC hereunder on or in the Property keep and store upon the Property all necessary materials, tools, and equipment. BNPLC shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business, or other damage to NAI or the subtenants or invitees of NAI by reason of making such repairs or the performance of any such work on or in the Property, or on account of bringing materials, supplies and equipment into or through the Property during the course of such work (except for any liability in excess of the liability insurance limits established in Exhibit B resulting from death or injury or damage to the property of third parties caused by the Established Misconduct of BNPLC or its officers, employees, or agents in connection therewith), and the obligations of NAI under this Improvements Lease shall not thereby be excused in any manner. (c) NAI shall have no obligation to provide proprietary information (as defined in the next sentence) to BNPLC, except and to the extent that (1) BNPLC reasonably determines that BNPLC cannot accomplish the purposes of BNPLC's inspection of the Property or exercise of other rights granted pursuant to the various express provisions of this Improvements Lease and the other Operative Documents without evaluating such information. For purposes of this Improvements Lease "PROPRIETARY INFORMATION" includes NAI's intellectual property, trade secrets and other confidential information of value to NAI about, among other things, NAI's manufacturing processes, products, marketing and corporate strategies, but in no event will "proprietary information" include any disclosure of substances and materials (and their chemical composition) which are or -24- <PAGE> 29 previously have been present in, on or under the Property at the time of any inspections by BNPLC, nor will "proprietary information" include any additional disclosures reasonably required to permit BNPLC to determine whether the presence of such substances and materials has constituted a violation of Environmental Laws. In addition, under no circumstances shall NAI have any obligation to disclose to BNPLC or any other party any proprietary information of NAI (including, without limitation, any pending applications for patents or trademarks, any research and design and any trade secrets) except if and to the limited extent reasonably necessary to comply with the express provisions of this Improvements Lease or the other Operative Documents. 17. EVENTS OF DEFAULT. Each of the following events shall be an "EVENT OF DEFAULT" by NAI under this Improvements Lease: (a) NAI shall fail to pay when due any installment of Rent due hereunder and such failure shall continue for three (3) Business Days after NAI is notified in writing thereof. (b) NAI shall fail to cause any representation or warranty of NAI contained herein or in the Closing Certificate that was 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 Paragraph 17), or NAI shall fail to comply with any term, provision or covenant of this Improvements Lease or the Closing Certificate (other than as described in the other clauses of this Paragraph 17), and in either case shall not cure such failure prior to the earlier of (A) thirty days after written notice thereof is sent to NAI or (B) the date any writ or order is issued for the levy or sale of any property owned by BNPLC (including the Property) or any criminal prosecution is instituted or overtly threatened against BNPLC 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 prosecution is instituted or overtly threatened, the period within which such failure may be cured by NAI shall be extended for a further period (not to exceed an additional sixty days) as shall be necessary for the curing thereof with diligence, if (but only if) (x) such failure is susceptible of cure but cannot with reasonable diligence be cured within such thirty day period, (y) NAI shall promptly have commenced to cure such failure and shall thereafter continuously prosecute the curing thereof with reasonable diligence and (z) the extension of the period for cure will not, in any event, cause the period for cure to extend beyond five days prior to the expiration of this Improvements Lease. (c) NAI shall abandon the Property. (d) NAI or any Subsidiary shall fail to make any payment or payments of principal, premium or interest, of Debt of NAI described in the next sentence when due (taking into consideration the time NAI may have to cure such failure, if any, under the documents governing such Debt). As used in this clause 14(a)(v), "DEBT" shall include only Debt (as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements)) of NAI or any of its Subsidiaries now existing or arising in the future (a) payable to BNPLC or any Affiliate of BNPLC, or (B) payable to any other Person and with respect to which $3,000,000 or more is actually due and payable because of acceleration or otherwise. (e) NAI: (a) shall generally not, or be unable to, or shall admit in writing its inability to, pay its debts as such debts become due; or (b) shall make an assignment for the benefit of creditors, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (c) shall file any petition or application to commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (d) shall have had any such petition or application filed against it; or (e) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property; or (f) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of sixty days or -25- <PAGE> 30 more. (f) One or more final judgments, decrees or orders for the payment of money in excess of $3,000,000 in the aggregate shall be rendered against NAI and such judgments, decrees or orders shall continue unsatisfied and in effect for a period of thirty consecutive days without NAI's having obtained an agreement (or after the expiration or termination of an agreement) of the Persons entitled to enforce such judgment, decrees or orders not to enforce the same pending negotiations with NAI concerning the satisfaction or other discharge of the same. (g) NAI shall breach the requirements of Paragraph 12, which by reference to Schedule 1 establishes certain financial covenants and other requirements. (h) as of the effective date of this Improvements Lease, any of the representations or warranties of NAI contained in subparagraphs 2(A) - (J) of the Closing Certificate shall be false or misleading in any material respect. (i) NAI shall fail to pay the full amount of any Supplemental Payment required by the Purchase Agreement on the Designated Sale Date or shall fail to provide Collateral as and when due pursuant to the Pledge Agreement Documents. (j) NAI shall fail to comply with any term, provision or condition of the Pledge Agreements after the expiration of any applicable notice and cure period set forth in the Pledge Agreement. 18. REMEDIES. (a) Basic Remedies. At any time after an Event of Default and after BNPLC has given any notice required by subparagraph 18.(b), BNPLC shall be entitled at BNPLC's option (and without limiting BNPLC in the exercise of any other right or remedy BNPLC may have, and without any further demand or notice except as expressly described in this subparagraph 18.(a)), to exercise any one or more of the following remedies: (i) By notice to NAI, BNPLC may terminate NAI's right to possession of the Property. A notice given in connection with unlawful detainer proceedings specifying a time within which to cure a default shall terminate NAI's right to possession if NAI fails to cure the default within the time specified in the notice. (ii) Upon termination of NAI's right to possession and without further demand or notice, BNPLC may re-enter the Property in any manner not prohibited by Applicable Law and take possession of all improvements, additions, alterations, equipment and fixtures thereon and remove any persons in possession thereof. Any property in the Improvements may be removed and stored in a warehouse or elsewhere at the expense and risk of and for the account of NAI. (iii) Upon termination of NAI's right to possession, this Improvements Lease shall terminate and BNPLC may recover from NAI: 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 -26- <PAGE> 31 such rental loss that NAI 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 NAI proves could be reasonably avoided; and d) Any other amount necessary to compensate BNPLC for all the detriment proximately caused by NAI's failure to perform NAI's obligations under this Improvements Lease or which in the ordinary course of things would be likely to result therefrom, including the costs and expenses (including Attorneys' Fees, advertising costs and brokers' commissions) of recovering possession of the Property, removing persons or property therefrom, placing the Property in good order, condition, and repair, preparing and altering the Property for reletting, all other costs and expenses of reletting, and any loss incurred by BNPLC as a result of NAI's failure to perform NAI's obligations under the other Operative Documents. The "WORTH AT THE TIME OF AWARD" of the amounts referred to in subparagraph 18.(a)(iii)a) and subparagraph 18.(a)(iii)b) shall be computed by allowing interest at the Default Rate. The "WORTH AT THE TIME OF AWARD" of the amount referred to in subparagraph 18.(a)(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) BNPLC 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 if NAI has breached this Improvements Lease and abandoned the Property, this Improvements Lease shall continue in effect for so long as BNPLC does not terminate NAI's right to possession, and BNPLC may enforce all of BNPLC's rights and remedies under this Improvements Lease, including the right to recover the Rent as it becomes due under this Improvements Lease. NAI's right to possession shall not be deemed to have been terminated by BNPLC except pursuant to subparagraph 18.(a)(i) hereof. The following shall not constitute a termination of NAI's right to possession: a) Acts of maintenance or preservation or efforts to relet the Property; b) The appointment of a receiver upon the initiative of BNPLC to protect BNPLC's interest under this Improvements Lease; or c) Reasonable withholding of consent to an assignment or subletting, or terminating a subletting or assignment by NAI. (b) Notice Required So Long As the Purchase Option and NAI's Initial Remarketing Rights and Obligations Continue Under the Purchase Agreement. So long as NAI remains in possession of the Property and there has been no termination of the Purchase Option and NAI's Initial Remarketing Rights and Obligations as provided Paragraph 4 of the Purchase Agreement, BNPLC's right to exercise remedies provided in subparagraph 18.(a) will be subject to the condition precedent that BNPLC shall have notified NAI, at a time when an Event of Default shall have occurred and be continuing, of BNPLC's intent to exercise remedies provided in -27- <PAGE> 32 subparagraph 18.(a) at least sixty days prior to exercising the remedies. The condition precedent is intended to provide NAI with an opportunity to exercise the Purchase Option or NAI's Initial Remarketing Rights and Obligations before losing possession of the Property pursuant to subparagraph 18.(a). The condition precedent is not, however, intended to extend any period for curing an Event of Default. Accordingly, if an Event of Default has occurred, and regardless of whether any Event of Default is then continuing, BNPLC may proceed immediately to exercise remedies provided in subparagraph 18.(a) at any time after the earlier of (i) sixty days after BNPLC has given such a notice to NAI, (ii) any date upon which NAI relinquishes possession of the Property, or (iii) any termination of the Purchase Option and NAI's Initial Remarketing Rights and Obligations. (c) Enforceability. This Paragraph 18 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 BNPLC is intended to be exclusive of any other right or remedy, and each and every such right and remedy shall be cumulative and in addition to any other right or remedy given to BNPLC hereunder or now or hereafter existing in favor of BNPLC under Applicable Law or in equity. In addition to other remedies provided in this Improvements Lease, BNPLC shall be entitled, to the extent permitted by Applicable Law or in equity, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Improvements Lease, or to a decree compelling performance of any of the other covenants, agreements, conditions or provisions of this Improvements Lease to be performed by NAI, or to any other remedy allowed to BNPLC at law or in equity. Nothing contained in this Improvements Lease shall limit or prejudice the right of BNPLC to prove for and obtain in proceedings for bankruptcy or insolvency of NAI by reason of the termination of this Improvements 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 BNPLC under the Purchase Documents, and BNPLC shall not be required to give the sixty day notice described in subparagraph 18.(b) as a condition precedent to any acceleration of the Designated Sale Date or to taking any action to enforce the Purchase Documents. 19. DEFAULT BY BNPLC. If BNPLC should default in the performance of any of its obligations under this Improvements Lease, BNPLC shall have the time reasonably required, but in no event less than thirty days, to cure such default after receipt of notice from NAI specifying such default and specifying what action NAI believes is necessary to cure the default. If NAI prevails in any litigation brought against BNPLC because of BNPLC's failure to cure a default within the time required by the preceding sentence, then NAI shall be entitled to an award against BNPLC for the monetary damages proximately caused to NAI by such default. Notwithstanding the foregoing, BNPLC's right to cure as provided in this Paragraph 19 will not in any event extend the time within which BNPLC must remove Liens Removable by BNPLC as required by Paragraph 20 beyond the Designated Sale Date. 20. QUIET ENJOYMENT. Provided NAI pays the Base Rent and all Additional Rent payable hereunder as and when due and payable and keeps and fulfills all of the terms, covenants, agreements and conditions to be performed by NAI hereunder, BNPLC shall not during the Term disturb NAI's peaceable and quiet enjoyment of the Property; however, such enjoyment shall be subject to the terms, provisions, covenants, agreements and conditions of this Improvements Lease, to Permitted Encumbrances, to Development Documents and to any other claims not constituting Liens Removable by BNPLC. If any Lien Removable by BNPLC is -28- <PAGE> 33 claimed against the Property, BNPLC will remove the Lien Removable by BNPLC promptly. Any breach by BNPLC of this Paragraph shall render BNPLC liable to NAI for any monetary damages proximately caused thereby, but as more specifically provided in subparagraph 4.(b) above, no such breach shall entitle NAI to terminate this Improvements Lease or excuse NAI from its obligation to pay Rent. 21. SURRENDER UPON TERMINATION. Unless NAI or an Applicable Purchaser purchases or has purchased BNPLC's entire interest in the Property pursuant to the terms of the Purchase Agreement and BNPLC's entire interest in the Improvements and other "Property" under (and as defined in) the Other Purchase Agreement, NAI shall, upon the termination of NAI's right to occupancy, surrender to BNPLC the Property, including Improvements constructed by NAI and fixtures and furnishings included in the Property, free of all Hazardous Substances (including Permitted Hazardous Substances) and tenancies and with all Improvements in substantially the same condition as of the date the same were initially completed, excepting only (i) ordinary wear and tear that occurs between the maintenance, repairs and replacements required by other provisions of this Improvements Lease or the Other Lease Agreement, and (ii) demolition, alterations and additions which are expressly permitted by the terms of this Improvements Lease or the Other Lease Agreement and which have been completed by NAI in a good and workmanlike manner in accordance with all Applicable Laws. Any movable furniture or movable personal property belonging to NAI or any party claiming under NAI, if not removed at the time of such termination and if BNPLC shall so elect, shall be deemed abandoned and become the property of BNPLC without any payment or offset therefor. If BNPLC shall not so elect, BNPLC may remove such property from the Property and store it at NAI's risk and expense. 22. HOLDING OVER BY NAI. Should NAI not purchase BNPLC's right, title and interest in the Property as provided in the Purchase Agreement, but nonetheless continue to hold the Property after the termination of this Improvements Lease without BNPLC's 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) Stipulated Loss Value on the day in question, times (ii) the Default Rate for such day; divided by (iii) three hundred and sixty; subject, however, to all of the terms, provisions, covenants and agreements on the part of NAI hereunder. No payments of money by NAI to BNPLC after the termination of this Improvements Lease shall reinstate, continue or extend the Term of this Improvements Lease and no extension of this Improvements Lease after the termination thereof shall be valid unless and until the same shall be reduced to writing and signed by both BNPLC and NAI. 23. INDEPENDENT OBLIGATIONS EVIDENCED BY THE OTHER OPERATIVE DOCUMENTS. NAI acknowledges and agrees that nothing contained in this Improvements Lease shall limit, modify or otherwise affect any of NAI's obligations under the other Operative Documents, which obligations are intended to be separate, independent and in addition to, and not in lieu of, the obligations set forth herein. In the event of any inconsistency between the express terms and provisions of the Purchase Documents and the express terms and provisions of this Improvements Lease, the express terms and provisions of the Purchase Documents shall control. In the event of any inconsistency between the express terms and provisions of the Closing Certificate and the express terms and provisions of this Improvements Lease, the express terms and provisions of this Improvements Lease shall control; provided, nothing herein will limit or impair NAI's obligations under the Closing Certificate following any expiration of termination of this Improvements Lease. [The signature pages follow.] -29- <PAGE> 34 IN WITNESS WHEREOF, NAI and BNPLC have caused this Improvements Lease Agreement to be executed as of December ___, 1999. "NAI" NETWORK APPLIANCE, INC. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- <PAGE> 35 [Continuation of signature pages to Lease Agreement dated to be effective December ___, 1999] "BNPLC" BNP LEASING CORPORATION By: ------------------------------------- Lloyd G. Cox, Vice President <PAGE> 36 Exhibit A LEGAL DESCRIPTION The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75~8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14~51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75~08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14~51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 <PAGE> 37 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 Exhibit A - Page 2 <PAGE> 38 Exhibit B INSURANCE REQUIREMENTS I. LIABILITY INSURANCE: A. NAI must maintain commercial general liability ("CGL") insurance on an occurrence basis, affording immediate protection to the limit of not less than $20,000,000 combined single limit for bodily and personal injury, death and property damage in respect of any one occurrence. The CGL insurance must be primary to, and shall receive no contribution from, any insurance policies or self-insurance programs otherwise afforded to or available to the Interested Parties, collectively or individually. Further, the CGL insurance must include blanket contractual liability coverage which insures contractual liability under the indemnifications set forth in this Improvements Lease (though such coverage or the amount thereof shall in no way limit such indemnifications). B. Any deductible or self-insured retention applicable to the CGL insurance shall not exceed $500,000. C. The forms of insurance policies (including endorsements) used to provide the CGL insurance required by this Improvements Lease, and the insurance company or companies providing the CGL insurance, must be acceptable to BNPLC. BNPLC shall have the right from time to time and at any time to review and approve such policy forms (including endorsements) and the insurance company or companies providing the insurance. Without limiting the generality of the foregoing, BNPLC may reasonably require (and unless and until NAI is otherwise notified by BNPLC, BNPLC does require) that such insurance be provided under forms and by companies consistent with the following: (1) Forms: CGL Insurance must be provided on Insurance Services Office ("ISO") forms CG 0001 1093 or CG 0001 0196 or equivalent substitute forms providing the same or greater coverage. (2) Rating Requirements: Insurance must be provided through insurance or reinsurance 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 VI or better. (3) Required Endorsements: CGL Insurance must be endorsed to provide or include: (a) in any policy containing a general aggregate limit, ISO form amendment "Aggregate Limits of Insurance Per Location" CG 2504 1185 or equivalent substitute form; (c) a waiver of subrogation, using ISO form CG 2404 1093 or equivalent substitute form (and under the commercial umbrella, if any), in favor of "BNP Leasing Corporation and other Interested Parties (as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements) between Network Appliance, Inc. and BNP Leasing Corporation dated December ___, 1999)"; (c) ISO additional insured form CG 2026 1185 or equivalent substitute form, without modification (and under the commercial umbrella, if any), designating as additional insureds "BNPLC and other Interested Parties, as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements) between Network Appliance, Inc. and BNP Leasing <PAGE> 39 Corporation dated December ___, 1999)"; and (d) provisions entitling BNPLC to 30 days' notice from the insurer prior to any cancellation, nonrenewal or material modification to the CGL coverage. (4) Other Insurance: Each policy to contain standard CGL "other insurance" wording, unmodified in any way that would make it excess over or contributory with the additional insured's own commercial general liability coverage. II. PROPERTY INSURANCE: From and after the commencement of any construction of Improvements on or about the Land or the delivery of any materials in anticipation of such construction: A. NAI must maintain property insurance in "special form" (including theft) or against "all risks," providing the broadest available coverage for all Improvements (as defined in the Common Provisions and Definitions Agreement) and equipment included in the Property, on a blanket basis if multiple buildings are involved, with no exclusions for vandalism, malicious mischief, or sprinkler leakage, and including coverage against earthquake and all coverage perils normally included within the definitions of extended coverage, vandalism, malicious mischief and, if the Property is in a flood zone, flood. In addition, boiler and machinery coverage must be maintained at all times by endorsement to the property insurance policy or by separate policy. Also, during any period of significant construction on any Improvements, the property insurance must include builder's completed value risk insurance for such Improvements, with no protective safeguard endorsement, and (without limiting the other requirements of this Exhibit) builder's completed value risk insurance must provide the following coverages: (1) materials and supplies at other locations awaiting installation; (2) materials and supplies in transit to the worksite for installation; (3) loss of use or consequential loss; (4) pollutant cleanup and removal; (5) freezing; (6) collapse during construction, resulting from fault, defect, error or omission in design, plan, specification or workmanship; (7) construction ordinance or law; (8) mechanical or electrical breakdown; (9) debris removal additional limit; (10) preservation of property; (11) fire department service charge; (12) additional interest on construction loan due to delays in the completion of construction; Exhibit B - Page 2 <PAGE> 40 (13) loss of rental income; (14) legal/professional fees (in the amount of no less than $1,500,000) and other soft costs as reasonably determined by NAI, subject to BNPLC's approval. B. The property insurance required hereby must provide coverage in the amount no less than replacement value (exclusive of land, foundation, footings, excavations and grading) 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. Subject to the approval of BNPLC, NAI will be responsible for determining the amount of property insurance to be maintained from time to time, but NAI must maintain such coverage on an agreed value basis to eliminate the effects of coinsurance. C. Any deductible or self-insured retention applicable to the property insurance shall not exceed (1) $500,000 for all coverages other than earthquake coverage, and (2) for earthquake coverage only, five percent of the aggregate amount of the property insurance required to satisfy this Improvements Lease, calculated as described in the preceding paragraph. D. The property insurance shall cover not only the value of NAI's interest in the Improvements, but also the interest of BNPLC, with BNPLC shown as an insured as its interests may appear. E. The forms of insurance policies (including endorsements) used to provide the property insurance required by this Improvements Lease, and the insurance company or companies providing the property insurance, must be acceptable to BNPLC. BNPLC shall have the right from time to time and at any time to review and approve such policy forms (including endorsements) and the insurance company or companies providing such insurance. Without limiting the generality of the foregoing, BNPLC may reasonably require (and unless and until NAI is otherwise notified by BNPLC, BNPLC does require) that such insurance be provided under forms and by companies consistent with the following: (1) Rating Requirements: Insurance to be provided through insurance or reinsurance companies rated by the A.M. Best Company of Oldwick, New Jersey as having (a) a policyholder's rating of A or better, (b) a reported financial information rating of no less than X, and (c) in the case of each insurance or reinsurance company, a reported financial information rating which indicates an adjusted policyholders' surplus equal to or greater than the underwriting exposure that such company has under the insurance or reinsurance it is providing for the Property. (2) Required Endorsements: NAI's property insurance must be endorsed to provide or include: (a) a waiver of subrogation in favor of "BNPLC and other Interested Parties, as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements) between Network Appliance, Inc. and BNP Leasing Corporation dated December ___, 1999)"; (b) that NAI's insurance is primary, with any policies of BNPLC or other Interested Parties being excess, secondary and noncontributing; (c) that the protection afforded to BNPLC by such insurance shall not be reduced or impaired by acts or omissions of NAI or any other beneficiary or insured; and (d) that BNPLC must be notified at least thirty days prior to any cancellation, nonrenewal or reduction of insurance coverage. Exhibit B - Page 3 <PAGE> 41 III. OTHER INSURANCE RELATED REQUIREMENTS: A. BNPLC must be notified in writing immediately by NAI of claims against NAI that might cause a reduction below seventy-five percent (75%) of any aggregate limit of any policy. B. NAI's property insurance must be evidenced by ACORD form 27 "Evidence of Property Insurance" completed and interlineated in a manner satisfactory to BNPLC to show compliance with the requirements of this Exhibit. Copies of endorsements to the property insurance must be attached to such form. C. NAI's CGL insurance must be evidenced by ACORD form 25 "Certificate of Insurance" completed and interlineated in a manner satisfactory to BNPLC to show compliance with the requirements of this Exhibit. Copies of endorsements to the CGL insurance must be attached to such form. D. Such evidence of required insurance must be delivered upon execution of this Improvements Lease and new certificate or evidence of insurance must be delivered no later than 10 days prior to expiration of existing policy. E. NAI shall not cancel, fail to renew, or make or permit any material reduction in any of the policies or certificates described in this Exhibit without the prior written consent of BNPLC. The certificates (ACORD forms 27 and 25) described in this Exhibit must contain the following express provision: "This is to certify that the policies of insurance described herein have been issued to the insured Network Appliance, Inc. for whom this certificate is executed and are in force at this time. In the event of cancellation, non-renewal, or material reduction in coverage affecting the certificate holder, at least sixty days prior notice shall be given to the certificate holder." F. The limits of liability under the liability insurance required by this Improvements Lease may be provided by a single policy of insurance or by a combination of primary and umbrella policies, but in no event shall the total limits of liability available for any one occurrence or accident be less than those required by this Exhibit. G. NAI shall provide copies, certified as complete and correct by an authorized agent of the applicable insurer, of all insurance policies required by this Exhibit within ten days after receipt of a request for such copies from BNPLC. Exhibit B - Page 4 <PAGE> 42 Exhibit C NOTICE OF LIBOR PERIOD ELECTION BNP Leasing Corporation 12201 Merit Drive Suite 860 Dallas, Texas 75251 Attention: Lloyd G. Cox Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: George Fung Re: Lease Agreement (Phase IV - Improvements) and Lease Agreement (Phase IV - Land), both dated as of December ___, 1999, and both between Network Appliance, Inc., as tenant, and BNP Leasing Corporation, as landlord Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the two Lease Agreements referenced above. This letter constitutes notice to you that the LIBOR Period Election under both of the Lease Agreements shall be: ________________ month(s), beginning with the first Base Rent Period that commences on or after: ______________, ____. NOTE: YOU SHALL BE ENTITLED TO DISREGARD THIS NOTICE IF THE NUMBER OF MONTHS SPECIFIED ABOVE IS NOT A PERMITTED NUMBER UNDER THE DEFINITION OF "LIBOR PERIOD ELECTION" IN THE COMMON DEFINITIONS AND PROVISIONS AGREEMENTS REFERENCED IN THE LEASE AGREEMENTS, OR IF THE DATE SPECIFIED ABOVE CONCERNING THE COMMENCEMENT OF THE LIBOR PERIOD ELECTION IS LESS THAN TEN BUSINESS DAYS AFTER YOUR RECEIPT OF THIS NOTICE. HOWEVER, WE ASK THAT YOU NOTIFY US IMMEDIATELY IF FOR ANY REASON YOU BELIEVE THIS NOTICE IS DEFECTIVE. Executed this _____ day of ______________, 19___. Network Appliance, Inc. Name: ----------------------------------- Title: ---------------------------------- <PAGE> 43 [cc all Participants] <PAGE> 44 Schedule 1 FINANCIAL COVENANTS This Schedule 1 is attached to and made a part of (a) the Lease Agreement (Phase IV - Improvements) (the "IMPROVEMENTS LEASE") dated to be effective as of December ___, 1999 (the "EFFECTIVE DATE"), between BNP Leasing Corporation, a Delaware corporation ("BNPLC") and Network Appliance, Inc., a California corporation ("NAI"), (b) the Lease Agreement (Phase IV - Land) (the "LAND LEASE" and, together with the Improvements Lease, the "LEASES") dated to be effective as of the Effective Date, between BNPLC and NAI, (c) the Pledge Agreement (Phase IV - Improvements) (the "PLEDGE AGREEMENT (IMPROVEMENTS)") dated to be effective as of the Effective Date, among BNPLC, NAI, and Banque Nationale de Paris, as a Participant and as agent for any financial institutions that become Participants thereunder from time to time, and (d) the Pledge Agreement (Phase IV - Land) (collectively with the Pledge Agreement (Improvements), the "PLEDGE AGREEMENTS") dated to be effective as of the Effective Date, among BNPLC, NAI, and Banque Nationale de Paris, as a Participant and as agent for any financial institutions that become Participants thereunder from time to time. PART I - DEFINED TERMS In this Schedule 1, capitalized terms used but not defined herein shall have the meaning assigned to them in the Leases or the Common Definitions and Provisions Agreements referenced in the Leases; and the following capitalized terms shall have the following meanings: "ADJUSTED NET INCOME" means, for any fiscal period of NAI, the aggregate net income earned (or net losses incurred) during such period by NAI and its Subsidiaries (determined on a consolidated basis), plus any Permitted Non-Cash Charges deducted in determining such net income (or net loss). "ADJUSTED EBIT" means, for any accounting period, net income (or net loss) of NAI and its Subsidiaries (determined on a consolidated basis), plus the amounts (if any) which, in the determination of net income (or net loss) for such period, have been deducted for (a) interest expense, (b) income tax expense (c) rent expense under leases of property, and (d) Permitted Non-Cash Charges. "COLLATERAL TEST DATES" mean the Base Rent Commencement Date and the earlier of the following dates after each fiscal quarter of NAI that ends after the Base Rent Commencement Date : (1) the seventh Business Day after the release by NAI of its financial statements for the fiscal quarter; or (2) the first Business Day of the third calendar month following the end of the fiscal quarter. "CONSOLIDATED TANGIBLE NET WORTH" means the excess of (1) the total assets, other than Intangible Assets, of NAI and its Subsidiaries (determined on a consolidated basis) over (2) the total liabilities of NAI and its Subsidiaries (determined on a consolidated basis). "DEBT" as used in this Exhibit shall have the meaning assigned to it in the Common Definitions and Provisions Agreements, where "Debt" of any Person is defined to mean (without duplication of any item): (a) indebtedness of such Person for borrowed money; (b) indebtedness of such Person for the deferred purchase price of property or services (except trade payables and accrued expenses constituting current liabilities in the ordinary course of business); (c) the face amount of any outstanding letters of credit issued for the account of such Person; (d) obligations of such Person arising under acceptance facilities; (e) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to purchase, to provide funds for payment, to provide funds to invest in any Person, or otherwise to assure a <PAGE> 45 creditor against loss; (f) obligations of others secured by any Lien on property of such Person; (g) obligations of such Person as lessee under Capital Leases; and (h) the obligations of such Person, contingent or otherwise, under any lease of property or related documents (including a separate purchase agreement) which provide that such Person or any of its Affiliates must purchase or cause another Person to purchase any interest in the leased property and thereby guarantee a minimum residual value of the leased property to the lessor. For purposes of this definition, the amount of the obligations described in clause (h) of the preceding sentence with respect to any lease classified according to GAAP as an "operating lease," shall equal the sum of (1) the present value of rentals and other minimum lease payments required in connection with such lease [calculated in accordance with SFAS 13 and other GAAP relevant to the determination of the whether such lease must be accounted for as an operating lease or capital lease], plus (2) the fair value of the property covered by the lease; provided, however, that such amount shall not exceed the price, as of the date a determination of Debt is required hereunder, for which the lessee can purchase the leased property pursuant to any valid ongoing purchase option if, upon such a purchase, the lessee shall be excused from paying rentals or other minimum lease payments that would otherwise accrue after the purchase. "FIXED CHARGES" means, for any accounting period, the sum (without duplication of any item) of the following charges or costs incurred or paid by NAI and its Subsidiaries (determined on a consolidated basis): (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, plus (d) taxes payable during such period. "INTANGIBLE ASSETS" means assets of NAI and its Subsidiaries (determined on a consolidated basis) that are properly classified as "INTANGIBLE ASSETS" in accordance with GAAP and, in any event, shall include goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, and deferred charges (other than prepaid insurance, prepaid taxes and current deferred taxes to the extent any such prepaid or deferred items are classified on the balance sheet of NAI and its consolidated Subsidiaries as current assets in accordance with GAAP and with the concurrence of NAI's independent public accountants). "MANDATORY COLLATERAL PERIOD" means any period during which, notwithstanding any contrary designation of a Collateral Percentage by NAI under the Pledge Agreements, the Collateral Percentage for purposes of the Pledge Agreements shall be one hundred percent (100%), determined as set forth in Part III of this Schedule 1. "PERMITTED NON-CASH CHARGES" means the amounts (if any) which, in the determination of net income (or net loss) for any relevant fiscal period, have been deducted by NAI or its Subsidiaries for non-cash charges made to write down goodwill or research and development costs in connection with acquisitions permitted by this Schedule 1. "QUICK RATIO" means the ratio of: (A) the sum (without duplication of any item) of the following assets of NAI and its Subsidiaries (determined on a consolidated basis): Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any); plus unencumbered cash; plus unencumbered short term cash investments; plus other unencumbered marketable securities which are classified as short term investments in accordance with GAAP; plus unencumbered accounts receivable, computed net of reserves for uncollectible amounts as determined in accordance with GAAP, to (B) the sum (without duplication of any item) of (1) all liabilities of NAI and its Subsidiaries (determined on a consolidated basis) treated as current liabilities in accordance with GAAP, plus (2) Schedule 1 - Page 2 <PAGE> 46 other obligations included in total Debt of NAI and its Subsidiaries (determined on a consolidated basis), the payment of which is due on demand or will become due within one year after the date on which the applicable determination of Quick Ratio is required hereunder. "ROLLING FOUR QUARTER PERIOD" means a period of four consecutive fiscal quarters of NAI, the last of which quarters ends after December 31, 1999. PART II - FINANCIAL COVENANTS FOR LEASE AGREEMENT NAI covenants that it shall not at any time suffer or permit: 1. Minimum Unencumbered Cash and Cash Equivalents. The sum (without duplication of any item) of the unrestricted cash, Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any), unencumbered short term cash investments and unencumbered marketable securities classified as short term investments according to GAAP of NAI and its Subsidiaries (determined on a consolidated basis) to be less than total Debt of NAI and its Subsidiaries (determined on a consolidated basis). 2. Minimum Tangible Net Worth. Consolidated Tangible Net Worth to be less than the sum of: (a) ninety percent of the Consolidated Tangible Net Worth as of October 30, 1998; plus (b) seventy-five percent of NAI's net income (computed without deduction for net losses in any fiscal quarter) earned in each fiscal quarter since October 30, 1998; plus (c) one-hundred percent of the net proceeds of sales of stock in NAI or its Subsidiaries (other than sales to NAI or its Subsidiaries) after October 30, 1998; less (d) Permitted Non-Cash Charges for any period after October 30, 1998. 3. Minimum Quick Ratio. The Quick Ratio to be less than 1.50 to 1.00. 4. Minimum Fixed Charge Coverage. The ratio of (a) Adjusted EBIT for any Rolling Four Quarter Period to (b) Fixed Charges for the same Rolling Four Quarter Period, to be less than 1.50 to 1.00. 5. Minimum Profitability. Adjusted Net Income to be less than $1.00 in more than one fiscal quarter of any Rolling Four Quarter Period. 6. Maximum Leverage Ratio. the ratio of (a) total Debt of NAI and its Subsidiaries (determined on a consolidated basis) at the end of any Rolling Four Quarter Period to (b) the Adjusted EBIT for the same Four Quarter Rolling Period, to exceed 3.00 to 1.00. PART III - TESTS FOR MANDATORY COLLATERAL PERIODS If, as of the end of the latest fiscal quarter of NAI ending before any Collateral Test Date, NAI shall have both: (A) failed to maintain a ratio of (1) the sum (without duplication of any item) of Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any), unencumbered cash, unencumbered short term cash investments and unencumbered marketable securities classified as short term investments according to GAAP of NAI and its Subsidiaries (determined on a consolidated basis) to (2) all Debt of NAI and its Subsidiaries (determined on a consolidated basis), of at least 1.5 to 1.00; and Schedule 1 - Page 3 <PAGE> 47 (B) failed to maintain a ratio of (i) all Debt of NAI and its Subsidiaries (determined on a consolidated basis) to (ii) Consolidated Tangible Net Worth of NAI, of no more than 0.45 to 1.00; such Collateral Test Date shall constitute a "FAILED COLLATERAL TEST DATE" for purposes of the determination of Mandatory Collateral Periods. A Mandatory Collateral Period shall commence on each Failed Collateral Test, and such Mandatory Collateral Period shall continue until the second of any two subsequent CONSECUTIVE Collateral Test Dates, neither of which constitutes a Failed Collateral Test Date. For purposes of illustration only, assume that the following dates are consecutive Collateral Test Dates, some of which are Failed Collateral Test Dates and some of which are not, as indicated opposite each date: <TABLE> <CAPTION> Date Failed Collateral Test Date? ---- ---------------------------- <S> <C> February 15, 2001 Yes May 12, 2001 No August 16, 2001 Yes November 11, 2001 No February 18, 2002 No May 14, 2002 Yes August 18, 2002 Yes November 18, 2002 No February 15, 2003 No </TABLE> Under these assumptions, the entire period from February 15, 2001 to February 18, 2002 falls within one or more Mandatory Collateral Periods. Also, the entire period commencing May 14, 2002 and ending February 15, 2003 falls within one or more Mandatory Collateral Periods. The period from February 18, 2002 to May 14, 2002 does not constitute Mandatory Collateral Period. PART IV - OTHER COVENANTS Without limiting NAI's obligations under the other provisions of the Operative Documents, during the Term, NAI shall not, without the prior written consent of BNPLC in each case: A. Liens. Create, incur, assume or suffer to exist, or permit any of its Consolidated Subsidiaries to create, incur, assume or suffer to exist, any Lien, upon or with respect to any of its properties, now owned or hereafter acquired, provided that the following shall be permitted except to the extent that they would encumber any interest in the Property in violation of other provisions of the Operative Documents: 1. 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; 2. Liens imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than thirty (30) days, or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; 3. Liens under workmen's compensation, unemployment insurance, social security or similar Schedule 1 - Page 4 <PAGE> 48 laws (other than ERISA); 4. 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; 5. judgment and other similar Liens against assets other than the Property or any part thereof in an aggregate amount not in excess of $3,000,000 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 by appropriate proceedings; 6. easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by NAI or any such Consolidated 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; 7. Liens securing obligations of such a Consolidated Subsidiary to NAI or to another such Consolidated Subsidiary; 8. Liens not otherwise permitted by this subparagraph A (and not encumbering the Property or any Collateral) incurred in connection with the incurrence of additional Debt or asserted to secure Unfunded Benefit Liabilities, provided that (a) the sum of the aggregate principal amount of all outstanding obligations secured by Liens incurred pursuant to this clause shall not at any time exceed five percent (5%) of Consolidated Tangible Net Worth at such time; and (b) such Liens do not constitute Liens against NAI's interest in any material Subsidiary or blanket Liens against all or substantially all of the inventory, receivables, general intangibles or equipment of NAI or of any material Subsidiary of NAI (for purposes of this clause, a "material Subsidiary" means any subsidiary whose assets represent a substantial part of the total assets of NAI and its Subsidiaries, determined on a consolidated basis in accordance with GAAP); and 9. Liens incurred in connection with any renewals, extensions or refundings of any Debt secured by Liens described in the preceding clauses of this subparagraph A, 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. B. Transactions with Affiliates. Enter into or permit any Subsidiary of NAI to enter into any material transactions (including, without limitation, the purchase, sale or exchange of property or the rendering of any service) with any Affiliates of NAI except on terms (1) that would not cause or result in a Default by NAI under the financial covenants set forth in Part II of this Schedule, and (2) that are no less favorable to NAI or the relevant Subsidiary than those that would have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. C. Compliance. Fail to preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; or fail to comply with the provisions of all documents pursuant to which NAI is organized and/or which govern NAI's continued existence and with the requirements of all laws, rules, regulations and orders of a governmental agency applicable to NAI and/or its business. D. Insurance. Fail to maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of NAI, including but not limited to fire, extended coverage, public liability, Schedule 1 - Page 5 <PAGE> 49 flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to BNPLC, or fail to deliver to BNPLC from time to time at BNPLC's request schedules setting forth all insurance then in effect. E. Facilities. fail to keep all properties useful or necessary to NAI's business in good repair and condition, or to from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. F. Taxes and Other Liabilities. Fail to pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as NAI may in good faith contest or as to which a bona fide dispute may arise, and (b) for which NAI has made provisions, to BNPLC's satisfaction, for eventual payment thereof in the event that NAI is obligated to make such payment. G. Capital Expenditures. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of twenty percent (20%) of NAI's total assets as of the end of the prior fiscal year. H. Merger, Consolidation, Transfer of Assets. Merge into or consolidate with any other entity (unless NAI is the surviving entity and remains in compliance of all provisions of the Operative Documents); or make any substantial change in the nature of NAI's business as conducted as of the date hereof; or sell, lease, transfer or otherwise dispose of all or a substantial or material portion of NAI's assets except in the ordinary course of its business. I. Loans, Advances, Investments. Make any loans or advances to or investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to BNPLC prior to, the date hereof, (b) loans to employees for travel advances, relocation loans and other loans in the ordinary course of business, (c) investments in accordance with NAI's investment policy, as in effect from time to time, (d) existing investments in subsidiaries and joint ventures which have been disclosed to BNPLC in writing prior to the date hereof, and new investments in subsidiaries and joint ventures in amounts up to an aggregated of $10,000,000.00, (e) loans to employees, officers, directors to finance or refinance the purchase of equity securities of NAI. J. Dividends, Distributions. Declare or pay any dividend or distribution either in cash, stock or any other property on NAI's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of NAI's stock now or hereafter outstanding. Schedule 1 - Page 6 <PAGE> 50 COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - IMPROVEMENTS) BETWEEN BNP LEASING CORPORATION AND NETWORK APPLIANCE, INC. DATED AS OF DECEMBER ___, 1999 <PAGE> 51 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> ARTICLE I - LIST OF DEFINED TERMS: ACTIVE NEGLIGENCE....................................................................1 ADDITIONAL RENT......................................................................1 ADMINISTRATIVE AGENCY FEE............................................................2 ADJUSTED EBIT........................................................................2 AFFILIATE............................................................................2 APPLICABLE LAWS......................................................................2 APPLICABLE PURCHASER.................................................................2 ARRANGEMENT FEE......................................................................2 ATTORNEYS' FEES......................................................................2 BANKING RULES CHANGE.................................................................2 BASE RATE............................................................................3 BASE RENT............................................................................3 BASE RENT COMMENCEMENT DATE..........................................................3 BASE RENT DATE.......................................................................3 BASE RENT PERIOD.....................................................................3 BNPLC................................................................................4 BNPLC'S PARENT.......................................................................4 BREAKAGE COSTS.......................................................................4 BREAK EVEN PRICE.....................................................................5 BUSINESS DAY.........................................................................5 CAPITAL ADEQUACY CHARGES.............................................................5 CAPITAL LEASE........................................................................5 CLOSING CERTIFICATE..................................................................5 CODE.................................................................................5 COLLATERAL...........................................................................5 COLLATERAL PERCENTAGE................................................................5 COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - IMPROVEMENTS)................5 CURRENT AS IS MARKET VALUE...........................................................5 DEBT.................................................................................6 DEFAULT..............................................................................7 DEFAULT RATE.........................................................................7 DEPOSIT TAKER........................................................................7 DEPOSIT TAKER LOSSES.................................................................7 DESIGNATED SALE DATE.................................................................7 DEVELOPMENT DOCUMENTS................................................................8 DIRECT PAYMENTS TO PARTICIPANTS......................................................8 EFFECTIVE DATE.......................................................................8 EFFECTIVE RATE.......................................................................8 ENVIRONMENTAL LAWS...................................................................8 ENVIRONMENTAL CUTOFF DATE............................................................8 ENVIRONMENTAL LOSSES.................................................................8 </TABLE> (i) <PAGE> 52 <TABLE> <CAPTION> Page ---- <S> <C> ENVIRONMENTAL REPORTS................................................................9 ERISA................................................................................9 ERISA AFFILIATE......................................................................9 ESCROWED PROCEEDS....................................................................9 ESTABLISHED MISCONDUCT..............................................................10 EUROCURRENCY LIABILITIES............................................................10 EURODOLLAR RATE RESERVE PERCENTAGE..................................................10 EVENT OF DEFAULT....................................................................10 EXCLUDED TAXES......................................................................10 EXISTING CONTRACT...................................................................11 FAILED COLLATERAL TEST DATE.........................................................11 FED FUNDS RATE......................................................................11 FUNDING ADVANCES....................................................................11 GAAP................................................................................11 HAZARDOUS SUBSTANCE.................................................................11 HAZARDOUS SUBSTANCE ACTIVITY........................................................11 IMPOSITIONS.........................................................................12 IMPROVEMENTS........................................................................12 IMPROVEMENTS LEASE..................................................................12 INITIAL FUNDING ADVANCE.............................................................12 INTERESTED PARTY....................................................................12 ISSUE 97-1 NON-PERFORMANCE-RELATED SUBJECTIVE EVENT OF DEFAULT......................13 LAND................................................................................13 LIBOR...............................................................................13 LIBOR PERIOD ELECTION...............................................................13 LIEN................................................................................14 LIENS REMOVABLE BY BNPLC............................................................14 LOSSES..............................................................................15 MANDATORY COLLATERAL PERIOD.........................................................15 MATERIAL ENVIRONMENTAL COMMUNICATION................................................15 MAXIMUM REMARKETING OBLIGATION......................................................15 MINIMUM EXTENDED REMARKETING PRICE..................................................15 MULTIEMPLOYER PLAN..................................................................15 NAI.................................................................................15 NAI'S EXTENDED REMARKETING PERIOD...................................................15 NAI'S EXTENDED REMARKETING RIGHT....................................................15 NAI'S INITIAL REMARKETING RIGHTS AND OBLIGATIONS....................................15 OPERATIVE DOCUMENTS.................................................................15 OTHER COMMON DEFINITIONS AND PROVISIONS AGREEMENT...................................16 OTHER LEASE AGREEMENT...............................................................16 OTHER PURCHASE AGREEMENT............................................................16 PARTICIPANT.........................................................................16 PARTICIPATION AGREEMENT.............................................................16 PBGC................................................................................16 </TABLE> (ii) <PAGE> 53 <TABLE> <CAPTION> Page ---- <S> <C> PERIOD..............................................................................16 PERMITTED ENCUMBRANCES..............................................................16 PERMITTED HAZARDOUS SUBSTANCE USE...................................................17 PERMITTED HAZARDOUS SUBSTANCES......................................................17 PERMITTED TRANSFER..................................................................17 PERSON..............................................................................18 PERSONAL PROPERTY...................................................................18 PLAN................................................................................18 PLEDGE AGREEMENT....................................................................18 PREMISES LEASES.....................................................................18 PRIME RATE..........................................................................18 PROPERTY............................................................................18 PURCHASE AGREEMENT..................................................................18 PURCHASE DOCUMENTS..................................................................18 PURCHASE OPTION.....................................................................19 QUALIFIED AFFILIATE.................................................................19 QUALIFIED PREPAYMENTS...............................................................19 REAL PROPERTY.......................................................................19 REMEDIAL WORK.......................................................................19 RENT................................................................................19 RESIDUAL RISK PERCENTAGE............................................................19 RESPONSIBLE FINANCIAL OFFICER.......................................................19 SALE CLOSING DOCUMENTS..............................................................20 SECURED SPREAD......................................................................20 SELLER..............................................................................20 STIPULATED LOSS VALUE...............................................................20 SUBSIDIARY..........................................................................20 SUPPLEMENTAL PAYMENT................................................................20 TERM................................................................................20 THIRD PARTY PRICE...................................................................20 THIRD PARTY SALE NOTICE.............................................................20 THIRD PARTY SALE PROPOSAL...........................................................20 THIRD PARTY TARGET PRICE............................................................20 TRANSACTION EXPENSES................................................................20 UNFUNDED BENEFIT LIABILITIES........................................................21 UNSECURED SPREAD....................................................................21 UPFRONT SYNDICATION FEES............................................................22 VOLUNTARY RETENTION OF THE PROPERTY.................................................22 ARTICLE II - PROVISIONS USED IN COMMON: 1 NOTICES.........................................................................22 2 SEVERABILITY....................................................................24 3 NO MERGER.......................................................................24 </TABLE> (iii) <PAGE> 54 <TABLE> <CAPTION> Page ---- <S> <C> 4 NO IMPLIED WAIVER...............................................................25 5 ENTIRE AND ONLY AGREEMENTS......................................................25 6 BINDING EFFECT..................................................................25 7 TIME IS OF THE ESSENCE..........................................................25 8 GOVERNING LAW...................................................................25 9 PARAGRAPH HEADINGS..............................................................25 10 NEGOTIATED DOCUMENTS............................................................26 11 TERMS NOT EXPRESSLY DEFINED IN AN OPERATIVE DOCUMENT............................26 12 OTHER TERMS AND REFERENCES......................................................26 13 EXECUTION IN COUNTERPARTS.......................................................26 14 NOT A PARTNERSHIP, ETC..........................................................26 </TABLE> (iv) <PAGE> 55 COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - IMPROVEMENTS) This Common Definitions and Provisions Agreement (Phase IV - Improvements), by and between BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), and NETWORK APPLIANCE, INC., a California corporation ("NAI"), is dated as of December ___, 1999, the Effective Date. RECITALS Contemporaneously with the execution of this Common Definitions and Provisions Agreement (Phase IV - Improvements), NAI is executing the Closing Certificate (as defined below) in favor of BNPLC, and BNPLC and NAI are executing the Improvements Lease (as defined below), and the Purchase Agreement (as defined below), all of which concern the Property (as defined below). Each of the Closing Certificate, the Improvements Lease and the Purchase Agreement (together with this Common Definitions and Provisions Agreement (Phase IV - Improvements) and the Pledge Agreement [as defined below], the "OPERATIVE DOCUMENTS") are intended to create separate and independent obligations upon the parties thereto. However, NAI and BNPLC intend that all of the Operative Documents share certain consistent definitions and other miscellaneous provisions. To that end, the parties are executing this Common Definitions and Provisions Agreement (Phase IV - Improvements) and incorporating it by reference into each of the other Operative Documents. AGREEMENTS ARTICLE I - LIST OF DEFINED TERMS UNLESS A CLEAR CONTRARY INTENTION APPEARS, THE FOLLOWING TERMS SHALL HAVE THE RESPECTIVE INDICATED MEANINGS AS USED HEREIN AND IN THE OTHER OPERATIVE DOCUMENTS: "ACTIVE NEGLIGENCE" of any Person (including BNPLC) means, and is limited to, the negligent conduct on the Property (and not mere omissions) by such Person or by others acting and authorized to act on such Person's behalf in a manner that proximately causes actual bodily injury or property damage for which NAI does not carry (and is not obligated by the Improvements Lease to carry) insurance. "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 Land, the Improvements or any interest in any other Property or as a party to the transactions described in the Improvements Lease or the other Operative Documents or in the Other Lease Agreement or the Other Purchase Agreement, (2) any negligent failure of any other Interested 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 transactions described in the Improvements Lease or other Operative Documents or in the Other Lease Agreement or Other Purchase Agreement, or (3) the exercise in a lawful manner by BNPLC (or any party lawfully claiming through or under BNPLC) of any right or remedy provided in or under the Improvements Lease or the other Operative Documents, or in the Other Lease Agreement or Other Purchase Agreement. "ADDITIONAL RENT" shall have the meaning assigned to it in subparagraph 3.(d) of the Improvements Lease. "ADMINISTRATIVE AGENCY FEE" shall have the meaning assigned to it in subparagraph 3.(g) of the Improvements Lease. <PAGE> 56 "ADJUSTED EBIT" shall have the meaning assigned to it in Part I of Schedule 1 attached to the Improvements Lease and to the Pledge Agreement. "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. "APPLICABLE LAWS" means any or all of the following, to the extent applicable to NAI or the Property or the Improvements Lease or the other Operative Documents: restrictive covenants; zoning ordinances and building codes; flood disaster laws; health, safety and environmental laws and regulations; the Americans with Disabilities Act and other laws pertaining to disabled persons; and other laws, statutes, ordinances, rules, permits, regulations, orders, determinations and court decisions. "APPLICABLE PURCHASER" means any third party designated by NAI to purchase BNPLC's interest in the Property and in any Escrowed Proceeds as provided in the Purchase Agreement. "ARRANGEMENT FEE" shall have the meaning assigned to it in subparagraph 3.(e) of the Improvements Lease. "ATTORNEYS' FEES" means the expenses and reasonable fees of counsel to the parties incurring the same, excluding costs or expenses of in-house counsel (whether or not accounted for as general overhead or administrative expenses), but otherwise including 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 all such fees and expenses incurred with respect to appeals, arbitrations and bankruptcy proceedings, and whether or not any manner of proceeding is brought with respect to the matter for which such fees and expenses were incurred. "BANKING RULES CHANGE" means either: (1) the introduction of or any change in any law or regulation applicable to BNPLC, BNPLC's Parent or any other Participant, or in the generally accepted interpretation by the institutional lending community of any such law or regulation, or in the interpretation of any such law or regulation asserted by any regulator, court or other governmental authority (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) or (2) the compliance by BNPLC, BNPLC's Parent or any other Participant with any new guideline or new request from any central bank or other governmental authority (whether or not having the force of law). "BASE RATE" for any Base Rent Period means a rate equal to the higher of (1) the Prime Rate in effect on the first day of such period, or (2) the rate which is fifty basis points (50/100 of 1%) above the Fed Funds Rate for that period. "BASE RENT" means the rent payable by NAI pursuant to subparagraph 3.(a) of the Improvements Lease. "BASE RENT COMMENCEMENT DATE" means the first Business Day of January, 2000. Page 2 <PAGE> 57 "BASE RENT DATE" means a date upon which Base Rent must be paid under the Improvements Lease, all of which dates shall be the first Business Day of a calendar month. The first Base Rent Date shall be determined as follows: a) If a LIBOR Period Election of one month is in effect on the Base Rent Commencement Date, then the first Business Day of the first calendar month following the Base Rent Commencement Date shall be the first Base Rent Date. b) If the LIBOR Period Election in effect on the Base Rent Commencement Date is three months or six months, then the first Business Day of the third calendar month following the Base Rent Commencement Date shall be the first Base Rent Date. Each successive Base Rent Date after the first Base Rent Date shall be the first Business Day of the first or third calendar month following the calendar month which includes the preceding Base Rent Date, determined as follows: (1) If a LIBOR Period Election of one month is in effect on a Base Rent Date, then the first Business Day of the first calendar month following such Base Rent Date shall be the next following Base Rent Date. (2) If a LIBOR Period Election of three months or six months is in effect on a Base Rent Date, then the first Business Day of the third calendar month following such Base Rent Date shall be the next following Base Rent Date. Thus, for example, if the Base Rent Commencement Date falls on the first Business Day of January, 2000 and a LIBOR Period Election of two months commences on the Base Rent Commencement Date, then the first Base Rent Date shall be the first Business Day of March, 2000. "BASE RENT PERIOD" means a period for which Base Rent must be paid under the Improvements Lease, each of which periods shall correspond to the LIBOR Period Election for such period. The first Base Rent Period shall begin on and include the Base Rent Commencement Date, and each successive Base Rent Period shall begin on and include the Base Rent Date upon which the preceding Base Rent Period ends. Each Base Rent Period, including the first Base Rent Period, shall end on but not include the first or second Base Rent Date after the Base Rent Date upon which such period began, determined as follows: (1) If the LIBOR Period Election for a Base Rent Period is one month or three months, then such Base Rent Period shall end on the first Base Rent Date after the Base Rent Date upon which such period began. (2) If the LIBOR Period Election for a Base Rent Period is six months, then such Base Rent Period shall end on the second Base Rent Date after the Base Rent Date upon which such period began. The determination of Base Rent Periods can be illustrated by two examples: 1) If NAI makes a LIBOR Period Election of three months for a hypothetical Base Rent Period beginning on the first Business Day in January, 2001, then such Base Rent Period will end Page 3 <PAGE> 58 on but not include the first Base Rent Date after it begins; that is, such Base Rent Period will end on the first Business Day in April, 2001, the third calendar month after January, 2001. 2) If, however, NAI makes a LIBOR Period Election of six months for the hypothetical Base Rent Period beginning the first Business Day in January, 2001, then such Base Rent Period will end on but not include the second Base Rent Date after it begins; that is, the first Business Day in July, 2001. "BNPLC" means BNP Leasing Corporation, a Delaware corporation. "BNPLC'S PARENT" means BNPLC's Affiliate, Banque Nationale de Paris, a bank organized and existing under the laws of France and any successors of such bank. "BREAKAGE COSTS" means any and all costs, losses or expenses incurred or sustained by BNPLC's Parent (as a Participant or otherwise) or any other Participant, for which BNPLC's Parent or the Participant shall request reimbursement from BNPLC, because of the resulting liquidation or redeployment of deposits or other funds: (1) used to make or maintain Funding Advances upon application of a Qualified Prepayment or upon any sale of the Property pursuant to the Purchase Agreement, if such application or sale occurs on any day other than the last day of a Base Rent Period; or (2) [intentionally deleted]; (3) used to make or maintain Funding Advances upon the acceleration of the end of any Base Rent Period pursuant subparagraph 3.(c)(iii) of the Improvements Lease. Breakage Costs will include, for example, losses attributable to any decline in LIBOR as of the effective date of any application described in the clause (1) preceding, as compared to LIBOR used to determine the Effective Rate then in effect. Each determination by BNPLC's Parent or the applicable Participant of Breakage Costs shall, in the absence of clear and demonstrable error, be conclusive and binding upon NAI. "BREAK EVEN PRICE" shall have the meaning assigned to it in subparagraph 1(B)(1) of the Purchase Agreement. "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). "CAPITAL ADEQUACY CHARGES" means any additional amounts BNPLC's Parent or any other Participant requests BNPLC to pay as compensation for an increase in required capital as provided in subparagraph 5.(b)(ii) of the Improvements Lease. "CAPITAL LEASE" means any lease which has been or should be capitalized on the books of the lessee in accordance with GAAP or for federal income tax purposes. Page 4 <PAGE> 59 "CLOSING CERTIFICATE" means the Closing Certificate and Agreement dated as of December ___, 1999 executed by NAI in favor of BNPLC, as such Closing Certificate may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "CODE" means the Internal Revenue Code of 1986, as amended. "COLLATERAL" shall have the meaning assigned to it in the Pledge Agreement. "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 the Improvements 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 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 period. "QUALIFYING SECURITY INTEREST" means a first priority perfected security interest under the Pledge Agreement. "COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - IMPROVEMENTS)" means this Agreement, which is incorporated by reference into each of the other Operative Documents. "CURRENT AS IS MARKET VALUE" means an amount equal to the fair market value of BNPLC's interest in the Property (or any applicable portion thereof), AS IS, WHERE IS AND WITH ALL FAULTS on the date in question. Whenever a determination of Current AS IS Market Value is required by the express terms of any Operative Document, it will be determined accordance with the following procedure unless BNPLC and NAI have otherwise agreed in writing upon a Current AS IS Market Value at that time: (A) BNPLC and NAI shall each, within ten days after written notice from either to the other, select an appraiser. If either BNPLC or NAI fails to select an appraiser within the required period, then the appraiser who has been timely selected shall conclusively determine the fair market value of the Property (or applicable portion thereof) in accordance with this definition within forty-five days after his or her selection. (B) Upon the selection of the two appraisers as provided above, such appraisers shall proceed to determine the fair market value of BNPLC's interest in the Property (or applicable portion thereof) in accordance with this clause (v). Such appraisals shall be submitted in writing no later than forty-five days after selection of the second appraiser. If the fair market value as determined by such appraisers is identical, such sum shall be Current AS IS Market Value. If the fair market value indicated by the lower appraisal differs from the fair market value indicated by the higher appraisal by less than five percent (5%) of the fair market value indicated by the higher appraisal, then Current AS IS Market 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 Current AS IS Market Value. (C) If the fair market value indicated by the lower appraisal differs from the fair market value indicated by the higher appraisal by more than five percent (5%) of the fair market value indicated by the Page 5 <PAGE> 60 higher appraisal, 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 fair market value of BNPLC's interest in the Property (or applicable portion thereof), such selection to be submitted in writing no later than ten days after selection of the third appraiser. Such selection shall be determinative of Current AS IS Market Value. (D) In making any such determination of fair market value, the appraisers shall assume that any improvements then located on the Property (or applicable portion thereof) or under construction thereon constitute the highest and best use, and that neither the Improvements Lease nor the Purchase Agreement add any value to the Property. Each appraiser selected hereunder shall be an independent MAI-designated appraiser with not less than ten years' experience in commercial real estate appraisal in Sunnyvale, California and surrounding areas. "DEBT" of any Person means (without duplication of any item): (a) indebtedness of such Person for borrowed money; (b) indebtedness of such Person for the deferred purchase price of property or services (except trade payables and accrued expenses constituting current liabilities in the ordinary course of business); (c) the face amount of any outstanding letters of credit issued for the account of such Person; (d) obligations of such Person arising under acceptance facilities; (e) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to purchase, to provide funds for payment, to provide funds to invest in any Person, or otherwise to assure a creditor against loss; (f) obligations of others secured by any Lien on property of such Person; (g) obligations of such Person as lessee under Capital Leases; and (h) the obligations of such Person, contingent or otherwise, under any lease of property or related documents (including a separate purchase agreement) which provide that such Person or any of its Affiliates must purchase or cause another Person to purchase any interest in the leased property and thereby guarantee a minimum residual value of the leased property to the lessor. For purposes of this definition, the amount of the obligations described in clause (h) of the preceding sentence with respect to any lease classified according to GAAP as an "operating lease," shall equal the sum of (1) the present value of rentals and other minimum lease payments required in connection with such lease [calculated in accordance with SFAS 13 and other GAAP relevant to the determination of the whether such lease must be accounted for as an operating lease or capital lease], plus (2) the fair value of the property covered by the lease; provided, however, that such amount shall not exceed the price, as of the date a determination of Debt is required hereunder, for which the lessee can purchase the leased property pursuant to any valid ongoing purchase option if, upon such a purchase, the lessee shall be excused from paying rentals or other minimum lease payments that would otherwise accrue after the purchase. "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. "DEFAULT RATE" means, for any period prior to the Designated Sale Date, a floating per annum rate equal to two percent (2%) above the Prime Rate, and for any period commencing on or after the Designated Sale Date, Default Rate shall mean a floating per annum rate equal to five percent (5%) above the Prime Rate. However, in no event will the "Default Rate" at any time exceed the maximum interest rate permitted by law. "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. Page 6 <PAGE> 61 "DESIGNATED SALE DATE" means the earlier of: (1) the first Business Day of January, 2005; or (2) any Business Day designated as such in an irrevocable, unconditional notice given by NAI to BNPLC; provided, that to be effective for purposes of this definition, any such notice from NAI to BNPLC must designate a Business Day that is more than thirty days after the date of such notice; and provided, further, to be effective for purposes of this definition, the notice must include an express, unconditional, unequivocal and irrevocable acknowledgment by NAI that because of NAI's election to accelerate the Designated Sale Date, the Maximum Remarketing Obligation will equal the Break Even Price under the Purchase Agreement; or (3) [intentionally deleted]; (4) the first Business Date after any termination by NAI of the Purchase Option and NAI's Initial Remarketing Rights and Obligations as provided in subparagraph 4(B) of the Purchase Agreement; or (5) any Business Day designated as such in a notice given by BNPLC to NAI when any Event of Default has occurred and is continuing; provided, that to be effective for purposes of this definition, any such notice from BNPLC to NAI must designate a Business Day that is more than thirty days after the date of such notice. "DEVELOPMENT DOCUMENTS" means the contracts, ordinances and other documents described in Exhibit C attached to the Closing Certificate, as the same may be modified from time to time in accordance with the Improvements Lease and the Closing Certificate, and any applications, permits or certificates concerning or affecting the use or development of the Property that may be submitted, issued or executed from time to time as contemplated in such contracts, ordinances and other documents or that BNPLC may hereafter execute, approve or consent to at the request of NAI. "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 NAI by the collateral agent appointed pursuant to the Pledge Agreement from all or any part of the Collateral described therein. "EFFECTIVE DATE" means December ___, 1999. "EFFECTIVE RATE" means for each Base Rent Period, the per annum rate determined by dividing (A) LIBOR for such Base Rent Period, as the case may be, by (B) one hundred percent (100%) minus the Eurodollar Rate Reserve Percentage for such Base Rent 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 of the date of such change, as the case may be, without prior notice to NAI. If for any reason BNPLC 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 foregoing, then the "EFFECTIVE RATE" for that Base Rent Period shall equal any published index or per annum interest rate determined in good faith by BNPLC's Parent to be comparable to LIBOR at the Page 7 <PAGE> 62 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 BNPLC's Parent's comparison of past eurodollar market rates to past yields on such Treasury obligations. Any determination by BNPLC of the Effective Rate under this definition shall, in the absence of clear and demonstrable error, be conclusive and binding upon NAI. "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 the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (as amended, "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, "RCRA"). "ENVIRONMENTAL CUTOFF DATE" means the later of the dates upon which (i) the Improvements Lease terminates, or (ii) NAI surrenders possession and control of the Property and ceases to have interest in the Land or Improvements or rights with respect thereto under any of the Operative Documents. "ENVIRONMENTAL LOSSES" means Losses suffered or incurred by BNPLC or any other Interested Party, directly or indirectly, relating to or arising out of, based on or as a result of any of the following: (i) any Hazardous Substance Activity on or prior to the Environmental Cutoff Date; (ii) any violation on or prior to the Environmental Cutoff Date of any applicable Environmental Laws relating to the 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 that occurs or is alleged to have occurred on or prior to the Environmental Cutoff Date; 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 Interested 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 definition or any allegation of any such matters. For purposes of determining whether Losses constitute "Environmental Losses," as the term is used in the Improvements Lease, any actual or alleged Hazardous Substance Activity or violation of Environmental Laws relating to the Property will be presumed to have occurred prior to the Environmental Cutoff Date unless NAI establishes by clear and convincing evidence to the contrary that the relevant Hazardous Substance Activity or violation of Environmental Laws did not occur or commence prior to the Environmental Cutoff Date. "ENVIRONMENTAL REPORTS" means collectively the following reports (whether one or more), which were provided by NAI to BNPLC prior to the Effective Date: Phase I Environmental Site Assessment for 1330-1350 Geneva and 1345-1347 Crossman Avenue, Sunnyvale, California, dated November 1999 by Romig Consulting Engineers. "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. "ERISA AFFILIATE" means any Person who for purposes of Title IV of ERISA is a member of NAI's controlled group, or under common control with NAI, within the meaning of Section 414 of the Internal Revenue Code, and the regulations promulgated and rulings issued thereunder. Page 8 <PAGE> 63 "ESCROWED PROCEEDS" means, subject to the exclusions specified in the next sentence, any money that is received by BNPLC from time to time during the Term (and any interest earned thereon) from any party (1) under any property insurance policy as a result of damage to the Property, (2) as compensation for any restriction imposed by any governmental authority upon the use or development of the Property or for the condemnation of the Property or any portion thereof, (3) because of any judgment, decree or award for physical damage to the Property or (4) as compensation under any title insurance policy or otherwise as a result of any title defect or claimed title defect with respect to the Property; provided, however, in determining the amount of "Escrowed Proceeds" there shall be deducted all expenses and costs of every type, kind and nature (including Attorneys' Fees) incurred by BNPLC to collect such proceeds. Notwithstanding the foregoing, "Escrowed Proceeds" will not include (A) any payment to BNPLC by a Participant or an Affiliate of BNPLC that is made to compensate BNPLC for the Participant's or Affiliate's share of any Losses BNPLC may incur as a result of any of the events described in the preceding clauses (1) through (4), (B) any money or proceeds that have been applied as a Qualified Prepayment or to pay any Breakage Costs or other costs incurred in connection with a Qualified Prepayment, (C) any money or proceeds that, after no less than ten days notice to NAI, BNPLC returns or pays to a third party because of BNPLC's good faith belief that such return or payment is required by law, (D) any money or proceeds paid by BNPLC to NAI or offset against any amount owed by NAI, or (E) any money or proceeds used by BNPLC in accordance with the Improvements Lease for repairs or the restoration of the Property or to obtain development rights or the release of restrictions that will inure to the benefit of future owners or occupants of the Property. Until Escrowed Proceeds are paid to NAI pursuant to Paragraph 10 of the Improvements Lease, transferred to a purchaser under the Purchase Agreement as therein provided or applied as a Qualified Prepayment or as otherwise described in the preceding sentence, BNPLC shall keep the same deposited in one or more interest bearing accounts, and all interest earned on such account shall be added to and made a part of Escrowed Proceeds. "ESTABLISHED MISCONDUCT" of a Person means, and is limited to: (1) if the Person is bound by the Operative Documents or the Participation Agreement, a breach by such Person of the express provisions of the Operative Documents or the Participation Agreement, as applicable, that continues beyond any period for cure provided therein, and (2) conduct of such Person or its Affiliates that has been determined to constitute wilful misconduct or Active Negligence in or as a necessary element of a final judgment rendered against such Person by a court with jurisdiction to make such determination. Established Misconduct of one Interested Party shall not be attributed to a second Interested Party unless the second Interested Party is an Affiliate of the first. Negligence which does not constitute Active Negligence shall not in any event constitute Established Misconduct. For purposes of this definition, "conduct of a Person" will include (1) the conduct of an employee of that Person, but only to the extent that the employee is acting within the scope of his employment by that Person, as determined in or as a necessary element of a final judgment rendered against such Person by a court with jurisdiction to make such determination, and (2) the conduct of an agent of that Person (such as an independent environmental consultant engaged by that Person), but only to the extent that the agent is, as determined in or as a necessary element of a final judgment rendered against such Person by a court with jurisdiction to make such determination, (x) acting within the scope of the authority granted to him by such Person, (y) not acting with the consent or approval of or under the direction of NAI or NAI's Affiliates, employees or agents, and (z) not acting in good faith to mitigate Losses that such Person may suffer because of a breach or repudiation by NAI of the Improvements Lease or the Purchase Documents. "EUROCURRENCY LIABILITIES" shall have the meaning assigned to it in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. Page 9 <PAGE> 64 "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 any emergency, supplemental or other marginal reserve requirement) for BNPLC's Parent 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. "EVENT OF DEFAULT" shall have the meaning assigned to it in subparagraph 17 of the Improvements Lease. "EXCLUDED TAXES" means (1) all federal, state and local income taxes upon Base Rent, Administrative Agency Fees, any interest paid to BNPLC or any Participant pursuant to subparagraph 3.(k) of the Improvements Lease, and any additional compensation claimed by BNPLC pursuant to subparagraph 5.(b)(ii) of the Improvements Lease; (2) any transfer or change of ownership taxes assessed because of BNPLC's transfer or conveyance to any third party of any rights or interest in the Improvements Lease, the Purchase Agreement or the Property (other than any such taxes assessed because of any Permitted Transfer under clauses (1), (3), (4), (5), (6) or (7) of the definition of Permitted Transfer in this Agreement), (3) all federal, state and local income taxes upon any amounts paid as reimbursement for or to satisfy Losses incurred by BNPLC or any Participant to the extent such taxes are offset by a corresponding reduction of BNPLC's or the applicable Participant's income taxes because of BNPLC's or such Participant's deduction of the reimbursed Losses from its taxable income or because of any tax credits attributable thereto. If, however, a change in Applicable Laws after the Effective Date results in an increase in such taxes for any reason other than an increase in the applicable tax rates (e.g., a disallowance of deductions that would otherwise be available against payments described in clause (A) of this definition), then for purposes of the Operative Documents, the term "Excluded Taxes" will not include the increase in such taxes attributable to the change. "EXISTING CONTRACT" means the Agreement of Sale covering the Land between NAI and Seller, dated November 16, 1999. "FAILED COLLATERAL TEST DATE" shall have the meaning indicated in Part III of Schedule 1 attached to the Improvements Lease. "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 BNPLC's Parent from three Federal funds brokers of recognized standing selected by BNPLC's Parent. All determinations of the Fed Funds Rate by BNPLC's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon NAI. "FUNDING ADVANCES" means (1) the Initial Funding Advance and (2) all future advances made by BNPLC's Parent or any other Participant to or on behalf of BNPLC to allow BNPLC to provide additional advances (if any) to NAI. Page 10 <PAGE> 65 "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 13.(a) of the Improvements Lease (except for changes with which NAI's independent public accountants concur). "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 or substance," "infectious waste," "toxic substance," "toxic pollutant," or any other formulation intended to define, list or classify substances by reason of deleterious properties, including 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; 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. "HAZARDOUS SUBSTANCE ACTIVITY" means any actual, proposed or threatened use, storage, holding, release (including 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 Property, including 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 Property and any resulting residual Hazardous Substance contamination in, on or under the Property. "HAZARDOUS SUBSTANCE ACTIVITY" also means any existence of Hazardous Substances on the Property that would cause the Property or the owner or operator thereof to be in violation of, or that would subject the Property to any remedial obligations under, any Environmental Laws, including CERCLA and RCRA, assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances pertaining to the Property. "IMPOSITIONS" means 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 the Improvements Lease or which are imposed upon BNPLC or the Property because of the ownership, leasing, occupancy, sale or operation of the Property, or any part thereof or interest therein, or relating to or required to be paid by any of the Permitted Encumbrances or the Development Documents, excluding only Excluded Taxes. "IMPOSITIONS" shall include real estate taxes imposed because of a change of use or ownership of the Property on or prior to the date of any sale by BNPLC pursuant to the Purchase Agreement. "IMPROVEMENTS" means any and all (1) buildings and other real property improvements now or hereafter erected on the Land, and (2) equipment (e.g., HVAC systems, elevators and plumbing fixtures) attached to the buildings or other real property improvements, the removal of which would cause structural or other material damage to the buildings or other real property improvements or would materially and adversely affect the value or use of the buildings or other real property improvements. Page 11 <PAGE> 66 "IMPROVEMENTS LEASE" means the Lease Agreement (Phase IV - Improvements") dated as of December ___, 1999 between BNPLC, as landlord, and NAI, as tenant, pursuant to which NAI has agreed to lease BNPLC's interest in the Property, as such Lease Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "INITIAL FUNDING ADVANCE" means the advance made by BNPLC's Parent (directly or through one or more of its Affiliates) to or on behalf of BNPLC on or prior to the Effective Date to cover the cost of BNPLC's acquisition of the Property and certain Transaction Expenses and other amounts described in this definition. The amount of the Initial Funding Advance may be confirmed by a separate closing certificate executed by NAI as of the Effective Date. To the extent that BNPLC does not itself use the entire Initial Funding Advance to pay Transaction Expenses incurred by BNPLC, the remainder thereof will be advanced to NAI, with the understanding that NAI shall use any such amount advanced for one or more of the following purposes: (1) the payment or reimbursement of Transaction Expenses incurred by NAI; (2) the maintenance of the Property; or (3) the payment of Rents next due. "INTERESTED PARTY" means each of (1) BNPLC, its Affiliates and its successors and assigns as to the Property or any part thereof or any interest therein, (2) BNPLC's Parent, and (3) any other Participants and their permitted successors and assigns under the Participation Agreement; provided, however, none of the following shall constitute an Interested Party: (a) any Person to whom BNPLC may transfer an interest in the Property by a conveyance that is not a Permitted Transfer and others that cannot lawfully claim an interest in the Property except through or under such a transfer by BNPLC, (b) NAI or any Person that cannot lawfully claim an interest in the Property except through or under a conveyance from NAI, or (c) any Applicable Purchaser under the Purchase Agreement and any Person that cannot lawfully claim an interest in the Property except through or under a conveyance from such Applicable Purchaser. "ISSUE 97-1 NON-PERFORMANCE-RELATED SUBJECTIVE EVENT OF DEFAULT" means an Event of Default that is unrelated to the Property or the use or maintenance thereof and that results solely from (A) a breach by NAI of a provision in any Operative Document, the occurrence of which breach cannot be objectively determined, or (B) any other event described in subparagraph 17.(e) of the Improvements Lease, the occurrence of which event cannot be objectively determined. For example, an Event of Default under subparagraph 17.(e) of the Improvements Lease resulting solely from a failure of NAI to "generally" pay its debts as such debts become due (in contrast to a failure of NAI to pay Rent to BNPLC as it becomes due under the Improvements Lease) would constitute an Issue 97-1 Non-performance-related Subjective Event of Default. In no event, however, will the term "Issue 97-1 Non-performance-related Subjective Event of Default" include an Event of Default resulting from (1) a failure of NAI to make any payment required to BNPLC under the Operative Documents, (2) a breach by NAI of the provisions set forth in Schedule 1 attached to the Improvements Lease (which set forth financial covenants), (3) any failure of NAI to use, maintain and insure the Property in accordance with the requirements of the Improvements Lease, or (4) any failure of NAI to pay the full amount of any Supplemental Payment on the Designated Sale Date as required by the Purchase Agreement. Except as provided in subparagraph 1(A)(2)(c)(i) of the Purchase Agreement, the characterization of any Event of Default as an Issue 97-1 Non-performance-related Subjective Event of Default will not affect the rights or remedies available to BNPLC because of the Event of Default. "LAND" means the land covered by the land described in Exhibit A attached to the Closing Certificate, the Improvements Lease and the Purchase Agreement. Page 12 <PAGE> 67 "LIBOR" means, for purposes of determining the Effective Rate for each Base Rent Period, the rate determined by BNPLC'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 BNPLC'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. BNPLC shall instruct BNPLC'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, as the case may be, (ii) in an amount equal or comparable to the total (projected on the applicable date of determination by BNPLC's Parent) Stipulated Loss Value on the first day of such period, and (iii) for a time equal or comparable to the length of such period. If BNPLC'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. If for any reason BNPLC'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 foregoing, or if BNPLC's Parent shall determine that it is unlawful (or any central bank or governmental authority shall assert that it is unlawful) for BNPLC, BNPLC's Parent or any Participant to provide or maintain Funding Advances during any Base Rent Period for which Carrying Costs or Base Rent is computed by reference to LIBOR, then "LIBOR" for that period shall equal the Base Rate for that period. All determinations of LIBOR by BNPLC's Parent shall, in the absence of clear and demonstrable error, be binding and conclusive upon NAI. "LIBOR PERIOD ELECTION" for any Base Rent Period means a period of one month, three months or six months as designated by NAI at least five Business Days prior to the commencement of such Base Rent Period by a notice given to BNPLC in the form of Exhibit C attached to the Improvements Lease. (For purposes of the Improvements Lease a LIBOR Period Election for any Base Rent Period shall also be considered the LIBOR Period Election in effect on the Base Rent Commencement Date or Base Rent Date upon which such Base Rent Period begins.) Any LIBOR Period Election so designated by NAI shall remain in effect for the entire Base Rent Period specified in NAI's notice to BNPLC (provided such Base Rent Period commences at least ten Business Days after BNPLC's receipt of the notice) and for all subsequent Base Rent Periods until a new designation becomes effective in accordance with the provisions set forth in this definition. Notwithstanding the foregoing, however: (1) NAI shall not be entitled to designate a LIBOR Period Election that would cause a Base Rent Period to extend beyond the end of the scheduled Term; (2) changes in the LIBOR Period Election shall become effective only upon the commencement of a new Base Rent Period; (3) for each Base Rent Period that occurs within any Mandatory Collateral Period, the LIBOR Period Election shall be one month; (4) no LIBOR Period Election designated by NAI hereunder shall be different than the LIBOR Period Election specified under (and as defined in) the Other Common Definitions and Provisions Agreement; and (5) if NAI fails to make a LIBOR Period Election consistent with the foregoing requirements for any Base Rent Period, or if an Event of Default shall have occurred and be continuing on the third Business Day preceding the commencement of any Base Rent Period, the LIBOR Period Election for such Base Rent Period shall be deemed to be one month. "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 lease in the nature thereof, any agreement to sell receivables with recourse, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). In addition, for purposes of subparagraph A.(8) of Part IV of Schedule 1 attached to the Improvements Lease, "Lien" includes any Liens under ERISA relating to Unfunded Benefit Liabilities of which NAI is required to notify BNPLC under subparagraph 13.(a)(vii) of the Improvements Lease (irrespective of whether NAI actually notifies BNPLC as required thereunder). Page 13 <PAGE> 68 "LIENS REMOVABLE BY BNPLC" means, and is limited to, Liens encumbering the Property that are asserted (1) other than as contemplated in the Operative Documents, by BNPLC itself, (2) by third parties lawfully claiming through or under BNPLC (which for purposes of the Improvements Lease shall include any judgment liens established against the Property because of a judgment rendered against BNPLC and shall also include any liens established against the Property to secure past due Excluded Taxes), or (3) by third parties lawfully claiming under a deed or other instrument duly executed by BNPLC; provided, however, Liens Removable by BNPLC shall not include (A) any Permitted Encumbrances or Development Documents (regardless of whether claimed through or under BNPLC), (B) the Operative Documents or any other document executed by BNPLC with the knowledge of (and without objection by) NAI's counsel contemporaneously with the execution and delivery of the Operative Documents, (C) Liens which are neither lawfully claimed through or under BNPLC (as described above) nor claimed under a deed or other instrument duly executed by BNPLC, (D) Liens claimed by NAI or claimed through or under a conveyance made by NAI, (E) Liens arising because of BNPLC's compliance with Applicable Law, the Operative Documents, Permitted Encumbrances, the Development Documents or any written request made by NAI, (F) Liens securing the payment of property taxes or other amounts assessed against the Property by any governmental authority, other than to secure the payment of past due Excluded Taxes or to secure damages caused by (and attributed by any applicable principles of comparative fault to) BNPLC's own Established Misconduct, (G) Liens resulting from or arising in connection with any breach by NAI of the Operative Documents; or (H) Liens resulting from or arising in connection with any Permitted Transfer that occurs more than thirty days after any Designated Sale Date upon which, for any reason, NAI or an Affiliate of NAI or any Applicable Purchaser shall not purchase BNPLC's interest in the Property pursuant to the Purchase Agreement for a cash price to BNPLC (when taken together with any Supplemental Payment made by NAI pursuant to Paragraph 1(A)(2) of the Purchase Agreement, in the case of a purchase by an Applicable Purchaser) equal to the Break Even Price. "LOSSES" means the following: any and all losses, liabilities, damages (whether actual, consequential, punitive or otherwise denominated), demands, claims, administrative or legal proceedings, actions, judgments, causes of action, assessments, fines, penalties, costs and expenses (including 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. "MANDATORY COLLATERAL PERIOD" shall have the meaning assigned to it in Part I of Schedule 1 attached to the Improvements Lease and to the Pledge Agreement. "MATERIAL ENVIRONMENTAL COMMUNICATION" means a communication between NAI or its agents and a regulatory agency or third party, which causes, or potentially could cause (whether by implementation of or response to said communication), a material change in the scope, duration, or nature of any Remedial Work. "MAXIMUM REMARKETING OBLIGATION" shall have the meaning indicated in subparagraph 1(A)(2)(c) of the Purchase Agreement. "MINIMUM EXTENDED REMARKETING PRICE" shall have the meaning assigned to it in subparagraph 2(B) of the Purchase Agreement. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 3(37) of ERISA to which contributions have been made by NAI or any ERISA Affiliate during the preceding six years and which is covered by Title IV of ERISA. Page 14 <PAGE> 69 "NAI" means Network Appliance, Inc., a California corporation. "NAI'S EXTENDED REMARKETING PERIOD" shall have the meaning assigned to it in subparagraph 2(A) of the Purchase Agreement. "NAI'S EXTENDED REMARKETING RIGHT" shall have the meaning assigned to it in subparagraph 2(A) of the Purchase Agreement. "NAI'S INITIAL REMARKETING RIGHTS AND OBLIGATIONS" shall have the meaning assigned to it in subparagraph 1(A)(2) of the Purchase Agreement. "OPERATIVE DOCUMENTS" means the Closing Certificate, the Improvements Lease, the Purchase Agreement, the Pledge Agreement and this Common Definitions and Provisions Agreement (Phase IV - Improvements). "OTHER COMMON DEFINITIONS AND PROVISIONS AGREEMENT" means the Common Definitions and Provisions Agreement (Phase IV - Land), dated as of December ___, 1999, between BNPLC and NAI, as such Common Definitions and Provisions Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "OTHER LEASE AGREEMENT" means the Lease Agreement (Phase IV - Land), dated as of December ___, 1999, between BNPLC and NAI, as such Lease Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "OTHER PURCHASE AGREEMENT" means the Purchase Agreement (Phase IV - Land), dated December ___, 1999, between BNPLC and NAI, as such Purchase Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "PARTICIPANT" means BNPLC's Parent and any other Person that, upon becoming a party to the Participation Agreement and the Pledge Agreement by executing supplements as contemplated therein, agrees from time to time to participate in all or some of the risks and rewards to BNPLC of the Improvements Lease and the Purchase Documents. As of the Effective Date, the only Participant is BNPLC's Parent, but BNPLC may agree after the Effective Date to share in risks and rewards of the Improvements Lease and the Purchase Documents with other Participants. However, no Person other than BNPLC's Parent and its Affiliates shall qualify as a Participant for purposes of the Operative Documents or other agreements concerning the Property to which NAI is a party unless such Person, during the continuance of an Event of Default or otherwise with NAI's prior written approval (which approval will not be unreasonably withheld), became a party to the Pledge Agreement and to the Participation Agreement by executing supplements to those agreements as contemplated therein. "PARTICIPATION AGREEMENT" means the Participation Agreement between BNPLC and BNPLC's Parent dated as of the Effective Date, pursuant to which BNPLC's Parent has agreed to participate in the risks and rewards to BNPLC of the Improvements Lease and the other Operative Documents, as such Participation Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. Page 15 <PAGE> 70 "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "PERIOD" means a Base Rent Period. "PERMITTED ENCUMBRANCES" means (i) the encumbrances and other matters affecting the Property that are set forth in Exhibit B attached to the Closing Certificate, (ii) any easement agreement or other document affecting title to the Property executed by BNPLC at the request of or with the consent of NAI (including the Other Lease Agreement, the Other Purchase Agreement and all documents executed by BNPLC pursuant to the Other Purchase Agreement), (iii) the Premises Leases, (iv) any Liens securing the payment of Impositions which are not delinquent or claimed to be delinquent or which are being contested in accordance with subparagraph 5.(a) of the Improvements Lease, and (iv) mechanics' and materialmen's liens for amounts not past due or claimed to be past due or which are being contested in accordance with subparagraph 11.(c) of the Improvements Lease. "PERMITTED HAZARDOUS SUBSTANCE USE" means the use, generation, 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, generation, storage and disposal shall not: (1) exceed that reasonably required for the operation of the Property for the purposes expressly permitted under subparagraph 2.(a) of the Improvements Lease; or (2) include any disposal, discharge or other release of Hazardous Substances from the Property in any manner that might allow such substances to reach 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 NAI 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 Property in a manner that requires a RCRA treatment, storage or disposal permit, including a landfill, incinerator or other waste disposal facility. "PERMITTED HAZARDOUS SUBSTANCES" means Hazardous Substances used and reasonably required for the use of the Property by NAI and its permitted subtenants and assigns for the purposes expressly permitted by subparagraph 2.(a) of the Improvements Lease, in either case 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 usual and customary office, laboratory and janitorial products. "PERMITTED TRANSFER" means any one or more of the following: (1) the creation or conveyance by BNPLC of rights and interests in favor of any Participant pursuant to the Participation Agreement; (2) the creation or conveyance of rights and interests in favor of or to Banque Nationale de Paris (through its San Francisco Branch or otherwise), as BNPLC's Parent, or any other Qualified Affiliate of BNPLC, provided that NAI must be notified before any such conveyance to Banque Nationale de Paris or another Qualified Affiliate of (A) any interest in the Property or any portion thereof by an assignment or other document which will be recorded in the real property Page 16 <PAGE> 71 records of San Mateo County, California or (B) BNPLC's entire interest in the Land and the Property; (3) any assignment or conveyance by BNPLC or its permitted successors or assigns to any present or future Participant of any lien or security interest against the Property (in contrast to a conveyance of BNPLC's fee estate in the Land and Improvements) or of any interest in Rent, payments required by or under the Purchase Documents or payments to be generated from the Property after the Term, provided that such assignment or conveyance is made expressly subject to the rights of NAI under the Operative Documents; (4) any agreement to exercise or refrain from exercising rights or remedies under the Operative Documents made by BNPLC with any present or future Participant; (5) any assignment or conveyance by BNPLC requested by NAI or required by any Permitted Encumbrance, by the Purchase Agreement, by the Existing Contract, by any other Development Contract or by Applicable Laws; or (6) any assignment or conveyance after a Designated Sale Date on which NAI shall not have purchased or caused an Applicable Purchaser to purchase BNPLC's interest in the Property and, if applicable, after the expiration of the thirty day cure period specified in Paragraph 4(D) of the Purchase Agreement. "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. "PERSONAL PROPERTY" shall have the meaning assigned to it on page 2 of the Improvements Lease. "PLAN" means any employee benefit or other plan established or maintained, or to which contributions have been made, by NAI or any ERISA Affiliate of NAI during the preceding six years and which is covered by Title IV of ERISA, other than a Multiemployer Plan. "PLEDGE AGREEMENT" means the Pledge Agreement (Phase IV - Improvements) dated as of the date hereof between BNPLC and NAI, pursuant to which NAI may pledge certificates of deposit as security for NAI's obligations under the Purchase Agreement (and for the corresponding obligations of BNPLC 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. "PREMISES LEASES" means the four subleases of space within the Improvements, each between NAI, as landlord, and TRW Inc., as tenant, executed of even date herewith, and any subleases or other transfers under and permitted by the terms of any such leases. "PRIME RATE" means the prime interest rate or equivalent charged by BNPLC's Parent in the United States of America as announced or published by BNPLC's Parent from time to time, which need not be the lowest interest rate charged by BNPLC's Parent. If for any reason BNPLC's Parent does not announce or publish a prime rate or equivalent, the prime rate or equivalent announced or published by either CitiBank, N.A. or any New York branch or office of Credit Commercial de France as selected by BNPLC shall be used to compute the rate describe in the preceding sentence. 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 Effective Date without notice to NAI as of the effective time of each change in rates described in this definition. "PROPERTY" means the Personal Property and the Real Property, collectively. The fee interest in the Land itself will not be included in the Property. Any rights, titles and interests acquired by BNPLC under the Existing Contract, to the extent not covered by the Improvements Lease and thus not encompassed within this definition of Page 17 <PAGE> 72 Property, are intended to be covered by the Other Lease Agreement and encompassed within the term "Property" as defined in the Other Common Definitions and Provisions. "PURCHASE AGREEMENT" means the Purchase Agreement (Phase IV - Improvements) dated as of December _____, 1999 between BNPLC and NAI, as such Purchase Agreement may be extended, supplemented, amended, restated or otherwise modified from time to time in accordance with its terms. "PURCHASE DOCUMENTS" means collectively (1) the Purchase Agreement, (2) the Memorandum of Purchase Agreement executed by BNPLC and NAI as of the Effective Date and recorded to provide notice of the Purchase Agreement; and (3) the Pledge Agreement and all financing statements, notices, acknowledgments and certificates of deposit executed or delivered from time to time by NAI, BNPLC or the other parties to the Pledge Agreement pursuant to and as expressly provided therein. "PURCHASE OPTION" shall have the meaning assigned to it in subparagraph 1(A)(1) of the Purchase Agreement. "QUALIFIED AFFILIATE" means any Person that is one hundred percent (100%) owned, directly or indirectly, by Banque Nationale de Paris or any successor of such bank; provided, that such Person can make (and has in writing made) the same representations to NAI that BNPLC has made in Paragraphs 3(D) and 3(E) of the Closing Certificate; and, provided, further, that such Person is not insolvent. "QUALIFIED PREPAYMENTS" means any payments received by BNPLC from time to time during the Term (1) under any property insurance policy as a result of damage to the Property, (2) as compensation for any restriction placed upon the use or development of the Property or for the condemnation of the Property or any portion thereof, (3) because of any judgment, decree or award for injury or damage to the 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 Property; provided, however, that (x) in determining the amount of "Qualified Prepayments", there shall be deducted all expenses and costs of every kind, type and nature (including taxes, Breakage Costs and Attorneys' Fees) incurred by BNPLC with respect to the collection or application of such payments, (y) "Qualified Prepayments" shall not include any payment to BNPLC by a Participant or an Affiliate of BNPLC that is made to compensate BNPLC for the Participant's or Affiliate's share of any Losses BNPLC may incur as a result of any of the events described in the preceding clauses (1) through (4) and (z) "Qualified Prepayments" shall not include any payments received by BNPLC that BNPLC has paid or is obligated to pay to NAI for the restoration or repair of the Property or that BNPLC is holding as Escrowed Proceeds pursuant to Paragraph 10 of the Improvements Lease or any other provision of the Improvements Lease. For purposes of computing the total Qualified Prepayments (and other amounts dependent upon Qualified Prepayments, such as Stipulated Loss Value) paid to or received by BNPLC as of any date, payments described in the preceding clauses (1) through (4) will be considered as Escrowed Proceeds, not Qualified Prepayments, until they are actually applied as Qualified Prepayments by BNPLC as provided in the Paragraph 10 of the Improvements Lease. "REAL PROPERTY" shall have the meaning assigned to it on page 1 of the Improvements Lease. "REMEDIAL WORK" means any investigation, monitoring, clean-up, containment, remediation, removal, payment of response costs, or restoration work and the preparation and implementation of any closure or other required remedial plans that any governmental agency or political subdivision requires or approves (or could reasonably be expected to require if it was aware of all relevant circumstances concerning the Property), whether Page 18 <PAGE> 73 by judicial order or otherwise, because of the presence of or suspected presence of Hazardous Substances in, on, under or about the Property or because of any prior Hazardous Substance Activity. Without limiting the generality of the foregoing, Remedial Work also means any obligations imposed upon or undertaken by NAI pursuant to Development Documents or any recommendations or proposals made therein. "RENT" means the Base Rent and all Additional Rent. "RESIDUAL RISK PERCENTAGE" means seventeen percent (17%). "RESPONSIBLE FINANCIAL OFFICER" means the chief financial officer, the controller, the treasurer or the assistant treasurer of NAI. "SALE CLOSING DOCUMENTS" shall have the meaning assigned to it in subparagraph 1(C) of the Purchase Agreement. "SECURED SPREAD" means thirty basis points (30/100 of 1%); provided, however, that for purposes of calculating the Base Rent for any period commencing on a Failed Collateral Test Date and continuing through the next Collateral Test Date (under and as defined in Schedule 1 attached to the Lease) that does not constitute a Failed Collateral Test Date, the Secured Spread shall equal one-half of the Unsecured Spread. "SELLER" means, collectively, TRW Inc., an Ohio corporation, and ESL Incorporated, a California corporation. "STIPULATED LOSS VALUE" as of any date means the amount equal to the sum of the Initial Funding Advance, minus all funds actually received by BNPLC and applied as Qualified Prepayments on or prior to such date. Under no circumstances will any payment of Base Rent, the Arrangement Fee, the Upfront Syndication Fees, or Administrative Agency Fees reduce Stipulated Loss Value. "SUBSIDIARY" means, with respect to any Person, any Affiliate of which at least a majority of the securities or other ownership interests having ordinary voting power then exercisable for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by such Person. "SUPPLEMENTAL PAYMENT" shall have the meaning assigned to it in subparagraph 1(A)(2)(c) of the Purchase Agreement. "TERM" shall have the meaning assigned to it in subparagraph 1.(a) of the Improvements Lease. "THIRD PARTY PRICE" shall have the meaning assigned to it in subparagraph 1(A)(2) of the Purchase Agreement. "THIRD PARTY SALE NOTICE" shall have the meaning assigned to it in subparagraph 2(C) of the Purchase Agreement. "THIRD PARTY SALE PROPOSAL" shall have the meaning assigned to it in subparagraph 2(C) of the Purchase Agreement. Page 19 <PAGE> 74 "THIRD PARTY TARGET PRICE" shall have the meaning assigned to it in subparagraph 2(C) of the Purchase Agreement. "TRANSACTION EXPENSES" means costs incurred in connection with the preparation and negotiation of the Operative Documents and related documents and the consummation of the transactions contemplated therein. "UNFUNDED BENEFIT LIABILITIES" means, with respect to any Plan or Multiemployer 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 or Multiemployer Plan exceeds the market value of all Plan or Multiemployer assets allocable to such benefit liabilities, as determined on the most recent valuation date of the Plan or Multiemployer Plan and in accordance with the provisions of ERISA for calculating the potential liability of NAI or any ERISA Affiliate of NAI under Title IV of ERISA. "UNSECURED SPREAD" means, for any period beginning on and including the Base Rent Commencement Date or a Base Rent Date and ending on but not including the next Base Rent Date, the amount established as described below in this definition on the date (in this definition, the "SPREAD TEST DATE") that is two Business Days prior to such period by reference to the ratio calculated by dividing (1) Adjusted EBIT for the then latest Rolling Four Quarters Period that ended prior to (and for which NAI has reported earnings as necessary to compute Adjusted EBIT) into (2) the total Debt of NAI and its Subsidiaries (determined on a consolidated basis) as of the end of such Rolling Four Quarters Period. The Unsecured Spread shall be established at the Level in the pricing grid below which corresponds to such ratio; provided, that: (a) for any period commencing on or prior to the first Business Day of February, 2000, the Unsecured Spread will be the amount indicated for Level III in the pricing grid below plus 100 basis points; (b) promptly after earnings are reported by NAI for the latest quarter in any Rolling Four Quarters Period, NAI must notify BNPLC of any resulting change in the Unsecured Spread under this definition, and no reduction in the Unsecured Spread from one period to the next will be effective for purposes of the Operative Documents unless, prior to the Spread Test Date for the next period, NAI shall have provided BNPLC with a written notice setting forth and certifying the calculation under this definition that justifies the reduction; and (c) notwithstanding anything to the contrary in this definition, on any date when an Event of Default has occurred and is continuing, the Unsecured Spread shall equal the Default Rate less the Effective Rate. <TABLE> <CAPTION> ==================================================================================================== LEVELS RATIO OF TOTAL DEBT TO ADJUSTED EBIT UNSECURED SPREAD - ---------------------------------------------------------------------------------------------------- <S> <C> <C> Level I less than 0.5 125.0 basis points - ---------------------------------------------------------------------------------------------------- Level II greater than or equal to 0.5, but 137.5 basis points less than 1.0 - ---------------------------------------------------------------------------------------------------- </TABLE> Page 20 <PAGE> 75 <TABLE> <S> <C> <C> - ---------------------------------------------------------------------------------------------------- Level III greater than or equal to 1.0, but 150.0 basis points less than 1.5 - ---------------------------------------------------------------------------------------------------- Level IV greater than or equal to 1.5, but 175.0 basis points less than 2.0 - ---------------------------------------------------------------------------------------------------- Level V greater than or equal to 2.0 200.0 basis points ==================================================================================================== </TABLE> All determinations of the Unsecured Spread by BNPLC shall, in the absence of clear and demonstrable error, be binding and conclusive for purposes of the Improvements Lease. Further BNPLC may, but shall not be required, to rely on the determination of the Unsecured Spread set forth in any notice delivered by NAI as described above in clause (b) of this definition. "UPFRONT SYNDICATION FEES" shall have the meaning assigned to it in subparagraph 2(M) of the Closing Certificate and Agreement. "VOLUNTARY RETENTION OF THE PROPERTY" means an affirmative election made by BNPLC to keep the Property pursuant to, and under the circumstances described in, the second sentence of subparagraph 1(A)(2)(a) of the Purchase Agreement. ARTICLE II - RULES OF INTERPRETATION THE FOLLOWING PROVISIONS WILL APPLY TO AND GOVERN THE INTERPRETATION OF EACH OF THE OPERATIVE DOCUMENTS: 1 NOTICES. The provision of any Operative Document, or of any Applicable Laws with reference to the sending, mailing or delivery of any notice or demand under any Operative Document or with reference to the making of any payment required under any Operative Document, shall be deemed to be complied with when and if the following steps are taken: (i) All Rent and other amounts required to be paid by NAI to BNPLC shall be paid to BNPLC in immediately available funds by wire transfer to: Federal Reserve Bank of New York ABA 026007689 Banque Nationale de Paris /BNP/ BNP San Francisco /AC/ 14334000176 /Ref/ NAI Sunnyvale Synthetic Improvements Lease (Phase IV) or at such other place and in such other manner as BNPLC may designate in a notice to NAI. Page 21 <PAGE> 76 (ii) All Collateral required to be paid by NAI to the Agent shall be paid in immediately available funds by wire transfer to: Federal Reserve Bank of New York ABA 026007689 Banque Nationale de Paris /BNP/ BNP San Francisco /AC/ 14334000176 /Ref/ NAI Collateral Payment or at such other place and in such other manner as Agent may designate in a notice to NAI. (iii) [intentionally deleted]; (iv) All notices, demands, approvals, consents and other communications to be made under any Operative Document to or by the parties thereto must, to be effective for purpose of such Operative Document, be in writing. Notices, demands and other communications required or permitted under any Operative Document are to be sent to the addresses set forth below (or in the case of communications to Participants, at the addresses set forth in Schedule 1 to 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 (B) hereof shall be deemed received upon such personal service or upon dispatch by electronic means, and, if sent pursuant to clause (C) shall be deemed received five days following deposit in the mail. Address of BNPLC: BNP Leasing Corporation 12201 Merit Drive Suite 860 Dallas, Texas 75251 Attention: Lloyd G. Cox Telecopy: (972) 788-9191 With a copy to: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, California 94104 Attention: Gavin Holles Telecopy: (415) 296-8954 And for draw requests and funding notices, with a copy to: Banque Nationale de Paris, San Francisco Page 22 <PAGE> 77 180 Montgomery Street San Francisco, California 94104 Attention: George Fung Telecopy: (415) 956-4230 Address of NAI: Network Appliance, Inc. Attn: Leslie Paulides 2770 San Thomas Expressway Santa Clara, CA 95051 Telecopy: (408) 367-3452 2 SEVERABILITY. If any term or provision of any Operative Document or the application thereof shall to any extent be held by a court of competent jurisdiction to be invalid and unenforceable, the remainder of such document, 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. 3 NO MERGER. There shall be no merger of the Improvements Lease or of the leasehold estate created by the Improvements Lease with any other interest in the Property by reason of the fact that the same person may acquire or hold, directly or indirectly, the Improvements Lease or the leasehold estate created hereby and any other interest in the Property, unless all Persons with an interest in the Property that would be adversely affected by any such merger specifically agree in writing that such a merger shall occur. There shall be no merger of the Purchase Agreement or of the purchase options or obligations created by the Purchase Agreement with any other interest in the Property by reason of the fact that the same person may acquire or hold, directly or indirectly, the Improvements Lease or the leasehold estate created hereby and any other interest in the Property, unless all Persons with an interest in the Property that would be adversely affected by any such merger specifically agree in writing that such a merger shall occur. 4 NO IMPLIED WAIVER. The failure of BNPLC or NAI 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 any Operative Document shall not be construed as a waiver or a relinquishment thereof for the future. The failure of Agent 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 the Pledge Agreement shall not be construed as a waiver or a relinquishment thereof for the future. The waiver of or redress for any breach of any Operative Document by any party thereto shall not prevent a similar subsequent act from constituting a violation. Any express waiver of any provision of any Operative Document shall affect only the term or condition specified in such waiver and only for the time and in the manner specifically stated therein. No waiver by any party to any Operative Document of any provision therein shall be deemed to have been made unless expressed in writing and signed by the party to be bound by the waiver. A receipt by BNPLC of any Rent with knowledge of the breach by NAI of any covenant or agreement contained in the Improvements Lease or any other Operative Document shall not be deemed a waiver of such breach. A receipt by Agent of any Collateral or other payment under the Pledge Agreement with knowledge of the breach by NAI of any covenant or agreement contained in the Pledge Agreement shall not be deemed a waiver of such breach. Page 23 <PAGE> 78 5 ENTIRE AND ONLY AGREEMENTS. The Operative Documents supersede any prior negotiations and agreements between BNPLC, Agent and NAI concerning the Property or the Collateral, and no amendment or modification of any Operative Document shall be binding or valid unless expressed in a writing executed by all parties to such Operative Document. 6 BINDING EFFECT. Except to the extent, if any, expressly provided to the contrary in any Operative Document with respect to assignments thereof, all of the covenants, agreements, terms and conditions to be observed and performed by the parties to the Operative Documents shall be applicable to and binding upon their respective successors and, to the extent assignment is permitted thereunder, their respective assigns. 7 TIME IS OF THE ESSENCE. Time is of the essence as to all obligations of NAI and BNPLC and all notices required of NAI and BNPLC under the Operative Documents. 8 GOVERNING LAW. Each Operative Document shall be governed by and construed in accordance with the laws of the State of California without regard to conflict or choice of laws (subject, however, in the case of the Pledge Agreement to any contrary provisions of the "UCC," as defined in the Pledge Agreement). 9 PARAGRAPH HEADINGS. The paragraph and section headings contained in the Operative Documents are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several provisions thereof. 10 NEGOTIATED DOCUMENTS. All the parties to each Operative Document and their counsel have reviewed and revised or requested revisions to such Operative Document, and the usual rule of construction that any ambiguities are to be resolved against the drafting party shall not apply to the construction or interpretation of any Operative Documents or any amendments thereof. 11 TERMS NOT EXPRESSLY DEFINED IN AN OPERATIVE DOCUMENT. As used in any Operative Document, a capitalized term that is not defined therein or in this Common Definitions and Provisions Agreement (Phase IV - Improvements), but is defined in another Operative Document, shall have the meaning ascribed to it in the other Operative Document. 12 OTHER TERMS AND REFERENCES. Words of any gender used in each Operative Document 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 in any Operative Document to Paragraphs, subparagraphs, Sections, subsections or other subdivisions shall refer to the corresponding Paragraphs, subparagraphs, Sections, subsections or subdivisions of that Operative Document, unless specific reference is made to another document or instrument. References in any Operative Document to any Schedule or Exhibit shall refer to the corresponding Schedule or Exhibit attached to that Operative Document, which shall be made a part thereof by such reference. All capitalized terms used in each Operative Document 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 in the Operative Documents or, in the case of any other document to which BNPLC is a party or of which BNPLC is an intended beneficiary, without the consent of BNPLC. All accounting terms used but not specifically defined in any Operative Document shall be construed in accordance with GAAP. The words "this [Agreement]", "herein", "hereof", "hereby", "hereunder" and words of similar import when used in each Operative Document refer to that Operative Document as a whole and not to any particular Page 24 <PAGE> 79 subdivision unless expressly so limited. The phrases "this Paragraph", "this subparagraph", "this Section", "this subsection" and similar phrases used in any operative document refer only to the Paragraph, subparagraph, Section, subsection or other subdivision described in which the phrase occurs. As used in the Operative Documents the word "or" is not exclusive. As used in the Operative Documents, the words "include", "including" and similar terms shall be construed as if followed by "without limitation to". 13 EXECUTION IN COUNTERPARTS. To facilitate execution, each Operative Document may be executed in as many identical counterparts as may be required. It shall not be necessary that the signature of, or on behalf of, each party, or that the signature of all persons required to bind any party, appear on each counterpart. All counterparts, taken together, shall collectively constitute a single instrument. It shall not be necessary in making proof of any Operative Document to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, each of the parties hereto. Any signature page to any counterpart may be detached from such counterpart without impairing the legal effect of the signatures thereon and thereafter attached to another counterpart identical thereto except having attached to it additional signature pages. 14 NOT A PARTNERSHIP, ETC. NOTHING IN ANY OPERATIVE DOCUMENT IS INTENDED TO CREATE ANY PARTNERSHIP, JOINT VENTURE, OR OTHER JOINT ENTERPRISE BETWEEN BNPLC AND NAI. NEITHER THE EXECUTION OF ANY OPERATIVE DOCUMENT NOR THE ADMINISTRATION THEREOF OR OTHER DOCUMENTS REFERENCED HEREIN BY BNPLC, NOR ANY OTHER RIGHT, DUTY OR OBLIGATION OF BNPLC UNDER OR PURSUANT TO ANY OPERATIVE DOCUMENT IS INTENDED TO BE OR TO CREATE ANY FIDUCIARY OBLIGATIONS OF BNPLC TO NAI. [The signature pages follows.] Page 25 <PAGE> 80 IN WITNESS WHEREOF, NAI and BNPLC have caused this Common Definitions and Provisions Agreement (Phase IV - Improvements) to be executed as of December ___, 1999. "NAI" NETWORK APPLIANCE, INC. By: ------------------------------------- Name: ------------------------------- Title: ------------------------------ <PAGE> 81 [Continuation of signature pages to Common Definitions and Provisions Agreement (Phase IV - Improvements) dated to be effective December ___, 1999] "BNPLC" BNP LEASING CORPORATION By: ------------------------------------- Lloyd G. Cox, Vice President </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.52 <SEQUENCE>11 <DESCRIPTION>EXHIBIT 10.52 <TEXT> <PAGE> 1 EXHIBIT 10.52 ================================================================================ PURCHASE AGREEMENT (PHASE IV - LAND) BETWEEN BNP LEASING CORPORATION ("BNPLC") AND NETWORK APPLIANCE, INC. ("NAI") DECEMBER ___, 1999 (SUNNYVALE, CALIFORNIA) ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> <C> 1. NAI'S OPTIONS AND OBLIGATIONS ON THE DESIGNATED SALE DATE............................1 (A) Right to Purchase; Right and Obligation to Remarket...........................1 (B) Determinations Concerning Price...............................................2 (C) Designation of the Purchaser..................................................3 (D) Effect of the Purchase Option and NAI's Initial Remarketing Rights and Obligations on Subsequent Title Encumbrances..................................4 (E) Security for the Purchase Option and NAI's Initial Remarketing Rights and Obligations...............................................................4 (F) Delivery of Books and Records If BNPLC Retains the Property...................4 2. NAI'S RIGHTS AND OPTIONS AFTER THE DESIGNATED SALE DATE..............................4 (A) NAI's Extended Right to Remarket..............................................4 (B) Definition of Minimum Extended Remarketing Price..............................5 (C) BNPLC's Right to Sell.........................................................6 (D) NAI's Right to Excess Sales Proceeds..........................................6 (E) Permitted Transfers During NAI's Extended Remarketing Period..................6 3. TERMS OF CONVEYANCE UPON PURCHASE....................................................6 4. SURVIVAL AND TERMINATION OF THE RIGHTS AND OBLIGATIONS OF NAI AND BNPLC..............7 (A) Status of this Agreement Generally............................................7 (B) Intentionally Deleted.........................................................8 (C) Intentionally Deleted.........................................................8 (D) Automatic Termination of NAI's Rights.........................................8 (E) Termination of NAI's Extended Remarketing Rights to Permit a Sale by BNPLC.........................................................................8 (F) Payment Only to BNPLC.........................................................8 (G) Remedies Under the Other Operative Documents..................................8 (H) Occupancy by NAI Prior to Closing of a Sale...................................8 5. SECURITY FOR NAI'S OBLIGATIONS; RETURN OF FUNDS......................................8 6. CERTAIN REMEDIES CUMULATIVE..........................................................9 7. ATTORNEYS' FEES AND LEGAL EXPENSES...................................................9 8. ESTOPPEL CERTIFICATE.................................................................9 9. SUCCESSORS AND ASSIGNS...............................................................9 10. GROUND LEASE TERM AND EARLY TERMINATION BY BNPLC.....................................2 11. NO OTHER GROUND LEASE TERMINATION....................................................2 12. GROUND LEASE RENT....................................................................3 13. USE OF GL PROPERTY...................................................................3 (A) Permitted Uses and Construction of Improvements...............................3 (B) Cooperation by Lessor and its Affiliates......................................3 (C) Title to Improvements.........................................................3 14. ASSIGNMENT AND SUBLETTING; PASS THROUGH OF BNPLC'S LIABILITY INSURANCE AND INDEMNITY RIGHTS.....................................................................3 15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSOR..................................4 (A) Title to the Property.........................................................4 (B) Modification of Permitted Encumbrances and Development Documents..............4 (C) Performance and Preservation of the Development Documents and Permitted </TABLE> <PAGE> 3 <TABLE> <CAPTION> Page ---- <S> <C> <C> Encumbrances for the Benefit of BNPLC................................................4 16. INSURANCE AND CONDEMNATION...........................................................5 (A) Entitlement to Insurance and Condemnation Proceeds............................5 (B) Collection of Insurance Proceeds..............................................5 (C) Collection of Condemnation Proceeds...........................................5 17. LEASEHOLD MORTGAGES..................................................................5 18. EVENTS OF DEFAULT....................................................................7 (A) Definition of Ground Lease Default............................................7 (B) Remedy........................................................................7 19. QUIET ENJOYMENT......................................................................7 20. ESTOPPEL CERTIFICATE.................................................................7 21. OPTION TO REPURCHASE.................................................................8 </TABLE> <PAGE> 4 Exhibits and Schedules Exhibit A......................................................Legal Description Exhibit B...................Requirements Re: Form of Grant Deed and Ground Lease Exhibit C............................................Bill of Sale and Assignment Exhibit D..........................................Acknowledgment and Disclaimer Exhibit E................................................Secretary's Certificate Exhibit F.................................Certificate Concerning Tax Withholding <PAGE> 5 PURCHASE AGREEMENT (PHASE IV - LAND) This PURCHASE AGREEMENT (PHASE IV - LAND) (this "AGREEMENT"), by and between BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), and NETWORK APPLIANCE, INC., a California corporation ("NAI"), is made and dated as of December ___, 1999, the Effective Date. ("EFFECTIVE DATE" and other capitalized terms used and not otherwise defined in this Agreement are intended to have the meanings assigned to them in the Common Definitions and Provisions Agreement (Phase IV - Land) executed by BNPLC and NAI contemporaneously with this Agreement. By this reference, the Common Definitions and Provisions Agreement (Phase IV - Land) is incorporated into and made a part of this Agreement for all purposes.) RECITALS Pursuant to the Existing Contract, which covers the Land described in Exhibit A, BNPLC is acquiring the Land and any appurtenances thereto from Seller contemporaneously with the execution of this Agreement. Pursuant to the Lease Agreement (Phase IV - Land) executed by BNPLC and NAI contemporaneously with this Agreement (the "LAND LEASE"), BNPLC is leasing the Land to NAI. (All of BNPLC's interests, including those created by the documents delivered at the closing under the Existing Contracts, in the Land and in all other real and personal property from time to time covered by the Land Lease and included within the "Property" as defined therein are hereinafter collectively referred to as the "PROPERTY". The Property does not include the Improvements, it being understood that the Other Purchase Agreement constitutes a separate agreement providing for the possible sale of the Improvements and the appurtenances thereto, and only the Improvements and the appurtenances thereto, from BNPLC to NAI or a third party designated by NAI.) NAI and BNPLC have reached agreement upon the terms and conditions upon which NAI will purchase or arrange for the purchase of the Property, and by this Agreement they desire to evidence such agreement. AGREEMENTS 1. NAI'S OPTIONS AND OBLIGATIONS ON THE DESIGNATED SALE DATE. (A) Right to Purchase; Right and Obligation to Remarket. Whether or not an Event of Default shall have occurred and be continuing or the Land Lease shall have been terminated, but subject to Paragraph 4 below: (1) NAI shall have the right (the "PURCHASE OPTION") to purchase or cause an Affiliate of NAI to purchase the Property and BNPLC's interest in Escrowed Proceeds, if any, on the Designated Sale Date for a cash price equal to the Break Even Price (as defined below). (2) If neither NAI nor an Affiliate of NAI purchases the Property and BNPLC's interest in any Escrowed Proceeds on the Designated Sale Date as provided in the preceding subparagraph 1(A)(1), then NAI shall have the following rights and obligations (collectively, "NAI'S INITIAL REMARKETING RIGHTS AND OBLIGATIONS"): (a) First, NAI shall have the right (but not the obligation) to cause an Applicable Purchaser who is not an Affiliate of NAI to purchase the Property and BNPLC's interest in any <PAGE> 6 Escrowed Proceeds on the Designated Sale Date for a cash purchase price (the "THIRD PARTY PRICE") determined as provided below. If, however, the Break Even Price exceeds the sum of any Third Party Price tendered or to be tendered to BNPLC by an Applicable Purchaser and any Supplemental Payment paid by NAI as described below, then BNPLC may affirmatively elect to decline such tender from the Applicable Purchaser and to keep the Property and any Escrowed Proceeds rather than sell to the Applicable Purchaser pursuant to this subparagraph (a "VOLUNTARY RETENTION OF THE PROPERTY"). (b) Second, if the Third Party Price actually paid by an Applicable Purchaser to BNPLC on the Designated Sale Date exceeds the Break Even Price, NAI shall be entitled to such excess, subject, however, to BNPLC's right to offset against such excess any and all sums that are then due from NAI to BNPLC under the other Operative Documents. (c) Third, if for any reason whatsoever (including a Voluntary Retention of the Property or a decision by NAI not to exercise its right to purchase or cause an Applicable Purchaser to purchase from BNPLC as described above) neither NAI nor an Applicable Purchaser pays a net cash price to BNPLC on the Designated Sale Date equal to or in excess of the Break Even Price in connection with a sale of the Property and BNPLC's interest in any Escrowed Proceeds pursuant to this Agreement, then NAI shall have the obligation to pay to BNPLC on the Designated Sale Date a supplemental payment (the "SUPPLEMENTAL PAYMENT") equal to the lesser of (1) the amount by which the Break Even Price exceeds such net cash price (if any) actually received by BNPLC on the Designated Sale Date (such excess being hereinafter called a "DEFICIENCY") or (2) the Maximum Remarketing Obligation. As used herein, the "MAXIMUM REMARKETING OBLIGATION" means a dollar amount determined in accordance with the following provisions: 1) The "MAXIMUM REMARKETING OBLIGATION" will equal the product of (i) Stipulated Loss Value on the Designated Sale Date, times (ii) 100% minus the Residual Risk Percentage, provided that both of the following conditions are satisfied: (x) NAI shall not have elected to accelerate the Designated Sale Date as provided in clause (2) of the definition of Designated Sale Date in the Common Definitions and Provisions Agreement (Phase IV - Land). (y) No Event of Default, other than an Issue 97-1 Non-performance-related Subjective Event of Default, shall occur on or be continuing on the Designated Sale Date. 2) If either of the conditions listed in subparagraph 1) preceding are not satisfied, the "MAXIMUM REMARKETING OBLIGATION" will equal the Break Even Price. If any Supplemental Payment or other amount payable to BNPLC pursuant to this subparagraph 1(A) is not actually paid to BNPLC on the Designated Sale Date, NAI shall pay interest on the past due amount computed at the Default Rate from the Designated Sale Date. (B) Determinations Concerning Price. (1) Determination of the Break Even Price. As used herein, "BREAK EVEN PRICE" means an amount equal, on the Designated Sale Date, to Stipulated Loss Value, plus all out-of-pocket costs 2 <PAGE> 7 and expenses (including appraisal costs, withholding taxes (if any) not constituting Excluded Taxes, and Attorneys' Fees) incurred by BNPLC in connection with any sale of BNPLC's interests in the Property under this Agreement or in connection with collecting payments due hereunder, but less the aggregate amounts (if any) of Direct Payments to Participants and Deposit Taker Losses. (2) Determination of Third Party Price. The Third Party Price required of any Applicable Purchaser purchasing from BNPLC under subparagraph 1(A)(2)(a) will be determined as follows: (a) NAI may give a notice (a "REMARKETING NOTICE") to BNPLC and to each of the Participants no earlier than one hundred twenty days before the Designated Sale Date and no later than ninety days before the Designated Sale Date, specifying an amount as the Third Party Price that NAI believes in good faith to constitute reasonably equivalent value for the Property and any Escrowed Proceeds. Once given, a Remarketing Notice shall not be rescinded or modified without BNPLC's written consent. (b) If BNPLC believes in good faith that the Third Party Price specified by NAI in a Remarketing Notice does not constitute reasonably equivalent value for the Property and any Escrowed Proceeds, BNPLC may at any time before sixty days prior to the Designated Sale Date respond to the Remarketing Notice with a notice back to NAI, objecting to the Third Party Price so specified by NAI. If BNPLC receives a Remarketing Notice, yet does not respond with an objection as provided in the preceding sentence, the Third Party Price suggested by NAI in the Remarketing Notice will be the Third Party Price for purposes of this Agreement. If, however, BNPLC does respond with an objection as provided in this subparagraph, and if NAI and BNPLC do not otherwise agree in writing upon a Third Party Price, then the Third Party Price will be the lesser of (I) fair market value of the Property, plus the amount of any Escrowed Proceeds, as determined by a professional independent appraiser satisfactory to BNPLC, or (II) the Break Even Price. (c) If for any reason, including an acceleration of the Designated Sale Date as provided in the definition thereof in the Common Definitions and Provisions Agreement (Phase IV - Land), NAI does not deliver a Remarketing Notice to BNPLC within the time period specified above, then the Third Party Price will be an amount determined in good faith by BNPLC as constituting reasonably equivalent value for the Property and any Escrowed Proceeds, but in no event more than the Break Even Price. If any payment to BNPLC by an Applicable Purchaser hereunder is held to constitute a preference or a voidable transfer under Applicable Law, or must for any other reason be refunded by BNPLC to the Applicable Purchaser or to another Person, and if such payment to BNPLC reduced or had the effect of reducing a Supplemental Payment or increased or had the effect of increasing any excess sale proceeds paid to NAI pursuant to subparagraph 1(A)(2)(b) or pursuant to subparagraph 2(D), then NAI shall pay to BNPLC upon demand an amount equal to the reduction of the Supplemental Payment or to the increase of the excess sale proceeds paid to NAI, as applicable, and this Agreement shall continue to be effective or shall be reinstated as necessary to permit BNPLC to enforce its right to collect such amount from NAI. (C) Designation of the Purchaser. To give BNPLC the opportunity before the Designated Sale Date to prepare the deed and other documents that BNPLC must tender pursuant to Paragraph 3 (collectively, the "SALE CLOSING DOCUMENTS"), NAI must, by a notice to BNPLC given at least seven days prior to the Designated Sale Date, specify irrevocably, unequivocally and with particularity the party who will purchase the Property in 3 <PAGE> 8 order to satisfy the obligations of NAI set forth in subparagraph 1(A). If for any reason NAI fails to so specify a party who will in accordance with the terms and conditions set forth herein purchase the Property (be it NAI itself, an Affiliate of NAI or another Applicable Purchaser), BNPLC shall be entitled to postpone the tender of the Sale Closing Documents until a date after the Designated Sale Date and not more than twenty days after NAI finally does so specify a party, but such postponement will not relieve or postpone the obligation of NAI to make a Supplemental Payment on the Designated Sale Date as provided in Paragraph 1(A)(2)(c). (D) Effect of the Purchase Option and NAI's Initial Remarketing Rights and Obligations on Subsequent Title Encumbrances. Any conveyance of the Property to NAI or any Applicable Purchaser pursuant to this Paragraph 1(A) shall cut off and terminate any interest in the Land or other Property claimed by, through or under BNPLC, including any interest claimed by the Participants and including any Liens Removable by BNPLC (such as, but not limited to, any judgment liens established against the Property because of a judgment rendered against BNPLC and any leasehold or other interests conveyed by BNPLC in the ordinary course of BNPLC's business), but not including personal obligations of NAI to BNPLC under the Land Lease or other Operative Documents (including obligations arising under the indemnities therein). 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 Purchase Option and NAI's Initial Remarketing Rights and Obligations. Further, NAI 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 NAI nor any Applicable Purchaser shall be responsible for the proper distribution or application of any such payments by BNPLC; and any such payment to BNPLC shall discharge the obligation of NAI to cause such payment to all Persons claiming an interest in such payment. Contemporaneously with the execution of this Agreement, the parties shall record a memorandum of this Agreement for purposes of effecting constructive notice to all Persons of NAI's rights under this Agreement, including its rights under this subparagraph. (E) Security for the Purchase Option and NAI's Initial Remarketing Rights and Obligations. To secure BNPLC's obligation to sell the Property pursuant to this Paragraph 1(A) and to pay any damages to NAI caused by a breach of such obligations, 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 NAI a lien and security interest against all rights, title and interests of BNPLC from time to time in and to the Land and other Property. NAI may enforce such lien and security interest judicially after any such breach by BNPLC, but not otherwise. Contemporaneously with the execution of this Agreement, NAI and BNPLC will execute a memorandum of this Agreement which is in recordable form and which specifically references the lien granted in this subparagraph, and NAI shall be entitled to record such memorandum at any time prior to the Designated Sale Date. (F) Delivery of Books and Records If BNPLC Retains the Property. Unless NAI or its Affiliate or another Applicable Purchaser purchases the Property pursuant to Paragraph 1(A), promptly after the Designated Sale Date NAI shall deliver to BNPLC copies of books and records of NAI which will be necessary or useful to any future owner's or occupant's use of the Property in the manner permitted by the Land Lease. 2. NAI'S RIGHTS AND OPTIONS AFTER THE DESIGNATED SALE DATE. (A) NAI's Extended Right to Remarket. During the two years following the Designated Sale Date ("NAI'S EXTENDED REMARKETING PERIOD"), NAI shall have the right ("NAI'S EXTENDED REMARKETING RIGHT") to cause an Applicable Purchaser who is not an Affiliate of NAI to purchase the Property for a cash purchase price not below the lesser of (I) the Minimum Extended Remarketing Price (as defined below), or (II) if applicable, the Third Party Target Price (as defined below) specified in any Third Party Sale Notice (as defined 4 <PAGE> 9 below) given by BNPLC pursuant to subparagraph 2(C)(2) within the ninety days prior to the date (the "FINAL SALE DATE") upon which BNPLC receives such purchase price from the Applicable Purchaser. NAI's Extended Remarketing Right shall, however, be subject to all of the following conditions: (1) The Property and BNPLC's interest in Escrowed Proceeds, if any, shall not have been sold on the Designated Sale Date as provided in Paragraph 1. (2) No Voluntary Retention of the Property shall have occurred as described in subparagraph 1(A)(2)(a). (3) NAI's Extended Remarketing Right shall not have been terminated pursuant to subparagraph 4(D) below because of NAI's failure to make any Supplemental Payment required on the Designated Sale Date. (4) NAI's Extended Remarketing Right shall not have been terminated by BNPLC pursuant to subparagraph 4(E) below to facilitate BNPLC's sale of the Property to a third party in accordance with subparagraph 2(C). (5) At least thirty days prior to the Final Sale Date, NAI shall have notified BNPLC of (x) the date proposed by NAI as the Final Sale Date (which must be a Business Day), (y) the full legal name of the Applicable Purchaser and such other information as will be required to prepare the Sale Closing Documents, and (z) the amount of the purchase price that the Applicable Purchaser will pay (consistent with the minimum required pursuant to the other provisions of this subparagraph 2(A)) for the Property. (B) Definition of Minimum Extended Remarketing Price. As used herein, "MINIMUM EXTENDED REMARKETING PRICE" means an amount equal to the sum of the following: (1) the amount by which the Break Even Price computed on the Designated Sale Date exceeds any Supplemental Payment actually paid to BNPLC on the Designated Sale Date, together with interest on such excess computed at the Default Rate from the period commencing on the Designated Sale Date and ending on the Final Sale Date, plus (2) all out-of-pocket costs and expenses (including withholding taxes [if any], other than Excluded Taxes, and Attorneys' Fees) incurred by BNPLC in connection with the sale to the Applicable Purchaser, to the extent not already included in the computation of Break Even Price, and plus (3) the sum of all Impositions, insurance premiums and other Losses of every kind suffered or incurred by BNPLC or any other Interested Party with respect to the ownership, operation or maintenance of the Property on or after the Designated Sale Date (except to the extent already reimbursed by any lessee of the Property after the Designated Sale Date), together with interest on such Impositions, insurance premiums and other Losses computed at the Default Rate from the date paid or incurred to the Final Sale Date. If, however, Losses described in the preceding clause (3) consist of claims against BNPLC or another Interested Party that have not been liquidated prior to the Final Sale Date (and, thus, such Losses have yet to be fixed in amount as of the Final Sale Date), then NAI may elect to exclude any such Losses from the computation of the Minimum Extended Remarketing Price by providing to BNPLC, for the benefit of BNPLC and other Interested Parties, a written agreement to indemnify and defend BNPLC and other Interested Parties against such Losses. To be effective hereunder for purposes of reducing the Minimum Extended Remarketing Price (and, thus, the Break 5 <PAGE> 10 Even Price), any such written indemnity must be fully executed and delivered by NAI on or prior to the Final Sale Date, must include provisions comparable to subparagraphs 5(c)(ii), (iii), (iv) and (v) of the Land Lease and otherwise must be in form and substance satisfactory to BNPLC. (C) BNPLC's Right to Sell. After the Designated Sale Date, if the Property has not already been sold by BNPLC pursuant to Paragraph 1 or this Paragraph 2, BNPLC shall have the right to sell the Property or offer the Property for sale to any third party on any terms believed to be appropriate by BNPLC in its sole good faith business judgment; provided, however, that so long as the conditions to NAI's Extended Remarketing Rights specified in subparagraph 2(A) continue to be satisfied: (1) BNPLC shall not sell the Property to an Affiliate of BNPLC on terms less favorable than those which BNPLC would require from a prospective purchaser not an Affiliate of BNPLC; (2) If BNPLC receives or desires to make a written proposal (whether in the form of a "letter of intent" or other nonbinding expression of interest or in the form of a more definitive purchase and sale agreement) for a sale of the Property to a prospective purchaser (a "THIRD PARTY SALE PROPOSAL"), and if on the basis of such Third Party Sale Proposal BNPLC expects to enter into or to pursue negotiations for a definitive purchase and sale agreement with the prospective purchaser, then prior to executing any such definitive agreement, BNPLC shall submit the Third Party Sale Proposal to NAI with a notice (the "THIRD PARTY SALE NOTICE") explaining that (A) BNPLC is then prepared to accept a price not below an amount specified in such Third Party Sale Notice (the "THIRD PARTY TARGET PRICE") if BNPLC and the prospective purchaser reach agreement on other terms and conditions to be incorporated into a definitive purchase and sale agreement, and (B) NAI's Extended Remarketing Right may be terminated pursuant to subparagraph 4(E) of this Agreement unless NAI causes an Applicable Purchaser to consummate a purchase of the Property pursuant to this Paragraph 2 within ninety days after the date of such Third Party Sale Notice. (D) NAI's Right to Excess Sales Proceeds. If the cash price actually paid by any third party purchasing the Property from BNPLC during NAI's Extended Remarketing Period, including any price paid by an Applicable Purchaser purchasing from BNPLC pursuant to this Paragraph 2, exceeds the Minimum Extended Remarketing Price, then NAI shall be entitled to the excess; provided, that BNPLC may offset and retain from the excess any and all sums that are then due and unpaid from NAI to BNPLC under any of the Operative Documents. (E) Permitted Transfers During NAI's Extended Remarketing Period. Any "Permitted Transfer" described in clause (6) of the definition thereof in the Common Definitions and Provisions Agreement (Phase IV - Land) to an Affiliate of BNPLC or that covers BNPLC's entire interest in the Land will be subject to NAI's Extended Remarketing Right if, at the time of the Permitted Transfer, NAI's Extended Remarketing Right has not expired or been terminated as provided herein. Any other Permitted Transfer described in clause (6) of the definition thereof, however, will not be subject to NAI's Extended Remarketing Right. Thus, for example, BNPLC's conveyance of a utility easement or space lease more than thirty days after the Designated Sale Date to a Person not an Affiliate of BNPLC shall not be subject to NAI's Extended Remarketing Right, though following the conveyance of the lesser estate, NAI's Extended Remarketing Right may continue to apply to BNPLC's remaining interest in the Land and any Personal Property. 3. TERMS OF CONVEYANCE UPON PURCHASE. As necessary to consummate any sale of the Property to NAI or an Applicable Purchaser pursuant to this Agreement, BNPLC must, subject to any postponement permitted by subparagraph 1(C), promptly after the tender of the purchase price and any other payments to BNPLC required pursuant to Paragraph 1 or Paragraph 2, as applicable, convey all of BNPLC's right, 6 <PAGE> 11 title and interest in the Land and other Property to NAI or the Applicable Purchaser, as the case may be, by BNPLC's execution, acknowledgment (where appropriate) and delivery of the Sale Closing Documents. Such conveyance by BNPLC will be subject only to the Permitted Encumbrances and any other encumbrances that do not constitute Liens Removable by BNPLC. However, such conveyance shall not include the rights of BNPLC or other Interested Parties under the indemnities provided in the Operative Documents, including rights to any payments then due from NAI under the indemnities or that may become due thereafter because of any expense or liability incurred by BNPLC or another Interested Party resulting in whole or in part from events or circumstances occurring or alleged to have occurred before such conveyance. All costs, both foreseen and unforeseen, of any purchase by NAI or an Applicable Purchaser hereunder shall be the responsibility of the purchaser. The Sale Closing Documents used to accomplish such conveyance shall consist of the following: (1) a Corporation Grant Deed in the form attached as Exhibit B-1 or Exhibit B-2 or Exhibit B-4, as required by Exhibit B, (2) if required by Exhibit B, a Ground Lease in the form attached as Exhibit B-3, which NAI or the Applicable Purchase must execute and return to BNPLC, (3) a Bill of Sale and Assignment in the form attached as Exhibit C, (4) an Acknowledgment of Disclaimer of Representations and Warranties, in the form attached as Exhibit D, which NAI or the Applicable Purchaser must execute and return to BNPLC, (5) a Secretary's Certificate in the form attached as Exhibit E, and (6) a certificate concerning tax withholding in the form attached as Exhibit F. If for any reason BNPLC fails to tender the Sale Closing Documents as required by this Paragraph 3, BNPLC may cure such refusal at any time before thirty days after receipt of a demand for such cure from NAI. 4. SURVIVAL AND TERMINATION OF THE RIGHTS AND OBLIGATIONS OF NAI AND BNPLC. (A) Status of this Agreement Generally. Except as expressly provided herein, this Agreement shall not terminate; nor shall NAI have any right to terminate this Agreement; nor shall NAI be entitled to any reduction of the Break Even Price, any Deficiency, the Maximum Remarketing Obligation, any Supplemental Payment or the Minimum Extended Remarketing Price hereunder; nor shall the obligations of NAI to BNPLC under Paragraph 1 be affected, by reason of (i) any damage to or the destruction of all or any part of the Property from whatever cause (though it is understood that NAI will receive any remaining Escrowed Proceeds yet to be applied as provided in the Land Lease that may result from such damage if NAI purchases the Property and the Escrowed Proceeds as herein provided), (ii) the taking of or damage to the Property or any portion thereof by eminent domain or otherwise for any reason (though it is understood that NAI will receive any remaining Escrowed Proceeds yet to be applied as provided in the Land Lease that may result from such taking or damage if NAI purchases the Property and the Escrowed Proceeds as herein provided), (iii) the prohibition, limitation or restriction of NAI'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 NAI or any party claiming under NAI by paramount title or otherwise, (v) NAI's prior acquisition or ownership of any interest in the Property, (vi) any default on the part of BNPLC under this Agreement, the Land 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 NAI to make payment to BNPLC hereunder shall be separate and independent covenants and agreements from BNPLC's obligations under this Agreement or any other agreement between BNPLC and NAI; provided, however, that nothing in this subparagraph shall excuse BNPLC from its obligation to tender the Sale Closing Documents in substantially the form attached hereto as exhibits when required by Paragraph 3. Further, nothing in this subparagraph shall be construed as a waiver by NAI of any right NAI may have at law or in equity to the following remedies, whether because of BNPLC's failure to remove a Lien Removable by BNPLC or because of any other default by BNPLC under this Agreement: (i) the recovery of monetary damages, (ii) injunctive relief in case of the violation, or attempted or threatened violation, by BNPLC of any of the express covenants, agreements, conditions or provisions of this Agreement which are binding upon BNPLC, or (iii) a decree compelling performance by BNPLC of any of the express covenants, agreements, conditions or provisions of this Agreement which are binding upon BNPLC. 7 <PAGE> 12 (B) Intentionally Deleted. (C) Intentionally Deleted. (D) Automatic Termination of NAI's Rights. Without limiting BNPLC's right to enforce NAI's obligation to pay any Supplemental Payment or other amounts required by this Agreement, the rights of NAI (to be distinguished from the obligations of NAI) included in NAI's Initial Remarketing Rights and Obligations, the Purchase Option and NAI's Extended Remarketing Rights shall all terminate automatically if NAI shall fail to pay the full amount of any Supplemental Payment required by subparagraph 1(A)(2)(c) on the Designated Sale Date or if BNPLC shall elect a Voluntary Retention of the Property as provided in subparagraph 1(A)(2)(a). However, notwithstanding anything in this subparagraph to the contrary, even after a failure to pay any required Supplemental Payment on the Designated Sale Date, NAI may nonetheless tender to BNPLC the full Break Even Price and all amounts then due under the Operative Documents, together with interest on the total Break Even Price computed at the Default Rate from the Designated Sale Date to the date of tender, on any Business Day within thirty days after the Designated Sale Date, and if presented with such a tender within thirty days after the Designated Sale Date, BNPLC must accept it and promptly thereafter deliver any Escrowed Proceeds and the Sale Closing Documents listed in Paragraph 3 to NAI. (E) Termination of NAI's Extended Remarketing Rights to Permit a Sale by BNPLC. At any time more than ninety days after BNPLC has delivered a Third Party Sale Notice to NAI as described in subparagraph 2(C)(2), BNPLC may terminate NAI's Extended Remarketing Rights contemporaneously with the consummation of a sale of the Property by BNPLC to any third party (be it the prospective purchaser named in the Third Party Sale Notice or another third party) at a price equal to or in excess of the Third Party Target Price specified in the Third Party Sale Notice, so as to permit the sale of the Property unencumbered by NAI's Extended Remarketing Rights. (F) Payment Only to BNPLC. All amounts payable under this Agreement by NAI and, if applicable, by an 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 subparagraph 1(A), on the Designated Sale Date NAI must pay all amounts then due to BNPLC under the Land Lease or other Operative Documents. (G) Remedies Under the Other Operative Documents. No repossession of or re-entering upon the Property or exercise of any other remedies available to BNPLC under the Land Lease or other Operative Documents shall terminate NAI's rights or obligations hereunder, all of which shall survive BNPLC's exercise of remedies under the other Operative Documents. NAI acknowledges that the consideration for this Agreement is separate and independent of the consideration for the Land Lease and the Closing Certificate, and NAI's obligations hereunder shall not be affected or impaired by any event or circumstance that would excuse NAI from performance of its obligations under such other Operative Documents. (H) Occupancy by NAI Prior to Closing of a Sale. Prior to the closing of any sale of the Property to NAI or an Applicable Purchaser hereunder, NAI's occupancy of the Land and its use of the Property shall continue to be subject to the terms and conditions of the Land Lease, including the terms setting forth NAI's obligation to pay rent, prior to any termination or expiration of the Land Lease pursuant to its express terms and conditions. 5. SECURITY FOR NAI'S OBLIGATIONS; RETURN OF FUNDS. NAI'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 8 <PAGE> 13 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 NAI of NAI's covenants and obligations under this Agreement, the Collateral shall not be considered an advance payment of the Break Even Price or any Supplemental Payment or a measure of BNPLC's damages should NAI breach this Agreement. If NAI 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 NAI, 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 NAI. If by a Permitted Transfer BNPLC conveys its interest in the Property before the Designated Sale Date, BNPLC may also assign BNPLC's interest in the Collateral to the transferee. BNPLC shall be entitled to return any Collateral not sold or used to satisfy the obligations secured by the Pledge Agreement directly to NAI notwithstanding any prior actual or attempted conveyance or assignment by NAI, voluntary or otherwise, of any right to receive the same; neither BNPLC nor the collateral agent named in the Pledge Agreement shall be responsible for the proper distribution or application by NAI of any such Collateral returned to NAI; and any such return of Collateral to NAI shall discharge any obligation of BNPLC to deliver such Collateral to all Persons claiming an interest in the Collateral. Further, BNPLC shall be entitled to deliver any Escrowed Proceeds it holds on the Designated Sale Date directly to NAI or to any Applicable Purchaser purchasing BNPLC's interest in the Property and the Escrowed Proceeds pursuant to this Agreement notwithstanding any prior actual or attempted conveyance or assignment by NAI, voluntary or otherwise, of any right to receive the same; BNPLC shall not be responsible for the proper distribution or application by NAI or any Applicable Purchaser of any such Escrowed Proceeds paid over to NAI or the Applicable Purchaser; and any such payment of Escrowed Proceeds to NAI or an Applicable Purchaser shall discharge any obligation of BNPLC to deliver the same to all Persons claiming an interest therein. 6. CERTAIN 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. 7. ATTORNEYS' FEES AND LEGAL EXPENSES. If either party to this Agreement commences any legal action or other proceeding to enforce any of the terms of this Agreement, or because of any breach by the other party or dispute hereunder, the party prevailing in such action or proceeding shall be entitled to recover from the other 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. Upon request by BNPLC, NAI shall execute, acknowledge and deliver 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 NAI has knowledge. Any such statement may be relied upon by any Participant or prospective purchaser or assignee of BNPLC with respect to the Property. 9. SUCCESSORS AND ASSIGNS. The terms, provisions, covenants and conditions hereof shall be binding upon NAI and BNPLC and their respective permitted successors and assigns and shall inure to the benefit of NAI and BNPLC and all permitted transferees, mortgagees, successors and assignees of NAI and BNPLC with respect to the Property; provided, that (A) the rights of BNPLC hereunder shall not pass to NAI or any Applicable 9 <PAGE> 14 Purchaser or any subsequent owner claiming through NAI or an Applicable Purchaser, (B) BNPLC shall not assign this Agreement or any rights hereunder except pursuant to a Permitted Transfer, and (C) NAI shall not assign this Agreement or any rights hereunder without the prior written consent of BNPLC. [Signature pages follow.] 10 <PAGE> 15 IN WITNESS WHEREOF, NAI and BNPLC have caused this Agreement to be executed as of December ___, 1999. "NAI" NETWORK APPLIANCE, INC. By: ------------------------------------- Name: ------------------------------- Title: ------------------------------ <PAGE> 16 [Continuation of signature pages to Purchase Agreement (Phase IV - Land) dated to be effective December ___, 1999.] "BNPLC" BNP LEASING CORPORATION By: ------------------------------------- Lloyd G. Cox, Vice President <PAGE> 17 EXHIBIT A LEGAL DESCRIPTION The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75[degrees]8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14[degrees]51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75[degrees]08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14[degrees]51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 <PAGE> 18 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 <PAGE> 19 EXHIBIT B REQUIREMENTS RE: FORM OF GRANT DEED AND GROUND LEASE The form of deed to be used to convey BNPLC's interest in the Land to NAI or an Applicable Purchaser will depend upon whether BNPLC's interest in the Improvements has been or is being conveyed at the same time to the same party. If BNPLC's interests in BOTH the Land and the Improvements are to be conveyed to NAI or an Applicable Purchaser at the same time, because a sale under this Purchase Agreement and a sale under the Other Purchase Agreement (covering the Improvements) are being consummated at the same time and to the same party, then the one deed in form attached as Exhibit B-1 will be used to convey both. If, however, a sale of BNPLC's interest in the Improvements pursuant to the Other Purchase Agreement has not been consummated before, and is not being consummated contemporaneously with the sale of BNPLC's interest in the Land under this Agreement, then BNPLC's interest in the Land will be conveyed by a deed in the from attached as Exhibit B-2, and BNPLC and the grantee under such deed shall, as a condition to BNPLC's obligation to deliver the deed, execute and deliver a Ground Lease covering the Land in the form attached hereto as Exhibit B-3. Finally, BNPLC's interest in the Land will be conveyed by a deed in the from attached as Exhibit B-4 if BNPLC's interest in the Improvements has been sold pursuant to the Other Purchase Agreement before a sale of BNPLC's interest in the Land under this Agreement, or if BNPLC's interest in the Improvements is being sold contemporaneously with a sale of BNPLC's interest in the Land, but the purchaser of the Improvements is not the same as the purchaser of the Land. <PAGE> 20 EXHIBIT B-1 CORPORATION GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ___________________ ATTN: ___________________ CITY: ___________________ STATE: ___________________ Zip: ___________________ MAIL TAX STATEMENTS TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ___________________ ATTN: ___________________ CITY: ___________________ STATE: ___________________ Zip: ___________________ CORPORATION GRANT DEED (Covering Land and Improvements) FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, BNP LEASING CORPORATION, a Delaware corporation ("Grantor"), hereby grants to [NAI or the Applicable Purchaser] ("Grantee") all of Grantor's interest in the land situated in Sunnyvale, California, described on Annex A attached hereto and hereby made a part hereof and all improvements on such land, together with the any other right, title and interest of Grantor in and to any easements, rights-of-way, privileges and other rights appurtenant to such land or the improvements thereon; provided, however, that this grant is subject to the encumbrances described on Annex B (the "Permitted Encumbrances"). Grantee hereby assumes the obligations (including any personal obligations) of Grantor, if any, created by or under, and agrees to be bound by the terms and conditions of, the Permitted Encumbrances to the extent that the same concern or apply to the land or improvements conveyed by this deed. <PAGE> 21 BNP LEASING CORPORATION Date: As of By: ------------ --------------------------------- Its: Attest: --------------------------------- Its: [NAI or Applicable Purchaser] Date: As of By: ------------ --------------------------------- Its: Attest: --------------------------------- Its: STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ---------------------------- EXHIBIT B-1 - PAGE 2 <PAGE> 22 STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ---------------------------- EXHIBIT B-1 - PAGE 3 <PAGE> 23 ANNEX A LEGAL DESCRIPTION [DRAFTING NOTE: TO THE EXTENT THAT THE "LAND" COVERED BY THE LAND LEASE CHANGES FROM TIME TO TIME BECAUSE OF ADJUSTMENTS FOR WHICH NAI REQUESTS BNPLC'S CONSENT OR APPROVAL, SO TOO WILL THE DESCRIPTION OF THE LAND BELOW CHANGE. ANY SUCH CHANGES WILL BE INCORPORATED INTO THE DESCRIPTION BELOW AND THIS "DRAFTING NOTE" WILL BE DELETED BEFORE THE DEED TO WHICH THIS DESCRIPTION IS ATTACHED IS ACTUALLY EXECUTED AND DELIVERED.] The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75[degrees]8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14[degrees]51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75[degrees]08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14[degrees]51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of EXHIBIT B-1 - PAGE 4 <PAGE> 24 Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 EXHIBIT B-1 - PAGE 5 <PAGE> 25 ANNEX B PERMITTED ENCUMBRANCES [DRAFTING NOTE: TO THE EXTENT THAT ENCUMBRANCES (OTHER THAN "LIENS REMOVABLE BY BNPLC") ARE IDENTIFIED IN ADDITION TO THOSE DESCRIBED BELOW, SUCH ADDITIONAL ENCUMBRANCES WILL BE ADDED TO THE LIST BELOW AND THIS "DRAFTING 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" UNDER THE LAND LEASE OR THE OTHER LEASE AGREEMENT FROM TIME TO TIME OR BECAUSE OF NAI'S REQUEST FOR BNPLC'S CONSENT OR APPROVAL TO AN ADJUSTMENT.] This conveyance is subject to all encumbrances not constituting a "Lien Removable by BNPLC" (as defined in the Common Definitions and Provisions Agreement (Phase IV - Land) incorporated by reference into the Lease Agreement (Phase IV - Land) referenced in the last item of the list below), including the following matters to the extent the same are still valid and in force: TRACT 1 and 2: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. LIMITATIONS, covenants, conditions, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded December 23, 1971 in Book 9640, page 443, Official Records. Assignments and Assumption, executed by Moffett Park Associates, a partnership to Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 4. AGREEMENT on the terms and conditions contained therein, For : Waiver of Construction Credits Between : Moffett Park Associates And : None Shown Recorded : September 28, 1976 in Book C307, page 346, Official Records. 5. EASEMENT for the purposes stated herein and incidents thereto Purpose : Construction, reconstruction, operation, repair, maintenance, replacement, relocation and enlargement of Public Utilities Granted to : The City of Sunnyvale, a municipal corporation Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : as follows: Being a portion of Parcel B as shown on that certain Parcel Map recorded August 28, 1974 in Book of Maps, at page 20, Santa Clara County Records; a strip of land 10 feet in width, measured at right angles lying Northerly and Easterly of and contiguous to the following described line; beginning at the EXHIBIT B-1 - PAGE 6 <PAGE> 26 intersection of the Westerly line of Crossman Road, 90 feet in width, with the Northerly line of Parcel A as shown on said Map; thence North 75[degrees]7'58" West along said Northerly line of Parcel A 450.13 feet; thence leaving said Northerly line, North 30[degrees]7'48" West 210.69 feet; thence North 75[degrees]8'27" West 391.04 feet to a point on the Easterly line of the proposed Geneva Drive, 60 feet wide, said point being the terminus of said easement. 6. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. TRACT 3: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 4. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 5. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. EXHIBIT B-1 - PAGE 7 <PAGE> 27 6. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities Granted to : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : Southerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 7. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. 8. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. (a) The fact that a chain link fence extends across the southerly boundary of said land. TRACT 4: 9. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 10. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 11. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 90, Official Records Affects : Westerly 5 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 12. EASEMENT recorded on that certain Map for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : July 7, 1994 in Book 657 of Maps, page 9, Official Records Affects : Westerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 13. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. EXHIBIT B-1 - PAGE 8 <PAGE> 28 ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 14. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. TRACT 5: 15. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 16. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 17. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : The Northeasterly and Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 18. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : The Northeasterly and Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 19. EASEMENT for the purposes stated herein and incidents thereto Purpose : Sidewalk and sign easement Recorded : July 7, 1994, in Book 657 of Maps, page 9, Official Records Affects : The Northerly 2 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 20. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. EXHIBIT B-1 - PAGE 9 <PAGE> 29 21. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : October 7, 1998, in Book 708 of Maps, pages 51-52, Official Records Affects : The Northerly 15 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. EXHIBIT B-1 - PAGE 10 <PAGE> 30 EXHIBIT B-2 CORPORATION GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ___________________ ATTN: ___________________ CITY: ___________________ STATE: ___________________ Zip: ___________________ MAIL TAX STATEMENTS TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ___________________ ATTN: ___________________ CITY: ___________________ STATE: ___________________ Zip: ___________________ CORPORATION GRANT DEED (Covering Land but not the Improvements On the Land) FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, BNP LEASING CORPORATION, a Delaware corporation ("Grantor"), hereby grants to [NAI or the Applicable Purchaser] ("Grantee") all of Grantor's interest in the land situated in Sunnyvale, California, described on Annex A attached hereto and hereby made a part hereof (the "Land"), together with the any other right, title and interest of Grantor in and to any easements, rights-of-way, privileges and other rights appurtenant to the Land; provided, however, that this grant is subject to the encumbrances described on Annex B (the "Permitted Encumbrances") and any reservations or qualifications set forth below. Grantee hereby assumes the obligations (including any personal obligations) of Grantor, if any, created by or under, and agrees to be bound by the terms and conditions of, the Permitted Encumbrances to the extent that the same concern or apply to the Land. Although this deed conveys Grantor's interest in the Land itself, this deed does not convey any interest in any buildings or other improvements on the Land (collectively, "Improvements") or any rights or easements appurtenant to Improvements. Grantor retains and reserves all right, title and interest of Grantor in and to Improvements and any rights and easements appurtenant to Improvements, together with a leasehold estate in and to the Land and any rights and easements appurtenant to the Land, which leasehold estate will permit the construction, maintenance and use of Improvements by Grantor and Grantor's successors and assigns on and subject to the terms and conditions set forth in the Ground Lease dated of even date herewith, executed by Grantee, as lessor, and Grantor, as lessee. Reference is made to such Ground Lease, all the terms and conditions of which are incorporated into this deed as if set forth herein. <PAGE> 31 BNP LEASING CORPORATION Date: As of By: ------------ --------------------------------- Its: Attest: --------------------------------- Its: [NAI or Applicable Purchaser] Date: As of By: ------------ --------------------------------- Its: Attest: --------------------------------- Its: STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ---------------------------- EXHIBIT B-2 - PAGE 2 <PAGE> 32 STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 --------------------------- EXHIBIT B-2 - PAGE 3 <PAGE> 33 ANNEX A LEGAL DESCRIPTION [DRAFTING NOTE: TO THE EXTENT THAT THE "LAND" COVERED BY THE LAND LEASE CHANGES FROM TIME TO TIME BECAUSE OF ADJUSTMENTS FOR WHICH NAI REQUESTS BNPLC'S CONSENT OR APPROVAL, SO TOO WILL THE DESCRIPTION OF THE LAND BELOW CHANGE. ANY SUCH CHANGES WILL BE INCORPORATED INTO THE DESCRIPTION BELOW AND THIS "DRAFTING NOTE" WILL BE DELETED BEFORE THE DEED TO WHICH THIS DESCRIPTION IS ATTACHED IS ACTUALLY EXECUTED AND DELIVERED.] The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75[degrees]8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14[degrees]51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75[degrees]08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14[degrees]51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of EXHIBIT B-2 - PAGE 4 <PAGE> 34 Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 EXHIBIT B-2 - PAGE 5 <PAGE> 35 ANNEX B PERMITTED ENCUMBRANCES [DRAFTING NOTE: TO THE EXTENT THAT ENCUMBRANCES (OTHER THAN "LIENS REMOVABLE BY BNPLC") ARE IDENTIFIED IN ADDITION TO THOSE DESCRIBED BELOW, SUCH ADDITIONAL ENCUMBRANCES WILL BE ADDED TO THE LIST BELOW AND THIS "DRAFTING 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" UNDER THE LAND LEASE OR THE OTHER LEASE AGREEMENT FROM TIME TO TIME OR BECAUSE OF NAI'S REQUEST FOR BNPLC'S CONSENT OR APPROVAL TO AN ADJUSTMENT.] This conveyance is subject to all encumbrances not constituting a "Lien Removable by BNPLC" (as defined in the Common Definitions and Provisions Agreement (Phase IV - Land) incorporated by reference into the Lease Agreement (Phase IV - Land) referenced in the last item of the list below), including the following matters to the extent the same are still valid and in force: TRACT 1 and 2: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. LIMITATIONS, covenants, conditions, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded December 23, 1971 in Book 9640, page 443, Official Records. Assignments and Assumption, executed by Moffett Park Associates, a partnership to Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 4. AGREEMENT on the terms and conditions contained therein, For : Waiver of Construction Credits Between : Moffett Park Associates And : None Shown Recorded : September 28, 1976 in Book C307, page 346, Official Records. 5. EASEMENT for the purposes stated herein and incidents thereto Purpose : Construction, reconstruction, operation, repair, maintenance, replacement, relocation and enlargement of Public Utilities Granted to : The City of Sunnyvale, a municipal corporation Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : as follows: Being a portion of Parcel B as shown on that certain Parcel Map recorded August 28, 1974 in Book of Maps, at page 20, Santa Clara County Records; a strip of land 10 feet in width, measured at right angles lying Northerly and Easterly of and contiguous to the following described line; beginning at the EXHIBIT B-2 - PAGE 6 <PAGE> 36 intersection of the Westerly line of Crossman Road, 90 feet in width, with the Northerly line of Parcel A as shown on said Map; thence North 75[degrees]7'58" West along said Northerly line of Parcel A 450.13 feet; thence leaving said Northerly line, North 30[degrees]7'48" West 210.69 feet; thence North 75[degrees]8'27" West 391.04 feet to a point on the Easterly line of the proposed Geneva Drive, 60 feet wide, said point being the terminus of said easement. 6. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. TRACT 3: 22. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 23. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 24. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 25. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 26. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. EXHIBIT B-2 - PAGE 7 <PAGE> 37 27. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities Granted to : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : Southerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 28. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. 29. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. (a) The fact that a chain link fence extends across the southerly boundary of said land. TRACT 4: 30. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 31. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 32. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 90, Official Records Affects : Westerly 5 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 33. EASEMENT recorded on that certain Map for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : July 7, 1994 in Book 657 of Maps, page 9, Official Records Affects : Westerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 34. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. EXHIBIT B-2 - PAGE 8 <PAGE> 38 ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 35. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. TRACT 5: 36. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 37. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 38. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : The Northeasterly and Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 39. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : The Northeasterly and Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 40. EASEMENT for the purposes stated herein and incidents thereto Purpose : Sidewalk and sign easement Recorded : July 7, 1994, in Book 657 of Maps, page 9, Official Records Affects : The Northerly 2 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 41. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. EXHIBIT B-2 - PAGE 9 <PAGE> 39 42. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : October 7, 1998, in Book 708 of Maps, pages 51-52, Official Records Affects : The Northerly 15 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. EXHIBIT B-2 - PAGE 10 <PAGE> 40 EXHIBIT B-3 GROUND LEASE This GROUND LEASE (this "GROUND LEASE"), by and between BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), whose address is 12201 Merit Drive, Suite 860,Dallas, Texas 75251, and [NAI or the Applicable Purchaser], a ___________ ("LESSOR"), whose address is ____________________. as of ____________, ____ (the "GL EFFECTIVE DATE"). RECITALS This Ground Lease is being executed pursuant to a Purchase Agreement (Phase IV - Land) dated as of December ___, 1999 (the "PURCHASE AGREEMENT"), between BNP Leasing Corporation and Network Appliance, Inc., covering the land described in Annex 1 attached hereto (the "LAND"). Incorporated by reference into the Purchase Agreement is a Common Definitions and Provisions Agreement (Phase IV - Land) dated as of the effective date of the Purchase Agreement (the "CDPA"), between BNP Leasing Corporation and Network Appliance, Inc. The CDPA is hereby incorporated into and made a part of this Ground Lease for all purposes. Capitalized terms defined in the CDPA and used but not otherwise defined herein are intended in this Ground Lease to have the respective meanings ascribed to them in the CDPA. The provisions in Article II of the CDPA are intended to apply to this Ground Lease as if set forth herein and as if this Ground Lease were one of the "Operative Documents" as defined therein. Lessor and BNPLC have reached agreement as to the terms and conditions upon which Lessor is willing to lease the Land described in Annex 1 to BNPLC for a term of approximately just less that 35 years, and by this Ground Lease Lessor and BNPLC desire to evidence such agreement. GRANTING CLAUSES NOW, THEREFORE, in consideration of the rent to be paid and the covenants and agreements to be performed by BNPLC, as hereinafter set forth, Lessor does hereby LEASE, DEMISE and LET unto BNPLC for the term hereinafter set forth the Land, together with: 1. all easements and rights-of-way now owned or hereafter acquired by Lessor for use in connection with the Land or as a means of access thereto; and 2. all right, title and interest of Lessor, 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 any abutting land not owned by Lessor. The Land and all of the property described in the preceding clauses (1) and (2) are hereinafter referred to collectively as the "REAL PROPERTY". To the extent, but only to the extent, that assignable rights or interests in, to or under the following have been or will be acquired by Lessor as the owner of any interest in the Real Property, Lessor also hereby grants and <PAGE> 41 assigns to BNPLC for the term of this Ground Lease (and thereafter, if BNPLC purchases the Real Property from Lessor pursuant to the Repurchase Option described in Paragraph 12) the right to use and enjoy (and, in the case of contract rights, to enforce) such rights or interests of Lessor: (a) the Permitted Encumbrances; and (b) any general intangibles, permits, licenses, franchises, certificates, and other rights and privileges related to the Real Property that BNPLC (rather than Lessor) would have acquired if BNPLC had itself acquired the fee estate in the Real Property (excluding, however, any rights and privileges of Lessor under this Ground Lease, any rights or privileges of Lessor under the Purchase Agreement or other Operative Documents, and [without limiting Lessor's obligations under subparagraphs 4(B), 6(B) or 6(C)] any rights and privileges of Lessor under the Development Documents described in Annex 3). Such rights and interests of Lessor, whether now existing or hereafter arising, are hereinafter collectively called the "GL PERSONAL PROPERTY". The Real Property and the GL Personal Property are hereinafter sometimes collectively called the "GL PROPERTY." Provided, however, the leasehold estate conveyed hereby and BNPLC's rights hereunder are expressly made subject and subordinate to the Permitted Encumbrances, including those listed on Annex 2. FURTHER, IF AND SO LONG AS THE OTHER LEASE AGREEMENT AND THE OTHER PURCHASE AGREEMENT (BOTH AS DEFINED IN THE CDPA) REMAIN IN FORCE, THE RIGHTS AND OBLIGATIONS OF LESSOR AND BNPLC HEREUNDER SHALL BE SUBJECT TO ANY CONTRARY PROVISIONS THEREIN. ACCORDINGLY, BNPLC'S RIGHTS UNDER PARAGRAPH 7 BELOW SHALL BE SUBJECT TO THE PROVISIONS GOVERNING INSURANCE AND CONDEMNATION IN THE OTHER LEASE AGREEMENT, IF AND SO LONG AS THE OTHER LEASE AGREEMENT REMAINS IN FORCE. GENERAL TERMS AND CONDITIONS The GL Property is leased by Lessor to BNPLC and is accepted and is to be used and possessed by BNPLC upon and subject to the following terms and conditions: 10. GROUND LEASE TERM AND EARLY TERMINATION BY BNPLC. The term of this Ground Lease (the "GROUND LEASE TERM") shall commence on and include the GL Effective Date and end on last Business Day prior to the thirty-fifth anniversary of the GL Effective Date. However, subject to the prior approval of any Leasehold Mortgagee, BNPLC shall have the right to terminate this Ground Lease by giving a notice to Lessor stating that BNPLC unequivocally elects to terminate effective as of a date specified in such notice, which may be any date more than thirty days after the notice and after the expiration or termination of the Lease pursuant to its terms. 11. NO OTHER GROUND LEASE TERMINATION. Except as expressly provided herein, this Ground Lease shall not terminate, nor shall Lessor have any right to terminate this Ground Lease, nor shall the obligations of Lessor under this Ground Lease be excused, for any reason whatsoever, including any of the following: (i) any damage to or the destruction of all or any part of the GL Property from whatever cause, (ii) the taking of the GL Property or any portion thereof by eminent domain or otherwise for any reason, (iii) any default on the part of BNPLC under this Ground Lease or under any other agreement to which Lessor and BNPLC are parties, or (iv) 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 Lessor hereunder shall be separate and independent of the covenants and agreements of BNPLC. However, nothing in this Paragraph shall be construed as a waiver by Lessor of any right Lessor may have at law or in equity to recover monetary damages for EXHIBIT B-3 - PAGE 2 <PAGE> 42 any default under this Ground Lease by BNPLC. 12. GROUND LEASE RENT. On each anniversary of the GL Effective Date, BNPLC shall make a payment to Lessor of rent for the then preceding year ("GROUND LEASE RENT"), in currency that at the time of payment is legal tender for public and private debts in the United States of America. Each such payment of Ground Lease Rent shall equal the Fair Rental Value, determined as provided in Annex 4. 13. USE OF GL PROPERTY. (A) Permitted Uses and Construction of Improvements. Subject to the Permitted Encumbrances and the terms hereof, BNPLC may use and occupy the GL Property for any purpose permitted by Applicable Laws and may construct, maintain and use any Improvements on the Land which are permitted by Applicable Laws. (B) Cooperation by Lessor and its Affiliates. (1) After the expiration or any earlier termination of the Lease, if a use of the GL Property by BNPLC or any new Improvements or any removal or modification of Improvements proposed by BNPLC would violate any Permitted Encumbrance, Development Document or Applicable Law unless Lessor or any of its Affiliates, as an owner of adjacent property or otherwise, gave its consent or approval thereto or agreed to join in a modification of a Permitted Encumbrance or Development Document, then Lessor shall give and cause its Affiliates to give such consent or approval or join in such modification. (2) To the extent, if any, that any Permitted Encumbrance, Development Document or Applicable Law requires the consent or approval of Lessor or any of its Affiliates or of the City of South San Francisco or any other Person to an assignment of this Ground Lease or a transfer of any interest in the GL Property by BNPLC or its successors or assigns, Lessor will without charge give and cause its Affiliates to give such consent or approval and will cooperate in any way reasonably requested by BNPLC to assist BNPLC to obtain such consent or approval from the City or any other Person; provided, however, the assignment or transfer is not then prohibited by the Lease. (3) Lessor's obligations under this subparagraph 4(B) shall be binding upon any successor or assign of Lessor with respect to the Land and other properties encumbered by the Permitted Encumbrances or subject to the Development Documents, and such obligations shall survive any sale of Lessor's interest in the GL Property to BNPLC because of BNPLC's exercise of the Repurchase Option (as defined in Paragraph 12). (C) Title to Improvements. Any and all Improvements of whatever nature at any time constructed, placed or maintained upon any part of the Land shall be and remain the property of BNPLC and BNPLC's sublessee's, assignees, licensees and concessionaires, as their interests may appear; provided, any such Improvements which remain on the Land when this Ground Lease expires or is terminated shall become and thereupon be the property of Lessor, free and clear of any Liens Removable by BNPLC. It is the intention of Lessor and BNPLC that severance of fee title to the Land and the Improvements shall not change the character of the Improvements as real property. BNPLC may at any time after Lessor ceases to have possession of the GL Property as tenant under the Lease and prior to the expiration or termination of this Ground Lease remove all or any Improvements from the Land without the consent of Lessor and without any obligation to Lessor or its Affiliates to provide compensation or to construct other Improvements on or about the Land. 14. ASSIGNMENT AND SUBLETTING; PASS THROUGH OF BNPLC'S LIABILITY INSURANCE AND INDEMNITY RIGHTS. BNPLC may sublet or assign this Ground Lease without the consent of Lessor or any of its EXHIBIT B-3 - PAGE 3 <PAGE> 43 Affiliates, subject only to limitations set forth in the Lease for the benefit of Lessor so long as those limitations remain in force. To the extent that BNPLC may from time to time after the expiration or earlier termination of the Other Lease Agreement require any subtenant to agree to maintain liability insurance against claims of third parties and agree to make BNPLC an additional or named insured under such insurance, BNPLC shall also require the subtenant to agree to make Lessor an additional or named insured. However, BNPLC shall have no liability to Lessor for a breach by the subtenant of any such agreements, and to the extent that BNPLC's rights as an additional or named insured are subject to exceptions or limitations concerning BNPLC's own acts or omissions or the acts or omissions of anyone other than the subtenant, so too may Lessor's rights as an additional or named insured be subject to exceptions or limitations concerning Lessor's own acts or omissions or the acts or omissions of anyone other than the subtenant. To the extent that BNPLC may itself from time to time after the expiration or earlier termination of the Other Lease Agreement maintain liability insurance against claims of third parties which may arise because of any occurrence on or alleged to have occurred on or about the GL Property, BNPLC shall cause Lessor to be an additional or named insured under such insurance, provided Lessor pays or reimburses BNPLC for any additional insurance premium required to have Lessor made an insured. To the extent that BNPLC may from time to time after the expiration or earlier termination of the Other Lease Agreement require any subtenant to agree to indemnify BNPLC against Environmental Losses or other Losses concerning the GL Property, BNPLC shall also require the subtenant to agree to indemnify Lessor. However, BNPLC shall have no liability to Lessor for a breach by the subtenant of any such agreement, and to the extent that BNPLC's rights as an indemnitee of the subtenant are subject to exceptions or limitations concerning BNPLC's own acts or omissions or the acts or omissions of anyone other than the subtenant, so too may Lessor's rights as an indemnitee be subject to exceptions or limitations concerning Lessor's own acts or omissions or the acts or omissions of anyone other than the subtenant. 15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSOR CONCERNING THE PROPERTY. Lessor represents, warrants and covenants as follows: (A) Title to the Property. This Ground Lease shall vest in BNPLC good and marketable title to a leasehold estate in the Land, subject only to the terms and conditions hereof, the Permitted Encumbrances, the Development Documents and any Liens Removable by BNPLC. Lessor shall not, without the prior consent of BNPLC, create, place or authorize, or through any act or failure to act, acquiesce in the placing of, any deed of trust, mortgage or other Lien, whether statutory, constitutional or contractual against or covering the GL Property or any part thereof (other than Permitted Encumbrances and Liens Removable by BNPLC), regardless of whether the same are expressly or otherwise subordinate to the Operative Documents or BNPLC's interest in the Property. (B) Modification of Permitted Encumbrances and Development Documents. Without the prior consent of BNPLC, Lessor shall not enter into, initiate, approve or consent to any modification of any Permitted Encumbrance or Development Document that would create or expand or purport to create or expand obligations or restrictions which would encumber the GL Property or any improvements constructed thereon. (C) Performance and Preservation of the Development Documents and Permitted Encumbrances for the Benefit of BNPLC. Not only during the term of the Other Lease Agreement, but thereafter throughout the term of this Ground Lease, Lessor shall comply with and perform the obligations imposed by the Permitted Encumbrances and the Development Documents upon Lessor or upon any owner of the Land, and shall do whatever is required to preserve the rights and benefits conferred or intended to be conferred by the Permitted Encumbrances and the Development Documents, as necessary to facilitate the construction of the Construction EXHIBIT B-3 - PAGE 4 <PAGE> 44 Project on the Land as contemplated in the Other Lease Agreement and the use of the Improvements included in the Construction Project by BNPLC and its successors, assigns and subtenants under this Ground Lease after the expiration or any earlier termination of the Other Lease Agreement. Further, if Lessor or any Affiliate of Lessor now or hereafter owns, acquires or leases land (other than the Land) that is the subject of a Permitted Encumbrance or Development Document, then Lessor shall, and shall cause its Affiliate to, assume liability for and indemnify BNPLC and other Interested Parties and defend and hold them harmless from and against all Losses (including Losses caused by any decline in the value of the Property or of the Improvements) that they would not have incurred or suffered but for (i) a termination of such Permitted Encumbrance or Development Document, to which Lessor or its Affiliate agreed, or which resulted from a breach thereof by Lessor or its Affiliate, or (ii) a refusal of Lessor or its Affiliate to agree to any waiver or modification requested by BNPLC of restrictions upon the Property or the transfer thereof imposed by such Permitted Encumbrance or Development Document, or (iii) anything done, authorized or suffered by Lessor or its Affiliate in violation of such Permitted Encumbrance or Development Document. Lessor's obligations under this subparagraph 6(C) shall be binding upon any successor or assign of Lessor or its Affiliates with respect to their interest in properties subject to the Development Documents and Permitted Encumbrances. 16. INSURANCE AND CONDEMNATION. (A) Entitlement to Insurance and Condemnation Proceeds. All insurance and condemnation proceeds payable with respect to any damage to or taking of the GL Property shall be payable to and become the property of BNPLC; provided, however, Lessor shall be entitled to receive condemnation proceeds awarded for the value of Lessor's remainder interest in the Land exclusive of the Improvements. BNPLC is authorized to take all action necessary on behalf of both BNPLC and Lessor (as lessor under this Ground Lease) to collect insurance and condemnation proceeds. (B) Collection of Insurance Proceeds. In the event any of the GL Property is destroyed or damaged by fire, explosion, windstorm, hail or by any other casualty against which insurance shall have been required hereunder, (i) BNPLC may make proof of loss, (ii) each insurance company concerned is hereby authorized and directed to make payment for such loss directly to BNPLC for application as required by subparagraph 7(A), and (iii) BNPLC'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. (C) Collection of Condemnation Proceeds. All proceeds of condemnation awards or proceeds of sale in lieu of condemnation with respect to the GL Property and all judgments, decrees and awards for injury or damage to the GL Property shall be paid to BNPLC and applied as provided in subparagraph 7(A) above. BNPLC is hereby authorized, in the name of Lessor, to execute and deliver valid acquittances for, and to appeal from, any such judgment, decree or award concerning condemnation of any of the GL Property. BNPLC 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. 17. LEASEHOLD MORTGAGES. (A) By Leasehold Mortgage BNPLC may encumber BNPLC's leasehold estate in the GL Property created by this Ground Lease, as well as BNPLC's rights and interests in buildings, fixtures, equipment and Improvements situated on the Land and rents, issues, profits, revenues and other income to be derived by BNPLC therefrom. (B) Any Leasehold Mortgagee or other party, including any corporation formed by a Leasehold Mortgagee, may become the legal owner of the leasehold estate created by this Ground Lease, and of the Improvements, equipment, fixtures and other property assigned as additional security pursuant to a Leasehold EXHIBIT B-3 - PAGE 5 <PAGE> 45 Mortgage, by foreclosure of a Leasehold Mortgage or as a result of the assignment or conveyance in lieu of foreclosure. Further, any such Leasehold Mortgagee or other party may itself, after becoming the legal owner and holder of the leasehold estate created by this Ground Lease, or of any Improvements, equipment, fixtures and other property assigned as additional security pursuant to a Leasehold Mortgage, convey or pledge the same without the consent of Lessor. (C) Lessor shall serve notice of any default by BNPLC hereunder upon any Leasehold Mortgagee. No notice of a default by BNPLC shall be deemed effective until it is so served. Any Leasehold Mortgagee shall have the right to correct or cure any such default within the same period of time after receipt of such notice as is given to BNPLC under this Ground Lease to correct or cure defaults, plus an additional period of thirty days thereafter. Lessor will accept performance by any Leasehold Mortgagee of any covenant, condition or agreement on BNPLC's part to be performed hereunder with the same force and effect as though performed by BNPLC. (D) If this Ground Lease should terminate by reason of a disaffirmance or rejection of this Ground Lease by BNPLC or any receiver, liquidator or trustee for the property of BNPLC, or by any governmental authority which had taken possession of the business or property of BNPLC by reason of the insolvency or alleged insolvency of BNPLC, then: (1) Lessor shall give notice thereof to each Leasehold Mortgagee; and upon request of any Leasehold Mortgagee made within sixty days after Lessor has given such notice, Lessor shall enter into a new ground lease of the GL Property with such Leasehold Mortgagee for the remainder of the Ground Lease Term, at the same Ground Lease Rent and on the same terms and conditions as contained in this Ground Lease. (2) The estate of the Leasehold Mortgagee, as lessee under the new lease, shall have priority equal to the estate of BNPLC hereunder. That is, there shall be no charge, lien or burden upon the GL Property prior to or superior to the estate granted by such new lease which was not prior to or superior to the estate of BNPLC under this Ground Lease as of the date immediately preceding the termination of this Ground Lease. (3) Notwithstanding the foregoing, if Lessor shall receive requests to enter into a new ground lease from more than one Leasehold Mortgagee, Lessor shall be required to enter into only one new ground lease, and the new ground lease shall be to the requesting Leasehold Mortgagee who holds the highest priority lien or interest in BNPLC's leasehold estate in the Land. If the liens or security interests of two or more such requesting Leasehold Mortgagees which shared the highest priority just prior to the termination of this Ground Lease, the new ground lease shall name all such Leasehold Mortgagees as co-tenants thereunder. (E) If BNPLC has agreed with any Leasehold Mortgagee that such Leasehold Mortgagee's consent will be required to any modification or early termination of this Ground Lease by BNPLC, and if Lessor has been notified of such agreement, such consent will be required. (F) No Leasehold Mortgagee will assume any liability under this Ground Lease either by virtue of its Leasehold Mortgage or by any subsequent receipt or collection of rents or profits generated from the GL Property, unless and until the Leasehold Mortgagee acquires BNPLC's leasehold estate in the GL Property at foreclosure or by deed in lieu of foreclosure. (G) Although the foregoing provisions concerning Leasehold Mortgages and Leasehold Mortgagees will be self operative, Lessor agrees to include, in addition to the items specified in Paragraph 11, EXHIBIT B-3 - PAGE 6 <PAGE> 46 confirmation of the foregoing in any statement provided to a Leasehold Mortgagee or prospective Leasehold Mortgagee pursuant to Paragraph 11. 18. EVENTS OF DEFAULT. (A) Definition of Ground Lease Default. Each of the following events shall be deemed to be a "GROUND LEASE DEFAULT" by BNPLC under this Ground Lease: (1) BNPLC shall fail to pay when due any installment of Ground Lease Rent due hereunder and such failure shall continue for sixty days after BNPLC receives notice thereof. (2) BNPLC shall fail to comply with any term, provision or covenant of this Ground Lease (other than as described in the other clauses of this subparagraph 9(A)), and shall not cure such failure prior to the earlier of (A) ninety days after notice thereof is sent to BNPLC, or (B) the date any writ or order is issued for the levy or sale of any property owned by Lessor or its Affiliates (including the GL Property) because of such failure or any criminal action is instituted against BNPLC 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 actions is instituted, if such failure is susceptible of cure but cannot with reasonable diligence be cured within such ninety day period, and if BNPLC 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 as shall be necessary for the curing thereof with reasonable diligence. (B) Remedy. Upon the occurrence of a Ground Lease Default which is not cured within any applicable period expressly permitted by subparagraph 9(A), Lessor's sole and exclusive remedies shall be to sue BNPLC for the collection of any amount due under this Ground Lease, to sue for the specific enforcement of BNPLC's obligations hereunder, or to enjoin the continuation of the Ground Lease Default; provided, however, no limitation of Lessor's remedies contained herein will prevent Lessor from recovering any reasonable costs Lessor may incur to mitigate its damages by curing a Ground Lease Default that BNPLC has failed to cure itself (so long as the cure by Lessor is pursued in a lawful manner and the costs Lessor seeks to recover do not exceed the actual damages to be mitigated). Lessor may not terminate this Ground Lease or BNPLC's right to possession under this Ground Lease. Any judgment which Lessor may obtain against BNPLC for amounts due under this Ground Lease may be collected only through resort of a judgement lien against BNPLC's interest in the GL Property and any Improvements. BNPLC shall have no personal liability for the payment amounts due under this or for the performance of any obligations of BNPLC under this Ground Lease. 19. QUIET ENJOYMENT. Neither Lessor nor any third party lawfully claiming any right or interest in the GL Property shall during the Ground Lease Term disturb BNPLC's peaceable and quiet enjoyment of the GL Property; however, such enjoyment shall be subject to the terms, provisions, covenants, agreements and conditions of this Ground Lease and the Permitted Encumbrances, to which this Ground Lease is subject and subordinate as herein above set forth. 20. ESTOPPEL CERTIFICATE. Lessor shall from time to time, within ten days after receipt of request by BNPLC, deliver a statement in writing certifying: (A) that this Ground Lease is unmodified and in full force and effect (or if modified that this Ground Lease as so modified is in full force and effect); (B) that to the knowledge of Lessor BNPLC has not previously assigned or hypothecated its rights or interests under this Ground Lease, except as is described in such statement with as much specificity as EXHIBIT B-3 - PAGE 7 <PAGE> 47 Lessor is able to provide; (C) the term of this Ground Lease and the Ground Lease Rent then in effect and any additional charges; (D) that BNPLC is not in default under any provision of this Ground Lease (or if in default, the nature thereof in detail) and a statement as to any outstanding obligations on the part of Lessor or BNPLC; and (E) such other matters as are reasonably requested by BNPLC. Lessor's failure to deliver such statement within such time shall be conclusive upon BNPLC (i) that this Ground Lease is in full force and effect, without modification except as may be represented by BNPLC, (ii) that there are no uncured defaults in BNPLC's performance hereunder. 21. OPTION TO REPURCHASE. Subject to the terms and conditions set forth in Annex 5, BNPLC (and any assignee of BNPLC's entire interest in the GL Property, but not any subtenant or assignee of a lesser interest) shall have the option (the "REPURCHASE OPTION") to purchase Lessor's interest in the GL Property. To secure BNPLC's right to recover any damages caused by a breach of the Repurchase Option or other provisions of this Ground Lease by Lessor, including any such breach caused by a rejection or termination of this Ground Lease in any bankruptcy or insolvency proceeding instituted by or against Lessor, as debtor, Lessor does hereby grant to BNPLC a lien and security interest against the Land and against all rights, title and interests of Lessor from time to time in and to the GL Property. [The signature pages follow.] EXHIBIT B-3 - PAGE 8 <PAGE> 48 IN WITNESS WHEREOF, this Ground Lease is hereby executed in multiple originals as of the date first written above. "Lessor" [NAI or the Applicable Purchaser] By: ------------------------------------- Name: ---------------------------- Title: ---------------------------- EXHIBIT B-3 - PAGE 9 <PAGE> 49 [Continuation of signature pages to GROUND LEASE dated as of ___________, ____] "BNPLC" BNP LEASING CORPORATION By: ------------------------------------- Name: ---------------------------- Title: ---------------------------- EXHIBIT B-3 - PAGE 10 <PAGE> 50 STATE OF ___________ ) ) SS COUNTY OF _____________ ) On _____________, _____, before me, ________________________, personally appeared ____________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature ----------------------------------- EXHIBIT B-3 - PAGE 11 <PAGE> 51 STATE OF ________ ) ) COUNTY OF __________ ) On ___________, _____, before me, ________________________, personally appeared ____________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature ----------------------------------- EXHIBIT B-3 - PAGE 12 <PAGE> 52 ANNEX 1 LEGAL DESCRIPTION [DRAFTING NOTE: TO THE EXTENT THAT THE "LAND" COVERED BY THE LAND LEASE CHANGES FROM TIME TO TIME BECAUSE OF ADJUSTMENTS FOR WHICH NAI REQUESTS BNPLC'S CONSENT OR APPROVAL, SO TOO WILL THE DESCRIPTION OF THE LAND BELOW CHANGE. ANY SUCH CHANGES WILL BE INCORPORATED INTO THE DESCRIPTION BELOW AND THIS "DRAFTING NOTE" WILL BE DELETED BEFORE THE DEED TO WHICH THIS DESCRIPTION IS ATTACHED IS ACTUALLY EXECUTED AND DELIVERED.] All that certain real property situate in the City of Sunnyvale, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75[degrees]8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14[degrees]51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75[degrees]08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14[degrees]51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: EXHIBIT B-3 - PAGE 13 <PAGE> 53 Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 EXHIBIT B-3 - PAGE 14 <PAGE> 54 ANNEX 2 PERMITTED ENCUMBRANCES The leasehold and other interests in the Land hereby conveyed by Lessor are conveyed subject to the following matters to the extent the same are still valid and in force: [THE SAME LIST OF PERMITTED ENCUMBRANCES ATTACHED TO THE GRANT DEED FROM BNPLC TO NAI OR THE APPLICABLE PURCHASER SHALL BE INSERTED HERE.] EXHIBIT B-3 - PAGE 15 <PAGE> 55 ANNEX 3 LIST OF DEVELOPMENT DOCUMENTS NONE EXHIBIT B-3 - PAGE 16 <PAGE> 56 ANNEX 4 DETERMINATION OF FAIR RENTAL VALUE Each annual payment of Ground Lease Rent will equal the Fair Rental Value, computed as of the most recent Rental Determination Date when such payment becomes due. As used in this Annex: "FAIR RENTAL VALUE" means (and all appraisers and other persons involved in the determination of the Fair Rental Value will be so advised) the annual rent, as determined in accordance with this Annex, that would be agreed upon between a willing tenant, under no compulsion to lease, and a willing landlord, under no compulsion to lease, for unimproved land comparable in size and location to the Land, exclusive of any Improvements but assuming that there is no higher and better use for such land than as a site for improvements of comparable size and utility to the Improvements, at the time a determination is required under hereunder and taking into consideration the condition of the Land, the encumbrances affecting the title to the Land and all applicable zoning, land use approvals and other governmental permits relating to the Land at the time of such determination; and "RENTAL DETERMINATION DATE" means the GL Effective Date and each fifth anniversary of the GL Effective Date. If Lessor and BNPLC have not agreed upon Fair Rental Value as of any Rental Determination Date within one hundred eighty days after the such date, then Fair Rental Value will be determined as follows: (a) Lessor and BNPLC shall each appoint a real estate appraiser who is familiar with rental values for properties in the vicinity of the Land and who has not previously acted for either party. Each party will make the appointment no later than ten days after receipt of notice from the other party that the appraisal process described in this Annex has been invoked. The agreement of the two appraisers as to Fair Rental Value will be binding upon Lessor and BNPLC. If the two appraisers cannot agree upon the Fair Rental Value within ten days following their appointment, they shall within another ten days agree upon a third real estate appraiser. Immediately thereafter, each of the first two appraisers will submit his best estimate of the appropriate Fair Rental Value (together with a written report supporting such estimate) to the third appraiser and the third appraiser will choose between the two estimates. The estimate of Fair Rental Value chosen by the third appraiser as the closest to the prevailing annual fair rental value will be binding upon Lessor and BNPLC. Notification in writing of this estimate shall be made to Lessor and BNPLC within fifteen days following the selection of the third appraiser. (b) If appraisers must be selected under the procedure set out above and either BNPLC or Lessor fails to appoint an appraiser or fails to notify the other party of such appointment within fifteen days after receipt of notice that the prescribed time for appointing the appraisers has passed, then the other party's appraiser will determine the Fair Rental Value. All appraisers selected for the appraisal process set out in this Annex will be disinterested, reputable, qualified real estate appraisers with the designation of MAI or equivalent and with at least 5 years experience in appraising properties comparable to the Land. (c) If a third appraiser must be chosen under the procedure set out above, he or she will be chosen on the basis of objectivity and competence, not on the basis of his relationship with the other appraisers or the parties to this Ground Lease, and the first two appraisers will be so advised. Although the first two appraisers will be instructed to attempt in good faith to agree upon the third appraiser, if for any reason they cannot agree within the prescribed time, either Lessor and BNPLC may require the first two appraisers to immediately submit its top choice for the third appraiser to the then highest ranking officer of the California Bar Association who will agree to help and who has no attorney/client or other significant EXHIBIT B-3 - PAGE 17 <PAGE> 57 relationship to either Lessor or BNPLC. Such officer will have complete discretion to select the most objective and competent third appraiser from between the choices of each of the first two appraisers, and will do so within twenty days after such choices are submitted to him. (d) Either Lessor or BNPLC may notify the appraiser selected by the other party to demand the submission of an estimate of Fair Rental Value or a choice of a third appraiser as required under the procedure described above; and if the submission of such an estimate or choice is required but the other party's appraiser fails to comply with the demand within fifteen days after receipt of such notice, then the Fair Rental Value or choice of the third appraiser, as the case may be, selected by the other appraiser (i.e., the notifying party's appraiser) will be binding upon Lessor and BNPLC. (e) Lessor and BNPLC shall each bear the expense of the appraiser appointed by it, and the expense of the third appraiser and of any officer of the California Bar Association who participates in the appraisal process described above will be shared equally by Lessor and BNPLC. EXHIBIT B-3 - PAGE 18 <PAGE> 58 ANNEX 5 REPURCHASE OPTION Subject to the terms of this Annex, BNPLC shall have an option (the "OPTION") to buy Lessor's fee interest in the GL Property at any time during the term of this Ground Lease for a purchase price (the "OPTION PRICE") to Lessor equal to the fair market value of the GL Property, determined as described in the next paragraph. For the purposes of this Annex, "fair market value" of the GL Property means (and all appraisers and other persons involved in the determination of the Option Price will be so advised) the price that would be agreed upon between a willing buyer, under no compulsion to buy, and a willing seller, under no compulsion to sell, for the Land, exclusive of any Improvements as if the Land were unimproved, but assuming that there is no higher and better use for the Land than as a site for the construction of improvements of comparable size and utility to the Improvements, at the time of BNPLC's exercise of the Option and taking into consideration the encumbrances affecting the title to the Land and all applicable zoning, land use approvals and other governmental permits relating to the Land at the time of the exercise of the Option. If BNPLC exercises the Option, which BNPLC may do by notifying Lessor that BNPLC has elected to buy Lessor's interest in the GL Property as provided herein, then: (a) To the extent, if any, required as a condition imposed by law to the conveyance of the fee interest in the GL Property to BNPLC, Lessor shall promptly at its expense do whatever is necessary to obtain approvals of a new Parcel Map or lot line adjustments. (b) Upon BNPLC's tender of the Option Price to Lessor, Lessor will convey to BNPLC by general warranty deed and assignment, subject only to the Permitted Encumbrances, good and marketable title to the fee estate in the Land , to Lessor's interest in all other GL Property and, to the extent still in force, to Lessor's Extended Remarketing Rights under the Purchase Agreement. (c) BNPLC's obligation to close the purchase shall be subject to the following terms and conditions, all of which are for the benefit of BNPLC: (1) BNPLC shall have been furnished with evidence satisfactory to BNPLC that Lessor can convey title as required by the preceding subparagraph; (2) nothing shall have occurred or been discovered after BNPLC exercised the Option that could significantly and adversely affect title to the GL Property or BNPLC's use thereof, (3) all of the representations of Lessor in this Ground Lease shall continue to be true as if made effective on the date of the closing and, with respect to any such representations which may be limited to the knowledge of Lessor or any of Lessor's representatives, would continue to be true on the date of the closing if all relevant facts and circumstances were known to Lessor and such representatives, (4) BNPLC shall find the Option Price acceptable after it is determined as provided in this Annex, and (5) BNPLC shall have been tendered the deed and other documents which are described in this Annex as documents to be delivered to BNPLC at the closing of BNPLC's purchase. (d) Closing of the purchase will be scheduled on the first Business Day following thirty days after the Option Price is established in accordance with the terms and conditions of this Annex and after any approvals described in subparagraph (a) above are obtained, and prior to closing BNPLC's occupancy of the GL Property shall continue to be subject to the terms and conditions of this Ground Lease, including the terms setting forth BNPLC's obligation to pay rent. Closing shall take place at the offices of any title insurance company reasonably selected by BNPLC to insure title under the title insurance policy described below. EXHIBIT B-3 - PAGE 19 <PAGE> 59 (e) Any transfer taxes or notices or registrations required by law in connection with the sale contemplated by this Annex will be the responsibility of Lessor. (f) Lessor will deliver a certificate of nonforeign status to BNPLC at closing as needed to comply with the provisions of the Foreign Investors Real Property Tax Act (FIRPTA) or any comparable federal, state or local law in effect at the time. (g) Lessor will also pay for and deliver to BNPLC at the closing an owner's title insurance policy in the full amount of the Option Price, issued by a title insurance company designated by BNPLC (or written confirmation from the title company that it is then prepared to issue such a policy), and subject only to standard printed exceptions which the title insurance company refuses to delete or modify in a manner acceptable to BNPLC and to Permitted Encumbrances. (h) Lessor shall also deliver at the closing all other documents or things reasonably required to be delivered to BNPLC or by the title insurance company to evidence Lessor's ability to transfer the GL Property to BNPLC. If Lessor and BNPLC do not otherwise agree upon the amount of the Option Price within twenty days after BNPLC exercises the Option, the Option Price shall be determined in accordance with the following procedure: (1) Lessor and BNPLC shall each appoint a real estate appraiser who is familiar with properties in the vicinity of the Land and who has not previously acted for either party. Each party will make the appointment no later than ten days after receipt of notice from the other party that the appraisal process described in this Annex has been invoked. The agreement of the two appraisers as to the Option Price will be binding upon Lessor and BNPLC. If the two appraisers cannot agree upon the Option Price within ten days following their appointment, they shall within another ten days agree upon a third real estate appraiser. Immediately thereafter, each of the first two appraisers will submit his best estimate of the appropriate Option Price (together with a written report supporting such estimate) to the third appraiser and the third appraiser will choose between the two estimates. The estimate of Option Price chosen by the third appraiser as the closest to the prevailing fair market value will be binding upon Lessor and BNPLC. Notification in writing of the Option Price shall be made to Lessor and BNPLC within fifteen days following the selection of the third appraiser. (2) If appraisers must be selected under the procedure set out above and either BNPLC or Lessor fails to appoint an appraiser or fails to notify the other party of such appointment within fifteen days after receipt of notice that the prescribed time for appointing the appraisers has passed, then the other party's appraiser will determine the Option Price. All appraisers selected for the appraisal process set out in this Annex will be disinterested, reputable, qualified real estate appraisers with the designation of MAI or equivalent and with at least 5 years experience in appraising properties comparable to the Land. (3) If a third appraiser 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 appraisers or the parties to this Ground Lease, and the first two appraisers will be so advised. Although the first two appraisers will be instructed to attempt in good faith to agree upon the third appraiser, if for any reason they cannot agree within the prescribed time, either Lessor and BNPLC may require the first two appraisers to immediately submit its top choice for the third appraiser to the then highest ranking officer of the California Bar Association who will agree to help and who has no attorney/client or other significant relationship to either Lessor or BNPLC. Such officer EXHIBIT B-3 - PAGE 20 <PAGE> 60 will have complete discretion to select the most objective and competent third appraiser from between the choices of each of the first two appraisers, and will do so within ten days after such choices are submitted to him. (4) Either Lessor or BNPLC may notify the appraiser selected by the other party to demand the submission of an estimate of Option Price or a choice of a third appraiser as required under the procedure described above; and if the submission of such an estimate or choice is required but the other party's appraiser fails to comply with the demand within fifteen days after receipt of such notice, then the Option Price or choice of the third appraiser, as the case may be, selected by the other appraiser (i.e., the notifying party's appraiser) will be binding upon Lessor and BNPLC. (5) Lessor and BNPLC shall each bear the expense of the appraiser appointed by it, and the expense of the third appraiser and of any officer of the California Bar Association who participates in the appraisal process described above will be shared equally by Lessor and BNPLC. EXHIBIT B-3 - PAGE 21 <PAGE> 61 EXHIBIT C BILL OF SALE AND ASSIGNMENT Reference is made to: (1) that certain Purchase Agreement (Phase IV - Land) between BNP Leasing Corporation ("ASSIGNOR") and Network Appliance, Inc., dated as of December ___, 1999, (the "PURCHASE AGREEMENT") and (2) that certain Lease Agreement (Phase IV - Land) between Assignor, as landlord, and Network Appliance, Inc., as tenant, dated as of December ___, 1999 (the "LAND LEASE"). (Capitalized terms used and not otherwise defined in this document are intended to have the meanings assigned to them in the Common Definitions and Provisions Agreement (Phase IV - Land) incorporated by reference into both the Purchase Agreement and Land Lease.) As contemplated by the Purchase Agreement, Assignor hereby sells, transfers and assigns unto [NAI 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) the Land Lease; (b) 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; and (c) all other property included within the definition of "Property" as set forth in the Purchase Agreement. Provided, however, excluded from this conveyance and reserved to Assignor are any rights or privileges of Assignor under the following ("EXCLUDED RIGHTS"): (1) the indemnities set forth in the Land Lease, whether such rights are presently known or unknown, including rights of the Assignor to be indemnified against environmental claims of third parties as provided in the Land Lease which may not presently be known, (2) provisions in the Land Lease that establish the right of Assignor to recover any accrued unpaid rent under the Land Lease which may be outstanding as of the date hereof, (3) agreements between Assignor and "BNPLC's Parent" or any "Participant," both as defined in the Land Lease, or any modification or extension thereof, or (4) any other instrument being delivered to Assignor contemporaneously herewith pursuant to the Purchase Agreement. To the extent that this conveyance does include any rights to receive future payments under the Land Lease, such rights ("INCLUDED RIGHTS") shall be subordinate to Assignor's Excluded Rights, and Assignee hereby waives any rights to enforce Included Rights until such time as Assignor has received all payments to which it remains entitled by reason of Excluded Rights. If any amount shall be paid to Assignee on account of any Included Rights at any time before Assignor has received all payments to which it is entitled because of Excluded Rights, such amount shall be held in trust by Assignee for the benefit of Assignor, shall be segregated from the other funds of Assignee and shall forthwith be paid over to Assignor to be held by Assignor as collateral for, or then or at any time thereafter applied in whole or in part by Assignor against, the payments due to Assignor because of Excluded Rights, whether matured or unmatured, in such order as Assignor shall elect. Assignor does for itself and its successors 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 a Lien Removable by BNPLC, but not otherwise. <PAGE> 62 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. IN WITNESS WHEREOF, the parties have executed this instrument as of _______________, _____. ASSIGNOR: BNP LEASING CORPORATION a Delaware corporation By: ------------------------------------- Its: ----------------------------------- ASSIGNEE: [NAI or the Applicable Purchaser], a -------------------- By: ------------------------------------- Its: ----------------------------------- EXHIBIT C - PAGE 2 <PAGE> 63 STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ---------------------------- STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ---------------------------- EXHIBIT C - PAGE 3 <PAGE> 64 ANNEX A LEGAL DESCRIPTION [DRAFTING NOTE: TO THE EXTENT THAT THE "LAND" COVERED BY THE LAND LEASE CHANGES FROM TIME TO TIME BECAUSE OF ADJUSTMENTS FOR WHICH NAI REQUESTS BNPLC'S CONSENT OR APPROVAL, SO TOO WILL THE DESCRIPTION OF THE LAND BELOW CHANGE. ANY SUCH CHANGES WILL BE INCORPORATED INTO THE DESCRIPTION BELOW AND THIS "DRAFTING NOTE" WILL BE DELETED BEFORE THE DOCUMENT TO WHICH THIS DESCRIPTION IS ATTACHED IS ACTUALLY EXECUTED AND DELIVERED.] The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75~8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14~51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75~08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14~51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of EXHIBIT C - PAGE 4 <PAGE> 65 Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 EXHIBIT C - PAGE 5 <PAGE> 66 EXHIBIT D ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES THIS ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES (this "Certificate") is made as of ___________________, ____, by [NAI 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 corporate grant deed and (2) a Bill of Sale and Assignment (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 Established Misconduct of BNPLC. As used in the preceding sentence, "ESTABLISHED MISCONDUCT" is intended to have, and be limited to, the meaning given to it in the Common Definitions and Provisions Agreement (Phase IV - Land) incorporated by reference into the Purchase Agreement (Phase IV-Land) between BNPLC and Network Appliance, Inc. dated December ___, 1999, pursuant to which Purchase Agreement BNPLC is delivering the Conveyancing Documents. 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 ________________, ____. [NAI or the Applicable Purchaser] By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- <PAGE> 67 EXHIBIT E SECRETARY'S CERTIFICATE The undersigned, [Secretary or Assistant 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 SALE CLOSING DOCUMENTS ON BEHALF OF THE CORPORATION.] <TABLE> <CAPTION> Name Title Signature - ---- ----- --------- <S> <C> <C> - ------------------------ ------------------------ ------------------------ - ------------------------ ------------------------ ------------------------ </TABLE> 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 and title] <PAGE> 68 CORPORATE RESOLUTIONS OF BNP LEASING CORPORATION WHEREAS, pursuant to that certain Purchase Agreement (Phase IV - Land) (herein called the "Purchase Agreement") dated as of December ___, 1999, by and between BNP Leasing Corporation (the "Corporation") and [NAI 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 Sunnyvale, 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 E - PAGE 2 <PAGE> 69 EXHIBIT F 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 [NAI 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 ______________ _________________________ _________________. 4. The Seller is qualified to do business in California. 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. 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: -------------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.53 <SEQUENCE>12 <DESCRIPTION>EXHIBIT 10.53 <TEXT> <PAGE> 1 EXHIBIT 10.53 ================================================================================ PURCHASE AGREEMENT (PHASE IV - IMPROVEMENTS) BETWEEN BNP LEASING CORPORATION ("BNPLC") AND NETWORK APPLIANCE, INC. ("NAI") DECEMBER ___, 1999 (SUNNYVALE, CALIFORNIA) ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> <C> 1. NAI'S OPTIONS AND OBLIGATIONS ON THE DESIGNATED SALE DATE.................................1 (A) Right to Purchase; Right and Obligation to Remarket..................................1 (B) Determinations Concerning Price......................................................2 (C) Designation of the Purchaser.........................................................3 (D) Effect of the Purchase Option and NAI's Initial Remarketing Rights and Obligations on Subsequent Title Encumbrances.........................................4 (E) Security for the Purchase Option and NAI's Initial Remarketing Rights and Obligations..........................................................................4 (F) Delivery of Books and Records If BNPLC Retains the Property..........................4 2. NAI'S RIGHTS AND OPTIONS AFTER THE DESIGNATED SALE DATE...................................4 (A) NAI's Extended Right to Remarket.....................................................4 (B) Definition of Minimum Extended Remarketing Price.....................................5 (C) BNPLC's Right to Sell................................................................6 (D) NAI's Right to Excess Sales Proceeds.................................................6 (E) Permitted Transfers During NAI's Extended Remarketing Period.........................6 3. TERMS OF CONVEYANCE UPON PURCHASE 6 4. SURVIVAL AND TERMINATION OF THE RIGHTS AND OBLIGATIONS OF NAI AND BNPLC 7 (A) Status of this Agreement Generally...................................................7 (B) [Intentionally deleted.].............................................................8 (C) [Intentionally deleted.].............................................................8 (D) Automatic Termination of NAI's Rights................................................8 (E) Termination of NAI's Extended Remarketing Rights to Permit a Sale by BNPLC...........8 (F) Payment Only to BNPLC................................................................8 (G) Remedies Under the Other Operative Documents.........................................8 (H) Occupancy by NAI Prior to Closing of a Sale..........................................8 5. SECURITY FOR NAI'S OBLIGATIONS; RETURN OF FUNDS.......................................... 8 6. CERTAIN REMEDIES CUMULATIVE.............................................................. 9 7. ATTORNEYS' FEES AND LEGAL EXPENSES....................................................... 9 8. ESTOPPEL CERTIFICATE..................................................................... 9 9. SUCCESSORS AND ASSIGNS................................................................... 9 </TABLE> <PAGE> 3 Exhibits and Schedules Exhibit A......................................................Legal Description Exhibit B...........................................Grant Deed Form Requirements Exhibit C............................................Bill of Sale and Assignment Exhibit D..........................................Acknowledgment and Disclaimer Exhibit E................................................Secretary's Certificate Exhibit F.................................Certificate Concerning Tax Withholding <PAGE> 4 PURCHASE AGREEMENT (PHASE IV - IMPROVEMENTS) This PURCHASE AGREEMENT (PHASE IV - IMPROVEMENTS) (this "AGREEMENT"), by and between BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"), and NETWORK APPLIANCE, INC., a California corporation ("NAI"), is made and dated as of December ___, 1999, the Effective Date. ("EFFECTIVE DATE" and other capitalized terms used and not otherwise defined in this Agreement are intended to have the meanings assigned to them in the Common Definitions and Provisions Agreement (Phase IV - Improvements) executed by BNPLC and NAI contemporaneously with this Agreement. By this reference, the Common Definitions and Provisions Agreement (Phase IV - Improvements) is incorporated into and made a part of this Agreement for all purposes.) RECITALS Pursuant to the Existing Contract, which covers the Land described in Exhibit A, BNPLC is acquiring the Land and any appurtenances thereto and the existing Improvements thereon from Seller contemporaneously with the execution of this Agreement. Pursuant to the Lease Agreement (Phase IV - Improvements) executed by BNPLC and NAI contemporaneously with this Agreement (the "IMPROVEMENTS LEASE"), BNPLC is leasing the Improvements to NAI. (All of BNPLC's interests, including those created by the documents delivered at the closing under the Existing Contracts, in the Improvements and in all other real and personal property from time to time covered by the Improvements Lease and included within the "Property" as defined therein are hereinafter collectively referred to as the "PROPERTY". The Property does not include the fee estate in the Land itself, it being understood that the Other Purchase Agreement constitutes a separate agreement providing for the possible sale of the Land and the appurtenances thereto, and only the Land and the appurtenances thereto, from BNPLC to NAI or a third party designated by NAI.) NAI and BNPLC have reached agreement upon the terms and conditions upon which NAI will purchase or arrange for the purchase of the Property, and by this Agreement they desire to evidence such agreement. AGREEMENTS 1. NAI'S OPTIONS AND OBLIGATIONS ON THE DESIGNATED SALE DATE. (A) Right to Purchase; Right and Obligation to Remarket. Whether or not an Event of Default shall have occurred and be continuing or the Improvements Lease shall have been terminated, but subject to Paragraph 4 below: (1) NAI shall have the right (the "PURCHASE OPTION") to purchase or cause an Affiliate of NAI to purchase the Property and BNPLC's interest in Escrowed Proceeds, if any, on the Designated Sale Date for a cash price equal to the Break Even Price (as defined below). (2) If neither NAI nor an Affiliate of NAI purchases the Property and BNPLC's interest in any Escrowed Proceeds on the Designated Sale Date as provided in the preceding subparagraph 1(A)(1), then NAI shall have the following rights and obligations (collectively, "NAI'S INITIAL REMARKETING RIGHTS AND OBLIGATIONS"): <PAGE> 5 (a) First, NAI shall have the right (but not the obligation) to cause an Applicable Purchaser who is not an Affiliate of NAI to purchase the Property and BNPLC's interest in any Escrowed Proceeds on the Designated Sale Date for a cash purchase price (the "THIRD PARTY PRICE") determined as provided below. If, however, the Break Even Price exceeds the sum of any Third Party Price tendered or to be tendered to BNPLC by an Applicable Purchaser and any Supplemental Payment paid by NAI as described below, then BNPLC may affirmatively elect to decline such tender from the Applicable Purchaser and to keep the Property and any Escrowed Proceeds rather than sell to the Applicable Purchaser pursuant to this subparagraph (a "VOLUNTARY RETENTION OF THE PROPERTY"). (b) Second, if the Third Party Price actually paid by an Applicable Purchaser to BNPLC on the Designated Sale Date exceeds the Break Even Price, NAI shall be entitled to such excess, subject, however, to BNPLC's right to offset against such excess any and all sums that are then due from NAI to BNPLC under the other Operative Documents. (c) Third, if for any reason whatsoever (including a Voluntary Retention of the Property or a decision by NAI not to exercise its right to purchase or cause an Applicable Purchaser to purchase from BNPLC as described above) neither NAI nor an Applicable Purchaser pays a net cash price to BNPLC on the Designated Sale Date equal to or in excess of the Break Even Price in connection with a sale of the Property and BNPLC's interest in any Escrowed Proceeds pursuant to this Agreement, then NAI shall have the obligation to pay to BNPLC on the Designated Sale Date a supplemental payment (the "SUPPLEMENTAL PAYMENT") equal to the lesser of (1) the amount by which the Break Even Price exceeds such net cash price (if any) actually received by BNPLC on the Designated Sale Date (such excess being hereinafter called a "DEFICIENCY") or (2) the Maximum Remarketing Obligation. As used herein, the "MAXIMUM REMARKETING OBLIGATION" means a dollar amount determined in accordance with the following provisions: (1) The "MAXIMUM REMARKETING OBLIGATION" will equal the product of (i) Stipulated Loss Value on the Designated Sale Date, times (ii) 100% minus the Residual Risk Percentage, provided that both of the following conditions are satisfied: (x) NAI shall not have elected to accelerate the Designated Sale Date as provided in clause (2) of the definition of Designated Sale Date in the Common Definitions and Provisions Agreement (Phase IV - Improvements). (y) No Event of Default, other than an Issue 97-1 Non-performance-related Subjective Event of Default, shall occur on or be continuing on the Designated Sale Date. (2) If either of the conditions listed in subparagraph 1) preceding are not satisfied, the "MAXIMUM REMARKETING OBLIGATION" will equal the Break Even Price. If any Supplemental Payment or other amount payable to BNPLC pursuant to this subparagraph 1(A) is not actually paid to BNPLC on the Designated Sale Date, NAI shall pay interest on the past due amount computed at the Default Rate from the Designated Sale Date. (B) Determinations Concerning Price. 2 <PAGE> 6 (1) Determination of the Break Even Price. As used herein, "BREAK EVEN PRICE" means an amount equal, on the Designated Sale Date, to Stipulated Loss Value, plus all out-of-pocket costs and expenses (including appraisal costs, withholding taxes (if any) not constituting Excluded Taxes, and Attorneys' Fees) incurred by BNPLC in connection with any sale of BNPLC's interests in the Property under this Agreement or in connection with collecting payments due hereunder, but less the aggregate amounts (if any) of Direct Payments to Participants and Deposit Taker Losses. (2) Determination of Third Party Price. The Third Party Price required of any Applicable Purchaser purchasing from BNPLC under subparagraph 1(A)(2)(a) will be determined as follows: (a) NAI may give a notice (a "REMARKETING NOTICE") to BNPLC and to each of the Participants no earlier than one hundred twenty days before the Designated Sale Date and no later than ninety days before the Designated Sale Date, specifying an amount as the Third Party Price that NAI believes in good faith to constitute reasonably equivalent value for the Property and any Escrowed Proceeds. Once given, a Remarketing Notice shall not be rescinded or modified without BNPLC's written consent. (b) If BNPLC believes in good faith that the Third Party Price specified by NAI in a Remarketing Notice does not constitute reasonably equivalent value for the Property and any Escrowed Proceeds, BNPLC may at any time before sixty days prior to the Designated Sale Date respond to the Remarketing Notice with a notice back to NAI, objecting to the Third Party Price so specified by NAI. If BNPLC receives a Remarketing Notice, yet does not respond with an objection as provided in the preceding sentence, the Third Party Price suggested by NAI in the Remarketing Notice will be the Third Party Price for purposes of this Agreement. If, however, BNPLC does respond with an objection as provided in this subparagraph, and if NAI and BNPLC do not otherwise agree in writing upon a Third Party Price, then the Third Party Price will be the lesser of (I) fair market value of the Property, plus the amount of any Escrowed Proceeds, as determined by a professional independent appraiser satisfactory to BNPLC, or (II) the Break Even Price. (c) If for any reason, including an acceleration of the Designated Sale Date as provided in the definition thereof in the Common Definitions and Provisions Agreement (Phase IV - Improvements), NAI does not deliver a Remarketing Notice to BNPLC within the time period specified above, then the Third Party Price will be an amount determined in good faith by BNPLC as constituting reasonably equivalent value for the Property and any Escrowed Proceeds, but in no event more than the Break Even Price. If any payment to BNPLC by an Applicable Purchaser hereunder is held to constitute a preference or a voidable transfer under Applicable Law, or must for any other reason be refunded by BNPLC to the Applicable Purchaser or to another Person, and if such payment to BNPLC reduced or had the effect of reducing a Supplemental Payment or increased or had the effect of increasing any excess sale proceeds paid to NAI pursuant to subparagraph 1(A)(2)(b) or pursuant to subparagraph 2(D), then NAI shall pay to BNPLC upon demand an amount equal to the reduction of the Supplemental Payment or to the increase of the excess sale proceeds paid to NAI, as applicable, and this Agreement shall continue to be effective or shall be reinstated as necessary to permit BNPLC to enforce its right to collect such amount from NAI. (C) Designation of the Purchaser. To give BNPLC the opportunity before the Designated Sale Date to prepare the deed and other documents that BNPLC must tender pursuant to Paragraph 3 (collectively, the 3 <PAGE> 7 "SALE CLOSING DOCUMENTS"), NAI must, by a notice to BNPLC given at least seven days prior to the Designated Sale Date, specify irrevocably, unequivocally and with particularity the party who will purchase the Property in order to satisfy the obligations of NAI set forth in subparagraph 1(A). If for any reason NAI fails to so specify a party who will in accordance with the terms and conditions set forth herein purchase the Property (be it NAI itself, an Affiliate of NAI or another Applicable Purchaser), BNPLC shall be entitled to postpone the tender of the Sale Closing Documents until a date after the Designated Sale Date and not more than twenty days after NAI finally does so specify a party, but such postponement will not relieve or postpone the obligation of NAI to make a Supplemental Payment on the Designated Sale Date as provided in Paragraph 1(A)(2)(c). (D) Effect of the Purchase Option and NAI's Initial Remarketing Rights and Obligations on Subsequent Title Encumbrances. Any conveyance of the Property to NAI or any Applicable Purchaser pursuant to this Paragraph 1(A) shall cut off and terminate any interest in the Improvements or other Property claimed by, through or under BNPLC, including any interest claimed by the Participants and including any Liens Removable by BNPLC (such as, but not limited to, any judgment liens established against the Property because of a judgment rendered against BNPLC and any leasehold or other interests conveyed by BNPLC in the ordinary course of BNPLC's business), but not including personal obligations of NAI to BNPLC under the Improvements Lease or other Operative Documents (including obligations arising under the indemnities therein). 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 Purchase Option and NAI's Initial Remarketing Rights and Obligations. Further, NAI 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 NAI nor any Applicable Purchaser shall be responsible for the proper distribution or application of any such payments by BNPLC; and any such payment to BNPLC shall discharge the obligation of NAI to cause such payment to all Persons claiming an interest in such payment. Contemporaneously with the execution of this Agreement, the parties shall record a memorandum of this Agreement for purposes of effecting constructive notice to all Persons of NAI's rights under this Agreement, including its rights under this subparagraph. (E) Security for the Purchase Option and NAI's Initial Remarketing Rights and Obligations. To secure BNPLC's obligation to sell the Property pursuant to this Paragraph 1(A) and to pay any damages to NAI caused by a breach of such obligations, 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 NAI a lien and security interest against all rights, title and interests of BNPLC from time to time in and to the Improvements and other Property. NAI may enforce such lien and security interest judicially after any such breach by BNPLC, but not otherwise. Contemporaneously with the execution of this Agreement, NAI and BNPLC will execute a memorandum of this Agreement which is in recordable form and which specifically references the lien granted in this subparagraph, and NAI shall be entitled to record such memorandum at any time prior to the Designated Sale Date. (F) Delivery of Books and Records If BNPLC Retains the Property. Unless NAI or its Affiliate or another Applicable Purchaser purchases the Property pursuant to Paragraph 1(A), promptly after the Designated Sale Date NAI shall deliver to BNPLC copies of books and records of NAI which will be necessary or useful to any future owner's or occupant's use of the Property in the manner permitted by the Improvements Lease. 2. NAI'S RIGHTS AND OPTIONS AFTER THE DESIGNATED SALE DATE. (A) NAI's Extended Right to Remarket. During the two years following the Designated Sale Date ("NAI'S EXTENDED REMARKETING PERIOD"), NAI shall have the right ("NAI'S EXTENDED REMARKETING RIGHT") to cause an Applicable Purchaser who is not an Affiliate of NAI to purchase the Property for a cash 4 <PAGE> 8 purchase price not below the lesser of (I) the Minimum Extended Remarketing Price (as defined below), or (II) if applicable, the Third Party Target Price (as defined below) specified in any Third Party Sale Notice (as defined below) given by BNPLC pursuant to subparagraph 2(C)(2) within the ninety days prior to the date (the "FINAL SALE DATE") upon which BNPLC receives such purchase price from the Applicable Purchaser. NAI's Extended Remarketing Right shall, however, be subject to all of the following conditions: (1) The Property and BNPLC's interest in Escrowed Proceeds, if any, shall not have been sold on the Designated Sale Date as provided in Paragraph 1. (2) No Voluntary Retention of the Property shall have occurred as described in subparagraph 1(A)(2)(a). (3) NAI's Extended Remarketing Right shall not have been terminated pursuant to subparagraph 4(D) below because of NAI's failure to make any Supplemental Payment required on the Designated Sale Date. (4) NAI's Extended Remarketing Right shall not have been terminated by BNPLC pursuant to subparagraph 4(E) below to facilitate BNPLC's sale of the Property to a third party in accordance with subparagraph 2(C). (5) At least thirty days prior to the Final Sale Date, NAI shall have notified BNPLC of (x) the date proposed by NAI as the Final Sale Date (which must be a Business Day), (y) the full legal name of the Applicable Purchaser and such other information as will be required to prepare the Sale Closing Documents, and (z) the amount of the purchase price that the Applicable Purchaser will pay (consistent with the minimum required pursuant to the other provisions of this subparagraph 2(A)) for the Property. (B) Definition of Minimum Extended Remarketing Price. As used herein, "MINIMUM EXTENDED REMARKETING PRICE" means an amount equal to the sum of the following: (1) the amount by which the Break Even Price computed on the Designated Sale Date exceeds any Supplemental Payment actually paid to BNPLC on the Designated Sale Date, together with interest on such excess computed at the Default Rate from the period commencing on the Designated Sale Date and ending on the Final Sale Date, plus (2) all out-of-pocket costs and expenses (including withholding taxes [if any], other than Excluded Taxes, and Attorneys' Fees) incurred by BNPLC in connection with the sale to the Applicable Purchaser, to the extent not already included in the computation of Break Even Price, and plus (3) the sum of all Impositions, insurance premiums and other Losses of every kind suffered or incurred by BNPLC or any other Interested Party with respect to the ownership, operation or maintenance of the Property on or after the Designated Sale Date (except to the extent already reimbursed by any lessee of the Property after the Designated Sale Date), together with interest on such Impositions, insurance premiums and other Losses computed at the Default Rate from the date paid or incurred to the Final Sale Date. If, however, Losses described in the preceding clause (3) consist of claims against BNPLC or another Interested Party that have not been liquidated prior to the Final Sale Date (and, thus, such Losses have yet to be fixed in amount as of the Final Sale Date), then NAI may elect to exclude any such Losses from the computation of the Minimum Extended Remarketing Price by providing to BNPLC, for the benefit of BNPLC and other Interested 5 <PAGE> 9 Parties, a written agreement to indemnify and defend BNPLC and other Interested Parties against such Losses. To be effective hereunder for purposes of reducing the Minimum Extended Remarketing Price (and, thus, the Break Even Price), any such written indemnity must be fully executed and delivered by NAI on or prior to the Final Sale Date, must include provisions comparable to subparagraphs 5(c)(ii), (iii), (iv) and (v) of the Improvements Lease and otherwise must be in form and substance satisfactory to BNPLC. (C) BNPLC's Right to Sell. After the Designated Sale Date, if the Property has not already been sold by BNPLC pursuant to Paragraph 1 or this Paragraph 2, BNPLC shall have the right to sell the Property or offer the Property for sale to any third party on any terms believed to be appropriate by BNPLC in its sole good faith business judgment; provided, however, that so long as the conditions to NAI's Extended Remarketing Rights specified in subparagraph 2(A) continue to be satisfied: (1) BNPLC shall not sell the Property to an Affiliate of BNPLC on terms less favorable than those which BNPLC would require from a prospective purchaser not an Affiliate of BNPLC; (2) If BNPLC receives or desires to make a written proposal (whether in the form of a "letter of intent" or other nonbinding expression of interest or in the form of a more definitive purchase and sale agreement) for a sale of the Property to a prospective purchaser (a "THIRD PARTY SALE PROPOSAL"), and if on the basis of such Third Party Sale Proposal BNPLC expects to enter into or to pursue negotiations for a definitive purchase and sale agreement with the prospective purchaser, then prior to executing any such definitive agreement, BNPLC shall submit the Third Party Sale Proposal to NAI with a notice (the "THIRD PARTY SALE NOTICE") explaining that (A) BNPLC is then prepared to accept a price not below an amount specified in such Third Party Sale Notice (the "THIRD PARTY TARGET PRICE") if BNPLC and the prospective purchaser reach agreement on other terms and conditions to be incorporated into a definitive purchase and sale agreement, and (B) NAI's Extended Remarketing Right may be terminated pursuant to subparagraph 4(E) of this Agreement unless NAI causes an Applicable Purchaser to consummate a purchase of the Property pursuant to this Paragraph 2 within ninety days after the date of such Third Party Sale Notice. (D) NAI's Right to Excess Sales Proceeds. If the cash price actually paid by any third party purchasing the Property from BNPLC during NAI's Extended Remarketing Period, including any price paid by an Applicable Purchaser purchasing from BNPLC pursuant to this Paragraph 2, exceeds the Minimum Extended Remarketing Price, then NAI shall be entitled to the excess; provided, that BNPLC may offset and retain from the excess any and all sums that are then due and unpaid from NAI to BNPLC under any of the Operative Documents. (E) Permitted Transfers During NAI's Extended Remarketing Period. Any "Permitted Transfer" described in clause (6) of the definition thereof in the Common Definitions and Provisions Agreement (Phase IV - Improvements) to an Affiliate of BNPLC or that covers BNPLC's entire interest in the Improvements will be subject to NAI's Extended Remarketing Right if, at the time of the Permitted Transfer, NAI's Extended Remarketing Right has not expired or been terminated as provided herein. Any other Permitted Transfer described in clause (6) of the definition thereof, however, will not be subject to NAI's Extended Remarketing Right. Thus, for example, BNPLC's conveyance of a utility easement or space lease more than thirty days after the Designated Sale Date to a Person not an Affiliate of BNPLC shall not be subject to NAI's Extended Remarketing Right, though following the conveyance of the lesser estate, NAI's Extended Remarketing Right may continue to apply to BNPLC's remaining interest in the Improvements and any Personal Property. 3. TERMS OF CONVEYANCE UPON PURCHASE. As necessary to consummate any sale of the Property to NAI or an Applicable Purchaser pursuant to this Agreement, BNPLC must, subject to any 6 <PAGE> 10 postponement permitted by subparagraph 1(C), promptly after the tender of the purchase price and any other payments to BNPLC required pursuant to Paragraph 1 or Paragraph 2, as applicable, convey all of BNPLC's right, title and interest in the Improvements and other Property to NAI or the Applicable Purchaser, as the case may be, by BNPLC's execution, acknowledgment (where appropriate) and delivery of the Sale Closing Documents. Such conveyance by BNPLC will be subject only to the Permitted Encumbrances and any other encumbrances that do not constitute Liens Removable by BNPLC. However, such conveyance shall not include the rights of BNPLC or other Interested Parties under the indemnities provided in the Operative Documents, including rights to any payments then due from NAI under the indemnities or that may become due thereafter because of any expense or liability incurred by BNPLC or another Interested Party resulting in whole or in part from events or circumstances occurring or alleged to have occurred before such conveyance. All costs, both foreseen and unforeseen, of any purchase by NAI or an Applicable Purchaser hereunder shall be the responsibility of the purchaser. The Sale Closing Documents used to accomplish such conveyance shall consist of the following: (1) a Corporation Grant Deed in the form attached as Exhibit B-1 or Exhibit B-2 or Exhibit B-3, as required by Exhibit B, (2) a Bill of Sale and Assignment in the form attached as Exhibit C, (3) an Acknowledgment of Disclaimer of Representations and Warranties, in the form attached as Exhibit D, which NAI or the Applicable Purchaser must execute and return to BNPLC, (4) a Secretary's Certificate in the form attached as Exhibit E, and (5) a certificate concerning tax withholding in the form attached as Exhibit F. If for any reason BNPLC fails to tender the Sale Closing Documents as required by this Paragraph 3, BNPLC may cure such refusal at any time before thirty days after receipt of a demand for such cure from NAI. 4. SURVIVAL AND TERMINATION OF THE RIGHTS AND OBLIGATIONS OF NAI AND BNPLC. (A) Status of this Agreement Generally. Except as expressly provided herein, this Agreement shall not terminate; nor shall NAI have any right to terminate this Agreement; nor shall NAI be entitled to any reduction of the Break Even Price, any Deficiency, the Maximum Remarketing Obligation, any Supplemental Payment or the Minimum Extended Remarketing Price hereunder; nor shall the obligations of NAI to BNPLC under Paragraph 1 be affected, by reason of (i) any damage to or the destruction of all or any part of the Property from whatever cause (though it is understood that NAI will receive any remaining Escrowed Proceeds yet to be applied as provided in the Improvements Lease that may result from such damage if NAI purchases the Property and the Escrowed Proceeds as herein provided), (ii) the taking of or damage to the Property or any portion thereof by eminent domain or otherwise for any reason (though it is understood that NAI will receive any remaining Escrowed Proceeds yet to be applied as provided in the Improvements Lease that may result from such taking or damage if NAI purchases the Property and the Escrowed Proceeds as herein provided), (iii) the prohibition, limitation or restriction of NAI'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 NAI or any party claiming under NAI by paramount title or otherwise, (v) NAI's prior acquisition or ownership of any interest in the Property, (vi) any default on the part of BNPLC under this Agreement, the Improvements 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 NAI to make payment to BNPLC hereunder shall be separate and independent covenants and agreements from BNPLC's obligations under this Agreement or any other agreement between BNPLC and NAI; provided, however, that nothing in this subparagraph shall excuse BNPLC from its obligation to tender the Sale Closing Documents in substantially the form attached hereto as exhibits when required by Paragraph 3. Further, nothing in this subparagraph shall be construed as a waiver by NAI of any right NAI may have at law or in equity to the following remedies, whether because of BNPLC's failure to remove a Lien Removable by BNPLC or because of any other default by BNPLC under this Agreement: (i) the recovery of monetary damages, (ii) injunctive relief in case of the violation, or attempted or threatened violation, by BNPLC of any of the express covenants, agreements, conditions or provisions of this Agreement which are binding upon BNPLC, or (iii) a decree compelling performance by BNPLC of any of the express covenants, agreements, conditions or provisions of this Agreement which are binding upon BNPLC. 7 <PAGE> 11 (B) [Intentionally deleted.] (C) [Intentionally deleted.] (D) Automatic Termination of NAI's Rights. Without limiting BNPLC's right to enforce NAI's obligation to pay any Supplemental Payment or other amounts required by this Agreement, the rights of NAI (to be distinguished from the obligations of NAI) included in NAI's Initial Remarketing Rights and Obligations, the Purchase Option and NAI's Extended Remarketing Rights shall all terminate automatically if NAI shall fail to pay the full amount of any Supplemental Payment required by subparagraph 1(A)(2)(c) on the Designated Sale Date or if BNPLC shall elect a Voluntary Retention of the Property as provided in subparagraph 1(A)(2)(a). However, notwithstanding anything in this subparagraph to the contrary, even after a failure to pay any required Supplemental Payment on the Designated Sale Date, NAI may nonetheless tender to BNPLC the full Break Even Price and all amounts then due under the Operative Documents, together with interest on the total Break Even Price computed at the Default Rate from the Designated Sale Date to the date of tender, on any Business Day within thirty days after the Designated Sale Date, and if presented with such a tender within thirty days after the Designated Sale Date, BNPLC must accept it and promptly thereafter deliver any Escrowed Proceeds and the Sale Closing Documents listed in Paragraph 3 to NAI. (E) Termination of NAI's Extended Remarketing Rights to Permit a Sale by BNPLC. At any time more than ninety days after BNPLC has delivered a Third Party Sale Notice to NAI as described in subparagraph 2(C)(2), BNPLC may terminate NAI's Extended Remarketing Rights contemporaneously with the consummation of a sale of the Property by BNPLC to any third party (be it the prospective purchaser named in the Third Party Sale Notice or another third party) at a price equal to or in excess of the Third Party Target Price specified in the Third Party Sale Notice, so as to permit the sale of the Property unencumbered by NAI's Extended Remarketing Rights. (F) Payment Only to BNPLC. All amounts payable under this Agreement by NAI and, if applicable, by an 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 subparagraph 1(A), on the Designated Sale Date NAI must pay all amounts then due to BNPLC under the Improvements Lease or other Operative Documents. (G) Remedies Under the Other Operative Documents. No repossession of or re-entering upon the Property or exercise of any other remedies available to BNPLC under the Improvements Lease or other Operative Documents shall terminate NAI's rights or obligations hereunder, all of which shall survive BNPLC's exercise of remedies under the other Operative Documents. NAI acknowledges that the consideration for this Agreement is separate and independent of the consideration for the Improvements Lease, and the Closing Certificate, and NAI's obligations hereunder shall not be affected or impaired by any event or circumstance that would excuse NAI from performance of its obligations under such other Operative Documents. (H) Occupancy by NAI Prior to Closing of a Sale. Prior to the closing of any sale of the Property to NAI or an Applicable Purchaser hereunder, NAI's occupancy of the Improvements and its use of the Property shall continue to be subject to the terms and conditions of the Improvements Lease, including the terms setting forth NAI's obligation to pay rent, prior to any termination or expiration of the Improvements Lease pursuant to its express terms and conditions. 5. SECURITY FOR NAI'S OBLIGATIONS; RETURN OF FUNDS. NAI'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 8 <PAGE> 12 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 NAI of NAI's covenants and obligations under this Agreement, the Collateral shall not be considered an advance payment of the Break Even Price or any Supplemental Payment or a measure of BNPLC's damages should NAI breach this Agreement. If NAI 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 NAI, 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 NAI. If by a Permitted Transfer BNPLC conveys its interest in the Property before the Designated Sale Date, BNPLC may also assign BNPLC's interest in the Collateral to the transferee. BNPLC shall be entitled to return any Collateral not sold or used to satisfy the obligations secured by the Pledge Agreement directly to NAI notwithstanding any prior actual or attempted conveyance or assignment by NAI, voluntary or otherwise, of any right to receive the same; neither BNPLC nor the collateral agent named in the Pledge Agreement shall be responsible for the proper distribution or application by NAI of any such Collateral returned to NAI; and any such return of Collateral to NAI shall discharge any obligation of BNPLC to deliver such Collateral to all Persons claiming an interest in the Collateral. Further, BNPLC shall be entitled to deliver any Escrowed Proceeds it holds on the Designated Sale Date directly to NAI or to any Applicable Purchaser purchasing BNPLC's interest in the Property and the Escrowed Proceeds pursuant to this Agreement notwithstanding any prior actual or attempted conveyance or assignment by NAI, voluntary or otherwise, of any right to receive the same; BNPLC shall not be responsible for the proper distribution or application by NAI or any Applicable Purchaser of any such Escrowed Proceeds paid over to NAI or the Applicable Purchaser; and any such payment of Escrowed Proceeds to NAI or an Applicable Purchaser shall discharge any obligation of BNPLC to deliver the same to all Persons claiming an interest therein. 6. CERTAIN 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. 7. ATTORNEYS' FEES AND LEGAL EXPENSES. If either party to this Agreement commences any legal action or other proceeding to enforce any of the terms of this Agreement, or because of any breach by the other party or dispute hereunder, the party prevailing in such action or proceeding shall be entitled to recover from the other 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. Upon request by BNPLC, NAI shall execute, acknowledge and deliver 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 NAI has knowledge. Any such statement may be relied upon by any Participant or prospective purchaser or assignee of BNPLC with respect to the Property. 9. SUCCESSORS AND ASSIGNS. The terms, provisions, covenants and conditions hereof shall be binding upon NAI and BNPLC and their respective permitted successors and assigns and shall inure to the benefit of NAI and BNPLC and all permitted transferees, mortgagees, successors and assignees of NAI and BNPLC with respect to the Property; provided, that (A) the rights of BNPLC hereunder shall not pass to NAI or any Applicable 9 <PAGE> 13 Purchaser or any subsequent owner claiming through NAI or an Applicable Purchaser, (B) BNPLC shall not assign this Agreement or any rights hereunder except pursuant to a Permitted Transfer, and (C) NAI shall not assign this Agreement or any rights hereunder without the prior written consent of BNPLC. [Signature pages follow.] 10 <PAGE> 14 IN WITNESS WHEREOF, NAI and BNPLC have caused this Agreement to be executed as of December ___, 1999. "NAI" NETWORK APPLIANCE, INC. By: ___________________________________ Name: _____________________________ Title: ____________________________ <PAGE> 15 [Continuation of signature pages to Purchase Agreement (Phase IV - Improvements) dated to be effective December __, 1999] "BNPLC" BNP LEASING CORPORATION By: ___________________________________ Lloyd G. Cox, Vice President <PAGE> 16 EXHIBIT A LEGAL DESCRIPTION The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75(degree)8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14(degree)51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75(degree)08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14(degree)51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 <PAGE> 17 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 <PAGE> 18 EXHIBIT B REQUIREMENTS RE: FORM OF GRANT DEED The form of deed to be used to convey BNPLC's interest in the Improvements to NAI or an Applicable Purchaser will depend upon whether BNPLC's interest in the Land has been or is being conveyed at the same time to the same party. If BNPLC's interests in BOTH the Land and the Improvements are to be conveyed to NAI or an Applicable Purchaser at the same time, because a sale under this Purchase Agreement and a sale under the Other Purchase Agreement (covering the Land) are being consummated at the same time and to the same party, then the one deed in form attached as Exhibit B-1 will be used to convey both. If, however, BNPLC's interest in the Land pursuant to the Other Purchase Agreement has not been consummated before, and is not being consummated contemporaneously with, the sale of BNPLC's interest in the Improvements under this Agreement, then BNPLC's interest in the Improvements will be conveyed by a deed in the form attached as Exhibit B-2. Finally, BNPLC's interest in the Improvements will be conveyed by a deed in the from attached as Exhibit B-3 if BNPLC's interest in the Land has been sold pursuant to the Other Purchase Agreement before a sale of BNPLC's interest in the Improvements under this Agreement, or BNPLC's interest in the Improvements is being sold contemporaneously with a sale of BNPLC's interest in the Land, but the purchaser of the Improvements is not the same as the purchaser of the Land. <PAGE> 19 EXHIBIT B-1 CORPORATION GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ____________________________ ATTN: _______________________________ CITY: _______________________________ STATE: ______________________________ Zip: ________________________________ MAIL TAX STATEMENTS TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ____________________________ ATTN: _______________________________ CITY: _______________________________ STATE: ______________________________ Zip: ________________________________ CORPORATION GRANT DEED (Covering Land and Improvements) FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, BNP LEASING CORPORATION, a Delaware corporation ("Grantor"), hereby grants to [NAI or the Applicable Purchaser] ("Grantee") all of Grantor's interest in the land situated in Sunnyvale, California, described on Annex A attached hereto and hereby made a part hereof and all improvements on such land, together with the any other right, title and interest of Grantor in and to any easements, rights-of-way, privileges and other rights appurtenant to such land or the improvements thereon; provided, however, that this grant is subject to the encumbrances described on Annex B (the "Permitted Encumbrances"). Grantee hereby assumes the obligations (including any personal obligations) of Grantor, if any, created by or under, and agrees to be bound by the terms and conditions of, the Permitted Encumbrances to the extent that the same concern or apply to the land or improvements conveyed by this deed. <PAGE> 20 BNP LEASING CORPORATION Date: As of ____________ By: __________________________________ Its: Attest: ______________________________ Its: [NAI or Applicable Purchaser] Date: As of ____________ By: __________________________________ Its: Attest: ______________________________ Its: STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 _____________________________ EXHIBIT B-1 - PAGE 2 <PAGE> 21 STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 _____________________________ EXHIBIT B-1 - PAGE 3 <PAGE> 22 ANNEX A LEGAL DESCRIPTION [DRAFTING NOTE: TO THE EXTENT THAT THE "LAND" COVERED BY THE LAND LEASE CHANGES FROM TIME TO TIME BECAUSE OF ADJUSTMENTS FOR WHICH NAI REQUESTS BNPLC'S CONSENT OR APPROVAL, SO TOO WILL THE DESCRIPTION OF THE LAND BELOW CHANGE. ANY SUCH CHANGES WILL BE INCORPORATED INTO THE DESCRIPTION BELOW AND THIS "DRAFTING NOTE" WILL BE DELETED BEFORE THE DEED TO WHICH THIS DESCRIPTION IS ATTACHED IS ACTUALLY EXECUTED AND DELIVERED.] The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75(degree)8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14(degree)51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75(degree)08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14(degree)51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of EXHIBIT B-1 - PAGE 4 <PAGE> 23 Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 EXHIBIT B-1 - PAGE 5 <PAGE> 24 ANNEX B PERMITTED ENCUMBRANCES [DRAFTING NOTE: TO THE EXTENT THAT ENCUMBRANCES (OTHER THAN "LIENS REMOVABLE BY BNPLC") ARE IDENTIFIED IN ADDITION TO THOSE DESCRIBED BELOW, SUCH ADDITIONAL ENCUMBRANCES WILL BE ADDED TO THE LIST BELOW AND THIS "DRAFTING 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" UNDER THE LAND LEASE OR THE OTHER LEASE AGREEMENT FROM TIME TO TIME OR BECAUSE OF NAI'S REQUEST FOR BNPLC'S CONSENT OR APPROVAL TO AN ADJUSTMENT.] This conveyance is subject to all encumbrances not constituting a "Lien Removable by BNPLC" (as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements) incorporated by reference into the Lease Agreement (Phase IV - Improvements) referenced in the last item of the list below), including the following matters to the extent the same are still valid and in force: TRACT 1 and 2: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. LIMITATIONS, covenants, conditions, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded December 23, 1971 in Book 9640, page 443, Official Records. Assignments and Assumption, executed by Moffett Park Associates, a partnership to Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 4. AGREEMENT on the terms and conditions contained therein, For : Waiver of Construction Credits Between : Moffett Park Associates And : None Shown Recorded : September 28, 1976 in Book C307, page 346, Official Records. 5. EASEMENT for the purposes stated herein and incidents thereto Purpose : Construction, reconstruction, operation, repair, maintenance, replacement, relocation and enlargement of Public Utilities Granted to : The City of Sunnyvale, a municipal corporation Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : as follows: Being a portion of Parcel B as shown on that certain Parcel Map recorded August 28, 1974 in Book of Maps, at page 20, Santa Clara County Records; a strip of land 10 feet in width, measured at right angles lying Northerly and Easterly of and contiguous to the following described line; beginning at the EXHIBIT B-1 - PAGE 6 <PAGE> 25 intersection of the Westerly line of Crossman Road, 90 feet in width, with the Northerly line of Parcel A as shown on said Map; thence North 75(degree) 7' 58" West along said Northerly line of Parcel A 450.13 feet; thence leaving said Northerly line, North 30(degree) 7' 48" West 210.69 feet; thence North 75(degree) 8' 27" West 391.04 feet to a point on the Easterly line of the proposed Geneva Drive, 60 feet wide, said point being the terminus of said easement. 6. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. TRACT 3: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 4. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 5. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. EXHIBIT B-1 - PAGE 7 <PAGE> 26 6. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities Granted to : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : Southerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 7. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. 8. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. (a) The fact that a chain link fence extends across the southerly boundary of said land. TRACT 4: 9. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 10. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 11. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 90, Official Records Affects : Westerly 5 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 12. EASEMENT recorded on that certain Map for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : July 7, 1994 in Book 657 of Maps, page 9, Official Records Affects : Westerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 13. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. EXHIBIT B-1 - PAGE 8 <PAGE> 27 ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 14. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. TRACT 5: 15. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 16. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 17. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : The Northeasterly and Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 18. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : The Northeasterly and Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 19. EASEMENT for the purposes stated herein and incidents thereto Purpose : Sidewalk and sign easement Recorded : July 7, 1994, in Book 657 Maps, page 9, Official Records Affects : The Northerly 2 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 20. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. EXHIBIT B-1 - PAGE 9 <PAGE> 28 21. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : October 7, 1998, in Book 708 of Maps, pages 51-52, Official Records Affects : The Northerly 15 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. EXHIBIT B-1 - PAGE 10 <PAGE> 29 EXHIBIT B-2 CORPORATION GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ____________________________ ATTN: _______________________________ CITY: _______________________________ STATE: ______________________________ Zip: ________________________________ MAIL TAX STATEMENTS TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ____________________________ ATTN: _______________________________ CITY: _______________________________ STATE: ______________________________ Zip: ________________________________ CORPORATION GRANT DEED (Covering Improvements but not the Land under the Improvements) FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, BNP LEASING CORPORATION, a Delaware corporation ("Grantor"), hereby grants to [NAI or the Applicable Purchaser] ("Grantee") all of Grantor's interest in the buildings and other improvements (the "Improvements") on the land situated in Sunnyvale, California, described on Annex A attached hereto and hereby made a part hereof (the "Land"), together with the any other right, title and interest of Grantor in and to any easements, rights-of-way, privileges and other rights appurtenant to the Improvements; provided, however, that this grant is subject to the encumbrances described on Annex B (the "Permitted Encumbrances") and any reservations or qualifications set forth below. Grantee hereby assumes the obligations (including any personal obligations) of Grantor, if any, created by or under, and agrees to be bound by the terms and conditions of, the Permitted Encumbrances to the extent that the same concern or apply to the Improvements. Although this deed conveys Grantor's interest in the Improvements, this deed does not convey any interest in the Land under the Improvements or any rights or easements appurtenant to Land. Grantor retains and reserves all right, title and interest of Grantor in and to the Land and any rights and easements appurtenant to Land. Further, this deed does not convey any right of access over or right to use the Land, it being understood that the right of Grantee or its successors and assigns to maintain or use the improvements conveyed hereby shall be on and subject to the terms and conditions of any separate ground lease or deed that Grantee may from time to time obtain from the owner of the Land. If Grantee does not obtain a separate deed or ground lease giving Grantee the authority to maintain the Improvements on the Land, Grantee shall remove or abandon the Improvements promptly upon request of the owner of the Land. Nothing herein or in the agreements pursuant to which this deed is being delivered shall be construed as an obligation on the part of Grantor to deliver or cooperate reasonably in obtaining for Grantee any deed or ground lease covering the Land described on Annex A. <PAGE> 30 BNP LEASING CORPORATION Date: As of ____________ By: ___________________________________ Its: Attest: _______________________________ Its: [NAI or Applicable Purchaser] Date: As of ____________ By: ___________________________________ Its: Attest: _______________________________ Its: STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 __________________________ EXHIBIT B-2 - PAGE 2 <PAGE> 31 STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 __________________________ EXHIBIT B-2 - PAGE 3 <PAGE> 32 ANNEX A LEGAL DESCRIPTION [DRAFTING NOTE: TO THE EXTENT THAT THE "LAND" COVERED BY THE LAND LEASE CHANGES FROM TIME TO TIME BECAUSE OF ADJUSTMENTS FOR WHICH NAI REQUESTS BNPLC'S CONSENT OR APPROVAL, SO TOO WILL THE DESCRIPTION OF THE LAND BELOW CHANGE. ANY SUCH CHANGES WILL BE INCORPORATED INTO THE DESCRIPTION BELOW AND THIS "DRAFTING NOTE" WILL BE DELETED BEFORE THE DEED TO WHICH THIS DESCRIPTION IS ATTACHED IS ACTUALLY EXECUTED AND DELIVERED.] Legal Description The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75(degree)8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14(degree)51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75(degree)08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14(degree)51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: EXHIBIT B-2 - PAGE 4 <PAGE> 33 Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 EXHIBIT B-2 - PAGE 5 <PAGE> 34 ANNEX B PERMITTED ENCUMBRANCES [DRAFTING NOTE: TO THE EXTENT THAT ENCUMBRANCES (OTHER THAN "LIENS REMOVABLE BY BNPLC") ARE IDENTIFIED IN ADDITION TO THOSE DESCRIBED BELOW, SUCH ADDITIONAL ENCUMBRANCES WILL BE ADDED TO THE LIST BELOW AND THIS "DRAFTING 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" UNDER THE LAND LEASE OR THE OTHER LEASE AGREEMENT FROM TIME TO TIME OR BECAUSE OF NAI'S REQUEST FOR BNPLC'S CONSENT OR APPROVAL TO AN ADJUSTMENT.] This conveyance is subject to all encumbrances not constituting a "Lien Removable by BNPLC" (as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements) incorporated by reference into the Lease Agreement (Phase IV - Improvements referenced in the last item of the list below), including the following matters to the extent the same are still valid and in force: TRACT 1 and 2: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. LIMITATIONS, covenants, conditions, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded December 23, 1971 in Book 9640, page 443, Official Records. Assignments and Assumption, executed by Moffett Park Associates, a partnership to Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 4. AGREEMENT on the terms and conditions contained therein, For : Waiver of Construction Credits Between : Moffett Park Associates And : None Shown Recorded : September 28, 1976 in Book C307, page 346, Official Records. 5. EASEMENT for the purposes stated herein and incidents thereto Purpose : Construction, reconstruction, operation, repair, maintenance, replacement, relocation and enlargement of Public Utilities Granted to : The City of Sunnyvale, a municipal corporation Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : as follows: Being a portion of Parcel B as shown on that certain Parcel Map recorded August 28, 1974 in Book of Maps, at page 20, Santa Clara County Records; a strip of land 10 feet in width, measured at right angles lying Northerly and Easterly of and contiguous to the following described line; beginning at the EXHIBIT B-2 - PAGE 6 <PAGE> 35 intersection of the Westerly line of Crossman Road, 90 feet in width, with the Northerly line of Parcel A as shown on said Map; thence North 75(degree) 7' 58" West along said Northerly line of Parcel A 450.13 feet; thence leaving said Northerly line, North 30(degree) 7' 48" West 210.69 feet; thence North 75(degree) 8' 27" West 391.04 feet to a point on the Easterly line of the proposed Geneva Drive, 60 feet wide, said point being the terminus of said easement. 6. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. TRACT 3: 22. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 23. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 24. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 25. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 26. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. EXHIBIT B-2 - PAGE 7 <PAGE> 36 27. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities Granted to : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : Southerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 28. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. 29. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. (a) The fact that a chain link fence extends across the southerly boundary of said land. TRACT 4: 30. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 31. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 32. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 90, Official Records Affects : Westerly 5 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 33. EASEMENT recorded on that certain Map for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : July 7, 1994 in Book 657 of Maps, page 9, Official Records Affects : Westerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 34. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. EXHIBIT B-2 - PAGE 8 <PAGE> 37 ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 35. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. TRACT 5: 36. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 37. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 38. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : The Northeasterly and Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 39. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : The Northeasterly and Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 40. EASEMENT for the purposes stated herein and incidents thereto Purpose : Sidewalk and sign easement Recorded : July 7, 1994, in Book 657 of Maps, page 9, Official Records Affects : The Northerly 2 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 41. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. EXHIBIT B-2 - PAGE 9 <PAGE> 38 42. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : October 7, 1998, in Book 708 of Maps, pages 51-52, Official Records Affects : The Northerly 15 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. EXHIBIT B-2 - PAGE 10 <PAGE> 39 EXHIBIT B-3 CORPORATION GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ____________________________ ATTN: _______________________________ CITY: _______________________________ STATE: ______________________________ Zip: ________________________________ MAIL TAX STATEMENTS TO: NAME: [NAI or the Applicable Purchaser] ADDRESS: ____________________________ ATTN: _______________________________ CITY: _______________________________ STATE: ______________________________ Zip: ________________________________ CORPORATION GRANT DEED (Covering Improvements but not Land under the Improvements) FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, BNP LEASING CORPORATION, a Delaware corporation ("Grantor"), hereby grants to [NAI or the Applicable Purchaser] ("Grantee") all of Grantor's interest in the buildings and other improvements (the "Improvements") on the land situated in Sunnyvale, California, described on Annex A attached hereto and hereby made a part hereof (the "Land"), together with the any other right, title and interest of Grantor in and to any easements, rights-of-way, privileges and other rights appurtenant to the Improvements; provided, however, that this grant is subject to the encumbrances described on Annex B (the "Permitted Encumbrances") and any reservations or qualifications set forth below. Grantee hereby assumes the obligations (including any personal obligations) of Grantor, if any, created by or under, and agrees to be bound by the terms and conditions of, the Permitted Encumbrances to the extent that the same concern or apply to the Improvements. Although this deed conveys Grantor's interest in the Improvements on the Land, this deed does not convey any interest in the Land itself or any rights or easements appurtenant to Land. Prior to or contemporaneously with the delivery of this deed, Grantor has conveyed or is conveying the Land and appurtenant rights and easements to another party, subject to the terms and conditions of a Ground Lease dated ________, filed or to be filed for record in the Santa Clara County records. Grantor is assigning it's rights as lessee under the Ground Lease to Grantee by a separate instrument dated of even date herewith. <PAGE> 40 BNP LEASING CORPORATION Date: As of ____________ By: ___________________________________ Its: Attest: _______________________________ Its: [NAI or Applicable Purchaser] Date: As of ____________ By: ___________________________________ Its: Attest: _______________________________ Its: STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ___________________________ EXHIBIT B-3 - PAGE 2 <PAGE> 41 STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ___________________________ EXHIBIT B-3 - PAGE 3 <PAGE> 42 ANNEX A LEGAL DESCRIPTION [DRAFTING NOTE: TO THE EXTENT THAT THE "LAND" COVERED BY THE LAND LEASE CHANGES FROM TIME TO TIME BECAUSE OF ADJUSTMENTS FOR WHICH NAI REQUESTS BNPLC'S CONSENT OR APPROVAL, SO TOO WILL THE DESCRIPTION OF THE LAND BELOW CHANGE. ANY SUCH CHANGES WILL BE INCORPORATED INTO THE DESCRIPTION BELOW AND THIS "DRAFTING NOTE" WILL BE DELETED BEFORE THE DEED TO WHICH THIS DESCRIPTION IS ATTACHED IS ACTUALLY EXECUTED AND DELIVERED.] The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75[degrees]8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14[degrees]51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75[degrees]08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14[degrees]51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. EXHIBIT B-3 - PAGE 4 <PAGE> 43 APN: 110-32-7 ARB: 110-3-x65 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 EXHIBIT B-3 - PAGE 5 <PAGE> 44 ANNEX B PERMITTED ENCUMBRANCES [DRAFTING NOTE: TO THE EXTENT THAT ENCUMBRANCES (OTHER THAN "LIENS REMOVABLE BY BNPLC") ARE IDENTIFIED IN ADDITION TO THOSE DESCRIBED BELOW, SUCH ADDITIONAL ENCUMBRANCES WILL BE ADDED TO THE LIST BELOW AND THIS "DRAFTING 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" UNDER THE LAND LEASE OR THE OTHER LEASE AGREEMENT FROM TIME TO TIME OR BECAUSE OF NAI'S REQUEST FOR BNPLC'S CONSENT OR APPROVAL TO AN ADJUSTMENT.] This conveyance is subject to all encumbrances not constituting a "Lien Removable by BNPLC" (as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements) incorporated by reference into the Lease Agreement (Phase IV - Improvements) referenced in the last item of the list below]), including the following matters to the extent the same are still valid and in force: TRACT 1 and 2: 1. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 2. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 3. LIMITATIONS, covenants, conditions, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded December 23, 1971 in Book 9640, page 443, Official Records. Assignments and Assumption, executed by Moffett Park Associates, a partnership to Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 4. AGREEMENT on the terms and conditions contained therein, For : Waiver of Construction Credits Between : Moffett Park Associates And : None Shown Recorded : September 28, 1976 in Book C307, page 346, Official Records. 5. EASEMENT for the purposes stated herein and incidents thereto Purpose : Construction, reconstruction, operation, repair, maintenance, replacement, relocation and enlargement of Public Utilities Granted to : The City of Sunnyvale, a municipal corporation Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : as follows: Being a portion of Parcel B as shown on that certain Parcel Map recorded August 28, 1974 in Book of Maps, at page 20, Santa Clara County Records; a strip of land 10 feet in width, measured at right angles lying Northerly and Easterly of and contiguous to the following described line; beginning at the EXHIBIT B-3 - PAGE 6 <PAGE> 45 intersection of the Westerly line of Crossman Road, 90 feet in width, with the Northerly line of Parcel A as shown on said Map; thence North 75[degrees]7'58" West along said Northerly line of Parcel A 450.13 feet; thence leaving said Northerly line, North 30[degrees]7'48" West 210.69 feet; thence North 75[degrees]8'27" West 391.04 feet to a point on the Easterly line of the proposed Geneva Drive, 60 feet wide, said point being the terminus of said easement. 6. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. TRACT 3: 43. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 44. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 45. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 46. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 47. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. EXHIBIT B-3 - PAGE 7 <PAGE> 46 48. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities Granted to : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 105, Official Records Affects : Southerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 49. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. 50. 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 for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. (a) The fact that a chain link fence extends across the southerly boundary of said land. TRACT 4: 51. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 52. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 53. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : November 16, 1976 in Book C414, page 90, Official Records Affects : Westerly 5 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 54. EASEMENT recorded on that certain Map for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : July 7, 1994 in Book 657 of Maps, page 9, Official Records Affects : Westerly 10 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 55. Covenants, Conditions and Restrictions in the Declaration of Protective Covenants - Moffett Industrial Park No. 2) recorded December 23, 1971 in Book 9640, page 443, Official Records; which provide that a violation thereof shall not defeat or render invalid the lien of any Mortgage or Deed of Trust made in good faith and for value. Said Covenants, Conditions and Restrictions do not provide for reversion of title in the event of a breach thereof. Restrictions, if any, based upon race, color, religion, sex, handicap, familial status, or national origin are deleted, unless and only to the extent that said covenant (a) is exempt under Chapter 42, Section 3607, of the United States Code, or (b) related to handicap but does not discriminate against handicapped persons. EXHIBIT B-3 - PAGE 8 <PAGE> 47 ASSIGNMENT AND ASSUMPTION of the rights, powers, duties, obligations, and reservations of Moffett Park Associates, in favor of The Prudential Insurance Company of America, recorded February 8, 1977 in Book C583, page 685, Official Records. 56. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. TRACT 5: 57. TAXES for the fiscal year 1999-2000, a lien not yet due or payable. 58. THE LIEN of supplemental taxes, if any, assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code, resulting from changes of ownership or completion of construction on or after the date hereof. 59. EASEMENT for the purposes stated herein and incidents thereto Purpose : Slope Easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 430, Official Records Affects : The Northeasterly and Easterly 18 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 60. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement In favor of : City of Sunnyvale Recorded : October 9, 1964 in Book 6695, page 450, Official Records Affects : The Northeasterly and Easterly 7 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 61. EASEMENT for the purposes stated herein and incidents thereto Purpose : Sidewalk and sign easement Recorded : July 7, 1994, in Book 657 of Maps, page 9, Official Records Affects : The Northerly 2 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. 62. LIMITATIONS, covenants, restrictions, reservations, exceptions or terms, but deleting any covenant, condition or restriction indicating a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status, or national origin to the extent such covenants, conditions or restrictions violate 42 USC 3604(c), contained in the document recorded February 5, 1980 in Book F122, page 460, Official Records. EXHIBIT B-3 - PAGE 9 <PAGE> 48 63. EASEMENT for the purposes stated herein and incidents thereto Purpose : Public utilities easement Recorded : October 7, 1998, in Book 708 of Maps, pages 51-52, Official Records Affects : The Northerly 15 feet, as shown on a survey plat entitled ALTA/ACSM Land Title Survey for: Network Appliance, 1345 Crossman Avenue, dated December 2, 1999, prepared by Kier & Wright, Job No. 97208-16. EXHIBIT B-3 - PAGE 10 <PAGE> 49 EXHIBIT C BILL OF SALE AND ASSIGNMENT Reference is made to: (1) that certain Purchase Agreement (Phase IV - Improvements) between BNP Leasing Corporation ("ASSIGNOR") and Network Appliance, Inc., dated as of December ___, 1999, (the "PURCHASE AGREEMENT") and (2) that certain Lease Agreement (Phase IV - Improvements) between Assignor, as landlord, and Network Appliance, Inc., as tenant, dated as of December ___, 1999 (the "IMPROVEMENTS LEASE"). (Capitalized terms used and not otherwise defined in this document are intended to have the meanings assigned to them in the Common Definitions and Provisions Agreement (Phase IV - Improvements) incorporated by reference into both the Purchase Agreement and Improvements Lease.) As contemplated by the Purchase Agreement, Assignor hereby sells, transfers and assigns unto [NAI 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) the Improvements Lease [DRAFTING NOTE: THE FOLLOWING WILL BE ADDED ONLY IF APPLICABLE BECAUSE OF THE SIMULTANEOUS DELIVERY OF A GRANT DEED IN THE FORM OF EXHIBIT B-3: and the Ground Lease dated _________, between _________, as lessor, and Assignor, as lessee, filed for record on in ___________ of Santa Clara County records (the "GROUND LEASE")]; (b) 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; and (c) all other property included within the definition of "Property" as set forth in the Purchase Agreement, including but not limited to any of the following transferred to Assignor by the tenant pursuant to Paragraph 7 of the Improvements Lease or otherwise acquired by Assignor, at the time of the execution and delivery of the Improvements Lease and Purchase Agreement or thereafter, by reason of Assignor's status as the owner of any interest in the Property: (1) any goods, equipment, furnishings, furniture, chattels and tangible personal property of whatever nature that are located on the Property and all renewals or replacements of or substitutions for any of the foregoing; (ii) the rights of Assignor, existing at the time of the execution of the Improvements Lease and Purchase Agreement or thereafter arising, under Permitted Encumbrances or Development Documents (both as defined in the Improvements Lease); and (iii) any other permits, licenses, franchises, certificates, and other rights and privileges related to the Property that Assignee would have acquired if Assignee had itself acquired the Improvements covered by the Improvements Lease and constructed the Improvements included in the Property. Provided, however, excluded from this conveyance and reserved to Assignor are any rights or privileges of Assignor under the following ("EXCLUDED RIGHTS"): (1) the indemnities set forth in the Improvements Lease, whether such rights are presently known or unknown, including rights of the Assignor to be indemnified against environmental claims of third parties as provided in the Improvements Lease which may not presently be known, (2) provisions in the Improvements Lease that establish the right of Assignor to recover any accrued unpaid rent under the Improvements Lease which may be outstanding as of the date hereof, (3) agreements between Assignor and "BNPLC's Parent" or any "Participant," both as defined in the Improvements Lease, or any modification or extension thereof, or (4) any other instrument being delivered to Assignor contemporaneously herewith pursuant to the Purchase Agreement. To the extent that this conveyance does include any rights to receive future payments <PAGE> 50 under the Improvements Lease, such rights ("INCLUDED RIGHTS") shall be subordinate to Assignor's Excluded Rights, and Assignee hereby waives any rights to enforce Included Rights until such time as Assignor has received all payments to which it remains entitled by reason of Excluded Rights. If any amount shall be paid to Assignee on account of any Included Rights at any time before Assignor has received all payments to which it is entitled because of Excluded Rights, such amount shall be held in trust by Assignee for the benefit of Assignor, shall be segregated from the other funds of Assignee and shall forthwith be paid over to Assignor to be held by Assignor as collateral for, or then or at any time thereafter applied in whole or in part by Assignor against, the payments due to Assignor because of Excluded Rights, whether matured or unmatured, in such order as Assignor shall elect. Assignor does for itself and its successors 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 a Lien Removable by BNPLC, but not otherwise. 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. IN WITNESS WHEREOF, the parties have executed this instrument as of _______________, _____. ASSIGNOR: BNP LEASING CORPORATION a Delaware corporation By: __________________________________ Its: _________________________________ ASSIGNEE: [NAI or the Applicable Purchaser], a ______________________________________ By: __________________________________ Its: _________________________________ EXHIBIT C - PAGE 2 <PAGE> 51 STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ______________________________ STATE OF ____________ ) ) SS COUNTY OF ___________ ) 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 ____________________________ EXHIBIT C - PAGE 3 <PAGE> 52 ANNEX A LEGAL DESCRIPTION [DRAFTING NOTE: TO THE EXTENT THAT THE "LAND" COVERED BY THE OTHER LEASE CHANGES FROM TIME TO TIME BECAUSE OF ADJUSTMENTS FOR WHICH NAI REQUESTS BNPLC'S CONSENT OR APPROVAL, SO TOO WILL THE DESCRIPTION OF THE LAND BELOW CHANGE. ANY SUCH CHANGES WILL BE INCORPORATED INTO THE DESCRIPTION BELOW AND THIS "DRAFTING NOTE" WILL BE DELETED BEFORE THE DOCUMENT TO WHICH THIS DESCRIPTION IS ATTACHED IS ACTUALLY EXECUTED AND DELIVERED.] The real property located in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: TRACT 1: All of Parcel 2, as shown upon that certain Map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of a portion of Parcel B, as shown upon that certain Parcel Map recorded in Book 345 of Maps, at page 20, Santa Clara County Records", which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on November 17, 1976, in Book 383 of Maps, at page 35. TRACT 2: Together with an easement for vehicles parking over the following described property: A 7-foot strip of land for parking easement purposes over a portion of Parcel A, as said Parcel A is shown on that certain Parcel Map filed for record on November 10, 1974 in Book 292 of Maps, at page 41, records of said County, and being more particularly described as follows: Commencing at the Northeast corner of said Parcel A; thence North 75[degrees]8'27" West 500.00 feet along the Northeasterly line of said Parcel A; thence South 14[degrees]51'33" West 7.00 feet; thence parallel to Northeasterly line of said Parcel A, South 75[degrees]08'27" East 500.00 feet to the Southeast line of said Parcel A, North 14[degrees]51'33" East 7.00 feet to the point of beginning. APN: 110-32-002 ARB: 110-3-65.02 TRACT 3: Parcel 1, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-6 ARB: 110-3-x65 EXHIBIT C - PAGE 4 <PAGE> 53 TRACT 4: Parcel 2, as shown on that certain Parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on July 7, 1994, in Book 657 of Parcel Maps, Page 9. APN: 110-32-7 ARB: 110-3-x65 TRACT 5: Parcel 2, as shown on that certain parcel Map which filed for record in the office of the recorder of the County of Santa Clara, State of California on October 7, 1998, in Book 708 of Parcel Maps, Pages 51 and 52. APN: 110-32-12 ARB: 110-03-65.11 EXHIBIT C - PAGE 5 <PAGE> 54 EXHIBIT D ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES THIS ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES (this "CERTIFICATE") is made as of ___________________, ____, by [NAI 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 corporate grant deed and (2) a Bill of Sale and Assignment (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 Established Misconduct of BNPLC. As used in the preceding sentence, "ESTABLISHED MISCONDUCT" is intended to have, and be limited to, the meaning given to it in the Common Definitions and Provisions Agreement (Phase IV - Improvements) incorporated by reference into the Purchase Agreement (Phase IV- Improvements) between BNPLC and Network Appliance, Inc. dated December ___, 1999, pursuant to which Purchase Agreement BNPLC is delivering the Conveyancing Documents. 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 ________________, ____. [NAI or the Applicable Purchaser] By: ___________________________________ Name: _________________________________ Title: ________________________________ <PAGE> 55 EXHIBIT E SECRETARY'S CERTIFICATE The undersigned, [Secretary or Assistant 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 SALE CLOSING 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 and title] <PAGE> 56 CORPORATE RESOLUTIONS OF BNP LEASING CORPORATION WHEREAS, pursuant to that certain Purchase Agreement (Phase IV - Improvements) (herein called the "Purchase Agreement") dated as of December ___, 1999, by and between BNP Leasing Corporation (the "Corporation") and [NAI 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 Sunnyvale, 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 E - Page 2 <PAGE> 57 EXHIBIT F 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 [NAI 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 ______________ _________________________ _________________. 4. The Seller is qualified to do business in California. 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. 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: ________________________________ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.54 <SEQUENCE>13 <DESCRIPTION>EXHIBIT 10.54 <TEXT> <PAGE> 1 ================================================================================ PLEDGE AGREEMENT (PHASE IV - LAND) AMONG BNP LEASING CORPORATION ("BNPLC") BANQUE NATIONALE DE PARIS, AS AGENT ("AGENT") NETWORK APPLIANCE, INC. ("NAI") AND PARTICIPANTS AS DESCRIBED HEREIN DECEMBER ___, 1999 ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> ARTICLE I DEFINITIONS AND INTERPRETATION...................................................1 Section 1.1 Capitalized Terms Used But Not Defined in This Agreement.................1 Section 1.2 Definitions.............................................................1 Account ......................................................................1 Account Office................................................................2 Agent ........................................................................2 BNPLC ........................................................................2 BNPLC's Corresponding Obligations to Participants.............................2 Cash Collateral...............................................................2 Certificate of Deposit........................................................2 Collateral....................................................................2 Collateral Imbalance..........................................................2 Collateral Percentage.........................................................2 Default ......................................................................2 Deposit Taker.................................................................3 Deposit Taker Losses..........................................................3 Deposit Taker's Acknowledgment and Agreement..................................3 Disqualified Deposit Taker....................................................3 Event of Default..............................................................3 Failed Collateral Test Date...................................................4 Initially Qualified Deposit Taker.............................................4 Lien .........................................................................4 Material Lease Default........................................................5 Mandatory Collateral Period...................................................5 Minimum Collateral Value......................................................5 NAI ..........................................................................5 NAI's Purchase Agreement Obligations..........................................5 Notice of Security Interest...................................................5 Other Liable Party............................................................5 Participants..................................................................5 Participation Agreement.......................................................5 Percentage....................................................................6 Qualified Pledge..............................................................6 Secured Obligations...........................................................6 Supplement....................................................................6 Transaction Documents.........................................................6 Value ........................................................................6 Section 1.3 Attachments.............................................................6 Section 1.4 Amendment of Defined Instruments........................................6 Section 1.5 References and Titles...................................................6 ARTICLE II SECURITY INTEREST...............................................................7 Section 2.1 Pledge and Grant of Security Interest...................................7 Section 2.2 Return of Collateral After the Secured Obligations are Satisfied in Full ...............................................................7 ARTICLE III DESIGNATION OF MINIMUM COLLATERAL PERCENTAGE...................................7 Section 3.1 Determination of Minimum Collateral Percentage Generally................7 </TABLE> [Phase IV - Land] -i- <PAGE> 3 <TABLE> <S> <C> Section 3.2 Limitations on NAI's Right to Lower the Collateral Percentage...........8 Section 3.3 Mandatory Collateral Periods............................................8 ARTICLE IV PROVISIONS CONCERNING DEPOSIT TAKERS............................................8 Section 4.1 Qualification of Deposit Takers Generally...............................8 Section 4.2 Existing Deposit Takers.................................................9 Section 4.3 Replacement of Participants Proposed by NAI.............................9 Section 4.4 Mandatory Substitution for Disqualified Deposit Takers..................9 Section 4.5 Voluntary Substitution of Deposit Takers...............................10 Section 4.6 Delivery of Notice of Security Interest by NAI and Agent...............10 Section 4.7 Constructive Possession of Collateral..................................10 Section 4.8 Attempted Setoff by Deposit Takers.....................................10 Section 4.9 Deposit Taker Losses...................................................10 Section 4.10 Losses Resulting from Failure of Deposit Taker to Comply with this Agreement....................................................................11 ARTICLE V DELIVERY AND MAINTENANCE OF CASH COLLATERAL.....................................11 Section 5.1 Delivery of Funds by NAI...............................................11 Section 5.2 Transition Account.....................................................11 Section 5.3 Allocation of Cash Collateral Among Deposit Takers.....................11 Section 5.4 Issuance and Redemption of Certificates of Deposit.....................12 Section 5.5 Status of the Accounts Under the Reserve Requirement Regulations.......12 Section 5.6 Acknowledgment by NAI that Requirements of this Agreement are Commercially Reasonable......................................................13 ARTICLE VI WITHDRAWAL OF CASH COLLATERAL..................................................13 Section 6.1 Withdrawal of Collateral Prior to the Designated Sale Date.............13 Section 6.2 Withdrawal and Application of Cash Collateral to Reduce or Satisfy the Secured Obligations to the Participants......................................13 Section 6.3 Withdrawal and Application of Cash Collateral to Reduce or Satisfy the Secured Obligations to BNPLC.................................................14 Section 6.4 Withdrawal of Cash Collateral From Accounts Maintained by Disqualified Deposit Takers...............................................................14 ARTICLE VII REPRESENTATIONS AND COVENANTS OF NAI..........................................14 Section 7.1 Representations of NAI.................................................14 Section 7.2 Covenants of NAI.......................................................15 ARTICLE VIII AUTHORIZED ACTION BY AGENT..................................................16 Section 8.1 Power of Attorney......................................................16 ARTICLE IX DEFAULT AND REMEDIES..........................................................16 Section 9.1 Remedies...............................................................16 ARTICLE X OTHER RECOURSE.................................................................17 Section 10.1 Recovery Not Limited..................................................17 ARTICLE XI PROVISIONS CONCERNING AGENT....................................................17 Section 11.1 Appointment and Authority.............................................17 Section 11.2 Exculpation, Agent's Reliance, Etc....................................18 Section 11.3 Participant's Credit Decisions........................................18 Section 11.4 Indemnity.............................................................18 Section 11.5 Agent's Rights as Participant and Deposit Taker.......................19 Section 11.6 Investments...........................................................19 Section 11.7 Benefit of Article XI.................................................19 Section 11.8 Resignation...........................................................19 ARTICLE XII MISCELLANEOUS.................................................................20 Section 12.1 Provisions Incorporated From Other Operative Documents.................20 Section 12.2 Cumulative Rights, etc................................................20 </TABLE> [Phase IV - Land] -ii- <PAGE> 4 <TABLE> <S> <C> Section 12.3 Survival of Agreements................................................20 Section 12.4 Other Liable Party....................................................20 Section 12.5 Termination...........................................................20 </TABLE> [Phase IV - Land] -iii- <PAGE> 5 <TABLE> <S> <C> Attachment 1....................................................Form of Certificate of Deposit Attachment 2..................................Supplement to Pledge Agreement (Phase IV - Land) Attachment 3......................Notice of NAI's Election to Change the Collateral Percentage Attachment 4.......................................................Notice of Security Interest Attachment 5..........................................................Examples of Calculations Attachment 6....................Notice of NAI's Requirement to Withdraw Excess Cash Collateral Attachment 7....................Notice of NAI's Requirement of Direct Payments to Participants Attachment 8....................Notice of NAI's Requirement of Direct Payments to Participants Attachment 9.......................................Notice of NAI's Requirement of a Withdrawal of Cash Collateral from a Disqualified Deposit Taker Schedule 1..........................................Financial Covenants and Negative Covenants </TABLE> [Phase IV - Land] -iv- <PAGE> 6 PLEDGE AGREEMENT (PHASE IV - LAND) This PLEDGE AGREEMENT (PHASE IV - LAND) (this "AGREEMENT") is made as of December ___, 1999 (the "EFFECTIVE DATE"), by NETWORK APPLIANCE, INC., a California corporation ("NAI"); BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"); BANQUE NATIONALE DE PARIS ("BNPLC'S PARENT"), as a "PARTICIPANT"; and BANQUE NATIONALE DE PARIS, acting in its capacity as agent for BNPLC and the Participants (in such capacity, "AGENT"), is made and dated as of the Effective Date. RECITALS A. NAI and BNPLC are parties to: (i) a Common Definitions and Provisions Agreement (Phase IV - Land) dated as of the Effective Date (the "COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - LAND)"); and (ii) a Purchase Agreement (Phase IV - Land) dated as of the Effective Date (the "PURCHASE AGREEMENT"), pursuant to which NAI has agreed to make a "SUPPLEMENTAL PAYMENT" (as defined in the Common Definitions and Provisions Agreement (Phase IV - Land)), in consideration of the rights granted to NAI by the Purchase Agreement. B. Pursuant to a Participation Agreement dated as of December ___, 1999 (the "PARTICIPATION AGREEMENT"), BNPLC's Parent has agreed with BNPLC to participate in the risks and rewards to BNPLC of the Purchase Agreement and other Operative Documents (as defined in the Common Definitions and Provisions Agreement (Phase IV - Land)), and the parties to this Agreement anticipate that other financial institutions may become parties to the Participation Agreement as Participants, agreeing to participate in the risks and rewards to BNPLC of the Purchase Agreement and other Operative Documents. C. NAI may from time to time deliver cash collateral for its obligations to BNPLC under the Purchase Agreement and for BNPLC's corresponding obligations to Participants under the Participation Agreement. This Agreement sets forth the terms and conditions governing such cash collateral. AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATION Section 1.1 Capitalized Terms Used But Not Defined in This Agreement. All capitalized terms used in this Agreement which are defined in Article I of the Common Definitions and Provisions Agreement (Phase IV - Land) and not otherwise defined herein shall have the same meanings herein as set forth in the Common Definitions and Provisions Agreement (Phase IV - Land). All terms used in this Agreement which are defined in the UCC and not otherwise defined herein shall have the same meanings herein as set forth therein, except where the context otherwise requires. Section 1.2 Definitions. When used in this Agreement, the following terms shall have the following respective meanings: "ACCOUNT" shall mean any deposit account maintained by a Deposit Taker into which Cash Collateral may be deposited at any time, excluding the Transition Account. [Phase IV - Land] -1- <PAGE> 7 "ACCOUNT OFFICE" shall mean, with respect to any Account maintained by any Deposit Taker, the office of such Deposit Taker in California or New York at which such Account is maintained as specified in the applicable Deposit Taker's Acknowledgment and Agreement. "AGENT" shall have the meaning given to that term in the introductory paragraph hereof. "BNPLC" shall have the meaning given to that term in the introductory paragraph hereof. "BNPLC'S CORRESPONDING OBLIGATIONS TO PARTICIPANTS" shall mean BNPLC's obligations under the Participation Agreement to pay Participants their respective Percentages of (or amounts equal to their respective Percentages of) sums "actually received by BNPLC" (as defined in the Participation Agreement) in satisfaction of NAI's Purchase Agreement Obligations; provided, however, any modification of the Participation Agreement executed after the date hereof without NAI's written consent shall not be considered for purposes of determining BNPLC's Corresponding Obligations to Participants under this Agreement. "CASH COLLATERAL" shall mean (i) all money of NAI which NAI has delivered to Agent for deposit with a Deposit Taker pursuant to this Agreement, and (ii) any additional money delivered to Agent as Collateral pursuant to Section 4.9. "CERTIFICATE OF DEPOSIT" shall mean a certificate of deposit issued by a Deposit Taker as required by Section 5.4 below to evidence an Account into which Cash Collateral has been deposited pursuant to this Agreement. Each Certificate of Deposit shall be issued in an amount equal to the Value of the Account which it evidences and shall otherwise be in the form set forth as ATTACHMENT 1. "COLLATERAL" shall have the meaning given to that term in Section 2.1 hereof. "COLLATERAL IMBALANCE" shall mean on any date prior to the Designated Sale Date that the Value (without duplication) of Accounts maintained by and Certificates of Deposit issued by the Deposit Taker for any Participant (other than a Disqualified Deposit Taker) does not equal such Participant's Percentage, multiplied by the lesser of (1) the Minimum Collateral Value in effect on such date, or (2) the aggregate Value of all Collateral subject to this Agreement on such date. For purposes of determining whether a Collateral Imbalance exists, the Value of any Accounts maintained by a bank that is acting as Deposit Taker for two or more Participants will be deemed to be held for them in proportion to their respective Percentages, and the Value of any Accounts maintained by a bank as Deposit Taker for both a Participant and BNPLC (as in the case of BNPLC's Parent acting as Deposit Taker for itself, as a Participant, and for BNPLC) will be deemed to be held for the Participant only to the extent necessary to prevent or mitigate a Collateral Imbalance and otherwise for BNPLC. "COLLATERAL PERCENTAGE" shall mean the percentage designated by NAI or required during a Mandatory Collateral Period pursuant to Part III of Schedule 1. "DEFAULT" means any Event of Default and any default, event or condition which would, with the giving of any requisite notices and the passage of any requisite periods of time, constitute an Event of Default. [Phase IV - Land] -2- <PAGE> 8 "DEPOSIT TAKER" for BNPLC shall mean BNPLC's Parent and for each Participant shall mean the Participant itself; provided, that each of BNPLC and the Participants, for itself only, may from time to time designate another Deposit Taker as provided in Sections 4.4 and 4.5 below. "DEPOSIT TAKER LOSSES" shall mean the Value of any Cash Collateral delivered to a Deposit Taker, but that the Deposit Taker will not (because of the insolvency of the Deposit Taker, offsets by the Deposit Taker in violation of the Deposit Taker's Acknowledgment and Agreement, or otherwise) return to NAI or return to Agent for disposition or application as provided herein or as required by applicable law. "DEPOSIT TAKER'S ACKNOWLEDGMENT AND AGREEMENT" shall have the meaning given to that term in subsection 4.1.2 hereof. "DISQUALIFIED DEPOSIT TAKER" shall mean any Deposit Taker with whom Agent may decline to deposit Collateral pursuant to Section 4.1. "EVENT OF DEFAULT" shall mean the occurrence of any of the following: (a) the failure by NAI to pay all or any part of NAI's Purchase Agreement Obligations when due, after giving effect to any applicable notice and grace periods expressly provided for in the Purchase Agreement; (b) the failure by NAI to provide funds as and when required by Section 5.1 of this Agreement, if within seven Business Days after such failure commences NAI does not (1) cure such failure by delivering the funds required by Section 5.1, and (2) pay to BNPLC as additional Rent under the Land Lease an amount equal to interest at the Default Rate (as defined in the Land Lease) on such funds for the period from which they were first due to the date of receipt by Agent; (c) the failure of the pledge or security interest contemplated herein in the Transition Account or any Account, Certificate of Deposit or Cash Collateral to be a Qualified Pledge (regardless of the characterization of the Transition Account or any Accounts, Certificates of Deposit or Cash Collateral as deposit accounts, instruments or general intangibles under the UCC), if within five Business Days after NAI becomes aware of such failure, NAI does not (1) notify Agent, BNPLC and the Participants of such failure, and (2) cure such failure, and (3) to the extent required by Section 7.2.9, pay to BNPLC any additional Base Rent that has accrued under the Land Lease because of (or that would have accrued if BNPLC had been aware of) such failure, together with interest at the Default Rate on any such additional Base Rent; (d) the failure of any representation herein by NAI to be true (other than a failure described in another clause of this definition of Event of Default), if such failure is not cured within thirty days after NAI receives written notice thereof from Agent; (e) the failure of any representation made by NAI in subsection 7.1.1 to be true, if within fifteen (15) days after NAI becomes aware of such failure, NAI does not (1) notify Agent, BNPLC and the Participants of such failure, and (2) cure such failure, and (3) pay to BNPLC any additional Base Rent that has accrued under the Land Lease because of (or that would have accrued if BNPLC had been aware of) such failure, and (4) pay to BNPLC interest at the Default Rate on any such additional Base Rent; [Phase IV - Land] -3- <PAGE> 9 (f) the failure by NAI timely and properly to observe, keep or perform any covenant, agreement, warranty or condition herein required to be observed, kept or performed (other than a failure described in another clause of this definition of Event of Default), if such failure is not cured within thirty days after NAI receives written notice thereof from Agent; and (g) the failure by BNPLC to pay when due on or after the Designated Sale Date any of BNPLC's Corresponding Obligations to Participants, after giving effect to any applicable notice and grace periods expressly provided for in the Participation Agreement. Notwithstanding the foregoing, if ever the aggregate Value of Cash Collateral held by Agent and the Deposit Takers EXCEEDS the Minimum Collateral Value then in effect, a failure of the pledge or security interest contemplated herein in SUCH EXCESS Cash Collateral to be a valid, perfected, first priority pledge or security interest shall not constitute an Event of Default under this Agreement. Accordingly, to provide a cure as required to avoid an Event of Default under clauses (c) or (e) of this definition, NAI could deliver additional Cash Collateral - the pledge of which or security interest in which created by this Agreement is a Qualified Pledge - sufficient in amount to cause the aggregate Value of the Cash Collateral then held by Agent and the Deposit Takers subject to a Qualified Pledge hereunder to equal or exceed the Minimum Collateral Value. "FAILED COLLATERAL TEST DATE" means any date upon which commences a Mandatory Collateral Period as described in Part III of Schedule 1. "INITIALLY QUALIFIED DEPOSIT TAKER" means (1) Banque Nationale de Paris, acting through any branch, office or agency that can lawfully maintain an Account as a Deposit Taker hereunder, and (2) any 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) A3 (in the case of long term debt) and P-2 (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, NAI 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 an Initially Qualified Deposit Taker. "LIEN" shall mean, with respect to any property or assets, any right or interest therein of a creditor to secure indebtedness of any kind which is owed to him or any other arrangement with such creditor which provides for the payment of such indebtedness out of such property or assets or which allows him to have such indebtedness satisfied out of such property or assets prior to the general creditors of any owner thereof, including any lien, mortgage, security interest, pledge, deposit, production payment, rights of a vendor under any title retention or conditional sale agreement or lease substantially equivalent thereto, tax lien, mechanic's or materialman's lien, or any other charge or encumbrance for security purposes, whether arising by law or agreement or otherwise, but excluding any right of setoff which arises without agreement in the ordinary course of business. "Lien" also means any filed financing statement, any registration with an issuer of uncertificated securities, or any other arrangement which would serve to perfect a Lien described in the preceding sentence, regardless of whether such financing statement is filed, such registration is made, or such arrangement is undertaken before or after such Lien exists. [Phase IV - Land] -4- <PAGE> 10 "MATERIAL LEASE DEFAULT" shall mean any of the following: (1) any "Event of Default" under and as defined in the Land Lease, including any such Event of Default consisting of a failure of NAI to comply with the requirements of Exhibit I attached to the Land Lease; and (2)(a) any failure of NAI to make any payment required by and when first due under the Land Lease, regardless of whether any period provided in the Land Lease for the cure of such failure by NAI shall have expired, and (b) any other default, event or condition which would, with the giving of any requisite notices and the passage of any requisite periods of time, constitute an "Event of Default" under and as defined in the Land Lease, if such other default, event or failure involves a material noncompliance with Applicable Law. (For purposes of this definition, "material" noncompliance with Applicable Law will include any noncompliance, the correction of which has been requested by a governmental authority, or because of which a threat of action against the Property or BNPLC has been asserted by a governmental authority.) "MANDATORY COLLATERAL PERIOD" shall mean any period, as determined in accordance with Part III of Schedule 1, during which NAI is required to maintain a Collateral Percentage of one hundred percent (100%) pursuant to Section 3.2. "MINIMUM COLLATERAL VALUE" shall mean (1) as of the Designated Sale Date or any prior date, an amount equal to the Collateral Percentage multiplied by the Stipulated Loss Value determined as of that date in accordance with the Land Lease; and (2) as of any date after the Designated Sale Date, an amount equal to the Break Even Price plus any unpaid interest accrued on past due amounts payable pursuant to Paragraph 1(a) of the Purchase Agreement. "NAI" shall have the meaning given to that term in the introductory paragraph hereof. "NAI'S PURCHASE AGREEMENT OBLIGATIONS" shall mean all of NAI's obligations under the Purchase Agreement, including (i) NAI's obligation to pay any Supplemental Payment as required under subparagraph 1(A) of the Purchase Agreement, and (ii) any damages incurred by BNPLC because of (A) NAI's breach of the Purchase Agreement or (B) the rejection by NAI of the Purchase Agreement in any bankruptcy or insolvency proceeding. "NOTICE OF SECURITY INTEREST" shall have the meaning given to that term in subsection 4.1.1 hereof. "OTHER LIABLE PARTY" shall mean any Person, other than NAI, who may now or may at any time hereafter be primarily or secondarily liable for any of the Secured Obligations or who may now or may at any time hereafter have granted to Agent a pledge of or security interest in any of the Collateral. "PARTICIPANTS" shall mean BNPLC's Parent and any other financial institutions which may hereafter become parties to (i) this Agreement by completing, executing and delivering to NAI and Agent a Supplement, and (ii) the Participation Agreement. "PARTICIPATION AGREEMENT" shall have the meaning given to such term in Recital B hereof. [Phase IV - Land] -5- <PAGE> 11 "PERCENTAGE" shall mean with respect to each Participant and the Deposit Taker for such Participant, such Participant's "Percentage" under and as defined in the Participation Agreement for purposes of computing such Participant's right thereunder to receive payments of (or amounts equal to a percentage of) any sales proceeds or Supplemental Payment received by BNPLC under the Purchase Agreement. Percentages may be adjusted from time to time as provided in the Participation Agreement or as provided in supplements thereto executed as provided in the Participation Agreement. "QUALIFIED PLEDGE" means a pledge or security interest that constitutes a valid, perfected, first priority pledge or security interest. "SECURED OBLIGATIONS" shall mean and include both NAI's Purchase Agreement Obligations and BNPLC's Corresponding Obligations to Participants. "SUPPLEMENT" shall mean a supplement to this Agreement in the form of ATTACHMENT 2. "TRANSACTION DOCUMENTS" shall mean, collectively, this Agreement, the Land Lease, the Purchase Agreement and the Participation Agreement. "TRANSITION ACCOUNT" shall have the meaning given it in Section 5.2. "UCC" shall mean the Uniform Commercial Code as in effect in the State of California from time to time, and the Uniform Commercial Code as in effect in any other jurisdiction which governs the perfection or non-perfection of the pledge of and security interests in the Collateral created by this Agreement. "VALUE" shall mean with respect to any Account, Certificate of Deposit or Cash Collateral on any date, a dollar value determined as follows (without duplication): (a) cash shall be valued at its face amount on such date; (b) an Account shall be valued at the principal balance thereof on such date; and (c) a Certificate of Deposit shall be valued at the face amount thereof. Section 1.3 Attachments. All attachments to this Agreement are a part hereof for all purposes. Section 1.4 Amendment of Defined Instruments. Unless the context otherwise requires or unless otherwise provided herein, references in this Agreement to a particular agreement, instrument or document (including references to the Land Lease, Purchase Agreement and Participation Agreement) also refer to and include all valid renewals, extensions, amendments, modifications, supplements or restatements of any such agreement, instrument or document; provided that nothing contained in this Section shall be construed to authorize any Person to execute or enter into any such renewal, extension, amendment, modification, supplement or restatement. Section 1.5 References and Titles. All references in this Agreement to Attachments, Articles, Sections, subsections, and other subdivisions refer to the Attachments, Articles, Sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the [Phase IV - Land] -6- <PAGE> 12 beginning of any subdivision are for convenience only and do not constitute any part of any such subdivision and shall be disregarded in construing the language contained in this Agreement. The words "this Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Article," "this Section" and "this subsection" and similar phrases refer only to the Articles, Sections or subsections hereof in which the phrase occurs. The word "or" is not exclusive, and the word "including" (in all of its forms) means "including without limitation". Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. ARTICLE II SECURITY INTEREST Section 2.1 Pledge and Grant of Security Interest. As security for the Secured Obligations, NAI hereby pledges and assigns to Agent (for the ratable benefit of BNPLC and the Participants) and grants to Agent (for the ratable benefit of BNPLC and the Participants) a continuing security interest and lien in and against all right, title and interest of NAI in and to the following property, whether now owned or hereafter acquired by NAI (collectively and severally, the "COLLATERAL"): (a) All Cash Collateral, all Accounts, the Transition Account and all Certificates of Deposit issued from time to time and general intangibles arising therefrom or relating thereto (however, "general intangibles" as used in this clause shall not include any general intangibles not related to Cash Collateral, Accounts, the Transition Account or Certificates of Deposit issued from time to time, and thus will not include, without limitation, any intellectual property of NAI); and all documents, instruments and agreements evidencing the same; and all extensions, renewals, modifications and replacements of the foregoing; and any interest or other amounts payable in connection therewith; and (b) All proceeds of the foregoing (including whatever is receivable or received when Collateral or proceeds is invested, sold, collected, exchanged, returned, substituted or otherwise disposed of, whether such disposition is voluntary or involuntary, including rights to payment and return premiums and insurance proceeds under insurance with respect to any Collateral, and all rights to payment with respect to any cause of action affecting or relating to the Collateral). The pledge, assignment and grant of a security interest made by NAI hereunder is for security of the Secured Obligations only; the parties to this Agreement do not intend that NAI's delivery of the Collateral to Agent as herein provided will constitute an advance payment of any Secured Obligations or liquidated damages, nor do the parties intend that the Collateral increase the dollar amount of the Secured Obligations. Section 2.2 Return of Collateral After the Secured Obligations are Satisfied in Full. If any proceeds of Collateral remain after all Secured Obligations have been paid in full, Agent will deliver or direct the Deposit Takers to deliver such proceeds to NAI or other Persons entitled thereto by law. ARTICLE III DESIGNATION OF MINIMUM COLLATERAL PERCENTAGE Section 3.1 Determination of Minimum Collateral Percentage Generally. Effective as of the date of this Agreement, and until a new Collateral Percentage becomes effective, the Collateral Percentage is zero percent (0%). Subject to the provisions of this Article III, NAI may from time to time designate a new Collateral Percentage between 0% and 100% by written notice delivered to Agent, BNPLC and the Participants in the form of ATTACHMENT 3. Any new Collateral Percentage so designated shall not become effective, however, until the commencement of the later of (A) the first Base Rent Period to [Phase IV - Land] -7- <PAGE> 13 commence on or after the first Business Day of January, 2002, or (B) the next following Base Rent Period which is at least ten Business Days after the receipt of such notice by Agent, BNPLC and the Participants. Further, after the first change in the Collateral Percentage resulting from a designation by NAI of a Collateral Percentage greater than zero percent (0%), any subsequent change resulting from NAI's designation of a new Collateral Percentage shall not become effective before the first Business Day of the first Base Rent Period that commences at least ninety days after the effective date of the last preceding change in the Collateral Period. In any event, if NAI provides more than one notice of a change in the Collateral Percentage to be effective on a particular Base Rent Date, then the latest such notice from NAI which satisfies the requirements of this Section (and of Sections 3.2 and 3.3) will control. After any Collateral Percentage becomes effective as provided in this Article, it shall remain in effect until a different Collateral Percentage becomes effective as provided in this Article. Section 3.2 Limitations on NAI's Right to Lower the Collateral Percentage. Notwithstanding the foregoing, no designation by NAI of a new Collateral Percentage will be effective to reduce the Collateral Percentage if the designation is given, or the reduction would otherwise become effective, on or after the Designated Sale Date or when any of the following shall have occurred and be continuing: 3.2.1 any Material Lease Default; 3.2.2 any Event of Default under and as defined in this Agreement; or 3.2.3 any Default under and as defined in this Agreement - excluding, however, any such Default limited to a failure of NAI described in clause (c) or clause (e) of the definition of Event of Default above, with respect to which the time for cure specified in clause (c) or clause (e), as applicable, has not expired. Section 3.3 Mandatory Collateral Periods. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN CONTAINED, THE COLLATERAL PERCENTAGE DURING ANY MANDATORY COLLATERAL PERIOD SHALL BE ONE HUNDRED PERCENT (100%). No later than five Business Days prior to any Failed Collateral Test Date, NAI shall notify Agent, BNPLC and the Participants of the conditions set forth in Part III of Schedule 1 that NAI will be unable to satisfy on the Failed Collateral Test Date. ARTICLE IV PROVISIONS CONCERNING DEPOSIT TAKERS Section 4.1 Qualification of Deposit Takers Generally. Agent may decline to deposit or maintain Collateral hereunder with any Person designated as a Deposit Taker, if such Person has failed to satisfy or no longer satisfies the following requirements: 4.1.1 Such Person must have received from Agent and NAI a completed, executed Notice of Security Interest in the form of ATTACHMENT 4 (a "NOTICE OF SECURITY INTEREST") which specifically identifies any and all Accounts in which such Person shall hold Cash Collateral delivered to it pursuant to this Agreement and which designates Account Offices with respect to all such Accounts in New York or California. 4.1.2 Such Person must have executed the Acknowledgment and Agreement at the end of such Notice of Security Interest (the "DEPOSIT TAKER'S ACKNOWLEDGMENT AND AGREEMENT") and returned the same to Agent. Further, such Person must have complied with the Deposit Taker's Acknowledgment and Agreement, and the representations set forth therein with respect to such Person must continue to be true and correct. [Phase IV - Land] -8- <PAGE> 14 4.1.3 Such Person must be a commercial bank, organized under the laws of the United States of America or a state thereof or under the laws of another country which is doing business in the United States of America; must be authorized to maintain deposit accounts for others through Account Offices in New York or California (as specified in the Deposit Taker's Acknowledgment and Agreement); and must be an Affiliate of BNPLC or the Participant for whom such Person will act as Deposit Taker or must have a combined capital, surplus and undivided profits of at least $500,000,000. 4.1.4 Such Person must have complied with the provisions in this Agreement applicable to Deposit Takers, including the provisions of Section 5.4 concerning the issuance and redemption of Certificates of Deposit. Section 4.2 Existing Deposit Takers. BNPLC's Parent (as Deposit Taker for itself and for BNPLC) has received a Notice of Security Agreement dated the Effective Date and has responded to such a notice with a Deposit Taker's Acknowledgment and Agreement dated the Effective Date, as contemplated in subsections 4.1.1 and 4.1.2. Section 4.3 Replacement of Participants Proposed by NAI. 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 NAI for any Participant, the Deposit Taker for whom would no longer meet the requirements for an Initially 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; (B) the new Participant will agree (by executing a Supplement and a supplement to the Participation Agreement as contemplated therein and by other agreements as may be reasonably required by BNPLC and NAI) to become a party to the Participation Agreement and to this Agreement, to designate an Initially Qualified Deposit Taker as the Deposit Taker for it under this 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 NAI) will provide the funds required to pay the termination fee by Section 6.4 of the Participation Agreement to accomplish the substitution; (D) NAI (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 this 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); (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); and (F) in no event will BNPLC be required to approve a substitution pursuant to this Section 4.3 which will replace a Participant that is an Affiliate of BNPLC. BNPLC shall attempt in good faith to assist (and cause BNPLC's Parent to attempt in good faith to assist) NAI in identifying a new Participant that NAI may propose to substitute for an existing Participant pursuant to this Section, as NAI 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. Section 4.4 Mandatory Substitution for Disqualified Deposit Takers. If any Deposit Taker shall cease to satisfy the requirements set forth in Section 4.1, the party for whom such Disqualified Deposit Taker has been designated as Deposit Taker (i.e., BNPLC or the applicable Participant) shall promptly (1) provide notice thereof to Agent and NAI, and (2) designate a substitute Deposit Taker and cause the [Phase IV - Land] -9- <PAGE> 15 substitute to satisfy the requirements set forth in Section 4.1. Pending the designation of the substitute and the satisfaction by it of the requirements set forth in Section 4.1, Agent may withdraw Collateral held by the Disqualified Deposit Taker and deposit such Collateral with other Deposit Takers, subject to Section 5.3 below. Section 4.5 Voluntary Substitution of Deposit Takers. With the written approval of Agent, which approval will not be unreasonably withheld, BNPLC or any Participant may at any time designate for itself a new Deposit Taker (in replacement of any prior Deposit Taker acting for it hereunder); provided, the Person so designated has satisfied the requirements set forth in Section 4.1; and, provided further, unless the designation of a new Deposit Taker is required by Section 4.4 to replace a Disqualified Deposit Taker, at the time of the replacement such Person must be an Initially Qualified Deposit Taker. Section 4.6 Delivery of Notice of Security Interest by NAI and Agent. To the extent required for the designation of a new Deposit Taker by BNPLC or any Participant pursuant to Section 4.5, or to permit the substitution or replacement of a Deposit Taker for BNPLC or any Participant as provided in Sections 4.4 and 4.5, NAI and Agent shall promptly execute and deliver any properly completed Notice of Security Interest requested by BNPLC or the applicable Participant. Section 4.7 Constructive Possession of Collateral. The possession by a Deposit Taker of any deposit accounts, money, instruments, chattel paper or other property constituting Collateral or evidencing Collateral shall be deemed to be possession by Agent or a person designated by Agent, for purposes of perfecting the security interest granted to Agent hereunder pursuant to the UCC or other Applicable Law; and notifications to a Deposit Taker by other Persons holding any such property, and Acknowledgments, receipts or confirmations from any such Persons delivered to a Deposit Taker, shall be deemed notifications to, or Acknowledgments, receipts or confirmations from, financial intermediaries, bailees or agents (as applicable) of such Deposit Taker for the benefit of Agent for the purposes of perfecting such security interests under Applicable Law. Section 4.8 Attempted Setoff by Deposit Takers. By delivery of a Deposit Taker's Acknowledgment and Agreement, each Deposit Taker shall be required to agree not to setoff or attempt a setoff, WITHOUT IN EACH CASE FIRST OBTAINING THE PRIOR WRITTEN AUTHORIZATION OF AGENT, Secured Obligations owed to it against any Collateral held by it from time to time. Further, by delivery of a Deposit Taker's Acknowledgment and Agreement, each Deposit Taker shall be required to agree not to setoff or attempt a setoff, WITHOUT IN EACH CASE FIRST OBTAINING THE PRIOR WRITTEN AUTHORIZATION OF BOTH NAI AND AGENT, obligations owed to it other than Secured Obligations against any Collateral held by it from time to time. Any Deposit Taker for BNPLC or a Participant shall not be permitted by BNPLC or the applicable Participant, as the case may be, to violate such agreements. However, NAI acknowledges and agrees (without limiting its right to recover damages from a Deposit Taker that violates such agreements) that Agent shall not be responsible for, or be deemed to have taken any action against NAI because of, any Deposit Taker's violation of such agreements; and, neither BNPLC nor any Participant shall be responsible for, or be deemed to have taken any action against NAI because of, any violation of such agreements by a Deposit Taker for another party. Section 4.9 Deposit Taker Losses. Agent shall not be responsible for any Deposit Taker Losses. However, Deposit Taker Losses with respect to a Deposit Taker for a particular Participant shall reduce the amount of BNPLC's Corresponding Obligations to Participants which are payable to such Participant as provided in Section 2.2 of the Participation Agreement. Further, when Deposit Taker Losses with respect to a Deposit Taker for a particular Participant are incurred in excess of the payments of Secured Obligations that such Participant would then have been entitled to receive under the Participation Agreement but for such Deposit Taker Losses, such Participant must immediately pay the excess to Agent [Phase IV - Land] -10- <PAGE> 16 as additional Collateral hereunder, failing which NAI may recover any damages suffered by it because of the Deposit Taker Losses from such Deposit Taker or such Participant. Section 4.10 Losses Resulting from Failure of Deposit Taker to Comply with this Agreement. Any Participant, the Deposit Taker for whom has failed to comply with the requirements of this Agreement or any Notices of Security Interest and any Deposit Taker's Acknowledgments and Agreements (the "RESPONSIBLE PARTICIPANT") must defend, indemnify, and hold harmless BNPLC, Agent and the other Participants from and against any Losses resulting from such failure. Without limiting the foregoing, if the failure of a Deposit Taker for a Responsible Participant to comply strictly with the terms of this Agreement (including, without limitation, the provisions of Section 5.4 concerning the issuance and redemption of Certificates of Deposit and the requirement that any cash deposits be held in a deposit account located in either New York or California) causes, in whole or in part, the security interest of Agent in the Collateral held by such Deposit Taker to be unperfected, then any and all Losses suffered as a result of such nonperfection shall be borne solely by the Responsible Participant and shall not be shared by BNPLC, Agent or the other Participants. ARTICLE V DELIVERY AND MAINTENANCE OF CASH COLLATERAL Section 5.1 Delivery of Funds by NAI. On each Base Rent Date, NAI must deliver to Agent, subject to the pledge and security interest created hereby, funds as Cash Collateral then needed (if any) to cause the Value of the Collateral to be no less than the Minimum Collateral Value. Each delivery of funds required by the preceding sentence must be received by Agent no later than 12:00 noon (San Francisco time) on the date it is required; if received after 12:00 noon it will be considered for purposes of the Land Lease as received on the next following Business Day. At least five Business Days prior to any Base Rent Date upon which it is expected that NAI will be required to deliver additional funds pursuant to this Section, NAI shall notify BNPLC, Agent and each of the Participants thereof and of the amount NAI expects to deliver to Agent as Cash Collateral on the applicable Base Rent Date. In addition to required deliveries of Cash Collateral as provided in the foregoing provisions, NAI may on any date (whether or not a Base Rent Date) deliver additional Cash Collateral to Agent as necessary to prevent any Default from becoming an Event of Default. Upon receipt of any funds delivered to it by NAI as Cash Collateral, Agent shall immediately deposit the same with the Deposit Takers in accordance with the requirements of Sections 5.3 and 5.4 below. Section 5.2 Transition Account. Pending deposit in the Accounts or other application as provided herein, all Cash Collateral received by Agent shall be credited to and held by Agent in an account (the "TRANSITION ACCOUNT") styled "NAI Collateral Account, held for the benefit of BNP Leasing Corporation and the Participants," separate and apart from all other property and funds of NAI or other Persons, and no other property or funds shall be deposited in the Transition Account. The books and records of Agent shall reflect that the Transition Account and all Cash Collateral on deposit therein are owned by NAI, subject to a pledge and security interest in favor of Agent for the benefit of BNPLC and Participants. Section 5.3 Allocation of Cash Collateral Among Deposit Takers. Funds received by Agent from NAI as Cash Collateral will be allocated for deposit among the Deposit Takers as follows: first, to the extent possible the funds will be allocated as required to rectify and prevent any Collateral Imbalance; and second, the funds will be allocated to the Deposit Taker for BNPLC, unless the Deposit Taker for BNPLC has become a Disqualified Deposit Taker, in which case the funds will be allocated to other Deposit Takers who are not Disqualified Deposit Takers as Agent deems appropriate. [Phase IV - Land] -11- <PAGE> 17 Further, if for any reason a Collateral Imbalance is determined by Agent to exist, Agent shall, as required to rectify or mitigate the Collateral Imbalance, promptly reallocate Collateral among Deposit Takers by withdrawing Cash Collateral from some Accounts and redepositing it in other Accounts. (If any party to this Agreement believes that the Value of the Accounts held by a particular Deposit Taker causes a Collateral Imbalance to exist, that party will promptly notify BNPLC, NAI and Agent.) Subject to the foregoing, and provided that Agent does not thereby create or exacerbate a Collateral Imbalance, Agent may withdraw and redeposit Cash Collateral in order to reallocate the same among Deposit Takers from time to time as Agent deems appropriate. For purposes of illustration only, examples of the allocations required by this Section are set forth in ATTACHMENT 5. Section 5.4 Issuance and Redemption of Certificates of Deposit. Upon the receipt of any deposit of Cash Collateral from Agent, each Deposit Taker shall issue a Certificate of Deposit evidencing the Account into which such deposit is made and deliver such Certificate of Deposit to Agent for the benefit of BNPLC and the Participants. Each Certificate of Deposit shall be issued in an amount equal to the Value of the Account which it evidences and shall otherwise be in the form set forth as ATTACHMENT 1 to this Agreement. Upon depositing any Cash Collateral into an Account that is already evidenced by an outstanding Certificate of Deposit, Agent will surrender the outstanding Certificate of Deposit, and in exchange the Deposit Taker receiving the deposit will issue a new Certificate of Deposit, evidencing the total amount of Cash Collateral in the Account after the deposit. A Deposit Taker that has issued a Certificate of Deposit may require the surrender of the Certificate of Deposit as a condition to a withdrawal from the Account evidenced thereby, including any withdrawal required or permitted by this Agreement. Upon surrender of a Certificate of Deposit in connection with a withdrawal of less than all of the Cash Collateral in the Account evidenced thereby, the applicable Deposit Taker will concurrently issue a new Certificate of Deposit to Agent, evidencing the balance of the Cash Collateral remaining on deposit in the Account after the withdrawal. Notwithstanding the foregoing, if any Certificate of Deposit held by Agent shall be destroyed, lost or stolen, the Deposit Taker that issued the Certificate, upon the written request of Agent, shall issue a new Certificate of Deposit to Agent in lieu of and in substitution for the Certificate of Deposit so destroyed, lost or stolen. However, as applicant for the substitute Certificate of Deposit, Agent must indemnify (at no cost to NAI) the applicable Deposit Taker against any liability on the Certificate of Deposit destroyed, lost or stolen, and Agent shall furnish to the Deposit Taker an affidavit of an officer of Agent setting forth the fact of destruction, loss or theft and confirming the status of Agent as holder of the Certificate of Deposit immediately prior to the destruction, loss or theft. If any Certificate of Deposit held by Agent shall become mutilated, the Deposit Taker that issued the Certificate, upon the written request of Agent, shall issue a new Certificate of Deposit to Agent in exchange and substitution for the mutilated Certificate of Deposit. Agent shall hold all Certificates of Deposit for the benefit of BNPLC and the Participants, subject to the pledge and security interest created hereby. Section 5.5 Status of the Accounts Under the Reserve Requirement Regulations. Deposit Takers shall be permitted to structure the Accounts as nonpersonal time deposits under 12 C.F.R., Part II, Chapter 204 (commonly known as "Regulation D"). Accordingly, each Deposit Taker may require at least seven days advance notice of any withdrawal or transfer of funds from Accounts it maintains and may limit the number of withdrawals or transfers from such Accounts to no more than six in any calendar month, notwithstanding anything to the contrary herein or in any deposit agreement that NAI and any Deposit Taker may enter into with respect to any Account. As necessary to satisfy the seven days notice requirement with respect to withdrawals by Agent when required by NAI pursuant to the provisions below, Agent shall notify Deposit Takers promptly after receipt of any notice from NAI described in subsection 6.1.2 or 6.2.1 or in Section 6.3. [Phase IV - Land] -12- <PAGE> 18 Section 5.6 Acknowledgment by NAI that Requirements of this Agreement are Commercially Reasonable. NAI acknowledges and agrees that the requirements set forth herein concerning receipt, deposit, withdrawal, allocation, application and distribution of Cash Collateral by Agent, including the requirements and time periods set forth in the next Article, are commercially reasonable. ARTICLE VI WITHDRAWAL OF CASH COLLATERAL NAI may not withdraw Cash Collateral, except as follows: Section 6.1 Withdrawal of Collateral Prior to the Designated Sale Date. NAI may require Agent to present Certificates of Deposit for payment and withdraw Cash Collateral from Accounts on any date prior to the Designated Sale Date and to deliver such Cash Collateral to NAI (which delivery shall be free and clear of all liens and security interests hereunder); provided, however, that in each case: 6.1.1 Such withdrawal and delivery of the Cash Collateral to NAI will not cause the Value of the remaining Collateral to be less than the Minimum Collateral Value. 6.1.2 by a notice in the form of ATTACHMENT 6, NAI must give Agent, BNPLC and the Participants notice of the required withdrawal at least ten days prior to the date upon which the withdrawal is to occur. 6.1.3 No Default or Event of Default shall have occurred and be continuing at the time NAI gives the notice required by the preceding subsection or on the date upon which the withdrawal is required. 6.1.4 NAI must pay to Agent any and all costs incurred by Agent in connection with the withdrawal. 6.1.5 Agent shall determine the Accounts from which to make any withdrawal required by NAI pursuant to this Section as necessary to prevent or mitigate any Collateral Imbalance. Section 6.2 Withdrawal and Application of Cash Collateral to Reduce or Satisfy the Secured Obligations to the Participants. To reduce the "Break Even Price" or "Supplemental Payment" required under (and as defined in) the Purchase Agreement (and, thus, to reduce the Secured Obligations), NAI may require Agent to withdraw Cash Collateral then held by or for Agent pursuant to this Agreement on the Designated Sale Date and to deliver the same on the Designated Sale Date or on any date thereafter prior to an Event of Default (which delivery shall be free and clear of all liens and security interests hereunder) directly to the Participants in proportion to their respective rights to payment of BNPLC's Corresponding Obligations to Participants and for application thereto or the reduction thereof pursuant to Section 2.2 of the Participation Agreement; provided, that: 6.2.1 by a notice in the form of ATTACHMENT 7, NAI must have notified Agent, BNPLC and each of the Participants of the required withdrawal and payment to Participants at least ten days prior to the date upon which it is to occur; 6.2.2 the required withdrawal shall be made as determined by Agent, first, from the Accounts maintained by the Deposit Takers for the Participants, and then (to the extent necessary) from the Accounts maintained by the Deposit Taker for BNPLC; and 6.2.3 in any event, no withdrawals or payments directly to Participants shall be required by this Section 6.2 (or permitted over the objection of BNPLC) in excess of those required to [Phase IV - Land] -13- <PAGE> 19 satisfy BNPLC's Corresponding Obligations to Participants or to reduce such obligations to zero under the Participation Agreement. Section 6.3 Withdrawal and Application of Cash Collateral to Reduce or Satisfy the Secured Obligations to BNPLC. To satisfy NAI's Purchase Agreement Obligations, NAI may require Agent to withdraw any Cash Collateral held by the Deposit Taker for BNPLC pursuant to this Agreement on the Designated Sale Date and to deliver the same on the Designated Sale Date or on any date thereafter prior to an Event of Default (which delivery shall be free and clear of all liens and security interests hereunder) directly to BNPLC as a payment on behalf of NAI of amounts due under the Purchase Agreement; provided, that by a notice in the form of ATTACHMENT 8, NAI must have notified Agent and BNPLC of the required withdrawal and payment to BNPLC at least ten days prior to the date upon which it is to occur. Section 6.4 Withdrawal of Cash Collateral From Accounts Maintained by Disqualified Deposit Takers. NAI may from time to time prior to the Designated Sale Date (regardless of the existence of any Default or Event of Default) require Agent to withdraw any or all Cash Collateral from any Account maintained by a Disqualified Deposit Taker and deposit it, still subject to the pledge and grant of security interest hereunder, with other Deposit Takers who are not Disqualified Deposit Takers (in accordance with the requirements of Sections 5.3 and 5.4) on any date prior to the Designated Sale Date; provided, that by a notice in the form of ATTACHMENT 9, NAI must have notified Agent, BNPLC and each of the Participants of the required withdrawal at least ten days prior to the date upon which it is to occur. ARTICLE VII REPRESENTATIONS AND COVENANTS OF NAI Section 7.1 Representations of NAI. NAI represents to BNPLC, Agent and the Participants as follows: 7.1.1 NAI is the legal and beneficial owner of the Collateral (or, in the case of after-acquired Collateral, at the time NAI acquires rights in the Collateral, will be the legal and beneficial owner thereof). No other Person has (or, in the case of after-acquired Collateral, at the time NAI acquires rights therein, will have) any right, title, claim or interest (by way of Lien, purchase option or otherwise) in, against or to the Collateral, except for rights created hereunder. 7.1.2 Agent has (or in the case of after-acquired Collateral, at the time NAI acquires rights therein, will have) a valid, first priority, perfected pledge of and security interest in the Collateral, regardless of the characterization of the Collateral as deposit accounts, instruments or general intangibles under the UCC, but assuming that the representations of each Deposit Taker in its Deposit Taker's Acknowledgment and Agreement are true. 7.1.3 NAI has delivered to Agent, together with all necessary stock powers, endorsements, assignments and other necessary instruments of transfer, the originals of all documents, instruments and agreements evidencing Accounts, Certificates of Deposit or Cash Collateral. 7.1.4 NAI's chief executive office is located at the address of NAI set forth in Article II of the Common Definitions and Provisions Agreement (Phase IV - Land) or at another address in California specified in a notice that NAI has given to Agent as required by Section 7.2.4. 7.1.5 To the knowledge of NAI, neither the ownership or the intended use of the Collateral by NAI, nor the pledge of Accounts or the grant of the security interest by NAI to Agent [Phase IV - Land] -14- <PAGE> 20 herein, nor the exercise by Agent of its rights or remedies hereunder, will (i) violate any provision of (a) Applicable Law, (b) the articles or certificate of incorporation, charter or bylaws of NAI, or (c) any agreement, judgment, license, order or permit applicable to or binding upon NAI, or (ii) result in or require the creation of any Lien, charge or encumbrance upon any assets or properties of NAI except as expressly contemplated in this Agreement. Except as expressly contemplated in this Agreement, to the knowledge of NAI no consent, approval, authorization or order of, and no notice to or filing with any court, governmental authority or third party is required in connection with the pledge or grant by NAI of the security interest contemplated herein or the exercise by Agent of its rights and remedies hereunder. Section 7.2 Covenants of NAI. NAI hereby agrees as follows: 7.2.1 NAI, at NAI's expense, shall promptly procure, execute and deliver to Agent all documents, instruments and agreements and perform all acts which are necessary, or which Agent may reasonably request, to establish, maintain, preserve, protect and perfect the Collateral, the pledge thereof to Agent or the security interest granted to Agent therein and the first priority of such pledge or security interest or to enable Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the preceding sentence, NAI shall (A) procure, execute and deliver to Agent all stock powers, endorsements, assignments, financing statements and other instruments of transfer requested by Agent, (B) deliver to Agent promptly upon receipt all originals of Collateral consisting of instruments, documents and chattel paper, (C) cause the security interest of Agent in any Collateral consisting of securities to be recorded or registered in the books of any financial intermediary or clearing corporation requested by Agent, and (D) reimburse Agent upon request for any legal opinion Agent may elect to obtain from a nationally recognized commercial law firm authorized to practice in New York concerning the enforceability, first priority and perfection of Agent's security interest in any Collateral maintained in New York, if BNPLC or any Participant should at any time elect to use a Deposit Taker that will maintain one or more Accounts in New York. 7.2.2 NAI shall not use or consent to any use of any Collateral in violation of any provision of the this Agreement or any other Transaction Document or any Applicable Law. 7.2.3 NAI shall pay promptly when due all taxes and other governmental charges, all Liens and all other charges now or hereafter imposed upon, relating to or affecting any Collateral. 7.2.4 Without thirty days' prior written notice to Agent, NAI shall not change NAI's name or place of business (or, if NAI has more than one place of business, its chief executive office). 7.2.5 NAI shall appear in and defend, on behalf of Agent, any action or proceeding which may affect NAI's title to or Agent's interest in the Collateral. 7.2.6 Subject to the express rights of NAI under Article VI, NAI shall not surrender or lose possession of (other than to Agent or a Deposit Taker pursuant hereto), sell, encumber, lease, rent, option, or otherwise dispose of or transfer any Collateral or right or interest therein, and NAI shall keep the Collateral free of all Liens. 7.2.7 NAI will not take any action which would in any manner impair the value or enforceability of Agent's pledge of or security interest in any Collateral, nor will NAI fail to take any action which is required to prevent (and which NAI knows is required to prevent) an impairment of the value or enforceability of Agent's pledge of or security interest in any Collateral. [Phase IV - Land] -15- <PAGE> 21 7.2.8 NAI shall pay (and shall indemnify and hold harmless Agent from and against) all Losses incurred by Agent in connection with or because of (A) the interest acquired by Agent in any Collateral pursuant to this Agreement, or (B) the negotiation or administration of this Agreement, whether such Losses are incurred at the time of execution of this Agreement or at any time in the future. Costs and expenses included in such Losses may include, without limitation, all filing and recording fees, taxes, UCC search fees and Attorneys' Fees incurred by Agent with respect to the Collateral. 7.2.9 Without limiting the foregoing, within five Business Days after NAI becomes aware of any failure of the pledge or security interest contemplated herein in the Transition Account or any Account, Certificate of Deposit or Cash Collateral to be a valid, perfected, first priority pledge or security interest (regardless of the characterization of the Transition Account or any Accounts, Certificates of Deposit or Cash Collateral as deposit accounts, instruments or general intangibles under the UCC), NAI shall notify Agent, BNPLC and the Participants of such failure. In addition, if the failure would not exist but for NAI's delivery of Cash Collateral to Agent subject to prior Liens or other claims by one or more third parties, or but for the grant by NAI itself of any Lien or other interest in the Collateral to one or more third parties, then, in addition to any other remedies available to BNPLC or Agent under the circumstances, NAI must pay to BNPLC any additional Base Rent that has accrued under the Land Lease because of (or that would have accrued if BNPLC had been aware of) the failure, together with interest at the Default Rate on any such additional Base Rent. ARTICLE VIII AUTHORIZED ACTION BY AGENT Section 8.1 Power of Attorney. NAI hereby irrevocably appoints Agent as NAI's attorney-in-fact for the purpose of authorizing Agent to perform (but Agent shall not be obligated to and shall incur no liability to NAI or any third party for failure to perform) any act which NAI is obligated by this Agreement to perform, and to exercise, consistent with the other provisions of this Agreement, such rights and powers as NAI might exercise with respect to the Collateral during any period in which a Default or Event of Default has occurred and is continuing, including the right to (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) insure, process, preserve and enforce the Collateral; (d) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral; (e) pay any indebtedness of NAI relating to the Collateral; and (f) execute UCC financing statements and other documents, instruments and agreements required hereunder. NAI agrees that such care as Agent gives to the safekeeping of its own property of like kind shall constitute reasonable care of the Collateral when in Agent's possession; provided, however, that Agent shall not be obligated to NAI to give any notice or take any action to preserve rights against any other Person in connection with the Secured Obligations or with respect to the Collateral. ARTICLE IX DEFAULT AND REMEDIES Section 9.1 Remedies. In addition to all other rights and remedies granted to Agent, BNPLC or the Participants by this Agreement, the Land Lease, the Purchase Agreement, the Participation Agreement, the UCC and other Applicable Laws, Agent may, upon the occurrence and during the continuance of any Event of Default, exercise any one or more of the following rights and remedies, all of which will be in furtherance of its rights as a secured party under the UCC: [Phase IV - Land] -16- <PAGE> 22 (a) Agent may collect, receive, appropriate or realize upon the Collateral or otherwise foreclose or enforce the pledge of or security interests in any or all Collateral in any manner permitted by Applicable Law or in this Agreement; and (b) Agent may notify any or all Deposit Takers to pay all or any portion of the Collateral held by such Deposit Taker(s) directly to Agent. Agent shall distribute the proceeds of all Collateral received by Agent after the occurrence of an Event of Default to BNPLC and the Participants for application to the Secured Obligations. If any proceeds of Collateral remain after all Secured Obligations have been paid in full, Agent will deliver or direct the Deposit Takers to deliver such proceeds to NAI or other Persons entitled thereto. In any case where notice of any sale or disposition of any Collateral is required, NAI hereby agrees that seven (7) Business Days notice of such sale or disposition is reasonable. ARTICLE X OTHER RECOURSE Section 10.1 Recovery Not Limited. To the fullest extent permitted by applicable law, NAI waives any right to require that Agent, BNPLC or the Participants proceed against any other Person, exhaust any Collateral or other security for the Secured Obligations, or to have any Other Liable Party joined with NAI in any suit arising out of the Secured Obligations or this Agreement, or pursue any other remedy in their power. NAI waives any and all notice of acceptance of this Agreement. NAI further waives notice of the creation, modification, rearrangement, renewal or extension for any period of any of the Secured Obligations of any Other Liable Party from time to time and any defense arising by reason of any disability or other defense of any Other Liable Party or by reason of the cessation from any cause whatsoever of the liability of any Other Liable Party. Until all of the Secured Obligations shall have been paid in full, NAI shall have no right to subrogation, reimbursement, contribution or indemnity against any Other Liable Party and NAI waives the right to enforce any remedy which Agent, BNPLC or any Participant has or may hereafter have against any Other Liable Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Agent, BNPLC or any Participant. NAI authorizes Agent, BNPLC and the Participants, without notice or demand and without any reservation of rights against NAI and without affecting NAI's liability hereunder or on the Secured Obligations, from time to time to (a) take or hold any other property of any type from any other Person as security for the Secured Obligations, and exchange, enforce, waive and release any or all of such other property, (b) after any Event of Default, apply or require the application of the Collateral (in accordance with this Agreement) or such other property in any order they may determine and to direct the order or manner of sale thereof as they may determine, (c) renew, extend for any period, accelerate, modify, compromise, settle or release any of the obligations of any Other Liable Party with respect to any or all of the Secured Obligations or other security for the Secured Obligations, and (d) release or substitute any Other Liable Party. ARTICLE XI PROVISIONS CONCERNING AGENT In the event of any conflict between the following and other provisions in this Agreement, the following will control: Section 11.1 Appointment and Authority. BNPLC and each Participant hereby irrevocably authorizes Agent, and Agent hereby undertakes, to take all actions and to exercise such powers under this Agreement as are specifically delegated to Agent by the terms hereof, together with all other powers reasonably incidental thereto. The relationship of Agent to the Participants is only that of one commercial bank acting as collateral agent for others, and nothing herein shall be construed to constitute Agent a [Phase IV - Land] -17- <PAGE> 23 trustee or other fiduciary for any Participant or anyone claiming through or under a Participant nor to impose on Agent duties and obligations other than those expressly provided for in this Agreement. With respect to any matters not expressly provided for in this Agreement and any matters which this Agreement places within the discretion of Agent, Agent shall not be required to exercise any discretion or take any action, and it may request instructions from BNPLC and Participants with respect to any such matter, in which case it shall be required to act or to refrain from acting (and shall be fully protected and free from liability to all Participants in so acting or refraining from acting) upon the instructions of the Majority, as defined in the Participation Agreement, including itself as a Participant and BNPLC; provided, however, that Agent shall not be required to take any action which exposes it to a risk of personal liability that it considers unreasonable or which is contrary to this Agreement or the other documents referenced herein or to Applicable Law. Section 11.2 Exculpation, Agent's Reliance, Etc. Neither Agent nor any of its directors, officers, agents, attorneys, or employees shall be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement, INCLUDING THEIR NEGLIGENCE OF ANY KIND, EXCEPT THAT EACH SHALL BE LIABLE FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Without limiting the generality of the foregoing, Agent (1) may treat the rights of any Participant under its Participation Agreement as continuing until Agent receives written notice of the assignment or transfer of those rights in accordance with such Participation Agreement, signed by such Participant and in form satisfactory to Agent; (2) may consult with legal counsel (including counsel for NAI), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts, unless the action taken or omitted constitutes misconduct; (3) makes no warranty or representation and shall not be responsible for any statements, warranties or representations made in or in connection with this Agreement or the other documents referenced herein; (4) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of the Transaction Documents on the part of any party thereto, or to inspect the property (including the books and records) of any party thereto; (5) shall not be responsible to any Participant for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Transaction Document or any instrument or document furnished in connection therewith; (6) may rely upon the representations and warranties of NAI, Participants and Deposit Takers in exercising its powers hereunder; and (6) shall incur no liability under or in respect of the Transaction Documents by acting upon any notice, consent, certificate or other instrument or writing (including any telecopy, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper Person or Persons. Section 11.3 Participant's Credit Decisions. Each Participant acknowledges that it has, independently and without reliance upon Agent or any other Participant, made its own analysis of NAI and the transactions contemplated hereby and its own independent decision to enter into the Transaction Documents to which it is a party. Each Participant also acknowledges that it will, independently and without reliance upon Agent or any other Participant and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Transaction Documents. Section 11.4 Indemnity. Each Participant agrees to indemnify Agent (to the extent not reimbursed by NAI within ten days after demand) from and against such Participant's Percentage of any and all Losses of any kind or nature whatsoever which to any extent (in whole or in part) may be imposed on, incurred by, or asserted against Agent growing out of, resulting from or in any other way associated with any of the Collateral, the Transaction Documents and the transactions and events (including the enforcement thereof) at any time associated therewith or contemplated therein. THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LOSSES ARE IN ANY WAY OR TO ANY [Phase IV - Land] -18- <PAGE> 24 EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY AGENT, PROVIDED ONLY THAT NO PARTICIPANT SHALL BE OBLIGATED UNDER THIS SECTION TO INDEMNIFY AGENT FOR THAT PORTION, IF ANY, OF ANY LOSS WHICH IS PROXIMATELY CAUSED BY AGENT'S OWN INDIVIDUAL GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, AS DETERMINED IN A FINAL JUDGMENT RENDERED AGAINST AGENT. Cumulative of the foregoing, each Participant agrees to reimburse Agent promptly upon demand for such Participant's Percentage share of any costs and expenses to be paid to Agent by NAI hereunder to the extent that Agent is not timely reimbursed by NAI as provided in subsection 7.2.8. As used in this Section the term "Agent" shall refer not only to the Person designated as such in the introductory paragraph of this Agreement, but also to each director, officer, agent, attorney, employee, representative and Affiliate of such Person. Section 11.5 Agent's Rights as Participant and Deposit Taker. In its capacity as a Participant, Banque Nationale de Paris shall have the same rights and obligations as any Participant and may exercise such rights as though it were not Agent. In its capacity as a Deposit Taker, Banque Nationale de Paris shall have the same rights and obligations as any Deposit Taker and may exercise such rights as though it were not Agent. Banque Nationale de Paris and any of its Affiliates may accept deposits from, lend money to, act as Trustee under indentures of, and generally engage in any kind of business with NAI or its Affiliates, all as if Banque Nationale de Paris were not designated as the Agent hereunder and without any duty to account therefor to any other Participant. Section 11.6 Investments. Whenever Agent in good faith determines that it is uncertain about how to distribute any funds which it has received hereunder, or whenever Agent in good faith determines that there is any dispute among BNPLC and Participants about how such funds should be distributed, Agent may choose to defer distribution of the funds which are the subject of such uncertainty or dispute. If Agent in good faith believes that the uncertainty or dispute will not be promptly resolved, or if Agent is otherwise required to invest funds pending distribution, Agent shall invest such funds pending distribution, all interest on any such investment shall be distributed upon the distribution of such investment and in the same proportion and to the same Persons as such investment. All moneys received by Agent for distribution to BNPLC or Participants shall be held by Agent pending such distribution solely as Agent hereunder, and Agent shall have no equitable title to any portion thereof. Section 11.7 Benefit of Article XI. The provisions of this Article (other than the following Section 11.8) are intended solely for the benefit of Agent, BNPLC and Participants, and NAI shall not be entitled to rely on any such provision or assert any such provision in a claim or defense against Agent, BNPLC or any Participant. Agent, BNPLC and Participants may waive or amend such provisions as they desire without any notice to or consent of NAI. Section 11.8 Resignation. Agent may resign at any time by giving written notice thereof to BNPLC, Participants and NAI. Upon any such resignation the Majority (as defined in the Participation Agreement) shall have the right to appoint a successor Agent, subject to NAI's consent, such consent not to be unreasonably withheld. A successor must be appointed for any retiring Agent, and such Agent's resignation shall become effective when such successor accepts such appointment. If, within thirty days after the date of the retiring Agent's resignation, no successor Agent has been appointed and has accepted such appointment, then the retiring Agent may appoint a successor Agent, which shall be a commercial bank organized or licensed to conduct a banking or trust business under the laws of the United States of America or of any state thereof. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, the retiring Agent shall be discharged from its duties and obligations under this [Phase IV - Land] -19- <PAGE> 25 Agreement. After any retiring Agent's resignation hereunder, the provisions of this Article 10.1 shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. ARTICLE XII MISCELLANEOUS Section 12.1 Provisions Incorporated From Other Operative Documents. Reference is made to the Common Definitions and Provisions Agreement (Phase IV - Land), to the Purchase Agreement and to the Participation Agreement for a statement of the terms thereof. Without limiting the generality of the foregoing, the provisions of Article II of the Common Definitions and Provisions Agreement (Phase IV - Land) are incorporated into this Agreement for all purposes as if set forth in this Article. Section 12.2 Cumulative Rights, etc. Except as herein expressly provided to the contrary, the rights, powers and remedies of Agent, BNPLC and the Participants under this Agreement shall be in addition to all rights, powers and remedies given to them by virtue of any Applicable Law, any other Transaction Document or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing their respective rights hereunder. NAI waives any right to require Agent, BNPLC or any Participant to proceed against any Person or to exhaust any Collateral or to pursue any remedy in Agent's, BNPLC's or such Participant's power. Section 12.3 Survival of Agreements. All representations and warranties of NAI herein, and all covenants and agreements herein shall survive the execution and delivery of this Agreement, the execution and delivery of any other Transaction Documents and the creation of the Secured Obligations and continue until terminated or released as provided herein. Section 12.4 Other Liable Party. Neither this Agreement nor the exercise by Agent or the failure of Agent to exercise any right, power or remedy conferred herein or by law shall be construed as relieving any Other Liable Party from liability on the Secured Obligations or any deficiency thereon. This Agreement shall continue irrespective of the fact that the liability of any Other Liable Party may have ceased or irrespective of the validity or enforceability of any other agreement evidencing or securing the Secured Obligations to which NAI or any Other Liable Party may be a party, and notwithstanding the reorganization, death, incapacity or bankruptcy of any Other Liable Party, or any other event or proceeding affecting any Other Liable Party. Section 12.5 Termination. Following the Designated Sale Date, upon satisfaction in full of all Secured Obligations and upon written request for the termination hereof delivered by NAI to Agent, (i) this Agreement and the pledge and security interest created hereby shall terminate and all rights to the Collateral shall revert to NAI and (ii) Agent will, upon NAI's request and at NAI's expense execute and deliver to NAI such documents as NAI shall reasonably request to evidence such termination and release. [The signature pages follow.] [Phase IV - Land] -20- <PAGE> 26 IN WITNESS WHEREOF, NAI, BNPLC, Agent and the Participants whose signatures appear below have caused this Agreement to be executed as of December ___, 1999. "NAI" NETWORK APPLIANCE, INC. By: ---------------------------------- <PAGE> 27 [Continuation of signature pages to Pledge Agreement (Phase IV - Land) dated to be effective December __, 1999.] "BNPLC" BNP LEASING CORPORATION By: ---------------------------------- Lloyd G. Cox, Vice President <PAGE> 28 [Continuation of signature pages to Pledge Agreement (Phase IV - Land) dated to be effective December __, 1999.] "AGENT" BANQUE NATIONALE DE PARIS By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- "PARTICIPANT" BANQUE NATIONALE DE PARIS By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- <PAGE> 29 ATTACHMENT 1 TO PLEDGE AGREEMENT CERTIFICATE OF DEPOSIT (No. _________) [---------, -----] [NAME OF THE ISSUING DEPOSIT TAKER AND THE ADDRESS OF ITS APPLICABLE ACCOUNT OFFICE] PAYABLE TO THE ORDER OF: BANQUE NATIONALE DE PARIS, as Agent under the Pledge Agreement (Phase IV - Land) dated December __, 1999, among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants _____ Dollars in current funds, without interest, seven days after presentment of this certificate properly endorsed. The bank issuing this certificate acknowledges and certifies that on the date indicated above the payee deposited the dollar amount indicated above, and that such amount shall be payable as provided above. - -------------------------------------------------------------------------------- Authorized Signature <PAGE> 30 ATTACHMENT 2 TO PLEDGE AGREEMENT SUPPLEMENT TO PLEDGE AGREEMENT [----------, ----] Banque Nationale de Paris - ------------------------- - ------------------------- - ------------------------- Network Appliance, Inc. - ------------------------- - ------------------------- - ------------------------- 1. Reference is made to the Pledge Agreement (Phase IV - Land) (the "PLEDGE AGREEMENT") dated December ___, 1999 among Network Appliance, Inc. ("NAI"), BNP Leasing Corporation ("BNPLC"), Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (collectively, the "PARTICIPANTS") and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants (in such capacity, "AGENT"). Unless otherwise defined herein, all capitalized terms used in this Supplement have the respective meanings given to those terms in the Pledge Agreement. 2. The undersigned hereby certifies to Agent and NAI that the undersigned has become a party to the Participation Agreement by executing a supplement as provided therein and that its Percentage thereunder is ______%. 3. The undersigned, by executing and delivering this Supplement to NAI and Agent, hereby agrees to become a party to the Pledge Agreement and agrees to be bound by all of the terms thereof applicable to Participants. The Deposit Taker for the undersigned shall be _________________, until such time as another Deposit Taker for the undersigned shall be designated in accordance with Sections 4.4 or 4.5 of the Pledge Agreement. The undersigned certifies to Agent and NAI that such Deposit Taker is an Initially Qualified Deposit Taker and satisfies the requirements for a Deposit Taker set forth in Section 4.1 of the Pledge Agreement. IN WITNESS WHEREOF, the undersigned has executed this Supplement as of the day and year indicated above. [______________________________________________________________________________] By: ----------------------------------------------------------------------------- Name: ----------------------- Title: ---------------------- <PAGE> 31 ATTACHMENT 3 TO PLEDGE AGREEMENT NOTICE OF NAI'S ELECTION TO CHANGE THE COLLATERAL PERCENTAGE [---------, -----] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Land) (the "PLEDGE AGREEMENT") dated December ___, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement referenced above. This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 3.1 of the Pledge Agreement, NAI elects to change the Collateral Percentage to: __________ percent (___%), on the following Base Rent Date: __________________, ______ NAI expects that multiplying the new Collateral Percentage specified above against Stipulated Loss Value of: ____________________________ Dollars ($__________), will result in an expected new Minimum Collateral Value of: _____________________________ Dollars ($__________). [NOTE: THE NEXT PARAGRAPH WILL BE INCLUDED ONLY IN A NOTICE OF AN INCREASE IN THE COLLATERAL PERCENTAGE, BECAUSE OF WHICH NAI WILL BE REQUIRED TO DELIVER ADDITIONAL CASH COLLATERAL TO SATISFY THE MINIMUM COLLATERAL VALUE REQUIREMENTS IN SECTION 5.1 OF THE PLEDGE AGREEMENT: Because of the increase in the Collateral Percentage which will result from this notice and the corresponding increase in the Minimum Collateral Value, NAI will deliver additional Cash Collateral to you as required by Section 5.1 of the Pledge Agreement no later than 12:00 noon (San Francisco time) on the Base Rent Date specified above, in the amount of: <PAGE> 32 ___________________________ Dollars ($__________).] To assure you that NAI has satisfied the conditions to its right to change the Collateral Percentage as provided in this notice, and to induce you to rely upon this notice in discharging your responsibilities under the Pledge Agreement, NAI certifies to you that: 1. NAI is giving this notice to you, BNPLC and the Participants at least ten Business Days prior to the Base Rent Date specified above, and such Base Rent Date is the commencement of a Base Rent Period. 2. No Event of Default or other event or circumstance that would, pursuant to Section 3.2 of the Pledge Agreement, preclude NAI from designating the new Collateral Percentage above has occurred and is continuing, and NAI does not anticipate that on the Base Rent Date specified above there will have occurred and be continuing any such Event of Default or other event or circumstance. 3. No Mandatory Collateral Period shall be in effect as of the effective date specified above. NOTE: YOU SHALL BE ENTITLED TO DISREGARD THIS NOTICE IF THE STATEMENTS ABOVE ARE NOT CORRECT. HOWEVER, WE ASK THAT YOU NOTIFY NAI IMMEDIATELY IF FOR ANY REASON YOU BELIEVE THIS NOTICE IS DEFECTIVE. Network Appliance, Inc. By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- [cc BNPLC and all Participants] [Phase IV - Land] -2- <PAGE> 33 ATTACHMENT 4 TO PLEDGE AGREEMENT NOTICE OF SECURITY INTEREST [_________, _____] [Name of Deposit Taker] [Address of Deposit Taker] 1. Reference is made to the Pledge Agreement (Phase IV - Land) (the "PLEDGE AGREEMENT") dated December __, 1999 among Network Appliance, Inc. ("NAI"), BNP Leasing Corporation ("BNPLC"), Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (collectively, the "PARTICIPANTS") and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants (in such capacity, "AGENT"). Unless otherwise defined herein, all capitalized terms used in this Notice have the respective meanings given to those terms in the Pledge Agreement. 2. NAI has informed Agent that NAI has established with the addressee of this Notice (the "DEPOSIT TAKER") the following non-interest bearing Account(s) to be maintained at the following Account Office(s): <TABLE> <CAPTION> Account Account Account Type Office Number <S> <C> <C> Time Deposit ------------ ------------ Time Deposit ------------ ------------ Time Deposit ------------ ------------ </TABLE> NAI has further informed Agent that NAI intends to maintain Cash Collateral in such Account(s), and that to evidence such Account(s) and the amount of Cash Collateral held therein from time to time, NAI has authorized the Deposit Taker to issue Certificates of Deposit payable to the order of Agent as provided in the Pledge Agreement. 3. NAI and Agent hereby notify Deposit Taker that, pursuant to the Pledge Agreement, NAI has granted to Agent, for the ratable benefit of BNPLC and the Participants as security for the Secured Obligations, a pledge of and security interest in all Accounts and other Collateral maintained by NAI with Deposit Taker, including the Account(s) described in Section 2 above. 4. In furtherance of such grant, NAI and Agent hereby authorize and direct Deposit Taker to: (a) hold all Collateral for Agent and as Agent's bailee, separate and apart from all other property and funds of NAI and all other Persons and to permit no other funds to be deposited or credited to the Account(s); <PAGE> 34 (b) make a notation in its books and records of the interest of Agent in the Collateral and that the Account(s) and all deposits therein or sums credited thereto are subject to a pledge and security interest in favor of Agent; (c) issue and redeem Certificates of Deposit evidencing the Account(s), as directed by Agent pursuant to the Pledge Agreement; (d) take such other steps as Agent may reasonably request to record, maintain, validate and perfect its pledge of and security interest in the Collateral; and (e) upon receipt of notice from Agent that an Event of Default has occurred, transfer and deliver to Agent or its nominee, together with all necessary endorsements, all or such portion of the Collateral held by Deposit Taker as Agent shall direct; provided, however, that in connection therewith the Deposit Taker may require compliance by Agent with the provisions in Section 5.4 of the Pledge Agreement for redemption of any outstanding Certificates of Deposit which evidence the Account(s). 5. NAI and Agent agree that (a) the possession by Deposit Taker of all money, instruments, chattel paper and other property constituting Collateral shall be deemed to be possession by Agent or a person designated by Agent, for purposes of perfecting the security interest granted to Agent hereunder pursuant to Section 9305, 8313 or 8213 of the UCC (as the case may be), and (b) notifications by Deposit Taker to other Persons holding any such property, and Acknowledgments, receipts or confirmations from such Persons delivered to Deposit Taker, shall be deemed notifications to, or Acknowledgments, receipts or confirmations from, financial intermediaries, bailees or agents (as applicable) of the Deposit Taker for the benefit of Agent for the purposes of perfecting such security interests under applicable law. 6. As contemplated by the Pledge Agreement, please acknowledge Deposit Taker's receipt of, and consent to, this notice and confirm the representations and agreements set forth in the Acknowledgment and Agreement attached hereto by executing the same and returning this letter to Agent. For your files, a copy of this letter is enclosed which you may retain. The authorizations and directions set forth herein may not be revoked or modified without the written consent of Agent. "AGENT" BANQUE NATIONALE DE PARIS By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- [Phase IV - Land] -2- <PAGE> 35 "NAI" Network Appliance, Inc. By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- [Phase IV - Land] -3- <PAGE> 36 ACKNOWLEDGMENT AND AGREEMENT OF DEPOSIT TAKER Deposit Taker hereby acknowledges receipt of, and consents to, the above notice, acknowledges that it will hold the Collateral for Agent and as Agent's bailee, agrees to comply with the authorizations and directions set forth above and represents to and agrees with NAI and Agent as follows: (a) Deposit Taker is a commercial bank, organized under the laws of the United States of America or a state thereof or under the laws of another country which is doing business in the United States of America. Deposit Taker is authorized to maintain deposit accounts for others through the Account Offices specified in the above notice, and Deposit Taker will not move the accounts described in the above notice to other offices without the prior written authorization of Agent and NAI. (b) Deposit Taker has a combined capital, surplus and undivided profits of at least $500,000,000. (c) The information set forth above regarding the Account(s) is accurate. Such Account(s) is (are) currently open and Deposit Taker has no prior notice of any other pledge, security interest, Lien, adverse claim or interest in such Account(s). (e) Deposit Taker shall promptly notify NAI and Agent if the representations made by Deposit Taker above cease to be true and correct. (f) Deposit Taker shall not (i) allow the withdrawal of funds from any Account by any Person other than Agent, or (ii) WITHOUT IN EACH CASE FIRST OBTAINING THE PRIOR WRITTEN AUTHORIZATION OF AGENT, setoff or attempt to setoff any Secured Obligations owed to Deposit Taker against any Collateral held from time to time by Deposit Taker, or (iii) WITHOUT IN EACH CASE FIRST OBTAINING THE PRIOR WRITTEN AUTHORIZATION OF BOTH NAI AND AGENT, setoff or attempt to setoff any obligations owed to Deposit Taker other than Secured Obligations, against any Collateral held from time to time by Deposit Taker. [___________________________________] By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- [Date] <PAGE> 37 ATTACHMENT 5 TO PLEDGE AGREEMENT EXAMPLES OF CALCULATIONS REQUIRED TO AVOID A COLLATERAL IMBALANCE The examples below are provided to illustrate the calculations required for allocations of Cash Collateral in a manner that will avoid a Collateral Imbalance. The examples are not intended to reflect actual numbers under this Agreement or actual Percentages of BNPLC or any of the Participants; nor are the examples intended to provide a formula for the allocations that would be appropriate in every case. The examples also reflect adjustments that would be appropriate if the Collateral Percentage were adjusted from time to time from and after the Base Rent Commencement Date, although this Agreement provides that such percentage is not to increase above zero until the second anniversary of the Effective Date (expected to be well after the Base Rent Commencement Date), except in a Mandatory Collateral Period, during which such percentage would be 100%. EXAMPLE NO. 1 Assumptions: 1. Two Participants ("Participant A" and "Participant B") are parties to the Participation Agreement with BNPLC. Participant A's Percentage is 50% and Participant B's Percentage is 45%, leaving BNPLC with a Percentage of 5%. 2. On the Base Rent Commencement Date, Funding Advances (including those to cover Carrying Costs under the Land Lease) totaled $12,000,000, resulting in a Stipulated Loss Value of $12,000,000, allocable as follows: <TABLE> <S> <C> A. BNPLC's Parent (providing BNPLC's share) (5%) ......... $ 600,000 B. Participant A (50%) ................................... 6,000,000 C. Participant B (45%) ................................... 5,400,000 ----------- TOTAL ............................................. $12,000,000 </TABLE> 3. The Minimum Collateral Value on the Base Rent Commencement Date was $7,200,000 (reflecting a Collateral Percentage of 60% times Stipulated Loss Value). 4. On the Base Rent Commencement Date, NAI had delivered to Agent Cash Collateral of $7,200,000, equal to the Minimum Collateral Value, as required by Section 5.1 of this Agreement. Allocation of Cash Collateral Required: To avoid a Collateral Imbalance under these assumptions, Agent would be required to allocate the $7,200,000 to the Deposit Takers for BNPLC and the Participants as follows: <TABLE> <S> <C> A. BNPLC's Deposit Taker (5% of Minimum Collateral Value) ................... $ 360,000 B. Participant A's Deposit Taker (50% of Minimum Collateral Value) .......... 3,600,000 C. Participant B's Deposit Taker (45% of Minimum Collateral Value) ......... 3,240,000 ---------- TOTAL .................................................................... $7,200,000 </TABLE> <PAGE> 38 EXAMPLE NO. 2 Assumptions: Assume the same facts as in Example No. 1, and in addition assume that: 1. Effective as of the first Base Rent Date, NAI increased its Collateral Percentage from 60% to 80%, raising the Minimum Collateral Value to $9,600,000. Because of such increase, NAI also delivered an additional $2,400,000 as Cash Collateral to Agent on the first Base Rent Date, bringing the total of all Cash Collateral delivered by NAI to $9,600,000 as required by Section 5.1 of this Agreement. 2. Also effective as of the first Base Rent Date, a new Participant approved by NAI ("Participant C") became a party to this Agreement and the Participation Agreement, taking a Percentage of 20%. Simultaneously, Participant A and Participant B entered into supplements to the Participation Agreement which reduced their Percentages to 40% and 35%, respectively. Allocation of Cash Collateral Required: To avoid a Collateral Imbalance under these assumptions, Agent would be required to allocate the Cash Collateral as required to leave the Deposit Takers for BNPLC and the Participants with the following amounts: <TABLE> <S> <C> A. BNPLC's Deposit Taker (5% of Minimum Collateral Value) ................... 480,000 B. Participant A's Deposit Taker (40% of Minimum Collateral Value) .......... 3,840,000 C. Participant B's Deposit Taker (35% of Minimum Collateral Value) .......... 3,360,000 D. Participant C's Deposit Taker (20% of Minimum Collateral Value) ......... 1,920,000 ---------- TOTAL .................................................................... $9,600,000 </TABLE> Thus, to prevent a Collateral Imbalance, Agent would have to allocate the $2,400,000 of additional Cash Collateral it received on the first Base Rent Date as follows: <TABLE> <S> <C> A. BNPLC's Deposit Taker ($480,000 less $360,000 already on deposit) ................ $ 120,000 B. Participant A's Deposit Taker ($3,840,000 less $3,600,000 already on deposit) .... 240,000 C. Participant B's Deposit Taker ($3,360,000 less $3,240,000 already on deposit) .... 120,000 D. Participant C's Deposit Taker ($1,920,000 less $0 already on deposit) ........... 1,920,000 ---------- TOTAL ............................................................................ $2,400,000 </TABLE> EXAMPLE NO. 3 Assumptions: Assume the same facts as in Example No. 2, except that: 1. Instead of increasing its Collateral Percentage from 60% to 80%, NAI increased its Collateral Percentage to 70% on the first Base Rent Date, raising the Minimum Collateral Value to $8,400,000. Because of such increase, NAI delivered an additional $1,200,000 as additional Cash Collateral to Agent on the first Base Rent Date, bringing the total of all Cash Collateral delivered by NAI to $8,400,000 as required by Section 5.1 of this Agreement. Allocation of Cash Collateral Required: To avoid a Collateral Imbalance under these assumptions, Agent would be required to allocate the Cash Collateral as required to leave the Deposit Takers for BNPLC and the Participants with the following amounts: [Phase IV - Land] -2- <PAGE> 39 <TABLE> <S> <C> A. BNPLC's Deposit Taker (5% of Minimum Collateral Value) ................... $ 420,000 B. Participant A's Deposit Taker (40% of Minimum Collateral Value) .......... 3,360,000 C. Participant B's Deposit Taker (35% of Minimum Collateral Value) .......... 2,940,000 D. Participant C's Deposit Taker (20% of Minimum Collateral Value) ......... 1,680,000 ---------- TOTAL .................................................................... $8,400,000 </TABLE> Thus, to prevent a Collateral Imbalance, Agent would have to allocate the $1,200,000 of additional Cash Collateral it received on the first Base Rent Date as follows: <TABLE> <S> <C> A. BNPLC's Deposit Taker ($420,000 less $360,000 already on deposit) ................ $ 60,000 B. Participant A's Deposit Taker ($3,360,000 less $3,600,000 already on deposit) .... (240,000) C. Participant B's Deposit Taker ($2,940,000 less $3,240,000 already on deposit) .... (300,000) D. Participant C's Deposit Taker ($1,680,000 less $0 already on deposit) ........... 1,680,000 ----------- TOTAL ............................................................................ $ 1,200,000 </TABLE> NOTE: THE NEGATIVE AMOUNTS (IN PARENTHESIS) ABOVE REPRESENT REQUIRED WITHDRAWALS RATHER THAN DEPOSITS. AS EXAMPLE NO. 3 ILLUSTRATES, TO AVOID A COLLATERAL IMBALANCE AGENT MAY FROM TIME TO TIME HAVE TO WITHDRAW CASH COLLATERAL HELD BY THE DEPOSIT TAKER FOR ONE PARTICIPANT AND DEPOSIT IT IN AN ACCOUNT MAINTAINED BY A DEPOSIT TAKER FOR ANOTHER PARTICIPANT. [Phase IV - Land] -3- <PAGE> 40 ATTACHMENT 6 TO PLEDGE AGREEMENT NOTICE OF NAI'S REQUIREMENT TO WITHDRAW EXCESS CASH COLLATERAL [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Land) dated December ___, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Land) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 6.1 of the Pledge Agreement, NAI requires you to withdraw from the Accounts and return to NAI the following amount: ___________________________ Dollars ($__________) on the following date: __________, ____ To assure you that NAI has satisfied the conditions to its right to require such withdrawal, and to induce you to comply with this notice, NAI certifies to you that: 1. Your withdrawal and delivery of the amount specified above to NAI will not cause the Value of the remaining Collateral to be less than the Minimum Collateral Value. After giving effect to such withdrawal, the Collateral remaining in the Accounts maintained by the Deposit Takers will be: ____________________________ Dollars ($__________), <PAGE> 41 and the Minimum Collateral Value on the date specified above will equal: ____________________________ Dollars ($__________). Such Minimum Collateral Value equals the Collateral Percentage of: __________ percent (___%), times the Stipulated Loss Value of: ____________________________ Dollars ($__________). 2. NAI is giving this notice to you, BNPLC and the Participants at least ten days prior to the Base Rent Date specified above. 3. No Default or Event of Default has occurred and is continuing as of the date of this notice, and NAI does not anticipate that any Default or Event of Default will have occurred and be continuing on the date upon which the withdrawal is required. 4. NAI agrees that you may determine the Accounts from which to make any withdrawal required by NAI pursuant to this Section as necessary to prevent or mitigate any Collateral Imbalance. NOTE: YOU SHALL BE ENTITLED TO DISREGARD THIS NOTICE IF THE STATEMENTS ABOVE ARE NOT CORRECT OR IF THE DATE FOR WITHDRAWAL SPECIFIED ABOVE IS LESS THAN TEN DAYS AFTER YOUR RECEIPT OF THIS NOTICE. HOWEVER, WE ASK THAT YOU NOTIFY NAI IMMEDIATELY IF FOR ANY REASON YOU BELIEVE THIS NOTICE IS DEFECTIVE. -2- <PAGE> 42 Please remember that the express terms of Certificates of Deposit issued pursuant to the Pledge Agreement require presentment of the Certificates of Deposit seven days before Cash Collateral is to be withdrawn from the Accounts they evidence. Accordingly, you must present Certificates of Deposit to Deposit Takers seven days prior to the withdrawal of Cash Collateral required by this notice. For your convenience, we have attached a letter as Annex 1 to this notice that you might execute and send to Deposit Takers to advise them of your intent to withdraw and of your presentment of Certificates of Deposit as required in connection therewith. The attached letter also sets forth the amounts NAI believes you must withdraw from each Account to avoid a Collateral Imbalance. Network Appliance, Inc. By: ---------------------------------- Name: ----------------------------- Title: ---------------------------- [cc BNPLC and all Participants] -3- <PAGE> 43 Annex 1 TO NAI'S NOTICE OF REQUIREMENT TO WITHDRAW CASH EXCESS COLLATERAL [_________, _____] Deposit Takers on the Attached Distribution List Re: Pledge Agreement (Phase IV - Land) dated December __, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Land) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice from the undersigned, as Agent under the Pledge Agreement, that pursuant to Section 6.1 of the Pledge Agreement, NAI requires Agent to withdraw from the Accounts and return to NAI the amounts listed below on the following date: __________, ____ Accordingly, on such date, the undersigned intends to withdraw the following amounts from the following Accounts, and with this letter the undersigned is presenting Certificates of Deposit as required in connection with such withdrawal: <TABLE> Deposit Taker Account No. Amount - ------------- ----------- ------ <S> <C> <C> 1.____________________ ______________________ $______________ 2.____________________ ______________________ $______________ 3.____________________ ______________________ $______________ 4.____________________ ______________________ $______________ TOTAL WITHDRAWALS: $______________ </TABLE> BANQUE NATIONALE DE PARIS, AS AGENT Name: --------------------------- Title: --------------------------- [cc BNPLC and NAI] [Phase IV - Land] -4- <PAGE> 44 ATTACHMENT 7 TO PLEDGE AGREEMENT NOTICE OF NAI'S REQUIREMENT OF DIRECT PAYMENTS TO PARTICIPANTS [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Land) dated December ___, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Land) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 6.2 of the Pledge Agreement, NAI requires you to withdraw from the Accounts and pay directly to the Participants (in proportion to their respective Percentages) the following amount: ____________________________ Dollars ($__________) on the following date (which, NAI acknowledges, must be the Designated Sale Date or a date thereafter prior to an Event of Default): __________, ____ The amount specified above equals the following percentage (equal to the aggregate of all Participant's Percentages): __________ percent (___%), times the total of all Cash Collateral presently pledged under the Pledge Agreement: ____________________________ Dollars ($__________). <PAGE> 45 To assure you that NAI has satisfied the conditions to its right to require such withdrawal, and to induce you to comply with this notice, NAI certifies to you that NAI is giving this notice to you, BNPLC and the Participants at least ten days prior to the date of required withdrawal and payment specified above. Please remember that the express terms of Certificates of Deposit issued pursuant to the Pledge Agreement require presentment of the Certificates of Deposit seven days before Cash Collateral is to be withdrawn from the Accounts they evidence. Accordingly, you must present Certificates of Deposit to Deposit Takers seven days prior to the withdrawal of Cash Collateral required by this notice. For your convenience, we have attached a letter as Annex 1 to this notice that you might execute and send to Deposit Takers to advise them of your intent to withdraw and of your presentment of Certificates of Deposit as required in connection therewith. The attached letter also sets forth the amounts NAI believes you must withdraw from each Account to comply with subsection 6.2.2 of the Pledge Agreement. Network Appliance, Inc. By: ---------------------------------- Name: ------------------------ Title: ------------------------ [cc BNPLC and all Participants] [Phase IV - Land] -2- <PAGE> 46 Annex 1 TO NAI'S NOTICE OF REQUIREMENT TO WITHDRAW CASH COLLATERAL FOR DIRECT PAYMENTS TO PARTICIPANTS [_________, _____] Deposit Takers on the Attached Distribution List Re: Pledge Agreement (Phase IV - Land) dated December ___, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Land) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice from the undersigned, as Agent under the Pledge Agreement, that pursuant to Section 6.2 of the Pledge Agreement, NAI requires Agent to withdraw from the Accounts and pay to the Participants (in proportion to their respective Percentages) the amounts listed below on the following date: __________, ____ Accordingly, on such date, the undersigned intends to withdraw the following amounts from the following Accounts, and with this letter the undersigned is presenting Certificates of Deposit as required in connection with such withdrawal: <TABLE> Deposit Taker Account No. Amount - ------------- ----------- ------ <S> <C> <C> 1.____________________ ______________________ $______________ 2.____________________ ______________________ $______________ 3.____________________ ______________________ $______________ 4.____________________ ______________________ $______________ TOTAL WITHDRAWALS: $______________ </TABLE> BANQUE NATIONALE DE PARIS, AS AGENT Name: --------------------------- Title: --------------------------- [cc BNPLC and NAI] [Phase IV - Land] -3- <PAGE> 47 ATTACHMENT 8 TO PLEDGE AGREEMENT NOTICE OF NAI'S REQUIREMENT OF DIRECT PAYMENT TO BNPLC [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Land) dated December __, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Land) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 6.3 of the Pledge Agreement, NAI requires you to withdraw from the Account maintained by the Deposit Taker for BNPLC and pay directly to BNPLC on behalf of NAI as a payment required by the Purchase Agreement the following amount: ____________________________ Dollars ($__________) on the following date (which, NAI acknowledges, must be the Designated Sale Date or a date thereafter prior to an Event of Default): __________, ____ To assure you that NAI has satisfied the conditions to its right to require such withdrawal, and to induce you to comply with this notice, NAI certifies to you that NAI is giving this notice to you and BNPLC at least ten days prior to the date of required withdrawal and payment specified above. Please remember that the express terms of Certificates of Deposit issued pursuant to the Pledge Agreement require presentment of the Certificates of Deposit seven days before Cash Collateral is to be withdrawn from the Accounts they evidence. Accordingly, you must present Certificates of Deposit to the Deposit Taker for BNPLC seven days prior to the withdrawal of Cash Collateral required by this notice. For your convenience, we have attached a letter as Annex 1 to this notice that you might execute and send to the Deposit Taker for BNPLC to advise it of your intent to withdraw and of your presentment of Certificates of Deposit as required in connection therewith. The attached letter also sets forth the amount NAI believes you must withdraw to comply with Section 6.3 of the Pledge Agreement. Network Appliance, Inc. By: ---------------------------------- Name: ------------------------ Title: ------------------------ [cc BNPLC] <PAGE> 48 Annex 1 TO NAI'S NOTICE OF REQUIREMENT OF DIRECT PAYMENT TO BNPLC [_________, _____] [Name of the Deposit Taker for BNPLC] [Address of such Deposit Taker] Re: Pledge Agreement (Phase IV - Land) dated December ___, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Land) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice from the undersigned, as Agent under the Pledge Agreement, that pursuant to Section 6.3 of the Pledge Agreement, NAI requires Agent to withdraw from the Account maintained by you, as Deposit Taker for BNPLC, the sum of: ____________________________ Dollars ($__________) and pay the same to BNPLC as a payment required by the Purchase Agreement on the following date: __________, ____ Accordingly, on such date, the undersigned intends to withdraw such amount from the following Account maintained by you as Deposit Taker for BNPLC, and with this letter the undersigned is presenting Certificate(s) of Deposit as required in connection with such withdrawal. BANQUE NATIONALE DE PARIS, AS AGENT Name: --------------------------- Title: --------------------------- [cc BNPLC and NAI] [Phase IV - Land] -2- <PAGE> 49 ATTACHMENT 9 TO PLEDGE AGREEMENT NOTICE OF NAI'S REQUIREMENT OF A WITHDRAWAL OF CASH COLLATERAL FROM A DISQUALIFIED DEPOSIT TAKER [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Land) dated December ___, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Land) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 6.4 of the Pledge Agreement, NAI requires you to withdraw from the following Account maintained by the following Deposit Taker: Deposit Taker Account No. ----------------------------- ------------------ Cash Collateral in the following amount: ____________________________ Dollars ($__________) and to deposit such Cash Collateral with other Deposit Takers who are not Disqualified Deposit Takers no later than ten days after the date upon which you receive this notice. To assure you that NAI has the right to require such withdrawal, and to induce you to comply with this notice, NAI certifies to you that the Deposit Taker specified above has become a Disqualified Deposit Taker because it no longer satisfies the requirements listed in Section 4.1 of the Pledge Agreement. Specifically, such Deposit Taker no longer satisfies the following requirements: [NAI MUST INSERT HERE A DESCRIPTION OF WHICH REQUIREMENTS THE DEPOSIT TAKER NO LONGER SATISFIES AND HOW NAI HAS DETERMINED THAT THE REQUIREMENTS ARE NO LONGER SATISFIED, ALL IN SUFFICIENT DETAIL TO PERMIT THE PARTICIPANT FOR WHOM SUCH DEPOSIT TAKER HAS BEEN <PAGE> 50 MAINTAINING AN ACCOUNT TO RESPOND IF IT BELIEVES THAT NAI IS IN ERROR.] Please remember that the express terms of Certificates of Deposit issued pursuant to the Pledge Agreement require presentment of the Certificates of Deposit seven days before Cash Collateral is to be withdrawn from the Accounts they evidence. Accordingly, you must present Certificates of Deposit to the Deposit Taker specified above seven days prior to the withdrawal of Cash Collateral required by this notice. For your convenience, we have attached a letter as Annex 1 to this notice that you might execute and send to such Deposit Taker to advise it of your intent to withdraw and of your presentment of Certificates of Deposit as required in connection therewith. The attached letter also sets forth the amount NAI believes you must withdraw to comply with Section 6.4 of the Pledge Agreement. Network Appliance, Inc. By: ---------------------------------- Name: ------------------------ Title: ------------------------ [cc BNPLC] [Phase IV - Land] -2- <PAGE> 51 Annex 1 TO NAI'S NOTICE OF REQUIREMENT OF A WITHDRAWAL OF CASH COLLATERAL FROM A DISQUALIFIED DEPOSIT TAKER [_________, _____] [Name of the Deposit Taker for BNPLC] [Address of such Deposit Taker] Re: Pledge Agreement (Phase IV - Land) dated December __, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Land) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Land) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice from the undersigned, as Agent under the Pledge Agreement, that pursuant to Section 6.4 of the Pledge Agreement, NAI has advised Agent that you are a Disqualified Deposit Taker, and NAI requires Agent to withdraw from the Account maintained by you, as a Deposit Taker under the Pledge Agreement, the sum of: ____________________________ Dollars ($__________) no later than the following date: __________, ____ Accordingly, on such date, the undersigned intends to withdraw such amount from the Account maintained by you as Deposit Taker (Account No. __________), and with this letter the undersigned is presenting Certificate(s) of Deposit as required in connection with such withdrawal. BANQUE NATIONALE DE PARIS, AS AGENT Name: --------------------------- Title: --------------------------- [cc BNPLC and NAI] [Phase IV - Land] -3- <PAGE> 52 Schedule 1 FINANCIAL COVENANTS This Schedule 1 is attached to and made a part of (a) the Lease Agreement (Phase IV - Improvements) (the "IMPROVEMENTS LEASE") dated to be effective as of December ___, 1999 (the "EFFECTIVE DATE"), between BNP Leasing Corporation, a Delaware corporation ("BNPLC") and Network Appliance, Inc., a California corporation ("NAI"), (b) the Lease Agreement (Phase IV - Land) (the "LAND LEASE" and, together with the Improvements Lease, the "LEASES") dated to be effective as of the Effective Date, between BNPLC and NAI, (c) the Pledge Agreement (Phase IV - Improvements) (the "PLEDGE AGREEMENT (IMPROVEMENTS)") dated to be effective as of the Effective Date, among BNPLC, NAI, and Banque Nationale de Paris, as a Participant and as agent for any financial institutions that become Participants thereunder from time to time, and (d) the Pledge Agreement (Phase IV - Land) (collectively with the Pledge Agreement (Improvements), the "PLEDGE AGREEMENTS") dated to be effective as of the Effective Date, among BNPLC, NAI, and Banque Nationale de Paris, as a Participant and as agent for any financial institutions that become Participants thereunder from time to time. PART I - DEFINED TERMS In this Schedule 1, capitalized terms used but not defined herein shall have the meaning assigned to them in the Leases or the Common Definitions and Provisions Agreements referenced in the Leases; and the following capitalized terms shall have the following meanings: "ADJUSTED NET INCOME" means, for any fiscal period of NAI, the aggregate net income earned (or net losses incurred) during such period by NAI and its Subsidiaries (determined on a consolidated basis), plus any Permitted Non-Cash Charges deducted in determining such net income (or net loss). "ADJUSTED EBIT" means, for any accounting period, net income (or net loss) of NAI and its Subsidiaries (determined on a consolidated basis), plus the amounts (if any) which, in the determination of net income (or net loss) for such period, have been deducted for (a) interest expense, (b) income tax expense (c) rent expense under leases of property, and (d) Permitted Non-Cash Charges. "COLLATERAL TEST DATES" mean the Base Rent Commencement Date and the earlier of the following dates after each fiscal quarter of NAI that ends after the Base Rent Commencement Date : (1) the seventh Business Day after the release by NAI of its financial statements for the fiscal quarter; or (2) the first Business Day of the third calendar month following the end of the fiscal quarter. "CONSOLIDATED TANGIBLE NET WORTH" means the excess of (1) the total assets, other than Intangible Assets, of NAI and its Subsidiaries (determined on a consolidated basis) over (2) the total liabilities of NAI and its Subsidiaries (determined on a consolidated basis). "DEBT" as used in this Exhibit shall have the meaning assigned to it in the Common Definitions and Provisions Agreements, where "Debt" of any Person is defined to mean (without duplication of any item): (a) indebtedness of such Person for borrowed money; (b) indebtedness of such Person for the deferred purchase price of property or services (except trade payables and accrued expenses constituting current liabilities in the ordinary course of business); (c) the face amount of any outstanding letters of credit issued for the account of such Person; (d) obligations of such [Phase IV - Land] -4- <PAGE> 53 Person arising under acceptance facilities; (e) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to purchase, to provide funds for payment, to provide funds to invest in any Person, or otherwise to assure a creditor against loss; (f) obligations of others secured by any Lien on property of such Person; (g) obligations of such Person as lessee under Capital Leases; and (h) the obligations of such Person, contingent or otherwise, under any lease of property or related documents (including a separate purchase agreement) which provide that such Person or any of its Affiliates must purchase or cause another Person to purchase any interest in the leased property and thereby guarantee a minimum residual value of the leased property to the lessor. For purposes of this definition, the amount of the obligations described in clause (h) of the preceding sentence with respect to any lease classified according to GAAP as an "operating lease," shall equal the sum of (1) the present value of rentals and other minimum lease payments required in connection with such lease [calculated in accordance with SFAS 13 and other GAAP relevant to the determination of the whether such lease must be accounted for as an operating lease or capital lease], plus (2) the fair value of the property covered by the lease; provided, however, that such amount shall not exceed the price, as of the date a determination of Debt is required hereunder, for which the lessee can purchase the leased property pursuant to any valid ongoing purchase option if, upon such a purchase, the lessee shall be excused from paying rentals or other minimum lease payments that would otherwise accrue after the purchase. "FIXED CHARGES" means, for any accounting period, the sum (without duplication of any item) of the following charges or costs incurred or paid by NAI and its Subsidiaries (determined on a consolidated basis): (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, plus (d) taxes payable during such period. "INTANGIBLE ASSETS" means assets of NAI and its Subsidiaries (determined on a consolidated basis) that are properly classified as "INTANGIBLE ASSETS" in accordance with GAAP and, in any event, shall include goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, and deferred charges (other than prepaid insurance, prepaid taxes and current deferred taxes to the extent any such prepaid or deferred items are classified on the balance sheet of NAI and its consolidated Subsidiaries as current assets in accordance with GAAP and with the concurrence of NAI's independent public accountants). "MANDATORY COLLATERAL PERIOD" means any period during which, notwithstanding any contrary designation of a Collateral Percentage by NAI under the Pledge Agreements, the Collateral Percentage for purposes of the Pledge Agreements shall be one hundred percent (100%), determined as set forth in Part III of this Schedule 1. "PERMITTED NON-CASH CHARGES" means the amounts (if any) which, in the determination of net income (or net loss) for any relevant fiscal period, have been deducted by NAI or its Subsidiaries for non-cash charges made to write down goodwill or research and development costs in connection with acquisitions permitted by this Schedule 1. "QUICK RATIO" means the ratio of: (A) the sum (without duplication of any item) of the following assets of NAI and its Subsidiaries (determined on a consolidated basis): Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any); plus [Phase IV - Land] -5- <PAGE> 54 unencumbered cash; plus unencumbered short term cash investments; plus other unencumbered marketable securities which are classified as short term investments in accordance with GAAP; plus unencumbered accounts receivable, computed net of reserves for uncollectible amounts as determined in accordance with GAAP, to (B) the sum (without duplication of any item) of (1) all liabilities of NAI and its Subsidiaries (determined on a consolidated basis) treated as current liabilities in accordance with GAAP, plus (2) other obligations included in total Debt of NAI and its Subsidiaries (determined on a consolidated basis), the payment of which is due on demand or will become due within one year after the date on which the applicable determination of Quick Ratio is required hereunder. "ROLLING FOUR QUARTER PERIOD" means a period of four consecutive fiscal quarters of NAI, the last of which quarters ends after December 31, 1999. PART II - FINANCIAL COVENANTS NAI covenants that it shall not at any time suffer or permit: 1. Minimum Unencumbered Cash and Cash Equivalents. The sum (without duplication of any item) of the unrestricted cash, Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any), unencumbered short term cash investments and unencumbered marketable securities classified as short term investments according to GAAP of NAI and its Subsidiaries (determined on a consolidated basis) to be less than total Debt of NAI and its Subsidiaries (determined on a consolidated basis). 2. Minimum Tangible Net Worth. Consolidated Tangible Net Worth to be less than the sum of: (a) ninety percent of the Consolidated Tangible Net Worth as of October 30, 1998; plus (b) seventy-five percent of NAI's net income (computed without deduction for net losses in any fiscal quarter) earned in each fiscal quarter since October 30, 1998; plus (c) one-hundred percent of the net proceeds of sales of stock in NAI or its Subsidiaries (other than sales to NAI or its Subsidiaries) after October 30, 1998; less (d) Permitted Non-Cash Charges for any period after October 30, 1998. 3. Minimum Quick Ratio. The Quick Ratio to be less than 1.50 to 1.00. 4. Minimum Fixed Charge Coverage. The ratio of (a) Adjusted EBIT for any Rolling Four Quarter Period to (b) Fixed Charges for the same Rolling Four Quarter Period, to be less than 1.50 to 1.00. 5. Minimum Profitability. Adjusted Net Income to be less than $1.00 in more than one fiscal quarter of any Rolling Four Quarter Period. 6. Maximum Leverage Ratio. the ratio of (a) total Debt of NAI and its Subsidiaries (determined on a consolidated basis) at the end of any Rolling Four Quarter Period to (b) the Adjusted EBIT for the same Four Quarter Rolling Period, to exceed 3.00 to 1.00. [Phase IV - Land] -6- <PAGE> 55 PART III - TESTS FOR MANDATORY COLLATERAL PERIODS If, as of the end of the latest fiscal quarter of NAI ending before any Collateral Test Date, NAI shall have both: (A) failed to maintain a ratio of (1) the sum (without duplication of any item) of Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any), unencumbered cash, unencumbered short term cash investments and unencumbered marketable securities classified as short term investments according to GAAP of NAI and its Subsidiaries (determined on a consolidated basis) to (2) all Debt of NAI and its Subsidiaries (determined on a consolidated basis), of at least 1.5 to 1.00; and (B) failed to maintain a ratio of (i) all Debt of NAI and its Subsidiaries (determined on a consolidated basis) to (ii) Consolidated Tangible Net Worth of NAI, of no more than 0.45 to 1.00; such Collateral Test Date shall constitute a "FAILED COLLATERAL TEST DATE" for purposes of the determination of Mandatory Collateral Periods. A Mandatory Collateral Period shall commence on each Failed Collateral Test, and such Mandatory Collateral Period shall continue until the second of any two subsequent CONSECUTIVE Collateral Test Dates, neither of which constitutes a Failed Collateral Test Date. For purposes of illustration only, assume that the following dates are consecutive Collateral Test Dates, some of which are Failed Collateral Test Dates and some of which are not, as indicated opposite each date: <TABLE> Date Failed Collateral Test Date? ---- ---------------------------- <S> <C> February 15, 2001 Yes May 12, 2001 No August 16, 2001 Yes November 11, 2001 No February 18, 2002 No May 14, 2002 Yes August 18, 2002 Yes November 18, 2002 No February 15, 2003 No </TABLE> Under these assumptions, the entire period from February 15, 2001 to February 18, 2002 falls within one or more Mandatory Collateral Periods. Also, the entire period commencing May 14, 2002 and ending February 15, 2003 falls within one or more Mandatory Collateral Periods. The period from February 18, 2002 to May 14, 2002 does not constitute Mandatory Collateral Period. PART IV - OTHER COVENANTS Without limiting NAI's obligations under the other provisions of the Operative Documents, during the Term, NAI shall not, without the prior written consent of BNPLC in each case: A. Liens. Create, incur, assume or suffer to exist, or permit any of its Consolidated Subsidiaries to create, incur, assume or suffer to exist, any Lien, upon or with respect to any of its properties, now owned or hereafter acquired, provided that the following shall be permitted except to the extent that they would encumber any interest in the Property in violation of other provisions of the [Phase IV - Land] -7- <PAGE> 56 Operative Documents: 1. 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; 2. Liens imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than thirty (30) days, or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; 3. Liens under workmen's compensation, unemployment insurance, social security or similar laws (other than ERISA); 4. 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; 5. judgment and other similar Liens against assets other than the Property or any part thereof in an aggregate amount not in excess of $3,000,000 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 by appropriate proceedings; 6. easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by NAI or any such Consolidated 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; 7. Liens securing obligations of such a Consolidated Subsidiary to NAI or to another such Consolidated Subsidiary; 8. Liens not otherwise permitted by this subparagraph A (and not encumbering the Property or any Collateral) incurred in connection with the incurrence of additional Debt or asserted to secure Unfunded Benefit Liabilities, provided that (a) the sum of the aggregate principal amount of all outstanding obligations secured by Liens incurred pursuant to this clause shall not at any time exceed five percent (5%) of Consolidated Tangible Net Worth at such time; and (b) such Liens do not constitute Liens against NAI's interest in any material Subsidiary or blanket Liens against all or substantially all of the inventory, receivables, general intangibles or equipment of NAI or of any material Subsidiary of NAI (for purposes of this clause, a "material Subsidiary" means any subsidiary whose assets represent a substantial part of the total assets of NAI and its Subsidiaries, determined on a consolidated basis in accordance with GAAP); and 9. Liens incurred in connection with any renewals, extensions or refundings of any Debt secured by Liens described in the preceding clauses of this subparagraph A, 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. [Phase IV - Land] -8- <PAGE> 57 B. Transactions with Affiliates. Enter into or permit any Subsidiary of NAI to enter into any material transactions (including, without limitation, the purchase, sale or exchange of property or the rendering of any service) with any Affiliates of NAI except on terms (1) that would not cause or result in a Default by NAI under the financial covenants set forth in Part II of this Schedule, and (2) that are no less favorable to NAI or the relevant Subsidiary than those that would have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. C. Compliance. Fail to preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; or fail to comply with the provisions of all documents pursuant to which NAI is organized and/or which govern NAI's continued existence and with the requirements of all laws, rules, regulations and orders of a governmental agency applicable to NAI and/or its business. D. Insurance. Fail to maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of NAI, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to BNPLC, or fail to deliver to BNPLC from time to time at BNPLC's request schedules setting forth all insurance then in effect. E. Facilities. fail to keep all properties useful or necessary to NAI's business in good repair and condition, or to from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. F. Taxes and Other Liabilities. Fail to pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as NAI may in good faith contest or as to which a bona fide dispute may arise, and (b) for which NAI has made provisions, to BNPLC's satisfaction, for eventual payment thereof in the event that NAI is obligated to make such payment. G. Capital Expenditures. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of twenty percent (20%) of NAI's total assets as of the end of the prior fiscal year. H. Merger, Consolidation, Transfer of Assets. Merge into or consolidate with any other entity (unless NAI is the surviving entity and remains in compliance of all provisions of the Operative Documents); or make any substantial change in the nature of NAI's business as conducted as of the date hereof; or sell, lease, transfer or otherwise dispose of all or a substantial or material portion of NAI's assets except in the ordinary course of its business. I. Loans, Advances, Investments. Make any loans or advances to or investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to BNPLC prior to, the date hereof, (b) loans to employees for travel advances, relocation loans and other loans in the ordinary course of business, (c) investments in accordance with NAI's investment policy, as in effect from time to time, (d) existing investments in subsidiaries and joint ventures which have been disclosed to BNPLC in writing prior to the date hereof, and new investments in subsidiaries and joint ventures in amounts up to an aggregated of $10,000,000.00, (e) loans to employees, officers, directors to finance or refinance the purchase of equity securities of NAI. J. Dividends, Distributions. Declare or pay any dividend or distribution either in cash, stock [Phase IV - Land] -9- <PAGE> 58 or any other property on NAI's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of NAI's stock now or hereafter outstanding. -10- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.55 <SEQUENCE>14 <DESCRIPTION>EXHIBIT 10.55 <TEXT> <PAGE> 1 EXHIBIT 10.55 ================================================================================ PLEDGE AGREEMENT (PHASE IV - IMPROVEMENTS) AMONG BNP LEASING CORPORATION ("BNPLC") BANQUE NATIONALE DE PARIS, AS AGENT ("AGENT") NETWORK APPLIANCE, INC. ("NAI") AND PARTICIPANTS AS DESCRIBED HEREIN DECEMBER ___, 1999 ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> ARTICLE I DEFINITIONS AND INTERPRETATION..................................................... 1 Section 1.1 Capitalized Terms Used But Not Defined in This Agreement................... 1 Section 1.2 Definitions............................................................... 1 Account......................................................................... 1 Account Office.................................................................. 2 Agent........................................................................... 2 BNPLC........................................................................... 2 BNPLC's Corresponding Obligations to Participants............................... 2 Cash Collateral................................................................. 2 Certificate of Deposit.......................................................... 2 Collateral...................................................................... 2 Collateral Imbalance............................................................ 2 Collateral Percentage........................................................... 2 Default......................................................................... 2 Deposit Taker................................................................... 3 Deposit Taker Losses............................................................ 3 Deposit Taker's Acknowledgment and Agreement.................................... 3 Disqualified Deposit Taker...................................................... 3 Event of Default................................................................ 3 Failed Collateral Test Date..................................................... 4 Initially Qualified Deposit Taker............................................... 4 Lien............................................................................ 4 Material Lease Default.......................................................... 5 Mandatory Collateral Period..................................................... 5 Minimum Collateral Value........................................................ 5 NAI............................................................................. 5 NAI's Purchase Agreement Obligations............................................ 5 Notice of Security Interest..................................................... 5 Other Liable Party.............................................................. 5 Participants.................................................................... 5 Participation Agreement......................................................... 5 Percentage...................................................................... 6 Qualified Pledge................................................................ 6 Secured Obligations............................................................. 6 Supplement...................................................................... 6 Transaction Documents........................................................... 6 Value........................................................................... 6 Section 1.3 Attachments............................................................... 6 Section 1.4 Amendment of Defined Instruments.......................................... 6 Section 1.5 References and Titles..................................................... 6 ARTICLE II SECURITY INTEREST................................................................. 7 Section 2.1 Pledge and Grant of Security Interest..................................... 7 Section 2.2 Return of Collateral After the Secured Obligations are Satisfied in Full.. 7 ARTICLE III DESIGNATION OF MINIMUM COLLATERAL PERCENTAGE..................................... 7 Section 3.1 Determination of Minimum Collateral Percentage Generally.................. 7 </TABLE> [Phase IV - Improvements] -i- <PAGE> 3 <TABLE> <S> <C> Section 3.2 Limitations on NAI's Right to Lower the Collateral Percentage............. 8 Section 3.3 Mandatory Collateral Periods.............................................. 8 ARTICLE IV PROVISIONS CONCERNING DEPOSIT TAKERS.............................................. 8 Section 4.1 Qualification of Deposit Takers Generally................................. 8 Section 4.2 Existing Deposit Takers................................................... 9 Section 4.3 Replacement of Participants Proposed by NAI............................... 9 Section 4.4 Mandatory Substitution for Disqualified Deposit Takers.................... 9 Section 4.5 Voluntary Substitution of Deposit Takers.................................. 10 Section 4.6 Delivery of Notice of Security Interest by NAI and Agent.................. 10 Section 4.7 Constructive Possession of Collateral..................................... 10 Section 4.8 Attempted Setoff by Deposit Takers........................................ 10 Section 4.9 Deposit Taker Losses...................................................... 10 Section 4.10 Losses Resulting from Failure of Deposit Taker to Comply with this Agreement............................................................. 11 ARTICLE V DELIVERY AND MAINTENANCE OF CASH COLLATERAL........................................ 11 Section 5.1 Delivery of Funds by NAI.................................................. 11 Section 5.2 Transition Account........................................................ 11 Section 5.3 Allocation of Cash Collateral Among Deposit Takers........................ 11 Section 5.4 Issuance and Redemption of Certificates of Deposit........................ 12 Section 5.5 Status of the Accounts Under the Reserve Requirement Regulations.......... 12 Section 5.6 Acknowledgment by NAI that Requirements of this Agreement are Commercially Reasonable............................................... 13 ARTICLE VI WITHDRAWAL OF CASH COLLATERAL..................................................... 13 Section 6.1 Withdrawal of Collateral Prior to the Designated Sale Date................ 13 Section 6.2 Withdrawal and Application of Cash Collateral to Reduce or Satisfy the Secured Obligations to the Participants............................... 13 Section 6.3 Withdrawal and Application of Cash Collateral to Reduce or Satisfy the Secured Obligations to BNPLC.......................................... 14 Section 6.4 Withdrawal of Cash Collateral From Accounts Maintained by Disqualified Deposit Takers........................................................ 14 ARTICLE VII REPRESENTATIONS AND COVENANTS OF NAI............................................. 14 Section 7.1 Representations of NAI.................................................... 14 Section 7.2 Covenants of NAI.......................................................... 15 ARTICLE VIII AUTHORIZED ACTION BY AGENT..................................................... 17 Section 8.1 Power of Attorney......................................................... 17 ARTICLE IX DEFAULT AND REMEDIES............................................................. 17 Section 9.1 Remedies.................................................................. 17 ARTICLE X OTHER RECOURSE.................................................................... 18 Section 10.1 Recovery Not Limited..................................................... 18 ARTICLE XI PROVISIONS CONCERNING AGENT....................................................... 18 Section 11.1 Appointment and Authority................................................ 18 Section 11.2 Exculpation, Agent's Reliance, Etc....................................... 19 Section 11.3 Participant's Credit Decisions........................................... 19 Section 11.4 Indemnity................................................................ 20 Section 11.5 Agent's Rights as Participant and Deposit Taker.......................... 20 Section 11.6 Investments.............................................................. 20 Section 11.7 Benefit of Article XI.................................................... 20 Section 11.8 Resignation.............................................................. 20 ARTICLE XII MISCELLANEOUS.................................................................... 21 Section 12.1 Provisions Incorporated From Other Operative Documents.................... 21 Section 12.2 Cumulative Rights, etc................................................... 21 </TABLE> [Phase IV - Improvements] -ii- <PAGE> 4 <TABLE> <S> <C> Section 12.3 Survival of Agreements................................................... 21 Section 12.4 Other Liable Party....................................................... 21 Section 12.5 Termination.............................................................. 21 </TABLE> [Phase IV - Improvements] -iii- <PAGE> 5 Attachment 1......................................Form of Certificate of Deposit Attachment 2............Supplement to Pledge Agreement (Phase IV - Improvements) Attachment 3........Notice of NAI's Election to Change the Collateral Percentage Attachment 4.........................................Notice of Security Interest Attachment 5............................................Examples of Calculations Attachment 6......Notice of NAI's Requirement to Withdraw Excess Cash Collateral Attachment 7......Notice of NAI's Requirement of Direct Payments to Participants Attachment 8.............Notice of NAI's Requirement of Direct Payments to BNPLC Attachment 9.........................Notice of NAI's Requirement of a Withdrawal of Cash Collateral from a Disqualified Deposit Taker Schedule 1............................Financial Covenants and Negative Covenants [Phase IV - Improvements] -iv- <PAGE> 6 PLEDGE AGREEMENT (PHASE IV - IMPROVEMENTS) This PLEDGE AGREEMENT (PHASE IV - IMPROVEMENTS) (this "AGREEMENT") is made as of December ___, 1999 (the "EFFECTIVE DATE"), by NETWORK APPLIANCE, INC., a California corporation ("NAI"); BNP LEASING CORPORATION, a Delaware corporation ("BNPLC"); BANQUE NATIONALE DE PARIS ("BNPLC'S PARENT"), as a "PARTICIPANT"; and BANQUE NATIONALE DE PARIS, acting in its capacity as agent for BNPLC and the Participants (in such capacity, "AGENT"), is made and dated as of the Effective Date. RECITALS A. NAI and BNPLC are parties to: (i) a Common Definitions and Provisions Agreement (Phase IV - Improvements) dated as of the Effective Date (the "COMMON DEFINITIONS AND PROVISIONS AGREEMENT (PHASE IV - IMPROVEMENTS)"); and (ii) a Purchase Agreement (Phase IV - Improvements) dated as of the Effective Date (the "PURCHASE AGREEMENT"), pursuant to which NAI has agreed to make a "SUPPLEMENTAL PAYMENT" (as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements)), in consideration of the rights granted to NAI by the Purchase Agreement. B. Pursuant to a Participation Agreement dated the date hereof (the "PARTICIPATION AGREEMENT"), BNPLC's Parent has agreed with BNPLC to participate in the risks and rewards to BNPLC of the Purchase Agreement and other Operative Documents (as defined in the Common Definitions and Provisions Agreement (Phase IV - Improvements)), and the parties to this Agreement anticipate that other financial institutions may become parties to the Participation Agreement as Participants, agreeing to participate in the risks and rewards to BNPLC of the Purchase Agreement and other Operative Documents. C. NAI may from time to time deliver cash collateral for its obligations to BNPLC under the Purchase Agreement and for BNPLC's corresponding obligations to Participants under the Participation Agreement. This Agreement sets forth the terms and conditions governing such cash collateral. AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATION Section 1.1 Capitalized Terms Used But Not Defined in This Agreement. All capitalized terms used in this Agreement which are defined in Article I of the Common Definitions and Provisions Agreement (Phase IV - Improvements) and not otherwise defined herein shall have the same meanings herein as set forth in the Common Definitions and Provisions Agreement (Phase IV - Improvements). All terms used in this Agreement which are defined in the UCC and not otherwise defined herein shall have the same meanings herein as set forth therein, except where the context otherwise requires. Section 1.2 Definitions. When used in this Agreement, the following terms shall have the following respective meanings: "ACCOUNT" shall mean any deposit account maintained by a Deposit Taker into which Cash Collateral may be deposited at any time, excluding the Transition Account. [Phase IV - Improvements] -1- <PAGE> 7 "ACCOUNT OFFICE" shall mean, with respect to any Account maintained by any Deposit Taker, the office of such Deposit Taker in California or New York at which such Account is maintained as specified in the applicable Deposit Taker's Acknowledgment and Agreement. "AGENT" shall have the meaning given to that term in the introductory paragraph hereof. "BNPLC" shall have the meaning given to that term in the introductory paragraph hereof. "BNPLC'S CORRESPONDING OBLIGATIONS TO PARTICIPANTS" shall mean BNPLC's obligations under the Participation Agreement to pay Participants their respective Percentages of (or amounts equal to their respective Percentages of) sums "actually received by BNPLC" (as defined in the Participation Agreement) in satisfaction of NAI's Purchase Agreement Obligations; provided, however, any modification of the Participation Agreement executed after the date hereof without NAI's written consent shall not be considered for purposes of determining BNPLC's Corresponding Obligations to Participants under this Agreement. "CASH COLLATERAL" shall mean (i) all money of NAI which NAI has delivered to Agent for deposit with a Deposit Taker pursuant to this Agreement, and (ii) any additional money delivered to Agent as Collateral pursuant to Section 4.9. "CERTIFICATE OF DEPOSIT" shall mean a certificate of deposit issued by a Deposit Taker as required by Section 5.4 below to evidence an Account into which Cash Collateral has been deposited pursuant to this Agreement. Each Certificate of Deposit shall be issued in an amount equal to the Value of the Account which it evidences and shall otherwise be in the form set forth as ATTACHMENT 1. "COLLATERAL" shall have the meaning given to that term in Section 2.1 hereof. "COLLATERAL IMBALANCE" shall mean on any date prior to the Designated Sale Date that the Value (without duplication) of Accounts maintained by and Certificates of Deposit issued by the Deposit Taker for any Participant (other than a Disqualified Deposit Taker) does not equal such Participant's Percentage, multiplied by the lesser of (1) the Minimum Collateral Value in effect on such date, or (2) the aggregate Value of all Collateral subject to this Agreement on such date. For purposes of determining whether a Collateral Imbalance exists, the Value of any Accounts maintained by a bank that is acting as Deposit Taker for two or more Participants will be deemed to be held for them in proportion to their respective Percentages, and the Value of any Accounts maintained by a bank as Deposit Taker for both a Participant and BNPLC (as in the case of BNPLC's Parent acting as Deposit Taker for itself, as a Participant, and for BNPLC) will be deemed to be held for the Participant only to the extent necessary to prevent or mitigate a Collateral Imbalance and otherwise for BNPLC. "COLLATERAL PERCENTAGE" shall mean the percentage designated by NAI or required during a Mandatory Collateral Period pursuant to Part III of Schedule 1. "DEFAULT" means any Event of Default and any default, event or condition which would, with the giving of any requisite notices and the passage of any requisite periods of time, constitute an Event of Default. [Phase IV - Improvements] -2- <PAGE> 8 "DEPOSIT TAKER" for BNPLC shall mean BNPLC's Parent and for each Participant shall mean the Participant itself; provided, that each of BNPLC and the Participants, for itself only, may from time to time designate another Deposit Taker as provided in Sections 4.4 and 4.5 below. "DEPOSIT TAKER LOSSES" shall mean the Value of any Cash Collateral delivered to a Deposit Taker, but that the Deposit Taker will not (because of the insolvency of the Deposit Taker, offsets by the Deposit Taker in violation of the Deposit Taker's Acknowledgment and Agreement, or otherwise) return to NAI or return to Agent for disposition or application as provided herein or as required by applicable law. "DEPOSIT TAKER'S ACKNOWLEDGMENT AND AGREEMENT" shall have the meaning given to that term in subsection 4.1.2 hereof. "DISQUALIFIED DEPOSIT TAKER" shall mean any Deposit Taker with whom Agent may decline to deposit Collateral pursuant to Section 4.1. "EVENT OF DEFAULT" shall mean the occurrence of any of the following: (a) the failure by NAI to pay all or any part of NAI's Purchase Agreement Obligations when due, after giving effect to any applicable notice and grace periods expressly provided for in the Purchase Agreement; (b) the failure by NAI to provide funds as and when required by Section 5.1 of this Agreement, if within seven Business Days after such failure commences NAI does not (1) cure such failure by delivering the funds required by Section 5.1, and (2) pay to BNPLC as additional Rent under the Improvements Lease an amount equal to interest at the Default Rate (as defined in the Improvements Lease) on such funds for the period from which they were first due to the date of receipt by Agent; (c) the failure of the pledge or security interest contemplated herein in the Transition Account or any Account, Certificate of Deposit or Cash Collateral to be a Qualified Pledge (regardless of the characterization of the Transition Account or any Accounts, Certificates of Deposit or Cash Collateral as deposit accounts, instruments or general intangibles under the UCC), if within five Business Days after NAI becomes aware of such failure, NAI does not (1) notify Agent, BNPLC and the Participants of such failure, and (2) cure such failure, and (3) to the extent required by Section 7.2.9, pay to BNPLC any additional Base Rent that has accrued under the Improvements Lease because of (or that would have accrued if BNPLC had been aware of) such failure, together with interest at the Default Rate on any such additional Base Rent; (d) the failure of any representation herein by NAI to be true (other than a failure described in another clause of this definition of Event of Default), if such failure is not cured within thirty days after NAI receives written notice thereof from Agent; (e) the failure of any representation made by NAI in subsection 7.1.1 to be true, if within fifteen (15) days after NAI becomes aware of such failure, NAI does not (1) notify Agent, BNPLC and the Participants of such failure, and (2) cure such failure, and (3) pay to BNPLC any additional Base Rent that has accrued under the Improvements Lease because of (or that would have accrued if BNPLC had been aware of) such failure, and (4) pay to BNPLC interest at the Default Rate on any such additional Base Rent; [Phase IV - Improvements] -3- <PAGE> 9 (f) the failure by NAI timely and properly to observe, keep or perform any covenant, agreement, warranty or condition herein required to be observed, kept or performed (other than a failure described in another clause of this definition of Event of Default), if such failure is not cured within thirty days after NAI receives written notice thereof from Agent; and (g) the failure by BNPLC to pay when due on or after the Designated Sale Date any of BNPLC's Corresponding Obligations to Participants, after giving effect to any applicable notice and grace periods expressly provided for in the Participation Agreement. Notwithstanding the foregoing, if ever the aggregate Value of Cash Collateral held by Agent and the Deposit Takers EXCEEDS the Minimum Collateral Value then in effect, a failure of the pledge or security interest contemplated herein in SUCH EXCESS Cash Collateral to be a valid, perfected, first priority pledge or security interest shall not constitute an Event of Default under this Agreement. Accordingly, to provide a cure as required to avoid an Event of Default under clauses (c) or (e) of this definition, NAI could deliver additional Cash Collateral - the pledge of which or security interest in which created by this Agreement is a Qualified Pledge - sufficient in amount to cause the aggregate Value of the Cash Collateral then held by Agent and the Deposit Takers subject to a Qualified Pledge hereunder to equal or exceed the Minimum Collateral Value. "FAILED COLLATERAL TEST DATE" means any date upon which commences a Mandatory Collateral Period as described in Part III of Schedule 1. "INITIALLY QUALIFIED DEPOSIT TAKER" means (1) Banque Nationale de Paris, acting through any branch, office or agency that can lawfully maintain an Account as a Deposit Taker hereunder, and (2) any 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) A3 (in the case of long term debt) and P-2 (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, NAI 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 an Initially Qualified Deposit Taker. "LIEN" shall mean, with respect to any property or assets, any right or interest therein of a creditor to secure indebtedness of any kind which is owed to him or any other arrangement with such creditor which provides for the payment of such indebtedness out of such property or assets or which allows him to have such indebtedness satisfied out of such property or assets prior to the general creditors of any owner thereof, including any lien, mortgage, security interest, pledge, deposit, production payment, rights of a vendor under any title retention or conditional sale agreement or lease substantially equivalent thereto, tax lien, mechanic's or materialman's lien, or any other charge or encumbrance for security purposes, whether arising by law or agreement or otherwise, but excluding any right of setoff which arises without agreement in the ordinary course of business. "Lien" also means any filed financing statement, any registration with an issuer of uncertificated securities, or any other arrangement which would serve to perfect a Lien described in the preceding sentence, regardless of whether such financing statement is filed, such registration is made, or such arrangement is undertaken before or after such Lien exists. [Phase IV - Improvements] -4- <PAGE> 10 "MATERIAL LEASE DEFAULT" shall mean any of the following: (1) any "Event of Default" under and as defined in the Improvements Lease, including any such Event of Default consisting of a failure of NAI to comply with the requirements of Exhibit I attached to the Improvements Lease; and (2)(a) any failure of NAI to make any payment required by and when first due under the Improvements Lease, regardless of whether any period provided in the Improvements Lease for the cure of such failure by NAI shall have expired, and (b) any other default, event or condition which would, with the giving of any requisite notices and the passage of any requisite periods of time, constitute an "Event of Default" under and as defined in the Improvements Lease, if such other default, event or failure involves a material noncompliance with Applicable Law. (For purposes of this definition, "material" noncompliance with Applicable Law will include any noncompliance, the correction of which has been requested by a governmental authority, or because of which a threat of action against the Property or BNPLC has been asserted by a governmental authority.) "MANDATORY COLLATERAL PERIOD" shall mean any period, as determined in accordance with Part III of Schedule 1, during which NAI is required to maintain a Collateral Percentage of one hundred percent (100%) pursuant to Section 3.2. "MINIMUM COLLATERAL VALUE" shall mean (1) as of the Designated Sale Date or any prior date, an amount equal to the Collateral Percentage multiplied by the Stipulated Loss Value determined as of that date in accordance with the Improvements Lease; and (2) as of any date after the Designated Sale Date, an amount equal to the Break Even Price plus any unpaid interest accrued on past due amounts payable pursuant to Paragraph 1(a) of the Purchase Agreement. "NAI" shall have the meaning given to that term in the introductory paragraph hereof. "NAI'S PURCHASE AGREEMENT OBLIGATIONS" shall mean all of NAI's obligations under the Purchase Agreement, including (i) NAI's obligation to pay any Supplemental Payment as required under subparagraph 1(A) of the Purchase Agreement, and (ii) any damages incurred by BNPLC because of (A) NAI's breach of the Purchase Agreement or (B) the rejection by NAI of the Purchase Agreement in any bankruptcy or insolvency proceeding. "NOTICE OF SECURITY INTEREST" shall have the meaning given to that term in subsection 4.1.1 hereof. "OTHER LIABLE PARTY" shall mean any Person, other than NAI, who may now or may at any time hereafter be primarily or secondarily liable for any of the Secured Obligations or who may now or may at any time hereafter have granted to Agent a pledge of or security interest in any of the Collateral. "PARTICIPANTS" shall mean BNPLC's Parent and any other financial institutions which may hereafter become parties to (i) this Agreement by completing, executing and delivering to NAI and Agent a Supplement, and (ii) the Participation Agreement. "PARTICIPATION AGREEMENT" shall have the meaning given to such term in Recital B hereof. [Phase IV - Improvements] -5- <PAGE> 11 "PERCENTAGE" shall mean with respect to each Participant and the Deposit Taker for such Participant, such Participant's "Percentage" under and as defined in the Participation Agreement for purposes of computing such Participant's right thereunder to receive payments of (or amounts equal to a percentage of) any sales proceeds or Supplemental Payment received by BNPLC under the Purchase Agreement. Percentages may be adjusted from time to time as provided in the Participation Agreement or as provided in supplements thereto executed as provided in the Participation Agreement. "QUALIFIED PLEDGE" means a pledge or security interest that constitutes a valid, perfected, first priority pledge or security interest. "SECURED OBLIGATIONS" shall mean and include both NAI's Purchase Agreement Obligations and BNPLC's Corresponding Obligations to Participants. "SUPPLEMENT" shall mean a supplement to this Agreement in the form of ATTACHMENT 2. "TRANSACTION DOCUMENTS" shall mean, collectively, this Agreement, the Improvements Lease, the Purchase Agreement and the Participation Agreement. "TRANSITION ACCOUNT" shall have the meaning given it in Section 5.2. "UCC" shall mean the Uniform Commercial Code as in effect in the State of California from time to time, and the Uniform Commercial Code as in effect in any other jurisdiction which governs the perfection or non-perfection of the pledge of and security interests in the Collateral created by this Agreement. "VALUE" shall mean with respect to any Account, Certificate of Deposit or Cash Collateral on any date, a dollar value determined as follows (without duplication): (a) cash shall be valued at its face amount on such date; (b) an Account shall be valued at the principal balance thereof on such date; and (c) a Certificate of Deposit shall be valued at the face amount thereof. Section 1.3 Attachments. All attachments to this Agreement are a part hereof for all purposes. Section 1.4 Amendment of Defined Instruments. Unless the context otherwise requires or unless otherwise provided herein, references in this Agreement to a particular agreement, instrument or document (including references to the Improvements Lease, Purchase Agreement and Participation Agreement) also refer to and include all valid renewals, extensions, amendments, modifications, supplements or restatements of any such agreement, instrument or document; provided that nothing contained in this Section shall be construed to authorize any Person to execute or enter into any such renewal, extension, amendment, modification, supplement or restatement. Section 1.5 References and Titles. All references in this Agreement to Attachments, Articles, Sections, subsections, and other subdivisions refer to the Attachments, Articles, Sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any subdivision are for convenience only and do not constitute any part of any such [Phase IV - Improvements] -6- <PAGE> 12 subdivision and shall be disregarded in construing the language contained in this Agreement. The words "this Agreement", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Article," "this Section" and "this subsection" and similar phrases refer only to the Articles, Sections or subsections hereof in which the phrase occurs. The word "or" is not exclusive, and the word "including" (in all of its forms) means "including without limitation". Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. ARTICLE II SECURITY INTEREST Section 2.1 Pledge and Grant of Security Interest. As security for the Secured Obligations, NAI hereby pledges and assigns to Agent (for the ratable benefit of BNPLC and the Participants) and grants to Agent (for the ratable benefit of BNPLC and the Participants) a continuing security interest and lien in and against all right, title and interest of NAI in and to the following property, whether now owned or hereafter acquired by NAI (collectively and severally, the "COLLATERAL"): (a) All Cash Collateral, all Accounts, the Transition Account and all Certificates of Deposit issued from time to time and general intangibles arising therefrom or relating thereto (however, "general intangibles" as used in this clause shall not include any general intangibles not related to Cash Collateral, Accounts, the Transition Account or Certificates of Deposit issued from time to time, and thus will not include, without limitation, any intellectual property of NAI); and all documents, instruments and agreements evidencing the same; and all extensions, renewals, modifications and replacements of the foregoing; and any interest or other amounts payable in connection therewith; and (b) All proceeds of the foregoing (including whatever is receivable or received when Collateral or proceeds is invested, sold, collected, exchanged, returned, substituted or otherwise disposed of, whether such disposition is voluntary or involuntary, including rights to payment and return premiums and insurance proceeds under insurance with respect to any Collateral, and all rights to payment with respect to any cause of action affecting or relating to the Collateral). The pledge, assignment and grant of a security interest made by NAI hereunder is for security of the Secured Obligations only; the parties to this Agreement do not intend that NAI's delivery of the Collateral to Agent as herein provided will constitute an advance payment of any Secured Obligations or liquidated damages, nor do the parties intend that the Collateral increase the dollar amount of the Secured Obligations. Section 2.2 Return of Collateral After the Secured Obligations are Satisfied in Full. If any proceeds of Collateral remain after all Secured Obligations have been paid in full, Agent will deliver or direct the Deposit Takers to deliver such proceeds to NAI or other Persons entitled thereto by law. ARTICLE III DESIGNATION OF MINIMUM COLLATERAL PERCENTAGE Section 3.1 Determination of Minimum Collateral Percentage Generally. Effective as of the date of this Agreement, and until a new Collateral Percentage becomes effective, the Collateral Percentage is zero percent (0%). Subject to the provisions of this Article III, NAI may from time to time designate a new Collateral Percentage between 0% and 100% by written notice delivered to Agent, BNPLC and the Participants in the form of ATTACHMENT 3. Any new Collateral Percentage so designated shall not become effective, however, until the commencement of the later of (A) the first Base Rent Period to commence on or after the first Business Day of January, 2002, or (B) the next following Base Rent Period [Phase IV - Improvements] -7- <PAGE> 13 which is at least ten Business Days after the receipt of such notice by Agent, BNPLC and the Participants. Further, after the first change in the Collateral Percentage resulting from a designation by NAI of a Collateral Percentage greater than zero percent (0%), any subsequent change resulting from NAI's designation of a new Collateral Percentage shall not become effective before the first Business Day of the first Base Rent Period that commences at least ninety days after the effective date of the last preceding change in the Collateral Period. In any event, if NAI provides more than one notice of a change in the Collateral Percentage to be effective on a particular Base Rent Date, then the latest such notice from NAI which satisfies the requirements of this Section (and of Sections 3.2 and 3.3) will control. After any Collateral Percentage becomes effective as provided in this Article, it shall remain in effect until a different Collateral Percentage becomes effective as provided in this Article. Section 3.2 Limitations on NAI's Right to Lower the Collateral Percentage. Notwithstanding the foregoing, no designation by NAI of a new Collateral Percentage will be effective to reduce the Collateral Percentage if the designation is given, or the reduction would otherwise become effective, on or after the Designated Sale Date or when any of the following shall have occurred and be continuing: 3.2.1 any Material Lease Default; 3.2.2 any Event of Default under and as defined in this Agreement; or 3.2.3 any Default under and as defined in this Agreement - excluding, however, any such Default limited to a failure of NAI described in clause (c) or clause (e) of the definition of Event of Default above, with respect to which the time for cure specified in clause (c) or clause (e), as applicable, has not expired. Section 3.3 Mandatory Collateral Periods. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN CONTAINED, THE COLLATERAL PERCENTAGE DURING ANY MANDATORY COLLATERAL PERIOD SHALL BE ONE HUNDRED PERCENT (100%). No later than five Business Days prior to any Failed Collateral Test Date, NAI shall notify Agent, BNPLC and the Participants of the conditions set forth in Part III of Schedule 1 that NAI will be unable to satisfy on the Failed Collateral Test Date. ARTICLE IV PROVISIONS CONCERNING DEPOSIT TAKERS Section 4.1 Qualification of Deposit Takers Generally. Agent may decline to deposit or maintain Collateral hereunder with any Person designated as a Deposit Taker, if such Person has failed to satisfy or no longer satisfies the following requirements: 4.1.1 Such Person must have received from Agent and NAI a completed, executed Notice of Security Interest in the form of ATTACHMENT 4 (a "NOTICE OF SECURITY INTEREST") which specifically identifies any and all Accounts in which such Person shall hold Cash Collateral delivered to it pursuant to this Agreement and which designates Account Offices with respect to all such Accounts in New York or California. 4.1.2 Such Person must have executed the Acknowledgment and Agreement at the end of such Notice of Security Interest (the "DEPOSIT TAKER'S ACKNOWLEDGMENT AND AGREEMENT") and returned the same to Agent. Further, such Person must have complied with the Deposit Taker's Acknowledgment and Agreement, and the representations set forth therein with respect to such Person must continue to be true and correct. [Phase IV - Improvements] -8- <PAGE> 14 4.1.3 Such Person must be a commercial bank, organized under the laws of the United States of America or a state thereof or under the laws of another country which is doing business in the United States of America; must be authorized to maintain deposit accounts for others through Account Offices in New York or California (as specified in the Deposit Taker's Acknowledgment and Agreement); and must be an Affiliate of BNPLC or the Participant for whom such Person will act as Deposit Taker or must have a combined capital, surplus and undivided profits of at least $500,000,000. 4.1.4 Such Person must have complied with the provisions in this Agreement applicable to Deposit Takers, including the provisions of Section 5.4 concerning the issuance and redemption of Certificates of Deposit. Section 4.2 Existing Deposit Takers. BNPLC's Parent (as Deposit Taker for itself and for BNPLC) has received a Notice of Security Agreement dated the Effective Date and has responded to such a notice with a Deposit Taker's Acknowledgment and Agreement dated the Effective Date, as contemplated in subsections 4.1.1 and 4.1.2. Section 4.3 Replacement of Participants Proposed by NAI. 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 NAI for any Participant, the Deposit Taker for whom would no longer meet the requirements for an Initially 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; (B) the new Participant will agree (by executing a Supplement and a supplement to the Participation Agreement as contemplated therein and by other agreements as may be reasonably required by BNPLC and NAI) to become a party to the Participation Agreement and to this Agreement, to designate an Initially Qualified Deposit Taker as the Deposit Taker for it under this 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 NAI) will provide the funds required to pay the termination fee by Section 6.4 of the Participation Agreement to accomplish the substitution; (D) NAI (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 this 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); (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); and (F) in no event will BNPLC be required to approve a substitution pursuant to this Section 4.3 which will replace a Participant that is an Affiliate of BNPLC. BNPLC shall attempt in good faith to assist (and cause BNPLC's Parent to attempt in good faith to assist) NAI in identifying a new Participant that NAI may propose to substitute for an existing Participant pursuant to this Section, as NAI 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. Section 4.4 Mandatory Substitution for Disqualified Deposit Takers. If any Deposit Taker shall cease to satisfy the requirements set forth in Section 4.1, the party for whom such Disqualified Deposit Taker has been designated as Deposit Taker (i.e., BNPLC or the applicable Participant) shall promptly (1) provide notice thereof to Agent and NAI, and (2) designate a substitute Deposit Taker and cause the substitute to satisfy the requirements set forth in Section 4.1. Pending the designation of the substitute and [Phase IV - Improvements] -9- <PAGE> 15 the satisfaction by it of the requirements set forth in Section 4.1, Agent may withdraw Collateral held by the Disqualified Deposit Taker and deposit such Collateral with other Deposit Takers, subject to Section 5.3 below. Section 4.5 Voluntary Substitution of Deposit Takers. With the written approval of Agent, which approval will not be unreasonably withheld, BNPLC or any Participant may at any time designate for itself a new Deposit Taker (in replacement of any prior Deposit Taker acting for it hereunder); provided, the Person so designated has satisfied the requirements set forth in Section 4.1; and, provided further, unless the designation of a new Deposit Taker is required by Section 4.4 to replace a Disqualified Deposit Taker, at the time of the replacement such Person must be an Initially Qualified Deposit Taker. Section 4.6 Delivery of Notice of Security Interest by NAI and Agent. To the extent required for the designation of a new Deposit Taker by BNPLC or any Participant pursuant to Section 4.5, or to permit the substitution or replacement of a Deposit Taker for BNPLC or any Participant as provided in Sections 4.4 and 4.5, NAI and Agent shall promptly execute and deliver any properly completed Notice of Security Interest requested by BNPLC or the applicable Participant. Section 4.7 Constructive Possession of Collateral. The possession by a Deposit Taker of any deposit accounts, money, instruments, chattel paper or other property constituting Collateral or evidencing Collateral shall be deemed to be possession by Agent or a person designated by Agent, for purposes of perfecting the security interest granted to Agent hereunder pursuant to the UCC or other Applicable Law; and notifications to a Deposit Taker by other Persons holding any such property, and Acknowledgments, receipts or confirmations from any such Persons delivered to a Deposit Taker, shall be deemed notifications to, or Acknowledgments, receipts or confirmations from, financial intermediaries, bailees or agents (as applicable) of such Deposit Taker for the benefit of Agent for the purposes of perfecting such security interests under Applicable Law. Section 4.8 Attempted Setoff by Deposit Takers. By delivery of a Deposit Taker's Acknowledgment and Agreement, each Deposit Taker shall be required to agree not to setoff or attempt a setoff, WITHOUT IN EACH CASE FIRST OBTAINING THE PRIOR WRITTEN AUTHORIZATION OF AGENT, Secured Obligations owed to it against any Collateral held by it from time to time. Further, by delivery of a Deposit Taker's Acknowledgment and Agreement, each Deposit Taker shall be required to agree not to setoff or attempt a setoff, WITHOUT IN EACH CASE FIRST OBTAINING THE PRIOR WRITTEN AUTHORIZATION OF BOTH NAI AND AGENT, obligations owed to it other than Secured Obligations against any Collateral held by it from time to time. Any Deposit Taker for BNPLC or a Participant shall not be permitted by BNPLC or the applicable Participant, as the case may be, to violate such agreements. However, NAI acknowledges and agrees (without limiting its right to recover damages from a Deposit Taker that violates such agreements) that Agent shall not be responsible for, or be deemed to have taken any action against NAI because of, any Deposit Taker's violation of such agreements; and, neither BNPLC nor any Participant shall be responsible for, or be deemed to have taken any action against NAI because of, any violation of such agreements by a Deposit Taker for another party. Section 4.9 Deposit Taker Losses. Agent shall not be responsible for any Deposit Taker Losses. However, Deposit Taker Losses with respect to a Deposit Taker for a particular Participant shall reduce the amount of BNPLC's Corresponding Obligations to Participants which are payable to such Participant as provided in Section 2.2 of the Participation Agreement. Further, when Deposit Taker Losses with respect to a Deposit Taker for a particular Participant are incurred in excess of the payments of Secured Obligations that such Participant would then have been entitled to receive under the Participation Agreement but for such Deposit Taker Losses, such Participant must immediately pay the excess to Agent [Phase IV - Improvements] -10- <PAGE> 16 as additional Collateral hereunder, failing which NAI may recover any damages suffered by it because of the Deposit Taker Losses from such Deposit Taker or such Participant. Section 4.10 Losses Resulting from Failure of Deposit Taker to Comply with this Agreement. Any Participant, the Deposit Taker for whom has failed to comply with the requirements of this Agreement or any Notices of Security Interest and any Deposit Taker's Acknowledgments and Agreements (the "RESPONSIBLE PARTICIPANT") must defend, indemnify, and hold harmless BNPLC, Agent and the other Participants from and against any Losses resulting from such failure. Without limiting the foregoing, if the failure of a Deposit Taker for a Responsible Participant to comply strictly with the terms of this Agreement (including, without limitation, the provisions of Section 5.4 concerning the issuance and redemption of Certificates of Deposit and the requirement that any cash deposits be held in a deposit account located in either New York or California) causes, in whole or in part, the security interest of Agent in the Collateral held by such Deposit Taker to be unperfected, then any and all Losses suffered as a result of such nonperfection shall be borne solely by the Responsible Participant and shall not be shared by BNPLC, Agent or the other Participants. ARTICLE V DELIVERY AND MAINTENANCE OF CASH COLLATERAL Section 5.1 Delivery of Funds by NAI. On each Base Rent Date, NAI must deliver to Agent, subject to the pledge and security interest created hereby, funds as Cash Collateral then needed (if any) to cause the Value of the Collateral to be no less than the Minimum Collateral Value. Each delivery of funds required by the preceding sentence must be received by Agent no later than 12:00 noon (San Francisco time) on the date it is required; if received after 12:00 noon it will be considered for purposes of the Improvements Lease as received on the next following Business Day. At least five Business Days prior to any Base Rent Date upon which it is expected that NAI will be required to deliver additional funds pursuant to this Section, NAI shall notify BNPLC, Agent and each of the Participants thereof and of the amount NAI expects to deliver to Agent as Cash Collateral on the applicable Base Rent Date. In addition to required deliveries of Cash Collateral as provided in the foregoing provisions, NAI may on any date (whether or not a Base Rent Date) deliver additional Cash Collateral to Agent as necessary to prevent any Default from becoming an Event of Default. Upon receipt of any funds delivered to it by NAI as Cash Collateral, Agent shall immediately deposit the same with the Deposit Takers in accordance with the requirements of Sections 5.3 and 5.4 below. Section 5.2 Transition Account. Pending deposit in the Accounts or other application as provided herein, all Cash Collateral received by Agent shall be credited to and held by Agent in an account (the "TRANSITION ACCOUNT") styled "NAI Collateral Account, held for the benefit of BNP Leasing Corporation and the Participants," separate and apart from all other property and funds of NAI or other Persons, and no other property or funds shall be deposited in the Transition Account. The books and records of Agent shall reflect that the Transition Account and all Cash Collateral on deposit therein are owned by NAI, subject to a pledge and security interest in favor of Agent for the benefit of BNPLC and Participants. Section 5.3 Allocation of Cash Collateral Among Deposit Takers. Funds received by Agent from NAI as Cash Collateral will be allocated for deposit among the Deposit Takers as follows: first, to the extent possible the funds will be allocated as required to rectify and prevent any Collateral Imbalance; and second, the funds will be allocated to the Deposit Taker for BNPLC, unless the Deposit Taker for BNPLC has become a Disqualified Deposit Taker, in which case the funds will be allocated to other Deposit Takers who are not Disqualified Deposit Takers as Agent deems appropriate. [Phase IV - Improvements] -11- <PAGE> 17 Further, if for any reason a Collateral Imbalance is determined by Agent to exist, Agent shall, as required to rectify or mitigate the Collateral Imbalance, promptly reallocate Collateral among Deposit Takers by withdrawing Cash Collateral from some Accounts and redepositing it in other Accounts. (If any party to this Agreement believes that the Value of the Accounts held by a particular Deposit Taker causes a Collateral Imbalance to exist, that party will promptly notify BNPLC, NAI and Agent.) Subject to the foregoing, and provided that Agent does not thereby create or exacerbate a Collateral Imbalance, Agent may withdraw and redeposit Cash Collateral in order to reallocate the same among Deposit Takers from time to time as Agent deems appropriate. For purposes of illustration only, examples of the allocations required by this Section are set forth in ATTACHMENT 5. Section 5.4 Issuance and Redemption of Certificates of Deposit. Upon the receipt of any deposit of Cash Collateral from Agent, each Deposit Taker shall issue a Certificate of Deposit evidencing the Account into which such deposit is made and deliver such Certificate of Deposit to Agent for the benefit of BNPLC and the Participants. Each Certificate of Deposit shall be issued in an amount equal to the Value of the Account which it evidences and shall otherwise be in the form set forth as ATTACHMENT 1 to this Agreement. Upon depositing any Cash Collateral into an Account that is already evidenced by an outstanding Certificate of Deposit, Agent will surrender the outstanding Certificate of Deposit, and in exchange the Deposit Taker receiving the deposit will issue a new Certificate of Deposit, evidencing the total amount of Cash Collateral in the Account after the deposit. A Deposit Taker that has issued a Certificate of Deposit may require the surrender of the Certificate of Deposit as a condition to a withdrawal from the Account evidenced thereby, including any withdrawal required or permitted by this Agreement. Upon surrender of a Certificate of Deposit in connection with a withdrawal of less than all of the Cash Collateral in the Account evidenced thereby, the applicable Deposit Taker will concurrently issue a new Certificate of Deposit to Agent, evidencing the balance of the Cash Collateral remaining on deposit in the Account after the withdrawal. Notwithstanding the foregoing, if any Certificate of Deposit held by Agent shall be destroyed, lost or stolen, the Deposit Taker that issued the Certificate, upon the written request of Agent, shall issue a new Certificate of Deposit to Agent in lieu of and in substitution for the Certificate of Deposit so destroyed, lost or stolen. However, as applicant for the substitute Certificate of Deposit, Agent must indemnify (at no cost to NAI) the applicable Deposit Taker against any liability on the Certificate of Deposit destroyed, lost or stolen, and Agent shall furnish to the Deposit Taker an affidavit of an officer of Agent setting forth the fact of destruction, loss or theft and confirming the status of Agent as holder of the Certificate of Deposit immediately prior to the destruction, loss or theft. If any Certificate of Deposit held by Agent shall become mutilated, the Deposit Taker that issued the Certificate, upon the written request of Agent, shall issue a new Certificate of Deposit to Agent in exchange and substitution for the mutilated Certificate of Deposit. Agent shall hold all Certificates of Deposit for the benefit of BNPLC and the Participants, subject to the pledge and security interest created hereby. Section 5.5 Status of the Accounts Under the Reserve Requirement Regulations. Deposit Takers shall be permitted to structure the Accounts as nonpersonal time deposits under 12 C.F.R., Part II, Chapter 204 (commonly known as "Regulation D"). Accordingly, each Deposit Taker may require at least seven days advance notice of any withdrawal or transfer of funds from Accounts it maintains and may limit the number of withdrawals or transfers from such Accounts to no more than six in any calendar month, notwithstanding anything to the contrary herein or in any deposit agreement that NAI and any Deposit Taker may enter into with respect to any Account. As necessary to satisfy the seven days notice requirement with respect to withdrawals by Agent when required by NAI pursuant to the provisions below, Agent shall notify Deposit Takers promptly after receipt of any notice from NAI described in subsection 6.1.2 or 6.2.1 or in Section 6.3. [Phase IV - Improvements] -12- <PAGE> 18 Section 5.6 Acknowledgment by NAI that Requirements of this Agreement are Commercially Reasonable. NAI acknowledges and agrees that the requirements set forth herein concerning receipt, deposit, withdrawal, allocation, application and distribution of Cash Collateral by Agent, including the requirements and time periods set forth in the next Article, are commercially reasonable. ARTICLE VI WITHDRAWAL OF CASH COLLATERAL NAI may not withdraw Cash Collateral, except as follows: Section 6.1 Withdrawal of Collateral Prior to the Designated Sale Date. NAI may require Agent to present Certificates of Deposit for payment and withdraw Cash Collateral from Accounts on any date prior to the Designated Sale Date and to deliver such Cash Collateral to NAI (which delivery shall be free and clear of all liens and security interests hereunder); provided, however, that in each case: 6.1.1 Such withdrawal and delivery of the Cash Collateral to NAI will not cause the Value of the remaining Collateral to be less than the Minimum Collateral Value. 6.1.2 by a notice in the form of ATTACHMENT 6, NAI must give Agent, BNPLC and the Participants notice of the required withdrawal at least ten days prior to the date upon which the withdrawal is to occur. 6.1.3 No Default or Event of Default shall have occurred and be continuing at the time NAI gives the notice required by the preceding subsection or on the date upon which the withdrawal is required. 6.1.4 NAI must pay to Agent any and all costs incurred by Agent in connection with the withdrawal. 6.1.5 Agent shall determine the Accounts from which to make any withdrawal required by NAI pursuant to this Section as necessary to prevent or mitigate any Collateral Imbalance. Section 6.2 Withdrawal and Application of Cash Collateral to Reduce or Satisfy the Secured Obligations to the Participants. To reduce the "Break Even Price" or "Supplemental Payment" required under (and as defined in) the Purchase Agreement (and, thus, to reduce the Secured Obligations), NAI may require Agent to withdraw Cash Collateral then held by or for Agent pursuant to this Agreement on the Designated Sale Date and to deliver the same on the Designated Sale Date or on any date thereafter prior to an Event of Default (which delivery shall be free and clear of all liens and security interests hereunder) directly to the Participants in proportion to their respective rights to payment of BNPLC's Corresponding Obligations to Participants and for application thereto or the reduction thereof pursuant to Section 2.2 of the Participation Agreement; provided, that: 6.2.1 by a notice in the form of ATTACHMENT 7, NAI must have notified Agent, BNPLC and each of the Participants of the required withdrawal and payment to Participants at least ten days prior to the date upon which it is to occur; 6.2.2 the required withdrawal shall be made as determined by Agent, first, from the Accounts maintained by the Deposit Takers for the Participants, and then (to the extent necessary) from the Accounts maintained by the Deposit Taker for BNPLC; and 6.2.3 in any event, no withdrawals or payments directly to Participants shall be required by this Section 6.2 (or permitted over the objection of BNPLC) in excess of those required to [Phase IV - Improvements] -13- <PAGE> 19 satisfy BNPLC's Corresponding Obligations to Participants or to reduce such obligations to zero under the Participation Agreement. Section 6.3 Withdrawal and Application of Cash Collateral to Reduce or Satisfy the Secured Obligations to BNPLC. To satisfy NAI's Purchase Agreement Obligations, NAI may require Agent to withdraw any Cash Collateral held by the Deposit Taker for BNPLC pursuant to this Agreement on the Designated Sale Date and to deliver the same on the Designated Sale Date or on any date thereafter prior to an Event of Default (which delivery shall be free and clear of all liens and security interests hereunder) directly to BNPLC as a payment on behalf of NAI of amounts due under the Purchase Agreement; provided, that by a notice in the form of ATTACHMENT 8, NAI must have notified Agent and BNPLC of the required withdrawal and payment to BNPLC at least ten days prior to the date upon which it is to occur. Section 6.4 Withdrawal of Cash Collateral From Accounts Maintained by Disqualified Deposit Takers. NAI may from time to time prior to the Designated Sale Date (regardless of the existence of any Default or Event of Default) require Agent to withdraw any or all Cash Collateral from any Account maintained by a Disqualified Deposit Taker and deposit it, still subject to the pledge and grant of security interest hereunder, with other Deposit Takers who are not Disqualified Deposit Takers (in accordance with the requirements of Sections 5.3 and 5.4) on any date prior to the Designated Sale Date; provided, that by a notice in the form of ATTACHMENT 9, NAI must have notified Agent, BNPLC and each of the Participants of the required withdrawal at least ten days prior to the date upon which it is to occur. ARTICLE VII REPRESENTATIONS AND COVENANTS OF NAI Section 7.1 Representations of NAI. NAI represents to BNPLC, Agent and the Participants as follows: 7.1.1 NAI is the legal and beneficial owner of the Collateral (or, in the case of after-acquired Collateral, at the time NAI acquires rights in the Collateral, will be the legal and beneficial owner thereof). No other Person has (or, in the case of after-acquired Collateral, at the time NAI acquires rights therein, will have) any right, title, claim or interest (by way of Lien, purchase option or otherwise) in, against or to the Collateral, except for rights created hereunder. 7.1.2 Agent has (or in the case of after-acquired Collateral, at the time NAI acquires rights therein, will have) a valid, first priority, perfected pledge of and security interest in the Collateral, regardless of the characterization of the Collateral as deposit accounts, instruments or general intangibles under the UCC, but assuming that the representations of each Deposit Taker in its Deposit Taker's Acknowledgment and Agreement are true. 7.1.3 NAI has delivered to Agent, together with all necessary stock powers, endorsements, assignments and other necessary instruments of transfer, the originals of all documents, instruments and agreements evidencing Accounts, Certificates of Deposit or Cash Collateral. 7.1.4 NAI's chief executive office is located at the address of NAI set forth in Article II of the Common Definitions and Provisions Agreement (Phase IV - Improvements) or at another address in California specified in a notice that NAI has given to Agent as required by Section 7.2.4. [Phase IV - Improvements] -14- <PAGE> 20 7.1.5 To the knowledge of NAI, neither the ownership or the intended use of the Collateral by NAI, nor the pledge of Accounts or the grant of the security interest by NAI to Agent herein, nor the exercise by Agent of its rights or remedies hereunder, will (i) violate any provision of (a) Applicable Law, (b) the articles or certificate of incorporation, charter or bylaws of NAI, or (c) any agreement, judgment, license, order or permit applicable to or binding upon NAI, or (ii) result in or require the creation of any Lien, charge or encumbrance upon any assets or properties of NAI except as expressly contemplated in this Agreement. Except as expressly contemplated in this Agreement, to the knowledge of NAI no consent, approval, authorization or order of, and no notice to or filing with any court, governmental authority or third party is required in connection with the pledge or grant by NAI of the security interest contemplated herein or the exercise by Agent of its rights and remedies hereunder. Section 7.2 Covenants of NAI. NAI hereby agrees as follows: 7.2.1 NAI, at NAI's expense, shall promptly procure, execute and deliver to Agent all documents, instruments and agreements and perform all acts which are necessary, or which Agent may reasonably request, to establish, maintain, preserve, protect and perfect the Collateral, the pledge thereof to Agent or the security interest granted to Agent therein and the first priority of such pledge or security interest or to enable Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the preceding sentence, NAI shall (A) procure, execute and deliver to Agent all stock powers, endorsements, assignments, financing statements and other instruments of transfer requested by Agent, (B) deliver to Agent promptly upon receipt all originals of Collateral consisting of instruments, documents and chattel paper, (C) cause the security interest of Agent in any Collateral consisting of securities to be recorded or registered in the books of any financial intermediary or clearing corporation requested by Agent, and (D) reimburse Agent upon request for any legal opinion Agent may elect to obtain from a nationally recognized commercial law firm authorized to practice in New York concerning the enforceability, first priority and perfection of Agent's security interest in any Collateral maintained in New York, if BNPLC or any Participant should at any time elect to use a Deposit Taker that will maintain one or more Accounts in New York. 7.2.2 NAI shall not use or consent to any use of any Collateral in violation of any provision of the this Agreement or any other Transaction Document or any Applicable Law. 7.2.3 NAI shall pay promptly when due all taxes and other governmental charges, all Liens and all other charges now or hereafter imposed upon, relating to or affecting any Collateral. 7.2.4 Without thirty days' prior written notice to Agent, NAI shall not change NAI's name or place of business (or, if NAI has more than one place of business, its chief executive office). 7.2.5 NAI shall appear in and defend, on behalf of Agent, any action or proceeding which may affect NAI's title to or Agent's interest in the Collateral. 7.2.6 Subject to the express rights of NAI under Article VI, NAI shall not surrender or lose possession of (other than to Agent or a Deposit Taker pursuant hereto), sell, encumber, lease, rent, option, or otherwise dispose of or transfer any Collateral or right or interest therein, and NAI shall keep the Collateral free of all Liens. 7.2.7 NAI will not take any action which would in any manner impair the value or enforceability of Agent's pledge of or security interest in any Collateral, nor will NAI fail to take [Phase IV - Improvements] -15- <PAGE> 21 any action which is required to prevent (and which NAI knows is required to prevent) an impairment of the value or enforceability of Agent's pledge of or security interest in any Collateral. [Phase IV - Improvements] -16- <PAGE> 22 7.2.8 NAI shall pay (and shall indemnify and hold harmless Agent from and against) all Losses incurred by Agent in connection with or because of (A) the interest acquired by Agent in any Collateral pursuant to this Agreement, or (B) the negotiation or administration of this Agreement, whether such Losses are incurred at the time of execution of this Agreement or at any time in the future. Costs and expenses included in such Losses may include, without limitation, all filing and recording fees, taxes, UCC search fees and Attorneys' Fees incurred by Agent with respect to the Collateral. 7.2.9 Without limiting the foregoing, within five Business Days after NAI becomes aware of any failure of the pledge or security interest contemplated herein in the Transition Account or any Account, Certificate of Deposit or Cash Collateral to be a valid, perfected, first priority pledge or security interest (regardless of the characterization of the Transition Account or any Accounts, Certificates of Deposit or Cash Collateral as deposit accounts, instruments or general intangibles under the UCC), NAI shall notify Agent, BNPLC and the Participants of such failure. In addition, if the failure would not exist but for NAI's delivery of Cash Collateral to Agent subject to prior Liens or other claims by one or more third parties, or but for the grant by NAI itself of any Lien or other interest in the Collateral to one or more third parties, then, in addition to any other remedies available to BNPLC or Agent under the circumstances, NAI must pay to BNPLC any additional Base Rent that has accrued under the Improvements Lease because of (or that would have accrued if BNPLC had been aware of) the failure, together with interest at the Default Rate on any such additional Base Rent. ARTICLE VIII AUTHORIZED ACTION BY AGENT Section 8.1 Power of Attorney. NAI hereby irrevocably appoints Agent as NAI's attorney-in-fact for the purpose of authorizing Agent to perform (but Agent shall not be obligated to and shall incur no liability to NAI or any third party for failure to perform) any act which NAI is obligated by this Agreement to perform, and to exercise, consistent with the other provisions of this Agreement, such rights and powers as NAI might exercise with respect to the Collateral during any period in which a Default or Event of Default has occurred and is continuing, including the right to (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) insure, process, preserve and enforce the Collateral; (d) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral; (e) pay any indebtedness of NAI relating to the Collateral; and (f) execute UCC financing statements and other documents, instruments and agreements required hereunder. NAI agrees that such care as Agent gives to the safekeeping of its own property of like kind shall constitute reasonable care of the Collateral when in Agent's possession; provided, however, that Agent shall not be obligated to NAI to give any notice or take any action to preserve rights against any other Person in connection with the Secured Obligations or with respect to the Collateral. ARTICLE IX DEFAULT AND REMEDIES Section 9.1 Remedies. In addition to all other rights and remedies granted to Agent, BNPLC or the Participants by this Agreement, the Improvements Lease, the Purchase Agreement, the Participation Agreement, the UCC and other Applicable Laws, Agent may, upon the occurrence and during the continuance of any Event of Default, exercise any one or more of the following rights and remedies, all of which will be in furtherance of its rights as a secured party under the UCC: [Phase IV - Improvements] -17- <PAGE> 23 (a) Agent may collect, receive, appropriate or realize upon the Collateral or otherwise foreclose or enforce the pledge of or security interests in any or all Collateral in any manner permitted by Applicable Law or in this Agreement; and (b) Agent may notify any or all Deposit Takers to pay all or any portion of the Collateral held by such Deposit Taker(s) directly to Agent. Agent shall distribute the proceeds of all Collateral received by Agent after the occurrence of an Event of Default to BNPLC and the Participants for application to the Secured Obligations. If any proceeds of Collateral remain after all Secured Obligations have been paid in full, Agent will deliver or direct the Deposit Takers to deliver such proceeds to NAI or other Persons entitled thereto. In any case where notice of any sale or disposition of any Collateral is required, NAI hereby agrees that seven (7) Business Days notice of such sale or disposition is reasonable. ARTICLE X OTHER RECOURSE Section 10.1 Recovery Not Limited. To the fullest extent permitted by applicable law, NAI waives any right to require that Agent, BNPLC or the Participants proceed against any other Person, exhaust any Collateral or other security for the Secured Obligations, or to have any Other Liable Party joined with NAI in any suit arising out of the Secured Obligations or this Agreement, or pursue any other remedy in their power. NAI waives any and all notice of acceptance of this Agreement. NAI further waives notice of the creation, modification, rearrangement, renewal or extension for any period of any of the Secured Obligations of any Other Liable Party from time to time and any defense arising by reason of any disability or other defense of any Other Liable Party or by reason of the cessation from any cause whatsoever of the liability of any Other Liable Party. Until all of the Secured Obligations shall have been paid in full, NAI shall have no right to subrogation, reimbursement, contribution or indemnity against any Other Liable Party and NAI waives the right to enforce any remedy which Agent, BNPLC or any Participant has or may hereafter have against any Other Liable Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Agent, BNPLC or any Participant. NAI authorizes Agent, BNPLC and the Participants, without notice or demand and without any reservation of rights against NAI and without affecting NAI's liability hereunder or on the Secured Obligations, from time to time to (a) take or hold any other property of any type from any other Person as security for the Secured Obligations, and exchange, enforce, waive and release any or all of such other property, (b) after any Event of Default, apply or require the application of the Collateral (in accordance with this Agreement) or such other property in any order they may determine and to direct the order or manner of sale thereof as they may determine, (c) renew, extend for any period, accelerate, modify, compromise, settle or release any of the obligations of any Other Liable Party with respect to any or all of the Secured Obligations or other security for the Secured Obligations, and (d) release or substitute any Other Liable Party. ARTICLE XI PROVISIONS CONCERNING AGENT In the event of any conflict between the following and other provisions in this Agreement, the following will control: Section 11.1 Appointment and Authority. BNPLC and each Participant hereby irrevocably authorizes Agent, and Agent hereby undertakes, to take all actions and to exercise such powers under this Agreement as are specifically delegated to Agent by the terms hereof, together with all other powers reasonably incidental thereto. The relationship of Agent to the Participants is only that of one commercial bank acting as collateral agent for others, and nothing herein shall be construed to constitute Agent a [Phase IV - Improvements] -18- <PAGE> 24 trustee or other fiduciary for any Participant or anyone claiming through or under a Participant nor to impose on Agent duties and obligations other than those expressly provided for in this Agreement. With respect to any matters not expressly provided for in this Agreement and any matters which this Agreement places within the discretion of Agent, Agent shall not be required to exercise any discretion or take any action, and it may request instructions from BNPLC and Participants with respect to any such matter, in which case it shall be required to act or to refrain from acting (and shall be fully protected and free from liability to all Participants in so acting or refraining from acting) upon the instructions of the Majority, as defined in the Participation Agreement, including itself as a Participant and BNPLC; provided, however, that Agent shall not be required to take any action which exposes it to a risk of personal liability that it considers unreasonable or which is contrary to this Agreement or the other documents referenced herein or to Applicable Law. Section 11.2 Exculpation, Agent's Reliance, Etc. Neither Agent nor any of its directors, officers, agents, attorneys, or employees shall be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement, INCLUDING THEIR NEGLIGENCE OF ANY KIND, EXCEPT THAT EACH SHALL BE LIABLE FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Without limiting the generality of the foregoing, Agent (1) may treat the rights of any Participant under its Participation Agreement as continuing until Agent receives written notice of the assignment or transfer of those rights in accordance with such Participation Agreement, signed by such Participant and in form satisfactory to Agent; (2) may consult with legal counsel (including counsel for NAI), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts, unless the action taken or omitted constitutes misconduct; (3) makes no warranty or representation and shall not be responsible for any statements, warranties or representations made in or in connection with this Agreement or the other documents referenced herein; (4) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of the Transaction Documents on the part of any party thereto, or to inspect the property (including the books and records) of any party thereto; (5) shall not be responsible to any Participant for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Transaction Document or any instrument or document furnished in connection therewith; (6) may rely upon the representations and warranties of NAI, Participants and Deposit Takers in exercising its powers hereunder; and (6) shall incur no liability under or in respect of the Transaction Documents by acting upon any notice, consent, certificate or other instrument or writing (including any telecopy, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper Person or Persons. Section 11.3 Participant's Credit Decisions. Each Participant acknowledges that it has, independently and without reliance upon Agent or any other Participant, made its own analysis of NAI and the transactions contemplated hereby and its own independent decision to enter into the Transaction Documents to which it is a party. Each Participant also acknowledges that it will, independently and without reliance upon Agent or any other Participant and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Transaction Documents. Section 11.4 Indemnity. Each Participant agrees to indemnify Agent (to the extent not reimbursed by NAI within ten days after demand) from and against such Participant's Percentage of any and all Losses of any kind or nature whatsoever which to any extent (in whole or in part) may be imposed on, incurred by, or asserted against Agent growing out of, resulting from or in any other way associated with any of the Collateral, the Transaction Documents and the transactions and events (including the enforcement thereof) at any time associated therewith or contemplated therein. THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LOSSES ARE IN ANY WAY OR TO ANY [Phase IV - Improvements] -19- <PAGE> 25 EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY AGENT, PROVIDED ONLY THAT NO PARTICIPANT SHALL BE OBLIGATED UNDER THIS SECTION TO INDEMNIFY AGENT FOR THAT PORTION, IF ANY, OF ANY LOSS WHICH IS PROXIMATELY CAUSED BY AGENT'S OWN INDIVIDUAL GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, AS DETERMINED IN A FINAL JUDGMENT RENDERED AGAINST AGENT. Cumulative of the foregoing, each Participant agrees to reimburse Agent promptly upon demand for such Participant's Percentage share of any costs and expenses to be paid to Agent by NAI hereunder to the extent that Agent is not timely reimbursed by NAI as provided in subsection 7.2.8. As used in this Section the term "Agent" shall refer not only to the Person designated as such in the introductory paragraph of this Agreement, but also to each director, officer, agent, attorney, employee, representative and Affiliate of such Person. Section 11.5 Agent's Rights as Participant and Deposit Taker. In its capacity as a Participant, Banque Nationale de Paris shall have the same rights and obligations as any Participant and may exercise such rights as though it were not Agent. In its capacity as a Deposit Taker, Banque Nationale de Paris shall have the same rights and obligations as any Deposit Taker and may exercise such rights as though it were not Agent. Banque Nationale de Paris and any of its Affiliates may accept deposits from, lend money to, act as Trustee under indentures of, and generally engage in any kind of business with NAI or its Affiliates, all as if Banque Nationale de Paris were not designated as the Agent hereunder and without any duty to account therefor to any other Participant. Section 11.6 Investments. Whenever Agent in good faith determines that it is uncertain about how to distribute any funds which it has received hereunder, or whenever Agent in good faith determines that there is any dispute among BNPLC and Participants about how such funds should be distributed, Agent may choose to defer distribution of the funds which are the subject of such uncertainty or dispute. If Agent in good faith believes that the uncertainty or dispute will not be promptly resolved, or if Agent is otherwise required to invest funds pending distribution, Agent shall invest such funds pending distribution, all interest on any such investment shall be distributed upon the distribution of such investment and in the same proportion and to the same Persons as such investment. All moneys received by Agent for distribution to BNPLC or Participants shall be held by Agent pending such distribution solely as Agent hereunder, and Agent shall have no equitable title to any portion thereof. Section 11.7 Benefit of Article XI. The provisions of this Article (other than the following Section 11.8) are intended solely for the benefit of Agent, BNPLC and Participants, and NAI shall not be entitled to rely on any such provision or assert any such provision in a claim or defense against Agent, BNPLC or any Participant. Agent, BNPLC and Participants may waive or amend such provisions as they desire without any notice to or consent of NAI. Section 11.8 Resignation. Agent may resign at any time by giving written notice thereof to BNPLC, Participants and NAI. Upon any such resignation the Majority (as defined in the Participation Agreement) shall have the right to appoint a successor Agent, subject to NAI's consent, such consent not to be unreasonably withheld. A successor must be appointed for any retiring Agent, and such Agent's resignation shall become effective when such successor accepts such appointment. If, within thirty days after the date of the retiring Agent's resignation, no successor Agent has been appointed and has accepted such appointment, then the retiring Agent may appoint a successor Agent, which shall be a commercial bank organized or licensed to conduct a banking or trust business under the laws of the United States of America or of any state thereof. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, the retiring Agent shall be discharged from its duties and obligations under this [Phase IV - Improvements] -20- <PAGE> 26 Agreement. After any retiring Agent's resignation hereunder, the provisions of this Article 10.1 shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. ARTICLE XII MISCELLANEOUS Section 12.1 Provisions Incorporated From Other Operative Documents. Reference is made to the Common Definitions and Provisions Agreement (Phase IV - Improvements), to the Purchase Agreement and to the Participation Agreement for a statement of the terms thereof. Without limiting the generality of the foregoing, the provisions of Article II of the Common Definitions and Provisions Agreement (Phase IV - Improvements) are incorporated into this Agreement for all purposes as if set forth in this Article. Section 12.2 Cumulative Rights, etc. Except as herein expressly provided to the contrary, the rights, powers and remedies of Agent, BNPLC and the Participants under this Agreement shall be in addition to all rights, powers and remedies given to them by virtue of any Applicable Law, any other Transaction Document or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing their respective rights hereunder. NAI waives any right to require Agent, BNPLC or any Participant to proceed against any Person or to exhaust any Collateral or to pursue any remedy in Agent's, BNPLC's or such Participant's power. Section 12.3 Survival of Agreements. All representations and warranties of NAI herein, and all covenants and agreements herein shall survive the execution and delivery of this Agreement, the execution and delivery of any other Transaction Documents and the creation of the Secured Obligations and continue until terminated or released as provided herein. Section 12.4 Other Liable Party. Neither this Agreement nor the exercise by Agent or the failure of Agent to exercise any right, power or remedy conferred herein or by law shall be construed as relieving any Other Liable Party from liability on the Secured Obligations or any deficiency thereon. This Agreement shall continue irrespective of the fact that the liability of any Other Liable Party may have ceased or irrespective of the validity or enforceability of any other agreement evidencing or securing the Secured Obligations to which NAI or any Other Liable Party may be a party, and notwithstanding the reorganization, death, incapacity or bankruptcy of any Other Liable Party, or any other event or proceeding affecting any Other Liable Party. Section 12.5 Termination. Following the Designated Sale Date, upon satisfaction in full of all Secured Obligations and upon written request for the termination hereof delivered by NAI to Agent, (i) this Agreement and the pledge and security interest created hereby shall terminate and all rights to the Collateral shall revert to NAI and (ii) Agent will, upon NAI's request and at NAI's expense execute and deliver to NAI such documents as NAI shall reasonably request to evidence such termination and release. [The signature pages follow.] [Phase IV - Improvements] -21- <PAGE> 27 IN WITNESS WHEREOF, NAI, BNPLC, Agent and the Participants whose signatures appear below have caused this Agreement to be executed as of December ___, 1999. "NAI" NETWORK APPLIANCE, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- <PAGE> 28 [Continuation of signature pages to Pledge Agreement (Phase IV - Improvements) dated to be effective December ___, 1999] "BNPLC" BNP LEASING CORPORATION By: ------------------------------------- Lloyd G. Cox, Vice President <PAGE> 29 [Continuation of signature pages to Pledge Agreement (Phase IV - Improvements) dated to be effective December ___, 1999] "AGENT" BANQUE NATIONALE DE PARIS By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- "PARTICIPANT" BANQUE NATIONALE DE PARIS By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- <PAGE> 30 ATTACHMENT 1 TO PLEDGE AGREEMENT CERTIFICATE OF DEPOSIT (No. _________) [_________, _____] [NAME OF THE ISSUING DEPOSIT TAKER AND THE ADDRESS OF ITS APPLICABLE ACCOUNT OFFICE] PAYABLE TO THE ORDER OF: BANQUE NATIONALE DE PARIS, as Agent under the Pledge Agreement (Phase IV - Improvements) dated December ____, 1999, among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants __________________Dollars in current funds, without interest, seven days after presentment of this certificate properly endorsed. The bank issuing this certificate acknowledges and certifies that on the date indicated above the payee deposited the dollar amount indicated above, and that such amount shall be payable as provided above. ________________________________________________ Authorized Signature <PAGE> 31 ATTACHMENT 2 TO PLEDGE AGREEMENT SUPPLEMENT TO PLEDGE AGREEMENT [__________, ____] Banque Nationale de Paris _________________________ _________________________ _________________________ Network Appliance, Inc. _________________________ _________________________ _________________________ 1. Reference is made to the Pledge Agreement (Phase IV - Improvements) (the "PLEDGE AGREEMENT") dated December ____, 1999 among Network Appliance, Inc. ("NAI"), BNP Leasing Corporation ("BNPLC"), Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (collectively, the "PARTICIPANTS") and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants (in such capacity, "AGENT"). Unless otherwise defined herein, all capitalized terms used in this Supplement have the respective meanings given to those terms in the Pledge Agreement. 2. The undersigned hereby certifies to Agent and NAI that the undersigned has become a party to the Participation Agreement by executing a supplement as provided therein and that its Percentage thereunder is ______%. 3. The undersigned, by executing and delivering this Supplement to NAI and Agent, hereby agrees to become a party to the Pledge Agreement and agrees to be bound by all of the terms thereof applicable to Participants. The Deposit Taker for the undersigned shall be _________________, until such time as another Deposit Taker for the undersigned shall be designated in accordance with Sections 4.4 or 4.5 of the Pledge Agreement. The undersigned certifies to Agent and NAI that such Deposit Taker is an Initially Qualified Deposit Taker and satisfies the requirements for a Deposit Taker set forth in Section 4.1 of the Pledge Agreement. IN WITNESS WHEREOF, the undersigned has executed this Supplement as of the day and year indicated above. [ ] -------------------------------------- By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- <PAGE> 32 ATTACHMENT 3 TO PLEDGE AGREEMENT NOTICE OF NAI'S ELECTION TO CHANGE THE COLLATERAL PERCENTAGE [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Improvements) (the "PLEDGE AGREEMENT") dated December ____, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement referenced above. This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 3.1 of the Pledge Agreement, NAI elects to change the Collateral Percentage to: __________ percent (___%), on the following Base Rent Date: __________, ____ NAI expects that multiplying the new Collateral Percentage specified above against Stipulated Loss Value of: ____________________________ Dollars ($__________), will result in an expected new Minimum Collateral Value of: ____________________________ Dollars ($__________). [NOTE: THE NEXT PARAGRAPH WILL BE INCLUDED ONLY IN A NOTICE OF AN INCREASE IN THE COLLATERAL PERCENTAGE, BECAUSE OF WHICH NAI WILL BE REQUIRED TO DELIVER ADDITIONAL CASH COLLATERAL TO SATISFY THE MINIMUM COLLATERAL VALUE REQUIREMENTS IN SECTION 5.1 OF THE PLEDGE AGREEMENT: Because of the increase in the Collateral Percentage which will result from this notice and the corresponding increase in the Minimum Collateral Value, NAI will deliver additional Cash Collateral to you as required by Section 5.1 of the Pledge Agreement no later than 12:00 noon (San Francisco time) on the Base Rent Date specified above, in the amount of: <PAGE> 33 ____________________________ Dollars ($__________).] To assure you that NAI has satisfied the conditions to its right to change the Collateral Percentage as provided in this notice, and to induce you to rely upon this notice in discharging your responsibilities under the Pledge Agreement, NAI certifies to you that: 1. NAI is giving this notice to you, BNPLC and the Participants at least ten Business Days prior to the Base Rent Date specified above, and such Base Rent Date is the commencement of a Base Rent Period. 2. No Event of Default or other event or circumstance that would, pursuant to Section 3.2 of the Pledge Agreement, preclude NAI from designating the new Collateral Percentage above has occurred and is continuing, and NAI does not anticipate that on the Base Rent Date specified above there will have occurred and be continuing any such Event of Default or other event or circumstance. 3. No Mandatory Collateral Period shall be in effect as of the effective date specified above. NOTE: YOU SHALL BE ENTITLED TO DISREGARD THIS NOTICE IF THE STATEMENTS ABOVE ARE NOT CORRECT. HOWEVER, WE ASK THAT YOU NOTIFY NAI IMMEDIATELY IF FOR ANY REASON YOU BELIEVE THIS NOTICE IS DEFECTIVE. Network Appliance, Inc. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- [cc BNPLC and all Participants] [Phase IV - Improvements] -2- <PAGE> 34 ATTACHMENT 4 TO PLEDGE AGREEMENT NOTICE OF SECURITY INTEREST [_________, _____] [Name of Deposit Taker] [Address of Deposit Taker] 1. Reference is made to the Pledge Agreement (Phase IV - Improvements) (the "PLEDGE AGREEMENT") dated December ____, 1999 among Network Appliance, Inc. ("NAI"), BNP Leasing Corporation ("BNPLC"), Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (collectively, the "PARTICIPANTS") and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants (in such capacity, "AGENT"). Unless otherwise defined herein, all capitalized terms used in this Notice have the respective meanings given to those terms in the Pledge Agreement. 2. NAI has informed Agent that NAI has established with the addressee of this Notice (the "DEPOSIT TAKER") the following non-interest bearing Account(s) to be maintained at the following Account Office(s): <TABLE> <CAPTION> Account Account Account Type Office Number ------- ------- ------- <S> <C> <C> Time Deposit __________ __________ Time Deposit __________ __________ Time Deposit __________ __________ </TABLE> NAI has further informed Agent that NAI intends to maintain Cash Collateral in such Account(s), and that to evidence such Account(s) and the amount of Cash Collateral held therein from time to time, NAI has authorized the Deposit Taker to issue Certificates of Deposit payable to the order of Agent as provided in the Pledge Agreement. 3. NAI and Agent hereby notify Deposit Taker that, pursuant to the Pledge Agreement, NAI has granted to Agent, for the ratable benefit of BNPLC and the Participants as security for the Secured Obligations, a pledge of and security interest in all Accounts and other Collateral maintained by NAI with Deposit Taker, including the Account(s) described in Section 2 above. 4. In furtherance of such grant, NAI and Agent hereby authorize and direct Deposit Taker to: (a) hold all Collateral for Agent and as Agent's bailee, separate and apart from all other property and funds of NAI and all other Persons and to permit no other funds to be deposited or credited to the Account(s); <PAGE> 35 (b) make a notation in its books and records of the interest of Agent in the Collateral and that the Account(s) and all deposits therein or sums credited thereto are subject to a pledge and security interest in favor of Agent; (c) issue and redeem Certificates of Deposit evidencing the Account(s), as directed by Agent pursuant to the Pledge Agreement; (d) take such other steps as Agent may reasonably request to record, maintain, validate and perfect its pledge of and security interest in the Collateral; and (e) upon receipt of notice from Agent that an Event of Default has occurred, transfer and deliver to Agent or its nominee, together with all necessary endorsements, all or such portion of the Collateral held by Deposit Taker as Agent shall direct; provided, however, that in connection therewith the Deposit Taker may require compliance by Agent with the provisions in Section 5.4 of the Pledge Agreement for redemption of any outstanding Certificates of Deposit which evidence the Account(s). 5. NAI and Agent agree that (a) the possession by Deposit Taker of all money, instruments, chattel paper and other property constituting Collateral shall be deemed to be possession by Agent or a person designated by Agent, for purposes of perfecting the security interest granted to Agent hereunder pursuant to Section 9305, 8313 or 8213 of the UCC (as the case may be), and (b) notifications by Deposit Taker to other Persons holding any such property, and Acknowledgments, receipts or confirmations from such Persons delivered to Deposit Taker, shall be deemed notifications to, or Acknowledgments, receipts or confirmations from, financial intermediaries, bailees or agents (as applicable) of the Deposit Taker for the benefit of Agent for the purposes of perfecting such security interests under applicable law. 6. As contemplated by the Pledge Agreement, please acknowledge Deposit Taker's receipt of, and consent to, this notice and confirm the representations and agreements set forth in the Acknowledgment and Agreement attached hereto by executing the same and returning this letter to Agent. For your files, a copy of this letter is enclosed which you may retain. The authorizations and directions set forth herein may not be revoked or modified without the written consent of Agent. "AGENT" BANQUE NATIONALE DE PARIS By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- "NAI" Network Appliance, Inc. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- [Phase IV - Improvements] -2- <PAGE> 36 ACKNOWLEDGMENT AND AGREEMENT OF DEPOSIT TAKER Deposit Taker hereby acknowledges receipt of, and consents to, the above notice, acknowledges that it will hold the Collateral for Agent and as Agent's bailee, agrees to comply with the authorizations and directions set forth above and represents to and agrees with NAI and Agent as follows: (a) Deposit Taker is a commercial bank, organized under the laws of the United States of America or a state thereof or under the laws of another country which is doing business in the United States of America. Deposit Taker is authorized to maintain deposit accounts for others through the Account Offices specified in the above notice, and Deposit Taker will not move the accounts described in the above notice to other offices without the prior written authorization of Agent and NAI. (b) Deposit Taker has a combined capital, surplus and undivided profits of at least $500,000,000. (c) The information set forth above regarding the Account(s) is accurate. Such Account(s) is (are) currently open and Deposit Taker has no prior notice of any other pledge, security interest, Lien, adverse claim or interest in such Account(s). (e) Deposit Taker shall promptly notify NAI and Agent if the representations made by Deposit Taker above cease to be true and correct. (f) Deposit Taker shall not (i) allow the withdrawal of funds from any Account by any Person other than Agent, or (ii) WITHOUT IN EACH CASE FIRST OBTAINING THE PRIOR WRITTEN AUTHORIZATION OF AGENT, setoff or attempt to setoff any Secured Obligations owed to Deposit Taker against any Collateral held from time to time by Deposit Taker, or (iii) WITHOUT IN EACH CASE FIRST OBTAINING THE PRIOR WRITTEN AUTHORIZATION OF BOTH NAI AND AGENT, setoff or attempt to setoff any obligations owed to Deposit Taker other than Secured Obligations, against any Collateral held from time to time by Deposit Taker. [ ] --------------------------------------- By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- [Date] <PAGE> 37 ATTACHMENT 5 TO PLEDGE AGREEMENT EXAMPLES OF CALCULATIONS REQUIRED TO AVOID A COLLATERAL IMBALANCE The examples below are provided to illustrate the calculations required for allocations of Cash Collateral in a manner that will avoid a Collateral Imbalance. The examples are not intended to reflect actual numbers under this Agreement or actual Percentages of BNPLC or any of the Participants; nor are the examples intended to provide a formula for the allocations that would be appropriate in every case. The examples also reflect adjustments that would be appropriate if the Collateral Percentage were adjusted from time to time from and after the Base Rent Commencement Date, although this Agreement provides that such percentage is not to increase above zero until the second anniversary of the Effective Date (expected to be well after the Base Rent Commencement Date), except in a Mandatory Collateral Period, during which such percentage would be 100%. EXAMPLE NO. 1 Assumptions: 1. Two Participants ("Participant A" and "Participant B") are parties to the Participation Agreement with BNPLC. Participant A's Percentage is 50% and Participant B's Percentage is 45%, leaving BNPLC with a Percentage of 5%. 2. On the Base Rent Commencement Date, Funding Advances (including those to cover Carrying Costs under the Improvements Lease) totaled $12,000,000, resulting in a Stipulated Loss Value of $12,000,000, allocable as follows: <TABLE> <S> <C> <C> A. BNPLC's Parent (providing BNPLC's share) (5%) ......... $ 600,000 B. Participant A (50%) ................................... 6,000,000 C. Participant B (45%) ................................... 5,400,000 ----------- TOTAL ................................................. $12,000,000 </TABLE> 3. The Minimum Collateral Value on the Base Rent Commencement Date was $7,200,000 (reflecting a Collateral Percentage of 60% times Stipulated Loss Value). 4. On the Base Rent Commencement Date, NAI had delivered to Agent Cash Collateral of $7,200,000, equal to the Minimum Collateral Value, as required by Section 5.1 of this Agreement. Allocation of Cash Collateral Required: To avoid a Collateral Imbalance under these assumptions, Agent would be required to allocate the $7,200,000 to the Deposit Takers for BNPLC and the Participants as follows: <TABLE> <S> <C> A BNPLC's Deposit Taker (5% of Minimum Collateral Value) ........... $ 360,000 B Participant A's Deposit Taker (50% of Minimum Collateral Value) .. 3,600,000 C Participant B's Deposit Taker (45% of Minimum Collateral Value) .. 3,240,000 ---------- TOTAL .............................................................. $7,200,000 </TABLE> EXAMPLE NO. 2 <PAGE> 38 Assumptions: Assume the same facts as in Example No. 1, and in addition assume that: 1. Effective as of the first Base Rent Date, NAI increased its Collateral Percentage from 60% to 80%, raising the Minimum Collateral Value to $9,600,000. Because of such increase, NAI also delivered an additional $2,400,000 as Cash Collateral to Agent on the first Base Rent Date, bringing the total of all Cash Collateral delivered by NAI to $9,600,000 as required by Section 5.1 of this Agreement. 2. Also effective as of the first Base Rent Date, a new Participant approved by NAI ("Participant C") became a party to this Agreement and the Participation Agreement, taking a Percentage of 20%. Simultaneously, Participant A and Participant B entered into supplements to the Participation Agreement which reduced their Percentages to 40% and 35%, respectively. Allocation of Cash Collateral Required: To avoid a Collateral Imbalance under these assumptions, Agent would be required to allocate the Cash Collateral as required to leave the Deposit Takers for BNPLC and the Participants with the following amounts: <TABLE> <S> <C> A. BNPLC's Deposit Taker (5% of Minimum Collateral Value) ................ $ 480,000 B. Participant A's Deposit Taker (40% of Minimum Collateral Value) ....... 3,840,000 C. Participant B's Deposit Taker (35% of Minimum Collateral Value) ....... 3,360,000 D. Participant C's Deposit Taker (20% of Minimum Collateral Value) ...... 1,920,000 ---------- TOTAL .............................................................. $9,600,000 </TABLE> Thus, to prevent a Collateral Imbalance, Agent would have to allocate the $2,400,000 of additional Cash Collateral it received on the first Base Rent Date as follows: <TABLE> <S> <C> A. BNPLC's Deposit Taker ($480,000 less $360,000 already on deposit) ................. $ 120,000 B. Participant A's Deposit Taker ($3,840,000 less $3,600,000 already on deposit) ..... 240,000 C. Participant B's Deposit Taker ($3,360,000 less $3,240,000 already on deposit) ..... 120,000 D. Participant C's Deposit Taker ($1,920,000 less $0 already on deposit) ............ 1,920,000 ---------- TOTAL .......................................................................... $2,400,000 </TABLE> EXAMPLE NO. 3 Assumptions: Assume the same facts as in Example No. 2, except that: 1. Instead of increasing its Collateral Percentage from 60% to 80%, NAI increased its Collateral Percentage to 70% on the first Base Rent Date, raising the Minimum Collateral Value to $8,400,000. Because of such increase, NAI delivered an additional $1,200,000 as additional Cash Collateral to Agent on the first Base Rent Date, bringing the total of all Cash Collateral delivered by NAI to $8,400,000 as required by Section 5.1 of this Agreement. Allocation of Cash Collateral Required: To avoid a Collateral Imbalance under these assumptions, Agent would be required to allocate the Cash Collateral as required to leave the Deposit Takers for BNPLC and the Participants with the following amounts: [Phase IV - Improvements] -2- <PAGE> 39 <TABLE> <S> <C> A. BNPLC's Deposit Taker (5% of Minimum Collateral Value) ................ $ 420,000 B. Participant A's Deposit Taker (40% of Minimum Collateral Value) ....... 3,360,000 C. Participant B's Deposit Taker (35% of Minimum Collateral Value) ....... 2,940,000 D. Participant C's Deposit Taker (20% of Minimum Collateral Value) ...... 1,680,000 ---------- TOTAL .............................................................. $8,400,000 </TABLE> Thus, to prevent a Collateral Imbalance, Agent would have to allocate the $1,200,000 of additional Cash Collateral it received on the first Base Rent Date as follows: <TABLE> <S> <C> A. BNPLC's Deposit Taker ($420,000 less $360,000 already on deposit) ................... $ 60,000 B. Participant A's Deposit Taker ($3,360,000 less $3,600,000 already on deposit) ....... (240,000) C. Participant B's Deposit Taker ($2,940,000 less $3,240,000 already on deposit) ....... (300,000) D. Participant C's Deposit Taker ($1,680,000 less $0 already on deposit) .............. 1,680,000 ----------- TOTAL ........................................................................... $ 1,200,000 </TABLE> NOTE: THE NEGATIVE AMOUNTS (IN PARENTHESIS) ABOVE REPRESENT REQUIRED WITHDRAWALS RATHER THAN DEPOSITS. AS EXAMPLE NO. 3 ILLUSTRATES, TO AVOID A COLLATERAL IMBALANCE AGENT MAY FROM TIME TO TIME HAVE TO WITHDRAW CASH COLLATERAL HELD BY THE DEPOSIT TAKER FOR ONE PARTICIPANT AND DEPOSIT IT IN AN ACCOUNT MAINTAINED BY A DEPOSIT TAKER FOR ANOTHER PARTICIPANT. [Phase IV - Improvements] -3- <PAGE> 40 ATTACHMENT 6 TO PLEDGE AGREEMENT NOTICE OF NAI'S REQUIREMENT TO WITHDRAW EXCESS CASH COLLATERAL [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Improvements) dated December __, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Improvements) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 6.1 of the Pledge Agreement, NAI requires you to withdraw from the Accounts and return to NAI the following amount: ____________________________ Dollars ($__________) on the following date: __________, ____ To assure you that NAI has satisfied the conditions to its right to require such withdrawal, and to induce you to comply with this notice, NAI certifies to you that: 1. Your withdrawal and delivery of the amount specified above to NAI will not cause the Value of the remaining Collateral to be less than the Minimum Collateral Value. After giving effect to such withdrawal, the Collateral remaining in the Accounts maintained by the Deposit Takers will be: ____________________________ Dollars ($__________), <PAGE> 41 and the Minimum Collateral Value on the date specified above will equal: ____________________________ Dollars ($__________). Such Minimum Collateral Value equals the Collateral Percentage of: __________ percent (___%), times the Stipulated Loss Value of: ____________________________ Dollars ($__________). 2. NAI is giving this notice to you, BNPLC and the Participants at least ten days prior to the Base Rent Date specified above. 3. No Default or Event of Default has occurred and is continuing as of the date of this notice, and NAI does not anticipate that any Default or Event of Default will have occurred and be continuing on the date upon which the withdrawal is required. 4. NAI agrees that you may determine the Accounts from which to make any withdrawal required by NAI pursuant to this Section as necessary to prevent or mitigate any Collateral Imbalance. NOTE: YOU SHALL BE ENTITLED TO DISREGARD THIS NOTICE IF THE STATEMENTS ABOVE ARE NOT CORRECT OR IF THE DATE FOR WITHDRAWAL SPECIFIED ABOVE IS LESS THAN TEN DAYS AFTER YOUR RECEIPT OF THIS NOTICE. HOWEVER, WE ASK THAT YOU NOTIFY NAI IMMEDIATELY IF FOR ANY REASON YOU BELIEVE THIS NOTICE IS DEFECTIVE. [Phase IV - Improvements] -2- <PAGE> 42 Please remember that the express terms of Certificates of Deposit issued pursuant to the Pledge Agreement require presentment of the Certificates of Deposit seven days before Cash Collateral is to be withdrawn from the Accounts they evidence. Accordingly, you must present Certificates of Deposit to Deposit Takers seven days prior to the withdrawal of Cash Collateral required by this notice. For your convenience, we have attached a letter as Annex 1 to this notice that you might execute and send to Deposit Takers to advise them of your intent to withdraw and of your presentment of Certificates of Deposit as required in connection therewith. The attached letter also sets forth the amounts NAI believes you must withdraw from each Account to avoid a Collateral Imbalance. Network Appliance, Inc. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- [cc BNPLC and all Participants] [Phase IV - Improvements] -3- <PAGE> 43 Annex 1 TO NAI'S NOTICE OF REQUIREMENT TO WITHDRAW CASH EXCESS COLLATERAL [_________, _____] Deposit Takers on the Attached Distribution List Re: Pledge Agreement (Phase IV - Improvements) dated December ____, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Improvements) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice from the undersigned, as Agent under the Pledge Agreement, that pursuant to Section 6.1 of the Pledge Agreement, NAI requires Agent to withdraw from the Accounts and return to NAI the amounts listed below on the following date: __________, ____ Accordingly, on such date, the undersigned intends to withdraw the following amounts from the following Accounts, and with this letter the undersigned is presenting Certificates of Deposit as required in connection with such withdrawal: <TABLE> <CAPTION> Deposit Taker Account No. Amount ------------- ----------- ------ <S> <C> <C> 1. ____________________ ______________________ $_____________ 2. ____________________ ______________________ $_____________ 3. ____________________ ______________________ $_____________ 4. ____________________ ______________________ $_____________ TOTAL WITHDRAWALS: $_____________ </TABLE> BANQUE NATIONALE DE PARIS, AS AGENT Name: ----------------------------------- Title: ---------------------------------- [cc BNPLC and NAI] [Phase IV - Improvements] -4- <PAGE> 44 ATTACHMENT 7 TO PLEDGE AGREEMENT NOTICE OF NAI'S REQUIREMENT OF DIRECT PAYMENTS TO PARTICIPANTS [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Improvements) dated December ____, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Improvements) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 6.2 of the Pledge Agreement, NAI requires you to withdraw from the Accounts and pay directly to the Participants (in proportion to their respective Percentages) the following amount: ____________________________ Dollars ($__________) on the following date (which, NAI acknowledges, must be the Designated Sale Date or a date thereafter prior to an Event of Default): __________, ____ The amount specified above equals the following percentage (equal to the aggregate of all Participant's Percentages): __________ percent (___%), times the total of all Cash Collateral presently pledged under the Pledge Agreement: ____________________________ Dollars ($__________). <PAGE> 45 To assure you that NAI has satisfied the conditions to its right to require such withdrawal, and to induce you to comply with this notice, NAI certifies to you that NAI is giving this notice to you, BNPLC and the Participants at least ten days prior to the date of required withdrawal and payment specified above. Please remember that the express terms of Certificates of Deposit issued pursuant to the Pledge Agreement require presentment of the Certificates of Deposit seven days before Cash Collateral is to be withdrawn from the Accounts they evidence. Accordingly, you must present Certificates of Deposit to Deposit Takers seven days prior to the withdrawal of Cash Collateral required by this notice. For your convenience, we have attached a letter as Annex 1 to this notice that you might execute and send to Deposit Takers to advise them of your intent to withdraw and of your presentment of Certificates of Deposit as required in connection therewith. The attached letter also sets forth the amounts NAI believes you must withdraw from each Account to comply with subsection 6.2.2 of the Pledge Agreement. Network Appliance, Inc. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- [cc BNPLC and all Participants] [Phase IV - Improvements] -2- <PAGE> 46 Annex 1 TO NAI'S NOTICE OF REQUIREMENT TO WITHDRAW CASH COLLATERAL FOR DIRECT PAYMENTS TO PARTICIPANTS [_________, _____] Deposit Takers on the Attached Distribution List Re: Pledge Agreement (Phase IV - Improvements) dated December ____, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Improvements) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice from the undersigned, as Agent under the Pledge Agreement, that pursuant to Section 6.2 of the Pledge Agreement, NAI requires Agent to withdraw from the Accounts and pay to the Participants (in proportion to their respective Percentages) the amounts listed below on the following date: __________, ____ Accordingly, on such date, the undersigned intends to withdraw the following amounts from the following Accounts, and with this letter the undersigned is presenting Certificates of Deposit as required in connection with such withdrawal: <TABLE> <CAPTION> Deposit Taker Account No. Amount ------------- ----------- ------ <S> <C> <C> 1. ____________________ ______________________ $_____________ 2. ____________________ ______________________ $_____________ 3. ____________________ ______________________ $_____________ 4. ____________________ ______________________ $_____________ TOTAL WITHDRAWALS: $_____________ </TABLE> BANQUE NATIONALE DE PARIS, AS AGENT Name: ----------------------------------- Title: ---------------------------------- [cc BNPLC and NAI] [Phase IV - Improvements] -3- <PAGE> 47 ATTACHMENT 8 TO PLEDGE AGREEMENT NOTICE OF NAI'S REQUIREMENT OF DIRECT PAYMENT TO BNPLC [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Improvements) dated December ____, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Improvements) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 6.3 of the Pledge Agreement, NAI requires you to withdraw from the Account maintained by the Deposit Taker for BNPLC and pay directly to BNPLC on behalf of NAI as a payment required by the Purchase Agreement the following amount: ____________________________ Dollars ($__________) on the following date (which, NAI acknowledges, must be the Designated Sale Date or a date thereafter prior to an Event of Default): __________, ____ To assure you that NAI has satisfied the conditions to its right to require such withdrawal, and to induce you to comply with this notice, NAI certifies to you that NAI is giving this notice to you and BNPLC at least ten days prior to the date of required withdrawal and payment specified above. Please remember that the express terms of Certificates of Deposit issued pursuant to the Pledge Agreement require presentment of the Certificates of Deposit seven days before Cash Collateral is to be withdrawn from the Accounts they evidence. Accordingly, you must present Certificates of Deposit to the Deposit Taker for BNPLC seven days prior to the withdrawal of Cash Collateral required by this notice. For your convenience, we have attached a letter as Annex 1 to this notice that you might execute and send to the Deposit Taker for BNPLC to advise it of your intent to withdraw and of your presentment of Certificates of Deposit as required in connection therewith. The attached letter also sets forth the amount NAI believes you must withdraw to comply with Section 6.3 of the Pledge Agreement. Network Appliance, Inc. By: ------------------------- Name: ---------------- Title: --------------- [cc BNPLC] <PAGE> 48 Annex 1 TO NAI'S NOTICE OF REQUIREMENT OF DIRECT PAYMENT TO BNPLC [_________, _____] [Name of the Deposit Taker for BNPLC] [Address of such Deposit Taker] Re: Pledge Agreement (Phase IV - Improvements) dated December ____, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Improvements) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice from the undersigned, as Agent under the Pledge Agreement, that pursuant to Section 6.3 of the Pledge Agreement, NAI requires Agent to withdraw from the Account maintained by you, as Deposit Taker for BNPLC, the sum of: ____________________________ Dollars ($__________) and pay the same to BNPLC as a payment required by the Purchase Agreement on the following date: __________, ____ Accordingly, on such date, the undersigned intends to withdraw such amount from the following Account maintained by you as Deposit Taker for BNPLC, and with this letter the undersigned is presenting Certificate(s) of Deposit as required in connection with such withdrawal. BANQUE NATIONALE DE PARIS, AS AGENT Name: ----------------------------------- Title: ---------------------------------- [cc BNPLC and NAI] [Phase IV - Improvements] -2- <PAGE> 49 ATTACHMENT 9 TO PLEDGE AGREEMENT NOTICE OF NAI'S REQUIREMENT OF A WITHDRAWAL OF CASH COLLATERAL FROM A DISQUALIFIED DEPOSIT TAKER [_________, _____] Banque Nationale de Paris [address of BNP] Re: Pledge Agreement (Phase IV - Improvements) dated December ____, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Improvements) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice to you, as Agent under the Pledge Agreement, that pursuant to Section 6.4 of the Pledge Agreement, NAI requires you to withdraw from the following Account maintained by the following Deposit Taker: Deposit Taker Account No. ------------- ----------- Cash Collateral in the following amount: ____________________________ Dollars ($__________) and to deposit such Cash Collateral with other Deposit Takers who are not Disqualified Deposit Takers no later than ten days after the date upon which you receive this notice. To assure you that NAI has the right to require such withdrawal, and to induce you to comply with this notice, NAI certifies to you that the Deposit Taker specified above has become a Disqualified Deposit Taker because it no longer satisfies the requirements listed in Section 4.1 of the Pledge Agreement. Specifically, such Deposit Taker no longer satisfies the following requirements: [NAI MUST INSERT HERE A DESCRIPTION OF WHICH REQUIREMENTS THE DEPOSIT TAKER NO LONGER SATISFIES AND HOW NAI HAS DETERMINED THAT THE REQUIREMENTS ARE NO LONGER SATISFIED, ALL IN SUFFICIENT DETAIL TO <PAGE> 50 PERMIT THE PARTICIPANT FOR WHOM SUCH DEPOSIT TAKER HAS BEEN MAINTAINING AN ACCOUNT TO RESPOND IF IT BELIEVES THAT NAI IS IN ERROR.] Please remember that the express terms of Certificates of Deposit issued pursuant to the Pledge Agreement require presentment of the Certificates of Deposit seven days before Cash Collateral is to be withdrawn from the Accounts they evidence. Accordingly, you must present Certificates of Deposit to the Deposit Taker specified above seven days prior to the withdrawal of Cash Collateral required by this notice. For your convenience, we have attached a letter as Annex 1 to this notice that you might execute and send to such Deposit Taker to advise it of your intent to withdraw and of your presentment of Certificates of Deposit as required in connection therewith. The attached letter also sets forth the amount NAI believes you must withdraw to comply with Section 6.4 of the Pledge Agreement. Network Appliance, Inc. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- [cc BNPLC] [Phase IV - Improvements] -2- <PAGE> 51 Annex 1 TO NAI'S NOTICE OF REQUIREMENT OF A WITHDRAWAL OF CASH COLLATERAL FROM A DISQUALIFIED DEPOSIT TAKER [_________, _____] [Name of the Deposit Taker for BNPLC] [Address of such Deposit Taker] Re: Pledge Agreement (Phase IV - Improvements) dated December ____, 1999 among Network Appliance, Inc., BNP Leasing Corporation, Banque Nationale de Paris and any other financial institutions which are from time to time Participants under such Pledge Agreement (Phase IV - Improvements) and Banque Nationale de Paris, acting in its capacity as agent for BNPLC and the Participants Gentlemen: Capitalized terms used in this letter are intended to have the meanings assigned to them in the Pledge Agreement (Phase IV - Improvements) referenced above (the "PLEDGE AGREEMENT"). This letter constitutes notice from the undersigned, as Agent under the Pledge Agreement, that pursuant to Section 6.4 of the Pledge Agreement, NAI has advised Agent that you are a Disqualified Deposit Taker, and NAI requires Agent to withdraw from the Account maintained by you, as a Deposit Taker under the Pledge Agreement, the sum of: ____________________________ Dollars ($__________) no later than the following date: __________, ____ Accordingly, on such date, the undersigned intends to withdraw such amount from the Account maintained by you as Deposit Taker (Account No. __________), and with this letter the undersigned is presenting Certificate(s) of Deposit as required in connection with such withdrawal. BANQUE NATIONALE DE PARIS, AS AGENT Name: ----------------------------------- Title: ---------------------------------- [cc BNPLC and NAI] [Phase IV - Improvements] -3- <PAGE> 52 Schedule 1 Financial Covenants and Negative Covenants This Schedule 1 is attached to and made a part of (a) the Lease Agreement (Phase IV - Improvements) (the "IMPROVEMENTS LEASE") dated to be effective as of December ___, 1999 (the "EFFECTIVE DATE"), between BNP Leasing Corporation, a Delaware corporation ("BNPLC") and Network Appliance, Inc., a California corporation ("NAI"), (b) the Lease Agreement (Phase IV - Land) (the "LAND LEASE" and, together with the Improvements Lease, the "LEASES") dated to be effective as of the Effective Date, between BNPLC and NAI, (c) the Pledge Agreement (Phase IV - Improvements) (the "PLEDGE AGREEMENT (IMPROVEMENTS)") dated to be effective as of the Effective Date, among BNPLC, NAI, and Banque Nationale de Paris, as a Participant and as agent for any financial institutions that become Participants thereunder from time to time, and (d) the Pledge Agreement (Phase IV - Land) (collectively with the Pledge Agreement (Improvements), the "PLEDGE AGREEMENTS") dated to be effective as of the Effective Date, among BNPLC, NAI, and Banque Nationale de Paris, as a Participant and as agent for any financial institutions that become Participants thereunder from time to time. PART I - DEFINED TERMS In this Schedule 1, capitalized terms used but not defined herein shall have the meaning assigned to them in the Leases or the Common Definitions and Provisions Agreements referenced in the Leases; and the following capitalized terms shall have the following meanings: "ADJUSTED NET INCOME" means, for any fiscal period of NAI, the aggregate net income earned (or net losses incurred) during such period by NAI and its Subsidiaries (determined on a consolidated basis), plus any Permitted Non-Cash Charges deducted in determining such net income (or net loss). "ADJUSTED EBIT" means, for any accounting period, net income (or net loss) of NAI and its Subsidiaries (determined on a consolidated basis), plus the amounts (if any) which, in the determination of net income (or net loss) for such period, have been deducted for (a) interest expense, (b) income tax expense (c) rent expense under leases of property, and (d) Permitted Non-Cash Charges. "COLLATERAL TEST DATES" mean the Base Rent Commencement Date and the earlier of the following dates after each fiscal quarter of NAI that ends after the Base Rent Commencement Date : (1) the seventh Business Day after the release by NAI of its financial statements for the fiscal quarter; or (2) the first Business Day of the third calendar month following the end of the fiscal quarter. "CONSOLIDATED TANGIBLE NET WORTH" means the excess of (1) the total assets, other than Intangible Assets, of NAI and its Subsidiaries (determined on a consolidated basis) over (2) the total liabilities of NAI and its Subsidiaries (determined on a consolidated basis). "DEBT" as used in this Exhibit shall have the meaning assigned to it in the Common Definitions and Provisions Agreements, where "Debt" of any Person is defined to mean (without duplication of any item): (a) indebtedness of such Person for borrowed money; (b) indebtedness of such Person for the deferred purchase price of property or services (except trade payables and accrued expenses constituting current liabilities in the ordinary course of business); (c) the face amount of any outstanding letters of credit issued for the account of such Person; (d) obligations of such [Phase IV - Improvements] -4- <PAGE> 53 Person arising under acceptance facilities; (e) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to purchase, to provide funds for payment, to provide funds to invest in any Person, or otherwise to assure a creditor against loss; (f) obligations of others secured by any Lien on property of such Person; (g) obligations of such Person as lessee under Capital Leases; and (h) the obligations of such Person, contingent or otherwise, under any lease of property or related documents (including a separate purchase agreement) which provide that such Person or any of its Affiliates must purchase or cause another Person to purchase any interest in the leased property and thereby guarantee a minimum residual value of the leased property to the lessor. For purposes of this definition, the amount of the obligations described in clause (h) of the preceding sentence with respect to any lease classified according to GAAP as an "operating lease," shall equal the sum of (1) the present value of rentals and other minimum lease payments required in connection with such lease [calculated in accordance with SFAS 13 and other GAAP relevant to the determination of the whether such lease must be accounted for as an operating lease or capital lease], plus (2) the fair value of the property covered by the lease; provided, however, that such amount shall not exceed the price, as of the date a determination of Debt is required hereunder, for which the lessee can purchase the leased property pursuant to any valid ongoing purchase option if, upon such a purchase, the lessee shall be excused from paying rentals or other minimum lease payments that would otherwise accrue after the purchase. "FIXED CHARGES" means, for any accounting period, the sum (without duplication of any item) of the following charges or costs incurred or paid by NAI and its Subsidiaries (determined on a consolidated basis): (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, plus (d) taxes payable during such period. "INTANGIBLE ASSETS" means assets of NAI and its Subsidiaries (determined on a consolidated basis) that are properly classified as "INTANGIBLE ASSETS" in accordance with GAAP and, in any event, shall include goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, and deferred charges (other than prepaid insurance, prepaid taxes and current deferred taxes to the extent any such prepaid or deferred items are classified on the balance sheet of NAI and its consolidated Subsidiaries as current assets in accordance with GAAP and with the concurrence of NAI's independent public accountants). "MANDATORY COLLATERAL PERIOD" means any period during which, notwithstanding any contrary designation of a Collateral Percentage by NAI under the Pledge Agreements, the Collateral Percentage for purposes of the Pledge Agreements shall be one hundred percent (100%), determined as set forth in Part III of this Schedule 1. "PERMITTED NON-CASH CHARGES" means the amounts (if any) which, in the determination of net income (or net loss) for any relevant fiscal period, have been deducted by NAI or its Subsidiaries for non-cash charges made to write down goodwill or research and development costs in connection with acquisitions permitted by this Schedule 1. "QUICK RATIO" means the ratio of: (A) the sum (without duplication of any item) of the following assets of NAI and its Subsidiaries (determined on a consolidated basis): Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any); plus [Phase IV - Improvements] -5- <PAGE> 54 unencumbered cash; plus unencumbered short term cash investments; plus other unencumbered marketable securities which are classified as short term investments in accordance with GAAP; plus unencumbered accounts receivable, computed net of reserves for uncollectible amounts as determined in accordance with GAAP, to (B) the sum (without duplication of any item) of (1) all liabilities of NAI and its Subsidiaries (determined on a consolidated basis) treated as current liabilities in accordance with GAAP, plus (2) other obligations included in total Debt of NAI and its Subsidiaries (determined on a consolidated basis), the payment of which is due on demand or will become due within one year after the date on which the applicable determination of Quick Ratio is required hereunder. "ROLLING FOUR QUARTER PERIOD" means a period of four consecutive fiscal quarters of NAI, the last of which quarters ends after December 31, 1999. PART II - FINANCIAL COVENANTS NAI covenants that it shall not at any time suffer or permit: 1. Minimum Unencumbered Cash and Cash Equivalents. The sum (without duplication of any item) of the unrestricted cash, Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any), unencumbered short term cash investments and unencumbered marketable securities classified as short term investments according to GAAP of NAI and its Subsidiaries (determined on a consolidated basis) to be less than total Debt of NAI and its Subsidiaries (determined on a consolidated basis). 2. Minimum Tangible Net Worth. Consolidated Tangible Net Worth to be less than the sum of: (a) ninety percent of the Consolidated Tangible Net Worth as of October 30, 1998; plus (b) seventy-five percent of NAI's net income (computed without deduction for net losses in any fiscal quarter) earned in each fiscal quarter since October 30, 1998; plus (c) one-hundred percent of the net proceeds of sales of stock in NAI or its Subsidiaries (other than sales to NAI or its Subsidiaries) after October 30, 1998; less (d) Permitted Non-Cash Charges for any period after October 30, 1998. 3. Minimum Quick Ratio. The Quick Ratio to be less than 1.50 to 1.00. 4. Minimum Fixed Charge Coverage. The ratio of (a) Adjusted EBIT for any Rolling Four Quarter Period to (b) Fixed Charges for the same Rolling Four Quarter Period, to be less than 1.50 to 1.00. 5. Minimum Profitability. Adjusted Net Income to be less than $1.00 in more than one fiscal quarter of any Rolling Four Quarter Period. 6. Maximum Leverage Ratio. the ratio of (a) total Debt of NAI and its Subsidiaries (determined on a consolidated basis) at the end of any Rolling Four Quarter Period to (b) the Adjusted EBIT for the same Four Quarter Rolling Period, to exceed 3.00 to 1.00. [Phase IV - Improvements] -6- <PAGE> 55 PART III - TESTS FOR MANDATORY COLLATERAL PERIODS If, as of the end of the latest fiscal quarter of NAI ending before any Collateral Test Date, NAI shall have both: (A) failed to maintain a ratio of (1) the sum (without duplication of any item) of Collateral delivered and pledged under the Pledge Agreements in accordance with the requirements thereof (if any), unencumbered cash, unencumbered short term cash investments and unencumbered marketable securities classified as short term investments according to GAAP of NAI and its Subsidiaries (determined on a consolidated basis) to (2) all Debt of NAI and its Subsidiaries (determined on a consolidated basis), of at least 1.5 to 1.00; and (B) failed to maintain a ratio of (i) all Debt of NAI and its Subsidiaries (determined on a consolidated basis) to (ii) Consolidated Tangible Net Worth of NAI, of no more than 0.45 to 1.00; such Collateral Test Date shall constitute a "FAILED COLLATERAL TEST DATE" for purposes of the determination of Mandatory Collateral Periods. A Mandatory Collateral Period shall commence on each Failed Collateral Test, and such Mandatory Collateral Period shall continue until the second of any two subsequent CONSECUTIVE Collateral Test Dates, neither of which constitutes a Failed Collateral Test Date. For purposes of illustration only, assume that the following dates are consecutive Collateral Test Dates, some of which are Failed Collateral Test Dates and some of which are not, as indicated opposite each date: <TABLE> <CAPTION> Date Failed Collateral Test Date? ---- ---------------------------- <S> <C> February 15, 2001 Yes May 12, 2001 No August 16, 2001 Yes November 11, 2001 No February 18, 2002 No May 14, 2002 Yes August 18, 2002 Yes November 18, 2002 No February 15, 2003 No </TABLE> Under these assumptions, the entire period from February 15, 2001 to February 18, 2002 falls within one or more Mandatory Collateral Periods. Also, the entire period commencing May 14, 2002 and ending February 15, 2003 falls within one or more Mandatory Collateral Periods. The period from February 18, 2002 to May 14, 2002 does not constitute Mandatory Collateral Period. PART IV - OTHER COVENANTS Without limiting NAI's obligations under the other provisions of the Operative Documents, during the Term, NAI shall not, without the prior written consent of BNPLC in each case: A. Liens. Create, incur, assume or suffer to exist, or permit any of its Consolidated Subsidiaries to create, incur, assume or suffer to exist, any Lien, upon or with respect to any of its properties, now owned or hereafter acquired, provided that the following shall be permitted except to the extent that they would encumber any interest in the Property in violation of other provisions of the [Phase IV - Improvements] -7- <PAGE> 56 Operative Documents: 1. 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; 2. Liens imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than thirty (30) days, or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; 3. Liens under workmen's compensation, unemployment insurance, social security or similar laws (other than ERISA); 4. 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; 5. judgment and other similar Liens against assets other than the Property or any part thereof in an aggregate amount not in excess of $3,000,000 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 by appropriate proceedings; 6. easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by NAI or any such Consolidated 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; 7. Liens securing obligations of such a Consolidated Subsidiary to NAI or to another such Consolidated Subsidiary; 8. Liens not otherwise permitted by this subparagraph A (and not encumbering the Property or any Collateral) incurred in connection with the incurrence of additional Debt or asserted to secure Unfunded Benefit Liabilities, provided that (a) the sum of the aggregate principal amount of all outstanding obligations secured by Liens incurred pursuant to this clause shall not at any time exceed five percent (5%) of Consolidated Tangible Net Worth at such time; and (b) such Liens do not constitute Liens against NAI's interest in any material Subsidiary or blanket Liens against all or substantially all of the inventory, receivables, general intangibles or equipment of NAI or of any material Subsidiary of NAI (for purposes of this clause, a "material Subsidiary" means any subsidiary whose assets represent a substantial part of the total assets of NAI and its Subsidiaries, determined on a consolidated basis in accordance with GAAP); and 9. Liens incurred in connection with any renewals, extensions or refundings of any Debt secured by Liens described in the preceding clauses of this subparagraph A, 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. [Phase IV - Improvements] -8- <PAGE> 57 B. Transactions with Affiliates. Enter into or permit any Subsidiary of NAI to enter into any material transactions (including, without limitation, the purchase, sale or exchange of property or the rendering of any service) with any Affiliates of NAI except on terms (1) that would not cause or result in a Default by NAI under the financial covenants set forth in Part II of this Schedule, and (2) that are no less favorable to NAI or the relevant Subsidiary than those that would have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. C. Compliance. Fail to preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; or fail to comply with the provisions of all documents pursuant to which NAI is organized and/or which govern NAI's continued existence and with the requirements of all laws, rules, regulations and orders of a governmental agency applicable to NAI and/or its business. D. Insurance. Fail to maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of NAI, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to BNPLC, or fail to deliver to BNPLC from time to time at BNPLC's request schedules setting forth all insurance then in effect. E. Facilities. fail to keep all properties useful or necessary to NAI's business in good repair and condition, or to from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. F. Taxes and Other Liabilities. Fail to pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as NAI may in good faith contest or as to which a bona fide dispute may arise, and (b) for which NAI has made provisions, to BNPLC's satisfaction, for eventual payment thereof in the event that NAI is obligated to make such payment. G. Capital Expenditures. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of twenty percent (20%) of NAI's total assets as of the end of the prior fiscal year. H. Merger, Consolidation, Transfer of Assets. Merge into or consolidate with any other entity (unless NAI is the surviving entity and remains in compliance of all provisions of the Operative Documents); or make any substantial change in the nature of NAI's business as conducted as of the date hereof; or sell, lease, transfer or otherwise dispose of all or a substantial or material portion of NAI's assets except in the ordinary course of its business. I. Loans, Advances, Investments. Make any loans or advances to or investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to BNPLC prior to, the date hereof, (b) loans to employees for travel advances, relocation loans and other loans in the ordinary course of business, (c) investments in accordance with NAI's investment policy, as in effect from time to time, (d) existing investments in subsidiaries and joint ventures which have been disclosed to BNPLC in writing prior to the date hereof, and new investments in subsidiaries and joint ventures in amounts up to an aggregated of $10,000,000.00, (e) loans to employees, officers, directors to finance or refinance the purchase of equity securities of NAI. J. Dividends, Distributions. Declare or pay any dividend or distribution either in cash, stock [Phase IV - Improvements] -9- <PAGE> 58 or any other property on NAI's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of NAI's stock now or hereafter outstanding. [Phase IV - Improvements] -10- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.56 <SEQUENCE>15 <DESCRIPTION>EXHIBIT 10.56 <TEXT> <PAGE> 1 EXHIBIT 10.56 ================================================================================ $62,000,000 PARTICIPATION AGREEMENT PHASE IV BETWEEN BNP LEASING CORPORATION ("BNPLC") AND BANQUE NATIONALE DE PARIS, (A "PARTICIPANT") EFFECTIVE AS OF DECEMBER ___, 1999 (NETWORK APPLIANCE, INC. - PHASE IV) (SUNNYVALE, SANTA CLARA COUNTY, CALIFORNIA PROPERTY) ================================================================================ <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> RECITALS.....................................................................................1 AGREEMENTS...................................................................................1 1.0 DEFINITIONS..........................................................................1 1.1. Bank Specific Charges.........................................................1 1.2. Common Definitions and Provisions Agreements..................................2 1.3. Critical Event................................................................2 1.4. Deposit Taker.................................................................2 1.5. Deposit Taker Losses..........................................................2 1.6. Direct Payments...............................................................2 1.7. Distributable Payment.........................................................2 1.8. Late Payment Rate.............................................................2 1.9. Leases........................................................................2 1.10. Majority......................................................................2 1.11. Net Cash Flow.................................................................2 1.12. Net Sales Proceeds............................................................2 1.13. Operative Documents...........................................................3 1.14. Participants..................................................................3 1.15. Participation Agreement Supplement............................................3 1.16. Participation Amount..........................................................3 1.17. Percentage....................................................................4 1.18. Pledge Agreements.............................................................4 1.19. Property......................................................................4 1.20. Protective Advances...........................................................4 1.21. Purchase Agreements...........................................................4 2.0 PAYMENTS FROM BNPLC TO EACH PARTICIPANT..............................................4 2.1. Payments Computed by Reference to Net Cash Flow and Net Sales Proceeds.......4 2.2. Payments Computed by Reference to Bank Specific Charges.......................4 2.3. [Intentionally deleted].......................................................4 2.4. [Intentionally deleted].......................................................4 2.5. Timing; Manner of Payment.....................................................4 2.6. Meaning of Actually Received..................................................5 3.0 PAYMENTS FROM THE PARTICIPANTS TO BNPLC..............................................5 3.1. Initial Funding Advance.......................................................5 3.2. [Intentionally deleted].......................................................5 3.3. Protective Advances...........................................................5 3.3.1. General................................................................5 3.3.2. Exceptions.............................................................6 3.4. Method of Payment.............................................................6 4.0 OTHER ADJUSTMENTS, DEDUCTIONS AND INVESTMENTS........................................6 4.1. [Intentionally deleted].......................................................6 4.2. Setoff........................................................................6 4.3. [Intentionally deleted].......................................................6 4.4. Sharing of Payments...........................................................6 </TABLE> i <PAGE> 3 <TABLE> <S> <C> 4.5. Withholding Taxes.............................................................7 4.6. Order of Application..........................................................7 4.7. Investments Pending Dispute Resolution; Overnight Investments.................7 5.0 NATURE OF THIS AGREEMENT.............................................................8 5.1. No Conveyance.................................................................8 5.2. Not a Partnership, Etc........................................................8 6.0 AMENDMENTS; WAIVERS; EXERCISE OF RIGHTS AND REMEDIES AGAINST NAI.....................9 6.1. Limitations...................................................................9 6.2. General......................................................................11 6.3. Conflicts and Purchase Agreements Defaults...................................11 6.4. Refusal to Give Consents; Failure to Fund; Failure of a Deposit Taker to Satisfy Minimum Ratings......................................................11 7.0 REQUIRED REPAYMENTS.................................................................12 8.0 NAI INFORMATION; INDEPENDENT ANALYSIS...............................................12 9.0 PERFORMANCE THROUGH REPRESENTATIVES.................................................12 10.0 DUTY OF CARE........................................................................12 11.0 REPRESENTATIONS BY EACH PARTICIPANT.................................................13 11.1. Nature of this Agreement.....................................................13 11.2. No Default or Violation......................................................13 11.3. No Suits.....................................................................13 11.4. Organization.................................................................13 11.5. Enforceability...............................................................13 11.6. No Funding With Plan Assets..................................................13 12.0 REPRESENTATIONS BY BNPLC............................................................14 12.1. No Default or Violation......................................................14 12.2. No Suits.....................................................................14 12.3. Organization.................................................................14 12.4. Enforceability...............................................................14 12.5. Liens Removable by BNPLC.....................................................14 12.6. BNPLC's Status as a Subsidiary of a Bank Holding Company.....................14 13.0 ASSIGNMENTS.........................................................................14 13.1. By the Participants Generally................................................14 13.2. By BNPLC.....................................................................15 13.3. Execution of Participation Agreement Supplements.............................15 13.4. Regulation A.................................................................15 13.5. Costs........................................................................15 14.0 GOVERNING LAW; SUBMISSION TO PROCESS; WAIVER OF JURY TRIAL..........................15 15.0 TERMINATION.........................................................................16 16.0 MISCELLANEOUS.......................................................................16 16.1. Reliance by Others...........................................................16 16.2. Waivers, Etc.................................................................16 16.3. Severability.................................................................16 16.4. Notices......................................................................16 16.5. Construction.................................................................17 16.6. Headings.....................................................................17 16.7. Entire Agreement.............................................................17 16.8. Further Assurances...........................................................17 16.9. Impairment of Operative Documents............................................17 16.10. Books and Records............................................................18 16.11. Definition of Knowledge......................................................18 </TABLE> ii <PAGE> 4 <TABLE> <S> <C> 16.12. Attorneys' Fees..............................................................18 </TABLE> iii <PAGE> 5 Exhibits and Schedules <TABLE> <S> <C> Schedule 1.................................................Names and Addresses of Participants Exhibit A..............................................Participation Agreement Supplement Form </TABLE> iv <PAGE> 6 PARTICIPATION AGREEMENT This Agreement (this "AGREEMENT") is made as of December ___, 1999, by and between BNP LEASING CORPORATION ("BNPLC"), a Delaware corporation, and the Participants (as defined below). RECITALS: A. BNPLC and Network Appliance, Inc. ("NAI") have entered into the following agreements, each dated as of December ___, 1999, relating to the Improvements: a Lease Agreement (Phase IV - Improvements) (the "PHASE IV IMPROVEMENTS LEASE"); a Purchase Agreement (Phase IV - Improvements) (the "PHASE IV IMPROVEMENTS PURCHASE AGREEMENT"); a Common Definitions and Provisions Agreement (Phase IV - Improvements) (the "PHASE IV IMPROVEMENTS CDPA"); and a Closing Certificate and Agreement (the "CLOSING CERTIFICATE"). Also, BNPLC, NAI, the Participants and Banque Nationale de Paris, in its capacity as agent for BNPLC and the Participants (in such capacity, "AGENT") have entered into a Pledge Agreement (Phase IV - Improvements) dated as of December ___, 1999 (the "PHASE IV IMPROVEMENTS PLEDGE AGREEMENT"). B. BNPLC and NAI have also entered into the following agreements, each dated as of December ___, 1999, relating to the Land: a Lease Agreement (Phase IV - Land) (the "PHASE IV LAND LEASE"); a Purchase Agreement (Phase IV - Land) (the "PHASE IV LAND PURCHASE Agreement"); a Common Definitions and Provisions Agreement (Phase IV - Land) (the "PHASE IV LAND CDPA"); and the Closing Certificate. Also, BNPLC, NAI, the Participants and Agent have entered into a Pledge Agreement (Phase IV - Land) dated as of December ___, 1999 (the "PHASE IV LAND PLEDGE AGREEMENT"). C. By this Agreement, the parties desire to evidence the Participants' agreement to participate with BNPLC in certain of the risks and rewards to BNPLC of the aforementioned agreements, which participation is to be accomplished through the exchange of promises to make payments computed by reference to the sums paid or received by BNPLC from time to time with respect to the aforementioned agreements, all as more particularly provided below. AGREEMENTS NOW, THEREFORE, BNPLC and the Participants hereby agree as follows: 1.0 DEFINITIONS. As used herein, capitalized terms defined above shall have the meanings assigned to them above; capitalized terms that are defined in one, but not both, of the Phase IV Improvements CDPA and the Phase IV Land CDPA and that are used but not defined herein shall have the respective meanings assigned to them in the Phase IV Improvements CDPA or Phase IV Land CDPA, as applicable; capitalized terms that are defined in both of the Phase IV Improvements CDPA and the Phase IV Land CDPA and that are and used but not defined herein shall have the respective meanings assigned to them in the Phase IV Improvements CDPA and the Phase IV Land CDPA (provided, if the meaning assigned to any such capitalized term in the Phase IV Improvements CDPA is different than the meaning assigned to it in the Phase IV Land CDPA, the term will be construed broadly for purposes of this Agreement to include anything that would fall within one or both of the definitions of the term in the Phase IV Improvements CDPA and the Phase IV Land CDPA); and, the following capitalized terms shall have the following meanings: 1.1. "BANK SPECIFIC CHARGES" means payments made to BNPLC by or on behalf of NAI for the account of a Participant or any other Interested Party under subparagraph 5(c)(i) or 5(c)(ii) of the Leases or -i- <PAGE> 7 as Upfront Syndication Fees. Bank Specific Charges include, for example, payments made to compensate a Participant for an increase in costs related to advances made by the Participant hereunder and attributable to a Banking Rules Change after the Effective Date. 1.2. "COMMON DEFINITIONS AND PROVISIONS AGREEMENTS" means the Phase IV Improvements CDPA and the Phase IV Land CDPA. 1.3. "CRITICAL EVENT" means any of the following: 1.3.1. any failure by NAI to purchase BNPLC's interest in the Property or to cause an Applicable Purchaser to purchase BNPLC's interest in the Property when required under the Purchase Agreements; or 1.3.2. any failure by NAI to pay Base Rent which continues for 10 days. 1.4. "DEPOSIT TAKER" shall have the meaning assigned to it in the Pledge Agreements. 1.5. "DEPOSIT TAKER LOSSES" shall have the meaning assigned to it in the Pledge Agreements. 1.6. "DIRECT PAYMENTS", like the phrase "Direct Payments to Participants" under the Purchase Agreements, 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 Agreements at the direction of and for NAI by Agent from all or any part of the Collateral described therein. 1.7. "DISTRIBUTABLE PAYMENT" means any payment ACTUALLY RECEIVED by BNPLC under the Leases or other Operative Documents as (or in satisfaction of NAI's obligations for) any of the following or interest on past due amounts thereof: Base Rent; Qualified Prepayments; Bank Specific Charges; a Supplemental Payment; or Net Sales Proceeds. 1.8. "LATE PAYMENT RATE" means (a) for each day (other than as set forth in clause (b) of this sentence) the Fed Funds Rate or (b) for the purpose of computing interest on past due payments for each day following the fifth day after such payments first became due, a rate of two percent (2%) per annum in excess of the Prime Rate then in effect; provided, the Late Payment Rate shall not, notwithstanding anything to the contrary herein contained, exceed the maximum rate of interest permitted by applicable law. 1.9. "LEASES" means the Phase IV Improvements Lease and the Phase IV Land Lease. 1.10. "MAJORITY" means, at the time any determination thereof is required, any of the Participants and BNPLC, the aggregate Percentages of which equal or exceed sixty-seven percent (67%) of the Percentages of BNPLC and of all the Participants then entitled to vote under Section 6.1. 1.11. "NET CASH FLOW" means payments made to BNPLC under the Leases or other Operative Documents as (or in satisfaction of NAI's obligations for) Base Rent, Qualified Prepayments, any Supplemental Payment or any interest on past due Base Rent, Qualified Prepayments or a Supplemental Payment. 1.12. "NET SALES PROCEEDS" means payments made to BNPLC under the Purchase Agreements as (or in satisfaction of NAI's or an Applicable Purchaser's obligations for) the purchase price for BNPLC's interest in Property or in Escrowed Proceeds; but less and excluding (x) any such payments applied by -2- <PAGE> 8 BNPLC to pay, or received by BNPLC as reimbursement for, bona fide costs of a sale under the Purchase Agreements, and (y) any excess sales proceeds received from an Applicable Purchaser that BNPLC is required by Paragraph 1(A)(2)(b) or 2(D) of the Purchase Agreements to pay over to NAI. Further, if BNPLC does not sell the Property to NAI or an Applicable Purchaser pursuant to the Purchase Agreements, then "NET SALES PROCEEDS" shall also include the excess, if any, of: 1.12.1. all rents and sales, condemnation and insurance proceeds ACTUALLY RECEIVED by BNPLC (other than sales proceeds paid or to be paid by BNPLC to NAI pursuant to Paragraph 2(D) of the Purchase Agreements) from any sale or lease after the Designated Sale Date of any interest in, or because of any subsequent taking or damage to, the Property; over 1.12.2. the sum of (i) all costs of collecting the rents and proceeds described in the preceding clause 1.12.1, plus (ii) all ad valorem taxes, insurance premiums and other Losses of every kind suffered or incurred by BNPLC with respect to the ownership, operation or maintenance of the Property. However, for purposes of computing any excess described in the preceding sentence, costs described in clause 1.12.2 shall not include BNPLC's general overhead costs or any Protective Advances for which the Participants have already paid BNPLC their respective Percentages thereof as required by Section 3.3. 1.13. "OPERATIVE DOCUMENTS" means all of Operative Documents under and as defined in the Phase IV Improvements CDPA and Operative Documents under and as defined in the Phase IV Land CDPA. The term Operative Documents includes the Phase IV Improvements Lease, the Phase IV Improvements Purchase Agreement, the Phase IV Improvements Pledge Agreement, the Phase IV Improvements CDPA, the Closing Certificate, the Phase IV Land Lease, the Phase IV Land Purchase Agreement, the Phase IV Land Pledge Agreement, and the Phase IV Land CDPA. 1.14. "PARTICIPANTS" means Banque Nationale de Paris and any other financial institutions which may hereafter become parties to (i) this Agreement (by joining with BNPLC in completing and executing a Participation Agreement Supplement) and (ii) the Pledge Agreements, in each case pursuant to a Permitted Transfer. 1.15. "PARTICIPATION AGREEMENT SUPPLEMENT" means a Participation Agreement Supplement in substantially the form attached hereto as Exhibit A, completed and executed by BNPLC and a Participant, adding the Participant as a party to this Agreement, changing a Participant's Percentage or removing a Participant as a party to this Agreement. 1.16. "PARTICIPATION AMOUNT" of BNPLC or any Participant means the outstanding balance from time to time of the total investment made by BNPLC under the Operative Documents or by the applicable Participant hereunder. The Participation Amount of BNPLC and each Participant will be comparable to its share of the outstanding principal balance that would be due from NAI from time to time if BNPLC had made a loan (and the Participants had participated in the loan) to NAI for NAI's acquisition of the Land and the Improvements as provided in the Operative Documents, instead of BNPLC's having acquired the Property itself and having leased the same to NAI as provided in the Operative Documents. Absent a failure by any Participant to make a payment required by Section 3.2 or some other unexpected contingency, it is expected that (a) the Participation Amounts of BNPLC and the Participants will always be in proportion to their respective Percentages set forth in SCHEDULE 1, and (b) the total Participation Amounts of BNPLC and all Participants during the Term of the Leases shall equal the Stipulated Loss Value computed from time to time under the Leases. -3- <PAGE> 9 1.17. "PERCENTAGE" of each Participant means, subject to change as provided in Section 4.1 and to change by a Participation Agreement Supplement, the percentage designated as the Participant's "Percentage" in SCHEDULE 1. "PERCENTAGE" of BNPLC means a percentage that, at the time a determination of such Percentage is required hereunder, is equal to 100% less the sum of the Percentages of all the Participants. 1.18. "PLEDGE AGREEMENTS" means the Phase IV Improvements Pledge Agreement and the Phase IV Land Pledge Agreement. 1.19. "PROPERTY" means all real and personal property covered from time to time by the Phase IV Improvements Lease and the Phase IV Land Lease. 1.20. "PROTECTIVE ADVANCES" shall mean any payments (including payments to attorneys, accountants, experts and other advisors) made by or on behalf of BNPLC at any time or from time to time because of, arising out of or related to, in whole or in part: (1) the Property or the protection, preservation, operation or ownership thereof; (2) any of the Operative Documents or the transactions contemplated therein; or (3) BNPLC's status as a party to any of the Operative Documents or anything done by BNPLC to enforce the obligations of NAI under the Operative Documents (whether done upon BNPLC's own initiative or upon the direction of the Majority). Protective Advances will include any and all payments made by or on behalf of BNPLC for which NAI is obligated to indemnify or reimburse BNPLC by Paragraph 5(c) of the Leases. 1.21. "PURCHASE AGREEMENTS" means the Phase IV Improvements Purchase Agreement and, from and the Phase IV Land Purchase Agreement. 2.0 PAYMENTS FROM BNPLC TO EACH PARTICIPANT. 2.1. Payments Computed by Reference to Net Cash Flow and Net Sales Proceeds. Upon the ACTUAL RECEIPT of any Net Cash Flow, Net Sales Proceeds or interest thereon, BNPLC will pay each Participant an amount equal to such Participant's Percentage times such Net Cash Flow, Net Sales Proceeds or interest, as the case may be. 2.2. Payments Computed by Reference to Bank Specific Charges. If BNPLC ACTUALLY RECEIVES any Bank Specific Charges (or interest thereon) for the account of a particular Participant, then BNPLC promises to promptly make a payment to such Participant equal to such Bank Specific Charges (or interest thereon). If requested by any Participant, BNPLC shall make a demand upon NAI for payment of any Bank Specific Charges due for the account of such Participant. 2.3. [Intentionally deleted] 2.4. [Intentionally deleted] 2.5. Timing; Manner of Payment. Each payment required of BNPLC by this Article 2 shall be made prior to 12:00 noon, San Francisco time, on the same day that BNPLC actually receives the corresponding Distributable Payment (in good funds), if BNPLC's receipt of the corresponding Distributable Payment occurs prior to 12:00 noon, San Francisco time; if, however, BNPLC's receipt of the Distributable Payment (in good funds) occurs on any day after 12:00 noon, San Francisco time, the payments required from BNPLC to the Participants shall not be due until 12:00 noon, San Francisco time, on the next Business Day. All payments from BNPLC to the Participants shall be by transfer of federal funds pursuant to the wiring instructions set forth in SCHEDULE 1. Each payment owing to a Participant by BNPLC shall bear interest from the date it is due until it is paid by BNPLC at the Late Payment Rate -4- <PAGE> 10 calculated on the basis of a 360-day year. Any payment by BNPLC to a Participant after the time of day specified herein for such payment shall be deemed not paid until the next following Business Day for purposes of this Agreement. 2.6. Meaning of Actually Received. As used herein with respect to payments, "actually received" and words of like effect shall include not only payments made directly from NAI or any Applicable Purchaser, but also amounts paid by others on NAI's behalf, amounts realized by way of setoff, amounts realized upon the disposition of collateral under the Pledge Agreement and any other documents that may be given from time to time to secure NAI's obligations under Leases or Purchase Agreements (net of the costs of disposition and further net of any amounts that must be returned to NAI or any third party having an interest in such collateral), and the fair market value of any property or services accepted in lieu of a cash payment (though it is understood that nothing herein contained shall require BNPLC to accept property or services in lieu of a cash payment required by the Operative Documents and that BNPLC will not agree to accept property or services in lieu of any cash Distributable Payment without the Participants' prior written consent). Such phrase shall not, however, include amounts received by BNPLC from any of the Participants or from any affiliate of BNPLC unless the context otherwise indicates. In the event of any reduction in Net Sales Proceeds "actually received" by BNPLC (as described in the preceding sentences) because of a reduction in the Break Even Price attributable to any Direct Payments or Deposit Taker Losses, BNPLC will be deemed for purposes of this Agreement to have received additional Net Sales Proceeds from NAI equal to such reduction. In such event, however, BNPLC will be entitled to a credit against the payments that would otherwise be required to any Participant hereunder equal to the aggregate amount, if any, of (1) Direct Payments which are ACTUALLY RECEIVED by such Participant, and (2) Deposit Taker Losses with respect to any Deposit Taker for such Participant. 3.0 PAYMENTS FROM THE PARTICIPANTS TO BNPLC. 3.1. Initial Funding Advance. Each of the original Participants joining in the execution of this Agreement promises to pay to BNPLC an initial payment as set forth below such Participant's name on SCHEDULE 1, equal to the Participant's Percentage times the sum of the Initial Funding Advances under and as defined in the Leases. BNPLC shall have no obligation hereunder to any of the original Participants that fails to pay such initial payment. Such initial payment shall be due no later than 12:00 noon, San Francisco time, on the date hereof. 3.2. [Intentionally deleted]. 3.3. Protective Advances. 3.3.1. General. If NAI fails to pay or reimburse any Protective Advance to BNPLC within ten days after BNPLC makes a demand or request therefor, BNPLC may notify the Participants of such failure. Promptly after receipt of any such notice, each Participant shall pay to BNPLC an amount equal to such Participant's Percentage times the Protective Advance described in the notice, EVEN IF THE PROTECTIVE ADVANCE WOULD NOT HAVE BEEN PAID BUT FOR ANY ACTUAL OR ALLEGED NEGLIGENCE OF BNPLC OR ITS AFFILIATES OR REPRESENTATIVES AND EVEN IF THE PROTECTIVE ADVANCE WOULD NOT HAVE BEEN PAID BUT FOR ANY ENVIRONMENTAL LOSSES OR OTHER MATTERS OR CIRCUMSTANCES FOR WHICH BNPLC MAY BE STRICTLY LIABLE. After any Participant has paid its respective Percentage times the Protective Advance to BNPLC, BNPLC shall be obligated to pay to such Participant an amount equal to its Adjusted Percentage (as defined below) times any subsequent Excess Reimbursement (as defined below) or interest thereon ACTUALLY RECEIVED by BNPLC from NAI for the Protective Advance. As used in this Agreement the "ADJUSTED -5- <PAGE> 11 PERCENTAGE" of any Participant shall equal (i) such Participant's Percentage, divided by (ii) the sum of BNPLC's Percentage and the Percentages of all Participants who have paid BNPLC their respective shares of the Protective Advance at issue. As used in this Agreement, the term "EXCESS REIMBURSEMENT" shall mean, for the Protective Advance at issue, amounts reimbursed or paid by NAI to or on behalf of BNPLC on account of such Protective Advance in excess of (i) such Protective Advance, times (ii) the Percentages of any Participants that have not paid BNPLC their respective Percentages of such Protective Advance. 3.3.2. Exceptions. Notwithstanding the foregoing, no Participant shall be required to make any payment pursuant to this Section 3.3 related to a Protective Advance that (1) consists of a payment of Excluded Taxes, or (2) is paid only because of a transfer or assignment by BNPLC of its right to receive Distributable Payments or its rights and interests in and to the Property, the Operative Documents or this Agreement to BNPLC's Affiliates. Further, nothing in this Section 3.3 shall be construed to require a payment by a Participant for that portion or percentage, if any, of a Protective Advance required only because of (and attributed by any applicable principles of comparative fault to): (a) conduct of BNPLC or a Representative of BNPLC that has been determined to constitute gross negligence or wilful misconduct in or as a necessary element of a final judgment rendered against BNPLC or such Representative by a court with jurisdiction to make such determination; (b) any representation made by BNPLC in the Operative Documents that is false in any material respect and that BNPLC knew was false at the time of BNPLC's execution of the Operative Documents; or (c) Liens Removable by BNPLC. As used in this Agreement, "gross negligence" of BNPLC shall not include 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 Property or as a party to the Operative Documents. 3.4. Method of Payment. All payments made by the Participants to BNPLC shall be made by transfer of federal funds to BNPLC pursuant to the wiring instructions for BNPLC set forth on SCHEDULE 1. Each payment owing to BNPLC by any Participant shall be payable to BNPLC on the date specified herein or, if not specified, on demand and shall bear interest from the date due until the date paid by the Participant at the Late Payment Rate calculated on the basis of a 360-day year. Any payment by a Participant to BNPLC after the time of day specified herein for such payment shall be deemed not paid until the next following Business Day for purposes of this Agreement. 4.0 OTHER ADJUSTMENTS, DEDUCTIONS AND INVESTMENTS. 4.1. [Intentionally deleted] 4.2. Setoff. In the event that one party to this Agreement has failed to pay to a second party hereto any amount when due hereunder, the second party may deduct such amount and interest thereon at the Late Payment Rate from any payments due from it under this Agreement to the first party. Without limitation, BNPLC may setoff amounts owed to it by any Defaulting Participant against any termination fee payable to such Defaulting Participant pursuant to Section 6.4 below if BNPLC shall elect to reduce such Defaulting Participant's Percentage to zero as provided in Section 6.4. 4.3. [Intentionally deleted] 4.4. Sharing of Payments. Each Participant agrees that if for any reason it shall obtain a payment made by or for NAI that reduces any Distributable Payment, and if such payment will cause such Participant to receive more than it would have received had such payment been made instead to BNPLC and generated the payments by BNPLC contemplated in this Agreement, then (1) such Participant shall promptly purchase interests in the rights of other parties to this Agreement as necessary to cause BNPLC -6- <PAGE> 12 and all Participants to share payments as they otherwise would have done under this Agreement, and (2) such other adjustments shall be made from time to time as shall be equitable to ensure that BNPLC and all Participants share all payments of (or that operate to reduce) Distributable Payments as they otherwise would have done under this Agreement. If, however, the payment received by the purchasing Participant or any part thereof is later recovered from the purchasing Participant, the purchase provided for in this Section shall be rescinded, and the price paid by the purchasing Participant to other parties shall be repaid by them to the purchasing Participant to the extent of such recovery. Also, if the purchasing Participant is required by court order to pay interest on the payment so recovered, then amounts repaid to the purchasing Participant by the other parties will be repaid with interest, computed in the same manner as the interest required by the court order. Nothing in this Section shall in any way affect the right of BNPLC or any Participant to obtain payment (whether by exercise of rights of banker's lien, set-off or counterclaim or otherwise) of indebtedness or obligations other than those established by this Agreement or any of the Operative Documents. 4.5. Withholding Taxes. BNPLC may deduct any United States withholding tax required on payments to a Participant hereunder from such payments, and the Participant shall reimburse BNPLC for any such taxes BNPLC is required to pay and that BNPLC has not deducted. If BNPLC is uncertain whether United States withholding tax is required, BNPLC may, after notice to the applicable Participant, deduct the withholding tax except during any period when BNPLC is excused from such withholding because of the Participant's delivery to BNPLC of (i) a statement in duplicate conforming to the requirements of United States Treasury Regulation Section 1.1441-5(b) or (ii) two duly completed copies of Internal Revenue Service Form W-8BEN or any successor form thereto ("FORM W-8BEN") relating to the Participant and claiming complete exemption from withholding tax on all amounts to be received by the Participant pursuant to this Agreement or (iii) a valid United States Internal Revenue Service Form W-8EC1 or any successor form thereto ("FORM W-8EC1") relating to the Participant and claiming complete exemption from withholding tax on all amounts to be received by the Participant pursuant to this Agreement. Any Participant shall, if requested by BNPLC, deliver to BNPLC subsequent statements with respect to such Treasury Regulation or two additional copies of Form W-8BEN or Form W-8EC1, or the applicable replacement forms, on or before the date that any prior such delivered statements or forms expire or become obsolete. If any such statement or form delivered by a Participant to BNPLC becomes invalid or inapplicable as to such Participant, such Participant shall promptly inform BNPLC. The obligations of each Participant pursuant to this Section 4.5 shall survive the termination of this Agreement. 4.6. Order of Application. For purposes of this Agreement, BNPLC shall be entitled, but not required, to apply any payments received from NAI under the Operative Documents to satisfy (1) NAI's obligation to pay or reimburse Protective Advances (and interest thereon), if any, and (2) costs incurred by BNPLC because of any sale under the Purchase Agreements, before applying such payments to satisfy NAI's other obligations, regardless of how NAI may have designated such payments. 4.7. Investments Pending Dispute Resolution; Overnight Investments. Whenever BNPLC in good faith determines that it does not have all information needed to determine how payments to the Participants must be made on account of any Distributable Payments, or whenever BNPLC in good faith determines that there is any dispute among the Participants about payments which must be made on account of Distributable Payments, BNPLC may choose to defer the payments to Participants which are the subject of such missing information or dispute. However, to minimize any such deferral, BNPLC shall attempt diligently to obtain any missing information needed to determine how payments to the Participants must be made. Also, pending any such deferral, or if BNPLC is otherwise required to invest funds pending distribution to the Participants, BNPLC shall endeavor to invest the payments at issue. In addition, if BNPLC receives any Distributable Payment after 12:00 noon, San Francisco time, on any day and will not make payments to Participants in connection therewith until the next Business Day pursuant to Section 2.5, -7- <PAGE> 13 then BNPLC shall endeavor to invest such payments overnight; provided that BNPLC shall have no liability to the Participants if BNPLC is unable to make such investments. Investments by BNPLC shall be in the overnight federal funds market pending distribution, and the interest earned on each dollar of principal so invested shall be paid to the Person entitled to receive such dollar of principal when the principal is paid to such Person. 5.0 NATURE OF THIS AGREEMENT. 5.1. No Conveyance. THIS AGREEMENT IS INTENDED TO CREATE CONTRACTUAL RIGHTS IN FAVOR OF EACH PARTICIPANT TO RECEIVE PAYMENTS FROM BNPLC, BUT IT IS NOT INTENDED TO CONVEY OR ASSIGN TO THE PARTICIPANTS ANY INTEREST IN THE PROPERTY OR IN THE OPERATIVE DOCUMENTS OR IN THE PAYMENTS TO BE MADE TO BNPLC THEREUNDER. IN NO EVENT SHALL ANY PARTICIPANT EXERCISE OR ATTEMPT TO EXERCISE ANY RIGHT OR REMEDY OF BNPLC UNDER THE OPERATIVE DOCUMENTS. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED TO GRANT TO THE PARTICIPANTS ANY RIGHT TO ENFORCE NAI'S OBLIGATIONS UNDER THE OPERATIVE DOCUMENTS OR TO COLLECT DIRECTLY FROM NAI ANY PAYMENTS DUE FROM NAI THEREUNDER. ALTHOUGH BNPLC'S OBLIGATIONS FOR PAYMENTS TO THE PARTICIPANTS HEREUNDER SHALL BE COMPUTED BY REFERENCE TO FUNDS ACTUALLY RECEIVED AS DISTRIBUTABLE PAYMENTS, THIS AGREEMENT SHALL NOT BE CONSTRUED AS AN ASSIGNMENT OF DISTRIBUTABLE PAYMENTS THEMSELVES OR ANY INTEREST THEREIN, IT BEING UNDERSTOOD THAT (WITHOUT LIMITING OR EXPANDING THE DOLLAR AMOUNT OF SUCH OBLIGATIONS) BNPLC MAY SATISFY SUCH OBLIGATIONS FROM OTHER FUNDS AVAILABLE TO IT, THEREBY RESERVING DISTRIBUTABLE PAYMENTS FOR PAYMENT TO OTHER CREDITORS OR FOR OTHER PURPOSES, AS BNPLC SHALL DETERMINE IN ITS SOLE DISCRETION. 5.2. Not a Partnership, Etc. NEITHER THE EXECUTION OF THIS AGREEMENT, NOR THE SHARING OF RISKS AND REWARDS UNDER THE OPERATIVE DOCUMENTS, NOR ANY AGREEMENT TO SHARE IN PROFITS OR LOSSES ARISING AS A RESULT OF THE TRANSACTIONS CONTEMPLATED THEREBY, IS INTENDED TO BE OR TO CREATE, AND THE FOREGOING SHALL BE CONSTRUED NOT TO BE OR TO CREATE ANY PARTNERSHIP, JOINT VENTURE, OR OTHER JOINT ENTERPRISE BETWEEN BNPLC AND ANY PARTICIPANT. NEITHER THE EXECUTION OF THIS AGREEMENT NOR THE MANAGEMENT AND ADMINISTRATION OF THE OPERATIVE DOCUMENTS AND THE RELATED DOCUMENTS BY BNPLC, NOR ANY OTHER RIGHT, DUTY OR OBLIGATION OF BNPLC UNDER OR PURSUANT TO THIS AGREEMENT IS INTENDED TO BE OR TO CREATE ANY FIDUCIARY RELATIONSHIP BETWEEN BNPLC AND ANY PARTICIPANT. -8- <PAGE> 14 6.0 AMENDMENTS; WAIVERS; EXERCISE OF RIGHTS AND REMEDIES AGAINST NAI. 6.1. Limitations. Subject to Section 6.3, but notwithstanding anything else to the contrary in this Agreement: 6.1.1. BNPLC shall not: 6.1.1.1. without the prior written consent of the Participants, execute any waiver, modification or amendment of the Operative Documents that would: (1) increase the amounts the Participants may be required to pay to BNPLC hereunder; or (2) reduce or postpone (or reasonably be expected to reduce or postpone) any payments that any Participant would, but for such modification or amendment, be expected to receive from BNPLC hereunder (including any extension of the Term of the Leases); (3) excuse or diminish NAI's obligations to provide Collateral under the Pledge Agreements during any "Mandatory Collateral Period" (as described in Part III of Schedule 1 attached to the Leases); or (4) except as otherwise expressly permitted by the Operative Documents, release BNPLC's interest in all or a substantial part of the Property or release any security interest in Collateral pledged under the Pledge Agreements; or 6.1.1.2. without the prior written consent of a Majority, execute any other waiver, modification or amendment of the Operative Documents, except a waiver, modification or amendment that NAI requests pursuant to express provisions of the Operative Documents and that BNPLC believes in good faith it must execute to satisfy the requirements of the Operative Documents; or 6.1.1.3. over the written objection of a Majority, affirmatively elect a Voluntary Retention of the Property pursuant to subparagraph 1(A)(2)(a) of the Purchase Agreements. However, this subsection 6.1.1 shall not limit BNPLC's right to forebear from exercising rights against NAI to the extent BNPLC shall determine in good faith that such forbearance is appropriate and is permitted by the following subsections in this Section 6.1. Upon the direction of the Majority, BNPLC shall execute any waiver, modification or amendment of the Operative Documents requested by NAI; provided, that: (A) the waiver, modification or amendment is not prohibited by the forgoing provisions of this Agreement, (B) the waiver, modification or amendment does not (1) increase the amount BNPLC may be required to pay to NAI or anyone else, or (2) reduce or postpone (and cannot reasonably be expected to reduce or postpone) any payments that BNPLC would, but for such modification or amendment, be expected to receive, or (3) release BNPLC's interest in all or a substantial part of the Property; and (C) BNPLC is not excused from executing the waiver, modification or amendment by Section 6.3. 6.1.2. BNPLC will, with reasonable promptness, provide the Participants with copies of all default notices it sends or receives under the Operative Documents and notify the Participants of any Event of Default under the Leases or Critical Event of which BNPLC is actually aware and of any other matters known to BNPLC which, in BNPLC's reasonable judgment, are likely to materially affect the payments any Participant will be required to make or be entitled to receive under this Agreement, but BNPLC will not in any event be liable to any Participant for BNPLC's failure to do so unless such failure constitutes gross negligence or wilful misconduct on the part of BNPLC. 6.1.3. Before taking possession of the Property because of any breach by NAI of the Operative Documents, filing any lawsuit against NAI, exercising foreclosure or offset rights against the -9- <PAGE> 15 Collateral under the Pledge Agreements, or exercising termination rights provided in subparagraph 1(c) of the Leases or subparagraph 4(B) of the Purchase Agreements, or if requested in writing by any Participant at any time when a Critical Event has occurred and is continuing, BNPLC shall call a meeting with the Participants to discuss what action by BNPLC, if any, is appropriate under the Operative Documents and what direction, if any, a Majority may give to BNPLC. Such meeting shall be scheduled during regular business hours in the offices of Banque Nationale de Paris, San Francisco, or another appropriate location in San Francisco, California, not earlier than five and not later than twenty Business Days after BNPLC's receipt of the written request from any Participant. BNPLC shall attempt in good faith and with reasonable diligence to comply with the direction of a Majority if, when a Critical Event or an Event of Default have occurred and be continuing, a Majority shall direct BNPLC in writing to do any one or more of the following, as applicable under the circumstances: (a) send any default notices required before a Critical Event can become an Event of Default, (b) bring a lawsuit against NAI to enforce the Operative Documents, or (c) exercise termination rights provided in subparagraph 1(c) of the Leases or subparagraph 4(B) of the Purchase Agreements. However, if BNPLC is not a member of the Majority voting pursuant to this subsection 6.1.3 in favor of any such action, then BNPLC may require that it first receive the written agreement (in form reasonably acceptable to BNPLC) of the members of the Majority so voting to indemnify BNPLC from and against all costs, liabilities and claims that may be incurred by or asserted against BNPLC because of the action the Majority directs BNPLC to take. In no event shall any Participant instigate any suit or other action directly against NAI with respect to the Operative Documents or the Property, even if the Participant would, but for this Agreement, be entitled to do so as a party or third party beneficiary under the Operative Documents or otherwise. 6.1.4. In the event NAI or an Applicable Purchaser fails to purchase the Property on the Designated Sale Date when required to do so pursuant to the Purchase Agreements, BNPLC shall, unless the Participants shall otherwise agree in writing, bring suit against NAI to enforce the Operative Documents in such form as shall be recommended by reputable counsel no later than sixty days after the expiration of any applicable cure or grace period given NAI by the express terms of the Purchase Agreements, and thereafter BNPLC shall prosecute the suit with reasonable diligence in accordance with the advice of reputable counsel. If BNPLC acquires the interests of NAI in any of the Property as a result of such suit or otherwise, BNPLC shall thereafter proceed with reasonable diligence to sell the Property in a commercially reasonable manner to one or more bona fide third party purchasers and shall in any event have consummated the sale of the entire Property (through a single sale of the entire property or a series of sales of parts) within five years following the date BNPLC recovers possession of the Property at the best price or prices BNPLC believes are reasonably attainable within such time. Further, after the Designated Sale Date and prior to BNPLC's sale of the entire Property, BNPLC shall retain a property management company experienced in the area where the Property is located to manage the operation of the Property and pursue the leasing of any completed improvements which are part of the Property. BNPLC shall not retain an Affiliate of BNPLC to act as the property manager except under a bona fide, arms-length management contract containing commercially reasonable terms. Further, after the Designated Sale Date and until BNPLC sells the Property, BNPLC shall (i) endeavor in good faith to maintain, or shall obtain the agreement of one or more tenants to maintain, the Property in good order and repair, (ii) procure and maintain casualty insurance against risks customarily insured against by owners of comparable properties, in amounts sufficient to eliminate the effects of coinsurance, (iii) keep and allow the Participants to review accurate books and records covering the operation of the Property, and (iv) pay prior to delinquency all taxes and assessments lawfully levied against the Property. Notwithstanding the foregoing, any Participants that have failed to fund any amount due hereunder, and that have not corrected such failure within five Business Days after being notified thereof, shall have no -10- <PAGE> 16 voting or consent rights under this Section 6.1 and no rights to require BNPLC to call a meeting pursuant to subsection 6.1.3 until such failure is corrected. 6.2. General. Subject to the limitations set forth in Section 6.1: 6.2.1. BNPLC shall have the exclusive right to take any action and to exercise any available powers, rights and remedies to enforce the obligations of NAI under the Operative Documents, or to refrain from taking any such action or exercising any such power, right or remedy. 6.2.2. BNPLC shall be entitled to (i) give any consent, waiver or approval requested by NAI with respect to any construction or other approval contemplated in the Leases or (ii) waive or consent to any adverse title claims affecting the Property, provided that, in either case, BNPLC believes in good faith that such action will not have a material adverse effect upon NAI's obligations or ability to make the payments required under the Operative Documents or upon the rights and remedies, taken as whole, of BNPLC under the Operative Documents or of the Participants' hereunder. 6.3. Conflicts and Purchase Agreements Defaults. Notwithstanding anything to the contrary herein contained, BNPLC shall be entitled, even over the objection of any Participant or the Majority, (A) to take any action recommended in writing by reputable counsel and believed in good faith by BNPLC to be required of BNPLC by the Operative Documents or any law, rule or regulation to which BNPLC is subject, (B) to refrain from taking any action if BNPLC believes in good faith that the action is prohibited by the Operative Documents or any law, rule or regulation to which BNPLC is subject, and if reputable counsel recommends in writing that BNPLC refrain from taking the action, and (C) after notice to the Participants, to bring and prosecute a suit against NAI in the form recommended by and in accordance with advice of reputable counsel at any time when a breach of the Operative Documents by NAI shall have put BNPLC (or any of its officers or employees) at risk of criminal prosecution or significant liability to third parties or at any time after NAI or an Applicable Purchaser fails to purchase the Property on the Designated Sale Date pursuant to the Purchase Agreements. (If, however, BNPLC takes any action or refrains from taking any action over the objection of a Majority pursuant to the preceding sentence, BNPLC must provide the Majority a written explanation (including a copy of a supporting written recommendation of counsel) of the basis for BNPLC's conclusion that taking the action, or refraining from taking the action, is permitted by the preceding sentence.) Further, nothing herein contained shall be construed to require BNPLC to agree to modify the Operative Documents or to take any action or refrain from taking any action in any manner that could increase BNPLC's liability to NAI or others, that could reduce or postpone payments to which BNPLC is entitled thereunder, or that could reduce the scope and coverage of the indemnities provided for BNPLC's benefit therein. 6.4. Refusal to Give Consents; Failure to Fund; Failure of a Deposit Taker to Satisfy Minimum Ratings. If any Participant declines to consent to any amendment, modification, waiver, release or consent for which the Participant's consent is requested or required by reason of this Agreement, or if any Participant fails to pay any amount owed by it hereunder, or if the Deposit Taker for any Participant shall cease to be a Qualified Deposit Taker (as defined in the Pledge Agreement), BNPLC shall have the right, but not the obligation and without limiting any other remedy of BNPLC, to reduce such Participant's Percentage to zero and to terminate such Participant's rights to receive any further payments under Article 2 of this Agreement by paying to such Participant a termination fee equal to the total amount it would be entitled to receive from BNPLC hereunder if the date of such payment were the Designated Sale Date and on such date NAI had itself purchased BNPLC's interest in the Property pursuant to and in accordance with the Purchase Agreements. No Participant's rights to receive payments equal to such Participant's Adjusted Percentage of any Excess Reimbursement of a Protective Advance or interest thereon as provided in Section 3.3 shall be impaired or affected by any termination contemplated in this Section 6.4; accordingly, -11- <PAGE> 17 BNPLC shall not, as a condition to such a termination, be required to reimburse a Participant for any payments the Participant has made in connection with Protective Advances pursuant to Section 3.3. 7.0 REQUIRED REPAYMENTS. Each Participant shall repay to BNPLC, upon written request or demand by BNPLC (i) any sums paid by BNPLC to such Participant under this Agreement from, or that were computed by reference to, any Distributable Payment or other amounts which BNPLC shall be required to return or pay over to another party, whether pursuant to any bankruptcy or insolvency law or proceeding or otherwise and (ii) any interest or other amount that BNPLC is also required to pay to another party with respect to such sums. Such repayment by a Participant shall not constitute a release of such Participant's right to receive payments from BNPLC hereunder upon BNPLC's receipt of any such Distributable Payment or other amount (or any interest thereon) that BNPLC may later recover. 8.0 NAI INFORMATION; INDEPENDENT ANALYSIS. Prior to the execution of this Agreement, BNPLC has provided to the Participants copies of the executed Operative Documents and of various certificates, legal opinions and other documents delivered to BNPLC by or on behalf of NAI with the Operative Documents. In the future, BNPLC shall provide (A) to all Participants copies of all amendments of the Operative Documents and certificates and legal opinions, if any, delivered by or on behalf of NAI in connection therewith, and (B) to any Participant, as reasonably required to comply with a specific, reasonable written request for information made by the Participant, copies of other information readily available to BNPLC concerning NAI or Guarantor and the transactions contemplated in the Operative Documents. However, BNPLC shall not be liable for its failure to provide the Participants any of the foregoing documents unless such failure constitutes gross negligence or wilful misconduct on BNPLC's part. Each Participant has entered into this Agreement without reliance upon representations made outside this Agreement by BNPLC or by any Affiliate, agent or attorney of BNPLC and only after independently reviewing such documents, independently making such inspections, independently consulting with counsel and independently collecting and verifying such information, as the Participant determined to be necessary or appropriate. Without limiting the foregoing, each Participant has independently reviewed the Operative Documents and independently made such inquiries and investigations of NAI and the Property as the Participant determined to be necessary or appropriate before executing this Agreement. 9.0 PERFORMANCE THROUGH REPRESENTATIVES. BNPLC may perform any of its duties hereunder by or through officers, directors, employees, attorneys or agents (collectively, "REPRESENTATIVES"), and BNPLC and its Representatives shall be entitled to rely, and shall be fully protected in relying, upon any communication or document believed by it or them to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon the opinion of counsel selected by BNPLC. The Participants acknowledge that Banque Nationale de Paris shall be entitled to act as agent for BNPLC with respect to the administration of this Agreement, and to the extent it does so, it shall be a Representative of BNPLC hereunder. 10.0 DUTY OF CARE. NEITHER BNPLC NOR ANY OF ITS REPRESENTATIVES SHALL BE LIABLE OR RESPONSIBLE TO ANY PARTICIPANT OR ANY OTHER PERSON FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY BNPLC OR ANY OF ITS REPRESENTATIVES UNDER THIS AGREEMENT OR THE OPERATIVE DOCUMENTS OR OTHERWISE (EVEN IF NEGLIGENT OR RELATED TO A MATTER FOR WHICH BNPLC OR ANY OF ITS REPRESENTATIVES MAY OTHERWISE BE STRICTLY LIABLE); provided, this provision will not excuse BNPLC from liability for failing to make timely payments required of BNPLC to the Participants by the express provisions of Article 2 or Section 3.3 or from liability for actions taken or omitted to be taken by BNPLC which constitute gross negligence or wilful misconduct. Without limiting the generality of the foregoing, BNPLC (1) may consult with legal counsel (including counsel for NAI), independent public accountants and other experts selected by it and shall not be liable for any action -12- <PAGE> 18 taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (2) makes no warranty or representation to the Participants except as provided in Article 12 and shall not be responsible to the Participants for any statements, warranties or representations made in or in connection with the Operative Documents; (3) shall not have any duty to the Participants to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of the Operative Documents or to inspect the Property or the books and records of NAI; (4) shall not be responsible to the Participants for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of the Operative Documents or any instrument or document furnished in connection therewith; (5) may rely upon the representations and warranties of NAI and the Participants in exercising its powers hereunder unless BNPLC shall have actual knowledge that such representations and warranties are untrue; and (6) shall incur no liability under or in respect of the Operative Documents by acting upon any notice, consent, certificate or other instrument or writing (including any telecopy, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper Person or Persons. 11.0 REPRESENTATIONS BY EACH PARTICIPANT. Each Participant represents that as of the date it became a party to this Agreement: 11.1. Nature of this Agreement. It is the type of financial institution set forth under its name in SCHEDULE 1, or in the Participation Agreement Schedule which made it a party to this Agreement, and it is entering into this Agreement for its own account in respect of a commercial transaction made in ordinary course of its business and not with a view to or in connection with any subparticipation, sale or distribution to any Person (other than its Affiliates). Such Participant does not consider the acceptance of the risk participation hereunder to constitute the "purchase" or "sale" of a "security" within the meaning of any federal or state securities statute or law, or any rule or regulations under any of the foregoing. 11.2. No Default or Violation. To such Participant's knowledge, the execution, delivery and performance of this Agreement do not and will not contravene, result in a breach of or constitute a default under any material contract or agreement to which the Participant is a party or by which the Participant is bound and do not violate or contravene any law, order, decree, rule or regulation to which the Participant is subject. 11.3. No Suits. To such Participant's knowledge, there are no judicial or administrative actions, suits or proceedings involving the validity, enforceability or priority of this Agreement and no such suits or proceedings are threatened. 11.4. Organization. Such Participant is duly incorporated and legally existing under the laws of jurisdiction indicated in SCHEDULE 1 or in the Participation Agreement Schedule which made it a party to this Agreement. Such Participant has all requisite power and all material governmental certificates of authority, licenses, permits, qualifications and other documentation necessary to perform its obligations under this Agreement. 11.5. Enforceability. This Agreement constitutes a legal, valid and binding obligation of such Participant, enforceable in accordance with its terms, subject to bankruptcy and other laws affecting creditors' rights generally and general equitable principles. The execution and delivery of, and performance under, this Agreement are within such Participant's powers and have been duly authorized by all requisite action and are not in contravention of the powers of the charter or other corporate papers of the Participant. 11.6. No Funding With Plan Assets. Such Participant has not and will not provide advances required by this Participant from the assets of any employee benefit plan (or its related trust). -13- <PAGE> 19 12.0 REPRESENTATIONS BY BNPLC. BNPLC represents to each Participant, as of the date such Participant became a party to this Agreement, that: 12.1. No Default or Violation. To BNPLC's knowledge, its execution, delivery and performance of this Agreement and the Operative Documents do not contravene, result in a breach of or constitute a default under any material contract or agreement to which BNPLC is a party or by which BNPLC is bound and do not violate or contravene any law, order, decree, rule or regulation to which BNPLC is subject. 12.2. No Suits. To BNPLC's knowledge, there are no judicial or administrative actions, suits or proceedings involving the validity, enforceability or priority of this Agreement and no such suits or proceedings are threatened. 12.3. Organization. BNPLC is duly incorporated and legally existing under the laws of Delaware and is duly qualified to do business in the State of California. BNPLC has all requisite power and all material governmental certificates of authority, licenses, permits, qualifications and other documentation necessary to perform its obligations under this Agreement. BNPLC has obtained or will obtain, at NAI's expense pursuant to the provisions of the Leases, all requisite power and all material governmental certificates of authority, licenses, permits, qualifications and other documentation necessary to own and lease the Property and to perform its obligations under the Operative Documents. 12.4. Enforceability. This Agreement and the Operative Documents constitute legal, valid and binding obligations of BNPLC, enforceable in accordance with their respective terms, subject to bankruptcy and other laws affecting creditors' rights generally and general equitable principles. BNPLC's execution and delivery of, and performance under, this Agreement and the Operative Documents are within BNPLC's powers and have been duly authorized by all requisite action and are not in contravention of the powers of the charter, by-laws or other corporate papers of BNPLC; provided, BNPLC makes no representation or warranty that conditions imposed by any state or local Applicable Laws to the purchase, ownership, lease or operation of the Property have been satisfied. 12.5. Liens Removable by BNPLC. BNPLC shall not create or permit any Liens Removable by BNPLC not claimed by, through or under any of the Participants (other than BNPLC's Affiliates), without NAI's consent. 12.6. BNPLC's Status as a Subsidiary of a Bank Holding Company. As of the effective date of this Agreement, BNPLC is a "subsidiary" of a "bank holding company" (as those terms are defined in Chapter 17 of Title 12 of the United States Code). 13.0 ASSIGNMENTS. 13.1. By the Participants Generally. Except as expressly provided below, no Participant shall assign or attempt to assign any interest in or rights under this Agreement without the prior written consent of BNPLC, which consent shall not be unreasonably withheld so long as the Participant requesting the approval is not in default hereunder; provided, this provision shall not prevent a Participant from transferring its rights hereunder to its Affiliates or to any other Participants who are already parties to this Agreement. Notwithstanding any permitted assignment by a Participant, if the assignment is to any Person that does not qualify as a "Participant" for purposes of the Leases itself (which, as more particularly provided in the definition of Participant in the Common Definitions and Provisions Agreements, may require the written approval of such Person by NAI), then such Participant's obligations under this Agreement shall remain unchanged, such Participant shall remain primarily responsible for the performance of its obligations hereunder, and BNPLC may continue to deal solely and directly with such -14- <PAGE> 20 Participant in connection with all rights and obligations under this Agreement. In the event, however, of a permitted assignment by a Participant to a Person that does qualify as a "Participant" for purposes of the Leases itself, accomplished by the execution of appropriate Participation Agreement Supplements as herein provided, the assigning Participant shall not be liable for any failure by the assignee to fulfill the obligations assumed hereunder by the assignee by reason of such assignment. 13.2. By BNPLC. Except as expressly provided herein, BNPLC shall not assign or attempt to assign any rights under or interest in the Operative Documents or this Agreement or any interest in the Property without the Participants' prior written consent, which consent shall not be unreasonably withheld. By a Participation Agreement Supplement, BNPLC may, without the prior written consent of any other Participant, assign participations in the Operative Documents or the payments required to BNPLC thereunder to any then existing Participant and to other financial institutions or Affiliates of financial institutions approved by NAI; provided, that the assignment of participations by BNPLC shall not reduce the Percentage of BNPLC (or any Affiliate of BNPLC that may become the owner of BNPLC's interest in the Property) to less than three percent (3%). In addition, BNPLC may assign its right to receive Distributable Payments and its rights and interests in and to the Property, the Operative Documents and this Agreement to Affiliates of BNPLC that do not become Participants; provided, however, that BNPLC's obligations under this Agreement shall remain unchanged, BNPLC shall remain primarily responsible for the performance of its obligations hereunder, and all Distributable Payments received by any such Affiliates as assignee of BNPLC shall, for purposes of computing payments required to any Participant hereunder, be considered as received by BNPLC. In addition, BNPLC shall be permitted to transfer any rights or interests as BNPLC shall believe in good faith to be necessary to satisfy the Operative Documents or Applicable Laws. 13.3. Execution of Participation Agreement Supplements. Promptly after the execution of a Participation Agreement Supplement by BNPLC and any Participant, BNPLC will provide a copy thereof to all other Participants, but the other Participants need not join in or approve the Participation Agreement Supplement for it to be effective. 13.4. Regulation A. Notwithstanding Sections 13.1 or 13.2, a Participant may assign and pledge all or any portion of its rights under this Agreement to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circulars issued by such Federal Reserve Bank. 13.5. Costs. Each Participant shall pay all costs incurred by BNPLC in connection with any permitted assignment by or through such Participant, including, but not limited to, reasonable fees and disbursements of its counsel, and any transfer taxes or other taxes assessed because of such assignment which NAI is not required to pay under the Leases. 14.0 GOVERNING LAW; SUBMISSION TO PROCESS; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE DEEMED A CONTRACT MADE UNDER THE LAWS OF THE STATE OF CALIFORNIA AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA AND THE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. EACH OF BNPLC AND THE PARTICIPANTS HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND THE FEDERAL COURTS SITTING IN SAN FRANCISCO, CALIFORNIA, AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT BY ANY MEANS ALLOWED UNDER CALIFORNIA OR FEDERAL LAW. EACH OF BNPLC AND THE PARTICIPANTS HEREBY WAIVES AND AGREES NOT TO -15- <PAGE> 21 ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, THAT ANY SUCH PROCEEDING WHICH IS BROUGHT IN A COURT IN SAN FRANCISCO, CALIFORNIA IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER. EACH OF BNPLC AND THE PARTICIPANTS, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A JURY TRIAL OF ANY DISPUTE RELATING TO THIS AGREEMENT AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. 15.0 TERMINATION. This Agreement shall terminate on the first date on which all obligations of NAI under the Operative Documents shall have been indefeasibly paid or otherwise satisfied or excused, BNPLC shall have ceased to have any rights in the Property and each party hereto shall have fully performed its obligations hereunder to the other parties hereto. The agreements of BNPLC and the Participants in Section 3.3 (which concerns payments by Participants of their respective Percentages of Protective Advances) shall survive the termination of this Agreement. Following any sale of the Property by BNPLC pursuant to the Purchase Agreements and the payment to any Participant of all amounts payable to such Participant hereunder (including, without limitation, such Participant's Percentage of all Net Sales Proceeds payable by NAI and any Applicable Purchaser on the Designated Sale Date), such Participant will execute and deliver such a quitclaim and release (in recordable form) to NAI or any Applicable Purchaser. 16.0 MISCELLANEOUS. 16.1. Reliance by Others. None of the provisions of this Agreement shall inure to the benefit of any Person other than the Participants and BNPLC and BNPLC's Representatives; consequently, no Person other than the Participants and BNPLC shall be entitled to rely upon or raise as a defense, in any manner whatsoever, the failure of any Participant or BNPLC to comply with the provisions of this Agreement. None of the Participants nor BNPLC shall incur any liability to any other Person for any act of omission of another. Notwithstanding the foregoing, however, NAI shall be a third party beneficiary of the representations of each Participant in Section 11, of the limitations upon each Participant's right to assign in Section 13.1, of each Participant's agreements concerning choice of law and other matters in Section 14, and of each Participant's agreement to provided a release and quitclaim of the Property pursuant to the last sentence of Section 15. As a third party beneficiary of the obligations of the Participants specified in the preceding sentence, NAI shall have standing to bring a claim against any Participant in NAI's own name if that Participant breaches such obligations. Further, BNPLC may assign to NAI any claims it may have against a Participant because of the Participant's breach of any of the provisions referenced in this paragraph or because of any adverse title claim made against the Property by, through or under the Participant. 16.2. Waivers, Etc. No delay or omission by any party to exercise any right under this Agreement shall impair any such right, nor shall it be construed to be a waiver thereof. No waiver of any single breach or default under this Agreement shall be deemed a waiver of any other breach or default. Any waiver, consent, or approval under this Agreement must be in writing to be effective. 16.3. Severability. The illegality or unenforceability of any provision of this Agreement shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement. 16.4. Notices. All notices, demands, approvals, consents and other communications to be made hereunder to or by the parties hereto must, to be effective for purpose of this Agreement, be in writing. Notices, demands and other communications required or permitted hereunder are to be sent to the -16- <PAGE> 22 addresses set forth in Schedule 1 to this 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. 16.5. Construction. Words of any gender used in this Agreement 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 Articles, Sections, subsections or other subdivisions shall refer to the corresponding Articles, Sections, subsections or subdivisions of this Agreement, 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 Agreement 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 BNPLC is a party or of which BNPLC is an intended beneficiary, without the consent of BNPLC. All accounting terms used but not specifically defined herein shall be construed in accordance with GAAP. The words "THIS AGREEMENT", "HEREIN", "HEREOF", "HEREBY", "HEREUNDER" and words of similar import when used in this Agreement refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "THIS ARTICLE" and "THIS SECTION" and "THIS SUBSECTION" and similar phrases used herein refer only to the Articles, Sections or subsections hereof in which the phrase occurs. As used herein the word "OR" is not exclusive. As used herein the words "INCLUDE", "INCLUDING" and similar terms shall be construed as if followed by "without limitation to". 16.6. Headings. The Article and Section 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 provisions hereof. 16.7. Entire Agreement. This Agreement (a) embodies the entire agreement between the parties, supersedes all prior agreements and understandings between the parties, if any, relating to the subject matter hereof, and may be amended only by an instrument in writing executed by an authorized representative of each party to be bound by such amendment, and (b) has been executed in a number of identical counterparts, each of which shall be deemed an original for all purposes and all of which constitute, collectively, one agreement or certificate; but, in making proof of this Agreement it shall not be necessary to produce or account for more than one such counterpart signed by each party thereto. 16.8. Further Assurances. Subject to any restriction in the Operative Documents, each of BNPLC and the Participants will promptly execute and deliver all further instruments and documents and take all further action as any of them may reasonably request in order to evidence the agreements made hereunder and otherwise to effect the purposes of this Agreement. 16.9. Impairment of Operative Documents. Nothing herein contained (including the provisions governing the application of payments in Section 4.6 and the provisions authorizing assignments by BNPLC in Section 13.2) shall impair or modify NAI's rights under the Operative Documents. -17- <PAGE> 23 16.10. Books and Records. BNPLC shall keep accurate books and records in which full, true and correct entries shall be promptly made as to all payments made and received concerning the Property and will permit all such books and records (excluding any information that would otherwise be protected by BNPLC's attorney client privilege) to be inspected and copied by the Participants and their duly accredited representatives at all times during reasonable business hours after five Business Days advance notice. This Section shall not be construed as requiring BNPLC to regularly maintain separate books and records relating exclusively to the Property; provided, however, that upon reasonable request, BNPLC shall, at the requesting Participant's expense, construct or abstract from its regularly maintained books and records information required by this Section relating to the Property. 16.11. Definition of Knowledge. Representations and warranties made in this Agreement but limited to the "knowledge" of BNPLC or any Participant, as the case may be, shall be limited to the present actual knowledge of the officers or other employees of such party primarily responsible for reviewing and negotiating this Agreement. Also, as used herein with respect to the existence of any facts or circumstances after the date of this Agreement, "knowledge" of BNPLC or a Participant, as the case may be, shall be limited to the present actual knowledge at the time in question of the officers or other employees of such party primarily responsible for administering this Agreement. However, none of the officers or employees of any party to this Agreement shall be personally liable for any representations or warranties made herein or for taking or failing to take any action required hereby. 16.12. Attorneys' Fees. If any party to this Agreement commences any legal action or other proceeding against another party hereto to enforce any of the terms of this Agreement, or because of any breach of the other party or dispute hereunder, 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 any 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. [The signature pages follow.] -18- <PAGE> 24 IN WITNESS WHEREOF, BNPLC and the Participants whose signatures appear below have caused this Participation Agreement to be executed by their respective, duly authorized representatives, as of the date first above written. "BNPLC" BNP LEASING CORPORATION By: --------------------------------- Lloyd G. Cox, Vice President <PAGE> 25 [Continuation of signature pages to Participation Agreement effective as of December ___, 1999] "PARTICIPANT" BANQUE NATIONALE DE PARIS By: --------------------------------- Name: ---------------------------- Title: --------------------------- <PAGE> 26 SCHEDULE 1 - Page 1 A. BNPLC: BNP LEASING CORPORATION, a Delaware corporation 1. Amount Retained: $1,860,000 2. Initial Percentage: 3% 3. Address for Notices: BNP Leasing Corporation 12201 Merit Drive Suite 860 Dallas, Texas 75251 Attention: Lloyd G. Cox Telephone: (972) 788-9191 Facsimile: (972) 788-9140 4. Payment Instructions: Federal Reserve Bank of New York ABA 026007689 Banque Nationale de Paris /BNP/ BNP San Francisco /AC/ /Ref/ Network Appliance/Sunnyvale Synthetic Leases/Phase IV 5. Operations Contact: BNP Leasing Corporation 12201 Merit Drive Suite 860 Dallas, Texas 75251 Attention: Lloyd G. Cox Telephone: (972) 788-9191 Facsimile: (972) 788-9140 <PAGE> 27 SCHEDULE 1 - Page 2 B. Participant: BANQUE NATIONALE DE PARIS, a banking corporation organized under the laws of France 1. Amount of Participation: $60,140,000 2. Percentage: 97% 3. Address for Notices: Banque Nationale de Paris, San Francisco 180 Montgomery Street San Francisco, CA 94104 Attention: Rafael Lumanlan or Gavin Holles Telephone: (415) 956-0707 Facsimile: (415) 296-8954 4. Payment Instructions: Federal Reserve Bank of New York ABA 026007689 Banque Nationale de Paris /BNP/ BNP San Francisco /AC/ /Ref/ Network Appliance/Sunnyvale Synthetic Leases/Phase IV 5. Operations Contact: George Fung Banque Nationale de Paris 180 Montgomery Street San Francisco, CA 94104 Telephone: (415) 956-0707 Facsimile: (415) 956-4230 6. "Initial Payment" Due from Participant to BNPLC: An amount equal to ninety-seven percent (97%) of initial funding advanced under the Leases. <PAGE> 28 EXHIBIT A SUPPLEMENT TO PARTICIPATION AGREEMENT [ , ] ---------- ---- BNP Leasing Corporation - -------------------- - -------------------- - -------------------- Reference is made to the Participation Agreement dated as of December ___, 1999 (as heretofore amended, the "PARTICIPATION AGREEMENT") between BNP Leasing Corporation ("BNPLC"), Banque Nationale de Paris and other financial institutions which are from time to time Participants under and as defined in such Participation Agreement (collectively, the "PARTICIPANTS"). Unless otherwise defined herein, all capitalized terms used in this Supplement have the respective meanings given to those terms in the Participation Agreement. [NOTE: THE NEXT TWO PARAGRAPHS, AND THE ADDENDUM TO SCHEDULE 1 ATTACHED TO THIS EXHIBIT, WILL BE INCLUDED ONLY AS PART OF A SUPPLEMENT THAT ADDS A NEW PARTICIPANT UNDER THE PARTICIPATION AGREEMENT: The undersigned hereby certifies to BNPLC that the undersigned has become a party to the Pledge Agreements by executing a supplement as provided therein, and that NAI has approved of the undersigned as a party to the Pledge Agreements by executing and returning that supplement. The undersigned, by executing and delivering this Supplement to BNPLC, hereby agrees to become a party to the Participation Agreement as a Participant and agrees to be bound by all of the terms thereof applicable to Participants. The undersigned hereby agrees that its Percentage under the Participation Agreement shall be ___________ percent (____%), effective as of the date of this letter. Contemporaneously with the execution of this letter, the undersigned is paying to BNPLC the sum of $_____________ in consideration of the rights it is acquiring as a Participant under the Participation Agreement with the foregoing Percentages. Schedule 1 attached to the Participation Agreement is amended by the addition of an Addendum (concerning the undersigned) in the form attached to this Supplement.] [NOTE: THE NEXT PARAGRAPH WILL BE INCLUDED ONLY IN A SUPPLEMENT THAT REDUCES AN EXISTING PARTICIPANT'S PERCENTAGE UNDER THE PARTICIPATION AGREEMENT: In consideration of the payment of $____________ to the undersigned, the receipt and sufficiency of which is hereby acknowledged by the undersigned, the undersigned hereby agrees that its Percentage under the Participation Agreement is reduced to ___________ percent (____%), effective as of the date of this letter.] [NOTE: THE NEXT PARAGRAPH WILL BE INCLUDED ONLY IN A SUPPLEMENT THAT INCREASES AN EXISTING PARTICIPANT'S PERCENTAGE UNDER THE PARTICIPATION AGREEMENT: <PAGE> 29 The undersigned hereby agrees that its Percentage under the Participation Agreement is increased to ___________ percent (____%), effective as of the date of this letter. Contemporaneously with the execution of this letter, the undersigned is paying BNPLC the sum of $_____________ in consideration of such increase.] IN WITNESS WHEREOF, the undersigned has executed this Supplement as of the day and year indicated above. [NAME] By: --------------------------------- Printed Name: Title: Accepted and agreed: BNP LEASING CORPORATION By: -------------------------------- Printed Name: Title: <PAGE> 30 ADDENDUM TO SCHEDULE 1 Participant: 1. Amount of Participation: $ 2. Percentage: ___% 3. Address for Notices: Attention: Telephone: Facsimile: 4. Payment Instructions: Bank: Account: Account No.: ABA No.: Reference: 5. Operations Contact: Attention: Telephone: Facsimile: Exhibit A - Page 3 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>16 <DESCRIPTION>EXHIBIT 27.1 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> APR-28-2000 <PERIOD-START> MAY-01-1999 <PERIOD-END> JAN-28-2000 <CASH> 231,416 <SECURITIES> 58,636 <RECEIVABLES> 99,674 <ALLOWANCES> 2,882 <INVENTORY> 20,878 <CURRENT-ASSETS> 447,428 <PP&E> 53,111 <DEPRECIATION> 19,465 <TOTAL-ASSETS> 493,916 <CURRENT-LIABILITIES> 77,748 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 312,144 <OTHER-SE> 103,969 <TOTAL-LIABILITY-AND-EQUITY> 493,916 <SALES> 379,281 <TOTAL-REVENUES> 379,281 <CGS> 155,470 <TOTAL-COSTS> 155,470 <OTHER-EXPENSES> 154,507 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 76,457 <INCOME-TAX> 27,142 <INCOME-CONTINUING> 49,315 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 49,315 <EPS-BASIC> 0.33 <EPS-DILUTED> 0.29 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.2 <SEQUENCE>17 <DESCRIPTION>EXHIBIT 27.2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <C> <PERIOD-TYPE> YEAR YEAR <FISCAL-YEAR-END> APR-30-1999 APR-24-1998 <PERIOD-START> APR-25-1998 APR-26-1997 <PERIOD-END> APR-30-1999 APR-24-1998 <CASH> 221,284 37,315 <SECURITIES> 5,800 10,800 <RECEIVABLES> 57,163 34,313 <ALLOWANCES> 1,886 811 <INVENTORY> 13,581 8,707 <CURRENT-ASSETS> 315,346 98,939 <PP&E> 33,959 21,723 <DEPRECIATION> 14,688 9,506 <TOTAL-ASSETS> 346,347 115,736 <CURRENT-LIABILITIES> 50,530 29,308 <BONDS> 0 0 <PREFERRED-MANDATORY> 0 0 <PREFERRED> 0 0 <COMMON> 240,093 65,924 <OTHER-SE> 55,631 20,341 <TOTAL-LIABILITY-AND-EQUITY> 346,347 115,736 <SALES> 289,420 166,163 <TOTAL-REVENUES> 289,420 166,163 <CGS> 118,120 67,549 <TOTAL-COSTS> 118,120 67,549 <OTHER-EXPENSES> 116,174 65,956 <LOSS-PROVISION> 0 0 <INTEREST-EXPENSE> 0 0 <INCOME-PRETAX> 56,990 33,547 <INCOME-TAX> 21,377 12,582 <INCOME-CONTINUING> 35,613 20,965 <DISCONTINUED> 0 0 <EXTRAORDINARY> 0 0 <CHANGES> 0 0 <NET-INCOME> 35,613 20,965 <EPS-BASIC> 0.26 0.16 <EPS-DILUTED> 0.23 0.15 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.3 <SEQUENCE>18 <DESCRIPTION>EXHIBIT 27.3 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <C> <PERIOD-TYPE> YEAR YEAR <FISCAL-YEAR-END> APR-25-1997 APR-26-1996 <PERIOD-START> APR-27-1996 MAY-01-1995 <PERIOD-END> APR-25-1997 APR-26-1996 <CASH> 21,520 24,637 <SECURITIES> 6,916 2,982 <RECEIVABLES> 13,911 5,330 <ALLOWANCES> 330 330 <INVENTORY> 9,920 4,825 <CURRENT-ASSETS> 56,620 40,402 <PP&E> 13,752 6,582 <DEPRECIATION> 4,514 1,733 <TOTAL-ASSETS> 68,941 45,449 <CURRENT-LIABILITIES> 14,701 6,121 <BONDS> 0 0 <PREFERRED-MANDATORY> 0 0 <PREFERRED> 0 0 <COMMON> 54,653 39,903 <OTHER-SE> (624) 0 <TOTAL-LIABILITY-AND-EQUITY> 68,941 45,449 <SALES> 93,333 46,632 <TOTAL-REVENUES> 93,333 46,632 <CGS> 38,061 20,557 <TOTAL-COSTS> 38,061 20,557 <OTHER-EXPENSES> 52,189 20,075 <LOSS-PROVISION> 0 110 <INTEREST-EXPENSE> 0 68 <INCOME-PRETAX> 4,043 6,600 <INCOME-TAX> 3,793 0 <INCOME-CONTINUING> 250 6,600 <DISCONTINUED> 0 0 <EXTRAORDINARY> 0 0 <CHANGES> 0 0 <NET-INCOME> 250 6,600 <EPS-BASIC> 0.00 0.09 <EPS-DILUTED> 0.00 0.05 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.4 <SEQUENCE>19 <DESCRIPTION>EXHIBIT 27.4 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <C> <C> <PERIOD-TYPE> 3-MOS 6-MOS 9-MOS <FISCAL-YEAR-END> APR-30-1999 APR-30-1999 APR-30-1999 <PERIOD-START> APR-25-1998 APR-25-1998 APR-25-1998 <PERIOD-END> JUL-31-1998 OCT-30-1998 JAN-29-1999 <CASH> 31,476 48,355 59,886 <SECURITIES> 14,930 8,750 8,150 <RECEIVABLES> 35,960 44,928 50,735 <ALLOWANCES> 911 1,511 1,686 <INVENTORY> 9,732 10,722 11,751 <CURRENT-ASSETS> 99,523 121,565 143,720 <PP&E> 22,292 25,188 29,939 <DEPRECIATION> 9,631 11,128 12,735 <TOTAL-ASSETS> 126,073 150,548 172,648 <CURRENT-LIABILITIES> 26,397 39,150 36,792 <BONDS> 0 0 0 <PREFERRED-MANDATORY> 0 0 0 <PREFERRED> 0 0 0 <COMMON> 72,064 75,468 90,655 <OTHER-SE> 27,455 35,796 45,085 <TOTAL-LIABILITY-AND-EQUITY> 126,073 150,548 172,648 <SALES> 57,375 123,000 198,616 <TOTAL-REVENUES> 57,375 123,000 198,616 <CGS> 23,239 50,120 80,938 <TOTAL-COSTS> 23,239 50,120 80,938 <OTHER-EXPENSES> 22,901 49,239 79,540 <LOSS-PROVISION> 0 0 0 <INTEREST-EXPENSE> 0 0 0 <INCOME-PRETAX> 11,356 24,757 39,796 <INCOME-TAX> 4,259 9,284 14,929 <INCOME-CONTINUING> 7,097 15,473 24,867 <DISCONTINUED> 0 0 0 <EXTRAORDINARY> 0 0 0 <CHANGES> 0 0 0 <NET-INCOME> 7,097 15,473 24,867 <EPS-BASIC> 0.05 0.11 0.18 <EPS-DILUTED> 0.05 0.10 0.16 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.5 <SEQUENCE>20 <DESCRIPTION>EXHIBIT 27.5 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <C> <C> <PERIOD-TYPE> 3-MOS 6-MOS 9-MOS <FISCAL-YEAR-END> APR-24-1998 APR-24-1998 APR-24-1998 <PERIOD-START> APR-26-1997 APR-26-1997 APR-26-1997 <PERIOD-END> JUL-25-1997 OCT-24-1997 JAN-23-1998 <CASH> 25,578 28,520 39,302 <SECURITIES> 4,850 5,250 5,250 <RECEIVABLES> 16,852 23,113 26,684 <ALLOWANCES> 296 421 546 <INVENTORY> 12,719 11,718 9,045 <CURRENT-ASSETS> 63,855 73,361 85,394 <PP&E> 15,161 17,014 18,638 <DEPRECIATION> 5,543 6,783 8,074 <TOTAL-ASSETS> 76,492 86,598 98,908 <CURRENT-LIABILITIES> 16,891 20,479 25,122 <BONDS> 0 0 0 <PREFERRED-MANDATORY> 0 0 0 <PREFERRED> 0 0 0 <COMMON> 55,814 57,457 59,579 <OTHER-SE> 3,597 8,482 14,037 <TOTAL-LIABILITY-AND-EQUITY> 76,492 86,598 98,908 <SALES> 33,420 71,821 115,805 <TOTAL-REVENUES> 33,420 71,821 115,805 <CGS> 13,570 29,316 47,196 <TOTAL-COSTS> 13,570 29,316 47,196 <OTHER-EXPENSES> 13,264 28,332 45,791 <LOSS-PROVISION> 0 125 125 <INTEREST-EXPENSE> 0 0 0 <INCOME-PRETAX> 6,754 14,570 23,458 <INCOME-TAX> 2,533 5,464 8,797 <INCOME-CONTINUING> 4,221 9,106 14,661 <DISCONTINUED> 0 0 0 <EXTRAORDINARY> 0 0 0 <CHANGES> 0 0 0 <NET-INCOME> 4,221 9,106 14,661 <EPS-BASIC> 0.03 0.07 0.11 <EPS-DILUTED> 0.03 0.06 0.10 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.6 <SEQUENCE>21 <DESCRIPTION>EXHIBIT 27.6 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <C> <C> <PERIOD-TYPE> 3-MOS 6-MOS 9-MOS <FISCAL-YEAR-END> APR-25-1997 APR-25-1997 APR-25-1997 <PERIOD-START> APR-27-1996 APR-27-1996 APR-27-1996 <PERIOD-END> JUL-26-1996 OCT-25-1996 JAN-24-1997 <CASH> 21,758 15,244 20,938 <SECURITIES> 6,350 8,850 6,850 <RECEIVABLES> 6,751 10,866 12,336 <ALLOWANCES> 330 0 0 <INVENTORY> 6,993 8,318 9,585 <CURRENT-ASSETS> 44,891 46,314 53,007 <PP&E> 5,704 5,841 6,148 <DEPRECIATION> 0 0 0 <TOTAL-ASSETS> 50,803 52,345 59,357 <CURRENT-LIABILITIES> 11,475 10,225 12,833 <BONDS> 0 0 0 <PREFERRED-MANDATORY> 0 40,448 0 <PREFERRED> 0 0 0 <COMMON> 40,416 0 41,495 <OTHER-SE> (1,365) 1,416 4,796 <TOTAL-LIABILITY-AND-EQUITY> 50,803 52,345 59,357 <SALES> 18,460 39,508 64,353 <TOTAL-REVENUES> 18,460 39,508 64,353 <CGS> 7,593 16,176 26,292 <TOTAL-COSTS> 7,593 16,176 26,292 <OTHER-EXPENSES> 11,913 20,361 30,131 <LOSS-PROVISION> 0 0 0 <INTEREST-EXPENSE> 0 0 0 <INCOME-PRETAX> (755) 3,523 8,723 <INCOME-TAX> (264) 1,233 3,053 <INCOME-CONTINUING> (491) 2,290 5,670 <DISCONTINUED> 0 0 0 <EXTRAORDINARY> 0 0 0 <CHANGES> 0 0 0 <NET-INCOME> (491) 2,290 5,670 <EPS-BASIC> (0.00) 0.02 0.05 <EPS-DILUTED> (0.00) 0.02 0.04 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

OKE

https://www.sec.gov/Archives/edgar/data/1039684/0000930661-00-000012.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, Er6Sqok1PXy2nL3rkXI006Y/25pQVxnlPMmdjjr3myjn611CjDZxXX2lX35mRfHX 63yjjBG46BSwri2Qh3TlIA== <SEC-DOCUMENT>0000930661-00-000012.txt : 20000110 <SEC-HEADER>0000930661-00-000012.hdr.sgml : 20000110 ACCESSION NUMBER: 0000930661-00-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONEOK INC /NEW/ CENTRAL INDEX KEY: 0001039684 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 731520922 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13643 FILM NUMBER: 503012 BUSINESS ADDRESS: STREET 1: 100 WEST 5TH ST CITY: TULSA STATE: OK ZIP: 74103 BUSINESS PHONE: 9185887000 MAIL ADDRESS: STREET 1: 100 WEST 5TH ST CITY: TULSA STATE: OK ZIP: 74103 FORMER COMPANY: FORMER CONFORMED NAME: WAI INC DATE OF NAME CHANGE: 19970519 </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, 1999. 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 001-13643 ONEOK, Inc. (Exact name of registrant as specified in its charter) Oklahoma 73-1520922 (State or other jurisdiction (I.R.S. Employer of incorporation of organization) Identification No.) 100 West Fifth Street, Tulsa, OK 74103 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code (918) 588-7000 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___ --- On November 30, 1999, the Company had 30,131,625 shares of common stock outstanding. <PAGE> ONEOK, Inc. QUARTERLY REPORT ON FORM 10-Q <TABLE> <CAPTION> Part I. Financial Information Page No. <S> <C> Consolidated Condensed Statements of Income - Three Months Ended November 30, 1999 and 1998 3 Consolidated Condensed Balance Sheets - November 30, 1999 and August 31, 1999 4 Consolidated Condensed Statements of Cash Flows - Three Months Ended November 30, 1999 and 1998 5 Notes to Consolidated Condensed Financial Statements 6 - 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 18 Part II. Other Information 19 - 20 </TABLE> 2 <PAGE> Part I - FINANCIAL INFORMATION ONEOK, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF INCOME <TABLE> <CAPTION> (Unaudited) Three Months Ended November 30, 1999 1998 - -------------------------------------------------------------------------------- (Thousands of Dollars, except per share amounts) <S> <C> <C> Operating Revenues $ 533,482 $ 374,936 Cost of gas 338,994 239,836 - -------------------------------------------------------------------------------- Net Revenues 194,488 135,100 - -------------------------------------------------------------------------------- Operating Expenses Operations and maintenance 104,821 64,589 Depreciation, depletion, and amortization 32,547 31,138 General taxes 11,043 9,374 - -------------------------------------------------------------------------------- Total Operating Expenses 148,411 105,101 - -------------------------------------------------------------------------------- Operating Income 46,077 29,999 - -------------------------------------------------------------------------------- Other income - 4,993 Interest 20,357 11,355 Income taxes 9,990 9,387 - -------------------------------------------------------------------------------- Net Income 15,730 14,250 Preferred Stock Dividends 9,275 9,324 - -------------------------------------------------------------------------------- Income Available for Common Stock $ 6,455 $ 4,926 ================================================================================ Earnings Per Share of Common Stock - Basic $ 0.21 $ 0.16 ================================================================================ Earnings Per Share of Common Stock - Diluted $ 0.21 $ 0.16 ================================================================================ Dividends Per Share of Common Stock $ 0.31 $ 0.31 ================================================================================ Average Shares of Common Stock - Basic (Thousands) 30,666 31,535 Average Shares of Common Stock - Diluted (Thousands) 30,681 31,578 </TABLE> See accompanying notes to consolidated condensed financial statements. 3 <PAGE> ONEOK, Inc. and Subsidiaries CONSOLIDATED CONDENSED BALANCE SHEETS <TABLE> <CAPTION> November 30, August 31, (Unaudited) 1999 1999 - --------------------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Assets Current Assets Cash and cash equivalents $ - $ 4,402 Trade accounts and notes receivable 284,055 228,336 Inventories 155,905 118,951 Other current assets 101,171 87,578 - --------------------------------------------------------------------------------------------------------- Total Current Assets 541,131 439,267 - --------------------------------------------------------------------------------------------------------- Property, Plant and Equipment 3,119,425 3,057,626 Accumulated depreciation, depletion, and amortization 1,015,845 988,797 - --------------------------------------------------------------------------------------------------------- Net Property 2,103,580 2,068,829 - --------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets Regulatory assets, net 244,831 246,658 Goodwill 80,993 81,560 Investments and other 204,352 188,631 - --------------------------------------------------------------------------------------------------------- Total Deferred Charges and Other Assets 530,176 516,849 - --------------------------------------------------------------------------------------------------------- Total Assets $ 3,174,887 $ 3,024,945 ========================================================================================================= Liabilities and Shareholders' Equity Current Liabilities Current maturities of long-term debt $ 22,817 $ 22,817 Notes payable 376,946 263,747 Accounts payable 223,292 183,759 Accrued taxes 4,620 11,186 Accrued interest 13,187 7,042 Other 50,561 55,031 - --------------------------------------------------------------------------------------------------------- Total Current Liabilities 691,423 543,582 - --------------------------------------------------------------------------------------------------------- Long-term Debt, excluding current maturities 809,428 810,087 Deferred Credits and Other Liabilities Deferred income taxes 346,782 323,624 Other deferred credits 179,727 173,193 - --------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 526,509 496,817 - --------------------------------------------------------------------------------------------------------- Total Liabilities 2,027,360 1,850,486 - --------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note F) Shareholders' Equity Convertible Preferred Stock, $0.01 par value: Series A authorized 20,000,000 shares; issued and outstanding 19,946,448 shares 199 199 Common stock, $0.01 par value: authorized 100,000,000 shares; issued 31,599,305 shares, outstanding 30,131,625 and 30,884,225 shares 316 316 Paid in capital 894,978 894,978 Unearned compensation (1,933) - Retained earnings 298,351 301,536 Treasury stock at cost: 1,467,680 and 715,080 shares (44,384) (22,570) - --------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 1,147,527 1,174,459 - --------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 3,174,887 $ 3,024,945 ========================================================================================================= See accompanying notes to consolidated condensed financial statements. </TABLE> 4 <PAGE> ONEOK, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Three Months Ended November 30, (Unaudited) 1999 1998 - ------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Operating Activities Net income $ 15,730 $ 14,250 Depreciation, depletion, and amortization 32,547 31,138 Gain on sale of assets - (4,993) Net income from other investments (1,760) (442) Deferred income taxes 23,652 (3,883) Changes in assets and liabilities (80,640) (66,088) - ------------------------------------------------------------------------------------------- Cash Provided by (Used in) Operating Activities (10,471) (30,018) - ------------------------------------------------------------------------------------------- Investing Activities Changes in other investments, net 641 442 Capital expenditures, net of salvage (64,307) (29,371) Proceeds from sale of property - 22,000 - ------------------------------------------------------------------------------------------- Cash Used in Investing Activities (63,666) (6,929) - ------------------------------------------------------------------------------------------- Financing Activities Issuance (payment) of notes payable, net 113,199 (144,000) Issuance of debt - 200,000 Payment of debt (797) - Acquisition of treasury stock (23,882) - Dividends paid (18,785) (19,099) - ------------------------------------------------------------------------------------------- Cash Provided by Financing Activities 69,735 36,901 - ------------------------------------------------------------------------------------------- Change in Cash and Cash Equivalents (4,402) (46) Cash and Cash Equivalents at Beginning of Period 4,402 86 - ------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ - $ 40 =========================================================================================== See accompanying notes to consolidated condensed financial statements. </TABLE> 5 <PAGE> NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) A. Summary of Significant Accounting Policies Interim Reporting. The interim consolidated condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Due to the seasonal nature of the business, the results of operations for the three months ended November 30, 1999, are not necessarily indicative of the results that may be expected for a twelve-month period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended August 31, 1999. Reclassification. Certain amounts for 1999 have been reclassified to conform with the 2000 presentation. In particular, the Company reclassified other income, including gains on sales of assets, from operating revenue to a separate caption, and now presents operating income. B. Significant Events A July, 1999 order from the Oklahoma Corporation Commission (OCC) removed the Oklahoma gathering and storage assets from utility regulation effective November 1, 1999. These assets are now included in the Transportation and Storage segment where they are being utilized in the competitive marketplace. An August, 1999 order from the OCC distinguished between upstream (transportation) and downstream (distribution) assets and cleared the way for future unbundling activities including competitive bidding for transportation services in Oklahoma. The Distribution segment issued bids for these services in Oklahoma during the quarter ended November 30, 1999 with contracts to be awarded in the spring of 2000. In October, 1999, the Company's Board of Directors approved a change in the Company's fiscal year-end. The fiscal year-end will be changed from August 31 to December 31 effective January 1, 2000. The Transition Report covering the four months ended December 31, 1999, will be filed on a Form 10-Q. On May 25, 1999, the Company began buying shares of common stock under a stock buyback plan authorized in March, 1999. Through November 30, 1999, 1,534,246 shares of common stock were purchased on the open market. The Company is authorized to buy back up to 15 percent of its capital stock. C. Regulatory Assets The table is a summary of regulatory assets, net of amortization, at November 30, 1999, and August 31, 1999. November 30, August 31, 1999 1999 ------------------------------------------------------------------- (Thousands of Dollars) Recoupable take-or-pay $ 84,756 $ 85,996 Pension costs 19,836 20,881 Postretirement costs other than pension 61,962 61,830 Other 9,740 8,521 Transition costs 22,785 22,903 Reacquired debt costs 22,221 22,413 Income taxes 23,531 24,114 ------------------------------------------------------------------ Regulatory assets, net $ 244,831 $ 246,658 ================================================================== 6 <PAGE> D. Supplemental Cash Flow Information The table is supplemental information relative to the Company's cash flows for the three months ended November 30, 1999 and 1998. 1999 1998 ------------------------------------------------------------------- (Thousands of Dollars) Cash paid during the year Interest (including amounts capitalized) $ 13,258 $ 11,118 Income taxes $ - $ 2,500 Noncash transactions Gas received as payment in kind $ - $ 61 Treasury stock transferred to compensation plans $ 2,068 $ - ------------------------------------------------------------------- E. Earnings per Share Information The following is a reconciliation of the basic and diluted EPS computations. <TABLE> <CAPTION> Three Months Ended November 30, 1999 Per Share Income Shares Amount ------------------------------------------------------------------------------ <S> <C> <C> <C> (Thousands, except per share amounts) Basic EPS Income available to common stockholders $ 6,455 30,666 $ 0.21 ======= Effect of Dilutive Securities Options - 15 Convertible preferred stock - - ---------- ------ Diluted EPS Income available to common stockholders + assumed conversions $ 6,455 30,681 $ 0.21 ============================================================================== Three Months Ended November 30, 1998 Per Share Income Shares Amount ------------------------------------------------------------------------------ (Thousands, except per share amounts) Basic EPS Income available to common stockholders $ 4,926 31,535 $ 0.16 ======= Effect of Dilutive Securities Options - 43 Convertible preferred stock - - ---------- ------ Diluted EPS Income available to common stockholders + assumed conversions $ 4,926 31,578 $ 0.16 =================================================================================== </TABLE> There were 19,874,254 shares of convertible preferred stock and 72,214 option shares excluded from the calculation of Diluted Earnings per Share due to being antidilutive for the three months ended November 30, 1999. For the same period one year ago, there were 20,071,000 convertible preferred shares excluded. F. Commitments and Contingencies During the year ended August 31, 1999, the Company and Southwest Gas Corporation (Southwest) entered into a definitive agreement whereby the Company agreed to acquire Southwest for $30 per share in an all cash transaction valued at $918 million. The total transaction cost, including assumed debt, is estimated at $1.8 billion. The transaction is subject to various conditions including regulatory approvals which are still pending in California and Arizona. Southwest shareholders approved the agreement on August 10, 1999. On January 4, 7 <PAGE> 2000, the Arizona Corporation Commission (ACC) staff filed prefiled testimony recommending the merger be delayed until a favorable resolution of pending litigation is reached. The Company and certain of its officers as well as Southwest have been named as defendants in a lawsuit brought by Southern Union Company (Southern Union) in connection with the proposed acquisition in the total amount of $750 million. The Southern Union allegations include, but are not limited to, Racketeer, Influenced and Corrupt Organization Act violations and improper interference in a contractual relationship between Southwest and Southern Union. If the plaintiff should be successful in any of the claims against the Company or Southwest and substantial damages are awarded, it could have a material adverse effect on the Company's operations, cash flow, and financial position. The Company, as third party beneficiary, has filed a lawsuit against Southern Union for breach of a confidentiality and standstill agreement with Southern Union and Southwest. The parties are presently involved in discovery. The Company believes the Southern Union allegations are without merit and is defending itself vigorously against all claims. The Company has responsibility for 12 manufactured gas sites located in Kansas which may contain potentially harmful materials that are classified as hazardous material. Hazardous materials are subject to control or remediation under various environmental laws and regulations. A consent agreement with the Kansas Department of Health and Environment (KDHE) presently governs all future work at these sites. The terms of the consent agreement allow the Company to investigate these sites and set remediation priorities based upon the results of the investigations and risk analysis. The prioritized sites will be investigated over a ten year period. At November 30, 1999, the costs of the investigations and risk analysis have been minimal. Limited information is available about the sites. Management's best estimate of the cost of remediation ranges from $100 thousand to $10 million per site based on a limited comparison of costs incurred to remediate comparable sites. These estimates do not give effect to potential insurance recoveries, recoveries through rates or from third parties. The KCC has permitted others to recover remediation costs through rates. It should be noted that additional information and testing could result in costs significantly below or in excess of the amounts estimated above. To the extent that such remediation costs are not recovered, the costs could be material to the Company's results of operations and cash flows depending on the remediation done and number of years over which the remediation is completed. The Company is a party to litigation matters and claims which are normal in the course of its operations, and while the results of litigation and claims cannot be predicted with certainty, management believes the final outcome of such matters will not have a materially adverse effect on consolidated results of operations, financial position, or liquidity. G. Segments In fiscal 1999, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement required the Company to define and report the Company's business segments based on how management currently evaluates its business. Management has segmented its business based on differences in products and services and management responsibility. The Company conducts its operations through six segments: (1) the Distribution segment distributes natural gas to residential, commercial and industrial customers, leases pipeline capacity to others and provides transportation services for end-use customers; (2) the Transportation and Storage segment transports and stores natural gas for others; (3) the Marketing segment markets natural gas to wholesale and retail customers and markets electricity to wholesale customers; (4) the Gathering and Processing segment gathers and processes natural gas and natural gas liquids; (5) the Production segment produces natural gas and oil; and (6) the Other segment primarily operates and leases the Company's headquarters building and a related parking facility. Intersegment oil and gas sales are recorded on the same basis as sales to unaffiliated customers. All corporate overhead costs relating to a reportable segment have been allocated for the purpose of calculating operating 8 <PAGE> income. The Company's equity method investments do not represent operating segments of the Company. The Company has no single external customer from which it receives ten percent or more of its revenues. <TABLE> <CAPTION> Gathering Eliminations Three Months Ended Transportation and and November 30, 1999 Distribution and Storage Marketing Processing Production Other Total - ------------------------------------------------------------------------------------------------------------------------------------ (Thousands of Dollars) <S> <C> <C> <C> <C> <C> <C> <C> Sales to unaffiliated customers $ 195,691 $ 13,596 $ 257,144 $ 46,078 $ 15,324 $ 5,649 $ 533,482 Intersegment sales 1,147 17,128 3,714 9,428 3,296 (34,713) - - ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 196,838 $ 30,724 $ 260,858 $ 55,506 $ 18,620 $ (29,064) $ 533,482 - ----------------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 82,618 $ 30,724 $ 6,866 $ 55,506 $ 18,620 $ 154 $ 194,488 Operating Costs $ 55,410 $ 10,162 $ 2,268 $ 47,282 $ 5,459 $ (4,717) $ 115,864 Depreciation, depletion and amortization $ 18,636 $ 3,852 $ 182 $ 1,846 $ 7,417 $ 614 $ 32,547 Operating Income $ 8,572 $ 16,710 $ 4,416 $ 6,378 $ 5,744 $ 4,257 $ 46,077 Income from Equity Investments $ - $ 776 $ - $ - $ 984 $ - $ 1,760 Total Assets $ 1,755,218 $ 372,915 $ 309,926 $ 364,602 $ 353,167 $ 19,059 $ 3,174,887 Capital Expenditures $ 22,817 $ 4,392 $ 10,258 $ 21,547 $ 5,153 $ 833 $ 65,000 - ----------------------------------------------------------------------------------------------------------------------------------- <CAPTION> Gathering Eliminations Three Months Ended Transportation and and November 30, 1999 Distribution and Storage Marketing Processing Production Other Total - ----------------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> <C> <C> <C> <C> <C> Sales to unaffiliated customers $ 179,711 $ 6,945 $ 167,825 $ 7,860 $ 8,104 $ 4,491 $ 374,936 Intersegment sales 2,169 20,059 2,596 3,246 5,318 (33,388) - - ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 181,880 $ 27,004 $ 170,421 $ 11,106 $ 13,422 $ (28,897) $ 374,936 - ----------------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 78,153 $ 27,004 $ 6,441 $ 11,106 $ 13,422 $ (1,026) $ 135,100 Operating Costs $ 56,077 $ 9,262 $ 1,807 $ 7,899 $ 3,767 $ (4,849) $ 73,963 Depreciation, depletion and amortization $ 18,502 $ 3,315 $ 45 $ 512 $ 7,637 $ 1,127 $ 31,138 Operating Income $ 3,574 $ 14,427 $ 4,589 $ 2,695 $ 2,018 $ 2,696 $ 29,999 Income from Equity Investments $ - $ 433 $ - $ - $ 9 $ - $ 442 Total Assets $ 1,756,980 $ 402,614 $ 144,734 $ 42,833 $ 242,164 $ (93,170) $ 2,496,155 Capital Expenditures $ 19,312 $ 7,173 $ 600 $ 5,004 $ 3,730 $ 2,351 $ 38,170 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> 9 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This form 10-Q contains statements concerning Company expectations or predictions of the future that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. these statements are intended to be covered by the safe harbor provision of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are based on management's beliefs and assumptions based on information currently available. it is important to note that actual results could differ materially from those projected in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: . The effects of weather and other natural phenomena; . increased competition from other energy suppliers as well as alternative forms of energy; . the capital intensive nature of the Company's business; . economic climate and growth in the geographic areas in which the Company does business; . the uncertainty of gas and oil reserve estimates; . the timing and extent of changes in commodity prices for natural gas, natural gas liquids, electricity, and crude oil; . the nature and projected profitability of potential projects and other investments available to the Company; . conditions of capital markets and equity markets; . the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance, authorized rates, and deregulation or "unbundling" of natural gas; . the pending merger with Southwest Gas Corporation (Southwest); and . regulatory delay or conditions imposed by regulatory bodies in, and the results of litigation involving, the Southwest merger. Accordingly, while the Company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. when used in Company documents, the words "anticipate," "expect," "projection," "goal" or similar words are intended to identify forward-looking statements. The Company does not have any intention or obligation to update forward-looking statements after they distribute this Form 10-Q even if new information, future events or other circumstances have made them incorrect or misleading. A. Results of Operations Consolidated Operations The Company provides natural gas and related products and services to its customers through the following segments: . Distribution . Transportation And Storage . Marketing . Gathering and Processing . Production . Other The Company is the ninth largest natural gas distribution company in the United States in terms of number of customers. Nonregulated operations involve transmission, storage, marketing, gathering and processing, and production of natural gas and natural gas liquids and marketing of electricity . Operating results continue to be strong despite warmer than normal weather. while the quarters ended November 30, 1999 and 1998 were both warmer than normal, the Company is using derivative instruments for fiscal 2000 to reduce the effect of weather variances during the heating season. During the quarter ended 10 <PAGE> November 30, 1999, these derivative instruments resulted in revenue of $4.1 million which offset much of the margin variances caused by weather. This revenue was recorded in the Other segment. Although some higher interest rate debt was refinanced at a lower interest rate during fiscal 1999, increased borrowing, primarily due to acquisitions in fiscal 1999, resulted in increased interest expense. Gains on sales of assets of $5.0 million were included in Other Income during the first quarter of fiscal 1999. Three Months Ended November 30, ---------------------------------------------------------------------- 1999 1998 ---------------------------------------------------------------------- (Thousands of Dollars) Financial Results Operating revenues $ 533,482 $ 374,936 Cost of gas 338,994 239,836 ---------------------------------------------------------------------- Net Revenue 194,488 135,100 Operating costs 115,864 73,963 Depreciation, depletion, and amortization 32,547 31,138 ---------------------------------------------------------------------- Operating income $ 46,077 $ 29,999 ====================================================================== Other income $ - $ 4,993 ====================================================================== Year 2000 - The Year 2000 (Y2K) issue arose because most computer systems, including application software and computer technology embedded in plant and equipment were constructed using a two digit date field that assumed the first two digits are always "19". It was believed that on January 1, 2000, those systems might incorrectly recognize the date as January 1, 1900, and incorrectly process critical information or stop processing altogether. Since 1996, the Company has been in the process of making the necessary conversions to make the Company Y2K compatible. While there can be no assurance that there will be no problems related to Y2K, it appears that these efforts were successful. January 1, 2000 passed with no negative impact on any of the Company's systems or operations. Distribution The Distribution segment provides natural gas distribution services in Oklahoma and Kansas. The Company's operations in Oklahoma are primarily conducted through Oklahoma Natural Gas Company Division (ONG) which serves residential, commercial, and industrial customers and leases pipeline capacity. The Company's operations in Kansas are conducted through Kansas Gas Service Company Division (KGS) which serves residential, commercial, and industrial customers. KGS also conducts regulated gas distribution operations in northeastern Oklahoma. The Distribution segment serves about 80 percent of Oklahoma and about 67 percent of Kansas. ONG is subject to regulatory oversight by the OCC. KGS is subject to regulatory oversight by the KCC and the OCC. Three Months Ended November 30, ---------------------------------------------------------------------- 1999 1998 ---------------------------------------------------------------------- (Thousands of Dollars) Financial Results Gas sales $ 180,682 $ 164,570 Cost of gas 114,220 103,727 ---------------------------------------------------------------------- Gross margin on gas sales 66,462 60,843 PCL and ECT revenues 12,670 13,621 Other revenues 3,486 3,689 ---------------------------------------------------------------------- Net revenues 82,618 78,153 Operating costs 55,410 56,077 Depreciation, depletion, and amortization 18,636 18,502 ---------------------------------------------------------------------- Operating Income $ 8,572 $ 3,574 ====================================================================== 11 <PAGE> Three Months Ended November 30, 1999 1998 ------------------------------------------------------------- Gross Margin Per Mcf Oklahoma Residential $ 3.83 $ 4.18 Commercial $ 2.83 $ 2.87 Industrial $ 1.12 $ 1.19 Pipeline capacity leases $ 0.25 $ 0.23 Kansas Residential $ 3.49 $ 3.36 Commercial $ 2.40 $ 2.23 Industrial $ 2.00 $ 1.99 End-use customer transportation $ 0.55 $ 0.43 ------------------------------------------------------------- Three Months Ended November 30, 1999 1998 ------------------------------------------------------------- Operating Information Number of customers 1,419,974 1,401,198 Capital expenditures (Thousands) $ 22,817 $ 19,312 Total assets (Thousands) $ 1,755,218 $ 1,756,980 Customers per employee 537 518 ------------------------------------------------------------- Three Months Ended November 30, 1999 1998 ------------------------------------------------------------- Volumes (MMcf) Gas sales Residential 15,680 15,197 Commercial 5,815 6,124 Industrial 1,207 1,064 ------------------------------------------------------------- Total volumes sold 22,702 22,385 PCL and ECT 45,865 57,541 ------------------------------------------------------------- Total volumes delivered 68,567 79,926 ============================================================= Gross margins on gas sales increased primarily due to reduced transportation costs paid to an affiliate and an increase in volumes sold during the quarter ended November 30, 1999 compared to the same period one year ago. Pipeline Capacity Lease (PCL) and End-use Customer Transportation (ECT) revenues and volumes decreased primarily due to the loss of three customers and the effect of warm weather including the temporary shut-down of two power plants served by the Distribution segment. The volume decrease was partially offset by an increase in rates. Two rate cases were combined in Oklahoma, eliminating an interim rate case scheduled for the summer of 1999 and providing for a one-time interim rate reduction of $5 million which began September 1, 1999 for residential customers in Oklahoma. The amount of the rate reduction in the quarter ended November 30, 1999 was $0.8 million. A July, 1999 order from the OCC removed the Oklahoma gathering and storage assets from utility regulation effective November 1, 1999. These assets are now included in the Transportation and Storage segment where they are being utilized in the competitive marketplace. The removal of the gathering and storage assets from rate base will result in a net reduction of revenues of $29.0 million on an annualized basis, based on the allocation of costs from the 1994 rate case. The Transportation and Storage and Marketing segments are aggressively seeking new business opportunities and have replaced a substantial portion of the revenues. Additionally, a charge to be collected through the PGA for ONG's current working gas in storage will replace a portion of the revenues. These revenue adjustments are subject to review in the current consolidated rate case with hearings scheduled for the spring of 2000. 12 <PAGE> In August, 1999, the OCC approved a plan to distinguish between upstream and downstream activities in Oklahoma. The Distribution segment began taking bids this fall for transportation services in Oklahoma with contracts to be awarded in the spring of 2000 for service beginning November 1, 2000. As contracts with PCL customers expire, these contracts may be renewed with the Distribution segment, the Transportation and Storage segment of the Company or nonaffiliated service providers. Consequently, this could result in reduced revenues in the Distribution segment. Certain costs to be recovered through the rate making process have been recorded as regulatory assets in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). As the Company continues to unbundle its services, certain of these assets may no longer meet the criteria for following SFAS 71, and accordingly, a write-off of regulatory assets and stranded costs may be required. The Company does not anticipate these costs to be significant. Transportation and Storage The Company's gathering and storage assets and services in Oklahoma were removed from utility regulation effective November 1, 1999. Gathering and storage assets, including current gas in storage, of $325.0 million were removed from rate base. With unbundling and deregulation of gathering and storage service, the Company is able to compete for business at market-based rates. The Company's strategy to increase its storage utilization through greater injection and withdrawal capabilities has resulted in increased storage revenues for the quarter ended November 30, 1999 compared to the same period one year ago. A decrease in transportation for an affiliate and warmer weather resulted in decreased transportation volumes and revenues for the quarter ended November 30, 1999 compared to the same period one year ago. The increase in other revenues is due to increased revenues from retained fuel. Three Months Ended November 30, 1999 1998 ---------------------------------------------------------------------- (Thousands of Dollars) Financial Results Transportation revenues $ 15,739 $ 18,568 Storage revenues 9,832 6,573 Other revenues 5,153 1,863 ---------------------------------------------------------------------- Net revenues 30,724 27,004 Operating costs 10,162 9,262 Depreciation, depletion, and amortization 3,852 3,315 ---------------------------------------------------------------------- Operating income $ 16,710 $ 14,427 ====================================================================== Three Months Ended November 30, 1999 1998 --------------------------------------------------------------- Operating Information Volumes transported (MMcf) 56,338 74,671 Injection Horsepower 35,300 31,000 Capital expenditures (Thousands) $ 4,392 $ 7,173 Total assets (Thousands) $ 372,915 $ 402,614 --------------------------------------------------------------- 13 <PAGE> Marketing The Company's marketing operation purchases, stores and markets natural gas at both the retail and wholesale level, primarily in the producing areas of the United States. The Company continues to develop its niche into new market areas by arbitraging storage in the day trading market rather than focusing on the baseload market. Gas volumes increased in the quarter ended November 30, 1999 over the same period one year ago primarily from the Company's expansion into the Permian/Waha region of the United States. The Company now leases from others more than 29 Bcf of storage capacity which gives direct access to the west coast and Texas intrastate markets. Three Months Ended November 30, 1999 1998 ---------------------------------------------------------------------- (Thousands of Dollars) Financial Results Gas sales $ 260,606 $ 168,395 Cost of gas 253,992 163,980 ---------------------------------------------------------------------- Gross margin on gas sales 6,614 4,415 Other revenues 252 2,026 ---------------------------------------------------------------------- Net revenues 6,866 6,441 Operating costs 2,268 1,807 Depreciation, depletion, and amortization 182 45 ---------------------------------------------------------------------- Operating income $ 4,416 $ 4,589 ====================================================================== Three Months Ended November 30, 1999 1998 ---------------------------------------------------------------------- Operating Information Natural gas volumes (MMcf) 93,676 86,556 Capital expenditures (Thousands) $ 10,258 $ 600 Total assets (Thousands) $ 309,926 $ 144,734 ---------------------------------------------------------------------- The increase in gross margins is attributable to increased throughput, higher margins, and a more extensive use of storage. The use of storage has allowed the Company to concentrate on the day-to-day market and take advantage of volatility in that market. Emphasis on base load market has been reduced. Increased sales volumes are primarily due to the expanded niche business into Texas and the west coast. The decrease in other revenues is due to the recovery of prior period costs in the quarter ended November 30, 1998. The increase in operating costs is related to leasing storage and start-up costs for ONEOK Power Marketing Company. Trading of electricity at market-based wholesale rates has begun but has had minimal impact on operations to date. Gathering and Processing Revenues increased in the quarter ended November 30, 1999 over the same period one year ago due to the acquisition of the midstream natural gas gathering and processing assets from Koch Midstream Enterprises in April, 1999. Operating costs and depreciation, depletion and amortization also increased due to the additional assets and the cost of operating those assets. Total gas gathered and total gas processed for the quarter ended November 30, 1999 increased 347.7 MMcf per day and 281.5 MMcf per day, respectively, compared to the same period one year ago. Average NGL price per gallon increased as prices continued to experience an upward correction from the abnormally low prices prevalent throughout much of fiscal 1999. Other income in fiscal 1999 consisted of the gains on sales of assets. 14 <PAGE> Three Months Ended November 30, ----------------------------------------------------------------------- 1999 1998 ----------------------------------------------------------------------- (Thousands of Dollars) Financial Results Natural gas liquids and condensate sales $ 32,368 $ 6,708 Gas sales 18,305 3,062 Gathering revenues 5,024 - Other revenues (191) 1,336 ----------------------------------------------------------------------- Total revenues 55,506 11,106 Cost of sales 40,996 6,214 ----------------------------------------------------------------------- Gross margin 14,510 4,892 Operating costs 6,286 1,685 Depreciation, depletion, and amortization 1,846 512 ----------------------------------------------------------------------- Operating income $ 6,378 $ 2,695 ======================================================================= Other income $ - $ 4,993 ======================================================================= Three Months Ended November 30, 1999 1998 ----------------------------------------------------------------------- Operating Information Average NGL's price ($/Gal) $ 0.371 $ 0.225 Average gas price ($/Mcf) $ 2.59 $ 1.77 Capital expenditures (Thousands) $ 21,547 $ 5,004 Total assets (Thousands) $ 364,602 $ 42,833 Total gas gathered (Mcf/D) 471,797 124,111 Total gas processed (Mcf/D) 394,320 112,828 Natural gas liquids sales (MGal) 93,534 29,276 Gas sales (MMMbtu) 7,057 1,733 Natural Gas Liquids by Component (%) Ethane 46 47 Propane 27 25 Iso butane 5 4 Normal butane 9 9 Natural gasoline 13 15 Contracts % Percent of Proceeds 64 65 Fuel and Shrink 36 35 ----------------------------------------------------------------------- Production Increased production from a successful developmental drilling program and properties acquired during fiscal 1999 were the primary reasons for the increases in volumes for the quarter ended November 30, 1999 compared to the same period one year ago. Gas and oil prices for the quarter ended November 30, 1999 increased compared to the same period one year ago. Operating costs also increased over one year ago due to the Company operating and owning an interest in an increased number of wells. Three Months Ended November 30, 1999 1998 ---------------------------------------------------------------------- (Thousands of Dollars) Financial Results Natural gas sales $ 15,610 $ 11,950 Oil sales 1,966 1,354 Other revenues 1,044 118 ---------------------------------------------------------------------- Net revenues 18,620 13,422 Operating costs 5,459 3,767 Depreciation, depletion, and amortization 7,417 7,637 ---------------------------------------------------------------------- Operating income $ 5,744 $ 2,018 ====================================================================== 15 <PAGE> Three Months Ended November 30, 1999 1998 ---------------------------------------------------------- Operating Information Proved reserves Gas (MMcf) 251,593 175,048 Oil (MBbls) 4,109 3,273 Production Gas (MMcf) 6,347 5,714 Oil (MBbls) 106 105 Average price Gas (Mcf) $ 2.46 $ 2.07 Oil (Bbls) $ 18.59 $ 12.94 Capital expenditures (Thousands) $ 5,153 $ 3,730 Total assets (Thousands) $ 353,167 $ 242,164 ========================================================== FINANCIAL FLEXIBILITY AND LIQUIDITY The Company's capitalization structure is 49 percent equity and 51 percent debt (including short-term debt) at November 30, 1999, compared to 66 percent equity and 34 percent debt at November 30, 1998. Cash provided by operating activities remains strong and continues as the primary source for meeting day-to-day cash requirements. However, due to seasonal fluctuations, acquisitions, and additional capital requirements, the Company accesses funds through commercial paper, short-term credit agreements and, if necessary, through long-term borrowing. Operating Cash Flows Operating cash flows for the three months ended November 30, 1999, as compared to the same period one year ago are higher due to higher operating income. Additionally, no tax payments have been made this quarter due to the accelerated depreciation on the assets acquired from Koch. Investing Cash Flows Capital expenditures totaled $65.0 million for the quarter ended November 30, 1999. This included $10.1 million for construction of an electric generating plant and $12.3 million for the purchase of a gathering pipeline in western Oklahoma. For the same period one year ago, capital expenditures totaled $38.2 million. Financing Cash Flows At November 30, 1999, $832.2 million of long-term debt was outstanding. As of that date, the Company could have issued $695.3 million of additional long-term debt under the most restrictive provisions contained in its various borrowing agreements. On March 18, 1999, the Company authorized a stock buyback plan for up to 15 percent of its capital stock. The program authorizes the Company to make purchases of its common stock on the open market with the timing and terms of purchases and the number of shares purchased to be determined by management based on market conditions and other factors. Purchases began May 25, 1999, with 1,534,246 shares purchased through November 30, 1999. The purchased shares are held in treasury and are available for general corporate purposes, funding of stock-based compensation plans, resale, or retirement. Purchases are financed with short-term debt. The Company believes that internally generated funds and access to financial markets will be sufficient to meet its normal debt services, dividend requirements, and capital expenditures. 16 <PAGE> LIQUIDITY Competition continues to increase in all segments of the Company's business. The loss of major customers without recoupment of those revenues and negative effects of weather are among the events which could have a material adverse effect on the Company's financial condition. However, rates in the Distribution segment are structured to reduce the Company's risk in serving its large customers. Other strategies, such as the use of derivative instruments to offset the effect of weather variances, and aggressive negotiations with potential new customers are expected to reduce other risks to the Company. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Risk Management - The Company, substantially through its nonutility segments, is exposed to market risk in the normal course of its business operations to the impact of market fluctuations in the price of natural gas and oil. Market risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in commodity energy prices. The Company's primary exposure arises from fixed price purchase or sale agreements which extend for periods of up to 48 months, gas in storage inventories utilized by the gas marketing operation, and anticipated sales of oil and gas production. To a lesser extent, the Company is exposed to risk of changing prices or the cost of intervening transportation resulting from purchasing gas at one location and selling it at another (hereinafter referred to as basis risk). To minimize the risk from market fluctuations in the price of natural gas and oil, the Company uses commodity derivative instruments such as future contracts, swaps and options to hedge existing or anticipated purchase and sale agreements, existing physical gas in storage, and basis risk. None of these derivatives are held for speculative purposes. The Company adheres to policies and procedures which limit its exposure to market risk from open positions and monitors its exposure to market risk. The results of the Company's derivative hedging activities continue to meet its stated objective. The Company's regulated distribution operations are exposed to market risk in the normal course of business operations due to the impact of fluctuations on gas sales resulting from weather as measured by heating degree days (HDD). Market risk refers to the risk of loss in cash flows and future earnings arising from adverse fluctuation in gross margins on gas sales. Kansas Gas Service has exposure arising from variances in gas consumption by residential and commercial customers caused by fluctuations in HDD from normal because it does not have a temperature adjustment clause (TAC) in its rate structure. ONG has a TAC, which partially mitigates this risk. To minimize the risk of HDD on gas sales margins, the Company is using weather derivative swaps to manage the risk of adverse fluctuations in HDD during the 1999/2000 heating season. The Company has $300 million in long-term debt at a floating interest rate as a result of an interest rate swap. The rate resets semiannually based on the six- month LIBOR at the reset date. All of the Company's remaining long-term debt is fixed-rate and, therefore, does not expose the Company to the risk of earnings or cash flow loss due to changes in market interest rates. Kansas Gas Service uses derivative instruments to hedge the cost of some anticipated gas purchases during the winter heating months to protect their customers from upward volatility in the market price of natural gas. The gain or loss resulting from such derivatives is combined with the physical cost of gas and recovered from the customer through the gas purchase clause in rates. The Company has no market risk associated with such activities and, accordingly, these derivatives have been omitted from the value-at-risk disclosures below. Value-at-Risk Disclosure of Market Risk - The estimation of potential losses that could arise from changes in market conditions is typically accomplished through the use of statistical models that seek to predict risk of loss based on historical price and volatility patterns. The value-at-risk (VAR) measurement used by the Company is based on J.P. Morgan's RiskMetrics/TM/ model, which measures recent volatility and correlation in the price of natural gas and oil, pulls through current price levels and net deltas, and applies estimates made by management regarding the time required to liquidate positions and the degree of confidence placed in the accuracy of the volatility and correlation estimates. The Company's VAR calculation presents a comprehensive market risk 17 <PAGE> disclosure by combining its commodity derivative portfolio used to hedge price and basis risk together with the current portfolio of firm physical purchase and sale contracts and nonutility gas-in-storage inventory. At November 30, 1999, the Company's estimated potential one-day favorable or unfavorable impact on future earnings, as measured by the VAR, using a 95 percent confidence level, diversified correlation and assuming three days to liquidate positions is immaterial. The Company's calculated VAR exposure represents an estimate of potential losses that would be recognized for its portfolio of derivative financial instruments and firm physical contracts and nonutility gas-in-storage assuming hypothetical movements in future market rates and are not necessarily indicative of actual results that may occur. It does not represent the maximum possible loss nor any expected loss that may occur, because actual future gains and losses will differ from those estimated, based on actual fluctuations in the market rates, operating exposures, and the timing thereof, and changes in the Company's portfolio of derivative financial instruments and firm physical contracts. Under the weather derivative swap agreements, the Company receives a fixed payment per degree day below the contracted normal HDD and pays a fixed amount per degree day above the contracted normal HDD. The swaps also contain a contract cap that limits the amount either party is required to pay. The Company estimates its VAR exposure on these swaps to be the total contract cap it would be required to pay if the weather were significantly colder than normal. At November 30, 1999, the total VAR for the 1999/2000 heating season is approximately $18.0 million. The Company believes that this risk would be substantially offset by an increase in gas sales margins resulting from additional gas sold due to the colder than normal temperatures. NEW ACCOUNTING PRONOUNCEMENT Statement of Financial Accounting Standards No. 133, Accounting for Derivatives Instruments and Hedging Activities (Statement 133), was issued by the FASB in June, 1998. Statement 133 standardizes the accounting for derivatives instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedge exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Statement 133 required the Company to adopt this statement by September 1, 1999. Statement 133 was amended by Statement No. 137 in June, 1999 which delayed implementation until fiscal years beginning after June 15, 2000, with early adoption permitted. The Company has not determined the impact of adopting Statement 133. In December 1998, the Emerging Issues Task Force reached a consensus on Issue 98-10, "Accounting for Contracts involved in Energy Trading and Risk Management Activities" (EITF 98-10). EITF 98-10 is effective for the Company's fiscal year beginning January 1, 2000 and requires energy trading contracts to be recorded at fair value on the balance sheet, with changes in fair value included in earnings. Although management has not completed its assessment of the impact of adopting EITF 98-10, the Marketing segment operates as an interstate aggregator and follows a strategy of concentrating its efforts toward capitalizing on day-to-day pricing volatility through the use of gas storage facilities leased from others, hedging, and transportation arbitraging. Accordingly, the impact of implementing EITF 98-10 on the Marketing segment is not expected to be material to the financial position or results of operations. Energy contracts held by other segments are designated as and considered effective as hedges and non-trading activities and are not considered energy trading contracts. 18 <PAGE> PART II - OTHER INFORMATION Item 1. Legal Proceedings United States ex rel. Jack J. Grynberg v. ONEOK, Inc., ONEOK Resources Company, and Oklahoma Natural Gas Company, (CTN-8), No. CIV-97-1006-R (Judge Russell), in the United States District Court for the Western District of Oklahoma. On September 24, 1999, a hearing on the motion to transfer and consolidate actions before a single district court was held. An order was issued on October 20, 1999, transferring all the actions to the federal district court in Wyoming for pretrial proceedings under multidistrict litigation procedures. The Company and most other defendants filed motions to dismiss the case in early December. This motion is set for hearing on March 17, 2000. ONEOK, Inc. v. Southern Union Company, No. 99-CV-0345-H(M), United States District Court for the Northern District of Oklahoma, on appeal of preliminary injunction, United States Court of Appeals for the Tenth Circuit, Case Number 99-5103. On October 12, 1999, ONEOK filed a motion to dismiss the counterclaims of Southern Union. On October 15, 1999, the Court denied ONEOK's motion to amend its complaint and on October 27, 1999, ONEOK filed a motion for reconsideration which was denied on November 4, 1999. On November 10, 1999, as a result of ONEOK's motion to dismiss, Southern Union filed an amended answer and counterclaims. The case is now in the discovery stage. In the related case of Klein v. Southwest Gas Corporation, Superior Court of San Diego County, California, Case No. 726615, on September 24, 1999, the Court dismissed Southern Union from the case and stated that Southern Union would not be allowed to refile until all federal court actions were complete. Southern Union Company v. Southwest Gas Corporation, et al., No. CIV 99 1294 PHX ROS, United States District Court for the District of Arizona. Rather than respond to motions filed by the defendants on October 12, 1999, Southern Union filed an amended complaint with substantially the same claims as in the original complaint except that it specifically eliminated its previous allegations that ONEOK had made payments to Tiffany & Bosco for the benefit of Jack Rose, and James C. Kneale and Larry W. Brummett were added as additional defendants. The Company and the other defendants filed motions to dismiss the amended complaint on December 6, 1999. The motions are to be heard by the Court on February 11, 2000. Joint Application of Oklahoma Natural Gas Company, a Division of ONEOK, Inc., ONEOK Gas Transportation Company, a Division of ONEOK, Inc., and Kansas Gas Service Company, a Division of ONEOK, Inc., for Approval of Their Unbundling Plan for Natural Gas Services Upstream of the City Gates or Aggregation Points, Cause PUD No. 980000177, before the Oklahoma Corporation Commission. On October 21, 1999, the Supreme Court granted a new stay for an additional twenty days. As settlement had not been reached between the parties, the Company filed a motion to extend the stay until conclusion of the Commission proceedings. On November 2, 1999, the Supreme Court issued an order directing the parties to respond to the Company's motion by November 17, 1999. Also, on November 5, 1999, the Commission Staff filed a response to the Company's motion and a motion to dismiss the appeal as moot and the Attorney General filed a motion to dismiss on November 12, 1999. The Company filed a response to the motions to dismiss on November 29, 1999. On December 13, 1999, the Court issued an order denying an extension of the stay and the motions to dismiss and directed the parties to file briefs. Application of Ernest G. Johnson, Director of the Public Utility Division, Oklahoma Corporation Commission, to Review the Rates, Charges, Services and Service Terms of Oklahoma Natural Gas Company, a division of ONEOK, Inc., and All Affiliated Companies and Any Affiliate or Nonaffiliate Transaction Relevant to Such Inquiry, Cause PUD No. 980000683, Oklahoma Corporation Commission. On September 20, 1999, Oklahoma Natural filed updated financial information and requested a $33.6 million rate increase. 19 <PAGE> In the Matter of the Application of Southwest Gas Corporation and ONEOK, Inc. for an Order Authorizing Implementation of the Agreement and Plan of Merger dated December 14, 1998, Docket Nos. G-01551A-99-0112 and G-03713A-99-0112, before the Arizona Corporation Commission. On January 4, 2000, direct testimony of the Director of the Utility Division of the Commission was filed in the proceeding. In her testimony, the Director states that the Commission Staff believes that the unresolved issues that are outstanding, approval of the merger by the Commission would be premature because the Company has not provided sufficient evidence for the Commission to make an affirmative showing that the proposed merger is in circumstances, are as follows: 1. The companies could withdraw their application to be refiled after the various litigations have been resolved. 2. The Commission could dismiss the proceedings without prejudice, which would allow the companies to refile the application at a later date. 3. The Commission could keep the docket open and order the companies to continue to supplement the record as more information becomes available from the civil litigation and other developments. The Commission Staff further recommended that if the Commission decides to approve the merger at this time that certain specified conditions be attached to such approval. These conditions are substantially the same conditions contained in a prior stipulation and agreement filed by the Company, the Commission Staff and Arizona's consumer advocate recommending that the transaction be approved. The Company has until January 18, 2000 to file rebuttal testimony to challenge the Commission Staff recommendations. Item 6. Exhibits and Reports on Form 8-K and 8-K/A. (b) Reports December 15, 1999 - Announced that the Transition Report related to the change in the Company's fiscal year-end for the four months ended December 31, 1999, would be filed on a Form 10-Q. 20 <PAGE> Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 5/th/ day of January 2000. ONEOK, Inc. Registrant By: Jim Kneale ----------------------------------- Jim Kneale Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) 21 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.(A) <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ONEOK, INC. FOR THE PERIOD ENDED NOVEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> SEP-01-1999 <PERIOD-START> AUG-31-2000 <PERIOD-END> NOV-30-1999 <CASH> 0 <SECURITIES> 0 <RECEIVABLES> 284,055 <ALLOWANCES> 0 <INVENTORY> 155,905 <CURRENT-ASSETS> 541,131 <PP&E> 3,119,425 <DEPRECIATION> 1,015,845 <TOTAL-ASSETS> 3,174,887 <CURRENT-LIABILITIES> 691,423 <BONDS> 809,428 <PREFERRED-MANDATORY> 0 <PREFERRED> 199 <COMMON> 316 <OTHER-SE> 1,147,012 <TOTAL-LIABILITY-AND-EQUITY> 3,174,887 <SALES> 533,482 <TOTAL-REVENUES> 533,482 <CGS> 338,994 <TOTAL-COSTS> 338,994 <OTHER-EXPENSES> 148,411 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 20,357 <INCOME-PRETAX> 25,720 <INCOME-TAX> 9,990 <INCOME-CONTINUING> 15,730 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 15,730 <EPS-BASIC> 0.21 <EPS-DILUTED> 0.21 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.(B) <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ONEOK, INC. FOR THE PERIOD ENDED NOVEMBER 30, 1998, 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-01-1998 <PERIOD-START> AUG-31-1999 <PERIOD-END> NOV-30-1998 <CASH> 0 <SECURITIES> 40 <RECEIVABLES> 216,837 <ALLOWANCES> 0 <INVENTORY> 173,142 <CURRENT-ASSETS> 404,358 <PP&E> 2,592,911 <DEPRECIATION> 926,029 <TOTAL-ASSETS> 2,496,155 <CURRENT-LIABILITIES> 338,466 <BONDS> 512,355 <PREFERRED-MANDATORY> 0 <PREFERRED> 200 <COMMON> 315 <OTHER-SE> 1,163,506 <TOTAL-LIABILITY-AND-EQUITY> 2,496,155 <SALES> 374,936 <TOTAL-REVENUES> 374,936 <CGS> 239,836 <TOTAL-COSTS> 239,836 <OTHER-EXPENSES> 105,101 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 11,355 <INCOME-PRETAX> 23,637 <INCOME-TAX> 9,387 <INCOME-CONTINUING> 14,250 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 14,250 <EPS-BASIC> 0.16 <EPS-DILUTED> 0.16 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

OKE

https://www.sec.gov/Archives/edgar/data/1039684/0000930661-00-000242.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, Q/F6zqcUPY3hOnGrgHiOt3Ht4Ea1fVYEItWsmr2MQGc73VH/t+SjY9lsSMxUkdWj pxeu4N+K+pjL3//tt4uf3g== <SEC-DOCUMENT>0000930661-00-000242.txt : 20000214 <SEC-HEADER>0000930661-00-000242.hdr.sgml : 20000214 ACCESSION NUMBER: 0000930661-00-000242 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONEOK INC /NEW/ CENTRAL INDEX KEY: 0001039684 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 731520922 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13643 FILM NUMBER: 534396 BUSINESS ADDRESS: STREET 1: 100 WEST 5TH ST CITY: TULSA STATE: OK ZIP: 74103 BUSINESS PHONE: 9185887000 MAIL ADDRESS: STREET 1: 100 WEST 5TH ST CITY: TULSA STATE: OK ZIP: 74103 FORMER COMPANY: FORMER CONFORMED NAME: WAI INC DATE OF NAME CHANGE: 19970519 </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 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 for the quarterly period ended . -------------- OR X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 for the transition period from September 1, 1999 to December 31, 1999. Commission file number 001-13643 ONEOK, Inc. (Exact name of registrant as specified in its charter) Oklahoma 73-1520922 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation of organization) 100 West Fifth Street, Tulsa, OK 74103 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (918) 588-7000 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 --- --- On December 31, 1999, the Company had 29,554,623 shares of common stock outstanding. <PAGE> ONEOK, Inc. QUARTERLY REPORT ON FORM 10-Q Part I. Financial Information Page No. Consolidated Condensed Statements of Income - 3 Four Months Ended December 31, 1999 and 1998 Consolidated Condensed Balance Sheets - 4 December 31, 1999 and August 31, 1999 Consolidated Condensed Statements of Cash Flows - 5 Four Months Ended December 31, 1999 and 1998 Notes to Consolidated Condensed Financial Statements 6 - 10 Management's Discussion and Analysis of 11 - 29 Financial Condition and Results of Operations Part II. Other Information 30 - 33 2 <PAGE> Part I - FINANCIAL INFORMATION ONEOK, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF INCOME <TABLE> <CAPTION> (Unaudited) Four Months Ended December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (Thousands of Dollars, except per share amounts) <S> <C> <C> Operating Revenues $ 808,874 $ 580,701 Cost of gas 523,533 368,783 - ------------------------------------------------------------------------------------------------------------------------------------ Net Revenues 285,341 211,918 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Expenses Operations and maintenance 141,395 89,559 Depreciation, depletion, and amortization 43,227 41,736 General taxes 14,755 12,485 - ------------------------------------------------------------------------------------------------------------------------------------ Total Operating Expenses 199,377 143,780 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Income 85,964 68,138 - ------------------------------------------------------------------------------------------------------------------------------------ Other income - 4,993 Interest 27,883 15,567 Income taxes 22,737 22,736 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income 35,344 34,828 Preferred Stock Dividends 12,367 12,432 - ------------------------------------------------------------------------------------------------------------------------------------ Income Available for Common Stock $ 22,977 $ 22,396 ==================================================================================================================================== Earnings Per Share of Common Stock - Basic $ 0.76 $ 0.71 ==================================================================================================================================== Earnings Per Share of Common Stock - Diluted $ 0.70 $ 0.67 ==================================================================================================================================== Average Shares of Common Stock - Basic (Thousands) 30,425 31,535 Average Shares of Common Stock - Diluted (Thousands) 50,384 51,648 See accompanying notes to consolidated condensed financial statements. </TABLE> 3 <PAGE> ONEOK, Inc. and Subsidiaries CONSOLIDATED CONDENSED BALANCE SHEETS <TABLE> <CAPTION> (Unaudited) December 31, August 31, 1999 1999 - ----------------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Assets Current Assets Cash and cash equivalents $ 72 $ 4,402 Trade accounts and notes receivable 371,313 228,336 Inventories 134,871 118,951 Other current assets 87,465 87,578 - ----------------------------------------------------------------------------------------------------- Total Current Assets 593,721 439,267 - ----------------------------------------------------------------------------------------------------- Property, Plant and Equipment 3,143,693 3,057,626 Accumulated depreciation, depletion, and amortization 1,021,915 988,797 - ----------------------------------------------------------------------------------------------------- Net Property 2,121,778 2,068,829 - ----------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets Regulatory assets, net (Note D) 247,486 246,658 Goodwill 80,743 81,560 Investments and other 195,847 188,631 - ----------------------------------------------------------------------------------------------------- Total Deferred Charges and Other Assets 524,076 516,849 - ----------------------------------------------------------------------------------------------------- Total Assets $ 3,239,575 $ 3,024,945 ===================================================================================================== Liabilities and Shareholders' Equity Current Liabilities Current maturities of long-term debt $ 21,767 $ 22,817 Notes payable 462,242 263,747 Accounts payable 237,653 183,759 Accrued taxes 359 11,186 Accrued interest 16,628 7,042 Other 48,064 55,031 - ----------------------------------------------------------------------------------------------------- Total Current Liabilities 786,713 543,582 - ----------------------------------------------------------------------------------------------------- Long-term Debt, excluding current maturities 775,074 810,087 Deferred Credits and Other Liabilities Deferred income taxes 348,218 323,624 Other deferred credits 178,046 173,193 - ----------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 526,264 496,817 - ----------------------------------------------------------------------------------------------------- Total Liabilities 2,088,051 1,850,486 - ----------------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes C and G) Shareholders' Equity Convertible Preferred Stock, $0.01 par value: Series A authorized 199 199 20,000,000 shares; issued and outstanding 19,946,448 shares Common stock, $0.01 par value: authorized 100,000,000 shares; issued 316 316 31,599,305 shares, outstanding 29,554,623 and 30,884,225 shares Paid in capital (Note I) 894,976 894,978 Unearned compensation (1,825) - Retained earnings 317,964 301,536 Treasury stock at cost: 2,044,682 and 715,080 shares (60,106) (22,570) - ----------------------------------------------------------------------------------------------------- Total Shareholders' Equity 1,151,524 1,174,459 - ----------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 3,239,575 $ 3,024,945 ===================================================================================================== See accompanying notes to consolidated condensed financial statements. </TABLE> 4 <PAGE> ONEOK, Inc. and Subsidiaries CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Four Months Ended December 31, (Unaudited) 1999 1998 - --------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Operating Activities Net income $ 35,344 $ 34,828 Depreciation, depletion, and amortization 43,227 41,736 Gain on sale of assets - (4,993) Net income from other investments (2,396) (634) Deferred income taxes 28,317 (4,874) Changes in assets and liabilities (111,524) (85,001) - --------------------------------------------------------------------------------- Cash Used in Operating Activities (7,032) (18,938) - --------------------------------------------------------------------------------- Investing Activities Changes in other investments, net 994 1,813 Capital expenditures, net of retirements (92,165) (64,767) Proceeds from sale of property - 13,500 - --------------------------------------------------------------------------------- Cash Used in Investing Activities (91,171) (49,454) - --------------------------------------------------------------------------------- Financing Activities Issuance (payment) of notes payable, net 198,495 98,000 Issuance of debt - 199,634 Payment of debt (36,952) (201,221) Acquisition of treasury stock (39,610) - Dividends paid (28,060) (28,107) - --------------------------------------------------------------------------------- Cash Provided by Financing Activities 93,873 68,306 - --------------------------------------------------------------------------------- Change in Cash and Cash Equivalents (4,330) (86) Cash and Cash Equivalents at Beginning of Period 4,402 86 - --------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 72 $ - ================================================================================= See accompanying notes to consolidated condensed financial statements. </TABLE> 5 <PAGE> NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) A. Change in Fiscal Year End. In October, 1999, the Company's Board of Directors approved a change in the Company's fiscal year-end from August 31 to December 31 beginning January 1, 2000. The consolidated condensed financial statements included in this Form 10-Q represent the period from September 1, 1999 through December 31, 1999, the Company's transition period (the "Transition Period") preceding the beginning of the new fiscal year. B. Summary of Significant Accounting Policies Interim Reporting. The interim consolidated condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Due to the seasonal nature of the business, the results of operations for the Transition Period are not necessarily indicative of the results that may be expected for a twelve-month period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended August 31, 1999. C. Significant Events On January 20, 2000, the Board of Directors of the Company voted unanimously to terminate the merger agreement with Southwest Gas Corporation (Southwest) in accordance with the terms of the merger agreement. Costs in the amount of $4.7 million related to the transaction have been deferred on the Company's Balance Sheet for December 31, 1999. These costs and other costs incurred since December 31, 1999 will be charged to expense during the first quarter of fiscal 2000. The pro forma effect of these costs being charged to expense during the Transition Period would be to reduce Diluted Earnings Per Share to $0.64 for the Transition Period from $0.70. On February 1, 2000, the Company announced the purchase of assets located in Oklahoma, Kansas, and the Texas Panhandle from Dynegy, Inc. for a cash purchase price of $307.7 million. The assets include gathering systems, gas processing facilities, and transmission pipelines. Closing of the transaction is expected by the end of the first quarter of 2000. On February 8, 2000, the Company announced the purchase of gathering and processing assets located in Oklahoma, Kansas and West Texas from Kinder Morgan, Inc. (KMI). The marketing and trading business of KMI as well as certain storage and transmission pipelines in the mid-continent region will also be purchased. The Company will pay approximately $114.0 million plus an amount equal to net working capital at closing. A July, 1999 order from the Oklahoma Corporation Commission (OCC) removed the Company's Oklahoma gathering and storage assets from utility regulation effective November 1, 1999. These assets are now included in the Transportation and Storage segment where they are being utilized in the competitive marketplace. An August, 1999 order from the OCC distinguished between upstream (transportation) and downstream (distribution) assets and cleared the way for future unbundling activities including competitive bidding for transportation services in Oklahoma. The Distribution segment issued bids for these services in Oklahoma during the Transition Period with contracts to be awarded in the spring of 2000. 6 <PAGE> D. Regulatory Assets The table is a summary of regulatory assets, net of amortization, at December 31, 1999, and August 31, 1999. <TABLE> <CAPTION> December 31, August 31, 1999 1999 - --------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Recoupable take-or-pay $ 84,343 $ 85,996 Pension costs 19,487 20,881 Postretirement costs other than pension 62,207 61,830 Transition costs 22,746 22,903 Reacquired debt costs 24,068 22,413 Income taxes 23,337 24,114 Other 11,298 8,521 - --------------------------------------------------------------------------- Regulatory assets, net $ 247,486 $ 246,658 =========================================================================== </TABLE> E. Supplemental Cash Flow Information The table is supplemental information relative to the Company's cash flows for the four months ended December 31, 1999 and 1998. <TABLE> <CAPTION> 1999 1998 - ------------------------------------------------------------------- <S> <C> <C> (Thousands of Dollars) Cash paid during the year Interest (including amounts capitalized) $ 16,605 $ 13,039 Income taxes $ - $ 21,500 Noncash transactions Treasury stock transferred to compensation plans $ 2,071 $ - - ------------------------------------------------------------------- </TABLE> F. Earnings per Share Information The following is a reconciliation of the basic and diluted EPS computations. <TABLE> <CAPTION> Four Months Ended December 31, 1999 Per Share Income Shares Amount - ----------------------------------------------------------------------------------- (Thousands, except per share amounts) <S> <C> <C> <C> Basic EPS Income available to common stockholders $ 22,977 30,425 $ 0.76 ======= Effect of Dilutive Securities Options - 13 Convertible preferred stock 12,367 19,946 ----------- --------- Diluted EPS Income available to common stockholders + assumed conversions $ 35,344 50,384 $ 0.70 =================================================================================== </TABLE> 7 <PAGE> <TABLE> <CAPTION> Four Months Ended December 31, 1998 Per Share Income Shares Amount - ----------------------------------------------------------------------------------- (Thousands, except per share amounts) <S> <C> <C> <C> Basic EPS Income available to common stockholders $ 22,396 31,535 $ 0.71 ======= Effect of Dilutive Securities Options - 42 Convertible preferred stock 12,432 20,071 ----------- ------- Diluted EPS Income available to common stockholders + assumed conversions $ 34,828 51,648 $ 0.67 =================================================================================== </TABLE> G. Commitments and Contingencies During the year ended August 31, 1999, the Company and Southwest entered into a merger agreement, as amended, in which the Company agreed to acquire Southwest for $30 per share of common stock in an all cash transaction valued at $918 million. On January 20, 2000, the Company terminated the merger agreement in accordance with the terms of the merger agreement. The Company and certain of its officers as well as Southwest have been named as defendants in a lawsuit brought by Southern Union Company (Southern Union). The complaint asks for $750 million and damages to be trebled for racketeering and unlawful violations, compensatory damages of not less than $750 million and rescission of the Confidentiality and Standstill Agreement. Southwest has filed a complaint against the Company and Southern Union in the United States District Court in Arizona. Southwest seeks actual, consequential, incidental and punitive damages in an amount in excess of $75,000 and a declaration that the Company has breached the merger agreement. It is anticipated that Southern Union and Southwest will continue their litigation against the Company. If any of the plaintiffs should be successful in any of their claims against the Company and substantial damages are awarded, it could have a material adverse effect on the Company's operations, cash flow and financial position. The Company intends to vigorously defend against the claims asserted by Southern Union and Southwest and all other matters relating to the now terminated merger with Southwest. On February 3, 2000, two substantially identical derivative actions were filed in the District Court in Tulsa, Oklahoma by shareholders against the members of the Board of Directors of the Company for alleged violation of their fiduciary duties to the Company by causing or allowing the Company to engage in certain fraudulent and improper schemes relating to the planned merger with Southwest. Such conduct allegedly caused the Company to be sued by both Southwest and Southern Union which exposed the Company to millions of dollars in liabilities. The plaintiffs seek an award of compensatory and punitive damages and costs, disbursements and reasonable attorney fees. The Company intends to vigorously defend against these allegations. The Company has responsibility for 12 manufactured gas sites located in Kansas which may contain potentially harmful materials that are classified as hazardous material. Hazardous materials are subject to control or remediation under various environmental laws and regulations. A consent agreement with the Kansas Department of Health and Environment presently governs all future work at these sites. The terms of the consent agreement allow the Company to investigate these sites and set remediation priorities based upon the results of the investigations and risk analysis. The prioritized sites will be investigated over a ten year period. At December 31, 1999, the costs of the investigations and risk analysis have been minimal. Limited information is available about the sites. Management's best estimate of the cost of remediation ranges from $100 thousand to 8 <PAGE> $10 million per site based on a limited comparison of costs incurred to remediate comparable sites. These estimates do not give effect to potential insurance recoveries, recoveries through rates or from third parties. The Kansas Corporation Commission (KCC) has permitted others to recover remediation costs through rates. It should be noted that additional information and testing could result in costs significantly below or in excess of the amounts estimated above. To the extent that such remediation costs are not recovered, the costs could be material to the Company's results of operations and cash flows depending on the remediation done and number of years over which the remediation is completed. The Company is a party to other litigation matters and claims which are normal in the course of its operations, and while the results of litigation and claims cannot be predicted with certainty, management believes the final outcome of such matters will not have a materially adverse effect on consolidated results of operations, financial position, or liquidity. H. Segments In fiscal 1999, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement required the Company to define and report the Company's business segments based on how management currently evaluates its business. Management has segmented its business based on differences in products and services and management responsibility. The Company conducts its operations through six segments: (1) the Distribution segment distributes natural gas to residential, commercial and industrial customers, leases pipeline capacity to others and provides transportation services for end-use customers; (2) the Transportation and Storage segment transports and stores natural gas for others; (3) the Marketing segment markets natural gas to wholesale and retail customers and markets electricity to wholesale customers; (4) the Gathering and Processing segment gathers and processes natural gas and natural gas liquids; (5) the Production segment develops and produces natural gas and oil; and (6) the Other segment primarily operates and leases the Company's headquarters building and a related parking facility. Intersegment oil and gas sales are recorded on the same basis as sales to unaffiliated customers. All corporate overhead costs relating to a reportable segment have been allocated for the purpose of calculating operating income. The Company's equity method investments do not represent operating segments of the Company. The Company has no single external customer from which it receives ten percent or more of its revenues. <TABLE> <CAPTION> Gathering Four Months Ended Transportation and Eliminations December 31, 1999 Distribution and Storage Marketing Processing Production and Other Total - -------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> <C> <C> <C> <C> <C> Sales to unaffiliated customers $ 337,890 $ 14,357 $ 365,224 $ 63,869 $ 20,014 $ 7,520 $ 808,874 Intersegment sales 1,334 25,868 17,825 15,032 4,779 (64,838) - - -------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 339,224 $ 40,225 $ 383,049 $ 78,901 $ 24,793 $ (57,318) $ 808,874 - -------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 133,662 $ 40,225 $ 11,493 $ 78,901 $ 24,793 $ (3,733) $ 285,341 Operating Costs $ 73,247 $ 14,844 $ 3,344 $ 68,076 $ 7,245 $ (10,606) $ 156,150 Depreciation, depletion and amortization $ 24,815 $ 5,124 $ 242 $ 2,513 $ 9,715 $ 818 $ 43,227 Operating Income $ 35,600 $ 20,257 $ 7,907 $ 8,312 $ 7,833 $ 6,055 $ 85,964 Income from Equity Investments $ - $ 1,074 $ - $ - $ 1,322 $ - $ 2,396 Total Assets $ 1,776,273 $ 437,561 $ 306,705 $ 368,904 $ 352,912 $ (2,780) $ 3,239,575 Capital Expenditures $ 38,994 $ 5,938 $ 13,454 $ 26,863 $ 7,206 $ 1,534 $ 93,989 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> 9 <PAGE> <TABLE> <CAPTION> Gathering Four Months Ended Transportation and Eliminations December 31, 1998 Distribution and Storage Marketing Processing Production and Other Total - ------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> <C> <C> <C> <C> <C> Sales to unaffiliated $ 307,424 $ 9,387 $ 237,927 $ 10,165 $ 10,694 $ 5,104 $ 580,701 customers Intersegment sales 3,029 26,610 8,319 4,341 6,968 (49,267) - - ------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 310,453 $ 35,997 $ 246,246 $ 14,506 $ 17,662 $ (44,163) $ 580,701 - ------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 133,450 $ 35,997 $ 12,436 $ 14,506 $ 17,662 $ (2,133) $ 211,918 Operating Costs $ 76,796 $ 13,010 $ 2,730 $ 10,650 $ 5,227 $ (6,369) $ 102,044 Depreciation, depletion and $ 24,603 $ 4,554 $ 103 $ 681 $ 10,292 $ 1,503 $ 41,736 amortization Operating Income $ 32,051 $ 18,433 $ 9,603 $ 3,175 $ 2,143 $ 2,733 $ 68,138 Income from Equity Investments $ - $ 620 $ - $ - $ 14 $ - $ 634 Total Assets $ 1,804,631 $ 507,573 $ 141,733 $ 45,709 $ 275,840 $ (218,348) $ 2,557,138 Capital Expenditures $ 24,636 $ 13,163 $ 605 $ 3,724 $ 39,533 $ 2,575 $ 84,236 - ------------------------------------------------------------------------------------------------------------------------- </TABLE> I. Paid in Capital Paid in Capital at December 31, 1999, is $330.8 million and $564.2 million for common stock and convertible preferred stock, respectively. 10 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q contains statements concerning Company expectations or predictions of the future that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are intended to be covered by the safe harbor provision of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are based on management's beliefs and assumptions based on information currently available. It is important to note that actual results could differ materially from those projected in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: . the effects of weather and other natural phenomena; . increased competition from other energy suppliers as well as alternative forms of energy; . the capital intensive nature of the Company's business; . economic climate and growth in the geographic areas in which the Company does business; . the uncertainty of gas and oil reserve estimates; . the timing and extent of changes in commodity prices for natural gas, natural gas liquids, electricity, and crude oil; . the nature and projected profitability of potential projects and other investments available to the Company; . conditions of capital markets and equity markets; . the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance, authorized rates, and deregulation or "unbundling" of natural gas; . the results of litigation related to the terminated previously proposed acquisition of Southwest and the termination of the Company's merger agreement with Southwest; and . the impact of the acquisitions of properties. Accordingly, while the Company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in Company documents, the words "anticipate," "expect," "projection," "goal" or similar words are intended to identify forward-looking statements. The Company does not have any intention or obligation to update forward-looking statements after they distribute this Form 10-Q even if new information, future events or other circumstances have made them incorrect or misleading. A. Acquisitions and Mergers On December 14, 1998, the Company entered into a merger agreement with Southwest subject to shareholder and regulatory approvals. The Company agreed to pay $28.50 per share of common stock in cash. On February 1, 1999, Southern Union made an unsolicited offer to purchase the Southwest shares for $32.00 in cash. Southern Union then signed a Confidentiality and Standstill Agreement with Southwest and completed its due diligence investigation. On April 25, 1999, the Board of Directors of Southwest rejected Southern Union's proposal as not being a superior proposal. Thereafter, the Company increased its offer to $30.00 per share and the merger agreement was amended. Southern Union then increased its offer to $33.50 per share which was also rejected by the Board of Directors of Southwest. Southern Union intervened in a shareholders lawsuit in California state court in an effort to block the holding of a meeting of the Southwest shareholders to consider the merger with the Company. Southwest brought an action in Nevada federal court to enforce the terms of the Confidentiality and Standstill Agreement. Southern Union also intervened in the regulatory proceedings in California and Nevada. After Southern Union made statements in the public press that it intended to solicit proxies in opposition to the Company/Southwest merger in breach of the Confidentiality and Standstill Agreement, the Company (as third party beneficiary) filed an action in Oklahoma federal court. The court entered a temporary restraining order against Southern Union. It was later converted to a preliminary injunction requiring Southern Union to abide by terms of the Confidentiality and Standstill Agreement. The issuance of the injunction is on appeal and efforts of Southern Union to have it lifted have been unsuccessful. 11 <PAGE> On July 19, 1999, Southern Union filed an action in the federal district court of Arizona in its further effort to block regulatory approval of the merger. Named as defendants in the case are the Company, Southwest, certain officers of the companies (including the Company's Eugene N. Dubay and John A. Gaberino, Jr.), a member of the Arizona Corporation Commission (ACC) and a former employee of the ACC's staff. Southern Union alleges a scheme of "fraud and racketeering" by the companies and the individual defendants to block Southwest shareholders from voting on the Southern Union proposal and ensuring that only the merger with the Company would be considered. It also alleges a "secret campaign of deception, corruption and misrepresentation" by the defendants to influence the vote of the ACC on the merger and to "mislead" the Board of Directors of Southwest. Southern Union further alleged that it was "fraudulently induced" to enter into the Confidentiality and Standstill Agreement. The complaint asks for $750 million and damages to be trebled for racketeering and unlawful violations, compensatory damages of not less than $750 million and rescission of the Confidentiality and Standstill Agreement. On October 12, 1999, Southern Union filed an amended complaint asserting essentially the same claims as in the earlier complaint and named additional individual defendants (including the Company's Larry W. Brummett and James C. Kneale). Southern Union withdrew its initial false allegation that the Company had funneled money through an Arizona law firm to a former member of the ACC staff in order to improperly influence the Arizona regulatory proceedings, Southern Union is now claiming that the Company intended to enter into an arrangement with a large national investment banking firm to funnel money to the same individual who was formerly on the ACC's staff. On August 5, 1999, both the California state court and the Arizona federal court denied Southern Union's motions for temporary restraining orders. As of January 1, 2000, the merger has been approved by the Public Utility Commission of Nevada. In California, a settlement document had been filed with a 30-day comment period. On January 4, 2000, the staff of the ACC advised the ACC that approval of the proposed merger was premature due to unresolved issues raised in the litigation, citing the Company's "appearance of impropriety" and raising concerns about the Company's integrity and truthfulness. Accordingly, the staff recommended that any decision on the merger be deferred until these issues and allegations could be resolved so as to allow the ACC to make an informed decision on whether the proposed merger was in the public interest. On January 18, 2000, the Company received a letter from Michael O. Maffie, President and Chief Executive Officer of Southwest, taking the position that the Company had breached the merger agreement and demanding that the breach be cured. On January 20, 2000, the Board of Directors of the Company voted unanimously to terminate the merger agreement in accordance with the terms of the merger agreement. On January 21, 2000, a letter was sent to Southwest denying that the Company was in breach of the merger agreement and advising Southwest of the Company's election to terminate the merger agreement. On the same date, the Company filed a complaint in Federal District Court in Tulsa, Oklahoma asking the court to declare that under the terms of the merger agreement, the Company has properly terminated the merger agreement. On the same date, the Company advised the ACC of the termination of the merger agreement and gave notice the Company withdrew the Application asking for authorization to implement the merger agreement. On January 25, 2000, Southwest filed an objection that the Company could not unilaterally withdraw a joint application. On February 4, 2000, the Hearing Officer granted the withdrawal and closed the docket. On January 24, 2000, in reaction to the notice of termination of the merger agreement, Southwest filed a complaint against the Company and Southern Union in the United States District Court in Arizona. In the complaint, Southwest alleges, among other things, that the Company failed to disclose to Southwest that the Company had purportedly participated in improper lobbying efforts allegedly involving a state regulatory official for the purpose of influencing state utility regulators to oppose Southern Union's attempt to acquire Southwest and inducing Southwest to enter into the merger agreement with the Company instead of accepting Southern 12 <PAGE> Union's acquisition proposal. The complaint also alleges that the Company failed to use commercially reasonable efforts to obtain all necessary governmental authorization for the planned merger with Southwest by failing to remedy alleged improper conduct and by failing to make truthful disclosure of such purportedly improper lobbying and relationships to the ACC. The complaint further alleges that, because of the Company's alleged breach of the merger agreement, the Company was contractually unable to terminate the merger agreement and that the Company's notice of termination of that agreement was therefore wrongful. The compliant uses these allegations as a basis for causes of action for fraud in the inducement, fraud, breach of contract, breach of implied covenant of good faith and fair dealing, and declaratory relief. Southwest seeks actual, consequential, incidental and punitive damages in an amount in excess of $75,000 and a declaration that the Company has breached the merger agreement. On February 3, 2000, two substantially identical derivative actions were filed in the District Court in Tulsa, Oklahoma by shareholders against the members of the Board of Directors of the Company for alleged violation of their fiduciary duties to the Company by causing or allowing the Company to engage in certain fraudulent and improper schemes relating to the planned merger with Southwest. Such conduct allegedly caused the Company to be sued by both Southwest and Southern Union which exposed the Company to millions of dollars in liabilities. The plaintiffs seek an award of compensatory and punitive damages and costs, disbursements and reasonable attorney fees. It is anticipated that Southern Union and Southwest will continue their litigation against the Company. If any of the plaintiffs should be successful in any of their claims against the Company and substantial damages are awarded, it could have a material adverse effect on the Company's operations, cash flow and financial position. The Company intends to vigorously defend against the claims asserted by Southern Union and Southwest and all other matters relating to the now terminated merger with Southwest. B. Results of Operations Consolidated Operations The Company provides natural gas and related products and services to its customers through the following segments: . Distribution . Transportation and Storage . Marketing . Gathering and Processing . Production . Other The Company is the ninth largest natural gas distribution company in the United States in terms of number of customers. Nonregulated operations involve transmission, storage, marketing, gathering and processing, and production of natural gas and natural gas liquids and marketing of electricity. Operating results continue to be strong despite warmer than normal weather. While the four month periods ended December 31, 1999 and 1998 were both warmer than normal, the Company is using derivative instruments for the 1999/2000 heating season to reduce the effect of weather variances. During the Transition Period, these derivative instruments resulted in revenue of $5.7 million which offset much of the margin variances caused by weather. This revenue was recorded in the Other segment. Although some higher interest rate debt was refinanced at a lower interest rate during fiscal 1999, increased borrowing, primarily due to acquisitions in fiscal 1999, resulted in increased interest expense. Gains on sales of assets of $5.0 million were included in Other Income during the four month period ended December 31, 1998. 13 <PAGE> <TABLE> <CAPTION> Four Months Ended December 31, - ---------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Financial Results Operating revenues $ 808,874 $ 580,701 Cost of gas 523,533 368,783 - ---------------------------------------------------------------------- Net Revenue 285,341 211,918 Operating costs 156,150 102,044 Depreciation, depletion, and amortization 43,227 41,736 - ---------------------------------------------------------------------- Operating income $ 85,964 $ 68,138 ====================================================================== Other income $ - $ 4,993 ====================================================================== </TABLE> Year 2000 - The Year 2000 (Y2K) issue arose because most computer systems, including application software and computer technology embedded in plant and equipment were constructed using a two digit date field that assumed the first two digits are always "19". It was believed that on January 1, 2000, those systems might incorrectly recognize the date as January 1, 1900, and incorrectly process critical information or stop processing altogether. The Company made the necessary conversions to make the Company Y2K compatible spending $2.2 million in this effort. No material projects were delayed during this time. While there can be no assurance that there will be no future problems related to Y2K, it appears that these efforts were successful. There has been no negative impact on any of the Company's systems or operations, and there are no remaining contingencies to be completed. The Company received assurances from all significant third party vendors that they are Y2K compliant, and there have been no problems to indicate otherwise. Distribution The Distribution segment provides natural gas distribution services in Oklahoma and Kansas. The Company's operations in Oklahoma are primarily conducted through Oklahoma Natural Gas Company Division (ONG) which serves residential, commercial, and industrial customers and leases pipeline capacity. The Company's operations in Kansas are conducted through Kansas Gas Service Company Division (KGS) which serves residential, commercial, and industrial customers. KGS also conducts regulated gas distribution operations in northeastern Oklahoma. The Distribution segment serves about 80 percent of Oklahoma and about 67 percent of Kansas. ONG is subject to regulatory oversight by the OCC. KGS is subject to regulatory oversight by the KCC and the OCC. 14 <PAGE> <TABLE> <CAPTION> Four Months Ended December 31, - ---------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Financial Results Gas sales $ 316,901 $ 286,317 Cost of gas 205,562 177,003 - ---------------------------------------------------------------------- Gross margin on gas sales 111,339 109,314 PCL and ECT revenues 18,230 19,582 Other revenues 4,093 4,554 - ---------------------------------------------------------------------- Net revenues 133,662 133,450 Operating costs 73,247 76,796 Depreciation, depletion, and amortization 24,815 24,603 - ---------------------------------------------------------------------- Operating Income $ 35,600 $ 32,051 ====================================================================== </TABLE> <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - --------------------------------------------------------- <S> <C> <C> Gross Margin per Mcf Oklahoma Residential $ 2.88 $ 2.96 Commercial $ 2.48 $ 2.51 Industrial $ 1.16 $ 1.27 Pipeline capacity leases $ 0.25 $ 0.23 Kansas Residential $ 2.76 $ 2.85 Commercial $ 2.07 $ 1.86 Industrial $ 1.97 $ 2.70 End-use customer transportation $ 0.60 $ 0.48 - --------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - ----------------------------------------------------------------- <S> <C> <C> Operating Information Number of customers 1,435,647 1,421,280 Capital expenditures (Thousands) $ 38,994 $ 24,636 Total assets (Thousands) $ 1,776,273 $ 1,804,631 Customers per employee 546 527 - ----------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - -------------------------------------------------- <S> <C> <C> Volumes (MMcf) Gas sales Residential 31,908 31,244 Commercial 11,415 12,005 Industrial 1,795 1,684 - -------------------------------------------------- Total volumes sold 45,118 44,933 PCL and ECT 61,696 76,974 - -------------------------------------------------- Total volumes delivered 106,814 121,907 ================================================== </TABLE> Gross margins on gas sales increased primarily due to reduced transportation costs paid to an affiliate and an increase in volumes sold during the Transition Period compared to the same period one year ago. A reduction in revenues due to the gathering and storage assets being removed from rate base, as discussed below, offset part of that increase. Pipeline Capacity Lease (PCL) and End-use Customer Transportation (ECT) revenues and volumes decreased primarily due to the loss of three customers and the effect of warm weather including the 15 <PAGE> temporary shut-down of two power plants served by the Distribution segment. The volume decrease was partially offset by an increase in rates. Operating costs decreased due to reductions in labor expense, employee benefits, and other operating efficiencies. The Distribution segment continues its strategy of increased operational efficiency while maintaining quality customer service. Two rate cases were combined in Oklahoma, eliminating an interim rate case scheduled for the summer of 1999 and providing for a one-time interim rate reduction of $5 million which began September 1, 1999 for residential customers in Oklahoma. The amount of the rate reduction in the Transition Period was $1.6 million. A July, 1999 order from the OCC removed the Oklahoma gathering and storage assets from utility regulation effective November 1, 1999. These assets are now included in the Transportation and Storage segment where they are being utilized in the competitive marketplace. The removal of the gathering and storage assets from rate base will result in a net reduction of revenues of $29.0 million on an annualized basis, based on the allocation of costs from the 1994 rate case. The Transportation and Storage and Marketing segments, as discussed below, are aggressively seeking new business opportunities and have replaced a substantial portion of these revenues. Additionally, a charge collected through the PGA for ONG's current working gas in storage is replacing a portion of the revenues. These revenue adjustments are subject to review in the current consolidated rate case with hearings scheduled for March, 2000. The Company filed its rate case proposal on September 20, 1999 supporting a revenue increase of $33.6 million. The OCC staff and the Attorney General filed testimonies on January 24, 2000, in response to the Company's rate case proposal recommending rate reductions of $69.5 million and $53.0 million, respectively. The Company will file rebuttal testimony on February 29, 2000. In August, 1999, the OCC approved a plan to distinguish between upstream and downstream activities in Oklahoma. The Distribution segment began taking bids during the Transition Period for transportation services in Oklahoma with contracts to be awarded in the spring of 2000 for service beginning November 1, 2000. As contracts with PCL customers expire, these contracts may be renewed with the Distribution segment, the Transportation and Storage segment of the Company or nonaffiliated service providers. Consequently, this could result in reduced revenues in the Distribution segment. Certain costs to be recovered through the rate making process have been recorded as regulatory assets in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). As the Company continues to unbundle its services, certain of these assets may no longer meet the criteria for following SFAS 71, and accordingly, a write-off of regulatory assets and stranded costs may be required. The Company does not anticipate these costs to be significant. Transportation and Storage The Company's gathering and storage assets and services in Oklahoma were removed from utility regulation effective November 1, 1999. Gathering and storage assets, including current gas in storage, of $325.0 million were removed from rate base. With unbundling and deregulation of gathering and storage service, the Company is positioned to compete for business at market-based rates. The Company's strategy to increase its storage utilization through greater injection and withdrawal capabilities has resulted in increased storage revenues for the Transition Period compared to the same period one year ago as well as increased compressor fuel expense. A decrease in transportation for an affiliate and warmer weather resulted in decreased transportation volumes and revenues for the Transition Period compared to the same period one year ago. The increase in other revenues is due to increased revenues from retained fuel. 16 <PAGE> <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - ---------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Financial Results Transportation revenues $ 20,435 $ 24,485 Storage revenues 13,218 9,099 Other revenues 6,572 2,413 - ---------------------------------------------------------------------- Net revenues 40,225 35,997 Operating costs 14,844 13,010 Depreciation, depletion, and amortization 5,124 4,554 - ---------------------------------------------------------------------- Operating income $ 20,257 $ 18,433 ====================================================================== </TABLE> <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - ---------------------------------------------------------- <S> <C> <C> Operating Information Volumes transported (MMcf) 115,970 104,054 Injection Horsepower 35,300 31,000 Capital expenditures (Thousands) $ 5,938 $ 13,163 Total assets (Thousands) $ 437,561 $ 507,573 - ---------------------------------------------------------- </TABLE> Marketing The Company's marketing operation purchases, stores and markets natural gas at both the retail and wholesale level, primarily in the producing areas of the United States. The Company continues to develop its niche into new market areas by arbitraging storage in the day trading market rather than focusing on the baseload market. Gas volumes increased in the Transition Period over the same period one year ago primarily from the Company's expansion into the Permian/Waha region of the United States. The Company now leases from others, including affiliates, more than 50 Bcf of storage capacity which gives direct access to the west coast and Texas intrastate markets. <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - ---------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Financial Results Gas sales $ 382,650 $ 243,776 Cost of gas 371,556 233,810 - ---------------------------------------------------------------------- Gross margin on gas sales 11,094 9,966 Other revenues 399 2,470 - ---------------------------------------------------------------------- Net revenues 11,493 12,436 Operating costs 3,344 2,730 Depreciation, depletion, and amortization 242 103 - ---------------------------------------------------------------------- Operating income $ 7,907 $ 9,603 ====================================================================== </TABLE> <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - ---------------------------------------------------------- <S> <C> <C> Operating Information Natural gas volumes (MMcf) 138,070 116,309 Capital expenditures (Thousands) $ 13,454 $ 605 Total assets (Thousands) $ 306,705 $ 141,733 - ---------------------------------------------------------- </TABLE> The increase in gross margins is attributable to increased throughput, and a more extensive use of storage. The use of storage has allowed the Company to concentrate on the day-to-day market and take advantage of volatility in that market. Emphasis on base load market has been reduced. Increased sales volumes are primarily due to the expanded niche business into Texas and the west coast. The decrease in other revenues is due to the recovery 17 <PAGE> of prior period costs in the four months ended December 31, 1998. The increase in operating costs is related to leasing storage and start-up costs for ONEOK Power Marketing Company. Trading of electricity at market-based wholesale rates has begun but has had minimal impact on operations to date. The increase in capital expenditures for the Transition Period is related to the 300-megawatt gas-fired electric generating plant to be constructed in Logan County, Oklahoma. The plant is expected to be in service in June, 2001. Gathering and Processing Revenues increased in the Transition Period over the same period one year ago due to the acquisition of the midstream natural gas gathering and processing assets from Koch Midstream Enterprises (Koch) in April, 1999. Operating costs and depreciation also increased due to the additional assets and the cost of operating those assets. Gathering, compression, and dehydration revenues result from operation of the Fuel and Shrink plants acquired from Koch. Total gas gathered and total gas processed for the Transition Period increased 354.5 MMcf per day and 281.4 MMcf per day, respectively, compared to the same period one year ago. Average NGL price per gallon increased as prices continued to experience an upward correction from the abnormally low prices prevalent throughout much of 1998 and early 1999. Other income in the four months ended December 31, 1998 consisted of the gains on sales of assets. <TABLE> <CAPTION> Four Months Ended December 31, - ----------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> Financial Results Natural gas liquids and condensate sales $ 43,290 $ 8,951 Gas sales 28,824 4,157 Gathering, compression and dehydration revenues 6,664 - Other revenues 123 1,398 - ----------------------------------------------------------------------------- Total revenues 78,901 14,506 Cost of sales 59,488 8,388 - ----------------------------------------------------------------------------- Gross margin 19,413 6,118 Operating costs 8,588 2,262 Depreciation, depletion, and amortization 2,513 681 - ----------------------------------------------------------------------------- Operating income $ 8,312 $ 3,175 ============================================================================= Other income $ - $ 4,993 ============================================================================= </TABLE> 18 <PAGE> <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - -------------------------------------------------------------- <S> <C> <C> Operating Information Average NGL's price ($/Gal) $ 0.371 $ 0.226 Average gas price ($/Mcf) $ 2.71 $ 1.80 Capital expenditures (Thousands) $ 26,863 $ 3,724 Total assets (Thousands) $ 368,904 $ 45,709 Total gas gathered (Mcf/D) 481,183 126,655 Total gas processed (Mcf/D) 396,512 115,141 Natural gas liquids sales (MGal) 126,309 38,934 Gas sales (MMMbtu) 10,643 2,303 Natural Gas Liquids by Component (%) Ethane 47 48 Propane 27 25 Iso butane 5 4 Normal butane 9 9 Natural gasoline 12 14 Contracts % Percent of Proceeds 64 65 Fuel and Shrink 36 35 - -------------------------------------------------------------- </TABLE> On February 1, 2000, the Company announced the purchase of assets from Dynegy, Inc. for $307.7 million in cash. These assets include eight gas processing plants, interest in two other gas processing plants, and approximately 7,000 miles of gas gathering and transmission pipeline systems in Oklahoma, Kansas, and the Texas Panhandle. Current throughput is approximately 240 million cubic foot per day with an approximate 375 million cubic foot per day capacity. Natural gas liquids production averages 25,000 barrels per day. Closing of the transaction is expected by the end of the first quarter of fiscal 2000. On February 8, 2000, the Company announced the purchase of gathering and processing assets located in Oklahoma, Kansas and West Texas from Kinder Morgan, Inc. (KMI). The marketing and trading business of KMI as well as certain storage and transmission pipelines in the mid-continent region will also be purchased. The Company will pay approximately $114.0 million plus an amount equal to net working capital at closing. The purchase includes over 12,000 miles of pipeline, six gas processing plants with capacity of 1.26 billion cubic feet per day and 10.5 billion cubic feet of storage. Production Increased production from a successful developmental drilling program and properties acquired were the primary reasons for the increases in volumes for the Transition Period compared to the same period one year ago. Gas and oil prices for the Transition Period also increased compared to the same period one year ago. Dividends earned from an investment increased other revenues. Operating costs also increased over one year ago due to the Company operating and owning an interest in an increased number of wells. <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - ---------------------------------------------------------------------- <S> <C> <C> (Thousands of Dollars) Financial Results Natural gas sales $ 20,789 $ 15,757 Oil sales 2,613 1,742 Other revenues 1,391 163 - ---------------------------------------------------------------------- Net revenues 24,793 17,662 Operating costs 7,245 5,227 Depreciation, depletion, and amortization 9,715 10,292 - ---------------------------------------------------------------------- Operating income $ 7,833 $ 2,143 ====================================================================== </TABLE> 19 <PAGE> <TABLE> <CAPTION> Four Months Ended December 31, 1999 1998 - ---------------------------------------------------------- <S> <C> <C> Operating Information Proved reserves Gas (MMcf) 247,708 165,933 Oil (MBbls) 4,070 3,112 Production Gas (MMcf) 8,306 7,700 Oil (MBbls) 138 145 Average price Gas (Mcf) $ 2.50 $ 2.03 Oil (Bbls) $ 18.99 $ 12.50 Capital expenditures (Thousands) $ 7,206 $ 39,533 Total assets (Thousands) $ 352,912 $ 275,840 - ---------------------------------------------------------- </TABLE> C. Financial Flexibility and Liquidity The Company's capitalization structure is 48 percent equity and 52 percent debt (including short-term debt) at December 31, 1999, compared to 64 percent equity and 36 percent debt at December 31, 1998. Cash provided by operating activities continues as the primary source for meeting day-to-day cash requirements. However, due to seasonal fluctuations, acquisitions, and additional capital requirements, the Company accesses funds through commercial paper, short-term credit agreements and, if necessary, through long-term borrowing. Operating cash flows for the Transition Period as compared to the same period one year ago are higher primarily because no tax payments have been made during the Transition Period due to the accelerated depreciation on the assets acquired from Koch. Competition continues to increase in all segments of the Company's business. The loss of major customers without recoupment of those revenues and negative effects of weather are among the events which could have a material adverse effect on the Company's financial condition. However, rates in the Distribution segment are structured to reduce the Company's risk in serving its large customers. Other strategies, such as the use of derivative instruments to offset the effect of weather variances, and aggressive negotiations with potential new customers are expected to reduce other risks to the Company. Capital expenditures totaled $94.0 million for the Transition Period. This included $13.2 million for construction of an electric generating plant and $12.3 million for the purchase of a gathering pipeline in western Oklahoma. For the same period one year ago, capital expenditures totaled $84.2 million including $34.9 million for the purchase of production assets. At December 31, 1999, $796.8 million of long-term debt was outstanding. As of that date, the Company could have issued $737.9 million of additional long-term debt under the most restrictive provisions contained in its various borrowing agreements. The recently announced purchases of assets from Dynegy, Inc. and Kinder Morgan, Inc. are expected to be financed through short-term and long-term debt. On March 18, 1999, the Company authorized a stock buyback plan for up to 15 percent of its capital stock. The program authorizes the Company to make purchases of its common stock on the open market with the timing and terms of purchases and the number of shares purchased to be determined by management based on market conditions and other factors. Purchases began May 25, 1999, with 2,111,337 shares purchased through December 31, 1999. The purchased shares are held in treasury and are available for general corporate purposes, funding of stock-based compensation plans, resale, or retirement. Purchases are financed with short-term debt. The Company believes that internally generated funds and access to financial markets will be sufficient to meet its normal debt services, dividend requirements, and capital expenditures. 20 <PAGE> D. Quantitative and Qualitative Disclosures about Market Risk Risk Management - The Company, substantially through its nonutility segments, is exposed to market risk in the normal course of its business operations through the impact of market fluctuations in the price of natural gas and oil. Market risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in commodity energy prices. The Company's primary exposure arises from fixed price purchase or sale agreements which extend for periods of up to 48 months, gas in storage inventories utilized by the gas marketing operation, and anticipated sales of oil and gas production. To a lesser extent, the Company is exposed to risk of changing prices or the cost of intervening transportation resulting from purchasing gas at one location and selling it at another (hereinafter referred to as basis risk). To minimize the risk from market fluctuations in the price of natural gas and oil, the Company uses commodity derivative instruments such as future contracts, swaps and options to hedge existing or anticipated purchase and sale agreements, existing physical gas in storage, and basis risk. None of these derivatives are held for speculative purposes. The Company adheres to policies and procedures which limit its exposure to market risk from open positions and monitors its exposure to market risk. The results of the Company's derivative hedging activities continue to meet its stated objective. The Company's regulated distribution operations are exposed to market risk in the normal course of business operations due to the impact of fluctuations on gas sales resulting from weather as measured by heating degree days (HDD). Market risk refers to the risk of loss in cash flows and future earnings arising from adverse fluctuation in gross margins on gas sales. To minimize this risk, the Company is using weather derivative swaps to manage the risk of fluctuations in HDD during the 1999/2000 heating season. Under the weather derivative swap agreements, the Company receives a fixed payment per degree day below the contracted normal HDD and pays a fixed amount per degree day above the contracted normal HDD. The swaps also contain a contract cap that limits the amount either party is required to pay. Kansas Gas Service uses derivative instruments to hedge the cost of some anticipated gas purchases during the winter heating months to protect their customers from upward volatility in the market price of natural gas. The gain or loss resulting from such derivatives is combined with the physical cost of gas and recovered from the customer through the gas purchase clause in rates. The Company has no market risk associated with such activities and, accordingly, these derivatives and the weather derivative swap agreements have been omitted from the value-at-risk disclosures below. All of the Company's long-term debt is fixed-rate and, therefore, does not expose the Company to the risk of earnings or cash flow loss due to changes in market interest rates. During the Transition Period, the Company entered into an interest rate swap on $300 million in long-term debt. The rate resets semiannually based on the six-month LIBOR at the reset date. Value-at-Risk Disclosure of Market Risk - The estimation of potential losses that could arise from changes in market conditions is typically accomplished through the use of statistical models that seek to predict risk of loss based on historical price and volatility patterns. The value-at-risk (VAR) measurement used by the Company is based on J.P. Morgan's RiskMetrics/TM/ model, which measures recent volatility and correlation in the price of natural gas and oil, pulls through current price levels and net deltas, and applies estimates made by management regarding the time required to liquidate positions and the degree of confidence placed in the accuracy of the volatility and correlation estimates. The Company's VAR calculation presents a comprehensive market risk disclosure by combining its commodity derivative portfolio used to hedge price and basis risk together with the current portfolio of firm physical purchase and sale contracts and nonutility gas-in-storage inventory. At December 31, 1999, the Company's estimated potential one-day favorable or unfavorable impact on future earnings, as measured by the VAR, using a 95 percent confidence level, diversified correlation and assuming three days to liquidate positions is immaterial. The Company's calculated VAR exposure represents an estimate of potential losses that would be recognized for 21 <PAGE> its portfolio of derivative financial instruments and firm physical contracts and nonutility gas-in-storage assuming hypothetical movements in future market rates and are not necessarily indicative of actual results that may occur. It does not represent the maximum possible loss nor any expected loss that may occur, because actual future gains and losses will differ from those estimated, based on actual fluctuations in the market rates, operating exposures, and the timing thereof, and changes in the Company's portfolio of derivative financial instruments and firm physical contracts. E. New Accounting Pronouncements Statement of Financial Accounting Standards No. 133, Accounting for Derivatives Instruments and Hedging Activities (Statement 133), was issued by the FASB in June, 1998. Statement 133 standardizes the accounting for derivatives instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedge exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Statement 133 was amended by Statement No. 137 in June, 1999 which delayed implementation until fiscal years beginning after June 15, 2000, with early adoption permitted. The Company has not determined the impact of adopting Statement 133. In December 1998, the Emerging Issues Task Force reached a consensus on Issue 98-10, "Accounting for Contracts involved in Energy Trading and Risk Management Activities" (EITF 98-10). EITF 98-10 is effective for the Company's fiscal year beginning January 1, 2000, and requires energy trading contracts to be recorded at fair value on the balance sheet, with changes in fair value included in earnings. Although management has not completed its assessment of the impact of adopting EITF 98-10, the Marketing segment operates as an interstate natural gas aggregator and follows a strategy of concentrating its efforts toward capitalizing on day-to-day pricing volatility through the use of gas storage facilities leased from others, hedging, and transportation arbitraging. Accordingly, the impact of implementing EITF 98-10 on the Marketing segment is not expected to be material to the Company's financial position or results of operations. Energy contracts held by other segments are designated as and considered effective as hedges and non-trading activities and are not considered energy trading contracts. 22 <PAGE> F. Supplemental Calendar Year Information by Quarter In October, 1999, the Company's Board of Directors approved a change in the Company's fiscal year-end from August 31 to December 31 beginning January 1, 2000. The consolidated condensed financial statements included in this Form 10-Q represent the period from September 1, 1999 through December 31, 1999, the Company's Transition Period preceding the beginning of the new fiscal year. The following information is intended to supplement the consolidated condensed financial statements by providing calendar year financial information by quarters for the years 1999 and 1998. <TABLE> <CAPTION> Consolidated Condensed Statements of Income Calendar Year 1999 First Second Third Fourth Total (Unaudited) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ (Thousands of Dollars, except per share amounts) <S> <C> <C> <C> <C> <C> Operating Revenues $ 547,171 $ 399,081 $ 471,499 $ 653,232 $ 2,070,983 Cost of gas 331,071 239,194 317,310 423,199 1,310,774 - ------------------------------------------------------------------------------------------------------------------------------------ Net Revenues 216,100 159,887 154,189 230,033 760,209 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Expenses Operations and maintenance 61,248 88,551 91,972 107,235 349,006 Depreciation, depletion, and amortization 32,092 34,168 32,115 32,820 131,195 General taxes 10,298 9,953 10,540 11,194 41,985 - ------------------------------------------------------------------------------------------------------------------------------------ Total Operating Expenses 103,638 132,672 134,627 151,249 522,186 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Income 112,462 27,215 19,562 78,784 238,023 - ------------------------------------------------------------------------------------------------------------------------------------ Other income - - 1,646 - 1,646 Interest 12,582 14,337 17,704 21,116 65,739 Income taxes 39,430 3,397 1,705 22,525 67,057 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income 60,450 9,481 1,799 35,143 106,873 Preferred Stock Dividends 9,324 9,307 9,276 9,275 37,182 - ------------------------------------------------------------------------------------------------------------------------------------ Income (Loss) Available for Common Stock $ 51,126 $ 174 $ (7,477) $ 25,868 $ 69,691 ==================================================================================================================================== Earnings (Loss) Per Share of Common Stock - Basic $ 1.62 $ 0.01 $ (0.24) $ 0.85 $ 2.24 ==================================================================================================================================== Earnings (Loss) Per Share of Common Stock - Diluted $ 1.17 $ 0.01 $ (0.24) $ 0.70 $ 2.09 ==================================================================================================================================== Average Shares of Common Stock - Basic (Thousands) 31,629 31,590 31,030 30,276 31,127 Average Shares of Common Stock - Diluted (Thousands) 51,715 31,603 31,030 50,233 51,153 </TABLE> There were 19,985,151 shares of convertible preferred stock and 86,871 option shares excluded from the calculation of Diluted Earnings per Share due to being antidilutive for the second quarter of 1999. For the third quarter of 1999, there were 19,912,313 shares of convertible preferred stock and 61,741 option shares excluded. Other income includes the gains on sales of assets. 23 <PAGE> Consolidated Condensed Statements of Income <TABLE> <CAPTION> Calendar Year 1998 First Second Third Fourth Total (Unaudited) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ (Thousands of Dollars, except per share amounts) <S> <C> <C> <C> <C> <C> Operating Revenues $ 654,253 $ 362,777 $ 344,317 $ 480,132 $ 1,841,479 Cost of gas 434,164 230,742 238,889 303,571 1,207,366 - ------------------------------------------------------------------------------------------------------------------------------------ Net Revenues 220,089 132,035 105,428 176,561 634,113 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Expenses Operations and maintenance 78,784 70,325 69,785 68,053 286,947 Depreciation, depletion, and amortization 27,129 28,062 30,833 31,170 117,194 General taxes 10,226 8,458 9,267 9,337 37,288 - ------------------------------------------------------------------------------------------------------------------------------------ Total Operating Expenses 116,139 106,845 109,885 108,560 441,429 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Income (Loss) 103,950 25,190 (4,457) 68,001 192,684 - ------------------------------------------------------------------------------------------------------------------------------------ Other income 14,644 - - 4,993 19,637 Interest 10,575 6,536 9,803 11,885 38,799 Income taxes 41,723 8,313 (4,784) 24,067 69,319 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) 66,296 10,341 (9,476) 37,042 104,203 Preferred Stock Dividends 8,983 8,999 9,016 9,423 36,421 - ------------------------------------------------------------------------------------------------------------------------------------ Income (Loss) Available for Common Stock $ 57,313 $ 1,342 $ (18,492) $ 27,619 $ 67,782 ==================================================================================================================================== Earnings (Loss) Per Share of Common Stock - Basic $ 1.82 $ 0.04 $ (0.59) $ 0.88 $ 2.15 ==================================================================================================================================== Earnings (Loss) Per Share of Common Stock - Diluted $ 1.29 $ 0.04 $ (0.59) $ 0.72 $ 2.02 ==================================================================================================================================== Average Shares of Common Stock - Basic (Thousands) 31,543 31,544 31,566 31,534 31,547 Average Shares of Common Stock - Diluted (Thousands) 51,548 31,617 31,566 51,650 51,621 There were 20,005,643 shares of convertible preferred stock excluded from the calculation of Diluted Earnings per Share due to being antidilutive for the second quarter of 1998. For the third quarter of 1998, there were 20,040,474 shares of convertible preferred stock and 43,951 option shares excluded. Other income includes the gains on sales of assets. </TABLE> 24 <PAGE> <TABLE> <CAPTION> Distribution Calendar Year 1999 First Second Third Fourth Total (Unaudited) Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> <C> <C> <C> Financial Results Gas sales $ 342,926 $ 146,622 $ 115,520 $ 274,329 $ 879,397 Cost of gas 210,166 89,337 69,242 179,380 548,125 - --------------------------------------------------------------------------------------------------------- Gross margin on gas sales 132,760 57,285 46,278 94,949 331,272 PCL and ECT revenues 18,085 11,969 12,776 13,855 56,685 Other revenues 4,400 5,946 3,622 2,671 16,639 - --------------------------------------------------------------------------------------------------------- Net revenues 155,245 75,200 62,676 111,475 404,596 Operating costs 55,384 60,126 55,647 54,495 225,652 Depreciation, depletion, and amortization 19,858 19,103 18,100 18,594 75,655 - --------------------------------------------------------------------------------------------------------- Operating income (loss) $ 80,003 $ (4,029) $ (11,071) $ 38,386 $ 103,289 ========================================================================================================= Calendar Year 1998 First Second Third Fourth Total Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Financial Results Gas sales $ 407,202 $ 151,376 $ 104,692 $ 248,865 $ 912,135 Cost of gas 274,452 92,586 65,924 153,535 586,497 - --------------------------------------------------------------------------------------------------------- Gross margin on gas sales 132,750 58,790 38,768 95,330 325,638 PCL and ECT revenues 21,821 16,311 15,256 15,078 68,466 Other revenues 5,006 5,503 3,884 3,159 17,552 - --------------------------------------------------------------------------------------------------------- Net revenues 159,577 80,604 57,908 113,567 411,656 Operating costs 63,492 59,439 60,369 58,039 241,339 Depreciation, depletion, and amortization 18,846 18,835 17,372 18,440 73,493 - --------------------------------------------------------------------------------------------------------- Operating income (loss) $ 77,239 $ 2,330 $ (19,833) $ 37,088 $ 96,824 ========================================================================================================= </TABLE> 25 <PAGE> Transportation and Storage <TABLE> <CAPTION> Calendar Year 1999 First Second Third Fourth Total (Unaudited) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> (Thousands of Dollars) Financial Results Transportation revenues $ 18,097 $ 18,038 $ 18,380 $ 14,956 $ 69,471 Storage revenues 6,387 7,095 8,240 10,160 31,882 Other revenues 2,180 2,127 3,506 4,448 12,261 - ------------------------------------------------------------------------------------------------------- Net revenues 26,664 27,260 30,126 29,564 113,614 Operating costs 6,748 9,206 8,984 11,851 36,789 Depreciation, depletion, and amortization 3,415 3,419 3,748 3,840 14,422 - ------------------------------------------------------------------------------------------------------- Operating income $ 16,501 $ 14,635 $ 17,394 $ 13,873 $ 62,403 ======================================================================================================= Calendar Year 1998 First Second Third Fourth Total Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Financial Results Transportation revenues $ 16,247 $ 18,078 $ 18,744 $ 18,197 $ 71,266 Storage revenues 7,227 4,376 4,404 7,653 23,660 Other revenues 2,285 2,110 2,342 1,917 8,654 - ------------------------------------------------------------------------------------------------------- Net revenues 25,759 24,564 25,490 27,767 103,580 Operating costs 7,674 8,037 8,226 10,045 33,982 Depreciation, depletion, and amortization 3,292 3,302 4,161 3,449 14,204 - ------------------------------------------------------------------------------------------------------- Operating income $ 14,793 $ 13,225 $ 13,103 $ 14,273 $ 55,394 ======================================================================================================= </TABLE> 26 <PAGE> Marketing <TABLE> <CAPTION> Calendar Year 1999 First Second Third Fourth Total (Unaudited) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> <C> <C> <C> Financial Results Gas sales $ 189,095 $ 193,389 $ 276,694 $ 301,586 $ 960,764 Cost of gas 178,089 186,910 271,335 291,367 927,701 - -------------------------------------------------------------------------------------------------------- Gross margin on gas sales 11,006 6,479 5,359 10,219 33,063 Other revenues 91 172 820 354 1,437 - -------------------------------------------------------------------------------------------------------- Net revenues 11,097 6,651 6,179 10,573 34,500 Operating costs 2,016 2,501 2,540 2,621 9,678 Depreciation, depletion, and amortization 151 150 160 181 642 - -------------------------------------------------------------------------------------------------------- Operating income $ 8,930 $ 4,000 $ 3,479 $ 7,771 $ 24,180 ======================================================================================================== Calendar Year 1998 First Second Third Fourth Total Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Financial Results Gas sales $ 202,277 $ 171,972 $ 203,354 $ 190,370 $ 767,973 Cost of gas 196,117 167,389 202,493 181,765 747,764 - -------------------------------------------------------------------------------------------------------- Gross margin on gas sales 6,160 4,583 861 8,605 20,209 Other revenues 1,785 785 387 2,537 5,494 - -------------------------------------------------------------------------------------------------------- Net revenues 7,945 5,368 1,248 11,142 25,703 Operating costs 1,938 2,075 1,957 2,158 8,128 Depreciation, depletion, and amortization 182 222 62 10 476 - -------------------------------------------------------------------------------------------------------- Operating income (loss) $ 5,825 $ 3,071 $ (771) $ 8,974 $ 17,099 ======================================================================================================== </TABLE> 27 <PAGE> Gathering and Processing <TABLE> <CAPTION> Calendar Year 1999 First Second Third Fourth Total (Unaudited) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> (Thousands of Dollars) Financial Results Natural gas liquids and condensate sales $ 6,307 $ 17,165 $ 30,819 $ 32,806 $ 87,097 Gas sales 2,932 14,599 7,043 23,125 47,699 Gathering revenues - 3,136 5,005 5,051 13,192 Other revenues (135) 140 96 96 197 - -------------------------------------------------------------------------------------------------------- Total revenues 9,104 35,040 42,963 61,078 148,185 Cost of sales 5,789 23,517 27,958 46,315 103,579 - -------------------------------------------------------------------------------------------------------- Gross margin 3,315 11,523 15,005 14,763 44,606 Operating costs 1,531 3,191 6,280 6,531 17,533 Depreciation, depletion, and amortization 359 1,334 1,781 1,920 5,394 - -------------------------------------------------------------------------------------------------------- Operating income $ 1,425 $ 6,998 $ 6,944 $ 6,312 $ 21,679 ======================================================================================================== Calendar Year 1998 First Second Third Fourth Total Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Financial Results Natural gas liquids and condensate sales $ 15,926 $ 8,548 $ 6,860 $ 6,776 $ 38,110 Gas sales 3,830 3,656 3,571 3,087 14,144 Other revenues 21 3,340 333 1,280 4,974 - -------------------------------------------------------------------------------------------------------- Total revenues 19,777 15,544 10,764 11,143 57,228 Cost of sales 14,526 7,911 6,745 6,255 35,437 - -------------------------------------------------------------------------------------------------------- Gross margin 5,251 7,633 4,019 4,888 21,791 Operating costs 2,335 1,843 1,762 1,736 7,676 Depreciation, depletion, and amortization 569 559 539 508 2,175 - -------------------------------------------------------------------------------------------------------- Operating income $ 2,347 $ 5,231 $ 1,718 $ 2,644 $ 11,940 ======================================================================================================== Other income $ 14,644 $ - $ - $ 4,993 $ 19,637 ======================================================================================================== </TABLE> Other income includes the gains on sales of assets. 28 <PAGE> Production <TABLE> <CAPTION> Calendar Year 1999 First Second Third Fourth Total (Unaudited) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) <S> <C> <C> <C> <C> <C> Financial Results Natural gas sales $ 16,408 $ 16,680 $ 14,451 $ 16,269 $ 63,808 Oil sales 1,289 1,866 1,866 2,019 7,040 Other revenues 1,606 1,350 1,553 1,028 5,537 - ------------------------------------------------------------------------------------------------------------- Net revenues 19,303 19,896 17,870 19,316 76,385 Operating costs 4,991 4,901 5,735 5,516 21,143 Depreciation, depletion, and amortization 8,487 9,595 7,753 7,661 33,496 - ------------------------------------------------------------------------------------------------------------- Operating income $ 5,825 $ 5,400 4,382 6,139 21,746 ============================================================================================================= Other income $ - $ - $ 1,646 $ - $ 1,646 ============================================================================================================= Other income includes gains on sales of assets. Calendar Year 1998 First Second Third Fourth Total Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Financial Results Natural gas sales $ 9,504 $ 8,320 $ 11,979 $ 12,406 $ 42,209 Oil sales 1,220 1,279 1,327 1,312 5,138 Other revenues 350 78 (108) 160 480 - ------------------------------------------------------------------------------------------------------------- Net revenues 11,074 9,677 13,198 13,878 47,827 Operating costs 3,442 3,437 4,234 3,962 15,075 Depreciation, depletion, and amortization 4,146 5,051 7,713 7,619 24,529 - ------------------------------------------------------------------------------------------------------------- Operating income $ 3,486 $ 1,189 $ 1,251 $ 2,297 $ 8,223 ============================================================================================================= </TABLE> 29 <PAGE> PART II - OTHER INFORMATION Item 1. Legal Proceedings United States ex rel. Jack J. Grynberg v. ONEOK, Inc., ONEOK Resources Company, and Oklahoma Natural Gas Company, (CTN-8), No. CIV-97-1006-R (Judge Russell), in the United States District Court for the Western District of Oklahoma. On September 24, 1999, a hearing on the motion to transfer and consolidate actions before a single district court was held. An order was issued on October 20, 1999, transferring all the actions to the federal district court in Wyoming for pretrial proceedings under multidistrict litigation procedures. The Company and most other defendants filed motions to dismiss the case in early December. This motion is set for hearing on March 14, 2000. ONEOK, Inc. v. Southern Union Company, No. 99-CV-0345-H(M), United States District Court for the Northern District of Oklahoma, on appeal of preliminary injunction, United States Court of Appeals for the Tenth Circuit, Case Number 99-5103. On October 12, 1999, ONEOK filed a motion to dismiss the counterclaims of Southern Union. On October 15, 1999, the Court denied ONEOK's motion to amend its complaint and on October 27, 1999, ONEOK filed a motion for reconsideration which was denied on November 4, 1999. On November 10, 1999, as a result of ONEOK's motion to dismiss, Southern Union filed an amended answer and counterclaims. ONEOK filed a reply to the amended answer and counterclaims on November 26, 1999. The case is now in the discovery stage. Oral argument on the appeal of the preliminary injunction has been scheduled for March 8, 2000. In the related case of Klein v. Southwest Gas Corporation, Superior Court of San Diego County, California, Case No. 726615, on September 24, 1999, the Court dismissed Southern Union from the case and stated that Southern Union would not be allowed to refile until all federal court actions were complete. Southern Union Company v. Southwest Gas Corporation, et al., No. CIV 99 1294 PHX ROS, United States District Court for the District of Arizona. Rather than respond to motions filed by the defendants on October 12, 1999, Southern Union filed an amended complaint with substantially the same claims as in the original complaint except that it specifically eliminated its previous allegations that ONEOK had made payments to Tiffany & Bosco for the benefit of Jack Rose, and James C. Kneale and Larry W. Brummett were added as additional defendants. The Company and the other defendants filed motions to dismiss the amended complaint on December 6, 1999. The motions are to be heard by the Court on June 16, 2000. Joint Application of Oklahoma Natural Gas Company, a Division of ONEOK, Inc., ONEOK Gas Transportation Company, a Division of ONEOK, Inc., and Kansas Gas Service Company, a Division of ONEOK, Inc., for Approval of Their Unbundling Plan for Natural Gas Services Upstream of the City Gates or Aggregation Points, Cause PUD No. 980000177, before the Oklahoma Corporation Commission. On October 21, 1999, the Supreme Court granted a new stay for an additional twenty days. As settlement had not been reached between the parties, the Company filed a motion to extend the stay until conclusion of the Commission proceedings. On November 2, 1999, the Supreme Court issued an order directing the parties to respond to the Company's motion by November 17, 1999. Also, on November 5, 1999, the Commission Staff filed a response to the Company's motion and a motion to dismiss the appeal as moot and the Attorney General filed a motion to dismiss on November 12, 1999. The Company filed a response to the motions to dismiss on November 29, 1999. On December 13, 1999, the Court issued an order denying an extension of the stay and the motions to dismiss and directed the parties to file briefs. The Company filed its reply brief on January 27, 2000. Application of Ernest G. Johnson, Director of the Public Utility Division, Oklahoma Corporation Commission, to Review the Rates, Charges, Services and Service Terms of Oklahoma Natural Gas Company, a division of ONEOK, Inc., and All Affiliated Companies and Any Affiliate or Nonaffiliate Transaction Relevant to Such Inquiry, Cause PUD No. 980000683, Oklahoma Corporation Commission. 30 <PAGE> On September 20, 1999, Oklahoma Natural filed updated financial information and requested a $33.6 million rate increase. The case is set for hearing before the Administrative Law Judges on March 27, 2000. In the Matter of the Application of Southwest Gas Corporation and ONEOK, Inc. for an Order Authorizing Implementation of the Agreement and Plan of Merger dated December 14, 1998, Docket Nos. G-01551A-99-0112 and G-03713A-99-0112, before the Arizona Corporation Commission. On January 4, 2000, the staff of the ACC advised the ACC that approval of the proposed merger was premature due to unresolved issues raised in the litigation, citing the Company's "appearance of impropriety" and raising concerns about the Company's integrity and truthfulness. Accordingly, the staff recommended that any decision on the merger be deferred until these issues and allegations could be resolved so as to allow the ACC to make an informed decision on whether the proposed merger was in the public interest. On January 21, 2000, the Company advised the Commission of its termination of the merger agreement and gave notice that the Company withdrew its application. On January 25, 2000, Southwest Gas filed an objection to the Company's notice of withdrawal and a motion to reject the Company's notice of withdrawal on the grounds that neither Southwest Gas nor the Company were empowered to withdraw unilaterally the joint application. The motion was heard on February 4, 2000, before a hearing officer and the withdrawal was granted and the docket was closed. ONEOK, Inc. v. Southwest Gas Corporation, No. CV 066H (E), United States District Court for the Northern District of Oklahoma. On January 18, 2000, the Company received a letter (the "Southwest Letter") from Michael O. Maffie, President and Chief Executive Officer of Southwest asserting that the Company had breached its previous merger agreement with Southwest and demanding that the breach be cured. On January 21, 2000, the Company sent a letter (the "ONEOK Letter") denying that it was in breach of the merger agreement. In the ONEOK Letter, the Company also advised Southwest of the Company's election to terminate the merger agreement under Section 8.1(b) of the merger agreement because of the fact that the conditions to closing under the merger agreement were not fulfilled or capable of being fulfilled on the first anniversary of the merger agreement. The failed condition of the pending lawsuit instituted by Southern Union against Southwest and the Company. On January 21, 2000, the Company filed a complaint in Federal District Court in Tulsa, Oklahoma asking the Court to declare that under the terms of the merger agreement, the Company has properly terminated the Agreement. Southwest Gas Corporation v. ONEOK, Inc., CIV 119 PHX VAM, United States District Court for the District of Arizona. On January 24, 2000, Southwest filed a complaint against the Company and Southern Union. Southwest alleges that: (1) under the merger agreement between the Company and Southwest, the Company agreed to furnish all information concerning itself that is required or customary for inclusion in the Southwest proxy statement related to the merger and that none of such information would contain any untrue statement of material facts or omit to state any material facts required to be stated therein or necessary to make 31 <PAGE> the statements therein in light of the circumstances under which they are made, not misleading; (2) under the merger agreement the Company promised to use its commercially reasonable efforts to obtain all necessary governmental authorization for the merger (consult with Southwest in respect thereto) and to take all other necessary actions and do all things necessary, proper or advisable to consummate and make effective the merger transaction; (3) the Company failed to disclose to the Southwest Board that (i) the Company had participated in improper lobbying efforts in support of the Company's bid for Southwest (including help in drafting a certain letter to the Board from a state regulatory commissioner concerning regulatory approval); (ii) the Company's improper involvement in efforts to lobby regulators in Arizona, California and Nevada; and (iii) certain relationships involving a former employee of the Arizona commission, all of which breached the merger agreement; (4) if the Company had disclosed such lobby efforts and relationships, it would have caused the Board of Southwest to have serious questions about the integrity of the Company's senior management and the chances of obtaining regulatory approvals, the Southwest Board would not have entered into an amendment of the merger agreement without answers to such questions and the Board would have demanded the Company cure its breach of the merger agreement; (5) the Company's failure to make full and truthful disclosure of such lobbying and relationships and the providing of false information and misleading answers to the Arizona Corporation Commission has resulted in staff withdrawing its support for the merger citing concerns over the integrity, veracity and fitness of the Company and as a result the Company failed to use its commercially reasonable efforts to obtain such approval as required by the merger agreement; and (6) the Company has refused to cure its breach of and has wrongfully terminated the merger agreement. The complaint alleges numerous causes of action including: (1) fraud in the inducement; (2) fraud; (3) breach of contract; (4) breach of implied covenant of good faith and fair dealing; and (5) declaratory relief. The complaint asks that the merger agreement be declared null and void and Southwest be awarded its actual, consequential, incidental and punitive damages in an amount in excess of $75,000 for fraud in the inducement and fraud or alternatively (1) damages for breach of the contract and implied covenant, or (2) a declaration that the Company has breached the merger agreement. The Company intends to vigorously defend all claims and other charges against the Company in the above litigation proceedings. Gaetan Lavalla, Derivatively on Behalf of Nominal Defendant ONEOK, Inc. v. Larry W. Brummett, et al. District Court of Tulsa County, No. CJ-2000-598 and Hayward Lane, Derivatively on Behalf of Nominal Defendant ONEOK, Inc. v. Larry W. Brummett, et al., District Court of Tulsa County, No. CJ-2000-593. On February 3, 2000, two substantially identical derivative actions were filed in the District Court in Tulsa, Oklahoma by shareholders against the members of the Board of Directors of the Company for violation of their fiduciary duties to the Company by allegedly causing or allowing the Company to engage in fraudulent and improper schemes designed to "sabotage" Southern Union's competitive bid to acquire Southwest and secure regulatory approval for the Company's own planned merger with Southwest. Such conduct allegedly caused the Company to be sued by both Southwest and Southern Union which exposed the Company to millions of dollars in liabilities. The allegations are used as a basis for causes of action for intentional breach of fiduciary duty, derivative claim for negligent breach of fiduciary duty, class and derivative claims for constructive fraud, and derivative claims for gross mismanagement. Each plaintiff seeks a declaration that the lawsuit is properly maintained as a derivative action, the defendants, and each of them, have breached their fiduciary duties to the Company, an injunction permanently enjoining defendants from further abuse of control and committing of gross management and constructive fraud, and asks for an award of compensatory and punitive damages and costs, disbursements and reasonable attorney fees. 32 <PAGE> Item 6. Exhibits and Reports on Form 8-K and 8-K/A. (g) Reports January 7, 2000 - Announced plans to move forward with the Company's proposed merger with Southwest Gas Corporation. January 24, 2000 - Announced that the Company had terminated its proposed merger with Southwest Gas Corporation. January 27, 2000 - Announced that Southwest Gas Corporation filed a complaint against the Company and Southern Union Company in the United States District Court in Arizona. February 1, 2000 - Announced that the Company had purchased the mid- continent midstream assets of Dynegy, Inc. February 8, 2000 - Announced that the Company had purchased the natural gas gathering and processing businesses, marketing and trading business, and storage and transmission pipelines from Kinder- Morgan, Inc. 33 <PAGE> Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this/ 10tth/ day of February 2000. ONEOK, Inc. Registrant By: Jim Kneale ------------------------------- Jim Kneale Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) 34 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF ONEOK, INC. FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 4-MOS <FISCAL-YEAR-END> DEC-31-2000 <PERIOD-START> SEP-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 72 <SECURITIES> 0 <RECEIVABLES> 371,313 <ALLOWANCES> 0 <INVENTORY> 134,871 <CURRENT-ASSETS> 593,721 <PP&E> 3,143,693 <DEPRECIATION> 1,021,915 <TOTAL-ASSETS> 3,239,575 <CURRENT-LIABILITIES> 786,713 <BONDS> 775,074 <PREFERRED-MANDATORY> 0 <PREFERRED> 199 <COMMON> 316 <OTHER-SE> 1,151,009 <TOTAL-LIABILITY-AND-EQUITY> 3,239,575 <SALES> 808,874 <TOTAL-REVENUES> 808,874 <CGS> 523,533 <TOTAL-COSTS> 523,333 <OTHER-EXPENSES> 199,377 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 27,883 <INCOME-PRETAX> 58,081 <INCOME-TAX> 22,737 <INCOME-CONTINUING> 35,344 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 35,344 <EPS-BASIC> 0.76 <EPS-DILUTED> 0.70 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

PAYX

https://www.sec.gov/Archives/edgar/data/723531/0000723531-00-000006.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, Sn8SppAaYoYV2RY8vUsewqCmB6esAK0m1xcY0dIk+fzgGoQX9M8krLiurwi3OivW 1EPXlT2XCbAY9jEFJV+xxw== <SEC-DOCUMENT>0000723531-00-000006.txt : 20000317 <SEC-HEADER>0000723531-00-000006.hdr.sgml : 20000317 ACCESSION NUMBER: 0000723531-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYCHEX INC CENTRAL INDEX KEY: 0000723531 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 161124166 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11330 FILM NUMBER: 571143 BUSINESS ADDRESS: STREET 1: 911 PANORAMA TRAIL S CITY: ROCHESTER STATE: NY ZIP: 14625-0397 BUSINESS PHONE: 7163856666 MAIL ADDRESS: STREET 1: 911 PANORAMA TRAIL SOUTH CITY: ROCHESTER STATE: NY ZIP: 14625-0397 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q <TEXT> 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 February 29, 2000 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 0-11330 PAYCHEX, INC. (Exact name of registrant as specified in its charter) DELAWARE 16-1124166 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 911 PANORAMA TRAIL SOUTH, ROCHESTER, NEW YORK 14625-0397 (Address of principal executive offices) (Zip Code) (716) 385-6666 (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 (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 247,532,832 Shares - ---------------------------- --------------------------------- CLASS OUTSTANDING AT February 29, 2000 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAYCHEX, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts) For the three months ended For the nine months ended February 29, February 28, February 29, February 28, 2000 1999 2000 1999 Service revenues: Payroll $171,821 $144,257 $477,639 $403,274 HRS-PEO (Net of PEO direct costs billed and incurred of $193,047, $148,292, $515,090 and $429,823, respectively (A)) 20,362 14,166 53,294 37,386 ------- ------- ------- ------- Total service revenues 192,183 158,423 530,933 440,660 Operating costs 45,964 40,989 126,686 113,737 Selling, general and administrative expenses 78,316 68,941 215,152 191,791 ------- ------- ------- ------- Operating income 67,903 48,493 189,095 135,132 Investment income 4,012 3,073 11,554 9,040 ------- ------- ------- ------- Income before income taxes 71,915 51,566 200,649 144,172 Income taxes 22,294 15,366 62,201 42,963 ------- ------- ------- ------- Net income $ 49,621 $ 36,200 $138,448 $101,209 ======= ======= ======= ======= Basic earnings per share $ .20 $ .15 $ .56 $ .41 ======= ======= ======= ======= Diluted earnings per share $ .20 $ .15 $ .55 $ .41 ======= ======= ======= ======= Weighted-average common shares outstanding 247,315 245,693 246,856 245,311 ======= ======= ======= ======= Weighted-average shares assuming dilution 251,815 248,934 250,206 248,683 ======= ======= ======= ======= Cash dividends per common $ .09 $ .06 $ .24 $ .16 share ======= ======= ======= ======= - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. (A) PEO direct costs billed to clients are equal to PEO direct costs incurred for the wages and payroll taxes of worksite employees and their related benefit premiums and claims. PAYCHEX, INC. CONSOLIDATED BALANCE SHEETS (In thousands) February 29, May 31, 2000 1999 ASSETS (UNAUDITED) (AUDITED) Cash and cash equivalents $ 64,839 $ 52,692 Investments 373,682 290,555 Interest receivable 17,931 18,045 Accounts receivable 77,337 62,941 Deferred income taxes 9,654 1,364 Prepaid expenses and other current assets 5,038 6,000 --------- --------- Current assets before ENS investments 548,481 431,597 ENS investments 1,830,485 1,361,523 --------- --------- Total current assets 2,378,966 1,793,120 Property and equipment - net 72,757 65,931 Deferred income taxes 2,322 1,417 Other assets 15,560 12,633 --------- --------- Total assets $2,469,605 $1,873,101 ========= ========= LIABILITIES Accounts payable $ 12,810 $ 10,328 Accrued compensation and related items 45,888 36,574 Deferred revenue 5,963 4,643 Accrued income taxes 12,062 4,281 Other current liabilities 21,846 17,905 --------- --------- Current liabilities before ENS client deposits 98,569 73,731 ENS client deposits 1,837,599 1,358,605 --------- --------- Total current liabilities 1,936,168 1,432,336 Long-term liabilities 5,154 4,965 --------- --------- Total liabilities 1,941,322 1,437,301 STOCKHOLDERS' EQUITY Common stock, $.01 par value, 600,000 authorized shares Issued: 247,533/February 29, 2000 and 246,326/May 31, 1999 2,475 2,463 Additional paid-in capital 91,349 68,238 Retained earnings 441,435 362,269 Accumulated other comprehensive income/(loss) (6,976) 2,830 --------- --------- Total stockholders' equity 528,283 435,800 --------- --------- Total liabilities and stockholders' equity $2,469,605 $1,873,101 ========= ========= - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. PAYCHEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) For the nine months ended February 29, February 28, 2000 1999 OPERATING ACTIVITIES Net income $138,448 $101,209 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization on depreciable and intangible assets 17,639 16,206 Amortization of premiums and discounts on available-for-sale securities 9,274 7,557 Provision for deferred income taxes (3,634) (2,058) Provision for bad debts 1,359 1,363 Net realized (gains)/losses on sales of available-for-sale securities 2,292 (2,813) Changes in operating assets and liabilities: Interest receivable 114 (1,298) Accounts receivable (15,755) (6,063) Prepaid expenses and other current assets 962 (1,595) Accounts payable and other current liabilities 39,598 17,670 Net change in other assets and liabilities 2,588 (1,496) ------- ------- Net cash provided by operating activities 192,885 128,682 INVESTING ACTIVITIES Purchases of available-for-sale securities (623,829) (571,285) Proceeds from sales of available-for-sale securities 443,225 352,013 Proceeds from maturities of available-for-sale securities 15,770 31,135 Net change in ENS money market securities and other cash equivalents (413,702) (184,548) Net change in ENS client deposits 478,994 320,749 Purchases of property and equipment, net of disposal proceeds (24,422) (18,482) Purchases of other assets (6,416) (3,418) ------- ------- Net cash used in investing activities (130,380) (73,836) FINANCING ACTIVITIES Dividends paid (59,281) (39,280) Proceeds from exercise of stock options 8,923 3,428 ------- ------- Net cash used in financing activities (50,358) (35,852) ------- ------- Increase in Cash and cash equivalents 12,147 18,994 Cash and cash equivalents, beginning of period 52,692 35,571 ------- ------- Cash and cash equivalents, end of period $ 64,839 $ 54,565 ======= ======= - ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. PAYCHEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) February 29, 2000 A) The accompanying unaudited Consolidated Financial Statements of Paychex, Inc., and its wholly-owned subsidiaries 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, the Consolidated Financial Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the information furnished herein reflects all adjustments (consisting of items of a normal recurring nature) which are necessary for a fair presentation of the results for the interim period. Operating results for the three months and nine months ended February 29, 2000, are not necessarily indicative of the results that may be expected for the full year ended May 31, 2000. There is no significant seasonality to the Company's business. However, during the third fiscal quarter, the number of new payroll segment clients and new PEO worksite employees tends to be higher than the rest of the fiscal year. Consequently, greater sales commission expenses are reported in the third quarter. The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes presented in the Company's Annual Report on Form 10-K for the year ended May 31, 1999. Certain amounts from the prior year are reclassified to conform to current year presentations. B) Segment Financial Information: The Company has two business segments: Payroll and Human Resource Services-Professional Employer Organization (HRS-PEO). The Payroll segment is engaged in the preparation of payroll checks, internal accounting records, federal, state and local payroll tax returns, and collection and remittance of payroll obligations for small- to medium-sized businesses. The HRS-PEO segment specializes in providing small- to medium-sized businesses with cost-effective outsourcing solutions for their employee benefits. HRS-PEO products include 401(k) plan recordkeeping services, section 125 plan administration, Professional Employer Organization (PEO) services, workers' compensation, group benefits, state unemployment insurance services, employee handbooks and management services. Corporate expenses are primarily related to the Information Technology, Organizational Development, Finance, Marketing and Senior Management functions of the Company. For the three months ended For the nine months ended (In thousands) February 29, February 28, February 29, February 28, 2000 1999 2000 1999 Service revenues: Payroll $171,821 $144,257 $477,639 $403,274 HRS-PEO (A) 20,362 14,166 53,294 37,386 ------- ------- ------- ------- Total service revenues $192,183 $158,423 $530,933 $440,660 ======= ======= ======= ======= ENS investment revenue included in Payroll revenue $ 16,355 $ 14,775 $ 40,595 $ 38,535 ======= ======= ======= ======= Operating income: Payroll $ 77,270 $ 60,993 $221,197 $171,556 HRS-PEO 7,244 3,236 18,301 8,422 ------- ------- ------- ------- Segment operating income 84,514 64,229 239,498 179,978 Corporate expenses 16,611 15,736 50,403 44,846 ------- ------- ------- ------- Total operating income 67,903 48,493 189,095 135,132 Investment income 4,012 3,073 11,554 9,040 ------- ------- ------- ------- Income before income taxes $ 71,915 $ 51,566 $200,649 $144,172 ======= ======= ======= ======= (A) Net of PEO direct costs billed and incurred of $193,047 and $148,292 for the three months ended February 29, 2000 and February 28, 1999, respectively, and $515,090 and $429,823 for the nine months ended February 29, 2000 and February 28, 1999, respectively. PEO direct costs billed to clients are equal to PEO direct costs incurred for the wages and payroll taxes of worksite employees and their related benefit premiums and claims. C) Basic and diluted earnings per share and stock split information: Basic earnings per share, diluted earnings per share, cash dividends per common share, weighted-average common shares outstanding, weighted-average shares assuming dilution and all other applicable information for the three months and nine months ended February 28, 1999, have been adjusted to reflect a three-for- two stock split effected in the form of 50% stock dividends on outstanding shares payable to shareholders of record as of May 13, 1999, and distributed on May 21, 1999. For the three months ended For the nine months ended (In thousands, February 29, February 28, February 29, February 28, except per share amounts) 2000 1999 2000 1999 Basic earnings per share: Net income $ 49,621 $ 36,200 $138,448 $101,209 ------- ------- ------- ------- Weighted-average common share outstanding 247,315 245,693 246,856 245,311 ------- ------- ------- ------- Basic earnings per share $ .20 $ .15 $ .56 $ .41 ======= ======= ======= ======= Diluted earnings per share: Net income $ 49,621 $ 36,200 $138,448 $101,209 ------- ------- ------- ------- Weighted-average common shares outstanding 247,315 245,693 246,856 245,311 Net effect of dilutive stock options at average market price 4,500 3,241 3,350 3,372 ------- ------- ------- ------- Weighted-average shares assuming dilution 251,815 248,934 250,206 248,683 ------- ------- ------- ------- Diluted earnings per share $ .20 $ .15 $ .55 $ .41 ======= ======= ======= ======= Weighted-average anti- dilutive stock options $ -- $ -- $ 381 $ 90 ======= ======= ======= ======= Weighted-average anti-dilutive stock options to purchase shares of common stock were excluded from the computation of diluted earnings per share. These options had an exercise price that was greater than the average market price of the common shares for the period and, therefore, the effect would have been anti-dilutive. For the three months and nine months ended February 29, 2000, stock options were exercised for 396,000 and 1,207,000 shares of the Company's common stock, respectively. D) Investments and ENS investments: February 29, May 31, (In thousands) 2000 1999 (UNAUDITED) (AUDITED) ---------------------- --------------------- COST FAIR VALUE COST FAIR VALUE Type of issue: Money market securities and other cash equivalents $1,184,350 $1,184,350 $ 770,648 $ 770,648 Available-for-sale securities: General obligation municipal bonds 434,786 429,791 313,485 314,636 Pre-refunded municipal bonds 316,457 314,221 295,359 297,621 Revenue municipal bonds 277,133 273,431 266,264 267,290 Other securities 21 78 21 73 --------- --------- --------- --------- Total available-for-sale securities 1,028,397 1,017,521 875,129 879,620 Other 1,802 2,296 1,424 1,810 --------- --------- --------- --------- Total Investments and ENS investments $2,214,549 $2,204,167 $1,647,201 $1,652,078 ========= ========= ========= ========= Classification of investments on Consolidated Balance Sheets: Investments $ 376,950 $ 373,682 $ 288,596 $ 290,555 ENS investments 1,837,599 1,830,485 1,358,605 1,361,523 --------- --------- --------- --------- Total Investments and ENS investments $2,214,549 $2,204,167 $1,647,201 $1,652,078 ========= ========= ========= ========= The Company is exposed to credit risk from the possible inability of the borrowers to meet the terms of their bonds. In addition, the Company is exposed to interest rate risk as rate volatility will cause fluctuations in the market value of held investments and the earnings potential of future investments. The Company does not utilize derivative financial instruments to manage interest rate risk. The Company attempts to limit these risks by investing primarily in AAA and AA rated securities, A-1 rated short-term securities, limiting amounts that can be invested in any single instrument, and by investing in short- to intermediate-term instruments whose market value is less sensitive to interest rate changes. At February 29, 2000, approximately 98% of the available-for-sale bond securities held an AA rating or better, and all short-term securities classified as cash equivalents held an A-1 or equivalent rating. E) Property and equipment - net: February 29, May 31, (In thousands) 2000 1999 (UNAUDITED) (AUDITED) Land and improvements $ 2,919 $ 2,896 Buildings and improvements 29,769 26,932 Data processing equipment and software 79,128 70,000 Furniture, fixtures and equipment 62,924 59,818 Leasehold improvements 10,159 8,838 ------- ------- 184,899 168,484 Less accumulated depreciation and amortization 112,142 102,553 ------- ------- Property and equipment - net $ 72,757 $ 65,931 ======= ======= F) Comprehensive income: Comprehensive income is comprised of two components: net income and other comprehensive income. Comprehensive income includes all changes in equity during a period except those resulting from transactions with owners of the Company. The unrealized gains and losses, net of applicable taxes, related to available-for-sale securities is the only component reported in accumulated other comprehensive income in the Consolidated Balance Sheets for the Company. Comprehensive income, net of related tax effects, is as follows: For the three months ended For the nine months ended (In thousands) February 29, February 28, February 29, February 28, 2000 1999 2000 1999 Net income $ 49,621 $ 36,200 $138,448 $101,209 Unrealized gains/(losses) on securities, net of reclassification adjustments (3,737) 253 (9,806) 3,213 ------- ------- ------- ------- Total comprehensive income $ 45,884 $ 36,453 $128,642 $104,422 ======= ======= ======= ======= ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis reviews the operating results for the three months and nine months ended February 29, 2000, (fiscal 2000) and February 28, 1999 (fiscal 1999), and its financial condition at February 29, 2000 for Paychex, Inc. and its subsidiaries (the "Company"). The focus of this review is on the underlying business reasons for significant changes and trends affecting revenues, net income and financial condition. This review should be read in conjunction with the accompanying February 29, 2000 Consolidated Financial Statements, and the related Notes to Consolidated Financial Statements contained in this Form 10-Q. Forward-looking statements in this Management's Discussion and Analysis are qualified by the cautionary statement in Exhibit 99, contained in this Form 10-Q. RESULTS OF OPERATIONS (In thousands, except per share amounts) For the three months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Service revenues $192,183 21.3% $158,423 Operating income $ 67,903 40.0% $ 48,493 Operating margin 35.3% 4.7 30.6% Income before income taxes $ 71,915 39.5% $ 51,566 Net income $ 49,621 37.1% $ 36,200 % of service revenues 25.8% 2.9 22.9% Basic earnings per share $ .20 33.3% $ .15 Diluted earnings per share $ .20 33.3% $ .15 ============================================================================== For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Service revenues $530,933 20.5% $440,660 Operating income $189,095 39.9% $135,132 Operating margin 35.6% 4.9 30.7% Income before income taxes $200,649 39.2% $144,172 Net income $138,448 36.8% $101,209 % of service revenues 26.1% 3.1 23.0% Basic earnings per share $ .56 36.6% $ .41 Diluted earnings per share $ .55 34.1% $ .41 ============================================================================== The Company's continued ability to grow its client base, increase client utilization of ancillary services, develop new services, implement price increases and decrease operating expenses as a percent of service revenues has resulted in record service revenues and net income for the three months and nine months ended February 29, 2000. Payroll segment (In thousands) For the three months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Payroll service revenue $171,821 19.1% $144,257 ENS investment revenue included in Payroll service revenue $ 16,355 10.7% $ 14,775 Payroll operating income $ 77,270 26.7% $ 60,993 Payroll operating margin 45.0% 2.7 42.3% ============================================================================== For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Payroll service revenue $477,639 18.4% $403,274 ENS investment revenue included in Payroll service revenue $ 40,595 5.3% $ 38,535 Payroll operating income $221,197 28.9% $171,556 Payroll operating margin 46.3% 3.8 42.5% ============================================================================== Client statistics at February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Payroll clients 345.9 9.2% 316.9 Taxpay clients 276.8 12.2% 246.7 % of Payroll clients 80.0% 2.2 77.8% Flexible Pay Package clients 157.1 20.8% 130.1 % of Payroll clients 45.4% 4.3 41.1% ============================================================================== Revenues: Payroll service revenue includes service fees and investment revenue. Service fee revenue is earned primarily from Payroll, Taxpay, Flexible Pay Package and other ancillary services. The Flexible Pay Package includes the Direct Deposit, Readychex, and Access Card products. ENS investment revenue is earned during the period between collecting client funds (ENS investments) and remitting the funds to the applicable tax authorities for Taxpay clients and employees of Flexible Pay Package clients. ENS investment revenue also includes net realized gains and losses from the sale of available-for-sale securities. Additional discussion on interest rates and related risk is included in the Liquidity and Capital Resources section of this review under the caption "Investments and ENS investments". The increases in payroll service revenue are primarily related to the addition of new clients, new services, price increases, and increased utilization of ancillary services, such as Taxpay and Flexible Pay Package by both new and existing clients. Client utilization of the Taxpay product is expected to mature within the next several years within a range of 82% to 87%. Client utilization of the Flexible Pay Package product is expected to provide growth opportunities for fiscal 2000 and beyond. ENS investment revenue increased in the third quarter due to the growth in Taxpay and Flexible Pay Package utilization and higher comparative short-term rates of return. These increases were offset by realized losses of $.8 million recognized on the sale of securities compared with realized gains of $1.1 million which were recognized during the same period last year. The percentage increase in ENS investment revenue for the first nine months of fiscal 2000 was lower than the percentage growth experienced in the third quarter. This was primarily due to lower comparable rates of return during the first six months of the fiscal year. Realized losses for the nine-month period were $1.6 million compared with realized gains of $2.3 million in the prior year period. Operating income: Operating income increased as a result of the increases in revenue and continued leveraging of the segment's operating expense base as evidenced by the improvement in operating margins. During the second quarter of fiscal 2000, the Company began the process of expanding its Major Market Services payroll product offering to include thirty-four cities that are currently serviced by its core Payroll product. The Company will continue to evaluate additional expansion efforts for this product in the future. Effective September 1, 1999, the Company increased its sales force compensation package in an effort to increase the retention and quality of its payroll sales representatives. The estimated impact of this increase resulted in additional pre-tax expense of approximately $1.5 million for the third quarter and $3.0 million year-to-date. HRS-PEO segment (In thousands) For the three months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ HRS-PEO service revenue $ 20,362 43.7% $14,166 HRS-PEO operating income $ 7,244 123.9% $ 3,236 HRS-PEO operating margin 35.6% 12.8 22.8% ============================================================================== For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ HRS-PEO service revenue $ 53,294 42.6% $37,386 HRS-PEO operating income $ 18,301 117.3% $ 8,422 HRS-PEO operating margin 34.3% 11.8 22.5% ============================================================================== Client Statistics at February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ 401(k) recordkeeping clients 13.4 47.3% 9.1 401(k) client funds managed externally (in millions) $1,178.5 93.0% $ 610.7 Section 125 clients 23.1 19.7% 19.3 Workers' compensation insurance clients 8.8 450.0% 1.6 PEO worksite employees 20.1 18.9% 16.9 ============================================================================== Revenues: The increases in service revenue are primarily related to increasing 401(k) recordkeeping, Section 125 and Workers' compensation insurance clients and PEO worksite employees. The increase in 401(k) clients reflects the continuing interest of small- to medium-sized businesses to offer retirement savings benefits to their employees. During the first quarter of fiscal 1999, the Company began a national rollout of its Workers' compensation insurance product, which provides insurance for qualified clients through a leading insurance provider and a method to stabilize their cash flows throughout the year. Operating income: The increases in operating income are primarily related to the service revenue gains, and the leveraging of operating expenses. In the third quarter of fiscal 2000 the Company entered into a new contract for Worker's compensation insurance coverage for the PEO worksite employees. Annual pre-tax costs under the new contract are expected to be approximately $1.8 million higher than under the previous contract. Full-year fiscal 2000's HRS-PEO service revenue and operating income are expected to continue to grow at a rate that is higher than the Payroll segment's. Quarter-over-quarter percentage comparisons in HRS-PEO service revenue and operating income may vary significantly throughout the year, and any one quarter's results may not be indicative of expected full-year results. Corporate expenses (In thousands) For the three months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Corporate expenses $16,611 5.6% $15,736 ============================================================================== For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Corporate expenses $50,403 12.4% $44,846 ============================================================================== Corporate expenses are primarily related to the Information Technology, Organizational Development, Finance, Marketing and Senior Management functions of the Company. The increases in expenses are due to additional employees and other expenditures required to support the continued growth of the Company's business segments. These increases are reduced by the costs capitalized for the development of internal-use software, in accordance with the adoption of Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", effective June 1, 1999. Additional discussion related to SOP 98-1 is included in the Liquidity and Capital Resources section of this document under the caption "Purchases of property and equipment, net of disposal proceeds." During the third quarter, Corporate expenses increased at a rate lower than in 1999 as a result of reduced spending on national marketing efforts. The Company expects the lower spending on national marketing efforts to continue in the fourth quarter. Investment income (In thousands) For the three months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Investment income $ 4,012 30.6% $3,073 ============================================================================== For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Investment income $11,554 27.8% $9,040 ============================================================================== Investment income represents earnings from the Company's cash and cash equivalents and investments in available-for-sale securities. Investment income does not include earnings from the ENS investments which are recorded as ENS investment revenue within the Payroll segment. The increases in Investment income are primarily due to the increases in average daily invested balances generated from increases in overall cash flows offset by realized losses during fiscal 2000. Realized losses were $.4 million and $.7 million for the third quarter and nine-month period, respectively, compared with realized gains in the third quarter and nine-months of fiscal 1999 of $.1 million and $.5 million, respectively. For the three-month period, Investment income also benefited from higher comparable rates of return. Average rates of return earned for the nine-month period were slightly lower than in the prior year period. Additional discussion on interest rates and related risk is included in the Liquidity and Capital Resources section of this review under the caption "Investments and ENS investments". Investment income for full-year fiscal 2000, subject to changes in market rates of interest, is expected to grow at a rate lower than the Company's net income growth. Income taxes (In thousands) For the three months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Income taxes $22,294 45.1% $15,366 Effective income tax rate 31.0% 1.2 29.8% ============================================================================== For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Income taxes $62,201 44.8% $42,963 Effective income tax rate 31.0% 1.2 29.8% ============================================================================== The increases in the effective income tax rate are due to the growth in taxable income exceeding the growth in tax-exempt income. Tax-exempt income is derived primarily from the Taxpay and Flexible Pay Package products that provide ENS investment revenue. Full-year fiscal 2000's effective income tax rate is expected to approximate 31%. LIQUIDITY AND CAPITAL RESOURCES Operating activities (In thousands) For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Operating cash flows $192,885 49.9% $128,682 ============================================================================== The increase in operating cash flows resulted primarily from the consistent achievement of higher net income. Projected operating cash flows are expected to adequately support normal business operations, forecasted growth, purchases of property and equipment and dividend payments. At February 29, 2000, the Company had $439 million in available cash and investments. The Company also has $140 million of available, uncommitted, unsecured lines of credit and $350 million available under a uncommitted, secured line of credit which was entered into during the third quarter of Fiscal 2000. Investing activities (In thousands) For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------- Net Investments and ENS activities $ (99,542) 91.7% $(51,936) Purchases of P&E, net of disposal proceeds (24,422) 32.1% (18,482) Purchases of other assets (6,416) 87.7% (3,418) -------------------------------- Net cash used in investing activities $(130,380) 76.6% $(73,836) ============================================================================== Investments and ENS investments: Investments are primarily available-for-sale debt securities. ENS investments are primarily short-term funds and available-for-sale debt securities. The portfolio of Investments and ENS investments is detailed in Note D of the Notes to the Consolidated Financial Statements. Investments have increased due to the investment of increasing cash balances provided by operating activities less purchases of property and equipment and dividend payments. The reported amount of ENS investments will vary significantly based upon the timing of collecting client funds, and remitting the funds to the applicable tax authorities for Taxpay clients and employees of clients utilizing the Flexible Pay Package. These increases in Investments and ENS investments have been offset by unrealized losses during fiscal 2000. At February 29, 2000 the available-for-sale debt securities in the Investments portfolio and ENS investments portfolio had market values exceeding the cost basis by $3.8 million and $7.1 million, respectively. Interest rate risk - The Company's available-for-sale debt securities are exposed to market risk from changes in interest rates, as rate volatility will cause fluctuations in the market value of held investments. Increases in interest rates normally decrease the market value of the available-for-sale securities, while decreases in interest rates increase the market value of the available-for-sale securities. In addition, the Company's available-for-sale securities and short-term funds are exposed to earnings risk from changes in interest rates, as rate volatility will cause fluctuations in the earnings potential of future investments. Increases in interest rates quickly increase earnings from short-term funds, and over time increase earnings from the available-for-sale securities portfolio. Earnings from the available-for-sale securities do not reflect changes in rates until the investments are sold or mature, and the proceeds are reinvested at current rates. Decreases in interest rates have the opposite earnings effect on the available-for-sale securities and short-term funds. The Company does not utilize derivative financial instruments to manage interest rate risk. The Company directs investments towards high credit-quality, tax-exempt securities to mitigate the risk that earnings from the portfolio could be adversely impacted by changes in interest rates in the near term. The Company invests in short- to intermediate-term, fixed-rate municipal and government securities, which typically have lower interest rate volatility, and manages the securities portfolio to a benchmark duration of 2.5 to 3.0 years. During the second quarter of fiscal 1999, the federal funds rate was reduced by 75 basis points to 4.75%. During the first quarter of fiscal 2000, the federal funds rate was increased by 50 basis points to 5.25%. During the second quarter of fiscal 2000, the rate was increased by 25 basis points to 5.50%, and during the third quarter of fiscal 2000, the rate was increased by 25 basis points to 5.75%. The earnings impact of these rate changes is not precisely quantifiable because many factors influence the return on the Company's portfolio. These factors include, among others, daily interest rate changes, the proportional mix of taxable and tax-exempt investments, and changes in tax-exempt and taxable investment rates, which are not synchronized, nor do they change simultaneously. Subject to the aforementioned factors, a 25 basis point change normally affects the Company's tax-exempt interest rates by approximately 17 basis points. At February 29, 2000, the Company had $1.18 billion of ENS investment funds invested in money market securities and other cash equivalents with an average maturity of less than 30 days, and $1.02 billion invested in available-for-sale securities with an average duration of 2.4 years. At February 29, 2000, the available-for-sale securities portfolio had a market value less than its cost basis by $10.9 million, compared with the portfolio at May 31, 1999, which had a market value greater than its cost basis by $4.5 million. The decrease in the portfolio's market value is due to the increase in relative interest rates experienced during the nine months ended February 29, 2000. As of February 29, 2000 and May 31, 1999, the Company had $1.02 billion and $879.6 million invested in available-for-sale securities at fair value, with a weighted-average yield to maturity of 4.4% and 4.1%, respectively. Assuming a hypothetical increase in interest rates of 75 basis points given the February 29, 2000 and May 31, 1999 portfolio of securities, the resulting potential decrease in fair value would be approximately $18.3 million and $16.2 million, respectively. Conversely, a corresponding decrease in interest rates would result in a comparable increase in fair value. This hypothetical increase or decrease in the fair value of the portfolio would be recorded as an adjustment to the portfolio's recorded value, with an offsetting amount recorded in stockholders' equity, and with no related or immediate impact to the results of operations. The Company's interest rate risk exposure has not changed materially since May 31, 1999. Credit risk - The Company is exposed to credit risk in connection with these investments through the possible inability of the borrowers to meet the terms of the bonds. The Company attempts to limit credit risk by investing primarily in AAA and AA rated securities, A-1 rated short-term securities and by limiting amounts that can be invested in any single instrument. At February 29, 2000, approximately 98% of the available-for-sale securities held an AA rating or better, and all short-term securities classified as cash equivalents held an A-1 or equivalent rating. Purchases of property and equipment, net of disposal proceeds: To support the Company's continued client and ancillary product growth, purchases of property and equipment were made for data processing and personal computer equipment, and for the expansion and upgrade of various operating facilities. During the first quarter ended August 31, 1999, the Company sold an office facility for approximately $1.2 million in cash proceeds. The Company purchased a branch office facility for $6.1 million during the quarter ended February 29, 2000. Purchases of property and equipment in fiscal 2000 are expected to approximate $35 million. Through the end of 1999, the Company expensed as incurred certain costs to develop and enhance its internal computer programs and software. In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires the capitalization of internal use computer software costs if certain criteria are met, including all external direct costs for materials and services and certain payroll and related fringe benefit costs. The Company adopted the SOP effective June 1, 1999. The effect of adopting the SOP is expected to increase net income by approximately $2.0 million to $3.0 million for the year ended May 31, 2000. Financing activities (In thousands, except per share amounts) For the nine months ended February 29, February 28, 2000 Change 1999 - ------------------------------------------------------------------------------ Dividends paid $(59,281) 50.9% $(39,280) Proceeds from exercise of stock options 8,923 160.3% 3,428 ------------------------------- Net cash used in financing activities $(50,358) 40.5% $(35,852) - ------------------------------------------------------------------------------ Cash dividends per common share $ .24 50.0% $ .16 ============================================================================== Dividends paid: On October 7, 1999, the Company's Board of Directors increased the quarterly dividend rate from $.06 per share to $.09 per share. During the quarter ended February 29, 2000 the Company's Board of Directors declared a dividend which was paid February 15, 2000, for shareholders of record as of February 1, 2000. The Company has increased its quarterly cash dividend rate per share by 50% in each of the last eight fiscal years. The Company has distributed three-for-two stock splits effected in the form of 50% stock dividends on outstanding shares each May in the past five fiscal years. Proceeds from exercise of stock options: The increase in proceeds from the exercise of stock options is primarily due to higher comparable exercise prices per share, plus an increase in the number of shares exercised. The Company has recognized a tax benefit from the exercise of stock options of $14.2 million and $12.5 million for the nine months ended February 29, 2000 and February 28, 1999, respectively. This tax benefit reduces the accrued income tax liability and increases additional paid-in capital, with no impact on the expense amount for income taxes. OTHER Year 2000 disclosure: The Company completed its year 2000 compliance program as scheduled. The Company has not experienced any significant problems or business disruptions resulting from year 2000 issues with either its internal systems or its interfaces with external agencies and partners. The Company is not aware that any of its external agencies and partners which include hardware and software vendors, government agencies, financial institutions, service providers, or other third parties, have experienced any significant year 2000 related problems. There could be an adverse effect on the Company for year 2000 failures that have not yet been discovered with either its internal systems or with third-party systems. However, since the Company has not experienced any significant year 2000 problems through this point in time, the Company believes this risk is minimal. Contingency plans remain in place to provide guidelines and instructions for reacting to any year 2000 issues that may be encountered. The Company estimates that it spent approximately $5 million from 1997 through the beginning of calendar year 2000 for its year 2000 compliance efforts. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK The information called for by this item is provided under the caption "Investments and ENS investments" at subheading "Interest rate risk:" under ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, within this Form 10-Q. ITEM 4. OTHER INFORMATION The text portion of the Company's press release dated March 16, 2000, regarding its financial results for the three months and nine months ended February 29, 2000, is attached. The related Consolidated Financial Statements are contained in PART I. FINANCIAL INFORMATION of this Form 10-Q. FOR IMMEDIATE RELEASE John M. Morphy, Chief Financial Officer Or Jan Shuler 716-383-3406 Access Paychex, Inc. Third Quarter SEC Form 10-Q, News Releases and related SEC filings at http://www.paychex.com/paychex/finance/finance.html PAYCHEX, INC. REPORTS RECORD THIRD QUARTER RESULTS ROCHESTER, NY, March 16, 2000 -- Paychex, Inc. (NASDAQ: PAYX) today announced record net income of $49.6 million or $.20 diluted earnings per share for the third quarter ended February 29, 2000, a 37% increase over net income of $36.2 million or $.15 diluted earnings per share for the same period last year. Total service revenues were $192.2 million, an increase of 21% over $158.4 million for the third quarter last year. For the nine months ended February 29, 2000, net income increased 37% to $138.4 million or $.55 diluted earnings per share as compared to net income of $101.2 million or $.41 diluted earnings per share for the same period last year. Total service revenues were $530.9 million, an increase of 20% over $440.7 million for the same period last year. PAYROLL SEGMENT For the third quarter ended February 29, 2000, operating income for the Payroll segment increased 27% to $77.3 million from $61.0 million for the same period last year. Payroll service revenue was $171.8 million, an increase of 19% over $144.3 million for the third quarter last year. For the nine months ended February 29, 2000, operating income from Payroll services increased 29% to $221.2 million from $171.6 million for the same period last year. Payroll service revenue was $477.6 million, an increase of 18% over $403.3 million for the same period last year. The increases in service revenue and operating income were primarily the result of continued growth in the Payroll client base, utilization of ancillary services and leveraging of operating expenses. Paychex currently services 345,900 Payroll clients, a 9.2% increase over last year. The Major Market Services client base increased by 39%. As of the end of the third quarter, 276,800 clients were using the Taxpay (registered trademark) product, the Company's tax filing and payment feature, and 157,100 clients were taking advantage of the Company's Flexible Pay Package, which includes Direct Deposit, Readychex and Access Card products. HRS-PEO SEGMENT For the third quarter ended February 29, 2000, operating income for the HRS-PEO segment increased 124% from $3.2 million to $7.2 million. HRS-PEO service revenue was $20.4 million, an increase of 44% over $14.2 million for the third quarter last year. For the nine months ended February 29, 2000, operating income for the HRS-PEO segment increased 117% from $8.4 million to $18.3 million. HRS-PEO service revenue was $53.3 million, an increase of 43% over $37.4 million for the same period last year. The increases in service revenue and operating income are primarily related to increasing 401(k) recordkeeping, Section 125 and Workers' compensation insurance clients. As of February 29, 2000, 8,800 clients have taken advantage of the Workers' compensation insurance product, since its national rollout in the first quarter of fiscal 1999. As of February 29, 2000, the segment serviced 13,400 401(k) recordkeeping clients, and 23,100 Section 125 administration plans, representing 47% and 20% year-over-year increases in these client bases, respectively. CORPORATE EXPENSES Corporate expenses are primarily related to the Information Technology, Organizational Development, Finance, Marketing and Senior Management functions of the Company. For the third quarter ended February 29, 2000, Corporate expenses increased 6% from $15.7 million to $16.6 million. For the nine months ended February 29, 2000, Corporate expenses increased 12% from $44.8 million to $50.4 million. The increases are primarily due to additional employees and other expenditures to support the continued growth of the Company. B. Thomas Golisano, Chairman, President and Chief Executive Officer of Paychex said, "We are pleased with our financial results for the first nine months of fiscal 2000. We continue to see opportunities in our payroll segment including our program to expand the Major Market Services payroll product and our efforts to increase utilization of ancillary services such as the Flexible Pay Package. The 401(k) and Workers' compensation products continue to drive strong increases in service revenues and operating income in our HRS-PEO segment. We look forward to pursuing these and other growth opportunities in the future." ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 27 - "Financial Data Schedule" is filed electronically. Exhibit 99 - "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. (b) Reports on Form 8-K: The Company filed a report on Form 8-K dated January 26, 2000 that included the Company's press release on January 26, 2000 announcing the election of Joseph M. Tucci to the Company's Board of Directors. 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. PAYCHEX, INC. Date: March 16, 2000 /s/ B. Thomas Golisano ----------------------- B. Thomas Golisano Chairman, President and Chief Executive Officer Date: March 16, 2000 /s/ John M. Morphy ----------------------- John M. Morphy Vice President, Chief Financial Officer and Secretary </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 27: FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FEBRUARY 29, 2000 CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PAYCHEX, INC., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000723531 <NAME> PAYCHEX, INC. <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> MAY-31-2000 <PERIOD-START> JUN-01-1999 <PERIOD-END> FEB-29-2000 <CASH> 64,829 <SECURITIES> 2,204,167 <RECEIVABLES> 95,268 <ALLOWANCES> 0 <INVENTORY> 0 <CURRENT-ASSETS> 2,378,966 <PP&E> 184,899 <DEPRECIATION> 112,142 <TOTAL-ASSETS> 2,469,605 <CURRENT-LIABILITIES> 1,936,168 <BONDS> 0 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 2,475 <OTHER-SE> 525,808 <TOTAL-LIABILITY-AND-EQUITY> 2,469,605 <SALES> 0 <TOTAL-REVENUES> 1,046,023 <CGS> 0 <TOTAL-COSTS> 641,776 <OTHER-EXPENSES> 215,152 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 200,649 <INCOME-TAX> 62,201 <INCOME-CONTINUING> 138,448 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 138,448 <EPS-BASIC> .56 <EPS-DILUTED> .55 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 99: "SAFE HARBOR" STATEMENT <TEXT> EXHIBIT 99: "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain written and oral statements made by Paychex, Inc. (the "Company") management may constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by such words and phrases as "are expected to", "we look forward to", "expects", "expected to", "we believe" and "could be." Because they are forward-looking, they should be evaluated in light of important risk factors. These risk factors include general market conditions, including demand for the Company's products and services, availability of internal and external resources, executing expansion plans, competition, and price levels; changes in the laws regulating collection and payment of payroll taxes, professional employer organizations, and employee benefits, including 401(k) plans, workers' compensation, state unemployment, and section 125 plans; delays in the development, timing of the introduction, and marketing of new products and services; changes in technology including use of the Internet; the possibility of catastrophic events that could impact the Company's operating facilities, computer technology and communication systems; and changes in short- and long-term interest rates and the credit rating of cash, cash equivalents, and securities held in the Company's investment portfolios. The information provided in this document is based upon the facts and circumstances known at this time. The Company is under no obligation to update forward-looking statments in this document for new information subsequent to its issuance. </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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https://www.sec.gov/Archives/edgar/data/80424/0000080424-00-000003.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, UsUC8t6YS/qhUWz5pa3IqP+Yv1G3nWRjCDH/UX16Rrs1IxDCLRYc1hMcT/LnTKFA apPwWo98TcuFh/zNWOFy5A== <SEC-DOCUMENT>0000080424-00-000003.txt : 20000203 <SEC-HEADER>0000080424-00-000003.hdr.sgml : 20000203 ACCESSION NUMBER: 0000080424-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000127 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: SEC FILE NUMBER: 001-00434 FILM NUMBER: 515031 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 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1999 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 1,315,714,296 shares of Common Stock outstanding as of December 31, 1999. PART I. FINANCIAL INFORMATION Item 1. Financial Statements The Condensed Consolidated Statements of Earnings of The Procter & Gamble Company and subsidiaries for the three and six months ended December 31, 1999 and 1998, the Condensed Consolidated Balance Sheets as of December 31, 1999 and June 30, 1999, and the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 1999 and 1998 follow. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods 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> <CAPTION> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Amounts in Millions Except Per Share Amounts Three Months Ended Six Months Ended December 31 December 31 ------------------ ---------------- 1999 1998 1999 1998 ------- ------- ------- ------- <S> <C> <C> <C> <C> NET SALES $10,588 $ 9,934 $20,507 $19,444 Cost of products sold 5,563 5,332 10,769 10,474 Marketing, research, and administrative expenses 3,183 2,765 6,049 5,259 ------- ------- ------- ------- OPERATING INCOME 1,842 1,837 3,689 3,711 Interest expense 178 166 325 323 Other income, net 51 60 96 110 ------- ------- ------- ------- EARNINGS BEFORE INCOME TAXES 1,715 1,731 3,460 3,498 Income taxes 589 589 1,187 1,189 ------- ------- ------- ------- NET EARNINGS $ 1,126 $ 1,142 $ 2,273 $ 2,309 ======= ======= ======= ======= PER COMMON SHARE: Basic net earnings $ 0.83 $ 0.84 $ 1.68 $ 1.70 Diluted net earnings $ 0.78 $ 0.78 $ 1.58 $ 1.58 Dividends $ 0.320 $ 0.285 $ 0.640 $ 0.570 AVERAGE COMMON SHARES OUTSTANDING - DILUTED 1,434.8 1,451.4 </TABLE> <TABLE> <CAPTION> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Amounts in Millions December 31 June 30 1999 1999 ------- ------- ASSETS - ------ <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 2,044 $ 2,294 Investment securities 230 506 Accounts receivable 3,576 2,940 Inventories Materials and supplies 1,374 1,176 Work in process 416 375 Finished products 1,969 1,787 Deferred income taxes 401 621 Prepaid expenses and other current assets 2,064 1,659 ------- ------- TOTAL CURRENT ASSETS 12,074 11,358 PROPERTY, PLANT AND EQUIPMENT 22,958 21,400 LESS ACCUMULATED DEPRECIATION 9,569 8,774 ------- ------- TOTAL PROPERTY, PLANT AND EQUIPMENT 13,389 12,626 GOODWILL AND OTHER INTANGIBLE ASSETS 9,015 6,822 OTHER NON-CURRENT ASSETS 1,523 1,307 ------- ------- TOTAL ASSETS $36,001 $32,113 ======= ======= <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ <S> <C> <C> CURRENT LIABILITIES Accounts payable and accrued liabilities $ 6,862 $ 7,611 Debt due within one year 4,779 3,150 ------- ------- TOTAL CURRENT LIABILITIES 11,641 10,761 LONG-TERM DEBT 8,703 6,231 DEFERRED INCOME TAXES 489 362 OTHER NON-CURRENT LIABILITIES 2,467 2,701 ------- ------- TOTAL LIABILITIES 23,300 20,055 SHAREHOLDERS' EQUITY Preferred stock 1,758 1,781 Common stock-shares outstanding - Dec 31 1,315.7 1,316 June 30 1,319.8 1,320 Additional paid-in capital 1,529 1,337 Reserve for ESOP debt retirement (1,530) (1,552) Accumulated comprehensive income (1,656) (1,606) Retained earnings 11,284 10,778 ------- ------- TOTAL SHAREHOLDERS' EQUITY 12,701 12,058 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $36,001 $32,113 ======= ======= </TABLE> <TABLE> <CAPTION> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Amounts in Millions Six Months Ended December 31 ------------------ 1999 1998 ------- -------- <S> <C> <C> CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 2,294 $ 1,549 OPERATING ACTIVITIES Net earnings 2,273 2,309 Depreciation and amortization 1,081 841 Deferred income taxes 318 58 Change in: Accounts receivable (548) (441) Inventories (360) (69) Accounts payables and accruals (845) 207 Other operating assets & liabilities (533) (651) Other 119 (269) ------- ------- TOTAL OPERATING ACTIVITIES 1,505 1,985 ------- ------- INVESTING ACTIVITIES Capital expenditures (1,452) Proceeds from asset sales and retirements 109 436 Acquisitions (3,082) (107) Change in investment securities 254 173 ------- ------- TOTAL INVESTING ACTIVITIES (4,171) (628) ------- ------- FINANCING ACTIVITIES Dividends to shareholders (900) (814) Change in short-term debt 1,816 631 Additions to long-term debt 2,534 842 Reduction of long-term debt (269) (264) Proceeds from stock options 109 85 Purchase of treasury shares (876) ------- ------- TOTAL FINANCING ACTIVITIES 2,414 (812) ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 2 0 CHANGE IN CASH AND CASH EQUIVALENTS (250) 545 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,044 $ 2,094 ======= ======= </TABLE> THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts in Millions 1. These statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. The results of operations for the three-month and six-month periods ended December 31, 1999 are not necessarily indicative of the results for the full year. 2. Comprehensive Income - Total comprehensive income is comprised primarily of net earnings, net currency translation gains and losses, and net unrealized gains and losses on securities. Total comprehensive income for the three months ended December 31, 1999 and 1998 was $983 and $1,295, respectively. For the six months ended December 31, 1999 and 1998 total comprehensive income was $2,223 and $2,549, respectively. 3. Segment Information - The basis for presenting segment results generally is consistent with overall Company reporting. The primary difference relates to presentation of partially-owned operations, which are presented in the operating segments on a 100% basis. The adjustment to ownership basis is included in Corporate & Other, which also includes certain financing and investment activities, goodwill amortization, charges related to the Organization 2005 program, and other general corporate income and expense items. <TABLE> <CAPTION> Three Months Ended Fabric & Health Beauty Food & Corporate & December 31 Home Care Paper Care Care Beverage Other Total --------- ------- ------- ------- -------- ----------- ------- <S> <C> <C> <C> <C> <C> <C> <C> Net Sales 1999 $ 3,168 $ 3,181 $ 1,074 $ 1,903 $ 1,321 $ (59) $10,588 1998 2,883 3,160 799 1,962 1,266 (136) 9,934 Earnings Before Income Taxes 1999 653 498 202 420 219 (277) 1,715 1998 608 591 116 437 181 (202) 1,731 Net Earnings 1999 405 293 125 273 137 (107) 1,126 1998 379 343 80 273 112 (45) 1,142 <CAPTION> Six Months Ended Fabric & Health Beauty Food & Corporate & December 31 Home Care Paper Care Care Beverage Other Total --------- ------- ------- ------- -------- ----------- ------- <S> <C> <C> <C> <C> <C> <C> <C> Net Sales 1999 $ 6,328 $ 6,193 $ 1,874 $ 3,722 $ 2,530 $ (140) $20,507 1998 5,798 6,236 1,490 3,785 2,420 (285) 19,444 Earnings Before Income Taxes 1999 1,427 1,073 349 777 388 (554) 3,460 1998 1,316 1,207 232 816 311 (384) 3,498 Net Earnings 1999 890 637 215 498 243 (210) 2,273 1998 821 695 150 509 190 (56) 2,309 </TABLE> Item 2. Management Discussion and Analysis RESULTS OF OPERATIONS - --------------------- The Company reported net earnings of $1.1 billion or $0.78 per diluted share for the quarter ended December 31, 1999, including charges of $137 million related to its Organization 2005 program. Organization 2005 is the Company's multi-year initiative designed to accelerate growth by increasing innovation and speed to market. The objective of the program is to increase long-term sales growth to six-to-eight percent annually and increase growth in core net earnings per share to 13 to 15 percent over a five year period. Core net earnings per diluted share, which exclude Organization 2005 costs, were $0.88, a 13 percent increase over the second quarter of last year. Net sales increased seven percent to a record $10.6 billion. Sales growth, resulting from faster speed to market with initiatives and a greater strategic focus from the Organization 2005 program, represented the largest quarterly increase since 1997. Exchange rates, primarily Western Europe and Brazil partially offset by Japan, negatively impacted sales by two percentage points. Unit volume grew six percent, reflecting continued initiative activity around the world, base business growth and acquisitions. For the first six months, reported net earnings were $2.3 billion, or $1.58 per diluted share. Worldwide sales grew five percent to $20.5 billion, including a two percent impact from unfavorable exchange rates on four percent unit volume growth. Core net earnings were $2.5 billion, while core diluted net earnings per share grew 11 percent to $1.76. Gross margin was 47.5 percent for the current quarter compared to 46.3 percent in the same quarter of the prior year and 44.8 percent for the full fiscal year ended June 30, 1999. Included in Cost of Products Sold is $110 million before tax related to Organization 2005. Excluding Organization 2005 costs, core gross margin reached 48.5 percent. Gross margin improvement this quarter reflected continued focus on cost control, improved pricing and shifts towards premium products. Operating margin was 17.4 percent for the quarter compared to 18.5 percent in the same quarter a year ago and 16.4 percent for the prior fiscal year. Excluding $183 million before tax in Organization 2005 charges, operating margin was 19.1 percent, primarily driven by gross margin improvement. For the six-month period, gross margin was 47.5 percent, versus 46.1 percent in the same period a year ago. Excluding $215 million in costs related to Organization 2005, gross margin was 48.5 percent. For the current six-month period, operating margin fell to 18 percent versus 19.1 percent in the July-December, 1998 period. Excluding $343 million before tax in Organization 2005 costs, operating margin increased to 19.7 percent. Following are highlights by business segment: FABRIC AND HOME CARE - -------------------- Fabric and home care continued to deliver strong results. Sales increased 10 percent to $3.17 billion, or 12 percent excluding unfavorable currency impacts, primarily from euro-denominated countries and Brazil. Base business strength and initiatives combined to ignite top-line growth. Febreze, Swiffer and Dryel sales continued to grow strongly from global expansion and the introduction of new line extensions. Unit volume grew eight percent, double the growth rate posted in the September quarter this year. Volume gains were broad-based across major markets in North America and Western Europe. Both volume and share growth were particularly strong in Northeast Asia and the Southern Cone (Brazil, Argentina, Chile). Net earnings grew seven percent to $405 million, on improved gross margin, partially offset by increased costs related to initiatives and negative exchange rate impacts. The Company also announced plans to introduce Ariel liquid in Japan and to launch another innovative new product, Fit Fruit and Vegetable Wash, in the United States this spring For the first six months of the fiscal year, a six percent unit volume increase and higher-value initiatives drove sales up nine percent. Net earnings increased eight percent. PAPER - ----- Paper results improved during the second quarter, with net sales up one percent to $3.18 billion. Excluding negative exchange rate impacts, largely due to the euro, net sales grew three percent. Unit volume grew three percent behind strong increases on Charmin and Bounty and improved performance in diapers, despite continuing competitive issues in feminine care. The divestiture of the Attends adult incontinence business weakened comparisons, negatively impacting volume and sales by two percent versus the same quarter last year. Earnings declined 15 percent to $293 million, behind continued investment in new initiatives, geographic expansion and rising pulp prices. The effect of prior pricing actions, primarily in baby care, were offset by price reductions in earlier quarters taken on tissue/towel in reaction to competitive activities and negative mix effects in diapers. An upgraded Tampax product based on closed-end satin technology was introduced in Ireland and Switzerland, as part of the Company's focus to build the business through product innovation. On a year-to-date basis, sales were down one percent on flat unit volume. Net earnings fell eight percent. BEAUTY CARE - ----------- Beauty care was impacted by a difficult competitive environment, especially in Greater China and Western Europe, and the double impact of declining consumption and price deflation in China, where the hair care market has been especially hard hit by the weakened economy. Sales fell three percent to $1.90 billion on a five percent volume decline. Net earnings were equal to year ago at $273 million, as pricing programs and progress on cost control offset incremental spending and costs related to initiatives. The Company's response to the situation in China, which is focused on stimulating consumption through price reductions on specific hair care brands and complemented by a strong sachet drive, is beginning to rebuild the business in that country. The Company also continues to emphasize long-term value creation through investment in premium initiatives, such as Secret Platinum and Oil of Olay Cosmetics. Several new product upgrades and launches, including the U.S. launch of the Physique styling-led hair care brand, are planned for the back half of the year. For the first six months of the year, unit volume fell four percent. Sales and net earnings fell two percent. HEALTH CARE - ----------- The health care segment, which includes new venture activities, delivered strong results this quarter behind the acquisitions of Iams and Recovery Engineering, with its water filtration brand, PuR. Net sales increased 35 percent to $1.07 billion on 33 percent unit volume growth. Net earnings were up 57 percent to $125 million, driven by outstanding progress by Iams that supplemented solid base business earnings. The Company recently announced that Iams pet food products will be expanded to new retail channels in the coming quarter, only a few months after the integration of the acquisition. Health care also introduced ThermaCare portable heat wraps, which are intended to change the way consumers think about pain relief, and announced further progress with Actonel, the Company's new osteoporosis drug. The Swedish government approved Actonel for use with Corticosteroid-Induced Osteoporosis and Post-Menopausal Osteoporosis in October, 1999, while FDA approval is expected in the near future. On a year-to-date basis, net sales increased 26 percent with unit volume up 21 percent. Net earnings increased 44 percent. Improvements were driven by the newly acquired businesses, as well as strong growth in leading respiratory brands. FOOD AND BEVERAGE - ----------------- Continued expansion of snacks across geographies, mainly in Western Europe, drove strong quarterly results, with sales increasing four percent to $1.32 billion on comparable unit volume growth. Recent launches of Pringles in Spain and Italy and the introduction of the Pringles Pizzalicious flavor in Japan are yielding great results. Excluding the effects of the Hawaiian Punch divestiture, volume grew nine percent, boosted by recent initiative launches of Folgers Whole Bean, Pringles Twin Pack, Sunny Delight Eclipse, and Jif Smooth Sensations. Significant improvements in gross margin, behind a sharpened focus on cost control, boosted earnings 23 percent to $137 million, despite investments in new initiatives. For the first half of the year, sales increased five percent on four percent unit volume growth. Net earnings climbed 28 percent, reflecting cost improvements. FISCAL YEAR ESTIMATES - --------------------- The Company confirmed that it was comfortable with the current range of analyst estimates for fiscal year earnings. However, earnings growth may be more concentrated in the April-June quarter, given heavy initiative spending planned for the January-March quarter. Volume and sales increases through the remainder of the year are expected to be above the growth achieved in the July-December period. For fiscal year 2001 and beyond, the Company has raised its internal expectations and is targeting for earnings growth near the top of its 13 to 15 percent target range, as it continues to see increased financial benefits flowing from Organization 2005. FINANCIAL CONDITION - ------------------- Total debt increased $4.1 billion since June 30, 1999. The incremental debt was used primarily to fund the previously announced share repurchase program and the acquisitions of the Iams Company and Recovery Engineering. For the six-month period ended December 31, 1999, cash generated from operating activities totaled $1.5 billion, down from $2.0 billion in the same prior year period. Most of the decrease resulted from increased investment in working capital, driven by lower accrual balances and inventory accumulation in advance of initiatives. Capital spending increased $322 million versus the year ago period, including Organization 2005-driven spending. Investment in acquisitions totaled $3.1 billion, compared to $0.1 billion in the prior period. YEAR 2000 UPDATE - ---------------- As described in the Form 10-K for the year ended June 30, 1999, the Company had developed plans to address the possible exposures related to the impact on its computer systems of the Year 2000. Since entering the year 2000, the Company has not experienced any major disruptions to its business nor is it aware of any significant Year 2000-related disruptions impacting its customers and suppliers. Furthermore, the Company did not experience any material impact on inventories at calendar year end. The Company will continue to monitor its critical systems over the next several months but does not anticipate any significant impacts due to Year 2000 exposures from its internal systems as well as from the activities of its suppliers and customers. Costs incurred to achieve Year 2000 readiness, which include contractor costs to modify existing systems and costs of internal resources dedicated to achieving Year 2000 compliance, were charged to expense as incurred. Such costs totaled approximately $90 million and were largely incurred prior to the current fiscal year. ORGANIZATION 2005 UPDATE - ------------------------ On June 9, 1999, the Company announced an Organization 2005 program that is an integral part of the broader 2005 initiative, which includes a realignment of the organization structure, work processes and culture designed to accelerate growth by streamlining management decision-making, manufacturing and other work processes. These changes are intended to increase the Company's ability to innovate and bring initiatives to global markets more quickly. In order to implement the program's structural changes and achieve the benefits of faster growth, the Company needs to make a number of structural changes to both its administrative and manufacturing operations. Charges related to Organization 2005 consist primarily of costs related to the consolidation of manufacturing facilities (including accelerated depreciation, asset writedowns and contract termination costs) and employee separation costs. During the quarter ended December 31, 1999, the Company recorded expenses totaling $183 million before tax related to Organization 2005, as detailed in the following table: <TABLE> <CAPTION> Organization 2005 July-December, 1999 Charges (before tax) ---------------------------------------------------------- For the July-December Period ---------------------------- Prior Current Beginning Quarter Quarter Total Charged Ending Reserves Charges New Charges Cash Against Reserve at 6/30/99 Jul-Sep 99 Charges Jul-Dec Spent Assets 12/31/99 ---------- ---------- ------- ------- ----- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Employee separations $35 $ 47 $ 25 $ 72 $(41) $--- $ 66 Asset write-downs -- 2 7 9 -- (9) -- Accelerated depreciation -- 100 99 199 -- (199) -- Other 9 11 52 63 (22) (3) 47 --- ---- ---- ---- ----- ----- ---- 44 160 183 343 (63) (211) 113 </TABLE> During October-December, 1999, Organization 2005 costs charged against the Company's cost of products sold amounted to $110 million, while charges included in marketing, research and administrative expenses amounted to $73 million. Charges related to Organization 2005 are included in Corporate & Other in the Company's segment reporting disclosure. The underlying plant closures and consolidations will impact all regions and product segments. Planned plant closures and consolidations will not all be executed immediately due to either capacity or logistics constraints. For the July-December, 1999 period, total charges related to Organization 2005 amounted to $343 million before tax. Employee separation charges in October-December, 1999 are associated with severance packages for approximately 310 people, representing primarily administrative employees in North America, Asia, and Europe. For the fiscal year-to-date period, separation charges related to Organization 2005 totaled $72 million, and relate to approximately 1,010 terminations. The predominantly voluntary packages are formula-driven, based on salary levels and past service. Severance costs related to voluntary separations are charged to earnings when the employee accepts the offer in accordance with P&G policy for such programs. On average, net enrollment is expected to decline by approximately 75% of total separations, as some terminations will be partially offset through increased enrollment at remaining sites. Of total separations expected through fiscal 2001, approximately half will take place in manufacturing with the balance in administrative functions. Separation costs related to manufacturing employees are included in cost of products sold, while those for administrative employees are reported in marketing, research and administrative expenses. Charges for accelerated depreciation relate to long-lived assets that will be taken out of service prior to the end of their normal service period due to manufacturing consolidations, technology standardization and closures that will occur primarily over the next three years as a result of the Organization 2005 program. The Company has changed the estimated useful lives of such assets, resulting in an acceleration of depreciation. Approximately 60% of the $99 million of accelerated depreciation recorded in the October-December, 1999 quarter is concentrated in the paper segment and reflects the standardization of manufacturing and other work processes being undertaken in that segment. Most of the balance is concentrated in the beauty care and fabric and home care segments. For the six month period ended December, 1999, total charges related to accelerated depreciation amounted to $199 million before tax. Charges for other costs related to Organization 2005 amounted to $52 million during the October-December, 1999 quarter, and consisted primarily of costs associated with the restructuring of certain beauty care categories, as well as relocation, training costs and other Organization 2005-related expenses. For the fiscal year-to-date period, other costs totaled $63 million. 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, 1998). (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). (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 has filed no reports on Form 8-K during the quarter ended December 31, 1999 and through the date of this report. 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/D. R. WALKER - -------------------------------------- D. R. Walker Vice President and Comptroller (Principal Accounting Officer) Date: January 27, 2000 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, 1998) -- (3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) -- (11) Computation of Earnings per Share 13 (12) Computation of Ratio of Earnings to Fixed Charges 14 (27) Financial Data Schedule 15 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <TEXT> <TABLE> <CAPTION> EXHIBIT (11) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES ============================================= Computation of Earnings Per Share --------------------------------- Amounts in Millions Except Per Share Amounts Three Months Ended Six Months Ended December 31 December 31 1999 1998 1999 1998 ---------- ------------ ----------- --------- <S> <C> <C> <C> <C> BASIC NET EARNINGS PER SHARE - ---------------------------- Net earnings $ 1,126 $ 1,142 $ 2,273 $ 2,309 Deduct preferred stock dividends 29 29 58 54 ----------- ----------- ----------- --------- Net earnings applicable to common stock $ 1,097 $ 1,113 $ 2,215 $ 2,255 =========== =========== =========== ========= Average number of common shares outstanding 1,316.0 1,330.1 1,316.0 1,330.1 =========== =========== =========== ========= Basic net earnings per share $ 0.83 $ 0.84 $ 1.68 $ 1.70 =========== =========== =========== ========= DILUTED NET EARNINGS PER SHARE - ------------------------------ Net earnings $ 1,126 $ 1,142 $ 2,273 $ 2,309 Deduct differential - preferred vs. common dividends 5 6 9 11 ----------- ----------- ----------- --------- Net earnings applicable to common stock $ 1,121 $ 1,136 $ 2,264 $ 2,298 =========== =========== =========== ========= Average number of common shares outstanding 1,316.0 1,330.1 1,316.0 1,330.1 Add potential effect of: Exercise of options 23.9 23.5 23.9 23.5 Conversion of preferred stock 95.0 97.8 95.0 97.8 ----------- ----------- ----------- --------- Average number of common shares outstanding, assuming dilution 1,434.9 1,451.4 1,434.9 1,451.4 =========== =========== =========== ========= Diluted earnings per share $ 0.78 $ 0.78 $ 1.58 $ 1.58 =========== =========== =========== ========= </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <TEXT> <TABLE> <CAPTION> EXHIBIT (12) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES ============================================= COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ------------------------------------------------- Amounts in Millions Six Months Ended Years Ended June 30 December 31 ------------------------------------------ ---------------- 1995 1996 1997 1998 1999 1998 1999 ------ ------ ------ ------ ------ ------ ------ <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 $4,022 $4,695 $5,274 $5,704 $5,866 $3,524 $3,432 Fixed charges, excluding capitalized interest 571 576 534 639 751 370 439 ------ ------ ------ ------ ------ ------ ------ TOTAL EARNINGS, AS DEFINED $4,593 $5,271 $5,808 $6,343 $6,617 $3,894 $3,871 ====== ====== ====== ====== ====== ====== ====== FIXED CHARGES, AS DEFINED - ------------------------- Interest expense including capitalized interest $ 511 $ 493 $ 457 $ 548 $ 650 $ 323 $ 325 1/3 of rental expense 83 92 77 91 101 47 53 ------ ------ ------ ------ ------ ------ ------ TOTAL FIXED CHARGES AS DEFINED $ 594 $ 585 $ 534 $ 639 $ 751 $ 370 $ 378 ====== ====== ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES 7.7 9.0 10.9 9.9 8.8 10.5 10.2 </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, 1999 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-30-2000 <PERIOD-START> JUL-01-1999 <PERIOD-END> DEC-31-1999 <EXCHANGE-RATE> 1 <CASH> 2,044 <SECURITIES> 230 <RECEIVABLES> 3,576 <ALLOWANCES> 0 <INVENTORY> 3,759 <CURRENT-ASSETS> 12,074 <PP&E> 22,958 <DEPRECIATION> 9,569 <TOTAL-ASSETS> 36,001 <CURRENT-LIABILITIES> 11,641 <BONDS> 8,703 <PREFERRED-MANDATORY> 0 <PREFERRED> 1,758 <COMMON> 1,316 <OTHER-SE> 9,627 <TOTAL-LIABILITY-AND-EQUITY> 36,001 <SALES> 20,507 <TOTAL-REVENUES> 20,507 <CGS> 10,769 <TOTAL-COSTS> 6,049 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 325 <INCOME-PRETAX> 3,460 <INCOME-TAX> 1,187 <INCOME-CONTINUING> 2,273 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 2,273 <EPS-BASIC> 1.68 <EPS-DILUTED> 1.58 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

PGL

https://www.sec.gov/Archives/edgar/data/77385/000007738500000002/0000077385-00-000002-d1.html

<HTML> <HEAD> <TITLE>FORM 10-Q</TITLE> </HEAD> <BODY> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=676> <TR><TD VALIGN="TOP" COLSPAN=3> <B><FONT SIZE=5><P ALIGN="CENTER">FORM 10-Q</B></FONT></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <B><P ALIGN="CENTER">UNITED STATES</B></TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <B><P ALIGN="CENTER">SECURITIES AND EXCHANGE COMMISSION</B></TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <B><P ALIGN="CENTER">Washington, D.C. 20549</B></TD> </TR> </TABLE> <FONT SIZE=2></FONT> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=676> <TR><TD WIDTH="59%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P> (Mark One)</FONT></TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP"> <FONT SIZE=3><P> [ X ]</FONT></TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P>QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)</FONT></TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P ALIGN="CENTER">OF THE SECURITIES EXCHANGE ACT OF 1934</FONT></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <B><P ALIGN="CENTER">For the Quarterly Period Ended December 31, 1999</B></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P ALIGN="CENTER">OR</FONT></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="41%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP"> <FONT SIZE=3><P> [ ]</FONT></TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)</FONT></TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P ALIGN="CENTER">OF THE SECURITIES EXCHANGE ACT OF 1934</FONT></TD> </TR> </TABLE> <FONT SIZE=2></FONT> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=679> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Exact Name of Registrant as</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Specified in Charter, State of</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Incorporation, Address of</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP"> <FONT SIZE=2><P>Commission</FONT></TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Principal Executive</FONT></TD> <TD WIDTH="32%" VALIGN="TOP"> <FONT SIZE=2><P>IRS Employer</FONT></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP"> <U><FONT SIZE=2><P>File Number</U></FONT></TD> <TD WIDTH="49%" VALIGN="TOP"> <U><FONT SIZE=2><P>Office and Telephone Number</U></FONT></TD> <TD WIDTH="32%" VALIGN="TOP"> <U><FONT SIZE=2><P>Identification Number</U></FONT></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP"> <FONT SIZE=2><P> 1-5540</FONT></TD> <TD WIDTH="49%" VALIGN="TOP"> <B><FONT SIZE=2><P>PEOPLES ENERGY CORPORATION</B></FONT></TD> <TD WIDTH="32%" VALIGN="TOP"> <FONT SIZE=2><P> 36-2642766</FONT></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>(an Illinois Corporation)</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>130 East Randolph Drive, 24<SUP>th</SUP> Floor</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Chicago, Illinois 60601-6207</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Telephone (312) 240-4000</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP"> <FONT SIZE=2><P> 2-26983</FONT></TD> <TD WIDTH="49%" VALIGN="TOP"> <B><FONT SIZE=2><P>THE PEOPLES GAS LIGHT AND COKE COMPANY</B></FONT></TD> <TD WIDTH="32%" VALIGN="TOP"> <FONT SIZE=2><P> 36-1613900</FONT></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>(an Illinois Corporation)</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>130 East Randolph Drive, 24<SUP>th</SUP> Floor</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Chicago, Illinois 60601-6207</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Telephone (312) 240-4000</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP"> <FONT SIZE=2><P> 2-35965</FONT></TD> <TD WIDTH="49%" VALIGN="TOP"> <B><FONT SIZE=2><P>NORTH SHORE GAS COMPANY</B></FONT></TD> <TD WIDTH="32%" VALIGN="TOP"> <FONT SIZE=2><P> 36-1558720</FONT></TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>(an Illinois Corporation)</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>130 East Randolph Drive, 24<SUP>th</SUP> Floor</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Chicago, Illinois 60601-6207</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP"> <FONT SIZE=2><P>Telephone (312) 240-4000</FONT></TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="49%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <FONT SIZE=2><P>Indicate by check mark whether the registrants (1) 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 (or for shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [x] No [ ] </FONT></TD> </TR> </TABLE> <FONT SIZE=2></FONT> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=679> <TR><TD VALIGN="TOP" COLSPAN=2> <FONT SIZE=2><P>Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date (January 31, 2000):</FONT></TD> </TR> <TR><TD WIDTH="40%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="60%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="40%" VALIGN="TOP"> <FONT SIZE=2><P>Peoples Energy Corporation</FONT></TD> <TD WIDTH="60%" VALIGN="TOP"> <FONT SIZE=2><P>Common Stock, No par value, 35,540,850shares outstanding</FONT></TD> </TR> <TR><TD WIDTH="40%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="60%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="40%" VALIGN="TOP"> <FONT SIZE=2><P>The Peoples Gas Light and Coke Company</FONT></TD> <TD WIDTH="60%" VALIGN="TOP"> <FONT SIZE=2><P>Common Stock, No par value, 24,817,566 shares outstanding (all of which are owned beneficially and of record by Peoples Energy Corporation)</FONT></TD> </TR> <TR><TD WIDTH="40%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="60%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="40%" VALIGN="TOP"> <FONT SIZE=2><P>North Shore Gas Company</FONT></TD> <TD WIDTH="60%" VALIGN="TOP"> <FONT SIZE=2><P>Common Stock, No par value, 3,625,887 shares outstanding (all of which are owned beneficially and of record by Peoples Energy Corporation)</FONT></TD> </TR> <TR><TD WIDTH="40%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="60%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=2> <FONT SIZE=2><P>This combined Form 10-Q is separately filed by Peoples Energy Corporation, The Peoples Gas Light and Coke Company, and North Shore Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.</FONT></TD> </TR> </TABLE> <Table border=0> <TD COLSPAN=10>&nbsp;</TD> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B><U>Part I. FINANCIAL INFORMATION</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><U>Item 1. Financial Statements</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B><U>Peoples Energy Corporation</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B><U>CONSOLIDATED STATEMENTS OF INCOME</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B>(Unaudited)</B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">12 Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=7 ALIGN="center"><FONT FACE="Times New Roman">(Thousands, except per-share amounts)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Revenues</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 412,485 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 310,241 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,296,626 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,058,668 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Expenses:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Cost of energy sold</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 228,040 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 141,165 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 660,164 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 465,644 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Operation and maintenance</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 67,382 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 66,191 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 252,225 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 250,774 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Depreciation, depletion and amortization</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22,884 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 20,584 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 85,832 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 79,020 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">Taxes, other than income taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 40,443 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 34,937 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 136,019 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 124,492 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Operating Expenses</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 358,749 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 262,877 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,134,240 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 919,930 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Income</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 53,736 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 47,364 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 162,386 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 138,738 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Equity Investment Income</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,078 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 76 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 12,876 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 407 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Operating Income and Equity Investment Income</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 57,814 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 47,440 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 175,262 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 139,145 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Other Income and (Deductions)</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 575 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 615 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,801 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,009 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Interest Expense</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 11,334 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,138 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 40,708 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 38,625 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Earnings Before Income Taxes</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 47,055 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 37,917 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 154,355 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 104,529 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Income Taxes</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,484 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 14,547 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 55,518 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 37,279 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Income</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 29,571 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 23,370 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 98,837 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 67,250 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Average Shares of Common Stock Outstanding</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 35,520 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 35,457 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 35,496 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 35,338 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Basic Earnings Per Share of Common Stock</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 0.83 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 0.66 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2.78 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1.90 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Diluted Earnings Per Share of Common Stock</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 0.83 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 0.66 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2.78 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1.90 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Dividends Declared Per Share</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 0.49 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 0.48 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1.96 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0.00_)[semicolon]_($* (#,##0.00)[semicolon]_($* [dquote]-[dquote]??_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1.92 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=10 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>Peoples Energy Corporation</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>CONSOLIDATED BALANCE SHEETS</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1999</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">September 30,</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1998</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=5 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B><U>PROPERTIES AND OTHER ASSETS</U></B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CAPITAL INVESTMENTS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Property, plant and equipment, at original cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,397,948 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,330,919 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,247,544 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Less - Accumulated depreciation</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 829,439 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 811,083 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 780,357 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Net property, plant and equipment</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,568,509 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,519,836 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,467,187 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other investments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 138,541 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 130,629 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 55,270 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capital Investments - Net</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,707,050 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,650,465 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,522,457 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CURRENT ASSETS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Cash and cash equivalents</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,214 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 11,609 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 12,334 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Temporary cash investments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 901 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,756 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,091 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Special deposits</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 98 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 98 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 27,042 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Receivables -</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Customers, net of allowance for uncollectible accounts </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> of $22,546, $22,335, and $22,476, respectively </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 128,191 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 71,154 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 99,332 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Other </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 31,486 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 29,033 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 23,513 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued unbilled revenues</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 105,101 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 34,326 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 82,171 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Materials and supplies, at average cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 15,472 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 16,282 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,975 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas in storage, at last-in, first-out cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 63,046 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 81,510 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 60,785 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas costs recoverable through rate adjustments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 522 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 11,167 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,261 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Regulatory assets of subsidiaries</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,766 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,683 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,507 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Prepayments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 103,063 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 95,903 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 77,856 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Current Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 471,860 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 365,521 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 411,867 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>OTHER ASSETS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Non-current regulatory assets of subsidiaries</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 59,431 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 59,927 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 58,265 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Deferred charges</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 28,682 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 24,223 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 23,990 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Other Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 88,113 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 84,150 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 82,255 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Properties and Other Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,267,023 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,100,136 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,016,579 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=8 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>Peoples Energy Corporation</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>CONSOLIDATED BALANCE SHEETS</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1999</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">September 30,</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1998</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=5 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B><U>CAPITALIZATION AND LIABILITIES</U></B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CAPITALIZATION:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Common Stockholders' Equity:</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Common stock, without par value -</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Authorized 60,000,000 shares </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Outstanding 35,533,228, 35,489,242, and </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 35,481,279 shares, respectively </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 297,475 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 296,712 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 296,603 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Retained earnings</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 484,642 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 472,483 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 455,382 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accumulated other comprehensive income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (465)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (465)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (1,389)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Common Stockholders' Equity</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 781,652 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 768,730 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 750,596 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Long-term debt of subsidiaries, exclusive of sinking</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> fund payments and maturities due within one year</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 521,734 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 521,734 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 546,639 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capitalization</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,303,386 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,290,464 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,297,235 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CURRENT LIABILITIES:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Short-term debt</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 252,489 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 129,000 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 53,065 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accounts payable</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 153,477 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 161,423 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 135,291 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Dividends payable on common stock</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,428 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,389 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,031 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Customer gas service and credit deposits</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 46,606 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 46,628 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 64,738 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 58,940 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 37,573 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 53,338 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas sales revenue refundable through rate adjustments </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,702 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 692 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 771 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Temporary LIFO Liquidation Credit</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,547 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued interest</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,773 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,210 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,089 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Current Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 543,962 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 402,915 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 331,323 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>DEFERRED CREDITS AND OTHER LIABILITIES:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Deferred income taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 308,959 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 299,524 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 269,591 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Investment tax credits being amortized over</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> the average lives of related property </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 30,598 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 30,850 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 32,239 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 80,118 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 76,383 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 86,191 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Deferred Credits and Other Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 419,675 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 406,757 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 388,021 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capitalization and Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,267,023 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,100,136 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,016,579 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN =8 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>Peoples Energy Corporation</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>CONSOLIDATED STATEMENTS OF CASH FLOWS</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman">(Unaudited)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Net Income</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 29,571 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 23,370 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Adjustments to reconcile net income to net cash:</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Depreciation, depletion, and amortization</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22,884 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 20,584 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Deferred income taxes and investment tax credits - net</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,276 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (1,921)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Change in deferred credits and other liabilities</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,642 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (1,159)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Change in other assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (5,300)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 16,381 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Distribution greater than (less than) income from equity affiliates</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (3,957)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (53)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Change in current assets and liabilities:</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Receivables - net</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (59,490)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (41,091)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued unbilled revenues</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (70,775)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (58,694)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Materials and supplies</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 810 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 270 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas in storage</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 18,464 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 30,005 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas costs recoverable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,645 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,201 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Regulatory assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 917 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 351 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Prepayments</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (7,160)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (3,832)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accounts payable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (7,946)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 11,910 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Customer gas service and credit deposits</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (22)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 15,796 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued taxes</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 21,367 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 28,353 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas sales revenue refundable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,010 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (10,257)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued interest</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (3,437)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (3,732)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Temporary LIFO Liquidation</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,547 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (2,910)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Net Cash Provided by (Used in) Operating Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (32,954)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 25,572 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Investing Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Capital spending</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (73,205)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (52,551)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Special deposit</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 94 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other temporary cash investments</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,855 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,302 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (969)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 12,769 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Net Cash Used in Investing Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (66,319)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (36,386)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Financing Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Short-term debt</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 123,489 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 44,165 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Issuance of long-term debt of subsidiaries</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 30,035 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Trust fund</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (25,693)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Retirement of long-term debt of subsidiaries</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (10,400)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Dividends paid on common stock</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (17,374)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (16,993)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Proceeds from issuance of common stock</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 763 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,912 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Net Cash Provided by Financing Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 106,878 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 24,026 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Increase in Cash and Cash Equivalents</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,605 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 13,212 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Cash and Cash Equivalents at Beginning of Period</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 11,609 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,622 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Cash and Cash Equivalents at End of Period</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 19,214 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 23,834 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=8 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B><U>Part I. FINANCIAL INFORMATION</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><U>Item 1. Financial Statements</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B><U>The Peoples Gas Light and Coke Company</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B><U>CONSOLIDATED STATEMENTS OF INCOME</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B>(Unaudited)</B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">12 Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=7 ALIGN="center"><FONT FACE="Times New Roman">(Thousands)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Revenues</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 286,528 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 235,291 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 902,752 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 835,845 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Expenses:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas costs</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 133,136 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 91,316 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 365,019 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 325,675 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Operation and maintenance</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 50,729 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 55,467 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 201,163 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 210,235 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Depreciation and amortization</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 18,371 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,151 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 70,664 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 68,124 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">Taxes - other than income taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 36,166 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 31,345 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 121,726 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 111,861 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Operating Expenses</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 238,402 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 195,279 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 758,572 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 715,895 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Income</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 48,126 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 40,012 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 144,180 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 119,950 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Other Income and (Deductions)</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 702 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 447 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,140 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,074 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Interest Expense</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,531 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,706 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 32,444 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 33,248 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Earnings Before Income Taxes</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 40,297 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 31,753 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 130,876 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 88,776 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Income Taxes</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 15,051 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 12,160 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 47,006 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 31,229 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Income Applicable to Common Stock</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 25,246 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 19,593 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 83,870 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 57,547 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=10 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>The Peoples Gas Light and Coke Company</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>CONSOLIDATED BALANCE SHEETS</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1999</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">September 30,</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1998</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=5 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B><U>PROPERTIES AND OTHER ASSETS</U></B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CAPITAL INVESTMENTS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Property, plant and equipment, at original cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,984,449 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,968,749 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,919,904 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Less - Accumulated depreciation and amortization</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 704,021 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 689,670 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 668,134 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Net property, plant and equipment</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,280,428 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,279,079 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,251,770 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other investments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,382 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 9,414 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,965 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capital Investments - Net</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,290,810 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,288,493 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,259,735 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CURRENT ASSETS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Cash and cash equivalents</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,744 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,716 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,170 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Temporary cash investments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 500 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 500 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 500 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Receivables -</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Customers, net of allowance for uncollectible accounts </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> of $21,167, $20,990, and $21,567, respectively </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 93,826 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 49,464 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 75,515 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Other </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 21,016 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 23,381 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22,784 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued unbilled revenues</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 74,870 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22,303 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 60,609 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Materials and supplies, at average cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,159 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,843 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 12,265 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas in storage, at last-in, first-out cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 49,758 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 64,640 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 47,770 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas costs recoverable through rate adjustments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,781 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,144 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Regulatory assets</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,349 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,106 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,472 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Prepayments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 101,279 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 95,448 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 76,734 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Current Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 364,501 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 284,182 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 309,963 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>OTHER ASSETS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Non-current regulatory assets</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 38,550 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 38,970 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 42,125 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Deferred charges</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,363 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,408 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 18,746 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Other Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 57,913 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 58,378 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 60,871 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Properties and Other Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,713,224 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,631,053 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,630,569 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=8 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>The Peoples Gas Light and Coke Company</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>CONSOLIDATED BALANCE SHEETS</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1999</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">September 30,</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1998</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=5 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B><U>CAPITALIZATION AND LIABILITIES</U></B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CAPITALIZATION:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Common Stockholder's Equity:</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Common stock, without par value -</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Authorized 40,000,000 shares </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Outstanding 24,817,566 shares </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 165,307 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 165,307 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 165,307 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Retained earnings</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 441,927 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 433,558 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 422,311 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accumulated other comprehensive income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (465)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (465)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (1,389)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Common Stockholder's Equity</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 606,769 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 598,400 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 586,229 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Long-term debt, exclusive of sinking fund</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">payments and maturities due within one year</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 452,000 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 452,000 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 452,000 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capitalization</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,058,769 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,050,400 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,038,229 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CURRENT LIABILITIES:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Short-term debt</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 91,115 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 15,990 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 32,540 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accounts payable</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 96,365 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 110,008 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 99,265 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Dividends payable on common stock</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,854 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 15,883 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Customer gas service and credit deposits</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 41,443 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 41,310 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 57,122 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 51,947 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 33,613 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 47,389 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas sales revenue refundable through rate adjustments </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,703 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 692 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Temporary LIFO Liquidation Credit</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 369 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued interest</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,159 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,473 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,145 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Current Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 292,101 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 229,940 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 258,344 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>DEFERRED CREDITS AND OTHER LIABILITIES:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Deferred income taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 288,332 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 279,289 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 249,893 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Investment tax credits being amortized over</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">the average lives of related property</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 27,340 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 27,571 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 28,839 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 46,682 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 43,853 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 55,264 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Deferred Credits and Other Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 362,354 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 350,713 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 333,996 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capitalization and Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,713,224 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,631,053 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,630,569 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=8 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>The Peoples Gas Light and Coke Company</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman"><B><U>CONSOLIDATED STATEMENTS OF CASH FLOWS</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=8><FONT FACE="Times New Roman">(Unaudited)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Net Income</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 25,246 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 19,593 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Adjustments to reconcile net income to net cash:</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Depreciation and amortization</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 18,371 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,151 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Deferred income taxes and investment tax credits - net</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,136 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,280 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Change in deferred credits and other liabilities</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,505 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (890)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Change in other assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (939)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 9,328 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Change in current assets and liabilities:</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Receivables - net</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (41,997)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (13,968)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued unbilled revenues</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (52,567)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (43,246)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Materials and supplies</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 684 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 67 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas in storage</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 14,882 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 27,997 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas costs recoverable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,781 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (9,864)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Regulatory assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 757 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 179 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Prepayments</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (5,831)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (3,418)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accounts payable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (13,643)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (1,257)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Customer gas service and credit deposits</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 133 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 13,885 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued taxes</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 18,334 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 21,681 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas sales revenue refundable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,011 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,703 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Temporary LIFO liquidation</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 369 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (2,910)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued interest</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (2,314)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (2,643)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Net Cash Provided by (Used in) Operating Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (14,082)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 34,668 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Investing Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Capital spending</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (18,316)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (33,754)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other capital investments</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (969)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,780 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Cash Used in Investing Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (19,285)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (31,974)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Financing Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Short-term debt</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 75,125 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 23,640 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Dividends paid on common stock</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (36,730)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (13,898)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Retirement of long-term debt</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (10,400)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Net Cash Provided by (Used in) Financing Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 38,395 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (658)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Increase (Decrease) in Cash and Cash Equivalents</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,028 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,036 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Cash and Cash Equivalents at Beginning of Period</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,716 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,134 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Cash and Cash Equivalents at End of Period</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 8,744 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 5,170 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=8 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10 ROWSPAN=2><FONT FACE="Times New Roman"><B><U>Part I. FINANCIAL INFORMATION</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TR><TD>&nbsp;</TD></TR> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><U>Item 1. Financial Statements</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B><U>North Shore Gas Company</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B><U>CONSOLIDATED STATEMENTS OF INCOME</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=10><FONT FACE="Times New Roman"><B>(Unaudited)</B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">12 Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=7 ALIGN="center"><FONT FACE="Times New Roman">(Thousands, except per-share amounts)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Revenues</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 47,261 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 37,248 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 145,734 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 131,355 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Expenses:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas costs</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 26,260 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,831 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 72,125 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 62,519 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Operation and maintenance</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,666 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,581 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 26,660 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 25,315 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Depreciation</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,169 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,099 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,529 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,120 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">Taxes - other than income taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,869 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,344 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 13,113 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 12,036 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Operating Expenses</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 38,964 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 29,855 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 120,427 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 107,990 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Income</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,297 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,393 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 25,307 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 23,365 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Other Income and (Deductions)</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 40 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 70 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 734 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 455 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Interest Expense</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,303 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,323 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,259 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,089 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Earnings Before Income Taxes</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,034 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,140 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 20,782 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 18,731 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Income Taxes</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,723 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,358 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,762 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,174 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Income Applicable to Common Stock</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 4,311 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 3,782 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 13,020 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 11,557 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=10 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=7><FONT FACE="Times New Roman"><B><U>North Shore Gas Company</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=7><FONT FACE="Times New Roman"><B><U>CONSOLIDATED BALANCE SHEETS</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1999</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">September 30,</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1998</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=5 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B><U>PROPERTIES AND OTHER ASSETS</U></B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CAPITAL INVESTMENTS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Property, plant and equipment, at original cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 319,795 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 317,368 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 308,333 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Less - Accumulated depreciation</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 117,170 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 115,143 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 109,617 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Net property, plant and equipment</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 202,625 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 202,225 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 198,716 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other investments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capital Investments - Net</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 202,647 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 202,247 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 198,738 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CURRENT ASSETS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Special Deposits</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 25,693 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Cash and cash equivalents</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,095 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 343 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,741 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Temporary cash investments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,855 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Receivables -</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Customers, net of allowance for uncollectible </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> accounts of $790, $755, and $637, respectively </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 11,830 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,602 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 9,199 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Other </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,631 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,030 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 681 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued unbilled revenues</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 13,273 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,744 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,350 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Materials and supplies, at average cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,222 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,348 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,526 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas in storage, at last-in, first-out cost</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,467 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,792 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,998 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas costs recoverable through rate adjustments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 522 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,386 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 117 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Regulatory assets</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 417 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 577 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,035 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Prepayments</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 184 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 271 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 223 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Current Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 38,641 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 34,948 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 58,563 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>OTHER ASSETS:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Non-current regulatory assets</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 20,881 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 20,956 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 16,140 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Deferred charges</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,786 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,057 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,090 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Other Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 24,667 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 25,013 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 20,230 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Properties and Other Assets</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 265,955 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 262,208 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 277,531 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=7 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=7><FONT FACE="Times New Roman"><B><U>North Shore Gas Company</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=7><FONT FACE="Times New Roman"><B><U>CONSOLIDATED BALANCE SHEETS</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">December 31,</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1999</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:@"><FONT FACE="Times New Roman">September 30,</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">1998</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>(Unaudited)</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=5 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B><U>CAPITALIZATION AND LIABILITIES</U></B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CAPITALIZATION:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Common Stockholder's Equity:</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Common stock, without par value -</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Authorized 5,000,000 shares </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> Outstanding 3,625,887 shares </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 24,757 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 24,757 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 24,757 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Retained earnings</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 73,588 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 72,142 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 70,648 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Common Stockholder's Equity</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 98,345 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 96,899 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 95,405 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Long-term debt, exclusive of sinking fund</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> payments and maturities due within one year</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 69,734 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 69,734 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 94,639 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capitalization</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 168,079 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 166,633 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 190,044 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>CURRENT LIABILITIES:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Short-term debt</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 7,600 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ - </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accounts payable</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 16,474 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 26,448 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 13,909 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Dividends payable on common stock</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,139 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,155 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Customer gas service and credit deposits</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,163 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,318 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,616 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,739 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,039 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,919 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Gas sales revenue refundable through rate adjustments </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 771 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Temporary LIFO liquidation</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,178 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Accrued interest</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 614 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,737 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 944 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Current Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 41,768 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 39,681 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 34,314 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>DEFERRED CREDITS AND OTHER LIABILITIES:</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Deferred income taxes</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 21,325 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 21,052 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,981 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Investment tax credits being amortized over</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> the average lives of related property</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,258 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,279 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,400 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 31,525 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 31,563 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 29,792 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Deferred Credits and Other Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 56,108 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 55,894 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 53,173 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Total Capitalization and Liabilities</B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 265,955 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 262,208 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 277,531 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=7 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <Table border=0> <TR><TD>&nbsp;</TD></TR> <TR><TD>&nbsp;</TD></TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=6><FONT FACE="Times New Roman"><B><U>North Shore Gas Company</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=6><FONT FACE="Times New Roman"><B><U>CONSOLIDATED STATEMENTS OF CASH FLOWS</U></B></FONT></TD> </TR> <TR ALIGN="center" VALIGN="bottom"> <TD COLSPAN=6><FONT FACE="Times New Roman">(Unaudited)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">(Thousands of Dollars)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Operating Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:#,##0_)[semicolon][Red](#,##0)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Net Income</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 4,311 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 3,782 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Adjustments to reconcile net income to net cash:</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Depreciation</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,169 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,099 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Deferred income taxes and investment tax credits - net</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 163 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (3,180)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Change in deferred credits and other liabilities</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 50 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 61 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Change in other assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 346 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,396 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Change in current assets and liabilities:</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Receivables - net</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (5,829)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (5,241)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Accrued unbilled revenues</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (9,529)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (7,721)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Materials and supplies</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 126 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 203 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Gas in storage</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,325 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,919 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Gas costs recoverable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,864 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 497 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Regulatory assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 160 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 173 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Accounts payable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (9,974)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (9,043)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Customer gas service and credit deposits</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (155)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,911 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Accrued taxes</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,700 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 6,614 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Gas sales revenue refundable</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (392)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Accrued interest</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (1,123)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (1,090)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Temporary LIFO liquidation</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 3,178 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> Prepayments</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 87 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 94 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Net Cash Provided by (Used in) Operating Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (7,131)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 82 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Investing Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Capital spending</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (2,568)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (3,919)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other temporary cash investments</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,855 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Net Cash Used in Investing Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,287 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (3,919)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Financing Activities:</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Short-term debt</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,600 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Issuance of long-term debt</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 30,035 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Dividends paid on common stock</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (5,004)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (2,429)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Trust fund </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (25,694)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B> Net Cash Provided by (Used in) Financing Activities</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,596 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,912 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Increase (Decrease) in Cash and Cash Equivalents</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 752 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> (1,925)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Cash and Cash Equivalents at Beginning of Period</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 343 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,666 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Cash and Cash Equivalents at End of Period</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,095 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,741 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD COLSPAN=6 ALIGN="left"><FONT FACE="Times New Roman">The Notes to Consolidated Financial Statements are an integral part of these statements.</FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&nbsp;</P> <B><U><P><CENTER>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</CENTER></P></U> <P><CENTER>(Unaudited)</CENTER></P></B> <P>&nbsp;</P> <B><U><P>1.&nbsp;&nbsp;BASIS OF PRESENTATION</P></B></U> <P>&#9;This Quarterly Report on Form 10-Q is a combined report of Peoples Energy Corporation (the Company), The Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company (North Shore Gas). The accompanying consolidated financial statements and Notes to the Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, Peoples Gas, North Shore Gas, Peoples District Energy Corporation, Peoples Energy Services Corporation, Peoples Energy Resources C <P>&#9;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, Peoples Gas' and North Shore Gas' Annual Report on Form 10-K for the fiscal year end <P>&#9;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.</P> <P>&nbsp;</P> <B><U><P>2.&nbsp;&nbsp;SIGNIFICANT ACCOUNTING POLICIES</P></B></U> <B><U><P>2A.&nbsp;&nbsp;Regulated Operations</P></B></U> <P>&#9;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 Standard (SFAS) No. 71, &quot;Accounting for the Effects of Certain Types of Regulation.&quot; 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 <P><U><B>2B.&nbsp;&nbsp;Statement of Cash Flows</B></U></P> <P>&#9;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.</P> <P>&#9;Income taxes and interest paid (excluding capitalized interest of $454,000 and $263,000 for the Company and Peoples Gas for the three months ended) were as follows:</P> <P ALIGN="CENTER"><CENTER><TABLE BORDER=0 CELLSPACING=1 WIDTH=614> <TR><TD WIDTH="38%" VALIGN="TOP"> <FONT SIZE=3><P>For the three months</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="20%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P ALIGN="CENTER"><U>The Company</U></FONT></TD> <TD WIDTH="20%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P ALIGN="CENTER"><U>Peoples Gas</U></FONT></TD> <TD WIDTH="20%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P ALIGN="CENTER"><U>North Shore Gas</U></FONT></TD> </TR> <TR><TD WIDTH="38%" VALIGN="TOP"> <FONT SIZE=3><P><U>ended December 31, (in thousands)</U></FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> </TR> <TR><TD WIDTH="38%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="38%" VALIGN="TOP"> <FONT SIZE=3><P>Income taxes paid</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;$ 3,543</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;$ 65</FONT></TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;$ 2,576</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;$ 63</FONT></TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;($ 769)</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;$ 2</FONT></TD> </TR> <TR><TD WIDTH="38%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="38%" VALIGN="TOP"> <FONT SIZE=3><P>Interest paid</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;14,553</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;14,034</FONT></TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;10,483</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;11,083</FONT></TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;2,320</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;2,850</FONT></TD> </TR> </TABLE> </CENTER></P> <B><U><P>2C.&nbsp;&nbsp;Recovery of Gas Costs</P></B></U> <P>&#9;Under the tariffs of Peoples Gas and North Shore Gas, all reasonably incurred gas costs are recoverable from customers. 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).</P> <P>&#9;For each gas distribution utility, the Commission conducts annual proceedings regarding 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 year 1999, are currently pending before the Commission.</P> <B><U><P>2D.&nbsp;&nbsp;Oil and Gas Exploration and Production Properties</P></B></U> <P>&#9;For oil and gas activities, the Company follows the full-cost method of accounting as prescribed by the SEC. Under the full-cost method, all costs directly associated with acquisition, exploration and development activities are capitalized, with the principal limitation that such amounts not exceed the present value of estimated future net revenues to be derived from the production of proved oil and gas reserves (the full-cost ceiling). If net capitalized costs exceed the full-cost ceiling at the e <B><U><P>2E.&nbsp;&nbsp;Accounting Standards</P></B></U> <P>&#9;In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, &quot;Accounting for Derivative Instruments and Hedging Activities.&quot; This statement establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fai <P>&#9;Changes in the fair value of derivatives will be recognized in the current period earnings, unless specific hedge accounting criteria are met. If an entity qualifies for hedge accounting, the derivative's gains and losses will offset the related results of the hedged item in the current period's income statement. SFAS No. 133 requires that formal documentation be maintained and that the effectiveness of the hedge be assessed quarterly. The statement must be adopted no later than the Company's fisca <P>&#9;In October 1999, the Company adopted the Statement of Position (SOP) 98-1, &quot;Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.&quot; This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use. The Company does not expect the application of this standard to have a material effect on its financial condition or results of operations.</P> <B><U><P>2F.&nbsp;&nbsp;Hedging Activities</P></B></U> <P>&#9;The Company has a formal risk management policy that establishes monitoring and control procedures for the execution, recording and reporting of derivative financial instruments. The intent of the policy is to utilize risk management trading solely to minimize risk, and not for any speculative purpose. The Company may use interest rate swaps, forward rate transactions, commodity futures contracts, options and swaps to hedge the impact of interest rate, price and volume fluctuations related to its b ng price risk related to the geographic location of the commodity (basis risk).</P> <P>&#9;The Company is accounting for all current derivative transactions through hedge accounting. These derivatives are designated as fair value hedges. Realized gains or losses from derivative instruments (through maturity or termination of the hedge) are deferred until the underlying hedged item is sold or matures. If the Company determines that any portion of the underlying hedged item will not be purchased or sold, the unmatched portion of the instrument is marked to market and any gain or loss is r <P><U><B>2G.&nbsp;&nbsp;Accounting for Gas Supply Contracts</B></U></P> <P>&#9;Effective October 1, 1999, Peoples Gas and North Shore Gas entered into gas purchase and agency agreements with Enron North America Corp. (Enron). Under the terms of the agreements, Enron agrees to sell and deliver gas to Peoples Gas and North Shore Gas covering baseload requirements plus incremental quantities as needed. In conjunction with these agreements Enron purchases from Peoples Gas and North Shore Gas all of the gas that Peoples Gas and North Shore Gas are obligated to buy from their suppliers under existing contracts. Enron will purchase these gas supplies at the same point and the same time as they are delivered to Peoples Gas and North Shore Gas, at a sales price exactly matching the purchase price from suppliers. Contractually Peoples Gas and North Shore Gas take title to the gas when it's delivered, at which point title passes to Enron. Although Peoples Gas and North Shore Gas have credit risk if Enron fails to pay the suppliers, the master agreement with Enron allows the utilities to net the obligations to suppliers with amounts owed to Enron. The company recordsthe purchases from Enron as gas purchases and nets the purchases from the suppliers with the sales to Enron.</P> <P>&nbsp;</P> <B><U><P>3:&nbsp;&nbsp;BUSINESS SEGMENTS</P></B></U> <P>&#9;The Company is presenting below information about its operating segments for the three and 12-month periods ending December 31, 1999 and 1998, according to SFAS No. 131, &quot;Disclosures about Segments of an Enterprise and Related I nformation.&quot; The Company has six business segments: Gas Distribution, Power Generation, Midstream Services, Retail Energy Services, Oil and Gas Production, and Other. Operating income also includes the effect of corporate activities and consolidating adjustments. North Shore Gas is active in the Gas Distribution segment only. Peoples Gas' main activity is the Gas Distribution segment but it is also involved in activities reported in the Midstream Services and Retail Energy Services segments.</P> <P>&#9;The Company has determined its business segments based on regulation plus a delineation based on type of product or services and activity related to those products or services, such as production versus marketing of natural gas. These segments are consistent with how the Company's Strategic Planning Committee develops overall strategy for the Company. The financial performance of each segment is evaluated based on its operating income and equity investment income before interest expense, other inco ived from sources within the U.S. and all reportable segments long-lived assets are located in the U.S.</P> <P>&#9;The Gas Distribution segment is the Company's core business. Its two regulated utilities purchase, distribute, sell and transport natural gas to approximately 1 million retail customers through a 6,000 mile distribution system serving the City of Chicago and 54 communities in northeastern Illinois. The Company also owns a storage facility in central Illinois and a pipeline which connects the facility and five major pipeline suppliers to Chicago.</P> <P>&#9;The Power Generation segment is engaged in the development, construction, operation, and ownership of gas-fired electric generation facilities for sales to electric utilities and marketers. The Company and Dominion Resources Inc. are equal investors in Elwood Energy, which owns and operates a 600-megawatt peaking facility near Chicago, Illinois.</P> <P>&#9;The Midstream Services segment performs wholesale activities that provide value to gas distribution utilities, marketers and pipelines. The Company, through Peoples Gas, operates a natural gas hub. It also owns and operates a natural gas liquids peaking facility and is active in other asset-based wholesale activities.</P> <P>&#9;The Retail Energy Services segment markets gas and electricity and provides energy management and other services to retail customers. Peoples Gas' home services activity is also part of this segment.</P> <P>&#9;The Oil and Gas Production segment is active in the development and production of oil and gas reserves in selected basins in the United States. The Company targets on-shore prospects with proved producing oil and gas reserves and the potential for enhancement through drilling programs.</P> <P>&#9;The Company is involved in other activities such as district heating and cooling and the development of natural gas fueling stations for natural gas vehicles. These and other activities do not fall under the above segments and are reported in the Other segment.</P> <P>&nbsp;</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD COLSPAN=8 ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Retail</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Corporate</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1>(Thousands)</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1> Gas</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Power</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Midstream</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Energy</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Oil and Gas</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>and</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>Three Months Ended 12-31-99</B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Generation</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Production</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Other</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Adjustments</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Total</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Revenues</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 334,659 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 39,794 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 34,719 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 4,402 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 8 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ (1,097)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 412,485 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Depreciation, Depletion and Amortization</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 20,540 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 66 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 402 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,819 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 16 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 41 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 22,884 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income (Loss) </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 57,417 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (665)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,218 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (1,583)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 898 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (239)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (4,310)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 53,736 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> Equity Investment Income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,912 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 79 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 87 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 4,078 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income and Equity Investment Income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 57,417 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,247 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,218 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (1,583)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 977 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (152)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (4,310)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 57,814 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Segment Assets</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,483,053 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1><B> - </B></FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 10,763 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,754 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 78,304 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (17)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 320 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,581,177 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Investments in Equity Investees</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 99,933 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 9,573 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 4,261 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 113,767 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Capital Spending</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 20,884 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 978 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 51,301 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 42 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 73,205 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Retail</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Corporate</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1> Gas</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Power</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Midstream</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Energy</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Oil and Gas</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>and</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>Three Months Ended 12-31-98</B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Generation</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Production</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Other</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Adjustments</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Total</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Revenues</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 270,466 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 16,613 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 22,580 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 1,686 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 4 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ (1,108)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 310,241 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Depreciation, Depletion and Amortization</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 19,251 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 75 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 213 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,044 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 20,584 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income (Loss) </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 45,616 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (243)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,316 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (297)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (111)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (127)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (790)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 47,364 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> Equity Investment Income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 36 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 40 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 76 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income and Equity Investment Income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 45,616 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (243)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,316 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (297)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (75)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (87)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (790)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 47,440 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Segment Assets</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,450,486 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,629 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 5,001 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 13,641 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 81 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,477,838 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Investments in Equity Investees</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 27,506 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,796 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 5,905 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 36,207 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Capital Spending</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 37,674 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 11,999 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 30 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 257 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 2,531 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 60 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 52,551 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Retail</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Corporate</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Gas</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Power</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Midstream</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Energy</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Oil and Gas</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>and</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>12 Months Ended 12-31-99</B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Generation</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Production</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Other</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Adjustments</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Total</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Revenues</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 1,044,318 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 130,097 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 113,397 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 11,955 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 30 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ (3,171)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 1,296,626 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Depreciation, Depletion and Amortization</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 79,193 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 202 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,556 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 4,815 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 17 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 49 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 85,832 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income (Loss) </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 166,651 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (2,051)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 7,893 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (4,876)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,161 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (635)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (7,757)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 162,386 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> Equity Investment Income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 12,426 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 101 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 349 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 12,876 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income and Equity Investment Income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 166,651 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 10,375 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 7,893 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (4,876)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,262 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (286)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (7,757)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 175,262 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Segment Assets</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,483,053 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 10,763 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,754 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 78,304 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (17)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 320 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,581,177 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Investments in Equity Investees</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 99,933 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 9,573 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 4,261 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 113,767 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Capital Spending</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 108,394 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 61,187 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 12 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 5,130 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 76,545 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 580 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ (2,307)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 249,541 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Retail</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Corporate</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Gas</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Power</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Midstream</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Energy</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Oil and Gas</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>and</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>12 Months Ended 12-31-98</B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Generation</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Production</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Other</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Adjustments</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Total</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Revenues</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 963,399 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 47,607 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 47,026 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 3,735 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 6 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ (3,105)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 1,058,668 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Depreciation, Depletion and Amortization</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 76,244 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 231 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 400 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,143 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 79,020 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income (Loss) </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 139,797 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (243)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,064 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (3,825)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (460)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (1,052)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (3,543)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 138,738 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> Equity Investment Income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 36 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 371 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 407 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income and Equity Investment Income</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 139,797 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (243)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,064 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (3,825)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (424)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (681)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (3,543)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 139,145 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Segment Assets</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,450,486 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,629 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 5,001 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 13,641 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 81 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,477,838 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Investments in Equity Investees</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 27,506 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,796 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 5,905 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 36,207 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Capital Spending</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 122,634 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 27,506 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 1,825 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 5,167 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 18,500 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 13 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 52 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 175,697 </FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&#9;The following table reconciles total segment assets and investments in equity investees to the Company's consolidated total assets at December 31, 1999 and 1998 as follows:</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">(Thousands)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Segment Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,581,177 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,477,838 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Investments in Equity Investees</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 113,767 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 36,207 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other Investments not included in</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"> above Categories</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 12,106 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,412 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Capital Investments - Net</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,707,050 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,522,457 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Current Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 471,860 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 411,867 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 88,113 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 82,255 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Assets</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,267,023 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 2,016,579 </FONT></TD> </TR> </TABLE> <P>&#9;The following table reconciles total segment operating income and equity investment income to the Company's consolidated net income for the three and 12 months ended December 1999 and 1998 as follows:</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">12 Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD COLSPAN=7 ALIGN="center"><FONT FACE="Times New Roman">(Thousands)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" COLSPAN=3><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center" COLSPAN=3><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Operating income and equity investment income</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 57,814 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 47,440 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $175,262 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $139,145 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Interest expense</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 11,334 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,138 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 40,708 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 38,625 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other income and (deductions)</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 575 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 615 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,801 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 4,009 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Income taxes</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 17,484 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 14,547 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 55,518 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 37,279 </FONT></TD> </TR> <TR VALIGN="middle"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Income</B></FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 29,571 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 23,370 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 98,837 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 67,250 </FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD COLSPAN=10 ALIGN="center"><FONT FACE="Arial" SIZE=-1><B><U>Peoples Gas</U></B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Arial" SIZE=-1><B><U>North Shore Gas</U></B></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Retail</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1>(Thousands)</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1> Gas</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Midstream</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Energy</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1> Gas</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>Three Months Ended 12-31-99</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Total</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Revenues</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 284,428 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 1,377 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 723 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 286,528 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 47,261 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Depreciation and Amortization</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 18,371 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 18,371 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,169 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income (Loss) </FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 46,720 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,377 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 29 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 48,126 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,297 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Segment Assets</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,280,428 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,280,428 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 202,625 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Capital Spending</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 18,316 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 18,316 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 2,568 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Retail</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1> Gas</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Midstream</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Energy</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1> Gas</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>Three Months Ended 12-31-98</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Total</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Revenues</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 233,218 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 1,763 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 310 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 235,291 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 37,248 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Depreciation and Amortization</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 17,151 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 17,151 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,099 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income (Loss) </FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 38,223 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,763 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 26 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 40,012 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 7,393 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Segment Assets</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,251,770 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,251,770 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 198,716 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Capital Spending</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 33,755 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 33,755 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 3,919 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Retail</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Gas</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Midstream</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Energy</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1> Gas</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>12 Months Ended 12-31-99</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Total</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Revenues</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 895,614 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 5,596 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 1,542 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 902,752 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 145,734 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Depreciation and Amortization</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 70,664 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 70,664 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,529 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income (Loss) </FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 138,945 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 5,597 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (362)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 144,180 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 25,307 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Segment Assets</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,280,428 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,280,428 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 202,625 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Capital Spending</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 95,957 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 95,957 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 12,437 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Retail</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Gas</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Midstream</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>Energy</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1> Gas</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>12 Months Ended 12-31-98</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Arial" SIZE=-1><B>&nbsp;</B></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Services</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Total</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><U>Distribution</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Revenues</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 832,044 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 3,491 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 310 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 835,845 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 131,355 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Depreciation and Amortization</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 68,124 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 68,124 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 8,120 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Operating Income (Loss) </FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 116,433 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,491 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 26 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 119,950 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 23,365 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Segment Assets</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,251,770 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,251,770 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 198,716 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Capital Spending</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 111,961 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ - </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 111,961 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 10,673 </FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&#9;The following table reconciles total segment assets to Peoples Gas' consolidated total assets at December 31, 1999 and 1998 as follows:</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">(Thousands)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Segment Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,280,428 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,251,770 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other Investments</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 10,382 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,965 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Capital Investments - Net</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,290,810 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,259,735 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Current Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 364,501 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 309,963 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 57,913 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 60,871 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Assets</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,713,224 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 1,630,569 </FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&#9;The following table reconciles total segment operating income to Peoples Gas' consolidated net income for the three and 12 months ended December 1999 and 1998 as follows:</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">12 Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD COLSPAN=7 ALIGN="center"><FONT FACE="Times New Roman">(Thousands)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Operating income</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 48,126 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 40,012 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $144,180 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $119,950 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Interest expense</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,531 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 8,706 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 32,444 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 33,248 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other income and (deductions)</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 702 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 447 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 19,140 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,074 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Income taxes</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 15,051 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 12,160 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 47,006 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 31,229 </FONT></TD> </TR> <TR VALIGN="middle"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Income</B></FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 25,246 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 19,593 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 83,870 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 57,547 </FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&#9;The following table reconciles total segment assets to North Shore Gas' consolidated total assets at December 31, 1999 and 1998 as follows:</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">(Thousands)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Segment Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 202,625 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 198,716 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other Investments</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 22 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Capital Investments - Net</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 202,647 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 198,738 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Current Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 38,641 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 58,563 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other Assets</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 24,667 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 20,230 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Total Assets</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 265,955 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 277,531 </FONT></TD> </TR> </TABLE> <P>&#9;The following table reconciles total segment operating income to North Shore Gas' consolidated net income for the three and 12 months ended December 1999 and 1998 as follows:</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">Three Months Ended</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman">12 Months Ended</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman"><U>December 31,</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1999</U></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman"><U>1998</U></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD COLSPAN=7 ALIGN="center"><FONT FACE="Times New Roman">(Thousands)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman"><I>&nbsp;</I></FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="center"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Operating income</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 8,297 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 7,393 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 25,307 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 23,365 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Interest expense</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,303 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 1,323 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,259 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 5,089 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Other income and (deductions)</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 40 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 70 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 734 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 455 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman">Income taxes</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,723 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 2,358 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,762 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> 7,174 </FONT></TD> </TR> <TR VALIGN="middle"> <TD ALIGN="left"><FONT FACE="Times New Roman"><B>Net Income</B></FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman"> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 4,311 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 3,782 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 13,020 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman">&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman"> $ 11,557 </FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <P><U><B>4.&nbsp;&nbsp;ENVIRONMENTAL MATTERS</B></U></P> <P><U><B>4A.&nbsp;&nbsp;Former Manufactured Gas Plant Operations</B></U></P> <P>&#9;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 re <P>&#9;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 was comprised of an investigation to determine the nature and extent of contamination at the Waukegan Site and a feasibil nd 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 (OMC) 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 remedial work that the EPA determines is necessary <P>&#9;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 shared 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.</P> <P>&#9;On May 14, 1999, the EPA notified GMC, OMC, Elgin Joliet and Eastern Railway Company, and North Shore Gas that they were potentially liable with respect to the Waukegan Site and that the EPA intended to begin discussions regarding the design and implementation of the remedial action selected for the Waukegan Site.</P> <P>&#9;On September 30, 1999, the EPA issued the Record of Decision (ROD) selecting the remedial action for the Waukegan Site. The remedy consists of on-site treatment of ground water, off-site treatment and disposal of soil containing polynuclear aeromatic hydrocarbons or creosote, and on-site solidification/stabilization of arsenic contaminated soils. The EPA has estimated the present worth of the remedy to be $26 million (representing the present worth of estimated capital costs and of estimated operat <P>&#9;North Shore Gas and the other parties notified by the EPA have entered into discussions regarding implementation of the remedy and the allocation of costs associated with the investigation and remediation of the Waukegan Site.</P> <P>&#9;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. Peoples Gas is contesting this suit.</P> <P>&#9;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, 1999, the total of the costs deferred (stated in current year dollars) for Peoples Gas was $23.1 million; for North Shore Gas the total was $19.5 million; and for the Company on a consolidated basis the total deferred was $42.6 million. This amount <P>&#9;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, among other things, 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 five of their Manufactured Gas Sites in Chicago and Waukegan. The utilities are also asking the court to awa from other insurance carriers.</P> <P>&#9;Management believes that the costs incurred by Peoples Gas and by North Shore Gas for environmental activities relating to former manufactured gas operations are recoverable 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 the financial position or results of operations of the utilities. Peoples G 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.</P> <B><U><P>4B.&nbsp;&nbsp;Former Mineral Processing Site in Denver, Colorado</P></B></U> <P>&#9;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 to the liability of a former entity that was allegedly responsible during the period 1934-1941 for the dispos <P>&#9;North Shore Gas filed a declaratory judgment action against Salomon in the District Court for the Northern District of Illinois. The suit asked the court to declare that North Shore Gas is not liable for response costs at the Denver site. Salomon filed a counterclaim for costs incurred by Salomon and Shattuck with respect to the site. In 1997, the District Court granted North Shore Gas' motion for summary judgment, declaring that North Shore Gas is not liable for any response costs in connection w <P>&#9;In August 1998, the U.S. Court of Appeals, Seventh Circuit, reversed the District Court's decision and remanded the case for determination of what liability, if any, the former entity has and therefore North Shore Gas has for activities at the site. </P> <P>&#9;In November 1999, the EPA announced that it was reopening the ROD for the Denver site. The EPA's announcement followed a six-month scientific/technical review by the agency of the remedy's effectiveness. In December 1999, the EPA issued its Proposed Plan for amending the ROD for public comment. The preferred alternative in the Proposed Plan is removal of the wastes to a licensed off-site facility. The EPA estimates the present worth of the preferred alternative to be $21.5 million (representing t <P>&#9;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.</P> <P>&nbsp;</P> <B><U><P>5.&nbsp;&nbsp;LONG-TERM DEBT</P></B></U> <B><U><P>5A.&nbsp;&nbsp;Issuance of Bonds</P></B></U> <P>&#9;On December 18, 1998, the Illinois Development Finance Authority issued $30,035,000 aggregate principal amount of 5.00% Gas Supply Revenue Bonds, Series 1998, which are secured by an equal amount of North Shore Gas' 30-year first mortgage bonds, Series M. The net proceeds were deposited with a trustee to be used for the redemption of long-term debt, the payment of issuance costs and for the payment of certain construction expenditures.</P> <B><U><P>5B.&nbsp;&nbsp;Interest Rate Adjustments</P></B></U> <P>&#9;The rate of interest on the $27 million principal amount of the City of Chicago 1993 Series B Bonds, which are secured by an equal principal amount of Peoples Gas' Adjustable-Rate First and Refunding 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 <P>&#9;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 has established a line of credit with The Northern Trust Company which expires on January 31, 2001.</P> <B><U><P>5C.&nbsp;&nbsp;Bonds Redeemed</P></B></U> <P>&#9;On October 1, 1998, Peoples Gas redeemed, from general corporate funds, $10.4 million aggregate principal amount of the City of Joliet 1984 Series C Bonds, which were secured by Peoples Gas' Adjustable-Rate First and Refunding Mortgage Bonds, Series W. On January 19, 1999, North Shore Gas redeemed, from a portion of the bond issuance proceeds deposited with the trustee, $24,905,000 aggregate principal amount of the Illinois Development Finance Authority Gas Supply Revenue Bonds, Series 1992, which w as' First Mortgage Bonds, Series K.</P> <B><U><P>6.&nbsp;&nbsp;EARNINGS PER SHARE</P></B></U> <P>&#9;Shares used to compute diluted earnings per share for the Company are as follows:</P> <P ALIGN="CENTER"><CENTER><TABLE BORDER=0 CELLSPACING=1 WIDTH=518> <TR><TD WIDTH="26%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="65%" VALIGN="TOP" COLSPAN=7> <FONT SIZE=3><P ALIGN="CENTER"><U>Average Common Stock Shares (in thousands)</U></FONT></TD> <TD WIDTH="4%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="26%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="31%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P ALIGN="CENTER"><U>Three Months Ended</U></FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="28%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P ALIGN="CENTER"><U>12 Months Ended</U></FONT></TD> <TD WIDTH="4%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="26%" VALIGN="TOP"> <FONT SIZE=3><P>December 31,</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="4%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="26%" VALIGN="TOP"> <FONT SIZE=3><P>As reported shares</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;35,520</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;35,457</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;35,496</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;35,338</FONT></TD> <TD WIDTH="4%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="26%" VALIGN="TOP"> <FONT SIZE=3><P>Effects of options</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;12</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;20</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;13</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;19</FONT></TD> <TD WIDTH="4%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="26%" VALIGN="TOP"> <FONT SIZE=3><P>Diluted shares</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;35,532</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;35,477</FONT></TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;35,509</FONT></TD> <TD WIDTH="2%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP"> <FONT SIZE=3><P>&#9;35,357</FONT></TD> <TD WIDTH="4%" VALIGN="TOP">&nbsp;</TD> </TR> </TABLE> </CENTER></P> <P>&nbsp;</P> <P>&#9;Options for which the average stock price is lower than the grant price are considered antidilutive and, therefore, are not included in the calculation of diluted earnings per share.</P> <B><U><P>7.&nbsp;&nbsp;COMPREHENSIVE INCOME</P></B></U> <P>&#9;SFAS No. 130, &quot;Reporting Comprehensive Income,&quot; requires the reporting of comprehensive income in addition to net income. Comprehensive income is the total of net income and all other nonowner changes in equity (other comprehensive income). Comprehensive income includes net income plus the effect of the additional pension liability not yet recognized as net periodic pension cost. The Company and Peoples Gas have reported accumulated other comprehensive income in their respective Consolid <P>&#9;Comprehensive income for the Company for the three and 12 months ended December 31, 1999 and 1998 is as follows:</P> <TABLE BORDER=0 CELLSPACING=1 CELLPADDING=2 WIDTH=564> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="23%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER">Three Months Ended</FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="23%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER">12 Months Ended</FONT></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="23%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="23%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>(Thousands of dollars)</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>Net income</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 29,571 </FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$23,370</FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$98,837 </FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$67,250</FONT></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>Other comprehensive income</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P>Minimum pension liability</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">1,533</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">1,604</FONT></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P>Income tax (expense)/benefit</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">(609)</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">(636)</FONT></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>Other comprehensive income, net of tax</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">924</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">968</FONT></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>Comprehensive income</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 29,571 </FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$23,370</FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 99,761 </FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$68,218</FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&#9;Comprehensive income for Peoples Gas for the three and 12 months ended December 31, 1999 and 1998 is as follows:</P> <TABLE BORDER=0 CELLSPACING=1 CELLPADDING=2 WIDTH=564> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="23%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER">Three Months Ended</FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="23%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER">12 Months Ended</FONT></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=37><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=37><P></P></TD> <TD WIDTH="23%" VALIGN="TOP" COLSPAN=2 HEIGHT=37> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=37><P></P></TD> <TD WIDTH="23%" VALIGN="TOP" COLSPAN=2 HEIGHT=37> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>(Thousands of dollars)</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>Net income</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 25,246 </FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$19,593</FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$83,870 </FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$57,547</FONT></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>Other comprehensive income</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P>Minimum pension liability</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">1,533</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">1,604</FONT></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P>Income tax (expense)/benefit</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">(609)</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">(636)</FONT></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>Other comprehensive income, net of tax</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">924</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">968</FONT></TD> </TR> <TR><TD WIDTH="2%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="48%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=12><P></P></TD> </TR> <TR><TD WIDTH="50%" VALIGN="TOP" COLSPAN=2 HEIGHT=18> <FONT SIZE=3><P>Comprehensive income</FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 25,246 </FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$19,593</FONT></TD> <TD WIDTH="4%" VALIGN="TOP" HEIGHT=18><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 84,794 </FONT></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=18> <FONT SIZE=3><P ALIGN="JUSTIFY">$58,515</FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <B><U><P>8.&nbsp;&nbsp;ELIMINATION OF DECOMMISSIONING RESERVE</P></B></U> <P>&#9;In January 1999, Peoples Gas eliminated a $13.0 million decommissioning reserve associated with the 1995 retirement of its synthetic natural gas plant. This elimination resulted in the recognition of $13.0 million in other income. Management determined that it does not expect the plant's decommissioning costs to exceed amounts incurred to date.</P> <P>&nbsp;</P> <P>&nbsp;</P> <B><P>Item 2.&nbsp;&nbsp;<U>Management's Discussion and Analysis of Results of Operations and Financial Condition</P></B></U> <B><U><P><CENTER>RESULTS OF OPERATIONS</CENTER></P></B></U> <P>&nbsp;</P> <P>&#9;The Company is reporting operating income and equity investment income for each of its six business segments: Gas Distribution, Power Generation, Midstream Services, Retail Energy Services, Oil and Gas Production and Other. (See Note 3 of the Notes to Consolidated Financial Statements.) North Shore Gas is active in the Gas Distribution segment only. Peoples Gas' main activity is in the Gas Distribution segment but is also involved in activities reported in the Midstream Services and Retail Energy <B><U><P>Net Income</P></B></U> <P>&#9;Net income for the Company increased $6.2 million to $29.6 million for the three-month period due primarily to weather that was 12 percent colder than during the year-ago period. The current period was bolstered by lower operating costs for the gas distribution segment and growth in diversified segment earnings.</P> <P>&#9;Net income for the Company increased $31.6 million to $98.8 million for the 12 month period, principally as a result of weather that was 15 percent colder than during the year-ago period, increases in earnings of the diversified business segments, the elimination of the decommissioning reserve associated with the 1995 retirement of Peoples Gas' synthetic natural gas plant and a state income tax refund.</P> <P>&#9;Net income for Peoples Gas increased $5.7 million to $25.2 million for the three-months ended, primarily as a result of weather that was colder than the prior period and decreased operation and maintenance expenses. Partially offsetting these effects was increased depreciation expense.</P> <P>&#9;Net income for Peoples Gas increased $26.3 million to $83.9 million for the 12-months ended, due primarily to weather that was colder than the prior year. Also contributing to this increase was the elimination of the decommissioning reserve associated with the 1995 retirement of its synthetic natural gas plant, decreases in operation and maintenance expenses, a state income tax refund, and an increase in income from hub activities.</P> <P>&#9;Net income for North Shore Gas increased by $529,000 to $4.3 million for the three months ended, primarily as a result of colder weather offset, in part, by increased operation and maintenance expenses and higher depreciation expense.</P> <P>&#9;Net income for North Shore Gas increased $1.5 million to $13.0 million for the 12 month period, principally as a result of weather that was colder than the prior year and a state income tax refund. Partially offsetting these effects were increased operation and maintenance expenses and higher depreciation expense.</P> <P>&#9;A summary of variations affecting income between years is presented below, with explanations of significant differences by segment following:</P> <Table border=0> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><I>Three Months Ended</I></FONT></TD> <TD COLSPAN=3 ALIGN="center"><FONT FACE="Times New Roman" SIZE=-1><I>12 Months Ended</I></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD COLSPAN=3 ALIGN="center" STYLE="vnd.ms-excel.numberformat:d-mmm-yy"><FONT FACE="Times New Roman" SIZE=-1><I><U>December 31, 1999</U></I></FONT></TD> <TD COLSPAN=3 ALIGN="center" STYLE="vnd.ms-excel.numberformat:d-mmm-yy"><FONT FACE="Times New Roman" SIZE=-1><I><U>December 31, 1999</U></I></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1><I><U>(Thousands of Dollars)</U></I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I><U>Amount</U></I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I><U>Percent</U></I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I><U>Amount</U></I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I><U>Percent</U></I></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B>Operating Income and Equity Investment Income</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1><I>&nbsp;</I></FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Gas Distribution </FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 11,801 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 25.9 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_($* #,##0_)[semicolon]_($* (#,##0)[semicolon]_($* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> $ 26,854 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 19.2 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Power Generation</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,490 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,436.2 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 10,618 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 4,369.5 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Midstream Services</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (1,098)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (33.1)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (171)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (2.1)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Retail Energy Services</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (1,286)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 433.0 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (1,051)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (27.5)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Oil and Gas Production</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,052 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,402.7 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 3,686 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 869.3 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Other</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (65)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 74.7 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 395 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 58.0 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Corporate and Adjustments</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (3,520)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (445.6)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (4,214)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (118.9)</FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Arial" SIZE=-1><B> Total Operating Income and Equity Investment Income</B></FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 10,374 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 21.9 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 36,117 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 26.0 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Other income and (deductions)</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (40)</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> (6.5)</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 15,792 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 393.9 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Interest expense</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 1,196 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 11.8 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,083 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 5.4 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Income taxes</FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 2,937 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 20.2 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 18,239 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 48.9 </FONT></TD> </TR> <TR VALIGN="bottom"> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1>Net income applicable to common stock</FONT></TD> <TD ALIGN="left"><FONT FACE="Times New Roman" SIZE=-1> </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 6,201 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 26.5 </FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0_)[semicolon]_(* (#,##0)[semicolon]_(* [dquote]-[dquote]_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 31,587 </FONT></TD> <TD ALIGN="right"><FONT FACE="Times New Roman" SIZE=-1>&nbsp;</FONT></TD> <TD ALIGN="right" STYLE="vnd.ms-excel.numberformat:_(* #,##0.0_)[semicolon]_(* (#,##0.0)[semicolon]_(* [dquote]-[dquote]?_)[semicolon]_(@_)"><FONT FACE="Times New Roman" SIZE=-1> 47.0 </FONT></TD> </TR> </TABLE> <B><U><P>Gas Distribution Segment</P></B></U> <P>&#9;The Company's core business is the distribution of natural gas. Its two regulated utilities purchase, distribute, sell and transport natural gas to approximately 1 million retail customers through a 6,000 mile distribution system serving the City of Chicago and 54 communities in northeastern Illinois. The Company also owns a storage facility in central Illinois and a pipeline which connects the facility and five major pipeline suppliers to Chicago.</P> <P>&#9;Gross revenues of Peoples Gas and North Shore Gas are affected by changes in the unit cost of the utilities' 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 utilities. The unit cost of gas does not have a direct significant effect on operating income because of the utilities' tariffs that provide for dollar-for-dollar recovery of gas costs. (See Note 1L of the Notes to Consolidated Financial Statemen <P>&#9;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 of the Company. In order to mitigate the effect of substantially warmer weather, the Company has purchased a five-year weather insurance policy. The weather insurance program, beginning in fiscal year 2000, allows the Company to protect earnings when weather is more than 8% warmer than normal. The Company wil <P>&#9;Operating revenues for the Company for the three months ended increased compared to 1998 due mainly to higher unit costs of gas and colder weather. Operating income increased $11.8 million to $57.4 million in 1999, due chiefly to colder weather and lower operating costs, partially offset by increased depreciation expense due to depreciable property additions.</P> <P>&#9;Operating revenues for the Company for the 12 months ended increased from the previous period due primarily to weather that was 15 percent colder than in the prior period and higher unit costs of gas. Operating income increased $26.9 million to $166.7 million, due mainly to colder weather, along with decreased labor costs and group insurance expense. These effects were offset, in part, by increased depreciation expense due to depreciable property additions.</P> <P>&#9;Despite colder weather than in the previous three and 12 month periods, weather for the current three and 12 month periods were 13 percent and 10 percent warmer than normal. As such, revenues for these periods also reflect the intrinsic value of its weather insurance policy as of December 31, 1999.</P> <P>&#9;Operating income for the three months ended increased $8.4 million to $46.7 million for Peoples Gas due primarily to an increase in gas deliveries as a result of colder weather, decreased labor costs and lower pension expense. Partially offsetting these effects was increased computer support services as well as increased depreciation expense due to depreciable property additions.</P> <P>&#9;Operating income for the 12-months ended period for Peoples Gas increased $22.5 million to $138.9 million, due chiefly to increased gas deliveries as a result of colder weather, decreased labor costs and lower group insurance expense. Offsetting these effects, in part, was increased depreciation expense due to depreciable property additions as well as increased computer support services.</P> <P>&#9;Operating income for North Shore Gas increased $904,000 to $8.3 million and $1.9 million to $25.3 million, for the three- and 12-month periods due mainly to increased gas deliveries as a result of colder weather, partially offset by increased operation and maintenance expenses and higher depreciation expense due to depreciable property additions.</P> <P>&#9;The Company's objectives for this segment center on continuous improvement, technological advancements and customer service. Initiatives for fiscal 2000 include the implementation and enhancement of the C-first customer information system, the near completion of the SureRead<SUP>sm</SUP> automatic meter reading system, gas supply portfolio optimization through agreements with Enron North America Corp., which are defined as the ENA Agreements and described in Part II, Item 5 below, and continued purs <B><U><P>Power Generation Segment</P></B></U> <P>&#9;The Company is engaged in the development, construction, operation and ownership of gas-fired electric generation facilities for sales to electric utilities and marketers. The Company and Dominion Resources Inc. are equal investors in Elwood Energy LLC, which owns and operates a 600-megawatt peaking facility near Chicago, Illinois.</P> <P>&#9;Operating income and equity investment income amounted to $3.2 million and $10.4 million for the three- and 12-month periods in 1999, mostly as a result of the Company's investment in Elwood Energy. Income from this partnership was partially offset by corporate operating costs allocated to this segment.</P> <P>&#9;The Company's objective is to own and operate more than 1,000 megawatts of peaking capacity. It is pursuing regional opportunities in and near the City of Chicago as well as considering the expansion of the Elwood facility, which has received regulatory approvals for a total of 3,100 megawatts in generating capacity. The Company expects equity investment income for fiscal 2000 to increase substantially due to the full year impact of Elwood. Annual revenues from the two contracts for the entire plant capacity are recognized based on utilization of the plant.</P> <B><U><P>Midstream Services Segment</P></B></U> <P>&#9;The Company performs wholesale activities that provide value to gas distribution utilities, marketers and pipelines. The Company operates a natural gas hub, owns and operates a natural gas liquids (NGL) peaking facility and is active in other asset-based wholesale activities.</P> <P>&#9;For the three-month period, operating income for the Company decreased $1.1 million to $2.2 million compared to the prior period, due primarily to lower margins from wholesale marketing activities and hub services.</P> <P>&#9;Operating income for the Company decreased $171,000 to $7.9 million for the 12-month period due mainly to lower margins from wholesale marketing activities, partially offset by higher revenues from hub services.</P> <P>&#9;For the three-month period, operating income for Peoples Gas, relative to this segment, decreased $386,000 to $1.4 million, as a result of decreased hub services revenues.</P> <P>&#9;Operating Income for the 12-months ended for Peoples Gas increased $2.1 million to $5.6 million due to higher revenues from hub services.</P> <P>&#9;The Company's objective is to become the primary player in the Midwest market center, developing additional hub services such as storage, transportation and title tracking while pursuing an exchange-traded Chicago contract. A recent agreement with Enron North America Corp. is expected to enable the Company to expand its Chicago hub and pursue additional wholesale marketing opportunities. The Company intends to market additional capacity from its existing NGL peaking facility and pursue the development of an additional gas peaking facility. The Company will also be active in the development of regional wholesale projects such as its proposed pipeline from the Midwest market center to Wisconsin.</P> <B><U><P>Retail Energy Services Segment</P></B></U> <P>&#9;The Company markets gas and electricity and provides energy management and other services to retail customers.</P> <P>&#9;For the quarter ended December 31, 1999, the Company reported an operating loss of $1.6 million as compared with an operating loss of $297,000 during the same period in fiscal 1999. The decrease is primarily the result of nonrecurring revenue adjustments.</P> <P>&#9;For the 12-months ended December 31, 1999, the Company reported an operating loss of $4.9 million as compared to the year-ago period operating loss of $3.8 million. The negative effect is a result of higher depreciation and amortization expense due to infrastructure property additions and customer acquisition costs.</P> <P>&#9;Peoples Gas reflected an operating loss for this segment of $362,000 for the 12-months ended due to product development costs associated with Peoples Home Services, a business unit providing home furnace and air conditioning maintenance services. Peoples Gas' involvement in this segment began in fiscal 1999.</P> <P>&#9;The Company's objective is to capture major regional market share in energy sales. It will develop proprietary products as it participates in the Illinois electric and gas unbundling process and will continue to build the necessary infrastructure as it grows through acquisitions and direct marketing efforts. Recently certified by the Illinois Commerce Commission (Commission) as an Alternative Retail Electric Supplier (ARES) in Illinois, the Company is one of the first ARES to provide electric products to eligible customers in the state.</P> <B><U><P>Oil and Gas Production Segment</P></B></U> <P>&#9;The Company is active in the development and production of oil and gas reserves in selected basins in the United States. The Company targets on-shore prospects with proved producing oil and gas reserves and the potential for enhancement through drilling programs.</P> <P>&#9;For the three- and 12-months ended, operating income and equity investment income for the Company increased $1.1 million to $977,000, and $3.7 million to $3.2 million, respectively, due primarily to new investments in partnerships and acquisitions which are now providing positive results.</P> <P>&#9;The Company's objective is to become a top-fifty owner of U.S. gas reserves with holdings of between 350 to 400 billion cubic feet. Toward this goal the Company recently acquired 41 Bcf equivalent in proved reserves in the San Juan basin. Existing oil and gas properties will be developed through drilling and production enhancements. The Company will continue to hedge production in order to mitigate price risk and will pursue reserve acquisitions that are consistent with its basin strategy. The Company intends to develop or acquire the expertise to operate its properties. </P> <B><U><P>Other Segment</P></B></U> <P>&#9;The Company is involved in other activities such as district heating and cooling and the development of fueling stations for natural gas vehicles. These and other activities do not fall under the above segments. The variations for the two reportable periods are primarily attributable to fluctuating costs associated with business development activities.</P> <B><U><P>Corporate and Adjustments</P></B></U> <P>&#9;This category encompasses corporate activities that support the six segments, as well as consolidating adjustments. The variations for the two reportable periods are due to costs associated with the corporate branding campaign.</P> <B><U><P>Other Income and Deductions</P></B></U> <P>&#9;Other income and deductions for the Company increased $15.8 million to $19.8 million, for the 12 months ended due mainly to the elimination of the decommissioning reserve associated with the 1995 retirement of its synthetic natural gas plant as well as the interest on a state income tax refund.</P> <P>&#9;Other income and deductions for the 12 months ended increased $17.1 million to $19.1 million for Peoples Gas, due primarily to the elimination of the decommissioning reserve as well as the interest on the state income tax refund.</P> <P>&#9;Other income and deductions for North Shore Gas increased $279,000, primarily due to increased interest income as a result of the state income tax refund.</P> <B><U><P>Interest Expense</P></B></U> <P>&#9;For the three- and 12-month periods, interest expense for the Company increased $1.2 million to $11.3 million and $2.1 million to $40.7 million, respectively, due primarily to an increase in interest on commercial paper and an increase in carrying charges on an environmental insurance recovery. This increase was offset, in part, by an increase in the allowance for borrowed funds used during construction and a decrease in interest on long term debt.</P> <P>&#9;For the three- and 12-month periods, interest expense for Peoples Gas increased $175,000 to $8.5 million and $804,000 to $32.4 million, respectively, due mainly to an increase in carrying charges on an environmental insurance recovery. Partially offsetting this effect was an increase in the allowance for borrowed funds used during construction and a decrease in interest on long term debt.</P> <P>&#9;Interest expense for North Shore Gas decreased by $20,000 to $1.3 million, for the three months ended due mainly to a decrease in interest on long term debt, offset in part, by an increase in other interest expense.</P> <P>&#9;Interest expense for the 12 months ended increased $170,000 to $5.3 million for North Shore Gas, due mainly to an increase in other interest expenses, including carrying charges on an environmental insurance recovery, offset in part, by a decrease in interest on long term debt.</P> <B><U><P>Income Taxes</P></B></U> <P>&#9;For the three- and 12-months ended, income taxes for the Company increased $2.9 million to $17.5 million, and $18.2 million to $55.5 million, due mainly to higher pre-tax income. The 12 months ended December 31, 1999 reflects other tax accrual adjustments. Variations between periods for these adjustments are minimal.</P> <P>&#9;For the three- and 12-months ended, income taxes increased for Peoples Gas $2.9 million to $15.1 million, and $15.8 million to $47.0 million, due primarily to higher pre-tax income. The 12 months ended December 31, 1999 reflects other tax accrual adjustments. Variations between periods for these adjustments are minimal.</P> <P>&#9;Income taxes for North Shore Gas increased $365,000 to $2.7 million, and $588,000 to $7.8 million, for the three- and 12-month periods primarily due to higher pre-tax income. The 12 months ended December 31, 1999 reflects other tax accrual adjustments. Variations between periods for these adjustments are minimal.</P> <B><U><P>Fiscal 2000 Outlook</P></B></U> <P>&#9;The Company expects its earnings per share for fiscal 2000 to fall between $2.45 and $2.55, based on the inclusion of actual weather through December 31, 1999 and the assumption of normal weather thereafter. The financial target for the gas distribution segment is to achieve a 12% return on common equity. The financial target for the diversified business segments is to achieve between 12% and 16% of total earnings, based on an estimated EBIT range between $20 and $30 million.</P> <B><U><P>Other Matters</P></B></U> <B><P>Accounting Standards.</B>&nbsp;&nbsp;In June 1998, as amended on May 19, 1999, the Financial Accounting Standards Board issued SFAS No. 133, &quot;Accounting for Derivative Instruments and Hedging Activities.&quot; See Note 2E of the Notes to Consolidated Financial Statements.</P> <P>&#9;In October 1999, the Company adopted the SOP 98-1, &quot;Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.&quot; See Note 2E of the Notes to Consolidated Financial Statements.</P> <P>&nbsp;</P> <P>&nbsp;</P> <B><U><P ALIGN="CENTER">OPERATING STATISTICS</P></U> <P>&#9;</B>The following table represents gross margin components and delivery statistics for the Company:</P> <TABLE BORDER=0 CELLSPACING=1 CELLPADDING=2 WIDTH=655> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="26%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER">Three Months Ended</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="27%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER">12 Months Ended</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="26%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="27%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> </TR> <TR><TD WIDTH="36%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P>Revenues: (thousands)</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gas Distribution Sales</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$243,683</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$189,791</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$738,154</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$669,175</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Non-heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">12,123</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">11,030</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">43,927</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">43,114</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">34,087</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">25,298</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">104,319</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">99,455</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">6,799</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">4,502</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">21,079</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">18,077</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">296,692</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">230,621</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">907,479</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">829,821</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gas Distribution Transportation</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">10,221</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">11,176</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">38,008</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">36,162</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">12,953</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">13,891</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">48,446</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">46,634</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">6,891</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,061</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">26,645</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">26,337</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Contract Pooling</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,414</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,746</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,410</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">9,632</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">31,479</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">35,874</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">120,509</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">118,765</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Other Gas Distribution Revenues</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,020</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,462</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">11,440</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">12,908</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Diversified Segment Revenues</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">81,294</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">40,284</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">257,198</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">97,174</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Total Operating Revenues</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">412,485</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">310,241</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,296,626</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,058,668</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Less - Cost of Energy Sold</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">228,040</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">141,165</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">660,164</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">465,644</FONT></TD> </TR> <TR><TD WIDTH="36%" VALIGN="TOP" COLSPAN=3 HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gross Margin</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$184,445</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 169,076</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 636,462</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 593,024</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="36%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P>Gas Distribution Deliveries (MDth):</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gas Sales</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">36,381</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">32,364</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">118,659</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">107,431</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Non-heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">905</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">866</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,238</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,148</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,324</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">4,649</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">18,085</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">17,707</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,223</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">966</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">4,337</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,727</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">43,833</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">38,845</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">144,319</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">132,013</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Transportation </FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,437</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,587</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">25,840</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">24,285</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">11,494</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">11,666</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">41,549</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">38,823</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">9,500</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">9,822</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">37,625</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">39,289</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">28,431</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">29,075</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">105,014</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">102,397</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Total Gas Distribution Deliveries</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">72,264</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">67,920</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">249,333</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">234,410</FONT></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&nbsp;</P> <P>&#9;The following table represents gross margin components and delivery statistics for Peoples Gas:</P> <TABLE BORDER=0 CELLSPACING=1 CELLPADDING=2 WIDTH=655> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="26%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER">Three Months Ended</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="27%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER">12 Months Ended</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="26%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="27%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> </TR> <TR><TD WIDTH="36%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P>Net Operating Revenues: (thousands)</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gas Sales</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 206,444</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 161,227</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 625,544</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="13%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$569,081</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Non-heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">11,820</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">10,753</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">42,861</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">42,055</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">28,699</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">21,080</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">87,429</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">84,412</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,715</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,554</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">17,526</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">14,639</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">252,678</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">196,614</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">773,360</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">710,187</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Transportation</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">9,842</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">10,807</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">36,653</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">34,845</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">11,354</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">12,349</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">42,914</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">41,285</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,931</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">6,112</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">23,249</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">22,610</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Contract Pooling</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,300</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,582</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">6,896</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">9,216</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">28,427</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">32,850</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">109,712</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">107,956</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Diversified Segments</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">2,100</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">2,073</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,138</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,801</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Other</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,323</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,754</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">12,542</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">13,901</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Total Operating Revenues</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">286,528</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">235,291</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">902,752</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">835,845</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Less - Gas Costs</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">133,136</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">91,316</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">365,019</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">325,675</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gross Margin</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 153,392</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 143,975</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 537,733</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$510,170</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="36%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P>Deliveries (MDth):</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gas Sales</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">30,396</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">27,090</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">98,872</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">89,953</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Non-heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">870</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">829</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,106</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,017</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">4,415</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,809</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">14,889</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">14,856</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,026</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">753</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,581</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">2,989</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">36,707</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">32,481</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">120,448</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">110,815</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Transportation </FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,218</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,377</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">25,086</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">23,584</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">9,824</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">10,130</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">35,967</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">33,611</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,927</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">8,175</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">31,878</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">33,260</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">24,969</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">25,682</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">92,931</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">90,455</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Total Gas Sales and Transportation</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">61,676</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">58,163</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">213,379</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">201,270</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&nbsp;</P> <P>&#9;The following table represents gross margin components for North Shore Gas:</P> <TABLE BORDER=0 CELLSPACING=1 CELLPADDING=2 WIDTH=655> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="26%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER">Three Months Ended</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="27%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER">12 Months Ended</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="26%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="27%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>December 31,</U></FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1999</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="CENTER"><U>1998</U></FONT></TD> </TR> <TR><TD WIDTH="36%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P>Net Operating Revenues: (thousands)</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gas Sales</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 37,239</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 28,564</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 112,610</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$100,092</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Non-heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">303</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">277</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,066</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,059</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,388</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">4,218</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">16,890</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">15,044</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,084</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">948</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,553</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,439</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">44,014</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">34,007</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">134,119</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">119,634</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Transportation</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">379</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">369</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,355</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,317</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,599</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,542</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,531</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,350</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">960</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">949</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,396</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,727</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Contract Pooling</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">114</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">164</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">514</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">416</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,052</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,024</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">10,796</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">10,810</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Other</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">195</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">217</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">819</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">911</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Total Operating Revenues</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">47,261</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">37,248</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">145,734</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">131,355</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Less - Gas Costs</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">26,260</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">17,831</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">72,125</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">62,519</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gross Margin</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 21,001</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 19,417</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 73,609</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">$ 68,836</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="36%" VALIGN="TOP" COLSPAN=3 HEIGHT=17> <FONT SIZE=3><P>Deliveries (MDth):</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Gas Sales</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,985</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,274</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">19,787</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">17,478</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P> Non-heating</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">35</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">37</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">132</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">131</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">909</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">841</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,196</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">2,851</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">197</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">213</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">756</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">738</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">7,126</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">6,365</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">23,871</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">21,198</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Transportation </FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Residential</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">219</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">210</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">754</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">701</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Commercial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,670</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,535</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,582</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,212</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P>Industrial</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,573</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">1,647</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">5,747</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">6,029</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,462</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">3,392</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">12,083</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">11,942</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="31%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17> <FONT SIZE=3><P>Total Gas Sales and Transportation</FONT></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">10,588</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">9,757</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">35,954</FONT></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17> <FONT SIZE=3><P ALIGN="JUSTIFY">33,140</FONT></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> <TR><TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="34%" VALIGN="TOP" COLSPAN=2 HEIGHT=17><P></P></TD> <TD WIDTH="8%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="3%" VALIGN="TOP" HEIGHT=17><P></P></TD> <TD WIDTH="12%" VALIGN="TOP" HEIGHT=17><P></P></TD> </TR> </TABLE> <P>&nbsp;</P> <P>&nbsp;</P> <B><U><P><CENTER>LIQUIDITY AND CAPITAL RESOURCES</CENTER></P></B></U> <B><P>Bonds Issued.&nbsp;&nbsp;</B>On December 18, 1998, the Illinois Development Finance Authority issued $30,035,000 aggregate principal amount of 5.00% Gas Supply Revenue Bonds, Series 1998, which were collateralized by an equal amount of North Shore Gas' 30-year First Mortgage Bonds, Series M. The net proceeds were deposited with a trustee to be used for the redemption of long-term debt, the payment of issuance costs, and for the payment of certain construction expenditures. (See Note 5A of the Notes to Consolidated Financial Statements.)</P> <B><P>Bonds Redeemed.&nbsp;&nbsp;</B>On October 1, 1998, Peoples Gas redeemed, from general corporate funds, $10.4 million aggregate principal amount of the City of Joliet 1984 Series C Bonds, which were secured by Peoples Gas' Adjustable-Rate First and Refunding Mortgage Bonds, Series W. On January 19, 1999, North Shore Gas redeemed, from a portion of the proceeds deposited with the trustee, $24,905,000 aggregate principal amount of the Illinois Development Finance Authority Gas Supply Revenue Bonds, Series 1992, which were secured by North Shore Gas' First Mortgage Bonds, Series K. (See Note 5C of the Notes to Consolidated Financial Statements.)</P> <B><P>Environmental Matters.&nbsp;&nbsp;</B>Peoples Gas and North Shore Gas 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.)</P> <P>&#9;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 in the District Court for the Northern District of Illinois asking the court to declare that North Shore Gas is not liable for response costs relating to the site. The defendant filed a counterclaim for costs incurred by the defendant with respect to the site. In 1997, the District Court granted North Shore Gas' motion for summary judgment, declaring that North Shore Gas is not liable for any response costs in connection with the Denver site. On August 5, 1998, the U.S. Court of Appeals, Seventh Circuit, reversed the District Court's decision and remanded the case for determination of what liability, if any, the former entity has and therefore North Shore Gas has for activities at the site. (See Note 4B of the Notes to Consolidated Financial Statements.)</P> <B><P>Credit Lines.&nbsp;&nbsp;</B>The Company has lines of credit totaling $220.0 million. Peoples Gas and North Shore Gas have lines of credit totaling $119.0 million of which North Shore Gas may borrow up to $30.0 million.</P> <B><P>Interest Coverage.&nbsp;&nbsp;</B>The fixed charges coverage ratios for Peoples Gas for the 12 months ended December 31, 1999, and for fiscal 1999 and 1998 were 4.84, 4.59 and 4.15, respectively. The corresponding coverage ratios for North Shore Gas for the same periods were 4.95, 4.77, and 5.07, respectively.</P> <B><P>Dividends.&nbsp;&nbsp;</B>On February 2, 2000, the Directors of the Company voted to increase the regular quarterly dividend on the Company's common stock to 50 cents per share from the 49 cents per share previously in effect. The annualized dividend rate now amounts to $2.00 per share.</P> <B><P>Guaranty Agreement.&nbsp;&nbsp;</B>On December 31, 1999, Manhattan Power, LLC, a subsidiary of the Company, entered into an Acquisition Agreement with Westdeutsche Landesbank Girozentrale (WestLB), which provides the company an option to purchase a gas-powered electric generating turbine. In conjunction with this agreement, the Company entered into a Guaranty Agreement with WestLB, whereby the Company guarantees all obligations resulting from the Acquisition Agreement. The maximum dollar amount of t <B><P>Year 2000 Readiness.&nbsp;&nbsp;</B>The Company, Peoples Gas and North Shore Gas began their efforts to assess the Year 2000 readiness of their mainframe computer systems in March 1996. The Company and North Shore Gas obtain their information technology services from Peoples Gas. The following discussion applies to the Company, Peoples Gas and North Shore Gas.</P> <P>&#9;The Company developed a comprehensive Year 2000 readiness plan that incorporates all of its information technology systems, including computer hardware and software, and its embedded systems equipment, including telecommunications equipment. The plan also includes a review by the Company of the Year 2000 compliance efforts of its key suppliers and customers and Year 2000 contingency planning. The Company-wide Year 2000 effort includes the Company's wholly owned subsidiaries, as well as various joint ventures, and utilizes a combination of consultants and employees of the Company's subsidiaries.</P> <P>&#9;The Company has contacted key suppliers to determine their Year 2000 compliance efforts. The Company has also contacted certain of its major customers to determine their Year 2000 readiness.</P> <P>&#9;Essential elements of the Company's business are dependent on certain key third parties (for example, interstate pipeline companies, natural gas suppliers, banks, electric utilities and telecommunication companies). A material failure by any such key third party could significantly disrupt the Company's business. With respect to operations over which it has direct control, management perceives that the most significant potential risks in the event that a Year 2000 problem causes one or more systems not to function (which is not expected to occur) to be an adverse effect on the abililty of the utility subsidiaries to use information systems and electronic devices to respond appropriately to customers' requests for information and assistance. The Company's contingency plan addresses these potential disruptions and risks.</P> <P>&#9;At the date of this filing, the Company has experienced no material Year 2000 failures and to the Company's knowledge, neither have any of its key vendors, suppliers or customers.</P> <P>&#9;The Company currently estimates that it will incur expenses of approximately $325,000 through March 31, 2000 to complete its Year 2000 compliance efforts, in addition to the $9.2 million already incurred through December 31, 1999. Management does not expect the cost of the Company's Year 2000 compliance efforts to have a material adverse impact on the financial position or results of operations of the Company.</P> <P>&nbsp;</P> <B><U><P>Market Risk Management</P></U> <P>Commodity Price Risk.&nbsp;&nbsp;</B>The Company uses market risk sensitive financial instruments, including futures, forward contracts, and derivatives such as swaps and options, to manage its exposure to certain commodity price risks in its subsidiaries' operations. These risks occur because of the changing prices of natural gas, power, crude oil, ethane, and propane. The Company's policy for risk management activities stipulates that such financial instruments are only to be used for hedging purpose o Consolidated Financial Statements.) The Company monitors and controls derivative and related physical positions using a mark-to-market analysis. This analysis provides information on credit exposure as well as the current value of the portfolio.</P> <P>&#9;Peoples Gas and North Shore Gas are not currently exposed to market risk caused by changes in commodity prices. This is due to current Illinois rate regulation, which allows for all reasonably incurred costs of natural gas to be recovered from the utilities' customers through the operation of the utilities' Gas Charges.</P> <P>&#9;Investments by the Company's diversified business segments are subject to a thorough analysis of related market risk and an acceptable plan for each investment is formulated to manage this risk. After a risk management program for the investment is approved, both the operating unit's and the Company's senior management are kept apprised of any remaining market risk through daily mark-to-market reports.</P> <P>&#9;The Company has working interests in natural gas and crude oil producing properties. Using swaps, approximately 87% of the production for calendar year 2000 is hedged, thereby removing market risk on that portion of the output. Price movements in natural gas and crude oil swaps and futures are highly correlated to any price changes in the underlying physical commodities. Therefore, a loss in the market value of the hedged commodity would be substantially offset by an equal gain in value resulting from the financial transaction. As of December 31, 1999 and 1998, the exposure from non-hedged production was immaterial to the consolidated financial statements. A sensitivity analysis has been prepared to estimate the Company's price exposure to the market risk of its physical natural gas and oil reserves and related financial instruments used to mitigate the price exposure. As of December 31, 1999, an instantaneous 10% adverse movement in the Nymex forward curve for natural gas and oil would have reduced future earnings before income taxes by approximately $5.5 million.</P> <P>&#9;The Company sells fixed price and variable priced products as part of its retail energy services. These contracts call for physical delivery and can not be settled financially. Risk is reduced through the use of fixed price supplier contracts and storage assets. As of December 31, 1999 and 1998, exposure from these activities was not material.</P> <P>&#9;The Elwood facility is a gas-fired electric generating peaking facility. Elwood has agreed to sell all of the facility's generation capacity and energy produced at fixed demand and commodity charges under multi-year contracts. Therefore, Elwood has no price risk on its power sales. However, it does bear fuel price risk when natural gas prices exceed its targeted weighted average cost of gas (WACOG). The partnership has implemented a comprehensive risk management program that is intended to reduce price risk, stabilize cash flow and extract maximum value from its investment. The program includes the purchase of gas supply at or near targeted WACOG prices, limits to minimize the threat of loss through market movements, daily review of price exposure and frequent senior management review. As of December 31, 1999 and 1998, Elwood had no open financial positions related to its risk management strategy.</P> <P>&#9;The Company is also exposed to credit risk when a hedging transaction counterparty or supplier defaults on a contract to pay for or deliver product at agreed-upon terms and conditions. To mitigate this risk, the Company has established procedures to determine and monitor the creditworthiness of counterparties. Transactions are executed only with counterparties having strong credit ratings. Controls are also in place to limit dollar exposure and transaction term based upon creditworthiness. The Company does not expect any of the counterparties to fail to meet their contractual obligations with these controls in place.</P> <B><P>Interest Rate Risk.&nbsp;&nbsp;</B>Interest rate risk generally is related to the Company's and its gas distribution subsidiaries' outstanding debt. A sensitivity analysis methodology is being utilized to determine potential loss of future earnings, fair values, or cash flows from market risk sensitive instruments over a selected time period due to hypothetical changes in interest rates.</P> <P>&#9;The Company, Peoples Gas and North Shore Gas manage their interest rate risk exposure by maintaining a mix of fixed and variable rate debt. Based on the current mix of $27.0 million in long-term variable rate debt and $252.5 million in short-term borrowings, assuming interest rates are 10% higher than the rates reported at the end of December 31, 1999, the Company's annualized interest expense would increase by approximately $1.3 million before considering the effect of income taxes.</P> <P>&#9;Peoples Gas manages its interest rate risk exposure by maintaining a mix of fixed and variable rate debt. Based on the current mix of $27.0 million in long-term variable rate debt and $91.1 million in short-term borrowings, assuming interest rates are 10% higher than the rates reported at the end of December 31, 1999, Peoples Gas' annualized interest expense would increase by approximately $551,000 before considering the effect of income taxes.</P> <B><U><P>FORWARD LOOKING INFORMATION</P></U></B> <P>&#9;The MD&amp;A contains statements that may be considered forward-looking, such as management's expectations, earnings forecasts for fiscal 2000, the statements of the Company's business and financial goals regarding its business segments, the effect of weather on net income, cash position, source of funds, coverage ratios, credit lines and financing activities, market risk, the insignificant effect on income arising from changes in revenue from customers' gas purchases from entities other than the gas distribution utility subsidiaries, environmental matters, and the discussion concerning Year 2000 compliant systems. These statements speak of the Company's plans, goals, beliefs, or expectations, refer to estimates or use similar terms. Actual results could differ materially, because the realization of those results is subject to many uncertainties including:</P> <UL> <LI>The future health of the U.S. and Illinois economies;</LI></UL> <UL> <LI>The effects of weather and other natural phenomena;</LI></UL> <UL> <LI>The timing and extent of changes in energy commodity prices and interest rates;</LI></UL> <UL> <LI>Litigation concerning North Shore Gas' liability for CERCLA response costs relating to a former mineral processing site in Denver, Colorado;</LI></UL> <UL> <LI>Regulatory developments and changes in government policies in the U.S., or in Illinois and other states where the Company does business; including income taxes, environmental compliance and utility rate regulations;</LI></UL> <UL> <LI>Changes in the nature of the Company's competition resulting from industry consolidation, legislative change, regulatory change and other factors, as well as action taken by particular competitors;</LI></UL> <UL> <LI>The uncertainty of oil and gas reserve estimates;</LI></UL> <UL> <LI>The Company's success in identifying diversified business segment projects on financially acceptable terms and generating earnings from projects in a reasonable time; and </LI></UL> <UL> <LI>The ability of various vendors and others with whom the Company interacts to complete Year 2000 systems modification efforts in a timely manner that allows them to continue normal business transactions with the Company without disruption.</LI></UL> <P>&#9;Some of these uncertainties that may affect future results are discussed in more detail under the captions &quot;Competition and Deregulation,&quot; &quot;Sales and Rates,&quot; &quot;State Legislation and Regulation,&quot; &quot;Federal Legislation and Regulation,&quot; &quot;Environmental Matters,&quot; and &quot;Current Gas Supply&quot; in &quot;Item 1 - Business&quot; of the Annual Report on Form 10-K. All forward-looking statements included in this MD&amp;A are based upon information presently available, and the Company assumes no obligation to update any forward-looking statements.</P> <P>&nbsp;</P> <B><P>ITEM 3.&nbsp;&nbsp;<U>Quantitative and Qualitative Disclosures about Market Risk</P></B></U> <P>&#9;Quantitative and Qualitative Disclosures About Market risk are reported under &quot;Management's Discussion and Analysis of Results of Operations and Financial Condition - Market Risk Management,&quot; and Note 2F of the Notes to Consolidated Financial Statements.</P> <P>&nbsp;</P> <P>&nbsp;</P> <B><U><P><CENTER>PART II.&nbsp;&nbsp;OTHER INFORMATION</CENTER></P></B></U> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=600> <TR><TD VALIGN="TOP" COLSPAN=6>&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=6> <B><FONT SIZE=3><P>Item 1. <U>Legal Proceedings</B></U></FONT></TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=6> <FONT SIZE=3><P>&#9;See Note 4 of the Notes to Consolidated Financial Statements for a discussion pertaining to environmental matters.</FONT></TD> </TR> </TABLE> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=600> <TR><TD VALIGN="TOP" COLSPAN=6>&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=6> <B><FONT SIZE=3><P>Item 5. <U>Other Information</U></B></FONT></TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=6> <P>&#9;Effective October 1, 1999, Peoples Gas and North Shore Gas entered into a series of agreements (the &quot;ENA Agreements") with Enron North America Corp. ("ENA") and its parent company, Enron Corp., with a term expiring October 31, 2004 (the "Contract Period"), which provide for ENA to secure and sell to Peoples Gas and North Shore Gas a firm supply of gas sufficient to meet a substantial portion of Peoples Gas' and North Shore Gas' requirements for its customers, and to act as Peoples Gas' and North Shore Gas' agent (to the extent permitted under federal law) in connection with nominations, scheduling and capacity releases under certain of Peoples Gas' and North Shore Gas' gas supply and transportation contracts.</TD> </TR> <TR><TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="13%" VALIGN="TOP">&nbsp;</TD> </TR> </TABLE> <TABLE BORDER=0 CELLSPACING=1 WIDTH=619> <TR><TD VALIGN="TOP" COLSPAN=7> <B><FONT SIZE=3><P>Item 6. <U>Exhibits and Reports on Form 8-K</B></U></FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="94%" VALIGN="TOP" COLSPAN=6> <B><U><FONT SIZE=3><P>Peoples Energy Corporation</B></U>:</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="87%" VALIGN="TOP" COLSPAN=4> <FONT SIZE=3><P>a. Exhibits</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>Exhibit</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P><U>Number</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>Description of Document</U></FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(a)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Long-Term Incentive Compensation Plan, dated December 1, 1999</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(b)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Gas Purchase and Agency Agreement By and Between The Peoples Gas Light and Coke Company and Enron North America Corp, dated September 16, 1999. Portions of this contract have been omitted pursuant to a request for confidential treatment. </FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(c)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Transportation Rate Schedule FTS Agreement between Natural Gas Pipeline Company of America and Peoples Gas Amendment No. 2 dated September 9, 1999.</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(d)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Gas Purchase and Agency Agreement By and Between North Shore Gas Company and Enron North America Corp, dated September 16, 1999. Portions of this contract have been omitted pursuant to a request for confidential treatment.</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(e)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Transportation Rate Schedule FTS Agreement between Natural Gas Pipeline Company of America and North Shore Gas Amendment No. 2 dated September 9, 1999.</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">27</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Financial Data Schedule</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> </TABLE> <P>&nbsp;</P> <TABLE BORDER=0 CELLSPACING=1 WIDTH=619> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="88%" VALIGN="TOP" COLSPAN=4> <FONT SIZE=3><P>b. Reports on Form 8-K filed during the quarter ended December 31, 1999</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>Date of Report - November 4, 1999</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;Item 5 - Other Event</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;Forward Looking Financial Information</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="94%" VALIGN="TOP" COLSPAN=5> <B><U><FONT SIZE=3><P>The Peoples Gas Light and Coke Company</B></U>:</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="88%" VALIGN="TOP" COLSPAN=4> <FONT SIZE=3><P>a. Exhibits</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>Exhibit</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P><U>Number</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>Description of Document</U></FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(b)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Gas Purchase and Agency Agreement By and Between The Peoples Gas Light and Coke Company and Enron North America Corp, dated September 16, 1999. Portions of this contract have been omitted pursuant to a request for confidential treatment. </FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(c)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Transportation Rate Schedule FTS Agreement between Natural Gas Pipeline Company of America and Peoples Gas Amendment No. 2 dated September 9, 1999.</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">27</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Financial Data Schedule</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="88%" VALIGN="TOP" COLSPAN=4> <FONT SIZE=3><P>b. Reports on Form 8-K filed during the quarter ended December 31, 1999</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>Date of Report - November 4, 1999</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;Item 5 - Other Event</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;Forward Looking Financial Information</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="94%" VALIGN="TOP" COLSPAN=5> <B><U><FONT SIZE=3><P>North Shore Gas Company</B></U>:</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="88%" VALIGN="TOP" COLSPAN=4> <FONT SIZE=3><P>a. Exhibits</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P>Exhibit</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P><U>Number</U></FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>Description of Document</U></FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(d)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Gas Purchase and Agency Agreement By and Between North Shore Gas Company and Enron North America Corp, dated September 16, 1999. Portions of this contract have been omitted pursuant to a request for confidential treatment.</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">10(e)</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Transportation Rate Schedule FTS Agreement between Natural Gas Pipeline Company of America and North Shore Gas Amendment No. 2 dated September 9, 1999.</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">27</FONT></TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP"> <FONT SIZE=3><P>Financial Data Schedule</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="88%" VALIGN="TOP" COLSPAN=4> <FONT SIZE=3><P>b. Reports on Form 8-K filed during the quarter ended December 31, 1999</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="9%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="3%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="70%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>Date of Report - November 4, 1999</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;Item 5 - Other Event</FONT></TD> </TR> <TR><TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="6%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="81%" VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;Forward Looking Financial Information</FONT></TD> </TR> </TABLE> <FONT SIZE=3><P>&nbsp;</P> <P>&nbsp;</P></FONT> <P ALIGN="CENTER"><CENTER><TABLE BORDER=0 CELLSPACING=1 CELLPADDING=7 WIDTH=638> <TR><TD VALIGN="TOP" COLSPAN=3> <B><U><P ALIGN="CENTER">SIGNATURE</B></U></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;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.</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>Peoples Energy Corporation</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">(Registrant)</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>February 10, 2000</U></FONT></TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">By: <U>/s/ J. M. LUEBBERS</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">(Date)</FONT></TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">J. M. Luebbers</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Chief Financial Officer and Controller</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>(Same as above)</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Principal Accounting Officer</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;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.</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>The Peoples Gas Light and Coke Company</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">(Registrant)</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>February 10, 2000</U></FONT></TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">By: <U>/s/ J. M. LUEBBERS</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">(Date)</FONT></TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">J. M. Luebbers</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Chief Financial Officer and Controller</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>(Same as above)</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Principal Accounting Officer</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD VALIGN="TOP" COLSPAN=3> <FONT SIZE=3><P>&#9;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.</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>North Shore Gas Company</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">(Registrant)</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>February 10, 2000</U></FONT></TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">By: <U>/s/ J. M. LUEBBERS</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">(Date)</FONT></TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">J. M. Luebbers</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Chief Financial Officer and Controller</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"><U>(Same as above)</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Principal Accounting Officer</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="15%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="52%" VALIGN="TOP">&nbsp;</TD> </TR> </TABLE> </CENTER></P> </BODY> </HTML>

2000

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https://www.sec.gov/Archives/edgar/data/76334/0000950152-00-000590.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, MDUtz1TR8/9xoVfeZOVje5OVQLy5uKSWmBLTp7uArE9yxs965YiIMHlboPPjHg9T hpTuCtuNoplGGsVaz5cG8Q== <SEC-DOCUMENT>0000950152-00-000590.txt : 20000207 <SEC-HEADER>0000950152-00-000590.hdr.sgml : 20000207 ACCESSION NUMBER: 0000950152-00-000590 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000204 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: SEC FILE NUMBER: 001-04982 FILM NUMBER: 524437 BUSINESS ADDRESS: STREET 1: 6035 PARKLAND BOULEVARD CITY: CLEVELAND STATE: OH ZIP: 44124-4141 BUSINESS PHONE: 2168963000 MAIL ADDRESS: STREET 1: 6035 PARKLAND BOULEVARD CITY: CLEVELAND STATE: OH ZIP: 44124-4141 FORMER COMPANY: FORMER CONFORMED NAME: PARKER APPLIANCE CO DATE OF NAME CHANGE: 19670907 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>PARKER-HANNIFIN CORPORATION 10-Q <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, 1999 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) 6035 Parkland Blvd., Cleveland, Ohio 44124-4141 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 896-3000 ------------- 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, 1999 112,086,749 <PAGE> 2 PART I - FINANCIAL INFORMATION PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, --------------------------- ----------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales $ 1,239,207 $ 1,199,021 $ 2,481,500 $ 2,417,745 Cost of sales 971,298 943,167 1,947,919 1,890,474 ----------- ----------- ----------- ----------- Gross profit 267,909 255,854 533,581 527,271 Selling, general and administrative expenses 140,157 141,370 278,305 275,528 Interest expense 14,028 17,341 28,571 33,416 Interest and other (income) expense, net (724) 333 (100) 406 ----------- ----------- ----------- ----------- Income before income taxes 114,448 96,810 226,805 217,921 Income taxes 39,485 33,278 78,248 76,272 ----------- ----------- ----------- ----------- Net income $ 74,963 $ 63,532 $ 148,557 $ 141,649 =========== =========== =========== =========== Earnings per share - Basic $ .69 $ .59 $ 1.36 $ 1.30 Earnings per share - Diluted $ .68 $ .58 $ 1.35 $ 1.29 Cash dividends per common share $ .17 $ .15 $ .34 $ .30 </TABLE> -2- See accompanying notes to consolidated financial statements. <PAGE> 3 PARKER-HANNIFIN CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> December 31, June 30, ASSETS 1999 1999 - ------------------ ----------- ----------- <S> <C> <C> Current assets: Cash and cash equivalents $ 74,353 $ 33,277 Accounts receivable, net 692,357 738,773 Inventories: Finished products 488,875 442,361 Work in process 302,534 347,376 Raw materials 123,628 125,393 ----------- ----------- 915,037 915,130 Prepaid expenses 19,021 22,928 Deferred income taxes 66,722 64,576 ----------- ----------- Total current assets 1,767,490 1,774,684 Plant and equipment 2,572,878 2,506,812 Less accumulated depreciation 1,358,676 1,305,943 ----------- ----------- 1,214,202 1,200,869 Other assets 740,719 730,335 ----------- ----------- Total assets $ 3,722,411 $ 3,705,888 =========== =========== LIABILITIES - --------------------- Current liabilities: Notes payable $ 61,123 $ 60,609 Accounts payable, trade 253,798 313,173 Accrued liabilities 299,742 328,147 Accrued domestic and foreign taxes 39,130 52,584 ----------- ----------- Total current liabilities 653,793 754,513 Long-term debt 713,592 724,757 Pensions and other postretirement benefits 279,760 276,637 Deferred income taxes 31,247 30,800 Other liabilities 75,075 65,319 ----------- ----------- Total liabilities 1,753,467 1,852,026 SHAREHOLDERS' EQUITY - ---------------------------- Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued -- -- Common stock, $.50 par value; authorized 600,000,000 shares; issued 112,130,445 shares at December 31 and 111,945,179 shares at June 30 56,065 55,973 Additional capital 134,536 132,227 Retained earnings 1,983,832 1,872,356 Unearned compensation related to guarantee of ESOP debt (105,035) (112,000) Deferred compensation related to stock options 1,304 Accumulated other comprehensive income (99,865) (92,858) ----------- ----------- 1,970,837 1,855,698 Common stock in treasury at cost; 43,696 shares at December 31 and 43,836 shares at June 30 (1,893) (1,836) ----------- ----------- Total shareholders' equity 1,968,944 1,853,862 ----------- ----------- Total liabilities and shareholders' equity $ 3,722,411 $ 3,705,888 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. -3- <PAGE> 4 PARKER-HANNIFIN CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended December 31, ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 - ------------------------------------ --------- --------- <S> <C> <C> Net income $ 148,557 $ 141,649 Adjustments to reconcile net income to net cash provided by operations: Depreciation 88,019 85,636 Amortization 18,943 19,146 Deferred income taxes (3,019) (4,454) Foreign currency transaction loss (gain) 3,443 (3,752) (Gain) loss on sale of plant and equipment (6,955) 794 Changes in assets and liabilities: Accounts receivable, net 44,321 68,054 Inventories 657 (39,916) Prepaid expenses 3,904 5,430 Other assets 2,541 (15,381) Accounts payable, trade (59,077) (69,408) Accrued payrolls and other compensation (34,371) (58,234) Accrued domestic and foreign taxes (12,640) (5,990) Other accrued liabilities 4,978 (15,494) Pensions and other postretirement benefits 4,245 10,116 Other liabilities 9,706 4,649 --------- --------- Net cash provided by operating activities 213,252 122,845 CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------- Acquisitions (less cash acquired of $2,609 in 1998) (5,711) (89,865) Capital expenditures (114,114) (114,650) Proceeds from sale of plant and equipment 20,203 2,364 Other (30,100) 1,045 --------- --------- Net cash used in investing activities (129,722) (201,106) CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------ Net proceeds from (payments for) common share activity 3,649 (47,863) (Payments for) proceeds from notes payable, net (523) 75,569 Proceeds from long-term borrowings 3,692 206,621 Payments of long-term borrowings (8,867) (115,895) Dividends (37,081) (32,700) --------- --------- Net cash (used in) provided by financing activities (39,130) 85,732 Effect of exchange rate changes on cash (3,324) 1,981 --------- --------- Net increase in cash and cash equivalents 41,076 9,452 Cash and cash equivalents at beginning of year 33,277 30,488 --------- --------- Cash and cash equivalents at end of period $ 74,353 $ 39,940 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. -4- <PAGE> 5 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 a significant portion of 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, agricultural and military machinery and equipment. Sales are made directly 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: <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, -------------------------- -------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales Industrial: North America $ 658,542 $ 603,874 $1,326,211 $1,225,469 International 303,918 316,902 602,381 632,132 Aerospace 276,747 278,245 552,908 560,144 ---------- ---------- ---------- ---------- Total $1,239,207 $1,199,021 $2,481,500 $2,417,745 ========== ========== ========== ========== Segment operating income Industrial: North America $ 87,200 $ 67,170 $ 180,883 $ 149,325 International 21,787 21,315 32,999 48,137 Aerospace 36,939 41,937 71,987 85,776 ---------- ---------- ---------- ---------- Total segment operating income 145,926 130,422 285,869 283,238 Corporate general and administrative expenses 14,087 15,337 28,200 27,632 ---------- ---------- ---------- ---------- Income before interest expense and other 131,839 115,085 257,669 255,606 Interest expense 14,028 17,341 28,571 33,416 Other 3,363 934 2,293 4,269 ---------- ---------- ---------- ---------- Income before income taxes $ 114,448 $ 96,810 $ 226,805 $ 217,921 ========== ========== ========== ========== </TABLE> -5- <PAGE> 6 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 except as discussed in Note 2) necessary to present fairly the financial position as of December 31, 1999, the results of operations for the three and six months ended December 31, 1999 and 1998 and cash flows for the six months then ended. 2. Charges related to business realignment During the first quarter of fiscal 2000 the Company recorded a $8,555 charge ($5,560 after-tax or $.05 per share) related to the costs of appropriately structuring its businesses to operate in their current economic environment. The charge primarily relates to severance costs attributable to approximately 260 employees principally associated with the Industrial International operations. As of December 31, 1999, the Company had made severance payments of $2,035 to approximately 130 employees. The remaining severance payments are expected to be made by the end of fiscal 2000. A change in the future utilization of long-lived assets at certain locations triggered an impairment review of these long-lived assets during the first quarter of fiscal 2000. The Company evaluated the recoverability of the long-lived assets and determined that the estimated future undiscounted cash flows were below the carrying value of these assets. Accordingly, the Company recorded a non-cash impairment loss of $4,875 ($3,169 after-tax or $.03 per share). Of the pre-tax amount, $3,499 relates to the Aerospace segment and $1,376 relates to the Industrial segment. The severance costs and impairment loss are presented in the Income statement for the six months ended December 31, 1999 in the following captions: $2,552 in Cost of sales; $2,476 in Selling, general and administrative expenses; and $8,402 in Interest and other (income) expense, net. Also recorded in the first quarter of fiscal 2000, was a gain of $6,423 ($4,175 after-tax or $.04 per share) realized primarily on the sale of real property. The gain is reflected in the Income statement for the six months ended December 31, 1999 in the Interest and other (income) expense, net caption. -6- <PAGE> 7 3. Earnings per share The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and six months ended December 31, 1999 and 1998. <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, ------------------------------ ------------------------------ NUMERATOR: 1999 1998 1999 1998. ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net income applicable to common shares $ 74,963 $ 63,532 $ 148,557 $ 141,649 DENOMINATOR: Basic - weighted average common shares 109,188,711 108,541,603 109,129,000 108,953,828 Increase in weighted average from dilutive effect of exercise of stock options 1,017,243 880,609 1,021,338 821,286 ------------------------------------------------------------------ Diluted - weighted average common shares, assuming exercise of stock options 110,205,954 109,422,212 110,150,338 109,775,114 ================================================================== Basic earnings per share $ .69 $ .59 $ 1.36 $ 1.30 Diluted earnings per share $ .68 $ .58 $ 1.35 $ 1.29 </TABLE> 4. Stock repurchase program The Board of Directors has approved a program to repurchase the Company's common stock on the open market, at prevailing prices. The repurchase is primarily funded from operating cash flows and the shares are initially held as treasury stock. The Company did not purchase any shares of its common stock during the three-month and six-month periods ended December 31, 1999. 5. Comprehensive income The Company's only item of other comprehensive income is foreign currency translation adjustments recorded in shareholders' equity. Comprehensive income for the three and six months ended December 31, 1999 and 1998 is as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, -------------------------- -------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net income $ 74,963 $ 63,532 $ 148,557 $ 141,649 Foreign currency translation adjustments (20,753) (508) (7,007) 24,691 --------------------------------------------------------- Comprehensive income $ 54,210 $ 63,024 $ 141,550 $ 166,340 ========================================================== </TABLE> -7- <PAGE> 8 6. Subsequent events On January 17, 2000, the Company and Commercial Intertech Corp. announced that their Boards of Directors had unanimously approved a definitive agreement pursuant to which Commercial Intertech will merge into the Company, with the Company as the surviving corporation, in a cash and stock transaction with an equity value of approximately $366 million. In addition, the Company will assume approximately $107 million of Commercial Intertech debt. Under the terms of the merger agreement, the Company will acquire all outstanding common stock of Commercial Intertech for $20.00 per share in exchange for Company common stock, subject to a collar. Commercial Intertech shareholders will receive the Company's common stock based on an exchange ratio that will be determined based on the average closing price of Company common stock for the 20 trading-day period ending five trading days immediately preceding the closing date of the merger. Commercial Intertech shareholders may elect to receive $20.00 per share in cash, subject to the limitation that no more than 49 percent of the total merger consideration is paid in cash. The merger is anticipated to close during the Company's quarter ending June 30, 2000. The Company plans to account for the transaction using the purchase method of accounting. On February 3, 2000, the Company announced their agreement to acquire the assets of Dana Corporation's Gresen Hydraulic business for approximately $112 million cash. Gresen manufactures a wide range of hydraulic pumps, motors, cylinders, control valves, filters and electronic controls for on- and off-highway vehicles and had prior-year annual sales of approximately $128 million. - 8 - <PAGE> 9 PARKER-HANNIFIN CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND COMPARABLE PERIODS ENDED DECEMBER 31, 1998 CONSOLIDATED STATEMENT OF INCOME Net sales increased 3.4 percent for the second quarter of fiscal 2000 and 2.6 percent for the six-month period ended December 31, 1999. Without acquisitions, the increases would have been 3.2 percent and 2.0 percent, respectively. Excluding acquisitions, these increases primarily result from higher volume in the North American Industrial operations. Income from operations was $127.8 million for the current second quarter and $255.3 million for the current six months, an increase of 11.6 percent and 1.4 percent, respectively. As a percent of sales, Income from operations increased to 10.3 percent from 9.5 percent for the quarter and declined to 10.3 percent from 10.4 percent for the six months. Cost of sales as a percent of sales declined to 78.4 percent from 78.7 percent for the quarter and increased to 78.5 percent from 78.2 percent for the six months. The increased margins in the second quarter are primarily the result of higher volume experienced in the North American Industrial operations, partially offset by lower volume and mix of original-equipment programs in the Aerospace operations. The declining margins for the six months reflect the weakness experienced in the International Industrial and Aerospace operations as well as the effect of business realignment charges recorded in fiscal 2000 (as discussed in more detail below). Selling, general and administrative expenses, as a percent of sales, decreased to 11.3 percent of sales from 11.8 percent for the quarter and to 11.2 percent from 11.4 percent for the six months. Interest expense decreased $3.3 million for the quarter ended December 31, 1999 and $4.8 million for the six-month period ended December 31, 1999 due to lower average debt outstanding in both the current year quarter and six months. Interest and other (income) expense, net for six months includes $6.4 million in gains primarily from the sale of real property and $8.4 million of asset impairment losses and other plant closure costs. Net income increased 18.0 percent for the quarter, and 4.9 percent for the six months, as compared to the prior year. As a percent of sales, Net income increased to 6.0 percent from 5.3 percent for the quarter and to 6.0 percent from 5.9 percent for the six months. Backlog was $1.65 billion at December 31, 1999 compared to $1.61 billion in the prior year and $1.63 billion at June 30, 1999. The increase in the level of backlog reflects an improvement in orders in the North American Industrial operations. -9- <PAGE> 10 RESULTS BY BUSINESS SEGMENT INDUSTRIAL - The Industrial Segment operations had the following changes in Net sales in the current year when compared to the equivalent prior-year period: <TABLE> <CAPTION> Period ending December 31, -------------------------- Three Months Six Months ------------ ---------- <S> <C> <C> Industrial North America 9.1 % 8.2 % Industrial International (4.1) % (4.7) % Total Industrial 4.5 % 3.8 % </TABLE> Without the effect of currency-rate changes, International sales would have increased 6.2 percent for the quarter and 3.3 percent for the six months. Without the effect of acquisitions completed within the past 12 months, the changes in Net sales would have been: <TABLE> <CAPTION> Period ending December 31, -------------------------- Three Months Six Months ------------ ---------- <S> <C> <C> Industrial North America 9.1 % 7.3 % Industrial International (4.7) % (5.5) % Total Industrial 4.3 % 2.9 % </TABLE> The increase in Industrial North American sales is attributed to higher volume, particularly in the semiconductor manufacturing and telecommunications markets. International Industrial sales were affected by the struggling industrial economy in Europe and Latin America while Asia Pacific sales were higher. Operating income for the Industrial segment increased 23.2 percent for the quarter and 8.3 percent for the six months. Industrial North American operating income increased 29.8 percent for the quarter and 21.1 percent for the six months. Industrial North American operating income, as a percent of sales, increased to 13.2 percent from 11.1 percent for the quarter and to 13.6 percent from 12.2 percent for the six months as margins benefited from the higher sales volume. Industrial International operating income increased 2.2 percent for the quarter and decreased 31.4 percent for the six months. Included in the International Industrial operating income for the current year six-month period was $9.0 million in business realignment charges. These charges were made as a result of actions the Company took to appropriately structure the European operations to operate in their current environment. Without the business realignment charges, International Industrial operating income decreased 12.8 percent for the current year first six months compared to the prior year six months. Excluding the business realignment charges, Industrial International operating income, as a percent of sales, increased to 7.2 percent from 6.7 percent for the quarter and decreased to 7.0 percent from 7.6 percent for the six months. The increase in margins for the current quarter is a result of the higher sales volume (excluding currency) while the six month margins reflect the weakness in the European operations. Total Industrial Segment backlog increased 4.4 percent compared to December 31, 1998 and 11.0 percent since June 30, 1999 driven primarily from an increase in order rates in the North American Industrial operations. Order demand for much of fiscal 2000 has been improving across virtually all of the Industrial operations. While this upward trend is expected to continue generally, a slight downward trend in order rates in the heavy-duty truck market is expected for the balance of fiscal 2000. The weakness in the European operations experienced in the first half of fiscal 2000 has moderated and are expected to continue to improve over the balance of fiscal 2000. -10- <PAGE> 11 AEROSPACE - Aerospace Net sales declined slightly for the quarter and 1.3 percent for the six months due to lower volume in the large aircraft business. Operating income for the Aerospace Segment declined 11.9 percent for the quarter and 16.1 percent for the six-month period. Included in the Aerospace operating income for current year six-month period was $4.4 million in business realignment charges. These charges were a result of the actions the Company took to resize the business in response to a decline in OEM orders. Excluding the business realignment charges, operating income, as a percent of sales, decreased to 13.3 percent from 15.1 percent for the quarter and to 13.8 percent from 15.3 percent for the six-month period reflecting the lower volume, a mix of original-equipment programs, as well as lower capacity utilization. Backlog for the Aerospace Segment remained essentially the same from December 31, 1998 and decreased 3.6 percent since June 30, 1999. The decline in backlog compared to June 30, 1999 reflects the expected slowdown in OEM order rates. The Company anticipates further inventory reductions for the balance of the fiscal year in anticipation of softer commercial aviation sales. Corporate general and administrative expenses decreased to $14.1 million from $15.3 million for the quarter and increased to $28.2 million from $27.6 million for the six months. The lower expense in the quarter is a result of reduced expenses associated with non-qualified benefit plans. Other (in the Results by Business Segment) increased $2.4 million for the quarter as a result of currency transaction losses and decreased $2.0 million for the six months primarily as a result of gains from the sale of real property as discussed in the Consolidated Statement of Income section, partially offset by currency transaction losses. BALANCE SHEET Working capital increased to $1,113.7 million at December 31, 1999 from $1,020.2 million at June 30, 1999 with the ratio of current assets to current liabilities increasing to 2.7 to 1. The increase was primarily due to an increase in Cash and decreases in Accounts payable and Accrued liabilities, partially offset by a decrease in Accounts receivable. Accounts receivable were lower by $46.4 million on December 31, 1999 compared to June 30, 1999 primarily due to the holiday induced lower level of sales in December. Days sales outstanding have increased to 49 days at December 31, 1999 from 47 days at June 30, 1999. Inventories remained flat since June 30, 1999 while months supply declined slightly. Accounts payable, trade decreased $59.4 million since June 30, 1999 with the reduction occurring consistently throughout the operations. A portion of the decrease was the result of lower production during the holidays. Accrued liabilities decreased $28.4 million since June 30, 1999 primarily as a result of lower incentive compensation and payroll accruals occurring throughout most of the operations. The debt to debt-equity ratio decreased to 28.2 percent at December 31, 1999 from 29.8 percent at June 30, 1999 primarily due to a decrease in Long-term debt. Due to the strength of the dollar, foreign currency translation adjustments resulted in a decrease in net assets of $7.0 million during the first half of fiscal 2000. The translation adjustments primarily affected Accounts receivable, Inventories and Notes payable. -11- <PAGE> 12 STATEMENT OF CASH FLOWS Net cash provided by operating activities was $213.3 million for the six months ended December 31, 1999, as compared to $122.8 million for the same six months of 1998. The increase in net cash provided was primarily the result of activity within the working capital items - Inventories, Accounts receivable, Accrued payrolls and Other accrued liabilities - which provided cash of $15.6 million in fiscal 2000 compared to using cash of $45.6 million in fiscal 1999. In addition, activity in Other assets provided cash of $2.5 million in the current year compared to using cash of $15.4 million in the prior year. Net cash used in investing activities declined to $129.7 million for fiscal 2000 compared to $201.1 million for fiscal 1999 primarily due to a reduction in the amount spent on acquisitions and an increase in the proceeds received from the sale of plant and equipment. Included in Other is an increase in cash used for equity investments in fiscal 2000. Financing activities used cash of $39.1 million for the six months ended December 31, 1999 compared to providing cash of $85.7 million for the same period in 1998. The change resulted primarily from net debt borrowings using cash of $5.7 million in fiscal 2000 compared to providing cash of $166.3 million in the prior year, partially offset by common stock activity providing cash of $3.6 million in the current year versus using cash of $47.9 million, primarily for the repurchase of shares, in the prior year. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company enters into forward exchange contracts and cross-currency swap agreements to reduce its exposure to fluctuations in related foreign currencies. These contracts are with major financial institutions and the risk of loss is considered remote. The Company does not hold or issue derivative financial instruments for trading purposes. In addition, the Company's foreign locations, in the ordinary course of business, enter into financial guarantees through financial institutions which enable customers to be reimbursed in the event of nonperformance by the Company. The total value of open contracts and any risk to the Company as a result of these arrangements is not material to the Company's financial position, liquidity or results of operations. YEAR 2000 CONSIDERATONS The Company took action to assure that its computerized products and systems and all external interfaces were Year 2000 compliant. These actions were part of a formal information technology initiative which the Company began several years ago. The Company has not experienced any business interruptions as a result of the Year 2000. In addition, the Company contacted its key suppliers, customers, distributors and financial service providers regarding their Year 2000 status. Follow-up inquiries and audits indicated that substantially all key third parties would be year 2000 compliant on a timely basis. The Company is unaware of any key suppliers, customers, distributors or financial service providers who have experienced problems regarding their Year 2000 compliance. While there have been no known adverse consequences of any unsuccessful modifications significantly affecting the financial position, liquidity, or results of operations of the Company, there can be no assurance that any unknown unsuccessful modifications would not have an adverse impact on the Company. -12- <PAGE> 13 FORWARD-LOOKING STATEMENTS This Report on Form 10-Q and other written reports and oral statements made from time to time by the Company may contain "forward-looking statements", all of which are subject to risks and uncertainties. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to growth, operating margin performance or earnings per share or statements expressing general opinions about future operating results, are forward-looking statements. These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of uncertainties and other factors, many of which are outside the Company's control, that could cause actual results to differ materially from such statements. Such factors include: - continuity of business relationships with and purchases by major customers, including among others, orders and delivery schedules for aircraft components, - ability of suppliers to provide materials as needed, - uncertainties surrounding timing, successful completion or integration of acquisitions, - competitive pressure on sales and pricing, - increases in material and other production costs which cannot be recovered in product pricing, - uncertainties surrounding the year 2000 issues, - difficulties in introducing new products and entering new markets, and - uncertainties surrounding the global economy and global market conditions, including among others, the potential devaluation of currencies. Any forward-looking statements are based on known events and circumstances at the time. The Company undertakes no obligation to update or publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this Report. -13- <PAGE> 14 PARKER-HANNIFIN CORPORATION PART II - OTHER INFORMATION ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS. During the quarter ended December 31, 1999, in reliance upon Section 4(2) of the Securities Act of 1933, as amended, the Registrant issued the following shares of Common Stock, $.50 par value: (a) 6,012 shares valued at $44.90625 per share pursuant to the Registrant's Non-Employee Directors Stock Plan in lieu of fees; and (b) 1,054 shares upon exercise of stock options granted under the Registrant's Non-Employee Directors Stock Option Plan in exchange for an average option exercise price of $30.952. The option price was paid by previously owned shares as permitted under the Non-Employee Directors Stock Option Plan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K: Exhibit 10(a) - Exchange Agreement entered into as of October 29, 1999 between the Registrant and Michael J. Hiemstra including an Executive Estate Protection Plan comprised of the Executive Estate Protection Agreement among the Registrant, Michael J. Hiemstra, and the Irrevocable Trust Creating Vested Trusts for Children of Michael J. Hiemstra dated August 16, 1999 (the "Trust") and the Collateral Assignment between the Trust and the Registrant. Exhibit 27 - Financial Data Schedule (b) The Registrant filed a report on Form 8-K on January 19, 2000 to file the press release issued by the Registrant announcing that the Registrant entered into an Agreement and Plan of Merger with Commercial Intertech Corp. whereby Commercial Intertech Corp. will be merged with and into the Registrant, with the Registrant as the surviving corporation and to file the Agreement and Plan of Merger. 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) /s/ Michael J. Hiemstra Michael J. Hiemstra Vice President - Finance and Administration and Chief Financial Officer Date: February 4, 2000 - 14 - <PAGE> 15 EXHIBIT INDEX Exhibit No. Description of Exhibit ----------- ---------------------- 10(a) Exchange Agreement entered into as of October 29, 1999 between the Registrant and Michael J. Hiemstra including an Executive Estate Protection Plan comprised of the Executive Estate Protection Agreement among the Registrant, Michael J. Hiemstra, and the Irrevocable Trust Creating Vested Trusts for Children of Michael J. Hiemstra dated August 16, 1999 (the "Trust") and the Collateral Assignment between the Trust and the Registrant. 27 Financial Data Schedule - 15 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.A <SEQUENCE>2 <DESCRIPTION>EXHIBIT 10(A) <TEXT> <PAGE> 1 EXHIBIT 10(a) EXCHANGE AGREEMENT THIS AGREEMENT (this "Agreement") is entered into as of October 29, 1999 between Parker-Hannifin Corporation (the "Employer") and Michael J. Hiemstra (the "Participant"). RECITALS A. The Employer has offered the Participant certain benefits under an Executive Estate Protection Plan in exchange for a portion of the Participant's future compensation. B. The Participant desires to surrender a portion of his future compensation in order to participate in the Executive Estate Protection Plan. AGREEMENT NOW THEREFORE, it is mutually agreed that: 1. REDUCTION IN FUTURE COMPENSATION. a. SURRENDER. In consideration of the Employer's agreement to be bound by the terms of the Executive Estate Protection Plan Document (defined below), the Participant agrees to the irrevocable surrender of future base pay (the "Surrendered Compensation") in the amount of $4,166.67 per month (the "Monthly Surrenders") beginning with the month of November, 1999 and ending with the month of October, 2006 (the "Surrender Term"). The Participant acknowledges that he shall have no further rights or claims of any sort whatsoever to the Surrendered Compensation. b. SHORTFALL. In the event the employment of the Participant is terminated prior to October 31, 2006 for any reason other than Termination for Cause or the death of the Participant (but only if the Participant is the Decedent), the Corporation shall be entitled to reduce any cash compensation or other non-qualified benefits payable to the Participant, or his representatives, heirs or beneficiaries (including without limitation benefits payable under the Employer's Supplemental Executive Retirement Program, Savings Restoration Plan or Executive Deferral Plan) by an amount equal to the sum of the Monthly Surrenders remaining in the Surrender Term (the "Mandatory Benefit Reduction"); provided, however, to the extent any Mandatory Benefit Reduction is imposed by the Employer on any payment earlier than the corresponding Monthly Surrender would have been made by the Participant, the amount of the Mandatory Benefit Reduction shall be reduced to the present value of such Monthly Surrender calculated by using a 4.52% discount rate. 2. EXECUTIVE ESTATE PROTECTION. The Employer has provided the Participant with an Executive Estate Protection Plan, comprised of that certain Executive Estate Protection Plan Agreement by and between the Employer, the Participant and the Irrevocable Trust Creating Vested Trusts for Children of M. J. Hiemstra dated August 16, 1999, attached hereto as Exhibit A, and the "as sold" illustration of an Executive Estate Protection Plan Insurance Policy as issued by John Hancock Life Insurance Company, dated October 20, 1999 (together, the 1 <PAGE> 2 "Executive Estate Protection Plan Document"). By his signature below, the Participant acknowledges that he has received a copy of the Executive Estate Protection Plan Document. The parties to this Agreement agree to and shall be bound by, and have the benefit of, each and every provision of the Executive Estate Protection Plan Document as set forth in the Executive Estate Protection Plan Agreement. This Agreement and the Executive Estate Protection Plan Document, collectively, shall be considered one complete contract between the parties. 3. EFFECT ON EXECUTIVE DEFERRAL PLAN. The Participant hereby agrees that the amount of any Surrendered Compensation hereunder shall reduce the maximum amount which the Participant is entitled to elect to defer under the Employer's Executive Deferral Plan. 4. EFFECT ON BONUS AND OTHER BENEFITS. The Employer hereby agrees that the amount of any Surrendered Compensation hereunder shall be included in Participant's base pay for the purpose of determining the amount of bonus payable to the Participant under the Employer's RONA plan and for the purpose of determining the Participant's benefits under the Employer's Executive Life Insurance Plan and Supplemental Executive Retirement Program. The Participant hereby agrees that the amount of any Surrendered Compensation hereunder shall not be included in base pay for the purpose of determining allowable deferrals under the Employer's Retirement Savings Plan, Savings Restoration Plan and Executive Deferral Plan nor for the purpose of determining benefits payable under the Employer's Retirement Plan. 5. CHANGE IN CONTROL. Employer intends to seek the approval of its Board of Directors to fund all payments required by the Employer under the Executive Estate Protection Plan in an irrevocable grantor trust in the event of a Change in Control of the Employer (as such term is defined in the Change in Control Severance Agreement between the Employer and the Participant dated August 16, 1996). 6. RATING. Employer acknowledges that Participant has entered into an Underwriting Agreement with the Insurer which requires a rating analysis to be performed on the Participant and his wife on the second anniversary of the Policy, if requested by the Participant. In the event such rating analysis by the Insurer results in the willingness of the Insurer to increase the Owner's Death Benefit under the Policy, the Employer agrees, at the election of the Participant, to meet in good faith with Participant to re-negotiate the terms of the Executive Estate Protection Plan, provided said renegotiation shall not result in an increase of the after-tax present value cost to the Employer of the Executive Estate Protection Plan. 7. ACKNOWLEDGMENT. The Participant hereby acknowledges that he has read and understands this Agreement and the Executive Estate Protection Plan Document. 8. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of, and be binding upon, the Employer and its successors and assigns, and the Participant and his assignees, devisees and heirs. 2 <PAGE> 3 9. GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Ohio, as in effect at the time of the execution of this Agreement. 10. DEFINED TERMS. Initially capitalized terms used but not defined herein shall have the meaning ascribed to them in the Executive Estate Protection Plan Document. IN WITNESS WHEREOF, the Participant has signed and the Employer has accepted this Agreement as of the date first written above. /s/ Michael J. Hiemstra Michael J. Hiemstra PARKER-HANNIFIN CORPORATION By: /s/ Duane E. Collins Duane E. Collins President and Chief Executive Officer 3 <PAGE> 4 EXECUTIVE ESTATE PROTECTION AGREEMENT This Executive Estate Protection Agreement ("Agreement") is made as of October 29, 1999, among Parker-Hannifin Corporation, an Ohio corporation, (the "Corporation"), Michael J. Hiemstra (the "Participant") and the Irrevocable Trust Creating Vested Trusts for Children of M. J. Hiemstra dated August 16, 1999 ( the "Owner"). RECITALS A. The Participant desires to insure his life and his wife's life for the benefit and protection of the Participant's family or other beneficiary under the Policy (as defined below); B. The Corporation desires to help the Participant provide life insurance for the benefit and protection of his family or beneficiary by providing funds from time to time to pay the premiums due on the Policy in accordance with this Agreement; and C. The Owner desires to assign certain rights and interests in the Policy to the Corporation, to the extent provided herein, as security for repayment of certain funds provided by the Corporation for the acquisition and/or maintenance of the Policy. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and the mutual agreements and covenants set forth below, the parties to this Agreement agree as follows: 1. DEFINITIONS. For purposes of this Agreement, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: (a) "Aggregate Premiums Paid" shall mean, at any time, an amount equal to the cumulative premiums paid by the Corporation on the Policy. (b) "Cash Surrender Value" shall mean an amount that equals, at any specified time, the cash surrender value as determined under the terms of the Policy. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Collateral Assignment" shall mean an assignment made by the Owner in favor of the Corporation in a form attached to this Agreement as Exhibit 1. (e) "Collateral Interest" shall mean the Corporation's interest in the Policy, which shall equal, at any time, the lesser of Aggregate Premiums Paid or Cash Surrender Value, and which shall be repaid to the Corporation in accordance with Section 6 below. (f) "Corporation's Death Benefit" shall mean the portion of the Policy's death benefit equal to Aggregate Premiums Paid plus an amount equal to the cumulative premiums paid by the Owner on the policy pursuant to Section 3(b) hereof. 1 <PAGE> 5 (g) "Decedent" shall mean the second to die of the Participant and his wife. (h) "Designated Beneficiary" shall mean the beneficiary designated under the Policy. (i) "Economic Income" shall mean an amount equal to the value of the "economic benefit" derived by the Participant from the Policy's life insurance protection, as determined for Federal income tax purposes under the Code. Economic Income shall include any increase in economic benefit attributable to the death of the first to die under the Policy. (j) "Insurer(s)" shall mean John Hancock Life Insurance Company. (k) "Investment Elections" shall mean any elections which the Owner has under the Policy to invest the Cash Surrender Value. (l) "Owner" shall mean the Irrevocable Trust Creating Vested Trusts for Children of M. J. Hiemstra dated August 16, 1999. (m) "Owner's Death Benefit" shall mean the portion of the Policy's death benefit, if any, that exceeds the Corporation's Death Benefit. The ultimate amount of death benefit payable under the Policy is dependent upon the financial performance of the Policy. (n) "Participant" shall mean Michael J. Hiemstra. (o) "Policy" shall mean the following joint life policy on the life of the Participant and his wife that is issued by the Insurer: <TABLE> <CAPTION> INSURER POLICY NUMBER TYPE OF POLICY -------------------------------------- ---------------------- ------------------------- <S> <C> <C> John Hancock Life Insurance Company 20039806 Estate Protection Life Insurance -------------------------------------- ---------------------- ------------------------- </TABLE> (p) "Split Dollar Maturity Date" shall mean the date on which the first of any of the following events occurs: (i) the fifteenth (15th) anniversary of the issuance of the Policy; (ii) the death of the Decedent; or (iii) Termination for Cause. (q) "Termination for Cause" shall mean termination of the Participant's employment by the Corporation as a result of activity by the Participant detrimental to the interest of the Corporation, including without limitation: (i) the rendering of services for an organization, or engaging in a business, that is in competition with the Corporation; 2 <PAGE> 6 (ii) the disclosure to anyone outside of the Corporation, or the use for any purpose other than the Corporation's business, of confidential information or material related to the Corporation; (iii) fraud, embezzlement, theft-in-office or other illegal activity; or (iv) violation of the Corporation's Code of Ethics. 2. ACQUISITION OF POLICY; OWNERSHIP OF INSURANCE. The parties to this Agreement shall cooperate in applying for and obtaining the Policy. The Policy shall be issued to the Owner as the sole and exclusive owner of the Policy, subject to the rights and interests granted to the Corporation as provided in this Agreement and the Collateral Assignment. Concurrent with the signing of this Agreement, the Owner will collaterally assign the Policy to the Corporation, in the form of the Collateral Assignment, as security for the payment of the Collateral Interest, which assignment shall not be altered or changed without the mutual consent of the Corporation and the Owner. 3. PREMIUM PAYMENTS ON POLICY. -------------------------- (a) PAYMENTS AND REIMBURSEMENTS. Prior to the occurrence of the Split Dollar Maturity Date, the Corporation shall pay to the Insurer, on or before each applicable premium due date, all applicable premiums for the Policy, less the amount payable by the Owner as described in subsection (b) below. The Corporation shall promptly notify Owner in writing of the amount and date of such premium payments. In the event that the Corporation fails to make any such payment, the Owner or the Participant may make (but is not required to make) any such payment, and the Corporation shall immediately reimburse the Owner or the Participant, as the case may be, for any amount so paid. (b) PREMIUM PAYMENT BY OWNER. Prior to the occurrence of the Split Dollar Maturity Date, Owner shall pay to the Insurer, on or before each applicable premium due date, a premium payment equal to the Economic Income for such calendar year, as mutually determined by the Corporation and the Participant. (c) PREMIUM REIMBURSEMENT. At least sixty (60) days prior to each applicable premium due date, the Corporation shall make a payment to the Participant equal to the premium payable by the Owner pursuant to subsection (b) above. (d) TAX REIMBURSEMENT. On or before March 15 following each calendar year until the Split Dollar Maturity Date, the Corporation shall reimburse the Participant for the Participant's state, local and federal income tax liability attributable to (i) the Participant's Economic Income for such calendar year, if any; (ii) the payment by the Corporation to the Participant pursuant to subsection (c) above; and (iii) payments made pursuant to this subsection (d). The tax rates used by the Corporation in calculating the reimbursement under this Section 3(d) shall be the appropriate federal, state and local income tax rates in effect for the Participant at the time of payment, as determined by the Corporation. 3 <PAGE> 7 4. Corporation's Rights. The Corporation's rights and interests in and to the Policy shall be specifically limited to (i) the right to be paid its Collateral Interest and the Corporation's Death Benefit, if any, in accordance with Section 6 below, and (ii) the rights specified in the Collateral Assignment. 5. Owner's Rights. Subject to the terms of this Agreement and the Collateral Assignment, the Owner of the Policy shall be entitled to exercise all rights in the Policy; provided, however, that while the Collateral Assignment is in effect, the following rights may be exercised only with the consent of the Corporation, which consent may be withheld at the sole discretion of the Corporation: (a) To borrow against or pledge the Policy; (b) To surrender or cancel the Policy; (c) To take a distribution or withdrawal from the Policy; or (d) To make Investment Elections. In particular, subject to the terms and conditions of the Policy, and the provisions of Section 6 below, the Owner may assign its rights under this Agreement and the Collateral Agreement, including but not limited to an assignment to an insurance trust of which the Participant is a settlor. In the event of an assignment of its rights, the Owner shall promptly notify the Corporation of the name and address of the new Owner or assignee, including the name and address of any trustee. 6. COLLATERAL INTEREST. On the Split Dollar Maturity Date, the Collateral Interest (or, if applicable under Section 6(a) below, the Corporation's Death Benefit) shall be paid or repaid to the Corporation in the following manner: (a) Notwithstanding any provision of this Agreement or the Policy that may be construed to the contrary, if the Split Dollar Maturity Date occurs due to the death of the Decedent, (i) the Corporation shall be entitled to that portion of the Policy's death proceeds that equals the Corporation's Death Benefit, if any, and (ii) the Owner or the Designated Beneficiary, as the case may be, shall be entitled to the Owner's Death Benefit; provided, however, if the Split Dollar Maturity Date occurs due to the suicide of the Decedent, and the proceeds from the Policy are limited by either a suicide or contestability provision under the Policy, the Corporation shall be entitled to that portion of the higher of the Policy's Cash Surrender Value or death proceeds that does not exceed the Aggregate Premiums Paid. In either event, promptly following the Decedent's death, the Corporation and the Owner or the Designated Beneficiary shall take all steps necessary to collect the death proceeds of the Policy by submitting the proper claims forms to the Insurer. The Corporation shall notify the Insurer of the amount of the Owner's Death Benefit (except when the Policy's proceeds are limited because of the Decedent's death by suicide) and the Corporation's Death Benefit. Such amounts shall be paid, respectively, by the Insurer to the Owner or to the Designated Beneficiary, as the case may be, and the Corporation. 4 <PAGE> 8 (b) If the Split Dollar Maturity Date is other than the date of the Decedent's death, the Corporation's Collateral Interest in the Policy shall be paid to the Corporation in one of the following ways, as elected by the Owner in writing within thirty (30) days after the date the Corporation first notifies the Participant and Owner in writing of the occurrence of the Split Dollar Maturity Date: (i) By the Owner authorizing the Insurer to make a loan against the Policy in an amount equal to the Corporation's Collateral Interest and to pay the proceeds to the Corporation, in which case the Owner shall be considered the borrower for all purposes under the loan; (ii) By the Owner authorizing the Insurer to withdraw from the Cash Surrender Value of the Policy an amount equal to the Corporation's Collateral Interest and to pay the proceeds to the Corporation; or (iii) By the Owner paying to the Corporation, from the Owner's separate funds, an amount equal to the Corporation's Collateral Interest. (c) If the Owner fails to timely exercise any of the options under Section 6(b) above, the Corporation shall be entitled to instruct the Insurer to pay to the Corporation from the Cash Surrender Value of the Policy an amount equal to the Corporation's Collateral Interest. (d) The Corporation agrees to keep records of its premium payments and to furnish the Owner and the Insurer with a statement of its Collateral Interest whenever either party requires such statement. (e) Upon and after the Corporation's Collateral Interest in the Policy has been repaid pursuant to Section 6(b) above, the Corporation shall execute and file with the Insurer an appropriate release of the Corporation's interest in the Policy and shall have no further interest in the Policy. Further, the Participant and/or Owner hereby acknowledge, understand and agree that, upon the release of the Corporation's Collateral Interest, the Corporation shall continue not to have any responsibility for the future performance of the Policy and shall have no obligation to make any additional premium payments. (f) Upon payment to the Corporation of its Collateral Interest or the Corporation's Death Benefit in accordance with this Section 6, this Agreement shall terminate and no party shall have any further rights or obligations under the Agreement with respect to any other party provided that the Corporation has complied with all provisions of this Agreement. 7. INSURER 5 <PAGE> 9 (a) The Insurer is not a party to this Agreement, shall in no way be bound by or charged with notice of its terms, and is expressly authorized to act only in accordance with the terms of the Policy. The Insurer shall be fully discharged from any and all liability under the Policy upon payment or other performance of its obligations in accordance with the terms of the Policy. (b) The signature(s) required for the Insurer to recognize the exercise of a right under the Policy shall be specified in the Collateral Assignment. 8. CLAIMS PROCEDURE. The following claims procedure shall be followed in handling any benefit claim under this Agreement: (a) The Owner, Participant, or the Designated Beneficiary, as the case may be, (the "Claimant"), shall file a claim for benefits by notifying the Corporation in writing. If the claim is wholly or partially denied, the Corporation shall provide a written notice within ninety (90) days (unless special circumstances require an extension of time for processing the claim, in which case an extension not to exceed ninety (90) days shall be allowed) specifying the reasons for the denial, the provisions of this Agreement on which the denial is based, and additional material or information, if any, that is necessary for the Claimant to receive benefits. Such written notice shall also indicate the steps to be taken by the Claimant if a review of the denial is desired. (b) If a claim is denied, and a review is desired, the Claimant shall notify the Corporation in writing within sixty (60) days after receipt of written notice of a denial of a claim. In requesting a review, the Claimant may submit any written issues and comments the Claimant feels are appropriate. The Corporation shall then review the claim and provide a written decision within sixty (60) days of receipt of a request for a review (unless special circumstances require an extension of time for processing the claim, in which case an extension not to exceed ninety (60) days shall be allowed). This decision shall state the specific reasons for the decision and shall include references to specific provisions of this Agreement, if any, upon which the decision is based. (c) If no event shall the Corporation's liability under this Agreement exceed the amount of proceeds from the Policy. 9. AMENDMENT OF AGREEMENT. This Agreement shall not be modified or amended except by a writing signed by all the parties hereto. 10. BINDING AGREEMENT. This Agreement shall be binding upon the heirs, administrators, executors, successors and assigns of each party to this Agreement. 11. STATE LAW. This Agreement shall be subject to and construed under the internal laws of the State of Ohio, without regard to its conflicts of laws principles. 6 <PAGE> 10 12. VALIDITY. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of this Agreement, but this Agreement shall be construed and enforced as if such illegal or invalid provision had never been inserted in this Agreement. 13. NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Agreement shall not be deemed to constitute a contract of employment between the Corporation and the Participant. Nothing in this Agreement shall be deemed to give the Participant the right to be retained in the service of the Corporation or to interfere with the right of the Corporation to discipline or discharge the Participant at any time. 14. NOTICE. Any notice or filing required or permitted to be given under this Agreement to the Owner, Participant or the Corporation shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: To the Owner: The Irrevocable Trust Creating Vested Trusts for Children of M. J. Hiemstra dated August 16, 1999 c/o David J. Hiemstra, Trustee 21006 Bayside St. Clair Shores, MI 48081 To the Participant: Michael J. Hiemstra 55 Winding River Trail Chagrin Falls, OH 44022 To the Corporation: Parker Hannifin Corporation 6035 Parkland Boulevard Cleveland, OH 44124 Attn: General Counsel or to such other address as may be furnished to the Owner, Participant or the Corporation in writing in accordance with this notice provision. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to the Owner and/or the Participant or the Designated Beneficiary under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Owner and/or the Participant, as the case may be. 15. CREDITWORTHINESS OF INSURER; TAX CONSEQUENCES. The Participant and Owner assume all risk of the creditworthiness of the Insurer and acknowledge that the Corporation makes no representation or guarantee of the creditworthiness of any Insurer. The Participant and Owner acknowledge responsibility for all federal, state and local income, estate or gift tax consequences imposed on the Participant and Owner as a result of this Agreement and further acknowledge that the Corporation has not made any representations or guarantees of present or future tax consequences. 7 <PAGE> 11 16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with regard to the subject matter of this Agreement and supersedes all previous negotiations, agreements and commitments in respect thereto. No oral explanation or oral information by the parties to this Agreement shall alter the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first written above. PARKER-HANNIFIN CORORATION By: /s/ Duane E. Collins Duane E. Collins President and Chief Executive Officer /s/ Michael J. Hiemstra Michael J. Hiemstra THE IRREVOCABLE TRUST CREATING VESTED TRUSTS FOR CHILDREN OF M. J. HIEMSTRA DATED AUGUST 16, 1999 By: /s/ David J. Hiemstra David J. Hiemstra, Trustee 8 <PAGE> 12 EXHIBIT 1 COLLATERAL ASSIGNMENT This Collateral Assignment (this "Assignment") is made and entered into as of October 29, 1999, by and between the Irrevocable Trust Creating Vested Trusts for Children of M. J. Hiemstra dated August 16, 1999 (the "Owner"), as the owner of a life insurance policy, No. 20039806 (the "Policy"), issued by John Hancock Life Insurance Company (the "Insurer"), on the lives of Michael J. Hiemstra (the "Participant") and Kathleen M. Hiemstra, Participant's wife (the "Wife"), and Parker-Hannifin Corporation, an Ohio corporation (the "Corporation"). RECITALS A. The Corporation desires to help the Owner provide life insurance for the benefit and protection of the Participant's family or beneficiary by providing funds from time to time to pay the premiums due on the Policy as more specifically provided in the Executive Estate Protection Agreement entered into between the Participant, the Owner and the Corporation as of the date hereof (the "Agreement"); and B. In consideration of the Corporation agreeing to provide such funds in accordance with the terms and conditions of the Agreement, the Owner agrees to grant to the Corporation, as a security interest in the Policy, a collateral security interest for the payment of the Corporation's Collateral Interest (as defined in the Agreement). AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and the mutual agreements and covenants set forth below, the parties to this Assignment agree as follows: 1. ASSIGNMENT. The Owner hereby assigns, transfers and sets over to the Corporation, and its successors and assigns, those certain rights and interests described in the Agreement that are to be assigned to the Corporation in accordance with the Agreement. Furthermore, this Assignment is made, and the Policy is to be held as collateral security for, any and all liabilities of the Owner to the Corporation, either now existing, or that may hereafter arise, pursuant to the terms of the Agreement. 2. SIGNATURES. (a) To facilitate the operation of this Assignment, the parties agree that the Insurer is hereby notified that the following rights under the Policy may be exercised while the Assignment is in effect without the signature or consent of any other party: (i) The Owner may sign a request to change the beneficiary under the Policy without the signature or consent of the Corporation. 1 <PAGE> 13 (ii) The Corporation may sign an instruction to the Insurer to pay an amount equal to the Corporation's Collateral Interest from the Policy's Cash Surrender Value to the Corporation without the Participant's or the Owner's signature or consent; provided that the Corporation simultaneously delivers to the Insurer a notarized statement that the Corporation is exercising its rights in accordance with Section 6(c) of the Agreement. (b) The exercise of any other right under the Policy not specifically set forth above shall be exercised with the signature of both the Corporation and the Owner. 3. POLICY PROCEEDS. Any amount payable from the Policy during the Participant's or the Wife's lives or at the Decedent's (as defined in the Agreement) death shall first be paid to the Corporation to the extent of its Collateral Interest or the Corporation's Death Benefit (as defined in the Agreement), respectively. Any balance will be paid to the Owner during the Participant's or the Wife's lifetime or to the Designated Beneficiary (as defined in the Agreement) upon or after the Decedent's death. A settlement option may be elected by the recipient of the proceeds. For purposes of this Section, the amount of the Collateral Interest or Corporation's Death Benefit shall be determined for purposes of the Insurer by a written statement delivered to the Insurer and signed by the Corporation. 4. ENDORSEMENT. The Corporation shall hold the Policy while this Assignment is operative and, upon request, forward the Policy to the Insurer, without unreasonable delay, for endorsement of any designation or change of beneficiary, any election of optional mode of settlement, or the exercise of any other right reserved by the Owner in this Assignment. 5. INSURER. The Insurer is hereby authorized to recognize the Corporation's claims to rights hereunder without investigating the reason for any action taken by the Corporation, the validity or amount of any of the liabilities of the Owner to the Corporation under the Agreement, the existence of any default therein, the giving of any notice required herein, or the application to be made by the Corporation of any amounts to be paid to the Corporation. The Insurer shall not be responsible for the sufficiency or validity of this Assignment and is not a party to the Agreement (or any other similar executive life insurance agreement) between the Corporation and the Owner or the Participant. 6. RELEASE OF ASSIGNMENT. Upon the full payment of the Corporation's Collateral Interest in accordance with the terms and conditions of this Assignment and the Agreement, the Corporation shall release to the Owner, if the Owner retains the Policy in accordance with the Agreement, the Policy and all specific rights included in this Assignment. 7. AMENDMENT OF ASSIGNMENT. This Assignment shall not be modified, amended or terminated, except by a writing signed by all the parties hereto. 8. NO RESTRICTION ON ASSIGNMENT. This Assignment does not limit the rights of the Owner to assign the rights it has retained under the Policy which rights may be assigned in accordance with Section 5 of the Agreement. 2 <PAGE> 14 9. BINDING AGREEMENT. This Assignment shall be binding upon the heirs, administrators, executors and permitted successors and assigns of each party to this Assignment. 10. STATE LAW. This Assignment shall be subject to and be construed under the internal laws of the State of Ohio, without regard to its conflicts of law principles. 11. VALIDITY. In case any provision of this Assignment shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of this Assignment, but this Assignment shall be construed and enforced as if such illegal or invalid provision had never been inserted in this Assignment. IN WITNESS WHEREOF, the Owner and the Corporation have signed this Assignment as of the date first written above. THE IRREVOCABLE TRUST CREATING PARKER-HANNIFIN CORPORATION VESTED TRUSTS FOR CHILDREN OF M. J. HIEMSTRA DATED AUGUST 16, 1999 By: /s/ David J. Hiemstra By: /s/ Duane E. Collins David J. Hiemstra, Trustee Duane E. Collins President and Chief Executive Officer FILED WITH THE INSURER: /s/ Charles Defilippo Date: 12/23/99 Insurer The John Hancock Mutual Life Insurance Company without assuming any responsibility for the validity or the sufficiency of this instrument, has on this date, filed a duplicate thereof at it's Home Office. Date 12/23/99 JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By /s/ Bruce Skrine - Attorney at Law Secretary 3 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 27 <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, 1999 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-30-2000 <PERIOD-END> DEC-31-1999 <CASH> 74,353 <SECURITIES> 0 <RECEIVABLES> 637,591 <ALLOWANCES> 9,477 <INVENTORY> 915,037 <CURRENT-ASSETS> 1,767,490 <PP&E> 2,572,878 <DEPRECIATION> 1,358,676 <TOTAL-ASSETS> 3,722,411 <CURRENT-LIABILITIES> 653,793 <BONDS> 735,266 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 56,065 <OTHER-SE> 1,912,879 <TOTAL-LIABILITY-AND-EQUITY> 3,722,411 <SALES> 2,481,500 <TOTAL-REVENUES> 2,481,500 <CGS> 1,947,919 <TOTAL-COSTS> 1,947,919 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 1,171 <INTEREST-EXPENSE> 28,571 <INCOME-PRETAX> 226,805 <INCOME-TAX> 78,248 <INCOME-CONTINUING> 148,557 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 148,557 <EPS-BASIC> 1.36 <EPS-DILUTED> 1.35 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

PTC

https://www.sec.gov/Archives/edgar/data/857005/000095010900000466/0000950109-00-000466-d1.html

<HTML> <HEAD> <TITLE>FORM 10-Q</TITLE> </HEAD> <BODY BGCOLOR="#FFFFFF"> <HR SIZE=1 NOSHADE> <HR SIZE=1 NOSHADE> <DIV><FONT SIZE="6">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="4" COLOR="#000000" FACE="'Times New Roman', Times"> <B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="3" COLOR="#000000" FACE="'Times New Roman', Times"><B>Washington, D.C. 20549</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><HR WIDTH="21%" SIZE="1" NOSHADE></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="5" COLOR="#000000" FACE="'Times New Roman', Times"><B>FORM 10-Q</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="4" COLOR="#000000" FACE="'Times New Roman', Times"><B>QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="4" COLOR="#000000" FACE="'Times New Roman', Times"><B>SECURITIES EXCHANGE ACT OF 1934</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="3" COLOR="#000000" FACE="'Times New Roman', Times"><B>For the Quarterly Period Ended: January 1, 2000</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="3" COLOR="#000000" FACE="'Times New Roman', Times"><B>Commission File Number: 0-18059</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><HR WIDTH="21%" SIZE="1" NOSHADE></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="6" COLOR="#000000" FACE="'Times New Roman', Times"><B>Parametric Technology Corporation</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>(Exact name of registrant as specified in its charter)</B></FONT></DIV> <DIV><FONT SIZE="6">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" ALIGN="center" CELLSPACING=0 CELLPADDING=0> <TR> <TD VALIGN="top" WIDTH="48%" ALIGN="left"> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>Massachusetts</B></FONT></DIV> </TD> <TD VALIGN="top" ALIGN="center" WIDTH="48%"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>04-2866152</B></FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="48%" ALIGN="left"> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>(State or other jurisdiction of</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>incorporation or organization)</B></FONT></DIV> </TD> <TD VALIGN="top" ALIGN="center" WIDTH="48%"> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>(I.R.S. Employer</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Identification Number)</B></FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="6">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>128 Technology Drive, Waltham, MA 02453</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>(Address of principal executive offices, including zip code)</B></FONT></DIV> <DIV><FONT SIZE="6">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>(781) 398-5000</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>(Registrant&#146;s telephone number, including area code)</B></FONT></DIV> <DIV><FONT SIZE="6">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">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&nbsp; &nbsp;&nbsp;&nbsp;</FONT><FONT SIZE="2" COLOR="#000000" FACE="Wingdings"> &#120;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> NO&nbsp;&nbsp;&nbsp;&nbsp;</FONT><FONT SIZE="2" COLOR="#000000" FACE="Wingdings">&#168;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">There were 274,962,701 shares of our common stock outstanding on January 1, 2000.</FONT></DIV> <DIV><FONT SIZE="6">&nbsp;</FONT></DIV> <HR SIZE=1 NOSHADE> <HR SIZE=1 NOSHADE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>PARAMETRIC TECHNOLOGY CORPORATION</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>INDEX TO FORM 10-Q</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>For the Quarter Ended January 1, 2000</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE ALIGN="center" WIDTH="615" CELLSPACING=0 CELLPADDING=0> <TR> <TH VALIGN="bottom" ALIGN="center" WIDTH="49"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" ALIGN="center" WIDTH="515"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" NOWRAP ALIGN="center" WIDTH="33"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Page <BR> Number</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TD COLSPAN=3 VALIGN="top" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Part I&#151;FINANCIAL INFORMATION</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right" WIDTH="33"></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Item 1.</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Financial Statements</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right" WIDTH="33"></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp; &nbsp;</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Consolidated Balance Sheets as of September 30, 1999 and January 1, 2000</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">1</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp; &nbsp;</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Consolidated Statements of Income for the three months ended January 2, 1999 and January <BR> 1, 2000</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp; &nbsp;</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Consolidated Statements of Cash Flows for the three months ended January 2, 1999 and <BR> January 1, 2000</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">3</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" ALIGN="left" WIDTH="49"><FONT SIZE="3" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Consolidated Statements of Comprehensive Income for the three months ended January 2, <BR> 1999 and January 1, 2000</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp; &nbsp;</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Notes to Consolidated Financial Statements</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">5</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Item 2.</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">7</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Item 3.</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Quantitative and Qualitative Disclosures About Market Risk</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">19</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="3" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD COLSPAN=3 VALIGN="top" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Part II&#151;OTHER INFORMATION</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right" WIDTH="33"></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Item 1.</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Legal Proceedings</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">19</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="top" WIDTH="49" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Item 6.</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="left" WIDTH="515"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Exhibits and Reports on Form 8-K</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">19</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD COLSPAN=5 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD COLSPAN=3 VALIGN="top" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Signature</FONT></TD> <TD WIDTH="8"><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="top" NOWRAP ALIGN="right" WIDTH="33"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">19</FONT></TD> </TR> </TABLE> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>PART I&#151;FINANCIAL INFORMATION</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>PARAMETRIC TECHNOLOGY CORPORATION</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>CONSOLIDATED BALANCE SHEETS</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>(in thousands)</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE ALIGN="center" WIDTH="615" CELLSPACING=0 CELLPADDING=0> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=2 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>September 30, <BR> 1999</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=2 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 1, <BR> 2000</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>ASSETS</B></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Current assets:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash and cash equivalents</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp; &nbsp;239,789</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp; &nbsp;315,351</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Short-term investments</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">101,217</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">95,347</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts receivable, net</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">221,889</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">189,340</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other current assets</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">142,209</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">119,345</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total current assets</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">705,104</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">719,383</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD COLSPAN=7 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Marketable investments</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">12,889</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">9,730</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Property and equipment, net</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">64,176</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">66,601</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Goodwill, net</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">113,011</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">110,317</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Other intangible assets, net</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">53,836</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">51,818</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Other assets</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">67,604</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">66,185</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total assets</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$1,016,620</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$1,024,034</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>LIABILITIES AND STOCKHOLDERS&#146; EQUITY</B></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Current liabilities:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts payable</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;40,879</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;35,982</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accrued expenses</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">67,135</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">52,748</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accrued compensation and severance</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">55,590</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">48,637</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">213,059</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">208,939</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income taxes</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">80,520</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">44,219</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total current liabilities</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">457,183</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">390,525</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD COLSPAN=7 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Other liabilities</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">38,333</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">34,458</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD COLSPAN=7 VALIGN="bottom" ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Stockholders&#146; equity:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Preferred stock, $0.01 par value; 5,000 shares authorized; none issued</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Common stock, $0.01 par value; 350,000 shares authorized; 272,277 and <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;274,963 shares issued, respectively</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2,723</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2,750</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Additional paid-in capital</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">1,583,846</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">1,621,400</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Treasury stock, at cost, 2,113 and 0 shares, respectively</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(27,727</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accumulated deficit</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;(1,022,357</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;(1,011,954</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accumulated other comprehensive loss</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(15,381</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(13,145</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total stockholders&#146; equity</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">521,104</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">599,051</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="457" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total liabilities and stockholders&#146; equity</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$1,016,620</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$1,024,034</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="63" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> </TABLE> <DIV><FONT SIZE="7">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The accompanying notes are an integral part of the consolidated financial statements.</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>PARAMETRIC TECHNOLOGY CORPORATION</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>CONSOLIDATED STATEMENTS OF INCOME</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>(in thousands, except per share data)</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE ALIGN="center" WIDTH="615" CELLSPACING=0 CELLPADDING=0> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=3 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Three months ended</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 2, <BR> 1999</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 1, <BR> 2000</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Revenue:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;License</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$136,080</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$104,874</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Service</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">114,037</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">134,163</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">250,117</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">239,037</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Costs and expenses:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of license revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4,139</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4,128</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of service revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">41,716</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">56,027</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and marketing</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">96,115</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">104,940</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and development</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">29,180</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">34,067</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">16,554</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">16,471</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortization of goodwill and other intangible assets</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2,487</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">9,428</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Acquisition and nonrecurring charges</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">13,829</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total costs and expenses</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">204,020</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">225,061</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Operating income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">46,097</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">13,976</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other income, net</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">1,944</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">643</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Income before income taxes</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">48,041</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">14,619</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Provision for income taxes</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">18,050</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4,238</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;29,991</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;10,381</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Earnings per share (Note 2):</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Basic</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;0.11</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;0.04</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Diluted</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;0.11</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;0.04</FONT></TD> </TR> </TABLE> <DIV><FONT SIZE="7">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The accompanying notes are an integral part of the consolidated financial statements.</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>PARAMETRIC TECHNOLOGY CORPORATION</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>(in thousands)</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE ALIGN="center" WIDTH="615" CELLSPACING=0 CELLPADDING=0> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=5 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Three months ended</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=2 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 2, <BR> 1999</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=2 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 1, <BR> 2000</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Cash flows from operating activities:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Net income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;29,991</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;10,381</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Adjustments to reconcile net income to net cash flows from operating activities:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Depreciation and amortization</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">12,283</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">18,185</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Charge for purchased in-process research and development</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">10,600</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Changes in assets and liabilities which provided (used) cash, net of effects of <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;purchased businesses:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts receivable</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(8,291</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">32,549</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts payable and accrued expenses</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(18,997</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(17,300</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accrued compensation and severance</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(8,218</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(10,353</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">7,208</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(4,120</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income taxes</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(24,559</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other current assets</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(4,099</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(3,428</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other noncurrent assets and liabilities</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(6,823</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">683</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net cash provided by operating activities</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">30,847</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2,038</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Cash flows from investing activities:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Additions to property and equipment</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(8,536</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(10,782</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Additions to other intangible assets</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(2,440</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Acquisitions of businesses</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(7,922</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Construction in progress</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(4,106</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Proceeds from sale of land and improvements</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">30,836</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Purchases of investments</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(11,705</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(11,831</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Proceeds from sales and maturities of investments</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">24,993</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">20,857</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net cash provided by investing activities</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2,312</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">17,052</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Cash flows from financing activities:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Proceeds from issuance of common stock</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4,493</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">53,845</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Purchases of treasury stock</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(49,963</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net cash provided (used) by financing activities</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(45,470</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">53,845</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Effect of exchange rate changes on cash</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">3,144</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2,627</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net increase (decrease) in cash and cash equivalents</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(9,167</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">75,562</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Cash and cash equivalents, beginning of period</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">205,971</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">239,789</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="460" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Cash and cash equivalents, end of period</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$196,804</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$315,351</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> </TABLE> <DIV><FONT SIZE="7">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The accompanying notes are an integral part of the consolidated financial statements.</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>PARAMETRIC TECHNOLOGY CORPORATION</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME</B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>(in thousands)</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE ALIGN="center" WIDTH="615" CELLSPACING=0 CELLPADDING=0> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=4 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Three months ended</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 2, <BR> 1999</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=2 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 1, <BR> 2000</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TD VALIGN="bottom" WIDTH="463" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$29,991</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$10,381</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="42" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="42" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="463" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Other comprehensive income (loss), net of tax provision (benefit):</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="463" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Foreign currency translation adjustment, net of tax of $847 and $1,205</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">1,573</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2,239</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="463" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unrealized gain (loss) on securities, net of tax of $111 and $0</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">205</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(3</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">)</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="42" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="42" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="463" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Other comprehensive income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">1,778</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2,236</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="42" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="42" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="463" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Comprehensive income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$31,769</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$12,617</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="42" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="42" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> </TABLE> <DIV><FONT SIZE="7">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The accompanying notes are an integral part of the consolidated financial statements.</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>PARAMETRIC TECHNOLOGY CORPORATION</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>1.&nbsp;&nbsp;&nbsp;&nbsp;Basis of Presentation</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The accompanying unaudited consolidated financial statements include the accounts of Parametric Technology Corporation and its wholly owned subsidiaries and have been prepared by us in accordance with generally accepted accounting principles. Our fiscal year end is September 30. Certain reclassifications have been made to the prior year&#146;s statements to conform with the fiscal 2000 presentation. The year end consolidated balance sheet was derived from our audited financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. While we believe that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 1999.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The results of operations for the three month period ended January 1, 2000 are not necessarily indicative of the results expected for the remainder of the fiscal year.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>2.&nbsp;&nbsp;&nbsp;&nbsp;Earnings Per Share</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Basic earnings per share (EPS) is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options using the &#147;treasury stock&#148; method and any other potential dilution. The following table presents the calculation for both basic and diluted EPS:</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE ALIGN="center" WIDTH="561" CELLSPACING=0 CELLPADDING=0> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=5 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Three months ended</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 2, <BR> 1999</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 1, <BR> 2000</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=3 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>(in thousands, except per <BR> share data)</B></FONT></TH> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;29,991</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;10,381</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Weighted average shares outstanding</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;268,429</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;272,436</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Dilutive effect of employee stock options</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4,933</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">14,434</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Contingently issuable shares related to InPart acquisition</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">418</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Diluted shares outstanding</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">273,780</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">286,870</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Basic EPS</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;0.11</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;0.04</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Diluted EPS</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;0.11</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;0.04</FONT></TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Options to purchase 17.9 million shares for the three months ended January 2, 1999 and 5.4 million shares for the three months ended January 1, 2000 were outstanding but were excluded from the computations of diluted shares outstanding because the price of the options was greater than the average market price of the common stock for the period reported.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>3.&nbsp;&nbsp;&nbsp;&nbsp;Facilities</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In December 1999, we sold land and certain improvements under construction for $30.8 million and entered into a lease covering approximately 381,000 square feet of office space in the Boston area that will allow us to consolidate and replace our Waltham operations. Occupancy and rent should begin in December 2000 and expire in December 2012, subject to completion of construction.</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>PARAMETRIC TECHNOLOGY CORPORATION</B></FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS &#151;(Continued)</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>4.&nbsp;&nbsp;&nbsp;&nbsp;New Accounting Pronouncements</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,<I> Accounting for Derivative Instruments and Hedging Activities.</I> SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. Originally, the statement had been effective for all quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,<I> Accounting for Derivative Instruments and Hedging Activities,</I> which postponed the adoption of SFAS No. 133 until fiscal years beginning after June 15, 2000. We plan to implement SFAS No. 133 in our fiscal year 2001. We believe that the adoption of this statement will not have a significant effect on our consolidated financial statements.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>5.&nbsp;&nbsp;&nbsp;&nbsp;Segment Information</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">During 1999, we adopted SFAS No. 131,<I> Disclosure about Segments of an Enterprise and Related Information,</I> which changes the way public companies report information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision making group is made up of our executive officers.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We operate within a single industry segment&#151;computer software and related services. We have two major product categories within that one segment: (1) our computer-aided design, manufacturing and engineering (CAD/CAM/CAE) solutions, including our flagship Pro/ENGINEER&reg; design software, which provides flexible engineering solutions to our customers and (2) our Web-based Windchill&reg; information management software which provides collaborative product commerce (CPC) solutions to our customers using Internet technologies to collaboratively develop, build and manage products throughout their entire lifecycle. Our products are sold worldwide by our sales force and distributors.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our revenue by product category and from unaffiliated customers for the geographic regions in which we operate is presented below:</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE ALIGN="center" WIDTH="561" CELLSPACING=0 CELLPADDING=0> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=3 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Three months ended</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 2, <BR> 1999</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 1, <BR> 2000</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=3 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>(in thousands)</B></FONT></TH> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Revenue:</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;CAD/CAM/CAE solutions</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$245,417</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$200,784</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Windchill CPC solutions</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4,700</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">38,253</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="1" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$250,117</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$239,037</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Revenue:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;North America</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$115,855</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$104,256</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Europe</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">98,583</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">90,964</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Asia/Pacific</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">35,679</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">43,817</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="406" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$250,117</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">$239,037</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="49" SIZE="2" NOSHADE></FONT></TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Total long-lived assets by geographic region have not changed significantly from September 30, 1999.</FONT></DIV> <DIV><FONT SIZE="5">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>ITEM 2.&nbsp;&nbsp;&nbsp;&nbsp;MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>Forward-Looking Statements</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">This Quarterly Report on Form 10-Q contains forward-looking statements that describe our anticipated financial results and growth based on our plans and assumptions. Important information about the basis for these plans and assumptions and certain factors that may cause our actual results to differ materially from these statements is contained below and in<I> &#147;Important Factors That May Affect Future Results&#148;</I> beginning on page 13.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>Business Overview</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Historically, our core business focus has been to provide mechanical CAD/CAM/CAE solutions to customers through our flagship Pro/ENGINEER&reg; design software, and we remain committed to providing our customers with industry leading flexible engineering solutions based on this software. Additionally, we believe that there is growing demand for collaborative product commerce (CPC) solutions from manufacturers who, in order to stay competitive, must deliver more custom-tailored goods faster and at lower prices while relying more than ever before on geographically dispersed and dynamic supply chains. CPC solutions include software and services that use Internet technologies to permit individuals&#151;no matter what role they have in the commercialization of a product, no matter what computer-based tools they use, no matter where they are located geographically or in the supply chain&#151;to collaboratively develop, build and manage products throughout their entire lifecycle. In order to pursue this opportunity, we expanded our focus in 1999 to encompass the complete CPC solution offered by our Web-based Windchill&reg; information management software and plan to continue this focus in 2000. This expanded focus going forward allows us to increase the business impact our customers derive from our flexible engineering solutions and provides our customers with the additional tools they need to elevate their products into enterprise assets and to leverage these assets into new business opportunities.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>Results of Operations</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The following is an overview of our results of operations:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Total revenue was $250.1 million for the first quarter of 1999 and $239.0 million for the first quarter of 2000.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our year-over-year first quarter revenue declined 4% reflecting a 23% decrease in software license revenue offset by an 18% increase in service revenue.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net income decreased 65% to $10.4 million for the first quarter of 2000.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Pro forma net income, which excludes the amortization of goodwill and intangible assets and acquisition and nonrecurring charges, decreased 61% to $17.6 million for the first quarter of 2000.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> The following table shows certain consolidated financial data as a percentage of our total revenue for the first quarter of 1999 and 2000.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE ALIGN="center" WIDTH="561" CELLSPACING=0 CELLPADDING=0> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=5 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Three months ended</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TH VALIGN="bottom" ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;</FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=2 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 2, <BR> 1999</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> <TH><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TH> <TH COLSPAN=2 VALIGN="bottom" NOWRAP ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>January 1, <BR> 2000</B></FONT><FONT SIZE="1"><HR ALIGN="center" WIDTH="100%" SIZE="1" NOSHADE></FONT></TH> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Revenue:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;License</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">54</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">%</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">44</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">%</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Service</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">46</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">56</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">100</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">100</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Costs and expenses:</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of license revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of service revenue</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">17</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">23</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and marketing</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">38</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">44</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and development</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">12</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">14</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">7</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">7</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortization of goodwill and other intangible assets</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">1</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Acquisition and nonrecurring charges</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">5</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Total costs and expenses</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">82</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">94</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Operating income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">18</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">6</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other income, net</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">1</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Income before income taxes</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">19</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">6</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Provision for income taxes</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">7</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">2</FONT></TD> <TD><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &nbsp;</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="1" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Net income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">12</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">%</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">4</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">%</FONT></TD> </TR> <TR> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD><FONT SIZE="1"><HR ALIGN="right" WIDTH="100%" SIZE="2" NOSHADE></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Pro forma, excluding amortization of goodwill and intangible assets and <BR> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;acquisition and nonrecurring charges:</I></FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="right"></TD> <TD></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">25</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">%</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">10</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">%</FONT></TD> </TR> <TR> <TD VALIGN="bottom" WIDTH="409" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net income</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">18</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">%</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" NOWRAP ALIGN="right"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">7</FONT></TD> <TD VALIGN="bottom" ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">%</FONT></TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>REVENUE.&nbsp;&nbsp;&nbsp;&nbsp;</I>As a result of our expanded focus on providing CPC solutions, software and service revenue from our Windchill products grew to 16% of total revenue in the first quarter of 2000, up from 2% in the first quarter of 1999. Overall, however, total revenue decreased 4% for the first quarter of 2000, compared to the first quarter of 1999.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">License revenue decreased 23% for the first quarter of 2000 compared to the first quarter of 1999. While we continue to derive our license revenue primarily from software related to the mechanical CAD/CAM/CAE industry, we have channeled significant resources into transforming ourselves from a CAD/CAM/CAE-only company to one that is strategically positioned to provide Internet-based CPC solutions. This fundamental transformation, which has taken place over the past six quarters, has impacted every aspect of our business, most notably our sales organization.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In fiscal 1999, we implemented a company-wide reorganization of our sales force. This reorganization has taken longer to be effective than we initially anticipated, and our results in this quarter reflect this. The transition to a two-product company has resulted in a greater Windchill CPC focus, reduced sales capacity for the CAD/CAM/CAE product line and resultant loss of market share. Given that the first quarter is seasonally our most challenging one, the reduced capacity for the CAD/CAM/CAE product line had an even more acute impact on revenue this quarter, as evidenced by the fact that unit sales of our core Pro/ENGINEER design software were down 32% in the first quarter of 2000 compared to the first quarter of 1999.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> An integral part of the sales force reorganization encompassed changing the way we distribute our CAD/CAM/CAE products to smaller business segments. We licensed approximately 90% of our products directly to end-user customers in each of the first quarters of 1999 and 2000 with the remainder licensed through third-party distributors, primarily Rand A Technology Corporation.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In the first quarter of 1999, we entered into a master distribution arrangement with Rand to address certain smaller business segments. Rand &#146;s performance has been impacted by the transition required by this new relationship, and, while their performance is improving, their level of revenue contribution has been lower than anticipated. We believe, however, that this strategy will enhance our long-term growth. In the first quarter of 2000, we amended the distribution agreement with Rand to expand its distribution into a broader segment of small businesses. Providing this broader base of business opportunity should continue to assist Rand in further developing its distribution network, growing sales of our products and enhancing our long-term growth. Our results could be adversely affected if Rand is unable to achieve certain sales levels or make existing or future payments.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">During this quarter we closed fewer large deals than we expected and experienced some weakness with existing customers, particularly in Japan and Europe. In addition, market demand in certain segments of the CAD/CAM/CAE industry appears to have slowed. We also experienced a lower average selling price of our Pro/ENGINEER software, which decreased by 10% in the first quarter of 2000 compared to the first quarter of 1999. Additional factors affecting our revenue and operating results are included in &#147;<I>Important Factors That May Affect Future Results</I>&#148; below.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our service revenue is derived from the sale of software maintenance contracts and the performance of training and consulting services. Service revenue, which has a lower gross profit margin than license revenue, accounted for 46% and 56% of total revenue in the first quarter of 1999 and 2000, respectively. Service revenue increased 18% in the first quarter of 2000 compared to the same period in 1999. This increase is the result of growth in our installed customer base and increased training and consulting services performed for these customers. We expect service revenue to continue to increase in absolute dollars for the remainder of 2000.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We derived 54% and 56% of our total revenue from sales to international customers in the first quarter of 1999 and 2000, respectively.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B> </B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">[CHART SHOWING REVENUE BY GEOGRAPHY (in millions)]</FONT></DIV> <DIV ALIGN="left"><PRE> North America Europe Asia/Pacific Q1 99 $115.9 $98.6 $35.7 Q1 00 $104.3 $91.0 $43.8 REVENUE BY GEOGRAPHY (IN MILLIONS) </PRE> </DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Looking forward, our overall revenue levels will be affected by our ability to capitalize on the CPC opportunity while balancing our sales capacity between Pro/ENGINEER and Windchill. Our challenge is to manage and maintain leadership in our traditional mechanical CAD/CAM/CAE business while investing aggressively in a new product area that presents significant growth opportunities. Because our transition to a two-product business model is not yet complete, we are cautious in our overall near-term outlook. Nevertheless, we believe that our Windchill business may further differentiate our mechanical CAD/CAM/CAE products and ultimately invigorate our mechanical CAD/CAM/CAE business.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">COSTS AND EXPENSES.&nbsp;&nbsp;&nbsp;&nbsp;Our operating expenses are based on anticipated future revenue and are relatively fixed for the short term. We are incurring expenses that would support revenues in excess of current levels in order to implement our strategic initiatives, particularly as they relate to our Windchill CPC solutions. Although these expense levels have adversely affected net income, we continue to believe that these initiatives will provide a foundation for future growth.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">COST OF LICENSE REVENUE.&nbsp;&nbsp;&nbsp;&nbsp;Our cost of license revenue consists of costs associated with reproducing and distributing software and documentation and the payment of royalties. Cost of license revenue as a percent of license revenue was 3% and 4% for the first quarter of 1999 and 2000, respectively.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">COST OF SERVICE REVENUE.&nbsp;&nbsp;&nbsp;&nbsp;Our cost of service revenue includes costs associated with training and consulting personnel, such as salaries and related costs and travel, and costs related to software maintenance, including costs incurred for customer support personnel and the release of maintenance updates. The increase in our cost of service revenue resulted primarily from growth in the staffing necessary to generate increased worldwide service revenue and to provide ongoing high-quality customer support to our growing installed base. Cost of service revenue as a percent of service revenue was 37% and 42% for the first quarter of 1999 and 2000, respectively. This increase reflects our investment in the staffing necessary to support our new product offerings, principally our Windchill CPC solutions.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">SALES AND MARKETING.&nbsp;&nbsp;&nbsp;&nbsp;Our sales and marketing expenses primarily include salaries and benefits, sales commissions, travel and facility costs. These costs increased 9% in the first quarter of 2000 compared to 1999 primarily due to the higher average cost per sales employee, as we are hiring a more experienced Windchill CPC solutions sales force. Total sales and marketing employees decreased from 2,180 at January 2, 1999 to 1,898 at January 1, 2000 primarily due to the sales force reorganizations during 1999.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">RESEARCH AND DEVELOPMENT.&nbsp;&nbsp;&nbsp;&nbsp;Our research and development expenses consist principally of salaries and benefits, expenses associated with product translations, costs of computer equipment used in software development and facility expenses. Compared to the first quarter of 1999, research and development expenses increased 17% in the first quarter of 2000. This is primarily attributable to our continued investment in research and development, particularly in connection with our Windchill CPC solutions and the impact of our InPart, Division and auxilium acquisitions in 1999. We expect our investment in research and development to increase in absolute dollars for the remainder of 2000.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">GENERAL AND ADMINISTRATIVE.&nbsp;&nbsp;&nbsp;&nbsp;Our general and administrative expenses include costs of our corporate, finance, information technology, human resources and administrative functions. These costs were flat in the first quarter of 2000 compared to the first quarter of 1999.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS.&nbsp;&nbsp; &nbsp;&nbsp;These costs represent the amortization of intangible assets acquired, including developed technology, goodwill, customer lists, assembled work force and trade names. The increased amortization of $6.9 million in the first quarter of 2000 compared to 1999 primarily resulted from our 1999 acquisitions of InPart, Division and auxilium.</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B> </B></FONT></DIV> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times">[CHART SHOWING COSTS AND EXPENSES (in millions)]</FONT></DIV> <DIV ALIGN="left"><PRE> Q1 99 Q1 00 ------- ------- Cost of License Revenue $ 4.1 $ 4.1 Cost of Service Revenue 41.7 56.0 Sales and Marketing 96.1 104.9 Research and Development 29.2 34.1 General and Administrative 16.6 16.5 Amortization of Goodwill and Intangible Assets 2.5 9.4 Acquisition and Nonrecurring Charges 13.8 - </PRE> </DIV> </DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B></B><I>ACQUISITION AND NONRECURRING CHARGES.</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Acquisition.&nbsp;&nbsp;&nbsp;&nbsp;</I>In October 1998, we purchased InPart Design, Inc., the developer of DesignSuite, a Web-based repository of 3D mechanical component data, as well as the developer of enterprise software applications focused on Web-based component and supplier management, which was founded in 1996. We allocated the purchase price of $38.1 million to the assets acquired and liabilities assumed based on our estimate of fair value. The values assigned included $741,000 for net liabilities assumed, $10.6 million for purchased in-process research and development (R&amp;D), $4.1 million for developed technology, $1.1 million for customer lists, $200,000 for an assembled workforce and $300,000 for trade names. The excess purchase price over the amounts allocated to assets acquired and liabilities assumed was recorded as goodwill of $22.5 million.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In the opinion of management, the purchased in-process R&amp;D had not yet reached technological feasibility and had no alternative future use. Accordingly, we recorded a nonrecurring charge of $10.6 million during the first quarter of 1999. For additional information about this acquisition, see Item 7 of our 1999 Annual Report on Form 10-K.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Sales Force Reorganization.&nbsp;&nbsp;&nbsp;&nbsp;</I>During the first quarter of 1999, we reorganized our sales force to provide a more focused approach to the unique product and service requirements of our customers. In connection with this action, we incurred a restructuring charge of $3.2 million for the severance and termination benefits of approximately 170 people who were terminated during the first quarter of 1999 in accordance with management&#146;s plans. All amounts related to terminated employees were paid in 1999.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>OTHER INCOME, NET.&nbsp;&nbsp;&nbsp;&nbsp;</I>Our other income, (net) includes interest income, interest expense, costs of hedging contracts, the gain or loss from the translation of results for subsidiaries for which the U.S. dollar is the functional currency and other charges incurred in connection with financing customer contracts. For the first quarter of 1999, we reported other income of $1.9 million compared to $643,000 for the first quarter of 2000. The change is primarily due to lower interest income, as a result of lower average invested balances, and the weakening of the dollar against certain foreign currencies.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>INCOME TAXES.&nbsp;&nbsp;&nbsp;&nbsp;</I>Our effective tax rate for the first quarter of 1999 was 38% compared with 29% for the corresponding period in 2000. The difference between our effective tax rate and the statutory federal income tax rate of 35% was due primarily to the non-deductibility of certain acquisition and nonrecurring charges in the first quarter of 1999 and the use of Computervision net operating losses in the first quarter of 2000. On a pro forma basis, which excludes amortization of goodwill and intangible assets and acquisition and nonrecurring charges, our effective tax rate for the first three months of 1999 and 2000 was 30% and 29%, respectively.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <I>EMPLOYEES.&nbsp;&nbsp;&nbsp;&nbsp;</I>The number of worldwide employees was 4,803 at January 2, 1999 compared to 5,051 at January 1, 2000. The increase over the prior year was a result of growth in our services organization and in the research and development group, primarily through acquisitions, offset by a decrease due to the sales force reorganizations during 1999.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>Liquidity and Capital Resources</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our operating activities, the proceeds from our issuance of stock under stock plans and existing cash and investments provided sufficient resources to fund our employee base, capital assets needs, stock repurchases, acquisitions and financing needs, in the first quarters of 1999 and 2000.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">As of January 1, 2000, cash and investments totaled $420.4 million, up from $353.9 million at September 30, 1999. The primary reason for the increase in cash and investments during the quarter ending January 1, 2000 was $53.8 million in proceeds from stock option exercises and $30.8 million from the sale of land and certain improvements, partially offset by $10.8 million in expenditures to acquire property and equipment. Our investment portfolio is diversified among security types, industries and individual issuers. Our investments are generally liquid and investment grade. The portfolio is primarily invested in short-term securities to minimize interest rate risk and to facilitate rapid deployment in the event of immediate cash needs.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Cash generated from operating activities was $30.8 million in the first quarter of 1999, compared to $2.0 million in the first quarter of 2000, net of cash expenditures for nonrecurring charges of $6.0 million in the first quarter of 2000. The decrease in cash generated from operating activities was primarily due to lower net income.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In the first quarter of 1999 and 2000, we acquired $8.5 million and $10.8 million, respectively, of capital equipment consisting principally of computer equipment, software and office equipment.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We generated net cash from financing activities during the first quarter of 2000 of $53.8 million from the issuance of common stock under our stock plans. In the first quarter of 1999, we used net cash in financing activities of $45.5 million, consisting of $50.0 million for the purchase of treasury stock, partially offset by $4.5 million from the issuance of common stock under our stock plans. Through January 1, 2000 we had repurchased 11.0 million of the 20.0 million shares authorized by the Board of Directors to be repurchased under our approved repurchase program. The repurchased shares will be used for stock option exercises, employee stock purchase plans and potential acquisitions. No shares were purchased in the first quarter of 2000, but we expect to repurchase shares during 2000 as determined by management.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In December 1999, we sold land and certain improvements under construction for approximately $30.8 million and entered into a lease covering approximately 381,000 square feet of office space in the Boston area that will allow us to consolidate and replace our Waltham operations. Occupancy and rent should begin in December 2000 and expire in December 2012, subject to completion of construction.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We believe that existing cash and short-term investments together with cash generated from operations and the issuance of common stock under our stock plans will be sufficient to meet our working capital, financing and capital expenditures requirements through at least the end of the current fiscal year.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>New Accounting Pronouncements</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. See Note 4 to the unaudited consolidated financial statements included herein.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>Year 2000 Computer Systems Compliance</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The initial results of our Year 2000 readiness plan indicate that our assessment, improvement and testing program succeeded in providing a smooth transition to the Year 2000 rollover. We have not experienced any significant Year 2000 disruptions with our products, our internal information technology systems or our major vendors. While these results are still preliminary, it does not appear that there will be a material impact on our business or operations from Year 2000 problems. In the aggregate, we incurred costs of approximately $7.0 million on our compliance project. All costs were expensed as incurred.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>Important Factors That May Affect Future Results</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The following are some of the factors that could affect our future results. They should be considered in connection with evaluating forward-looking statements contained in this Quarterly Report on Form 10-Q and otherwise made by us or on our behalf, because these factors could cause actual results and conditions to differ materially from those projected in forward-looking statements.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>I.&nbsp;&nbsp;&nbsp;&nbsp;Operational Considerations</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Our operating results fluctuate within each quarter and from quarter-to-quarter making our future revenues and operating results difficult to predict</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">While our sales cycle varies substantially from customer to customer, we usually realize a high percentage of our revenue in the third month of each fiscal quarter, and this revenue tends to be concentrated in the later part of that month. Our orders early in a quarter will not generally occur at a rate which, if sustained throughout the quarter, would be sufficient to assure that we will meet our revenue targets for any particular quarter. Moreover, our sales force reorganizations in 1999, our shift in business emphasis to a more solutions-oriented sales process&#151;undertaken in part to increase our average order size&#151;and our focus on Windchill CPC solutions have resulted in longer and more unpredictable sales cycles for products and services. Accordingly, our quarterly results may be difficult to predict prior to the end of the quarter. Any inability to obtain large orders or orders in large volumes or to make shipments or perform services in the period immediately preceding the end of any particular quarter may cause the results for that quarter to fall short of our revenue targets. In addition, our operating expenses are based on expected future revenue and are relatively fixed for the short term. As a result, a revenue shortfall in any quarter could cause our earnings for that quarter to fall below expectations as well. Any failure to meet our quarterly revenue or earnings targets could adversely impact the market price of our stock.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Other factors that may also cause quarter-to-quarter revenue and earnings fluctuation, include the following:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">our sales incentive structure is weighted more heavily toward the end of the fiscal year, and the rate of revenue growth for the first quarter historically has been lower and more difficult to predict than that for the fourth quarter of the immediately preceding fiscal year; and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">variability in the levels of professional service revenues and the mix of our license and service revenues.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In addition, the levels of quarterly or annual software or service revenue in general, or for particular geographic areas, may not be comparable to those achieved in previous periods.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>We may not be able to implement new initiatives successfully</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We have had a history of rapid growth and development as an organization. Part of our success has resulted from our ability to implement new initiatives. Our future operating results will continue to depend upon:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">the success of our sales force reorganization initiatives, including</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="8%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;our shift from point sales to solution sales,</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="8%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> &#151;our shift from geography-based to named-account sales,</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="8%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;the ability of our sales reps to learn and sell our full product line, and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="8%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;Rand&#146;s and other distributor&#146;s ability to perform, including building a distributor network and competing successfully in the small business segment of the mechanical CAD/CAM/CAE arena;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">our ability to anticipate and meet evolving customer requirements in the CPC arena and successfully deliver products and services at an enterprise level; and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">our ability to identify and penetrate additional industry sectors that represent growth opportunities.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B></B><I>We may not be successful in integrating recently acquired businesses or products</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We have increased our product range and customer base in the recent past due in part to acquisitions. We may acquire additional businesses or product lines in the future. The success of any acquisition may be dependent upon our ability to integrate the acquired business or products successfully and to retain key personnel and customers associated with the acquisition. If we fail to do so, or if the costs of or length of time for integration increase significantly, it could negatively affect our business.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In addition, acquisitions may result in the allocation of purchase price to in-process R&amp;D. The Securities and Exchange Commission (SEC) has raised issues regarding the methodologies used and allocation of purchase price to in-process R&amp;D and has required some companies to adjust or restate prior periods to reduce allocations to in-process R&amp;D, thereby increasing intangible assets and future amortization expense. While we believe that our in-process R&amp;D allocations are appropriate, if the SEC were to require us to change an allocation, this would result in a higher amortization expense, which would adversely impact our operating results.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B></B><I>We are dependent on key personnel whose loss could cause delays in our product development and sales efforts</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our success depends upon our ability to attract and retain highly skilled technical, managerial and sales personnel. Competition for such personnel in the high technology industry is intense. We assume that we will continue to be able to attract and retain such personnel. The failure to do so, however, could have a material adverse effect on our business.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B></B><I>We must continually modify and enhance our products to keep pace with changing technology, and we may experience delays in developing and debugging our software</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We must continually modify and enhance our products to keep pace with changes in computer software, hardware and database technology, as well as emerging standards in the Internet software industry. Our ability to remain competitive will depend on our ability to:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">enhance our current offerings and develop new products and services that keep pace with technological developments through</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="8%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;internal research and development,</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="8%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;acquisition of technology, and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="8%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&#151;strategic partnerships;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">meet evolving customer requirements, especially ease-of-use;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">provide adequate funding for development efforts; and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">license appropriate technology from third parties.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> Also, as is common in the computer software industry, we may from time to time experience delays in our product development and &#147;debugging &#148; efforts. Our performance could be hurt by significant delays in developing, completing or shipping new or enhanced products. Among other things, such delays could cause us to incorrectly predict the fiscal quarter in which we will realize revenue from the shipment of the new or enhanced products and give our competitors a greater opportunity to market competing products.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B></B><I>We may be unable to price our products competitively or distribute them effectively</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our success is tied to our ability to price our products and services competitively and to deliver them efficiently, including our ability to:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">provide products with functionality that our customers want at a price they can afford;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">build appropriate direct distribution channels;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">utilize the Internet for sales; and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">build appropriate indirect distribution channels through Rand or others.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B></B><I>We depend on sales from outside the United States that could be adversely affected by changes in the international markets</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">A significant portion of our business comes from outside the United States. Accordingly, our performance could be adversely affected by economic downturns in Europe or the Asia/Pacific region. Another consequence of significant international business is that a large percentage of our revenues and expenses are denominated in foreign currencies that fluctuate in value. Although we may enter into foreign exchange forward contracts and foreign exchange option contracts to offset a portion of the foreign exchange fluctuations, unanticipated events may have a material impact on our results. Other risks associated with international business include:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">changes in regulatory practices and tariffs;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">staffing and managing foreign operations, including the difficulties in providing cost-effective, equity-based compensation to attract skilled workers;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">longer collection cycles in certain areas;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">potential changes in tax and other laws;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">greater difficulty in protecting intellectual property rights; and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">general economic and political conditions.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B></B><I>We may not be able to obtain copyright or patent protection for the software products we develop or our other trademarks</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our software products and our other trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, there can be no assurance that the laws of all relevant jurisdictions will afford adequate protection to our products and other intellectual property. The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. While we have not, to date, had any significant claims of this type asserted against us, there can be no assurance that someone will not assert such claims against us with respect to existing or future products or other intellectual property or that, if asserted, we would prevail in such claims. In the event a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we ultimately prevail.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <B>II.&nbsp;&nbsp;&nbsp;&nbsp;Mechanical CAD/CAM/CAE-Related Considerations</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Increasing competition in the mechanical CAD/CAM/CAE marketplace may reduce our revenues</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">There are an increasing number of competitive mechanical CAD/CAM/CAE products. Despite our belief that our products are technologically superior, some competitive products have reached a level of functionality whereby product differentiation is less likely, in and of itself, to dislodge incumbent CAD systems, given the training and other startup costs associated with system replacement. Increased competition and market acceptance of these competitive products could have a negative effect on pricing and revenues for our products, which could have a material adverse affect on our results.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In addition, our CAD/CAM/CAE software is capable of performing on a variety of platforms. Several of our competitors focus on single platform applications, particularly Windows-based platforms. There can be no assurance that we will have a competitive advantage with multiple platform applications.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We continue to enhance our existing products by releasing updates. Our competitive position and operating results could suffer if:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">we fail to anticipate or to respond adequately to customer requirements or to technological developments, particularly those of our competitors;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">we delay the development, production, testing, marketing or availability of new or enhanced products or services; or</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">customers fail to accept such products or services.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Growth in the CAD/CAM/CAE industry appears to have slowed</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Growth in certain segments of the mechanical CAD/CAM/CAE industry appears to have slowed and, coupled with decreased functional differentiation among flexible engineering tools, may affect our ability to penetrate the market for new customers and recapture our market share. We believe our emphasis on Windchill CPC solutions will allow us to differentiate our flexible engineering products from the competition and invigorate sales of those products. However, the strategy may not be successful or may take longer than we plan. There could be a material adverse affect on our operating results in any quarter if these assumptions prove to be incorrect.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>III.&nbsp;&nbsp;&nbsp;&nbsp;CPC and Windchill Strategy Considerations</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>We are implementing a new strategy to capitalize on an Internet-based, business-to-business market opportunity known as Collaborative Product Commerce (CPC). It may be that our assumptions about the CPC market opportunity are wrong, which could adversely affect our results</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">We have identified CPC as a new market opportunity for us, and have devoted significant resources toward capitalizing on that opportunity. CPC solutions include software and services that use Internet technologies to permit employees, customers, suppliers and others to collaboratively develop, build and manage products throughout their entire lifecycle. Because the market for software products that allow companies to collaborate on product information on an enterprise-wide level is newly emerging and because companies have not traditionally linked customers and suppliers in this process directly, we cannot be certain as to the size of this market, whether it will grow, or whether companies will elect to utilize our products rather than attempt to develop applications internally or through other sources.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In addition, companies that have already invested substantial resources in other methods of sharing product information in the design-through-manufacture process may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems or methods. We expect that we will continue to need to pursue intensive marketing and sales efforts to educate prospective customers about the uses and benefits of our products. Demand for and market acceptance of our products will be affected by the success of these efforts.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"> <I>Our Windchill software, which is central to our CPC strategy, is relatively new and is not yet well established in the marketplace</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The success of our CPC strategy will depend in large part on the ability of our Windchill solutions to meet customer expectations, especially with respect to:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">ease of installation;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">ease of use;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">full capability, functionality and performance;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">ability to support a large user base; and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">quality and efficiency of the services we perform relating to implementation and customization.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The software is still relatively new. If our customers cannot successfully deploy large-scale implementation projects or if they determine that we are unable to accommodate large-scale deployments, our operating results may be affected.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In addition, implementing a Windchill software solution on an enterprise level takes longer and requires greater expertise than does installing our other products. Our Windchill software must integrate with existing computer systems and software programs used by our customers and their partners. Because we are one of the first companies to offer a CPC solution, many customers will be facing these integration issues for the first time, particularly in the context of collaborating with members of the extended enterprise, including customers and supply chain partners. Our customers could become dissatisfied with our products or services if integrations prove to be difficult, costly or time consuming, and our operating results may be affected.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Competition among providers of CPC solutions may increase, which may reduce our profits and limit or reduce our market share</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The market for CPC solutions is new, highly fragmented, rapidly changing and increasingly competitive. We expect competition to intensify, which could result in price reductions for our products and services, reduced gross margins and loss of market share. Our primary competition comes from:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">in-house development efforts by potential customers or partners;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">other vendors of engineering information management software; and</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">larger, more well-known enterprise software providers seeking to extend the functionality of their products to encompass CPC.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In addition, our professional services organization may face increasing competition for follow-on customization services from other third-party consultants and service providers.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>If use of the Internet does not continue to develop or reliably support the demands placed on it by electronic commerce, we may experience a loss of sales</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our success depends upon continued growth in the use of the Internet as a medium of commerce. Although the Internet is experiencing rapid growth in the overall number of users, this growth is a recent phenomenon and may not continue. Furthermore, the use of the Internet for commerce is still relatively new. As a result, a sufficiently broad base of companies and their supply chain partners may not adopt or continue to use the Internet as a medium of exchanging product information. Our CPC strategy would be seriously harmed if:</FONT></DIV> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">use of the Internet does not continue to increase or increases more slowly than expected;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">the infrastructure for the Internet does not effectively support enterprises and their supply chain partners;</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">the Internet does not create a viable commercial marketplace, thereby inhibiting the development of electronic commerce and reducing the demand for our products; or</FONT></DIV> </TD> </TR> </TABLE> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="4%" ALIGN="left" VALIGN="top"></TD> <TD WIDTH="4%" ALIGN="left" VALIGN="top"><DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT><FONT SIZE="2" COLOR="#000000" FACE="Symbol">&#183;</FONT><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> <TD WIDTH="92%" ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">concerns over the secure transmission of confidential information over public networks inhibit the growth of the Internet as a means of conducting commercial transactions.</FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="1">&nbsp;</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Our CPC strategy will also be seriously harmed if the Internet infrastructure is not able to support the demands placed on it by increased usage or the limited capacity of networks to transmit large amounts of data, or if delays in the development or adoption of new equipment standards or protocols required to handle increased levels of Internet activity, or increased governmental regulation, cause the Internet to lose its viability as a means of communication between manufacturers and their customers and supply chain partners.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>IV.&nbsp;&nbsp;&nbsp;&nbsp;Other Considerations</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Our stock price, which may reflect an Internet valuation, has been highly volatile; this may make it harder to resell your shares at the time and at a price that is favorable to you</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Market prices for securities of software companies have generally been volatile. In particular, the market price of our common stock has been and may continue to be subject to significant fluctuations.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">In addition, our expanded focus on delivering Internet-based solutions may cause us to be viewed, in part, as an Internet company. The trading prices of Internet stocks in general are unusually high under conventional valuation standards such as price-to-earnings and price-to-sales ratios and have experienced fluctuations unrelated or disproportionate to the operating performance of these companies. The trading prices and valuations of these stocks, and of ours, may not be sustained. Any negative change in the public&#146;s perception of the prospects of Internet or e-commerce companies, or of PTC as an Internet company, could depress our stock price regardless of our results.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Also, a large percentage of our common stock traditionally has been held by institutional investors. Consequently, actions with respect to our common stock by certain of these institutional investors could have a significant impact on the market price of the stock. For more information, please see our proxy statement with respect to our most recent annual meeting of stockholders and Schedules 13D and 13G filed with the SEC with respect to our common stock.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>We are currently defending a securities class action lawsuit in which we could be liable for damages</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Certain class action lawsuits were filed by shareholders in the fourth quarter of 1998 against us and certain of our current and former officers and directors in the U.S. District Court in Massachusetts claiming violations of the federal securities laws based on alleged misrepresentations regarding our anticipated revenue and earnings for the third quarter of 1998. The plaintiffs in these lawsuits joined together to file a consolidated and amended complaint in the second quarter of 1999. The consolidated and amended complaint seeks unspecified damages. We believe the claims made in the consolidated and amended complaint are without merit, and we intend to defend them vigorously. In the third quarter of 1999 we filed a motion to dismiss the consolidated and amended complaint. We cannot predict the outcome of this motion or the ultimate resolution of this action at this time, and there can be no assurance that the litigation will not have a material adverse impact on our financial condition or results of operations.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Year 2000 problems which have not yet surfaced could cause interruption or failure with respect to our product offerings, our internal computer systems and those of our critical vendors and suppliers</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operations and results could be adversely affected if our current product offerings or internal systems should demonstrate Year 2000 problems that are not yet apparent or if the major vendors or suppliers with whom we deal cannot be easily replaced should they experience Year 2000 difficulties that have not yet appeared. In addition, purchases by our customers could be affected if they must expend significant resources to correct their own systems.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><I>Our operations in Europe may be affected by the European Union &#146;s conversion to a common currency</I></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">The conversion of major European countries to a common legal currency creates uncertainties for companies like us that do significant business in Europe. These uncertainties include technical adaptation of internal systems to accommodate euro-denominated transactions, long-term competitive implications of the conversion and the effect on market risk with respect to financial instruments.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>ITEM 3.&nbsp;&nbsp;&nbsp;&nbsp;QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Other than as disclosed in this report on Form 10-Q, there have been no significant changes in our market risk exposure as described in Item 7A: &#147;<I>Quantitative and Qualitative Disclosures About Market Risk</I> &#148; to our 1999 Annual Report on Form 10-K, which is incorporated herein by reference.</FONT></DIV> <DIV><FONT SIZE="6">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>PART II&#151;OTHER INFORMATION</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>ITEM 1.&nbsp;&nbsp;&nbsp;&nbsp;LEGAL PROCEEDINGS</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Certain class action lawsuits were filed by shareholders in the fourth quarter of 1998 against us and certain of our current and former officers and directors in the U.S. District Court in Massachusetts claiming violations of the federal securities laws based on alleged misrepresentations regarding our anticipated revenue and earnings for the third quarter of fiscal 1998. The plaintiffs in these lawsuits joined together to file a consolidated and amended complaint in the second quarter of 1999. The consolidated and amended complaint seeks unspecified damages. We believe the claims made in the consolidated and amended complaint are without merit, and we intend to defend them vigorously. In the third quarter of 1999 we filed a motion to dismiss the consolidated and amended complaint. We cannot predict the outcome of this motion or the ultimate resolution of this action at this time, and there can be no assurance that the litigation will not have a material adverse impact on our financial condition or results of operations.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are also subject to various legal proceedings and claims that arise in the ordinary course of business. We currently believe that resolving these matters will not have a material adverse impact on our financial condition or results of operations.</FONT></DIV> <DIV><FONT SIZE="5">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>ITEM 6.&nbsp;&nbsp;&nbsp;&nbsp;EXHIBITS AND REPORTS ON FORM 8-K</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(a)&nbsp;&nbsp;&nbsp;&nbsp;Exhibits</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE WIDTH="468" CELLSPACING=0 CELLPADDING=0> <TR> <TD VALIGN="bottom" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">27.1</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" WIDTH="426" NOWRAP ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Financial Data Schedule for the period ended January 1, 2000; filed herewith.</FONT></TD> <TD><FONT SIZE="1">&nbsp;&nbsp;</FONT></TD> <TD VALIGN="bottom" ALIGN="left"></TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">For our documents incorporated by reference, references are to File No. 0-18059.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">(b)&nbsp;&nbsp;&nbsp;&nbsp;Reports on Form 8-K</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">No reports on Form 8-K were filed during the quarter ending January 1, 2000.</FONT></DIV> <DIV><FONT SIZE="6">&nbsp;</FONT></DIV> <DIV ALIGN="center"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"><B>SIGNATURE</B></FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">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 hereunto duly authorized.</FONT></DIV> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="52%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">P<SMALL>ARAMETRIC </SMALL> T<SMALL>ECHNOLOGY </SMALL> C<SMALL>ORPORATION</SMALL> </FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="5">&nbsp;</FONT></DIV> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="56%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" WIDTH="44%" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times"></FONT></DIV> </TD> </TR> </TABLE> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="52%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" WIDTH="48%" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">By:&nbsp; &nbsp;/<SMALL>S</SMALL> /&nbsp;&nbsp;&nbsp;&nbsp;E<SMALL>DWIN </SMALL> J. G<SMALL>ILLIS</SMALL> <U> <HR SIZE=1 NOSHADE> </U></FONT></DIV> </TD> </TR> </TABLE> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="56%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="left"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B>Edwin J. Gillis</B></FONT></DIV> </TD> </TR> </TABLE> <TABLE WIDTH="100%" BORDER="0" CELLPADDING="0" CELLSPACING="0"> <TR> <TD WIDTH="52%" ALIGN="left" VALIGN="top"></TD> <TD ALIGN="left" VALIGN="top"> <DIV ALIGN="center"><FONT SIZE="1" COLOR="#000000" FACE="'Times New Roman', Times"><B><I>Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)</I></B></FONT></DIV> </TD> </TR> </TABLE> <DIV><FONT SIZE="2">&nbsp;</FONT></DIV> <DIV ALIGN="left"><FONT SIZE="2" COLOR="#000000" FACE="'Times New Roman', Times">Date: February 14, 2000</FONT></DIV> </BODY> </HTML>

2000

0QTR1

QCOM

https://www.sec.gov/Archives/edgar/data/804328/0000936392-00-000080.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, VRXTvcua7cEsx6PbxbZlVMWaphdV07aMcKhQC+ZAGe+3T/x8HokK+um6ZsATPhxw vkIp4BpOZWqJwT1nZIgEVA== <SEC-DOCUMENT>0000936392-00-000080.txt : 20000203 <SEC-HEADER>0000936392-00-000080.hdr.sgml : 20000203 ACCESSION NUMBER: 0000936392-00-000080 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991226 FILED AS OF DATE: 20000128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALCOMM INC/DE CENTRAL INDEX KEY: 0000804328 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 953685934 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19528 FILM NUMBER: 516840 BUSINESS ADDRESS: STREET 1: 5775 MOREHOUSE DR CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 8585871121 MAIL ADDRESS: STREET 1: 5775 MOREHOUSE DR CITY: SAN DIEGO STATE: CA ZIP: 92121 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 12/26/99 <TEXT> <PAGE> 1 ================================================================================ 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 26, 1999 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 0-19528 QUALCOMM INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3685934 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO) 5775 MOREHOUSE DR., SAN DIEGO, CALIFORNIA 92121-1714 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (858) 587-1121 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) FORMER ADDRESS: 6455 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121-2779 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 twelve 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 ninety days. Yes [X] No [ ] The number of shares outstanding of each of the issuer's classes of common stock, as of the close of business on January 24, 2000: Class Number of Shares ----- ---------------- Common Stock; $0.0001 per share par value 708,241,290 <PAGE> 2 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. QUALCOMM Incorporated /s/ ANTHONY S. THORNLEY ------------------------------------------- Anthony S. Thornley Executive Vice President & Chief Financial Officer Dated: January 28, 2000 2 <PAGE> 3 QUALCOMM INCORPORATED INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets .................. 4 Condensed Consolidated Statements of Income ............ 5 Condensed Consolidated Statements of Cash Flows ........ 6 Notes to Condensed Consolidated Financial Statements.... 7-15 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ..................... 16-21 PART II. OTHER INFORMATION............................................ 22 Item 1. Legal Proceedings ...................................... 22 Item 2. Changes in Securities .................................. 22 Item 3. Defaults Upon Senior Securities ........................ 22 Item 4. Submission of Matters to a Vote of Security Holders .... 22 Item 5. Other Information ...................................... 22 Item 6. Exhibits and Reports on Form 8-K ....................... 22-23 </TABLE> 3 <PAGE> 4 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS QUALCOMM INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) (Unaudited) ASSETS <TABLE> <CAPTION> DECEMBER 26, SEPTEMBER 26, 1999 1999 ------------ ------------- <S> <C> <C> Current Assets: Cash and cash equivalents $ 303,978 $ 660,016 Investments 1,087,164 954,415 Accounts receivable, net 998,200 883,640 Finance receivables 24,167 26,377 Inventories, net 259,968 257,941 Other current assets 201,825 195,849 ---------- ---------- Total current assets 2,875,302 2,978,238 Property, plant and equipment, net 537,482 555,991 Investments 165,338 70,495 Finance receivables, net 680,090 548,482 Other assets 727,223 381,744 ---------- ---------- Total assets $4,985,435 $4,534,950 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 715,546 $ 705,208 Unearned revenue 64,625 56,070 Bank lines of credit 124,000 112,000 Current portion of long-term debt 3,109 3,099 ---------- ---------- Total current liabilities 907,280 876,377 Long-term debt - 795 Other liabilities 64,587 74,872 ---------- ---------- Total liabilities 971,867 952,044 ---------- ---------- Commitments and contingencies (Note 9) Minority interest in consolidated subsidiaries 54,910 51,596 ---------- ---------- Company-obligated mandatorily redeemable Trust Convertible Preferred Securities of a subsidiary trust holding solely debt securities of the Company 269,895 659,555 ---------- ---------- Stockholders' Equity: Preferred stock, $0.0001 par value - - Common stock, $0.0001 par value 70 65 Paid-in capital 3,196,953 2,587,899 Retained earnings 377,998 200,879 Accumulated other comprehensive income 113,742 82,912 ---------- ---------- Total stockholders' equity 3,688,763 2,871,755 ---------- ---------- Total liabilities and stockholders' equity $4,985,435 $4,534,950 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements. 4 <PAGE> 5 QUALCOMM INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED ---------------------------------- DECEMBER 26, DECEMBER 27, 1999 1998 ----------- ----------- <S> <C> <C> Revenues $ 1,120,073 $ 941,223 ----------- ----------- Operating expenses: Cost of revenues 648,748 642,390 Research and development 83,404 100,362 Selling, general and administrative 101,848 120,523 Other 26,152 - ----------- ----------- Total operating expenses 860,152 863,275 ----------- ----------- Operating income 259,921 77,948 Interest expense (2,673) (3,315) Investment income (expense), net 36,247 6,750 Distributions on Trust Convertible Preferred Securities of subsidiary trust (11,045) (9,799) ----------- ----------- Income before income taxes 282,450 71,584 Income tax expense (105,331) (23,054) ----------- ----------- Net income $ 177,119 $ 48,530 =========== =========== Net earnings per common share: Basic $ 0.27 $ 0.09 =========== =========== Diluted $ 0.23 $ 0.08 =========== =========== Shares used in per share calculations: Basic 664,586 565,780 =========== =========== Diluted 790,827 593,749 =========== =========== </TABLE> See Notes to Condensed Consolidated Financial Statements. 5 <PAGE> 6 QUALCOMM INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------- DECEMBER 26, DECEMBER 27, 1999 1998 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 177,119 $ 48,530 Depreciation and amortization 35,082 44,448 Impairments and other non-cash charges and credits 24,784 - Gain on sale of available-for-sale securities (2,574) (5,663) Minority interest in income of consolidated subsidiaries 3,314 3,698 Equity in losses of investees 4,571 1,021 Deferred income tax provision 105,331 - Increase (decrease) in cash resulting from changes in: Accounts receivable, net (114,571) (240,279) Finance receivables, net (126,398) (29,866) Inventories (2,895) 51,464 Other current assets (27,479) (4,812) Accounts payable and accrued liabilities (6,288) (2,081) Unearned revenue 8,555 (8,633) Other liabilities 2,852 3,877 --------- --------- Net cash provided (used) by operating activities 81,403 (138,296) --------- --------- INVESTING ACTIVITIES: Capital expenditures (38,079) (62,884) Purchases of held-to-maturity investments (293,435) (10,363) Maturities of held-to-maturity investments 118,814 32,358 Proceeds from sale of available-for-sale securities 2,607 7,163 Issuance of notes receivable (145,555) (25,021) Collection of notes receivable - 16,835 Investments in other entities (120,511) (7,500) Other items, net (3,023) - --------- --------- Net cash used by investing activities (479,182) (49,412) --------- --------- FINANCING ACTIVITIES: Net borrowings under bank lines of credit 12,000 137,000 Net proceeds from issuance of common stock 31,484 7,953 Other items, net (1,231) (1,151) --------- --------- Net cash provided by financing activities 42,253 143,802 --------- --------- Effect of exchange rate changes on cash (512) - --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (356,038) (43,906) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 660,016 175,846 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 303,978 $ 131,940 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 6 <PAGE> 7 QUALCOMM INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying interim condensed consolidated financial statements have been prepared by QUALCOMM Incorporated (the "Company" or "QUALCOMM"), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair presentation of its financial position, results of operations and cash flows in accordance with generally accepted accounting principles. The condensed consolidated balance sheet at September 26, 1999 was derived from the audited consolidated balance sheet at that date which is not presented herein. The Company operates and reports using a period ending on the last Sunday of each month. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments (which include only normal, recurring adjustments) necessary for a fair presentation. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1999. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. 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 assets and 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. Certain prior year amounts have been reclassified to conform to the current year presentation. The Company effected a two-for-one stock split in May 1999 and a four-for-one stock split in December 1999. Stockholders' equity has been restated to give retroactive recognition to the stock splits for all periods presented by reclassifying the par value of the additional shares arising from the splits from paid-in capital to common stock. All references in the financial statements and notes to number of shares and per share amounts have been restated to reflect these stock splits. Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share ("diluted EPS") reflect the potential dilutive effect, calculated using the treasury stock method, of 68,626,000 and 27,969,000 additional common shares that are issuable upon exercise of outstanding stock options for the three months ended December 26, 1999 and December 27, 1998, respectively, and the potential dilutive effect of Trust Convertible Preferred Securities convertible into 57,615,000 shares of common stock, determined on an if-converted basis, for the three months ended December 26, 1999. Options outstanding during the three months ended December 26, 1999 and December 27, 1998 to purchase approximately 1,821,000 shares and 53,111,000 shares of common stock, respectively, were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common stock during the period and, therefore, the effect would be anti-dilutive. Net income in the computation of diluted EPS for the three months ended December 26, 1999 is increased by $7 million representing the assumed savings of distributions, net of taxes, on the Trust Convertible Preferred Securities. The inclusion of additional common shares assuming the conversion of the Trust Convertible Preferred Securities for the three months ended December 27, 1998 would have been anti-dilutive. During the first quarter of fiscal 2000, 7,793,182 Trust Convertible Preferred Securities were converted into 42,906,040 shares of common stock. The conversions resulted in a $390 million reduction in the recorded obligation to Trust Convertible Preferred Securities holders (Note 11). The Company displays the accumulated balance of other comprehensive income or loss separately in the equity section of the consolidated balance sheets. Total comprehensive income, which is comprised of net income and other comprehensive income (loss), amounted to approximately $208 million and $48 million for the three months ended December 26, 1999 and December 27, 1998, respectively. Components of other comprehensive income (loss) consist of the following (in thousands): 7 <PAGE> 8 <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------ DECEMBER 26, DECEMBER 27, 1999 1998 ------------ ------------ <S> <C> <C> Foreign currency translation $ (866) $ (403) Change in unrealized gain on securities, net of income taxes 33,292 - Reclassification adjustment for gains included in net income, net of income taxes (1,596) - -------- -------- $ 30,830 $ (403) ======== ======== </TABLE> In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to delay the effective date of FAS 133 by one year. The Company will be required to adopt FAS 133 for fiscal year 2001. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all derivatives must be recognized as assets and liabilities and measured at fair value. The Company has not completed its determination of the impact of the adoption of this new accounting standard on its consolidated financial position or results of operations. NOTE 2 - COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS Accounts receivable, net are comprised as follows (in thousands): <TABLE> <CAPTION> DECEMBER 26, SEPTEMBER 26, 1999 1999 ------------ ------------- <S> <C> <C> Trade, net of allowance for doubtful accounts of $20,201 and $22,276, respectively $782,248 $674,211 Long-term contracts: Billed 133,456 128,208 Unbilled 68,325 69,409 Other 14,171 11,812 -------- -------- $998,200 $883,640 ======== ======== </TABLE> Unbilled receivables represent costs and profits recorded in excess of amounts billable pursuant to contract provisions and are expected to be realized within one year. Finance receivables result from arrangements in which the Company has agreed to provide its customers or certain CDMA customers of Ericsson (Note 7) with long-term interest bearing debt financing for the purchase of equipment and/or services. Such financing is generally collateralized by the related equipment. Finance receivables are comprised as follows (in thousands): <TABLE> <CAPTION> DECEMBER 26, SEPTEMBER 26, 1999 1999 ------------ ------------- <S> <C> <C> Finance receivables $ 714,876 $ 585,482 Allowance for doubtful receivables (10,619) (10,623) --------- --------- 704,257 574,859 Current maturities 24,167 26,377 --------- --------- Noncurrent finance receivables, net $ 680,090 $ 548,482 ========= ========= </TABLE> At December 26, 1999, commitments to extend long-term financing to CDMA customers of Ericsson (Note 7) totaled approximately $355 million, which the Company expects to fund over the next five years. Such commitments are subject to the customers meeting certain conditions established in the financing arrangements 8 <PAGE> 9 and, in most cases, to Ericsson also financing a portion of such sales. Commitments represent the estimated amounts to be financed under these arrangements; actual financing may be in lesser amounts. Inventories are comprised as follows (in thousands): <TABLE> <CAPTION> DECEMBER 26, SEPTEMBER 26, 1999 1999 ------------ ------------- <S> <C> <C> Raw materials $ 87,678 $161,481 Work-in-process 35,759 51,003 Finished goods 136,531 45,457 -------- -------- $259,968 $257,941 ======== ======== </TABLE> NOTE 3 - INVESTMENT INCOME (EXPENSE), NET Investment income (expense) is comprised as follows (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------- DECEMBER 26, DECEMBER 27, 1999 1998 ------------ ------------ <S> <C> <C> Interest income $ 41,558 $ 5,806 Realized gains on marketable securities 2,574 5,663 Minority interest in income of consolidated subsidiaries (3,314) (3,698) Equity in losses of investees (4,571) (1,021) -------- -------- $ 36,247 $ 6,750 ======== ======== </TABLE> NOTE 4 - INVESTMENTS IN OTHER ENTITIES Globalstar L.P. Through partnership interests held in certain intermediate limited partnerships, the Company owns a 6.4% partnership interest in Globalstar L.P. ("Globalstar"), a limited partnership formed to develop, own and operate the Globalstar low-Earth-orbit ("LEO") satellite system utilizing CDMA technology ("the Globalstar System"). At December 26 and September 26, 1999, $405 million and $349 million in interest bearing financed amounts and $189 million and $171 million in accounts receivable, including $54 million and $59 million in unbilled receivables, were outstanding from Globalstar, respectively. The Company is finalizing negotiations with Globalstar which will result in the financing of current and future contract payments. Such financing is expected to be interest bearing and paid by Globalstar in quarterly installments beginning January 15, 2001 through August 15, 2003. As a result of these negotiations, the Company changed its estimate of amounts collectible under the Globalstar development contract and recorded previously unrecognized revenue of $9 million and interest income of $9 million during the first quarter of fiscal 2000. Interest bearing financed amounts include $296 million at December 26, 1999 and $240 million at September 26, 1999 in trade receivables which were reclassified to non-current finance receivables in anticipation of such financing. At December 26, 1999, $104 million in future contract payments are expected to be eligible for financing under the anticipated financing agreement with Globalstar. Korea Telecom Freetel On November 24, 1999, the Company invested approximately $196 million in Korea Telecom Freetel ("KT Freetel") and received 2,565,000 common shares, representing a 1.9% interest in KT Freetel, and a zero coupon bond with warrants to purchase approximately 1,851,000 additional shares. The exercise price of the warrants is expected to be paid by tendering the bond as payment in full. KT Freetel has agreed to commercially deploy high data rate ("HDR") technology, subject to the successful completion of technical and marketing trials. If KT Freetel meets certain obligations related to HDR technology, QUALCOMM is required to 9 <PAGE> 10 exercise the warrants. If KT Freetel does not meet such obligations, QUALCOMM will have the right to redeem the bond at a premium equal to 10% per annum. Other Investments The Company has entered into strategic alliances with domestic and international emerging wireless telecommunications operating companies. These alliances often involve investment by QUALCOMM of capital in these operating companies. Funding commitments related to these investments total $103 million at December 26, 1999, which the Company expects to fund over three years. Such commitments are subject to the operating companies meeting certain conditions; actual equity funding may be in lesser amounts. NOTE 5 - BANK LINES OF CREDIT The Company has an unsecured credit facility under which banks are committed to make up to $400 million in revolving loans to the Company. The credit facility expires in March 2001. The facility may be extended on an annual basis upon maturity. The Company is currently obligated to pay commitment fees equal to 0.175% per annum on the unused amount of the credit facility. The credit facility includes certain restrictive financial and operating covenants. At December 26, 1999, there were no amounts or letters of credit issued or outstanding under the credit facility. Under terms of two identical revolving credit agreements, negotiated in 1996 and expiring in July 2000, QUALCOMM Personal Electronics ("QPE"), a 51% owned consolidated subsidiary of the Company, may borrow a total of $150 million. Borrowings under the facilities, which are drawn in equal amounts, totaled $124 million and $112 million at December 26 and September 26, 1999, respectively. The interest rate under the facilities is at the applicable LIBOR rate plus 0.5%. The credit facilities include covenants, which, among other things, require QPE to maintain a minimum tangible net worth. NOTE 6 - RESTRUCTURING During January 1999, the Company completed a review of its operating structure to identify opportunities to improve operating effectiveness. As a result of this review, management approved a formal restructuring plan, and the Company recorded charges to operations of $15 million during the second quarter of fiscal 1999, including $10 million in employee termination costs, $3 million in asset impairments and $1 million in estimated net losses on subleases or lease cancellation penalties. The following table (in thousands) presents the roll forward from the initial provision during the second quarter of fiscal 1999 to September 26, 1999, and from September 26, 1999 to December 26, 1999: <TABLE> <CAPTION> SEPTEMBER 26, DECEMBER 26, Provisions Deductions 1999 Deductions 1999 ------------- ---------- -------- ---------- ------ <S> <C> <C> <C> <C> <C> Employee termination costs $ 10,162 $(10,162) $ - $ - $ - Facility exit costs 4,397 (3,866) 531 (414) 117 -------- -------- -------- -------- ------ Total $ 14,559 $(14,028) $ 531 $ (414) $ 117 ======== ======== ======== ======== ====== </TABLE> NOTE 7 - DISPOSITION OF ASSETS AND OTHER CHARGES On December 22, 1999, QUALCOMM announced an agreement with Kyocera Corporation ("Kyocera") which will result in Kyocera acquiring QUALCOMM's terrestrial-based wireless CDMA consumer phone business, including its phone inventory, manufacturing equipment and customer commitments. Under the Kyocera agreement, Kyocera has agreed to purchase at least a majority of its CDMA chipset requirements from QUALCOMM for a period of five years. Kyocera will continue its existing royalty-bearing CDMA license agreement with QUALCOMM. The transaction, which is subject to regulatory approval and other customary closing conditions, is expected to close by the end of February 2000. As part of the Kyocera agreement, QUALCOMM will form a new subsidiary with a substantial number of employees from QUALCOMM Consumer Products to provide services to Kyocera on a cost-plus basis to support Kyocera's phone business for up to three years. Selected employees of QPE will be transferred to Kyocera. Upon the close of the transaction, it is anticipated that QPE manufacturing assets will be 10 <PAGE> 11 liquidated. QUALCOMM recorded $27 million in charges in the first quarter of fiscal 2000 to reflect the estimated difference between the carrying value of the net assets and the consideration to be received from Kyocera, less costs to sell. The Company estimates that additional charges in the second quarter of fiscal 2000 relating to the disposition of the terrestrial-based wireless CDMA phone business could total approximately $50 million. The additional charges will primarily relate to Kyocera's right under the agreement to exclude certain properties and equipment and employee termination costs. In May 1999, the Company sold certain of its assets related to its terrestrial CDMA wireless infrastructure business to Telefonaktiebolaget LM Ericsson ("Ericsson") and entered into various license and settlement agreements with Ericsson. The Company has received notice of Ericsson's intention to dispute the purchase price (Note 9). Pursuant to the Company's agreement with Ericsson, the Company will extend financing for possible future sales by Ericsson of infrastructure equipment and related services to specific customers in certain geographic areas, including Brazil, Chile, Mexico, and Russia or in other areas selected by Ericsson (Note 2). NOTE 8 - INCOME TAXES The Company's income tax provisions for the first quarters of fiscal 2000 and 1999 reflect adjustments for the retroactive reinstatements of the R&D tax credit. Excluding the adjustments, the Company currently estimates its annual effective income tax rate to be approximately 38% for fiscal 2000, compared to 35% for fiscal 1999. NOTE 9 - COMMITMENTS AND CONTINGENCIES Litigation On March 5, 1997, the Company filed a complaint against Motorola, Inc. ("Motorola"). The complaint was filed in response to allegations by Motorola that the Company's then, recently announced, Q Phone infringes design and utility patents held by Motorola as well as trade dress and common law rights relating to the appearance of certain Motorola wireless telephone products. The complaint denies such allegations and seeks a judicial declaration that the Company's products do not infringe any patents held by Motorola. On March 10, 1997, Motorola filed a complaint against the Company (the "Motorola Complaint"), alleging claims based primarily on the above-alleged infringement. The Company's motion to transfer the Motorola Complaint to the U.S. District Court for the Southern District of California was granted on April 3, 1997. On April 24, 1997, the court denied Motorola's motion for a preliminary injunction thereby permitting the Company to continue to manufacture, market and sell the Q Phone. On April 25, 1997, Motorola appealed the denial of its motion for a preliminary injunction. On January 16, 1998 the U.S. Court of Appeals for the Federal Circuit denied Motorola's appeal and affirmed the decision of the U.S. District Court for the Southern District of California refusing Motorola's request to enjoin QUALCOMM from manufacturing and selling the Q Phone. On June 4, 1997, Motorola filed another lawsuit alleging infringement by QUALCOMM of four patents. Three of the patents had already been alleged in previous litigation between the parties. On August 18, 1997, Motorola filed another complaint against the Company alleging infringement by the Company of seven additional patents. All of the Motorola cases have been consolidated for pretrial proceedings. On August 6, 1999, the court granted the Company's motion for summary judgment that the Q Phone does not infringe two of Motorola's design patents. On October 5, 1999, the U.S. District Court in San Diego granted the Company's motions for summary judgment that the Q Phone does not infringe the last two Motorola design patents remaining in the case. As a consequence of these rulings and Motorola's decision to drop one utility patent from the case, there are no design patents and a total of ten utility patents remaining in the case. The cases have been set for a final pretrial conference in April 2000. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on the Company's results of operations, liquidity or financial position, the Company believes the claims are without merit and will continue to vigorously defend the action. On July 20, 1999, the Company filed a lawsuit against Motorola seeking a judicial determination that the Company has the right to terminate all licenses granted to Motorola under a 1990 Patent License Agreement, while retaining all licenses granted by Motorola to the Company under the same agreement. The Company's complaint was filed in the U.S. District Court for the Southern District of California where the earlier actions between the Company and Motorola described above have been pending for more than two years. The complaint alleges that Motorola has committed breaches of the Patent License Agreement that include pursuing a lawsuit against the Company for infringement of patents that are in fact licensed to the Company under the agreement and a failure to grant certain sublicenses to the Company in accordance with the terms of the agreement. The Company's new 11 <PAGE> 12 filing also seeks a ruling that upon termination of the Patent License Agreement, the patents formerly licensed to Motorola would be infringed by CDMA handsets, integrated circuits and network infrastructure equipment made and sold by Motorola. On August 5, 1999, the Company amended its complaint to allege that Motorola's CDMA wireless phones infringe three patents of the Company. The Company's new claims seek damages and an injunction against Motorola's sale of infringing phones. Motorola has filed counterclaims alleging breach of the Patent License Agreement and a DS-CDMA Technology License Agreement also signed in 1990. On January 14, 2000, the court entered an order staying the 1999 case pending resolution of the consolidated 1997 cases. On or about June 5, 1997, Elisra Electronic Systems Ltd. ("Elisra") submitted to the International Chamber of Commerce a Request for Arbitration of a dispute with the Company based upon a Development and Supply Agreement ("DSA") entered into between the parties effective November 15, 1995, alleging that the Company wrongfully terminated the DSA, seeking monetary damages. The Company thereafter submitted a Reply and Counterclaim, alleging that Elisra breached the DSA, seeking monetary damages. Subsequently, the parties stipulated that the dispute be heard before an arbitrator under the jurisdiction of the American Arbitration Association, and to bifurcate the resolution of liability issues from damage issues. To date, the arbitrator has heard testimony regarding the liability or non-liability of the parties, and a briefing schedule has been set. Although there can be no assurance that the resolution of these claims will not have a material adverse effect on the Company's results of operations, liquidity or financial position, the Company believes that the claims made by Elisra are without merit and will vigorously defend against the claims. On October 27, 1998, the Electronics and Telecommunications Research Institute of Korea ("ETRI") submitted to the International Chamber of Commerce a Request for Arbitration (the "Request") of a dispute with the Company arising out of a Joint Development Agreement ("JDA") dated April 30, 1992, between ETRI and the Company. In the Request, ETRI alleges that the Company has breached certain provisions of the JDA and seeks monetary damages and an accounting. The Company filed an answer and counterclaims denying the allegations, seeking a declaration establishing the termination of the JDA and monetary damages and injunctive relief against ETRI. In accordance with the JDA, the arbitration will take place in San Diego. The arbitration hearing is scheduled to commence July 5, 2000. Although there can be no assurance that the resolution of these claims will not have a material adverse effect on the Company's results of operations, liquidity or financial position, the Company believes that the claims are without merit and will vigorously defend the action. On May 6, 1999, Thomas Sprague, a former employee of the Company, filed a putative class action against the Company, ostensibly on behalf of himself and those of the Company's former employees who were offered employment with Ericsson in conjunction with the sale to Ericsson of certain of the Company's infrastructure division assets and liabilities and who elected not to participate in a Retention Bonus Plan being offered to such former employees. The complaint was filed in California Superior Court in and for the County of San Diego and purports to state eight causes of action arising primarily out of alleged breaches of the terms of the Company's 1991 Stock Option Plan, as amended from time to time. The putative class sought to include former employees of the Company who, among other things, "have not or will not execute the Bonus Retention Plan and accompanying full and complete release of QUALCOMM." The complaint seeks an order accelerating all unvested stock options for the members of the class. Of the 1,053 transitioning former employees who had unvested stock options, 1,016 elected to participate in the Retention Bonus Plan offered by QUALCOMM and Ericsson, which provides several benefits including cash compensation based upon a portion of the value of their unvested options, and includes a written release of claims against the Company. On July 30, 1999, plaintiffs filed a First Amended Complaint incorporating the allegations set forth in the original complaint, adding two new causes of action and expanding the putative class to also include those former employees who chose to participate in the Bonus Retention Plan. In October 1999, the court sustained the Company's demurrer to the plaintiffs' cause of action for breach of fiduciary duty. Counsel for the putative class filed a Second Amended Complaint, including substantially the same allegations as the First Amended Complaint, on November 1, 1999. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on the Company's results of operations, liquidity or financial position, the Company believes the claims are without merit and will vigorously defend the action. On June 29, 1999, GTE Wireless, Incorporated ("GTE") filed an action in the U.S. District Court for the Eastern District of Virginia asserting that wireless telephones sold by the Company infringe a single patent allegedly owned by GTE. On September 15, 1999, the court granted the company's motion to transfer the action to the U.S. District Court for the Southern District of California. Although there can be no assurance that an 12 <PAGE> 13 unfavorable outcome of the dispute would not have a material adverse effect on the Company's results of operations, liquidity or financial position, the Company believes the action is without merit and will vigorously defend the action. QUALCOMM has received notice from Ericsson that Ericsson intends to dispute the determination of the purchase price under the Agreement, pursuant to which Ericsson acquired certain assets related to the Company's terrestrial wireless infrastructure business in May 1999. QUALCOMM has also received notice from Ericsson that Ericsson intends to assert claims for indemnification under the Agreement. QUALCOMM and Ericsson are having on-going discussions aimed at potentially resolving these claims. In the event the parties are unable to resolve these claims, they are subject to dispute resolution procedures set forth in the Agreement. Although there can be no assurance that the resolution of these claims will not have a material adverse effect on the Company's results of operations, liquidity or financial position, the Company believes the claims are without merit and will vigorously defend them. The Company is engaged in other legal actions arising in the ordinary course of its business and believes that the ultimate outcome of these actions will not have a material adverse effect on its results of operations, liquidity or financial position. Letters of Credit and Financial Guarantees The Company has issued a letter of credit to support a guarantee of up to $22.5 million of Globalstar (Note 4) borrowings under an existing bank financing agreement. The guarantee will expire in December 2000. The letter of credit is collateralized by a commensurate amount of the Company's investments in debt securities. As of December 26, 1999, Globalstar had no borrowings outstanding under the existing bank financing agreement. In addition to the letter of credit on behalf of Globalstar, the Company has $21 million of letters of credit and $103 million of other financial guarantees outstanding as of December 26, 1999, none of which are collateralized. Leap Wireless Commitments QUALCOMM has a funding commitment to Leap Wireless in the form of a $265 million secured credit facility, which consists of two sub-facilities. The first sub-facility enables Leap Wireless to borrow up to $35 million from QUALCOMM, solely to meet the normal working capital and operating expenses of Leap Wireless, including salaries, overhead and credit facility fees, but excluding, among other things, strategic capital investments in wireless operators, substantial acquisitions of capital products, and/or the acquisition of telecommunications licenses. The other sub-facility enables Leap Wireless to borrow up to $230 million from QUALCOMM, solely to use as investment capital to make certain identified portfolio investments. Amounts borrowed under the credit facility will be due and payable on September 23, 2006. QUALCOMM has a first priority security interest in, subject to minor exceptions, substantially all of the assets of Leap Wireless for so long as any amounts are outstanding under the credit facility. Amounts borrowed under the credit facility bear interest at a variable rate equal to LIBOR plus 5.25% per annum. Interest is payable quarterly beginning September 30, 2001; prior to such time, accrued interest shall be added to the principal amount outstanding. At December 26, 1999, the remaining commitment under this facility is $90 million. NOTE 10. SEGMENT INFORMATION The Company is organized on the basis of products and services. Reportable segments are as follows: QUALCOMM CDMA Technologies ("QCT") designs and supplies chipsets and software solutions to handset and infrastructure manufacturers; QUALCOMM Technology Licensing ("QTL") provides licenses to third parties related to the design, manufacture, and sale of products using the Company's technologies; QUALCOMM Wireless Systems ("QWS") designs, manufactures, markets, and deploys infrastructure and handset products for use in terrestrial and non-terrestrial CDMA wireless and satellite networks and provides satellite-based two-way data messaging, position reporting equipment and services to transportation companies; and QUALCOMM Consumer Products ("QCP") designs, manufactures, and markets wireless handsets and accessories using CDMA technology for use in mobile and fixed wireless networks (Note 7). The table below presents revenues and earnings before taxes ("EBT") for reported segments for the three months ended December 26, 1999 and December 27, 1998 (in thousands): 13 <PAGE> 14 <TABLE> <CAPTION> QCT QTL QWS QCP RECONCILING ITEMS TOTAL ---------- ---------- ---------- ---------- ----------------- ---------- <S> <C> <C> <C> <C> <C> <C> DECEMBER 26, 1999 Revenues $ 352,395 $ 177,545 $ 214,964 $ 442,294 $ (67,125) $1,120,073 EBT 127,690 162,590 66,147 (17,546) (56,431) 282,450 DECEMBER 27, 1998 Revenues $ 193,315 $ 74,066 $ 300,081 $ 382,602 $ (8,841) $ 941,223 EBT 63,924 62,296 (14,875) (130) (39,631) 71,584 </TABLE> Reconciling items in the above table are comprised as follows (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED -------------------------- December 26, December 27, 1999 1998 ------------ ------------ <S> <C> <C> Revenues Elimination of intersegment revenue $(101,034) $ (99,788) Other products 33,909 90,947 --------- --------- Reconciling items $ (67,125) $ (8,841) ========= ========= EARNINGS BEFORE INCOME TAXES (Unallocated) allocated corporate expenses $ (27,570) $ 4,551 Unallocated investment income, net 26,031 5,602 Distributions on Trust Convertible Preferred Securities of subsidiary trust (11,045) (9,799) Intracompany profit (31,905) (34,786) Other (11,942) (5,199) --------- --------- Reconciling items $ (56,431) $ (39,631) ========= ========= </TABLE> Revenues from external customers and intersegment revenues are as follows (in thousands): <TABLE> <CAPTION> QCT QTL QWS QCP -------- -------- -------- -------- <S> <C> <C> <C> <C> DECEMBER 26, 1999 Revenues from external customers $285,975 $143,861 $214,964 $441,364 Intersegment revenues 66,420 33,684 - 930 DECEMBER 27, 1998 Revenues from external customers $139,766 $ 50,221 $290,754 $369,535 Intersegment revenues 53,549 23,845 9,327 13,067 </TABLE> NOTE 11 - SUBSEQUENT EVENT On January 6, 2000, the Company announced its intention to redeem its remaining 5,397,908 outstanding Trust Convertible Preferred Securities as of March 6, 2000. The redemption price is $51 per share plus accrued interest. The holders of the Trust Convertible Preferred Securities have the option to convert each such security into 5.5056 shares of the Company's common stock and 0.17205 shares of the common stock of Leap Wireless. The Company expects substantially all holders to convert the Trust Convertible Preferred Securities rather than allow redemption. On January 26, 2000, QUALCOMM announced an agreement to acquire SnapTrack, Inc. ("SnapTrack"), a company which designs and develops wireless position location technology. Under the agreement, SnapTrack will become a wholly owned subsidiary of QUALCOMM. QUALCOMM will pay approximately $1 billion in stock for the 14 <PAGE> 15 acquisition of SnapTrack. The final purchase price may differ based on the average trading price of QUALCOMM stock used to settle the transaction. Completion of the agreement, which is subject to regulatory approval and other customary closing conditions, is expected to occur in March, 2000. 15 <PAGE> 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition for the year ended September 26, 1999 contained in the Company's 1999 Annual Report on Form 10-K. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. QUALCOMM's future results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not specifically limited to: the ability to develop and introduce cost effective new products in a timely manner; the risk that the rate of growth in the CDMA subscriber population will decrease; risks associated with the scale-up, acceptance and operations of CDMA systems, including HDR technology; risks associated with component shortages and inventory balancing by customers; risks associated with strategic opportunities or acquisitions, divestitures and investments the Company may pursue; risks related to the ability to sustain or improve operational efficiency and profitability; risks relating to the success of Globalstar; developments in current or future litigation; the Company's ability to effectively manage growth and the intense competition in the wireless communications industry; and risks associated with the timing and receipt of license fees and royalties; risk associated with international business activities; and risks related to customer receivables, as well as the other risks detailed in this Form 10-Q and in the Company's 1999 Annual Report on Form 10-K. The Company's consolidated financial data includes QPE and certain other consolidated subsidiaries of the Company. OVERVIEW QUALCOMM is a leading provider of digital wireless communications products, technologies and services based on the Company's technology. The Company designs, develops, and markets CDMA chipsets and system software and designs, develops, manufactures, and markets CDMA subscriber products. The Company also licenses and receives royalty payments on its CDMA technology from major domestic and international telecommunications equipment suppliers. In addition, the Company designs, manufactures and distributes products and provides services for its OmniTRACS system. The Company also has contracts with Globalstar to design, develop and manufacture subscriber products and ground communications systems utilizing CDMA technology and to provide contract development services. The Company's CDMA technology has been adopted as an industry standard for digital cellular, Personal Communications Services ("PCS") and other wireless services. Wireless networks based on the Company's current implementation of CDMA technology, referred to as cdmaOne, have been commercially deployed or are under development in more than 35 countries around the world, with 27 countries already in commercial deployments. In December 1999, the CDMA Development Group ("CDG") reported that CDMA carriers now have over 41 million commercial subscribers worldwide as of September 1999. QUALCOMM continues to invest in research and development projects focused on improving current CDMA applications and products, developing and commercializing next generation CDMA technology and products, interfacing with other digital cellular standards, and developing and commercializing new leading edge CDMA HDR technology, products and services. The Company believes HDR will provide a high speed, cost-effective, fixed and mobile alternative for Internet access, competing with digital subscriber loop, cable, and satellite networks. HDR is designed to enable existing cdmaOne and future CDMA third-generation service providers to obtain higher capacities and superior performance by optimizing voice and data spectrum separately, while serving both applications from the same access point. QUALCOMM has entered into a number of development and manufacturing contracts involving the Globalstar System. QUALCOMM's development agreement provides for the design and development of the ground communications stations, known as gateways, and user terminals of the Globalstar System. Since telephone systems using LEO satellites are a new commercial technology, demand for Globalstar's service is uncertain. If Globalstar fails to generate sufficient cash flow from operations through the marketing efforts of its service providers, it will be unable to fund its operating costs or service its debt. 16 <PAGE> 17 The value of QUALCOMM's investment in and future business with Globalstar, as well as QUALCOMM's ability to collect outstanding receivables from Globalstar, depends on the success of Globalstar and the Globalstar System. See "Notes to Condensed Consolidated Financial Statements - Note 4 Investments in Other Entities." From time to time the Company considers strategic transactions and alternatives with the goal of maximizing stockholder value. For example, in September 1998, the Company completed the spin-off of Leap Wireless and in May 1999, the Company completed the sale of its terrestrial CDMA wireless infrastructure business to Ericsson. In December 1999, the Company announced an agreement with Kyocera relating to the sale of its terrestrial-based phone business and in January 2000, the Company announced that it will acquire SnapTrack. The Company will continue to evaluate other potential strategic transactions and alternatives which management believes may enhance stockholder value. These additional potential transactions may include a variety of different business arrangements, including acquisitions, spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. There can be no assurance that any such transactions will be consummated on favorable terms or at all, will in fact enhance stockholder value or will not adversely affect the Company's business or the trading price of our stock. Any such transaction may require the Company to incur non-recurring or other charges and may pose significant integration challenges and/or management and business disruptions, any of which could materially and adversely affect the Company's business and financial results. RECENT DEVELOPMENTS On November 24, 1999, the Company invested approximately $196 million in KT Freetel. See "Notes to Condensed Consolidated Financial Statements - Note 4 Investments in Other Entities." In December 1999, the Company effected a four-for-one stock split of its common stock. See "Item 4 Submission of Matters to a Vote of Security Holders." On December 22, 1999, QUALCOMM announced an agreement with Kyocera that will result in Kyocera's acquiring QUALCOMM's terrestrial-based wireless CDMA consumer phone business. See "Notes to Condensed Consolidated Financial Statements - Note 7 Disposition of Assets and Other Charges." On January 26, 2000, QUALCOMM announced that it will acquire SnapTrack. See "Notes to Condensed Consolidated Financial Statements - Note 11 Subsequent Event." FIRST QUARTER OF FISCAL 2000 COMPARED TO FIRST QUARTER OF FISCAL 1999 Total revenues for the first quarter of fiscal 2000 were $1,120 million compared to $941 million for the first quarter of fiscal 1999. Revenue growth for the first quarter of fiscal 2000 was primarily due to increased sales of CDMA chipsets and phone products, and significant growth in royalties, offset by the decrease in terrestrial CDMA wireless infrastructure product revenue as a result of the sale of this business in May 1999. Sales to one South Korean customer, Samsung Electronics Company, by QCT and QTL segments comprised 11% of total revenues in first quarter of fiscal 2000. The Company anticipates that shipments of its phone chips in the second quarter of fiscal 2000 may be lower than the first quarter of fiscal 2000 due to seasonal factors, inventory balancing by customers due to continued shortages of other phone components, and customers transitioning to next generation chips. In addition, the Company anticipates that shipments of its handsets in the second quarter of fiscal 2000 may be lower than the first quarter of fiscal 2000 due to the sale of this business in the quarter, as well as seasonal factors. Cost of revenues for the first quarter of fiscal 2000 was $649 million compared to $642 million for the first quarter of fiscal 1999. The decrease in cost of revenues as a percentage of revenues to 58% in the first quarter of fiscal 2000 from 68% in the first quarter of fiscal 1999 primarily reflects an increase in royalty revenue, a decrease in terrestrial CDMA wireless infrastructure cost as a result of the sale of this business in May 1999, and improved operational efficiencies. For the first quarter of fiscal 2000, research and development expenses were $83 million or 7% of revenues, compared to $100 million or 11% of revenues for the first quarter of fiscal 1999. The dollar and percent decreases were due to a decrease in terrestrial CDMA wireless infrastructure product research and development as a result of the sale of this business in May 1999, offset by increased chipset product initiatives and development of HDR products. For the first quarter of fiscal 2000, selling, general and administrative expenses were $102 million or 9% of revenues, compared to $121 million or 13% of revenues for the first quarter of fiscal 1999. The dollar and percent decreases from the first quarter of fiscal 1999 were due to a decrease in marketing expense for terrestrial CDMA wireless infrastructure products as a result of the sale of this business, offset by continued growth in personnel and associated overhead expenses necessary to support the overall growth in the Company's operations and increased patent and information technology expenses. Interest expense was $3 million for each of the first quarters of fiscal 2000 and 1999. Investment income, net was $36 million in the first quarter of fiscal 2000 compared to $7 million for the first quarter of fiscal 1999. The increase was largely due to the $1 billion in cash proceeds from a stock offering in July 1999, interest from finance receivables, higher interest rates, and a change in the estimate of amounts collectible 17 <PAGE> 18 under the Globalstar development contract. See "Notes to Condensed Consolidated Financial Statements - Note 4 Investment in Other Entities." Distributions on Trust Convertible Preferred Securities of $11 million for the first quarter of fiscal 2000 compared to $10 million for the first quarter of fiscal 1999 relate to the 5 3/4% Trust Convertible Preferred Securities outstanding. See "Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources." Income tax expense was $105 million for the first quarter of fiscal 2000 compared to $23 million for the first quarter of fiscal 1999, resulting primarily from higher pretax earnings and a higher effective tax rate for the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999. The Company's income tax provisions for the first quarters of fiscal 2000 and 1999 reflect adjustments for the retroactive reinstatements of the R&D tax credit. Excluding the adjustments, the Company currently estimates its annual effective income tax rate to be approximately 38% for fiscal 2000, compared to 35% for fiscal 1999. The higher tax rate is the result of higher earnings relative to the growth of R&D tax credits. SEGMENT RESULTS FOR THE FIRST QUARTER OF FISCAL 2000 COMPARED TO FIRST QUARTER OF FISCAL 1999 The following should be read in conjunction with the first quarter financial results of fiscal 2000 for each reporting segment. See "Notes to Condensed Consolidated Financial Statements - Note 10 Segment Information." CDMA Technologies Segment ("QCT") The QCT segment is a major supplier of chipsets and software solutions to handset and infrastructure manufacturers. QCT helps manufacturers produce smaller and more affordable products by bringing new chipsets to the market with more functionality in a substantially smaller package size. QCT's CDMA ASIC products include Mobile Station Modem ("MSM") chips for telephone handsets, Cell Site Modem ("CSM") chips for infrastructure base stations and a number of related chips that make digital voice transmission and processing possible. QCT segment revenues for the first quarter of fiscal 2000 were $352 million compared to $193 million for the first quarter of fiscal 1999. Earnings before taxes for the first quarter of fiscal 2000 were $128 million compared to $64 million for the first quarter of fiscal 1999. Revenue and earnings before taxes growth was primarily due to increased customer demand for CDMA chipsets in the United States, Korea, and Japan and to new product releases. Over 14 million MSM chipsets were sold during the first quarter of fiscal 2000, contributing to the significant growth in both the revenue and earnings before tax. The Company anticipates that shipments of its phone chips in the second quarter of fiscal 2000 may be lower than the first quarter of fiscal 2000 due to seasonal factors, inventory balancing by customers due to continued shortages of other phone components, and customers transitioning to next generation chips. Technology Licensing Segment ("QTL") QTL provides licenses to third parties related to the design, manufacture and sale of products using the Company's technologies. QTL segment revenues for the first quarter of fiscal 2000 were $178 million compared to $74 million for the first quarter of fiscal 1999. Earnings before taxes for the first quarter of fiscal 2000 were $163 million compared to $62 million for the first quarter of fiscal 1999. Revenue and earnings before taxes growth was primarily due to royalties paid from licensees resulting from an increase in worldwide demand for CDMA products. Wireless Systems Segment ("QWS") QWS designs, manufactures, markets and deploys infrastructure and handset products for use in terrestrial and non-terrestrial CDMA wireless and satellite networks and provides satellite-based two-way data messaging, position reporting equipment, and services to transportation companies. QWS segment revenues for the first quarter of fiscal 2000 were $215 million compared to $300 million for the first quarter of fiscal 1999. Earnings before taxes for the first quarter of fiscal 2000 were $66 million compared to $15 million loss for the first quarter of fiscal 1999. Revenues decreased while earnings before taxes increased due to the sale of certain assets of the Company's terrestrial CDMA wireless infrastructure business in May 1999 to 18 <PAGE> 19 Ericsson and the completion of production of Globalstar gateways, offset by OmniTRACS domestic unit demand from existing customers and increase in messaging revenue due to an increase in customer base. Consumer Products Segment ("QCP") QCP designs, manufactures and markets wireless handsets and accessories using CDMA technology for use in mobile and fixed wireless networks. QCP segment revenues for the first quarter of fiscal 2000 were $442 million compared to $383 million for the first quarter of fiscal 1999. For the first quarter of fiscal 2000, QCP recorded a loss of $18 million compared to breaking even for the first quarter of fiscal 1999. Revenue growth was primarily due to an increase in demand for CDMA handsets and new product releases. Losses were a result of declining average sales prices per handset, which were not fully offset by decreases in related manufacturing cost. The Company anticipates that shipments of its handsets in the second quarter of fiscal 2000 may be lower than the first quarter of fiscal 2000 due to the sale of this business in the quarter, as well as seasonal factors. QUALCOMM has entered into an agreement with Kyocera that will result in Kyocera's acquiring QUALCOMM's terrestrial-based wireless CDMA consumer phone business. See "Notes to Condensed Consolidated Financial Statements - Note 7 Disposition of Assets and Other Charges." LIQUIDITY AND CAPITAL RESOURCES The Company anticipates that its cash and cash equivalents and investments balances of $1,556 million at December 26, 1999, including interest earned thereon, will be used to fund its working and other capital requirements, including investments in other entities and other assets to support the growth of its business, financing for customers of CDMA infrastructure products in accordance with the agreement with Ericsson, and facilities related to the expansion of the Company's operations. In the event additional needs for cash arise, the Company may raise additional funds from a combination of sources including potential debt and equity issuance. There can, however, be no assurance that additional financing will be available on acceptable terms or at all. In addition, the Company's credit facility places restrictions on the Company's ability to incur additional indebtedness which could adversely affect its ability to raise additional capital through debt financing. The Company has an unsecured credit facility under which banks are committed to make up to $400 million in revolving loans to the Company. The facility expires in March 2001 and may be extended on an annual basis upon maturity. The Company is currently obligated to pay commitment fees equal to 0.175% per annum on the unused amount of the facility. The facility includes certain restrictive financial and operating covenants. At December 26, 1999, there were no amounts or letters of credit issued or outstanding under the facility. In the first quarter of fiscal 2000, $81 million in cash was provided by operating activities, compared to $138 million used by operating activities in the first quarter of fiscal 1999. Cash provided by operating activities in the first quarter of fiscal 2000 includes $350 million of net cash flow provided by operations offset by $269 million of net working capital requirements. The improved cash flow from operations primarily reflects the increase in net income resulting from increased revenues and gross margins. Net working capital requirements of $269 million primarily reflect increases in accounts receivable, finance receivables, and other current assets. The increases in accounts and finance receivables in the first quarter of fiscal 2000 result from the continued growth in products and component sales and the deferral of contract payments under the development agreement with Globalstar. Investments in capital expenditures and other entities and issuance of notes receivable totaled $304 million in the first quarter of fiscal 2000, compared to $95 million in the first quarter of fiscal 1999. Significant components in first quarter of fiscal 2000 consisted of the purchase of $38 million of capital assets, the investment of $121 million in entities in which the Company holds less than a 50% interest, and the issuance of $146 million in notes receivable. The Company expects to continue making significant investments in capital assets, including new facilities and building improvements, and in other entities throughout fiscal 2000. In the first quarter of fiscal 2000, the Company's financing activities provided $42 million, including $31 million from the issuance of common stock under the Company's stock option and employee stock purchase plans and $12 million in net borrowing under bank lines of credit. In the first quarter of fiscal 1999, the Company's financing activities provided net cash of $144 million, including $8 million from the issuance of common stock under the Company's stock option and employee stock purchase plans and $137 million in net borrowing under bank lines of credit. 19 <PAGE> 20 The Company is finalizing negotiations with Globalstar which will result in the financing of current and future contract payments. See "Notes to Condensed Consolidated Financial Statements - Note 4 Investments in Other Entities." On October 29, 1999, the Company and Pegaso Telecomunicaciones ("Pegaso") executed a commitment letter, subject to Pegaso shareholder approval, in which the Company agreed to underwrite up to $500 million of debt financing to Pegaso and its wholly-owned subsidiary, Pegaso Comunicaciones y Sistemas, a CDMA wireless operating company in Mexico. The debt financing would consist of a $250 million senior secured facility and a $250 million unsecured facility. The Company currently has guaranteed a $100 million facility that would be refinanced by the $250 million senior secured facility. The debt facilities are expected to have final maturities of seven to eight years. During the first quarter of fiscal 2000, 7,793,182 Trust Convertible Preferred Securities were converted into 42,906,040 shares of common stock. The conversions resulted in a $390 million reduction in the recorded obligation to Trust Convertible Preferred Securities holders. On January 6, 2000, the Company announced its intention to redeem its remaining 5,397,908 outstanding Trust Convertible Preferred Securities as of March 6, 2000. The redemption price is $51 per share plus accrued interest. The holders of the Trust Convertible Preferred Securities have the option to convert each such security into 5.5056 shares of the Company's common stock and 0.17205 shares of the common stock of Leap Wireless. The Company expects substantially all holders to convert the Trust Convertible Preferred Securities rather than allow redemption. Information regarding the Company's financial commitments at December 26, 1999 is provided in the Notes to the Condensed Consolidated Financial Statements. See "Notes to Condensed Consolidated Financial Statements - Note 2 Composition of Certain Balance Sheet Captions and Note 9 Commitments and Contingencies." YEAR 2000 The Company has completed its Year 2000 ("Y2K") Project ("Project") as scheduled, including addressing leap year calendar date calculation concerns. The possibility of significant interruptions of normal operations has been reduced. As of January 27, 2000, the Company's products, computing, and communications infrastructure systems have operated without Y2K related problems and appear to be Y2K ready. The Company is not aware that any of its major customers or third-party suppliers have experienced significant Y2K related problems. The Company believes all its critical systems are Y2K ready. However, there is no guarantee that the Company has discovered all possible failure points. Specific factors contributing to this uncertainty include failure to identify all systems, non-ready third parties whose systems and operations impact the Company, and other similar uncertainties. Contingency plans are complete and will be implemented if required. Should a significant problem occur, the Company would revert to standard manual contingency procedures to continue operation until the problem is corrected. To date, the Company has spent an estimated $20 million on this Project. The funding for this Project comes from operations and working capital. The Company estimates the allocable time of employees using average hourly rates for each class of employee. None of the Company's other mission critical information projects has been delayed due to the implementation of the Y2K Project. The Company identified and fixed several Y2K system bugs. In addition, the Company received other benefits from the Y2K Project, including acceleration of the development of alternative sourcing for our supply base risk mitigation plans which are valid and beneficial to long term supply assurance, refinement of the Company's Disaster Recovery Plan, improvement of diagnostic procedures for core information technology services and asset management, and establishment of a more consistent computer desktop environment which should ultimately reduce support costs. FUTURE ACCOUNTING REQUIREMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to delay the effective date of FAS 133 by one year. The Company will be required to adopt FAS 133 for fiscal year 2001. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all 20 <PAGE> 21 derivatives must be recognized as assets and liabilities and measured at fair value. The Company has not completed its determination of the impact of the adoption of this new accounting standard on its consolidated financial position or results of operations. MARKET RISK Discussion and analysis of the Company's market risks is described in the Company's 1999 Form 10-K. At December 26, 1999, there have been no other material changes to the market risks described at September 26, 1999. Additionally, the Company does not anticipate any near-term changes in the nature of its market risk exposures or in management's objectives and strategies with respect to managing such exposures. 21 <PAGE> 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A review of the Company's current litigation is disclosed in the Notes to Condensed Consolidated Financial Statements. See "Notes to Condensed Consolidated Financial Statements - Note 9 Commitments and Contingencies." The Company is also engaged in other legal actions arising in the ordinary course of its business and believes that the ultimate outcome of these actions will not have a material adverse effect on its results of operations, liquidity or financial position. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 2, 1999, the Company's Board of Directors approved, subject to stockholders' approval, a four-for-one stock split of the Company's common stock and an increase in the number of authorized shares of common stock to three billion shares. The Board of Directors also authorized a special meeting of stockholders for the purposes of approving the stock split and the proposed share increase. The special stockholders meeting was held on December 20, 1999. Stockholders approved the stock split and the increase in the authorized number of shares. The stock was distributed on December 30, 1999 to stockholders of record on December 20, 1999. The proposal to approve an amendment to the Company's Restated Certificate of Incorporation to increase the authorized number of shares from 300 million to three billion received the following votes: <TABLE> <S> <C> <C> For: 121,573,417 73.69% Against: 22,601,301 13.69% Abstain: 983,472 0.60% Broker Non-votes: 0 </TABLE> The foregoing proposal was approved and accordingly ratified. The proposal to approve an amendment to the Company's Restated Certificate of Incorporation to effect a four-for-one stock split received the following votes: <TABLE> <S> <C> <C> For: 141,553,720 85.80% Against: 124,730 0.08% Abstain: 526,807 0.32% Broker Non-votes: 2,952,933 1.78% </TABLE> The foregoing proposal was approved and accordingly ratified. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.2 Asset Purchase Agreement, among QUALCOMM Incorporated, KII Acquisition Company and Kyocera International, Inc., dated as of December 22, 1999. (1) (2) 3.2 Certificate of Amendment of Restated Certificate of Incorporation. (3) 10.21 Executive Retirement Matching Contribution Plan, as amended. 22 <PAGE> 23 27.0 Financial Data Schedule. (1) Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment. Omitted portions will be filed separately with the Securities and Exchange Commission. (2) Schedules omitted pursuant to Rule 601(b)(2) of Regulation S-K of the Securities and Exchange Commission. Registrant undertakes to furnish such schedules and attachments thereto to the Securities and Exchange Commission upon request. (3) Previously filed as an exhibit to QUALCOMM's Current Report on Form 8-K dated December 20, 1999 and incorporated herein by reference. (b) Reports on Form 8-K Report on Form 8-K dated December 20, 1999, containing information relating to the approval by QUALCOMM's stockholders of an amendment to QUALCOMM's Restated Certificate of Incorporation to effect a four-for-one stock split of the Common Stock and to increase the number of authorized shares of Common Stock. 23 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-2.2 <SEQUENCE>2 <DESCRIPTION>ASSET PURCHASE AGREEMENT <TEXT> <PAGE> 1 EXHIBIT 2.2 -------------------------------------- *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 240.24b-2 -------------------------------------- ASSET PURCHASE AGREEMENT AMONG QUALCOMM INCORPORATED, A DELAWARE CORPORATION, KII ACQUISITION COMPANY, A DELAWARE CORPORATION, AND KYOCERA INTERNATIONAL, INC. A CALIFORNIA CORPORATION ---------------------------- DATED DECEMBER 22, 1999 ---------------------------- <PAGE> 2 TABLE OF CONTENTS <TABLE> <S> <C> ARTICLE 1 DEFINITIONS............................................................. 1 1.1 Certain Defined Terms...................................................... 1 1.2 Other Defined Terms........................................................ 9 1.3 Other Definitional Provisions.............................................. 11 ARTICLE 2 PURCHASE AND SALE....................................................... 11 2.1 Assets to Be Sold.......................................................... 11 2.2 Assumption and Exclusion of Liabilities.................................... 14 2.3 Purchase Price............................................................. 15 2.4 Closing.................................................................... 15 2.5 Closing Deliveries by the Seller........................................... 15 2.6 Closing Deliveries by the Purchaser........................................ 15 2.7 Post-Closing Adjustment of the Purchase Price.............................. 16 (a) September Statement of Net Assets................................... 16 (b) Closing Statement Of Net Assets..................................... 16 (c) Disputes............................................................ 17 (d) Purchase Price Adjustment........................................... 18 (e) Prorations.......................................................... 19 2.8 Allocation of the Purchase Price........................................... 19 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SELLER............................ 19 3.1 Organization, Authority and Qualification of the Selling Party............. 19 3.2 No Conflict................................................................ 20 3.3 Governmental Consents and Approvals........................................ 20 3.4 Financial Information...................................................... 21 3.5 No Undisclosed Liabilities................................................. 21 3.6 Inventories................................................................ 21 3.7 Sales and Purchase Order Backlog........................................... 22 3.8 Customers.................................................................. 22 3.9 Suppliers.................................................................. 22 3.10 Products and Services...................................................... 22 3.11 Year 2000 Readiness........................................................ 23 3.12 Litigation................................................................. 23 3.13 Compliance with Laws....................................................... 23 </TABLE> <PAGE> 3 <TABLE> <S> <C> 3.14 Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions................................................................. 24 3.15 Permits and Licenses....................................................... 25 3.16 Environmental Matters...................................................... 25 3.17 Material Contracts......................................................... 26 3.18 Intellectual Property...................................................... 27 3.19 Real Property.............................................................. 28 3.20 Tangible Personal Property................................................. 29 3.21 Right, Title and Interest in Tangible Personal Property.................... 29 3.22 Employee Benefit Matters................................................... 30 3.23 Labor Matters.............................................................. 32 3.24 Key Employees.............................................................. 33 3.25 Taxes...................................................................... 33 3.26 Insurance.................................................................. 33 3.27 Brokers.................................................................... 34 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND THE PARENT CORPORATION............................................................. 34 4.1 Organization and Authority................................................. 34 4.2 No Conflict................................................................ 34 4.3 Governmental Consents and Approvals........................................ 35 4.4 Litigation................................................................. 35 4.5 Brokers.................................................................... 35 ARTICLE 5 ADDITIONAL AGREEMENTS................................................... 35 5.1 Conduct of Business Prior to the Closing................................... 35 5.2 Access to Information...................................................... 36 5.3 Confidentiality............................................................ 36 5.4 Regulatory and Other Authorizations; Notices and Consents.................. 38 5.5 Notice of Developments..................................................... 39 5.6 No Solicitation or Negotiation............................................. 39 5.7 Certain Matters Related to Intellectual Property........................... 40 5.8 Non-Competition and Non-Solicitation....................................... 43 5.9 Excluded Liabilities....................................................... 44 5.10 Bulk Transfer Laws......................................................... 44 </TABLE> <PAGE> 4 <TABLE> <S> <C> 5.11 Tax Matters................................................................ 44 5.12 Letters of Credit; Lien Releases........................................... 45 5.13 Subscriber Business Receivables............................................ 46 5.14 Ancillary Agreements....................................................... 46 5.15 Further Action............................................................. 47 5.16 Selection of Tangible Personal Property; Spare Parts....................... 47 5.17 Relocation and Outsourcing................................................. 48 5.18 Catastrophic Occurrences................................................... 48 ARTICLE 6 EMPLOYEE MATTERS........................................................ 49 6.1 Employee Selection......................................................... 49 6.2 Hiring of Employees........................................................ 49 6.3 Employee Liabilities....................................................... 50 6.4 Service Credit............................................................. 50 6.5 Indemnity.................................................................. 50 6.6 Certain Other Employee-Related Costs....................................... 51 ARTICLE 7 CONDITIONS TO CLOSING................................................... 51 7.1 Conditions to Obligations of the Seller.................................... 51 7.2 Conditions to Obligations of the Purchaser................................. 52 ARTICLE 8 INDEMNIFICATION......................................................... 54 8.1 Survival of Representations and Warranties and Covenants................... 54 8.2 Indemnification by the Seller.............................................. 54 8.3 Indemnification by the Purchaser and the Parent Corporation................ 55 8.4 Indemnification Procedures................................................. 56 8.5 Tax Matters................................................................ 57 8.6 Knowledge of Breach........................................................ 57 8.7 Indemnification Exclusive Remedy........................................... 57 8.8 Subrogation................................................................ 57 ARTICLE 9 TERMINATION AND WAIVER.................................................. 58 9.1 Termination................................................................ 58 9.2 Effect of Termination...................................................... 58 9.3 Waiver..................................................................... 58 ARTICLE 10 GENERAL PROVISIONS...................................................... 59 </TABLE> <PAGE> 5 <TABLE> <S> <C> 10.1 Expenses................................................................... 59 10.2 Notices.................................................................... 59 10.3 Public Announcements....................................................... 60 10.4 Headings................................................................... 60 10.5 Severability............................................................... 60 10.6 Entire Agreement........................................................... 60 10.7 Assignment................................................................. 60 10.8 No Third-Party Beneficiaries............................................... 60 10.9 Amendment.................................................................. 61 10.10 Governing Law.............................................................. 61 10.11 Attorneys' Fees............................................................ 61 10.12 Counterparts............................................................... 61 10.13 Specific Performance....................................................... 61 10.14 Guarantee of Parent Corporation............................................ 61 10.15 Knowledge.................................................................. 61 </TABLE> <PAGE> 6 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT is entered into on December 22, 1999, by and among QUALCOMM INCORPORATED, a Delaware corporation ("Seller"), KII ACQUISITION COMPANY, a Delaware corporation ("Purchaser"), and KYOCERA INTERNATIONAL, INC., a California corporation ("Parent Corporation"). RECITALS A. The Seller and those Affiliates of Seller set forth on Exhibit A (the Seller and such Affiliates being referred to herein as the "Selling Parties") desire to sell to Purchaser and Purchaser desires to purchase from the Selling Parties, the Purchased Assets and in connection therewith Purchaser is willing to assume certain liabilities of the Selling Parties related thereto, all upon the terms and subject to the conditions set forth in this Agreement. B. In connection with the closing of the transactions contemplated by this Agreement, Seller and Purchaser intend to enter into certain other related agreements. NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, and intending to be legally bound hereby, the Purchaser and the Seller hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ACTION" means any 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 Asset Purchase Agreement, dated December 22, 1999, by and among the Seller, the Purchaser and the Parent Corporation (including the Exhibits hereto and the Disclosure Schedule) and all amendments hereto made in accordance with the provisions of Section 10.9. "ANCILLARY AGREEMENTS" means: the (a) Lease Agreements; (b) ASICs Supply Agreement; (c) Transition Services Agreement; (d) Employee Matters Agreement; (e) Trademark License Agreement; and (f) Retained Business Support Agreement. "ANNUAL FINANCIAL STATEMENTS" means the audited consolidated balance sheets of the Seller as of September 26, 1999, together with the related statement of income and cash flows for <PAGE> 7 the fiscal year then ended, included in the Seller's Annual Report on Form 10-K for the fiscal year ended September 26, 1999. "ASICS SUPPLY AGREEMENT" means the ASICS Supply Agreement to be entered into between the Seller and the Purchaser at the Closing containing the principal terms set forth on Exhibit B. "ASSUMPTION AGREEMENTS" means the Assumption Agreements to be entered into between the Seller and the Purchaser or Affiliates of the Purchaser at the Closing substantially in the form of Exhibit C. "BILLS OF SALE" means the Bills of Sale and Assignment to be executed by the Seller at the Closing substantially in the form of Exhibit D. "BUSINESS" means the business of the Selling Parties and Qualcomm Personal Electronics as conducted as of the date hereof relating to designing, developing, manufacturing, marketing, selling, distributing and servicing subscriber products incorporating CDMA technology and related accessories for use in mobile or fixed wireless terrestrial networks, and shall specifically include the 7000 series wireless local loop terminal (but shall not include the 8000 series wireless local loop terminal); provided, however, that the Business shall not include (a) application specific integrated circuits, chips or chipsets which the Seller has developed or is developing for sale, nor the component designs, mask sets and associated software and developmental hardware, or (b) any of the Selling Parties' other businesses, such as, by way of example and not by way of limitation, the following: (i) the design, development, manufacture, marketing or sale of components and associated software for incorporation in third parties' wireless telephones, user terminals, infrastructure products or other equipment or devices, including but not limited to ASICS, chipsets and modules; (ii) the design, development, manufacture, marketing or sale of equipment, software or products relating to the Seller's high data rate, global positioning system and/or net broadcast applications; (iii) the design, development, manufacture, marketing or sale of terrestrial or satellite based network infrastructure products; and (iv) the design, development, manufacture, marketing or sale of (U) telephones for use in satellite applications (such as Globalstar), (V) equipment, software or products used to test or otherwise measure the performance of telephones or infrastructure equipment, (X) telephones for sale to or use by governmental entities (such as Condor) and high security applications, (Y) equipment, software or products relating to Seller's OmniTracs (or any other tracking or monitoring type activities), Eudora and Digital Cinema activities, or (Z) modules. "BUSINESS DAY" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by Law to be closed in the City of San Diego, California. "BUSINESS EMPLOYEE" means any employee of any Selling Party who is employed in the Business. "CLOSING STATEMENT CREDITS" means, collectively, (a) the net book value of the personal computers of those employees subject to the Employee Matters Agreement, as such computers are specifically set forth on Section 2.1(b)(xiii) of the Disclosure Schedule , which specified 2 <PAGE> 8 computers shall constitute Excluded Assets, (b) the net book value of those items of Tangible Personal Property that the Purchaser does not elect to purchase pursuant to Section 5.16, which non-selected items of Tangible Personal Property shall constitute Excluded Assets, and (c) the net book value of those spare parts that would otherwise constitute Purchased Inventory that the Purchaser does not elect to purchase pursuant to Section 5.16, which non-selected spare parts shall constitute Excluded Assets. "CODE" means the Internal Revenue Code of 1986, as amended through the date hereof. "COMPETITIVE ACTIVITIES" means manufacturing, marketing, selling, distributing and servicing commercial terrestrial-based wireless telephones incorporating CDMA technology for use in mobile or fixed wireless terrestrial networks, all as conducted or provided by the Selling Parties and their Affiliates as of the Closing Date and which is encompassed by the Business. Notwithstanding the foregoing, as examples and not by way of limitation, neither the Seller nor any Affiliate of the Seller shall be considered to be engaged in "Competitive Activities" (a) if the Seller or its Affiliates shall engage in any activity contemplated by the preceding sentence that relates to the fulfillment of the Seller's or its Affiliates' obligations under any Excluded Contracts or Excluded Liabilities, (b) if the Seller or its Affiliates make loans to, or otherwise assist in equipment financing for, any Competitive Entity, (c) if the Seller or its Affiliates engage in any activity relating to the design, development, manufacture, marketing or sale of components and associated software for incorporation in third parties' wireless telephones or user terminals, including but not limited to ASICS, chipsets and modules, (d) if the Seller or its Affiliates grant licenses of its intellectual property (including the provision of engineering and technical assistance) to any third party, including any third party that engages in Competitive Activities, (e) if the Seller or its Affiliates shall engage in any activity relating to the design, development, manufacture, marketing or sale of equipment, software or products relating to the Seller's high data rate, global positioning system and/or net broadcast applications, (f) if the Seller or its Affiliates engage in any activity relating to the design, development, manufacture, marketing or sale of terrestrial or satellite based network infrastructure products, (g) if the Seller or its Affiliates engage in any activity relating to the design or development of terrestrial-based wireless telephones incorporating CDMA technology for use in mobile or fixed wireless terrestrial networks, (h) if the Seller or its Affiliates engage in any activity relating to the design, development, manufacture, marketing or sale of non-commercial prototype terrestrial-based wireless telephones incorporating CDMA technology for use in mobile or fixed wireless terrestrial networks, and/or (i) if the Seller or its Affiliates engage in any activity relating to the design, development, manufacture, marketing or sale of (V) telephones for use in satellite applications (such as Globalstar), (W) equipment, software or products used to test or otherwise measure the performance of telephones, (X) telephones for sale to or use by governmental entities (such as Condor) and high security applications, (Y) equipment, software or products relating to Seller's OmniTracs (or any other tracking or monitoring type activities), Eudora and Digital Cinema activities, or (Z) modules. "COMPETITIVE ENTITY" means any Person that is engaged in Competitive Activities. "CONFIDENTIALITY AGREEMENT" means the nondisclosure agreement, dated as of October 1, 1999, between the Seller and Kyocera Corporation. 3 <PAGE> 9 "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, personal representative or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee, personal representative 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. "DISCLOSURE SCHEDULE" means the Disclosure Schedule, dated as of the date hereof, delivered by the Seller to the Purchaser. "EMPLOYEE MATTERS AGREEMENT" means the Employee Matters Agreement to be entered into between Seller and Purchaser at the Closing containing the principal terms set forth on Exhibit E. "ENCUMBRANCE" means any security interest, pledge, mortgage, lien, 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. "ENVIRONMENTAL CLAIMS" means any and all administrative, regulatory or judicial actions, suits, demands, claims, liens, notices of non-compliance or violation, investigations, proceedings, consent orders or consent agreements relating in any way to any Environmental Law or any permit under any Environmental Law (hereinafter "Claims"), including, without limitation, (a) any and all Claims by Governmental Authorities for enforcement, cleanup or other actions or damages pursuant to any applicable Environmental Law and (b) any and all Claims by any Person seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "ENVIRONMENTAL CONDITION" means a condition relating to or arising or resulting from a failure to comply with any applicable Environmental Law or any permit under any Environmental Law or a release or discharge of a Hazardous Material into the environment. "ENVIRONMENTAL LAW" means any Law, now or hereafter in effect and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials. "EXCLUDED INTELLECTUAL PROPERTY" means all right, title and interest of each Selling Party and its Affiliate in or to (a) except as otherwise provided by the Trademark License Agreement, the name "Qualcomm," and any variations thereof or combinations with such name, (b) any and all Intellectual Property described in clauses "(a)" and "(b)" of the definition of Intellectual Property, (c) patent cross-license agreements and other intellectual property licenses entered into as part of such cross-license agreements or related to such cross-license agreements, (d) any and all Intellectual Property (whether such Intellectual Property is Owned Intellectual Property or Shared Third Party Intellectual Property) used both in the conduct of the Business and in the 4 <PAGE> 10 conduct of any business of any Selling Party or its Affiliates other than the Business, and (e) any and all Intellectual Property (whether such Intellectual Property is Owned Intellectual Property or licensed to a Selling Party or any of its Affiliates by a third party) that is not used in the conduct of the Business. "EXISTING LICENSE AGREEMENT" means that certain Subscriber Unit License Agreement, dated August 31, 1996, between the Seller and Kyocera Corporation, a Japanese corporation, as amended. "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. "HAZARDOUS MATERIALS" means (a) petroleum and petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contain polychlorinated biphenyls, and radon gas, (b) any other chemicals, materials or substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "toxic substances", "contaminants" or "pollutants", or words of similar import, under any applicable Environmental Law, and (c) any other chemical, material or substance exposure to which is regulated by any Governmental Authority. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "INDEBTEDNESS" means, with respect to any Person, (a) all indebtedness of such Person, whether or not contingent, for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services, (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) 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), (e) 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, (f) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all Indebtedness of others referred to in clauses (a) through (f) 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 such Indebtedness 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) or (iv) otherwise to assure a creditor against loss, and (h) all Indebtedness referred to in clauses (a) through (f) above secured 5 <PAGE> 11 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 the Selling Parties' and their Affiliates' (a) inventions, ideas and conceptions of inventions, whether or not patentable, whether or not reduced to practice, and whether or not yet made the subject of a pending patent application or applications, (b) all United States, international and foreign statutory invention registrations, patents, patent registrations and patent applications (including, without limitation, all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations thereof) and all rights therein provided by international treaties or conventions and all improvements to the inventions disclosed in each such registration, patent or application, (c) trademarks, service marks, certification marks, collective marks, trade dress, logos, domain names, product configurations, trade names, business names, corporate names and other source identifiers, whether or not registered and whether or not currently in use, including all common law rights, and registrations and applications for registration thereof, including, but not limited to, all marks registered in the United States Patent and Trademark Office or in any office or agency of any State or Territory thereof or of any foreign country, and all rights therein provided by international treaties or conventions, and all reissues, extensions and renewals of any of the foregoing, (d) copyrighted works, copyrights, whether or not registered, and registrations and applications for registration thereof in the United States and any foreign country, and all rights therein provided by international treaties or conventions, (e) moral rights (including, without limitation, rights of paternity and integrity), and waivers of such rights by others, (f) computer software, including, without limitation, source code, object code, objects, comments, screens, user interfaces, report formats, templates, menus, buttons and icons, and all files, data, documentation and other materials related thereto, (g) confidential and proprietary information, including know-how, trade secrets, manufacturing and production processes and techniques, research and development information, technical data, financial, marketing and business data, pricing and cost information, business and marketing plans, and customer and supplier lists and information, (h) copies and tangible embodiments of all the foregoing, in whatever form or medium, (i) all rights to obtain and rights to register trademarks and copyrights, and (j) all rights to sue or recover and retain damages and costs and attorneys' fees for past, present and future infringement of any of the foregoing. "INTELLECTUAL PROPERTY CONTRACTS" means the Subscriber Business IP Licenses and each license or sublicense relating to any Shared Third Party Intellectual Property other than shrink wrap license agreements. "INVENTORIES" means all inventory (including, without limitation, parts, field replacement units and accessories), merchandise, finished goods, works in process, raw materials, packaging, supplies and other personal property intended to be used in the Business, maintained, held or stored by or for the Selling Parties on the Closing Date. "IRS" means the Internal Revenue Service of the United States. 6 <PAGE> 12 "LAW" means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, order, requirement or rule of common law. "LEASE AGREEMENTS" means (a) the Lease Agreements to be entered into between the Seller and the Purchaser at the Closing containing the principal terms set forth on Exhibit F and (b) the assignments and subleases of the leases to be entered into pursuant to Section 2.1(a)(ii) as set forth on Exhibit F. "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. "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 would reasonably be expected to be, materially adverse to the Assets or Assumed Liabilities or the operations, employee relationships, customer or supplier relationships, results of operations or the condition (financial or otherwise) of the Business. Notwithstanding the foregoing, in no event shall any of the following constitute a Material Adverse Effect: (a) any circumstance, change or effect generally affecting the industry in which the Selling Parties operate the Business or arising from changes in general business or economic conditions, or (b) any circumstance, change or effect (including, without limitation, delays in customer orders, a reduction in sales, a disruption in supplier, distributor or similar relationships or loss of employees) resulting from the fact that the Purchaser (rather than another party) is the purchaser of the Business, or (c) any circumstance, change or effect resulting from actions taken by the Selling Parties that are required by the Selling Party Documents. "OWNED INTELLECTUAL PROPERTY" means that Intellectual Property owned by the Selling Parties or their Affiliates. "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; (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 $250,000 in the case of a single property or $1,000,000 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 title to real property that (i) do not render title to the property encumbered thereby unmarketable and (ii) do not, individually or in the aggregate, materially adversely affect the value of such property or the use of such property for its present purposes. "PERMITTED PERCENTAGE" means (a) [***] during the two-year period following the Closing Date and (b) [***] for the remainder of the Restricted Period. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 7 <PAGE> 13 "PERSON" means any individual, partnership, limited liability company, 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. "PRE-CLOSING RECEIVABLES" means Subscriber Business Receivables which exist as of 12:01 a.m. on the Closing Date and are owned by a Selling Party as of such time. "POST-CLOSING RECEIVABLES" means all Subscriber Business Receivables other than Pre-Closing Receivables. "PURCHASER'S ACCOUNTANTS" means PricewaterhouseCoopers LLP, independent accountants of the Purchaser. "PURCHASER DOCUMENTS" means this Agreement and any Ancillary Agreements to which the Purchaser or the Parent Corporation is a party and all other agreements, instruments and certificates to be executed and delivered by the Purchaser or the Parent Corporation in connection with this Agreement. "QUALCOMM'S INTELLECTUAL PROPERTY" means the Intellectual Property which the Seller owns or has the right to license without the payment of royalties or other consideration to any third party as it exists as of the Closing Date (other than Subscriber Business Intellectual Property and Shared Third Party Intellectual Property); provided, that the term "Qualcomm's Intellectual Property" does not include (a) any Intellectual Property described in clauses "(a)" or "(b)" of the definition of Intellectual Property, other than design patents, (b) the name "Qualcomm" and any variations thereof or combinations with such name, or (c) any Intellectual Property described in clause "(j)" of the definition of Intellectual Property. "RECEIVABLES" means any and all accounts receivable (including unbilled receivables) and intercompany receivables reflecting indebtedness from Seller or any Affiliate of Seller to any other Affiliate of Seller or to Seller arising from the conduct of the Business before the Closing Date, whether or not in the ordinary course, together with any unpaid financing charges accrued thereon. "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. "RETAINED BUSINESS SUPPORT AGREEMENT" means the Retained Business Support Agreement to be entered into between Seller and Purchaser at the Closing containing the principal terms contained on Exhibit G. "SELLER'S ACCOUNTANTS" means PricewaterhouseCoopers LLP, independent accountants of the Seller. "SELLING PARTY DOCUMENTS" means this Agreement and any Ancillary Agreements to which a Selling Party is a party and all other agreements, instruments and certificates to be executed and delivered by any Selling Party in connection with this Agreement. 8 <PAGE> 14 "SHARED THIRD PARTY INTELLECTUAL PROPERTY" means that Intellectual Property that is licensed or sublicensed to each Selling Party or its Affiliates by a third party and that is used both in the conduct of the Business and in the conduct of any business of such Selling Party or its Affiliates other than the Business. "SPECIFIC ASSETS" of any Selling Party means the Assets which such Selling Party directly or indirectly owns or to which it is directly or indirectly entitled. "SUBSCRIBER BUSINESS IP LICENSES" means those agreements and other contracts pursuant to which a third party has licensed or sublicensed to the Selling Parties or their Affiliates any trademarks, service marks, trade names, copyrights and applications therefor or software used by the Selling Parties or their Affiliates exclusively in the conduct of the Business. "SUBSCRIBER BUSINESS RECEIVABLES" means, as of any time, all trade accounts receivable (including unbilled receivables), together with any unpaid financing charges accrued thereon, arising from the conduct of the Business (whether or not in the ordinary course). "TAX" OR "TAXES" means any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (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 or other charges 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, tariffs, and similar charges. "TRADEMARK LICENSE AGREEMENT" means the Trademark License Agreement to be entered into by Seller and Purchaser containing the principal terms set forth on Exhibit H. "TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement to be entered into between Seller and Purchaser at the Closing containing the principal terms set forth on Exhibit I. "U.S. GAAP" means United States generally accepted accounting principles and practices in effect from time to time applied consistently by the Seller throughout the periods involved. 1.2 OTHER DEFINED TERMS. The following terms shall have the meanings defined for such terms in the Sections of this Agreement set forth below: <TABLE> <CAPTION> <S> <C> TERM SECTION Accountant's Report 2.7(b) Assets 2.1(a) Assumed Contract 5.18 Assumed Liabilities 2.2(a) Business Financial Statements 3.4 </TABLE> 9 <PAGE> 15 <TABLE> <S> <C> Business Systems 3.11 Catastrophic Occurrence 5.18 Closing 2.4 Closing Date 2.4 Closing Net Book Value 2.7(a) Closing Statement Credits 2.7(a) Closing Statement of Net Assets 2.7(a) Customer 5.18 Deferred Amounts 6.6 Dispute Threshold 2.7(c)(ii) ERISA 3.22(a) ERISA Affiliate 3.22(c) Excluded Assets 2.1(b) Excluded Contracts 2.1(b)(ii) Excluded Liabilities 2.2(b) Final Closing Net Book Value 2.7(d) FMLA 6.2 Independent Accounting Firm 2.7(c)(ii) Leased Real Property 3.19(b) Leases 3.19(b) Licensed Intellectual Property 5.7(a) Loss 8.2(a) Material Contracts 3.17(a)(i) Material Intellectual Property 3.18(b) Material Operations Contracts 3.17(a)(i) Multiemployer Plan 3.22(b) Omitted Tangible Personal Property 5.15(a) Owned Real Property 3.19(a) Permits 3.15 Plans 3.22(a) Purchase Price. 2.3 Purchased Inventories 2.1(a)(iv) Purchaser Preamble Purchaser Indemnitees 8.2(a) Purchaser Non-Solicit Period 5.8(c) Restricted Period 5.8(a) Real Property 3.19(b) Selected Seller Employees 6.1 Selected QPE Employees 6.1 Seller Preamble Seller Indemnitees 8.3(a) Seller Non-Solicit Period 5.8(b) September Net Book Value 2.7(a) September Statement of Net Assets 2.7(a) Subscriber Business Intellectual Property 2.1(a)(vi) Supplier Systems 3.11 </TABLE> 10 <PAGE> 16 <TABLE> <S> <C> Tangible Personal Property 3.20 Third Party Claims 8.4 Transferred Customer Contracts 2.1(a)(i) Transferred Employees 6.3 WARN 3.22(f) Year 2000 Plan. 3.11 Year 2000 Ready 3.11 </TABLE> 1.3 OTHER DEFINITIONAL PROVISIONS. (a) The terms "dollars" and "$" shall mean United States dollars. (b) Terms defined in the singular shall have a comparable meaning when used in the plural and vice versa. ARTICLE 2 PURCHASE AND SALE 2.1 ASSETS TO BE SOLD. (a) On the terms and subject to the conditions of this Agreement, the Seller shall, on the Closing Date, sell, assign, transfer, convey and deliver to the Purchaser, or cause to be sold, assigned, transferred, conveyed and delivered to the Purchaser, and the Purchaser shall purchase from the Selling Parties and their Affiliates, on the Closing Date, all their right, title and interest as of the Closing Date in and to all of the assets, properties, goodwill and business of every kind and description and wherever located, whether tangible or intangible, real, personal or mixed, directly or indirectly owned by the Selling Parties and their Affiliates or to which they are directly or indirectly entitled and, in any case, primarily used or intended to be primarily used in the Business as conducted as of the Closing Date, other than the Excluded Assets (the assets to be purchased by the Purchaser being referred to as the "Assets"), including, without limitation, the following: (i) those agreements, contracts, purchase orders and other instruments set forth in Section 2.1(a)(i) of the Disclosure Schedule and subject to Section 5.1, those additional agreements, contracts, purchase orders and other instruments (other than agreements, contracts or other instruments which relate to or constitute Excluded Intellectual Property) entered into between the date of this Agreement and the Closing Date which relate primarily to the Business (collectively the "Transferred Customer Contracts") (which shall not include rights or obligations related to the provision of network infrastructure products, test and deployment products or modules); (ii) leasehold interests in, to and under the Real Property, identified in Section 2.1(a)(ii) of the Disclosure Schedule, upon the terms set forth on Exhibit F; (iii) all other contracts, agreements, leases, commitments, and sales and purchase orders, and all commitments, bids and offers (to the extent such offers are transferable) 11 <PAGE> 17 to the extent primarily used or intended to be primarily used in the Business, including, without limitation, such items as are set forth on Section 2.1(a)(iii) of the Disclosure Schedule; (iv) all Inventories primarily used or intended to be primarily used in the Business (collectively, the "Purchased Inventories"); (v) all furniture, fixtures, equipment, machinery, vehicles and other tangible personal property primarily used or held primarily for use at the locations at which the Business is conducted, or otherwise owned or held primarily for use in the conduct of the Business that is selected by Purchaser from Section 3.20 of the Disclosure Schedule pursuant to the procedures set forth in Section 5.16 (which shall exclude the personal computers referenced in clause "(a)" of the definition of Closing Statement Credits) which are selected by the Purchaser pursuant to Section 5.16 (with only those items selected to be deemed to constitute Assets), other than such assets primarily used or intended to be used in connection with the Excluded Contracts; (vi) all Owned Intellectual Property, other than Excluded Intellectual Property, used exclusively in the conduct of the Business, and all Subscriber Business IP Licenses, subject to the provisions of Section 5.7(b) (collectively, the "Subscriber Business Intellectual Property"); (vii) other than for experimental FCC licenses, all municipal, state and federal franchises, permits, licenses, agreements, waivers and authorizations primarily held or used in connection with the Business, to the extent transferable; (viii) all claims, causes of action, choses in action, rights of recovery and rights of set-off of any kind (including rights to insurance proceeds and rights under and pursuant to all warranties, representations and guarantees made by suppliers of products, materials or equipment, or components thereof), primarily pertaining to or primarily arising out of the Business, except to the extent any of the foregoing relates to the Excluded Assets or the Excluded Liabilities; (ix) all books of account, general, financial, tax and personnel records, invoices, shipping records, supplier lists, correspondence and other documents, records and files and all computer software and programs and any rights thereto primarily used in, or primarily relating to, the Business; (x) all sales and promotional literature, customer lists and other sales-related materials designed for and intended to be used in the Business; (xi) the Business as a going concern and the goodwill relating to the Business; and (xii) all other assets, rights and claims of every kind and nature primarily used or intended to be primarily used in the operation of the Business. 12 <PAGE> 18 (b) The Assets shall exclude, and Purchaser shall not acquire any interest in or any rights under, in or relating to, the following assets owned by the Selling Parties and their Affiliates (the "Excluded Assets"): (i) all items of Excluded Intellectual Property; (ii) all rights in, to and under the contracts listed on Section 2.1(b)(ii) of the Disclosure Schedule and all other contracts not included in the Transferred Customer Contracts (the "Excluded Contracts"); (iii) all rights in, to and under the Transferred Customer Contracts to the extent related to the provision of network infrastructure products, test and deployment products or modules; (iv) except as otherwise provided by the Lease Agreements, all Owned Real Property; (v) all cash, cash equivalents and bank accounts; (vi) all Inventories not primarily used or intended to be used in the Business and the spare parts Inventory not selected by the Purchaser pursuant to Section 5.16; (vii) all Receivables, whether or not related to the Business, including all Pre-Closing Receivables; (viii) the capital stock, notes and other securities of, and all other interests in, any Person, including, without limitation, all subsidiaries and all investments in other entities; (ix) all federal, state and local income and franchise tax credits and tax refund claims (and any foreign equivalents thereof) relating to or arising out of the Business prior to the Closing; (x) all rights under this Agreement and the Ancillary Agreements; (xi) any insurance policies and all rights of every nature and description under or arising out of such insurance policies; (xii) all right, title and interest on the Closing Date in, to and under all other assets, properties, goodwill and business of every kind, wherever located, whether tangible or intangible, real, personal or mixed, not primarily used or intended to be primarily used in the operation of the Business; (xiii) all right, title and interest on the Closing Date in, to and under all assets set forth on Section 2.1(b)(xiii) of the Disclosure Schedule; and 13 <PAGE> 19 (xiv) the personal computers referenced in clause "(a)" of the definition of Closing Statement Credits and those items of Tangible Personal Property that the Purchaser does not elect to purchase pursuant to Section 5.16. 2.2 ASSUMPTION AND EXCLUSION OF LIABILITIES. (a) On the terms and subject to the conditions of this Agreement (including, without limitation any contrary provisions which may be contained in Section 2.2(b)), Purchaser shall, on the Closing Date, assume and shall pay, perform and discharge when due only the following and no other Liabilities of the Selling Parties as of the Closing Date (the "Assumed Liabilities"): (i) Liabilities primarily arising out of or relating to the Business to the extent such Liabilities are reflected on the Closing Statement of Net Assets, as adjusted pursuant to Section 2.7, including all accrued liabilities (other than liabilities for accrued payroll taxes, sales taxes, salary, benefits and vacation and sick pay) to the extent reflected or reserved for on the Closing Statement of Net Assets, as adjusted pursuant to Section 2.7; (ii) all Liabilities arising out of the Transferred Customer Contracts, and other contracts, agreements, leases, commitments, sales and purchase orders, bids and offers that are included in the Assets and which are reflected on the Closing Statement of Net Assets or which accrue on or after the Closing Date; (iii) those employment related Liabilities, if any, expressly assumed by the Purchaser pursuant to Article VI; (iv) all Liabilities for accounts payable for goods and services received or rendered on or after the Closing Date; and (v) except as otherwise provided in Section 5.18, all Liabilities with respect to product warranties and service obligations arising out of or relating to the operations of the Subscriber Business or any products manufactured, sold or distributed on behalf of the Subscriber Business. (b) Notwithstanding anything to the contrary set forth in Section 2.2(a), the Seller shall retain, and shall be responsible for paying, performing and discharging when due, and the Purchaser shall not assume or have any responsibility for, all Liabilities of the Selling Parties, other than the Assumed Liabilities (the "Excluded Liabilities"), including, without limitation: (i) all Taxes now or hereafter owed by the Selling Parties or any Affiliates of the Selling Parties, or attributable to the Assets or the Business, relating to any period, or any portion of any period, ending prior to the Closing Date, subject to Section 5.11(c); (ii) all Liabilities to the extent relating to or arising out of the Excluded Assets; 14 <PAGE> 20 (iii) all employment-related Liabilities other than those expressly assumed by Purchaser, if any, pursuant to Article VI; and (iv) all Liabilities for accounts payable for goods and services received or rendered prior to the Closing Date. 2.3 PURCHASE PRICE. As partial consideration for the sale of the Assets, at the Closing, Purchaser shall pay to Seller, by wire transfer of immediately available funds, the sum of [***] subject to adjustment as contemplated by Section 2.7 (the "Purchase Price"). 2.4 CLOSING. Subject to the terms and conditions of this Agreement, the sale and purchase of the Assets and the assumption of the Assumed Liabilities contemplated by this Agreement shall take place at a closing (the "Closing") to be held at the offices of Seller at 10:00 a.m. (Pacific Standard Time) on the later to occur of (i) February 21, 2000 or (ii) the third Business Day following the satisfaction or waiver of all conditions to the obligations of the parties set forth in Article VII, or at such other place or at such other time or on such other date as the Seller and the Purchaser may mutually agree upon in writing (the day on which the Closing takes place being the "Closing Date"). Notwithstanding anything contained in this Agreement to the contrary, for the purposes of this Agreement, the Closing shall be deemed to have occurred as of 12:01 a.m., Pacific Standard Time, on the Closing Date. 2.5 CLOSING DELIVERIES BY THE SELLER. At the Closing, the Seller (and, to the extent applicable, the Selling Parties) shall deliver or cause to be delivered to the Purchaser: (a) one or more Bills of Sale in the form of Exhibit D and such other instruments, in form and substance reasonably satisfactory to the Purchaser and the Seller, as may be reasonably requested by the Purchaser to evidence such transfer of any Assets on the public records; (b) an executed counterpart of the (i) ASICs Supply Agreement, (ii) Transition Services Agreement, (iii) Employee Matters Agreement, (iv) Trademark License Agreement, (v) Lease Agreements, and (vi) Retained Business Support Agreement; (c) a receipt for the Purchase Price; and (d) the opinions, certificates and other documents required to be delivered pursuant to Section 7.2. 2.6 CLOSING DELIVERIES BY THE PURCHASER. At the Closing, the Purchaser shall deliver or cause to be delivered to the Seller: (a) the Purchase Price, by wire transfer in immediately available funds to a bank account in the United States to be designated by the Seller in a written notice to the Purchaser at least two Business Days prior to the Closing; (b) an executed counterpart of the (i) ASICs Supply Agreement, (ii) Transition Services Agreement, (iii) Employee Matters Agreement, (iv) Trademark License Agreement, (v) Lease Agreements, and (vi) Retained Business Support Agreement; *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 15 <PAGE> 21 (c) the Assumption Agreements, executed by the Purchaser; and (d) the opinions, certificates and other documents required to be delivered pursuant to Section 7.1. 2.7 POST-CLOSING ADJUSTMENT OF THE PURCHASE PRICE. The Purchase Price shall be subject to adjustment after the Closing as specified in this Section 2.7. (a) SEPTEMBER STATEMENT OF NET ASSETS. The Seller has prepared and delivered to the Purchaser a schedule of specified assets and liabilities of the Business as of the close of business on September 26, 1999 attached hereto as Section 2.7 of the Disclosure Schedule (the "September Statement Of Net Assets"), which the Seller represents was prepared in accordance with U.S. GAAP applied on a basis consistent with the preparation of the Annual Financial Statements, reflecting only the book value of the Assets and the Assumed Liabilities (as the same shall exist as of September 26, 1999) and eliminating the book value of the Excluded Assets and the Excluded Liabilities (as the same shall exist as of September 26, 1999), except that the September Statement Of Net Assets does not present the operating leases of the Business in accordance with U.S. GAAP and includes the Excluded Assets described in subparagraphs (a), (b) and (c) of the definition of "Closing Statement Credits." The specified net assets of the Business as of September 26, 1999 (the "September Net Book Value") shall be calculated as the excess of the book value of the Assets as of September 26, 1999 over the book value of the Assumed Liabilities as of September 26, 1999; provided, however, that notwithstanding the foregoing, the parties agree that the book value of certain Assets will be reflected in the September Net Book Value in accordance with the following methodologies:[***] (b) CLOSING STATEMENT OF NET ASSETS. As promptly as practicable, but in any event within 60 calendar days following the Closing Date, the Seller shall at its expense prepare and deliver to the Purchaser a schedule of specified assets and liabilities of the Business as of the close of business on the day immediately preceding the Closing Date (the "Closing Statement Of Net Assets") prepared in accordance with U.S. GAAP applied on a basis consistent with the preparation of the September Statement of Net Assets (except that the Closing Statement of Net Assets will not present the operating leases of the Business in accordance with U.S. GAAP and will exclude the Excluded Assets described in subparagraphs (a), (b) and (c) of the definition of Closing Statement Credits), reflecting only the book value of the Assets and the Assumed Liabilities (as the same shall exist as of the close of business on the day immediately preceding the Closing Date) and eliminating the book value of the Excluded Assets and the Excluded Liabilities (as the same shall exist as of the close of business on the day immediately preceding the Closing Date), together with (i) a report thereon of the Seller's Accountants stating that the Closing Statement of Net Assets fairly presents the Assets and the Assumed Liabilities at the Closing Date in accordance with U.S. GAAP (the "Accountant's Report"), and (ii) a certification of the chief financial officer or chief accounting officer of the Seller to the effect that the Closing Statement of Net Assets has been prepared in compliance with the requirements *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 16 <PAGE> 22 of this Section 2.7. The Purchaser and the Parent Corporation will use reasonable commercial efforts to cooperate in any audit conducted by the Seller's Accountants in connection with the preparation of the Accountant's Report, including but not limited to providing to Seller's Accountants any necessary engagement letters and management representation letters as are customary and appropriate. The specified net assets of the Business as of the close of business on the day immediately preceding the Closing Date (the "Closing Net Book Value") shall be calculated as the excess of the book value of the Assets reflected on the Closing Statement of Net Assets over the book value of the Assumed Liabilities reflected on the Closing Statement of Net Assets; provided, however, that notwithstanding the foregoing, the parties agree that the book value of certain Assets will be reflected in the Closing Net Book Value in accordance with the methodologies set forth in Section 2.7(a). (c) DISPUTES. (i) Subject to clause (ii) of this Section 2.7(c), the Closing Statement of Net Assets delivered by the Seller to the Purchaser shall be deemed to be and shall be final, binding and conclusive on the parties hereto. (ii) The Purchaser may dispute any amounts reflected on the Closing Statement of Net Assets to the extent the net effect of such disputed amounts in the aggregate would affect the Closing Net Book Value reflected on the Closing Statement of Net Assets by more than [***] of the Closing Net Book Value (the "Dispute Threshold"), but only on the basis that the amounts reflected on the Closing Statement of Net Assets were not arrived at in accordance with U.S. GAAP applied on a basis consistent with the preparation of the September Statement of Net Assets (other than with respect to the treatment of operating leases and other than with respect to those items described in the definition of Closing Statement Credits) or that the amounts reflected thereon do not properly adjust to include only the book value of the Assets and the Assumed Liabilities and to eliminate the book value of the Excluded Assets and the Excluded Liabilities; provided, however, that the Purchaser shall have notified the Seller and the Seller's Accountants in writing of each disputed item, specifying the amount thereof in dispute and setting forth, in reasonable detail, the basis for such dispute, within twenty (20) Business Days of the later of the Seller's delivery of the Closing Statement of Net Assets and the Seller's delivery of the Accountant's Report to the Purchaser. In the event of such a dispute, the Seller's Accountants and the Purchaser's Accountants shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto. If any such resolutions by the Purchaser's Accountants and the Seller's Accountants leaves in dispute amounts the net effect of which in the aggregate would not affect the Closing Net Book Value reflected on the Closing Statement of Net Assets by more than the Dispute Threshold, all such amounts remaining in dispute shall then be deemed to have been resolved in favor of the Closing Statement of Net Assets delivered by the Seller to the Purchaser. If the Seller's Accountants and the Purchaser's Accountants are unable to reach a resolution with respect to all amounts in dispute within ten Business Days after receipt by the Purchaser and the Purchaser's Accountants of the Seller's written notice of dispute, the Seller's Accountants and the Purchaser's Accountants shall submit the items remaining in dispute for resolution to an independent accounting firm of international reputation mutually acceptable to the Purchaser and the Seller (the "Independent Accounting Firm"), which shall, within ten Business Days after such submission, determine and report to the Purchaser and the Seller upon *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 17 <PAGE> 23 such remaining disputed items, and such report shall be final, binding and conclusive on the Seller and the Purchaser. (iii) In acting under this Agreement, the Purchaser's Accountants, the Seller's Accountants and the Independent Accounting Firm shall be entitled to the privileges and immunities of arbitrators. (iv) Notwithstanding anything to the contrary set forth in this Section 2.7(c), no adjustment to the Closing Net Book Value reflected on the Closing Statement of Net Assets pursuant to this Section 2.7(c) shall be made with respect to amounts disputed by the Purchaser pursuant to this Section 2.7(c), unless the net effect of the amounts successfully disputed by the Purchaser (by resolution of the Seller's Accountants and the Purchaser's Accountants and, if applicable, by determination of the Independent Accounting Firm) in the aggregate is to decrease the Closing Net Book Value reflected on the Closing Statement of Net Assets by at least the amount of the Dispute Threshold, in which case such adjustment shall be made in the full amount of such amounts successfully disputed by the Purchaser. (v) The fees and disbursements of the Independent Accounting Firm, if any, shall be borne by (A) the Purchaser, if the net effect of the amounts successfully disputed by the Purchaser in the aggregate is to decrease the Closing Net Book Value reflected on the Closing Statement of Net Assets by less than the amount of the Dispute Threshold, and (B) by the Seller, if the net effect of the amounts successfully disputed by the Purchaser in the aggregate is to decrease the Closing Net Book Value reflected on the Closing Statement of Net Assets by at least the amount of the Dispute Threshold. (d) PURCHASE PRICE ADJUSTMENT. The Closing Net Book Value shall be deemed final (the "Final Closing Net Book Value") for the purposes of this Section 2.7 upon the earlier of (i) the failure of the Purchaser to notify the Seller of a dispute within 20 Business Days of the later of the Seller's delivery of the Closing Statement of Net Assets to the Purchaser and the Seller's delivery of the Accountant's Report to the Purchaser, (ii) the resolution of all disputes, pursuant to Section 2.7(c)(ii), by the Purchaser's and the Seller's Accountants and (iii) the resolution of all disputes, pursuant to Section 2.7(c)(ii), by the Independent Accounting Firm. Within three Business Days of the Closing Statement of Net Assets being deemed final, a Purchase Price adjustment shall be made as follows: (i) in the event that the September Net Book Value reflected on the September Statement of Net Assets exceeds the Final Closing Net Book Value, then the Purchase Price shall be adjusted downward in an amount equal to such excess, and the Seller shall, within three Business Days of such determination, pay such amount, together with interest thereon, from the Closing Date through the date of payment at the rate of interest publicly announced by Citibank, N.A. or any successor thereto in New York, New York from time to time as its reference rate from the Closing Date to the date of such payment, to the Purchaser by wire transfer in immediately available funds; and (ii) in the event that the Final Closing Net Book Value exceeds the September Net Book Value reflected on the September Statement of Net Assets, then the Purchase Price shall be adjusted upward in an amount equal to such excess and the Purchaser 18 <PAGE> 24 shall, within three Business Days of such determination, pay the amount of such excess together with interest thereon, from the Closing Date through the date of payment at the rate of interest publicly announced by Citibank, N.A. or any successor thereto in New York, New York from time to time as its reference rate from the Closing Date to the date of such payment, to the Seller by wire transfer in immediately available funds. (e) PRORATIONS. Notwithstanding anything to the contrary set forth in this Section 2.7, the parties agree that the following expenses shall (to the extent not otherwise already reflected in the Closing Date Statement) be prorated. All personal property taxes and assessments which are past due on the Assets will be paid by the Seller on or before the Closing Date together with any penalty or interest thereon. Utility fees, current personal property taxes, classified telephone book advertising, real property taxes with respect to real property leased pursuant to the Lease Agreements, and all other costs and expenses paid by any Selling Party which relate directly to the day-to-day operation of the Business after the Closing Date and which will materially benefit the Purchaser in its day-to-day operation of the Business, will be prorated and adjusted between the Purchaser and the Seller as of 12:01 a.m. on the Closing Date on a due date basis. If current tax bills are unavailable on the Closing Date, the prior year's tax bills will be used for proration purposes and taxes will be re-prorated between the Purchaser and the Seller when the current tax bills are received. 2.8 ALLOCATION OF THE PURCHASE PRICE. The sum of the Purchase Price (and all other capitalized costs) shall be allocated among the Assets as agreed upon between the Purchaser and the Seller prior to Closing. Any subsequent adjustments to the sum of the Purchase Price and Assumed Liabilities shall be reflected in the allocation hereunder in a manner consistent with Treasury Regulation Section 1.1060-1T(f). For all purposes (including tax, financial and accounting), the Purchaser and the Seller agree to report the transactions contemplated in this Agreement in a manner consistent with the terms of this Agreement and that neither of them will take any position inconsistent therewith in any Tax return, in any refund claim, in any litigation, or otherwise without the consent of the other party, which consent shall not be unreasonably withheld or delayed. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SELLER As an inducement to the Purchaser to enter into this Agreement, the Seller hereby represents and warrants to the Purchaser as follows as of the Closing Date: 3.1 ORGANIZATION, AUTHORITY AND QUALIFICATION OF THE SELLING PARTY. Each Selling Party is a corporation or other entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has all necessary corporate and authority to enter into the Selling Party Documents to which it is a party, to carry out its obligations thereunder and to consummate the transactions contemplated thereby. Each Selling Party is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the Assets owned or leased by it or the operation of the Business makes such licensing or qualification necessary, except to the extent that the failure to be so licensed or qualified would not materially adversely affect (a) the ability of such Selling Party to carry out its obligations under, and to consummate 19 <PAGE> 25 the transactions contemplated by, the Selling Party Documents to which it is a party and (b) the ability of such Selling Party to conduct the Business as it is currently being conducted. The execution and delivery of the Selling Party Documents to which it is a party by each Selling Party, the performance by such Selling Party of its obligations thereunder and the consummation by such Selling Party of the transactions contemplated thereby have been duly authorized by all requisite action on the part of such Selling Party. No approval of the stockholders of any Selling Party is required in connection with the execution and delivery of any Selling Party Documents by any Selling Party, the performance by any Selling Party of its obligations thereunder or the consummation by any Selling Party of the transactions contemplated thereby. This Agreement has been duly executed and delivered by the Seller and (assuming due authorization, execution and delivery by the Purchaser, this Agreement constitutes the legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms, except as enforceability may be limited by (a) bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally and (b) general principles of equity, including specific performance, injunctive relief and other equitable remedies. The Selling Party Documents to which it is a party will be duly executed and delivered by each Selling Party, and (assuming due authorization, execution and delivery by the Purchaser) the Selling Party Documents to which it is a party will constitute, legal, valid and binding obligations of such Selling Party enforceable against such Selling Party in accordance with their respective terms, except as enforceability may be limited by (a) bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally and (b) general principles of equity, including specific performance, injunctive relief and other equitable remedies. 3.2 NO CONFLICT. Assuming that all consents, approvals, authorizations and other actions described in Section 3.3 have been obtained and all filings and notifications listed in Section 3.3 of the Disclosure Schedule have been made, the execution, delivery and performance of the Selling Party Documents to which it is a party by each Selling Party 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 such Selling Party, (b) conflict with or violate (or cause an event which could have a Material Adverse Effect as a result of) any Law or Governmental Order applicable to such Selling Party or the Assets or the Business, or (c) except for the required consents described in Section 3.2(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 on any of the Assets pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which such Selling Party is a party or by which any of the Assets is bound or affected, except, in the case of clauses (b) and (c), as would not have a Material Adverse Effect and would not prevent or materially delay consummation by any Selling Party of the transactions contemplated by this Agreement. 3.3 GOVERNMENTAL CONSENTS AND APPROVALS. The execution, delivery and performance by each Selling Party of the Selling Party Documents to which it is a party 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 3.3 of the Disclosure Schedule, (b) the notification requirements of the HSR Act and (c) where the failure 20 <PAGE> 26 to obtain such consent, approval, authorization or order would not have a Material Adverse Effect and would not prevent or materially delay consummation of the transactions contemplated by this Agreement and the Ancillary Agreements. 3.4 FINANCIAL INFORMATION. Section 3.4 of the Disclosure Schedule contains true and complete copies of (a) the unaudited statements of income of the Business for the last three fiscal quarters in the fiscal year ended September 27, 1998 and for the fiscal year ended September 26, 1999 (the "Business Financial Statements") and (b) the September Statement of Net Assets. The Business Financial Statements and the September Statement of Net Assets (a) were prepared in accordance with the books of account and other financial records of the Business, (b) present fairly the financial condition and results of operations of the Business as of the dates thereof or for the periods covered thereby, (c) have been prepared in accordance with U.S. GAAP applied on a basis consistent with the past practices of the Business throughout the periods involved (except that the unaudited financial statements may not contain footnotes and except for the treatment of operating leases) and (d) include or will include all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the financial condition of the Business and the results of the operations of the Business as of the dates thereof or for the periods covered thereby. 3.5 NO UNDISCLOSED LIABILITIES. As of the date hereof, there are no Liabilities of any Selling Party related to the Business other than Liabilities (a) reflected or reserved against on the September Statement of Net Assets, (b) disclosed in Section 3.5 of the Disclosure Schedule, (c) incurred since September 26, 1999 in the ordinary course of business, consistent with past practice, of the Business and which do not (individually, or in the aggregate) and would not reasonably be expected to have (individually, or in the aggregate) a Material Adverse Effect, (d) arising in the ordinary course under contracts assumed by the Purchaser under this Agreement or (e) which are Excluded Liabilities. Reserves are reflected on the September Statement of Net Assets against all Liabilities of each Selling Party related to the Business, other than Liabilities relating to the Excluded Assets and Excluded Liabilities, in amounts that have been established on a basis consistent with the past practices of the Business and in accordance with U.S. GAAP. 3.6 INVENTORIES. Subject to amounts reserved therefor on the September Statement of Net Assets, the values at which all Inventories are carried on the September Statement of Net Assets reflect the historical inventory valuation policy of the Business of stating such Inventories at the lower of cost (determined on the first-in, first-out method) or market value. Each Selling Party has good and valid title to the Inventories free and clear of all Encumbrances except Permitted Encumbrances. The Inventories are in good and merchantable condition in all material respects, are suitable and usable for the purposes for which they are intended and are in a condition such that they can be sold in the ordinary course of the Business consistent with past practice. Except as set forth in Section 3.6 of the Disclosure Schedule, the Inventories do not consist of, in any material amount, items that are obsolete, damaged or slow-moving. Except as set forth on Section 3.6 of the Disclosure Schedule, the Inventories do not consist of any items held on consignment. No Selling Party is under any obligation or liability with respect to accepting returns of items of Inventory or merchandise in the possession of its customers, except to the extent consistent with past return policies or warranties of the Business. No clearance or extraordinary sale of the Inventories has been conducted since the date of the September Statement of Net Assets. Except as set forth in Section 3.6 of the Disclosure Schedule, no 21 <PAGE> 27 Selling Party has acquired or committed to acquire or manufacture Inventory for sale which is not of a quality and quantity usable in the ordinary course of the Business within a reasonable period of time and consistent with past practice nor has any Selling Party changed the price of any Inventory except for (a) reductions to reflect any reduction in the cost thereof to such Selling Party, (b) reductions and increases responsive to normal competitive conditions and consistent with the past sales practices of the Business, and (c) increases to reflect any increase in the cost thereof to such Selling Party. Section 3.6 of the Disclosure Schedule contains a complete list of the addresses of all warehouses and other facilities in which any significant portion of the Inventories are located. 3.7 SALES AND PURCHASE ORDER BACKLOG. (a) As of December 15, 1999, the unshipped portion of open sales orders accepted by all of the Selling Parties related to the Business totaled [***] (as measured by standard cost). Section 3.7(a) of the Disclosure Schedule lists all accepted open sales orders as of December 15, 1999 as to which the unshipped portion exceeded $250,000. (b) As of December 16, 1999, open purchase orders issued by the Selling Parties related to the Business totaled [***] Section 3.7(b) of the Disclosure Schedule lists all purchase orders relating to the Business exceeding $250,000 per order, which have been issued by the Selling Party and which are open as of December 15, 1999. 3.8 CUSTOMERS. Section 3.8 of the Disclosure Schedule lists the five most significant customers (by revenue) of the Business for the twelve-month period ended September 26, 1999 and the amount of such revenues from each such customer during such period. Except as disclosed in Section 3.8 of the Disclosure Schedule, as of the date hereof, no Selling Party has received any notice and has any reason to believe that any significant customer of the Business has ceased, or will cease, to use the products, equipment, goods or services of the Business or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services. Except as set forth in Section 3.8 of the Disclosure Schedule, there are not pending, nor, to the best knowledge of the Seller, threatened, any claims under or pursuant to any warranty which are not fully reserved against in the September Statement of Net Assets or the Closing Statement of Net Assets. 3.9 SUPPLIERS. Section 3.9 of the Disclosure Schedule lists the ten most significant suppliers of raw materials, supplies, merchandise and other goods for the Business for the twelve-month period ended September 26, 1999 and the amount of such raw materials, supplies, merchandise and other goods received from each such supplier related to the Business during such period. Except as disclosed in Section 3.9 of the Disclosure Schedule, as of the date hereof, no Selling Party has received any notice and has any reason to believe that any such supplier will not sell raw materials, supplies, merchandise and other goods to the Business at any time after the Closing Date on terms and conditions similar to those imposed on current sales to the Business, subject only to general and customary price increases. 3.10 PRODUCTS AND SERVICES. Except as described in Section 3.10 of the Disclosure Schedule, there is no material defect in design, materials, manufacture or otherwise in any products designed, manufactured, distributed or sold by the Business, or any material defect in *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 22 <PAGE> 28 repair to, or replacement of, any such products. Section 3.10 of the Disclosure Schedule sets forth a true and complete list of all product families designed, manufactured, marketed or sold by the Business that have been recalled or withdrawn (whether voluntarily or otherwise) as of the date hereof. The aggregate expense of all product recalls and withdrawals performed by the Business has not exceeded [***] in any of the four fiscal quarters prior to the date hereof. The September Statement of Net Assets includes, and the Closing Statement of Net Assets will include, adequate reserves in accordance with U.S. GAAP for all product warranty obligations of the Business. 3.11 YEAR 2000 READINESS. Each Selling Party has (a) undertaken an assessment of all significant computer hardware, software, networks, systems and equipment embedded within products of the Business and/or used in the conduct of the Business as currently conducted ("Business Systems") that could be adversely affected by a failure to accurately adapt, accommodate, process or respond to the Year 2000 and thereafter ("Year 2000 Ready"), (b) developed a plan and time line for rendering all significant Business Systems Year 2000 Compliant (the "Year 2000 Plan"), and (c) to date, implemented such plan in accordance with such timetable in all material respects. Assuming the Purchaser continues to implement the Year 2000 Plan following the Closing in accordance with such timetable, there are no Business Systems which will not be Year 2000 Ready in all material respects. Each Selling Party has also (a) requested all significant suppliers to the Business to provide to such Selling Party assessments of the Year 2000 Readiness of all material computer hardware, software, networks, systems and equipment of such suppliers used in providing products or services to the Business ("Supplier Systems"), (b) is receiving assessments from all such suppliers and (c) based on such assessments to date, has no reason to believe that any material Supplier Systems will not be Year 2000 Ready in all material respects. 3.12 LITIGATION. Except as described in Section 3.12 of the Disclosure Schedule, there are no Actions by or against any Selling Party relating to the Business, or affecting or that would reasonably be expected to affect any of the Assets or the Business, pending before any Governmental Authority (or, to the best knowledge of Seller, threatened in writing to be brought by or before any Governmental Authority). None of the matters disclosed in Section 3.12 of the Disclosure Schedule has had or could reasonably be expected to have a Material Adverse Effect or could affect the legality, validity or enforceability of any Selling Party Document or the consummation of the transactions contemplated thereby. Except as set forth in Section 3.12 of the Disclosure Schedule, no Selling Party is subject to any Governmental Order relating to the Business, or affecting or that would reasonably be expected to affect any of the Assets or the Business (nor, to the best knowledge of the Seller, are there any such Governmental Orders threatened in writing to be imposed by any Governmental Authority). 3.13 COMPLIANCE WITH LAWS. Each Selling Party has conducted and continues to conduct the Business in all material respects in accordance with all Laws and Governmental Orders applicable to such Selling Party, the Assets and the Business (including, without limitation, the Foreign Corrupt Practices Act and the anti-boycott laws and regulations promulgated under the Export Administration Act of 1979), and such Selling Party is not in violation of any such Law or Governmental Order in any material respect. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 23 <PAGE> 29 3.14 CONDUCT IN THE ORDINARY COURSE; ABSENCE OF CERTAIN CHANGES, EVENTS AND CONDITIONS. From the date of the September Statement of Net Assets, except as disclosed in Section 3.14 of the Disclosure Schedule, the Business has been conducted in the ordinary course and consistent with past practice. Except as disclosed in Section 3.14 of the Disclosure Schedule, from the date of the September Statement of Net Assets, no Selling Party has: (i) made any material changes in the customary methods of operations of the Business, including, without limitation, practices and policies relating to manufacturing, purchasing, Inventories, marketing, selling and pricing; (ii) sold, transferred, leased or otherwise disposed of any assets of the Business, other than the sale of Inventories or the disposition of immaterial amounts of obsolete assets in the ordinary course of the Business consistent with past practice; (iii) acquired any material assets related to the Business other than in the ordinary course of the Business consistent with past practice; (iv) permitted or allowed any of the assets of the Business to be subjected to any Encumbrance, other than Permitted Encumbrances and Encumbrances that will be released at or prior to the Closing; (v) except in the ordinary course of the 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 September Statement of Net Assets and current liabilities incurred in the ordinary course of the Business consistent with past practice since the date of the September Statement of Net Assets; (vi) written down or 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 related to the Business or revalued any assets of the Business other than in the ordinary course of the Business consistent with past practice and in accordance with U.S. GAAP; (vii) made any change in any method of accounting or accounting practice or policy used by the Business, other than such changes required by U.S. GAAP and disclosed in Section 3.14 of the Disclosure Schedule; (viii) made any capital expenditure or commitment for any capital expenditure related to the Business in excess of $250,000; (ix) other than in the ordinary course of Business, (A) granted any increase, or announced any increase, in the wages, salaries, compensation, bonuses, incentives, pension or other benefits payable by such Selling Party to any employees of the Business, including, without limitation, any increase or change pursuant to any Plan, (B) established or increased or promised to increase any benefits under any Plan, in either case except as required by Law or any collective bargaining agreement and involving ordinary increases consistent with the past practice of the Business, or (C) entered into any agreement, arrangement or transaction with any employees of the Business; 24 <PAGE> 30 (x) terminated, discontinued, closed or disposed of any plant, facility or other operation of the Business, or laid off any employees of the Business or implemented any early retirement, separation or program providing early retirement window benefits to employees of the Business within the meaning of Section 1.401(a)-4 of the Regulations or announced or planned any such action or program for the future; (xi) suffered any material casualty loss or damage with respect to any of the Assets; (xii) amended, modified or consented to the termination of any Material Contract or the Selling Party's rights thereunder; (xiii) suffered any Material Adverse Effect; or (xiv) agreed, whether in writing or otherwise, to take any of the actions specified in this Section 3.14, except as expressly contemplated by a Selling Party Document. 3.15 PERMITS AND LICENSES. Except as disclosed in Section 3.15 of the Disclosure Schedule, each Selling Party currently holds all the health and safety and other permits, licenses, authorizations, certificates, exemptions and approvals of Governmental Authorities (collectively, "Permits") necessary or proper for the current use, occupancy and operation of its specific Assets and its conduct of the Business, except for such Permits the failure of which to hold has not had and would not reasonably be expected to have a Material Adverse Effect, and all such Permits are in full force and effect. No Selling Party has received any written notice from any Governmental Authority revoking, canceling, rescinding, materially modifying or refusing to renew any material Permit or providing notice of material violations under any Law or Permit. Except as disclosed in Section 3.15 of the Disclosure Schedule, each Selling Party is in all material respects in compliance with its Permits. No Selling Party has reason to believe that any consent of any Governmental Authority required in order to transfer any of its Permits to the Purchaser in the event of the consummation of the transactions contemplated by this Agreement will not be obtained, or if not obtained that the Purchaser will not be able to obtain a replacement or substitute Permit sufficient to conduct the Business as it is currently conducted. 3.16 ENVIRONMENTAL MATTERS. (a) Except as disclosed in Section 3.16(a) of the Disclosure Schedule, (i) Hazardous Materials have not been generated, used, treated, handled or stored on, or transported to or from, or released or discharged on any Real Property; (ii) each Selling Party has disposed of all wastes in compliance with all applicable Environmental Laws and permits required under Environmental Laws; (iii) there are no past, pending or threatened Environmental Claims against any Selling Party or any Real Property; (iv) no Real Property is listed or proposed for listing on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or on the Comprehensive Environmental Response, Compensation and Liability Information System or any analogous state list of sites requiring investigation or cleanup; and (v) to the Selling Parties' knowledge, no Selling Party has transported or arranged for the transportation of any Hazardous Materials to any location that is listed or proposed for listing on the National Priorities List under the Comprehensive 25 <PAGE> 31 Environmental Response, Compensation and Liability Act of 1980, as amended, or on the Comprehensive Environmental Response, Compensation and Liability Information System or any analogous state list or which is the subject of any Environmental Claim. (b) Except as disclosed in Section 3.16(b) of the Disclosure Schedule, to the Seller's knowledge, there are no circumstances with respect to any Real Property or any Asset or the operation of the Business which would reasonably be anticipated (i) to form the basis of an Environmental Claim against any Selling Party 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. 3.17 MATERIAL CONTRACTS. (a) Section 3.17(a) of the Disclosure Schedule lists each of the following contracts and agreements to which each Selling Party is a party that relate to the Business and that are in effect as of the date hereof, other than Excluded Contracts (such contracts and agreements, together with the Leases and the Transferred Customer Contracts being "Material Contracts"): (i) each contract, agreement, invoice, purchase order, sales order and other arrangement, for the purchase or sale of Inventory or other products or equipment to be used in the Business or for the furnishing of services by or to the Business under the terms of which any Selling Party: (A) is obligated to pay or is entitled to receive consideration of more than $250,000 in the aggregate during the fiscal year ended September 30, 2000 or (B) is obligated to pay or entitled to receive consideration of more than $250,000 in the aggregate over the remaining term of such contract (together with the Transferred Customer Contracts, collectively, the "Material Operations Contracts"); (ii) all material broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing consulting and advertising contracts and agreements to which any Selling Party is a party and which are primarily related to the Business; (iii) all material contracts with independent contractors or consultants (or similar arrangements) to which any Selling Party is a party and which are primarily related to the Business; (iv) all contracts and agreements that involve Indebtedness of any Selling Party in excess of $500,000 and that are related to the Business; (v) all contracts and agreements with any Governmental Authority to which any Selling Party is a party and which are primarily related to the Business; (vi) all contracts and agreements that limit or purport to limit the ability of any Selling Party to engage in any Competitive Activity in any geographic area or during any period of time; 26 <PAGE> 32 (vii) all contracts and agreements between or among any Selling Party or any Affiliate of any Selling Party which are primarily related to the Business; (viii) each Material Operations Contract which contains a performance guarantee on the part of any Selling Party to the extent equipment is not delivered by scheduled delivery dates or systems fail to meet certain performance criteria by such dates which performance guarantee may result in a Liability in excess of $250,000. (ix) all agreements and contracts pursuant to which any Selling Party is granted a security interest to secure an obligation owing to such Selling Party in connection with the Business, other than purchase money security interests; and (x) all other contracts and agreements, whether or not made in the ordinary course of the Business, which are material to the conduct of the Business, excluding, however, all contracts or licenses relating to Shared Third Party Intellectual Property and all Subscriber Business IP Licenses. (b) The Seller has made available to the Purchaser true and complete copies of all Material Contracts. The Material Contracts are all of the material contracts necessary for the conduct of the Business as it is being conducted as of the date of this Agreement. Each Material Contract to which each Selling Party is a party (i) is a legal, valid and binding obligation of such Selling Party, and to the Seller's knowledge, the other parties thereto, and is in full force and effect, (ii) except as set forth in Section 3.17(b) of the Disclosure Schedule, is freely and fully assignable to the Purchaser without penalty or other adverse consequences, and (iii) upon consummation of the transactions contemplated by the Selling Party Documents, except in any case to the extent that any consents set forth in Section 3.2(c) of the Disclosure Schedule are not obtained, shall continue in full force and effect without penalty or other adverse consequence. Except as disclosed in Section 3.17(b) of the Disclosure Schedule, no Selling Party is in breach of, or default under, any Material Contract, and, to the best knowledge of the Seller, no event has occurred that, with notice or lapse of time would constitute such a breach or default or permit termination, modification or acceleration under any Material Contract. Except as set forth in Section 3.17(b) of the Disclosure Schedule, no Selling Party has received any written notice of uncured breach or default under, or termination of, any Material Contract. Except as disclosed in Section 3.17(b) of the Disclosure Schedule, to the best knowledge of the Seller, no other party to any Material Contract is in breach thereof or default thereunder. 3.18 INTELLECTUAL PROPERTY. (a) Section 3.18(a) of the Disclosure Schedule sets forth a true and complete list of all trademarks, service marks, trade names, registered copyrights and applications therefor primarily used or intended to be primarily used in the conduct of the Business as of the date hereof and which are owned by any Selling Party or any Affiliate of a Selling Party or which are licensed or sublicensed by any Selling Party from a third party, other than Excluded Intellectual Property and commercially available, over-the-counter "shrink-wrap" software. (b) The Subscriber Business Intellectual Property, the Intellectual Property licensed pursuant to the Existing License Agreement, the Intellectual Property to be licensed or 27 <PAGE> 33 sublicensed to Purchaser pursuant to Section 5.7 and the Intellectual Property to be licensed to the Purchaser pursuant to the Ancillary Agreements (collectively, but with the exclusion of the Intellectual Property licensed pursuant to the Existing License Agreement, the "Material Intellectual Property") constitute all the material Intellectual Property primarily used or intended to be used in, and all such material Intellectual Property necessary in the conduct of, the Business as such Business is currently conducted, except as set forth on Section 3.18(b) of the Disclosure Schedule. (c) Except as disclosed in Section 3.2(c) of the Disclosure Schedule, all rights of each Selling Party in each item of Material Intellectual Property are either transferable or licensable to the Purchaser as contemplated by this Agreement and the Ancillary Agreements. As a result of the transactions contemplated by this Agreement (including the consents or alternate licenses that may be necessary to be obtained pursuant to Section 5.7) and the Ancillary Agreements, upon the Closing, the Purchaser shall own, or have adequate and enforceable licenses, sublicenses or other rights to use, without payment of any fee other than fees payable to third party licensors under such licenses or fees disclosed in the subject license agreement or alternate license agreement (as contemplated by Section 5.7), all Material Intellectual Property. (d) Except as otherwise described in Section 3.18(d) of the Disclosure Schedule, there are no contracts pursuant to which any Selling Party licenses or sublicenses Owned Intellectual Property used exclusively in the Business (other than Excluded Intellectual Property) or Intellectual Property licensed pursuant to a Subscriber Business IP License to a third party, other than Excluded Contracts and Transferred Customer Contracts. (e) Except as otherwise described in Section 3.18(e) of the Disclosure Schedule, to the best knowledge of the Seller, the rights of each Selling Party and their Affiliates in or to the Material Intellectual Property do not infringe on the rights of any other Person and no Selling Party or its Affiliate has received any written notice from any Person to such effect. Except as otherwise described in Section 3.18(e) of the Disclosure Schedule, no Actions have been made or asserted or are pending (nor, to the best knowledge of the Seller has any such Action been threatened in writing) against any Selling Party either (i) based upon or challenging or seeking to deny or restrict the use by any Selling Party or its Affiliate of any of the Material Intellectual Property or (ii) alleging that any services provided, or products manufactured or sold by the Business are being provided, manufactured or sold in violation of any patents or trademarks, or any other rights of any Person. To the best knowledge of the Seller, no Person is using any copyrights, trademarks, service marks, trade names, trade secrets or similar property that infringe upon the Material Intellectual Property or upon the rights of any Selling Party or its Affiliate therein. (f) Except as set forth in Section 3.18(f) of the Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not result in the termination or impairment of any of the Material Intellectual Property. 3.19 REAL PROPERTY. (a) Section 3.19(a) of the Disclosure Schedule lists the address of each plant, office, warehouse and other parcels of real property at which significant Assets are located or 28 <PAGE> 34 from which the Business is conducted and which are owned by any Selling Party or Affiliates of any Selling Party (together with all buildings and other structures, facilities or improvements located thereon and all fixtures attached or appurtenant thereto, the "Owned Real Property") and the current use of each such parcel of Owned Real Property. (b) Section 3.19(b) of the Disclosure Schedule lists the address of each plant, office, warehouse and other parcels of real property at which significant Assets are located or from which the Business is conducted and which are leased by any Selling Party or Affiliate of any Selling Party as tenant (together with all buildings and other structures, facilities or improvements located thereon and all fixtures attached or appurtenant thereto, the "Leased Real Property", and, together with the Owned Real Property, the "Real Property") and the current use of each such parcel of Leased Real Property and all applicable lease agreements related thereto (collectively, the "Leases"). (c) There is no material violation of any Law relating to any of the Real Property. Each Selling Party is in peaceful and undisturbed possession of each parcel of Real Property occupied by it and there are no contractual or legal restrictions that preclude or materially restrict the ability to use the premises for the purposes for which they are currently being used. All existing water, sewer, steam, gas, electricity, telephone and other utilities required for the use, occupancy and operation of the Real Property are adequate for the conduct of the Business as it has been and currently is conducted. Except as set forth in Section 3.19(c) of the Disclosure Schedule, no Selling Party has leased or subleased any parcel or any portion of any parcel of Real Property to any other Person, nor has any Selling Party assigned its interest under any Lease to any third party. (d) As a result of the transactions contemplated by this Agreement (including the obtaining of any necessary third party lessor consents) and the Lease Agreements, upon the Closing, the Purchaser shall possess adequate and enforceable leases or other rights to use, without payment of any fee other than fees disclosed in the Lease Agreements, all the Real Property that is subject to the Lease Agreements. To the best knowledge of the Seller, there are no facts that would prevent the Real Property that is subject to the Lease Agreements from being occupied by the Purchaser after the Closing in the same manner as immediately prior to the Closing, other than the obtaining of any necessary third party lessor consents. 3.20 TANGIBLE PERSONAL PROPERTY. Section 3.20 of the Disclosure Schedule lists each item or distinct group of machinery, equipment, tools, supplies, furniture, fixtures, personalty, vehicles and other tangible personal property primarily used in the Business except for the personal computers referenced in Section 2.1(b)(xiv) (the "Tangible Personal Property") as of November 21, 1999. Prior to the Closing Date, the Seller will deliver to the Purchaser a revised list of Tangible Personal Property, as contemplated by Section 5.16. 3.21 RIGHT, TITLE AND INTEREST IN TANGIBLE PERSONAL PROPERTY. (a) Except as disclosed in Section 3.21(a) of the Disclosure Schedule, each Selling Party owns, leases or has the legal right to use all its Specific Assets and, with respect to rights under contracts included within the Specific Assets, is a party to and enjoys the right to the benefits of all such contracts, agreements and other arrangements. Each Selling Party has good 29 <PAGE> 35 and marketable title to, or, in the case of leased or subleased Assets, valid and subsisting leasehold interests in, all its Specific Assets, free and clear of all Encumbrances, except (i) as disclosed in the Disclosure Schedule and (ii) Permitted Encumbrances. (b) The items of Tangible Personal Property included within the Assets and transferred to the Purchaser under this Agreement or made available to the Purchaser under the Transition Services Agreement constitute all the Tangible Personal Property primarily used or intended to be primarily used in, and all (other than the Tangible Personal Property included in the Closing Statement Credits or set forth in Section 2.1(b)(xiii) of the Disclosure Schedule) such assets as are necessary in the conduct of the Business. All items of Tangible Personal Property included within the Assets are in good operating condition and repair (normal wear and tear excepted) and are suitable for the purposes for which they are used and intended. (c) Except as set forth in Section 3.21(c) of the Disclosure Schedule, each Selling Party has the complete and unrestricted power and unqualified right to sell, assign, transfer, convey and deliver its Specific Assets to the Purchaser without penalty or other adverse consequences. Except as contemplated by Section 5.7 and the obtaining of any third party lessor consents, following the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements and the execution of the instruments of transfer contemplated by this Agreement and the Ancillary Agreements, the Purchaser will own, with good, valid and marketable title, or lease, under valid and subsisting leases, or otherwise acquire the interests of each Selling Party in its Specific Assets, free and clear of any Encumbrances, other than Permitted Encumbrances, and without incurring any penalty or other adverse consequence, including, without limitation, any increase in rentals, royalties, or license or other fees imposed as a result of, or arising from, the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements. 3.22 EMPLOYEE BENEFIT MATTERS. (a) PLANS AND MATERIAL DOCUMENTS. Section 3.22(a) of the Disclosure Schedule lists (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance or other benefit plans, programs or arrangements, and all employment, termination, severance or other contracts or agreements, whether legally enforceable or not, to which each Selling Party is a party, with respect to which any Selling Party has any obligation or which are maintained, contributed to or sponsored by any Selling Party for the benefit of any of its current or former employees, officers or directors, (ii) each employee benefit plan for which any Selling Party could incur liability under Section 4069 of ERISA in the event such plan has been or were to be terminated, (iii) any plan in respect of which any Selling Party could incur liability under Section 4212(c) of ERISA and (iv) any contracts, arrangements or understandings between any Selling Party or any of its Affiliates and any employee of any Selling Party including, without limitation, any contracts, arrangements or understandings relating to a sale of the Business (collectively, the "Plans"). Each Plan is in writing and the Seller has furnished the Purchaser with a true and complete copy of each Plan and a true and complete copy of each material document prepared in connection with each such Plan as follows: (i) a copy of each trust or other funding arrangement, (ii) each summary plan description and 30 <PAGE> 36 summary of material modifications, (iii) the most recently filed IRS Form 5500, (iv) the most recently received IRS determination letter for each such Plan, and (v) the most recently prepared actuarial report and financial statement in connection with each such Plan. Except as disclosed on Section 3.22(a) of the Disclosure Schedule, there are no other employee benefit plans, programs, arrangements or agreements, whether formal or informal, whether in writing or not, to which any Selling Party is a party, with respect to which any Selling Party has any obligation or which are maintained, contributed to or sponsored by any Selling Party for the benefit of any of its current or former employees, officers or directors. No Selling Party has any express or implied commitment, whether legally enforceable or not, (i) to create, incur liability with respect to or cause to exist any other employee benefit plan, program or arrangement, (ii) to enter into any contract or agreement to provide compensation or benefits to any individual or (iii) to modify, change or terminate any Plan, other than with respect to a modification, change or termination required by ERISA or the Code. (b) ABSENCE OF CERTAIN TYPES OF PLANS. None of the Plans is a multiemployer plan (within the meaning of Section 3(37) or 4001(a)(3) of ERISA) (a "Multiemployer Plan"). None of the Plans is subject to Title IV of ERISA. None of the Plans provides for the payment of separation, severance, termination or similar-type benefits to any Person or obligates any Selling Party to pay separation, severance, termination or similar-type benefits (i) solely as a result of any transaction contemplated by this Agreement and the Ancillary Agreements or (ii) as a result of a "change in the ownership or effective control" or a "change in the ownership of a substantial portion of the assets" of any Selling Party, within the meaning of such term under Section 280G of the Code. None of the Plans provides for or promises retiree medical, retiree disability or retiree life insurance benefits to any current or former employee, officer or director of any Selling Party. No Selling Party maintains or contributes to a voluntary employees' beneficiary association which is intended to be exempt from federal income taxation under Section 501(c)(9) of the Code. Each of the Plans is subject only to the laws of the United States or a political subdivision thereof. (c) COMPLIANCE WITH APPLICABLE LAW. Each Plan is operated in all material respects, in both form and operation, in accordance with the requirements of all applicable Laws, including, without limitation, ERISA and the Code. No Selling Party nor any ERISA Affiliate of a Selling Party (as hereinafter defined) has incurred (nor has any event occurred or condition been incurred or a claim been threatened which reasonably can be expected to result in a Selling Party or an ERISA Affiliate of a Selling Party incurring) any material obligation or liability in connection with any existing or previously existing employee benefit plan which could become an obligation or liability of Purchaser or give rise to a lien on any of the Assets. For purposes thereof, the term "ERISA Affiliate" means a Person which, together with a Selling Party, are treated as a single employer under Section 414 of the Code. (d) QUALIFICATION OF CERTAIN PLANS. Each Plan which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS that it is so qualified and, to the knowledge of the Seller, no fact or event has occurred since the date of such determination letter from the IRS to adversely affect the qualified status of any such Plan (or the exempt status of any trust thereunder). 31 <PAGE> 37 (e) PLAN CONTRIBUTIONS AND FUNDING. All contributions, premiums or payments required to be made with respect to any Plan have been made on or before their due dates. All such contributions have been fully deducted for income tax purposes and no such deduction has been challenged or disallowed by any Governmental Authority and, to the knowledge of the Seller, no fact or event exists which could give rise to any such challenge or disallowance. (f) WARN ACT. Each Selling Party is in compliance with the requirements of the Worker Adjustment and Retraining Notification Act ("WARN") and has no liabilities pursuant to WARN. 3.23 LABOR MATTERS. Except as set forth in Section 3.23 of the Disclosure Schedule, (a) no Selling Party is a party to any collective bargaining agreement or other labor union contract applicable to any Business Employee, and currently there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit; (b) there are no controversies, strikes, slowdowns or work stoppages pending or, to the best knowledge of the Seller, threatened between any Selling Party and any of the Business Employees, and no Selling Party has experienced any such controversy, strike, slowdown or work stoppage within the past three years; (c) no Selling Party has breached or otherwise failed to comply with the provisions of any collective bargaining or union contract covering Business Employees and there are no grievances outstanding against any Selling Party under any such agreement or contract; (d) there are no unfair labor practice complaints pending against any Selling Party before the National Labor Relations Board or any other Governmental Authority or any current union representation questions involving Business Employees; (e) each Selling Party is currently in compliance with all applicable Laws relating to the employment of labor, including those related to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by the appropriate Governmental Authority and has withheld and paid to the appropriate Governmental Authority or is holding for payment not yet due to such Governmental Authority all amounts required to be withheld from Business Employees and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing; (f) each Selling Party has paid in full to all Business Employees or adequately accrued for in accordance with U.S. GAAP consistently applied all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees; (g) there is no claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or threatened before any Governmental Authority with respect to any Persons currently or formerly employed by any Selling Party in the Business; (h) no Selling Party is a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Authority relating to employees of the Business or employment practices; (i) there is no charge or proceeding with respect to a violation of any occupational safety or health standards that has been asserted or is now pending or threatened with respect to any Selling Party; (j) there is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, which has been asserted or is now pending or threatened before the United States Equal Employment Opportunity Commission, or any other Governmental Authority in any jurisdiction in which any Selling Party has employed or currently employs any Person in the Business; (k) to the knowledge of the Seller, each Selling Party has properly classified independent contractors to the Business for federal income tax purposes; and (l) to the knowledge of the Seller, no Business 32 <PAGE> 38 Employee is in violation of the terms of any employment contract, nondisclosure agreement, noncompetition agreement or nonsolicitation agreement by which such Business Employee is bound due to the activities in which such Business Employee engages for any Selling Party. 3.24 KEY EMPLOYEES. (a) Section 3.24(a) of the Disclosure Schedule lists the name, the 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), the date of employment and job title of each current salaried employee, officer, director, consultant or agent of the Business as of December 21, 1999. (b) All Business Employees who are officers, management employees or technical or professional employees are under written obligation to any Selling Party to maintain in confidence all confidential or proprietary information acquired by them in the course of their employment and to assign to such Selling Party all inventions made by them within the scope of their employment during such employment and for a reasonable period thereafter. All such agreements are assignable by each Selling Party to the Purchaser without the consent of any Business Employee. 3.25 TAXES. (a) All returns and reports in respect of Taxes required to be filed with respect to each Selling Party or the Business have been timely filed; (b) all Taxes required to be shown on such returns and reports or otherwise due have been timely paid; (c) all such returns and reports are true, correct and complete in all material respects; (d) no adjustment relating to such returns has been proposed formally or informally by any Tax authority; (e) there are no pending or, to the best knowledge of the Seller, threatened Actions for the assessment or collection of Taxes against any Selling Party or (insofar as either relates to the activities or income of such Selling Party or the Business or could result in liability of any Selling Party on the basis of joint and/or several liability) any corporation that was includible in the filing of a return with any Selling Party on a consolidated or combined basis; (f) no consent under Section 341(f) of the Code has been filed with respect to any Selling Party; (g) there are no Tax liens on any properties or assets of any Selling Party, including, without limitation, the Assets and the Business; and (h) there are no proposed reassessments of any property owned by any Selling Party that could increase the amount of any Tax to which any Selling Party or the Business would be subject. 3.26 INSURANCE. All material assets, properties and risks of the Business and each Selling Party are, and for the past five years have been, covered by valid and, except for policies that have expired under their terms in the ordinary course, currently effective insurance policies or binders of insurance (including, without limitation, general liability, property workers, compensation, automobile liability, excess liability, fiduciary liability, professional errors and omissions, directors and officers liability and fidelity insurance) issued in favor of such Selling Party, in each case with responsible insurance companies, in such types and amounts and covering such risks as are consistent with customary practices and standards of companies engaged in businesses and operations similar to those of such Selling Party. 33 <PAGE> 39 3.27 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 or the Ancillary Agreements based upon arrangements made by or on behalf of any Selling Party. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND THE PARENT CORPORATION As an inducement to the Seller to enter into this Agreement, the Purchaser and the Parent Corporation hereby jointly and severally represent and warrant to the Seller as follows as of the Closing Date: 4.1 ORGANIZATION AND AUTHORITY. Each of the Purchaser and the Parent Corporation is a corporation duly organized and validly existing under the laws of its jurisdiction of organization and has all necessary corporate power and authority to enter into the Purchaser Documents, to carry out its obligations thereunder and to consummate the transactions contemplated thereby. The execution and delivery of the Purchaser Documents by each of the Purchaser and the Parent Corporation, the performance by it of its obligations thereunder and the consummation by it of the transactions contemplated thereby have been duly authorized by all requisite action on the part of the Purchaser and the Parent Corporation. This Agreement has been, and upon their execution the other Purchaser Documents will be, duly executed and delivered by each of the Purchaser and the Parent Corporation, and (assuming due authorization, execution and delivery by the Selling Parties) this Agreement constitutes, and upon their execution the other Purchaser Documents will constitute, legal, valid and binding obligations of each of the Purchaser and the Parent Corporation, enforceable against the Purchaser and the Parent Corporation in accordance with their respective terms, except as enforceability may be limited by (a) bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally, and (b) general principles of equity, including specific performance, injunctive relief and other equitable remedies. 4.2 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 4.3, except as may result from any facts or circumstances relating solely to a Selling Party, the execution, delivery and performance of the Purchaser Documents by each of the Purchaser and the Parent Corporation do not and will not (a) violate, conflict with or result in the breach of any provision of its charter or by-laws (or other organizational documents), (b) conflict with or violate any Law or Governmental Order applicable to it or (c) conflict with, or 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 on any of its assets or properties pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which it is a party or by which any of such assets or properties is bound or affected, except, in the case of clauses (b) and 34 <PAGE> 40 (c), as would not prevent or materially delay consummation by it of the transactions contemplated by this Agreement. 4.3 GOVERNMENTAL CONSENTS AND APPROVALS. The execution, delivery and performance of the Purchaser Documents by each of the Purchaser and the Parent Corporation 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) the notification requirements of the HSR Act and (b) where the failure to obtain such consent, approval, authorization or order would not prevent or materially delay consummation of the transactions contemplated by the Purchaser Documents. 4.4 LITIGATION. No Actions are pending or, to the best knowledge of the Purchaser or the Parent Corporation, threatened in writing, which seeks to delay or prevent the consummation of, or which would be reasonably likely to materially adversely affect the Purchaser's or the Parent Corporation's ability to consummate the transactions contemplated by any Purchaser Documents. 4.5 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 Purchaser or the Parent Corporation. ARTICLE 5 ADDITIONAL AGREEMENTS 5.1 CONDUCT OF BUSINESS PRIOR TO THE CLOSING. The Seller covenants and agrees that, except (a) to the extent the Purchaser shall otherwise consent in writing (which consent shall not be unreasonably withheld), (b) as permitted or contemplated by this Agreement, (c) as may be necessary or appropriate to carry out the transactions contemplated by this Agreement, or (d) as may be required to facilitate compliance with any Laws, between the date hereof and the Closing, the Seller shall not, and shall not suffer or permit conduct of the Business other than in the ordinary course and consistent with the past practice of the Business. Without limiting the generality of the foregoing, the Seller shall, and shall cause its Affiliates and each other Selling Party to (a) continue its advertising and promotional activities, and pricing and purchasing policies, related to the Business in accordance with past practice; (b) not shorten or lengthen the customary payment cycles for any of the payables or receivables of the Business; (c) use its reasonable best efforts to (i) preserve intact the Assets and the organization of the Business, (ii) use commercially reasonable efforts to keep available to the Purchaser the services of the employees to be designated in writing by the Purchaser to the Seller in writing pursuant to Section 6.1 and (iii) preserve the Business' current relationships with its customers, suppliers and other persons with which it has significant business relationships; and (d) use commercially reasonable efforts to not engage in any practice, take any action, fail to take any action or enter into any transaction which would reasonably be expected to cause any representation or warranty of the Seller to be untrue or result in a breach of any covenant made by the Seller in this Agreement. The Seller covenants and agrees that, prior to the Closing, without the prior written consent of the Purchaser, the Seller will not and will not suffer or permit the occurrence of (a) 35 <PAGE> 41 any of the things enumerated in the second sentence of Section 3.14 or (b) the entering into of any new Material Contract. 5.2 ACCESS TO INFORMATION. (a) From the date hereof until the Closing, upon reasonable notice, the Seller shall and shall cause each other Selling Party and each of the Seller's and each Selling Party's officers, employees, agents, accountants and counsel to: (i) afford the officers, employees and authorized agents, accountants, counsel and representatives of the Purchaser reasonable access, during normal business hours, to the offices, properties, plants, other facilities, books and records of the Business and to those officers, employees, agents, accountants and counsel of the Seller and any Selling Party who have any knowledge relating to the Business, and (ii) furnish to the officers, employees and authorized agents, accountants, counsel and representatives of the Purchaser such additional financial and operating data and other information regarding the Business as the Purchaser may from time to time reasonably request. (b) In order to facilitate the resolution of any claims made against or incurred by any Selling Party prior to or following the Closing, for a period of seven years after the Closing, the Purchaser shall (i) retain the books and records of each Selling Party which are transferred to the Purchaser pursuant to this Agreement relating to periods prior to or following the Closing in a manner reasonably consistent with the prior practices of each Selling Party, and (ii) upon reasonable notice, afford the officers, employees, authorized agents, accountants, counsel and representatives of any Selling Party reasonable access (including the right to make photocopies at such Selling Party's expense), during normal business hours, to such books and records. (c) In order to facilitate the resolution of any claims made by or against or incurred by the Purchaser after the Closing, for a period of seven years following the Closing, the Seller shall (i) retain all books and records of each Selling Party which are not transferred to the Purchaser pursuant to this Agreement and which relate to the Business for periods prior to the Closing and which shall not otherwise have been delivered to the Purchaser, and (ii) upon reasonable notice, afford the officers, employees, authorized agents, accountants, counsel and representatives of the Purchaser, reasonable access (including the right to make photocopies at the Purchaser's expense), during normal business hours, to such books and records. 5.3 CONFIDENTIALITY. (a) The Seller agrees to, and shall cause each Selling Party, and the respective agents, representatives, Affiliates, employees, officers and directors of the Seller and each Selling Party to: (i) treat and hold as confidential (and not disclose or provide access to any Person to) all information relating to trade secrets, processes, patent or trademark applications, product development, price, customer and supplier lists, pricing and marketing plans, policies and strategies, operations methods, product development techniques, business acquisition plans, new personnel acquisition plans and any other confidential information with respect to the Business; (ii) in the event that the Seller, any Selling Party or any such agent, representative, Affiliate, employee, officer or director becomes legally compelled to disclose any such information, provide the Purchaser with prompt written notice of such requirement so that the 36 <PAGE> 42 Purchaser may seek a protective order or other remedy or waive compliance with this Section 5.3; (iii) in the event that such protective order or other remedy is not obtained, or the Purchaser waives compliance with this Section 5.3, furnish only that portion of such confidential information which is legally required to be provided and exercise its reasonable best efforts to obtain assurances that confidential treatment will be accorded such information; and (iv) promptly furnish (prior to, at, or as soon as practicable following, the Closing) to the Purchaser any and all copies (in whatever form or medium) of all such confidential information then in the possession of the Seller or any Selling Party or any of the agents, representatives, Affiliates, employees, officers and directors or the Seller or any Selling Party and destroy any and all additional copies then in the possession of such Persons of such information and of any analyses, compilations, studies or other documents prepared, in whole or in part, on the basis thereof; provided, however, that this sentence shall not apply to any information that, at the time of disclosure, is available publicly and was not disclosed in breach of this Agreement by the Seller, any Selling Party, or the agents, representatives, Affiliates, employees, officers or directors of the Seller or any Selling Party; provided, further, that specific information shall not be deemed to be within the foregoing exception merely because it is embraced in general disclosures in the public domain. In addition, any combination of features shall not be deemed to be within the foregoing exception merely because the individual features are in the public domain unless the combination itself and its principle of operation are in the public domain. (b) The Purchaser agrees to, and shall cause its agents, representatives, Affiliates, employees, officers and directors to: (i) treat and hold as confidential (and not disclose or provide access to any Person to) all information relating to trade secrets, processes, patent or trademark applications, product development, price, customer and supplier lists, pricing and marketing plans, policies and strategies, operations methods, product development techniques, business acquisition plans, new personnel acquisition plans and any other confidential information obtained by the Purchaser pursuant to the Confidentiality Agreement and not related to the Business; (ii) in the event that the Purchaser or any such agent, representative, Affiliate, employee, officer or director becomes legally compelled to disclose any such information, provide the Seller with prompt written notice of such requirement so that the Seller may seek a protective order or other remedy or waive compliance with this Section 5.3; (iii) in the event that such protective order or other remedy is not obtained, or the Seller waives compliance with this Section 5.3, furnish only that portion of such confidential information which is legally required to be provided and exercise its reasonable best efforts to obtain assurances that confidential treatment will be accorded such information; and (iv) promptly furnish (prior to, at, or as soon as practicable following, the Closing) to the Seller any and all copies (in whatever form or medium) of all such confidential information then in the possession of the Purchaser or any of its agents, representatives, Affiliates, employees, officers and directors and destroy any and all additional copies then in the possession of the Purchaser or any of its agents, representatives, Affiliates, employees, officers and directors of such information and of any analyses, compilations, studies or other documents prepared, in whole or in part, on the basis thereof; provided, however, that this sentence shall not apply to any information that, at the time of disclosure, is available publicly and was not disclosed in breach of this Agreement by the Purchaser, its agents, representatives, Affiliates, employees, officers or directors; provided, further, that specific information shall not be deemed to be within the foregoing exception merely because it is embraced in general disclosures in the public domain. In addition, any combination of features shall not be deemed to be within the foregoing exception merely because the individual features 37 <PAGE> 43 are in the public domain unless the combination itself and its principle of operation are in the public domain. (c) Each of the Seller and the Purchaser agrees and acknowledges that remedies at Law for any breach of its obligations under this Section 5.3 are inadequate and that in addition thereto a party shall be entitled to seek equitable relief, including injunction and specific performance, in the event of any such breach, without the necessity of demonstrating the inadequacy of money damages or the posting of any bond or similar security. (d) Upon consummation of the Closing, the Confidentiality Agreement shall terminate without any further action on the part of the Purchaser or the Seller. 5.4 REGULATORY AND OTHER AUTHORIZATIONS; NOTICES AND CONSENTS. (a) Each of the Seller and the Purchaser shall use its reasonable best efforts to obtain all authorizations, consents, orders and approvals of all Governmental Authorities and officials that may be or become necessary for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and the Ancillary Agreements and will cooperate fully with the other party 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 practicable, but in any event within fifteen (15) Business Days of the date hereof, 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. Notwithstanding the forgoing provisions of this Section 5.4(a), no party shall be required to take any action in connection with obtaining any such authorizations, consents, orders and approvals to the extent doing so would have a material adverse effect on its business or the Business. (b) The Seller shall give promptly such notices to third parties and use its reasonable best efforts to obtain all such third party consents that are necessary or desirable in connection with the transfer of the Material Contracts. The Purchaser shall cooperate and use its reasonable best efforts to assist the Seller in giving such notices and obtaining such consents; provided, however, that the Purchaser shall have no obligation to give any guarantee or other consideration of any nature in connection with any such notice or consent or to consent to any change in the terms of any Material Contract which the Purchaser in its sole discretion may deem adverse to the interests of the Purchaser or the Business. (c) The Seller and the Purchaser agree that, in the event any consent, approval or authorization necessary or desirable to preserve for the Business or the Purchaser any right or benefit under any lease, license, contract, commitment or other agreement or arrangement to which a Selling Party is a party is not obtained prior to the Closing, the Seller will, and if applicable, will cause a Selling Party to, subsequent to the Closing, cooperate with the Purchaser in attempting to obtain such consent, approval or authorization as promptly thereafter as practicable. If such consent, approval or authorization cannot be obtained, the Seller will and if applicable, will cause a Selling Party to, use its reasonable best efforts to provide the Purchaser with the rights and benefits of the affected lease, license, contract, commitment or other agreement or arrangement for the term of such lease, license, contract or other agreement or 38 <PAGE> 44 arrangement (including remaining as a party thereto and passing the benefits thereof to the Purchaser), and, if the Seller provides such rights and benefits, the Purchaser shall assume the obligations and burdens thereunder. (d) The Seller and the Purchaser agree to cooperate with each other (i) in providing to the Purchaser, on commercially reasonable terms and for purposes of conducting the Business, the benefit of any asset or right that is currently used in the Business and that is not effectively transferred to the Purchaser under this Agreement or the Ancillary Agreements and (ii) in providing to the Seller, on commercially reasonable terms and for purposes of conducting the businesses of the Seller as of the date hereof other than the Business, the benefit of any asset or right that is currently used in such businesses and that is transferred to the Purchaser under this Agreement or the Ancillary Agreements. (e) The Seller and the Purchaser shall cooperate in preparing a comprehensive list prior to the Closing of all Permits that are non-transferable or which will require the consent of any Governmental Authority in order to be transferred to the Purchaser in the event of the consummation of the transactions contemplated by this Agreement. Seller agrees that it will, and if applicable, will cause a Selling Party to, reasonably cooperate with the Purchaser in attempting to transfer those Permits which are transferable and to reasonably cooperate to obtain such Permits which are not transferable, in each case, as soon as practicable following the delivery of the foregoing list to the Purchaser. 5.5 NOTICE OF DEVELOPMENTS. (a) Prior to the Closing, the Seller shall promptly notify the Purchaser in writing of (i) all events, circumstances, facts and occurrences arising subsequent to the date of this Agreement which would reasonably be expected to result in any material breach of a representation or warranty or covenant of the Seller in this Agreement or which would reasonably be expected to have the effect of making any representation or warranty of the Seller in this Agreement untrue or incorrect in any material respect, and (ii) all other material adverse developments affecting the Assets, Liabilities, business, financial condition, operations, results of operations, customer or supplier relations, employee relations, projections or prospects of the Seller or the Business. (b) Prior to the Closing, the Purchaser shall promptly notify the Seller in writing of all events, circumstances, facts and occurrences arising subsequent to the date of this Agreement which would reasonably be expected to result in any material breach of a representation or warranty or covenant of the Purchaser in this Agreement or which would reasonably be expected to have the effect of making any representation or warranty of the Purchaser in this Agreement untrue or incorrect in any material respect. 5.6 NO SOLICITATION OR NEGOTIATION. The Seller agrees that between the date of this Agreement and the earlier of (a) the Closing and (b) the termination of this Agreement, neither the Seller nor any of its respective Affiliates, officers, directors, representatives or agents will (a) solicit, initiate, consider, encourage or accept any other proposals or offers from any Person relating to any acquisition or purchase of all or any portion of the Assets or the Business (other than (i) Inventory to be sold in the ordinary course of the Business consistent with past practice 39 <PAGE> 45 and (ii) proposals or offers related to the acquisition of all or substantially all of the assets or capital stock of the Seller in a transaction subject to the prior rights of the Purchaser under this Agreement related to the acquisition of the Assets and the Business), or (b) participate in any discussions, conversations, negotiations or 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 Seller 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. Subject to confidentiality agreements binding upon the Seller as of the date hereof, the Seller shall notify the Purchaser 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 the Purchaser, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact and the material terms and conditions of such proposal, offer, inquiry or other contact. The Seller agrees not to, without the prior written consent of the Purchaser, release any Person from, or waive any provision of, any confidentiality or standstill agreement to which the Seller is a party and which is primarily related to a potential acquisition of all or any portion of the Assets or the Business, and the Seller agrees to send, promptly after the date of this Agreement, requests to all parties under such agreements to return or destroy confidential information obtained from the Seller thereunder related to the Assets or the Business. 5.7 CERTAIN MATTERS RELATED TO INTELLECTUAL PROPERTY. (a) Effective as of the Closing, Seller grants, and shall cause its Affiliates to grant, to the Purchaser a perpetual, nonexclusive, nontransferable (except for sublicenses to Affiliates of Purchaser), world-wide, royalty free license under all of Qualcomm's Intellectual Property that is necessary to make, have made, use, sell, offer for sale, lease or otherwise dispose of products of the Business (including all current product lines and accessories manufactured by the Business) (hereafter the "Licensed Intellectual Property"). (b) Seller shall, and shall cause its Affiliates to, use commercially reasonable efforts to obtain all consents and provide all notices required under the terms of any Subscriber Business IP License to be obtained or provided in order to assign to Purchaser all of Seller's and its Affiliates' right, title and interest in and to such Subscriber Business IP License. Seller and Purchaser agree that, in the event a required consent to the assignment and transfer to Purchaser of any Subscriber Business IP License is not obtained prior to the Closing, then Seller shall use commercially reasonable efforts to obtain such consent thereafter. If a consent under a Subscriber Business IP License is not obtained, then Seller shall use commercially reasonable efforts to provide Purchaser with the rights and benefits of such Subscriber Business IP License and if Seller provides such rights and benefits, Purchaser shall assume the obligations and burdens thereunder; provided, however, that the parties acknowledge that Seller shall not be obligated to pay any consideration or agree to any modification or amendment of any term of any agreement or contract in connection with the obligations of Seller under this Section 5.7(b). Purchaser shall use commercially reasonable efforts in cooperating and assisting Seller in obtaining such consents, providing such notices and otherwise carrying out the obligations of Seller under this Section 5.7(b). 40 <PAGE> 46 (c) Subject to the limitations contained in the next sentence of this Section 5.7(c), effective as of the Closing, Seller grants, and shall cause its Affiliates to grant, to Purchaser a nonexclusive sublicense to use all Shared Third Party Intellectual Property in the conduct of the Business; provided, that, to the extent Seller is obligated to make royalty or other payments to any third party under any license or sublicense agreement covering any Shared Third Party Intellectual Property which royalties or other payments relate to or arise out of the use of such Shared Third Party Intellectual Property by Purchaser in the conduct of the Business, such payment obligations shall be passed through to Purchaser. In the event Seller or an Affiliate of Seller is unable to provide a sublicense to Purchaser with respect to any Shared Third Party Intellectual Property (whether because Seller or such Affiliate is prohibited under the terms of any license or sublicense agreement or otherwise), then Seller shall use commercially reasonable efforts to obtain for Purchaser, and Purchaser shall cooperate with Seller in obtaining, a license or sublicense in favor of Purchaser from the licensor of such Shared Third Party Intellectual Property; provided, that, Purchaser acknowledges that any such license or sublicense may be subject to negotiations between Purchaser and any such licensor and may contain terms and conditions that are different than the terms and conditions contained in any license or sublicense agreement between Seller and the licensor of any such Shared Third Party Intellectual Property; provided, further, that neither Seller nor any Affiliate of Seller shall be obligated to agree to any modification or amendment of any term of any agreement or contract granting to Seller or an Affiliate of Seller a license or sublicense to any Shared Third Party Intellectual Property. In the event that Seller and Purchaser are unable to obtain for Purchaser a license or sublicense to any Shared Third Party Intellectual Property, then Seller shall use commercially reasonable efforts to provide Purchaser with Seller's or its Affiliate's rights to and benefits of such Shared Third Party Intellectual Property and if Purchaser receives such rights and benefits, Purchaser shall assume the obligations and burdens thereunder. Purchaser agrees to negotiate in good faith the terms and conditions of any license or sublicense agreement to be entered into between Purchaser and the licensor of any Shared Third Party Intellectual Property pursuant to this Section 5.7(c) and to otherwise relieve Seller of its obligations under this Section 5.7(c). (d) Effective as of the Closing, Purchaser grants to Seller a perpetual, royalty-free license (with the right to sublicense to any Affiliate of Seller) to use the Owned Intellectual Property (and the right to grant sublicenses to use which are deemed to be granted to purchasers of products and licensees of associated software (whether or not embedded therein) of the Seller or its Affiliates in connection with the use of the products purchased and associated software licensed) and the customer lists (which rights to the customer lists may not be sublicensed by Seller to any Person other than to affiliates of Seller) being sold and transferred to Purchaser pursuant to Section 2.1(a)(vi) and Section 2.1(a)(x), respectively, as each respectively exists as of the Closing Date to commercially exploit the Excluded Assets, to fulfill its obligations under all Excluded Liabilities (including any obligations under any contracts or agreements to which Seller or its Affiliates are a party as of the Closing Date), and otherwise in the conduct of any business of Seller or its Affiliates other than the Business. Except as contemplated by the foregoing sentence or as contemplated by the Ancillary Agreements, from and after the Closing, Seller shall not use any of the Owned Intellectual Property or customer lists being sold and transferred to Purchaser pursuant to Section 2.1(a)(vi) (other than software not customized for the Business) and Section 2.1(a)(x), respectively. 41 <PAGE> 47 (e) Subject to the limitations contained in the next sentence of this Section 5.7(e), effective as of the Closing, Purchaser grants to Seller a nonexclusive sublicense (with the right to sublicense to Affiliates of Seller) to use all Intellectual Property covered by the Subscriber Business IP Licenses to commercially exploit the Excluded Assets, to fulfill its obligations under all Excluded Liabilities (including any obligations under any contracts or agreements to which Seller or its Affiliates are a party as of the Closing Date), and otherwise in the conduct of any business of Seller or its Affiliates other than the Business; provided, that, to the extent Purchaser is obligated to make royalty or other payments to any third party under any Subscriber Business IP Licenses that are transferred to Purchaser which royalties or other payments relate to or arise out of the use by Seller of any Intellectual Property covered by such Subscriber Business IP License in the conduct of any business of Seller other than the Business, such payment obligations shall be passed through to Seller. In the event Purchaser is unable to provide a sublicense to Seller under any Subscriber Business IP License that is transferred to Purchaser (whether because Purchaser is prohibited under the terms of any license or sublicense agreement or otherwise), then Purchaser shall use commercially reasonable efforts to obtain for Seller, and Seller shall cooperate with Purchaser in obtaining, a license or sublicense in favor of Seller from the licensor with respect to the Intellectual Property covered by such Subscriber Business IP License; provided, that, Seller acknowledges that any such license or sublicense may be subject to negotiations between Seller and any such licensor and may contain terms and conditions that are different than the terms and conditions contained in any such Subscriber Business IP License transferred to Purchaser; provided, further, that Purchaser shall not be obligated to agree to any modification or amendment of any term of any Subscriber Business IP License transferred to Purchaser. In the event that Seller and Purchaser are unable to obtain for Seller a license or sublicense to any Intellectual Property covered by any Subscriber Business IP License, then Purchaser shall use commercially reasonable efforts to provide Seller with the rights to and benefits of such Intellectual Property and if Seller receives such rights and benefits, Seller shall assume the obligations and burdens thereunder. Seller agrees to negotiate in good faith the terms and conditions of any license or sublicense agreement to be entered into between Seller and the licensor of any Intellectual Property covered by a Subscriber Business IP License that is transferred to Purchaser and to otherwise relieve Purchaser of its obligations under this Section 5.7(e). (f) Notwithstanding anything to the contrary set forth in this Agreement, effective as of the Closing, the Licensed Intellectual Property created or acquired by the Seller prior to July 3, 1995 shall be deemed "Included Commercially Necessary IPR" as that term is defined in the Existing License Agreement, and the use by the Purchaser and its Affiliates of such Licensed Intellectual Property shall be governed by the terms and conditions of the Existing License Agreement. (g) Seller shall, not later than January 31, 2000, provide to Purchaser a schedule of all contracts and agreements to which any Selling Party is a party relating to (i) the Subscriber Business IP Licenses, (ii) the Shared Third Party Intellectual Property, and (iii) all other software licensed or sublicensed by a Selling Party from a third party, other than Excluded Intellectual Property and commercially available, over-the-counter "shrink-wrap" software. (h) Notwithstanding anything to the contrary contained in this Section 5.7 or in any other provision of this Agreement, no transfer of, or grant of any license or other right to, 42 <PAGE> 48 any patents or patent applications are made or granted hereunder to Purchaser, other than rights to design patents and design patent applications specifically granted to Purchaser hereunder. 5.8 [***] *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 43 <PAGE> 49 [***] 5.9 EXCLUDED LIABILITIES. The Seller shall pay and discharge the Excluded Liabilities as and when the same become due and payable. 5.10 BULK TRANSFER LAWS. The Purchaser hereby acknowledges that no Selling Party has taken, or intends to take, any action required to comply with any applicable bulk sale or bulk transfer laws or similar laws, and the Purchaser hereby waives compliance by any Selling Party with any applicable bulk sale or bulk transfer laws of any jurisdiction in connection with the sale of the Assets to the Purchaser (other than any obligations with respect to the application of the proceeds herefrom). The Seller agrees to pay and discharge when due all claims of creditors which are asserted against the Purchaser by reason of such non-compliance. Pursuant to Article VIII, the Seller has agreed to indemnify the Purchaser against any and all liabilities which may be asserted by third parties (including with respect to Taxes) against the Purchaser as a result of the noncompliance of any Selling Party with any such law. 5.11 TAX MATTERS. (a) The Seller agrees to indemnify and hold harmless the Purchaser against any loss, damage, liability or expense, including reasonable fees for attorneys and other outside consultants, incurred in contesting or otherwise in connection with Taxes imposed on any Selling Party or the Business with respect to taxable periods or portions thereof ending on or before the Closing Date and Taxes imposed on the Purchaser as a result of any breach of warranty or misrepresentation under Section 3.25. (b) Payment by the Seller of any amounts due under this Section 5.11 in respect of Taxes shall be made (i) at least three Business Days before the due date of the applicable estimated or final tax return required to be filed by the Purchaser on which is required to be reported income for a period ending after the Closing Date for which the Seller is responsible under Section 5.11(a) without regard to whether the tax return shows overall net income or loss for such period, and (ii) within three Business Days following an agreement between the Seller and the Purchaser that an indemnity amount is payable, an assessment of a Tax by a taxing authority, or a "determination" as defined in Section 1313(a) of the Code. If liability under this Section 5.11 is in respect of costs or expenses other than Taxes, payment by the Seller of any amounts due under this Section 5.11 shall be made within five Business Days *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 44 <PAGE> 50 after the date when the Seller has been notified by the Purchaser that the Seller has a liability for a determinable amount under this Section 5.11 and is provided with calculations or other materials supporting such liability. (c) The Seller and the Purchaser shall share equally any real property transfer or gains, sales, use, transfer, value added, stock transfer, and stamp taxes, any transfer, recording, registration, and other fees, and any similar Taxes which become payable in connection with the transactions contemplated by this Agreement and the Ancillary Agreements. The Seller, after review and consent by the Purchaser, shall file such applications and documents as shall permit any such Tax to be assessed and paid on or prior to the Closing Date in accordance with any available pre-sale filing procedure. The Purchaser shall execute and deliver all instruments and certificates necessary to enable the Seller to comply with the foregoing. The Purchaser shall complete and execute a resale or other exemption certificate with respect to the inventory items sold hereunder, and shall provide the Seller with an executed copy thereof. The Seller shall provide to the Purchaser such information regarding the location of tangible property of the Business sufficient to support the filing of complete and accurate Tax returns and reports by the Purchaser. (d) At the request of the Purchaser, the Seller shall file with all applicable Tax authorities any statements, certificates or forms provided for under federal, state, local or foreign Tax laws to prevent the Purchaser from being liable as a transferee for Taxes of the Seller. (e) The Seller and the Purchaser agree to treat all payments made by either to or for the benefit of the other under this Section 5.11 and any other indemnity provisions of this Agreement and for any misrepresentations or breach of warranties or covenants, as adjustments to the Purchase Price for Tax purposes and that such treatment shall govern for purposes hereof except to the extent that the laws of a particular jurisdiction provide otherwise, in which case such payments shall be made in an amount sufficient to indemnify the relevant party on an after-Tax basis. (f) The Seller shall, on or before June 30, 2000, provide to the Purchaser such information and substantiating documentation, as required under Section 41(f)(3) of the Code, regarding "qualified research expense" and "gross receipts" of the Business for purposes of computing the credit for increasing research activities under Section 41 of the Code. 5.12 LETTERS OF CREDIT; LIEN RELEASES. (a) Within 5 days prior to the Closing, the Seller shall deliver to the Purchaser a true and complete list of all letters of credit, performance bonds and similar obligations arising under any Transferred Customer Contracts whether issued on behalf of or for the benefit of a Selling Party. The Purchaser shall use all reasonable efforts to cause the Seller or any other Selling Party to be released, as of or as promptly as practicable following the Closing, from all such letters of credit, performance bond and similar obligations (whether through the provision of a replacement letter of credit, guaranty or otherwise). (b) The Seller shall use all reasonable efforts to cause the Purchaser to receive the benefits following the Closing of all letters of credit, performance bonds and similar 45 <PAGE> 51 obligations that have been issued in favor of or for the benefit of the Seller under any Transferred Customer Contracts (whether through the assignment thereof, the issuance of a replacement letter of credit, guaranty or otherwise). (c) Seller shall, subsequent to the Closing, provide to Purchaser evidence reasonably satisfactory to Purchaser that, with respect to assets previously owned or held by QUALCOMM Personal Electronics which are included within the Assets, (i) all liens on such Assets have been terminated and released, and (ii) all equipment leases encumbering such Assets have been fully paid and are no longer in force or effect. 5.13 SUBSCRIBER BUSINESS RECEIVABLES. (a) Purchaser agrees to cooperate in good faith with Seller, at the Seller's expense, in assisting Seller in the collection of the Pre-Closing Receivables after the Closing, including among other things, providing Seller with reasonable access during normal business hours to any records or other information transferred to Purchaser in connection with the transactions contemplated in this Agreement that may be useful in the collection of the Pre-Closing Receivables. Further, Purchaser acknowledges that after the Closing, Purchaser may receive payments in respect of Pre-Closing Receivables. In the event that after the Closing Purchaser receives any payments with respect to the Pre-Closing Receivables, Purchaser shall promptly upon receipt thereof remit such payments to Seller. In order to assist the Purchaser in identifying payments received which are attributable to Pre-Closing Receivables, as soon as practicable following the Closing, the Seller shall deliver to the Purchaser a list describing the Pre-Closing Receivables. The Seller shall reimburse the Purchaser for all reasonable costs and expenses incurred by the Purchaser in complying with the provisions of this Section 5.13(a). (b) Seller agrees to cooperate in good faith with Purchaser, at the Purchaser's expense, in assisting Purchaser in the collection of the Post-Closing Receivables after the Closing, including among other things, providing the Purchaser with reasonable access during normal business hours to any records or other information relating to the Business retained by any Selling Party in connection with the transactions contemplated in this Agreement that may be useful in the collection of the Post-Closing Receivables. Further, the Seller acknowledges that after the Closing, the Selling Parties may receive payments in respect of Post-Closing Receivables. In the event that after the Closing any Selling Party receives any payments with respect to the Post-Closing Receivables, the Seller shall, and shall cause any other Selling Party to, promptly upon receipt thereof remit such payments to the Purchaser. The Purchaser shall reimburse the Seller for all reasonable costs and expenses incurred by the Seller in complying with the provisions of this Section 5.13(b). 5.14 ANCILLARY AGREEMENTS. The parties shall cooperate in good faith to prepare, negotiate and finalize the Ancillary Agreements as promptly as practicable after the date hereof. Notwithstanding anything to the contrary contained in this Agreement, in the event the parties cooperate in good faith but are nevertheless unable to finalize any Ancillary Agreement by the time otherwise scheduled for the Closing, the term sheet attached hereto which sets forth the principal terms of such Ancillary Agreement shall be binding on the parties and shall govern the relationship of the parties following the Closing with respect to the matters covered thereby until such time as the parties shall execute and deliver the applicable Ancillary Agreement. 46 <PAGE> 52 5.15 FURTHER ACTION. (a) Each of the parties hereto shall use all reasonable 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 Laws, 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, including, without limitation, delivering, or causing to be delivered, the certificates, opinions and other documents to be delivered to the other party as a condition to such other party's obligations under Article VII of this Agreement. At any time and from time to time after the Closing, at Purchaser's request and without further consideration, the Seller shall, and shall cause any Selling Party to, at Purchaser's expense, (i) execute and deliver such other instruments of sale, transfer, conveyance, assignment and confirmation Purchaser may reasonably deem necessary or desirable in order more effectively to convey to Purchaser, and to confirm Purchaser's title to, all of the Assets, to put Purchaser in actual possession and operating control thereof and to assist Purchaser in exercising all rights with respect thereto and (ii) prosecute or otherwise enforce in its own name for the benefit of Purchaser any claims, rights or benefits which are transferred to Purchaser under this Agreement but which require prosecution or enforcement in the name of any Selling Party. Without limiting the generality of the foregoing, if following the Closing it is determined by the Purchaser and Seller, that Section 3.20 of the Disclosure Schedule (as supplemented pursuant to Section 5.16) omitted any machinery, equipment, tools, supplies, furniture, fixtures, personalty, vehicles or other tangible personal property primarily used in the Business ("Omitted Tangible Personal Property"), the Seller shall or shall promptly cause the transfer of such Omitted Tangible Personal Property to the Purchaser upon the payment by the Purchaser therefor of a purchase price equal to the net asset book value thereof. Any Omitted Tangible Personal Property shall be deemed to constitute Tangible Personal Property and Assets for all purposes of this Agreement. (b) CERTAIN INTELLECTUAL PROPERTY. The Purchaser acknowledges that certain Subscriber Business Intellectual Property may not be identified until after the Closing and therefore will not be physically delivered to the Purchaser until after the Closing. Following the Closing, the Seller shall use reasonable commercial efforts to identify any Subscriber Business Intellectual Property not identified prior to the Closing, and upon the making of such identification shall promptly thereafter transfer physically all such Subscriber Business Intellectual Property. 5.16 SELECTION OF TANGIBLE PERSONAL PROPERTY; SPARE PARTS. Subject to the Seller providing to the Purchaser a reasonably detailed list of Tangible Personal Property on or prior to January 7, 2000, the Purchaser shall designate in writing to the Seller on or before January 31, 2000, which items of Tangible Personal Property the Purchaser desires to purchase pursuant to this Agreement (the "Selected Tangible Personal Property"); provided however, the Seller shall in any event provide the Purchaser with such list prior to February 14, 2000. In the event that the Seller provides such list after January 7, 2000, the Purchaser shall designate in writing to the Seller the Selected Tangible Personal Property on the later of (i) February 14, 2000, and (ii) the earlier of five days after the list is provided to the Purchaser or the Closing Date. The Purchaser shall select sufficient items of Tangible Personal Property such that the aggregate book value of the Selected Tangible Personal Property, as reflected in the September Statement of Net Assets, 47 <PAGE> 53 shall equal at least [***] of the aggregate book value of all Tangible Personal Property, as reflected in the September Statement of Net Assets. Those items of Tangible Personal Property not so selected shall constitute Excluded Assets. Subject to the Seller providing to the Purchaser a reasonably detailed list of spare parts inventory (as to those spare parts not relating to 5GP and PDQ phones and not otherwise expressly allocated to an outstanding purchase order) on or prior to January 7, 2000, the Purchaser shall designate in writing to the Seller on or before January 31, 2000 which items of such spare parts inventory the Purchaser desires to purchase pursuant to this Agreement; provided however, the Seller shall in any event provide the Purchaser with such list prior to February 14, 2000. In the event that the Seller provides such list after January 7, 2000, the Purchaser shall designate in writing to the Seller the items of such spare parts inventory the Purchaser wishes to purchase on the later of (i) February 14, 2000, and (ii) the earlier of five days after the list is provided to the Purchaser or the Closing Date. Those items of spare parts inventory so selected shall be included in the Assets, and those items of spare parts inventory not so selected shall constitute Excluded Assets. 5.17 RELOCATION AND OUTSOURCING. The Seller agrees to discuss in good faith with the Purchaser the possibility of accomplishing the following prior to the Closing relocating certain Assets and operations of the Business as between Real Property to be leased to the Purchaser pursuant to the Lease Agreements. To the extent the Seller and the Purchaser mutually agree to any such relocation or outsourcing, the Seller shall use commercially reasonable efforts to accomplish or significantly prepare for such relocation and outsourcing prior to the Closing. 5.18 [***] *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 48 <PAGE> 54 [***] ARTICLE 6 EMPLOYEE MATTERS 6.1 EMPLOYEE SELECTION. On or prior to January 17, 2000, the Purchaser shall deliver to the Seller a list setting forth the names of (a) those employees of the Seller whom the Purchaser desires to provide services to the Purchaser under the Employee Matters Agreement (the "Selected Seller Employees"), and (b) those employee of Qualcomm Personal Electronics to whom the Purchaser intends to extend an offer of employment (the "Selected QPE Employees"). In connection with the Purchaser's selection of employees, from and after the date hereof, the Seller shall upon reasonable notice permit the Purchaser to interview any employees of the Business. The Seller shall use reasonable commercial efforts to assist the Purchaser in such interviews. [***] 6.2 HIRING OF EMPLOYEES. On the Closing Date, the Purchaser shall offer to employ on an "at-will" basis and subject to the Purchaser's standard terms, conditions and policies of *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 49 <PAGE> 55 employment (or if none, the standard terms, conditions and policies of the Parent Corporation), each Selected QPE Employee as a "new hire" (full- or part-time as such Selected QPE Employee was employed by Qualcomm Personal Electronics immediately prior to the Closing Date); provided, however, that any Selected QPE Employee who is on vacation at the Closing Date shall be offered employment only if his or her return date is within 30 days of the Closing Date; provided, further, however, that any Selected QPE Employee who is on short-term disability or on an approved leave of absence shall be offered employment hereunder upon the employee obtaining a medical release or other documentation reasonably satisfactory to the Purchaser which evidences the employee's ability to perform the essential functions of his regular work, with or without reasonable accommodation, and the employee returns to active employment with the Purchaser (a) if on short-term disability or on an approved leave of absence under the Family Medical Leave Act of 1993, as amended ("FMLA"), no later than the last day on which the employee may return to work under the provisions of the applicable short-term disability plan of Qualcomm Personal Electronics or FMLA, or (b) for all other approved leaves of absence, within 30 days of the Closing Date. Those Selected QPE Employees who accept such offers prior to the Closing Date shall become employees of the Purchaser as of the Closing Date, or, for individuals on leave, as of their return from leave as described in the previous sentence. 6.3 EMPLOYEE LIABILITIES. The Seller shall retain, and the Purchaser shall not assume, any obligations relating to (a) any Selected QPE Employees who do not become employees of the Purchaser, (b) any Selected QPE Employees who actually become employees of the Purchaser (the "Transferred Employees") arising on or prior to the Closing Date, or (c) any Seller Selected Employees or any other employee of Seller. The Seller agrees that the Purchaser shall have no responsibility to provide continuing group health benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), for any employees of the Business (whether or not a Transferred Employee) (and their "qualified beneficiaries" as defined in COBRA). 6.4 SERVICE CREDIT. Transferred Employees shall receive credit for their service with Qualcomm Personal Electronics for all purposes under Purchaser's welfare benefit plans. For all other employee plans, programs and arrangements of the Purchaser Transferred Employees shall receive credit for their service with QUALCOMM Personal Electronics for purposes of eligibility and vesting only. 6.5 INDEMNITY. Without limiting in any way the scope of Article VIII or the applicability of such Article to employment-related and benefit-related matters, the Seller shall indemnify and hold harmless the Purchaser from any and all claims (including reasonable attorneys' fees and expenses incurred in defending such claims) against the Purchaser by Transferred Employees or other Employees of the Business (including former employees of the Business) (a) that arise from representations made by any Selling Party or Qualcomm Personal Electronics to such employees regarding their future employment, (b) that pertain to the payment of any bonus or other incentive compensation accrued or earned by any Transferred Employee prior to the Closing Date or (c) that arise from the termination of employment (through layoff or otherwise) of any employee of the Business prior to the Closing Date. The Seller shall further indemnify and hold harmless the Purchaser against any and all claims (including reasonable attorneys' fees and expenses incurred in defending such claims) against the Purchaser by any 50 <PAGE> 56 Selected QPE Employee who does not accept the Purchaser's offer of employment or who otherwise fails to become a Transferred Employee. 6.6 CERTAIN OTHER EMPLOYEE-RELATED COSTS. On the Closing Date, the Seller shall or shall cause the payment to each Transferred Employee of all amounts payable to the Transferred Employees ("Employee Amounts") that relate to any service by any Transferred Employee with Qualcomm Personal Electronics through the Closing Date, including, without limitation, any salary or wages, any accrued vacation, sick or personal days or any bonuses (collectively, "Accrued Employee Benefits"); provided, however, that the Purchaser may elect to permit each Transferred Employee to select either to be paid his or her accrued salary or wages, vacation, sick or personal days ("Deferred Amounts") on the Closing Date or, to the extent such payment is not required by applicable Law, to request that the Purchaser assume his or her Deferred Amounts. To the extent the Purchaser elects to permit the assumption of Deferred Amounts and certain Transferred Employees elect to request assumption of such Deferred Amounts, within five Business Days after the Closing Date, the Seller shall provide the Purchaser with a complete and accurate statement of the Deferred Amounts expected to be payable by the Purchaser following the Closing that relate to any such Persons who have requested assumption of Deferred Amounts (the "Assumed Employee Amounts"). The Seller shall retain liability for the Assumed Employee Amounts and shall pay or cause to be paid an amount of cash to the Purchaser equal to the Assumed Employee Amounts within ten Business Days after the Closing Date. ARTICLE 7 CONDITIONS TO CLOSING 7.1 CONDITIONS TO OBLIGATIONS OF THE SELLER. The obligations of the Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver, at or prior to the Closing, of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser and the Parent Corporation contained in this Agreement that are not qualified as to materiality shall be true and correct in all material respects, and the representations and warranties of the Purchaser and the Parent Corporation contained in this Agreement that are qualified as to materiality shall be true and correct, as of the Closing Date as though made on and as of the Closing Date, and the Seller shall have received a certificate from the Purchaser to such effect signed by a duly authorized officer thereof; (b) COVENANTS. The covenants and agreements contained in this Agreement to be complied with by the Purchaser on or before the Closing shall have been complied with in all material respects, and the Seller shall have received a certificate from the Purchaser to such effect signed by a duly authorized officer thereof; (c) HSR ACT. Any waiting period (and any extension thereof) under the HSR Act applicable to the purchase of the Assets contemplated by this Agreement shall have expired or shall have been terminated; 51 <PAGE> 57 (d) NO LEGAL IMPEDIMENT. No statute, rule or regulation shall have been promulgated, enacted, entered or enforced, and no other legally binding, final and nonappealable action shall have been taken, by any Governmental Authority or by any court or tribunal of competent jurisdiction, domestic, foreign or supranational, that in any of the foregoing cases has the effect of making illegal or prohibiting or to such extent that it has a Material Adverse Effect, restraining or restricting the consummation of the transactions contemplated by this Agreement; (e) INCUMBENCY CERTIFICATE. The Seller shall have received a certificate of the Secretary or an Assistant Secretary (or comparable officer) of the Purchaser certifying the names and signatures of the officers of the Purchaser authorized to sign this Agreement and the Ancillary Agreements to which it is a party and the other documents to be delivered hereunder and thereunder; (f) LEGAL OPINION. The Seller shall have received from Loeb & Loeb LLP legal opinions, addressed to the Seller and dated the Closing Date, covering the matters set forth in Exhibit J; and (g) ANCILLARY AGREEMENTS. The Purchaser shall have executed and delivered to the Seller each of the Ancillary Agreements to which it is a party and all Ancillary Agreements shall be in force and effect (or, in the event all Ancillary Agreements have not been executed and delivered, the Purchaser shall have complied with its obligations under Section 5.14). 7.2 CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The obligations of the Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver, at or prior to the Closing, of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Seller contained in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date (in each case determined without respect to any qualification as to "materiality," "Material Adverse Effect" or similar qualification), in all such respects as would not, individually or in the aggregate, have a Material Adverse Effect, and the Purchaser shall have received a certificate from the Seller to such effect signed by a duly authorized officer thereof; (b) COVENANTS. The covenants and agreements contained in this Agreement to be complied with by the Seller on or before the Closing (other than Section 5.1) shall have been complied with in all material respects, the covenants and agreements contained in Section 5.1 shall have been complied with in all respects as would not, individually or in the aggregate, have a Material Adverse Effect, and the Purchaser shall have received a certificate from the Purchaser to such effect signed by a duly authorized officer thereof; (c) HSR ACT. Any waiting period (and any extension thereof) under the HSR Act applicable to the purchase of the Assets contemplated hereby shall have expired or shall have been terminated; (d) NO LEGAL IMPEDIMENT. No statute, rule or regulation shall have been promulgated, enacted, entered or enforced, and no other legally binding, final and nonappealable 52 <PAGE> 58 action shall have been taken, by any Governmental Authority or by any court or tribunal of competent jurisdiction, domestic, foreign or supranational, that in any of the foregoing cases requires the divestiture by the Purchaser of assets or has the effect of making illegal or prohibiting or, to such an extent that it has a Material Adverse Effect, restraining or restricting the consummation of the transactions contemplated by this Agreement; (e) RESOLUTIONS OF SELLING PARTIES. The Purchaser shall, with respect to each Selling Party, have received a true and complete copy, certified by the Secretary or an Assistant Secretary of such Selling Party, of the resolutions duly and validly adopted by the Board of Directors of such Selling Party evidencing its authorization of the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby; (f) INCUMBENCY CERTIFICATE. The Purchaser shall, with respect to each Selling Party, have received a certificate of the Secretary or an Assistant Secretary of such Selling Party certifying the names and signatures of the officers of such Selling Party authorized to sign this Agreement and the Ancillary Agreements and the other documents to be delivered hereunder and thereunder; (g) LEGAL OPINION. The Purchaser shall have received from Cooley Godward LLP a legal opinion, addressed to the Purchaser and dated the Closing Date, covering the matters set forth in Exhibit K; (h) CONSENTS AND APPROVALS. The Purchaser and the Seller shall have received, all authorizations, consents, orders and approvals of all Governmental Authorities and officials reasonably necessary for the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, other than such authorizations, consents, orders, approvals or consents the absence of which could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect (taking into account in any such determination any rights or benefits conveyed on the Purchaser pursuant to Section 5.4(c)); (i) ANCILLARY AGREEMENTS. Each Selling Party shall have executed and delivered to the Purchaser each of the Ancillary Agreements to which it is a party and all Ancillary Agreements shall be in force and effect (or, in the event all Ancillary Agreements have not been executed and delivered, each Selling Party shall have complied with its obligations under Section 5.14); (j) NO MATERIAL ADVERSE EFFECT. No event, circumstance, change in, or effect on the Business shall have occurred and be continuing which has a Material Adverse Effect as of the Closing Date; (k) CERTIFICATE OF NON-FOREIGN STATUS. The Purchaser shall have received a certificate from each Selling Party (which complies with Section 1445 of the Code) of non-foreign status executed in accordance with the provisions of the Foreign Investment in Real Property Tax Acts; (l) TRANSFER AND TERMINATION OF EMPLOYEES. The Seller shall have transferred the Selected Seller Employees to the Person providing services to the Purchaser 53 <PAGE> 59 under the Employee Matters Agreement, the employment of all Selected QPE Employees shall have been terminated on the Closing Date and unless otherwise agreed to by the Purchaser pursuant to Section 6.6 all salaries, benefits and all other amounts accruing or owing through and as of the Closing Date to the Selected QPE Employees shall have been paid; and (m) TRANSFER OF ASSETS. To the extent, as of the date hereof, any of the Assets are not owned by any Selling Party, the Seller shall have caused the transfer of such Assets to the Seller. ARTICLE 8 INDEMNIFICATION 8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND COVENANTS. [***] (b) Notwithstanding anything to the contrary contained in this Agreement, no event, fact or circumstance which results in any actual payments made pursuant to Section 2.7 shall result in or serve as the basis for any claim for indemnification under this Section 8.1. 8.2 INDEMNIFICATION BY THE SELLER. (a) Following the Closing, the Purchaser and its Affiliates, officers, directors, employees, agents, successors and assigns (collectively, the "Purchaser Indemnitees") shall be indemnified, defended and held harmless by the Seller for any and all Liabilities, losses, damages, diminution in value, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, attorneys' and consultants' fees and expenses) actually *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 54 <PAGE> 60 suffered or incurred by them (including, without limitation, any Action brought or otherwise initiated by any of them) (hereinafter a "Loss"), arising out of or resulting from: (i) the breach of any representation or warranty made by any Selling Party contained in any Selling Party Document (provided that solely for purposes of this Article VIII, each such representation and warranty shall be read as if all qualifications as to materiality, "Material Adverse Effect" and similar qualifications were deleted therefrom); or (ii) the breach of any covenant or agreement by any Selling Party contained in any Selling Party Document; or (iii) Liabilities of any Selling Party, whether arising before or after the Closing Date, that are not expressly assumed by the Purchaser pursuant to this Agreement, including, without limitation: (A) Liabilities arising from or related to any failure to comply with laws relating to bulk transfers or bulk sales with respect to the transactions contemplated by this Agreement (notwithstanding the waiver contained in Section 5.10); and (B) the Excluded Liabilities. To the extent that the Seller's undertakings set forth in this Section 8.2 may be unenforceable, the Seller shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Purchaser Indemnitees. (b) Notwithstanding anything to the contrary contained in this Agreement except as provided in Section 5.18(e), (i) the maximum aggregate amount of indemnifiable Losses which may be recovered from the Seller arising out of or resulting from the causes enumerated in Section 8.2(a)(i), or in Section 8.2(a)(ii), shall be an amount equal to [***] and (ii) the Seller shall not be liable to indemnify the Purchaser Indemnitees for any indemnifiable Losses otherwise payable thereunder until such time as all such indemnifiable Losses shall aggregate to more [***] (the "Indemnification Threshold"), after which time the Seller shall be liable to indemnify the Purchaser Indemnitees for the entire amount of all Losses. The limitations on indemnification contained in this Section 8.2(b) shall not apply to claims for Losses based on fraud or other tortious conduct or the deliberate failure of the Seller to perform any post-Closing obligations to be performed by it hereunder. 8.3 INDEMNIFICATION BY THE PURCHASER AND THE PARENT CORPORATION. (a) Following the Closing, the Seller and its Affiliates, officers, directors, employees, agents, successors and assigns (the "Seller Indemnitees") shall be indemnified, defended and held harmless by the Purchaser and the Parent Corporation, jointly and severally, for any and all Losses, arising out of or resulting from: (i) the breach of any representation or warranty made by the Purchaser or the Parent Corporation contained in any Purchaser Document (provided that solely for purposes of this Article VIII, each such representation and warranty shall be read as if all qualifications as to materiality and similar qualifications were deleted therefrom); or *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 55 <PAGE> 61 (ii) the breach of any covenant or agreement by the Purchaser or the Parent Corporation contained in any Purchaser Document; or (iii) the Assumed Liabilities. To the extent that the undertakings of the Purchaser or the Parent Corporation set forth in this Section 8.3 may be unenforceable, the Purchaser and the Parent Corporation shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Seller Indemnitees. (b) Notwithstanding anything to the contrary contained in this Agreement, (i) the maximum aggregate amount of indemnifiable Losses which may be recovered from the Purchaser and the Parent Corporation, collectively, arising out of or resulting from the causes enumerated in Section 8.3(a)(i), or in Section 8.3(a)(ii) shall be an amount equal to [***] and (ii) neither the Purchaser nor the Parent Corporation shall be liable to indemnify the Seller Indemnitees for any indemnifiable Losses otherwise payable thereunder until such time as all such indemnifiable Losses shall aggregate to more than the Indemnification Threshold, after which time the Purchaser and the Parent Corporation, collectively, shall be liable to indemnify the Seller Indemnitees for the entire amount of all Losses. The limitations on indemnification contained in this Section 8.3(b) shall not apply to claims for Losses based on fraud or other tortious conduct or the deliberate failure of the Purchaser or the Parent Corporation to perform any of its respective post-Closing obligations to be performed hereunder. 8.4 INDEMNIFICATION PROCEDURES. An indemnified party shall give the indemnifying party notice of any matter which an indemnified party has determined has given or could give rise to a right of indemnification under this Agreement, within 60 days of such determination, stating the amount of the Loss, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises. The obligations and Liabilities of the indemnifying party under this Article VIII with respect to Losses arising from claims of any third party which are subject to the indemnification provided for in this Article VIII ("Third Party Claims") shall be governed by and contingent upon the following additional terms and conditions: if an indemnified party shall receive notice of any Third Party Claim, the indemnified party shall give the indemnifying party notice of such Third Party Claim within 30 days of the receipt by the indemnified party of such notice; provided, however, that the failure to provide such notice shall not release the indemnifying party from any of its obligations under this Article VIII except to the extent the indemnifying party is materially prejudiced by such failure and shall not relieve the indemnifying party from any other obligation or liability that it may have to any indemnified party otherwise under this Article VIII. Upon receipt of notice of a Third Party Claim, the indemnifying party shall assume and control the defense of such Third Party Claim at its expense and through counsel of its choice reasonably satisfactory to the indemnified party; provided, however, that if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the judgment of the indemnified party for the same counsel to represent both the indemnified party and the indemnifying party, then the indemnified party shall be entitled to retain its own counsel, in each jurisdiction for which the indemnified party determines counsel is required, at the expense of the indemnifying party; provided, further, that the indemnified party may assume the defense of any Third Party Claim, at the expense of the indemnifying party, if *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 56 <PAGE> 62 the indemnifying party fails to assume the defense of a Third Party Claim within 15 days of receipt of a notice relating thereto. In the event the indemnifying party undertakes any such defense against any such Third Party Claim as provided above, the indemnified party shall cooperate with the indemnifying party in such defense and make available to the indemnifying party, at the indemnifying party's expense, all witnesses, pertinent records, materials and information in the indemnified party's possession or under the indemnified party's control relating thereto as is reasonably required by the indemnifying party. Similarly, in the event the indemnified party is, directly or indirectly, conducting the defense against any such Third Party Claim, the indemnifying party shall cooperate with the indemnified party in such defense and make available to the indemnified party, at the indemnifying party's expense, all such witnesses, records, materials and information in the indemnifying party's possession or under the indemnifying party's control relating thereto as is reasonably required by the indemnified party. No such Third Party Claim may be settled by the indemnifying party without the written consent of the indemnified party, unless such settlement only requires payment of money damages which will be indemnified. 8.5 TAX MATTERS. Anything in this Article VIII (except for the specific reference to Tax matters in Section 8.1) to the contrary notwithstanding, the rights and obligations of the parties with respect to indemnification for any and all Tax matters shall be governed by Section 5.11. 8.6 KNOWLEDGE OF BREACH. For purposes of this Article 8, (a) Seller shall not be deemed to have breached any representation, warranty or covenant if Purchaser or Parent Corporation had actual knowledge (as determined in accordance with Section 10.15 and with respect to which the Seller shall bear the burden of proving), on or prior to the Closing Date, of the breach of, or of any facts or circumstances constituting or resulting in a breach of, such representation, warranty or covenant, and (b) neither Purchaser nor Parent Corporation shall be deemed to have breached any representation, warranty or covenant if Seller had actual knowledge (as determined in accordance with Section 10.15 and with respect to which the Purchaser shall bear the burden of proving), on or prior to the Closing Date, of the breach of, or of any facts or circumstances constituting or resulting in a breach of, such representation, warranty or covenant. 8.7 INDEMNIFICATION EXCLUSIVE REMEDY. Except as provided for in Sections 2.7 and 5.18(e) and except for claims based on fraud or other tortious conduct or a party's deliberate failure to perform post-Closing covenants to be performed by it, the right of each party hereto to demand and receive indemnification payments pursuant to this Article 8 shall be the sole and exclusive right and remedy exercisable by such party with respect to any breach of any representation or warranty of the other party contained in this Agreement or in any certificate delivered pursuant hereto or noncompliance by the other party with any covenant contained in this Agreement. 8.8 SUBROGATION. To the extent that either party hereto (the "Indemnitor") makes or is required to make any indemnification payment to the other party hereto (the "Indemnified Party"), the Indemnitor shall be entitled to exercise, and shall be subrogated to, any rights and remedies (including rights of indemnity, rights of contribution and other rights of recovery) that the Indemnified Party or any of the Indemnified Party's Affiliates may have against any other 57 <PAGE> 63 Person with respect to any Losses, circumstances or Action to which such indemnification payment is directly or indirectly related. The Indemnified Party shall permit the Indemnitor to use the name of the Indemnified Party and the names of the Indemnified Party's Affiliates in any transaction or in any proceeding or other Action involving any of such rights or remedies; and the Indemnified Party shall take such actions as the Indemnitor may reasonably request for the purpose of enabling the Indemnitor to perfect or exercise the Indemnitor's right of subrogation hereunder. ARTICLE 9 TERMINATION AND WAIVER 9.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing: (a) by the Purchaser if, between the date hereof and the time scheduled for the Closing: (i) an event or condition occurs that has resulted in or that would reasonably be expected to result in a Material Adverse Effect; or (ii) the Seller makes a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Seller seeking to adjudicate it 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 (b) by either the Seller or the Purchaser if the Closing shall not have occurred by 12:01 a.m. on March 27, 2000 , which date may be extended by mutual written consent of the parties hereto; provided, however, that if a request for additional information is received from the FTC or the DOJ pursuant to the HSR Act, such date shall be extended to the fourteenth (14th) calendar day following acknowledgment by the FTC or DOJ, as applicable, that the parties have complied with such request, but in any event not later than 12:01 a.m. on June 30, 2000; provided, further, that the right to terminate this Agreement under this Section 9.1(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 Closing to occur on or prior to such date; or (c) by either the Purchaser or the Seller in the event that any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, 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 mutual written consent of the Seller and the Purchaser. 9.2 EFFECT OF TERMINATION. In the event of termination of this Agreement as provided in Section 9.1, 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 Section 5.3 and Article X and (b) that nothing herein shall relieve either party from liability for any breach of this Agreement. 9.3 WAIVER. The Seller, on the one hand, and the Purchaser and the Parent Corporation, on the other hand, may (a) extend the time for the performance of any of the 58 <PAGE> 64 obligations or other acts of the other, (b) waive any inaccuracies in the representations and warranties of the other contained herein or in any document delivered by the other pursuant hereto, or (c) waive compliance with any of the agreements or conditions of the other 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 10 GENERAL PROVISIONS 10.1 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 Closing shall have occurred. 10.2 NOTICES. All notices and other communications hereunder shall be in writing and shall be delivered personally, by FedEx or other nationally recognized next-day courier, telecopied with confirmation of receipt, or mailed first class, postage prepaid, by certified mail, return receipt requested, to the parties at the addresses specified below (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof) All notices, requests and other communications shall be deemed given on the date of actual receipt or delivery as evidenced by written receipt, acknowledgement or other evidence of actual receipt or delivery to the address specified below. In case of service by telecopy, a copy of such notice shall be personally delivered or sent by certified mail, in the manner set forth above, within three (3) business days thereafter: (a) if to any Selling Party: QUALCOMM Incorporated 5775 Morehouse Drive San Diego, California 92121-1714 Telecopy: (858)845-1249 Attention:General Counsel with a copy to: 59 <PAGE> 65 Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, California 92121-2128 Telecopy: (619) 453-3555 Attention: Frederick T. Muto, Esq. (b) if to the Purchaser or Parent Corporation: Kyocera International, Inc. 8611 Balboa Avenue San Diego, California 92123-1580 Telecopy: (858) 492-1456 Attention: President with copies to: Loeb & Loeb LLP 1000 Wilshire Boulevard, Suite 1800 Los Angeles, California 90017 Telecopy: (213) 688-3460 Attention: Kenneth R. Benbassat, Esq. 10.3 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 the prior written consent of the other party (which consent shall not be unreasonably withheld), and the parties shall cooperate as to the timing and contents of any such press release or public announcement. 10.4 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. 10.5 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 and effect 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. 10.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, between the Seller and the Purchaser with respect to the subject matter hereof, including, without limitation, the Confidentiality Agreement. 60 <PAGE> 66 10.7 ASSIGNMENT. This Agreement may not be assigned by operation of Law or otherwise without the express written consent of the Seller and the Purchaser (which consent may be granted or withheld in the sole discretion of the Seller and the Purchaser); provided, however, that the Seller may assign this Agreement, in whole and not in part, to a Person who acquires all or substantially all of the capital stock or assets and liabilities of the Seller, without the consent of the Purchaser. 10.8 NO THIRD-PARTY BENEFICIARIES. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto, the Selling Parties, the Purchaser Indemnitees, the Seller Indemnitees and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person, including, without limitation, any union or any employee or former employee of the Seller, any legal or equitable right, benefit or remedy of any nature whatsoever, including, without limitation, any rights of employment for any specified period, under or by reason of this Agreement. 10.9 AMENDMENT. This Agreement may not be amended or modified except (a) by an instrument in writing signed by, or on behalf of, the Seller, the Purchaser and the Parent Corporation, or (b) by a waiver in accordance with Section 9.3. 10.10 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. All actions and proceedings arising out of or relating to this Agreement shall be heard and determined in any California state or federal court sitting in the City of San Diego, California. 10.11 ATTORNEYS' FEES. If any legal action or other proceeding is brought for the enforcement of this Agreement, any Selling Party Document or any Purchaser Document or because of any alleged dispute, breach, default or misrepresentation in connection herewith or therewith, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 10.12 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. 10.13 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at Law or equity, without the necessity of demonstrating the inadequacy of money damages or the posting of any bond or similar security. 10.14 GUARANTEE OF PARENT CORPORATION. The Parent Corporation hereby guarantees that Purchaser shall duly perform, satisfy and discharge on a timely basis each of the covenants, obligations and liabilities of Purchaser under this Agreement and the Ancillary Agreements, and the Parent Corporation shall be and is jointly and severally liable with Purchaser for the due and 61 <PAGE> 67 timely performance and satisfaction of each of said covenants, obligations and liabilities. Parent Corporation agrees that the liability of Purchaser for any matter contained in this Agreement shall be the immediate, direct, and primary obligation of Parent Corporation and shall not be contingent upon Seller's or any Seller Indemnitee's exercise or enforcement of any remedy it may have against Purchaser or any other person. 10.15 KNOWLEDGE. As used in this Agreement, the "knowledge" of a Party, means (a) with respect to Seller, the actual knowledge of the Chief Executive Officer, President, Chief Financial Officer or General Counsel of Seller or any employee of the Business with the rank of Vice President or above, and (b) with respect to Purchaser and Parent Corporation, the Chief Executive Officer, President, Chief Financial Officer or General Counsel of Purchaser or Parent Corporation, respectively. 62 <PAGE> 68 IN WITNESS WHEREOF, the Seller, the Purchaser and the Parent Corporation have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. QUALCOMM INCORPORATED KYOCERA INTERNATIONAL, INC. By: By: ---------------------------- --------------------------------- Name: Name: -------------------------- ------------------------------- Title: Title: ------------------------- ------------------------------ WITNESS: KII ACQUISITION COMPANY By: - ------------------------------- --------------------------------- Name: ------------------------------- Title: ------------------------------ WITNESS: ------------------------------------ [SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT] <PAGE> 69 <TABLE> <CAPTION> EXHIBITS <S> <C> A Selling Parties B Principal Terms of the ASICs Supply Agreement C Assumption Agreement D Bill of Sale E Principal Terms of the Employee Matters Agreement F Principal Terms of the Lease Agreements G Principal Terms of the Retained Business Support Agreement H Principal Terms of the Trademark License Agreement I Principal Terms of the Transition Services Agreement J Legal Opinion (Loeb) K Legal Opinion (Cooley) </TABLE> <PAGE> 70 EXHIBIT A SELLING PARTIES QUALCOMM Incorporated Qualcomm do Brasil Ltda. QUALCOMM (Australia) Pty Limited <PAGE> 71 EXHIBIT B PRINCIPAL TERMS OF THE ASICS SUPPLY AGREEMENT FORM OF AGREEMENT: Seller and Purchaser shall enter into an ASICs supply agreement (the "Agreement") which shall contain normal and customary terms and conditions to be mutually agreed to and not otherwise inconsistent with this term sheet. The Agreement shall contain warranty and indemnification provisions no less favorable than those warranty and indemnification provisions commonly offered by Seller to similar situated third party customers of Chipsets. Each party shall have the right to assign its interest in the Agreement to any respective successor in interest to such party's respective subject business unit. VOLUME/REQUIREMENTS: [ *** ] *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 1 <PAGE> 72 [ *** ] TERM OF AGREEMENT: [ *** ] PRICING OF CHIPSETS: [ *** ] AFFILIATES: [ *** ] GOVERNING LAW; VENUE: California; San Diego, California. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2 <PAGE> 73 EXHIBIT C FORM OF ASSUMPTION AGREEMENTS ASSUMPTION AGREEMENT, dated as of [_______________], 2000 (this "ASSUMPTION AGREEMENT"), between QUALCOMM INCORPORATED, a Delaware corporation (the "SELLER"), and [_________________], a Delaware corporation (the "PURCHASER"). WITNESSETH: WHEREAS, the Seller, the Purchaser, and Kyocera International, Inc., a California corporation and sole stockholder of the Purchaser ("PARENT") have entered into an Asset Purchase Agreement, dated December 22, 1999 (the "ASSET PURCHASE AGREEMENT"; unless otherwise defined herein, capitalized terms shall be used herein as defined in the Asset Purchase Agreement); WHEREAS, pursuant to the Asset Purchase Agreement, the Purchaser has agreed to assume certain liabilities and obligations of the Seller with respect to the Business; and WHEREAS, the execution and delivery of this Assumption Agreement by the Purchaser is a condition to the obligations of the Seller to consummate the transactions contemplated by the Asset Purchase Agreement. NOW THEREFORE, in consideration of the premises and the mutual agreements and covenants set forth herein and in the Asset Purchase Agreement, and intending to be legally bound hereby, the Purchaser and the Seller hereby agree as follows: 1. ASSUMPTION OF LIABILITIES. Subject to Section 2 hereof, the Purchaser hereby assumes and agrees to pay, perform and discharge when due only the Assumed Liabilities and no other Liabilities of the Selling Parties. 2. EXCLUDED LIABILITIES. Notwithstanding the provisions of Section 1 hereof, the Seller shall retain, and shall be responsible for paying, performing and discharging when due, and the Purchaser shall not assume or have any responsibility for, all Excluded Liabilities. 3. NO THIRD PARTY BENEFICIARIES. This Assumption Agreement shall be binding upon and inure solely to the benefit of the parties hereto and the Selling Parties 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 Assumption Agreement. 4. ASSIGNMENT. This Assumption Agreement may not be assigned by operation of Law or otherwise without the express written consent of the Seller and the Purchaser (which consent may be granted or withheld in the sole discretion of the Seller or the Purchaser). 5. COUNTERPARTS. This Assumption Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when 1. <PAGE> 74 executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 6. GOVERNING LAW. This Assumption 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. IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Assumption Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. QUALCOMM INCORPORATED By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- [______________________________] By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- 2. <PAGE> 75 EXHIBIT D FORM OF BILLS OF SALE AND ASSIGNMENT BILL OF SALE AND ASSIGNMENT, dated as of [__________], 1999 (this "BILL OF SALE AND ASSIGNMENT"), from [QUALCOMM INCORPORATED, a Delaware corporation] (the "SELLER"), to [__________], a Delaware corporation (the "PURCHASER"). WITNESSETH: WHEREAS, the Seller, the Purchaser, and Kyocera International, Inc., a California corporation and sole stockholder of the Purchaser ("PARENT") have entered into an Asset Purchase Agreement, dated December 22,1999 (the "ASSET PURCHASE AGREEMENT"; unless otherwise defined herein, capitalized terms shall be used herein as defined in the Asset Purchase Agreement); and WHEREAS, the execution and delivery of this Bill of Sale and Assignment by the Seller is a condition to the obligations of the Purchaser to consummate the transactions contemplated by the Asset Purchase Agreement. NOW THEREFORE, for good and valuable consideration to the Seller, the receipt and sufficiency of which is hereby acknowledged, and pursuant to the Asset Purchase Agreement, the Seller, intending to be legally bound hereby, does hereby agree as follows: 1. SALE AND ASSIGNMENT OF ASSETS AND PROPERTIES. (a) The Seller does hereby sell, assign, transfer, convey, grant, bargain, set over, release, deliver, vest and confirm unto the Purchaser, its successors and assigns, forever, the entire right, title and interest of the Seller in and to all the Assets. The Seller warrants that upon delivery to the Purchaser of the Assets sold, assigned, transferred, conveyed, granted, bargained, set over, released, delivered, vested and confirmed from the Seller to the Purchaser pursuant to this Bill of Sale and Assignment, the Purchaser will own, with good and marketable title, or lease, under valid and subsisting leasehold interests, the Assets, free and clear of all Encumbrances, except as expressly contemplated by the Asset Purchase Agreement, including, without limitation, the Exhibits and the Disclosure Schedule that are a part thereof. 2. ASSETS AND PROPERTIES NOT SOLD AND ASSIGNED. The Assets shall exclude the Excluded Assets. 3. POWER OF ATTORNEY. The Seller hereby constitutes and appoints the Purchaser, its successors and assigns, the true and lawful attorney and attorneys of the Seller, with full power of substitution, in the name of the Purchaser or in the name and stead of the Seller, but on behalf of, for the benefit and at the expense of the Purchaser, its successors and assigns: (i) to collect, demand and receive any and all Assets hereby sold and assigned to the Purchaser or intended so to be and to give receipts and releases for and in respect ` of the same; ii to institute and prosecute any and all actions, suits or proceedings, at law, in equity or otherwise, which the 1. <PAGE> 76 Purchaser may deem proper in order to collect, assert or enforce any claim, right or title of any kind in or to the Assets hereby sold and assigned to the Purchaser or intended so to be, to defend or compromise any and all actions, suits or proceedings in respect of any of the Assets, and to do all such acts and things in relation thereto as the Purchaser shall deem advisable; (iii) to take any and all other reasonable action designed to vest more fully in the Purchaser the Assets hereby sold and assigned to the Purchaser or intended so to be, and in order to provide for the Purchaser the benefit, use, enjoyment and possession of such Assets; and (iv) to do all reasonable acts and things in relation to the Assets hereby sold and assigned. The Seller acknowledges that the foregoing powers are coupled with an interest and shall be irrevocable by it or upon its subsequent dissolution or in any manner or for any reason. The Purchaser shall be entitled to retain for its own account any amounts collected pursuant to the foregoing powers, including any amounts payable as interest with respect thereto. The Seller shall from time to time pay to the Purchaser, when received, any amounts which shall be received directly or indirectly by the Seller (including amounts received as interest) in respect of any Assets sold and assigned to the Purchaser pursuant hereto. 4. OBLIGATIONS AND LIABILITIES NOT ASSUMED. Nothing expressed or implied in this Bill of Sale and Assignment shall be deemed to be an assumption by the Purchaser of any Liabilities of the Seller. The Purchaser does not by this Bill of Sale and Assignment assume or agree to pay, perform or discharge any Liabilities of the Seller of any nature, kind or description whatsoever. The terms and provisions of the assumption of Liabilities by the Purchaser are set forth in the Assumption Agreement dated as of the date hereof between the Purchaser and the Seller. 5. NO THIRD PARTY BENEFICIARIES. This Bill of Sale and Assignment 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 Bill of Sale and Assignment. 6. ASSIGNMENT. This Bill of Sale and Assignment may not be assigned by operation of Law or otherwise without the express written consent of the Seller and the Purchaser (which consent may be granted or withheld in the sole discretion of the Seller or the Purchaser); provided, however, that the Purchaser may assign this Bill of Sale and Assignment to an Affiliate of the Purchaser without the consent of the Seller. 2. <PAGE> 77 7. GOVERNING LAW. This Bill of Sale and Assignment shall be governed by, and construed in accordance with, the laws of the State of California. IN WITNESS WHEREOF, the Seller has caused this Bill of Sale and Assignment to be executed as of the date first written above by its officer thereunto duly authorized. QUALCOMM INCORPORATED By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- <PAGE> 78 EXHIBIT E PRINCIPAL TERMS OF EMPLOYEE MATTERS AGREEMENT 1. Seller shall create a separate wholly owned subsidiary ("QCP"), which will continue to employ those identified employees of the Business that are necessary to the provision of certain enumerated services to Purchaser, including engineering, product management, quality, sales and marketing, as well as administrative and other services (e.g. information technology, human resources, finance and operations) to be agreed by the parties (the "Selected Business Employees"). Purchaser shall specifically identify such employees that Purchaser desires to include in the group of Selected Business Employees on or before January 17, 2000. Seller shall indemnify and hold harmless Purchaser with respect to any and all claims brought by employees of the Business that are not selected by Purchaser to be included in the group of Selected Business Employees to the extent such claims against Purchaser relate in any way to stock options in Seller held by employees not selected. 2. [ *** ] Notwithstanding the foregoing, except for normal and customary increases consistent with past practices, QCP shall not increase (as a result of increasing the level of benefits, salaries and the like, or the manner of calculating the overhead allocation) any such costs or other expenses to be charged to Purchaser without the prior written approval of Purchaser, which approval shall not be unreasonably withheld. QCP shall not be entitled to charge Purchaser for any such non-approved increased costs or expenses. In no event shall Purchaser have any obligation to pay to QCP for any such costs to the extent that they relate in any way to stock options held by any Selected Business Employee. 3. The Selected Business Employees shall perform such services as are reasonably specified by Purchaser from time to time. Except for those services specifically agreed to by the parties to be provided to Seller pursuant to the Retained Business Support Agreement, [ *** ], the Selected Business Employees shall, unless otherwise mutually agreed, perform services exclusively for Purchaser primarily for the purpose of design and development of CDMA handsets which incorporate Seller ASICs, to be manufactured by Purchaser, with sales and marketing and administrative support provided by QCP. The parties agree that in the event of any competing demands for services of the Selected Business Employees which may arise under the Retained Business Support Agreement or otherwise, the first priority of the Selected Business Employees in performing services shall be to perform those services to be performed for the benefit of Purchaser. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 1 <PAGE> 79 4. The statutory officers of QCP shall be selected by Seller. All statutory officers of QCP shall consist of Seller officers and/or employees that are not within the group of Selected Business Employees. 5. The Board of Directors of QCP will consist of one board member. The board member shall be selected by Seller and will be an individual that is not within the group of Selected Business Employees. 6. QCP shall retain control of the employment relationship with the Selected Business Employees throughout the [ *** ] period, including the right to adjust pay, discipline, supervise, terminate, hire, promote, etc. QCP shall have the exclusive right, in its sole discretion, to grant stock options, if any, to the Selected Business Employees. 7. During the [ *** ] term, unless otherwise mutually agreed, Seller will not transfer any Selected Business Employee to Seller. 8. During the [ *** ] term, QCP will be responsible for ensuring compliance with applicable employment laws, including those related to payroll and compensation, benefits, withholding of state and federal taxes, workers compensation insurance, disability insurance, workplace safety, state and federal law relating to the employment relationship, as well as applicable record-keeping requirements. Any penalties or additional payments required as a result of QCP's failure to pay wages, taxes, insurance or other amounts required by law shall be borne by QCP. 9. Purchaser and QCP shall agree upon appropriate terms and conditions relating to confidentiality of information of Purchaser and QCP, and to ownership of intellectual property created or conceived by the Selected Business Employees during the [ *** ] term. Generally, any intellectual property created or conceived by any Selected Business Employee (except for intellectual property created or conceived in connection with performing those services specifically agreed to by the parties to be provided to Seller pursuant to the Retained Business Support Agreement) during the [ *** ] term shall be the property of Purchaser; provided, however, if any such intellectual property is derivative of any intellectual property owned by or licensed to Seller (or its affiliates) and in existence prior to the Closing Date, Purchaser shall not have any rights in such underlying intellectual property except as expressly granted to Purchaser elsewhere. 10. After the [ *** ] term, Purchaser shall identify those Selected Business Employees that Purchaser desires (excluding the statutory officers and the director of QCP) to hire as full-time employees of Purchaser and may make offers of employment to such employees. Any Selected Business Employee that is not hired or that declines to be hired by Purchaser may be transferred by Seller to Seller (or any affiliate of Seller). Purchaser shall pay all costs and expenses associated with any Selected Business Employee that is not offered employment by Purchaser as set forth above and is terminated by QCP upon the expiration of the [ *** ] term and not otherwise employed by Purchaser and/or Seller; provided, however, Purchaser shall have no liability for any such costs or expenses to the extent that they relate in any way to stock options in Seller held by any such Selected Business Employee, and Seller shall *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2 <PAGE> 80 indemnify and hold harmless Purchaser with respect to any and all claims brought by Selected Business Employees after the [ *** ] term to the extent such claims against Purchaser relate in any way to stock options in Seller held by any such Selected Business Employee. 11. If during the [ *** ] term Purchaser elects to reduce the number of Selected Business Employees, then Seller (and any of its affiliates) shall be entitled to transfer any such Selected Business Employees which Purchaser desires to exclude from the list of Selected Business Employees. Purchaser shall (i) pay all costs and expenses associated with any such Selected Business Employees not so transferred by Seller to Seller (or its affiliates) who are terminated by QCP prior to the expiration of the [ *** ] term and not otherwise employed by Seller (or its affiliates), and (ii) indemnify and hold harmless Seller and its officers, directors, employees and affiliates with respect to any and all claims arising out of or relating to any such early termination by QCP of any such Selected Business Employees; provided, however, Purchaser shall have no liability for any such costs or expenses and Purchaser shall have no obligation to provide such indemnification to the extent that they relate in any way to stock options in Seller held by any such Selected Business Employee, and Seller shall indemnify and hold harmless Purchaser with respect to any and all claims brought by Selected Business Employees to the extent such claims against Purchaser relate in any way to stock options in Seller held by any such Selected Business Employee. 12. The parties shall mutually agree to the manner in which Selected Business Employees shall be permitted to represent themselves with respect to third parties (for example, with respect to the use of business cards, stationary and the like); provided, however, in no case shall the Selected Business Employees be permitted to represent themselves in a manner which is inconsistent with being anything other than QCP employees; provided further, however, that that shall not preclude the Selected Business Employees from representing that, in their capacity as employees of QCP, they are performing services for Purchaser. 13. Services performed by the Selected Business Employees shall be provided on an "AS-IS" basis. QCP makes no warranty concerning such services. 14. With respect to any actions (or inaction) of the Selected Business Employees which are done as a result of the requirements or other requests of Purchaser, Purchaser shall indemnify and hold harmless Seller, QCP and Seller's officers, directors, employees and affiliates with respect to any and all claims arising out of or relating to any such actions (or inaction). Without limitation to the prior sentence, Purchaser shall indemnify and hold harmless Seller, QCP and Seller's officers, directors, employees and affiliates with respect to any and all claims for infringement arising out of or relating to engineering services provided to Purchaser by QCP and the Selected Business Employees. With respect to any actions (or inaction) of the Selected Business Employees which are done as a result of the requirements or other requests of QCP (other than as a result of the requirements or other requests of Purchaser), QCP shall indemnify and hold harmless Purchaser and Purchaser's officers, directors, employees and affiliates with respect to any and all claims arising out of or relating to any such actions (or inaction). *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 3 <PAGE> 81 EXHIBIT F PRINCIPAL TERMS OF THE LEASE AGREEMENTS LEASED FACILITIES: Purchaser agrees to lease or sublease, as the case may be, certain facilities from Seller as follows (collectively, the "Leases") for use by Purchaser in continuing the Business: [ *** ] PREMISES: The foregoing list of properties represents the parties' current expectations as to the space to be leased by Purchaser. [ *** ] *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 1 <PAGE> 82 [ *** ] All of the facilities will be delivered to Purchaser on a then current "as is" basis, without warranty by Seller; provided, however, the Purchaser shall have the right to inspect the facilities prior to the Closing and prepare a list of items requiring repair in order to put such properties in the condition required by the terms and conditions set forth in the Agreement, and Seller shall reasonably promptly fix, at Seller's cost and expense, those items required to be so repaired. Any future alterations will require the consent of Seller and the landlord under any applicable Master Lease. [ *** ] LEASE TERM: [ *** ] *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2 <PAGE> 83 [ *** ] With respect to all other facilities, the term of the subject lease or sublease shall expire concurrently with the expiration of the existing term under the applicable Master Lease. Seller shall not be required to exercise any option to extend the term under any Master Lease. The lease or sublease arrangements shall commence on consummation of the sale of the Business; provided, however, that in the event the sale transaction does not close, Seller and Purchaser shall be under no obligation to lease the facilities, obtain assignments of leases or enter into subleases. Each form of lease or sublease shall be prepared by Seller and shall contain such other terms and conditions as are commonly found in leases currently being used by landlords for similar space in the vicinity of the subject properties. [ *** ] *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 3 <PAGE> 84 [ *** ] NON-OWNED FACILITIES: As to each facility [ *** ] Seller, at its election, shall either assign the lease for such facility to Purchaser or sublease the subject space to Purchaser. Purchaser and Seller acknowledge that each proposed assignment and sublease will be subject to obtaining the consent of the landlord under the applicable Master Lease, and will be further subject to the restrictions on assignment/subletting contained in the applicable Master Lease. Each sublease shall provide that the subtenant will perform all of the obligations of the tenant under the Master Lease as well as such other obligations as are set forth in the form of sublease to be prepared by Seller and approved by Purchaser. Seller will use reasonable good faith efforts, at no cost or liability to Seller, to cause the landlord under each Master Lease to perform its obligations under the Master Lease for the benefit of Purchaser. [ *** ] LEASE RATE: [ *** ] *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 4 <PAGE> 85 [ *** ] [ *** ] USE: Purchaser shall use the respective premises only for uses similar to those currently being conducted by Seller in such premises. DEFAULTS; REMEDIES: Each lease/sublease shall contain customary default provisions, including without limitation, failure to pay rent, failure to perform the terms of the lease/sublease, and *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 5 <PAGE> 86 bankruptcy of Purchaser, etc. In addition, each lease/sublease shall contain customary remedies for tenant defaults, including, without limitation, late charges, the right to terminate Purchaser's possession of the leased premises, the right to seek damages, and the right to keep the lease or sublease in effect if so elected by Seller. ASSIGNMENT/SUBLEASES: None of the leases/subleases shall be assigned by Purchaser, nor shall any sublease be entered into, without the prior written consent of Seller, which consent shall not be unreasonably withheld; provided, however, Purchaser shall be able to sublease portions of a subject facility(ies) to an Affiliate(s) of Purchaser without obtaining the prior written consent of Seller. In addition, with respect to any subleased space, the consent of the landlord under the Master Lease will have to be obtained as well. [ *** ] [ *** ] BROKERS: Each party shall be responsible for the payment of any fees or commissions payable to any broker retained by such party in connection with this transaction, and any extension of the term of any lease. OTHER TERMS: Each lease/sublease shall contain a requirement that Purchaser maintain adequate insurance and other customary terms and conditions consistent with the leasing of commercial property. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 6 <PAGE> 87 EXHIBIT G PRINCIPAL TERMS OF THE RETAINED BUSINESS SUPPORT AGREEMENT TERM: Purchaser shall provide Seller with prescribed Services (as defined below) and access to equipment and facilities (as described below) for a period of between six (6) and twelve (12) months (depending on the nature of the Service, equipment and/or facilities, which time frame for any given type of Service, equipment and/or facility shall be specified in greater detail in the definitive Retained Business Support Agreement or attached statements of work), or for that longer period of time as is mutually agreed to by the parties or that shorter period of time as is directed by Seller for any particular Service, equipment or facility (the "Term"). The provision of Services and the access to equipment and facilities shall be on mutually agreed upon terms and conditions, taking into account the availability of the subject equipment and facilities, as well as the work load of potentially affected personnel. The parties shall cooperate in good faith to define reasonable parameters for the provision of Services and the access to any subject equipment and facilities. Seller acknowledges and agrees that, in the event of any conflict between the needs of Purchaser and the needs of Seller with respect to the utilization of affected personnel, equipment or facilities, the needs of Purchaser shall have priority. SERVICES: The type and scope of such Services which Purchaser shall make available to Seller shall consist of those services which are currently provided in the Business (except to the extent providing such Services compromises or could reasonably be expected to compromise Purchaser's confidential information, as reasonably determined by Purchaser) and which support other current business activities of Seller (such as the Condor business and other government and high security business and applications, the ASICs business, the Globalstar business and other satellite based business and applications such as global positioning, the OmniTracs business and other tracking or monitoring type businesses and applications, HDR, Eudora, net broadcast applications, and the wireless network test and deployment tools and software businesses), including the following services and technical support (collectively, the "Services"): Manufacturing: Purchaser may provide services relating to the manufacture and assembly of subscriber equipment. 1 <PAGE> 88 Engineering Services: Purchaser may provide engineering and technical services, including test. Assistance with Litigation Matters: Purchaser may provide Seller with reasonable access to personnel and records with respect to any pending or threatened litigation matters to the extent such personnel and/or records are knowledgeable about/relevant to such matters. EQUIPMENT/ FACILITIES: The type and scope of access to equipment and facilities which Purchaser shall make available to Seller shall consist of the use of that equipment and those facilities that are used in the Business and which support other current business activities of Seller, including equipment and facilities used for test and development purposes (except to the extent providing access to such equipment or facilities compromises or could reasonably be expected to compromise Purchaser's confidential information, as reasonably determined by Purchaser). DESIGNATION: As soon as reasonably practical and in any event prior to the Closing Date, Seller shall designate to Purchaser the specific type and scope of the Services requested by Seller, as well as identified the equipment and facilities as to which Seller desires access; provided, however, Seller acknowledges and agrees that the ability of Purchaser to provide any requested Service and access as of the Closing Date and thereafter, and the initial quality of such Service, may be negatively impacted to the extent Seller makes its designations at a time(s) closer to the Closing Date than at an earlier time(s). PERFORMANCE OF SERVICES/ACCESS: Purchaser shall provide the Services and permit such access to equipment and facilities on an ongoing basis during the Term in accordance with mutually agreed upon reasonable parameters, taking into account availability of the subject equipment and facilities, as well as the work load of potentially affected personnel. QCP EMPLOYEES: It is acknowledged that Services to be provided under the Retained Business Support Agreement may be performed by employees transferred to QCP and who otherwise are to exclusively provide their services to Purchaser in support of the Business. The use of any such employees shall 2 <PAGE> 89 be subject to mutually agreed upon statements of work or other mutually agreed upon work orders. CHARGE FOR SERVICES/ACCESS: [***] OTHER TERMS: The Retained Business Support Agreement shall contain other customary terms and conditions *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 3 <PAGE> 90 EXHIBIT H PRINCIPAL TERMS OF THE TRADEMARK LICENSE AGREEMENT FORM OF AGREEMENT: Seller and Purchaser shall enter into a Trademark License Agreement (the "Agreement") which shall contain normal and customary terms and conditions which shall be mutually agreed to and not otherwise inconsistent with this term sheet. LICENSE TERMS: Seller shall grant a nonexclusive, nontransferable, world-wide, royalty free license to Purchaser to use the name "QUALCOMM" and certain other trademarks of Seller to be mutually agreed to by the parties on all product lines manufactured in commercial quantities by the Business as of the Closing Date (including on (i) all finished goods inventory purchased by Purchaser from Seller which finished goods inventory bore the name "QUALCOMM" on the Closing Date, (ii) 5GP model units and PdQ units, and (iii) on parts and accessories for any such Business products so long as Purchaser continues to manufacture, support and/or sell the products to which such parts and accessories relate). Such license to use may include the use of such trademarks on co-branded items, to the extent the parties mutually agree. If and to the extent the parties mutually agree, Seller may grant a nonexclusive, nontransferable, world-wide, license to Purchaser to use the name "QUALCOMM" and certain other trademarks of Seller (to be mutually agreed to by the parties) on other product lines manufactured in commercial quantities by Purchaser. AFFIRMATIVE COVENANTS: The Agreement shall contain customary covenants, including the duty of Purchaser to (i) maintain certain quality standards set by Seller for all products bearing the "QUALCOMM" name or any trademark licensed under the Agreement, and (ii) notify Seller with respect to any infringements of the trademarks. In addition, the parties shall cooperate in obtaining any required registrations or making any filings in any country to protect the trademarks from unlawful use. 1 <PAGE> 91 TERM OF AGREEMENT: Except to the extent necessary to permit Purchaser to perform warranty obligations and support the Business products, parts and accessories (for example, by providing replacement parts bearing any subject trademark), the license granted under the Agreement shall terminate [***] after the Closing Date, unless mutually extended. In addition, the Agreement shall terminate in the event Purchaser fails to maintain the quality standards set by Seller with respect to the products, parts and/or accessories manufactured or sold by Purchaser that bear the name "QUALCOMM" (and the certain other trademarks of Seller to be mutually agreed to). GOVERNING LAW; VENUE: California; San Diego, California *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2 <PAGE> 92 EXHIBIT I PRINCIPAL TERMS OF THE TRANSITION SERVICES AGREEMENT TERM: Seller shall provide Purchaser with the Services (as defined below) for a period of between six (6) and twelve (12) months (depending on the nature of the Service, which time frame for any given Service shall be specified in greater detail in the subject agreement or attached statement of work), or for that longer period of time as is mutually agreed to by the parties or that shorter period of time as is directed by Purchaser for any particular Service (the "Term"). These Services are in addition to those services being provided to Purchaser by QCP, as more fully described in the Principal Terms of Employee Matters Agreement term sheet. SERVICES: The type and scope of such Services which Seller shall make available to Purchaser shall consist of those services which Seller currently provides in support of the Business (except to the extent providing such Services compromises or could reasonably be expected to compromise Seller's confidential information, as reasonably determined by Seller), including the following services and technical support (collectively, the "Services"): MIS Services: Seller may provide management information services to Purchaser related to the Business, including coordination of procurement of hardware and software and software development and sales and manufacturing. Accounting Services: Seller may provide bookkeeping, accounting services, internal audit and financial analytical support services, each as related to the Business. Human Resources and Payroll Services: Seller may provide services related to human resources as well as administration of employee payroll matters and maintenance of general employee insurance and benefit obligations and advice on employee relations and similar issues, each as related to the Business. Facilities Services: Seller may provide services related to facilities to be leased by Purchaser from Seller such as security, mail services, etc. 1 <PAGE> 93 Engineering Services: Seller may provide engineering and technical services, including but not limited to providing access to the test bed facility. As soon as reasonably practical and in any event prior to the Closing Date, Purchaser shall designate to Seller the specific type and scope of the Services requested by Purchaser; provided, however, Purchaser acknowledges and agrees that the ability of Seller to provide any requested Service as of the Closing Date and thereafter, and the initial quality of such Service, may be negatively impacted to the extent Purchaser makes its designations at a time(s) closer to the Closing Date than at an earlier time(s). PERFORMANCE OF SERVICES: Seller shall provide the Services on an ongoing basis during the Term. CHARGE FOR SERVICES: [***] OTHER TERMS: The Transition Services Agreement shall contain other customary terms and conditions. *** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2 <PAGE> 94 EXHIBIT J FORM OF OPINION OF PURCHASER'S AND PARENT CORPORATION'S COUNSEL Please note that, as a firm, we are not able to opine on the enforceability of noncompete, nonsolicit or licensing provisions. In addition, the opinion shall contain customary assumptions and exceptions. The following opinions are subject to approval by our opinion committee. 1. Each of the Purchaser and the Parent Corporation is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation 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 its business as it has been and is currently conducted. Each of the Purchaser and the Parent Corporation has all necessary corporate power and authority to execute and deliver the Asset Purchase Agreement and the Related Agreements to which it is a party, to perform its obligations thereunder and to consummate the transactions contemplated thereby. The execution and delivery by each of the Purchaser and the Parent Corporation of the Asset Purchase Agreement and the Related Agreements to which it is a party, the performance by it of its obligations thereunder and the consummation by it of the transactions contemplated thereby have been duly authorized by all requisite corporate action on its part. The Asset Purchase Agreement and the Related Agreements to which each of the Purchaser and the Parent Corporation is a party have been duly executed and delivered by it, and (assuming due authorization, execution and delivery by the Seller) the Asset Purchase Agreement and the Related Agreements to which each of the Purchaser and the Parent Corporation is a party constitute its legal, valid and binding obligations, enforceable against it in accordance with their respective terms, except as rights to indemnity under Article VIII of the Asset Purchase Agreement and rights to indemnity and contribution under any of the Related Agreements may be limited by applicable laws and except as enforceability may be limited by applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, arrangement, moratorium or similar law affecting creditors' rights and subject to general equity principles and to limitations on availability of equitable relief, including specific performance. 2. Assuming that all approvals required under the HSR Act have been made or obtained, the execution, delivery and performance by each of the Purchaser and the Parent Corporation of the Asset Purchase Agreement and the Related Agreements to which it is a party do not and will not, to the best of our knowledge, conflict with or violate (or cause an event which could have a Material Adverse Effect as a result of) any law or governmental order of the State of California or the United States of America applicable to the Purchaser or the Parent Corporation or any of their respective assets, properties or businesses (except that we express no opinion as to any law or governmental order related to any telecommunications regulatory matter). 3. The execution, delivery and performance by each of the Purchaser and the Parent Corporation of the Asset Purchase Agreement and the Related Agreements to which it is a party, do not and will not require any consent, approval, authorization or other order of, action by, filing with or notification to, any Governmental Authority of the State of California or the United 1. <PAGE> 95 States of America, except the notification requirements of the HSR Act (except that we express no opinion as to any law or governmental order related to any telecommunications regulatory matter). 4. The execution, delivery and performance of the Asset Purchase Agreement and the Related Agreements to which each of the Purchaser and the Parent Corporation is a party do not and will not violate any provision of its Certificate of Incorporation or Articles of Incorporation or bylaws. 5. To the best of our knowledge, as of the date of the Asset Purchase Agreement, there was no Action pending or threatened in writing, which seeks to delay or prevent the consummation of, or which would be reasonably likely to materially adversely affect the Purchaser's or the Parent Corporation's ability to consummate the transactions contemplated by the Asset Purchase Agreement or any Related Agreement, pending before any Governmental Authority of the State of California or the United States of America. 2. <PAGE> 96 EXHIBIT K FORM OF OPINION OF SELLER'S COUNSEL Please note that, as a firm, we are not able to opine on the enforceability of noncompete, nonsolicit or licensing provisions. In addition, the opinion shall contain customary assumptions and exceptions. The following opinions are subject to approval by our opinion committee. 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware 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. The Company has all necessary corporate power and authority to execute and deliver the Asset Purchase Agreement and the Related Agreements to which it is a party, to perform its obligations thereunder and to consummate the transactions contemplated thereby. The execution and delivery by the Company of the Asset Purchase Agreement and the Related Agreements to which it is a party, the performance by the Company of its obligations thereunder and the consummation by the Company of the transactions contemplated thereby have been duly authorized by all requisite corporate action on the part of the Company. The Asset Purchase Agreement and the Related Agreements to which it is a party have been duly executed and delivered by the Company, and (assuming due authorization, execution and delivery by the Purchaser and the Parent Corporation) the Asset Purchase Agreement and the Related Agreements to which the Company is a party constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as rights to indemnity under Article VIII of the Asset Purchase Agreement and rights to indemnity and contribution under any of the Related Agreements may be limited by applicable laws and except as enforceability may be limited by applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, arrangement, moratorium or similar law affecting creditors' rights and subject to general equity principles and to limitations on availability of equitable relief, including specific performance. 2. Assuming that all approvals required under the HSR Act, and that all consents, approvals, authorizations, other actions, filings and notifications listed in Sections 3.2, 3.3 and 3.15 of the Disclosure Schedule, have been made or obtained, the execution, delivery and performance by the Company of the Asset Purchase Agreement and the Related Agreements to which the Company is a party do not and will not, to the best of our knowledge, conflict with or violate (or cause an event which could have a Material Adverse Effect as a result of) any law or governmental order of the State of California or the United States of America applicable to the Company or any of its assets, properties or businesses, including, without limitation, the Assets and the Business (except that we express no opinion as to any law or governmental order related to any telecommunications regulatory matter). 3. The execution, delivery and performance by the Company of the Asset Purchase Agreement and the Related Agreements to which the Company is a party, do not and will not require any consent, approval, authorization or other order of, action by, filing with or notification to, any Governmental Authority of the State of California or the United States of America, except (i) as described in Sections 3.2, 3.3 and 3.15 of the Disclosure Schedule and (ii) 1. <PAGE> 97 the notification requirements of the HSR Act (except that we express no opinion as to any law or governmental order related to any telecommunications regulatory matter). 4. The execution, delivery and performance of the Asset Purchase Agreement and the Related Agreements to which the Company is a party do not and will not violate any provision of the certificate of incorporation or bylaws of the Company. 5. Except as disclosed in Section 3.12 of the Disclosure Schedule, to the best of our knowledge, as of the date of the Asset Purchase Agreement, there were no Actions by or against the Company relating to the Business, or affecting or that could reasonably be expected to materially and adversely affect any of the Assets or the Business, pending before any Governmental Authority of the State of California or the United States of America (or, to the best of our knowledge, threatened in writing to be brought by or before any Governmental Authority of the State of California or the United States of America). To the best of our knowledge, none of the matters disclosed in Section 3.12 of the Disclosure Schedule could reasonably be expected to materially and adversely affect the legality, validity or enforceability of any of the material terms of the Asset Purchase Agreement and the Related Agreements or the consummation of the transactions contemplated thereby. 2. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.21 <SEQUENCE>3 <DESCRIPTION>EXECUTIVE RETIREDMENT MATCHING CONTRIBUTION PLAN <TEXT> <PAGE> 1 EXHIBIT 10.21 QUALCOMM INCORPORATED EXECUTIVE RETIREMENT MATCHING CONTRIBUTION PLAN (AS AMENDED AND RESTATED) EFFECTIVE DATE: DECEMBER 1, 1995 AMENDED AND RESTATED EFFECTIVE: AUGUST 26, 1996 AMENDED AND RESTATED EFFECTIVE: DECEMBER 18, 1997 AMENDED AND RESTATED EFFECTIVE: JANUARY 19, 1998 AMENDED AND RESTATED EFFECTIVE: APRIL 24, 1998 AMENDED AND RESTATED EFFECTIVE: AUGUST 1, 1998 AMENDED AND RESTATED EFFECTIVE: FEBRUARY 20, 1999 AMENDED AND RESTATED EFFECTIVE: JANUARY 1, 2000 <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> <C> ARTICLE 1 INTRODUCTION...............................................................1 ARTICLE 2 DEFINITIONS................................................................2 ARTICLE 3 CONTRIBUTIONS..............................................................5 ARTICLE 4 WITHDRAWALS DURING EMPLOYMENT..............................................7 ARTICLE 5 EARNINGS ON PARTICIPANTS' ACCOUNTS AND PLAN INVESTMENTS....................7 ARTICLE 6 BENEFICIARY................................................................8 ARTICLE 7 VESTING....................................................................9 ARTICLE 8 DISTRIBUTION OF BENEFITS..................................................11 ARTICLE 9 ADMINISTRATION............................................................12 ARTICLE 10 MISCELLANEOUS.............................................................13 </TABLE> i. <PAGE> 3 ARTICLE 1 INTRODUCTION WHEREAS, QUALCOMM INCORPORATED (the "Company") has established a supplementary employee retirement plan as set forth herein (the "Plan") to provide deferred compensation for a select group of management or highly compensated employees of the Employer, originally effective December 1, 1995; and WHEREAS, the Company amended and restated the Plan on August 26, 1996, to refine the definition of "Base Salary;" on December 18, 1997, to limit the instances in which termination of employment following a Change of Control will fully vest the benefits provided to participants in the Plan, on January 19, 1998, to provide for the discretionary allocation of contributions by the Board, to the accounts of Participants, on April 24, 1998, to adjust the formula for Matching Contributions in order to improve the benefits provided to Participants in the Plan and to add additional vesting schedules to allow certain participants to accelerate the vesting in their participant Accounts, on August 1, 1998, to allow the transfer of funds under limited circumstances to or from certain other nonqualified, unfunded, deferred compensation plans and to determine when a termination of employment has occurred, and effective February 20, 1999 to permit employment with the Company's Affiliate, Wireless Knowledge, Inc. to be considered for purposes of certain types of vesting under the Plan; and WHEREAS, the Company has the legal authority to establish the Plan pursuant to the laws of the State of Delaware and to amend the Plan pursuant to Section 10.1 of the Plan; and WHEREAS, the Company intends to provide under the Plan that the Company shall pay to Participants and their beneficiaries the entire cost of benefits under the Plan from its general assets and set aside contributions by the Company to meet its obligations under the Plan; and WHEREAS, the Company intends that the assets of the Plan and its accompanying trust shall at all times be subject to the claims of the general creditors of the Company in the event of the financial insolvency of the Company; and WHEREAS, the Company intends that any rights of Participants in the Plan and their beneficiaries be unsecured and unfunded for purposes of tax law and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and WHEREAS, the Company wishes to amend the Plan to add an additional alternate vesting schedule; NOW, THEREFORE, the Company does hereby amend and restate the Plan as follows, effective as of January 1, 2000, and does also hereby agree that the assets of the Plan shall be identified, held, invested, and disposed of as follows: 1. <PAGE> 4 ARTICLE 2 DEFINITIONS "AFFILIATE" includes any entity which controls, is controlled by, or is under common control with the Company. "BENEFICIARY" means the beneficiary or beneficiaries designated by the Participant who are to receive any distributions from the Plan payable upon the death of the Participant. "BASE SALARY" means wages as defined in Section 3401(a) of the Code, any annual cash incentive bonus which is normally paid by the Employer to a Participant in December, and all other payments of compensation to a Participant by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Participant a written statement under Section 6041(d) or Section 6051(a)(3) of the Code, excluding the following items: any bonus other than an annual cash incentive bonus which is normally paid by the Employer to a Participant in the month of December, commissions, the value of a qualified, incentive, or non-qualified stock option granted to the Participant by the Company to the extent such value is includable in the Participant's taxable income, reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation and welfare benefits, and in-service withdrawals of amounts from the Plan or the Executive Retirement Plan, but including amounts that are not includable in the gross income of the Participant under a salary reduction agreement by reason of the application of Sections 125, 402(a)(8), 402(h), or 403(b) of the Code or by reason of an election of the Participant to defer amounts of base salary under the Executive Retirement Plan. Base Salary must be determined without regard to any rules under Section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). "BOARD" means the Company's Board of Directors. "CAUSE" means any of the following: (i) an intentional act which materially injures the Company (or any surviving entity following a Change of Control); (ii) an intentional refusal or failure to follow lawful and reasonable directions of the Board (or comparable body of the surviving entity following a Change of Control) or an individual to whom the Participant reports (as appropriate); (iii) a willful and habitual neglect of duties; or (iv) a conviction of a felony involving moral turpitude which is reasonably likely to inflict or has inflicted material injury on the Company (or any surviving entity following a Change of Control). "CHANGE OF CONTROL" means: (i) a merger or consolidation in which the Company is not the surviving corporation, (ii) a reverse merger in which the Company is the surviving corporation, but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, (iii) a transaction in which beneficial ownership of at least thirty percent (30%) of the shares of the Company's common stock is no longer held by those shareholders (or their affiliates) holding such beneficial ownership immediately prior to such transaction, (iv) the sale of all or substantially all of the Company's assets, or (v) the acquisition 2. <PAGE> 5 by any person or group of related persons of beneficial ownership of at least thirty percent (30%) of the Company's outstanding voting securities. "COMPENSATION COMMITTEE" means the Compensation Committee of the Company's Board of Directors. "EARLY RETIREMENT AGE" means the time that a Participant attains age 62-1/2 while employed by the Employer and completes ten (10) Years of Service for Vesting (as defined in the Executive Retirement Plan). "EFFECTIVE DATE" means December 1, 1995. "ELIGIBLE EMPLOYEE" means an employee of the Employer who is a member of a select group of management or highly compensated employees and who has been chosen by the Plan Administrator, in the Plan Administrator's sole discretion, to be eligible to participate in the Plan. For purposes of the Plan, the phrase "select group of management or highly compensated employees" in a given Plan Year shall include those individuals selected by the Plan Administrator from that group of individuals who hold the position of Office of the Chair, Corporate Senior Vice President, Division President, Corporate Vice President, Division Senior Vice President, Division Vice President, or a position of equivalent seniority and responsibility with the Employer. "EMPLOYER" means QUALCOMM Incorporated, a Delaware corporation, QUALCOMM Investments, QUALCOMM International, any succeeding or continuing corporation of any of the foregoing, and any other parent or subsidiary corporation of the Company which the Compensation Committee permits to adopt the Plan. "ENROLLMENT AGREEMENT" means the agreement or agreements entered into by a Participant under the Executive Retirement Plan which specifies the Participant's Beneficiary and the Participant's election of form of payment on termination of employment and certain withdrawals during employment. "EXECUTIVE RETIREMENT PLAN" means the QUALCOMM Incorporated Executive Retirement Contribution Plan, adopted effective as of December 1, 1995, as amended from time to time. "FAIR MARKET VALUE" means, with respect to a single day on which the Company's common stock is actively traded on the public market, the closing sales price for the Company's common stock for such day as reported on an established securities exchange or automated quotation system (including NASDAQ) on which the Company's common stock is traded, or if the stock is actively traded on more than one such exchange or system, the one with the highest trading volume for the Company's common stock on such day. "GOOD REASON" means (i) reduction of Participant's rate of compensation as in effect immediately prior to the occurrence of a Change of Control, (ii) failure to provide a package of welfare benefit plans which, taken as a whole, provide substantially similar benefits to those in 3. <PAGE> 6 which the Participant is entitled to participate immediately prior to the occurrence of a Change of Control (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect Participant's participation or reduce Participant's benefits under any of such plans, (iii) change in Participant's responsibilities, authority, title or office resulting in diminution of position, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by the Employer promptly after notice thereof is given by Participant, (iv) request that Participant relocate to a worksite that is more than 50 miles from his or her prior worksite, unless Participant accepts such relocation opportunity, (v) material reduction in Participant's duties, (vi) failure or refusal of a successor to the Employer to assume the Employer's obligations under the Plan, or (vii) material breach by the Employer or any successor to the Employer of any of the material provisions of the Plan. "NORMAL RETIREMENT AGE" means the time that a Participant attains age 65 while employed by the Employer. "PARTICIPANT" means any Eligible Employee selected by the Plan Administrator and any individual whose benefits under the Plan have not been distributed in their entirety. "PARTICIPANT'S ACCOUNT" means the individual account maintained for a Participant by the Plan Administrator in accordance with the terms of the Plan and the Trust Agreement. "PLAN ADMINISTRATOR" means the committee of one or more individuals selected by the Compensation Committee to control and manage the operation and administration of the Plan. "PLAN YEAR" means the 12 consecutive month period beginning on January 1 and ending on the following December 31. Notwithstanding the foregoing, the Plan's initial Plan Year shall commence on December 1, 1995 and end on December 31, 1995. "TOP HAT PLAN" means a non-qualified deferred compensation plan for a select group of management or highly compensated employees within the meaning of section 401(a)(1) of ERISA. "TRUST" means the legal entity created by the Trust Agreement. "TRUST AGREEMENT" means that trust agreement entered into between the Company and the Trustee to hold the assets of the Plan. "TRUSTEE" means the original Trustee named in the Trust Agreement and any duly appointed and acting successor Trustee(s) which shall be appointed by the Employer and may consist of one or more persons. 4. <PAGE> 7 ARTICLE 3 CONTRIBUTIONS 3.1 All non-discretionary contributions ("Match Contributions") to the Plan with respect to a given Participant shall be made by the Company in the amount determined under the following formula. The Company will make a Match Contribution to the Plan with respect to a Participant for a Plan Year in an amount equal to fifty percent (50%) of the amount which such Participant has authorized to be withheld from his or her compensation (as defined in the Executive Retirement Plan) which would have otherwise been paid during such Plan Year and which is contributed to the Executive Retirement Plan on his or her behalf. For Plan Years prior to Plan Year 1998, the Match Contribution to the Plan with respect to a Participant for a given Plan Year shall not exceed 7.5% (or 50% of 15%) of such Participant's Base Salary for the fiscal year of the QUALCOMM Inc. Employee Savings and Profit Sharing Plan (the "401(k) Plan") which ends with or within the Plan Year, reduced by the lesser of 50% of the limit established under section 402(g) of the Code for the calendar year which ends with or within such Plan Year (i.e., 50% of $9,240 for calendar year 1995) or 50% of the maximum amount which the Plan permits a Participant to contribute to the 401(k) Plan for the fiscal year of the 401(k) Plan which ends with or within such Plan Year (the "401(k) Annual Matching Contribution Limit"). For Plan Year 1998, the Match Contribution to the Plan with respect to a Participant shall not exceed the sum of 7.5% (or 50% of 15%) of the wages portion of such Participant's Base Salary (excluding all items of compensation listed as being excluded from the definition of Base Salary and also excluding the annual cash incentive bonus that is normally paid by the Employer to the Participant in the month of December) and 10% (or 50% of 20%) of the portion of such Participant's Base Salary that is attributable to the annual cash incentive bonus that is normally paid by the Employer to the Participant in the month of December for the fiscal year of the 401(k) Plan which ends with or within the Plan Year, reduced by the lesser of 50% of the limit established under section 402(g) of the Code for the calendar year which ends with or within such Plan Year (i.e., 50% of $10,000 for calendar year 1998) or 50% of the 401(k) Annual Matching Contribution Limit. For Plan Years commencing after Plan Year 1998, the Match Contribution to the Plan with respect to a Participant for a given Plan Year shall not exceed 10% (or 50% of 20%) of such Participant's Base Salary for the fiscal year of the 401(k) Plan which ends with or within the Plan Year, reduced by the lesser of 50% of the limit established under section 402(g) of the Code for the calendar year which ends with or within such Plan Year or 50% of the 401(k) Annual Matching Contribution Limit. The Company's Match Contribution to the Plan for a given Participant for a specified quarterly contribution period as described in Section 3.4 shall be equal to fifty percent (50%) of the amount which the Participant has authorized to be withheld from his or her compensation (as defined in the Executive Retirement Plan) for contribution to the Executive Retirement Plan 5. <PAGE> 8 which would have otherwise been paid during such quarterly contribution period, subject to a maximum of 2.5% (1.875% for Plan Years prior to Plan Year 1998) of such Participant's Base Salary for the fiscal year of the 401(k) Plan ending with or within the Plan Year with respect to which such quarterly contribution is made, and further reduced by 25% of the 401(k) Annual Matching Contribution Limit for the fiscal year of the 401(k) Plan ending with or within the Plan Year in which such quarterly contribution period falls. Notwithstanding the foregoing, the Company's Match Contribution to the Plan for a given Participant for the final quarterly contribution period for a given Plan Year shall be equal to the annual Match Contribution for such Participant for that Plan Year calculated by applying the rules set forth in the preceding paragraph, reduced by the sum of the Match Contributions made by the Company for the first three quarterly contribution periods of that Plan Year. Furthermore, notwithstanding any other provision of the Plan to the contrary, the Company's Match Contribution for a given Participant for a specified quarterly contribution period shall be rounded up to the next whole number of shares of the Company's common stock. No Participant shall be permitted to make or authorize any contributions to the Plan, whether by means of authorized withholding and deferral of compensation or otherwise. No entity which is a part of the Employer other than the Company shall have any obligations to make any contributions to the Plan, pay any benefits to any Participant created by the Plan, or have any other financial obligation or liability as a result of the establishment, operation or termination of the Plan. 3.2 From time to time the Company may, as recommended by the Compensation Committee to the Board, and approved by the Board in its complete discretion, make a discretionary contribution of less than twenty-five thousand (25,000) shares to a Participant's Account, for one or more Participants, to recruit or retain Participants as employees of the Company. 3.3 All contributions to the Plan shall be made solely in the form of whole shares of the Company's common stock. For purposes of converting the Company's contribution from a dollar value as determined under Section 3.1 to a number of whole shares of the Company's common stock which shall be contributed for a quarterly contribution period as described in Section 3.4, the Fair Market Value of the Company's common stock shall be the average of the closing sales prices for the Company's common stock for a period of the last ten (10) trading days within such quarterly contribution period. 3.4 Match Contributions shall be made to the Plan by the Company for a given Plan Year on a quarterly basis. The first quarterly Match Contribution shall be made as soon as administratively reasonable after March 31 and shall relate to contributions on compensation received or otherwise receivable by Participants on or after January 1 and on or before the next following March 31. The second quarterly Match Contribution shall be made as soon as administratively reasonable after June 30 and shall relate to contributions on compensation received or otherwise receivable by Participants after March 31 and on or before the following June 30. The third quarterly Match Contribution shall be made as soon as administratively reasonable after September 30 and shall relate to contributions on compensation received or otherwise receivable by Participants after June 30 and on or before the following September 30. 6. <PAGE> 9 The fourth quarterly Match Contribution shall be made as soon as administratively reasonable after December 31 and shall relate to contributions on compensation received or otherwise receivable by Participants after September 30 and on or before the last day of such Plan Year. However, the Match Contribution for the Plan's initial Plan Year shall be made as soon as administratively reasonable after December 31, 1995 and shall relate to contributions on compensation received or otherwise receivable by Participants during the month of December 1995. Discretionary contributions made pursuant to Section 3.2 may be made at any time. 3.5 All contributions to the Plan made by the Company shall be held as an asset of the Company, and the Company shall deposit such contributions (less any applicable tax withholding required by law) into the Trust. 3.6 The Company, through the Plan Administrator, has the power to establish rules and from time to time to modify or change such rules governing the manner and method by which contributions are made, but only the Compensation Committee may change the contribution formula set forth in Section 3.1 of the Plan. 3.7 All deposits to the Trust made under the Plan on behalf of a Participant shall be reflected by a credit in the same amount to such Participant's Account. A Participant's Account is a bookkeeping record of all amounts deposited in the Trust on behalf of such Participant, and any earnings allocated to such Account as provided in the Plan, for purposes of determining the Participant's interest in the Trust, and shall be accounted for and reported in terms of whole shares of the Company's common stock. 3.8 Notwithstanding any other provision of the Plan to the contrary, the maximum number of shares which may be contributed to the Plan shall be eight hundred thousand (800,000) shares of the Company's common stock (after giving effect to the 2:1 split in the Company's common stock effective May 10, 1999, and the 4:1 split in the Company's common stock effective December 30, 1999). ARTICLE 4 WITHDRAWALS DURING EMPLOYMENT 4.1 A Participant may request a withdrawal of some or all of his or her benefits from the Plan while remaining employed by the Employer, but whether or not such a request is approved shall be in the sole discretion of the Plan Administrator. ARTICLE 5 EARNINGS ON PARTICIPANTS' ACCOUNTS AND PLAN INVESTMENTS 5.1 All contributions will be made in shares of the Company's common stock. In the event that the Trust for any reason holds cash or other property sufficient to purchase a whole share of the Company's common stock, the Trustee shall arrange to acquire additional shares of the Company's common stock, either by purchasing such shares in the public market or by 7. <PAGE> 10 acquiring such shares directly from the Company. In the event that the Trust for any reason holds cash or other property in an amount insufficient to purchase a whole share of the Company's common stock, such amount shall be held in cash or a cash equivalent determined by the Plan Administrator. 5.2 All contributions and other amounts governed by the terms of the Plan and Trust Agreement, including all investments purchased with such amounts and all income attributable thereto, shall remain (until distributed to a Participant or Beneficiary) the property of the Company as provided under the Plan and Trust Agreement and shall be subject to the claims of the Company's general creditors in the event of the Company's financial insolvency. No Participant or Beneficiary shall have any secured or beneficial interest in any property, rights or investments held by the Company, the Employer or the Trustee in connection with the Plan. 5.3 Each Participant's Account shall be invested in shares of the Company's common stock and shall be accounted for and reported in terms of whole shares of the Company's common stock. 5.4 Earnings shall be calculated and allocated as of the last day of each Plan Year and such other dates as shall be determined by the Plan Administrator in the Plan Administrator's sole discretion. 5.5 Notwithstanding any other provision of the Plan to the contrary, and intending to elaborate on the other provisions of this Article 5, any transaction which might cause the Trust to hold any property other than a single class of the Company's securities (such as cash) as a result of any transaction (such as the payment of a cash dividend), and after the completion of such transaction that other property does not comprise a majority of the Plan's assets (by value) held by the Trust, then such property shall be allocated to Participants' Accounts on a provisional basis, the Trustee shall use such property to acquire additional shares of the same class of the Company's security held by the Trust, and each Participant's Account shall then be rounded to the nearest whole number of shares of such security. Any remaining property other than the Company's securities shall be held unallocated in the Trust. If after completing these actions the number of shares of the Company's securities held by the Trust is less than the sum of the shares allocated to the Participants' Accounts, then the Company shall contribute sufficient additional shares to the Trust to make up the difference. If the sum of the number of shares allocated to the Participants' Accounts is less than the number of shares of the Company's securities held by the Trust, then all Participants whose Account balances were rounded down shall be ranked in order based on the size of the fractional share allocated to their Accounts prior to such rounding, and the Accounts of such Participants shall be increased to the next higher whole share in their order of ranking, one by one, until the number of shares allocated to the Participants' Accounts equals the number of shares of the Company's securities held by the Trust. ARTICLE 6 BENEFICIARY 6.1 The Participant's Enrollment Agreement shall designate the Beneficiary who is to receive a distribution of the value of a Participant's Account in the event of such Participant's 8. <PAGE> 11 death. If the Participant has not properly designated a Beneficiary, or if for any reason such designation shall not be legally effective, or if said designated Beneficiary shall predecease the Participant, then the Participant's Beneficiary shall be determined by the terms of the Executive Retirement Plan. The other terms and conditions of a Participant's selection of a Beneficiary shall also be determined by the Executive Retirement Plan. ARTICLE 7 VESTING 7.1 The value of a Participant's Account at the time of vesting (i.e., to the extent not forfeited earlier) shall vest in accordance with whichever one of the following schedules results in the largest vested balance in such Participant's Account: (a) One hundred percent (100%) shall be vested upon the occurrence of such Participant's death, termination of employment on account of total and permanent disability, or attainment of Normal Retirement Age while employed by the Employer. "Total and permanent disability" means a medically determinable physical or mental impairment which renders the Participant unable to engage in any substantial gainful activity and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. (b) One hundred percent (100%) of all contributions (discretionary and non-discretionary) made on the Participant's behalf for a Plan Year shall be vested on the first day of the eleventh Plan Year that follows such Plan Year, provided that the Participant has not terminated employment with all Employers by that date. (c) For a Participant who has attained at least age 61 and has completed three (3) Years of Service for Vesting (as defined in the Executive Retirement Plan), then the value of such Participant's Account shall be vested on the day on which the foregoing conditions are satisfied, provided that the Participant has not terminated employment with all Employers by that date (the "Age 61 & 3 Vesting Date"), in an amount determined by multiplying the value of such Participant's Account, on such date, by the product of 20% multiplied by the number of whole years (with fractional years rounded down) by which such Participant's age exceeds 60. On each anniversary of the Age 61 & 3 Vesting Date thereafter, the vested value of such Participant's Account shall be recalculated again by using the formula for calculating the vested value of such Participant's Account on the Age 61 & 3 Vesting Date, provided that the Participant has not terminated employment with all Employers by that date. (d) In determining the vesting of persons who were Participants in the Plan on or prior to April 24, 1998, the following vesting schedule shall also be considered. Upon satisfaction of the age and service requirements for Early Retirement Age while employed by the Employer, then such a Participant's Account shall become vested in that percentage determined according to the following formula: one hundred percent (100%) reduced by ten percent (10%) for each full six-month period during which the Participant must remain employed with the Employer in order to reach his or her Normal Retirement Age while employed by the Employer. Upon completing each additional six-month period of employment with the Employer after 9. <PAGE> 12 having attained Early Retirement Age while employed by the Employer, such a Participant's Account shall be vested in an additional ten percent (10%). (e) Partially or fully vested in the complete discretion of the Compensation Committee. (f) One hundred percent (100%) vested in the event of a Change of Control, if at any time within twenty-four (24) months of the Change of Control, the Participant's employment with the Employer is involuntarily terminated by the Employer without Cause, or if such employment is voluntarily terminated by the Participant with Good Reason (which Good Reason must occur at or after the time of the Change of Control). (g) Effective January 1, 2000, for determining the vesting of contributions (whenever made) to the account of a person who is a Participant on or after that date the following schedule shall also be considered: twenty-five percent (25%) of the contributions relating to a given Plan Year (including any earnings thereon) shall vest at the end of each Plan Year thereafter; provided, however, that (i) the Participant is an employee of the Employer for the entire duration of such subsequent Plan Year, and (ii) the Participant is deferring compensation into the Executive Retirement Plan during that subsequent Plan Year. If the Participant takes an unpaid leave of absence that either is approved by the Employer or is legally required to be made available to the Participant, and from which it is anticipated that the Participant will return to service as an employee of the Employer, then the duration of that leave of absence will not be considered for purposes of determining whether the Participant has been employed for the entire duration of a Plan Year (e.g., vacation, sabbatical, paid time off for illness or injury of the Participant or to care for a member of the Participant's family or circle of friends due to that person's illness or injury are instances in which the Participant would be anticipated to return to active service as an employee of the Employer). If the Participant is not an employee of the Employer for the entire duration of a subsequent Plan Year or is not deferring compensation into the Executive Retirement Plan during such subsequent Plan Year, then all further vesting under this provision shall be suspended for that Participant. Suspended vesting installments relating to contributions made to a Participant's Account for a particular Plan Year shall vest as follows: (i) the suspended vesting installment that would have been first to vest if the above conditions had been met shall vest at the end of the next Plan Year following such suspension in which (A) the Participant is an employee of the Employer for the entire duration of such Plan Year, and (B) the Participant is deferring compensation into the Executive Retirement Plan during such Plan Year; and (ii) only one suspended vesting installment of the suspended vesting installments relating to contributions made for a particular Plan Year shall vest in that later Plan Year. The other suspended vesting installments relating to contributions made to a Participant's Account for a particular Plan Year shall vest one at a time in later Plan Years in which the conditions set forth in the preceding sentence are met. 7.2 For purposes of Sections 7.1(b), (c) and (d) (including the calculation of Years of Service for Vesting), a Participant's service and employment with Leap Wireless International, Inc. ("Leap") shall be treated as service and employment with the Employer if such Participant commenced employment with Leap on or before October 1, 1998 and such employment was immediately subsequent to employment with the Employer. 10. <PAGE> 13 7.3 For purposes of Sections 7.1(b), (c) and (d) (including the calculation of Years of Service for Vesting), a Participant's service and employment with Wireless Knowledge, Inc. ("WK") shall be treated as service and employment with the Employer if such Participant (i) received a discretionary contribution pursuant to Section 3.2, (ii) commenced employment with WK on or before April 1, 1999 and (iii) such employment was concurrent with, or immediately subsequent to, employment with the Employer or an Affiliate. 7.4 Notwithstanding the vesting of some or all of the amounts credited to Participants' Accounts under the Plan, all amounts credited to all Participants' Accounts shall remain available to satisfy the claims of the Company's creditors in the event of the Company's financial insolvency as defined in the Trust Agreement. Amounts credited to a Participant's Account which are not vested at the time that the Participant terminates employment with the Employer shall be forfeited and applied to reduce the Company's future contributions or to pay costs associated with the operation and administration of the Plan. A Participant who forfeits any such amounts shall have no rights to the restoration of such amounts in the event that he or she once again becomes employed by the Employer and is eligible to participate in the Plan. ARTICLE 8 DISTRIBUTION OF BENEFITS 8.1 A Participant shall automatically receive a distribution of his or her vested benefits in the Plan as soon as administratively reasonable following the termination of the Participant's employment with the Employer. The amount of such distribution shall be equal to the final balance of such vested benefits credited to such Participant's Account as of the date of such termination, plus any subsequent contributions. The distribution shall be paid only in whole shares of the Company's common stock or stock of Leap Wireless International, Inc., a Delaware corporation and any succeeding or continuing corporation of the foregoing. A distribution of vested benefits will be made to such Participant based upon the payment option elected by the Participant. The forms of payment options and the terms and conditions for making and changing an election regarding a payment option shall be the same as provided for under the Executive Retirement Plan. 8.2 Any benefits paid upon the death of a Participant must be paid to the Beneficiary designated by such Participant in the Enrollment Agreement. Such death benefits shall be paid in the form of payment determined under the Executive Retirement Plan. 8.3 In the event that a Participant or Beneficiary elects to receive his or her distribution in the form of installment payments in accordance with the terms of the Executive Retirement Plan, the Plan Administrator shall require that all installment payments be made solely in whole shares of the Company's common stock and shall direct the Trustee to make such payments in accordance with that requirement. 8.4 The Plan Administrator shall have the authority to withhold from a distribution to a Participant or Beneficiary or from a Participant's Account any amount needed to satisfy the Employer's income or employment withholding tax obligations with respect to such distribution 11. <PAGE> 14 or upon the vesting of a Participant's Account and may also arrange with the Participant to allow the Participant to make payment to the Employer to satisfy such obligations. 8.5 In the event that any distribution from the Plan received or to be received by a Participant (a "Distribution") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Code, and (ii) but for this Section 8.5, cause the Participant to become subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax") or increase such Participant's Excise Tax liability, then such Distribution may be reduced to the largest amount which the Participant, in his or her sole discretion, determines would result in no portion of the Distribution being subject to the Excise Tax. The determination by a Participant of any reduction shall be conclusive and binding upon the Employer, the Company, and the Plan Administrator. The Plan Administrator shall reduce a Distribution only upon written notice by the Participant indicating the amount of such reduction and/or shall accept the return of some or all of a Distribution previously made to a Participant. Any amounts returned to the Plan pursuant to this Section 8.5 shall be treated as a forfeiture and shall be used to reduce the Company's future contributions to the Plan or to pay costs associated with the operation and administration of the Plan. 8.6 For purposes of this Article 8, the following shall be deemed to be employment of the Participant with the Employer: (i) employment by an Affiliate, (ii) the provision of consulting services to the Employer or Affiliate, (iii) employment by Leap Wireless International, Inc. that commences prior to October 1, 1998, and is simultaneous with or immediately after employment with the Employer or an Affiliate, and (iv) if the Participant has received a discretionary contribution pursuant to Section 3.2, then employment by WK that commences prior to April 1, 1999, and is simultaneous with or immediately after employment with the Employer or an Affiliate. ARTICLE 9 ADMINISTRATION 9.1 The Plan Administrator shall be a committee of one or more individuals which has the authority to control and manage the operation and administration of the Plan. The Plan Administrator may also be referred to as the Plan Committee. Administrative concerns of the Plan include, but are not limited to, the enrollment of Eligible Employees as Participants, the maintenance of all records, the direction of the Trustee to distribute benefits to Participants and their Beneficiaries, the interpretation of the Plan, and the establishment of rules and procedures for the operation of the Plan Committee. The initial number of members of the Plan Committee shall be three (3), until such number is changed by the approval of the majority of the Plan Committee. A member of the Plan Committee must be an employee of the Employer or member of the Board and shall continue to serve until such member (i) resigns, (ii) is removed or (iii) terminates employment with the Employer and no longer serves on the Board for any reason. The approval of at least two-thirds of the members of the Plan Committee shall be required to remove a member of the Plan Committee. A majority of the remaining members of the Plan Committee may fill one or more vacancies on the Plan Committee. The Plan Committee may allocate and delegate some or all of its responsibilities described in this Article 9. The Plan Committee's authority under this Article 9.1 shall at times be subject to the ability of the 12. <PAGE> 15 Compensation Committee to remove any or all of the members of the Plan Committee for any reason, change the number of members of the Plan Committee, fill vacancies on such committee, and establish rules and procedures for such committee. 9.2 Any decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated thereunder or a Participant's Enrollment Agreement shall be final and conclusive and binding upon all persons having any interest in the Plan. 9.3 All costs and expenses related to the operation and administration of the Plan shall be paid by the Company. ARTICLE 10 MISCELLANEOUS 10.1 AMENDMENT OF PLAN. The Company reserves the right to amend any provisions of the Plan at any time upon an action by a majority of the Plan Committee or the Compensation Committee to the extent that it may deem advisable without the consent of the Participant or any Beneficiary; provided, however, that no such amendment shall impair the rights of any Participant or Beneficiary with respect to either contributions made or authorized before such amendment or any earnings on such contributions credited to a Participant's Account before such amendment. Notwithstanding the foregoing, the formula for determining the Employer's contributions may only be amended by the Board or the Compensation Committee. Any such amendment to the Plan shall be submitted for the approval of the Company's stockholders if such approval is required to comply with the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, or the terms of any listing agreement with any established securities exchange or automated quotation system (including NASDAQ) on which the Company's common stock is listed for trading, or for any other reason determined by the Board or the Compensation Committee after consulting with legal counsel. 10.2 TERMINATION OF PLAN. The Company reserves the right to terminate the Plan at any time upon an action by the Board or the Compensation Committee. Distribution of any benefits to a Participant shall generally commence only upon the occurrence of the termination of employment of a Participant; provided, however, that the Plan Administrator shall retain the sole discretion to make payment to a Participant in the form of a single, lump sum distribution at any time following the termination of the Plan. 10.3 TRANSFERS TO OTHER PLANS. (a) In the event that a Participant employed by the Employer or an Affiliate of the Employer simultaneously or subsequently becomes employed by Leap Wireless International, Inc., the Plan Administrator shall have the right, but no obligation, to direct the Trustee to transfer funds in an amount equal to the amount credited to such Participant's Account (the "Transferred Account") to a trust established under a Transferee Plan. The Plan Administrator shall determine, in its sole discretion, whether such transfer shall be made and the 13. <PAGE> 16 timing of such transfer. Such transfer shall be made only if, and to the extent that, approval of such transfer is obtained from the Trustee. (b) For purposes of this Section 10.3, "Transferee Plan" shall mean an unfunded, nonqualified deferred compensation plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA") maintained by Leap Wireless International, Inc. (c) No transfer shall be made under this Section 10.3 unless the Participant for whose benefit the Transferred Account is held executes a written waiver of all of such Participant's rights and benefits under this Plan in such form as shall be acceptable to the Plan Administrator. 10.4 TRANSFERS IN FROM OTHER PLANS. There may be transferred directly from the trustee of another nonqualified, unfunded, deferred compensation plan ("Other Plan") to the Trustee, subject to the approval of the transferor corporation maintaining the Other Plan, the Plan Administrator, and the Eligible Employee, funds in an amount not to exceed the amount credited to the Other Plan accounts maintained for the benefit of that Eligible Employee. Amounts transferred pursuant to this Section 10.4, and any gains or losses allocable thereto, (i) shall be accounted for separately ("Transfer Account") from amounts otherwise allocable to the Eligible Employee under this Plan, and (ii) the Transfer Account shall be distributed in accordance with the Eligible Employee's deferral election under the Other Plan, as such election may be amended pursuant to the terms of the Other Plan. Subsequent earnings on the amount in the Transfer Account shall be credited to a separate account for the Eligible Employee established pursuant to this Plan and shall be determined under the Plan's investment procedures in Article 5. 10.5 The Plan Administrator may at any time make rules as it determines necessary regarding the administration of the Plan which are not inconsistent with the Plan. 10.6 The Plan Administrator may, from time to time, hire outside consultants, accountants, actuaries, legal counsel, or recordkeepers to perform such tasks as the Plan Administrator may from time to time determine. 10.7 In the event that any Participants are found to be ineligible, that is, not members of a select group of management or highly compensated employees eligible to participate in a Top Hat Plan, according to a determination made by the United States Department of Labor, the Plan Administrator will take whatever steps it deems necessary, in its sole discretion, to equitably protect the interests of the affected Participants. 10.8 No benefits under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment. The provisions of the Plan shall be binding upon and inure to the benefit of the Company, the Employer and Participants and their respective successors, heirs, personal representatives, executors, administrators, and legatees. 14. <PAGE> 17 Notwithstanding any other provision in the Plan to the contrary, any amount credited to a Participant's Account shall be paid from the Trust only to the extent that the Company is not financially insolvent at the time of such payment. Whether or not the Company is financially insolvent shall be determined by the Trustee in the Trustee's sole discretion based upon the standard for financial insolvency set forth in the Trust Agreement. Any benefits under the Plan represent an unfunded, unsecured promise by the Company to pay these benefits to the Participants when due. A Participant has no greater right to any assets in the Trust than the general creditors of the Company in the event that the Company shall become financially insolvent. Trust assets can be used to pay only benefits under the Plan or the claims of the Company's general creditors or the expenses of administering the Plan and Trust to the extent permitted under the terms of the Trust Agreement. 10.9 The Plan, the Trust Agreement, and the Participant's Enrollment Agreement, and any subsequently adopted amendment to any of these documents, shall constitute the total agreement or contract between the Company and such Participant regarding the Plan. No oral statement regarding the Plan may be relied upon by the Participant. If there are any conflicts between the terms of the Plan and the Trust Agreement, and a Participant's Enrollment Agreement, the terms of the Plan and the Trust Agreement shall control. 10.10 The terms and conditions of the Plan shall not be deemed to constitute a contract of employment between the Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, with or without cause, unless expressly provided in a written employment agreement or expressly provided by law. Nothing in the Plan shall be deemed to give a Participant the right to be retained in the service of the Employer, or to interfere with the right of the Employer to discipline or discharge the Participant at any time. 10.11 If any change is made to the Company's common stock because of a change in the Company's capital structure not involving the receipt of consideration by the Company, whether through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise, then the class(es) and number of shares that may be contributed by the Company under Section 3.8 and the class(es) and number of shares held by the Trust will be appropriately adjusted to reflect the impact of such change upon the Company's stockholders. The conversion of any convertible securities issued by the Company shall not be considered a transaction "involving the receipt of consideration by the Company." In the event that such change causes the Trust to hold substantially all of its assets in securities of the Company or a successor corporation to the Company other than the Company's common stock, references in the Plan to the Company's common stock shall mean such securities. After the occurrence of a transaction described in this Section 10.11, the rounding rules set forth in Section 5.5 shall be applied to ensure that each Participant's Account shall be invested in the shares of the Company's common stock (or such other securities) and shall be accounted for and reported in terms of whole shares of the Company's common stock (or such other securities). 10.12 The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan the authority as may be required to contribute and distribute 15. <PAGE> 18 shares of the Company's common stock; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as amended, or comparable securities law of any other applicable jurisdiction, shares of the Company's common stock or any participation interest in the Plan deemed to be a security. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance of stock to the Plan or distribution of stock from the Plan, the Company shall be relieved from any liability for failure to issue the Company's common stock to the Plan, and the Company, Employer, Plan Administrator and/or the Trustee shall be relieved from any liability for failure to distribute the Company's common stock from the Plan, as applicable, unless and until such authority is obtained. 10.13 This Plan shall be construed under the laws of the State of California, except to the extent that the laws of the State are preempted by ERISA. IN WITNESS WHEREOF, the Plan is hereby adopted by a duly authorized officer of QUALCOMM, Incorporated on this __ day of ________, 1999. QUALCOMM, INC. By: ------------------------------------ Name: --------------------------------- Title: --------------------------------- 16. </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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED DECEMBER 26, 1999, 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-24-2000 <PERIOD-START> SEP-27-1999 <PERIOD-END> DEC-26-1999 <CASH> 303,978 <SECURITIES> 1,087,164 <RECEIVABLES> 1,042,568 <ALLOWANCES> 20,201 <INVENTORY> 259,968 <CURRENT-ASSETS> 2,875,302 <PP&E> 537,482 <DEPRECIATION> 0 <TOTAL-ASSETS> 4,985,435 <CURRENT-LIABILITIES> 907,280 <BONDS> 35,629 <PREFERRED-MANDATORY> 269,895 <PREFERRED> 0 <COMMON> 70 <OTHER-SE> 3,688,693 <TOTAL-LIABILITY-AND-EQUITY> 4,985,435 <SALES> 1,120,073 <TOTAL-REVENUES> 1,120,073 <CGS> 648,748 <TOTAL-COSTS> 648,748 <OTHER-EXPENSES> 26,152 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 2,673 <INCOME-PRETAX> 282,450 <INCOME-TAX> 105,331 <INCOME-CONTINUING> 177,119 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 177,119 <EPS-BASIC> 0.27<F1> <EPS-DILUTED> 0.23<F1> <FN> <F1>ON DECEMBER 30, 1999, THE COMPANY EFFECTED A FOUR-FOR-ONE STOCK DISTRIBUTION TO QUALCOMM STOCKHOLDERS OF RECORD ON DECEMBER 20, 1999. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THE RECAPITALIZATION. IN ADDITION, ON MAY 10, 1999, THE COMPANY EFFECTED A TWO-FOR-ONE STOCK DISTRIBUTION TO QUALCOMM STOCKHOLDERS OF RECORD ON APRIL 21, 1999. FINANCIAL DATA SCHEDULES PRIOR TO THE NINE MONTHS ENDED JUNE 27, 1999, HAVE NOT BEEN RESTATED FOR SUCH RECAPITALIZATION. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

ROK

https://www.sec.gov/Archives/edgar/data/1024478/0000950124-00-000563.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, Q2nMeoH8n/HdzDLQznt76Z1Q+Ou8smFoZhQ+xn6oHOYo42Ufm5CFrZmqkVd8LtnP uHLmsLp3tEiaFrHk6ejC/Q== <SEC-DOCUMENT>0000950124-00-000563.txt : 20000214 <SEC-HEADER>0000950124-00-000563.hdr.sgml : 20000214 ACCESSION NUMBER: 0000950124-00-000563 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKWELL INTERNATIONAL CORP CENTRAL INDEX KEY: 0001024478 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 251797617 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12383 FILM NUMBER: 534835 BUSINESS ADDRESS: STREET 1: 600 ANTON BLVD STE 700 CITY: COSTA MESA STATE: CA ZIP: 92626-7147 BUSINESS PHONE: 7144244200 MAIL ADDRESS: STREET 1: 600 ANTON BLVD STE 700 CITY: COSTA MESA STATE: CA ZIP: 92626-7147 FORMER COMPANY: FORMER CONFORMED NAME: NEW ROCKWELL INTERNATIONAL CORP DATE OF NAME CHANGE: 19961009 </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 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1999 ---------------------------------- 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.) 777 East Wisconsin Avenue, Suite 1400, Milwaukee, Wisconsin 53202 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (414) 212-5299 - -------------------------------------------------------------------------------- (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 ----- ----- 189,769,279 shares of registrant's Common Stock, $1.00 par value, were outstanding on January 31, 2000. <PAGE> 2 ROCKWELL INTERNATIONAL CORPORATION INDEX <TABLE> <CAPTION> Page No. ---- <S> <C> <C> PART I. FINANCIAL INFORMATION: Item 1. Consolidated Financial Statements: Condensed Consolidated Balance Sheet -- December 31, 1999 and September 30, 1999....... 2 Consolidated Statement of Operations -- Three Months Ended December 31, 1999 and 1998.. 3 Consolidated Statement of Cash Flows -- Three Months Ended December 31, 1999 and 1998.. 4 Notes to Consolidated Financial Statements..... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 9 PART II. OTHER INFORMATION: Item 1. Legal Proceedings.............................. 10 Item 2. Changes in Securities and Use of Proceeds...... 10 Item 5. Other Information.............................. 11 Item 6. Exhibits and Reports on Form 8-K............... 11 Signatures......................................................... 12 </TABLE> <PAGE> 3 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements ROCKWELL INTERNATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (in millions) <TABLE> <CAPTION> December 31 September 30 1999 1999 ----------- ------------ ASSETS <S> <C> <C> Current assets: Cash.................................................... $ 296 $ 356 Receivables, net........................................ 1,181 1,294 Inventories, net........................................ 1,337 1,339 Deferred income taxes................................... 364 364 Other current assets.................................... 248 229 ------- ------- Total current assets.............................. 3,426 3,582 Property (net of accumulated depreciation: December 31, 1999, $1,558; September 30, 1999, $1,508).. 1,562 1,581 Intangible assets (net of accumulated amortization: December 31, 1999, $531; September 30, 1999, $514)...... 1,372 1,390 Other assets............................................... 155 151 ------- ------- TOTAL....................................... $ 6,515 $ 6,704 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt......................................... $ 186 $ 189 Accounts payable........................................ 713 843 Compensation and benefits............................... 357 469 Income taxes payable.................................... 152 91 Other current liabilities............................... 483 516 ------- ------- Total current liabilities......................... 1,891 2,108 Long-term debt............................................. 911 911 Retirement benefits........................................ 650 653 Other liabilities.......................................... 383 395 Shareowners' equity: Common stock (shares issued: 216.4)..................... 216 216 Additional paid-in capital.............................. 962 960 Retained earnings....................................... 3,138 3,034 Accumulated other comprehensive loss.................... (159) (153) Common stock in treasury, at cost (shares held: December 31, 1999, 26.7; September 30, 1999, 25.5)..... (1,477) (1,420) ------- ------- Total shareowners' equity......................... 2,680 2,637 ------- ------- TOTAL....................................... $ 6,515 $ 6,704 ======= ======= </TABLE> See Notes to Consolidated Financial Statements. - 2 - <PAGE> 4 ROCKWELL INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (in millions, except per share amounts) <TABLE> <CAPTION> Three Months Ended December 31 ------------------ 1999 1998 ------- ------- <S> <C> <C> Revenues: Sales....................................................... $ 1,660 $ 1,608 Other income, net........................................... 13 46 ------- ------- Total revenues............................................ 1,673 1,654 ------- ------- Costs and expenses: Cost of sales............................................... 1,123 1,135 Selling, general, and administrative........................ 297 291 Interest.................................................... 20 19 ------- ------- Total costs and expenses.................................. 1,440 1,445 ------- ------- Income from continuing operations before income taxes......... 233 209 Income tax provision.......................................... (76) (75) ------- ------- Income from continuing operations............................. 157 134 Loss from discontinued operations............................. -- (20) ------- ------- Net income.................................................... $ 157 $ 114 ======= ======= Basic earnings per share: Continuing operations....................................... $ 0.83 $ 0.71 Discontinued operations..................................... -- (0.11) ------- ------- Net income.................................................. $ 0.83 $ 0.60 ======= ======= Diluted earnings per share: Continuing operations ...................................... $ 0.81 $ 0.70 Discontinued operations..................................... -- (0.11) ------- ------- Net income ................................................ $ 0.81 $ 0.59 ======= ======= Cash dividends per share...................................... $ 0.255 $ 0.255 ======= ======= Weighted average outstanding shares: Basic....................................................... 190.0 189.9 ======= ======= Diluted (includes effect of stock options).................. 192.9 192.2 ======= ======= </TABLE> See Notes to Consolidated Financial Statements. - 3 - <PAGE> 5 ROCKWELL INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (in millions) <TABLE> <CAPTION> Three Months Ended December 31 ------------------ 1999 1998 ------- -------- <S> <C> <C> Continuing Operations: Operating Activities: Income from continuing operations.......................... $ 157 $ 134 Adjustments to arrive at cash provided by operating activities: Depreciation........................................... 63 53 Amortization of intangible assets...................... 22 15 Deferred income taxes.................................. (5) (96) Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Receivables........................................ 110 85 Inventories........................................ -- (36) Accounts payable................................... (130) (59) Income taxes payable............................... 61 129 Compensation and benefits.......................... (111) (109) Other assets and liabilities....................... (60) (62) ------- ------- Cash Provided by Operating Activities........... 107 54 ------- ------- Investing Activities: Property additions......................................... (54) (55) Acquisitions of businesses, net of cash acquired........... -- (46) Proceeds from dispositions of property and businesses...... 1 92 ------- ------- Cash Used for Investing Activities.............. (53) (9) ------- ------- Financing Activities: Net (decrease) increase in debt............................ (3) 180 Purchases of treasury stock................................ (67) (56) Cash dividends............................................. (49) (48) Proceeds from the exercise of stock options................ 5 18 ------- ------- Cash (Used for) Provided by Financing Activities......................... (114) 94 ------- ------- Cash (Used for) Provided by Continuing Operations.......... (60) 139 ------- ------- Cash Used for Discontinued Operations...................... -- (47) ------- ------- (Decrease) Increase in Cash................................ (60) 92 Cash at Beginning of Period................................ 356 103 ------- ------- Cash at End of Period...................................... $ 296 $ 195 ======= ======= </TABLE> See Notes to Consolidated Financial Statements. - 4 - <PAGE> 6 ROCKWELL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management of Rockwell International Corporation (the Company or Rockwell), the unaudited consolidated 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, 1999. The results of operations for the three-month period ended December 31, 1999 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. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. For derivatives that are hedges, changes in fair value will be offset by changes in the fair value of the hedged assets, liabilities or firm commitments. In June 1999, the Financial Accounting Standards Board delayed the effective date of SFAS 133 to fiscal year 2001, but early adoption continues to be permitted. When adopted, the Company believes the effect of this standard will not be material to its results of operations or equity. 2. Discontinued operations relate to the Company's former Semiconductor Systems business (Semiconductor Systems) which was spun off on December 31, 1998 into an independent, separately traded, publicly-held company by distributing all of the outstanding shares of Conexant Systems, Inc. to the Company's shareowners. The revenues and net loss of Semiconductor Systems for the three months ended December 31, 1998 were $289 million and $20 million, respectively. 3. Inventories, net of reserves, are summarized as follows (in millions): <TABLE> <CAPTION> December 31 September 30 1999 1999 ----------- ------------ <S> <C> <C> Finished goods.................................... $ 408 $ 415 Work in process................................... 449 457 Raw materials, parts, and supplies................ 459 446 ------- ------- Total........................................... 1,316 1,318 Adjustment to the carrying value of certain inventories to a LIFO basis............. 21 21 ------- ------- Inventories, net.................................. $ 1,337 $ 1,339 ======= ======= </TABLE> 4. The reconciliation of net income to comprehensive income is as follows (in millions): <TABLE> <CAPTION> Three Months Ended December 31 ------------------- 1999 1998 ---- ---- <S> <C> <C> Net income.......................................... $ 157 $ 114 Other comprehensive (loss) income: Net foreign currency translation adjustment..................................... (6) 1 ------- ------- Comprehensive income................................ $ 151 $ 115 ======= ======= </TABLE> - 5 - <PAGE> 7 ROCKWELL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. In the third quarter of 1998, the Company recorded special charges of $597 million in connection with asset impairments and the implementation of a comprehensive restructuring program. These charges included $100 million for severance and other employee separation costs associated with a worldwide workforce reduction of approximately 3,100 employees and $84 million related to facility closures and consolidations and exiting non-strategic businesses and product lines. These actions are substantially complete at December 31, 1999. Total cash expenditures in connection with these actions are expected to approximate $149 million. The Company spent approximately $84 million through December 31, 1999, of which $52 million related to severance and other employee separation costs, and expects to spend an additional $26 million through December 2000. The remaining cash expenditures relate to employee separation costs and lease obligations for vacant facilities. Through December 31, 1999, the workforce has been reduced by approximately 2,500 employees. Revenues and results of operations of businesses and product lines which have been exited were not material for the quarter ended December 31, 1998. 6. Various 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, intellectual property, safety and health, environmental and employment matters. Rockwell has indemnified The Boeing Company for certain government contract and environmental matters related to operations of its former aerospace and defense business for periods prior to its divestiture in fiscal 1997. 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 consolidated financial statements. 7. In February 2000, the Company entered into an interest rate swap contract which effectively converted its $350 million aggregate principal amount of 6.15% notes, payable in 2008, to floating rate debt based on 90 day LIBOR. The effective rate the Company will pay through April 15, 2000 is 4.79%. The Company entered into this contract to achieve a more balanced mix of fixed and floating rate debt. The Company accounts for interest rate swap contracts by accruing the underlying payments and receipts as an adjustment to interest expense on the underlying notes payable. - 6 - <PAGE> 8 ROCKWELL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. The sales and results of operations of the Company's reportable segments are summarized as follows (in millions): <TABLE> <CAPTION> Three Months Ended December 31 ------------------ 1999 1998 ---- ---- <S> <C> <C> Sales: Automation............................................ $ 1,043 $ 1,045 Avionics & Communications............................. 561 510 Other Businesses...................................... 56 53 ------- ------- Total............................................... $ 1,660 $ 1,608 ======= ======= Segment operating earnings: Automation............................................ $ 163 $ 143 Avionics & Communications............................. 104 121 Other Businesses...................................... 4 2 ------- ------- Total............................................... 271 266 General corporate - net................................. (18) (38) Interest expense........................................ (20) (19) Provision for income taxes.............................. (76) (75) ------- ------- Income from continuing operations....................... 157 134 Loss from discontinued operations....................... - (20) ------- ------- Net income.............................................. $ 157 $ 114 ======= ======= </TABLE> - 7 - <PAGE> 9 ROCKWELL INTERNATIONAL CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Sales in the 2000 first quarter of $1.7 billion were three percent higher than the same period a year ago. Automation's sales of $1 billion were about the same as last year's first quarter as sales increases at control systems were offset by a $25 million decline at the motors business. Avionics & Communications sales increased 10 percent over the same period a year ago to $561 million. The government systems, passenger systems and business and regional systems businesses all reported substantial sales increases over 1999's first quarter and more than offset lower volume at the air transport systems business. Sales at Rockwell Electronic Commerce and Rockwell Science Center were up six percent to $56 million from $53 million a year ago. Income from continuing operations for the 2000 first quarter was $157 million, or 81 cents per diluted share, compared to income from continuing operations of $134 million, or 70 cents per diluted share, for the first quarter of 1999. Earnings per diluted share were up 16 percent due to improved operating margins at Automation and continued strong performance at Avionics & Communications. Automation's first quarter operating earnings of $163 million were 14 percent higher than last year. The benefits of manufacturing process improvements, material cost reductions from the Company's Strategic Sourcing Initiative and higher control systems volume more than offset investments in new product development, SourceAlliance.com launch costs and the earnings effect of lower motors volume. Automation's return on sales increased to 15.6 percent from 13.7 percent a year ago. Avionics & Communications' operating earnings were $104 million, an 11 percent increase over last year's first quarter earnings of $94 million, excluding 1999's $36 million pre-tax gain from the sale of the railroad electronics business and pre-tax charge of $9 million related to the consolidation of certain government systems activities. Avionics & Communications' return on sales increased to 18.5 percent from 18.4 percent a year ago (excluding the $36 million gain and the $9 million charge). Operating earnings for Other Businesses of $4 million were $2 million higher than last year's first quarter primarily due to higher sales volume. Corporate expenses were lower in the first quarter of 2000 compared to a year ago due to a charge of $15 million in 1999 for costs related to the relocation of the corporate office. The first quarter 2000 effective income tax rate of 32.6 percent was lower than 1999's first quarter rate of 35.9 percent. This improvement reflects the benefits of the development and implementation of strategies to achieve meaningful and sustainable tax rate reductions. These strategies include utilization over the next few years of large foreign tax credit carryforwards, lower state income tax rates, and lower taxes associated with our growing international business due to the rationalization of our European distribution, warehousing and customer support operations. Based upon the Company's strong first quarter operating performance, coupled with expected profitable growth across each of the Company's businesses, management has confidence that Rockwell can achieve earnings per share growth in 2000 well in excess of the long-term goal of low double digit annual growth. - 8 - <PAGE> 10 ROCKWELL INTERNATIONAL CORPORATION FINANCIAL CONDITION The major uses of cash for the first three months of 2000 were for property additions of $54 million, cash dividends paid to shareowners of $49 million, and the repurchase of common stock. The Company spent $67 million in the first three months of 2000 in connection with its stock repurchase program. At December 31, 1999, the Company had approximately $175 million remaining on its current $250 million stock repurchase program. Future significant uses of cash, which are expected to be funded by cash generated by operating activities and commercial paper borrowings, are expected to include property additions, dividends to shareowners and may include acquisitions. 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 on pages 38 and 39 in Note 18 of the Notes to Consolidated Financial Statements in Item 8, Consolidated Financial Statements and Supplementary Data of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. Management believes that at December 31, 1999, there has been no material change to this information. Year 2000 Update As described in the Company's Annual Report on Form 10-K for the year ended September 30, 1999, the Company developed plans to address possible exposures related to the Year 2000. Since entering the year 2000, the Company has not experienced any major disruptions to its business nor is it aware of any significant Year 2000 related disruptions related to its products or impacting its customers and suppliers. The Company will continue to monitor its critical systems over the next several months but does not anticipate any significant effects due to Year 2000 exposures from its internal systems or from the activities of its suppliers and customers. Cautionary Statement This Quarterly Report contains statements (including certain projections and business trends) accompanied by such phrases as "believes", "expected", "has confidence", "anticipate", and other similar expressions, 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 economic and political changes in international markets where the Company competes, such as currency exchange rates, inflation rates, recession, foreign ownership restrictions and other external factors over which the Company has no control; domestic and foreign government spending, budgetary and trade policies; demand for and market acceptance of new and existing products; successful development of advanced technologies; competitive product and pricing pressures; and the uncertainties of litigation, 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. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Item 3. Quantitative And Qualitative Disclosures About Market Risk Information with respect to the Company's exposure to interest rate risk and foreign currency risk is contained in pages 16 and 17 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, 1999. Management believes that at December 31, 1999, there has been no material change to this information. In February 2000, the Company entered into an interest rate swap contract which effectively converted its $350 million aggregate principal amount of 6.15% notes, payable in 2008, to floating rate debt based on 90 day LIBOR. - 9 - <PAGE> 11 ROCKWELL INTERNATIONAL CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings On June 24, 1996, judgment was entered against the Company in a civil action in the Circuit Court of Logan County, Kentucky on a jury verdict awarding $8 million in compensatory and $210 million in punitive damages for property damage. The action had been brought August 12, 1993 by owners of flood plain real property near Russellville, Kentucky allegedly damaged by polychlorinated biphenyls (PCBs) discharged from a plant owned and operated by the Company's Measurement & Flow Control Division prior to its divestiture in March 1989. On January 14, 2000, the Kentucky Court of Appeals reversed the lower court's judgment and directed entry of judgment in Rockwell's favor on all claims as a matter of law. The plaintiffs have 30 days from the ruling in which to seek discretionary review of the decision in the state supreme court. On December 27, 1995, one shareowner, purporting to act derivatively on behalf of the Company, commenced an action in the Superior Court of the State of California for the County of Orange against 13 of the Company's directors, and the Company as a nominal defendant, alleging principally breaches of fiduciary duties in failing properly to manage the business of the Company in a manner to prevent certain violations of applicable federal and state laws, including environmental laws, by certain named and unnamed employees or agents of the Company. The action seeks declaratory judgment, damages suffered by the Company as a result of the alleged conduct, plaintiffs' costs and expenses and other proper relief. On February 27, 1996, a similar suit, making similar allegations and seeking similar relief, was filed against the Company and the same directors, plus Don H. Davis, Jr., by two other shareowners in the Superior Court of the State of California for the County of Los Angeles. In August 1996, the Los Angeles County action was dismissed voluntarily by the plaintiffs, and a First Amended Consolidated Complaint was filed in the Orange County action, adding the plaintiffs from the dismissed Los Angeles County suit as party plaintiffs to the Orange County suit. On February 4, 1997, plaintiffs voluntarily dismissed the action with respect to two of the director-defendants, Judith L. Estrin and William H. Gray, III. The Company and the director-defendants are defending the consolidated action. On December 3, 1999, the court denied the defendants' motion for summary judgment. No trial date has been set. Item 2. Changes in Securities and Use of Proceeds (c) On October 1, 1999, the Company paid a portion of the annual retainer fees for non-employee directors by issuance of 177 shares of restricted stock to each of James Clayburn LaForce, Jr. and William S. Sneath, whose terms expired in February 2000, and issuance of 516 shares of restricted stock to each of the following directors: George L. Argyros, Donald R. Beall, William H. Gray, III, William T. McCormick, Jr., John D. Nichols, Bruce M. Rockwell, Robert B. Shapiro and Joseph F. Toot, Jr. On the same date, the Company also issued 187, 182 and 187 shares of restricted stock to Messrs. Argyros, Beall and Nichols, respectively, pursuant to deferral elections made in accordance with the Directors Stock Plan in payment of retainer fees otherwise payable in cash. On December 1, 1999, the Company issued 17,500 shares of restricted stock to Don H. Davis, Jr., Chairman of the Board and Chief Executive Officer, in part payment of a bonus under the Annual Incentive Compensation Plan for Senior Executive Officers. The issuance of all these shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. - 10 - <PAGE> 12 ROCKWELL INTERNATIONAL CORPORATION 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 page 3 of the Company's Annual Report on Form 10-K for the year ended September 30, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges for the Three Months Ended December 31, 1999 Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K during the quarter ended December 31, 1999: 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. ROCKWELL INTERNATIONAL CORPORATION ---------------------------------- (Registrant) Date: February 11, 2000 By W. E. Sanders ---------------------- ------------------------------- W. E. Sanders Vice President and Controller (Principal Accounting Officer) Date: February 11, 2000 By W. J. Calise, Jr. ---------------------- ------------------------------- W. J. Calise, Jr. Senior Vice President, General Counsel and Secretary - 12 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES <TEXT> <PAGE> 1 EXHIBIT 12 ROCKWELL INTERNATIONAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES THREE MONTHS ENDED DECEMBER 31, 1999 (IN MILLIONS, EXCEPT RATIO) <TABLE> <S> <C> EARNINGS AVAILABLE FOR FIXED CHARGES: Income from continuing operations before income taxes............. $ 233 Minority interest in losses of subsidiaries....................... - ------- 233 ------- Add fixed charges included in earnings: Interest expense............................................... 20 Interest element of rentals.................................... 13 ------- 33 ------- Total earnings available for fixed charges........................ $ 266 ======= FIXED CHARGES: Fixed charges included in earnings................................ $ 33 Capitalized interest.............................................. 2 ------- Total fixed charges............................................ $ 35 ======= RATIO OF EARNINGS TO FIXED CHARGES (1)............................... 7.60 ======= </TABLE> [FN] (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. </FN> </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 DECEMBER 31, 1999 CONDENSED CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND NOTES TO FINANCIAL STATEMENTS 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> SEP-30-1999 <PERIOD-END> DEC-31-1999 <CASH> 296 <SECURITIES> 0 <RECEIVABLES> 1181 <ALLOWANCES> 52 <INVENTORY> 1337 <CURRENT-ASSETS> 3426 <PP&E> 3120 <DEPRECIATION> 1558 <TOTAL-ASSETS> 6515 <CURRENT-LIABILITIES> 1891 <BONDS> 911 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 216 <OTHER-SE> 2464 <TOTAL-LIABILITY-AND-EQUITY> 6515 <SALES> 1660 <TOTAL-REVENUES> 1673 <CGS> 1123 <TOTAL-COSTS> 1440 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 20 <INCOME-PRETAX> 233 <INCOME-TAX> (76) <INCOME-CONTINUING> 157 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 157 <EPS-BASIC> 0.83 <EPS-DILUTED> 0.81 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

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https://www.sec.gov/Archives/edgar/data/87777/0000931763-00-000248.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, GokCo7M+xdZV3Ej2drnhtm/R14GxPcuAu8xfDAHqQx2izj778YmknYBagRl8E1OY Oynnkbj6NeOed+SQ0uJmlg== <SEC-DOCUMENT>0000931763-00-000248.txt : 20000214 <SEC-HEADER>0000931763-00-000248.hdr.sgml : 20000214 ACCESSION NUMBER: 0000931763-00-000248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: SEC FILE NUMBER: 001-05517 FILM NUMBER: 533112 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 31, 1999 ----------------- 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 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 28, 2000, Scientific-Atlanta, Inc. had outstanding 79,061,629 shares of common stock. 1 of 14 <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 31, January 1, December 31, January 1, 1999 1999 1999 1999 ------------- ------------- ----------- ------------ <S> <C> <C> <C> <C> SALES $ 372,721 $ 310,747 $ 722,040 $ 568,225 ------- -------- -------- ------- COSTS AND EXPENSES Cost of sales 263,512 222,925 512,883 410,034 Sales and administrative 42,260 42,883 81,366 81,672 Research and development 29,508 29,762 57,840 59,053 Interest expense - 355 286 522 Interest income (4,117) (1,837) (7,750) (3,939) Other (income) expense, net (6,117) (10,753) (6,337) (27,949) ------- -------- -------- ------- Total costs and expenses 325,046 283,335 638,288 519,393 ------- -------- -------- ------- EARNINGS BEFORE INCOME TAXES 47,675 27,412 83,752 48,832 PROVISION (BENEFIT) FOR INCOME TAXES Current 16,185 28,199 20,781 21,712 Deferred (1,882) (19,975) 4,345 (7,062) ------- -------- -------- ------- NET EARNINGS $ 33,372 $ 19,188 $ 58,626 $ 34,182 ======= ======== ======== ======= EARNINGS PER COMMON SHARE BASIC $ 0.42 $ 0.25 $ 0.74 $ 0.44 ======= ======== ======== ======= DILUTED $ 0.41 $ 0.25 $ 0.72 $ 0.44 ======= ======== ======== ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC 78,753 75,274 78,309 77,245 ======= ======== ======== ======= DILUTED 81,808 76,031 81,237 78,340 ======= ======== ======== ======= DIVIDENDS PER SHARE PAID 0.015 0.015 0.03 0.03 ======= ======== ======== ======= COMPREHENSIVE INCOME: NET EARNINGS $ 33,372 $ 19,188 $ 58,626 $ 34,182 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX(1) Unrealized gains (losses) on marketable securities, net 9,120 - 22,911 - Reversal of unrealized gains on marketable securities sold (2,171) - (6,238) - Minimum retirement plan minimum liability adjustment - - (828) - Foreign currency translation adjustments (670) 1,165 (907) 1,712 ------- -------- -------- ------- COMPREHENSIVE INCOME $ 39,651 $ 20,353 $ 73,564 $ 35,894 ======= ======== ======== ======= </TABLE> (1) Assumed 38% and 40% tax rate in fiscal 2000 and fiscal 1999, respectively SEE ACCOMPANYING NOTES 2 of 14 <PAGE> SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION <TABLE> <CAPTION> In Thousands ----------------------------------- December 31, July 2, 1999 1999 --------------- ---------- ASSETS (Unaudited) <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 347,953 $ 300,454 Marketable securities 4,105 2,438 Receivables, less allowance for doubtful accounts of $8,445,000 at December 31 and $8,160,000 at July 2 298,301 290,274 Inventories 222,012 189,354 Deferred income taxes 34,611 37,130 Other current assets 15,908 11,811 --------- ---------- TOTAL CURRENT ASSETS 922,890 831,461 --------- ---------- PROPERTY, PLANT AND EQUIPMENT, at cost Land and improvements 21,161 21,161 Buildings and improvements 32,545 31,802 Machinery and equipment 219,033 197,326 --------- ---------- 272,739 250,289 Less - Accumulated depreciation and amortization 107,395 92,751 --------- ---------- 165,344 157,538 --------- ---------- COST IN EXCESS OF NET ASSETS ACQUIRED 7,943 7,900 --------- ---------- NON-CURRENT MARKETABLE SECURITIES 42,336 18,783 --------- ---------- OTHER ASSETS 57,610 46,592 --------- ---------- TOTAL ASSETS $ 1,196,123 $ 1,062,274 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt and current maturities of long-term debt $ 418 $ 416 Accounts payable 149,857 137,146 Accrued liabilities 113,944 125,038 Income taxes currently payable 1,118 5,211 --------- ---------- TOTAL CURRENT LIABILITIES 265,337 267,811 --------- ---------- LONG-TERM DEBT, less current maturities 257 370 --------- ---------- OTHER LIABILITIES 70,153 55,927 --------- ---------- STOCKHOLDERS' EQUITY Preferred stock, authorized 50,000,000 shares; no shares issued - - Common stock, $0.50 par value, authorized 350,000,000 shares; issued 79,621,212 shares at December 31 and 79,616,712 at July 2 39,811 39,808 Additional paid-in capital 256,415 226,390 Retained earnings 553,673 497,403 Accumulated other comprehensive income, net of taxes of $13,679,000 at December 31 and $4,921,000 at July 2 22,317 7,379 --------- ---------- 872,216 770,980 Less - Treasury stock, at cost (672,129 shares at December 31 and 2,269,646 shares at July 2) 11,840 32,814 --------- ---------- 860,376 738,166 --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,196,123 $ 1,062,274 ========= ========== </TABLE> SEE ACCOMPANYING NOTES 3 of 14 <PAGE> SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> Six Months Ended ---------------- December 31, January 1, 1999 1999 ------------ ---------- <S> <C> <C> NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 58,780 $ (11,367) --------- ------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment (28,607) (27,701) Acquisition of businesses (7,697) - Proceeds from the sale of certain assets of a business unit 3,259 - Proceeds from the sale of marketable securities 8,719 64,450 Investments (13,100) - Other 175 214 --------- ------- Net cash provided (used) by investing activities (37,251) 36,963 --------- ------- FINANCING ACTIVITIES: Principal payments on long-term debt (111) (235) Dividends paid (2,356) (2,316) Issuance of common stock 28,437 5,968 Treasury shares acquired - (65,228) --------- ------- Net cash provided (used) by financing activities 25,970 (61,811) --------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 47,499 (36,215) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 300,454 175,392 --------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 347,953 $ 139,177 ========= ======= SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid $ 246 $ 495 ========= ======= Income taxes paid, net $ 8,977 $ 8,697 ========= ======= </TABLE> SEE ACCOMPANYING NOTES 4 of 14 <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 company's 1999 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. The company's fiscal year ends on the Friday closest to June 30 of each year. Fiscal 1999 included fifty-three weeks. The three and six months ended January 1, 1999 included fourteen weeks and twenty-seven weeks, respectively. C. Basic earnings per share were computed based on the weighted average number of shares outstanding. Diluted earnings per share were computed based on the weighted average number of dilutive shares of common stock outstanding. See Exhibit 11. <TABLE> <CAPTION> D. Inventories consist of the following: December 31, July 2, 1999 1999 ------------- -------- <S> <C> <C> Raw materials and work-in-process $ 172,483 $ 129,911 Finished goods 49,530 59,443 --------- --------- Total inventory $ 222,013 $ 189,354 ========= ========= </TABLE> E. During the six months ended December 31, 1999, the company acquired 17,397 shares of its common stock from the payment in stock rather than cash by employees of tax withholdings on restricted stock which vested. During the six months ended January 1, 1999, the company acquired 4,648,000 shares of its common stock for $65,228 and acquired an additional 75,880 shares primarily from the payment in stock rather than cash by employees of tax withholdings on restricted stock which vested. The company re-issues these shares under the company's stock option plans, 401(k) plan, employee stock purchase plan and other stock-based employee compensation arrangements. F. Other income (expense) of $6,117 for the quarter ended December 31, 1999 included a $5,780 gain from the divesture of a portion of the company's investment in WorldGate Communications, Inc. and other miscellaneous gains and expenses. During the six months ended December 31, 1999, the company completed the sale of certain assets of its Control Systems business unit for $3,259 of cash and recorded a gain of $1,500. This gain was partially offset by other miscellaneous expenses. Other (income) expense for the quarter ended January 1, 1999 included a $20,375 gain from the adjustment of the company's investment in Broadcom Corporation (Broadcom) to market value, a $10,880 loss on the sale of one million shares of the company's investment in Broadcom, and a gain of $6,250 from the cancellation of a loss contract. In addition, during the quarter ended January 1, 1999, the company decided to dispose of a business unit, Control Systems, which produced devices to monitor and manage utility service usage, because the business unit did not fit with the company's core strategy. The company recorded a charge of $6,225 to adjust the carrying value of the assets to be sold to fair value, less costs to sell, to adjust the estimated profitability on certain contracts to allow the purchaser to achieve reasonable margins, to provide for indemnification to the purchaser and to provide for other miscellaneous expenses associated with the sale. Other (income) expense for the six months ended January 1, 1999 also included $18,000 gain from the adjustment of the company's investment in Broadcom to market in the first quarter of the fiscal year. G. During the six months ended December 31, 1999, the company invested $13,100 in Bookham Technology Limited (Bookham), a UK-based developer and supplier of optical components. In addition, the company acquired certain assets of an optics business for a cash payment of $7,697. 5 of 14 <PAGE> NOTES: (continued): (Amounts in thousands, except share data). H. Information on the segments of the company and reconciliations to consolidated amounts are as follows: <TABLE> <CAPTION> Three Months Ended ------------------ December 31, 1999 January 1, 1999 -------------------------------------------- ---------------------------------------------- Corporate Corporate and and Broadband Satellite Other Total Broadband Satellite Other Total <S> <C> <C> <C> <C> <C> <C> <C> <C> Sales $ 328,452 $ 44,131 $ 138 $372,721 $ 259,176 $ 49,912 $ 1,659 $310,747 Earnings (loss) before taxes $ 40,970 $ (306) $ 7,011/(1)/ $ 47,675 $ 24,155 $ (6,603) $ 9,860/(2)/ $ 27,412 </TABLE> (1) Includes a gain of $5,780 from the sale of a portion of the company's investment in WorldGate and interest income of $4,117. (2) Includes gains of $20,375 from the adjustment of the company's investment in Broadcom to market value and $6,250 from the cancellation of a contract and losses of $10,880 from the sale of one million shares of the company's investment in Broadcom and $6,225 from the decision to dispose of the Control Systems business unit. (See Note F.) Corporate and Other also includes interest income of $1,837. <TABLE> <CAPTION> Six Months Ended ---------------- December 31, 1999 January 1, 1999 ------------------------------------------ ---------------------------------------------- Corporate Corporate and and Broadband Satellite Other Total Broadband Satellite Other Total <S> <C> <C> <C> <C> <C> <C> <C> <C> Sales $ 632,315 $88,727 $ 998 $722,040 $ 469,414 $ 94,235 $ 4,576 $568,225 Earnings (loss) before taxes $ 74,010 $(1,487) $ 11,229/(1)/ $ 83,752 $ 32,148 $(14,214) $ 30,898/(2)/ $ 48,832 </TABLE> (1) Includes interest income of $7,750 in addition to the $5,780 gain from the sale of a portion of the company's investment in WorldGate discussed above. (2) In addition to the items discussed in footnote (1) for the three months ended December 31, 1999, includes additional interest income of $3,633. I. In January 2000, the company announced it had reached a definitive agreement to sell certain assets of the Satellite Networks business unit to ViaSat Inc. for approximately $75,000. The transaction is subject to various regulatory and other conditions and is expected to close prior to the end of the fiscal year. The amount of the purchase price is subject to normal closing adjustments. The company does not expect the transaction to have a material impact on the company's results of operations or financial position. 6 of 14 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - ------------------- Scientific-Atlanta had stockholders' equity of $860.4 million and cash on hand was $348.0 million at December 31, 1999. Cash increased $47.5 million from July 2, 1999 as cash provided by operations, the issuance of common stock and the sale of a portion of the company's investment in WorldGate Communications, Inc. (WorldGate) exceeded the company's expenditures for equipment, investment in Bookham, a developer and supplier of optical components and the acquisition of an optics business. The current ratio was 3.5:1 at December 31, 1999, up from 3.1:1 at July 2, 1999. At December 31, 1999, total debt was $0.7 million or less than one percent of total capital invested. 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 31, 1999 were $372.7 million, up 20 percent over the prior year. Broadband segment sales for the quarter were $328.5 million, up 27 percent over the prior year, driven by the rapid acceleration in the deployment of digital interactive systems and strong demand for the Explorer(R) 2000 digital interactive set-tops. The company shipped approximately 267,000 Explorer 2000 digital interactive set-tops during the quarter as compared to approximately 126,000 in the prior year. Sales of transmission products also increased significantly in the quarter with strong growth across all product areas. As anticipated and previously announced, sales of analog set-tops continued to decline as cable operators shifted from analog to digital products. The company expects that the downward trend in sales of analog set-tops will continue throughout the fiscal year. Satellite segment sales were $44.1 million for the quarter ended December 31, 1999, down 12 percent as compared to the prior year. The company expects to continue to experience softness in the Satellite segment because of its significant reliance on international markets. In the quarter ended December 31, 1999, international sales were 26 percent of total sales, up from 23 percent of total sales last year. Broadband segment sales for the six months ended December 31, 1999 were $632.3 million, up 35 percent over the prior year. The increase was driven by the continued rapid acceleration in the deployment of digital interactive systems and strong demand for the Explorer 2000 set-tops. Satellite segment sales for the six months ended December 31, 1999 were $88.7 million, down 6 percent from the prior year. International sales for the six months ended December 31, 1999 were 24 percent of total sales, approximately the same as the prior year. Sales for the six months ended December 31, 1999 were $722.0 million up 27.1 percent from the prior year. Gross margins were 29.3 percent and 29.0 percent for the three and six months ended December 31, 1999, 1.0 percentage points and 1.2 percentage points respectively, higher than the comparable periods of the prior year, reflecting the economies of scale associated with increased manufacturing volumes, the continuing benefit from manufacturing in Juarez, Mexico and negotiated procurement savings. Decreases in operating expenses relative to last year are due in part to the fact that the three and six months ended January 1, 1999 included fourteen and twenty-seven weeks, respectively, as compared to the normal thirteen and twenty-six week periods in the current year. Research and development costs were $29.5 million and $57.8 million for the three and six months ended December 31, 1999, respectively, or 8 percent of sales, reflecting the company's continued investment in research and development programs which are focused on the development of applications and enhancements to the company's interactive broadband networks. The company continues to invest in research and development programs to support existing products. During the three and six months ended December 31, 1999, the company capitalized $0.6 million and $1.0 million of software development, respectively. During the three and six months ended December 31, 1999, the company recognized revenue on certain of the products on which software development costs had been capitalized and amortized $1.5 million and $3.2 million, respectively, of these costs to cost of sales. The company capitalized software development costs of $0.8 million and $1.4 million during the three and six months ended January 1, 1999, respectively. The company amortized $1.1 million of these costs to cost of sales during the three and six months ended January 1, 1999. Selling and administrative expenses were flat for the three and six months periods ended December 31, 1999 as compared to the prior year. Lower sales and marketing expenses, due in part to cost reductions from the restructuring of the Satellite segment, were offset by increases in professional fees and expenses related to the higher volume of sales in the three and six months ended December 31, 1999. 7 of 14 <PAGE> The restructuring plan announced during fiscal 1998 was substantially completed during fiscal 1999. During the six months ended December 31, 1999, $0.2 million was charged against the liability for contractual liabilities for cancelled leases and $1.5 million remains in the liability which is expected to be utilized by 2002 for expenses related to contractual liabilities for cancelled leases. Other (income) expense for the quarter ended December 31, 1999 included a $5.8 million gain from the divesture of a portion of the company's investment in WorldGate. Other (income) expense for the quarter ended January 1, 1999 included a $20.4 million gain from the adjustment of the company's investment in Broadcom to market value, a $10.9 million loss on the sale of one million shares of the company's investment in Broadcom, and a gain of $6.2 million from the cancellation of a loss contract. In addition, during the quarter ended January 1, 1999, the company decided to dispose of a business unit, Control Systems, which produced devices to monitor and manage utility service usage, because the business unit did not fit with the company's core strategy. The company recorded a charge of $6.2 million to adjust the carrying value of the assets to be sold to fair value, less costs to sell, to adjust the estimated profitability on certain contracts to allow the purchaser to achieve reasonable margins, to provide for indemnification to the purchaser and to provide for other miscellaneous expenses associated with the sale. Other (income) expense in the six months ended December 31, 1999 also included a gain of $1.5 million from the sale of certain assets of the Control Systems business unit which was partially offset by other miscellaneous expenses. Other (income) expense for the six months ended January 1, 1999 also included an $18.0 million gain from the adjustment of the company's investment in Broadcom to market value. Other (income) expense for the three and six months ended December 31, 1999 and January 1, 1999 also included the results of foreign currency transactions and partnership activities and net gains from rental income and other miscellaneous items. There were no other significant items in other (income) expense during the three and six months ended December 31, 1999 and January 1, 1999. Earnings before taxes were $47.7 million and $83.8 million in the three and six months ended December 31, 1999, up $20.3 million and $34.9 million, respectively, over the comparable periods of the prior year. Earnings before income taxes in the Broadband segment were $41.0 million and $74.0 million, respectively, in the three and six months ended December 31, 1999, a $16.8 million and $41.9 million improvement, respectively, over the comparable periods of the prior year. Significantly higher sales volumes and improved gross margins were the primary factors in the year-over-year increase. Losses before taxes for the Satellite segment were reduced from $6.6 million to $0.3 million in the three months ended December 31, 1999 and from $14.2 million to $1.5 million in the six months ended December 31, 1999 reflecting the benefit from the previously reported restructuring and resizing efforts in this segment. The company's effective income tax rate was 30 percent for the three and six months ended December 31, 1999, unchanged from the prior year. Net earnings for the quarter ended December 31, 1999 were $33.4 million compared to $19.2 million in the prior year. Higher sales volume, higher gross margins as a percent of sales and reduced operating expenses contributed to the year-over-year improvement in net earnings. Net earnings for the six months ended December 31, 1999 were $58.6 million compared to $34.2 million in the prior year. In January 2000, the company announced it had reached a definitive agreement to sell certain assets of the Satellite Networks business unit to ViaSat Inc. for approximately $75 million. The transaction is subject to various regulatory and other conditions and is expected to close prior to the end of the fiscal year. The amount of the purchase price is subject to normal closing adjustments. The company does not expect the transaction to have a material impact on the company's results of operations or financial position. Year 2000 - --------- The company, like most other major companies, has addressed over the past several years a universal problem commonly referred to as "Year 2000 Compliance," which relates to the ability of computer programs and systems to properly recognize and process date sensitive information before and after January 1, 2000. To date, there have not been, and the company does not expect there to be, any Year 2000 Compliance problems that are 8 of 14 <PAGE> expected to have a material adverse effect on its financial condition or its results of operations. In addition, to date, the company is not aware of any significant customer, vendor, supplier, financial organization or service provider who experienced critical Year 2000 Compliance problems. 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. Explorer is a registered trademark for Scientific-Atlanta. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS ----------------------------------------------------------- The company enters into foreign exchange forward contracts to hedge certain firm commitments and assets denominated in currencies other than the U.S. dollar. These contracts are for periods consistent with the exposure being hedged and generally have maturities of one year or less. To qualify as a hedge, the item to be hedged must expose the company to asset devaluation risk and the related contract must reduce that exposure and be designated by the company as a hedge. Gains and losses on foreign exchange forward contracts, including cost of the contracts, are deferred and recognized in income in the same period as the hedged transactions. The company's foreign exchange forward contracts do not subject the company's results of operations to risk due to exchange rate fluctuations because gains and losses on these contracts generally offset losses and gains on the exposure being hedged. The company does not enter into any foreign exchange forward contracts for speculative trading purposes. If a foreign exchange forward contract did not meet the criteria for a hedge, the company would recognize unrealized gains and losses as they occur. Firmly committed purchase and sales exposure and related derivative contracts through June 30, 2000 are as follows: <TABLE> <CAPTION> Canadian Spanish Dollar Pesetas ---------- --------- (In thousands, except per dollar amounts) <S> <C> <C> Firmly committed purchase (sales) contracts 9,500 (159,720) Notional amount of forward exchange contracts 9,370 (159,720) Average contract amount (Foreign currency/ United States dollar) 1.48 202.26 </TABLE> The company has no derivative exposure beyond June 30, 2000. 9 of 14 <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 10, 1999. (b) Election of directors: <TABLE> <CAPTION> Votes For Withhold Authority ---------- ------------------ <S> <C> <C> Marion H. Antonini 66,214,642 484,085 William E. Kassling 66,226,126 472,601 Mylle Bell Mangum 66,215,327 483,400 </TABLE> David W. Dorman, James F. McDonald, David L. McLaughlin, James V. Napier and Sam Nunn continue as directors. (c)(i) Re-approval of the Long-Term Incentive Plan, as amended Votes For Votes Against Abstain ------------------ ------------------ -------------- 59,490,669 6,843,267 364,791 (ii) Re-approval of the Senior Officer Annual Incentive Plan, as amended Votes For Votes Against Abstain ------------------- ------------------ -------------- 64,406,279 1,874,513 417,935 (iii) Ratification of the selection of Arthur Andersen LLP as independent auditors Votes For Votes Against Abstain ------------------- ------------------ -------------- 66,365,454 113,560 219,713 Item 6 Exhibits and Reports on Form 8-K - ------ -------------------------------- (a) Exhibits. Exhibit No. Description ----------- ----------- 11 Computation of Earnings Per Share 27 Financial Data Schedule (for commission use only) 99 Cautionary Statements (b) No reports on Form 8-K were filed during the quarter ended December 31, 1999. Date: February 11, 2000 /s/ Wallace G. Haislip ----------------- ---------------------- Wallace G. Haislip Senior Vice President Chief Financial Officer and Treasurer (Principal Financial Officer and duly authorized signatory of the Registrant) 10 of 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE <TEXT> <PAGE> SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES Exhibit 11 COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> Three Months Ended December 31, 1999 Three Months Ended January 1, 1999 ------------------------------------ ---------------------------------- Net Per Share Net Per Share Earnings Shares Amount Earnings Shares Amount -------- ------ ------ -------- ------ ------ <S> <C> <C> <C> <C> <C> <C> Basic earnings per common share: Net earnings $ 33,372 78,753 $ 0.42 $19,188 75,274 $ 0.25 Diluted earnings per common share: Net earnings $ 33,372 81,808 0.41 $19,188 76,031 0.25 ------ ------ ----- ------ ------ ---- Effect of dilutive stock options $ - 3,055 $ (0.01) $ - 757 $ - ====== ====== ===== ====== ====== ==== </TABLE> <TABLE> <CAPTION> Six Months Ended December 31, 1999 Six Months Ended January 1, 1999 ---------------------------------- -------------------------------- Net Per Share Net Per Share Earnings Shares Amount Earnings Shares Amount -------- ------ ------ -------- ------ ------ <S> <C> <C> <C> <C> <C> <C> Basic earnings per common share: Net earnings $ 58,626 78,309 $ 0.74 $34,182 77,245 $ 0.44 Diluted earnings per common share: Net earnings $ 58,626 81,237 0.72 $34,182 78,340 0.44 ------ ------ ------ ------ ------ ---- Effect of dilutive stock options $ - 2,928 $ (0.02) $ - 1,095 $ - ====== ====== ====== ===== ====== ==== </TABLE> The following information pertains to options to purchase shares of common stock which were not included in the computation of Diluted Earnings per Common Share because the option's exercise price was greater than the average market price of the common shares: <TABLE> <CAPTION> December 31, 1999 January 1, 1999 ----------------- --------------- <S> <C> <C> Number of options outstanding 61 4,944 Weighted average exercise price $ 60.451 $ 22.473 </TABLE> </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 10-Q for the quarter ended December 31, 1999, 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-30-2000 <PERIOD-START> JUL-03-1999 <PERIOD-END> DEC-31-1999 <CASH> 347,953 <SECURITIES> 4,105 <RECEIVABLES> 306,746 <ALLOWANCES> 8,445 <INVENTORY> 222,012 <CURRENT-ASSETS> 922,890 <PP&E> 272,739 <DEPRECIATION> 107,395 <TOTAL-ASSETS> 1,196,123 <CURRENT-LIABILITIES> 265,337 <BONDS> 257 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 39,811 <OTHER-SE> 820,565 <TOTAL-LIABILITY-AND-EQUITY> 1,196,123 <SALES> 722,040 <TOTAL-REVENUES> 722,040 <CGS> 512,883 <TOTAL-COSTS> 512,883 <OTHER-EXPENSES> 57,840 <LOSS-PROVISION> 372 <INTEREST-EXPENSE> 286 <INCOME-PRETAX> 83,752 <INCOME-TAX> 25,126 <INCOME-CONTINUING> 58,626 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 58,626 <EPS-BASIC> 0.74 <EPS-DILUTED> 0.72 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>4 <DESCRIPTION>CAUTIONARY STATEMENT <TEXT> <PAGE> EXHIBIT 99 CAUTIONARY STATEMENTS General 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-K (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 and some of which are described in more detail below 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 (including, but not limited to, the continued weak economic conditions in the Asia Pacific region and the Latin America region); uncertainties relating to government and regulatory policies; including but not limited to the FCC Report and Order entitled "In the Matter of Implementation of Section 304 of the Telecommunications Act of 1996 - Commercial Availability of Navigation Devices; uncertainties relating to customer plans and commitments; changes in the ownership and/or management of major customers of the company; changes in customer order patterns; 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 development, manufacture, and/or deployment of new products, including digital set-top products and the software applications to be used on such digital set- top products; delays in testing of new products; uncertainties related to the regulation of the Internet; rapid technology changes; the highly competitive environment in which the company operates; the entry of new, well-capitalized competitors into the company's markets as both competitors and customers; reliance on software programs used by the company or its suppliers containing problems related to computations that must be made in 2000 and beyond ("Year 2000 Problems"); in the financial markets relating to the company's capital structure and cost of capital; the impact of a major earthquake on the company's operations; and uncertainties inherent in international operations and foreign currency fluctuations. The words "believe," "expect," "anticipate," "project," "plan," "intend," "seek," "estimate" 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. Factors That May Affect Future Performance Dependence Of The Company On The Cable Television Industry And Cable Television Capital Spending. The majority of the company's revenues come from sales of systems and equipment to the cable television industry. In January 2000, the company announced that it had reached a definitive agreement to sell certain assets of the satellite network business unit as part of its strategy to focus on broadband cable systems and satellite systems that support video and internet protocol data distribution. Demand for these products depends primarily on capital spending by cable television system operators for constructing, rebuilding or upgrading their systems. The amount of this capital spending, and, therefore, the company's sales and profitability, may be affected by a variety of factors, including general economic conditions, the continuing trend of cable system consolidation within the industry, the financial condition of domestic cable television system operators and their access to financing, competition from direct-to-home satellite, wireless television providers and telephone companies offering video programming, technological developments that impact the deployment of equipment and new legislation and regulations affecting the equipment used by cable television system operators and their customers. There can be no assurance that cable television capital spending will increase from historical levels or that existing levels of cable television capital spending will be maintained. Dependence on Key Customers. Although the domestic cable television industry is comprised of thousands of cable systems, a small number of large cable television multiple systems operators ("MSOs") own a majority of the cable television systems and account for a significant portion of the capital expenditures made by cable television <PAGE> system operators. Sales of products to Time Warner, Inc. and its affiliates were 16% of the company's total sales in fiscal 1999, and sales to MediaOne and its affiliates were 14% of the company's total sales in fiscal 1999. The loss of business from a significant MSO could have a material adverse effect on the business of the company. International. The company has and expects to continue to make significant sales to customers outside the United States. In addition, a portion of the company's product manufacturing is located outside the United States. Accordingly, the company's future results could be adversely affected by a variety of factors, including changes in a specific country's or region's political conditions or changes or continued weakness in economic conditions, trade protection measures, import or export licensing requirements, the overlap of different tax structures and unexpected changes in regulatory requirements. Rapid Changes in Technology. 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. The success of the company's existing and future products is dependent on several factors, including proper product definition, product cost, timely completion and introduction of new products, differentiation of new products from those of the company's competitors and market acceptance of these products. There can be no assurance that the company will successfully identify new product opportunities, develop and bring new products to market in a timely manner and achieve market acceptance of its products or that products and technologies developed by others will not render its products or technologies obsolete or noncompetitive. New Product Introductions. The company's future operating results may be adversely affected if the company is unable to continue to develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability on a timely basis. The process of developing the company's new high technology products is inherently complex and uncertain. The company has in the past experienced delays in product development and introduction, and there can be no assurance that the company will not experience further delays in connection with its current product development or future development activities. Competition. The company's products compete with those of a substantial number of foreign and domestic companies, some with greater resources, financial or otherwise, than the company, and the rapid technological changes occurring in the company's markets are expected to lead to the entry of new competitors. The company's ability to anticipate technological changes and to introduce enhanced products on a timely basis will be a significant factor in the company's ability to anticipate technological changes and to introduce enhanced products on a timely basis will be a significant factor in the company's ability to expand and remain competitive. Intellectual Property. The company generally relies upon patent, copyright, trademark and trade secret laws to establish and maintain its proprietary rights in its technology and products. However, there can be no assurance that any of the company's proprietary rights will not be challenged, invalidated or circumvented, or that any such rights will provide significant competitive advantage. Third parties have claimed, and may claim, that the company has infringed their current, or future, intellectual property rights. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays, or require the company to enter into royalty or licensing agreements, any of which could seriously harm the company's business, financial condition and results of operations. There can be no assurance that such royalty or licensing agreements, if required, would be available on terms acceptable to the company, if at all. Additionally, there can be no assurance that the company will prevail in any intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. In the event an intellectual property claim against the company was successful and the company could not obtain a license on acceptable terms or license a substitute technology or redesign to avoid infringement, the company's business, financial condition and results of operations would be seriously harmed. Even if the company prevails in litigation, the expense of litigation could be significant and could seriously harm the company's business, financial condition and results of operation. Reliance on Suppliers. The company's growth and ability to meet customer demands also depend in part on its ability to obtain timely deliveries of parts from the company's suppliers. Certain components of the company's products are presently available only from a single source or limited sources. A reduction or interruption in supply or a significant increase in the price of one or more components could adversely affect the company's business, operating results and financial condition and could materially damage customer relationships. Industry Consolidation and Acquisitions. There has been a recent trend toward industry consolidation. The company's major competitor, General Instrument Corporation, was acquired by Motorola, Inc., and a significant customer, Time Warner Inc., has agreed to be acquired by America Online, Inc. The company believes that this <PAGE> trend toward industry consolidation will continue as companies attempt to strengthen or hold their market positions in an evolving industry. In addition, the company's industry is highly competitive, and as such, the company's growth is dependent upon market growth and its ability to enhance its existing products and services. Accordingly, one of the ways the company may address the need to enhance products and services is through acquisitions of other companies. Acquisitions involve numerous risks, including the following: difficulties in integration of the operations, technologies and products of the acquired companies; the risk of diverting management's attention from normal daily operations of the business; and the potential loss of key employees of the acquired company. Failure to manage growth effectively and successfully integrate acquisitions made by the company could materially harm the company's business and operating results. Volatility of Stock Price. The trading price of the company's common stock may be volatile. The stock market in general, and the market for technology companies in particular, has, from time to time, experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may significantly affect the trading price of the company's common stock, regardless of its actual operating performance. The trading price of the company's common stock could be affected by a number of factors, including: changes in expectations of the company's future financial performance; changes in securities analysts' estimates (or the failure to meet such estimates); announcements of technological innovations; customer relationship developments; conditions affecting the company's targeted markets in general; and quarterly fluctuations in the company's revenue and financial results. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. If this were to happen to the company, such litigation would be expensive and would divert management's attention. </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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SLR

https://www.sec.gov/Archives/edgar/data/835541/0000835541-00-000002.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, IlWz7DZbY6gY1oBDAKC9jsIjos7mJzXX/DEvIfac4ICEOE97BOp+sfSFJXNR0AEY r70u5F7NlR9AjMsNyVd5Pw== <SEC-DOCUMENT>0000835541-00-000002.txt : 20000110 <SEC-HEADER>0000835541-00-000002.hdr.sgml : 20000110 ACCESSION NUMBER: 0000835541-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991126 FILED AS OF DATE: 20000107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLECTRON CORP CENTRAL INDEX KEY: 0000835541 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 942447045 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11098 FILM NUMBER: 503229 BUSINESS ADDRESS: STREET 1: 777 GIBRALTAR DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089578500 MAIL ADDRESS: STREET 1: 777 GIBRALTAR DR CITY: MILPITAS STATE: CA ZIP: 95035 </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 NOVEMBER 26, 1999. __ 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 1-11098 SOLECTRON CORPORATION (Exact Name of Registrant as specified in its Charter) Delaware 94-2447045 (State or other jurisdiction (IRS Employer of Incorporation or Organization) Identification Number) 777 Gibraltar Drive, Milpitas, California 95035 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (408) 957-8500 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 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At December 31, 1999, 296,331,101 shares of Common Stock of the Registrant were outstanding. <PAGE> SOLECTRON CORPORATION INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of November 30, 1999 and August 31, 1999 3 Condensed Consolidated Statements of Income for the three months ended November 30, 1999 and 1998 4 Condensed Consolidated Statements of Comprehensive Income for the three months ended November 30, 1999 and 1998 5 Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 1999 and 1998 6 - 7 Notes to Condensed Consolidated Financial Statements 8 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 30 Item 3. Quantitative and Qualitative Disclosures About 31 Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings 32 Item 2. Changes in Securities 32 Item 3. Defaults Upon Senior Securities 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 Signature 33 2 <PAGE> ITEM 1. FINANCIAL STATEMENTS SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In millions) (Unaudited) November 30, August 31, 1999 1999 ASSETS ----------- ----------- Current assets: Cash, cash equivalents and short-term investments $ 1,470.7 $ 1,688.4 Accounts receivable, net 1,250.8 1,118.3 Inventories 1,495.7 1,080.1 Prepaid expenses and other current assets 116.5 107.3 ---------- ---------- Total current assets 4,333.7 3,994.1 Net property and equipment 675.7 653.6 Other assets 217.7 187.0 ---------- ---------- Total assets $ 5,227.1 $ 4,834.7 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 29.8 $ 21.4 Accounts payable 1,129.6 902.6 Accrued employee compensation 75.2 88.9 Accrued expenses 55.1 40.4 Other current liabilities 83.9 59.9 ---------- ---------- Total current liabilities 1,373.6 1,113.2 Long-term debt 943.9 922.6 Other long-term liabilities 9.1 5.8 ---------- ---------- Total liabilities 2,326.6 2,041.6 ---------- ---------- Commitments Stockholders' equity: Common stock 0.3 0.3 Additional paid-in capital 1,935.5 1,910.1 Retained earnings 1,069.2 971.2 Accumulated other comprehensive losses (104.5) (88.5) ---------- ---------- Total stockholders' equity 2,900.5 2,793.1 ---------- ---------- Total liabilities and stockholders' equity $ 5,227.1 $ 4,834.7 ========== ========== See accompanying notes to condensed consolidated financial statements. 3 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share data) (Unaudited) Three Months Ended November 30, ----------------------- 1999 1998 ---------- ---------- Net sales $ 2,501.8 $ 1,945.6 Cost of sales 2,268.7 1,769.7 ---------- ---------- Gross profit 233.1 175.9 Operating expenses: Selling, general and administrative 85.4 70.8 Research and development 8.8 7.9 ---------- ---------- Operating income 138.9 97.2 Interest income 21.2 4.4 Interest expense (10.9) (5.5) ---------- ---------- Income before income taxes and cumulative effect of change in accounting principle 149.2 96.1 Income taxes 47.7 32.2 ---------- --------- Income before cumulative effect of change in accounting principle 101.5 63.9 Cumulative effect of change in accounting principle for start-up costs, net of $1.6 income tax benefit (3.5) - ---------- --------- Net income $ 98.0 $ 63.9 ========== ========= Basic net income per share: Income before cumulative effect of change in accounting principle $ 0.37 $ 0.27 Cumulative effect of change in accounting principle (0.01) - ---------- --------- Net income per share $ 0.36 $ 0.27 ========== ========= Diluted net income per share: Income before cumulative effect of change in accounting principle $ 0.36 $ 0.26 Cumulative effect of change in accounting principle (0.01) - ---------- --------- Net income per share $ 0.35 $ 0.26 ========== ========= Shares used to compute net income per share: Basic 271.7 236.8 Diluted 283.5 257.5 See accompanying notes to condensed consolidated financial statements. 4 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions) (Unaudited) Three Months Ended November 30, ----------------------- 1999 1998 ---------- ---------- Net income $ 98.0 $ 63.9 Other comprehensive income (loss): Foreign currency translation adjustments, net of income tax benefit of $0.4 in 1999 (15.7) 2.2 Unrealized loss on investments, net of income tax benefit of $0.1 in 1999 (0.3) - ---------- --------- Comprehensive income $ 82.0 $ 66.1 ========== ========= - --------------- Accumulated foreign currency translation losses were $103.2 million at November 30, 1999 and $87.5 million at August 31, 1999. For fiscal year 1999, the foreign currency translation loss primarily resulted from the devaluation of the Brazilian real. Most of Solectron's foreign currency translation adjustment amounts relate to investments which are permanent in nature. To the extent that such amounts relate to investments which are permanent in nature, no adjustment for income taxes is made. Accumulated unrealized losses on investments were $1.3 million at November 30, 1999 and $1.0 million at August 31, 1999. See accompanying notes to condensed consolidated financial statements. 5 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited) Three Months Ended November 30, ----------------------- 1999 1998 ---------- ---------- Cash flows from operating activities: Net income $ 98.0 $ 63.9 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 49.0 40.6 Non-cash interest 7.7 - Tax benefit associated with the exercise of stock options 7.1 - Cumulative effect of change in accounting principle for start-up costs 3.5 - Other 2.4 0.6 Changes in operating assets and liabilities: Accounts receivable (133.9) (201.7) Inventories (404.5) (99.2) Prepaid expenses and other current assets (8.0) (18.2) Accounts payable 227.3 177.6 Accrued expenses and other current liabilities 22.9 17.7 ---------- --------- Net cash used in operating activities (128.5) (18.7) ---------- --------- Cash flows from investing activities: Sales and maturities of short-term investments 144.5 56.4 Purchases of short-term investments (816.2) (9.7) Acquisition of manufacturing locations (38.1) (24.6) Capital expenditures (103.7) (118.8) Proceeds from sale of property and equipment 24.6 5.0 Other (12.6) 0.3 ---------- --------- Net cash used in investing activities (801.5) (91.4) ---------- --------- (continued on next page) 6 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In millions) (Unaudited) Three Months Ended November 30, ------------------------ 1999 1998 ---------- ---------- Cash flows from financing activities: Net proceeds from bank lines of credit 8.4 11.2 Proceeds from long-term debt 13.5 - Net proceeds from stock issued under option and employee purchase plans 18.3 25.6 Other 4.2 3.9 ---------- ---------- Net cash provided by financing activities 44.4 40.7 ---------- ---------- Effect of exchange rate changes on cash and cash equivalents (3.8) 2.2 ---------- --------- Net decrease in cash and cash equivalents (889.4) (67.2) Cash and cash equivalents at beginning of period 1,325.6 225.2 ---------- ---------- Cash and cash equivalents at end of period $ 436.2 $ 158.0 ========== ========== SUPPLEMENTAL DISCLOSURES Cash paid during the period: Income taxes $ 6.2 $ 9.1 Interest $ 5.8 $ 12.6 See accompanying notes to condensed consolidated financial statements. 7 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements NOTE 1 - Basis of Presentation The accompanying unaudited condensed consolidated balance sheets as of November 30, 1999 and August 31, 1999, and the related unaudited condensed consolidated statements of income for the three months ended November 30, 1999 and 1998, and the unaudited condensed consolidated statements of comprehensive income for the three months ended November 30, 1999 and 1998, and the unaudited condensed consolidated statements of cash flows for the three months ended November 30, 1999 and 1998 have been prepared on substantially the same basis as the annual consolidated financial statements. Management believes the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position, operating results and cash flows for the periods presented. The results of operations for the three months ended November 30, 1999 are not necessarily indicative of results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 1999 included in the Company's Annual Report to Stockholders. For clarity of presentation, the Company has indicated its first fiscal quarters as ending on November 30, and its fiscal year as ending on August 31. In fact, the Company's first quarter of fiscal 2000 ended on November 26, 1999, its first quarter of fiscal 1999 ended on November 27, 1998 and its 1999 fiscal year ended on August 27, 1999. NOTE 2 - Inventories Inventories consisted of (in millions): November 30, August 31, 1999 1999 ----------- ----------- Raw materials $ 1,138.3 $ 789.6 Work-in-process 262.2 211.1 Finished goods 95.2 79.4 ----------- ----------- Total $ 1,495.7 $ 1,080.1 =========== =========== 8 <PAGE> NOTE 3 - Net Income Per Share The following table sets forth the computation of basic and diluted net income per share for the three months ended November 30, 1999 and 1998. Three Months Ended November 30, ----------------------- 1999 1998 ---------- ---------- (in millions, except per share data) Net income before cumulative effect of change in accounting principle $ 101.5 $ 63.9 Cumulative effect of change in accounting principle, net of taxes (3.5) - Interest expense from convertible subordinated notes, net of taxes - 2.4 ---------- ---------- Net income - diluted $ 98.0 $ 66.3 ========== ========== Weighted average shares - basic 271.7 236.8 Common stock equivalents - stock options 11.8 7.1 Common shares issuable upon assumed conversion of convertible subordinated notes - 13.6 ---------- ---------- Weighted average shares - diluted 283.5 257.5 ========== ========== Basic net income per share: Income before cumulative effect of change in accounting principle $ 0.37 $ 0.27 Cumulative effect of change in accounting principle (0.01) - ---------- --------- Net income per share $ 0.36 $ 0.27 ========== ========= Diluted net income per share: Income before cumulative effect of change in accounting principle $ 0.36 $ 0.26 Cumulative effect of change in accounting principle (0.01) - ---------- --------- Net income per share $ 0.35 $ 0.26 ========== ========= For the first quarter ended November 30, 1999, options to purchase 273,000 shares of common stock with exercise prices greater than the average fair market value of the Company's stock for the period of $76.80 were not included in the calculation because the effect would have been antidilutive. For the first quarter ended November 30, 1998, options to purchase 489,000 shares of common stock with exercise prices greater than the average fair market value of the Company's stock for the period of $26.77 were not included in the calculation because the effect would have been antidilutive. In addition, the calculation above did not include the 12.4 million common shares issuable upon conversion of the zero-coupon senior notes as they would have been antidilutive. 9 <PAGE> NOTE 4 - Commitments Solectron leases various facilities under operating lease agreements. The facility leases expire at various dates through 2008. All such leases require Solectron to pay property taxes, insurance and normal maintenance costs. Payments of some leases are periodically adjusted based on LIBOR rates. Certain leases for Solectron's facilities, including Milpitas and San Jose, California; Everett, Washington; Suwanee, Georgia; and Columbia, South Carolina, provide Solectron with an option at the end of the lease term of either acquiring the property at its original cost or arranging for the property to be acquired. For these leases, Solectron is contingently liable under a first loss clause for a decline in market value of such leased facilities up to 85% of the original costs, or approximately $149 million in total as of November 30, 1999, in the event Solectron does not purchase the properties at the end of the respective lease terms. Under such agreements, the Company must also maintain compliance with financial covenants similar to its $100 million unsecured multicurrency revolving credit facility. Additionally, Solectron periodically enters into lease arrangements with third-party leasing companies under which it sells fixed assets and leases them back from the leasing companies. Solectron is accounting for these leases as operating leases. NOTE 5 - Segment Information Solectron is operated and managed geographically. Each region has its own president and support staff. Solectron's management uses an internal management reporting system, which provides important financial data, to evaluate performance and allocate Solectron's resources on a geographic basis. However, the current management reporting structure may be subject to changes as Solectron is transitioning into a global supply-chain facilitator offering a complete range of integrated supply-chain solutions to its customers for the entire product cycle. The Company is realigning its operations into three strategic business units - technology solutions, manufacturing and operations, and Global Services. As of November 30, 1999, Solectron's three reportable operating segments were the Americas, Europe and Asia. Intersegment adjustments were related primarily to intersegment sales that were generally recorded at prices that approximated arm's length transactions. Certain corporate expenses were allocated to these operating segments and were included for performance evaluation. Some amortization expenses were also allocated to these operating segments, but the related intangible assets were not allocated. The accounting policies for the segments were the same as for Solectron taken as a whole. Information about the operating segments for the three months ended November 30, 1999 and 1998, was as follows: 10 <PAGE> Three Months Ended November 30, ----------------------- 1999 1998 ---------- ---------- (in millions) Net sales: Americas $ 1,909.9 $ 1,336.0 Europe 347.4 315.5 Asia 341.0 312.5 Intersegment adjustments (96.5) (18.4) ---------- ---------- $ 2,501.8 $ 1,945.6 ========== ========== Depreciation and amortization: Americas $ 28.2 $ 21.9 Europe 6.6 7.6 Asia 8.8 10.1 Corporate 5.4 1.0 ---------- ---------- $ 49.0 $ 40.6 ========== ========== Interest income: Americas $ 4.1 $ 4.7 Europe 1.2 0.9 Asia 0.7 0.3 Corporate 24.2 5.0 Intersegment adjustments (9.0) (6.5) ---------- ---------- $ 21.2 $ 4.4 ========== ========== Interest expense: Americas $ 7.9 $ 5.2 Europe 1.4 1.7 Asia 0.1 0.1 Corporate 10.5 5.0 Intersegment adjustments (9.0) (6.5) ---------- ---------- $ 10.9 $ 5.5 ========== ========== Pre-tax income: Americas $ 123.0 $ 80.9 Europe 14.2 7.6 Asia 26.5 20.2 Corporate (19.6) (12.6) ---------- ---------- $ 144.1* $ 96.1 ========== ========== Capital expenditures: Americas $ 59.2 $ 59.6 Europe 18.5 11.4 Asia 11.3 29.5 Corporate 14.7 18.3 ---------- ---------- $ 103.7 $ 118.8 ========== ========== - --------------- *Includes $5.1 million for cumulative effect of change in accounting principle for start-up costs. 11 <PAGE> November 30, August 31, 1999 1999 ------------ ---------- (in millions) Total assets: Americas $ 2,719.3 $ 2,492.8 Europe 601.9 491.7 Asia 544.8 480.1 Corporate 2,365.0 2,317.9 Intersegment adjustments (1,003.9) (947.8) ------------ ---------- $ 5,227.1 $ 4,834.7 ============ ========== NOTE 6 - Purchase of Business In November 1999, Solectron acquired NULOGIX Technical Services, Inc. (NULOGIX), a wholly owned subsidiary of IBM Canada, in its entirety. NULOGIX is located in Vaughan, Canada, and specializes in repair, remanufacturing and refurbishment. The purchase price was approximately $4.5 million, subject to adjustments. The acquisition was accounted for as a purchase of a business resulting in goodwill of approximately $1.4 million. The condensed consolidated financial statements include the operating results of NULOGIX from the date of acquisition. Pro forma results of operations are not presented because the effect of this acquisition is not significant. NOTE 7 - Purchase of Manufacturing Assets In September 1999, Solectron entered into an agreement to acquire the manufacturing assets, primarily inventory and equipment, of IBM's Netfinity server operations in Greenock, Scotland in several phases for approximately $27 million, subject to adjustments. In addition, Solectron acquired certain IBM intellectual property rights included in the design and manufacture of PC server motherboards for $19.7 million. Under the terms of the agreement, the Company assumed NPI and manufacturing responsibility for the PCB assemblies used in IBM's Netfinity server lines which were formerly manufactured at IBM's Greenock operations. The Company will provide IBM full-service NPI management which includes a full range of premanufacturing services, specifically component and concurrent engineering, test development, prototype, procurement and assembly. Solectron will also provide to IBM for the next three years fully integrated PCB assembly services including early prototyping, new product launch, assembly and test, volume production, end-of-life support and life cycle management. NOTE 8 - Pending Acquisition of Manufacturing Assets In November 1999, Solectron announced the signing of memoranda of understanding for Solectron to acquire the complex systems manufacturing assets of Ericsson's telecommunications infrastructure equipment operations in Longuenesse, France, and Ostersund, Sweden. As part of the agreement, Solectron will provide a complete range of integrated supply-chain solutions to Ericsson. This includes supply-base management, early prototyping, NPI management, complex PCB assembly, configure-to-order and build-to-order complex systems assembly, and global services. The transaction is expected to be completed by the first quarter of calendar year 2000. Completion of the transaction is subject to applicable government approvals and various conditions of closing. 12 <PAGE> NOTE 9 - Newly Adopted Accounting Pronouncement Effective in the first quarter of fiscal 1999, the Company adopted the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." This SOP requires companies to expense all costs incurred in connection with start-up activities. The Company recorded a cumulative effect of change in accounting principle of $3.5 million, net of $1.6 million tax benefit. NOTE 10 - Subsequent Event On November 30, 1999, Solectron completed its acquisition of SMART Modular Technologies, Inc (SMART). Under the terms of the agreement, each share of SMART common stock was exchanged for 0.51 shares of Solectron common stock. As a result, Solectron issued approximately 23.8 million shares of Solectron common stock and assumed all stock options held by SMART employees. The acquisition is being accounted for as a pooling of interests. SMART is a designer and manufacturer of memory modules and memory cards, embedded computers and I/O products. Since the fiscal years for Solectron and SMART differ, SMART has changed its fiscal year to coincide with Solectron's starting in the first quarter of fiscal 2000. The following pro forma combined financial information gives effect to the acquisition of SMART using the pooling of interests method of accounting. This pro forma combined financial information includes certain adjustments for the elimination of net sales, cost of sales and income taxes related to shipments by SMART to Solectron as well as for reclassification of other, net of SMART to selling, general and administrative to conform with Solectron's financial statement presentation. There were no adjustments necessary to conform the accounting policies of the combining companies. Pro Forma Three Months Ended November 30, ----------------------- 1999 1998 ---------- ---------- (in millions) Net sales $ 2,775.6 $ 2,203.1 Operating income $ 154.8 $ 113.0 The combined pro forma financial information presented is not necessarily indicative of the operating results or financial position that would have occurred if the merger had been in effect during the periods indicated, nor is such information indicative of the future operating results or financial positions of the combined company after the merger. 13 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute forward-looking statements which involve risks and uncertainties. Solectron's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under "Trends and Uncertainties" below. General Solectron provides electronics manufacturing services to original equipment manufacturers (OEMs) who design and sell networking equipment, workstations, personal and notebook computers, computer peripherals, telecommunications equipment or other electronic equipment. These OEMs include Cisco Systems, Inc., Hewlett-Packard Company, Inc., International Business Machines Corporation (IBM), and Sun Microsystems, Inc. These companies contract with Solectron to build their products for them or to obtain other related services from Solectron. Solectron furnishes integrated supply-chain solutions that span the entire product life cycle - from technology, to manufacturing, to global services. These solutions include the following range of services: - - Product design; - - New Product Introduction management; - - Materials purchasing and management; - - Prototyping; - - Printed circuit board assembly (the process of placing components on an electrical printed circuit board that controls the processing functions of a personal computer or other electronic equipment); - - System assembly (for example, building complete systems such as mobile telephones and testing them to ensure functionality); - - Distribution; - - Product repair; and - - Warranty services. Solectron's performance of these services allows its customers to remain competitive by focusing on their core competencies of sales, marketing, and research and development. We have manufacturing facilities in the Americas, Europe and Asia. This geographic presence gives our customers access to manufacturing services in the locations where they need to be close to their expanding markets for faster product delivery. During 1997, Solectron established a strategic, global manufacturing partnership with Ericsson Telecom AB's Business Area Infocom Systems (Ericsson). We established a New Product Introduction (NPI) center in Sweden and transferred production from certain Ericsson plants worldwide to our manufacturing sites around the world. In October 1997, we acquired certain assets, primarily equipment and inventory, of Ericsson's printed circuit board (PCB) assembly operation located in Sao Paulo, Brazil. In April 1998, Solectron acquired NCR Corporation's (NCR) manufacturing assets in Columbia, South Carolina; Duluth, Georgia; and Dublin, Ireland. Under the terms of the agreement, NCR will outsource the manufacturing of certain computer components to Solectron for at least 14 <PAGE> five years. The site in Duluth was subsequently merged with the Braselton, Georgia, site into a newly constructed manufacturing facility in Suwanee, Georgia, in October 1999. The Braselton site was originally acquired from Mitsubishi in October 1998. In June 1998, Solectron acquired International Business Machines Corporation's (IBM) Electronic Card Assembly and Test (ECAT) manufacturing assets in Charlotte, North Carolina, and non-exclusive rights to certain IBM intellectual property. Under the terms of the agreement, we will provide PCB assembly services to IBM in North America for the next three years. In addition, IBM has made available to Solectron intellectual property rights covering a wide spectrum of technologies and capabilities. IBM also provided to Solectron failure analysis and characterization tools for process development and manufacturing, including fault detection and isolation. In October 1998, Solectron acquired the wireless telephone manufacturing assets of Mitsubishi Consumer Electronics America, Inc.'s (MCEA) Cellular Mobile Telephone (CMT) division in Braselton, Georgia. MCEA was a subsidiary of Mitsubishi Electric Corporation (Mitsubishi). Under the terms of the agreement, we will provide MCEA-CMT with a full range of manufacturing services for five years, including NPI management, PCB assembly and full systems assembly for MCEA's branded and private-label cellular products sold in North America. In October 1999, we combined the operations of Braselton and Duluth into a newly constructed manufacturing facility in Suwanee, Georgia. Also in October 1998, Solectron signed a definitive agreement with Ingram Micro Inc. under which the two companies entered into a strategic alliance to provide global build-to-order and configure-to-order assembly services for personal computers, servers and related products in the United States, Canada, Europe, Asia and Latin America. The alliance is managed by both companies under a joint management matrix that includes a sales and marketing staff, program management, materials management, information technology resources, test and process engineers, and in most cases, uses existing facilities, systems and personnel. Shipments to customers under the arrangement began in April 1999. In February 1999, Solectron acquired IBM's Electronic Card Assembly and Test (ECAT) manufacturing assets in Austin, Texas, and non-exclusive rights to certain IBM intellectual property. Under the terms of the agreement, for the next three years we will provide PCB assembly for motherboards used in IBM's mobile computer products manufactured worldwide. This includes physical design, early prototyping, new product launch, PCB assembly and test, volume production, end-of-life support, field return services and life cycle management. We will also provide IBM's worldwide design teams a full range of integrated NPI services which involve pre-manufacturing support, such as design and layout, component and concurrent engineering, test development, prototype, procurement and assembly. In July 1999, Solectron issued common stock to acquire Sequel, Inc. (Sequel). Sequel was a privately held corporation specializing in notebook computer and liquid crystal display repair service and support. We have assumed responsibility for Sequel's business operations in San Jose, California; Memphis, Tennessee; and Reading, United Kingdom. We have also assumed Sequel's ownership in joint-venture operations in Japan and Taiwan. The acquisition is expected to enable us to expand our global support services capabilities by adding quick-turn service 15 <PAGE> operations, customer service centers and help-desk support for the end-users of Solectron-built products. In August 1999, Solectron acquired the manufacturing assets of Trimble Navigation Limited (Trimble) in Sunnyvale, California, and assumed full manufacturing responsibility of Trimble's Global Positioning System (GPS) and related radio frequency (RF) technology products for the next three years. Trimble is a leader in RF products enabled by GPS technology. We also acquired certain intellectual property rights related to RF technology. Under the terms of the agreement, we will provide Trimble a full range of integrated services across the entire product life cycle including design consultation, prototyping, NPI management, and volume PCB and systems assembly. In September 1999, Solectron acquired the manufacturing assets of IBM's Netfinity server operations in Greenock, Scotland. In addition, we acquired certain IBM intellectual property rights included in the design and manufacture of PC server motherboards. Under the terms of the agreement, we assumed NPI and manufacturing responsibility for the PCB assemblies used in IBM's Netfinity server lines which were formerly manufactured at IBM's Greenock operations. We will provide IBM full-service NPI management which includes a full range of premanufacturing services, specifically component and concurrent engineering, test development, prototype, procurement and assembly. We will also provide IBM for the next three years fully integrated PCB assembly services including early prototyping, new product launch, assembly and test, volume production, end-of-life support and life cycle management. The volume PCB assembly services will be transferred from IBM's Greenock facility to our existing global manufacturing operations. In addition, we have established a new, full-service NPI center in Port Glasgow, Scotland, to support the IBM design teams. In October 1999, Solectron signed a definitive agreement with Acer, Inc. (Acer), a core unit of the Acer Group, the world's third-largest PC manufacturer, to form a strategic alliance to provide global design, manufacturing and service solutions for OEM-branded personal computers, servers and workstations. As a result of the alliance, it is expected that customers will be able to access the extensive technology, motherboard and system-level design services, and global supply-base, manufacturing, distribution, logistics and Global Services operations of both companies to further streamline their global supply chain. Solectron and Acer plan to leverage their combined resources, including facilities, systems and personnel, to provide the industry's first fully integrated, global and optimized end-to-end design, manufacturing and services solution. The companies will manage this alliance under a joint management matrix. In November 1999, Solectron acquired NULOGIX Technical Services, Inc. (NULOGIX), a wholly owned subsidiary of IBM Canada, in its entirety. NULOGIX is located in Vaughan, Canada, and specializes in repair, remanufacturing and refurbishment. With this acquisition, we expect to be able to provide the Canadian market a full range of value-added global service solutions. These services include product repair, upgrades, remanufacturing and maintenance through factory and fast-hub service centers located around the world; help-desk support through customer call centers for end-users; logistics and parts management; returns processing; warehousing; engineering change management; and end-of-life manufacturing. Also in November 1999, Solectron announced the signing of memoranda of understanding for Solectron to acquire the complex systems manufacturing 16 <PAGE> assets of Ericsson's telecommunications infrastructure equipment operations in Longuenesse, France, and Ostersund, Sweden. As part of the agreement, Solectron will provide a complete range of integrated supply-chain solutions to Ericsson. This includes supply-base management, early prototyping, NPI management, complex PCB assembly, configure-to-order and build-to-order complex systems assembly, and global services. The transaction is expected to be completed by the first quarter of calendar year 2000. Completion of the transaction is subject to applicable government approvals and various conditions of closing. On November 30, 1999, Solectron completed its acquisition of SMART Modular Technologies, Inc (SMART). Under the terms of the agreement, each share of SMART common stock was exchanged for 0.51 of a share of Solectron common stock. Solectron issued approximately 23.8 million shares of Solectron common stock. SMART is a designer and manufacturer of memory modules and memory cards, embedded computers, and I/O products. The acquisition is another step in enabling Solectron to expand its service capabilities and infrastructure as it continues to transform itself into a global supply-chain facilitator. We have gained a manufacturing presence in Aguada, Puerto Rico, and additional manufacturing capacity through SMART's facilities in Fremont, California; Penang, Malaysia; and East Kilbride, Scotland. In addition, we have gained design centers in Fremont, California; Bangalore, India; Boston, Massachusetts; and Ayr, Scotland. On January 5, 2000, Solectron signed a letter of intent to acquire Alcatel's manufacturing assets in Aguadilla, Puerto Rico, and Longview, Texas. Alcatel is a world leader in building next-generation networks and end-to-end data voice solutions. Solectron will assume full manufacturing responsibility for Alcatel's build-to-order (BTO) RF communication systems and certain networking printed circuit board (PCB) products. As part of the proposed agreement, Solectron will provide a full range of manufacturing services to Alcatel for the next three years including: prototyping and NPI management of RF systems, BTO systems build and high-volume PCB assembly. The transaction is expected to be completed by the end of the first quarter of calendar year 2000. Completion of the transaction is subject to applicable government approvals and various conditions of closing. On January 6, 2000, Solectron signed a letter of intent to acquire tbe manufacturing assets of Premisys Communications, Inc., a wholly owned subsidiary of Zhone Technologies, Inc. (Zhone). Zhone is a communications equipment provider integrating expertise in voice, video and data communications. Under the proposed agreement, Solectron will become Zhone's virtual supply-chain partner and will sign a five-year commitment with Zhone to provide product life cycle management services, including NPI through repair and end-of-life services. The transaction is expected to be completed by the end of the first quarter of calendar year 2000. Completion of the transaction is subject to applicable government approvals and various conditions of closing. Results of Operations The electronics industry is subject to rapid technological change, product obsolescence and price competition. These and other factors affecting the electronics industry, or any of Solectron's major customers in particular, could materially harm Solectron's results of operations. See "Trends and Uncertainties" for factors relating to possible fluctuation of operating results and our competitors. 17 <PAGE> The following table sets forth, for the periods indicated, certain items in the Consolidated Statements of Income as a percentage of net sales. The financial information and the discussion below should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Three Months Ended November 30, ------------------- 1999 1998 ------ ------ Net sales 100.0% 100.0% Cost of sales 90.7 91.0 ------ ------ Gross profit 9.3 9.0 Operating expenses: Selling, general and administrative 3.4 3.6 Research and development 0.4 0.4 ------ ------ Operating income 5.5 5.0 Net interest income (expense) 0.4 (0.1) ------ ------ Income before income taxes and cumulative effect of change in accounting principle 5.9 4.9 Income taxes 1.9 1.6 ------ ------ Income before cumulative effect of change in accounting principle 4.0 3.3 Cumulative effect of change in accounting principle for start-up costs (0.1) - ------ ------ Net income 3.9% 3.3% ====== ====== Net Sales Net sales for the first quarter of fiscal 2000 grew to $2.5 billion, an increase of 28.6% over the same period in fiscal 1999. The sales growth was primarily attributable to strong demand from our customers worldwide and acquisitions made during fiscal 1999. However, the demand increases were partially offset by end-of-life products and component shortages in flash memory, tantalum capacitors and saw filters. Americas - The sales increase for the first quarter of fiscal 2000 compared to the corresponding period in fiscal 1999 was primarily due to strong demand and acquisitions of manufacturing assets of Mitsubishi in October 1998, IBM ECAT in Austin, Texas in February 1999 and Trimble in August 1999. The business acquisitions of Sequel in July 1999 and NULOGIX in November 1999 also contributed incremental net sales to the first quarter of fiscal 2000. In addition, the Mexico site and Milpitas site in California were the largest contributors due to demand growth from our customers. The sales growth in Milpitas site was partially offset by planned transfer of personal computer PCB programs and computer peripherals systems assembly programs to Mexico and networking business to Penang. Solectron's operations in Milpitas, California, contributed a substantial portion of Solectron's net sales and operating income during fiscal 1999, 1998 and 1997. In recent years, management has undertaken deliberate actions to achieve improved global load balancing by 18 <PAGE> transferring certain projects from the Milpitas site to other sites worldwide. However, the performance of the Milpitas operation is expected to continue to be a significant factor in the overall financial performance of Solectron. Any adverse material change to the customer base, product mix, efficiency or other attributes of this site could materially harm Solectron's consolidated results of operations. Europe - Net sales increase in the first quarter of fiscal 2000 over the same period of fiscal 1999 was principally due to increased demand from our telecommunications customers. Additionally, the recently expanded Romania site started ramping up its production to meet demand. Asia - Net sales growth was primarily due to core business growth in the first quarter of fiscal 2000 compared to the same period of fiscal 1999. The China and Japan sites also experienced ramp-up production to meet demand growth. Solectron's Penang operations in Malaysia continue to benefit from the transfer of networking business from Milpitas, California. In the first quarter of fiscal 2000, international locations contributed 40.1% of consolidated net sales compared to 39.2% in the same period of fiscal 1999. As a result of Solectron's international sales and facilities, Solectron's operations are subject to the risks of doing business abroad. While, to date, these dynamics have not materially harmed Solectron's results of operations, we cannot assure that there will not be such an impact in the future. See "Trends and Uncertainties" for factors pertaining to our international sales and fluctuations in the exchange rates of foreign currency for further discussion of potential adverse effects in operating results associated with the risks of doing business abroad. Net Sales to Major Customers - Several of our customers accounted for more than 10% of our net sales in the first three months of fiscal 2000 and 1999. The following table details these customers and the percentage of net sales attributed to them. Three Months Ended November 30, ------------------- 1999 1998 ------ ------ Cisco Systems, Inc. (Cisco) 11.5% * Lucent Technologies Inc. (Lucent)** 10.1% * International Business Machines Corporation (IBM) 10.0% * Hewlett-Packard Company (HP) * 12.2% - ---------------- * Less than 10%. **Reflects the merger of Lucent and Ascend Communications, Inc. No other customer accounted for more than 10% of net sales during any of the periods presented. Solectron's top ten customers accounted for approximately 72% of consolidated net sales in the first three months of fiscal 2000 and 1999. We are dependent upon continued revenues from Cisco, Lucent, IBM, and HP as well as our other top ten customers. We cannot guarantee that these or any other customers will not increase or decrease as a percentage of consolidated net sales either individually or as a group. 19 <PAGE> Consequently, any material decrease in sales to these or other customers could materially harm Solectron's results of operations. Solectron believes that its ability to continue achieving growth will depend upon growth in sales to existing customers for their current and future product generations, successful marketing to new customers, and future geographic expansion. Customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of delayed, canceled or reduced orders with new business cannot be assured. In addition, we cannot assure that any of Solectron's current customers will continue to utilize Solectron's services. Because of these factors, we cannot assure that Solectron's historical revenue growth rate will continue. See "Trends and Uncertainties" for a discussion of certain factors affecting the management of growth, geographic expansion, and potential fluctuations in sales and results of operations. Gross Profit The gross margin percentage increased to 9.3% for the first quarter of fiscal 2000 period from 9.0% for the same period of fiscal 1999. The increase was primarily attributable to higher sales volume, manufacturing efficiency and cost reduction, partially offset by the negative impacts from product mix and non-linear production due to component shortages and integration of new projects. For the foreseeable future, Solectron's gross margin is expected to depend primarily on product mix, production efficiencies, utilization of manufacturing capacity, start-up and integration costs of new and acquired businesses, the percentage of sales derived from systems-build projects, pricing within the electronics industry, and the cost structure at individual sites. Over time, gross margins at the individual sites and for Solectron as a whole may continue to fluctuate. In future periods, we anticipate that a larger percentage of our sales may be derived from systems-build projects which generally yield lower profit margins than PCB assembly. Increases in the systems-build business, additional costs associated with new projects, and price erosion within the electronics industry could harm our gross margin. In addition, we have recently experienced component shortages. While the component availability fluctuates from time to time and is still subject to lead time and other constraints, this could possibly limit our revenue growth and might have a negative impact on our revenue projections for the foreseeable future. Because of these factors and others discussed under "Trends and Uncertainties" below, we cannot assure that Solectron's gross margin will not fluctuate or decrease in future periods. Selling, General and Administrative Expenses In absolute dollars, selling, general and administrative (SG&A) expenses increased 20.6% in the first quarter of fiscal 2000 over the same period of fiscal 1999. The increase in fiscal 2000 period was primarily due to investment in infrastructure such as marketing, sales, supply-base management as well as continuing investment in information systems to support the increased size and complexity of our business. As a percentage of net sales, SG&A expenses were 3.4% and 3.6% in the fiscal 2000 and fiscal 1999 periods, respectively. The primary reason for the fiscal 2000 decrease in SG&A expenses as a percentage of net sales is the significant increase in the sales base, offset partially by the costs related to investments in our business infrastructure and 20 <PAGE> information systems. We anticipate SG&A expenses will continue to increase in terms of absolute dollars in the future, and may possibly increase as a percentage of revenue, as we continue to build the infrastructure necessary to support our current and prospective business. Research and Development Expenses With the exception of our Force Computers operation, Solectron's research and development (R&D) activities have been focused primarily on the development of prototype and engineering design capabilities, fine pitch interconnecting technologies (which include ball-grid array, tape-automated bonding, multichip modules, chip-on-flex, chip-on-board and flip chip), high-reliability environmental stress test technology and the implementation of environmentally friendly assembly processes such as VOC-free and no-clean. Force's R&D efforts are concentrated on new product development and improvement of product designs through improvements in functionality and the use of microprocessors in embedded applications. In absolute dollars, R&D expenses were $8.8 million in the first quarter of fiscal 2000 and $7.9 million in the same quarter of fiscal 1999. As a percentage of net sales, R&D expenses were 0.4% in the first quarter of fiscal 2000 and 1999 periods. The increase in R&D expenses in the fiscal 2000 period compared to fiscal 1999 period was primarily due to increased R&D effort at Force and new R&D projects initiated at various sites. We expect that R&D expenses will increase in absolute dollars in the future and may increase as a percentage of net sales as SMART, our newly acquired operations, and Force will continue to invest in their R&D efforts and additional R&D projects are undertaken at certain sites. Net Interest Income (Expense) Net interest income was $10.3 million for the first three months of fiscal 2000 compared to net interest expense of $1.1 million in the same period of fiscal 1999. The net interest income in the fiscal 2000 period resulted from interest income earned on undeployed cash and investments and the capitalization of interest expense, partially offset by interest expense on our 4% yield zero-coupon convertible senior notes and 7 3/8% senior notes. In the first quarter of fiscal 2000, we capitalized approximately $0.3 million of interest expense related to the costs of computer software developed for internal use. We expect to utilize more of the undeployed cash during fiscal 2000 in order to fund anticipated future growth. See "Trends and Uncertainties" for factors relating to management growth and potential fluctuations in operating results. Income Taxes Income taxes increased to $47.7 million in the first quarter of fiscal 2000 from $32.2 million in the fiscal 1999 period. The increase was primarily due to increased income before income taxes, partially offset by the lower effective income tax rate of 32.0% for the first quarter of fiscal 2000 comparing to 33.5% for the same quarter of fiscal 1999. In general, the effective income tax rate is largely a function of the balance between income from domestic and international operations. Solectron's international operations, taken as a whole, have been taxed at a lower rate than those in the United States, primarily due to the tax holiday granted to Solectron's sites in Malaysia. The Malaysian tax holiday is effective through January 31, 2002, subject to some 21 <PAGE> conditions, including certain levels of research and development expenditures. Solectron has also been granted various tax holidays in China, which are effective for various terms and are subject to some conditions. Cumulative Effect of Change in Accounting Principle See Note 9 of Notes to Condensed Consolidated Financial Statements. Liquidity and Capital Resources Working capital was $3.0 billion at November 30, 1999 compared to $2.9 billion at the end of fiscal 1999. During the first three-month period of fiscal 2000, cash, cash equivalents and short-term investments decreased to $1.5 billion from $1.7 billion which reflects funding for required investments in working capital and capital expenditures to support sales growth. Additionally, we used approximately $38.1 million for acquisitions of additional manufacturing assets from Trimble in California, partial acquisition funding of manufacturing assets at IBM's Netfinity server operations in Greenock of Scotland, and the business acquisition of NULOGIX in Canada during the first quarter of fiscal 2000. As we continue to grow, it is expected that we will require greater amounts of working capital to support our operations. We believe that our current level of working capital, together with cash generated from operations and our available credit facilities, will provide adequate working capital for the foreseeable future. However, we may need to raise additional funds to finance our rapid expansion, including establishing new locations or financing additional acquisitions. We cannot assure that such funds, if needed, will be available on terms acceptable to us or at all. Inventory levels fluctuate directly with the volume of Solectron's manufacturing. Changes or significant fluctuations in product market demands can cause fluctuations in inventory levels that may result in changes of inventory turns and liquidity. Historically, we have been able to manage our inventory levels for these fluctuations. However, should material fluctuations occur in product demand, we could experience slower turns and reduced liquidity. The increase in inventory levels at November 30, 1999 from fiscal year end 1999 was primarily due to Y2K buffer inventory, bulk inventory buys from customers associated with acquisitions and new business, and incomplete kits on hand awaiting short components. In the first quarter of fiscal 2000, Solectron invested $103.7 million in capital expenditures. A large portion of these expenditures related to the purchase of new equipment, primarily surface mount assembly and test equipment, to meet current and expected production levels, as well as to replace or upgrade older equipment which was retired or sold. Expenditures were also made for the acquisition of land and buildings for the Mexico and Romania sites. We expect total capital expenditures in fiscal 1999 to be approximately $500 million. In addition to working capital as of November 30, 1999, which includes cash and cash equivalents investments of $436.2 million and short-term investments of $1,034.5 million, Solectron has available a $100 million unsecured multicurrency revolving credit facility which is subject to financial covenants. We also have approximately $115 million in unused foreign credit facilities of which $20 million is committed credit line. 22 <PAGE> "Year 2000" Issues Solectron developed a comprehensive program to address the issues associated with the programming code in existing computer systems as the year 2000 approached. The Year 2000 problem was pervasive and complex, since computer systems, manufacturing equipment and industrial control systems would have been affected in some way by the rollover of the two-digit year value to 00. Systems that could not properly recognize such dates could have generated erroneous information or caused a system to fail. The Year 2000 issue created risk for us from unforeseen problems in our systems and from those of third parties with whom we do business. Any failure of Solectron's and/or third parties' computer systems, manufacturing equipment and industrial control systems could have materially harmed our ability to conduct business. To deal with this issue we formed a worldwide task force and implemented a comprehensive program to analyze our internal systems as well as all external systems (including vendor, customer and banking systems) upon which we were dependent, to identify and evaluate any potential Year 2000 issues. This task force met regularly and tracked progress against the program, and then modified the program as was needed to help ensure timely completion of all tasks. We were committed to achieving Year 2000 compliance; however, because a significant portion of the potential problem was external to us and therefore outside of our direct control, we could not totally give assurance that we would be fully Year 2000 compliant. In addition, since full testing of Year 2000 functionality had to occur in a simulated environment, we were not able to test full system Year 2000 interfaces and capabilities prior to the start of the year 2000. As of November 30, 1999, we had completed an inventory, assessment, remediation and testing of internal systems, hardware, software, manufacturing equipment and embedded chips in industrial control instruments. While we believed that our testing and evaluation had been entirely comprehensive, we could not give assurance that all systems critical to Year 2000 compliance had been identified, or that the corrective actions identified would be completely successful. As of November 30, 1999, we had inventoried every key supplier of goods and services to us and considered the potential impact of these suppliers being Year 2000 compliant on our customers and us. Also, we evaluated the key suppliers' responses to our mailing surveys and then audited those suppliers. We disqualified potentially non-compliant sources and qualified new suppliers as needed. We were also involved with various geographic Year 2000 consortiums, with the goal of leveraging contacts and information for commonly used suppliers and services such as utility companies. We are a founding member of the High Tech Consortium (HTC) - Year 2000 & Beyond, which through collaborative efforts ensured that member companies were addressing Year 2000 readiness on a coordinated basis. The HTC addressed the risk associated with the interconnected supply chain. Detailed supplier audits by the HTC's independent consultants began in late March. In addition, we completed the review of EDI linkages and data transmission for our customers and suppliers. We developed contingency plans for the replacement and re-qualification of suppliers, the creation of certain buffer stock, the relocation of production using our disaster recovery plans, and the purchase of emergency generators in the event of power outages at locations we considered not to be low risk. 23 <PAGE> We estimate the total cost of completing the program to be in the range of $32 million to $36 million. Of this amount, approximately $10 million was for the replacement of capital equipment, approximately half of which comprises non-compliant systems that would not otherwise have been replaced at that point in time. A significant portion of these costs was not incremental to us, but rather represents the redeployment of existing resources. Certain other information technology projects have been delayed due to the focus on Year 2000 issues. The total amount spent on the program in the prior fiscal year ended August 31, 1999, was $27 million, of which $18 million principally pertained to payroll costs for personnel involved in the program and costs of outside consultants and $9 million principally pertained to the replacement of capital equipment. The total amount spent for the first quarter ended November 30, 1999 was $2.9 million in expense plus an additional $0.4 million on capital expenditures. Prior to fiscal 1999, costs of software and hardware applications incurred for Year 2000 compliance were not tracked separately, but were estimated to be in the range of $2 million to $3 million. Although we experienced no significant incidents as we passed the 12/31/99 date and we do not believe that this issue will have material future costs for reparations or that there will be any collateral legal costs, we cannot assure such results. Trends and Uncertainties A majority of our net sales comes from a small number of customers; if we lose any of these customers, our net sales could decline significantly. A majority of our annual net sales comes from a small number of our customers. Our ten largest customers accounted for 72% of net sales in the first quarter of fiscal 2000 and 74% of net sales in fiscal 1999. Since we are dependent upon continued net sales from our ten largest customers, any material delay, cancellation or reduction of orders from these or other major customers could cause our net sales to decline significantly. Some of these customers individually account for more than ten percent of our annual net sales. We cannot guarantee that we will be able to retain any of our ten largest customers or any other accounts. In addition, our customers may materially reduce the level of services ordered from us at any time. This could cause a significant decline in our net sales and we may not be able to reduce the accompanying expenses at the same time. Our long-term contracts do not include minimum purchase requirements. Although we have long-term contracts with a few of our top ten customers, including Ericsson Telecom AB, NCR Corporation and IBM Corporation, under which these customers are obligated to obtain services from us, they are not obligated to purchase any minimum amount of services. As a result, we cannot guarantee that we will receive any net sales from these contracts. In addition, these customers with whom we have long-term contracts may materially reduce the level of services ordered at any time. This could cause a significant decline in our net sales and we may not be able to reduce our accompanying expenses at the same time. 24 <PAGE> Possible fluctuation of operating results from quarter to quarter could affect the market price of our common stock. Our quarterly earnings may fluctuate in the future due to a number of factors including the following: - - Differences in the profitability of the types of manufacturing services we provide. For example, high velocity and low complexity systems assembly services have lower gross margins than PCB assembly services; - - Our ability to maximize the hours of use of our equipment and facilities is dependent on the duration of the production run time for each job and customer; - - The amount of automation that we can use in the manufacturing process for cost reduction varies depending upon the complexity of the product being made; - - Our ability to optimize the ordering of inventory as to timing and amount to avoid holding inventory in excess of immediate production; and - - Fluctuations in demand for our services or the products being manufactured. Therefore, our operating results in the future could be below the expectations of securities analysts and investors. If this occurs, the market price of our common stock could be harmed. We are dependent upon the electronics industry which continually produces technologically advanced products with short life cycles; Our inability to continually manufacture such products on a cost-effective basis would harm our business. A majority of our net sales is to companies in the electronics industry, which is subject to rapid technological change and product obsolescence. If our customers are unable to create products that keep pace with the changing technological environment, our customers' products could become obsolete and the demand for our services could decline significantly. If we are unable to offer technologically advanced, cost-effective, quick-response manufacturing services to customers, demand for our services will also decline. In addition, a substantial portion of our net sales is derived from our ability to offer complete service solutions for our customers. For example, if we fail to maintain high-quality design and engineering services, our net sales would significantly decline. We potentially bear the risk of price increases associated with potential shortages in the availability of electronics components. At various times, there have been shortages of components in the electronics industry. One of the services that we perform for many customers is purchasing electronics components used in the manufacturing of the customers' products. As a result of this service, we potentially bear the risk of price increases for these components because we are unable to purchase components at the same time as we agree with our customers on the pricing for the components. Our net sales could decline if our competitors provide comparable manufacturing services at a lower cost. We compete with different contract manufacturers, depending on the type of service we provide or the geographic locale of our operations. These 25 <PAGE> competitors may have greater manufacturing, financial, R&D and/or marketing resources than we have. In addition, we may not be able to offer prices as low as some of our competitors because those competitors may have lower cost structures as a result of their geographic location or the services they provide. Our inability to provide comparable or better manufacturing services at a lower cost than our competitors could cause our net sales to decline. If we are unable to manage our rapid growth and assimilate new operations in a cost-effective manner, our profitability could decline. We have experienced rapid growth over the last five fiscal years. Our historical growth may not continue. In recent years, we have established operations in different places throughout the world. For example, in fiscal 1998, we opened offices in Taipei, Taiwan; Tel Aviv, Israel; and Norrkoping and Stockholm, Sweden, and commenced manufacturing operations in Guadalajara, Mexico, and Timisoara, Romania. Also in fiscal 1998, we acquired foreign facilities in Sao Paulo, Brazil, and Dublin, Ireland. Furthermore, through acquisitions in fiscal 1998 and 1999, we acquired facilities in Duluth, Georgia; Columbia, South Carolina; and Memphis, Tennessee, and enhanced our capabilities in Charlotte, North Carolina; Austin, Texas; and Milpitas, California. Also during that period, we announced a joint venture with Ingram Micro Inc. During October and November of 1999, we completed the asset acquisition of IBM's Netfinity server operations in Greenock, Scotland, and acquired IBM Canada's NULOGIX Technical Services, Inc. subsidiary in Vaughan, Canada, in its entirety. Also in October 1999, we signed a definitive agreement with Acer, Inc. (Acer), a core unit of the Acer Group, the world's third-largest PC manufacturer, to form a strategic alliance to provide global design, manufacturing and service solutions for OEM-branded personal computers, servers and workstations. Also in November 1999, we announced the signing of memoranda of understanding for Solectron to acquire the complex systems manufacturing assets of Ericsson's telecommunications infrastructure equipment operations in Longuenesse, France, and Ostersund, Sweden. On November 30, 1999, we completed the acquisition of SMART Modular Technologies, Inc. On January 5, 2000, we signed a letter of intent to acquire Alcatel's manufacturing assets in Aguadilla, Puerto Rico, and Longview, Texas. On January 6, 2000, we signed a letter of intent to acquire tbe manufacturing assets of Premisys Communications, Inc., a wholly owned subsidiary of Zhone Technologies, Inc. As we manage and continue to expand new operations, we may incur substantial infrastructure and working capital costs. If we do not achieve sufficient growth to offset increased expenses associated with rapid expansion, our profitability will decline. We need to manage integration of our acquisitions to maintain profitability. In fiscal 1998 and 1999, we completed acquisitions of manufacturing assets and facilities from Ericsson, NCR, IBM, Mitsubishi and Trimble Navigation Limited and acquired all of the capital stock of Sequel, Inc. We also continue to evaluate acquisition opportunities and may pursue additional acquisitions over time. These acquisitions involve risks, including: 26 <PAGE> - - Integration and management of the operations; - - Retention of key personnel; - - Integration of purchasing operations and information systems; - - Management of an increasingly larger and more geographically disparate business; and - - Diversion of management's attention from other ongoing business concerns. Our profitability will suffer if we are unable to successfully integrate and manage recent acquisitions, as well as any future acquisitions that we might pursue, or if we do not achieve sufficient revenue to offset the increased expenses associated with these acquisitions. Our international sales are a significant and growing portion of our net sales; we are increasingly exposed to risks associated with operating internationally. In fiscal 1999, approximately 36% of our net sales came from outside of the United States. As a result of our foreign sales and facilities, our operations are subject to a variety of risks that are unique to international operations, including the following: - - Adverse movement of foreign currencies against the U.S. dollar in which our results are reported; - - Import and export duties, and value-added taxes; - - Import and export regulation changes that could erode our profit margins or restrict exports; - - Potential restrictions on the transfer of funds; - - Inflexible employee contracts in the event of business downturns; and - - The burden and cost of compliance with foreign laws. In addition, we have operations in several locations that have inflationary economies or potentially volatile currencies, including Guadalajara, Mexico; Sao Paulo, Brazil; Suzhou, China; and Timisoara, Romania. In the future, these factors may harm our results of operations. Markets in Southeast Asia, Latin America and Eastern Europe have recently experienced and are experiencing currency, economic and political instability. As of November 30, 1999, we recorded $103.2 million in cumulative foreign exchange translation losses on our balance sheet which were primarily the result of the devaluation of the Brazilian real. While, to date, these factors have not had a significant adverse impact on our results of operations, we cannot assure that there will not be such an impact. Furthermore, while we may adopt measures to reduce the impact of losses resulting from volatile currencies and other risks of doing business abroad, we cannot assure that such measures will be adequate. The Malaysian government adopted currency exchange controls, including controls on its currency, the ringgit, held outside Malaysia, and established a fixed exchange rate for the ringgit against the U.S. dollar. The fixed exchange rate provides a stable rate environment when applied to local expenses denominated in ringgit. The long-term impact of such controls is not predictable due to dynamic economic conditions that also affect or are affected by other regional or global economies. We have been granted a tax holiday which is effective through January 31, 2002, subject to some conditions, for our Malaysian sites. We have also been granted various tax holidays in China. These tax holidays are effective for various terms and are subject to some conditions. It is possible that the current tax holidays will be terminated or modified or 27 <PAGE> that future tax holidays that Solectron may seek will not be granted. If the current tax holidays are terminated or modified, or if additional tax holidays are not granted in the future, Solectron's effective income tax rate would likely increase. We are exposed to fluctuations in the exchange rates of foreign currency. We do not use derivative financial instruments for speculative purposes. Our policy is to hedge our foreign currency denominated transactions in a manner that substantially offsets the effects of changes in foreign currency exchange rates. Presently, we use foreign currency borrowings and foreign currency forward contracts to hedge only those currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies. Corresponding gains and losses on the underlying transaction generally offset the gains and losses on these foreign currency hedges. As of November 30, 1999, all of the foreign currency hedging contracts were scheduled to mature in less than three months and there were no material deferred gains or losses. In addition, our international operations in some instances act as a natural hedge because both operating expenses and a portion of sales are denominated in local currency. In these instances, including our current experience involving the devaluation of the Brazilian real, although an unfavorable change in the exchange rate of a foreign currency against the U.S. dollar will result in lower sales when translated to U.S. dollars, operating expenses will also be lower in these circumstances. However, because less than 10% of net sales are denominated in currencies other than the U.S. dollar, we do not believe our total exposure to be significant. Fluctuations in the rate of exchange between the U.S. dollar and the currencies of countries other than the U.S. in which we conduct business could seriously harm our business, operating results and financial condition. For example, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases, and if we price our products and services in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products and services in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our prices being uncompetitive in markets where business is transacted in the local currency. We have a task force which evaluates the effect of the Euro conversion on us from many perspectives. We continue to evaluate our tax positions and all outstanding contracts in currencies of the participating countries to determine the effects, if any, of the Euro conversion. It is possible that the Euro conversion could significantly harm our results of operations and financial position due to competitive and other factors relating to the conversion that we cannot predict. We are exposed to fluctuations in interest rates. The primary objective of our investment activities is to preserve principal, while at the same time, maximize yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including both government and corporate obligations, certificates of 28 <PAGE> deposit and money market funds. As of November 30, 1999, approximately 63% of our total portfolio was scheduled to mature in less than six months. We have entered into an interest rate swap transaction under which we pay a fixed rate of interest hedging against the variable interest rates charged by the lessor for the facility lease at Milpitas, California. The interest rate swap expires in the year 2002, which coincides with the maturity date of the lease term. As we intend to hold the interest rate swap until the maturity date, we are not subject to market risk. In fact, such interest rate swap has fixed the interest rate for the facility lease, thus reducing interest rate risk. Solectron's debt instruments are subject to fixed interest rates. In addition, the amount of principal to be repaid at maturity is also fixed. In the case of the convertible notes, such notes are based on fixed conversion ratios into common stock. Therefore, we are not subject to market risk from our debt instruments. We may not be able to adequately protect or enforce our intellectual property rights; and we could become involved in intellectual property disputes. Our ability to effectively compete may be affected by our ability to protect our proprietary information. We hold a number of patents and other license rights. These patent and license rights may not provide meaningful protection for our manufacturing processes and equipment innovations. On June 23, 1999, Solectron was served, along with 87 other companies including SMART Modular Technologies, Inc., as a defendant in a lawsuit brought by the Lemelson Medical, Education & Research Foundation. The lawsuit alleges that Solectron has infringed certain of the plaintiff's patents relating to machine vision and bar-code technology. Solectron believes it has meritorious defenses to these allegations and does not expect that this litigation will result in a material impact on its financial condition or results of operations. In the future, third parties may assert infringement claims against Solectron or its customers. In the event of an infringement claim, we may be required to spend a significant amount of money to develop a non-infringing alternative or to obtain licenses. We may not be successful in developing such an alternative or obtaining a license on reasonable terms, if at all. In addition, any such litigation could be lengthy and costly and could harm our financial condition. Failure to comply with environmental regulations could harm our business. As a company in the electronics manufacturing services industry, we are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process. Although we have never sustained any significant loss as a result of noncompliance with such regulations, any failure by us to comply with environmental laws and regulations could result in liabilities or the suspension of production. In addition, these laws and regulations could restrict our ability to expand our facilities or require us to acquire costly equipment or incur other significant costs to comply with regulations. Our stock price may be volatile due to factors outside of our control. Our stock price could fluctuate due to the following factors, among others: 29 <PAGE> - - Announcements of operating results and business conditions by our customers; - - Announcements by our competitors relating to new customers or technological innovation or new services; - - Economic developments in the electronics industry as a whole; - - Political and economic developments in countries in which we have operations; and - - General market conditions. Failure to retain key personnel and skilled associates could hurt our operations. Our continued success depends to a large extent upon the efforts and abilities of key managerial and technical associates. Losing the services of key personnel could harm us. Our business also depends upon our ability to continue to attract and retain senior managers and skilled associates. Failure to do so could harm our operations. Year 2000 problems may have an adverse effect on our operations and ability to offer products and services without interruption. The Year 2000 issue was a result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that had this date-sensitive software could have recognized a date using "00" as the year 1900 rather than the year 2000. This could have resulted in system failures or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, order materials or otherwise engage in normal business activities. While we believe the Year 2000 issue has been successfully addressed we are still highly dependent on computer systems. A key to our ability to successfully manage our operations is the responsiveness of the supply chain for electronics components. Whether for issues such as Y2K or others, the supply chain is dependent on processes that are often controlled by computer systems which could fail. While Solectron controls some of these systems, our vendors, our customers, transportation companies and other service providers that are outside of Solectron's control operate some of these computer systems, as well. If any of these computer systems failed, for any reason, it could delay our receipt of previously ordered electronics components, thereby causing us to delay, cancel or modify orders from our customers, which could harm our business. Although we have now passed the 12/31/99 date without incident or disruptions thus far, we cannot give assurance that disruptions will not occur in the days and months ahead. Our anti-takeover defense provisions may deter potential acquirors and may depress our stock price. Our certificate of incorporation and bylaws contain provisions that could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of Solectron. These provisions allow us to issue preferred stock with rights senior to those of our common stock and impose various procedural and other requirements that could make it more difficult for our stockholders to effect certain corporate actions. 30 <PAGE> ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Management's Discussion and Analysis of Financial Condition and Results of Operations for factors related to fluctuations in the exchange rates of foreign currency and fluctuations in interest rates under "Trend and Uncertainties." 31 <PAGE> SOLECTRON CORPORATION AND SUBSIDIARIES Part II. OTHER INFORMATION Item 1: Legal Proceedings On June 23, 1999, Solectron was served, along with 87 other companies including SMART Modular Technologies, Inc., as a defendant in a lawsuit brought by the Lemelson Medical, Education & Research Foundation. The lawsuit alleges that Solectron has infringed certain of the plaintiff's patents relating to machine vision and bar-code technology. Solectron believes it has meritorious defenses to these allegations and does not expect that this litigation will result in a material impact on its 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 None Item 5: Other Information None Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule - Three Months Ended November 26, 1999 (b) Reports on Form 8-K On September 17, 1999, Solectron filed a Current Report on Form 8-K regarding the completion of a definitive merger agreement with SMART Modular Technologies. 32 <PAGE> SOLECTRON CORPORATION 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. SOLECTRON CORPORATION (Registrant) Date: January 7, 2000 By: /s/ Susan Wang ---------------------- Susan S. Wang Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 33 <PAGE> EXHIBIT INDEX Exhibit Number Document - -------------- -------- 27.1 Financial Data Schedule - Three Months Ended November 26, 1999 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>2 <DESCRIPTION>FINANCIAL DATA SCHEDULE - 11/26/99 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <CIK> 0000835541 <NAME> SOLECTRON CORPORATION <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> AUG-25-2000 <PERIOD-END> NOV-26-1999 <CASH> 436,166 <SECURITIES> 1,034,489 <RECEIVABLES> 1,256,910 <ALLOWANCES> 6,132 <INVENTORY> 1,495,754 <CURRENT-ASSETS> 4,333,724 <PP&E> 1,244,236 <DEPRECIATION> 568,508 <TOTAL-ASSETS> 5,227,197 <CURRENT-LIABILITIES> 1,373,620 <BONDS> 943,909 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 272 <OTHER-SE> 2,900,312 <TOTAL-LIABILITY-AND-EQUITY> 5,227,197 <SALES> 2,501,803 <TOTAL-REVENUES> 2,501,803 <CGS> 2,268,689 <TOTAL-COSTS> 2,268,689 <OTHER-EXPENSES> 93,317 <LOSS-PROVISION> 899 <INTEREST-EXPENSE> 10,865 <INCOME-PRETAX> 149,256 <INCOME-TAX> 47,762 <INCOME-CONTINUING> 101,494 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> (3,480) <NET-INCOME> 98,014 <EPS-BASIC> 0.36 <EPS-DILUTED> 0.35 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

SVU

https://www.sec.gov/Archives/edgar/data/95521/0001045969-00-000014.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, JmDgnnQ9SpOtSXbao5Mz2L6fyIsRKzQs21eXvTSDaZ11mHn9BT6iozprZud+wP4I RFcCpY1ADScRA/lO/42eCw== <SEC-DOCUMENT>0001045969-00-000014.txt : 20000202 <SEC-HEADER>0001045969-00-000014.hdr.sgml : 20000202 ACCESSION NUMBER: 0001045969-00-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991204 FILED AS OF DATE: 20000118 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: 0222 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05418 FILM NUMBER: 508956 BUSINESS ADDRESS: STREET 1: 11840 VALLEY VIEW RD STREET 2: NULL 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 4, 1999. [_] 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 January 14, 2000 is as follows: Title of Each Class Shares Outstanding ------------------- ------------------ Common Shares 139,612,847 <PAGE> PART I - FINANCIAL INFORMATION - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Item 1: Financial Statements - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS - ------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - ------------------------------------------------------------------------------- (In thousands, except per share data) <TABLE> <CAPTION> Third Quarter (12 weeks) ended Dec. 4, 1999 % of sales Dec. 5, 1998 % of sales - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net sales $ 5,361,732 100.00% $ 4,079,696 100.00% Costs and expenses: Cost of sales 4,780,026 89.15 3,665,933 89.86 Selling and administrative expenses 432,089 8.06 312,668 7.66 Amortization of goodwill 10,893 0.20 4,875 0.12 Interest Interest expense 44,738 0.83 28,749 0.70 Interest income 4,927 0.09 5,872 0.14 -------------------------------------------------------------------- Interest expense, net 39,811 0.74 22,877 0.56 -------------------------------------------------------------------- Total costs and expenses 5,262,819 98.16 4,006,353 98.20 -------------------------------------------------------------------- Earnings before income taxes 98,913 1.84 73,343 1.80 Provision for income taxes Current 36,959 26,327 Deferred 3,300 1,756 -------------------------------------------------------------------- Income tax expense 40,259 0.75 28,083 0.69 -------------------------------------------------------------------- Net earnings $ 58,654 1.09% $ 45,260 1.11% ==================================================================== Net earnings per common share - diluted $ .42 $ .37 Net earnings per common share - basic $ .42 $ .38 Weighted average number of common shares outstanding Diluted 140,469 121,861 Basic 139,635 120,191 Dividends declared per common share $ .1350 $ .1325 </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. 2 <PAGE> CONSOLIDATED STATEMENTS OF EARNINGS - ------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - ------------------------------------------------------------------------------- (In thousands, except per share data) <TABLE> <CAPTION> Year-to-date (40 weeks) ended ---------------------------------------------------------------------- Dec. 4, 1999 % of sales Dec. 5, 1998 % of sales - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 14,797,227 100.00% $13,219,590 100.00% Costs and expenses: Cost of sales 13,224,512 89.37 11,884,239 89.90 Selling and administrative expenses 1,189,807 8.04 1,014,846 7.68 Amortization of goodwill 23,743 0.16 15,970 0.12 (Gain) Loss on sale (163,662) 1.11 - - Restructuring and other charges 103,596 0.70 - - Interest Interest expense 107,747 0.73 94,345 0.71 Interest income 14,826 0.10 16,162 0.12 ---------------------------------------------------------------- Interest expense, net 92,921 0.63 78,183 0.59 ---------------------------------------------------------------- Total costs and expenses 14,470,917 97.79 12,993,238 98.29 ---------------------------------------------------------------- Earnings before income taxes 326,310 2.21 226,352 1.71 Provision for income taxes Current 202,273 83,826 Deferred (46,820) 5,568 ---------------------------------------------------------------- Income tax expense 155,453 1.06 89,394 0.67 ---------------------------------------------------------------- Net earnings $ 170,857 1.15% $ 136,958 1.04% ================================================================ Net earnings per common share - diluted $ 1.34 $ 1.12 Net earnings per common share - basic $ 1.35 $ 1.14 Weighted average number of common shares outstanding Diluted 127,553 122,069 Basic 126,488 120,509 Dividends declared per common share $ .4025 $ .3950 </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. 3 <PAGE> CONSOLIDATED STATEMENTS OF NET SALES AND EARNINGS - ------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - ------------------------------------------------------------------------------- (In thousands) <TABLE> <CAPTION> Third Quarter (12 weeks) ended Year-to-Date (40 weeks) ended ---------------------------------- ------------------------------------ Net sales Dec. 4, 1999 Dec. 5, 1998 Dec. 4, 1999 Dec. 5, 1998 - -------------------------------------------------------------------------- ------------------------------------ <S> <C> <C> <C> <C> Retail food $ 1,711,094 $ 1,158,982 $ 4,669,709 $ 3,711,984 31.9 % 28.4 % 31.6 % 28.1 % Food distribution 4,656,726 3,638,591 12,791,710 11,697,580 86.9 % 89.2 % 86.4 % 88.5 % Sales eliminations (1,006,088) (717,877) (2,664,192) (2,189,974) (18.8)% (17.6)% (18.0)% (16.6)% ----------------------------------------------------------------------- Total net sales $ 5,361,732 $ 4,079,696 $14,797,227 $13,219,590 100.0 % 100.0 % 100.0 % 100.0 % - -------------------------------------------------------------------------------------------------------------- Earnings - -------------------------------------------------------------------------------------------------------------- Retail food $ 41,925 $ 28,474 $ 115,556 $ 91,659 Food distribution 106,519 75,210 271,367 235,483 Gain on sale - - 163,662 - Restructuring and other charges (1) - - (103,596) - ----------------------------------------------------------------------- Total operating earnings 148,444 103,684 446,989 327,142 Interest income 4,927 5,872 14,826 16,162 Interest expense (44,738) (28,749) (107,747) (94,345) General corporate expenses (9,720) (7,464) (27,758) (22,607) ----------------------------------------------------------------------- Earnings before income taxes 98,913 73,343 326,310 226,352 Provision for income taxes (40,259) (28,083) (155,453) (89,394) ----------------------------------------------------------------------- Net earnings $ 58,654 $ 45,260 $ 170,857 $ 136,958 ============================================================================================================== </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. (1) In the first quarter, the company incurred restructuring and other charges for retail food and food distribution of $19.4 and $84.2 million, respectively. 4 <PAGE> CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries Third Quarter as of Fiscal Year End - --------------------------------------------------------------------------------------------------------------------- (In thousands) December 4, February 27, Assets 1999 1999 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Current Assets Cash and cash equivalents $ 10,548 $ 7,608 Receivables, less allowance for losses of $30,705 at December 4, 1999 and $18,983 at February 27, 1999 670,948 410,799 Inventories 1,663,354 1,067,837 Other current assets 145,062 96,283 ------------------------------------------- Total current assets 2,489,912 1,582,527 Long-term notes receivable 188,486 161,273 Property, plant and equipment, net 2,052,829 1,699,024 Goodwill 1,576,895 567,890 Other assets 387,490 255,235 ------------------------------------------- Total assets $6,695,612 $4,265,949 =========================================== Liabilities and Stockholders' Equity - --------------------------------------------------------------------------------------------------------------------- Current Liabilities Notes payable $ 495,542 $ 89,157 Accounts payable 1,638,978 981,961 Current debt and obligations under capital leases 117,989 232,928 Other current liabilities 338,709 217,861 ------------------------------------------- Total current liabilities 2,591,218 1,521,907 Long-term debt and obligations under capital leases 2,063,839 1,246,269 Other liabilities and deferred income taxes 183,503 192,134 Total stockholders' equity 1,857,052 1,305,639 ------------------------------------------- Total liabilities and stockholders' equity $6,695,612 $4,265,949 =========================================== </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. 5 <PAGE> CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - ------------------------------------------------------------------------------- (In thousands, except per share data) <TABLE> <CAPTION> 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 28, 1998 $ 5,908 $ 150,670 $ 2,927 $ (507,296) $ 1,549,696 $ 1,201,905 Net earnings - - - - 191,338 191,338 Sales of common stock under option plans - - (5,902) 35,497 (3,667) 25,928 Cash dividends declared on common stock - $.5275 per share - - - - (63,985) (63,985) Compensation under employee incentive plans - - 1,057 10,914 - 11,971 Treasury shares exchanged for acquisition - - 1,918 2,167 - 4,085 Purchase of shares for treasury - - - (65,603) - (65,603) - ----------------------------------------------------------------------------------------------------------------------- Balances at February 27, 1999 5,908 150,670 - (524,321) 1,673,382 1,305,639 Net earnings - - - - 170,857 170,857 Sales of common stock under option plans - - (4,145) 8,736 - 4,591 Cash dividends declared on common stock - $.4025 per share - - - - (50,800) (50,800) Compensation under employee incentive plans - - (390) 6,087 - 5,697 Treasury shares exchanged for - - 138,988 306,066 - 445,054 acquisition Redemption of preferred stock (5,908) - - - - (5,908) Purchase of shares for treasury - - - (18,078) - (18,078) - ----------------------------------------------------------------------------------------------------------------------- Balances at December 4, 1999 $ - $ 150,670 $ 134,453 $ (221,510) $ 1,793,439 $ 1,857,052 ======================================================================================================================= </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. 6 <PAGE> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- SUPERVALU INC. and Subsidiaries - ------------------------------------------------------------------------------- (In thousands) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> Year-to-date (40 weeks ended) - ----------------------------------------------------------------------------------------------- December 4, December 5, 1999 1998 - ----------------------------------------------------------------------------------------------- <S> <C> <C> - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 20,381 $ 243,985 - ----------------------------------------------------------------------------------------------- Cash flows from investing activities Additions to long-term notes receivable (36,935) (40,454) Proceeds received on long-term notes receivable 28,889 92,325 Proceeds from sale of assets 368,076 55,017 Purchase of property, plant and equipment (249,722) (194,669) Business acquisition, net of cash acquired (469,185) (37,438) Increase in other non-current assets (8,442) (18,511) - ----------------------------------------------------------------------------------------------- Net cash used in investing activities (367,319) (143,730) - ----------------------------------------------------------------------------------------------- Cash flows from financing activities Net increase in checks outstanding, net of deposits 99,018 39,042 Net issuance of short-term notes payable 391,699 140,456 Proceeds from issuance of long-term debt 594,485 83,500 Repayment of long-term debt (645,483) (258,483) Dividends paid (48,061) (48,099) Payment for purchase of treasury stock (18,078) (53,465) Other cash used in financing activities (23,702) (3,042) - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 349,878 (100,091) - ----------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 2,940 164 Cash and cash equivalents at beginning of year 7,608 6,100 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of third quarter $ 10,548 $ 6,264 =============================================================================================== Supplemental Information: Pretax LIFO income (expense) $ (5,952) $ 1,729 Pretax depreciation and amortization $201,900 $174,837 </TABLE> All data subject to year-end audit. See notes to consolidated financial statements. 7 <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 1999 annual report of SUPERVALU INC. ("SUPERVALU" or the "company"). Richfood Acquisition - -------------------- On August 31, 1999, the company acquired, in a merger, all of the outstanding common stock of Richfood Holdings, Inc. ("Richfood"), a major food retailer and distributor operating primarily in the Mid-Atlantic region of the United States. The acquisition is being accounted for as a purchase. The company issued approximately 19.7 million shares of SUPERVALU common stock with a market value of approximately $443 million and paid $443 million in cash for the common stock of Richfood. In addition, the company repaid approximately $394 million of outstanding Richfood debt. Approximately $291 million of Richfood debt remained outstanding immediately after the acquisition. The allocation of the consideration paid for Richfood to the consolidated assets and liabilities is based on preliminary estimates of their respective fair values. The excess of the purchase price over the fair value of net assets acquired of approximately $1.1 billion is being amortized on a straight line basis over 40 years. The results of Richfood's operations from August 31, 1999 have been included in the company's financial statements. One-time charges related to the merger of $10 to $15 million after tax are expected within the first eighteen months following the close. Unaudited pro forma consolidated results of continuing operations, as though the companies had been combined at the beginning of the periods presented, are as follows: <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------- Year-to-date (40 weeks) ended - ----------------------------------------------------------------------------------------------------- (In thousands, except per share data) December 4, 1999 December 5, 1998 - ------------------------------------------------------------------------- --------------------------- <S> <C> <C> Net sales $ 16,767,209 $ 16,031,280 Net earnings $ 189,322(a) $ 143,041(b) Net earnings per common share - diluted $ 1.34(a) $ 1.01(b) - ------------------------------------------------------------------------- --------------------------- </TABLE> (a) Amounts include a net gain of $10.9 million or $.08 per share from the gain on the sale of Hazelwood Farms Bakeries and from restructuring and other charges. (b) Amounts include a restructuring charge at Richfood of $14.5 million or $ .10 per share. 8 <PAGE> Special Charges - --------------- In the first quarter of fiscal 2000, the company recorded one-time, pre-tax restructuring and other charges of $103.6 million as a result of an extensive review to reduce costs and enhance efficiency. Included in this total is $14.9 million for asset impairment costs. The restructuring charges include costs for facility consolidation, non-core store disposal, and rationalization of redundant and certain decentralized administrative functions. Due to the above restructuring items, the company expects approximately 2,500 employees to be terminated. Details of the restructuring activity follow. <TABLE> <CAPTION> - -------------------------------------- ---------------- ----------------------- ------------------ ------------------- Initial Current Quarter Year-to-Date Balance at (In thousands) Restructure Activity Activity Dec. 4, 1999 - -------------------------------------- ---------------- ----------------------- ------------------ ------------------- <S> <C> <C> <C> <C> Facility consolidation $ 34,143 $ 840 $ 1,496 $ 32,647 Non-core store disposal 39,978 3,072 5,376 34,602 Infrastructure realignment 14,591 121 538 14,053 - -------------------------------------- ---------------- ----------------------- ------------------ ------------------- Total restructure $ 88,712 $ 4,033 $ 7,410 $ 81,302 - -------------------------------------- ---------------- ----------------------- ------------------ ------------------- Employees 2,517 307 480 2,037 - -------------------------------------- ---------------- ----------------------- ------------------ ------------------- </TABLE> 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 condensed consolidated financial position of the company and its subsidiaries at December 4, 1999 and December 5, 1998, and the results of the company's operations and condensed cash flows for the periods then ended. These interim results are not necessarily indicative of the results of the fiscal years as a whole. 9 <PAGE> Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- RESULTS FOR THE QUARTER: The company recorded record sales of $5.4 billion, net earnings of $58.7 million and diluted earnings per share of $.42. Last year sales were $4.1 billion, net earnings were $45.3 million and diluted earnings per share were $.37. The results of operations include the impacts from the acquisition of Richfood, which was acquired during the second quarter of this year. Net sales Net sales increased 31.4 percent compared to last year primarily reflecting the acquisition of Richfood. Retail food and food distribution sales increased 47.6 percent and 28.0 percent, respectively. Retail food sales increased over last year primarily due to the Richfood acquisition in addition to other smaller acquisitions and new store openings over the past twelve months. Same-store sales were essentially flat compared to last year, impacted by low inflation, competitive activities and cannibalization in certain markets. Food distribution sales increased from last year primarily due to the Richfood acquisition, growth of the retail operations and the ramp up of a new $2.3 billion annual supply agreement with Kmart Corporation ("Kmart"), fully offsetting the loss of sales resulting from the sale of Hazelwood Farms Bakeries which occurred in the first quarter of this year. Gross profit Gross profit as a percentage of net sales was 10.9 percent compared to 10.1 percent last year. The increase was primarily due to the Richfood acquisition which increased the proportion of the higher margin retail food business of the company. Retail food gross profit as a percent of net sales increased from last year primarily due to higher margins associated with the Richfood retail markets. This increase was partially offset by a decrease in food distribution gross profit as a percent of net sales, primarily due to the sale of Hazelwood Farms Bakeries, which had higher margins. Selling and administrative expenses Selling and administrative expenses were 8.3 percent of net sales compared to 7.8 percent last year. The increase was primarily due to the growing proportion of the company's retail food business, which operates at a higher selling and administrative expense as a percentage of net sales than the food distribution business. Retail food selling and administrative expenses as a percentage of net sales increased, primarily reflecting higher labor and occupancy costs of the Richfood retail food operations. The food distribution business incurred certain start up costs associated with the ramp 10 <PAGE> up of the new supply agreement with Kmart during the quarter. These increases were partially offset by lower selling and administrative expenses as a percent of net sales for food distribution due to the lower expense levels of the Richfood food distribution operations and the sale of Hazelwood Farms Bakeries, which had higher selling and administrative expenses. Operating earnings The company's operating earnings (earnings before interest and taxes) increased to $138.7 million compared with $96.2 million last year, a 44.2 percent increase. Operating earnings before depreciation and amortization increased to $210.2 million compared with $148.9 million last year, a 41.2 percent increase. Retail food operating earnings increased 47.2 percent to $41.9 million from last year's $28.5 million. Food distribution operating earnings increased 41.6 percent to $106.5 million from $75.2 million last year. The increase in operating earnings was primarily due to increased sales as a result of the Richfood acquisition. Operating earnings as a percent to sales was 2.6 percent, compared to 2.4 percent last year, primarily reflecting the acquired Richfood operations. Interest expense and income Interest expense increased to $44.7 million compared with $28.7 million last year, primarily reflecting increased borrowings resulting from the Richfood acquisition. Interest income decreased to $4.9 million compared with $5.9 million last year. Income taxes The effective tax rate was 40.7 percent, an increase from last year's effective tax rate of 38.3 percent as a result of non-deductible goodwill expense associated with the Richfood acquisition. Net earnings Net earnings were $58.7 million or $.42 per share compared with last year's net earnings of $45.3 million or $.37 per share. Weighted average shares increased to 140.5 million compared with last year's 121.9 million due to the approximately 19.7 million shares issued in connection with the Richfood acquisition. YEAR-TO-DATE RESULTS: Net sales Net sales increased 11.9 percent to $14.8 billion compared with $13.2 billion last year, primarily reflecting the acquisition of Richfood. Retail food sales increased 25.8 percent over last year and food distribution sales increased 9.4 percent over last year. 11 <PAGE> Retail food sales increased over last year primarily due to the Richfood acquisition in addition to other smaller acquisitions and new store openings over the past twelve months. Same-store sales were essentially flat compared to last year, impacted by low inflation, competitive activities and cannibalization in certain markets. Food distribution sales increased from last year primarily due to the Richfood acquisition, growth of the retail operations and the ramp up of a new supply agreement with Kmart, fully offsetting the loss of sales resulting from the sale of Hazelwood Farms Bakeries in the first quarter of this year. Gross profit Gross profit as a percentage of net sales was 10.6 percent compared to 10.1 percent last year. The growing proportion within the company's total sales mix of the higher margin retail food business favorably impacted the gross profit percentage. Retail food and food distribution gross profit margins were comparable to last year. Selling and administrative expenses Selling and administrative expenses were 8.2 percent of net sales compared to 7.8 percent last year. The higher percentage was primarily due to the growing proportion of the company's retail food business, which operates at a higher selling and administrative expense as a percentage of net sales than the food distribution business. Retail food and food distribution selling and administrative expenses were comparable to last year, as a percent of net sales. Sale of Business In the first quarter, the company sold Hazelwood Farms Bakeries, which resulted in a pre-tax gain of $163.7 million. The company had identified Hazelwood Farms Bakeries as a non-strategic asset to be liquidated to allow the redeployment of capital. The transaction resulted in $248.2 million of after-tax cash proceeds. Special Charges In the first quarter, the company recorded one-time, pre-tax restructuring and other charges of $103.6 million as a result of an extensive review to reduce costs and enhance efficiency by the end of fiscal 2001. Included in this total is $14.9 million for asset impairment costs. The charge by segment was $19.4 million for retail and $84.2 million for food distribution. The restructuring charges include costs for facility consolidation, non-core store disposals, and rationalization of redundant and certain decentralized administrative functions. A total of $7.4 million has been offset against the restructuring reserve year-to-date. Facility consolidation costs were $47.2 million and primarily include losses for the sale or writedown of assets and leases. Holding costs are also included in this total. Non-core store disposals include the sale or closure of retail locations currently operated in the distribution business and other retail stores that are located in non-strategic markets. These costs total $41.8 million and include losses to be incurred upon the sale or closure of the stores and 12 <PAGE> related assets, costs for future lease obligations and lease buy-outs. Rationalization of redundant and certain decentralized administrative functions consists primarily of severance for staff reductions as a result of both standardizing and consolidating business support functions across the company's home office, retail and distribution operating regions. These costs amount to $14.6 million. Due to the above restructuring items, the company expects approximately 2,500 employees to be terminated. Approximately 480 employees have been terminated year-to-date. Operating earnings The company's operating earnings (earnings before interest and taxes) increased 17.9 percent to $359.2 million compared with $304.5 million last year excluding the gain on the sale of Hazelwood Farms Bakeries and restructuring and other charges. Excluding one-time items, operating earnings before depreciation and amortization were $561.1 million, a 17.0 percent increase over last year. Retail food operating earnings, excluding restructuring and other charges, increased 26.1 percent to $115.6 million from last year's $91.7 million. Food distribution operating earnings, excluding the gain on the sale of Hazelwood Farms Bakeries and restructuring and other charges, increased 15.2 percent to $271.4 million from $235.5 million last year. Excluding one-time items, operating earnings as a percent to sales was 2.4 percent, compared to 2.3 percent last year, primarily reflecting the acquired Richfood operations. Including one-time items, operating earnings were $419.2 million and operating earnings before depreciation and amortization were $621.1 million. Operating earnings for retail food and food distribution, including one-time items, increased 4.9 percent and 49.0 percent, respectively. Interest expense and income Interest expense increased to $107.7 million compared with $94.3 million last year. The increase was primarily due to increased borrowings resulting from the Richfood acquisition partially offset by lower average borrowings as a result of cash generated from the sale of Hazelwood Farms Bakeries in the first quarter. Interest income decreased to $14.8 million compared with $16.2 million last year, primarily due to the reduction of notes receivable as the result of the sale of notes in the ordinary course of business. Income taxes The effective tax rate was 47.6 percent compared with 39.5 percent last year. The higher effective tax rate is primarily the result of the gain on the sale of Hazelwood Farms Bakeries. Excluding the impact of the gain on the sale of Hazelwood Farms Bakeries, the effective tax rate was approximately 39.9 percent. Net earnings Excluding the gain on the sale of Hazelwood Farms Bakeries and restructuring and other charges, net earnings increased 16.8 percent to $159.9 million or $1.25 per share compared to $137.0 million or $1.12 per share in the prior year. Net earnings were $170.9 million or $1.34 13 <PAGE> per share including the one-time items. Weighted average shares increased to 127.6 million compared with last year's 122.1 million. In the second quarter of fiscal 2000, the company issued approximately 19.7 million shares of SUPERVALU common stock resulting from the Richfood acquisition. Liquidity and Capital Resources - ------------------------------- Internally generated funds from operations continued to be the major source of liquidity and capital growth. Cash provided from operations year-to-date was $20.4 million compared with $244.0 million last year, primarily due to the ramp up of a new supply agreement with Kmart and changes in working capital timing. Net cash used in investing activities was $367.3 million compared with $143.7 million last year. The change from the prior year reflects cash used for business acquisitions of $469.2 million, including the cash portion of the Richfood acquisition, and cash proceeds received on the sale of assets of $368.1 million, which includes the proceeds received from the sale of Hazelwood Farms Bakeries. In addition to the $400 million revolving credit agreement, the company put in place a 364 day $300 million revolving credit agreement during the second quarter of this year. The revolving credit agreements are available for general corporate purposes and to support the company's commercial paper program. There were no drawings on the revolving credit agreements during the quarter and $496 million of commercial paper was outstanding at the end of the quarter. A total of $40.5 million of letters of credit were outstanding at the end of the quarter under the $400 million revolving credit agreement. On August 31, 1999, the company acquired, in a merger, all of the outstanding common stock of Richfood. The company issued approximately 19.7 million shares of SUPERVALU common stock with a market value of approximately $443 million and paid $443 million in cash for the common stock of Richfood. In addition, the company repaid approximately $394 million of outstanding Richfood debt. To finance the acquisition and repay the Richfood debt the company used cash, a portion of the proceeds from the issuance of $350 million of 7 7/8 percent notes due 2009 and proceeds from the issuance of commercial paper. During the third quarter, the company issued $250 million of 7 5/8 percent notes due 2004 and used the proceeds to reduce commercial paper outstanding. Subsequent to third quarter, the Board of Directors authorized a stock repurchase program under which the company may acquire up to five percent, or seven million shares, of its stock outstanding as of December 8, 1999. The purchases will be made from time to time at prevailing market prices in the open market or otherwise. The timing and volume of repurchases will vary depending on market conditions and other factors. Such purchases may be commenced or suspended at any time without notice. 14 <PAGE> YEAR 2000 - --------- General The final phase of SUPERVALU's company wide Year 2000 Project ("Project") is being completed on schedule. The Project is addressing the issue of application systems, information technology (IT) systems and technologies which include embedded systems being able to distinguish between the year 1900 and the year 2000. In 1996, the company began establishing processes for evaluating and managing the risks associated with the Project. The Project is divided into six components. These components include program management, communications, application conversions and technology upgrades, contingency planning, quality assurance and external entities. The company is using both internal and external resources to implement the Project. Year 2000 remediation, upgrade and testing of critical applications and technology is complete and remediation, upgrade and testing of most non-critical systems is complete. The company has developed contingency plans for key business functions that could be impacted by year 2000 issues and the focus of the remaining year 2000 work has shifted to readying contingency plans. The company has relationships with a significant number of key business partners. The company has had formal communications with its key business partners and has developed formal contingency plans to mitigate the risk to the company if the business partners are not prepared for the year 2000. The company has continued to communicate with its key business partners on relevant issues throughout 1999 and beyond. There can be no guarantee that the business partners will successfully and timely reprogram or replace and test all of their own computer hardware, software and process control systems. While the failure of a single business partner to achieve year 2000 compliance should not have a material adverse effect on the company's results of operations, the failure of several key business partners could have such an effect. Costs The total costs associated with required modifications to become year 2000 compliant is not expected to be material to the company's financial position. The company has incurred costs to date of $27.6 million, which is in line with previous year 2000 spending forecasts. Estimated costs for the remainder of work is $1.1 million for a total projected Project cost of $28.7 million. The estimated remaining costs are primarily for monitoring and supporting the transition and contingency plans. Risks While the efforts to assess and correct the company's year 2000 issues have been substantially completed prior to related forecasted failure horizons, the company has taken specific measures to assess risks and develop specific contingency plans. Key business functions have 15 <PAGE> been assessed and action plans have been created which describe the communications, operations and IT activities that will be conducted if the contingency plans must be executed. The costs of the Project and the completion dates are based on management's best estimates, which were derived from assumptions of future events including the availability of resources, key business partner modification plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could vary due to uncertainties. The company's year 2000 efforts are ongoing and its overall Project will continue to evolve as new information becomes available. The failure to correct a material year 2000 problem could result in an interruption in certain normal business activities and operations. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third parties on whom the company relies, the company is unable to determine at this time whether the consequences of year 2000 failures will have a material adverse impact on the company's results of operations. Nonetheless, the company believes that, with the implementation of new business systems and completion of the Project as scheduled, the possibility of significant interruptions of normal operations should be reduced. As of the time of the filing of this report, the company's computer systems have rolled over to the year 2000 without any significant issues and there has been no interruption of normal business activities and operations. The company will continue to monitor its systems and contingency plans and will communicate with its key business partners throughout 2000 and beyond. 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 to the company's Annual Report on Form 10-K for the fiscal year ended February 27, 1999 and under the caption "Year 2000" in this Form 10-Q; other risks or uncertainties may be detailed from time to time in the company's future Securities and Exchange Commission filings. 16 <PAGE> Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in market risk for the company in the period covered by this report. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds 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 filed with this Form 10-Q: (11) Computation of Earnings Per Common share. (27) Financial Data Schedule. (b) Reports on Form 8-K: None <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. SUPERVALU INC. (Registrant) Dated: January 18, 2000 By:/s/ Pamela K. Knous ------------------------------ Pamela K. Knous Executive Vice President, Chief Financial Officer (Authorized officer of Registrant) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 11 <TEXT> <PAGE> Exhibit 11 SUPERVALU INC. Computation of Earnings per Common Share (unaudited) <TABLE> <CAPTION> - --------------------------------------------------------- ------------------------------------- ------------------------------------ Third Quarter Ended Year-to-date Ended (In thousands, except per share amounts) Dec. 4, 1999 Dec. 5, 1998 Dec. 4, 1999 Dec. 5, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Earnings per share - basic Income available to common shareholders $ 58,654 $ 45,260 $ 170,857 $ 136,958 Weighted average shares outstanding 139,635 120,191 126,488 120,509 Earnings per share - basic $.42 $.38 $1.35 $1.14 Earnings per share - diluted Income available to common shareholders $ 58,654 $ 45,260 $ 170,857 $ 136,958 Weighted average shares outstanding 139,635 120,191 126,488 120,509 Dilutive impact of options outstanding 834 1,670 1,065 1,560 ------------------ ----------------- ------------------ ------------------ Weighted average shares and potential dilutive shares outstanding 140,469 121,861 127,553 122,069 Earnings per share - dilutive $.42 $.37 $1.34 $1.12 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> Basic earnings per share is calculated using income available to common shareholders divided by the weighted average of common shares outstanding during the period. Diluted earnings per share is similar to basic earnings per share except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, such as options, had been issued. </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 4, 1999 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE 40 WEEKS ENDED DECEMBER 4, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <S> <C> <PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> FEB-26-2000 <PERIOD-START> FEB-28-1999 <PERIOD-END> DEC-04-1999 <CASH> 10,548 <SECURITIES> 0 <RECEIVABLES> 701,653 <ALLOWANCES> (30,705) <INVENTORY> 1,663,354 <CURRENT-ASSETS> 2,489,912 <PP&E> 3,472,273 <DEPRECIATION> (1,419,444) <TOTAL-ASSETS> 6,695,612 <CURRENT-LIABILITIES> 2,591,218 <BONDS> 2,063,839 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 150,670 <OTHER-SE> 1,706,382 <TOTAL-LIABILITY-AND-EQUITY> 6,695,612 <SALES> 14,797,227 <TOTAL-REVENUES> 14,797,227 <CGS> 13,224,512 <TOTAL-COSTS> 13,224,512 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 6,843 <INTEREST-EXPENSE> 107,747 <INCOME-PRETAX> 326,310 <INCOME-TAX> 155,453 <INCOME-CONTINUING> 170,857 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 170,857 <EPS-BASIC> 1.35 <EPS-DILUTED> 1.34 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

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https://www.sec.gov/Archives/edgar/data/709804/0000912057-00-005853.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, ESwEloOj39kaE4NwideC05k75iedfpwHX9KOKNgfqEDzVLW94b7be/JiHYjtXQ/D xcV6KiBccR3ndqCYDhUhEw== <SEC-DOCUMENT>0000912057-00-005853.txt : 20000214 <SEC-HEADER>0000912057-00-005853.hdr.sgml : 20000214 ACCESSION NUMBER: 0000912057-00-005853 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAPTEC INC CENTRAL INDEX KEY: 0000709804 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 942748530 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15071 FILM NUMBER: 536613 BUSINESS ADDRESS: STREET 1: 691 S MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089458600 MAIL ADDRESS: STREET 1: 691 SOUTH MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>10-Q <TEXT> <PAGE> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) <TABLE> <C> <S> /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 </TABLE> FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999 OR <TABLE> <C> <S> / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 </TABLE> FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-15071 ------------------------ ADAPTEC, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> DELAWARE 94-2748530 (State of Incorporation) (I.R.S. Employer Identification No.) 691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035 (Address of principal executive offices) (Zip Code) </TABLE> (408) 945-8600 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 / / The number of shares outstanding of the Company's common stock as of December 31, 1999 was 103,947,039. This document consists of 44 pages, excluding exhibits, of which this is page 1. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> TABLE OF CONTENTS <TABLE> <CAPTION> PAGE -------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Statements of Operations......... 3 Condensed Consolidated Balance Sheets................... 4 Condensed Consolidated Statements of Cash Flows......... 5 Notes To Condensed Consolidated Financial Statements.... 6-23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations................................... 24-33 Liquidity and Capital Resources......................... 33-34 Factors Affecting Future Operating Results.............. 34-40 Pro Forma Financial Results............................. 41-42 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................. 42 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................. 43 Item 6. Exhibits and Reports on Form 8-K.................. 43 SIGNATURES.................................................. 44 </TABLE> 2 <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> THREE MONTH NINE MONTH PERIOD ENDED PERIOD ENDED ----------------------------- ----------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> Net revenues................................ $211,446 $183,872 $598,104 $508,424 Cost of revenues............................ 69,529 74,719 202,583 217,544 -------- -------- -------- -------- Gross profit................................ 141,917 109,153 395,521 290,880 -------- -------- -------- -------- Operating expenses: Research and development.................. 25,804 35,156 73,539 119,970 Sales, marketing and administrative....... 41,496 40,809 121,106 129,905 Amortization of goodwill and other intangibles............................. 3,094 2,715 5,844 9,826 Write-off of acquired in-process technology.............................. 16,739 -- 19,755 45,482 Restructuring and other charges........... 9,599 -- 9,599 62,187 -------- -------- -------- -------- Total operating expenses.................... 96,732 78,680 229,843 367,370 -------- -------- -------- -------- Income (loss) from operations............... 45,185 30,473 165,678 (76,490) Interest and other income................... 8,119 7,916 39,183 24,961 Interest expense............................ (2,811) (2,992) (8,732) (9,106) -------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes.............................. 50,493 35,397 196,129 (60,635) Provision (benefit) for income taxes........ 18,825 10,385 61,757 (974) -------- -------- -------- -------- Net income (loss)........................... $ 31,668 $ 25,012 $134,372 $(59,661) ======== ======== ======== ======== Net income (loss) per share: Basic..................................... $ 0.31 $ 0.23 $ 1.30 $ (0.54) ======== ======== ======== ======== Diluted................................... $ 0.29 $ 0.23 $ 1.23 $ (0.54) ======== ======== ======== ======== Shares used in computing net income (loss) per share: Basic..................................... 103,267 108,040 103,311 111,274 ======== ======== ======== ======== Diluted................................... 110,424 110,881 109,591 111,274 ======== ======== ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 3 <PAGE> ADAPTEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> DECEMBER 31, MARCH 31, 1999 1999 ------------ ---------- (IN THOUSANDS) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents................................. $ 171,133 $ 317,580 Marketable securities..................................... 546,967 426,332 Accounts receivable, net.................................. 75,823 67,158 Inventories............................................... 71,939 50,838 Prepaid expenses.......................................... 18,648 11,312 Other current assets...................................... 24,916 136,797 ---------- ---------- Total current assets.................................... 909,426 1,010,017 Property and equipment, net................................. 134,252 126,734 Goodwill and other intangibles.............................. 233,732 2,238 Other long-term assets...................................... 51,843 34,079 ---------- ---------- $1,329,253 $1,173,068 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 39,818 $ 39,487 Accrued liabilities....................................... 180,145 112,879 ---------- ---------- Total current liabilities............................... 219,963 152,366 ---------- ---------- 4 3/4% Convertible Subordinated Notes....................... 229,800 230,000 Other long-term liability................................... 10,800 -- Contingencies (Notes 16 and 18) Stockholders' equity: Common stock.............................................. 104 106 Additional paid-in capital................................ 94,745 194,521 Retained earnings......................................... 730,447 596,075 Accumulated other comprehensive income.................... 43,394 -- ---------- ---------- Total stockholders' equity.............................. 868,690 790,702 ---------- ---------- $1,329,253 $1,173,068 ========== ========== </TABLE> See accompanying notes to condensed consolidated financial statements. 4 <PAGE> ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> NINE MONTH PERIOD ENDED --------------------------- DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS) <S> <C> <C> NET CASH PROVIDED BY OPERATING ACTIVITIES................... $237,239 $120,455 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of certain net assets in connection with acquisitions, net......................................... (186,416) (34,126) Purchases of property and equipment......................... (7,253) (32,203) Net proceeds from the sale of property and equipment........ 1,941 -- Net proceeds from the sale of land held for sale............ 16,577 -- Net proceeds from the sale of PTS........................... -- 4,543 Purchases of marketable securities.......................... (961,390) (479,033) Sales of marketable securities.............................. 630,371 350,634 Maturities of marketable securities......................... 283,174 205,692 Purchases of minority investments........................... (3,372) -- -------- -------- NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES........ (226,368) 15,507 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common stock.................. 88,593 11,567 Proceeds from the issuance of put warrants.................. 3,725 -- Repurchases of common stock................................. (244,132) (106,514) Principal payments on long-term debt........................ (5,504) (5,550) -------- -------- NET CASH USED FOR FINANCING ACTIVITIES...................... (157,318) (100,497) -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (146,447) 35,465 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 317,580 227,183 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $171,133 $262,648 ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 5 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements have been prepared on a consistent basis with the March 31, 1999 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, except as described in Notes 7 through 11, necessary to provide a fair statement of the results for the interim periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto in the Company's Annual Report on Form 10-K for the year ended March 31, 1999. For presentation purposes, the Company has indicated its third quarter of fiscal 1999, as having ended on December 31, whereas in fact, the Company's third quarter of fiscal 1999 ended on January 1, 1999. The results of operations for the three and nine month periods ended December 31, 1999, are not necessarily indicative of the results to be expected for the entire year. Additionally, certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation. On June 8, 1999, the Company received a comment letter from the Securities and Exchange Commission ("SEC") regarding certain of the Company's previous filings under the Securities Exchange Act of 1934, primarily relating to disclosures in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements. Accordingly, the Company has responded to the SEC's inquiries and provided additional disclosures in its fiscal 1999 Annual Report on Form 10-K and all subsequent 1934 Act filings, including this Report on Form 10-Q for the third quarter of fiscal 2000. However, there can be no assurance that the SEC will not take exception with the Company's disclosures and require that the Company make additional disclosures in its periodic reports or further amend its previous filings. 2. COMPREHENSIVE INCOME As of April 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 requires components of comprehensive income, including unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, to be reported in the financial statements or notes thereto. The adoption does not impact net income (loss). Comprehensive income (loss) consists of net income (loss) and other comprehensive income. 6 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 2. COMPREHENSIVE INCOME (CONTINUED) The components of comprehensive income (loss), net of income taxes, included: <TABLE> <CAPTION> THREE MONTH PERIOD ENDED ------------------------------------- DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- (IN THOUSANDS) <S> <C> <C> Net income.................................. $31,668 $25,012 Change in net unrealized gain on available-for-sale securities............. 43,394 -- ------- ------- Total....................................... $75,062 $25,012 ======= ======= </TABLE> <TABLE> <CAPTION> NINE MONTH PERIOD ENDED ------------------------------------- DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- (IN THOUSANDS) <S> <C> <C> Net income (loss)........................... $134,372 $(59,661) Change in net unrealized gain on available-for-sale securities............. 43,394 -- -------- -------- Total....................................... $177,766 $(59,661) ======== ======== </TABLE> Accumulated other comprehensive income presented in the accompanying Condensed Consolidated Balance Sheet represents the accumulated net unrealized gain on available-for-sale securities, net of income taxes, primarily related to the Company's investment in JNI common stock (Note 8). The realization of these gains is dependent on the market value of the securities, which is subject to fluctuation, and the Company's ability to sell the securities under its current limitations. There can be no assurance if and when these gains will be realized. 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires recognition of all derivatives as assets or liabilities and measurement of those instruments at fair value. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which deferred the required date of adoption of SFAS 133 for one year, to fiscal years beginning after June 15, 2000. The Company will adopt this statement in its first quarter of fiscal 2002, but does not expect the adoption of SFAS 133 to have a material impact on the Company's financial position, results of operations or cash flows. 7 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 4. BALANCE SHEET DETAIL Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventory were as follows: <TABLE> <CAPTION> DECEMBER 31, MARCH 31, 1999 1999 ------------ --------- (IN THOUSANDS) <S> <C> <C> Raw materials......................................... $24,395 $16,354 Work-in-process....................................... 10,598 8,202 Finished goods........................................ 36,946 26,282 ------- ------- $71,939 $50,838 ======= ======= </TABLE> The components of accrued liabilities were as follows: <TABLE> <CAPTION> DECEMBER 31, MARCH 31, 1999 1999 ------------ --------- (IN THOUSANDS) <S> <C> <C> Tax related........................................... $ 84,200 $ 65,754 Accrued compensation and related taxes................ 39,696 22,137 Acquisition related................................... 19,262 491 Sales and marketing related........................... 7,787 7,708 Other................................................. 29,200 16,789 -------- -------- $180,145 $112,879 ======== ======== </TABLE> 5. LINES OF CREDIT In December 1999, the Company assumed a $10.0 million revolving line of credit, of which $5.5 million was outstanding, in conjunction with the purchase of Distributed Processing Technology Corporation ("DPT") (Note 8). The line of credit was paid in full as of December 31, 1999 and subsequently, the Company terminated this line of credit in January 2000. In March 1999, the Company obtained an unsecured $60.0 million revolving line of credit which expires on March 25, 2000. No borrowings were outstanding under this line of credit as of December 31, 1999. The interest rate and commitment fee is based on a pricing matrix, which correlates with the Company's credit rating. Under the arrangement, the Company is required to maintain certain financial ratios among other restrictive covenants. The Company was in compliance with all such covenants as of December 31, 1999. 6. LONG-TERM DEBT In February 1997, the Company issued $230.0 million of 4 3/4% Convertible Subordinated Notes due on February 1, 2004. The Company received net proceeds of $223.9 million. The holders of the notes are entitled to convert the notes into common stock at a conversion price of $51.66 per share through February 1, 2004. The notes are redeemable in whole or in part, at the option of the Company, at any time on or after February 3, 2000 at declining premiums to par. Debt issuance costs are being amortized ratably 8 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 6. LONG-TERM DEBT (CONTINUED) over the term of the notes. During the third quarter of fiscal 2000, a 4 3/4% Convertible Subordinated Note for $0.2 million was converted by a note holder into 3,871 shares of the Company's common stock. In June 1992, the Company entered into a $17.0 million term loan agreement bearing interest at 7.65%, with principal and interest payable in quarterly installments of $850,000. In the first quarter of fiscal 1999, the Company paid the remaining outstanding principal and interest due on the loan. 7. STATEMENTS OF OPERATIONS Restructuring and other charges included: <TABLE> <CAPTION> THREE MONTH NINE MONTH PERIOD ENDED PERIOD ENDED ------------------- ------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1999 1998 1999 1998 -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Acquisition related costs (Note 10)........ $ -- $ -- $ -- $21,463 Restructuring charges (Note 9)............. -- -- -- 33,330 Asset impairment and other charges (Notes 10 and 16)............................... 9,599 -- 9,599 7,394 ------ ------ ------ ------- Total restructuring and other charges...... $9,599 $ -- $9,599 $62,187 ====== ====== ====== ======= </TABLE> Interest and other income included: <TABLE> <CAPTION> THREE MONTH NINE MONTH PERIOD ENDED PERIOD ENDED ------------------- ------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1999 1998 1999 1998 -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Interest income........................... $8,119 $7,916 $24,750 $24,961 Gain on sale of land (Note 11)............ -- -- 3,513 -- Gain on exchange of warrant (Note 8)...... -- -- 10,920 -- ------ ------ ------- ------- Total interest and other income........... $8,119 $7,916 $39,183 $24,961 ====== ====== ======= ======= </TABLE> 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS DPT: In December 1999, the Company purchased DPT, a leading supplier of high-performance storage solutions, including RAID controllers and storage subsystems, for $185.2 million in cash and assumed stock options valued at $51.8 million. The stock options were valued using the Black-Scholes valuation model. As part of the purchase agreement, $18.5 million of the purchase price was held back for unknown liabilities that may have existed as of the acquisition date. The holdback was included in "Accrued liabilities" in the Condensed Consolidated Balance Sheet as of December 31, 1999. The holdback will be paid for such unknown liabilities or to the seller within 12 months from the acquisition date and was included as part of the purchase price of the transaction. Additionally, the Company incurred 9 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED) $1.1 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. Assuming the business combination had taken place as of April 1, 1998, amortization of goodwill and other intangibles would have increased by $39.4 million and $40.7 million for the nine month periods ended December 31, 1999 and December 31, 1998, respectively. The Company will disclose further pro forma financial information in a subsequent filing on Form 8-K/A. The Company accounted for the acquisition of DPT using the purchase method of accounting and, excluding the write-off of acquired in-process technology, the impact of the acquisition was not material to the Company's consolidated financial results of operations from the acquisition date through December 31, 1999. The preliminary allocation of the Company's purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below. The preliminary allocation was based on an independent appraisal and estimate of fair value. <TABLE> <CAPTION> (IN THOUSANDS) <S> <C> Net tangible assets......................................... $ 4,262 In-process technology....................................... 16,739 Goodwill and other intangible assets: Goodwill.................................................. 147,825 Purchased technology...................................... 38,621 Covenant not to compete................................... 9,332 Acquired employees........................................ 6,832 Distribution network...................................... 9,292 OEM relationships......................................... 5,190 -------- 217,092 -------- Net assets acquired......................................... $238,093 ======== </TABLE> The net tangible assets acquired were comprised primarily of inventory, property and equipment and receivables offset by accrued liabilities, including amounts due under a line of credit (Note 5). The acquired in-process technology was written-off in the third quarter of fiscal 2000. The estimated weighted average useful life of the intangible assets for purchased technology, covenant not to compete, acquired employees, distribution network, OEM relationships and the residual goodwill, created as a result of the acquisition of DPT, is approximately four years. The $16.7 million allocation of the purchase price to the acquired in-process technology has been determined by identifying research projects in areas for which technological feasibility had not been established and no alternative future uses existed. The Company acquired technology consisting of next generation RAID controllers. The value was determined by estimating the expected cash flows from the project once commercially viable, discounting the net cash flows back to their present value, and then applying a percentage of completion to the calculated value as defined below. 10 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED) NET CASH FLOWS. The net cash flows from the identified project was based on estimates of revenues, cost of sales, research and development costs, selling, general and administrative costs, royalty costs and income taxes from the project. These estimates were based on the assumptions mentioned below. The research and development costs excluded costs to bring the acquired in-process project to technological feasibility. The estimated revenues were based on management projections of the acquired in-process project. The business projections were compared with and found to be in line with industry analysts' forecasts of growth in substantially all of the relevant markets. Estimated total revenues from the acquired in-process technology product are expected to peak in fiscal 2003 and decline in fiscal 2004 as other new products are expected to become available. These projections were based on estimates of market size and growth, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. Projected gross margins were based on DPT's historical margins, which were in line with the Company's RAID segment that acquired DPT. The estimated selling, general and administrative costs, as well as research and development costs, were consistent with DPT's historical cost structure. ROYALTY RATE. The Company applied a royalty charge of 25% of operating income for each in-process project to attribute value for dependency on predecessor core technologies. DISCOUNT RATE. Discounting the net cash flows back to their present value was based on the cost of capital for well managed venture capital funds which typically have similar risks and returns on investments. The cost of capital used in discounting the net cash flows from acquired in-process technology was 25%. PERCENTAGE OF COMPLETION. The percentage of completion was determined using costs incurred by DPT prior to the acquisition date compared to the remaining research and development to be completed to bring the project to technological feasibility. The Company estimated, as of the acquisition date, the project was 60% complete and the estimated costs to complete the project were approximately $7.8 million. The Company expects to complete the project within 15 months from the acquisition date. However, development of this project remains a significant risk to the Company due to the remaining effort to achieve technical feasibility, rapidly changing customer markets and significant competitive threats from numerous companies. Failure to bring these products to market in a timely manner could adversely impact sales and profitability of the Company in the future. Additionally, the value of the intangible assets acquired may become impaired. CEQUADRAT: In July 1999, the Company purchased CeQuadrat GmbH ("CeQuadrat"), a developer of CD-R software products, for $24.0 million in cash. As part of the purchase agreement, $4.8 million of the purchase price was held back for unknown liabilities that may have existed as of the acquisition date. The holdback was included in "Accrued liabilities" in the Condensed Consolidated Balance Sheet as of September 30, 1999. In the third quarter of fiscal 2000, the Company paid the holdback to an escrow 11 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED) account, thereby reducing accrued liabilities in the Condensed Consolidated Balance Sheet as of December 31, 1999. The holdback will be paid for such unknown liabilities or to the seller within 12 months from the acquisition date and was included as part of the purchase price of the transaction. Additionally, the Company incurred $0.3 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. The Company accounted for the acquisition of CeQuadrat using the purchase method of accounting and, excluding the write-off of acquired in-process technology, the impact of the acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The allocation of the Company's purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below. The allocation was based on an independent appraisal and estimate of fair value. <TABLE> <CAPTION> (IN THOUSANDS) <S> <C> Net tangible assets......................................... $ 123 In-process technology....................................... 3,016 Goodwill and other intangible assets: Goodwill.................................................. 10,341 Purchased technology...................................... 3,140 Covenant not to compete................................... 4,360 Acquired employees........................................ 1,173 OEM relationships......................................... 1,186 Trade name................................................ 953 ------- 21,153 ------- Net assets acquired......................................... $24,292 ======= </TABLE> The net tangible assets acquired were comprised primarily of cash and receivables offset by accrued liabilities. The acquired in-process technology was written-off in the second quarter of fiscal 2000. The estimated weighted average useful life of the intangible assets for purchased technology, covenant not to compete, acquired employees, OEM relationships, trade name and the residual goodwill, created as a result of the acquisition of CeQuadrat, is approximately three years. 12 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED) The $3.0 million allocation of the purchase price to the acquired in-process technology was determined by identifying research projects in areas for which technological feasibility had not been established and no alternative future uses existed. The Company acquired technology consisting of next generation consumer-oriented CD-R software, next generation professional-oriented CD-R software and CD backup software; the amount of in-process technology allocated to each of the projects was $0.6 million, $2.2 million and $0.2 million, respectively. The value for each of the projects was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value, and then applying a percentage of completion to the calculated value as defined below. NET CASH FLOWS. The net cash flows from the identified projects were based on estimates of revenues, cost of sales, research and development costs, selling, general and administrative costs, royalty costs and income taxes from those projects. These estimates were based on the assumptions mentioned below. The research and development costs excluded costs to bring acquired in-process projects to technological feasibility. The estimated revenues were based on management projections of the acquired in-process projects for the next generation consumer-oriented CD-R software, next generation professional-oriented CD-R software and the CD backup software. The business projections were compared with and found to be in line with industry analysts' forecasts of growth in substantially all of the relevant markets. Estimated total revenues from all of the acquired in-process technology products are expected to peak in fiscal 2002 and decline in fiscal 2003 as other new products are expected to become available. These projections were based on estimates of market size and growth, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. Projected gross margins were based on CeQuadrat's historical margins, which were in line with the Company's Software segment that acquired CeQuadrat. The estimated selling, general and administrative costs, as well as research and development costs, were consistent with CeQuadrat's historical cost structure. ROYALTY RATE. The Company applied a royalty charge of 30% of operating income for each in-process project to attribute value for dependency on predecessor core technologies. DISCOUNT RATE. Discounting the net cash flows back to their present value was based on the cost of capital for well managed venture capital funds which typically have similar risks and returns on investments. The cost of capital used in discounting the net cash flows from acquired in-process technology was 30% for each of the acquired in-process technology projects. Higher required rates of return, which would correspond to higher risk, are partially mitigated by the Company's expertise in the CD-R market. PERCENTAGE OF COMPLETION. The percentage of completion for the projects was determined using costs incurred by CeQuadrat prior to the acquisition date compared to the remaining research and development to be completed to bring the projects to technological feasibility. The Company estimated, as of the acquisition date, the next generation consumer-oriented CD-R software, next generation professional-oriented CD-R software and the CD backup software projects were 82%, 69% and 82% complete, respectively, and the estimated costs to complete the projects were approximately $0.1 million in aggregate. 13 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED) All of the in-process technology projects acquired from CeQuadrat were completed during the third quarter of fiscal 2000, and estimated costs to complete the projects were in line with estimates. The next generation professional-oriented CD recording software and the CD backup software began shipping in the third quarter of fiscal 2000. The Company does not anticipate that the next generation consumer-oriented CD recording software will be commercially released. RIDGE: In May 1998, the Company purchased Ridge Technologies, Inc. ("Ridge"), a development stage company, for 1.2 million shares of the Company's common stock valued at $21.2 million, and assumed stock options valued at $13.1 million. Prior to the acquisition, the Company owned a 19.9% interest in Ridge with a carrying value of $1.5 million and Grant Saviers, former Chairman and CEO of the Company, was a director of Ridge. The Company incurred $0.8 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. In-process technology was valued at $39.4 million and was written-off in the first quarter of fiscal 1999. In August 1998, the Company divested the storage subsystems business, abandoned the in-process technology projects (these projects remained incomplete from the date of acquisition through abandonment) and wrote-off the remaining unamortized goodwill of $0.6 million and other intangible asset of $1.2 million associated with Ridge. The aggregate impact of this acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The tangible liabilities assumed exceeded the tangible assets acquired. The purchase price allocation is included in the Company's fiscal 1999 Annual Report on Form 10-K. ADI: In April 1998, the Company purchased read channel and preamplifier ASIC technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") for $34.4 million in cash. The ASIC technologies purchased from ADI were to be incorporated into the mainstream removable Peripheral Technology Solutions ("PTS") business line upon completion. Grant Saviers, former Chairman and CEO of the Company, is a director of ADI. The Company incurred $0.4 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. The acquired in-process technology was valued at $6.1 million and was written-off in the first quarter of fiscal 1999. In January 1999, the Company sold the mainstream removable PTS business line, including the in-process technologies purchased from ADI (these projects remained incomplete from the date of acquisition through their disposition), and relieved the remaining unamortized goodwill of $18.3 million and other intangible asset of $1.7 million associated with the ASIC technologies purchased from ADI. The aggregate impact of this acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The purchase price allocation is included in the Company's fiscal 1999 Annual Report on Form 10-K. JNI: Under an Asset Acquisition Agreement, dated November 12, 1998, between JNI Corporation ("JNI") and the Company ("Asset Acquisition Agreement"), the Company sold certain fibre channel technology, products and property and equipment to JNI. As consideration for the assets received, JNI issued to the Company 1,132,895 shares of JNI Series A Convertible Preferred Stock. In addition, JNI issued to the Company warrants to purchase up to 2,436,551 shares of JNI Series A Convertible Preferred Stock (the share amounts contained in this Report on Form 10-Q for the third quarter of fiscal 2000 reflect a 70% reverse stock split effected by JNI in October 1999). Exercisibility of the warrants was contingent 14 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS (CONTINUED) upon JNI attaining certain milestones such as net revenue levels from products based on the acquired technology, new product introductions or a change in majority control including an initial public offering of JNI's stock before January 31, 2001. On September 30, 1999, pursuant to an offer from JNI, the Company exchanged an existing contingent warrant to purchase shares of JNI Series A Convertible Preferred Stock for an immediately exercisable warrant to purchase 840,000 shares of JNI Series A Convertible Preferred Stock. The remaining contingent warrants expired unexercisable on October 27, 1999, the effective date of JNI's initial public offering. Upon the closing of the initial public offering the Series A Convertible Preferred Stock automatically converted into shares of common stock. As a result of the exchange of the warrant described above, the Company recorded a gain of $10.9 million ($6.6 million net of income taxes) in the second quarter of fiscal 2000, reflecting the excess of fair value of the warrant received over the carrying amount of the warrant surrendered. The Company valued the JNI warrant received using the Black-Scholes valuation model. The gain was included in "Interest and other income" in the Condensed Consolidated Statements of Operations for the nine-month period ended December 31, 1999. The fair value of the warrant received is included in "Other long-term assets" in the Condensed Consolidated Balance Sheet. The Company possesses certain limited registration rights beginning two years following the date of JNI's initial public offering with respect to the 1,132,895 shares of JNI common stock acquired in November 1998 and the 840,000 shares issuable upon exercise of the warrant. However, the Company may sell the unregistered common shares beginning one year from the date the shares were acquired or the warrant is exercised subject to certain restrictions related to the trading volume or total outstanding shares of JNI. JNI stock became publicly traded in the third quarter of fiscal 2000 as a result of their initial public offering. Accordingly, the Company's investment in JNI common stock is stated at fair value and included in "Marketable securities" and the unrealized gain, net of income taxes, is included in "Other comprehensive income" in the Condensed Consolidated Balance Sheet at December 31, 1999 (Note 3). Due to the governmental and contractual restrictions in excess of one year placed on the disposal of the shares underlying the warrant, the warrant does not qualify as a marketable security under Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, the warrant is accounted for under the historical cost basis and regularly evaluated for recoverability. When the disposal restrictions are within one year of lapsing, the warrant will be accounted for as an available-for-sale security under SFAS 115, which requires investments to be recorded at their fair value. Unrealized gains or losses, net of income taxes, will be recorded as other comprehensive income in the equity section of the Condensed Consolidated Balance Sheet. 9. RESTRUCTURING In the first quarter of fiscal 1999, the Company recorded a restructuring charge of $8.8 million, comprised primarily of severance and benefits. In the second quarter of fiscal 1999, the Company recorded a restructuring charge of $24.5 million, net of an adjustment to the restructuring charge taken in the first 15 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 9. RESTRUCTURING (CONTINUED) quarter of fiscal 1999 of $1.4 million. The second quarter restructuring charge was comprised primarily of severance and benefits and the write-off of fixed assets, inventory and other current and long-term assets. In the fourth quarter of fiscal 1999, the Company recorded a restructuring charge of $6.6 million, net of an adjustment to the restructuring charges taken in the first and second quarters of fiscal 1999 of $1.2 million. The fourth quarter restructuring charge was comprised primarily of severance and benefits. In total, the Company recorded $39.9 million in restructuring charges during fiscal 1999, of which $17.4 million were non-cash charges. During fiscal 1999, the Company paid $20.0 million in cash relating to restructuring activities. The restructuring reserve balance at March 31, 1999 was comprised of $1.5 million for severance and benefits and $1.0 million for other charges, primarily lease payments for vacated facilities. As of December 31, 1999, substantially all of the reserve balance has been paid out. 10. ASSET IMPAIRMENT AND OTHER CHARGES The Company regularly evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated future undiscounted cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Based on these evaluations, the Company recorded non-cash impairment charges of $4.0 million in the second quarter of fiscal 1999, including $1.4 million in manufacturing equipment deemed unnecessary due to non-temporary declines in production volume and the write-off of $2.6 million of non-trade related receivables previously classified in "Other current assets" in the Condensed Consolidated Balance Sheets. Additionally, the Company recorded executive termination costs of $3.4 million in the second quarter of fiscal 1999, relating to three executives. The costs consisted of $1.9 million in severance and benefits payments and $1.5 million in non-cash stock compensation charges resulting from amended option agreements. In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed to terminate the agreement. The Company paid a $7.0 million termination fee and $6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred $7.8 million in other acquisition-related charges, including legal, consulting and other costs. The Company expensed the entire $21.5 million in fees associated with this terminated acquisition in the first quarter of fiscal 1999. 11. ASSETS HELD FOR SALE In March 1999, the Company sold land located in California for net proceeds of $5.1 million resulting in a gain of $1.6 million recorded in the fourth quarter of fiscal 1999. Net proceeds from the sale were received in April 1999. As of March 31, 1999, the Company had $41.1 million in assets held for sale which were included in "Other current assets" in the Condensed Consolidated Balance Sheet, representing several pieces of land in California and land and a building in Colorado. In April 1999, the Company sold land held for sale in 16 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 11. ASSETS HELD FOR SALE (CONTINUED) California for net proceeds of $11.5 million resulting in a gain of $3.5 million recorded in the first quarter of fiscal 2000. The gain is included in "Interest and other income" in the Condensed Consolidated Statement of Operations for the nine-month period ended December 31, 1999. Net proceeds from the sale were received in April 1999. During the third quarter of fiscal 2000, the Company took the Colorado land and building off the market in order to make improvements to the property. At which time the improvements are completed, the Company will make a determination as to its future requirements for the property. Accordingly, the Colorado land and building have been reclassed to "Property and equipment" in the Condensed Consolidated Balance Sheet as of December 31, 1999. As of December 31, 1999, $12.9 million remained in assets held for sale, representing land located in California. In January 2000, the Company entered into a contract to sell the remaining land held for sale in California, however, the Company does not expect to transfer ownership for several months. 12. NET INCOME (LOSS) PER SHARE Following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented below. <TABLE> <CAPTION> THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED DECEMBER 31, 1999 DECEMBER 31, 1998 --------------------------------------- --------------------------------------- INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> BASIC NET INCOME PER SHARE Net income available to common stockholders.................. $31,668 103,267 $0.31 $25,012 108,040 $0.23 ===== ===== EFFECT OF DILUTIVE SECURITIES Common stock equivalents........ -- 7,157 -- 2,841 ------- ------- ------- ------- DILUTED NET INCOME PER SHARE Net income available to common stockholders and assumed conversions................... $31,688 110,424 $0.29 $25,012 110,881 $0.23 ======= ======= ===== ======= ======= ===== </TABLE> 17 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 12. NET INCOME (LOSS) PER SHARE (CONTINUED) <TABLE> <CAPTION> NINE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED DECEMBER 31, 1999 DECEMBER 31, 1998 --------------------------------------- --------------------------------------- INCOME SHARES PER-SHARE LOSS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> BASIC NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders........... $134,372 103,311 $1.30 $(59,661) 111,274 $(0.54) ===== ====== EFFECT OF DILUTIVE SECURITIES Common stock equivalents........ -- 6,280 -- -- -------- ------- -------- ------- DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders and assumed conversions........... $134,372 109,591 $1.23 $(59,661) 111,274 $(0.54) ======== ======= ===== ======== ======= ====== </TABLE> Additional options to purchase 156,000 shares of common stock were outstanding at December 31, 1999, but were not included in the computation of diluted weighted average shares outstanding because the options' exercise price was greater than the average market price of the common shares during the third quarter of fiscal 2000. The conversion of 4,452,000 shares of common stock related to the 4 3/4% Convertible Subordinated Notes were also not included in the computation of diluted net income per share for the third quarter and first nine months of fiscal 2000 because they were anti-dilutive. For the three month period ended December 31, 1998, additional options to purchase 4,187,000 shares of common stock were outstanding at December 31, 1998, but were not included in the computation of diluted weighted average shares outstanding because the options' exercise price was greater than the average market price of the common shares during the third quarter of fiscal 1999. For the nine month period ended December 31, 1998, 20,981,000 shares of common stock were outstanding at December 31, 1998, but were not included in the computations of net loss per share because they were anti-dilutive. The conversion of 4,452,000 shares of common stock related to the 4 3/4% Convertible Subordinated Notes were not included in the computations of net income (loss) per share for the third quarter and first nine months of fiscal 1999 because they were anti-dilutive. 13. STOCK REPURCHASES In January 1998, the Company's Board of Directors approved a stock buy back program under which the Company could repurchase up to 10.0 million shares of its common stock in the open market. In October 1998, the Company's Board of Directors approved a stock buy back program under which the Company could repurchase up to $200.0 million of its common stock in the open market. In May 1999, the Company's Board of Directors approved another stock buy back program under which the Company could repurchase up to an additional $200.0 million of its common stock in the open market. The Company repurchased and retired 7,902,000 and 8,746,000 shares of its common stock for $244.1 million and $106.5 million during the first nine months of fiscal 2000 and 1999, respectively, under the buy back programs. The transactions were recorded as reductions to common stock and additional paid-in-capital. 18 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 13. STOCK REPURCHASES (CONTINUED) As of December 31, 1999, $56.6 million remained authorized for stock buy back under the May 1999 program. In the second quarter of fiscal 2000, the Company sold put warrants that could have obligated the Company to buy back up to 1.0 million shares of its common stock at prices ranging from $37 to $39 in exchange for up front premiums of $3.7 million. In the third quarter of fiscal 2000, the put warrants expired unexercised. 14. STOCK PLANS During the second quarter of fiscal 2000, the Company's Board of Directors and its stockholders approved the Company's 1999 Stock Plan and reserved for issuance thereunder (a) 1,000,000 shares of common stock plus (b) any shares of common stock reserved but ungranted under the Company's 1990 Stock Plan as of the date of stockholder approval plus (c) any shares returned to the 1990 Stock Plan after the date of stockholder approval of the 1999 Stock Plan as a result of termination of options under the 1990 Stock plan. Upon stockholder approval of the 1999 Stock Plan, the 1990 Stock Plan was terminated with respect to new option grants. The 1999 Stock Plan provides for granting of incentive and nonstatutory stock options to employees, consultants and directors of the Company. Options granted under this plan are for periods not to exceed ten years, and are granted at prices not less than 100% and 85% for incentive and nonstatutory stock options, respectively, of the fair market value on the date of grant. Generally, stock options become fully vested and exercisable over a four-year period. 15. INCOME TAXES Income tax provisions (benefits) for interim periods are based on estimated annual income tax rates. The difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate is primarily due to income earned in Singapore where the Company is subject to a significantly lower effective income tax rate. The Company recorded an income tax provision of $18.8 million representing 37.3% of income before provision for income taxes for the third quarter of fiscal 2000 compared to an income tax provision of $10.4 million representing 29.3% of income before provision for income taxes for the third quarter of fiscal 1999. The effective income tax rate used to calculate the income tax provision for the third quarter of fiscal 2000 was higher than 28% primarily as a result of the book write-offs associated with the acquisition of DPT, for which no current tax benefit will be derived. The effective income tax rate used to calculate the income tax provision for the third quarter of fiscal 1999 was greater than 28% primarily as a result of book write-offs, which are not deductible for tax purposes. 19 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 16. CONTINGENCIES A class action lawsuit is pending in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. The class action lawsuit alleges that the Company made false and misleading statements at various times during the period between April 1997 and January 1998 in violation of federal securities laws. The complaint does not set forth purported damages. The Company believes the class action lawsuit is without merit and intends to defend itself vigorously. In addition, a derivative action was filed in the Superior Court of the State of California against the Company and certain of its officers and directors, alleging that the individual defendants improperly profited from transactions in the Company's stock during the same time period referenced by the class action lawsuit. In July 1999, the Company entered into an agreement to settle the derivative action. Under the terms of the agreement, the Company will reimburse the fees and costs incurred by the plaintiff's attorney of $600,000. The settlement does not affect the class action lawsuit still pending. The court approved the settlement on December 21, 1999, and, as a result, the derivative action has been dismissed. The liability is included in "Accrued liabilities" in the Condensed Consolidated Balance Sheet at December 31, 1999. As previously disclosed, the Company has been negotiating with a third party concerning a potential patent cross-license agreement. Subsequently, the Company reached a tentative agreement with that party for a patent cross-license. Under the proposed agreement, each party will be granted a license for specified patents of the other party covering the period from January 1, 1990, through June 30, 2004. The license fee to be paid by the Company under the proposed cross-license agreement will range from $11 million to $25 million, depending on the outcome of an evaluation of certain patents by an independent party. The Company's best estimate of the total license fee that will be payable under the proposed cross-license agreement is $18.0 million. The portion of the estimated license fee allocated to revenues from periods prior to December 31, 1999 of $9.6 million was written-off and included in "Restructuring and other charges" in the Condensed Consolidated Statement of Operations for the three and nine month periods ended December 31, 1999. The remaining license fee pertaining to future periods was allocated to an intangible asset and will be amortized over the period from January 1, 2000 through June 30, 2004. At December 31, 1999, $0.9 million of the intangible asset was included in "Prepaid expenses" and $7.5 million was included in "Other long-term assets" in the Condensed Consolidated Balance Sheet. $7.2 million of the total estimated license fee is included in "Accrued liabilities" and the remaining $10.8 million is included in "Other long-term liability" in the Condensed Consolidated Balance Sheet at December 31, 1999. The Company is a party to other litigation matters and claims which are normal in the course of its operations, and while the results of such litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a materially adverse impact on the Company's consolidated financial position or results of operations. The IRS is currently auditing the Company's federal income tax returns for its fiscal years 1994 through 1996. No proposed adjustments have been received for these years. The Company believes sufficient taxes have been provided in prior years and that the ultimate outcome of the IRS audits will not have a material adverse impact on the Company's financial position or results of operations. 20 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 17. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information" in its fiscal 1999 Annual Report on Form 10-K. The Company evaluated its product segments in accordance with SFAS 131 and concluded that its reportable segments are Host I/O, RAID (Redundant Array of Independent Disks), Software and PTS. The Host I/O segment designs, develops, manufactures and markets host bus adapter ("HBA") boards and chips that allow computers to transfer information to and from peripherals, such as hard disk drives, scanners, CD-ROMs, CD-Rs, CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. The Company's HBAs are based on Small Computer System Interface ("SCSI") technology and are utilized in servers, high-end workstations, desktops and laptops where high performance I/O is a vital component of overall system performance. The RAID segment designs, develops, manufactures and markets bus-based and microprocessor-based RAID solutions. These products are utilized from entry-level workstations to enterprise-class servers. The Company's RAID controllers provide performance and functionality, incorporate the latest technical innovations, and offer superior software functionality to make RAID fast, simple and reliable. In December 1999, the Company acquired DPT, a Florida-based company and leading supplier of high-performance storage solutions, including adapters, RAID controllers, storage subsystems, and management software. Operating results of DPT were not material from the acquisition date (December 22, 1999) through December 31, 1999. Beginning in the fourth quarter of fiscal 2000, operating results of DPT will be combined with those of the Company, specifically the RAID segment. The Software segment designs, develops and markets primarily application software for optical peripherals, including CD-R, CD-RW and DVD recordable devices. In addition, the segment offers software utility products that simplifies connecting a SCSI host adapter and peripherals to a microcomputer system. The Company's application software products allow users to store data, including audio, video and still photos, to virtually all marketed CD-R and CD-RW drives using industry standard formats. The application software, along with the peripherals, provide users with a cost effective alternative to other forms of removable media for general purpose computing needs, including the ability to transfer downloaded music from the Internet to CDs for private use or creating compilations of music from purchased music CD labels. The Company's CD-R software offerings are available as stand-alone products, and also ship built-in or "bundled" with most CD-R drives in the desktop market. In July 1999, the Company acquired CeQuadrat, a German-based software company, also providing CD-R and CD-RW products. With the acquisition, came enhanced product development and engineering expertise, as well as a greater European customer base. Results of CeQuadrat have been combined with those of the Company, specifically the Software segment, beginning in the second quarter of fiscal 2000. The business lines that comprised the PTS segment were sold in November 1998 and January 1999 to Texas Instruments, Inc. ("TI") and ST Microelectronics, Inc. ("ST"), respectively. This segment designed, developed, manufactured and marketed proprietary integrated circuits ("ICs") for use in mass storage devices and other peripherals. Summarized pre-tax financial information concerning the Company's reportable segments is shown in the following table. The Company does not identify or allocate assets or depreciation by operating 21 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 17. SEGMENT REPORTING (CONTINUED) segments nor are the segments evaluated under these criteria. The "Other" column includes corporate related items and income and expenses not allocated to reportable segments, primarily unusual transactions and business lines divested in fiscal 1999. <TABLE> <CAPTION> THREE MONTH NINE MONTH PERIOD ENDED PERIOD ENDED ------------------- -------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1999 1998 1999 1998 -------- -------- -------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> HOST I/O: Net revenues..................................... $161,096 $137,240 $468,757 $ 368,121 Segment profit................................... 72,413 47,507 205,092 105,552 RAID: Net revenues..................................... 26,186 8,156 78,306 18,006 Segment profit (loss)............................ 1,038 (4,830) 5,247 (14,613) SOFTWARE: Net revenues..................................... 23,156 13,563 47,783 35,542 Segment profit................................... 3,366 1,950 2,246 5,907 PTS: Net revenues..................................... -- 24,266 -- 84,791 Segment loss..................................... -- (9,078) -- (29,794) OTHER: Net revenues..................................... 1,008 647 3,258 1,964 Segment loss..................................... (26,324) (152) (16,456) (127,687) </TABLE> The following table presents the details of "Other" segment loss: <TABLE> <CAPTION> THREE MONTH NINE MONTH PERIOD ENDED PERIOD ENDED ------------------- -------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1999 1998 1999 1998 -------- -------- -------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> Profit (loss) from divested business lines........... $ -- $ 41 $ -- $ (31,618) Unallocated corporate loss........................... (5,294) (5,117) (17,553) (4,255) Interest and other income............................ 8,119 7,916 39,183 24,961 Interest expense..................................... (2,811) (2,992) (8,732) (9,106) Write-off of acquired in-process technology.......... (16,739) -- (19,755) (45,482) Restructuring and other charges...................... (9,599) -- (9,599) (62,187) -------- ------- -------- --------- Total................................................ $(26,324) $ (152) $(16,456) $(127,687) ======== ======= ======== ========= </TABLE> 22 <PAGE> ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (UNAUDITED) 18. SUBSEQUENT EVENT In January 2000, the Company entered into a four-year agreement with Agilent Technologies, Inc. ("Agilent") to co-develop, market and sell fibre channel host bus adapters. In exchange, the Company issued warrants to Agilent to purchase 1,160,000 shares of the Company's common stock at $62.25 per share. The warrants were valued at $37.1 million using the Black-Scholes valuation model. The value of the warrants will be recorded as an intangible asset in the fourth quarter of fiscal 2000 and will be amortized ratably over the term of the agreement. In addition, the Company will license Agilent's fibre channel host adapter and software driver technology and pay royalties to Agilent based on revenue from certain products, with aggregate guaranteed minimum royalty payments of $60.0 million over the term of the agreement. 23 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth the items in the Condensed Consolidated Statements of Operations as a percentage of net revenues: <TABLE> <CAPTION> THREE MONTH NINE MONTH PERIOD ENDED PERIOD ENDED ------------------- ------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net revenues................................ 100.0% 100.0% 100.0% 100.0% Cost of revenues............................ 32.9 40.6 33.9 42.8 ----- ----- ----- ----- Gross margin................................ 67.1 59.4 66.1 57.2 ----- ----- ----- ----- Operating expenses: Research and development.................. 12.2 19.1 12.3 23.6 Sales, marketing and administrative....... 19.6 22.2 20.2 25.6 Amortization of goodwill and other intangibles............................. 1.5 1.5 1.0 1.9 Write-off of acquired in-process technology.............................. 7.9 -- 3.3 8.9 Restructuring and other charges........... 4.5 -- 1.6 12.2 ----- ----- ----- ----- Total operating expenses.................... 45.7 42.8 38.4 72.2 ----- ----- ----- ----- Income (loss) from operations............... 21.4 16.6 27.7 (15.0) Interest and other income................... 3.8 4.3 6.6 4.9 Interest expense............................ (1.3) (1.6) (1.5) (1.8) ----- ----- ----- ----- Income (loss) before provision (benefit) for income taxes.............................. 23.9 19.3 32.8 (11.9) Provision (benefit) for income taxes........ 8.9 5.7 10.3 (0.2) ----- ----- ----- ----- Net income (loss)........................... 15.0% 13.6% 22.5% (11.7)% ===== ===== ===== ===== </TABLE> SEC COMMENT LETTER. On June 8, 1999, the Company received a comment letter from the Securities and Exchange Commission ("SEC") regarding certain of the Company's previous filings under the Securities Exchange Act of 1934, primarily relating to disclosures in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements. Accordingly, the Company has responded to the SEC's inquiries and provided additional disclosures in its fiscal 1999 Annual Report on Form 10-K and all subsequent 1934 Act filings, including this Report on Form 10-Q for the third quarter of fiscal 2000. However, there can be no assurance that the SEC will not take exception with the Company's disclosures and require that the Company make additional disclosures in its periodic reports or further amend its previous filings. BUSINESS SEGMENTS. The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information" in its fiscal 1999 Annual Report on Form 10-K. The Company evaluated its product segments in accordance with SFAS 131 and concluded that its reportable segments are Host I/O, RAID (Redundant Array of Independent Disks), Software and PTS. The Host I/O segment designs, develops, manufactures and markets host bus adapter ("HBA") boards and chips that allow computers to transfer information to and from peripherals, such as hard disk drives, scanners, CD-ROMs, CD-Rs, CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. The Company's HBAs are based on Small Computer System Interface ("SCSI") technology and are utilized in servers, high-end workstations, desktops and laptops where high performance I/O is a vital component of overall system performance. 24 <PAGE> The RAID segment designs, develops, manufactures and markets bus-based and microprocessor-based RAID solutions. These products are utilized from entry level workstations to enterprise-class servers. The Company's RAID adapters provide performance and functionality, incorporate the latest technical innovations, and offer superior software functionality to make RAID fast, simple and reliable. In December 1999, the Company acquired Distributed Processing Technology Corporation ("DPT"), a Florida-based company and leading supplier of high-performance storage solutions, including RAID controllers and storage subsystems. Operating results of DPT were not material from the acquisition date (December 22, 1999) through December 31, 1999. Beginning in the fourth quarter of fiscal 2000, operating results of DPT will be combined with those of the Company, specifically the RAID segment. The Software segment designs, develops and markets primarily application software for optical peripherals, including CD-R, CD-RW and DVD recordable devices. In addition, the segment offers software utility products that simplify connecting a SCSI host adapter and peripherals to a microcomputer system. The Company's application software products allow users to store data, including audio, video and still photos, to virtually all marketed CD-R and CD-RW drives using industry standard formats. The application software, along with the peripherals, provide users with a cost effective alternative to other forms of removable media for general purpose computing needs, including the ability to transfer downloaded music from the Internet to CDs for private use or creating compilations of music from purchased music CD labels. The Company's CD-R software offerings are available as stand-alone products, and also ship built-in or "bundled" with most CD-R drives in the desktop market. In July 1999, the Company acquired CeQuadrat, a German-based software company, also providing CD-R and CD-RW products. With the acquisition, came enhanced product development and engineering expertise, as well as a greater European customer base. Results of CeQuadrat have been combined with those of the Company, specifically the Software segment, beginning in the second quarter of fiscal 2000. The business lines that comprised the PTS segment were sold in November 1998 and January 1999 to Texas Instruments, Inc. ("TI") and ST Microelectronics, Inc. ("ST"), respectively. This segment designed, developed, manufactured and marketed proprietary integrated circuits ("ICs") for use in mass storage devices and other peripherals. NET REVENUES. Net revenues were $211.4 million and $598.1 million for the third quarter and first nine months of fiscal 2000, respectively, an increase of 15.0% and 17.6% from net revenues of $183.9 million and $508.4 million for the third quarter and first nine months of fiscal 1999, respectively. Net revenues for the third quarter of fiscal 2000 were comprised of $161.1 million from the Host I/O segment, an increase of 17.4% from the third quarter of fiscal 1999, $26.2 million from the RAID segment, an increase of 221.1% from the third quarter of fiscal 1999, $23.1 million from the Software segment, an increase of 70.7% from the third quarter of fiscal 1999, and $1.0 million representing unallocated corporate net revenues. Net revenues for the third quarter of fiscal 1999 also included $24.3 million from the divested PTS segment. Excluding the divested PTS segment, total net revenues increased $51.8 million or 32.5% in the third quarter of fiscal 2000, compared to the third quarter of fiscal 1999. Net revenues for the first nine months of fiscal 2000 were comprised of $468.8 million from the Host I/O segment, an increase of 27.3% from the first nine months of fiscal 1999, $78.3 million from the RAID segment, an increase of 334.9% from the first nine months of fiscal 1999, $47.8 million from the Software segment, an increase of 34.4% from the first nine months of fiscal 1999, and $3.2 million representing unallocated corporate net revenues. Net revenues for the first nine months of fiscal 1999 also included $84.8 million from the divested PTS segment. Excluding the divested PTS segment, total net revenues increased $174.5 million or 41.2% in the first nine months of fiscal 2000, compared to the first nine months of fiscal 1999. Net revenues from the Host I/O segment increased in the third quarter and first nine months of fiscal 2000, compared to the third quarter and first nine months of fiscal 1999, primarily as a result of increased 25 <PAGE> demand for high performance I/O. The demand for high performance I/O increased due to growth in on-line applications like electronic commerce, on-line publishing, and the proliferation of the Internet and corporate intranets. The growth in the Host I/O segment net revenues was in line with overall growth in the server market, partially offset by a decline in net revenues from the desktop market, as a result of Ultra-DMA penetration. Additionally, net revenues for the first nine months of fiscal 1999 were adversely impacted as the Company focused on reducing inventory in the distribution channel in the second quarter of fiscal 1999. Net revenues from the RAID segment increased in the third quarter and first nine months of fiscal 2000, compared to the third quarter and first nine months of fiscal 1999, primarily as a result of sales of the Company's high-end RAID product which was first introduced in the third quarter of fiscal 1999. Additionally, net revenues from the RAID segment increased as a result of year over year growth in its low-end RAID products through channel distribution. Currently, the Company ships to one significant RAID OEM customer. However, the Company is continuing to market its RAID products to all major server manufacturers and continues to work closely with the OEMs on the design of current and next generation products to meet customer requirements. The Company expects its acquisition of DPT will play an important role in not only extending the range of RAID products, but also expanding its customer base. Net revenues from the Software segment increased in the third quarter and first nine months of fiscal 2000, compared to the third quarter and first nine months of fiscal 1999, primarily due to worldwide growth in the CD-R and CD-RW drive markets and additional design wins with PC system OEMs in fiscal 2000. Additionally, net revenues increased due to shipments of the Company's release of Easy CD Creator 4.0 Deluxe product, which launched domestically in the second quarter and worldwide in the third quarter of fiscal 2000. The acquisition of CeQuadrat, beginning in the second quarter of fiscal 2000, also contributed additional net revenues, specifically in Europe. The Company's software royalty revenues have increased from higher unit volume shipments attributable to the rapidly expanding CD-R peripheral market, although per unit royalties have declined. GROSS MARGIN. Gross margin in the third quarter and first nine months of fiscal 2000 was 67.1% and 66.1%, respectively, compared to 59.4% and 57.2% in the third quarter and first nine months of fiscal 1999. The higher gross margin experienced in the first nine months of fiscal 2000 primarily resulted from the exclusion of net revenues and cost of sales from PTS products included in the fiscal 1999 gross margin. The PTS products generally obtained a lower gross margin than the Host I/O segment, which represents the largest percentage of net revenues. Excluding the divested PTS segment, gross margin in the third quarter and first nine months of fiscal 1999 was 64.4% and 62.6%, respectively. Excluding the divested PTS segment, the increase in gross margin was due to manufacturing efficiencies obtained through greater production volumes, as well as improved pricing obtained from the Company's global suppliers in the first nine months of fiscal 2000. RESEARCH AND DEVELOPMENT. Spending for research and development was $25.8 million and $73.5 million for the third quarter and first nine months of fiscal 2000, respectively, representing a decrease of 26.6% and 38.7% from $35.2 million and $120.0 million for the third quarter and first nine months of fiscal 1999, respectively. The decrease in spending for research and development was primarily due to $7.9 million and $29.2 million of spending related to the divested PTS segment included in the third quarter and first nine months of fiscal 1999, respectively. The decrease in spending for research and development was also attributable to Company-wide cost reduction programs initiated in fiscal 1999 which included reductions in workforce and the curtailment of costs related to the divesting of certain unprofitable business activities. The Company initiated cost reduction programs in order to bring operating expenses in line with net revenues and the business divestitures were completed to further management's objective to refocus the business. Research and development expenses, as a percentage of net revenues, decreased to 12.2% and 12.3% in the third quarter and first nine months of fiscal 2000, respectively, from 19.1% and 23.6% in the third quarter and first nine months of fiscal 1999, respectively. 26 <PAGE> SALES, MARKETING AND ADMINISTRATIVE EXPENSES. Spending for selling marketing and administrative activities was $121.1 million for the first nine months of fiscal 2000, a decrease of 6.8% from $129.9 million for the first nine months of fiscal 1999. Spending for selling, marketing and administrative activities for the third quarter and first nine months of fiscal 1999 included $1.3 million and $5.6 million, respectively, from the divested PTS segment. The decrease in fiscal 2000, compared to fiscal 1999, was also attributable to Company-wide cost reduction programs initiated in fiscal 1999, specifically reductions in workforce. The Company initiated the cost reduction programs in order to bring operating expenses in line with net revenues. Spending for selling, marketing and administrative activities was $41.5 million for the third quarter of fiscal 2000, representing a slight increase of 1.7% from $40.8 million for the third quarter of fiscal 1999. In the third quarter of fiscal 2000, the increase was primarily attributable to the acquisition of CeQuadrat and the expansion of the marketing and sales activities of the RAID segment, partially offset by the cost reductions programs and the divestiture of the PTS segment described above. Sales, marketing and administrative expenses, as a percentage of net revenues, decreased to 19.6% and 20.2% in the third quarter and first nine months of fiscal 2000, respectively, from 22.2% and 25.6% in the third quarter and first nine months of fiscal 1999, respectively. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and other intangibles was $3.1 million and $5.8 million for the third quarter and first nine months of fiscal 2000, respectively, compared to $2.7 million and $9.8 million for the third quarter and first nine months of fiscal 1999, respectively. Amortization of goodwill and other intangibles for fiscal 2000 includes goodwill associated with the acquisition of Data Kinesis, Inc. ("DKI") and goodwill and other intangible assets associated with the acquisition of CeQuadrat and DPT. If the acquisition of DPT had taken place as of April 1, 1998, amortization of goodwill and other intangibles would have increased by $39.4 million and $40.7 million for the nine month periods ended December 31, 1999 and December 31, 1998, respectively. Amortization of goodwill and other intangibles for fiscal 1999 includes goodwill associated with the acquisition of DKI, Western Digital's Connectivity Solutions Group and Future Domain Corporation, and goodwill and other intangible assets associated with the acquisition of read channel and preamplifier ASIC technologies ("ASIC technologies") purchased from Analog Devices, Inc. ("ADI") and Ridge Technologies, Inc. ("Ridge"). WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. In December 1999, the Company purchased DPT, a leading supplier of high-performance storage solutions, including RAID controllers and storage subsystems for $185.2 million in cash and assumed stock options valued at $51.8 million. The stock options were valued using the Black-Scholes valuation model. As part of the purchase agreement, $18.5 million of the purchase price was held back for unknown liabilities that may have existed as of the acquisition date. The holdback was included in "Accrued liabilities" in the Condensed Consolidated Balance Sheet as of December 31, 1999. The holdback will be paid for such unknown liabilities or to the seller within 12 months from the acquisition date and was included as part of the purchase price of the transaction. Additionally, the Company incurred $1.1 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. Assuming the business combination had taken place as of April 1, 1998, amortization of goodwill and other intangibles would have increased by $39.4 million and $40.7 million for the nine month periods ended December 31, 1999 and December 31, 1998, respectively. The Company will disclose further pro forma financial information in a subsequent filing on Form 8-K/A. 27 <PAGE> The Company accounted for the acquisition of DPT using the purchase method of accounting and, excluding the write-off of acquired in-process technology, the impact of the acquisition was not material to the Company's consolidated financial results of operations from the acquisition date through December 31, 1999. The preliminary allocation of the Company's purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below. The preliminary allocation was based on an independent appraisal and estimate of fair value. <TABLE> <CAPTION> (IN THOUSANDS) <S> <C> Net tangible assets......................................... $ 4,262 In-process technology....................................... 16,739 Goodwill and other intangible assets: Goodwill.................................................. 147,825 Purchased technology...................................... 38,621 Covenant not to compete................................... 9,332 Acquired employees........................................ 6,832 Distribution network...................................... 9,292 OEM relationships......................................... 5,190 -------- 217,092 -------- Net assets acquired......................................... $238,093 ======== </TABLE> The net tangible assets acquired were comprised primarily of inventory, property and equipment and receivables offset by accrued liabilities, including amounts due under a line of credit. The acquired in-process technology was written-off in the third quarter of fiscal 2000. The estimated weighted average useful life of the intangible assets for purchased technology, covenant not to compete, acquired employees, distribution network, OEM relationships and the residual goodwill, created as a result of the acquisition of DPT, is approximately four years. The $16.7 million allocation of the purchase price to the acquired in-process technology has been determined by identifying research projects in areas for which technological feasibility had not been established and no alternative future uses existed. The Company acquired technology consisting of next generation RAID controllers. The value was determined by estimating the expected cash flows from the project once commercially viable, discounting the net cash flows back to their present value, and then applying a percentage of completion to the calculated value. The Company expects to complete the project within 15 months from the acquisition date. However, development of this project remains a significant risk to the Company due to the remaining effort to achieve technical feasibility, rapidly changing customer markets and significant competitive threats from numerous companies. Failure to bring these products to market in a timely manner could adversely impact sales and profitability of the Company in the future. Additionally, the value of the intangible assets acquired may become impaired. In July 1999, the Company purchased CeQuadrat GmbH ("CeQuadrat"), a developer of CD-R software products, for $24.0 million in cash. As part of the purchase agreement, $4.8 million of the purchase price was held back for unknown liabilities that may have existed as of the acquisition date. The holdback was included in "Accrued liabilities" in the Condensed Consolidated Balance Sheet as of September 30, 1999. In the third quarter of fiscal 2000, the Company paid the holdback to an escrow account, thereby reducing accrued liabilities in the Condensed Consolidated Balance Sheet as of December 31, 1999. The holdback will be paid for such unknown liabilities or to the seller within 12 months from the acquisition date and was included as part of the purchase price of the transaction. Additionally, the Company incurred $0.3 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. 28 <PAGE> The Company accounted for the acquisition of CeQuadrat using the purchase method of accounting and, excluding the write-off of acquired in-process technology, the impact of the acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The allocation of the Company's purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below. The allocation was based on an independent appraisal and estimate of fair value. <TABLE> <CAPTION> (IN THOUSANDS) <S> <C> Net tangible assets......................................... $ 123 In-process technology....................................... 3,016 Goodwill and other intangible assets: Goodwill.................................................. 10,341 Purchased technology...................................... 3,140 Covenant not to compete................................... 4,360 Acquired employees........................................ 1,173 OEM relationships......................................... 1,186 Trade name................................................ 953 ------- 21,153 ------- Net assets acquired......................................... $24,292 ======= </TABLE> The net tangible assets acquired were comprised primarily of cash and receivables offset by accrued liabilities. The acquired in-process technology was written-off in the second quarter of fiscal 2000. The estimated weighted average useful life of the intangible assets for purchased technology, covenant not to compete, acquired employees, OEM relationships, trade name and the residual goodwill, created as a result of the acquisition of CeQuadrat, is approximately three years. The $3.0 million allocation of the purchase price to the acquired in-process technology was determined by identifying research projects in areas for which technological feasibility had not been established and no alternative future uses existed. The Company acquired technology consisting of next generation consumer-oriented CD-R software, next generation professional-oriented CD-R software and CD backup software; the amount of in-process technology allocated to each of the projects was $0.6 million, $2.2 million and $0.2 million, respectively. The value for each of the projects was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value, and then applying a percentage of completion to the calculated value. All of the in-process technology projects acquired from CeQuadrat were completed during the third quarter of fiscal 2000, and estimated costs to complete the projects were in line with estimates. The next generation professional-oriented CD recording software and the CD back up software began shipping in the third quarter of fiscal 2000. The Company does not anticipate that the next generation consumer-oriented CD recording software will be commercially released. In May 1998, the Company purchased Ridge Technologies, Inc. ("Ridge"), a development stage company, for 1.2 million shares of the Company's common stock valued at $21.2 million, and assumed stock options valued at $13.1 million. Prior to the acquisition, the Company owned a 19.9% interest in Ridge with a carrying value of $1.5 million and Grant Saviers, former Chairman and CEO of the Company, was a director of Ridge. The Company incurred $0.8 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. In-process technology was valued at $39.4 million and was written-off in the first quarter of fiscal 1999. In August 1998, the Company divested the storage subsystems business, abandoned the in-process technology projects (these projects remained incomplete from the date of acquisition through abandonment) and wrote-off the remaining unamortized goodwill of $0.6 million and other intangible 29 <PAGE> asset of $1.2 million associated with Ridge. The aggregate impact of this acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The tangible liabilities assumed exceeded the tangible assets acquired. The purchase price allocation is included in the Company's fiscal 1999 Annual Report on Form 10-K. In April 1998, the Company purchased read channel and preamplifier ASIC technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") for $34.4 million in cash. The ASIC technologies purchased from ADI were to be incorporated into the mainstream removable Peripheral Technology Solutions ("PTS") business line upon completion. Grant Saviers, former Chairman and CEO of the Company, is a director of ADI. The Company incurred $0.4 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. The acquired in-process technology was valued at $6.1 million and was written-off in the first quarter of fiscal 1999. In January 1999, the Company sold the mainstream removable PTS business line, including the in-process technologies purchased from ADI (these projects remained incomplete from the date of acquisition through their disposition), and relieved the remaining unamortized goodwill of $18.3 million and other intangible asset of $1.7 million associated with the ASIC technologies purchased from ADI. The aggregate impact of this acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The purchase price allocation is included in the Company's fiscal 1999 Annual Report on Form 10-K. RESTRUCTURING CHARGES. In the first quarter of fiscal 1999, the Company recorded a restructuring charge of $8.8 million, comprised primarily of severance and benefits. In the second quarter of fiscal 1999, the Company recorded a restructuring charge of $24.5 million, net of an adjustment to the restructuring charge taken in the first quarter of fiscal 1999 of $1.4 million. The second quarter restructuring charge was comprised primarily of severance and benefits and the write-off of fixed assets, inventory and other current and long-term assets. In the fourth quarter of fiscal 1999, the Company recorded a restructuring charge of $6.6 million, net of an adjustment to the restructuring charges taken in the first and second quarters of fiscal 1999 of $1.2 million. The fourth quarter restructuring charge was comprised primarily of severance and benefits. In total, the Company recorded $39.9 million in restructuring charges during fiscal 1999, of which $17.4 million were non-cash charges. During fiscal 1999, the Company paid $20.0 million in cash relating to restructuring activities. The restructuring reserve balance at March 31, 1999 was comprised of $1.5 million for severance and benefits and $1.0 million for other charges, primarily lease payments for vacated facilities. As of December 31, 1999, substantially all of the reserve balance has been paid out. ASSET IMPAIRMENT AND OTHER CHARGES. As previously disclosed, the Company has been negotiating with a third party concerning a potential cross-license agreement. Subsequently, the Company reached a tentative agreement with that party for a patent cross-license. Under the proposed agreement, each party will be granted a license for specified patents of the other party covering the period from January 1, 1990, through June 30, 2004. The license fee to be paid by the Company under the proposed cross-license agreement will range from $11 million to $25 million, depending on the outcome of an evaluation of certain patents by an independent party. The Company's best estimate of the total license fee that will be payable under the proposed cross-license agreement is $18.0 million. The portion of the estimated license fee allocated to revenues from periods prior to December 31, 1999 of $9.6 million was written-off in the third quarter of fiscal 2000. The remaining license fee pertaining to future periods was allocated to an intangible asset and will be amortized over the period from January 1, 2000 through June 30, 2004. The Company recorded non-cash impairment charges of $4.0 million in the second quarter of fiscal 1999, including $1.4 million in manufacturing equipment deemed unnecessary due to non-temporary declines in production volume and the write-off of $2.6 million of non-trade related receivables previously classified in "Other current assets" in the Condensed Consolidated Balance Sheets. 30 <PAGE> Additionally, the Company recorded executive termination costs of $3.4 million in the second quarter of fiscal 1999, relating to three executives. The costs consisted of $1.9 million in severance and benefits payments and $1.5 million in non-cash stock compensation charges resulting from amended option agreements. In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed to terminate the agreement. The Company paid a $7.0 million termination fee and $6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred $7.8 million in other acquisition-related charges, including legal, consulting and other costs. The Company expensed the entire $21.5 million in fees associated with this terminated acquisition in the first quarter of fiscal 1999. INTEREST AND OTHER INCOME. Interest and other income for the third quarter and first nine months of fiscal 2000 was $8.1 million and $39.2 million, respectively, compared to $7.9 million and $25.0 million for the third quarter and first nine months of fiscal 1999, respectively. Interest and other income for the first nine months of fiscal 2000 consisted of $24.8 million of interest income, $3.5 million from the gain on the sale of land recorded in the first quarter of fiscal 2000 and $10.9 million from the gain on exchange of a warrant to purchase JNI Corporation ("JNI") common stock recorded in the second quarter of fiscal 2000 described below. Interest and other income for the first nine months of fiscal 1999 consisted only of interest income. Excluding the gain on the sale of land and the gain on exchange of the warrant, interest income for the third quarter and first nine months of fiscal 2000 remained flat compared to the prior year. Under an Asset Acquisition Agreement, dated November 12, 1998, between JNI and the Company ("Asset Acquisition Agreement"), the Company sold certain fibre channel technology, products and property and equipment to JNI. As consideration for the assets received, JNI issued to the Company 1,132,895 shares of JNI Series A Convertible Preferred Stock. In addition, JNI issued to the Company warrants to purchase up to 2,436,551 shares of JNI Series A Convertible Preferred Stock (the share amounts contained in this Report on Form 10-Q for the third quarter of fiscal 2000 reflect a 70% reverse stock split effected by JNI in October 1999). Exercisibility of the warrants was contingent upon JNI attaining certain milestones such as net revenue levels from products based on the acquired technology, new product introductions or a change in majority control including an initial public offering of JNI's stock before January 31, 2001. On September 30, 1999, pursuant to an offer from JNI, the Company exchanged an existing contingent warrant to purchase shares of JNI Series A Convertible Preferred Stock for an immediately exercisable warrant to purchase 840,000 shares of JNI Series A Convertible Preferred Stock. The remaining contingent warrants expired unexercisable on October 27, 1999, the effective date of JNI's initial public offering. Upon the closing of the initial public offering the Series A Convertible Preferred Stock automatically converted into shares of common stock. As a result of the exchange of the warrants described above, the Company recorded a gain of $10.9 million ($6.6 million net of income taxes) in the second quarter of fiscal 2000, reflecting the excess of fair value of the warrant received over the carrying amount of the warrant surrendered. The Company valued the JNI warrant received using the Black-Scholes valuation model. The gain was included in "Interest and other income" in the Condensed Consolidated Statements of Operations for the nine-month period ended December 31, 1999. The fair value of the warrant received is included in "Other long-term assets" in the Condensed Consolidated Balance Sheet. The Company possesses certain limited registration rights beginning two years following the date of JNI's initial public offering with respect to the 1,132,895 shares of JNI common stock acquired in November 1998 and the 840,000 shares issuable upon exercise of the warrant. However, the Company may sell the unregistered common shares beginning one year from the date the shares were acquired or the 31 <PAGE> warrant is exercised subject to certain restrictions related to the trading volume or total outstanding shares of JNI. INTEREST EXPENSE. Interest expense was $2.8 million and $8.7 million for the third quarter and first nine months of fiscal 2000, respectively, compared to $3.0 million and $9.1 million for the third quarter and first nine months of fiscal 1999, respectively. The interest expense was primarily related to the 4 3/4% Convertible Subordinated Notes. During the third quarter of fiscal 2000, a 4 3/4% Convertible Subordinated Note for $0.2 million was converted by a note holder into 3,871 shares of the Company's common stock. INCOME TAXES. Income tax provisions (benefits) for interim periods are based on estimated annual income tax rates. The difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate is primarily due to income earned in Singapore where the Company is subject to a significantly lower effective income tax rate. The Company recorded an income tax provision of $18.8 million representing 37.3% of income before provision for income taxes for the third quarter of fiscal 2000 compared to an income tax provision of $10.4 million representing 29.3% of income before provision for income taxes for the third quarter of fiscal 1999. The effective income tax rate used to calculate the income tax provision for the third quarter of fiscal 2000 was higher than 28% primarily as a result of the book write-offs associated with the acquisition of DPT, for which no current tax benefit will be derived. The effective income tax rate used to calculate the income tax provision for the third quarter of fiscal 1999 was greater than 28% primarily as a result of book write-offs, which are not deductible for tax purposes. SUBSEQUENT EVENT. In January 2000, the Company entered into a four-year agreement with Agilent Technologies, Inc. ("Agilent") to co-develop, market and sell fibre channel host bus adapters. In exchange, the Company issued warrants to Agilent to purchase 1,160,000 shares of the Company's common stock at $62.25 per share. The warrants were valued at $37.1 million using the Black-Scholes valuation model. The value of the warrants will be recorded as an intangible asset in the fourth quarter of fiscal 2000 and amortized ratably over the term of the agreement. In addition, the Company will license Agilent's fibre channel host adapter and software driver technology and pay royalties to Agilent based on revenue from certain products, with aggregate guaranteed minimum royalty payments of $60.0 million over the term of the agreement. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires recognition of all derivatives as assets or liabilities and measurement of those instruments at fair value. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which deferred the required date of adoption of SFAS 133 for one year, to fiscal years beginning after June 15, 2000. The Company will adopt this statement in its first quarter of fiscal 2002, but does not expect the adoption of SFAS 133 to have a material impact on the Company's financial position, results of operations or cash flows. YEAR 2000. The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2-digit year is commonly referred to as the Year 2000 Compliance issue. As a result, some systems may be unable to accurately process certain date-based information. During fiscal 1998, the Company completed implementation of Enterprise Resource Planning ("ERP") software to replace the Company's core business applications, which support sales and customer service, manufacturing, distribution, and finance and accounting. The ERP software was selected not only because it was Year 2000 Compliant, but more importantly, to add functionality and efficiency to the business processes of the Company. The Company completed Year 2000 testing of the ERP software in fiscal 1999 and its has not presented any significant Year 2000 Compliance issues as of the date of this Report. In the first half of fiscal 1998, the Company also began a project to analyze and assess the remainder of its business not addressed by the ERP software such as other computer and network hardware and 32 <PAGE> software, production process controllers and related manufacturing equipment. Internal and external resources were used to complete any required modification and tests for Year 2000 Compliance. The replacement or upgrade of its internal use software is primarily commercial off-the-shelf software and non-compatible hardware. As of the date of this Report, the Company has not experienced any significant operational problems for the Company or its customers as a result of Year 2000 Compliance. As of the date of this Report, the Company believes that its products are Year 2000 Compliant. The majority of the Company's products are not date sensitive. However, for those products that are date sensitive, the Company, as a standard part of its product development cycle, has had procedures, tests, and methodologies in effect since fiscal 1997 to ensure each product's Year 2000 Compliance readiness. Prior to January 1, 2000, the Company defined its critical suppliers and communicated with them to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 Compliance issues. Although the Company has not experienced any significant problems with its suppliers as of the date of this report, there can be no guarantee that the systems of other companies, on which the Company's operations rely, will not malfunction for years into and beyond the turn of the century, that those systems will be remediated in a timely manner, or that a failure to become Year 2000 Compliant by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse impact on the Company. The Company's costs to date related to the Year 2000 Compliance issue consist primarily of reallocation of internal resources to evaluate and assess systems and products as described above and to plan testing and remediation efforts. The total cost to the Company for Year 2000 Compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year (less than $1.0 million). Such costs exclude costs to implement the ERP system and the reallocation of internal resources, as these costs are not considered incremental to the Company. These costs and the date on which the Company plans to complete the Year 2000 Compliance remediation and testing processes are based on management's best estimates, which were derived utilizing various assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. The Company has developed a contingency plan for some of its applications and systems to address any of the consequences of internal or external failures to be Year 2000 Compliant. The Company has also created a contingency plan for internal and external sources, including key suppliers. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. Net cash provided by operating activities for the first nine months of fiscal 2000 totaled $237.2 million compared to $120.5 million for the first nine months of fiscal 1999. Net cash provided by operating activities for the first nine months of fiscal 2000 was primarily attributable to net income of $134.4 million, adjusted for non-cash expenses including depreciation and amortization expense of $30.1 million, the write-off of acquired in-process technology of $19.8 million, write-off of estimate license fees attributable to the proposed cross-license agreement of $9.6 million. Net income was also adjusted for non-cash income, including the gain on sale of land of $3.5 million and the gain on exchange of a warrant to purchase JNI common stock of $6.6 million (net of income taxes). Additionally, net cash provided by operating activities in the first nine months of fiscal 2000 was generated by the decrease in deferred tax assets of $24.5 million and other current assets of $20.2 million and an increase in accounts payable and accrued liabilities of $28.5 million, partially offset by the increase in inventories of $14.2 million and the increase in prepaid expenses of $5.3 million. INVESTING ACTIVITIES. Net cash used for investing activities for the first nine months of fiscal 2000 totaled $226.4 million, compared to net cash provided by investing activites for the first nine months of fiscal 1999 of $15.5 million. Net cash used for investing activities for the first nine months of fiscal 2000 33 <PAGE> included investments in marketable securities of $47.8 million (net of sales and maturities of marketable securities). Additionally, the Company paid $186.4 million (net of cash received) in connection with the acquisition of CeQuadrat and DPT. The Company spent $7.3 million for capital expenditures and $3.4 million for additional minority investments. The Company received $18.5 million in proceeds from the sale of property and equipment. FINANCING ACTIVITIES. Net cash used for financing activities for the first nine months of fiscal 2000 totaled $157.3 million, compared to $100.5 million for the first nine months of fiscal 1999. During the first nine months of fiscal 2000, the Company repurchased 7.9 million shares of its common stock from the open market for $244.1 million. The stock repurchases were partially offset by proceeds of $88.6 million received from the issuance of common stock to employees through the Company's stock option and employee stock purchase plans. In the second quarter of fiscal 2000, the Company sold put warrants that could have obligated the Company to repurchase up to 1.0 million shares of its common stock at prices ranging from $37 to $39 in exchange for up front premiums of $3.7 million. In the third quarter of fiscal 2000, the warrants expired unexercised. LIQUIDITY. As of December 31, 1999, the Company's principal sources of liquidity consisted of $718.1 million of cash, cash equivalents and marketable securities, of which $74.8 million is restricted from sale through April 2000. Additionally, the Company has available an unsecured $60.0 million revolving line of credit which expires in March 2000. The Company is currently negotiating an extension of this line of credit. No amounts were due under the line of credit as of December 31, 1999. The Company believes that existing working capital, together with expected cash flows from operations and available sources of bank, equity and equipment financing, will be sufficient to support its operations for the next twelve months. FACTORS AFFECTING FUTURE OPERATING RESULTS This report contains forward-looking statements that involve risks and uncertainties. For example, Management's Discussion and Analysis of Results of Operations and Financial Condition includes statements relating to expected sales growth, gross margins, anticipated operating expenditures and anticipated capital expenditures. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this document. In evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information set forth in this document. FUTURE OPERATING RESULTS SUBJECT TO FLUCTUATION. In the first half of fiscal 1999, the Company's operating results were adversely affected by shifts in corporate and retail buying patterns, increased competition, emerging technologies, economic instability in Asia and turbulence in the computer disk drive industry. In addition, fiscal 1999 operating results were significantly impacted by unusual charges and credits including write-offs of acquired in-process technology, costs related to the termination of the Symbios acquisition, restructuring charges, impairment of assets, terminations of senior executives, the gain on the sale of PTS and the gain on the sale of land. Operating results for the nine month period ended December 31, 1999 were significantly impacted by unusual charges and credits including write-offs of acquired in-process technology, write-off of estimated license fees attributable to the proposed cross-license agreement, gain on the exchange of a warrant to purchase JNI common stock and the gain on the sale of land. Additionally, operating results were affected by the recent acquisition of CeQuadrat GmbH 34 <PAGE> beginning in the second quarter of fiscal 2000. Operating results will be affected by the acquisition of Distributed Processing Technology Corporation ("DPT"), beginning in the fourth quarter of fiscal 2000, including increased goodwill and other intangibles amortization expense. In the future, operating results may be affected by the cross-license agreement between the Company and Agilent Technologies, Inc. ("Agilent"), including increased intangible amortization expense. In the future, the Company's operating results may fluctuate as a result of the factors described above and as a result of a wide variety of other factors, including, but not limited to, cancellations or postponements of orders, shifts in the mix of the Company's products and sales channels, changes in pricing policies by the Company's suppliers, interruption in the supply of custom integrated circuits, the market acceptance of new and enhanced versions of the Company's products, product obsolescence and general worldwide economic and computer industry fluctuations. In addition, fluctuations may be caused by future accounting pronouncements, changes in accounting policies, and the timing of acquisitions of other business products and technologies and any associated charges to earnings. The volume and timing of orders received during a quarter are difficult to forecast. The Company's customers from time to time encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below such forecasts or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from the Company. The Company has historically operated with a relatively small backlog, especially relating to orders of its Host I/O products and has set its operating budget based in part on expectations of future revenues. Because much of the Company's operating budget is relatively fixed in the short-term, if revenues do not meet the Company's expectations, then the Company's operating income and net income may be disproportionately affected. Operating results in any particular quarter, which do not meet the expectations of securities analysts, are likely to cause volatility in the price of the Company's common stock. CERTAIN RISKS ASSOCIATED WITH THE HIGH-PERFORMANCE COMPUTER MARKET. The Company's Host I/O products are used primarily in high performance computer systems designed to support bandwidth-intensive applications and operating systems. Historically, the Company's growth has been supported by increasing demand for systems that support client/server and Internet/intranet applications, computer-aided engineering, desktop publishing, multimedia, and video. Beginning in the second half of fiscal 1998, the demand for such systems slowed as more businesses chose to use relatively inexpensive PC's for desktop applications and information technology managers shifted resources toward resolving Year 2000 problems and investing in network infrastructure. Should demand for such systems continue to slow, the Company's business or operating results could be materially adversely affected by a resulting decline in demand for the Company's products. CERTAIN RISKS ASSOCIATED WITH THE SERVER MARKET. The Company's RAID products are used primarily in workstations and enterprise servers. The use of RAID technology in this market is an industry standard, however, there can be no assurance that another technology will not replace RAID in the disk array controller marketplace or that there will be continuing widespread acceptance or growth of the use of RAID products in general, or the Company's RAID controllers in particular, in that market. Should demand for such systems slow or should the Company's products not be widely accepted, the Company's business or operating results could be materially adversely affected by a resulting decline in demand for the Company's products. CERTAIN RISKS ASSOCIATED WITH THE SOFTWARE MARKET. The Company's Software products are used primarily in high performance computer systems to enable the control of SCSI peripherals and/or enable CD-R and CD-RW. The Company's sales are primarily to major OEM's and distributors, thus the Company's business depends on general economic and business conditions and the growth of the CD-R and high-performance computer markets. Should demand for the Company's products slow and/or the CD-R market not develop as quickly as expected, the Company's business or operating results could be materially adversely affected by a resulting decline in demand for the Company's products. 35 <PAGE> RELIANCE ON INDUSTRY STANDARDS, TECHNOLOGICAL CHANGE, DEPENDENCE ON NEW PRODUCTS. Various standards and protocols that evolve with time characterize the computer industry. The Company's current products are designed to conform to certain industry standards and protocols such as SCSI, UltraSCSI, Ultra2 SCSI, Ultra3 SCSI, PCI, RAID, and Fast Ethernet. In particular, a majority of the Company's revenues are currently derived from products based on the SCSI standard. If consumer acceptance of these standards was to decline, or if they were replaced with new standards, and if the Company did not anticipate these changes and develop new products, the Company's business or operating results could be materially adversely affected. For example, the Company believes that changes in consumers' perceptions of the relative merits of SCSI based products and products incorporating a competing standard, Ultra-DMA, have materially adversely affected the sales of the Company's products and may materially adversely affect the Company's future sales. The markets for the Company's products are characterized by rapidly changing technology, frequent new product introductions, and declining average selling prices over product life cycles. The Company's future success is therefore highly dependent upon the timely completion and introduction of new products at competitive price/performance levels. The success of new product introductions is dependent on several factors, including proper new product definition, product costs, timely completion and introduction of new product designs, quality of new products, differentiation of new products from those of the Company's competitors, and market acceptance of the Company's and its customers' products. As a result, the Company believes that continued significant expenditures for research and development will be required in the future. 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, that products or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive, or that the Company's products will be selected for design into the products of its targeted customers. The failure of any of the Company's new product development efforts could have a material adverse effect on the Company's business or operating results. In addition, the Company's revenues and operating results could be materially adversely impacted if its customers shifted their demand to a significant extent away from board-based I/O solutions to application-specific ICs. COMPETITION. The markets for all of the Company's products are intensely competitive and are characterized by rapid technological advances, frequent new product introductions, evolving industry standards, and price erosion. In the host adapter market, the Company competes with a number of host adapter manufacturers, including LSI Logic Corporation and other small host adapter manufacturers. The Company's principal competitors for RAID solutions in the server market are American Megatrends, Inc., Mylex Corporation (a wholly-owned subsidiary of IBM), and captive suppliers. The Company's principal competitors in the Software segment range from small operations to large consumer software companies. As the Company has continued to broaden its bandwidth management product offerings into the desktop, server, and networking environments, it has experienced, and expects to experience in the future, significantly increased competition both from existing competitors and from additional companies that may enter its markets. Some of these companies have greater technical, marketing, manufacturing, and financial resources than the Company. There can be no assurance that the Company will have sufficient resources to meet growing product demand, that the Company will be able to make timely introduction of new leading-edge solutions in response to competitive threats, that the Company will be able to compete successfully in the future against existing or potential competitors or that the Company's business or operating results will not be materially adversely affected by price competition. CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS. In July 1999, the Company acquired CeQuadrat and in December 1999, the Company acquired DPT. Both acquisitions were accounted for using the purchase method of accounting. In January 2000, the Company entered into an agreement with Agilent to co-develop, market and sell fibre channel host bus adapters. As part of its overall strategy, the Company may continue to acquire or invest in complementary companies, products, or technologies and to enter into 36 <PAGE> joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include the difficulty of assimilating the operations and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses, additional expenses associated with amortization of acquired intangible assets, dilution of existing equity holders, the maintenance of uniform standards, controls, procedures, and policies, and the impairment of relationships with employees and customers as a result of any integration of new personnel. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with this or other business combinations, investments, or joint ventures, or that such transactions will not materially adversely affect the Company's business, financial condition, or operating results. YEAR 2000 COMPLIANCE ISSUES. The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2-digit year is commonly referred to as the Year 2000 Compliance issue. As a result, some systems may be unable to accurately process certain date-based information. During fiscal 1998, the Company completed implementation of Enterprise Resource Planning ("ERP") software to replace the Company's existing core business applications. Additionally, the Company has analyzed the remainder of its business not addressed by the ERP software and has, through its standard product development cycle, ensured its products are Year 2000 Compliant through procedures, tests and methodologies that have been in effect since fiscal 1997. Although the Company has encountered no significant problems with its internal systems as of the date of this Report, if internal systems do not properly recognize and process date information for years into and beyond the turn of the century, there could be a material adverse impact on other Company's operations. A significant disruption of the Company's financial or business systems would materially adversely impact the Company's ability to process orders, manage production and issue and pay invoices. The Company's inability to perform these functions for a long period of time could result in a material adverse impact on the Company's result of operations and financial condition. Failure of these systems could cause a disruption in the manufacturing process and could result in a delay in completion and shipment of product. The Company has communicated with others with whom it does significant business, including major distributors, suppliers, customers, vendors and financial service organizations, to assess their Year 2000 Compliance readiness with respect to both their operations and the products and services they supply. The analysis will continue into fiscal 2000, with corrective action taken commensurate with the criticality of affected products and services. Although, the Company has not encountered any significant problems with others with whom it does significant business as of the date of this Report, if companies with whom the Company does significant business fail because of a Year 2000 malfunction for years into and beyond the turn of the century, there could be a material adverse impact on the Company's operating results. The Company believes it has been impacted by its customers' redirection of corporate management information system budgets towards resolving Year 2000 Compliance issues. Continuation of this trend could lower the demand for the Company's products if corporate buyers defer purchases of high-end business PCs. As of the date of this Report, the Company has not encountered any significant problems with its applications and systems or its internal and external sources. However, the Company has developed a contingency plan for some of its applications and systems to address any of the consequences of internal or external failures to be Year 2000 Compliant. The Company has also created a contingency plan for internal and external sources, including key suppliers. The potential ramifications of a Year 2000 type failure are potentially far-reaching and largely unknown. The Company cannot assure that a contingency plan in effect at the time of a system failure will adequately address the immediate or long-term effects of a failure, or that such a failure would not have a material adverse impact on the Company's operations or financial results in spite of prudent planning. 37 <PAGE> DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS. All of the finished silicon wafers used for the Company's products are currently manufactured to the Company's specifications by independent foundries. The Company currently purchases most of its wafers through a supply agreement with TSMC. The manufacture of semiconductor devices is sensitive to a wide variety of factors, including the availability of raw materials, the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. While the quality, yield, and timeliness of wafer deliveries to date have been acceptable, there can be no assurance that manufacturing yield problems will not occur in the future. In addition, although the Company has various supply agreements with its supplier, a shortage of raw materials or production capacity could lead the Company's wafer supplier to allocate available capacity to customers other than the Company, or to internal uses. Any prolonged inability to obtain wafers with competitive performance and cost attributes, adequate yields, or timely deliveries from its foundries would delay production and product shipments and could have a material adverse impact on the Company's business or operating results. The Company expects that it will, in the future, seek to convert its fabrication process arrangements to smaller wafer geometries and to more advanced process technologies. Such conversions entail inherent technological risks that can affect yields and delivery times. If for any reason the Company's current supplier was unable or unwilling to satisfy the Company's wafer needs, the Company would be required to identify and qualify additional foundries. There can be no assurance that any additional wafer foundries would become available, that such foundries would be successfully qualified, or that such foundries would be able to satisfy the Company's requirements on a timely basis. In order to secure wafer capacity, the Company from time to time has entered into "take or pay" contracts that committed the Company to purchase specified wafer quantities over extended periods, and has made prepayments to foundries. In the future, the Company may enter into similar transactions or other transactions, including, without limitation, non-refundable deposits with or loans to foundries, or equity investments in, joint ventures with or other partnership relationships with foundries. Any such transaction could require the Company to seek additional equity or debt financing to fund such activities. There can be no assurance that the Company will be able to obtain any required financing on terms acceptable to the Company. Additionally, the Company relies on subcontractors for the assembly and packaging of the ICs included in its products. The Company has no long-term agreements with its assembly and packaging subcontractors. In addition, the Company is increasingly using board subcontractors to better balance production runs and capacity. There can be no assurance that such subcontractors will continue to be able and willing to meet the Company's requirements for such components or services. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, such subcontractors could delay shipments and result in the loss of customers or revenues or otherwise have a material adverse impact on the Company's business or operating results. CERTAIN ISSUES RELATED TO DISTRIBUTORS. The Company's distributors generally offer a diverse array of products from several different manufacturers. Accordingly, there is a risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell the Company's products. A reduction in sales efforts by the Company's current distributors could have a material adverse impact on its business or operating results. The Company's distributors may on occasion build inventories in anticipation of substantial growth in sales, and if such growth does not occur as rapidly as anticipated, distributors may decrease the amount of product ordered from the Company in subsequent quarters. In addition, there has recently been an industry trend towards the elimination of price protection and distributor incentive programs and channel assembly. These trends could result in a change in distributor business habits, with distributors possibly deciding to decrease the amount of product held so as to reduce inventory levels. This in turn could reduce the Company's revenues in any given quarter and give rise to fluctuation in the Company's operating results. In addition, the Company may from time to time take 38 <PAGE> actions to reduce inventory levels at distributors. These actions could reduce the Company's revenues in any given quarter and give rise to fluctuations in the Company's operating results. DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in large part on the continued service of its key technical, marketing, and management personnel, and on its ability to continue to attract and retain qualified employees, particularly those highly skilled design, process, and test engineers involved in the design enhancements and manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material adverse impact on the Company's business or operating results. CERTAIN RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company's manufacturing facility and various subcontractors it utilizes from time to time are located primarily in Asia. Additionally, the Company has various sales offices and customers throughout Europe, Japan, and other countries. The Company's international operations and sales are subject to political and economic risks, including political instability, currency controls, exchange rate fluctuations, and changes in import/export regulations, tariffs, and freight rates. The Company may use forward exchange contracts to manage any exposure associated with certain foreign currency denominated commitments. In addition, because the Company's wafer supplier, TSMC, is located in Taiwan, the Company may be subject to certain risks resulting from the political instability in Taiwan, including conflicts between Taiwan and the People's Republic of China. INTELLECTUAL PROPERTY PROTECTION AND DISPUTES. The Company has historically devoted significant resources to research and development and believes that the intellectual property derived from such research and development is a valuable asset that has been and will continue to be important to the success of the Company's business. Although the Company actively maintains and defends its intellectual property rights, no assurance can be given that the steps taken by the Company will be adequate to protect its proprietary rights. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured, or sold, including Asia and Europe, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The Company has from time to time discovered counterfeit copies of its products being manufactured or sold by others. Although the Company maintains an active program to detect and deter the counterfeiting of its products, should counterfeit products become available in the market to any significant degree, it could materially adversely impact the business or operating results of the Company. From time to time, third parties may assert exclusive patent, copyright, and other intellectual property rights to technologies that are important to the Company. There can be no assurance that third parties will not assert infringement claims against the Company in the future, that assertions by third parties will not result in costly litigation or that the Company would prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources of the Company. Any infringement claim or other litigation against or by the Company could materially adversely impact the Company's business or operating results. NEED FOR INTEROPERABILITY. The Company's products must be designed to interoperate effectively with a variety of hardware and software products supplied by other manufacturers, including microprocessors, peripherals, and operating system software. The Company depends on significant cooperation with these manufacturers in order to achieve its design objectives and produce products that interoperate successfully. While the Company believes that it generally has good relationships with leading system, peripheral, and microprocessor suppliers, there can be no assurance that such suppliers will not from time to time make it more difficult for the Company to design its products for successful interoperability or decide to compete with the Company. NATURAL DISASTERS. The Company's corporate headquarters in California are located near major earthquake faults. Any damage to the Company's information systems caused as a result of an earthquake, 39 <PAGE> fire or any other natural disasters could have a material impact on the Company's business, financial condition and results of operations. Additionally, the Company's primary wafer supplier is located in Taiwan, which has recently experienced significant earthquakes. Although there was no major damage to their facilities or the equipment, additional earthquakes could interrupt the Company's manufacturing process and have a material adverse impact on the Company's business, financial condition or results of operations. VOLATILITY OF STOCK PRICE. The stock market in general, and the market for shares of technology companies in particular, has from time to time experienced extreme price fluctuations, which have often been unrelated to the operating performance of the affected companies. In addition, factors such as technological innovations or new product introductions by the Company, its competitors, or its customers may have a significant impact on the market price of the Company's common stock. Furthermore, quarter-to-quarter fluctuations in the Company's results of operations caused by changes in customer demand, changes in the microcomputer and peripherals markets, or other factors, may have a significant impact on the market price of the Company's common stock. In addition, the Company's stock price may be affected by general market conditions and international macroeconomic factors unrelated to the Company's performance. These conditions, as well as factors that generally affect the market for stocks of high technology companies, could cause the price of the Company's common stock to fluctuate substantially over short periods. EQUITY PRICE RISK. The Company is exposed to equity price risk with its investment in JNI common stock included in "Marketable securities" and its investment in a warrant to purchase JNI common stock included in "Other long-term assets" in the Condensed Consolidated Balance Sheet at December 31, 1999. An adverse change in the price of JNI common stock and limitations on the sale of that stock could have an adverse material impact on the Company's financial results if the Company was to sell its investment at a loss and it could have a material adverse impact on the Company's financial position. DERIVATIVES. In the second quarter of fiscal 2000, the Company sold put warrants that could have obligated the Company to buy back shares of its common stock at prices greater than market value in exchange for up front premiums. In the third quarter of fiscal 2000, the put warrants expired unexercised. In the future, the Company may sell additional derivative instruments, which could have a material adverse impact on the Company's financial position. 40 <PAGE> PRO FORMA FINANCIAL RESULTS The following pro forma results of operations for the three and nine month periods ended December 31, 1999 and 1998, do not represent the Company's results of operations or earnings per share information in accordance with generally accepted accounting principles. Pro forma operating results have been presented to provide period to period comparability of the Company's underlying operating results excluding revenue and expenses related to the PTS business lines sold in the third and fourth quarters of fiscal 1999, amortization of goodwill and other intangibles, write-off of acquired in-process technology, restructuring and other charges, gain on the sale of land, gain on the exchange of a warrant to purchase JNI common stock, and the related income tax effects associated with each of these items. The pro forma results of operations presented are not necessarily indicative of future operating results and should be read in conjunction with the historical financial statements and related notes. <TABLE> <CAPTION> PRO FORMA THREE MONTH PERIOD ENDED -------------------------------------------- DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------- ------------------- (1) (2) <S> <C> <C> <C> <C> Net revenues............................................. $211,446 100.0% $159,606 100.0% Cost of revenues......................................... 69,529 32.9 56,752 35.6 -------- ----- -------- ----- Gross profit............................................. 141,917 67.1 102,854 64.4 -------- ----- -------- ----- Operating expenses: Research and development............................... 25,804 12.2 27,267 17.1 Sales, marketing and administrative.................... 41,496 19.6 39,492 24.7 -------- ----- -------- ----- Total operating expenses................................. 67,300 31.8 66,759 41.8 -------- ----- -------- ----- Income from operations................................... 74,617 35.3 36,095 22.6 Interest and other income................................ 8,119 3.8 7,916 5.0 Interest expense......................................... (2,811) (1.3) (2,992) (1.9) -------- ----- -------- ----- Income from operations before provision for income taxes.................................................. 79,925 37.8 41,019 25.7 Provision for income taxes............................... 22,379 10.6 11,485 7.2 -------- ----- -------- ----- Net income............................................... $ 57,546 27.2% $ 29,534 18.5% ======== ===== ======== ===== Net income per share: Basic.................................................. $ 0.56 $ 0.27 ======== ======== Diluted................................................ $ 0.52 $ 0.27 ======== ======== Shares used in computing net income per share: Basic.................................................. 103,267 108,040 ======== ======== Diluted................................................ 114,876 110,881 ======== ======== </TABLE> - ------------------------ (1) As a percentage of net revenues for the three month period ended December 31, 1999 (2) As a percentage of net revenues for the three month period ended December 31, 1998 41 <PAGE> <TABLE> <CAPTION> PRO FORMA NINE MONTH PERIOD ENDED -------------------------------------------- DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------- ------------------- (1) (2) <S> <C> <C> <C> <C> Net revenues............................................. $598,104 100.0% $423,633 100.0% Cost of revenues......................................... 202,583 33.9 158,244 37.4 -------- ----- -------- ----- Gross profit............................................. 395,521 66.1 265,389 62.6 -------- ----- -------- ----- Operating expenses: Research and development............................... 73,539 12.3 90,805 21.4 Sales, marketing and administrative.................... 121,106 20.2 124,285 29.3 -------- ----- -------- ----- Total operating expenses................................. 194,645 32.5 215,090 50.7 -------- ----- -------- ----- Income from operations................................... 200,876 33.6 50,299 11.9 Interest and other income................................ 24,750 4.2 24,961 5.9 Interest expense......................................... (8,732) (1.5) (9,106) (2.2) -------- ----- -------- ----- Income from operations before provision for income taxes.................................................. 216,894 36.3 66,154 15.6 Provision for income taxes............................... 60,730 10.2 17,769 4.2 -------- ----- -------- ----- Net income............................................... $156,164 26.1% $ 48,385 11.4% ======== ===== ======== ===== Net income per share: Basic.................................................. $ 1.51 $ 0.43 ======== ======== Diluted................................................ $ 1.42 $ 0.43 ======== ======== Shares used in computing net income per share: Basic.................................................. 103,311 111,274 ======== ======== Diluted................................................ 114,043 113,073 ======== ======== </TABLE> - ------------------------ (1) As a percentage of net revenues for the nine month period ended December 31, 1999 (2) As a percentage of net revenues for the nine month period ended December 31, 1998 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K for the year ended March 31, 1999. In the second quarter of fiscal 2000, the Company sold put warrants that could have obligated the Company to buy back up to 1.0 million shares of its common stock at prices ranging from $37 to $39 in exchange for up front premiums of $3.7 million. In the third quarter of fiscal 2000, the put warrants expired unexercised. The Company is exposed to equity price risk relating to its available-for-sale securities. The Company has not attempted to reduce or eliminate its market exposure on the equity securities. The realization of the unrealized gains on its equity securities is dependent on the market value of the securities, which is subject to fluctuation and the Company's ability to sell the securities under its current limitations. There can be no assurance if and when the unrealized gains will be realized. For each 10% decline in market value of its available-for-sale equity securities from December 31, 1999, the Company's marketable securities would decline in value by $7.5 million. This represents an update to the Quantitative and Qualitative Disclosure About Market Risk contained in the Company's Annual Report on Form 10-K for the year ended March 31, 1999. 42 <PAGE> PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A derivative action was filed in the Superior Court of the State of California against the Company and certain of its officers and directors, alleging that the individual defendants improperly profited from transactions in the Company's stock during the same time period referenced by the class action lawsuit. In July 1999, the Company entered into an agreement to settle the derivative action. Under the terms of the agreement, the Company will reimburse the fees and costs incurred by the plaintiff's attorney of $600,000. The settlement does not affect the class action lawsuit still pending. The settlement was approved by the court on December 21, 1999, and, as a result, the derivative action has been dismissed. The liability is included in "Accrued liabilities" in the Condensed Consolidated Balance Sheet at December 31, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: <TABLE> <CAPTION> NUMBER EXHIBIT DESCRIPTION - ------ ------------------- <C> <S> 2.1 Agreement and Plan of Reorganization, dated as of December 3, 1999, by and among Adaptec, Inc., Adaptec Mfg. (S) Pte. Ltd., Adaptec Acquisition Corp., Distributed Processing Technology Corp., and Stephen H. Goldman. (Incorporated by reference to Exhibit 2.1 to Form 8-K as filed January 6, 2000) 27.1 Financial Data Schedule for the quarter ended December 31, 1999 </TABLE> (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter. 43 <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. <TABLE> <S> <C> <C> ADAPTEC, INC. By: /s/ ANDREW J. BROWN Date: February 11, 2000 ------------------------------------------- Andrew J. Brown Vice President, Finance Chief Financial Officer (Principal Financial Officer) By: /s/ KENNETH B. AROLA Date: February 11, 2000 ------------------------------------------- Kenneth B. Arola Vice President Corporate Controller (Principal Accounting Officer) </TABLE> 44 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>2 <DESCRIPTION>FDS <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> MAR-31-2000 <PERIOD-START> OCT-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 171,133 <SECURITIES> 546,967 <RECEIVABLES> 78,834 <ALLOWANCES> 3,011 <INVENTORY> 71,939 <CURRENT-ASSETS> 909,426 <PP&E> 245,217 <DEPRECIATION> 110,965 <TOTAL-ASSETS> 1,329,253 <CURRENT-LIABILITIES> 219,963 <BONDS> 229,800 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 104 <OTHER-SE> 868,586 <TOTAL-LIABILITY-AND-EQUITY> 1,329,253 <SALES> 211,446 <TOTAL-REVENUES> 211,446 <CGS> 69,529 <TOTAL-COSTS> 69,529 <OTHER-EXPENSES> 96,732 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 2,811 <INCOME-PRETAX> 50,493 <INCOME-TAX> 18,825 <INCOME-CONTINUING> 31,668 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 31,668 <EPS-BASIC> 0.31 <EPS-DILUTED> 0.29 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

SYY

https://www.sec.gov/Archives/edgar/data/96021/0000950129-00-000597.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, N2XjrTE1QqVgg64ppKjvdYO+n4A6j7QJfJoQoC/QjSML9kgZnTt0XDdJEgMhoCsj SynyUBRx4iVtgFD8fKmVGw== <SEC-DOCUMENT>0000950129-00-000597.txt : 20000215 <SEC-HEADER>0000950129-00-000597.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950129-00-000597 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000214 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: SEC FILE NUMBER: 001-06544 FILM NUMBER: 540683 BUSINESS ADDRESS: STREET 1: 1390 ENCLAVE PKWY CITY: HOUSTON STATE: TX ZIP: 77077 BUSINESS PHONE: 2815841390 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <DESCRIPTION>SYSCO CORPORATION - DATED 01/01/00 <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 1, 2000 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 incorporation or organization) identification number) 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 ----- ----- 330,007,564 shares of common stock were outstanding as of January 28, 2000. 1 <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 3, 1999, consolidated balance sheet which was taken from the audited financial statements included in the Company's Fiscal 1999 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 1999 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. 2 <PAGE> 3 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data) <TABLE> <CAPTION> Jan. 1, 2000 July 3, 1999 Dec. 26, 1998 ------------ ------------ ------------- (Unaudited) (Audited) (Unaudited) <S> <C> <C> <C> ASSETS Current assets Cash $ 95,851 $ 149,303 $ 109,246 Accounts and notes receivable, less allowances of $38,903, $21,095 and $35,539 1,444,083 1,334,371 1,310,972 Inventories 961,846 851,965 888,088 Deferred taxes 43,243 43,353 34,757 Prepaid expenses 31,075 29,775 27,934 ---------- ---------- ---------- Total current assets 2,576,098 2,408,767 2,370,997 Plant and equipment at cost, less depreciation 1,265,320 1,227,669 1,196,871 Goodwill and intangibles, less amortization 403,621 302,100 306,931 Other 173,424 158,046 156,330 ---------- ---------- ---------- Total other assets 577,045 460,146 463,261 ---------- ---------- ---------- Total assets $4,418,463 $4,096,582 $4,031,129 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 13,273 $ 13,377 $ 10,812 Accounts payable 1,060,440 1,013,302 1,001,364 Accrued expenses 456,820 374,271 279,951 Accrued income taxes 3,422 6,103 5,274 Current maturities of long-term debt 20,833 20,487 115,387 ---------- ---------- ---------- Total current liabilities 1,554,788 1,427,540 1,412,788 Long-term debt 1,132,976 997,717 975,496 Deferred taxes 229,247 244,129 224,548 Shareholders' equity Preferred stock, par value $1 per share Authorized 1,500,000 shares, issued none - - - Common stock, par value $1 per share Authorized 1,000,000,000 shares, issued 382,587,450 shares 382,587 382,587 382,587 Paid-in capital 35,255 872 1,524 Retained earnings 2,165,683 2,032,068 1,909,068 ---------- ---------- ---------- 2,583,525 2,415,527 2,293,179 Less cost of treasury stock, 53,032,124, 52,915,065 and 49,271,826 shares 1,082,073 988,331 874,882 ---------- ---------- ---------- Total shareholders' equity 1,501,452 1,427,196 1,418,297 ---------- ---------- ---------- Total liabilities and shareholders' equity $4,418,463 $4,096,582 $4,031,129 ========== ========== ========== </TABLE> Note: The July 3, 1999 consolidated balance sheet has been taken from the audited financial statements at that date. 3 <PAGE> 4 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) (In Thousands Except for Share Data) <TABLE> <CAPTION> 26-Week Period Ended 13-Week Period Ended ---------------------------------- --------------------------------- Jan. 1, 2000 Dec. 26, 1998 Jan. 1, 2000 Dec. 26, 1998 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Sales $ 9,308,569 $ 8,439,305 $ 4,651,535 $ 4,246,675 Costs and expenses Cost of sales 7,565,198 6,895,541 3,771,998 3,469,496 Operating expenses 1,369,662 1,224,711 695,418 616,899 Interest expense 34,624 35,328 16,680 18,397 Other, net 1,565 415 1,754 245 -------------- -------------- -------------- -------------- Total costs and expenses 8,971,049 8,155,995 4,485,850 4,105,037 -------------- -------------- -------------- -------------- Earnings before income taxes 337,520 283,310 165,685 141,638 Income taxes 129,945 110,491 63,789 55,239 -------------- -------------- -------------- -------------- Net earnings before cumulative effect of accounting change 207,575 172,819 101,896 86,399 Cumulative effect of accounting change (8,041) -- -- -- -------------- -------------- -------------- -------------- Net earnings $ 199,534 $ 172,819 $ 101,896 $ 86,399 ============== ============== ============== ============== Earnings before accounting change: Basic earnings per share $ 0.63 $ 0.52 $ 0.31 $ 0.26 ============== ============== ============== ============== Diluted earnings per share $ 0.62 $ 0.51 $ 0.31 $ 0.26 ============== ============== ============== ============== Cumulative effect of accounting change: Basic earnings per share $ (0.02) $ -- $ -- $ -- ============== ============== ============== ============== Diluted earnings per share $ (0.02) $ -- $ -- $ -- ============== ============== ============== ============== Net earnings: Basic earnings per share $ 0.61 $ 0.52 $ 0.31 $ 0.26 ============== ============== ============== ============== Diluted earnings per share $ 0.60 $ 0.51 $ 0.31 $ 0.26 ============== ============== ============== ============== Average number of shares outstanding 328,701,719 334,367,309 328,478,205 333,885,574 ============== ============== ============== ============== Diluted average number of shares outstanding 333,686,134 338,039,496 333,544,018 337,894,965 ============== ============== ============== ============== Dividends paid per common share $ 0.20 $ 0.18 $ 0.10 $ 0.09 ============== ============== ============== ============== </TABLE> 4 <PAGE> 5 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS (Unaudited) (In Thousands) <TABLE> <CAPTION> 26 - Week Period Ended ------------------------------- Jan. 1, 2000 Dec. 26, 1998 ------------ ------------- <S> <C> <C> Operating activities: Net earnings $ 199,534 $ 172,819 Add non-cash items: Cumulative effect of accounting change 8,041 -- Depreciation and amortization 106,932 98,093 Deferred (tax benefit) (14,538) (5,329) Provision for losses on accounts receivable 13,052 11,893 Additional investment in certain assets and liabilities, net of effect of businesses acquired: (Increase) in receivables (93,478) (107,255) (Increase) in inventories (95,694) (97,587) (Increase) in prepaid expenses (961) (1,339) Increase in accounts payable 31,037 152,205 Increase (decrease) in accrued expenses 79,605 (12,304) Increase (decrease) in accrued income taxes 1,762 (20,249) (Increase) in other assets (29,708) (21,063) ------------ ------------ Net cash provided by operating activities 205,584 169,884 ------------ ------------ Investing activities: Additions to plant and equipment (126,319) (147,589) Sales and retirements of plant and equipment 6,727 10,549 Acquisition of businesses, net of cash acquired (69,218) -- ------------ ------------ Net cash used for investing activities (188,810) (137,040) ------------ ------------ Financing activities: Bank and commercial paper borrowings (repayments) 135,219 (142,366) Other debt (repayments) borrowings (281) 219,791 Common stock reissued from treasury 31,277 22,175 Treasury stock purchases (170,522) (73,247) Dividends paid (65,919) (60,239) ------------ ------------ Net cash used for financing activities (70,226) (33,886) ------------ ------------ Net (decrease) in cash (53,452) (1,042) Cash at beginning of period 149,303 110,288 ------------ ------------ Cash at end of period $ 95,851 $ 109,246 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 34,556 $ 29,331 Income taxes, net of refund 129,051 130,244 </TABLE> 5 <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 in Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Fiscal 1999 Annual Report on Form 10-K remains applicable, other than the items described below. In Fiscal 1992, the Company began a common stock repurchase program which continued into the second quarter of Fiscal 2000, resulting in the cumulative repurchase of 80,000,000 shares of common stock. The Board of Directors authorized the repurchase of an additional 8,000,000 shares in July 1999. Under this latest authorization, 3,805,400 shares were purchased for $124,984,000 through January 1, 2000. The increase in treasury stock purchases in the period ended January 1, 2000 primarily reflects shares repurchased for acquisitions. As of January 1, 2000, SYSCO's borrowings under its commercial paper program were $349,115,000. During the 26 weeks ended January 1, 2000, commercial paper and short-term bank borrowings ranged from approximately $199,028,000 to $545,407,000. Long-term debt to capitalization ratio was 43% at January 1, 2000, exceeding the 35% to 40% target ratio due to the shares repurchased and cash paid for acquisitions. SYSCO may exceed this target ratio periodically to take advantage of acquisition and internal growth opportunities. The increase in paid-in capital at January 1, 2000 related primarily to shares issued from treasury in conjunction with acquisitions. On February 10, 2000, the Company filed with the Securities and Exchange Commission a shelf registration covering 2,850,000 shares of common stock to be offered from time to time in connection with acquisitions. Results of Operations For the period ended October 2, 1999, the Company recorded a one-time, after-tax, non-cash charge of $8,000,000 to comply with the required adoption of AICPA Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up Activities." SOP 98-5 required the write-off of any unamortized costs of start-up activities and organization costs. Going forward such costs have been expensed as incurred. 6 <PAGE> 7 Sales increased 10.3% during the 26 weeks and 9.5% in the second quarter of Fiscal 2000 over comparable periods of the prior year. Cost of sales also increased 9.7% during the 26 weeks and 8.7% in the second quarter of Fiscal 2000. Real sales growth for the 26 weeks of Fiscal 2000 was 8.9% after eliminating the effects of 1.8% due to acquisitions and a 0.4% deflation in food costs, due primarily to lower costs for dairy and poultry products. Real sales growth for the quarter was 7.7% after adjusting for a 2.4% increase due to acquisitions and a 0.6% for food cost deflation. Operating expenses for the current periods presented were above the prior periods due primarily to expenses related to the closing of a facility and one-time non-recurring costs associated with the completion of the SYSCO Uniform Systems implementation. There was also a charge to other non-operating expenses in connection with the facility closing. The costs described above were approximately $13,000,000. Interest expense in Fiscal 2000 is lower than the prior periods due to interest income received in the amount of $3,000,000 related to a Federal income tax refund on an amended return. Without this income, interest expense would have been above last year due to higher borrowings. Income taxes for the periods presented reflect an effective rate of 38.5% this year compared to 39% last year. Pretax earnings and net earnings for the 26 weeks, before the accounting change, increased 19.1% and 20.1%, respectively, over the prior year. Pretax earnings and net earnings for the 13 weeks increased 17.0% and 17.9%, respectively, over the prior year. The increases were due to the factors discussed above as well as the Company's success in its continued efforts to increase sales to the Company's higher margin territorial street customers and increasingly higher sales of SYSCO brand products. Basic and diluted earnings per share increased 21.2% and 21.5%, respectively, for the 26 weeks, before the accounting change, and 19.2% for the quarter. The increases were caused by the factors discussed above, along with the decrease in average shares outstanding for the periods presented, reflecting purchases of shares made through the Company's share repurchase program. A reconciliation of basic and diluted earnings per share follows. 7 <PAGE> 8 The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> 26-Week Period Ended 13-Week Period Ended --------------------------------- --------------------------------- Jan. 1, 2000 Dec. 26, 1998 Jan. 1, 2000 Dec. 26, 1998 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Numerator: Numerator for basic earnings per share -- income available to common shareholders $ 199,534,000 $ 172,819,000 $ 101,896,000 $ 86,399,000 ============== ============== ============== ============== Denominator: Denominator for basic earnings per share -- weighted-average shares 328,701,719 334,367,309 328,478,205 333,885,574 Effect of dilutive securities: Employee and director stock options 4,984,415 3,672,187 5,065,813 4,009,391 -------------- -------------- -------------- -------------- Denominator for diluted earnings per share -- adjusted for weighted-average shares 333,686,134 338,039,496 333,544,018 337,894,965 ============== ============== ============== ============== Basic earnings per share $ 0.61 $ 0.52 $ 0.31 $ 0.26 ============== ============== ============== ============== Diluted earnings per share $ 0.60 $ 0.51 $ 0.31 $ 0.26 ============== ============== ============== ============== </TABLE> 8 <PAGE> 9 Acquisitions In July 1999, SYSCO acquired Newport Meat Co. Inc., a southern California based distributor of fresh aged beef and other meats, seafood and poultry products. In August 1999, the company acquired Doughtie's Foods, Inc., a food distributor located in Virginia and bought substantially all of the assets of Buckhead Beef Company, Inc., a distributor located in Georgia of custom-cut fresh steaks and other meats, seafood and poultry products. In November 1999, SYSCO acquired Malcolm Meats, an Ohio based distributor of custom-cut fresh steaks and other meat and poultry products. The transactions were accounted for using the purchase method of accounting and the financial statements for the 26 weeks and 13 weeks ended January 1, 2000 include the results of the acquired companies from the respective dates they joined SYSCO. There was no material effect, individually or in the aggregate, on SYSCO's operating results or financial position from these transactions. Subsequent Events On January 6, 2000, SYSCO entered into a letter of intent to acquire by merger FreshPoint Holdings, Inc., located in Dallas, Texas. FreshPoint is primarily a wholesale produce distributor in North America. On January 26, 2000, SYSCO acquired Watson Foodservice, Inc., a broadline foodservice distributor located in Lubbock, Texas. 9 <PAGE> 10 Year 2000 SYSCO is not aware of any significant failures of its systems, software, hardware or those of its suppliers or customers as a result of the occurrence of the Year 2000 date change. The total costs incurred by SYSCO in its Year 2000 readiness effort did not have a material impact on the financial statements of the Company. While SYSCO continues to monitor the Year 2000 issue, it does not believe there will be a material adverse effect to its consolidated results of operations or financial position as a result of the Year 2000 issue. Item 3. Quantitative and Qualitative Disclosures about Market Risks SYSCO does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. SYSCO's exposure to market risk for changes in interest rates relates primarily to its long-term obligations. At January 1, 2000 the Company had outstanding $349,115,000 of commercial paper with maturities through February 22, 2000. The Company's remaining long-term debt obligations of $783,861,000 were primarily at fixed rates of interest. SYSCO has no significant cash flow exposure due to interest rate changes for long-term debt obligations. ----------------------------- Statements made herein regarding continuation of the share repurchase program, the impact of Year 2000 and SYSCO's market risks are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties and are based on current expectations and management's estimates; actual results may differ materially. Share repurchases could be affected by market prices of the Company's stock as well as management's decision to utilize its capital for other purposes. The effect of market risks could be impacted by future borrowing levels and certain economic factors, such as interest rates. Those risks and uncertainties that could impact these statements include the risks relating to the foodservice industry's relatively low profit margins and sensitivity to economic conditions, SYSCO's leverage and debt risks and other risks detailed in the Company's Fiscal 1999 Annual Report on Form 10-K. 10 <PAGE> 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings SYSCO is engaged in various legal proceedings which have arisen but have not been fully adjudicated. These proceedings, in the opinion of management, will not have a material adverse effect upon the consolidated financial position or results of operations of the company when ultimately concluded. Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on November 5, 1999 ("1999 Annual Meeting"). At the 1999 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 1999 Annual Meeting: Gordon M. Bethune, Colin G. Campbell, Charles H. Cotros, Frank A. Godchaux III, Jonathan Golden, Frank H. Richardson, Richard J. Schnieders, Arthur J. Swenka, Thomas B. Walker and John F. Woodhouse. At the 1999 Annual Meeting, the stockholders voted upon the directors as noted above, and on the approval of SYSCO Corporation's proposal to increase the number of authorized shares to one billion (1,000,000,000) shares. 11 <PAGE> 12 The results of such votes were as follows: <TABLE> <CAPTION> NUMBER OF VOTES CAST ----------------------------------------------------------------------- Withheld & Broker Matter Voted Upon For Against Abstained Non-votes - ---------------------------------- -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Election as Director: John W. Anderson 280,020,105 N/A 2,396,678 None Judith B. Craven 230,614,683 N/A 51,802,100 None Bill M. Lindig 280,022,619 N/A 2,394,164 None Richard G. Merrill 280,020,980 N/A 2,395,803 None Phyllis S. Sewell 280,050,492 N/A 2,366,291 None Approval of proposal to increase authorized shares to 1,000,000,000 264,931,181 16,159,101 1,326,501 None </TABLE> Item 5. Other Information On February 9, 2000, the Board of Directors announced a regular quarterly cash dividend of $0.12 per common share. On February 14, 2000 the Company issued a press release announcing a shelf registration covering 2,850,000 shares of common stock. The press release is filed herewith as Exhibit 99.1. 12 <PAGE> 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3(a) Restated Certificate of Incorporation incorporated by reference to Exhibit 3(a) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 3(b) Bylaws, as amended, incorporated by reference to Exhibit 3(a) to Form 10-K for the year ended July 3, 1999 (File No. 1-6544). 3(c) Form of Amended Certificate of Designation Preferences and Rights of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(c) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 3(d)# Certificate of Amendment of Certificate of Incorporation of SYSCO Corporation to increase authorized shares. 4(a) Sixth Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated May 31, 1996, incorporated by reference to Exhibit 4(a) to Form 10-K in the year ended June 27, 1996 (File No. 1-6544). 4(b) Agreement and Seventh Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997 incorporated by reference to Exhibit 4(a) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 4(c) Agreement and Eighth Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of June 22, 1998, incorporated by reference to Exhibit 4(c) to Form 10-K for the year ended July 3, 1999 (File No. 1-6544). 4(d) Senior Debt, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-3 filed June 6, 1995 (File No. 33-60023). 13 <PAGE> 14 4(e) First Supplemental Indenture, dated June 27, 1995, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Exhibit 4(e) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 4(f) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Exhibit 4(f) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 4(g) Third Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Exhibit 4(g) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 4(h) Fourth Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Exhibit 4(h) to Form 10-K for the year ended June 28,1997 (File No. 1-6544). 4(i) Fifth Supplemental Indenture, dated as of July 27, 1998 between Sysco Corporation and First Union National Bank, Trustee incorporated by reference to Exhibit 4 (h) to Form 10-K for the year ended June 27, 1998 (File No. 1-6554). 4(j)# Agreement and Ninth Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of December 1, 1999. 10(m)+# Sysco Corporation Split Dollar Life Insurance Plan. 10(n)+# Executive Compensation Adjustment Agreement - Bill M. Lindig. 10(o)+# Executive Compensation Adjustment Agreement - Charles H. Cotros. 10(p)+# First Amendment to Fifth Amended and Restated Sysco Corporation Supplemental Executive Retirement Plan dated effective June 29, 1997. 14 <PAGE> 15 10(q)+# First Amendment to Amended and Restated Sysco Corporation Executive Deferred Compensation Plan dated effective June 29, 1997. 10(r)+# First Amendment to Sysco Corporation 1995 Management Incentive Plan dated effective June 29, 1997. 15# Letter from Arthur Andersen LLP dated February 10, 2000, re: unaudited interim consolidated financial statements. 27# Financial Data Schedule 99.1# Press release dated February 14, 2000. + Executive Compensation Arrangement pursuant to 601(b)(10) (iii)(A) of Regulation S-K. # Filed Herewith (b) Reports on Form 8-K: On October 21, 1999, the Company filed a Form 8-K to attach a press release dated October 20, 1999 announcing results of operations for the first quarter ended October 2, 1999 (File No. 1-6544). 15 <PAGE> 16 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. Executive Vice President, Finance and Administration Date: February 10, 2000 16 <PAGE> 17 EXHIBIT INDEX NO. DESCRIPTION - -------- ----------------------------------------------------------------------- 3(a) Restated Certificate of Incorporation incorporated by reference to Exhibit 3(a) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 3(b) Bylaws, as amended, incorporated by reference to Exhibit 3(a) to Form 10-K for the year ended July 3, 1999 (File No. 1-6544). 3(c) Form of Amended Certificate of Designation Preferences and Rights of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(c) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 3(d)# Certificate of Amendment of Certificate of Incorporation of SYSCO Corporation to increase authorized shares. 4(a) Sixth Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated May 31, 1996, incorporated by reference to Exhibit 4(a) to Form 10-K in the year ended June 27, 1996 (File No. 1-6544). 4(b) Agreement and Seventh Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997 incorporated by reference to Exhibit 4(a) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 4(c) Agreement and Eighth Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of June 22, 1998, incorporated by reference to Exhibit 4(c) to Form 10-K for the year ended July 3, 1999 (File No. 1-6544). 4(d) Senior Debt, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-3 filed June 6, 1995 (File No. 33-60023). 4(e) First Supplemental Indenture, dated June 27, 1995, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Exhibit 4(e) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). <PAGE> 18 NO. DESCRIPTION - -------- ----------------------------------------------------------------------- 4(f) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Exhibit 4(f) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 4(g) Third Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Exhibit 4(g) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 4(h) Fourth Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Exhibit 4(h) to Form 10-K for the year ended June 28,1997 (File No. 1-6544). 4(i) Fifth Supplemental Indenture, dated as of July 27, 1998 between Sysco Corporation and First Union National Bank, Trustee incorporated by reference to Exhibit 4 (h) to Form 10-K for the year ended June 27, 1998 (File No. 1-6554). 4(j)# Agreement and Ninth Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of December 1, 1999. 10(m)+# Sysco Corporation Split Dollar Life Insurance Plan. 10(n)+# Executive Compensation Adjustment Agreement - Bill M. Lindig. 10(o)+# Executive Compensation Adjustment Agreement - Charles H. Cotros. 10(p)+# First Amendment to Fifth Amended and Restated Sysco Corporation Supplemental Executive Retirement Plan dated effective June 29, 1997. 10(q)+# First Amendment to Amended and Restated Sysco Corporation Executive Deferred Compensation Plan dated effective June 29, 1997. <PAGE> 19 10(r)+# First Amendment to Sysco Corporation 1995 Management Incentive Plan dated effective June 29, 1997. 15# Letter from Arthur Andersen LLP dated February 10, 2000, re: unaudited interim consolidated financial statements. 27# Financial Data Schedule 99.1# Press release dated February 14, 2000. + Executive Compensation Arrangement pursuant to 601(b)(10)(iii)(A) of Regulation S-K. # Filed Herewith </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.D <SEQUENCE>2 <DESCRIPTION>CERT.OF AMENDMENT OF CERTIFICATE OF INCORPORATION <TEXT> <PAGE> 1 EXHIBIT 3(d) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SYSCO CORPORATION IT IS HEREBY CERTIFIED THAT: 1. The name of the corporation (hereinafter referred to as the "Corporation") adopting the amendment specified below is: Sysco Corporation. 2. The Certificate of Incorporation of the Corporation is hereby amended by striking out Article FOURTH, Section A, and substituting in lieu of said Article the following new Article: "FOURTH: A. The total number of shares of stock which the corporation shall have authority to issue is One Billion One Million Five Hundred Thousand (1,001,500,000) shares, consisting of One Million Five Hundred Thousand (1,500,000) shares of Preferred Stock with a par value of One Dollar ($1.00) each and One Billion (1,000,000,000) shares of Common Stock with a par value of One Dollar ($1.00) each. The corporation may issue fractional shares of stock, which shall be entitled to proportionate dividends, voting and liquidation rights." 3. The amendment of the Certificate of Incorporation herein certified has been duly adopted effective November 5, 1999 by all of the stockholders entitled to vote in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. Signed and attested to be effective as of the 9th day of November, 1999. SYSCO CORPORATION /s/ MICHAEL C. NICHOLS ------------------------------------ Michael C. Nichols Vice President, General Counsel, and Assistant Secretary Attest: /s/ KENT R. BERKE - --------------------------------- Kent R. Berke, Assistant Vice President Assistant Secretary <PAGE> 2 STATE OF TEXAS COUNTY OF HARRIS BE IT REMEMBERED, that on the 9th day of November 1999, before me, a Notary Public duly authorized by law to take acknowledgement of deeds, personally came Michael C. Nichols, Vice President, General Counsel and Assistant Secretary of Sysco Corporation, who duly signed the foregoing instrument before me and acknowledged that such signing is his act and deed, that such instrument as executed is the act and deed of said corporation, and that the facts stated therein are true. GIVEN under my hand and seal on the 9th day of November, 1999. /s/ LINDA F. HARTDEGEN ------------------------------- Linda F. Hartdegen Notary Public in and for the State of Texas </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.J <SEQUENCE>3 <DESCRIPTION>9TH AMEND.TO COMPETITIVE ADVANCE & REVOLVING CRED. <TEXT> <PAGE> 1 EXHIBIT 4(j) AGREEMENT AND NINTH AMENDMENT TO COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT THIS AGREEMENT AND NINTH AMENDMENT TO COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT (this "Amendment") dated as of December 1, 1999 is among SYSCO CORPORATION, a Delaware corporation (the "Company"), the banks listed on the signature pages hereof (the "Banks"), CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National Association), a national banking association, as agent for the Banks (in such capacity, the "Agent"), and THE CHASE MANHATTAN BANK, a New York banking corporation (successor to Chemical Bank), as auction administration agent (in such capacity, the "Auction Administration Agent"). PRELIMINARY STATEMENT The Company, the Banks, certain other banks, the Agent and the Auction Administration Agent have entered into a Competitive Advance and Revolving Credit Facility Agreement dated as of July 27, 1988, as modified by an Agreement and First Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of February 14, 1989, by an Agreement and Second Amendment to Competitive Advance and Revolving Credit Facility Agreement and Modification of Notes dated as of May 1, 1989, by an Agreement and Third Amendment to Competitive Advance and Revolving Credit Facility Agreement and Modification of Notes dated as of January 2, 1990, by an Agreement and Fourth Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of January 31, 1994, and by an <PAGE> 2 Agreement and Fifth Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of November 15, 1994, as amended and restated by a Sixth Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated as of May 31, 1996, as further modified by an Agreement and Seventh Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997, and as further modified by an Agreement and Eighth Amendment to Competitive Advance and Revolving Credit Facility Agreement dated as of June 22, 1998 (said Competitive Advance and Revolving Credit Facility Agreement as so modified, amended and restated and further modified being the "Credit Agreement"). All capitalized terms defined in the Credit Agreement and not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Company, the Banks, the Agent and the Auction Administration Agent have agreed, upon the terms and conditions specified herein, to amend the Credit Agreement as hereinafter set forth: NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the Company, the Banks, the Agent and the Auction Administration Agent hereby agree as follows: SECTION 1. Amendments to Section 1.01 of the Credit Agreement. Certain definitions contained in Section 1.01 of the Credit Agreement are hereby amended as follows: (a) The definition of the term"Subsidiary" is amended in its entirety to read as follows: "`Subsidiary' means, with respect to any Person (the `parent') at any date, any corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of -2- <PAGE> 3 the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise controlled, by the parent or one or more Subsidiaries of the parent or by the parent and one or more Subsidiaries of the parent. In the foregoing sentence the term `controlled' refers to the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.". (b) The definition of the term "Wholly-Owned Consolidated Subsidiary" is hereby amended in its entirety to read as follows: "`Wholly-Owned Consolidated Subsidiary' means a Consolidated Subsidiary, all of the outstanding capital stock, member interests, partner interests or other ownership interests in which, other than directors' qualifying shares, are at the time owned by the Company, by any one or more other Wholly-Owned Consolidated Subsidiaries, or by the Company and any one or more Wholly-Owned Consolidated Subsidiaries.". SECTION 2. Amendments to Section 4.18(c) of the Credit Agreement. Section 4.18(c) of the Credit Agreement is hereby amended in its entirety to read as follows: "(c) Neither the Company nor any ERISA Affiliate has incurred, or is reasonably expected to incur, any Withdrawal Liability to any Multiemployer Plan which would exceed in the aggregate 4% of Net Worth.". -3- <PAGE> 4 SECTION 3. Amendments to Section 5.01(i)(iii) of the Credit Agreement. Section 5.01(i)(iii) of the Credit Agreement is hereby amended in its entirety to read as follows: "(iii) The Company will furnish to the Agent (i) if requested by any Bank through the Agent, promptly after the filing thereof with the Internal Revenue Service copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each PBGC Plan; (ii) promptly after becoming aware of the occurrence of any material Termination Event in connection with any PBGC Plan, a written notice signed by the President or Financial Officer of the Company specifying the nature thereof and any action the Company or appropriate ERISA Affiliate proposes to take with respect thereto; (iii) promptly and in any event within five Business Days after receipt thereof by the Company or any of its ERISA Affiliates from the PBGC, copies of each notice received by the Company or any such ERISA Affiliate of the PBGC's intention to terminate any PBGC Plan or to have a trustee appointed under Section 4042(b) of ERISA to administer any PBGC Plan; (iv) promptly a written notice in the event there is either a failure of the Company or an ERISA Affiliate to comply with the minimum funding requirements of Section 412 of the Code or Section 302 of ERISA or an application for a waiver from either or both of such standards is requested or received by the Company or an ERISA Affiliate with respect to a PBGC Plan and in either event the failure to comply or the application or grant of waiver is with respect to a material amount; and (v) promptly and in any event within five Business Days after receipt thereof by the Company or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of each notice received by the Company or any ERISA Affiliate concerning the imposition and the amount of withdrawal liability upon the -4- <PAGE> 5 Company or an ERISA Affiliate by a Multiemployer Plan pursuant to Section 4202 of ERISA. The Company will comply in all material respects with all applicable provisions of ERISA, the violation of which would, in the reasonable judgment of the Majority Banks, give rise to a material liability of the Company, and notice of which violation has been given by the Agent to the Company. For purposes of this Section 5.01(i)(iii), an obligation or liability shall be considered material if it equals or exceeds $4,000,000;". SECTION 4. Amendment to Section 5.02(a)(xi) of the Credit Agreement. Section 5.02(a)(xi) of the Credit Agreement is hereby amended in its entirety to read as follows: "(xi) a Lien on the Company's headquarters building located at 1390 Enclave Parkway, Houston, Texas to secure Indebtedness;". SECTION 5. Amendments to Section 6.01 of the Credit Agreement. Section 6.01 of the Credit Agreement is hereby amended (a) by amending paragraph (e) thereof in its entirety to read as follows: "(e) The Company or any Subsidiary shall (i) default in the payment of any Indebtedness (excluding Indebtedness evidenced by the Notes) of the Company or such Subsidiary (as the case may be), or any interest or premium thereon, when due whether by acceleration or otherwise, beyond any period of grace provided with respect thereto, or (ii) default in the performance or observance of any obligation or condition with respect to such other Indebtedness if the effect of such default results in the holder of such other Indebtedness accelerating the maturity of such other Indebtedness and the Company or such Subsidiary fails to pay such Indebtedness within five Business Days after such acceleration, if, in the case of any defaults described in clauses (i) and (ii) of this Section 6.01(e), the -5- <PAGE> 6 aggregate principal amount of all such Indebtedness for which all such defaults shall have occurred and be continuing exceeds $25,000,000; or"; (b) by amending paragraph (j) thereof in its entirety to read as follows: "(j) A final judgment or judgments for the payment of money shall be rendered by a court or courts against the Company or any Significant Subsidiary in excess of $25,000,000 in the aggregate and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or such Significant Subsidiary, as the case may be, shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or"; and (c) by amending paragraph (k) thereof in its entirety to read as follows: "(k) (i) The Company or any ERISA Affiliate or any of its agents or representatives shall engage in any `prohibited transaction' (as defined in Section 406 of ERISA or Section 4975 of the Code) which can be expected to result in a material liability to the Company or any ERISA Affiliate, (ii) any material `accumulated funding deficiency' (as defined in Section 302 of ERISA or Section 412 of the Code), whether or not waived, shall exist with respect to any PBGC Plan, if in the reasonable judgment of the Majority Banks, such accumulated funding deficiency would give rise to a material liability of the Company or any ERISA Affiliate, (iii) the Company or any ERISA Affiliate shall apply for or be granted a funding waiver under Section 302 of ERISA or Section 412 of the Code, which waiver or request for waiver is for a material amount, (iv) a `reportable event' (other -6- <PAGE> 7 than a reportable event not subject to the provision for thirty-day notice to the PBGC under applicable PBGC regulations) shall occur with respect to any PBGC Plan, which reportable event is, in the reasonable opinion of the Majority Banks, likely to result in the termination of such PBGC Plan for purposes of Title IV of ERISA and to give rise to a material liability of the Company or any ERISA Affiliate, (v) proceedings shall commence to have a trustee appointed or a trustee shall be appointed to terminate or administer a PBGC Plan under Section 4042(b) of ERISA which proceeding is, in the reasonable opinion of the Majority Banks, likely to result in the termination of such PBGC Plan and to give rise to a material liability of the Company or any ERISA Affiliate with respect to such termination, (vi) a notice of intent to terminate a PBGC Plan under Section 4041(c) is filed with the PBGC if such termination would give rise to a material liability of the Company or any ERISA Affiliate, (vii) any Multiemployer Plan is in reorganization or is insolvent and the circumstances are such that, in the reasonable opinion of the Majority Banks, there could be a material liability incurred by or imposed upon the Company or any ERISA Affiliate, (viii) there is a complete or partial withdrawal from a Multiemployer Plan under circumstances that, in the reasonable opinion of the Majority Banks, would likely subject the Company or any ERISA Affiliate to a material liability, or (ix) any event or condition described in (i) through (viii) above (determined without regard to whether the event or condition taken alone would or could result in a material liability) shall occur or exist with respect to a PBGC Plan or Multiemployer Plan which individually or in combination with one or more of any events described in (i) through (viii) above (determined without regard to whether the event or condition taken alone would or could result in a material liability), if any, in the -7- <PAGE> 8 reasonable opinion of the Majority Banks would likely, subject the Company or any ERISA Affiliate to any material tax, penalty or other liability (for purposes of this Section 6.01(k) , an obligation or liability shall be considered material if it equals or exceeds $20,000,000);". SECTION 6. Conditions of Effectiveness. This Amendment shall become effective when, and only when, the following conditions shall have been fulfilled: (a) the Company, the Agent, the Auction Administration Agent and Banks together constituting the Majority Banks shall have executed a counterpart hereof and delivered the same to the Agent or, in the case of any such Bank as to which an executed counterpart hereof shall not have been so delivered, the Agent shall have received written confirmation by telecopy or other similar writing from such Bank of execution of a counterpart hereof by such Bank; and (b) the Agent shall have received from the Company a certificate of the Secretary or Assistant Secretary of the Company certifying that attached thereto is (i) a true and complete copy of the general borrowing resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance of the Credit Agreement, as amended hereby, and (ii) the incumbency and specimen signature of each officer of the Company executing this Amendment. SECTION 7. Representations and Warranties True; No Default or Event of Default. The Company hereby represents and warrants to the Agent, the Auction Administration Agent and the Banks that after giving effect to the execution and delivery of this Amendment (a) the representations and warranties set forth in the Credit Agreement (as modified hereby) are true and correct on the date hereof as though made on and as of such date; provided, however, that for purposes of this clause (a), Schedule II as used in Section 4.02 of the Credit Agreement shall -8- <PAGE> 9 be deemed to include any supplements to such Schedule delivered to the Agent and the Banks by the Company prior to the date of this Amendment and (b) neither any Default nor Event of Default has occurred and is continuing as of the date hereof. SECTION 8. Reference to the Credit Agreement and Effect on the Notes and Other Documents Executed Pursuant to the Credit Agreement. (a) Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "herein," "hereof" or words of like import shall mean and be a reference to the Credit Agreement, as amended hereby. (b) Upon the effectiveness of this Amendment, each reference in the Notes and the other documents and agreements delivered or to be delivered pursuant to the Credit Agreement shall mean and be a reference to the Credit Agreement, as amended hereby. (c) The Credit Agreement and the Notes and other documents and agreements delivered pursuant to the Credit Agreement, and modified by the amendments referred to above, shall remain in full force and effect and are hereby ratified and confirmed. SECTION 9. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 10. GOVERNING LAW; BINDING EFFECT. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW AND SHALL BE BINDING UPON THE COMPANY, THE AGENT, THE AUCTION ADMINISTRATION AGENT AND THE BANKS AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. -9- <PAGE> 10 SECTION 11. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. SECTION 12. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED HEREBY, THE NOTES AND THE LETTER AGREEMENTS REFERRED TO IN SECTIONS 2.05(b) AND 2.05(c) OF THE CREDIT AGREEMENT CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF 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. -10- <PAGE> 11 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed effective as of the date first stated herein, by their respective officers thereunto duly authorized. SYSCO CORPORATION By: /s/ DIANE DAY SANDERS -------------------------------------- Name: Diane Day Sanders Title: Vice President & Treasurer CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (FORMERLY KNOWN AS TEXAS COMMERCE BANK NATIONAL ASSOCIATION), INDIVIDUALLY AND AS AGENT By: /s/ MICHAEL ONDRUCH -------------------------------------- Name: Michael Ondruch Title: Vice President -11- <PAGE> 12 THE CHASE MANHATTAN BANK (SUCCESSOR TO CHEMICAL BANK), AS AUCTION ADMINISTRATION AGENT By: /s/ CHRISTOPHER CONSOMER -------------------------------------- Name: Christopher Consomer Title: Assistant Vice President -12- <PAGE> 13 BANK OF AMERICA, NATIONAL ASSOCIATION (FORMERLY KNOWN AS CONTINENTAL BANK N.A.) By: /s/ LYNN DERNING -------------------------------------- Name: Lynn Derning Title: Principal -13- <PAGE> 14 FIRST UNION NATIONAL BANK By: /s/ WILLIAM F. FOX -------------------------------------- Name: William F. Fox Title: Vice President -14- <PAGE> 15 WACHOVIA BANK OF GEORGIA, NATIONAL ASSOCIATION By: /s/ JESSICA S. WRIGHT -------------------------------------- Name: Jessica S. Wright Title: Vice President -15- <PAGE> 16 THE TORONTO-DOMINION BANK By: -------------------------------------- Name: Title: -16- <PAGE> 17 UBS AG, STAMFORD BRANCH By: /s/ WILFRED SAINT -------------------------------------- Name: Wilfred Saint Title: Associate Director Loan Portfolio Support, US By: /s/ ROBERT H. RILEY III -------------------------------------- Name: Robert H. Riley III Title: Executive Director -17- <PAGE> 18 WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ SUSAN HAUFSCHILD -------------------------------------- Name: Susan Haufschild Title: Vice President -18- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.M <SEQUENCE>4 <DESCRIPTION>SPLIT DOLLAR LIFE INSURANCE PLAN <TEXT> <PAGE> 1 EXHIBIT 10(m) SYSCO CORPORATION SPLIT DOLLAR LIFE INSURANCE PLAN <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> <S> <C> ARTICLE I - Purposes, Definitions and Duration Purpose.........................................................................................................1.1 Definitions.....................................................................................................1.2 Term............................................................................................................1.3 ARTICLE II - Administration Powers of the Committee.........................................................................................2.1 Committee Organization and Voting...............................................................................2.2 Reimbursement of Expenses.......................................................................................2.3 Resignation or Removal..........................................................................................2.4 ARTICLE III -- Participation Eligibility of Employees........................................................................................3.1 Designation of Eligible Employees...............................................................................3.2 Election to Participate.........................................................................................3.3 ARTICLE IV - Benefits Death Benefit...................................................................................................4.1 Contributions and Funding.......................................................................................4.2 Responsibility for Payments and Withholding of Taxes............................................................4.3 Termination of Benefits for a Participant.......................................................................4.4 Assignment of Death Benefits....................................................................................4.5 ARTICLE V - Rights of Participants Limitation of Rights............................................................................................5.1 Prerequisites to Benefits.......................................................................................5.2 ARTICLE VI - Miscellaneous Amendment or Termination of Plan................................................................................6.1 Claims Procedure................................................................................................6.2 Plan Year.......................................................................................................6.3 Agent for Process...............................................................................................6.4 Governing Law...................................................................................................6.5 Severability....................................................................................................6.6 Reliance Upon Information.......................................................................................6.7 Notice..........................................................................................................6.8 Continuance Permitted Upon Merger, Consolidation or Transfer of Assets..........................................6.9 Plan May Use Rabbi Trust.......................................................................................6.10 ARTICLE VII - ERISA Provisions Named Fiduciary.................................................................................................7.1 Funding.........................................................................................................7.2 Payments........................................................................................................7.3 </TABLE> -i- <PAGE> 3 SYSCO CORPORATION SPLIT DOLLAR LIFE INSURANCE PLAN ARTICLE I Purposes, Definitions and Duration 1.1 Purpose. This Plan is established by Sysco Corporation for the purpose of providing life insurance protection for the family of certain employees. 1.2 Definitions. Each term below shall have the meaning assigned thereto for all purposes of this Plan unless the context requires a different construction. (a) "Board" means the board of directors of Sysco. (b) "Committee" means the members (and their successors) of the Compensation and Stock Option Committee of the Board. (c) "Employee" means any person who at the time such person is designated a Participant hereunder, is employed by Sysco in a position to contribute materially to the continued growth and development and to the future financial success of Sysco. (d) "Participant" means an Employee who has been designated by the Committee to participate in the Plan and who has entered into a Split Dollar Life Insurance Agreement with Sysco. (e) "Plan" means the Sysco Corporation Split Dollar Life Insurance Plan, as may be amended from time to time. (f) "Split Dollar Life Insurance Agreement" means the agreement entered into between the Participant and the Employer providing for life insurance protection for the family of certain Employees (g) "Sysco" means Sysco Corporation 1.3 Term. The effective date of the Plan is July 4, 1999. The Plan shall continue until terminated by Sysco. The Committee in its sole discretion, may or may not designate eligible Participants during the term of the Plan. -1- <PAGE> 4 ARTICLE II Administration 2.1 Powers of the Committee. The Committee shall have the exclusive responsibility for the general administration of the Plan, according to the terms and provisions of the Plan, and shall have all powers necessary to accomplish such purposes, including, but not by way of limitation, the right, power and authority: (a) to make rules and regulations for the administration of the Plan which are not inconsistent with the terms and provisions hereof, provided such rules and regulations are evidenced in writing; (b) to construe all terms, provisions, conditions and limitations of the Plan and its construction thereof made in good faith and without discrimination in favor of or against any Participant shall be final and conclusive on all parties at interest; (c) to correct any defect, supply any omission, or reconcile any inconsistency which may appear in the Plan in such manner and to such extent as it shall deem expedient to carry the Plan into effect for the greatest benefit of all parties at interest, and its judgment in such matters shall be final and conclusive as to all parties at interest; (d) to determine which Employees shall be eligible to become Participants; (e) to determine all controversies relating to the administration of the Plan, including but not limited to: (1) differences of opinion arising between Sysco and any Participant; and (2) any questions it deems advisable to determine in order to promote the uniform administration of the Plan for the benefit of all parties at interest; (f) to determine within the limits specified by the Plan, the amount of insurance coverage and premium payments and the division between Sysco and the Employee of the insurance coverage, premium payments and cash surrender value for insurance policies on the life of a particular Participant; (g) to delegate by written notice such of the clerical and recordation duties of the Committee under the Plan as the Committee may deem necessary or advisable for the proper and efficient administration of the Plan; and (h) to modify from time to time the terms of the sample Split Dollar Life Insurance Agreement attached as Exhibit A or of a Split Dollar Life Insurance Agreement to be executed by a certain Participant; provided, however, that such modification shall not be made to a Split Dollar Life Insurance Agreement after it has been executed by Sysco and a Participant without the consent of both parties. The Committee, in exercising any of the rights, powers, and authorities set out in this Section and all other sections of the Plan, shall perform or refrain from performing those acts using its sole -2- <PAGE> 5 discretion and judgment. Any decision made by the Committee or any refraining to act or any act taken by the Committee in good faith shall be final, conclusive and binding on all parties. The Committee's decision shall never be subject to de novo review. 2.2 Committee Organization and Voting. The Committee shall select from among its members a chairman, who shall preside at all of its meetings, and shall select a secretary, without regard as to whether that person is a member of the Committee, who shall keep all records, documents and data pertaining to its supervision of the administration of the Plan. A majority of the members of the Committee constitutes a quorum for the transaction of business, and the vote of majority of the members present at any meeting will decide any question brought before that meeting. In addition, the Committee may decide any question by a vote, taken without a meeting of a majority of its members. A member of the Committee who is also a Participant shall not vote or act upon any matter relating solely to himself or herself. 2.3 Reimbursement of Expenses. The members of the Committee shall serve without compensation for their services, but shall be reimbursed by Sysco for all expenses properly and actually incurred in performance of their duties under the plan. 2.4 Resignation or Removal. Members of the Committee shall serve until they resign or are removed by the Board. Any member of the Committee may resign by giving at least 30 days written notice to the Board. The Board may remove any member of the Committee by written notice, which removal shall be effective as of the date specified in the notice. The Board is not required to give any advance notice of such removal. ARTICLE III Participation 3.1 Eligibility of Employees. An Employee must be in a position to contribute materially to the continued growth and development and to the future financial success of Sysco in order to be eligible to participate in the Plan. An Employee shall be ineligible to participate in the Plan if the proposed insured(s) (e.g., the Employee and the Employee's spouse, if any) is declined for insurance coverage. The Committee from time to time may establish additional eligibility requirements for participation in the Plan. 3.2 Designation of Eligible Employees. The Committee shall designate and notify in writing the Employees who are eligible to participate in the Plan. Any copy of such notification shall be given to Sysco. If a designated Employee is classified as a substandard or impaired risk by insurance carriers, the Committee has the discretion to declare the Employee ineligible to participate in the Plan or to enter into a Split Dollar Insurance Agreement with the Employee modified to make allowance for his or her substandard rating. 3.3 Election to Participate. After the Employee has been notified by the Committee that he or she is eligible to participate in the Plan, such Employee must, in order to participate in the Plan, enter into a Split Dollar Life Insurance Agreement with Sysco in the format of the sample agreement attached as Exhibit A. At the option of the Employee, the trustee of a trust or a family member of -3- <PAGE> 6 the Employee may enter into the Split Dollar Life Insurance Agreement and such trustee or family member shall possess all of the rights and obligations otherwise given to the Participant under this Plan and the Split Dollar Life Insurance Agreement. The obligation of Sysco to pay benefits under this Plan shall be effective upon the execution of the Split Dollar Life Insurance Agreement by the Participant and Sysco. The Split Dollar Life Insurance Agreement must be executed within 180 days after the date on which Sysco is notified that the Employee is eligible to participate in the Plan but Sysco shall not unduly delay its signature of the Split Dollar Life Insurance Agreement. If the Split Dollar Life Insurance Agreement is not signed within said 180 days, the Employee shall no longer be eligible to participate in the Plan but the Committee, in its sole discretion, shall have the authority to select said Employee again at a future time, in accordance with the provisions of Section 3.2, to be eligible to participate in the Plan. ARTICLE IV Benefits 4.1 Death Benefit. The basic benefit provided under the Plan is a death benefit payable to the beneficiary designated by the Participant in an amount specified in the Split Dollar Life Insurance Agreement with the Participant subject to any limitations imposed by the life insurance policy. The amount of insurance on each Participant, and/or the Participant's spouse, is determined by the Committee and is not necessarily the same for all Participants. 4.2 Contributions and Funding. The death benefit of each Participant is entirely funded with life insurance policies insuring the life of the Participant or the Participant's spouse or the joint lives of the Participant and the Participant's spouse. The Employer shall pay the required premium on each insurance policy although the Split Dollar Life Insurance Agreement may require the Participant to reimburse the Employer part of the premium payment. 4.3 Responsibility for Payments and Withholding of Taxes. Sysco shall make the payments and calculate the deductions for such payments of any taxes required to be withheld by federal or any state or local government with respect to any economic benefit the Participant may realize from the Plan. The Committee shall furnish Sysco information concerning the amount of economic benefits under the Plan for each Participant. 4.4 Termination of Benefits for a Participant. The benefits under the Plan for a Participant may be terminated as specified in Section 5.1 of the sample Split Dollar Life Insurance Agreement attached as Exhibit A, as it may be modified by the Committee with respect to a particular Participant. 4.5 Assignment of Death Benefits. Each Participant has the power to assign all rights and obligations of the Participant in the insurance policies and under the Split Dollar Life Insurance Agreement and under this Plan to an assignee of the Participant's choice and thereafter such designee shall possess all of the rights and obligations of the Participant under this Plan and the Split Dollar Life Insurance Agreement. -4- <PAGE> 7 ARTICLE V Rights of the Participants 5.1 Limitation of Rights. Nothing in the Plan shall be construed: (a) to give any Employee of Sysco any right to be designated a Participant in the Plan other than at the sole discretion of the Committee; (b) to limit in any way the right of Sysco to terminate the Participant's employment with Sysco at any time; (c) to be evidence of any agreement or understanding, expressed or implied, that Sysco will employ Participant in any particular position or at any particular rate or remuneration; (d) to give the Employee or his or her beneficiary any interest or rights to the Employer's investment in the insurance policy on the Employee's life. 5.2 Prerequisites to Benefits. No Participant, nor any person claiming through a Participant, shall have any right or interest in the Plan, or any benefits hereunder, unless and until all of the terms, conditions and provisions of the Plan which affect such Participant or such other person shall have been complied with as specified herein. ARTICLE VI Miscellaneous 6.1 Amendment or Termination of Plan. The Board of Sysco may modify or terminate this Plan by a written instrument. Any modification or termination will then be binding upon all persons ever to become entitled to payments under this Plan. No amendment or termination, however, will affect a Split Dollar Life Insurance Agreement after it has been executed by Sysco and the Participant unless it is mutually agreed to by the Participant and Sysco. 6.2 Claims Procedure. When a benefit is due, a Participant or other person entitled thereto should submit his or her claim in accordance with the claim procedure specified in the Split Dollar Life Insurance Agreement. 6.3 Plan Year. The Plan Year for reporting to governmental agencies and employees will coincide with the fiscal year of Sysco. Sysco has a 52/53 week fiscal year beginning on the Sunday next following the Saturday closest to the June 30th of each calendar year. 6.4 Agent for Process. Legal process may be served on the Committee at 1390 Enclave Parkway, Houston, Texas 77077. 6.5 Governing Law. The Plan shall be construed, administered, and governed in all respects by the laws of the State of Texas, except as may be preempted by federal law. -5- <PAGE> 8 6.6 Severability. If any term, provision, covenant, or condition of the Plan is held to be invalid, void or otherwise unenforceable, the rest of the Plan shall remain in full force and effect and shall in no way be affected, impaired, or invalidated. 6.7 Reliance Upon Information. The Committee shall not be liable for any decision or action taken in good faith in connection with the administration of this Plan. Without limiting the generality of the foregoing, any such decision or action taken by the Committee in reliance upon any information supplied to it by any officer of Sysco, Sysco's legal counsel or Sysco's independent accountants in connection with the administration of this Plan shall be deemed to have been taken in good faith. 6.8 Notice. Any notice or filing required or permitted to be given to the Committee or a Participant under this Plan shall be sufficient if in writing and hand delivered, facsimile transmitted, or sent by registered or certified mail to the principal office of Sysco or to the residential mailing address of the Participant. Such notice shall be deemed given as of the date of the delivery or, if delivery is made by mail, as of the date shown on the postmark on the envelope. 6.9 Continuance Permitted Upon Merger, Consolidation or Transfer of Assets. Sysco's participation in this Plan shall not automatically terminate if it consolidates or merges and is not the surviving corporation, sells substantially all of its assets, is a party to a reorganization and its employees and substantially all of its assets are transferred to another entity, liquidates, or dissolves, if there is a successor organization. Instead, the successor may assume and continue this Plan by executing a direction, entering into a contractual commitment or adopting a resolution providing for the continuance of the Plan. Only upon the successor's rejection of this Plan or its failure to respond to the Employer's request that it affirm its assumption of this Plan within 90 days of the request shall this Plan automatically terminate; provided, however, that termination of the Plan shall not affect any Split Dollar Life Insurance Agreement after it has been executed unless agreed to by the Participant who is a party to such Split Dollar Life Insurance Agreement. 6.10 Plan May Use Rabbi Trust. It is specifically recognized by both Sysco and the Participants that some or all of the Split Dollar Life Insurance Agreements may use Sysco Corporation Split Dollar Life Insurance Trust or other such Rabbi trusts to possess the insurance policy subject to such Split Dollar Life Insurance Agreements, to execute any collateral assignments and to carry out the obligations of Sysco under this Plan and such Split Dollar Life Insurance Agreements. However, under all circumstances, the rights of the Participants to the assets held in such trust will be no greater than the rights expressed in this Plan and the applicable Split Dollar Life Insurance Agreement. Nothing contained in the trust agreement will constitute a guarantee by Sysco that assets of Sysco transferred to the trust will be sufficient to pay any benefits under this plan or the applicable Split Dollar Life Insurance Agreement or would place the Participant in a secured position ahead of general creditors should Sysco become insolvent or bankrupt. The Rabbi trust designed to carry out Sysco's obligations under this Plan or the applicable Split Dollar Life Insurance Agreements must specifically set out these principles so it is clear in the Rabbi trust that the Participants are only unsecured general creditors of Sysco in relation to their benefits under this Plan and the applicable Split Dollar Life Insurance Agreements. -6- <PAGE> 9 ARTICLE VII ERISA Provisions 7.1 Sysco is the named fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974 and shall have the authority to control and manage the operation and administration of the Plan. 7.2 The funding policy of the Plan will be through premium payments to the insurer issuing the insurance policy. 7.3 The basis of payments from the Plan will consist of payments by the insurer in accordance with the insurance policy. IN WITNESS WHEREOF, the Employer has executed this instrument as of this 21st day of October, 1999. SYSCO CORPORATION By /s/ MICHAEL C. NICHOLS --------------------------------------- -7- <PAGE> 10 EXHIBIT A SYSCO CORPORATION SPLIT DOLLAR LIFE INSURANCE AGREEMENT This Agreement made and entered into between Sysco Corporation, (the "Employer") and _______________________________________ (the "Employee"). W I T N E S S E T H WHEREAS, Sysco has adopted the Sysco Corporation Split Dollar Life Insurance Plan (the "Plan") which is designed to encourage certain employees to continue in the service of Sysco by offering such employees assistance in providing life insurance protection for the employees' family; and WHEREAS, a Committee (the "Committee") has been established by the Plan to administer the Plan and to designate employees of Sysco who are eligible to participate in the Plan; and WHEREAS, the Committee has selected the Employee to be a participant under the Plan because the services of the Employee, the Employee's experience and knowledge of the affairs of Sysco, and the Employee's reputation and contacts in the industry are extremely valuable to Sysco; and WHEREAS, Sysco desires that the Employee remain in its service and wishes to receive the benefit of the Employee's knowledge, experience, reputation and contacts; and WHEREAS, Sysco is willing to encourage the Employee's continued service to Sysco by joining with the Employee for the mutual benefit of the parties hereto in an investment of life insurance on the life of the Employee, the life of the Employee's spouse, or the joint lives of the Employee and the Employee's spouse so as to provide life insurance protection for the Employee's family; and <PAGE> 11 WHEREAS, the Employee will be the owner of the Insurance Policies acquired pursuant to the terms of the Agreement, and Sysco's Investment in the Insurance Policies will be represented by an assignment from the Employee to Sysco of limited ownership rights in the Insurance Policies; and WHEREAS, this plan is intended to qualify as a life insurance employee benefit plan as described in Revenue Ruling 64-328. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, Sysco and the Employee agree as follows: ARTICLE 1 Definitions 1.1 "Agreement" means this agreement, as it may be amended from time to time. 1.2 "Change of Control" is defined in section 3.5. 1.3 "Committee" means the administrative committee under the Plan. 1.4 "Employee" means ____________. 1.5 "Insurance Policies" means the policies or policy shown on the attached Schedule 1, together with any other policies that may be added to the Agreement. 1.6 "Insurer" means an insurance company issuing Insurance Policies subject to this Agreement. 1.7 "Plan" means the Sysco Corporation Split Dollar Life Insurance Plan. 1.8 "Rabbi Trust" means the Sysco Corporation Split Dollar Life Insurance Trust. 1.9 "Sysco" means Sysco Corporation. 1.10 "Sysco's Investment" means the interest of Sysco in the Insurance Policy as defined in Section 4.1 of the Agreement. -2- <PAGE> 12 ARTICLE 2 Insurance Policies The Employee has purchased insurance on the life of the Employee, the life of the Employee's spouse or the joint lives of the Employee and the Employee's spouse for the benefit and protection of the Employee's family under the Insurance Policy or Insurance Policies shown on the attached Schedule 1 in the face amounts as shown on such schedule. ARTICLE 3 Premium Payments 3.1 Sysco shall pay the required premium specified on Schedule 1 for each Insurance Policy on or before the due date. 3.2 Any dividends attributable to each Insurance Policy shall be applied as Sysco and the Employee agree by an instrument in writing. 3.3 The Employee shall pay to Sysco during each year the Insurance Policy is subject to this Agreement and during which Sysco makes a premium payment under section 3.1, an amount equal to the one-year term cost of the insurance protection to which the Employee is entitled under such Insurance Policy pursuant to the terms of this Agreement, including any term insurance rider and any insurance purchased by dividends, and such cost is to be determined under the principles established by applicable U.S. Treasury Department pronouncements, rulings and regulations in effect for determining such costs for insurance protection. The Employee shall reimburse Sysco for such one-year term cost within a reasonable time after payment of the required premium to the Insurer by Sysco on each Insurance Policy under section 3.1. (a) Until changed by U.S. Treasury Department pronouncements, rulings or regulations, the one-year term cost of insurance protection on a second to die -3- <PAGE> 13 policy on the joint lives of the Employee and the Employee's spouse shall be the lesser of the following: (i) the current published one-year term rates available to all standard risks of the Insurer issuing such insurance protection, or (ii) U.S. Life Table 38. (b) Until changed by U.S. Treasury Department pronouncements, rulings or regulations, the one-year term cost of insurance protection on the single life of the Employee or the Employee's spouse (including the single life of the survivor after the death of the first of the Employee and the Employee's spouse to die if the Insurance Policy covers their joint lives), shall be the lesser of the following: (i) the current published one-year term rates of the Insurer issuing such insurance coverage, pursuant to the guidelines set forth in Rev. Rul. 66-110 and Rev. Rul. 67-154, or (ii) an amount determined in accordance with the tables set forth in Rev. Rul. 55-747 (called the "PS 58 costs"). 3.4 Upon a Change of Control, Sysco shall, as soon as possible, but in no event longer than ninety days following the Change of Control, as defined herein, make an irrevocable contribution to the Rabbi Trust in an amount equal to the present value, using a 5% interest factor, of the remaining aggregate premiums required to be paid by Sysco on Schedule 1 for each Insurance Policy. The trustee of the Rabbi Trust shall pay future premiums for such Insurance Policy from such contributions and the appreciation and earnings thereon; provided, however, that, should such contributions and appreciation and earnings thereon prove insufficient to pay all of the premiums -4- <PAGE> 14 required by Schedule 1 for such Insurance Policy, Sysco shall remain liable to make such remaining premium payments. 3.5 For purposes of this Agreement, Change of Control shall mean the occurrence of one or more of the following events: (a) Any "person," including a "syndication" or "group" as those terms are used in Section 13(d)(3) of the Securities Act, is or becomes the beneficial owner, directly or indirectly, of securities of Sysco representing 20% or more of the combined voting power of Sysco's then outstanding "Voting Securities" which is any security which ordinarily possesses the power to vote in the election of the Board of Directors of Sysco without the happening of any precondition or contingency; (b) Sysco is merged or consolidated with another corporation and immediately after giving effect to the merger or consolidation either (i) less than 80% of the outstanding Voting Securities of the surviving or resulting entity are then beneficially owned in the aggregate by (x) the stockholders of Sysco immediately prior to such merger or consolidation, or (y) if a record date has been set to determine the stockholders of Sysco entitled to vote on such merger or consolidation, the stockholders of Sysco as of such record date, or (ii) the Board of Directors, or similar governing body, of the surviving or resulting entity does not have as a majority of its members the persons specified in subparagraph (c)(i) and (ii) below; (c) If at any time the following do not constitute a majority of the Board of Directors of Sysco (or any successor entity referred to in subparagraph (b) above): i. Persons who are directors of Sysco on July 4, 1999; -5- <PAGE> 15 ii. persons who, prior to their election as a director of Sysco (or successor entity if applicable) were nominated, recommended or endorsed by a formal resolution of the Board of Directors of Sysco; (d) If at any time during a calendar year a majority of the directors of Sysco are not persons who were directors at the beginning of the calendar year; and (e) Sysco transfers substantially all of its assets to another corporation which is a less than 80% owned subsidiary of Sysco. ARTICLE 4 Sysco's Investment 4.1 Sysco's Investment in each Insurance Policy shall be: (a) except as provided in subsection (b) below, the lesser of (1) the cash surrender value of the Insurance Policy and (2) the amounts paid by Sysco as premiums on such Insurance Policy under the provisions of section 3.1 with both (1) and (2) reduced by the amount of any indebtedness which may exist against such Insurance Policy and any unpaid interest on such indebtedness if said indebtedness was incurred after such Insurance Policy becomes subject to the Agreement and with (2) only reduced by the premiums paid by the Employee with respect to such Insurance Policy under the provisions of section 3.3; (b) at any time upon the death of the last insured, the amounts paid by Sysco as premiums on such Insurance Policy under the provisions of section 3.1 less (1) the amount of any indebtedness which may exist against such Insurance Policy and any unpaid interest on such indebtedness if said indebtedness was incurred after -6- <PAGE> 16 such Insurance Policy becomes subject to this Agreement, and (2) the premiums paid by the Employee with respect to such Insurance Policy under the provisions of section 3.3. 4.2 The Employee will collaterally assign the Insurance Policies acquired pursuant to the terms of this Agreement to the Rabbi Trust as evidence of Sysco's Investment. The collateral assignment shall not be altered or changed without the written consent of Sysco. The Rabbi Trust shall have possession of the Insurance Policy during the term of this Agreement; provided, however, that the possessor of the Insurance Policy shall make such Insurance Policy available to the Insurer when it shall be necessary to endorse changes of beneficiary thereon in accordance with the Employee's right to appoint beneficiaries as provided in this Agreement or to exercise any other rights of the Employee to such Insurance Policy. 4.3 The rights of Sysco and the Rabbi Trust under the collateral assignment are restricted to (a) assigning Sysco's Investment in the Insurance Policy to the Employee or the Employee's designee upon payment of Sysco's Investment, (b) upon the death of the last insured, obtaining that portion of the Insurance Policy death proceeds in an amount equal to Sysco's Investment at such insured's death, and (c) upon surrender of the Insurance Policy, obtaining that portion of the surrender proceeds not in excess of Sysco's Investment. 4.4 Sysco and the Rabbi Trust are prohibited from taking any action that would endanger either the interest of the Employee or the payment of the proceeds in excess of Sysco's Investment to the beneficiary designated by the Employee upon the last insured's death. Prior to the termination of this Agreement, Sysco and the Rabbi Trust will not exercise the right to pledge the Insurance Policies, to surrender the Insurance Policies or paid up additions for cancellation or to partially surrender the Insurance Policies, to assign its rights to anyone other than the Employee or the -7- <PAGE> 17 Employee's designee, and to borrow against the Insurance Policies even for the purpose of paying premiums unless there has been a default by the Employee under this Agreement. 4.5 The Employee has the power to assign all rights of the Employee in the Insurance Policies and under this Agreement, change the beneficiary designation on each Insurance Policy and exercise settlement options. In the event of an assignment, the assignee shall possess all of the rights and obligations of the Employee under such Insurance Policy and this Agreement. The Employee has all rights to the Insurance Policies, not specifically granted to Sysco by this Agreement; provided, however, that the Employee may not exercise any rights in a manner which would endanger Sysco's Investment. 4.6 Sysco and the Employee recognize that the investment of Sysco in the Insurance Policies and other assets held in the Rabbi Trust is also subject to the general creditors of Sysco as set forth in the Rabbi Trust. The Employee shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Rabbi Trust. Any rights created under the Plan or this Agreement shall be mere unsecured contractual rights of the Employee against Sysco. Any assets held by the Rabbi Trust will be subject to the claims of Sysco's general creditors under Federal and state law as specified in the Rabbi Trust. 4.7 Any payments of Sysco's Investment in the Insurance Policy pursuant to the collateral assignment shall be first made from Insurance Policy cash values attributable to paid up additional life insurance and purchased by Insurance Policy dividends, if any. The Employee shall have no interest in paid up additional life insurance protection, if any, except to the extent the death benefit or cash value thereof exceeds Sysco's Investment. -8- <PAGE> 18 ARTICLE 5 Termination This Agreement shall terminate on the happening of any one or more of the following events: (a) Mutual agreement of the parties; (b) Adjudication of Sysco as a bankrupt or a general assignment by Sysco to or for the benefit of creditors or dissolution of Sysco; (c) Surrender of all the Insurance Policies; (d) Payment in full to Sysco at any time of Sysco's Investment, at which time Sysco shall release the collateral assignment; (e) Cessation of Sysco's business; (f) The Employee ceases to be employed by Sysco for any reason except death. Additionally, Sysco, in its sole discretion, may terminate this Agreement upon any failure of the Employee to pay premiums to Sysco as provided in section 3.3. ARTICLE 6 Termination of Sysco's Investment 6.1 Upon the death of the last insured, Sysco shall receive from the proceeds of all Insurance Policies payable upon such insured's death the full amount of Sysco's Investment in the death benefits in all such Insurance Policies. The balance of the proceeds of such Insurance Policies shall be paid (a) to the beneficiary designated by the Employee or (b) if no such beneficiary has been designated, to the Employee's executor or administrator for administration as part of the Employee's estate. -9- <PAGE> 19 6.2 In the event of the termination of this Agreement under Article 5 (except as provided in Section (d) of Article 5), the Employee or the designee of the Employee shall have ninety days in which to pay Sysco in an amount equal to Sysco's Investment in each Insurance Policy. Upon the payment of such an amount, Sysco and the Rabbi Trust shall release the collateral assignment of the Insurance Policies. If the Employee or the designee of the Employee does not make such payment to Sysco within such ninety day period, the Employee may either (a) surrender the Insurance Policy as provided in the collateral assignment, or (b) transfer ownership of such Insurance Policy to Sysco, thereby discharging the obligation of the Employee to purchase Sysco's Investment in such Insurance Policy and relinquishing all rights of the Employee to such Insurance Policy under this Agreement. 6.3 Upon the surrender or partial surrender of any Insurance Policy covered by this Agreement or should the Employee borrow against any Insurance Policy covered by this Agreement, the proceeds received upon such surrender, partial surrender or loan shall be used first to pay Sysco in an amount equal to Sysco's Investment in such Insurance Policy and any excess proceeds shall be paid to the Employee. -10- <PAGE> 20 ARTICLE 7 Insurers The Insurer(s) issuing the Insurance Polices shall not be deemed to be a party to this Agreement for any purpose, nor is the Insurer in any way responsible for its validity or its enforcement. The Insurer shall not be obligated to inquire as to the distribution or application of any monies, payable or paid by the Insurer under the Insurance Policies, if the Insurer makes appropriate payment or otherwise performs its contractual obligations in accordance with the terms of the Insurance Policies. The Insurer shall be bound only by the provisions of the Insurance Policies or an endorsement thereto. Any payments made or actions taken by the Insurer in accordance with such Insurance Policies shall fully discharge the Insurer from liability. ARTICLE 8 Amendments and Miscellaneous 8.1 This Agreement shall not be modified or amended except by a written instrument signed by Sysco and the Employee. This Agreement shall be binding upon the administrators, assigns and successors of the parties to this Agreement. 8.2 The provisions of this Agreement shall be construed and enforced according to the laws of the State of Texas, except to the extent preempted by federal law. 8.3 This Agreement and the Plan contain the entire contract between the parties and constitute a complete integration of the representations, covenants and promises of the Employee and Sysco. In case of a conflict, express or implied, between the terms of the Plan and this Agreement, the terms of the Plan will govern. 8.4 This Agreement is not the basic employment contract between Sysco and the Employee and Sysco reserves the unqualified and unrestricted right to terminate the services of the Employee on exactly the same basis as if this Agreement had never been entered into. -11- <PAGE> 21 8.5 The Employee shall have no interest or rights in Sysco's Investment in any Insurance Policy. ARTICLE 9 ERISA Provisions 9.1 Sysco is the named fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974 and shall have the authority to control and manage the operation and administration of the Plan. 9.2 The funding policy of this Plan will be through premium payments to the Insurer as specified in this Agreement. 9.3 The basis of payments from the Plan will consist of payments by the Insurer in accordance with the Insurance Policies. 9.4 Claims for death benefits are established under the Insurance Policy by the Insurer. If for any reason a claim for benefits under the Plan other than death benefits is denied, Sysco shall deliver to the claimant a written explanation setting forth the specific reasons for the denial, pertinent references to the Plan section on which the denial was based, such other data as may be pertinent and information on procedures to be followed by the claimant in obtaining a review of his or her claim, all written in a manner calculated to be understood by the claimant. For this purpose: (a) The claimant's claim shall be deemed filed when presented orally or in writing to Sysco. (b) Sysco's explanation shall be in writing and delivered to the claimant within ninety days of the date the claim is filed. -12- <PAGE> 22 The claimant shall have sixty days following his or her receipt of the denial of the claim to file with Sysco a written request for review of the denial. For such review, the claimant or his or her representative may submit pertinent documents and written issues and comments. Sysco shall decide the issue on review and furnish the claimant with a copy within sixty days of receipt of the claimant's request for review of his or her claim. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent plan provisions on which the decision is based. If a copy of the decision is not so furnished to the claimant within such sixty days, the claim shall be deemed denied on review. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on this _____ day of ________________, ______. SYSCO CORPORATION, EMPLOYER By --------------------------------------- ----------------------------------------- _____________________, Employee -13- <PAGE> 23 SCHEDULE 1 The Insurance Policy or Insurance Policies covered by the foregoing Split Dollar Life Insurance Agreement between Sysco Corporation and the Employee include the following: 1. Insurer: ________________________________ 2. Policy No. ______________________________ 3. Initial Face Amount: ______________________ 4. Insured(s): ______________________________ 5. Sysco Premium: $_________ annually from __________ through __________ 6. Employee section 3.3 Reimbursement: from __________ through __________ EXECUTED this _____ day of ___________________, __________. SYSCO CORPORATION, EMPLOYER By --------------------------------------- ------------------------------------------ ______________________, Employee -14- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.N <SEQUENCE>5 <DESCRIPTION>EXECUTIVE COMPENSATION ADJUSTMENT AGRMT - LINDIG <TEXT> <PAGE> 1 EXHIBIT 10(n) EXECUTIVE COMPENSATION ADJUSTMENT AGREEMENT This Executive Compensation Adjustment Agreement ("Agreement") made and entered into between Sysco Corporation ("Sysco") and Bill M. Lindig ("Officer") W I T N E S S E T H WHEREAS, the Officer is currently the Chairman and Chief Executive Officer of Sysco and his experience and knowledge of the affairs of Sysco, his reputation and contacts in the industry are all extremely valuable to Sysco; and WHEREAS, the Officer is currently a participant in the Sysco Corporation Executive Deferred Compensation Plan ("EDCP") and the Sysco Corporation Supplemental Executive Retirement Plan ("SERP"); and WHEREAS, Sysco has adopted the Sysco Corporation Split Dollar Life Insurance Plan ("the Split Dollar Plan") which is designed to encourage certain employees to continue in the service of Sysco by offering such employees assistance in providing life insurance protection for the employees' families; and WHEREAS, Sysco wishes to offer split dollar life insurance coverage for the Officer's family as an alternative to part of the benefits provided under the EDCP and the SERP; and WHEREAS, the Officer wishes to take advantage of the split dollar life insurance coverage offered by Sysco as an alternative to some of the Officer's benefits provided under the EDCP and the SERP; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, Sysco and the Officer agree as follows: 1. Split Dollar Plan. Contemporaneously with the execution of this Agreement, the Compensation and Stock Option Committee of the Sysco Board of Directors appointed under the Split Dollar Plan will designate the Officer as a participant in the Split Dollar Plan and Sysco and David Brett Lindig and Mark Bradley Lindig, co-trustees (as the Officer's designee), of the Lindig 1999 Family Trusts ("Trust"), created by that certain instrument dated September 30, 1999, shall execute the Split Dollar Life Insurance Agreement ("Split Dollar Agreement") attached hereto as Exhibit A and incorporated herein for all purposes. 2. Partial Waiver of EDCP Benefits. Subject to the conditions of paragraph 4, as a requirement for participation in the Split Dollar Plan, Officer hereby irrevocably waives, renounces, and forfeits any and all rights to the Officer's benefits credited to his Account in the Deferred Compensation Ledger maintained by the EDCP plan Committee under the EDCP as of 10-14, 1999; provided, however, this waiver, renunciation, and forfeiture does not apply to amounts which may be credited to the Officer's said Account in the special Deferred Compensation Ledger under the EDCP from and after said date; provided -1- <PAGE> 2 further any interest credited to the Officer's said Account under the EDCP will apply only to Officer deferrals and Sysco's Company Matches (as defined in the EDCP) from and after said date. 3. Partial Waiver of SERP Benefits. Subject to the conditions of paragraph 4, as a requirement for participation in the Split Dollar Plan, Officer hereby irrevocably waives, renounces, and forfeits $13,487.50 of the monthly SERP retirement benefit for the Officer in the form of an age 65, 5 year certain and life annuity as calculated under Article 4.1 of the SERP prior to the adjustment for vesting. After such reduction and the application of vesting, the resulting amount will be adjusted for the form and time of payment as specified under Article 4.2 of the SERP. In calculating the death benefit under Article 5 of the SERP, the commuted lump sum values referenced in Article 5 will be reduced by the commuted lump sum value of the monthly retirement benefit forfeited above. 4. Conditions on Waiver. The partial waivers, renunciations, and forfeitures contained in paragraphs 2 and 3 are conditioned upon each of the two insurance policies initially covered by the Split Dollar Agreement not being set aside for material misrepresentations in its application and the death proceeds of each such policy not being limited to premiums paid because an insured dies by suicide. Such conditions will lapse with regard to each such policy two years after the date of issue of such policy. Should only one of such policies fail to meet the conditions of this paragraph, the partial waiver, renunciation and forfeiture of EDCP and SERP benefits in paragraphs 2 and 3 shall be reduced by 67.2% if the John Hancock Mutual Life Insurance Company policy fails to meet said conditions or by 33.8% if the Pacific Life Insurance Company policy fails to meet said conditions. If both of the insurance policies initially covered by the Split Dollar Agreement fail to meet either of the conditions of this paragraph, the partial waiver, renunciation, and forfeiture of EDCP and SERP benefits in paragraphs 2 and 3 shall be null and void and this Agreement shall terminate. 5. Reimbursement Bonuses. Sysco agrees to pay the following reimbursement bonuses to the Officer or his affiliate within a reasonable time after certification to Sysco of the amount subject to reimbursement: a. Sysco shall bonus to the Officer or his affiliate an amount equal to the term premium payment required of the trustee of the Trust pursuant to section 3.3 of the Split Dollar Agreement. b. Sysco shall bonus an amount equal to any Federal gift taxes paid by the Officer or his affiliate because of contributions, whether direct, indirect or deemed, to the Trust to cover the portion of the premium required to be paid by the Trust under section 3.3 of the Split Dollar Agreement or because of any economic benefit attributable to the cost of current life insurance protection to -2- <PAGE> 3 which the Trust is entitled under the Split Dollar Agreement which constitutes a gift to the Trust by the Officer or his affiliate. As an administrative convenience, said premium contribution or said current life insurance benefit will be deemed to be a gift by the Officer or his affiliate at highest marginal Federal gift tax bracket regardless of whether the Officer or his affiliate pay any or a lesser amount of gift tax. The bonus will be paid to the Officer or his affiliate upon certification to Sysco of the amount of said premium contribution or current life insurance protection benefit for the taxable year of the Officer or his affiliate. No bonus is required for any other gift or any generation-skipping transfer, direct, indirect or deemed, from the Officer or his affiliate to the Trust caused under the Split Dollar Agreement except for gifts of said premium contribution or for said current life insurance protection benefit to which the Trust is entitled. c. Sysco shall bonus annually to the Officer or his affiliate a fixed dollar amount to offset fees paid to a tax return preparer by the Officer or his affiliate for any state or Federal gift tax or generation-skipping transfer tax return which includes a gift or generation-skipping transfer which results from this Agreement or the Split Dollar Agreement regardless of whether such a return was filed and regardless of the amount of tax return preparer fees paid by the Officer or his affiliate. The fixed dollar amount in 2000 will be a total of $5,000. For 2001, the fixed dollar amount will be $1,000 for each gift tax return. For each year beginning in 2002, the fixed dollar amount for each gift tax return will be the fixed dollar amount for the previous year increased by 5%. d. Should a dispute with the Internal Revenue Service or a state tax authority develop between the Officer or his affiliate concerning the income, gift or generation-skipping transfer tax results attributable to this Agreement, the waiver of the Officer's accrued benefit under the EDCP or the SERP, or the Split Dollar Agreement, Sysco agrees to pay the Officer's or his affiliate's reasonable accounting and legal fees and court and other costs incurred in any administrative proceedings or litigation concerning assessment or proposed assessment of additional taxes involving their state or Federal gift tax, income tax, or generation-skipping transfer tax returns based upon such tax results including, litigation of a notice of tax deficiency, filing a refund claim or suing for a refund in court which concerns said dispute of income, gift or generation-skipping transfer tax results. Sysco shall have no liability to pay for any state or Federal income, gift or generation-skipping transfer tax liability, including penalties or interest thereon, unless expressly authorized elsewhere in this Agreement. Sysco -3- <PAGE> 4 will pay such fees or costs directly to the provider upon being furnished by the Officer or his affiliate with a statement or other evidence of the fee or cost payable in a format acceptable to Sysco. 6. Federal Income Tax Bonuses. Sysco agrees to pay the following supplemental bonuses within a reasonable time after the close of the calendar year during which the subject reimbursement bonuses were paid: a. Sysco shall make a supplemental bonus to the Officer or his affiliate to cover any Federal income tax liability resulting from a reimbursement to the Officer or his affiliate pursuant to subparagraphs a, b and c of paragraph 5 above. The amount of the supplemental bonus shall be the difference between (i) an amount determined by dividing the amount of the reimbursement by one minus the highest Federal individual marginal income tax bracket for the year of such reimbursement under subparagraphs a, b and c of paragraph 5 above expressed as a decimal, and (ii) the amount of said reimbursement. b. With regard to any payment of the Officer's or his affiliate's reasonable accounting and legal fees or court or other costs pursuant to subparagraph d of paragraph 5 above, Sysco shall make a supplemental bonus to the Officer or his affiliate to cover any Federal income tax liability resulting from such payment. The parties acknowledge that the determination of such Federal income tax liability is made complicated because of the potential deductibility by the Officer or his affiliate of such accounting and legal fees and court and other costs on his or her Federal income tax return. The parties hereby agree that the supplemental bonus required by this subparagraph shall be calculated in the following two steps: i. The Federal income tax caused by such payment shall be determined by the difference, if any, between (a) all Federal income taxes payable for the year of reimbursement by the Officer or affiliate calculated by including the subparagraph d of paragraph 5 payment in gross income reduced by the deduction allowable for the expenditure covered by such payment, if any, (whether or not the deduction is taken by the Officer or affiliate on the Federal income tax return for the taxable year of the reimbursement) and (b) all Federal income taxes payable for the year of payment by the Officer or affiliate calculated by excluding -4- <PAGE> 5 the subparagraph d of paragraph 5 reimbursement from gross income without any deduction for the expenditure covered by such reimbursement. ii. The amount of supplemental bonus required by this subparagraph shall be the difference between (a) an amount determined by dividing the Federal income tax difference determined by subparagraph bi of paragraph 6 above by one minus the highest Federal individual marginal income tax bracket for the year of such payment under subparagraph d of paragraph 5 above expressed as a decimal, and (b) the Federal income tax difference determined by subparagraph bi of paragraph 6 above. Should the Internal Revenue Service finally determine with regard to a Federal income tax return for the Officer or his affiliate that any of the assumptions pursuant to subparagraph bi(a) of paragraph 6 concerning inclusion of the payment in gross income or the deductibility of all or part of the expenditure covered by the payment is incorrect, the calculations in subparagraph bi(a) of paragraph 6 above shall be adjusted to reflect such final determination and the amount of supplemental bonus by this subparagraph b of paragraph 6 shall be recalculated and Sysco shall pay, without interest, to the Officer or his affiliate any increase in such supplemental bonus caused by the recalculation and the Officer or his affiliate shall return to Sysco that part of any supplemental bonus received in excess of such recalculation. c. For years during which there are no premium reimbursements by Sysco pursuant to subparagraph a of paragraph 5 above but the Officer or his affiliate realizes an economic benefit equal to the cost of current life insurance protection (calculated as specified in section 3.3 of the Split Dollar Agreement) to which the Trust is entitled under the Split Dollar Agreement, Sysco shall bonus the Officer or his affiliate an amount to cover Federal income tax liability resulting from the realized economic benefit equal to the cost of current life insurance protection to which the Trust is entitled under the Split Dollar Agreement. The amount of the bonus shall be the difference between (i) an amount determined by dividing the amount of said economic benefit by one minus the highest Federal individual marginal income tax bracket for the year said economic benefit is realized expressed as a decimal, and (ii) the amount of said economic benefit. No bonus is required for any economic benefit realized by the Officer or his affiliate under the Split Dollar Agreement except for the cost of current life insurance protection to which the Trust is entitled. -5- <PAGE> 6 7. Ceiling on Reimbursement and Federal Income Tax Bonuses. The bonuses specified in paragraphs 5 and 6 above, in the aggregate, shall not exceed $3,898.202. 8. Payment of Taxes and Withholding. The Officer or his affiliate will be required to pay his share of any Federal or state income, social security or other taxes that are required to be paid due to the bonuses specified in paragraphs 5 and 6 above and Sysco will withhold such taxes to the extent required by applicable law and regulations. 9. Special Deduction Bonus. The parties do not anticipate that there will be any additional income tax consequences to the Officer or his affiliate from this Agreement, the waiver of his accrued benefit under the EDCP or the SERP, and the Split Dollar Agreement other than that attributable to the benefit from the cost of current life insurance protection to which the Trust is entitled and the bonuses discussed in paragraphs 5 and 6. However, should additional income be realized by the Officer or his affiliate because of this Agreement, the waiver of his accrued benefit under the EDCP or the SERP, or the Split Dollar Agreement and should Sysco be entitled to a Federal income tax deduction against its gross income for such other income realized by the Officer or his affiliate, then Sysco agrees to bonus to the Officer or his affiliate who realized such other income pursuant to this Agreement, the waiver of the Officer's benefit under the EDCP or the SERP or the Split Dollar Agreement an amount equal to the difference between (i) an amount determined by dividing the amount of said deduction by one minus the highest Federal corporate marginal income tax bracket for the year such deduction is available to Sysco expressed as a decimal, and (ii) the amount of said deduction. 10. Dispute Resolution. Sysco and the Officer have entered into this Agreement in good faith and in belief that it is mutually advantageous to them. It is with the same spirit of cooperation that they pledge to attempt to resolve any dispute amicably without the necessity of litigation. Accordingly, they agree that if any dispute arises between them relating to this Agreement or the Split Dollar Agreement (a "Dispute"), they will first utilize the mediation procedures specified in this paragraph prior to any arbitration. a. Initiation of Mediation. The party seeking to initiate mediation (the "Initiating Party") shall give written notice to the other party, describing in general terms the nature of the Dispute, and the Initiating Party's claim for relief. Sysco and the Officer or the Officer's affiliate shall have thirty business days from the date of notice to select a mutually agreeable mediator. In consultation with the mediator selected, the parties shall promptly designate a mutually convenient time and place for mediation, and unless circumstances require otherwise, such time to be not later than forty-five days after the selection of the mediator. -6- <PAGE> 7 b. Conduct of Mediation. In the mediation, each party shall be represented by one or more individuals with authority to settle the Dispute and may be represented by counsel. In addition, each party may, with permission of the mediator, bring such additional persons as needed to respond to questions, contribute information, and participate in the negotiations. The parties agree to sign a document that provides that the mediator shall be governed by the provisions of Chapter 154 of the Texas Civil Practice and Remedies Code or such other rules as the mediator shall prescribe. The parties commit to participate in the proceedings in good faith and with the intention of resolving the Dispute if at all possible. c. Termination of Procedure. The parties agree to participate in the mediation procedure to its conclusion. The mediation shall be terminated (i) by the execution of a settlement agreement by the parties, (ii) by a declaration of the mediator that mediation is terminated, or (iii) by a written declaration by one of the parties to the effect that the mediation process is terminated at the conclusion of one full day's mediation session. d. Arbitration. The parties agree to participate in good faith in the mediation to its conclusion. If the parties are not successful in resolving the Dispute through mediation, then the parties agree that the Dispute shall be settled by arbitration in accordance with the provisions of the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) shall be final and may be entered in any court having jurisdiction. The parties further agree that the award rendered by the arbitrator(s) may include an award of attorneys' fees and costs related to the arbitration. e. Fees of Mediation; Disqualification. The fees and expenses of the mediator shall be shared equally by the parties. The mediator shall be disqualified as a witness, consultant, expert or counsel by any party with respect to the Dispute and any related matters. f. Confidentiality. The entire mediation process is confidential, and no stenographic, visual or audio records shall be made. All conduct, statements, promises, offers, views and opinions, whether oral or written, made in the course of mediation by any party, agent, employee, representative, or other invitee and by the mediator are confidential and shall, in addition and where appropriate, be deemed privileged. Such conduct, statements, promises, offers, views and opinions shall not be disclosed to anyone, not an agent, employee, expert, witness, or representative of any of the parties. -7- <PAGE> 8 11. Officer's Affiliate. References to an affiliate of the Officer include such persons and entities who are the successors of the Officer (e.g., administrator or executor of his estate, his assigns, or his heirs, legatees, or devisees) or who are related to the Officer in connection with this Agreement or the Split Dollar Agreement (e.g., the Officer's wife, the Trust, or the trustee of the Trust and their heirs or successors). 12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Officer and Sysco, their successors, assigns, heirs, executors, administrators, and other beneficiaries. 13. Amendment. No amendment or variations of the terms of this Agreement shall be valid, unless made in writing and signed by Sysco and the Officer. 14. Not Employment Contract. This Agreement is not the basic employment contract between Sysco and the Officer nor is it evidence of any agreement or understanding, express or implied, that Sysco will employ the Officer in any particular position or at any particular rate of remuneration. Sysco reserves the unqualified and unrestricted right to terminate the services of the Officer on exactly the same basis as if this Agreement had never been entered into although any rights or obligations of Sysco and the Officer under this Agreement shall survive such termination of employment. 15. Governing Law. The provisions of this Agreement shall be construed and enforced according to the laws of the State of Texas. 16. Entire Agreement. This Agreement contains the entire contract between Sysco and the Officer and constitutes a complete integration of the representations, covenants and promises of Sysco and the Officer. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on this 25th day of October, 1999. SYSCO CORPORATION By: /s/ MICHAEL C. NICHOLS ----------------------------------- MICHAEL C. NICHOLS, Vice President /s/ BILL M. LINDIG ---------------------------------- BILL M. LINDIG, Officer -8- <PAGE> 9 The Officer's wife is fully aware, understands, and fully consents and agrees to the provisions of this Agreement including its binding effect upon any community property interest she may have in the EDCP and SERP benefits irrevocably waived, renounced, and forfeited by the Officer and any economic benefits realized under the Split Dollar Agreement. Such awareness, understanding, consent and agreement is evidenced by signing this Agreement. /s/ BOBETTA C. LINDIG ---------------------------------------- BOBETTA C. LINDIG -9- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.O <SEQUENCE>6 <DESCRIPTION>EXECUTIVE COMPENSATION ADJUSTMENT AGRMT - COTROS <TEXT> <PAGE> 1 EXHIBIT 10(o) EXECUTIVE COMPENSATION ADJUSTMENT AGREEMENT This Executive Compensation Adjustment Agreement ("Agreement") made and entered into between Sysco Corporation ("Sysco") and Charles H. Cotros ("Officer") W I T N E S S E T H WHEREAS, the Officer is currently the President and Chief Operating Officer of Sysco and his experience and knowledge of the affairs of Sysco, his reputation and contacts in the industry are all extremely valuable to Sysco; and WHEREAS, the Officer is currently a participant in the Sysco Corporation Executive Deferred Compensation Plan ("EDCP") and the Sysco Corporation Supplemental Executive Retirement Plan ("SERP"); and WHEREAS, Sysco has adopted the Sysco Corporation Split Dollar Life Insurance Plan ("the Split Dollar Plan") which is designed to encourage certain employees to continue in the service of Sysco by offering such employees assistance in providing life insurance protection for the employees' families; and WHEREAS, Sysco wishes to offer split dollar life insurance coverage for the Officer's family as an alternative to part of the benefits provided under the EDCP and the SERP; and WHEREAS, the Officer wishes to take advantage of the split dollar life insurance coverage offered by Sysco as an alternative to some of the Officer's benefits provided under the EDCP and the SERP; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, Sysco and the Officer agree as follows: 1. Split Dollar Plan. Contemporaneously with the execution of this Agreement, the Compensation and Stock Option Committee of the Sysco Board of Directors appointed under the Split Dollar Plan will designate the Officer as a participant in the Split Dollar Plan and Sysco and Harry Charles Cotros, trustee (as the Officer's designee), of the Cotros 1999 Family Trust ("Trust"), created by that certain instrument dated September 13, 1999, shall execute the Split Dollar Life Insurance Agreement ("Split Dollar Agreement") attached hereto as Exhibit A and incorporated herein for all purposes. 2. Partial Waiver of EDCP Benefits. Subject to the conditions of paragraph 4, as a requirement for participation in the Split Dollar Plan, Officer hereby irrevocably waives, renounces, <PAGE> 2 and forfeits 35% of the Officer's benefits credited to his Account in the Deferred Compensation Ledger maintained by the EDCP plan Committee under the EDCP as of October 14, 1999; provided, however, this waiver, renunciation, and forfeiture does not apply to the Officer's benefits credited to the Officer's said Account as of such date in excess of 35% and amounts which may be credited to the Officer's said Account in the special Deferred Compensation Ledger under the EDCP from and after said date; provided further any interest credited to the Officer's said Account after said date under the EDCP will apply only to the Officer's benefits credited to Officer's said Account as of such date and to Officer deferrals and Sysco's Company Matches (as defined in the EDCP) from and after said date. 3. Partial Waiver of SERP Benefits. Subject to the conditions of paragraph 4, as a requirement for participation in the Split Dollar Plan, Officer hereby irrevocably waives, renounces, and forfeits $18,658.88 of the monthly SERP retirement benefit for the Officer in the form of an age 65, 5 year certain and life annuity as calculated under Article 4.1 of the SERP prior to the adjustment for vesting. After such reduction and the application of vesting, the resulting amount will be adjusted for the form and time of payment as specified under Article 4.2 of the SERP. In calculating the death benefit under Article 5 of the SERP, the commuted lump sum values referenced in Article 5 will be reduced by the commuted lump sum value of the monthly retirement benefit forfeited above. 4. Conditions on Waiver. The partial waivers, renunciations, and forfeitures contained in paragraphs 2 and 3 are conditioned upon each of the two insurance policies initially covered by the Split Dollar Agreement not being set aside for material misrepresentations in its application and the death proceeds of each such policy not being limited to premiums paid because an insured dies by suicide. Such conditions will lapse with regard to each such policy two years after the date of issue of such policy. Should only one of such policies fail to meet the conditions of this paragraph, the partial waiver, renunciation and forfeiture of EDCP and SERP benefits in paragraphs 2 and 3 shall be reduced by 36.5% if the John Hancock Mutual Life Insurance Company policy fails to meet said conditions or by 63.5% if the Pacific Life Insurance Company policy fails to meet said conditions. If both of the insurance policies initially covered by the Split Dollar Agreement fail to meet either of the conditions of this paragraph, the partial waiver, renunciation, and forfeiture of EDCP and SERP benefits in paragraphs 2 and 3 shall be null and void and this Agreement shall terminate. -2- <PAGE> 3 5. Reimbursement Bonuses. Sysco agrees to pay the following reimbursement bonuses to the Officer or his affiliate within a reasonable time after certification to Sysco of the amount subject to reimbursement: a. Sysco shall bonus to the Officer or his affiliate an amount equal to the term premium payment required of the trustee of the Trust pursuant to section 3.3 of the Split Dollar Agreement. b. Sysco shall bonus an amount equal to any Federal gift taxes paid by the Officer or his affiliate because of contributions, whether direct, indirect or deemed, to the Trust to cover the portion of the premium required to be paid by the Trust under section 3.3 of the Split Dollar Agreement or because of any economic benefit attributable to the cost of current life insurance protection to which the Trust is entitled under the Split Dollar Agreement which constitutes a gift to the Trust by the Officer or his affiliate. As an administrative convenience, said premium contribution or said current life insurance benefit will be deemed to be a gift by the Officer or his affiliate at the highest marginal Federal gift tax bracket regardless of whether the Officer or his affiliate paid any or a lesser amount of gift tax. The bonus will be paid to the Officer or his affiliate upon certification to Sysco of the amount of said premium contribution or current life insurance protection benefit for the taxable year of the Officer or his affiliate. No bonus is required for any other gift or any generation-skipping transfer, direct, indirect or deemed, from the Officer or his affiliate to the Trust caused under the Split Dollar Agreement except for gifts of said premium contribution or for said current life insurance protection benefit to which the Trust is entitled. c. Sysco shall bonus annually to the Officer or his affiliate a fixed dollar amount to offset fees paid to a tax return preparer by the Officer or his affiliate for any state or Federal gift tax or generation-skipping transfer tax return which includes a gift or generation-skipping transfer which results from this Agreement or the Split Dollar Agreement regardless of whether such a return was filed and regardless of the amount of tax return preparer fees paid by the Officer or his affiliate. The fixed dollar amount in 2000 will be a total of $5,000. For 2001, the fixed dollar amount will be $1,000 for each gift tax return. For each year beginning in 2002, the fixed -3- <PAGE> 4 dollar amount for each gift tax return will be the fixed dollar amount for the previous year increased by 5%. d. Should a dispute with the Internal Revenue Service or a state tax authority develop between the Officer or his affiliate concerning the income, gift or generation-skipping transfer tax results attributable to this Agreement, the waiver of the Officer's accrued benefit under the EDCP or the SERP, or the Split Dollar Agreement, Sysco agrees to pay the Officer's or his affiliate's reasonable accounting and legal fees and court and other costs incurred in any administrative proceedings or litigation concerning assessment or proposed assessment of additional taxes involving their state or Federal gift tax, income tax, or generation-skipping transfer tax returns based upon such tax results including, litigation of a notice of tax deficiency, filing a refund claim or suing for a refund in court which concerns said dispute of income, gift or generation-skipping transfer tax results. Sysco shall have no liability to pay for any state or Federal income, gift or generation-skipping transfer tax liability, including penalties or interest thereon, unless expressly authorized elsewhere in this Agreement. Sysco will pay such fees or costs directly to the provider upon being furnished by the Officer or his affiliate with a statement or other evidence of the fee or cost payable in a format acceptable to Sysco. 6. Federal Income Tax Bonuses. Sysco agrees to pay the following supplemental bonuses within a reasonable time after the close of the calendar year during which the subject reimbursement bonuses were paid: a. Sysco shall make a supplemental bonus to the Officer or his affiliate to cover any Federal income tax liability resulting from a reimbursement to the Officer or his affiliate pursuant to subparagraphs a, b and c of paragraph 5 above. The amount of the supplemental bonus shall be the difference between (i) an amount determined by dividing the amount of the reimbursement by one minus the highest Federal individual marginal income tax bracket for the year of such reimbursement under subparagraphs a, b and c of paragraph 5 above expressed as a decimal, and (ii) the amount of said reimbursement. b. With regard to any payment of the Officer's or his affiliate's reasonable accounting and legal fees or court or other costs pursuant to -4- <PAGE> 5 subparagraph d of paragraph 5 above, Sysco shall make a supplemental bonus to the Officer or his affiliate to cover any Federal income tax liability resulting from such payment. The parties acknowledge that the determination of such Federal income tax liability is made complicated because of the potential deductibility by the Officer or his affiliate of such accounting and legal fees and court and other costs on his or her Federal income tax return. The parties hereby agree that the supplemental bonus required by this subparagraph shall be calculated in the following two steps: i. The Federal income tax caused by such payment shall be determined by the difference, if any, between (a) all Federal income taxes payable for the year of reimbursement by the Officer or affiliate calculated by including the subparagraph d of paragraph 5 payment in gross income reduced by the deduction allowable for the expenditure covered by such payment, if any, (whether or not the deduction is taken by the Officer or affiliate on the Federal income tax return for the taxable year of the reimbursement) and (b) all Federal income taxes payable for the year of payment by the Officer or affiliate calculated by excluding the subparagraph d of paragraph 5 payment from gross income without any deduction for the expenditure covered by such reimbursement. ii. The amount of supplemental bonus required by this subparagraph shall be the difference between (a) an amount determined by dividing the Federal income tax difference determined by subparagraph bi of paragraph 6 above by one minus the highest Federal individual marginal income tax bracket for the year of such payment under subparagraph d of paragraph 5 above expressed as a decimal, and (b) the Federal income tax difference determined by subparagraph bi of paragraph 6 above. Should the Internal Revenue Service finally determine with regard to a Federal income tax return for the Officer or his affiliate that any of the assumptions pursuant to subparagraph bi(a) of paragraph 6 concerning inclusion of the payment in gross income or the deductibility of all or part of the expenditure covered by the payment -5- <PAGE> 6 is incorrect, the calculations in subparagraph bi(a) of paragraph 6 above shall be adjusted to reflect such final determination and the amount of supplemental bonus by this subparagraph b of paragraph 6 shall be recalculated and Sysco shall pay, without interest, to the Officer or his affiliate any increase in such supplemental bonus caused by the recalculation and the Officer or his affiliate shall return to Sysco that part of any supplemental bonus received in excess of such recalculation. c. For years during which there are no premium reimbursements by Sysco pursuant to subparagraph a of paragraph 5 above but the Officer or his affiliate realizes an economic benefit equal to the cost of current life insurance protection (calculated as specified in section 3.3 of the Split Dollar Agreement) to which the Trust is entitled under the Split Dollar Agreement, Sysco shall bonus the Officer or his affiliate an amount to cover Federal income tax liability resulting from the realized economic benefit equal to the cost of current life insurance protection to which the Trust is entitled under the Split Dollar Agreement. The amount of the bonus shall be the difference between (i) an amount determined by dividing the amount of said economic benefit by one minus the highest Federal individual marginal income tax bracket for the year said economic benefit is realized expressed as a decimal, and (ii) the amount of said economic benefit. No bonus is required for any economic benefit realized by the Officer or his affiliate under the Split Dollar Agreement except for the cost of current life insurance protection to which the Trust is entitled. 7. Ceiling on Reimbursement and Federal Income Tax Bonuses. The bonuses specified in paragraphs 5 and 6 above, in the aggregate, shall not exceed $2,882,652. 8. Payment of Taxes and Withholding. The Officer or his affiliate will be required to pay his share of any Federal or state income, social security or other taxes that are required to be paid due to the bonuses specified in paragraphs 5 and 6 above and Sysco will withhold such taxes to the extent required by applicable law and regulations. 9. Special Deduction Bonus. The parties do not anticipate that there will be any additional income tax consequences to the Officer or his affiliate from this Agreement, the waiver of his accrued benefit under the EDCP or the SERP, and the Split Dollar Agreement other than that attributable to the benefit from the cost of current life insurance protection to which the Trust is -6- <PAGE> 7 entitled and the bonuses discussed in paragraphs 5 and 6. However, should additional income be realized by the Officer or his affiliate because of this Agreement, the waiver of his accrued benefit under the EDCP or the SERP, or the Split Dollar Agreement and should Sysco be entitled to a Federal income tax deduction against its gross income for such other income realized by the Officer or his affiliate, then Sysco agrees to bonus to the Officer or his affiliate who realized such other income pursuant to this Agreement, the waiver of the Officer's benefit under the EDCP or the SERP or the Split Dollar Agreement an amount equal to the difference between (i) an amount determined by dividing the amount of said deduction by one minus the highest Federal corporate marginal income tax bracket for the year such deduction is available to Sysco expressed as a decimal, and (ii) the amount of said deduction. 10. Dispute Resolution. Sysco and the Officer have entered into this Agreement in good faith and in belief that it is mutually advantageous to them. It is with the same spirit of cooperation that they pledge to attempt to resolve any dispute amicably without the necessity of litigation. Accordingly, they agree that if any dispute arises between them relating to this Agreement or the Split Dollar Agreement (a "Dispute"), they will first utilize the mediation procedures specified in this paragraph prior to any arbitration. a. Initiation of Mediation. The party seeking to initiate mediation (the "Initiating Party") shall give written notice to the other party, describing in general terms the nature of the Dispute, and the Initiating Party's claim for relief. Sysco and the Officer or the Officer's affiliate shall have thirty business days from the date of notice to select a mutually agreeable mediator. In consultation with the mediator selected, the parties shall promptly designate a mutually convenient time and place for mediation, and unless circumstances require otherwise, such time to be not later than forty-five days after the selection of the mediator. b. Conduct of Mediation. In the mediation, each party shall be represented by one or more individuals with authority to settle the Dispute and may be represented by counsel. In addition, each party may, with permission of the mediator, bring such additional persons as needed to respond to questions, contribute information, and participate in the negotiations. The parties agree to sign a document that provides that the mediator shall be governed by the provisions of Chapter 154 of the Texas Civil Practice and Remedies Code or such other rules as the mediator -7- <PAGE> 8 shall prescribe. The parties commit to participate in the proceedings in good faith and with the intention of resolving the Dispute if at all possible. c. Termination of Procedure. The parties agree to participate in the mediation procedure to its conclusion. The mediation shall be terminated (i) by the execution of a settlement agreement by the parties, (ii) by a declaration of the mediator that mediation is terminated, or (iii) by a written declaration by one of the parties to the effect that the mediation process is terminated at the conclusion of one full day's mediation session. d. Arbitration. The parties agree to participate in good faith in the mediation to its conclusion. If the parties are not successful in resolving the Dispute through mediation, then the parties agree that the Dispute shall be settled by arbitration in accordance with the provisions of the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) shall be final and may be entered in any court having jurisdiction. The parties further agree that the award rendered by the arbitrator(s) may include an award of attorneys' fees and costs related to the arbitration. e. Fees of Mediation; Disqualification. The fees and expenses of the mediator shall be shared equally by the parties. The mediator shall be disqualified as a witness, consultant, expert or counsel by any party with respect to the Dispute and any related matters. f. Confidentiality. The entire mediation process is confidential, and no stenographic, visual or audio records shall be made. All conduct, statements, promises, offers, views and opinions, whether oral or written, made in the course of mediation by any party, agent, employee, representative, or other invitee and by the mediator are confidential and shall, in addition and where appropriate, be deemed privileged. Such conduct, statements, promises, offers, views and opinions shall not be disclosed to anyone, not an agent, employee, expert, witness, or representative of any of the parties. 11. Officer's Affiliate. References to an affiliate of the Officer include such persons and entities who are the successors of the Officer (e.g., administrator or executor of his estate, his assigns, or his heirs, legatees, or devisees) or who are related to the Officer in connection with this -8- <PAGE> 9 Agreement or the Split Dollar Agreement (e.g., the Officer's wife, the Trust, or the trustee of the Trust and their heirs or successors). 12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Officer and Sysco, their successors, assigns, heirs, executors, administrators, and other beneficiaries. 13. Amendment. No amendment or variations of the terms of this Agreement shall be valid, unless made in writing and signed by Sysco and the Officer. 14. Not Employment Contract. This Agreement is not the basic employment contract between Sysco and the Officer nor is it evidence of any agreement or understanding, express or implied, that Sysco will employ the Officer in any particular position or at any particular rate of remuneration. Sysco reserves the unqualified and unrestricted right to terminate the services of the Officer on exactly the same basis as if this Agreement had never been entered into although any rights or obligations of Sysco and the Officer under this Agreement shall survive such termination of employment. 15. Governing Law. The provisions of this Agreement shall be construed and enforced according to the laws of the State of Texas. 16. Entire Agreement. This Agreement contains the entire contract between Sysco and the Officer and constitutes a complete integration of the representations, covenants and promises of Sysco and the Officer. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on this 21st day of October, 1999. SYSCO CORPORATION By /s/ MICHAEL C. NICHOLS ---------------------------------------- MICHAEL C. NICHOLS, Vice President /s/ CHARLES H. COTROS ---------------------------------------- CHARLES H. COTROS, Officer The Officer's wife is fully aware, understands, and fully consents and agrees to the provisions of this Agreement including its binding effect upon any community property interest she -9- <PAGE> 10 may have in the EDCP and SERP benefits irrevocably waived, renounced, and forfeited by the Officer and any economic benefits realized under the Split Dollar Agreement. Such awareness, understanding, consent and agreement is evidenced by signing this Agreement. /s/ CONSTANCE COTROS ------------------------------------------ CONSTANCE COTROS -10- <PAGE> 11 EXHIBIT A SYSCO CORPORATION SPLIT DOLLAR LIFE INSURANCE AGREEMENT This Agreement made and entered into between Sysco Corporation, (the "Employer") and Harry Charles Cotros, Trustee of the Cotros 1999 Family Trust. W I T N E S S E T H WHEREAS, Sysco has adopted the Sysco Corporation Split Dollar Life Insurance Plan (the "Plan") which is designed to encourage certain employees to continue in the service of Sysco by offering such employees assistance in providing life insurance protection for the employees' family; and WHEREAS, a Committee (the "Committee") has been established by the Plan to administer the Plan and to designate employees of Sysco who are eligible to participate in the Plan; and WHEREAS, the Committee has selected Charles H. Cotros (the "Employee") to be a participant under the Plan because the services of the Employee, the Employee's experience and knowledge of the affairs of Sysco, and the Employee's reputation and contacts in the industry are extremely valuable to Sysco; and WHEREAS, Sysco desires that the Employee remain in its service and wishes to receive the benefit of the Employee's knowledge, experience, reputation and contacts; and WHEREAS, Sysco is willing to encourage the Employee's continued service to Sysco by joining with the Trustee for the mutual benefit of the parties hereto in an investment of life insurance on the joint lives of the Employee and Constance P. Cotros, (the "Employee's spouse") so as to provide life insurance protection for the Employee's family; and <PAGE> 12 WHEREAS, the Trustee will be the owner of the Insurance Policies acquired pursuant to the terms of the Agreement, and Sysco's Investment in the Insurance Policies will be represented by an assignment from the Trustee to Sysco of limited ownership rights in the Insurance Policies; and WHEREAS, this plan is intended to qualify as a life insurance employee benefit plan as described in Revenue Ruling 64-328. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, Sysco and the Trustee agree as follows: ARTICLE 1 Definitions 1.1 "Agreement" means this agreement, as it may be amended from time to time. 1.2 "Change of Control" is defined in section 3.5. 1.3 "Committee" means the administrative committee under the Plan. 1.4 "Employee" means Charles H. Cotros. 1.5 "Employee's Spouse" means Constance P. Cotros. 1.6 "Insurance Policies" means the policies or policy shown on the attached Schedule 1, together with any other policies that may be added to the Agreement. 1.7 "Insurer" means an insurance company issuing an Insurance Policy subject to this Agreement. 1.8 "Plan" means the Sysco Corporation Split Dollar Life Insurance Plan. 1.9 "Rabbi Trust" means the Sysco Corporation Split Dollar Life Insurance Trust. 1.10 "Sysco" means Sysco Corporation. 1.11 "Sysco's Investment" means the interest of Sysco in the Insurance Policy as defined in Section 4.1 of the Agreement. -2- <PAGE> 13 1.12 "Trust" means the Cotros 1999 Family Trust created by that certain instrument dated September 13, 1999, between Charles H. Cotros and Constance P. Cotros, as grantors and Harry Charles Cotros, as trustee. 1.13 "Trustee" means Harry Charles Cotros or his successor in office as trustee of the Trust. ARTICLE 2 Insurance Policies The Trustee has purchased on behalf of the Trust insurance on the joint lives of the Employee and the Employee's spouse for the benefit and protection of the Employee's family under the Insurance Policy or Insurance Policies shown on the attached Schedule 1 in the face amounts as shown on such schedule. ARTICLE 3 Premium Payments 3.1 Sysco shall pay the required premium specified on Schedule 1 for each Insurance Policy on or before the due date. 3.2 Any dividends attributable to each Insurance Policy shall be applied as Sysco and the Trustee agree by an instrument in writing. 3.3 The Trustee shall pay to Sysco during each year the Insurance Policy is subject to this Agreement and during which Sysco makes a premium payment under section 3.1, an amount equal to the one-year term cost of the insurance protection to which the Trust is entitled under such Insurance Policy pursuant to the terms of this Agreement, including any term insurance rider and any insurance purchased by dividends, and such cost is to be determined under the principles established by applicable U.S. Treasury Department pronouncements, rulings and regulations in effect for -3- <PAGE> 14 determining such costs for insurance protection. The Trustee shall reimburse Sysco for such one-year term cost within a reasonable time after payment of the required premium to the Insurer by Sysco on each Insurance Policy under section 3.1. (a) Until changed by U.S. Treasury Department pronouncements, rulings or regulations, the one-year term cost of insurance protection on a second to die policy on the joint lives of the Employee and the Employee's spouse shall be: (i) With regard to the Pacific Life Insurance Company Policy listed on Schedule 1, the lesser of the following: (y) the current published one-year term rates available to all standard risks of the Insurer issuing such insurance protection, or (z) U.S. Life Table 38. (ii) With regard to the John Hancock Mutual Life Insurance Company Policy listed on Schedule 1, U.S. Life Table 38. (b) Until changed by U.S. Treasury Department pronouncements, rulings or regulations, the one-year term cost of insurance protection on the single life of the Employee or the Employee's spouse (including the single life of the survivor after the death of the first of the Employee and the Employee's spouse to die if the Insurance Policy covers their joint lives), shall be the lesser of the following: (i) the current published one-year term rates of the Insurer issuing such insurance coverage, pursuant to the guidelines set forth in Rev. Rul. 66-110 and Rev. Rul. 67-154, or -4- <PAGE> 15 (ii) an amount determined in accordance with the tables set forth in Rev. Rul. 55-747 (called the "PS 58 costs"). 3.4 Upon a Change of Control, Sysco shall, as soon as possible, but in no event longer than ninety days following the Change of Control, as defined herein, make an irrevocable contribution to the Rabbi Trust in an amount equal to the present value, using a 5% interest factor, of the remaining aggregate premiums required to be paid by Sysco on Schedule 1 for each Insurance Policy. The trustee of the Rabbi Trust shall pay future premiums for such Insurance Policy from such contributions and the appreciation and earnings thereon; provided, however, that, should such contributions and appreciation and earnings thereon prove insufficient to pay all of the premiums required by Schedule 1 for such Insurance Policy, Sysco shall remain liable to make such remaining premium payments. 3.5 For purposes of this Agreement, Change of Control shall mean the occurrence of one or more of the following events: (a) Any "person," including a "syndication" or "group" as those terms are used in Section 13(d)(3) of the Securities Act, is or becomes the beneficial owner, directly or indirectly, of securities of Sysco representing 20% or more of the combined voting power of Sysco's then outstanding "Voting Securities" which is any security which ordinarily possesses the power to vote in the election of the Board of Directors of Sysco without the happening of any precondition or contingency; (b) Sysco is merged or consolidated with another corporation and immediately after giving effect to the merger or consolidation either (i) less than 80% of the outstanding Voting Securities of the surviving or resulting entity are then beneficially owned in the aggregate by (x) the stockholders of Sysco immediately -5- <PAGE> 16 prior to such merger or consolidation, or (y) if a record date has been set to determine the stockholders of Sysco entitled to vote on such merger or consolidation, the stockholders of Sysco as of such record date, or (ii) the Board of Directors, or similar governing body, of the surviving or resulting entity does not have as a majority of its members the persons specified in subparagraph (c)(i) and (ii) below; (c) If at any time the following do not constitute a majority of the Board of Directors of Sysco (or any successor entity referred to in subparagraph (b) above): (i) Persons who are directors of Sysco on July 4, 1999; (ii) persons who, prior to their election as a director of Sysco (or successor entity if applicable) were nominated, recommended or endorsed by a formal resolution of the Board of Directors of Sysco; (d) If at any time during a calendar year a majority of the directors of Sysco are not persons who were directors at the beginning of the calendar year; and (e) Sysco transfers substantially all of its assets to another corporation which is a less than 80% owned subsidiary of Sysco. ARTICLE 4 Sysco's Investment 4.1 Sysco's Investment in each Insurance Policy shall be: (a) except as provided in subsection (b) below, the lesser of (1) the cash surrender value of the Insurance Policy and (2) the amounts paid by Sysco as premiums on such Insurance Policy under the provisions of section 3.1 with both (1) and (2) reduced by the amount of any indebtedness which may exist against such -6- <PAGE> 17 Insurance Policy and any unpaid interest on such indebtedness if said indebtedness was incurred after such Insurance Policy becomes subject to the Agreement and with (2) only reduced by the premiums paid by the Trustee with respect to such Insurance Policy under the provisions of section 3.3; (b) at any time upon the death of the last insured, the amounts paid by Sysco as premiums on such Insurance Policy under the provisions of section 3.1 less (1) the amount of any indebtedness which may exist against such Insurance Policy and any unpaid interest on such indebtedness if said indebtedness was incurred after such Insurance Policy becomes subject to this Agreement, and (2) the premiums paid by the Trustee with respect to such Insurance Policy under the provisions of section 3.3. 4.2 The Trustee will collaterally assign the Insurance Policies acquired pursuant to the terms of this Agreement to the Rabbi Trust as evidence of Sysco's Investment. The collateral assignment shall not be altered or changed without the written consent of Sysco. The Rabbi Trust shall have possession of the Insurance Policy during the term of this Agreement; provided, however, that the possessor of the Insurance Policy shall make such Insurance Policy available to the Insurer when it shall be necessary to endorse changes of beneficiary thereon in accordance with the Trustee's right to appoint beneficiaries as provided in this Agreement or to exercise any other rights of the Trustee to such Insurance Policy. 4.3 The rights of Sysco and the Rabbi Trust under the collateral assignment are restricted to (a) assigning Sysco's Investment in the Insurance Policy to the Trustee or the Trustee's designee upon payment of Sysco's Investment, (b) upon the death of the last insured, obtaining that portion of the Insurance Policy death proceeds in an amount equal to Sysco's Investment at such insured's -7- <PAGE> 18 death, and (c) upon surrender of the Insurance Policy, obtaining that portion of the surrender proceeds not in excess of Sysco's Investment. 4.4 Sysco and the Rabbi Trust are prohibited from taking any action that would endanger either the interest of the Trustee or the payment of the proceeds in excess of Sysco's Investment to the beneficiary designated by the Trustee upon the last insured's death. Prior to the termination of this Agreement, Sysco and the Rabbi Trust will not exercise the right to pledge the Insurance Policies, to surrender the Insurance Policies or paid up additions for cancellation or to partially surrender the Insurance Policies, to assign its rights to anyone other than the Trustee or the Trustee's designee, and to borrow against the Insurance Policies even for the purpose of paying premiums unless there has been a default by the Trustee under this Agreement. 4.5 The Trustee has the power to assign all rights of the Trustee in the Insurance Policies and under this Agreement, change the beneficiary designation on each Insurance Policy and exercise settlement options. In the event of an assignment, the assignee shall possess all of the rights and obligations of the Trustee under such Insurance Policy and this Agreement. The Trustee has all rights to the Insurance Policies, not specifically granted to Sysco by this Agreement; provided, however, that the Trustee may not exercise any rights in a manner which would endanger Sysco's Investment. 4.6 Sysco and the Trustee recognize that the investment of Sysco in the Insurance Policies and other assets held in the Rabbi Trust is also subject to the general creditors of Sysco as set forth in the Rabbi Trust. The Trustee and the beneficiaries of the Trust shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Rabbi Trust. Any rights created under the Plan or this Agreement shall be mere unsecured contractual rights of the Trustee and the -8- <PAGE> 19 beneficiaries of the Trust against Sysco. Any assets held by the Rabbi Trust will be subject to the claims of Sysco's general creditors under Federal and state law as specified in the Rabbi trust. 4.7 Any payments of Sysco's Investment in the Insurance Policy pursuant to the collateral assignment shall be first made from Insurance Policy cash values attributable to paid up additional life insurance and purchased by Insurance Policy dividends, if any. The Trustee shall have no interest in paid up additional life insurance protection, if any, except to the extent the death benefit or cash value thereof exceeds Sysco's Investment. ARTICLE 5 Termination This Agreement shall terminate on the happening of any one or more of the following events: (a) Mutual agreement of the parties; (b) Adjudication of Sysco as a bankrupt or a general assignment by Sysco to or for the benefit of creditors or dissolution of Sysco; (c) Surrender of all the Insurance Policies; (d) Payment in full to Sysco at any time of Sysco's Investment, at which time Sysco shall release the collateral assignment; (e) Cessation of Sysco's business; Additionally, Sysco, in its sole discretion, may terminate this Agreement upon any failure of the Trustee to pay premiums to Sysco as provided in section 3.3. With regard to each Insurance Policy, the Agreement shall terminate upon the expiration of the number of years specified on Schedule 1 for such Insurance Policy unless the agreement is otherwise terminated at an earlier date. -9- <PAGE> 20 The termination of employment with Sysco by the Employee for any reason, including the Employee's death, will not terminate this Agreement. ARTICLE 6 Termination of Sysco's Investment 6.1 Upon the death of the last insured, Sysco shall receive from the proceeds of all Insurance Policies payable upon such insured's death the full amount of Sysco's Investment in the death benefits in all such Insurance Policies. The balance of the proceeds of such Insurance Policies shall be paid (a) to the beneficiary designated by the Trustee or (b) if no such beneficiary has been designated, to the Trust. 6.2 In the event of the termination of this Agreement under Article 5 (except as provided in Section (d) of Article 5), the Trustee or the designee of the Trustee shall have ninety days in which to pay Sysco in an amount equal to Sysco's Investment in each affected Insurance Policy. Upon the payment of such an amount, Sysco and the Rabbi Trust shall release the collateral assignment of such Insurance Policies. If the Trustee or the designee of the Trustee does not make such payment to Sysco within such ninety day period, the Trustee may either (a) surrender such Insurance Policy as provided in the collateral assignment, or (b) transfer ownership of such Insurance Policy to Sysco, thereby discharging the obligation of the Trustee to purchase Sysco's Investment in such Insurance Policy and relinquishing all rights of the Trustee to such Insurance Policy under this Agreement. 6.3 Upon the surrender or partial surrender of any Insurance Policy covered by this Agreement or should the Trustee borrow against any Insurance Policy covered by this Agreement, the proceeds received upon such surrender, partial surrender or loan shall be used first to pay Sysco in an amount equal to Sysco's Investment in such Insurance Policy and any excess proceeds shall be paid to the Trust. -10- <PAGE> 21 ARTICLE 7 Insurers The Insurer(s) issuing the Insurance Polices shall not be deemed to be a party to this Agreement for any purpose, nor is the Insurer in any way responsible for its validity or its enforcement. The Insurer shall not be obligated to inquire as to the distribution or application of any monies, payable or paid by the Insurer under the Insurance Policies, if the Insurer makes appropriate payment or otherwise performs its contractual obligations in accordance with the terms of the Insurance Policies. The Insurer shall be bound only by the provisions of the Insurance Policies or an endorsement thereto. Any payments made or actions taken by the Insurer in accordance with such Insurance Policies shall fully discharge the Insurer from liability. ARTICLE 8 Amendments and Miscellaneous 8.1 This Agreement shall not be modified or amended except by a written instrument signed by Sysco and the Trustee. This Agreement shall be binding upon the administrators, assigns and successors of the parties to this Agreement. 8.2 The provisions of this Agreement shall be construed and enforced according to the laws of the State of Texas, except to the extent preempted by federal law. 8.3 This Agreement and the Plan contain the entire contract between the parties and constitute a complete integration of the representations, covenants and promises of the Employee and Sysco. In case of a conflict, express or implied, between the terms of the Plan and this Agreement, the terms of the Plan will govern. -11- <PAGE> 22 8.4 This Agreement is not the basic employment contract between Sysco and the Employee and Sysco reserves the unqualified and unrestricted right to terminate the services of the Employee on exactly the same basis as if this Agreement had never been entered into. 8.5 The Trustee shall have no interest or rights in Sysco's Investment in any Insurance Policy. ARTICLE 9 ERISA Provisions 9.1 Sysco is the named fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974 and shall have the authority to control and manage the operation and administration of the Plan. 9.2 The funding policy of this Plan will be through premium payments to the Insurer as specified in this Agreement. 9.3 The basis of payments from the Plan will consist of payments by the Insurer in accordance with the Insurance Policies. 9.4 Claims for death benefits are established under the Insurance Policy by the Insurer. If for any reason a claim for benefits under the Plan other than death benefits is denied, Sysco shall deliver to the claimant a written explanation setting forth the specific reasons for the denial, pertinent references to the Plan section on which the denial was based, such other data as may be pertinent and information on procedures to be followed by the claimant in obtaining a review of his or her claim, all written in a manner calculated to be understood by the claimant. For this purpose: (a) The claimant's claim shall be deemed filed when presented orally or in writing to Sysco. -12- <PAGE> 23 (b) Sysco's explanation shall be in writing and delivered to the claimant within ninety days of the date the claim is filed. The claimant shall have sixty days following his or her receipt of the denial of the claim to file with Sysco a written request for review of the denial. For such review, the claimant or his or her representative may submit pertinent documents and written issues and comments. Sysco shall decide the issue on review and furnish the claimant with a copy within sixty days of receipt of the claimant's request for review of his or her claim. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent plan provisions on which the decision is based. If a copy of the decision is not so furnished to the claimant within such sixty days, the claim shall be deemed denied on review. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on this _____ day of ________________________, _____. SYSCO CORPORATION, Employer By --------------------------------------- COTROS 1999 FAMILY TRUST, Trust By --------------------------------------- Harry Charles Cotros, Trustee -13- <PAGE> 24 SCHEDULE 1 The Insurance Policy or Insurance Policies covered by the foregoing Split Dollar Life Insurance Agreement between Sysco Corporation and the Employee include the following: 1. Insurer: John Hancock Mutual Life Insurance Company 2. Policy No. ______________________________ 3. Initial Face Amount: $5,000,000 4. Insured(s): Charles H. Cotros and Constance P. Cotros 5. Sysco Premium: $295,000 annually from 1999 through 2004 6. Trustee section 3.3 Reimbursement: from 1999 through 2004 7. Unless terminated earlier under the Agreement, the Agreement will terminate for this Policy on its anniversary date in 2018. 1. Insurer: Pacific Life Insurance Company 2. Policy No. ______________________________ 3. Initial Face Amount: $10,000,000 4. Insured(s): Charles H. Cotros and Constance P. Cotros 5. Sysco Premium: $615,504 annually from 1999 through 2003 6. Trustee section 3.3 Reimbursement: from 1999 through 2003 7. Unless terminated earlier under the Agreement, the Agreement will terminate for this Policy on its anniversary date in 2018. EXECUTED this _____ day of ___________________, __________. SYSCO CORPORATION, Employer By ---------------------------------------------- COTROS 1999 FAMILY TRUST, Trust By ---------------------------------------------- Harry Charles Cotros, Trustee -14- <PAGE> 25 EXHIBIT A SYSCO CORPORATION SPLIT DOLLAR LIFE INSURANCE AGREEMENT This Agreement made and entered into between Sysco Corporation, (the "Employer") and David Brett Lindig and Mark Bradley Lindig, Trustees of the Lindig 1999 Family Trusts. W I T N E S S E T H WHEREAS, Sysco has adopted the Sysco Corporation Split Dollar Life Insurance Plan (the "Plan") which is designed to encourage certain employees to continue in the service of Sysco by offering such employees assistance in providing life insurance protection for the employees' family; and WHEREAS, a Committee (the "Committee") has been established by the Plan to administer the Plan and to designate employees of Sysco who are eligible to participate in the Plan; and WHEREAS, the Committee has selected Bill M. Lindig (the "Employee") to be a participant under the Plan because the services of the Employee, the Employee's experience and knowledge of the affairs of Sysco, and the Employee's reputation and contacts in the industry are extremely valuable to Sysco; and WHEREAS, Sysco desires that the Employee remain in its service and wishes to receive the benefit of the Employee's knowledge, experience, reputation and contacts; and WHEREAS, Sysco is willing to encourage the Employee's continued service to Sysco by joining with the Trustee for the mutual benefit of the parties hereto in an investment of life insurance on the joint lives of the Employee and Bobetta C. Lindig, (the "Employee's spouse") so as to provide life insurance protection for the Employee's family; and <PAGE> 26 WHEREAS, the Trustee will be the owner of the Insurance Policies acquired pursuant to the terms of the Agreement, and Sysco's Investment in the Insurance Policies will be represented by an assignment from the Trustee to Sysco of limited ownership rights in the Insurance Policies; and WHEREAS, this plan is intended to qualify as a life insurance employee benefit plan as described in Revenue Ruling 64-328. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, Sysco and the Trustee agree as follows: ARTICLE 1 Definitions 1.1 "Agreement" means this agreement, as it may be amended from time to time. 1.2 "Change of Control" is defined in section 3.5. 1.3 "Committee" means the administrative committee under the Plan. 1.4 "Employee" means Bill M. Lindig. 1.5 "Employee's spouse" means Bobetta C. Lindig. 1.6 "Insurance Policies" means the policies or policy shown on the attached Schedule 1, together with any other policies that may be added to the Agreement. 1.7 "Insurer" means an insurance company issuing an Insurance Policy subject to this Agreement. 1.8 "Plan" means the Sysco Corporation Split Dollar Life Insurance Plan. 1.9 "Rabbi Trust" means the Sysco Corporation Split Dollar Life Insurance Trust. 1.10 "Sysco" means Sysco Corporation. 1.11 "Sysco's Investment" means the interest of Sysco in the Insurance Policy as defined in Section 4.1 of the Agreement. -2- <PAGE> 27 1.12 "Trust" means the Lindig 1999 Family Trusts created by that certain instrument dated September 30, 1999, between Bill Milton Lindig and Bobetta Jane Clayton Lindig, as grantors and David Brett Lindig, Mark Bradley Lindig and Chase Manhattan Bank Delaware, as trustees. 1.13 "Trustee" means for the purposes of this Agreement, David Brett Lindig and Mark Bradley Lindig or their successors in office as individual trustees of the Trust. Pursuant to express provisions of the Trust, the individual trustees have the sole authority to execute this Agreement and Chase Manhattan Bank Delaware, the corporate co-trustee, has no such authority. ARTICLE 2 Insurance Policies The Trustee has purchased on behalf of the Trust insurance on the joint lives of the Employee and the Employee's spouse for the benefit and protection of the Employee's family under the Insurance Policy or Insurance Policies shown on the attached Schedule 1 in the face amounts as shown on such schedule. ARTICLE 3 Premium Payments 3.1 Sysco shall pay the required premium specified on Schedule 1 for each Insurance Policy on or before the due date. 3.2 Any dividends attributable to each Insurance Policy shall be applied as Sysco and the Trustee agree by an instrument in writing. 3.3 The Trustee shall pay to Sysco during each year the Insurance Policy is subject to this Agreement and during which Sysco makes a premium payment under section 3.1, an amount equal to the one-year term cost of the insurance protection to which the Trust is entitled under such Insurance Policy pursuant to the terms of this Agreement, including any term insurance rider and any -3- <PAGE> 28 insurance purchased by dividends, and such cost is to be determined under the principles established by applicable U.S. Treasury Department pronouncements, rulings and regulations in effect for determining such costs for insurance protection. The Trustee shall reimburse Sysco for such one-year term cost within a reasonable time after payment of the required premium to the Insurer by Sysco on each Insurance Policy under section 3.1. (a) Until changed by U.S. Treasury Department pronouncements, rulings or regulations, the one-year term cost of insurance protection on a second to die policy on the joint lives of the Employee and the Employee's spouse shall be: (i) With regard to the Pacific Life Insurance Company Policy listed on Schedule 1, the lesser of the following: (y) the current published one-year term rates available to all standard risks of the Insurer issuing such insurance protection, or (z) U.S. Life Table 38. (ii) With regard to the John Hancock Mutual Life Insurance Company Policy listed on Schedule 1, U.S. Life Table 38. (b) Until changed by U.S. Treasury Department pronouncements, rulings or regulations, the one-year term cost of insurance protection on the single life of the Employee or the Employee's spouse (including the single life of the survivor after the death of the first of the Employee and the Employee's spouse to die if the Insurance Policy covers their joint lives), shall be the lesser of the following: -4- <PAGE> 29 (i) the current published one-year term rates of the Insurer issuing such insurance coverage, pursuant to the guidelines set forth in Rev. Rul. 66-110 and Rev. Rul. 67-154, or (ii) an amount determined in accordance with the tables set forth in Rev. Rul. 55-747 (called the "PS 58 costs"). 3.4 Upon a Change of Control, Sysco shall, as soon as possible, but in no event longer than ninety days following the Change of Control, as defined herein, make an irrevocable contribution to the Rabbi Trust in an amount equal to the present value, using a 5% interest factor, of the remaining aggregate premiums required to be paid by Sysco on Schedule 1 for each Insurance Policy. The trustee of the Rabbi Trust shall pay future premiums for such Insurance Policy from such contributions and the appreciation and earnings thereon; provided, however, that, should such contributions and appreciation and earnings thereon prove insufficient to pay all of the premiums required by Schedule 1 for such Insurance Policy, Sysco shall remain liable to make such remaining premium payments. 3.5 For purposes of this Agreement, Change of Control shall mean the occurrence of one or more of the following events: (a) Any "person," including a "syndication" or "group" as those terms are used in Section 13(d)(3) of the Securities Act, is or becomes the beneficial owner, directly or indirectly, of securities of Sysco representing 20% or more of the combined voting power of Sysco's then outstanding "Voting Securities" which is any security which ordinarily possesses the power to vote in the election of the Board of Directors of Sysco without the happening of any precondition or contingency; -5- <PAGE> 30 (b) Sysco is merged or consolidated with another corporation and immediately after giving effect to the merger or consolidation either (i) less than 80% of the outstanding Voting Securities of the surviving or resulting entity are then beneficially owned in the aggregate by (x) the stockholders of Sysco immediately prior to such merger or consolidation, or (y) if a record date has been set to determine the stockholders of Sysco entitled to vote on such merger or consolidation, the stockholders of Sysco as of such record date, or (ii) the Board of Directors, or similar governing body, of the surviving or resulting entity does not have as a majority of its members the persons specified in subparagraph (c)(i) and (ii) below; (c) If at any time the following do not constitute a majority of the Board of Directors of Sysco (or any successor entity referred to in subparagraph (b) above): (i) Persons who are directors of Sysco on July 4, 1999; (ii) persons who, prior to their election as a director of Sysco (or successor entity if applicable) were nominated, recommended or endorsed by a formal resolution of the Board of Directors of Sysco; (d) If at any time during a calendar year a majority of the directors of Sysco are not persons who were directors at the beginning of the calendar year; and (e) Sysco transfers substantially all of its assets to another corporation which is a less than 80% owned subsidiary of Sysco. ARTICLE 4 Sysco's Investment 4.1 Sysco's Investment in each Insurance Policy shall be: -6- <PAGE> 31 (a) except as provided in subsection (b) below, the lesser of (1) the cash surrender value of the Insurance Policy and (2) the amounts paid by Sysco as premiums on such Insurance Policy under the provisions of section 3.1 with both (1) and (2) reduced by the amount of any indebtedness which may exist against such Insurance Policy and any unpaid interest on such indebtedness if said indebtedness was incurred after such Insurance Policy becomes subject to the Agreement and with (2) only reduced by the premiums paid by the Trustee with respect to such Insurance Policy under the provisions of section 3.3; (b) at any time upon the death of the last insured, the amounts paid by Sysco as premiums on such Insurance Policy under the provisions of section 3.1 less (1) the amount of any indebtedness which may exist against such Insurance Policy and any unpaid interest on such indebtedness if said indebtedness was incurred after such Insurance Policy becomes subject to this Agreement, and (2) the premiums paid by the Trustee with respect to such Insurance Policy under the provisions of section 3.3. 4.2 The Trustee will collaterally assign the Insurance Policies acquired pursuant to the terms of this Agreement to a Rabbi Trust established by Sysco as evidence of Sysco's Investment. The collateral assignment shall not be altered or changed without the written consent of Sysco. The Rabbi Trust shall have possession of the Insurance Policy during the term of this Agreement; provided, however, that the possessor of the Insurance Policy shall make such Insurance Policy available to the Insurer when it shall be necessary to endorse changes of beneficiary thereon in accordance with the Trustee's right to appoint beneficiaries as provided in this Agreement or to exercise any other rights of the Trustee to such Insurance Policy. -7- <PAGE> 32 4.3 The rights of Sysco and the Rabbi Trust under the collateral assignment are restricted to (a) assigning Sysco's Investment in the Insurance Policy to the Trustee or the Trustee's designee upon payment of Sysco's Investment, (b) upon the death of the last insured, obtaining that portion of the Insurance Policy death proceeds in an amount equal to Sysco's Investment at such insured's death, and (c) upon surrender of the Insurance Policy, obtaining that portion of the surrender proceeds not in excess of Sysco's Investment. 4.4 Sysco and the Rabbi Trust are prohibited from taking any action that would endanger either the interest of the Trustee or the payment of the proceeds in excess of Sysco's Investment to the beneficiary designated by the Trustee upon the last insured's death. Prior to the termination of this Agreement, Sysco and the Rabbi Trust will not exercise the right to pledge the Insurance Policies, to surrender the Insurance Policies or paid up additions for cancellation or to partially surrender the Insurance Policies, to assign its rights to anyone other than the Trustee or the Trustee's designee, and to borrow against the Insurance Policies even for the purpose of paying premiums unless there has been a default by the Trustee under this Agreement. 4.5 The Trustee has the power to assign all rights of the Trustee in the Insurance Policies and under this Agreement, change the beneficiary designation on each Insurance Policy and exercise settlement options. In the event of an assignment, the assignee shall possess all of the rights and obligations of the Trustee under such Insurance Policy and this Agreement. The Trustee has all rights to the Insurance Policies, not specifically granted to Sysco by this Agreement; provided, however, that the Trustee may not exercise any rights in a manner which would endanger Sysco's Investment. 4.6 Sysco and the Trustee recognize that the investment of Sysco in the Insurance Policies and other assets held in the Rabbi Trust is also subject to the general creditors of Sysco as -8- <PAGE> 33 set forth in the Rabbi Trust. The Trustee and the beneficiaries of the Trust shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Rabbi Trust. Any rights created under the Plan or this Agreement shall be mere unsecured contractual rights of the Trustee and the beneficiaries of the Trust against Sysco. Any assets held by the Rabbi Trust will be subject to the claims of Sysco's general creditors under Federal and state law as specified in the Rabbi trust. 4.7 Any payments of Sysco's Investment in the Insurance Policy pursuant to the collateral assignment shall be first made from Insurance Policy cash values attributable to paid up additional life insurance and purchased by Insurance Policy dividends, if any. The Trustee shall have no interest in paid up additional life insurance protection, if any, except to the extent the death benefit or cash value thereof exceeds Sysco's Investment. ARTICLE 5 Termination This Agreement shall terminate on the happening of any one or more of the following events: (a) Mutual agreement of the parties; (b) Adjudication of Sysco as a bankrupt or a general assignment by Sysco to or for the benefit of creditors or dissolution of Sysco; (c) Surrender of all the Insurance Policies; (d) Payment in full to Sysco at any time of Sysco's Investment, at which time Sysco shall release the collateral assignment; (e) Cessation of Sysco's business; Additionally, Sysco, in its sole discretion, may terminate this Agreement upon any failure of the Trustee to pay premiums to Sysco as provided in section 3.3. -9- <PAGE> 34 With regard to each Insurance Policy, the Agreement shall terminate upon the expiration of the number of years specified on Schedule 1 for such Insurance Policy unless the agreement is otherwise terminated at an earlier date. The termination of employment with Sysco by the Employee for any reason, including Employee's death, will not terminate this Agreement. ARTICLE 6 Termination of Sysco's Investment 6.1 Upon the death of the last insured, Sysco shall receive from the proceeds of all Insurance Policies payable upon such insured's death the full amount of Sysco's Investment in the death benefits in all such Insurance Policies. The balance of the proceeds of such Insurance Policies shall be paid (a) to the beneficiary designated by the Trustee or (b) if no such beneficiary has been designated, to the Trust. 6.2 In the event of the termination of this Agreement under Article 5 (except as provided in Section (d) of Article 5), the Trustee or the designee of the Trustee shall have ninety days in which to pay Sysco in an amount equal to Sysco's Investment in each affected Insurance Policy. Upon the payment of such an amount, Sysco and the Rabbi Trust shall release the collateral assignment of such Insurance Policies. If the Trustee or the designee of the Trustee does not make such payment to Sysco within such ninety day period, the Trustee may either (a) surrender such Insurance Policy as provided in the collateral assignment, or (b) transfer ownership of such Insurance Policy to Sysco, thereby discharging the obligation of the Trustee to purchase Sysco's Investment in such Insurance Policy and relinquishing all rights of the Trustee to such Insurance Policy under this Agreement. 6.3 Upon the surrender or partial surrender of any Insurance Policy covered by this Agreement or should the Trustee borrow against any Insurance Policy covered by this Agreement, -10- <PAGE> 35 the proceeds received upon such surrender, partial surrender or loan shall be used first to pay Sysco in an amount equal to Sysco's Investment in such Insurance Policy and any excess proceeds shall be paid to the Trust. ARTICLE 7 Insurers The Insurer(s) issuing the Insurance Polices shall not be deemed to be a party to this Agreement for any purpose, nor is the Insurer in any way responsible for its validity or its enforcement. The Insurer shall not be obligated to inquire as to the distribution or application of any monies, payable or paid by the Insurer under the Insurance Policies, if the Insurer makes appropriate payment or otherwise performs its contractual obligations in accordance with the terms of the Insurance Policies. The Insurer shall be bound only by the provisions of the Insurance Policies or an endorsement thereto. Any payments made or actions taken by the Insurer in accordance with such Insurance Policies shall fully discharge the Insurer from liability. ARTICLE 8 Amendments and Miscellaneous 8.1 This Agreement shall not be modified or amended except by a written instrument signed by Sysco and the Trustee. This Agreement shall be binding upon the administrators, assigns and successors of the parties to this Agreement. 8.2 The provisions of this Agreement shall be construed and enforced according to the laws of the State of Texas, except to the extent preempted by federal law. 8.3 This Agreement and the Plan contain the entire contract between the parties and constitute a complete integration of the representations, covenants and promises of the Employee -11- <PAGE> 36 and Sysco. In case of a conflict, express or implied, between the terms of the Plan and this Agreement, the terms of the Plan will govern. 8.4 This Agreement is not the basic employment contract between Sysco and the Employee and Sysco reserves the unqualified and unrestricted right to terminate the services of the Employee on exactly the same basis as if this Agreement had never been entered into. 8.5 The Trustee shall have no interest or rights in Sysco's Investment in any Insurance Policy. ARTICLE 9 ERISA Provisions 9.1 Sysco is the named fiduciary of the Plan for purposes of the Employee Retirement Income Security Act of 1974 and shall have the authority to control and manage the operation and administration of the Plan. 9.2 The funding policy of this Plan will be through premium payments to the Insurer as specified in this Agreement. 9.3 The basis of payments from the Plan will consist of payments by the Insurer in accordance with the Insurance Policies. 9.4 Claims for death benefits are established under the Insurance Policy by the Insurer. If for any reason a claim for benefits under the Plan other than death benefits is denied, Sysco shall deliver to the claimant a written explanation setting forth the specific reasons for the denial, pertinent references to the Plan section on which the denial was based, such other data as may be pertinent and information on procedures to be followed by the claimant in obtaining a review of his or her claim, all written in a manner calculated to be understood by the claimant. For this purpose: -12- <PAGE> 37 (a) The claimant's claim shall be deemed filed when presented orally or in writing to Sysco. (b) Sysco's explanation shall be in writing and delivered to the claimant within ninety days of the date the claim is filed. The claimant shall have sixty days following his or her receipt of the denial of the claim to file with Sysco a written request for review of the denial. For such review, the claimant or his or her representative may submit pertinent documents and written issues and comments. Sysco shall decide the issue on review and furnish the claimant with a copy within sixty days of receipt of the claimant's request for review of his or her claim. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent plan provisions on which the decision is based. If a copy of the decision is not so furnished to the claimant within such sixty days, the claim shall be deemed denied on review. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on this _____ day of ________________________, _____. SYSCO CORPORATION, Employer By -------------------------------------- LINDIG 1999 FAMILY TRUSTS, Trust ---------------------------------------- David Brett Lindig, Co-Trustee ---------------------------------------- Mark Bradley Lindig, Co-Trustee -13- <PAGE> 38 SCHEDULE 1 The Insurance Policy or Insurance Policies covered by the foregoing Split Dollar Life Insurance Agreement between Sysco Corporation and the Employee include the following: 1. Insurer: John Hancock Mutual Life Insurance Company 2. Policy No. ______________________________ 3. Initial Face Amount: $13,145,000 4. Insured(s): Bill M. Lindig and Bobetta C. Lindig 5. Sysco Premium: $878,050 annually from 1999 through 2003 6. Trustee section 3.3 Reimbursement: from 1999 through 2003 7. Unless terminated earlier under the Agreement, the Agreement will terminate for this Policy on its anniversary date in 2016. 1. Insurer: Pacific Life Insurance Company 2. Policy No. ______________________________ 3. Initial Face Amount: $6,855,000 4. Insured(s): Bill M. Lindig and Bobetta C. Lindig 5. Sysco Premium: $535,240 annually from 1999 through 2002 6. Trustee section 3.3 Reimbursement: from 1999 through 2002 7. Unless terminated earlier under the Agreement, the Agreement will terminate for this Policy on its anniversary date in 2019. EXECUTED this _____ day of ___________________, __________. SYSCO CORPORATION, Employer By ---------------------------------------------------- LINDIG 1999 FAMILY TRUSTS, Trust ----------------------------------------------------- DAVID BRETT LINDIG, Co-Trustee ----------------------------------------------------- MARK BRADLEY LINDIG, Co-Trustee </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.P <SEQUENCE>7 <DESCRIPTION>1ST AMEND.TO 5TH AMENDED SUPP.EXEC.RETIREMENT PLAN <TEXT> <PAGE> 1 EXHIBIT 10(p) FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED SYSCO CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, by unanimous written consent of the Board of Directors of Sysco Corporation (the "Company"), the Company approved an amendment to the Fifth Amended and Restated Sysco Corporation Supplemental Executive Retirement Plan (the "Plan") as more particularly set forth below; NOW, THEREFORE, the Plan is hereby amended as follows: I. Defined Terms. Initially capitalized terms used in this Amendment which are not otherwise defined by this Amendment are used with the same meaning ascribed to such terms in the Plan. II. Amendment. Section 1.18 of the Plan is amended by deleting such Section 1.18 in its entirety and substituting the following in lieu thereof: "1.18 Subsidiary. "Subsidiary" means (a) any corporation which is a member of a "controlled group of corporations" which includes Sysco, as defined in Code Section 414(b), (b) any trade or business under "common control" with Sysco, as defined in Code Section 414(c), (c) any organization which is a member of an "affiliated service group" which includes Sysco, as defined in Code Section 414(m), (d) any other entity required to be aggregated with Sysco pursuant to Code Section 414(o), and (e) any other organization or employment location designated as a "Subsidiary" by resolution of the Board of Directors." III. Effectiveness. This Amendment shall be effective as of June 29, 1997. IV. Ratification. Except as herein above amended and modified, the Plan shall remain in full force and effect without further modification or amendment. Ratification. <PAGE> 2 IN WITNESS WHEREOF, the Company has caused this First Amendment to be effective as of June 29, 1997 in accordance with Section 9.1 of the Plan and the authority provided by the Board of Directors. SYSCO CORPORATION By: /s/ MICHAEL C. NICHOLS ---------------------------------------- Name: Michael C. Nichols Title: Vice President -2- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.Q <SEQUENCE>8 <DESCRIPTION>1ST AMEND.TO AMENDED EXEC.DEFERRED COMPENSATION <TEXT> <PAGE> 1 EXHIBIT 10(q) FIRST AMENDMENT TO AMENDED AND RESTATED SYSCO CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN WHEREAS, by unanimous written consent of the Board of Directors of Sysco Corporation (the "Company"), the Company approved an amendment to the Amended and Restated Sysco Corporation Executive Deferred Compensation Plan (the "Plan") as more particularly set forth below; NOW, THEREFORE, the Plan is hereby amended as follows: I. Defined Terms. Initially capitalized terms used in this Amendment which are not otherwise defined by this Amendment are used with the same meaning ascribed to such terms in the Plan. II. Amendment. Section 1.17 of the Plan is amended by deleting such Section 1.17 in its entirety and substituting the following in lieu thereof: "1.17 Subsidiary. "Subsidiary" means (a) any corporation which is a member of a "controlled group of corporations" which includes Sysco, as defined in Code Section 414(b), (b) any trade or business under "common control" with Sysco, as defined in Code Section 414(c), (c) any organization which is a member of an "affiliated service group" which includes Sysco, as defined in Code Section 414(m), (d) any other entity required to be aggregated with Sysco pursuant to Code Section 414(o), and (e) any other organization or employment location designated as a "Subsidiary" by resolution of the Board of Directors." III. Effectiveness. This Amendment shall be effective as of June 29, 1997. IV. Ratification. Except as herein above amended and modified, the Plan shall remain in full force and effect without further modification or amendment. Ratification. <PAGE> 2 IN WITNESS WHEREOF, the Company has caused this First Amendment to be effective as of June 29, 1997 in accordance with Section 9.1 of the Plan and the authority provided by the Board of Directors. SYSCO CORPORATION By: /s/ MICHAEL C. NICHOLS ------------------------------------- Name: Michael C. Nichols Title: Vice President -2- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.R <SEQUENCE>9 <DESCRIPTION>FIRST AMENDMENT TO 1995 MANAGEMENT INCENTIVE PLAN <TEXT> <PAGE> 1 EXHIBIT 10(r) FIRST AMENDMENT TO SYSCO CORPORATION 1995 MANAGEMENT INCENTIVE PLAN WHEREAS, by unanimous written consent of the Board of Directors of Sysco Corporation (the "Company"), the Company approved an amendment to the Sysco Corporation 1995 Management Incentive Plan (the "Plan") as more particularly set forth below; NOW, THEREFORE, the Plan is hereby amended as follows: I. Defined Terms. Initially capitalized terms used in this Amendment which are not otherwise defined by this Amendment are used with the same meaning ascribed to such terms in the Plan. II. Amendment. 1. Section 1 of the Plan is amended by deleting the first sentence of such Section 1 in its entirety and substituting the following in lieu thereof: "The purpose of the Plan is to reward (i) certain key management personnel for outstanding performance in the management of the divisions or Subsidiaries (as hereinafter defined) of the Company and (ii) certain corporate personnel for managing the operations of the Company as a whole and/or managing the operations of certain Subsidiaries (as hereinafter defined). For purposes of the Plan, the term "Subsidiary" means (a) any corporation which is a member of a "controlled group of corporations" which includes the Company, as defined in Code Section 414(b), (b) any trade or business under "common control" with the Company, as defined in Code Section 414(c), (c) any organization which is a member of an "affiliated service group" which includes the Company, as defined in Code Section 414(m), (d) any other entity required to be aggregated with the Company pursuant to Code Section 414(o), and (e) any other organization or employment location designated as a "Subsidiary" by resolution of the Board of Directors." 2. Section 4 of the Plan is amended by deleting the first sentence of such Section 4 and substituting the following in lieu thereof: <PAGE> 2 "The bonus which a Participant can earn is based (i) on the performance of the Company as a whole and (ii) (A) (as to Subsidiary Participants and possibly Designated Participants) either the performance of the Subsidiary which employs such Participant or the performance of the Subsidiary designated by the Plan Compensation Committee as the Subsidiary by reference to which the bonus is to be determined and (B) (as to Corporate and possibly Designated Participants) the performance of a select group of Subsidiaries, subject to the discretion of the Plan Compensation Committee to formulate a different bonus structure as to any Participant, other than Senior Executive Participants." 3. Paragraph (A) of Section 4 is amended by deleting the first paragraph of such Paragraph (A) of Section 4 and substituting the following in lieu thereof: "With respect to each Subsidiary Participant and each Senior Executive Participant who would be a Subsidiary Participant but for the application of the Executive Compensation Provisions, a portion of the bonus may depend upon the return on capital and/or increase in pretax earnings of the Subsidiary employing such Participant or the Subsidiary designated by the Plan Compensation Committee as the Subsidiary by reference to which the bonus is to be determined; a portion of the bonus may depend upon the return on stockholder's equity and increase in earnings per share of the Company as a whole; and a portion of the bonus may depend upon any one or more of the following performance factors: (i) sales of the Company and/or one or more Subsidiaries, (ii) pretax earnings of the Company, (iii) net earnings of the Company and/or one or more Subsidiaries, (iv) control of operating and/or nonoperating expenses of the Company and/or one or more Subsidiaries, (v) margins of the Company and/or one or more Subsidiaries, (vi) market price of the Company's securities, and (vii) other objectively measurable factors directly tied to the performance of the Company and/or one or more Subsidiaries. The relative weights of the factors considered and the percentages of the total bonus comprised by the portion of the bonus determined with respect to the Subsidiary employing the Participant or the Subsidiary designated by the Plan Compensation Committee as the Subsidiary by reference to which the bonus is to be -2- <PAGE> 3 determined and the portion of the bonus determined with respect to the Company shall be determined by the Plan Compensation Committee in its sole discretion. Notwithstanding the foregoing, the Plan Compensation Committee may alter the bonus formula with respect to any such Participant by changing the performance targets as determined in the sole discretion of the Committee." III. Effectiveness. This Amendment shall be effective as of June 29, 1997. IV. Ratification. Except as herein above amended and modified, the Plan shall remain in full force and effect without further modification or amendment. IN WITNESS WHEREOF, the Company has caused this First Amendment to be effective as of June 29, 1997 in accordance with Section 9 of the Plan and the authority provided by the Board of Directors. SYSCO CORPORATION By: /s/ MICHAEL C. NICHOLS ------------------------------------- Name: Michael C. Nichols Title: Vice President -3- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15 <SEQUENCE>10 <DESCRIPTION>LETTER FROM ARTHUR ANDERSEN LLP <TEXT> <PAGE> 1 Exhibit 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Sysco Corporation: We have reviewed the consolidated balance sheets of Sysco Corporation (a Delaware corporation) and its subsidiaries as of January 1, 2000, and December 26, 1998 and the related consolidated results of operations for the twenty-six and thirteen week periods then ended and consolidated cash flows for the twenty-six 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 10, 2000 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>11 <DESCRIPTION>FINANCIAL DATA SCHEDULE <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> JUL-1-2000 <PERIOD-END> JAN-1-2000 <CASH> $95,851 <SECURITIES> 0 <RECEIVABLES> 1,482,986 <ALLOWANCES> 38,903 <INVENTORY> 961,846 <CURRENT-ASSETS> 2,576,098 <PP&E> 2,411,777 <DEPRECIATION> 1,146,457 <TOTAL-ASSETS> 4,418,463 <CURRENT-LIABILITIES> 1,554,788 <BONDS> 1,132,976 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 382,587 <OTHER-SE> 1,118,865 <TOTAL-LIABILITY-AND-EQUITY> 4,418,463 <SALES> 9,308,569 <TOTAL-REVENUES> 9,308,569 <CGS> 7,565,198 <TOTAL-COSTS> 8,971,049 <OTHER-EXPENSES> (1,565) <LOSS-PROVISION> 13,052 <INTEREST-EXPENSE> 34,624 <INCOME-PRETAX> 337,520 <INCOME-TAX> 129,945 <INCOME-CONTINUING> 207,575 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 8,041 <NET-INCOME> 199,534 <EPS-BASIC> 0.61 <EPS-DILUTED> 0.60 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99.1 <SEQUENCE>12 <DESCRIPTION>PRESS RELEASE, DATED FEBRUARY 14, 2000 <TEXT> <PAGE> 1 EXHIBIT 99.1 SYSCO [LOGO] - ------------------------------------------------------------------------------- SYSCO Corporation NEWS RELEASE 1390 Enclave Parkway Houston, Texas 77077-2099 (281) 584-1390 FOR IMMEDIATE RELEASE FOR MORE INFORMATION CONTACT: Toni R. Spigelmyer Assistant Vice President Investor and Media Relations SYSCO FILES SHELF REGISTRATION FOR 2,850,000 SHARES HOUSTON, FEBRUARY 14, 2000 - SYSCO Corporation (NYSE: SYY) announced today that it has filed with the Securities and Exchange Commission a shelf registration covering 2,850,000 shares of common stock to be offered from time to time in connection with acquisitions. Charles H. Cotros, president and chief executive officer of SYSCO Corporation, said, "SYSCO has closed or announced six acquisitions in fiscal 2000 for varying combinations of stock and cash. Since the company continues to seek attractive acquisition candidates, this filing will provide SYSCO with greater flexibility in structuring and closing future transactions." SYSCO is the largest foodservice marketing and distribution organization in North America, generating annualized sales in excess of $18.5 billion based on first half fiscal 2000 results. The company provides food and services to approximately 325,000 customers including restaurants, healthcare and educational institutions, lodging facilities and other foodservice operations. The SYSCO distribution network currently extends throughout the entire contiguous United States and Alaska as well as portions of Canada. For the first half of fiscal 2000, which ended January 1, 2000, the company reported sales of $9.3 billion and net earnings of $199.5 million. THIS INFORMATION WAS FURNISHED ON BEHALF OF SYSCO, ITS BOARD OF DIRECTORS AND MANAGEMENT. PLEASE READ SYSCO'S REGISTRATION STATEMENT ON FORM S-4 AND THE DOCUMENTS INCORPORATED BY REFERENCE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION SINCE THEY CONTAIN IMPORTANT INFORMATION CONCERNING SYSCO'S COMMON STOCK AND THE TERMS OF THE SHELF OFFERING. THE REGISTRATION STATEMENT AND RELATED DOCUMENTS ARE PUBLICLY AVAILABLE. YOU CAN READ A COPY OF SYSCO'S REGISTRATION STATEMENT AND ITS OTHER SEC FILINGS FOR FREE AT THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. Certain statements made herein are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They include statements regarding annualized sales and acquisitions. These statements involve risks and uncertainties and are based on current expectations and management's estimates; actual results may differ materially. Those risks and uncertainties that could impact these statements include the risks relating to the foodservice distribution industry's relatively low profit margins and sensitivity to economic conditions, SYSCO's leverage and debt risks, the risk of exposure to product liability claims, the risk of interruption of supplies due to lack of long-term contracts, work stoppages or otherwise, the inability to find or complete attractive acquisitions and other risk factors detailed in SYSCO's Form 10-K for the fiscal year ended July 3, 1999 filed with the Securities and Exchange Commission. # # # </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

TEK

https://www.sec.gov/Archives/edgar/data/96879/0000893877-00-000016.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, NHG5znbvvBitLBxUCSL1yDD+n06MvjUlc0GFtgae5y0L9WctvZlgGnZxThfGD0G0 wobspi6XduYawxoY15Ch9w== <SEC-DOCUMENT>0000893877-00-000016.txt : 20000202 <SEC-HEADER>0000893877-00-000016.hdr.sgml : 20000202 ACCESSION NUMBER: 0000893877-00-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991127 FILED AS OF DATE: 20000111 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: SEC FILE NUMBER: 001-04837 FILM NUMBER: 505559 BUSINESS ADDRESS: STREET 1: 26600 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>QUARTERLY REPORT <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 quarter ended November 27, 1999, 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 (IRS Employer incorporation or organization) Identification No.) 14200 SW KARL BRAUN DRIVE BEAVERTON, OREGON 97077 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 627-7111 26600 SW PARKWAY WILSONVILLE, OREGON 97070-1000 (Address of principal executive offices) (Zip 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 [ ] AT DECEMBER 25, 1999 THERE WERE 47,252,593 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. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets - 2 November 27, 1999 and May 29, 1999 Condensed Consolidated Statements of Operations - 3 for the Quarter ended November 27, 1999 and the Quarter ended November 28, 1998 for the Two Quarters ended November 27, 1999 and the Two Quarters ended November 28, 1998 Condensed Consolidated Statements of Cash Flows - 4 for the Two Quarters ended November 27, 1999 and the Two Quarters ended November 28, 1998 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURE 20 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) Nov. 27, May 29, (In thousands) 1999 1999 - ------------------------------------------------------------------------------------------ <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 57,860 $ 39,747 Accounts receivable - net 128,637 165,979 Inventories 120,870 158,305 Net assets of discontinued operations 341,799 338,990 Other current assets 93,636 83,417 ---------- ---------- Total current assets 742,802 786,438 Property, plant and equipment - net 253,651 283,769 Deferred tax assets 55,347 56,405 Other long-term assets 139,494 121,723 ---------- ---------- Total assets $1,191,294 $1,248,335 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt $ 79,564 $ 115,687 Accounts payable 171,578 171,306 Accrued compensation 94,282 108,982 Deferred revenue 4,319 2,438 ---------- ---------- Total current liabilities 349,743 398,413 Long-term debt 150,596 150,722 Other long-term liabilities 69,364 77,638 Shareholders' equity: Common stock 142,608 143,263 Retained earnings 454,046 458,613 Accumulated other comprehensive income 24,937 19,686 ---------- ---------- Total shareholders' equity 621,591 621,562 ---------- ---------- Total liabilities and shareholders' equity $1,191,294 $1,248,335 ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE> 2 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Quarter ended Two quarters ended Nov. 27, Nov. 28, Nov. 27, Nov. 28, (In thousands except for per share amounts) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 261,271 $ 272,910 $ 542,018 $ 536,511 Cost of sales 141,274 185,579 297,729 331,516 ----------- ----------- ----------- ----------- Gross profit 119,997 87,331 244,289 204,995 Research and development expenses 32,736 41,099 70,943 77,936 Selling, general and administrative expenses 71,459 84,669 143,335 172,039 Equity in business ventures' loss 25 1,182 343 9,180 Non-recurring charges - 81,488 - 81,488 Charges related to the sale of the Video and Networking division - - 26,100 - ----------- ----------- ----------- ----------- Operating income (loss) 15,777 (121,107) 3,568 (135,648) Other expense - net 2,008 2,599 5,622 2,001 ----------- ----------- ----------- ----------- Earnings (loss) from continuing operations before taxes 13,769 (123,706) (2,054) (137,649) Income tax expense (benefit) 4,828 (39,585) (78) (44,047) ----------- ----------- ----------- ----------- Earnings (loss) from continuing operations 8,941 (84,121) (1,976) (93,602) Discontinued operations: Income (loss) from operations of Color Printing and Imaging (less applicable tax of $3,667, (824), 4,762, and 1,443, respectively) 6,245 (1,750) 8,680 3,068 ----------- ----------- ----------- ----------- Net earnings (loss) $ 15,186 $ (85,871) $ 6,704 $ (90,534) =========== =========== =========== =========== Earnings (loss) per share - basic and diluted $ 0.32 $ (1.82) $ 0.14 $ (1.87) Earnings (loss) per share from continuing operations - basic and diluted $ 0.19 $ (1.79) $ (0.04) $ (1.93) Earnings (loss) per share from discontinued operations - basic and diluted $ 0.13 $ (0.04) $ 0.18 $ 0.06 Dividends per share $ 0.12 $ 0.12 $ 0.24 $ 0.24 Average shares outstanding - basic 47,062 47,077 47,005 48,414 Average shares outstanding - diluted 47,636 47,077 47,468 48,583 The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE> 3 <PAGE> <TABLE> <CAPTION> TEKTRONIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Two quarters ended Nov. 27, Nov. 28, (In thousands) 1999 1998 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ 6,704 $ (90,534) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Income from discontinued operations (8,680) (3,068) Depreciation and amortization expense 30,016 32,184 Restructuring charges - 27,760 Non-recurring charges - 92,774 Charges related to the sale of the Video and Networking division 26,100 - Gain on sale of investments (217) (6,465) Equity in business ventures' loss 343 9,180 Changes in operating assets and liabilities: Accounts receivable 42,342 66,637 Inventories (18,631) (35,171) Other current assets (13,634) (54,724) Accounts payable 4,047 (2,892) Accrued compensation (11,721) (38,321) Other-net (10,647) (7,901) ---------- ---------- Net cash provided by (used in) continuing operations 46,022 (10,541) Net cash provided by discontinued operations 5,986 1,833 ---------- ---------- Net cash provided by (used in) operating activities 52,008 (8,708) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment (22,536) (36,874) Net proceeds from sale of business 22,600 - Proceeds from sale of fixed assets 14,848 273 Proceeds from sale of investments 397 8,929 ---------- ---------- Net cash provided by (used in) investing activities 15,309 (27,672) CASH FLOWS FROM FINANCING ACTIVITIES Net change in short-term debt (36,123) 66,279 Issuance of long-term debt - - Repayment of long-term debt (126) (511) Issuance of common stock 12,889 931 Repurchase of common stock (14,573) (85,524) Dividends (11,271) (11,658) ---------- ---------- Net cash used in financing activities (49,204) (30,483) ---------- ---------- Net increase (decrease) in cash and cash equivalents 18,113 (66,863) Cash and cash equivalents at beginning of period 39,747 120,541 ---------- ---------- Cash and cash equivalents at end of period $ 57,860 $ 53,678 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS Income taxes paid - net $ 3,999 $ 9,805 Interest paid 9,554 7,266 NON-CASH INVESTING ACTIVITIES Note receivable for sale of Video and Networking assets $ 22,500 $ - Common stock of Grass Valley Group, Inc. for sale of Video and Networking assets 6,300 - The accompanying notes are an integral part of these condensed consolidated financial statements. </TABLE> 4 <PAGE> 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 years 2000 and 1999 are 52 weeks. DISCONTINUED OPERATIONS On September 22, 1999, the company announced that it had reached an agreement with Xerox Corporation (Xerox) to sell the net assets of the Color Printing and Imaging division. On January 1, 2000, the company closed the sale of substantially all of the assets of the division. The purchase price was $925.0 million in cash, with certain liabilities of the division assumed by Xerox. Tektronix expects to realize a pre-tax gain on the sale of approximately $600.0 million. This gain will be recorded during the third quarter of 2000 as will the loss from operations realized by the Color Printing and Imaging division during the five weeks prior to the close of the sale and any transition costs or other charges related to the transaction. In accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the company has accounted for the Color Printing and Imaging division as a discontinued operation. Summarized results of operations for the Color Printing and Imaging division were as follows: <TABLE> <CAPTION> Quarter ended Two quarters ended Nov. 27, Nov. 28, Nov. 27, Nov. 28, (In thousands except for per share amounts) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $ 189,753 $ 159,254 $ 345,157 $ 314,632 ----------- ----------- ----------- ----------- Earnings (loss) before taxes 9,912 (2,574) 13,442 4,511 Income tax expense (benefit) 3,667 (824) 4,762 1,443 ----------- ----------- ----------- ----------- Net earnings (loss) $ 6,245 $ (1,750) $ 8,680 $ 3,068 =========== =========== =========== =========== Net earnings (loss) per share $ 0.13 $ (0.04) $ 0.18 $ 0.06 =========== =========== =========== =========== </TABLE> Summarized net assets for the Color Printing and Imaging division were as follows: Nov 27, May 29, (In thousands) 1999 1999 - ------------------------------------------------------------------------------- Current assets $ 253,141 $ 272,210 Long-term assets 173,620 177,810 Current liabilities (77,706) (98,633) Long-term liabilities (7,256) (12,397) ------------ ------------ Net assets of discontinued operations $ 341,799 $ 338,990 ============ ============ 5 <PAGE> SALE OF VIDEO AND NETWORKING On August 9, 1999, the company announced that it had reached an agreement to sell substantially all of the operating assets of its Video and Networking division to Grass Valley Group, Inc. During the first quarter of 2000, Tektronix recorded pre-tax charges of $26.1 million for losses expected to be incurred in connection with the transaction. These charges were calculated based upon the excess of the estimated net book value of net assets transferred over the proceeds, as well as asset impairments expected to be incurred as a result of the sale. On September 24, 1999, the companies closed the transaction. Tektronix received cash of $23.7 million, net of transaction costs of $1.1 million, a note receivable of $22.5 million, and a 10% equity interest in that company, which is accounted for under the cost method. Actual losses incurred in connection with the transaction were $26.1 million. NON-RECURRING CHARGES In the second quarter of 1999, the company announced and began to implement a series of actions (the plan) intended to align worldwide operations with current market conditions and to improve the profitability of its operations. These actions include a net reduction of approximately 15% of the company's worldwide workforce, the exit from certain facilities and the streamlining of product and service offerings. Major actions are summarized by each of the three business divisions in which the company has historically operated. Measurement's service business was consolidated from several depots in the United States and Europe into two depots in each of these geographies. This consolidation resulted in headcount reductions and the write-down and disposal of redundant inventory through the first quarter of 2000. Measurement closed the Bend, Oregon manufacturing facility during the third quarter of 1999 and consolidated that process into its Beaverton, Oregon facilities. This action resulted in headcount reductions and lease settlements. Measurement reduced headcount throughout the division, primarily in manufacturing. During the second quarter of 1999, Color Printing and Imaging discontinued three product lines - wide format, dye sublimation and B-size solid ink. This action resulted in write-offs of disposed inventory. Color Printing and Imaging also reduced headcount throughout the division, primarily in manufacturing. During 1999, Video and Networking discontinued development, manufacturing, and sales of non-linear digital editing products sold under the Lightworks name. This decision resulted in headcount reductions, write-offs of disposed inventory, incremental sales returns and bad debts, and costs to fulfill commitments to deliver software enhancements on previously sold product. Outside of the divisions, selective involuntary terminations have occurred throughout the execution of the plan. The company recorded pre-tax charges of $125.7 million to account for these actions, including restructuring charges of $115.8 million and other non-recurring charges of $9.9 million for related actions. The $115.8 million in restructuring charges include $27.1 million in charges to cost of sales for the write-off of excess inventory resulting from discontinued product lines and consolidation of service centers worldwide, $56.9 million in severance expense related to employee separation, $14.8 million in charges to facilities for lease cancellation fees and $17.0 million in charges to long-term assets associated with discontinued product lines. The $9.9 million for related actions include $5.1 million of expected sales returns of previously sold product, $0.8 million of bad debt expense related to existing accounts receivable that will not be collected and $4.0 million of costs to fulfill commitments to deliver software enhancements on previously sold product, all associated with exiting the non-linear digital editing business. 6 <PAGE> The pre-tax charges incurred under the plan impacted the company's results of operations for the year ended May 29, 1999 as follows: <TABLE> <CAPTION> Location of charge in the consolidated statements of (In thousands) operations - ---------------------------------------------------------------------------------------- <S> <C> <C> Severance and benefits Non-recurring charges $ 56,924 Inventory write-offs Cost of sales 27,070 Lease buy-outs and abandonment of facilities Non-recurring charges 16,942 Asset write-offs and impairments Non-recurring charges 14,804 Sales returns and allowances Net sales 5,120 Commitment for enhancements related to discontinued products Research and development expenses 4,019 Bad debt expense related to Selling, general and discontinued products administrative expenses 803 --------- $ 125,682 ========= </TABLE> The pre-tax charges incurred under the plan affected the company's financial position in the following manner: <TABLE> <CAPTION> Equipment Payables Accrued and other and other (In thousands) compensation Inventories assets liabilities - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Original charges $ 54,680 $ 27,760 $ 18,200 $ 19,894 1999 activity: Cash paid out (20,844) - - (7,415) Non-cash disposals or write-offs - (27,070) (17,055) - Adjustments to plan 2,244 (690) (455) 4,049 --------- --------- --------- --------- Balance May 29, 1999 $ 36,080 $ - $ 690 $ 16,528 --------- --------- --------- --------- 2000 activity: Cash paid out (16,611) - - (8,327) Non-cash disposals or write-offs - - (690) - Adjustments to plan - - - - --------- --------- --------- --------- Balance November 27, 1999 $ 19,469 $ - $ - $ 8,201 ========= ========= ========= ========= </TABLE> The charge of $54.7 million in accrued compensation reflects an original planned headcount reduction of 1,371 employees worldwide. This charge was increased by a net $2.2 million during the fourth quarter of 1999. The $2.2 million consists of an $8.6 million reserve for severance of an additional 282 employees worldwide across all responsibilities, offset in part by reversal of a $6.4 million reserve for pension settlement that was not needed as settlement accounting was not appropriate during the year. Headcount reduction under the current plan of reorganization now totals 1,653 employees worldwide. Approximately 1,200 employees have been terminated under the plan. Severance of $37.5 million has been paid to approximately 1,177 of these employees, while the other 23 employees will be paid severance in the third quarter of 2000. As a result of the sale of the Color Printing and Imaging division, the company will need to evaluate the severance reserves to determine whether all of the remaining amounts are required. This process will take place during the third quarter, and any excess reserve will be reversed to non-recurring charges. 7 <PAGE> The $27.8 million charge to inventories includes inventories related to the consolidation of Measurement service offerings, the discontinuation of three Color Printing and Imaging product lines and the discontinuation of non-linear digital editing products sold under the Lightworks name, which were written off during the second quarter of 1999. The charge of $18.2 million for equipment and other assets includes asset impairments of $17.4 million and $0.8 million in reserve for bad debt expense. The impaired assets are primarily related to discontinued product lines in Color Printing and Imaging and Video and Networking and include manufacturing assets of $6.2 million, goodwill and other intangibles of $6.5 million, and leasehold improvements and other assets of $4.7 million. The $19.9 million charge for payables and other liabilities includes reserves for lease buy-outs and abandonment of facilities, sales returns and allowances and commitments for enhancements related to discontinued products. This reserve was increased by $4.0 million during 1999 to provide for additional costs to exit certain sales and service offices worldwide and to fulfill certain contractual commitments, partly offset by a decrease in original sales returns allowances. The $8.2 million reserve remaining at the end of the period mainly represents future lease payments on abandoned facilities that will continue over the lives of the lease contracts. RECEIVABLES On September 10, 1996, the company entered into a five-year revolving receivables 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. Receivables of $50.0 million were sold under this agreement as of November 27, 1999 and are therefore not reflected in the accounts receivable balance in the accompanying Condensed Consolidated Balance Sheet. INVENTORIES Inventories consisted of: Nov. 27, May 29, (In thousands) 1999 1999 - ------------------------------------------------------------------------------- Materials and work in process $ 51,325 $ 54,766 Finished goods 69,545 103,539 ---------- ---------- Inventories $ 120,870 $ 158,305 ========== ========== PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of: Nov. 27, May 29, (In thousands) 1999 1999 - ------------------------------------------------------------------------------- Land $ 4,754 $ 4,642 Buildings 170,074 186,525 Machinery and equipment 350,302 405,978 ---------- ---------- 525,130 597,145 Accumulated depreciation and amortization (271,479) (313,376) ---------- ---------- Property, plant and equipment - net $ 253,651 $ 283,769 ========== ========== 8 <PAGE> COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) and its components, net of tax, are as follows: <TABLE> <CAPTION> Quarter ended Two quarters ended Nov. 27, Nov. 28, Nov. 27, Nov. 28, (In thousands) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net earnings (loss) $ 15,186 $ (85,871) $ 6,704 $ (90,534) Other comprehensive income (loss): Currency translation adjustment 5,207 14,733 5,157 11,242 Unrealized loss on available-for-sale securities (60) (340) (277) (4,446) Reclassification adjustment for realized gains (losses) included in net income 360 (1,415) 371 (3,879) ---------- ---------- ---------- ---------- Comprehensive income (loss) $ 20,693 $ (72,893) $ 11,955 $ (87,617) ========== ========== ========== ========== </TABLE> BUSINESS SEGMENTS The company has historically been organized based on the products and services that it offers. During the periods reported, the company operated in three main segments: Measurement, Color Printing and Imaging, and Video and Networking. Operations for the Color Printing and Imaging division were accounted for as discontinued during the quarter, and substantially all of the assets of the division were sold to Xerox subsequent to quarter-end. In addition, substantially all of the operating assets of the Video and Networking division were sold to Grass Valley Group, Inc. in a transaction that closed September 24, 1999. Going forward, the only segment in which the company will operate is Measurement. The information provided below was obtained from internal information that was provided to the company's chief operating decision-maker for the purpose of corporate management. Assets, liabilities and expenses attributable to corporate activity were not allocated to the three operating segments. Inter-segment sales were not material and were included in net sales to external customers below. Figures shown for 1999 were restated to include results for the VideoTele.com product family within Measurement and exclude them from Video and Networking. <TABLE> <CAPTION> Quarter ended Two quarters ended Nov. 27, Nov. 28, Nov. 27, Nov. 28, (In thousands) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales to external customers (by division): Measurement $ 253,325 $ 213,291 $ 481,359 $ 424,449 Video and Networking 7,946 59,619 60,659 112,062 ---------- ---------- ---------- ---------- Net sales $ 261,271 $ 272,910 $ 542,018 $ 536,511 ========== ========== ========== ========== Net sales to external customers (by region): United States $ 140,484 $ 136,264 $ 287,695 $ 267,352 Europe 65,132 83,750 137,481 154,336 Pacific 29,399 27,718 57,924 61,090 Japan 14,746 13,953 35,547 30,005 Americas 11,510 11,225 23,371 23,728 ---------- ---------- ---------- ---------- Net sales $ 261,271 $ 272,910 $ 542,018 $ 536,511 ========== ========== ========== ========== 9 <PAGE> Operating income (loss): Measurement $ 26,375 $ 14,743 $ 49,033 $ 26,134 Video and Networking (10,710) (13,285) (19,013) (30,861) Charges related to the sale of the Video and Networking division - - (26,100) - Non-recurring charges - (120,534) - (120,534) Business ventures' income (loss) and other 112 (2,031) (352) (10,387) ---------- ---------- ---------- ---------- Operating income (loss) $ 15,777 $ (121,107) $ 3,568 $ (135,648) ========== ========== ========== ========== </TABLE> INCOME TAXES The provision for income tax expense (benefit) consisted of: <TABLE> <CAPTION> Quarter ended Two quarters ended Nov. 27, Nov. 28, Nov. 27, Nov. 28, (In thousands) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> United States $ 1,448 $ (80,862) $ (23) $ (89,976) State 483 (3,829) (8) (4,261) Foreign 2,897 45,106 (47) 50,190 ---------- ---------- ---------- ---------- Income tax expense (benefit) $ 4,828 $ (39,585) $ (78) $ (44,047) ========== ========== ========== ========== </TABLE> The annual effective rate used to calculate 1999 income tax benefit from continuing operations was 32%. The effective rate used to calculate income tax on continuing operations for the second quarter of 2000 was 35%, while the rate used to calculate income tax on discontinued operations was 37%. Management currently expects the company's overall effective tax rate for fiscal year 2000 will be 37%. FUTURE ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new statement will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The new statement is effective for the company's fiscal year 2002, as deferred by SFAS No. 137, but early adoption is permitted. Management has not yet completed an evaluation of the effects this standard will have on the company's consolidated financial statements. 10 <PAGE> Item 2. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations ----------------------------------- GENERAL The company has historically operated in three major business divisions: Measurement, Color Printing and Imaging, and Video and Networking, as well as in five major geographies: the United States; Europe; the Americas, including Mexico, Canada and South America; the Pacific, excluding Japan; and Japan. On August 9, 1999, the company announced that it had reached an agreement to sell substantially all of the operating assets of its Video and Networking division to Grass Valley Group, Inc. During the first quarter of fiscal year 2000, Tektronix recorded pre-tax charges of $26.1 million for losses expected to be incurred in connection with the transaction. These charges were calculated based upon the excess of the estimated net book value of net assets transferred over the proceeds, as well as asset impairments expected to be incurred as a result of the sale. On September 24, 1999, the companies closed the transaction. Tektronix received cash of $23.7 million, net of transaction costs of $1.1 million, a note receivable of $22.5 million, and a 10% equity interest in that company, which is accounted for under the cost method. Actual losses incurred in connection with the transaction were $26.1 million. Video and Networking operating results through September 24, 1999 have been included in those from continuing operations for the periods reported. During the quarter and two quarters ended November 27, 1999, Video and Networking realized sales of $7.9 million and $60.7 million, respectively. For the same periods, the division experienced operating losses of $10.7 million and $19.0 million, respectively. During the quarter and two quarters ended November 28, 1998, Video and Networking sales were $59.6 million and $112.1 million, respectively. For these same periods, the division experienced operating losses of $13.3 million and $30.9 million, respectively. On September 22, 1999, the company announced that it had reached an agreement with Xerox Corporation (Xerox) to sell the net assets of the Color Printing and Imaging division. On January 1, 2000, the company closed the sale of substantially all of the assets of the division. The purchase price was $925.0 million in cash, with certain liabilities of the division assumed by Xerox. Tektronix expects to realize a pre-tax gain on the sale of approximately $600.0 million. This gain will be recorded during the third quarter of 2000 as will the loss from operations realized by the Color Printing and Imaging division during the five weeks prior to the close of the sale and any transition costs or other charges related to the transaction. In accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the company has accounted for the Color Printing and Imaging division as a discontinued operation. During the quarter and two quarters ended November 27, 1999, Color Printing and Imaging realized sales of $189.8 million and $345.2 million and operating income of $10.8 million and $14.9 million, respectively. During the quarter and two quarters ended November 28, 1998, Color Printing and Imaging realized sales of $159.3 million and $314.6 million, respectively. For the same periods, the division experienced an operating loss of $2.5 million and operating income of $4.7 million, respectively. 11 <PAGE> NON-RECURRING CHARGES In the second quarter of fiscal year 1999, the company announced and began to implement a series of actions (the plan) intended to align worldwide operations with current market conditions and to improve the profitability of its operations. Simultaneously, the company recorded pre-tax charges of $125.7 million to account for these actions. Through the execution of the plan, the company began to decentralize. As a final step in the decentralization of the company, management committed to sell the majority of the operating assets of the Video and Networking division and the net assets of the Color Printing and Imaging division in early fiscal year 2000. Substantially all division-specific actions included in the plan were completed prior to the consummation of these transactions. As of November 27, 1999, reserves of $19.5 million and $8.2 million remain for severance and other liabilities, respectively. As a result of the sale of the Color Printing and Imaging division, the company will need to evaluate the severance reserves to determine whether all of the remaining $19.5 million is required. This process will take place during the third quarter, and any excess reserve will be reversed to non-recurring charges. The remaining $8.2 million reserve for other liabilities mainly represents future lease payments on facilities that were abandoned as a result of the decentralization of the company. These payments will continue over the lives of the lease contracts. Management currently expects that actions related to the remaining reserves will require approximately $27.7 million in cash. RESULTS OF OPERATIONS Quarter and Two Quarters Ended November 27, 1999 vs. Quarter and Two Quarters Ended November 28, 1998 NET INCOME FROM CONTINUING OPERATIONS The company recognized net income from continuing operations of $8.9 million, or $0.19 per diluted share, during the second quarter of 2000 as compared to a net loss from continuing operations of $84.1 million, or $1.79 per diluted share, recognized during the same period in 1999. During the first half of 2000, the company recognized a net loss from continuing operations of $2.0 million, or $0.04 per diluted share, as compared to net loss from continuing operations of $93.6 million, or $1.93 per diluted share, for the first half of 1999. The company recognized pre-tax non-recurring charges of $26.1 million during the first quarter of 2000 and $120.5 million during the second quarter of 1999. Excluding these charges, Tektronix would have recognized net income from continuing operations of $8.9 million, or $0.19 per diluted share, for the current quarter, as compared to a net loss of $2.2 million, or $0.05 per diluted share, for the same period in 1999. During the first half of 2000, the company would have recognized net income from continuing operations of $13.4 million, or $0.28 per diluted share, as compared to net loss from continuing operations of $11.6 million, or $0.24 per diluted share for the first half of 1999. NET INCOME FROM DISCONTINUED OPERATIONS The company recognized net income from discontinued operations of $6.2 million, or $0.13 per diluted share, for the second quarter of 2000, as compared to a net loss of $1.8 million, or $0.04 per diluted share, for the same period in 1999. For the first half of 2000, the company recognized $8.7 million, or $0.18 per diluted share, in net income from discontinued operations, as compared to net income of $3.1 million, or $0.06 per diluted share, for the first half of 1999. 12 <PAGE> SALES Sales from continuing operations for the second quarter of 2000 were $261.3 million, down 4% from second quarter 1999 sales of $272.9 million. Sales for Measurement were $253.3 million, as compared to sales of $213.3 million for the second quarter of 1999. Measurement sales increased 19% over the prior year, including growth in all geographies. The United States and the Pacific experienced the most significant growth, up $25.4 million or 23% and $6.5 million or 29%, respectively. The majority of the increase was realized in sales of oscilloscopes, wireless communication test products and logic analyzers. Sales of these products increased due to positive market response to the launch of new products at the end of 1999, continued growth in wireless communication infrastructure and resurgence in the semiconductor industry. Sales from continuing operations for the first half of 2000 were $542.0 million, as compared to sales of $536.5 million for the first half of 1999. Measurement sales were $481.4 million, as compared to sales of $424.4 million for the first half of 1999. Measurement sales increased 13% over the prior year, including growth in all geographies. The United States and Japan experienced the most significant growth, up $38.6 million or 18% and $7.2 million or 27%, respectively. Sales for the first half of 2000 increased in the same product lines and for the same reasons discussed above under current quarter results. ORDERS Second quarter 2000 orders for Measurement were $241.6 million, up $34.6 million or 17% over orders for the same period in 1999. Orders were up across all geographies except Europe, where orders declined $7.1 million or 11%, as compared to the same quarter of 1999. The decline in orders from Europe can be attributed to a decline in the value of the Euro, as well as strong orders from the region in the second quarter of 1999. Measurement orders from Europe for the second quarter of 1999 were up 24% over those for the same quarter of 1998, while orders from all other regions had declined. The United States and the Pacific experienced the largest increases in orders during the current quarter, up $31.1 million or 34% and $5.7 million or 21%, respectively. Orders from these regions increased in the same product lines and for the same reasons as sales increased for the quarter. Measurement orders for the first half of 2000 were $485.3 million, up $89.0 million or 22% over orders for the same period in 1999. Orders were up across all geographies, particularly in the United States and the Pacific. Orders from the United States were $250.3 million, up $59.8 million or 31% from orders for the same period in 1999. Orders from the Pacific were $62.0 million, up $12.9 million or 26% from orders for the same period in 1999. Orders were impacted by the same favorable conditions that impacted sales. GROSS PROFIT The company's gross profit from continuing operations was $120.0 million for the second quarter of 2000, an increase over gross profit of $87.3 million for the same period in 1999. Excluding the non-recurring charges of $34.2 million, gross profit was $121.6 million for the second quarter of 1999. As a percentage of net sales, gross profit was 45.9% for the second quarter of 2000, as compared to 43.5% for the second quarter of 1999, excluding non-recurring charges. The company's gross profit from continuing operations was $244.3 million for the first half of 2000, an increase over gross profit of $205.0 million for the same period in 1999. Excluding the non-recurring charges noted above, gross profit was $239.2 million for the first half of 1999. As a percentage of net sales, gross profit increased from 44.1%, excluding non-recurring charges, to 45.1% for the first half of 2000. Measurement gross profit improved from $103.0 million for the second quarter of 1999, to $122.7 million for the second quarter of 2000. As a percentage of net sales, gross profit was 48.4%, as compared to 48.3% for the second quarter of 1999. Measurement gross profit for the first half of 2000 was $232.8 million, as compared to $203.7 million for the first half of 1999. As a percentage of net sales, gross profit was 48.4%, as compared to 48.0% for the first half of 1999. The increase in both periods resulted mainly from higher margins on oscilloscopes introduced during the third and fourth quarters of 1999. 13 <PAGE> OPERATING EXPENSES Operating expenses from continuing operations were $104.2 million, down $104.2 million from $208.4 million for the second quarter of 1999, due mainly to $81.5 million in non-recurring charges in the prior year, as well as a decrease in selling, general and administrative and research and development expenses. Selling, general and administrative expenses were $71.5 million for the quarter, a decrease of $13.2 million from the same period in 1999, primarily as a result of only one month of Video and Networking results included in this quarter. Research and development expenses were $32.7 million, $8.4 million lower than those recognized in the second quarter of 1999. The decline was due mainly to $4.0 million in non-recurring charges in the prior year, as well as only one month of Video and Networking results included in the current quarter. For the first half of 2000, operating expenses from continuing operations were $240.7 million, down $99.9 million from $340.6 million for the first half of 1999, due mainly to lower non-recurring charges, as well as a decrease in selling, general and administrative expenses and losses on investments accounted for under the equity method. Non-recurring charges for the first half of 2000 were $26.1 million, $55.4 million lower than the $81.5 million recorded during the first half of 1999. Selling, general and administrative expenses were $143.3 million, a decrease of $28.7 million from the same period in 1999, primarily as a result of only one month of Video and Networking results included this year. Losses on investments accounted for under the equity method were $0.3 million, $8.8 million lower than those recognized in the same period of 1999, primarily due to Tektronix' $7.2 million share of the loss reported by Merix Corporation during the first half of 1999. OPERATING MARGIN Measurement operating income for the second quarter of 2000 was $26.4 million, as compared to $14.7 million generated in the same period of 1999. Operating margin was approximately 10.4% of sales for the quarter, as compared to 6.9% for the second quarter of 1999. Management currently expects that the measurement division will continue to see operating margins of approximately 10% through the end of the year, excluding any non-recurring charges or transition costs. INCOME TAXES Income taxes increased from a benefit of $39.6 million for the second quarter of 1999 to expense of $4.8 million for the second quarter of 2000 as a result of earnings before taxes. Income tax expense related to discontinued operations was $3.7 million for the current quarter, as compared to a benefit of $0.8 million for the second quarter of 1999. Income tax benefit was $0.1 million for the first half of 2000, as compared to income tax benefit of $44.0 million for the same period in 1999 as a result of decreased losses before taxes. Income tax expense related to discontinued operations was $4.8 million for the first half of 2000, as compared to $1.4 million for the first half of 1999. The annual effective rate used to calculate 1999 income tax benefit from continuing operations was 32%. The effective rate used to calculate income tax on continuing operations for the second quarter of 2000 was 35%, while the rate used to calculate income tax on discontinued operations was 37%. Management currently expects the company's overall effective tax rate for fiscal year 2000 will be 37%. FINANCIAL CONDITION At November 27, 1999, the company held $57.9 million in cash and cash equivalents and bank credit facilities totaling $308.4 million, of which $221.2 million was unused. Unused facilities include $146.7 million in lines of credit and $74.5 million under revolving credit agreements with United States and foreign banks. Net cash proceeds from the sale of the net assets of the Color Printing and Imaging division will be used to pay down outstanding debt and returned to shareholders through the repurchase of common stock, with a small amount retained for other corporate purposes. 14 <PAGE> WORKING CAPITAL At November 27, 1999, the company's working capital was $393.1 million, an increase of $5.1 million from the end of 1999. Net assets from discontinued operations were $341.8 million, an increase of $2.8 million during the first half of the year. Excluding net assets of discontinued operations, working capital was $51.3 million, a $2.3 million or 5% increase over year-end. Current assets decreased $43.6 million during the first half of 2000, with accounts receivable decreasing $37.3 million and inventory decreasing $37.4 million, offset in part by cash and cash equivalents increasing $18.1 million and other current assets increasing $10.2 million. Accounts receivable decreased due to a decrease of $50.9 million in Video and Networking accounts receivable, which were excluded from the sale to Grass Valley Group, Inc., offset in part by a decline of $5.0 million in securitized receivables and an increase in Measurement accounts receivable resulting from increased sales over the prior quarter. Inventory declined due to $43.6 million of Video and Networking inventory that did not remain at the end of the quarter as a result of the sale to Grass Valley Group, Inc., offset in part by an increase in inventory in the Measurement division. Measurement inventory, especially purchased materials and work in process balances, were greater than those at year-end due to increased sales over the prior quarter, as well as increased order backlog and production forecasts going into the next quarter. Cash and cash equivalents increased $18.1 million during the first half of the year. Sources of cash included $46.0 million from continuing operations, $6.0 million from discontinued operations, $22.6 million in net proceeds from the sale of Video and Networking and $14.8 million in proceeds from sales of real estate and other fixed assets. Cash was consumed during the first half of the year through capital expenditures of $22.5 million, dividends of $11.3 million and a $36.1 million reduction in short-term debt. Other current assets increased primarily due to the recording of the $5.0 million current portion of a note receivable from Grass Valley Group, Inc., as well as an increase in current income tax benefits of $3.3 million associated mainly with non-recurring charges recorded in connection with the sale of the Video and Networking division. Current liabilities decreased $48.7 million during the first half of 2000, due mainly to a decrease in short-term debt of $36.1 million and a decrease in accrued compensation of $14.7 million. Short-term debt declined as cash requirements were met with cash received from the sale of Video and Networking and other sources. Accrued compensation decreased mainly due to the transfer of accrued payroll for Video and Networking employees to Grass Valley Group, Inc., payment of severance, as well as payment of year-end accruals of incentives and commissions. LONG-TERM FINANCIAL POSITION Other long-term assets increased $17.8 million due mainly to the recording of the $17.5 million long-term portion of a note receivable from Grass Valley Group, Inc. and a 10% equity interest in that company, which is accounted for under the cost method. Shareholders' equity was nearly flat, as compared to year-end. 15 <PAGE> YEAR 2000 UPDATE Subject to continued monitoring of third party suppliers, Tektronix, Inc.'s Year 2000 Program (Program) is complete, and no material problems have arisen since the end of calendar year 1999. The Program addressed the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000. All of the company's business computer systems are year 2000 ready. Other information technology projects have not been delayed due to the implementation of the Year 2000 Program. Program Tektronix' Program was divided into three major sections: (1) infrastructure (information, logistics and other technology used in the company's business, including hardware and software, which is sometimes referred to as IT); (2) products (hardware and software products delivered to customers); and (3) external suppliers and providers (vendors, manufacturers and suppliers to the company). The general phases common to all sections were: (1) identification and prioritization of various systems through an extensive inventory of all items used throughout the company including customer products and services and material third party manufacturers, suppliers and vendors; (2) remediation of material systems through replacement or updates; (3) testing, including the sending, receiving and processing of various information types to ensure ongoing functionality, integrity and accuracy; and (4) contingency planning to establish alternate solutions for any material systems determined not to be year 2000 compliant. Material items were those believed by the company to have a risk involving the safety of individuals or that may cause damage to property or the environment, or affect the continuation of business activities or materially affect revenues. All phases for all three sections are complete. The company's products that are not year 2000 ready have been identified, and the company has determined to what extent upgrades will be made available to make non-compliant products ready. All newly introduced products will be year 2000 ready. The company maintains a web site for customers to review product readiness, including product upgrades, customer-serviceable fixes, and non-compliant products for which upgrades will not be available. Material external suppliers have been identified and prioritized. Tektronix has evaluated the preparedness of material external suppliers. Contingency plans address alternatives in the event that a material supplier is unable to supply materials or services due to a lack of preparedness. Evaluating supplier readiness included written representations from suppliers regarding their year 2000 readiness programs, as well as onsite assessments. Assessments were conducted using the criteria established by the High Tech Consortium, LLC, an organization consisting of approximately 15 other high technology companies that was organized for the purpose of developing review criteria and sharing the results of common supplier readiness assessments. Costs Costs associated with modifications to become year 2000 ready, as well as the total cost of the Year 2000 Program (but not including the costs of the Oracle enterprise system), are estimated as follows: (In thousands) - ------------------------------------------------------------------------------- Costs incurred through November 27, 1999 $ 2,368 Estimated remaining costs 358 ------- Total costs $ 2,726 ======= The total costs associated with required modifications to become year 2000 ready, as well as the total costs of the Year 2000 Program, are not expected to be material to the company's financial position or operating results. Such costs are expensed as incurred in accordance with generally accepted accounting principles. 16 <PAGE> Risks The failure to correct a material year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the company's results of operations, liquidity and financial condition. While the company is not aware of any material 2000 related problems that have resulted from the new year, due to the general uncertainty inherent in the year 2000 problem, the company is unable to determine at this time whether the consequences of year 2000 failures will have a material impact on the company's results of operations, liquidity or financial condition. The Year 2000 Program, which has been completed, together with ongoing monitoring of suppliers during the Year 2000, is expected to significantly reduce the company's level of uncertainty about the year 2000 problem and significantly reduce the risk of significant interruptions of normal operations. Tektronix believes that its most reasonably likely worst-case year 2000 scenarios would relate to problems with the systems of third parties rather than with the company's internal systems or its products. The company believes the risks are greatest with transportation supply chains and critical suppliers of materials, because the company has less control over assessing and remediating the year 2000 problems of third parties. A worst-case scenario involving a transportation supply chain or a critical supplier of materials would be the partial or complete shutdown of transportation facilities or the supplier, with the resulting inability to provide critical materials to the company on a timely basis. The company does not maintain the capability to replace most third-party materials with internal production. Contingency planning includes alternatives where efforts to work with critical suppliers to ensure year 2000 capability have not been successful. The company is not in a position to identify or to avoid all possible scenarios. Contingency plans include mitigating the impact of various scenarios if they were to occur. Due to the large number of variables involved, the company cannot provide an estimate of the damage it might suffer if any of these scenarios were to occur. The above contains forward-looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations, intentions and resources and are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that forward-looking statements contained in the "Year 2000 Update" should be read in conjunction with the company's disclosures under "Forward-looking Statements." FORWARD-LOOKING STATEMENTS Statements and information included in this Form 10-Q that relate to the company's goals, strategies and expectations as to future results and events are based on the company's current expectations. They constitute forward-looking statements subject to a number of risk factors that could cause actual results to differ materially from those currently expected or desired. As with many high technology companies, risk 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: worldwide economic and business conditions in the electronics industry; competitive factors, including pricing pressures, technological developments and new products offered by competitors; changes in product and sales mix, 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; and 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. Tektronix has other risk factors in its business, including, but not limited to: the continued growth in wireless communication infrastructure and the semiconductor industry; the effects of year 2000 compliance issues later in the year; the timely introduction of new products scheduled during the current year, which could be affected by engineering or other development program slippage, the ability to ramp up production or to develop effective sales channels; customers' acceptance of and demand for new products; the ability to reduce expenditures; and other risk factors listed from time-to-time in the company's Securities and Exchange Commission reports and press releases. 17 <PAGE> Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------- ---------------------------------------------------------- Reference is made to Item 7A of the company's Annual Report on Form 10-K for the year ended May 29, 1999. 18 <PAGE> PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibit: (2) (i) Amended Asset Purchase Agreement between Tektronix, Inc. and Xerox Corporation dated as of September 22, 1999 and Amendment Nos. 1 and 2 thereto. (27) (i) Financial Data Schedule. -------------- (b) Reports on Form 8-K: Tektronix filed a report on Form 8-K on October 12, 1999 with respect to the sale of substantially all of the operating assets related to its video content production business to Grass Valley Group, Inc. 19 <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. January 11, 2000 TEKTRONIX, INC. By CARL W. NEUN -------------------------------------- Carl W. Neun Senior Vice President and Chief Financial Officer 20 <PAGE> EXHIBIT INDEX Exhibit No. Exhibit Description ----------- ------------------- (2) (i) Amended Asset Purchase Agreement between Tektronix, Inc. and Xerox Corporation dated as of September 22, 1999 and Amendment Nos. 1 and 2 thereto. (27) (i) Financial Data Schedule. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-2.(I) <SEQUENCE>2 <DESCRIPTION>AMENDED ASSET PURCHASE AGREEMENT <TEXT> AMENDED ASSET PURCHASE AGREEMENT dated as of September 22, 1999, by and between XEROX CORPORATION and TEKTRONIX, INC. with respect to the assets of its Color Printing and Imaging Products Division <PAGE> TABLE OF CONTENTS ARTICLE 1 SALE OF ASSETS AND CLOSING.............................................. 2 1.1 Assets...................................................... 2 1.2 Liabilities................................................. 7 1.3 Sale of United States Purchased Assets and Non-United States Purchased Assets Owned by Selling Affiliates and Assumption of Assumed Liabilities by the Purchasing Affiliates......... 12 1.4 Purchase Price; Allocation; Adjustment...................... 18 1.5 Closing..................................................... 23 1.6 Prorations.................................................. 25 1.7 Further Assurances; Post-Closing Cooperation................ 25 1.8 Third-Party Consents........................................ 26 1.9 Insurance Proceeds.......................................... 27 ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER................................ 27 2.1 Organization of Seller and the Selling Affiliates........... 27 2.2 Authority................................................... 28 2.3 No Conflicts................................................ 28 2.4 Governmental Approvals and Filings.......................... 29 2.5 Books and Records........................................... 29 2.6 Financial Statements........................................ 29 2.7 Absence of Changes.......................................... 30 2.8 No Undisclosed Liabilities.................................. 32 2.9 Taxes....................................................... 32 2.10 Legal Proceedings........................................... 36 2.11 Compliance With Laws and Orders............................. 37 2.12 Benefit Plans: ERISA........................................ 37 2.13 Real Property............................................... 38 2.14 Tangible Personal Property.................................. 40 2.15 Intellectual Property Rights................................ 41 2.16 Contracts................................................... 42 2.17 Business Licenses........................................... 44 2.18 Insurance................................................... 44 2.19 Affiliate Transactions...................................... 44 2.20 Employees; Labor Relations.................................. 45 2.21 Environmental Matters, etc.................................. 45 2.22 Substantial Customers and Suppliers......................... 48 2.23 Accounts Receivable......................................... 48 AMENDED ASSET PURCHASE AGREEMENT i <PAGE> Page 2.24 Inventory................................................... 48 2.25 Vehicles.................................................... 48 2.26 No Guarantees............................................... 49 2.27 Entire Business............................................. 49 2.28 Brokers..................................................... 49 2.29 Year 2000................................................... 49 2.30 Disclosure.................................................. 50 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASER............................. 51 3.1 Organization of Purchaser and the Purchasing Affiliates..... 51 3.2 Authority................................................... 51 3.3 No Conflicts................................................ 51 3.4 Governmental Approvals and Filings.......................... 52 3.5 Legal Proceedings........................................... 52 3.6 Brokers..................................................... 52 ARTICLE 4 COVENANTS OF SELLER..................................................... 53 4.1 Regulatory and Other Approvals.............................. 53 4.2 HSR Filings, etc............................................ 53 4.3 Investigation by Purchaser.................................. 54 4.4 No Solicitations............................................ 54 4.5 Conduct of Business......................................... 55 4.6 Financial Statements and Reports; Filings................... 55 4.7 Employee Matters............................................ 56 4.8 Certain Restrictions........................................ 57 4.9 Security Deposits........................................... 58 4.10 Delivery of Books and Records, etc.; Removal of Property.... 58 4.11 Noncompetition.............................................. 58 4.12 Notice and Cure............................................. 60 4.13 Fulfillment of Conditions................................... 60 4.14 Environmental Matters. .................................... 61 ARTICLE 5 COVENANTS OF PURCHASER.................................................. 61 5.1 Regulatory and Other Approvals.............................. 61 5.2 HSR Filings, etc............................................ 62 5.3 Notice and Cure............................................. 62 5.4 Fulfillment of Conditions................................... 63 AMENDED ASSET PURCHASE AGREEMENT ii <PAGE> Page ARTICLE 6 CONDITIONS TO OBLIGATIONS OF PURCHASER.................................. 63 6.1 Representations and Warranties.............................. 63 6.2 Performance................................................. 64 6.3 Officers' Certificates...................................... 64 6.4 No Material Adverse Change.................................. 64 6.5 Orders and Laws............................................. 64 6.6 Regulatory Consents and Approvals........................... 65 6.7 Third Party Consents........................................ 65 6.8 Title Insurance............................................. 65 6.9 General Assignment, Assignment Instruments.................. 66 6.10 Transition Agreement........................................ 66 6.11 Trademark License Agreement................................. 66 6.12 Technology Transfer Agreement............................... 66 6.13 Ancillary Agreements........................................ 66 6.14 Malaysian Stock Purchase Agreement.......................... 66 6.15 Proceedings................................................. 66 6.16 Accounting Policies......................................... 66 ARTICLE 7 CONDITIONS TO OBLIGATIONS OF SELLER..................................... 67 7.1 Representations and Warranties.............................. 67 7.2 Performance................................................. 67 7.3 Officers' Certificates...................................... 67 7.4 Orders and Laws............................................. 68 7.5 Regulatory Consents and Approvals........................... 68 7.6 Third Party Consents........................................ 68 7.7 Assumption Agreement; Assumption Instruments................ 68 7.8 Transition Agreement........................................ 69 7.9 Trademark License Agreement................................. 69 7.10 Technology Transfer Agreement............................... 69 7.11 Ancillary Agreements........................................ 69 7.12 Malaysian Stock Purchase Agreement.......................... 69 7.13 Proceedings................................................. 69 ARTICLE 8 TAX MATTERS; CLOSING AND POST-CLOSING TAXES; VAT........................ 70 8.1 General..................................................... 70 8.2 Return Preparation.......................................... 70 8.3 Tax Refunds................................................. 71 8.4 Cooperation with Respect to Tax Matters..................... 72 AMENDED ASSET PURCHASE AGREEMENT iii <PAGE> Page 8.5 Transfer Taxes.............................................. 73 8.6 Real Property Taxes......................................... 74 8.7 VAT......................................................... 74 ARTICLE 9 EMPLOYEE MATTERS........................................................ 77 9.1 Offer of Employment......................................... 77 9.2 Purchaser's Plan Service Credits............................ 77 9.3 Employee Benefit Programs Service Credits................... 78 9.4 WARN Act.................................................... 78 9.5 Foreign Nationals........................................... 78 9.6 Seller COBRA Compliance..................................... 78 9.7 Evidence of Insurability.................................... 79 9.8 HMO Coverage................................................ 79 9.9 Direct Transfer of 401(k) Balances.......................... 79 ARTICLE 10 SURVIVAL OF REPRESENTATIONS, WARRANTIES,COVENANTS AND AGREEMENTS.............................................................. 79 ARTICLE 11 INDEMNIFICATION......................................................... 80 11.1 Tax Indemnification......................................... 80 11.2 Other Indemnification....................................... 82 11.3 Method of Asserting Claims.................................. 85 ARTICLE 12 TERMINATION............................................................. 88 12.1 Termination................................................. 88 12.2 Effect of Termination....................................... 91 ARTICLE 13 DEFINITIONS............................................................. 92 13.1 Definitions................................................. 92 ARTICLE 14 MISCELLANEOUS...........................................................104 14.1 Notices.....................................................104 14.2 Bulk Sales Act..............................................106 14.3 Entire Agreement............................................106 14.4 Expenses....................................................106 AMENDED ASSET PURCHASE AGREEMENT iv <PAGE> 14.5 Public Announcements........................................106 14.6 Sony-Tektronix Corporation..................................106 14.7 Waiver......................................................107 14.8 Amendment...................................................107 14.9 No Third Party Beneficiary..................................107 14.10 No Assignment: Binding Effect...............................107 14.11 Headings....................................................107 14.12 Invalid Provisions..........................................107 14.13 Governing Law...............................................108 14.14 Accounting Policies.........................................108 14.15 Counterparts................................................108 AMENDED ASSET PURCHASE AGREEMENT v <PAGE> EXHIBITS Exhibit A Technology Transfer Agreement AMENDED ASSET PURCHASE AGREEMENT vi <PAGE> This AMENDED ASSET PURCHASE AGREEMENT dated as of September 22, 1999, is made and entered into by and between XEROX CORPORATION, a New York corporation, ("Purchaser"), and TEKTRONIX, INC., an Oregon corporation, ("Seller"). Capitalized terms not otherwise defined herein have the meanings set forth in Section 13.1. WHEREAS, Seller, through its Color Printing and Imaging Products Division (the "Division"), and the wholly owned subsidiaries and Affiliates of Seller identified in Section 2.1 of the Disclosure Schedules hereto (each such subsidiary or Affiliate, a "Selling Affiliate"; all such subsidiaries and Affiliates, collectively, the "Selling Affiliates") are engaged in the business of developing, manufacturing, distributing and servicing printers and related products, accessories and supplies throughout the world (such business as conducted by the Division and the Selling Affiliates is hereinafter referred to as the "Business"); WHEREAS, Seller desires to sell, transfer and assign to Purchaser, and desires to cause the Selling Affiliates to sell, transfer and assign to Purchaser, substantially all of the assets relating to the Business, all in accordance with the terms and conditions set forth in this Agreement; and WHEREAS, Purchaser desires to purchase and acquire from Seller or the Selling Affiliates, or to cause certain subsidiaries or Affiliates of Purchaser (each such subsidiary or Affiliate, a "Purchasing Affiliate"; all such subsidiaries and Affiliates, collectively, the "Purchasing Affiliates") to purchase and acquire from Seller or the Selling Affiliates, said assets relating to the Business and, in connection therewith, Purchaser has agreed to assume, or to cause one or more Purchasing Affiliates to assume, certain Liabilities relating to the Business, all in accordance with the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 SALE OF ASSETS AND CLOSING 1.1 Assets. (a) Assets Purchased. On the terms and subject to the conditions set forth in this Agreement, at the Closing or the applicable Foreign Closing, as the case may be, Seller will sell, transfer, convey, assign and deliver to Purchaser or to a Purchasing Affiliate or Purchasing Affiliates designated by Purchaser, and will cause each of the Selling Affiliates to sell, transfer, convey, assign and deliver to Purchaser or to the designated Purchasing Affiliate, free and clear of all Liens other than Permitted Liens, AMENDED ASSET PURCHASE AGREEMENT 2 <PAGE> all of Seller's or the Selling Affiliates' right, title and interest in, to and under the Assets and Properties used or held for use primarily in connection with the Business, including but not limited to those Assets and Properties described in this Section 1.1(a), and Purchaser or the designated Purchasing Affiliate will purchase and pay for such Assets and Properties, as the same shall exist on the Closing Date or the applicable Foreign Closing Date, as the case may be (collectively, the "Purchased Assets"). Without limiting the generality of the foregoing, the Purchased Assets shall not include any of the Excluded Assets described in Section 1.1(b), but shall include the following: (i) Real Property. The real property described in Section 1.1(a)(i) of the Disclosure Schedule, and all of the rights arising out of the ownership thereof or appurtenant thereto (the "Real Property"), together with all buildings, structures, facilities, fixtures and other improvements thereto (the "Improvements"); (ii) Real Property Leases. The leases and subleases of real property described in Section 1.1(a)(ii) of the Disclosure Schedule as to which Seller or a Selling Affiliate is the lessee or sublessee, together with any options to purchase the underlying property and leasehold improvements thereon, and in each case all other rights, subleases, licenses, permits, deposits and profits appurtenant to or related to such leases and subleases (the "Real Property Leases"); (iii) Inventory. All inventories of raw materials, work-in-process, finished goods, demonstration equipment, office and other supplies, parts, packaging materials and other accessories related thereto which are used or held for use primarily in the conduct of the Business, including any of the foregoing purchased subject to any conditional sales or title retention agreement in favor of any other Person, but excluding any inventory disposed of in the ordinary course of business before the Closing Date in accordance with Section 4.8(a), together with all rights against suppliers of such inventories (the "Inventory"); (iv) Accounts Receivable. All trade accounts receivable and all notes, bonds and other evidences of Indebtedness of and rights to receive payments arising out of sales occurring in the conduct of the Business and all Security Agreements related thereto, including any rights with respect to any third party collection procedures or any other Actions or Proceedings which have been commenced in connection therewith, excluding any accounts receivables included in Intercompany Accounts and any Sales Taxes included in accounts receivable that are not invoiced as of the Closing Date or the applicable Foreign Closing Date (the "Accounts Receivable"); (v) Tangible Personal Property. All furniture, computer hardware and software, fixtures, equipment, machinery, tools, dies, jigs, patterns, molds, breadboards, prototypes, engineering and pre-engineering models and AMENDED ASSET PURCHASE AGREEMENT 3 <PAGE> components and other tangible personal property (other than Inventory and Vehicles) used or held for use primarily in the conduct of the Business (including but not limited to the items listed in Section 1.1(a)(v) of the Disclosure Schedule), including any of the foregoing purchased subject to any conditional sales or title retention agreement in favor of any other Person, but excluding any such items disposed of in the ordinary course of business before the Closing Date in accordance with Section 4.8(a) (the "Tangible Personal Property"); (vi) Personal Property Leases. (A) The leases or subleases of Tangible Personal Property used or held for use primarily in the conduct of the Business, including those described in Section 1.1(a)(vi)(A) of the Disclosure Schedule as to which Seller or a Selling Affiliate is the lessor or sublessor, and (B) the leases of Tangible Personal Property used or held for use primarily in the conduct of the Business, including those described in Section 1.1(a) (vi) (B) of the Disclosure Schedule as to which Seller or a Selling Affiliate is the lessee or sublessee, together with any options to purchase the underlying property (the leases and subleases described in subclauses (A) and (B) hereof, the "Personal Property Leases"); (vii) Business Contracts. All Contracts (other than the Real Property Leases, the Personal Property Leases and the Accounts Receivable) which are utilized in the conduct of the Business, including without limitation those Contracts relating to suppliers, sales representatives, sales agents, distributors, dealers, value-added resellers, purchase orders, service arrangements, marketing arrangements, manufacturing arrangements, research and development arrangements, product development arrangements and licensing arrangements, including those listed in Section 2.16(a) of the Disclosure Schedule (the "Business Contracts"); (viii) Prepaid Expenses. All prepaid items related primarily to the Business and reflected in the Statement of Closing Net Assets as "prepaid expenses" (the "Prepaid Expenses "); (ix) Intangible Personal Property. All customer lists, intangibles for marketing and other intangibles used or held for use in the conduct and/or development of the Business (including any goodwill therein) and all rights, privileges, claims, causes of action and options relating or pertaining to the Business or the Purchased Assets, including but not limited to the rights arising out of the covenant of non-competition in Section 4.11 and the items listed in Section 1.1(a) (ix) of the Disclosure Schedule, provided, however, that all Intellectual Property, including any Intellectual Property transferred under the Technology Transfer Agreement, shall be excluded (the "Intangible Personal Property"); AMENDED ASSET PURCHASE AGREEMENT 4 <PAGE> (x) Business Licenses. All Licenses (including applications therefor) utilized in the conduct of the Business (the "Business Licenses"); (xi) Vehicles. All motor vehicles owned or leased by Seller or a Selling Affiliate and used or held for use primarily in the conduct of the Business, including but not limited to the vehicles listed in Section 1.1(a) (xi) of the Disclosure Schedule (the "Vehicles"); (xii) Security Deposits. All security deposits deposited by or on behalf of Seller or a Selling Affiliate as lessee or sublessee under the Real Property Leases or the Personal Property Leases (the "Tenant Security Deposits"); (xiii) Books and Records. All Books and Records used or held for use in the conduct of the Business or otherwise relating to the Total Acquired Assets, other than the minute books, stock transfer books, Tax Returns and corporate seal of Seller or a Selling Affiliate (the "Business Books and Records"); (xiv) Stock in Tektronix Malaysia Sdn. Bhd. All of the capital stock and other equity or ownership interests owned by Seller or a Selling Affiliate in Tektronix Malaysia Sdn. Bhd. to be acquired by Purchaser or a Purchasing Affiliate in accordance with the terms and conditions of a Stock Purchase Agreement, in form and substance reasonably acceptable to Seller and Purchaser, that is usual and customary for transactions of such type in Malaysia so as to effect the sale and transfer of all of the capital stock of Tektronix Malaysia Sdn. Bhd. to the Purchaser or the designated Purchasing Affiliate in order to give the parties the benefit of this Agreement and to conform to the Laws, customs and practices of Malaysia; (xv) Selling Affiliate Cash. All cash on hand and in banks with respect to any Selling Affiliate, the Non-United States Purchased Assets of which are not sold on the Closing Date and which arise in the operation of the Business between the Closing Date and the applicable Foreign Closing Date with respect to such Selling Affiliate (so long as such Foreign Closing Date actually occurs); and (xvi) Other Assets and Properties. All other Assets and Properties used or held for use primarily in connection with the Business and not excluded pursuant to Section 1.1(b) (the "Other Purchased Assets"). To the extent any of the Business Books and Records are items susceptible to duplication and are either (AA) used in connection with any of Seller's or the Selling Affiliates' businesses other than the Business or (BB) are required by Law to be retained by Seller or a Selling Affiliate or are necessary to assist Seller in the preparation of its financial statements, Seller or the Selling Affiliate may deliver photocopies, other reproductions or electronic media from which, in the case of Business Books and Records referred to in the foregoing clause (AA), information solely concerning Seller's AMENDED ASSET PURCHASE AGREEMENT 5 <PAGE> or the Selling Affiliates' businesses other than the Business has been deleted. (b) Excluded Assets. Notwithstanding anything in this Agreement to the contrary, the following Assets and Properties (the "Excluded Assets") shall be excluded from and shall not constitute Purchased Assets: (i) Cash. Cash, commercial paper, certificates of deposit and other bank deposits, treasury bills, other cash equivalents and rebates received prior to Closing to the extent not reflected in the Statement of Closing Net Assets (whether in respect of suppliers, insurers or otherwise other than warranty rights); (ii) Insurance. Life insurance policies on officers and other employees of Seller and all other insurance policies relating to the operation of the Business and rights arising from any refunds due (including, but not limited to, retrospective premium adjustment) with respect to insurance premium payments; (iii) Employee Benefit Plans. All assets owned or held by any Benefit Plans unless such assets relate to a foreign benefit obligation which Purchaser is required to assume under applicable Laws; (iv) Tax Refunds. All refunds or credits, if any, of Taxes due to or from Seller or any of its Affiliates unless such refunds or credits are included in the Statement of Closing Net Assets; (v) Tax Deposits. Deposits of Seller or any Selling Affiliate with any Taxing Authority, including without limitation, tax deposits, prepayment and estimated payments unless included in the Statement of Closing Net Assets; (vi) Deferred Tax Assets. Any Deferred Tax Assets of Seller or any Selling Affiliate related to the Business; (vii) Tax and Financial Records. Seller's and Selling Affiliates' Tax Returns, tax and financial records and reports and other documents and records pertaining to Seller's and Selling Affiliates' operation of the Business that Seller or Selling Affiliates are required by Laws to retain or that will be necessary or advisable for Seller or Selling Affiliates to retain, in their reasonable discretion, for tax or related purposes; (viii) Real and Personal Property and Real Property Leases. The real and personal property and real property leases described in Section 1.1(b)(viii) of the Disclosure Schedule; (ix) Litigation Claims. Any rights (including indemnification) and claims and recoveries under litigation of Seller or a Selling Affiliate (A) AMENDED ASSET PURCHASE AGREEMENT 6 <PAGE> commenced against third parties prior to the Closing Date or the applicable Foreign Closing Date if and to the extent related to any of the Excluded Assets or Retained Liabilities, whether arising by way of counterclaim or otherwise or (B) arising out of or relating to events that occur following the Closing; (x) Shared Assets. The Shared Assets as defined in Section 2.27; (xi) Intellectual Property. The Intellectual Property to be transferred or licensed to Purchaser pursuant to the Technology Transfer Agreement; (xii) Excluded Obligations. The rights and obligations of Seller or a Selling Affiliate in, to and under (A) all Contracts listed in Section 1.1(b)(xii) of the Disclosure Schedule or (B) any other Contracts, unless the obligations of Seller or a Selling Affiliate in, to and under such other Contracts are expressly assumed by Purchaser pursuant to Section 1.2(a); (xiii) Tradename and Logo. All right, title and interest in, to and under the "Tektronix" name, trademark, service mark and the Tektronix logo; (xiv) Prepaid Expenses. Rights arising from prepaid expenses, if any, with respect to Excluded Assets; (xv) Other Excluded Assets and Properties. The Assets and Properties described on Schedule 1.1(b)(xv) of the Disclosure Schedule; (xvi) Certain Rights of Seller. Seller's rights under this Agreement, the Ancillary Agreements and the Operative Agreements; (xvii) Assets Disposed of in the Ordinary Course of Business. Any assets described in the Disclosure Schedules to Section 1.1 that are transferred or otherwise disposed of by Seller or a Selling Affiliate prior to the Closing in the ordinary course of business without violation of this Agreement; and (xviii) Non-Business Assets and Properties. Any of the Assets and Properties of Seller or a Selling Affiliate that are not primarily related to or used primarily in connection with the Business, including but not limited to, Assets and Properties used in Seller's measurement business or video business. 1.2 Liabilities. (a) Assumed Liabilities. In connection with the sale, transfer, conveyance, assignment and delivery of the Purchased Assets pursuant to this Agreement, on the terms and subject to the conditions set forth in this Agreement, at the Closing or the applicable Foreign Closing, as the case may be, subject to Section 11.2(a)(iii), Purchaser will assume and agree to pay, perform and discharge when due, or will cause a AMENDED ASSET PURCHASE AGREEMENT 7 <PAGE> designated Purchasing Affiliate to assume and agree to pay, perform and discharge when due, the following obligations of Seller or a Selling Affiliate, as the case may be, arising primarily in connection with the operation of the Business, as the same shall exist on the Closing Date or the applicable Foreign Closing Date, as the case may be (the "AssumedLiabilities"), and no others: (i) Real Property Lease Obligations. All obligations of Seller or a Selling Affiliate under the Real Property Leases; (ii) Accounts Payable. All obligations of Seller or a Selling Affiliate with respect to accounts payable reflected or reserved against in the Statement of Closing Net Assets and those arising in the ordinary course of business since the date of the Statement of Closing Net Assets, excluding (X) accounts payable included in Intercompany Accounts and (Y) any amounts attributable to VAT which have been invoiced as of the Closing Date or the applicable Foreign Closing Date (the "Accounts Payable"); (iii) Personal Property Lease Obligations. All obligations of Seller or a Selling Affiliate under the Personal Property Leases; (iv) Obligations under Business Contracts and Business Licenses. All obligations of Seller or a Selling Affiliate under the Business Contracts and Business Licenses; (v) Accrued Expenses. All obligations of Seller or a Selling Affiliate with respect to accrued expenses reflected or reserved against in the Statement of Closing Net Assets or those incurred in the ordinary course of business since the date of the Statement of Closing Net Assets, excluding all accrued and unpaid expenses payable under Intercompany Accounts and all Taxes (except to the extent they are Assumed Real Property Taxes) (the "Accrued Expenses"); (vi) Assumed Real Property Taxes. The Prorated Real Property Taxes arising out of the Business for the tax period during which the Closing Date or the applicable Foreign Closing Date occurs (excluding any Liability for Taxes arising out of the sale or transfer of the Real Property) (the "Assumed Real Property Taxes"). The Assumed Real Property Taxes shall be treated as an Assumed Liability irrespective of whether, at the time of Closing or the applicable Foreign Closing, liability for the Real Property Taxes attached or whether such Real Property Taxes have become payable or have been paid by Seller or any Selling Affiliate; (vii) Security Deposits. All obligations of Seller or a Selling Affiliate with respect to any security deposit held by Seller or a Selling Affiliate as lessor or sublessor under the Real Property Leases and the Personal Property Leases (the "Landlord Security Deposits"); AMENDED ASSET PURCHASE AGREEMENT 8 <PAGE> (viii) Severance and Other Employee-Related Liabilities. All Liabilities and obligations expressly assumed by Purchaser in accordance with Article 9; (ix) Balance Sheet Liabilities. All Liabilities and obligations reflected in the Statement of Closing Net Assets; (x) Liabilities of Selling Affiliates. All Liabilities of Selling Affiliates, the Non-United States Purchased Assets of which are not sold on the Closing Date, which arise in the operation of the Business between the Closing Date and the Foreign Closing Date with respect to such Selling Affiliate (so long as such Foreign Closing Date actually occurs); (xi) Warranty Obligations. All Liabilities and obligations under all of Seller's or a Selling Affiliate's warranty arrangements for Business products sold before or after the Closing, which arrangements were made in the ordinary course of business consistent with past practices; (xii) Customer Support and Service. All Liabilities and obligations for customer support and services under Seller's policies and practices for the Business, whether arising before or after the Closing, which policies and practices were made in the ordinary course of business consistent with past practices; (xiii) Customer Policies. All Liabilities and obligations of the Business to customers whose purchased products are no longer covered by warranty consistent with Seller's long-term support policies, whether arising before or after the Closing, which policies were made in the ordinary course of business consistent with past practices; provided, that such obligations and Liabilities shall be discharged in a manner and with a level of professionalism customary in the industry and consistent with Purchaser's practices; (xiv) Wilsonville, Oregon. All Liabilities or obligations of Seller or any Selling Affiliate, whether known or unknown, fixed or contingent, with respect to or relating to any Environmental Laws or any Environmental Claim arising out of any acts, omissions, or conditions relating to the operations associated with the Real Property located at Wilsonville, Oregon, but specifically excluding any Environmental Claim related to the real property (located adjacent to Seller's Wilsonville, Oregon, property) that was sold by Seller to Venture Properties, Inc. in 1998; (xv) Intellectual Property Infringement. All claims against or Liabilities of Seller or any Selling Affiliates arising out of or in any way connected with infringement of any Intellectual Property arising out of the conduct of the Business, whether before or after the Closing Date, regardless of whether said claim or Liability is asserted, including but not limited to any claim AMENDED ASSET PURCHASE AGREEMENT 9 <PAGE> or Liability for consequential or punitive damages in connection with the foregoing; (xvi) Litigation. All Liabilities and obligations related to pending litigation listed in Section 2.10 of the Disclosure Schedule; (xvii) Other Taxes. All Taxes expressly assumed by Purchaser or Purchasing Affiliates in accordance with Article 8; (xviii) Hazardous Products, etc. Any claims against or Liabilities arising out of or in any way connected with (A) Products that contain a hazard or are found by any Governmental or Regulatory Authority to contain a hazard as that term is used in the United States Consumer Product Safety Commission Act or any similar Laws (including, but not limited to, any voluntary or required recalls of such Products), or (B) Epidemic Failures of Products (including but not limited to any costs or expenses incurred in connection with refunds, returns, replacements or repairs of same), in either case arising out of the sale of Products or the conduct of the Business by Seller or any Selling Affiliate prior to the Closing Date or the applicable Foreign Closing Date, regardless of when or against whom said claim or Liability is asserted, including, but not limited to, any claim or Liability for consequential or punitive damages in connection with the foregoing and, in either case, excluding Retained Liabilities described in Section 1.2(b)(vii); and (xix) Print Head Drift. All Liabilities and obligations related to print head drift associated with Seller's Phaser 340/350/360 Products ("Print Head Drift"). Subject to Section 11.2(a)(iii), Purchaser shall remain solely responsible for satisfying, discharging or performing all such Assumed Liabilities on a timely basis in accordance with their terms, provided Purchaser or a Purchasing Affiliate shall have the ability to contest, in good faith, any such claim of Liability asserted in respect thereof by any Person. (b) Retained Liabilities. Except for the Assumed Liabilities, and without any implication that Purchaser or a Purchasing Affiliate is assuming any Liability not expressly excluded by this Section 1.2(b) and, where applicable, without any implication that any of the following would constitute Assumed Liabilities but for this Section 1.2(b), neither Purchaser nor any Purchasing Affiliate shall assume by virtue of this Agreement or the transactions contemplated hereby, and shall have no liability for, any Liabilities of Seller or a Selling Affiliate (including, without limitation, those related to the Business) of any kind, character or description whatsoever, whether known or unknown, contingent or otherwise, including but not limited to those Liabilities described in this Section 1.2(b) (the "Retained Liabilities"). AMENDED ASSET PURCHASE AGREEMENT 10 <PAGE> (i) Intercompany Accounts. Any Liabilities reflected in Intercompany Accounts; (ii) Fees. Any Liabilities for legal, accounting, audit and investment banking fees, brokerage commissions, and any other expenses incurred by Seller or the Selling Affiliates in connection with the negotiation and preparation of this Agreement and the sale of the Assets and Properties; (iii) Taxes. Any Liabilities of Seller or any of its Affiliates for Taxes, irrespective of the manner in which such Taxes are reflected on the financial statements of Seller or any Affiliate, including any Deferred Tax Liability, except to the extent they are Assumed Real Property Taxes or are expressly assumed by Purchaser or any Purchasing Affiliate in accordance with Article 8; (iv) Debt. Any Liability for or related to Indebtedness of Seller or any of the Selling Affiliates, on its own behalf or on behalf of other Persons, to banks, financial institutions or other Persons with respect to borrowed money and including any interest payable in respect thereof; (v) Severance Payments. Any Liabilities of Seller or any of the Selling Affiliates to pay severance benefits or similar obligations which arise either from any action by Seller or a Selling Affiliate prior to the Closing Date or the applicable Foreign Closing Date or by virtue of the sale of the Purchased Assets pursuant to the provisions hereof (other than (A) any such Liabilities which arise out of any action by Purchaser or a Purchasing Affiliate on or following the Closing Date or the applicable Foreign Closing Date with respect to a Transferred Employee, it being understood and agreed that any such Liabilities constitute Assumed Liabilities hereunder or (B) obligations of Purchaser under Article 9); (vi) Worker Claims. Any Liability in respect of any wrongful discharge claim or claims by any Employees of Seller or any Selling Affiliate under any Laws arising out of the conduct of the Business by Seller or by any Selling Affiliate on or before the Closing Date or the applicable Foreign Closing Date; (vii) Tort and Product Claims. Any claims against or Liabilities of Seller or any Selling Affiliates for injury to or death of persons (including, without limitation, any worker's compensation claims) or damages to or destruction of property, arising from the sale or distribution of Products distributed, and/or business services provided, by Seller or any Selling Affiliate prior to the Closing Date or the applicable Foreign Closing Date, regardless of when said claim or Liability is asserted, including but not limited to, any claim or Liability for consequential or punitive damages in connection with the foregoing; AMENDED ASSET PURCHASE AGREEMENT 11 <PAGE> (viii) Benefit Plans. Except as specifically provided in Article 9, any Liabilities arising out of or in connection with any of the Benefit Plans; (ix) Employee Payments. Any so-called "sale bonuses" or similar payments payable to any Employees of Seller or any Selling Affiliate by reason of the sale of the Purchased Assets; (x) Environmental Claims. Any Liabilities or obligations of Seller or any Selling Affiliate, whether known or unknown, fixed or contingent, with respect to, or relating to, any Environmental Laws or any Environmental Claim, arising out of any acts, omissions, or conditions relating to the operations of the Business at locations other than Wilsonville, Oregon, including but not limited to the disposal of, transportation to, and arrangements for disposal of Hazardous Materials at Seller's Beaverton, Oregon, Treatment, Storage and Disposal Facility, the Western Processing Superfund Site located in Kent, Washington, and/or any other location and Hazardous Materials Contamination on the real property (located adjacent to Seller's Wilsonville, Oregon property) that was sold by Seller to Venture Properties, Inc. in 1998, Seller's former manufacturing facility in Heerenveen, The Netherlands, that was sold in 1996 and the Nanticoke Microtechnologies facility in Nanticoke, Pennsylvania; (xi) Non-Purchased Assets. Except as otherwise expressly provided in this Agreement, any Liability or obligation, whether presently in existence or hereafter arising, which is attributable to Assets and Properties that are not Purchased Assets; (xii) Litigation. Any Liability of Seller or any Selling Affiliates for any claim, complaint, action, suit, proceeding, arbitration or litigation (pending, threatened, contingent or otherwise) arising out of any acts, omissions or conditions that occurred prior to the Closing Date or the applicable Foreign Closing Date, except to the extent assumed by Purchaser or a Purchasing Affiliate pursuant to Section 1.2(a); and (xiii) Other. Without limitation by the specific enumeration of the foregoing, any Liabilities not expressly assumed by Purchaser or a Purchasing Affiliate pursuant to Section 1.2(a). Seller shall remain solely responsible for satisfying, discharging or performing all such Retained Liabilities on a timely basis in accordance with their terms, provided that Seller or a Selling Affiliate shall have the ability to contest, in good faith, any such claim of Liability asserted in respect thereof by any Person. 1.3 Sale of United States Purchased Assets and Non-United States Purchased Assets Owned by Selling Affiliates and Assumption of Assumed Liabilities by the Purchasing Affiliates. Tektronix Export, Inc. ("TEI") and Tektronix Asia, Ltd. ("Tek AMENDED ASSET PURCHASE AGREEMENT 12 <PAGE> Asia") shall sell their United States Purchased Assets to Purchaser under terms and conditions identical to the terms and conditions contained in this Agreement governing the sale by Seller of its United States Purchased Assets. Seller shall provide Purchaser with a separate bill of sale and any other commercially reasonable documentation requested by Purchaser to evidence the sale of TEI and Tek Asia's United States Purchased Assets to Purchaser. Certain of the Non-United States Purchased Assets shall be sold to the Purchasing Affiliates designated by Purchaser and certain of the Assumed Liabilities shall be assumed by such Purchasing Affiliates pursuant to the terms and conditions of separate Asset Purchase Agreements, in form and substance reasonably acceptable to Seller and Purchaser, so as to effect the sale, transfer and assignment of the Assets and Properties of the Selling Affiliates to the Purchasing Affiliates and the assumption of the associated Assumed Liabilities by the Purchasing Affiliates in order to give the parties the benefit of this Agreement and to conform to the Laws, customs and practices of the relevant jurisdiction, as follows: (a) Seller shall cause its Selling Affiliate, Tektronix Gesellschaft m.b.H. ("Austria Tek") to sell, transfer and assign the Assets and Properties of Austria Tek that constitute Non-United States Purchased Assets to Purchasing Affiliates, Xerox Austria G.m.b.H. ("Xerox Austria"), which shall purchase all of Austria Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels Limited ("Xerox Channels") and Purchaser shall cause Xerox Austria and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Austria Tek (the "Austria Acquisition"); (b) Seller shall cause its Selling Affiliate, Tektronix Australia Pty. Ltd. ("Australia Tek"), to sell, transfer and assign the Assets and Properties of Australia Tek that constitute Non-United States Purchased Assets to Purchaser or a designated Australian Purchasing Affiliate and Purchaser shall, or shall cause such designated Purchasing Affiliate to purchase such Assets and Properties and to assume certain Assumed Liabilities from Australia Tek (the "Australia Acquisition"); (c) Seller shall cause its Selling Affiliate, Tektronix N.V. ("Belgium Tek"), to sell, transfer and assign the Assets and Properties of Belgium Tek that constitute NonUnited States Purchased Assets to Purchasing Affiliates, N.V. Xerox S.A. ("Xerox Belgium"), which shall purchase all of Belgium Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels and Purchaser shall cause Xerox Belgium and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Belgium Tek (the "Belgium Acquisition"); (d) Seller shall cause its Selling Affiliate, Tektronix Industria e Comercio Ltda. ("Brazil Tek"), to sell, transfer and assign the Assets and Properties of Brazil Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate, Xerox Commercio E. Industria Ltda. ("Xerox Brazil"), and Purchaser shall cause Xerox Brazil AMENDED ASSET PURCHASE AGREEMENT 13 <PAGE> to purchase such Assets and Properties and to assume certain Assumed Liabilities from Brazil Tek (the "Brazil Acquisition"); (e) Seller shall cause its Selling Affiliate, Tektronix Canada, Inc. ("Canada Tek"), to sell, transfer and assign the Assets and Properties of Canada Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate, Xerox Canada Ltd. ("Xerox Canada"), and Purchaser shall cause Xerox Canada to purchase such Assets and Properties and to assume certain Assumed Liabilities from Canada Tek (the "Canada Acquisition"); (f) Seller shall cause its Selling Affiliate, Tektronix Electronics (China) Co., Ltd. ("China Tek"), to sell, transfer and assign the Assets and Properties of China Tek that constitute Non-United States Purchased Assets to Purchaser or to its designated Chinese Purchasing Affiliate and Purchaser shall, or shall cause its designated Chinese Purchasing Affiliate to, purchase such Assets and Properties and to assume certain Assumed Liabilities from China Tek (the "China Acquisition"); (g) Seller shall cause its Selling Affiliate, Tektronix A/S ("Denmark Tek"), to sell, transfer and assign the Assets and Properties of Denmark Tek that constitute NonUnited States Purchased Assets to Purchasing Affiliates, Xerox A/S ("Xerox Denmark"), which shall purchase all of Denmark Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels and Purchaser shall cause Xerox Denmark and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Denmark Tek (the "Denmark Acquisition"); (h) Seller shall cause its Selling Affiliate, Tektronix Oy ("Finland Tek"), to sell, transfer and assign the Assets and Properties of Finland Tek that constitute NonUnited States Purchased Assets to Purchasing Affiliates, Xerox Oy ("Xerox Finland"), which shall purchase all of Finland Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox Finland and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Finland Tek (the "Finland Acquisition"); (i) Seller shall cause its Selling Affiliate, Tektronix S.A. ("France Tek"), to sell, transfer and assign the Assets and Properties of France Tek that constitute NonUnited States Purchased Assets to Purchasing Affiliates, Xerox - THE DOCUMENT COMPANY SAS ("Xerox France"), which shall purchase all of France Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox France and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from France Tek (the "France Acquisition"); AMENDED ASSET PURCHASE AGREEMENT 14 <PAGE> (j) Seller shall cause its Selling Affiliate, Tektronix GmbH ("Germany Tek"), to sell, transfer and assign the Assets and Properties of Germany Tek that constitute NonUnited States Purchased Assets to Purchasing Affiliates, Xerox GmBh ("Xerox Germany"), which shall purchase all of Germany Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox Germany and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Germany Tek (the "Germany Acquisition"); (k) Seller shall cause its Selling Affiliate, Tektronix Hong Kong Limited ("Hong Kong Tek"), to sell, transfer and assign the Assets and Properties of Hong Kong Tek that constitute Non-United States Purchased Assets to Purchaser or its designated Hong Kong Purchasing Affiliate and Purchaser shall, or shall cause such designated Hong Kong Purchasing Affiliate to, purchase such Assets and Properties and to assume certain Assumed Liabilities from Hong Kong Tek (the "Hong Kong Acquisition"); (l) Seller shall cause its Selling Affiliate, Tektronix (India) Limited ("India Tek"), to sell, transfer and assign the Assets and Properties of India Tek that constitute Non-United States Purchased Assets to Purchaser or its designated Indian Purchasing Affiliate and Purchaser shall, or shall cause such designated Indian Purchasing Affiliate to, purchase such Assets and Properties and to assume certain Assumed Liabilities from India Tek (the "India Acquisition"); (m) Seller shall cause its Selling Affiliate, Tektronix S.p.A. ("Italy Tek"), to sell, transfer and assign the Assets and Properties of Italy Tek that constitute Non-United States Purchased Assets to Purchasing Affiliates, Xerox S.p.A. ("Xerox Italy") which shall purchase all of Italy Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox Italy and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Italy Tek (the "Italy Acquisition"); (n) Seller shall cause its Selling Affiliate, Tektronix Korea, Ltd. ("Korea Tek"), to sell, transfer and assign the Assets and Properties of Korea Tek that constitute NonUnited States Purchased Assets to Purchaser or its designated Korean Purchasing Affiliate, and Purchaser shall, or shall cause such designated Korean Purchasing Affiliate to, purchase such Assets and Properties and to assume certain Assumed Liabilities from Korea Tek (the "Korea Acquisition"); (o) Seller shall cause its Selling Affiliate, Tektronix, S.A. de C.V. ("Mexico Tek"), to sell, transfer and assign the Assets and Properties of Mexico Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate, Xerox Mexicana, S.A. de C.V. ("Xerox Mexico"), and Purchaser shall cause Xerox Mexico to purchase such Assets and Properties and to assume certain Assumed Liabilities from Mexico Tek (the "Mexico Acquisition"); AMENDED ASSET PURCHASE AGREEMENT 15 <PAGE> (p) Seller shall cause its Selling Affiliate, Tektronix Holland N.V. ("Holland Tek"), to sell, transfer and assign the Assets and Properties of Holland Tek that constitute Non-United States Purchased Assets to Purchasing Affiliates, Xerox (Nederland) BV ("Xerox Netherland"), which shall purchase all of Holland Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox Netherland and Xerox Channels to, purchase such Assets and Properties and to assume certain Assumed Liabilities from Holland Tek (the "Holland Acquisition"); (q) Seller shall cause its Selling Affiliate, Tektronix Distribution Europe B.V. ("Europe Tek"), to sell, transfer and assign the Assets and Properties of Europe Tek that constitute Non-United States Purchased Assets to Xerox Holding (Nederland) BV ("Xerox Holding Holland") and/or its designated Dutch Purchasing Affiliate which shall purchase all of Europe Tek's Assets and Properties and Purchaser shall cause Xerox Holding Holland and/or its designated Dutch Purchasing Affiliate to assume certain Assumed Liabilities from Europe Tek (the "Dutch Acquisition"). (r) Seller shall cause its Selling Affiliate, Tektronix Norge A/S ("Norway Tek"), to sell, transfer and assign the Assets and Properties of Norway Tek that constitute NonUnited States Purchased Assets to Purchasing Affiliates, Xerox AS ("Xerox Norway") which shall purchase all of Norway Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox Norway and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Norway Tek (the "Norway Acquisition"); (s) Seller shall cause its Selling Affiliate, Tektronix Southeast Asia Pte Ltd ("Singapore Tek"), to sell, transfer and assign the Assets and Properties of Singapore Tek that constitute Non-United States Purchased Assets to Purchaser or its designated Singapore Purchasing Affiliate and Purchaser shall, or cause such designated Singapore Purchasing Affiliate to, purchase such Assets and Properties and to assume certain Assumed Liabilities from Singapore Tek (the "Singapore Acquisition"); (t) Seller shall cause its Selling Affiliate, Tektronix Espanola, S.A. ("Spain Tek"), to sell, transfer and assign the Assets and Properties of Spain Tek that constitute Non-United States Purchased Assets to Purchasing Affiliates, Xerox Espana, The Document Company, S.A.U. ("Xerox Spain") which shall purchase all of Spain Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox Espana and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Spain Tek (the "Spain Acquisition"); (u) Seller shall cause its Selling Affiliate, Tektronix AB ("Sweden Tek"), to sell, transfer and assign the Assets and Properties of Sweden Tek that constitute Non-United States Purchased Assets to Purchasing Affiliates, Xerox AB ("Xerox Sweden"), which shall AMENDED ASSET PURCHASE AGREEMENT 16 <PAGE> purchase all of Sweden Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox Sweden and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Sweden Tek (the "Sweden Acquisition"); (v) Seller shall cause its Selling Affiliate, Tektronix International AG ("Switzerland Tek"), to sell, transfer and assign the Assets and Properties of Switzerland Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate, Xerox AG ("Xerox Switzerland") which shall purchase all of Switzerland Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and Purchaser shall cause Xerox Switzerland and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Switzerland Tek (the "Switzerland Acquisition"); (w) Seller shall cause its Selling Affiliate, Tektronix Taiwan, Ltd. ("Taiwan Tek"), to sell, transfer and assign the Assets and Properties of Taiwan Tek that constitute Non-United States Purchased Assets to Purchaser or its designated Taiwanese Purchasing Affiliate and Purchaser shall, or shall cause such designated Taiwanese Purchasing Affiliate to, purchase such Assets and Properties and to assume certain Assumed Liabilities from Taiwan Tek (the "Taiwan Acquisition"); (x) Seller shall cause its Selling Affiliate, Tektronix U.K. Limited ("United Kingdom Tek"), to sell, transfer and assign the Assets and Properties of United Kingdom Tek that constitute Non-United States Purchased Assets to Purchasing Affiliates, Xerox (UK) Limited ("Xerox UK"), which shall purchase all of United Kingdom Tek's Assets and Properties except for the Intangible Personal Property and Accounts Receivable which shall be purchased by Xerox Channels, and the lease on the Lithuanian property, which shall be purchased by a Purchasing Affiliate designated by Purchaser, and Purchaser shall cause Xerox UK, Xerox Channels and the designated Purchasing Affiliate to purchase such Assets and Properties and to assume certain Assumed Liabilities from United Kingdom Tek (the "United Kingdom Acquisition"); (y) Seller shall cause its Selling Affiliate, Tektronix Export Inc. ("TEI"), to sell, transfer and assign the Assets and Properties of TEI that constitute Non-United States Purchased Assets in the Netherlands to Xerox (Europe) Limited; and in Brazil, Australia, Canada and Hong Kong to Purchaser or its designated Brazilian, Australian, Canadian and Hong Kong Purchasing Affiliates respectively, and Purchaser shall or shall cause the aforementioned designated Purchasing Affiliates to, purchase such Assets and Properties and to assume certain Assumed Liabilities from TEI (the "TEI Acquisition"). (z) Seller shall cause either its Selling Affiliate, GVG Japan, Ltd. ("GVG Japan Tek"), or Seller's designated Japanese Selling Affiliate, to sell, transfer and assign the Assets and Properties presently owned by GVG Japan Tek, or subsequently owned by Seller or Seller's designated Japanese Selling Affiliate (the former being referred to as "Japan's AMENDED ASSET PURCHASE AGREEMENT 17 <PAGE> Successor") that constitute Non-United States Purchased Assets to Purchaser or its designated Japanese Purchasing Affiliate, and Purchaser shall, or cause such designated Japanese Purchasing Affiliate to, purchase such Assets and Properties and to assume certain Assumed Liabilities from Japan Tek or Japan's Successor (the "Japan Acquisition"); (aa) Seller shall cause its Selling Affiliate, Tektronix Europe Ltd. ("Ltd. Tek"), to sell, transfer and assign the Assets and Properties of Ltd. Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate, Xerox (Europe) Limited ("Xerox Europe"), and Purchaser shall cause Xerox Europe to purchase such Assets and Properties and to assume certain Assumed Liabilities from Ltd. Tek (the "Europe Acquisition"). The portion of the Purchase Price Consideration and Cash Purchase Price in respect of each of the Asset Purchase Agreements referred to in this Section 1.3 shall be as determined in Section 1.4. The Asset Purchase Agreements referred to in this Section 1.3, together with any other agreements, documents or instruments executed in connection therewith, are referred to, collectively, in this Agreement as the "Ancillary Agreements". Seller unconditionally guarantees any and all Liabilities and obligations of each Selling Affiliate in accordance with the terms of this Agreement and the Ancillary Agreements to which it is a party. In the event any Foreign Closing does not occur on the Closing Date, Seller shall cause its Selling Affiliate to enter into arrangements reasonably acceptable to the parties hereto with respect to the operation of that portion of the Business until the consummation of the Foreign Closing or the termination of this Agreement in respect thereof in accordance with Section 1.5. Notwithstanding the foregoing, Purchaser shall have the right to designate any other Purchasing Affiliate or Purchasing Affiliates to take the place of and be substituted for another Purchasing Affiliate or Purchasing Affiliates at any time at least ten (10) Business Days prior to the Closing Date or the applicable Foreign Closing Date and Seller agrees that neither Seller nor any Selling Affiliate shall refuse to amend the relevant Ancillary Agreements so as to effect such designation. Further, in the event that a Selling Affiliate owns or uses Assets and Properties that constitute Purchased Assets in any geographic territory or jurisdiction other than the one set forth above in connection with such Selling Affiliate, Purchaser may designate a Purchasing Affiliate in such other geographic territory or jurisdiction to purchase such Assets and Properties pursuant to the terms of an Asset Purchase Agreement to be executed in respect thereof. 1.4 Purchase Price; Allocation; Adjustment. (a) Purchase Price. The aggregate purchase price (the "Purchase Price Consideration") for the Purchased Assets, the Purchased Intellectual Property and for the covenants of Seller contained in Section 4.11 (collectively, the "Total Acquired Assets") is the sum of (i) Nine Hundred Fifty Million Dollars ($950,000,000.00) (the "Cash Purchase Price"), subject to adjustment as provided in Section 1.4(c), and (ii) Purchaser's and the Purchasing Affiliates' assumption of the Assumed Liabilities in accordance with the terms of this Agreement. The Purchase Price Consideration shall be allocated to the Total Acquired Assets in accordance with Section 1.4(b). The portions of the Cash Purchase Price allocated to the Seller and each Selling Affiliate shall be payable by Purchaser or a AMENDED ASSET PURCHASE AGREEMENT 18 <PAGE> designated Purchasing Affiliate or Purchasing Affiliates, as the case may be, in immediately available funds to the Seller and each Selling Affiliate at the Closing or the relevant Foreign Closing in the manner provided in Section 1.5. (b) Allocation of Purchase Price. (i) Within thirty (30) days following the date of this Agreement, Purchaser shall furnish to Seller a draft schedule (the "Draft Allocation Schedule") for Seller and each Selling Affiliate (a "Selling Entity") arranged in a columnar fashion, setting forth (A) the total fair market value of the Total Acquired Assets being sold by that Selling Entity other than goodwill in each relevant class (e.g., such Selling Entity's Class I through Class IV Assets, as defined in Section 1060 of the Code (the "Section 1060 Rules")), (B) a commercially reasonable estimate of the amount of the total Assumed Liabilities of such Selling Entity, and (C) the total Purchase Price Consideration (which shall be determined as set forth in the Section 1060 Rules) for such Selling Entity. Seller shall render commercially reasonable assistance to Purchaser in the preparation of the Draft Allocation Schedule. The Draft Allocation Schedule shall be considered final and binding (the "Pre-Closing Allocation Schedule") if Seller has not conveyed objections to Purchaser within ten (10) Business Days. If Seller conveys objections to the Pre-Closing Allocation Schedule to Purchaser prior to the end of said ten-day period, Seller and Purchaser shall discuss and attempt to resolve, in good faith, any disagreements with respect to the Draft Allocation Schedule. If the parties are unable to agree, then the dispute shall be submitted to an independent accounting firm other than KPMG Peat Marwick ("KPMG"), Deloitte & Touche LLP ("Deloitte & Touche"), Arthur Andersen LLP ("Arthur Andersen") or PricewaterhouseCoopers LLP ("PWC"), such firm to be agreed upon by Seller and Purchaser (the "Independent Accountant"). The decision of the Independent Accountant shall be binding. The fees and expenses of the Independent Accountant shall be borne as provided in Section 1.4(c)(v). Within ten (10) Business Days after the finalization of the Pre-Closing Allocation Schedule, Seller and Purchaser shall negotiate the Cash Purchase Price to be allocated to each Selling Entity in a manner consistent with the Pre-Closing Allocation Schedule. (ii) Purchaser and Seller shall each prepare and file in a timely manner an IRS Form 8594 and other appropriate information, as required by the Section 1060 Rules with respect to the portion of the Total Acquired Assets allocable to the United States (the "Total United States Assets"). Such IRS Form 8594 shall be based on the fair market value of the Total United States Assets and the Assumed Liabilities allocated thereto, consistent with the allocations agreed to pursuant to this Section 1.4(b), adjusted properly to reflect the final determination of the fair market value of the Total United States Assets as shown on the Statement of Closing Net Assets. Purchaser shall submit to Seller a draft copy of the IRS Form 8594 ("Draft Form 8594") it proposes to file at least sixty (60) days before the proposed filing date thereof. Within fifteen (15) days from receiving the Draft Form AMENDED ASSET PURCHASE AGREEMENT 19 <PAGE> 8594 from Purchaser, Seller shall either notify Purchaser in writing that it accepts the Draft Form 8594 or shall set out its objections. Seller shall be deemed to have accepted the Draft Form 8594 if it provides no notification to Purchaser. Seller and Purchaser shall discuss and attempt to resolve, in good faith, any disagreements with respect to the Draft Form 8594. If such disagreements are not resolved by thirty (30) days before the due date of the IRS Form 8594, then the dispute shall be submitted to the Independent Accountant in accordance with Section 1.4(b)(i) and the Independent Accountant's determination shall be incorporated into the Draft Form 8594. The Draft Form 8594 as agreed to by the parties or determined by the Independent Accountant shall be the final Form 8594 (the "Final Form 8594") shall be attached to both Seller's and Buyer's U.S. Corporate Income Tax Return for the tax year which includes the sale of the Total United States Assets. If the Purchase Price allocable to the Total United States Assets is adjusted after the Closing Date, the parties agree to revise and amend any agreed Schedule and their respective IRS Form 8594 in the same manner and according to the same procedure set forth above. (iii) Purchaser and each Purchasing Affiliate and Seller and each Selling Affiliate shall follow procedures similar to the procedures set forth in Section 1.4(b)(ii) with respect to any reporting required by any non-U.S. Taxing Authority similar in nature to the requirements of Section 1060 of the Code and IRS Form 8594. (iv) The determination of the Purchase Price and the allocation of the Purchase Price Consideration among the Total Acquired Assets set forth in this Section 1.4(b) shall be binding on Purchaser and each Purchasing Affiliate and Seller and each Selling Affiliate for all tax reporting purposes. Neither party shall take a position on any Tax Return, before any Taxing Authority charged with the collection of any such Tax, or in any judicial proceeding, that is in any manner inconsistent with the terms of such determination and allocation without the consent of the other party, which consent shall not be unreasonably withheld. (c) Adjustment of Cash Purchase Price. The Cash Purchase Price shall be subject to adjustment as follows: (i) At the Closing, Seller shall deliver to Purchaser a Statement of Estimated Closing Net Assets of the Business dated as of the Closing Date (the "Statement of Estimated Closing Net Assets"). The Statement of Estimated Closing Net Assets shall be prepared by Seller in accordance with GAAP as modified by the Accounting Policies determined pursuant to Section 14.14 (the "Accounting Policies"), and will include an adjustment for any compensation payments pursuant to Section 9.1(b), but any Liabilities or Losses associated with Print Head Drift shall be excluded for all balance sheet and Cash Purchase Price adjustment purposes. The Statement of Estimated Closing Net Assets above shall be accompanied by a statement signed by the President or a Vice President of Seller setting forth the AMENDED ASSET PURCHASE AGREEMENT 20 <PAGE> amount, if any, by which the Estimated Closing Net Asset Value is greater than, or less than, the Target Amount. The Statement of Estimated Closing Net Assets shall also be accompanied by work papers setting forth the calculations showing the basis for the determination of such sums. For purposes of this Agreement, "Target Amount" shall mean Three Hundred Seven Million Dollars ($307,000,000.00). If the Estimated Closing Net Asset Value is greater than or equal to Three Hundred Two Million Dollars ($302,000,000.00) and less than or equal to Three Hundred Twelve Million Dollars ($312,000,000.00), there shall be no adjustment in the Cash Purchase Price. In the event that the Estimated Closing Net Asset Value is (A ) less than Three Hundred Two Million Dollars ($302,000,000.00), then the Cash Purchase Price shall be decreased by an amount equal to the amount by which the Estimated Closing Net Asset Value is less than Three Hundred Seven Million Dollars ($307,000,000.00), or (B) greater than Three Hundred Twelve Million Dollars ($312,000,000.00), then the Cash Purchase Price shall be increased by an amount equal to the amount by which the Estimated Closing Net Asset Value exceeds Three Hundred Seven Million ($307,000,000.00). (ii) Within ninety (90) days after the Closing Date, Purchaser will prepare and deliver to Seller (X) a statement by which Purchaser accepts Seller's Estimated Closing Net Asset Value in which case Estimated Closing Net Asset Value will be deemed to be the Closing Net Asset Value and there will be no further adjustments to the Cash Purchase Price, or (Y) in the event that Purchaser does not accept Seller's Estimated Closing Net Asset Value, a Statement of Closing Net Assets, together with an unqualified report of KPMG thereon, setting forth the calculation of the Closing Net Asset Value. The Statement of Closing Net Assets shall be prepared by Purchaser in accordance with GAAP as modified by the Accounting Policies. The Statement of Closing Net Assets shall be accompanied by a statement signed by the Chief Financial Officer or a Vice President of Purchaser setting forth the amount, if any, by which the Closing Net Asset Value is greater than, or less than, the Target Amount and the amount, if any, by which the Closing Net Asset Value is greater than, or less than, the Estimated Closing Net Asset Value. The Statement of Closing Net Assets shall also be accompanied by work papers setting forth the calculations showing the basis for the determination of such sums. Subject to adjustment pursuant to the resolution of any disputes in accordance with Section 1.4(c)(iv), the Cash Purchase Price shall be finally adjusted as follows: (A) If the Closing Net Asset Value is greater than or equal to Three Hundred Two Million Dollars ($302,000,000.00) and less than or equal to Three Hundred Twelve Million Dollars ($312,000,000.00), there shall be no adjustment in the Cash Purchase Price (notwithstanding any adjustments made to the Cash Purchase Price in accordance with Section 1.4(c)(i) and rendering any such adjustments null, void and of no effect whatsoever); AMENDED ASSET PURCHASE AGREEMENT 21 <PAGE> (B) If the Closing Net Asset Value is less than Three Hundred Two Million Dollars ($302,000,000.00), then the Cash Purchase Price shall be decreased by an amount equal to the amount by which the Closing Net Asset Value is less than Three Hundred Seven Million Dollars ($307,000,000.00) (notwithstanding any adjustments made to the Cash Purchase Price in accordance with Section 1.4(c)(i) and rendering any such adjustments null, void and of no effect whatsoever); or (C) If the Closing Net Asset Value is greater than Three Hundred Twelve Million Dollars ($312,000,000.00), then the Cash Purchase Price shall be increased by an amount equal to the amount by which the Closing Net Asset Value exceeds Three Hundred Seven Million ($307,000,000.00) (notwithstanding any adjustments made to the Cash Purchase Price in accordance with Section 1.4(c)(i) and rendering any such adjustments null, void and of no effect whatsoever). (iii) Purchaser and Seller agree that each of them will, and will respectively cause KPMG and Deloitte & Touche to, cooperate and assist in the preparation of the Statement of Closing Net Assets and the calculation of the Closing Net Asset Value and in the conduct of the audits, reviews, inventories and inspections to be undertaken in connection with the preparation of the Statement of Closing Net Assets, including but not limited to making available such Books and Records, work papers, facilities and personnel as may be necessary. (iv) In the event that Seller, in good faith, disputes the Statement of Closing Net Assets or the calculation of the Closing Net Asset Value, Seller shall notify Purchaser in writing (the "Dispute Notice") setting forth in detail the items, amount, nature and basis of such dispute, within thirty (30) Business Days after delivery of the Statement of Closing Net Assets, accompanied by a report of Deloitte & Touche stating that such firm concurs with Seller's assertions in the Dispute Notice. In the event of such dispute, Seller and Purchaser shall first use their diligent good faith efforts to resolve such dispute between themselves. If the parties are unable to resolve any items in dispute within twenty (20) Business Days after delivery of the Dispute Notice, then such unresolved items in dispute shall be submitted to an independent nationally recognized accounting firm other than KPMG, Deloitte & Touche, PWC or Arthur Andersen and with no material relationship to either Seller or Purchaser, such firm to be mutually agreed upon by Seller and Purchaser or, if the Seller and Purchaser fail to agree upon or refuse to select such a firm within ten (10) calendar days after written request therefor by either of them, such an independent nationally recognized accounting firm shall be selected by Seller and Purchaser in accordance with the rules of the American Arbitration Association then in effect (such accounting firm shall be referred to as the "Arbitrator"). Within forty-five (45) Business Days, the Arbitrator shall determine the remaining disputed items and report to the Seller and Purchaser in writing with respect to such items. The Arbitrator shall, in connection with the AMENDED ASSET PURCHASE AGREEMENT 22 <PAGE> resolution of any such dispute, have access to all Books and Records, documents, records, work papers, facilities and personnel necessary to perform its functions as arbitrator. The Arbitrator's decision shall be in writing and shall be final, conclusive and binding on all parties. A judgment on the determination made by the Arbitrator pursuant to this Section 1.4(c)(iv) may be entered into and enforced by any court of appropriate jurisdiction. (v) The fees and expenses of the Arbitrator in connection with the resolution of disputes pursuant to Section 1.4(c)(iv) shall be (A) borne equally by Seller and Purchaser if and to the extent that the Arbitrator determines Seller and Purchaser should each be awarded one-half of the total amount of the items in dispute, or (B) borne by Seller and/or Purchaser in inverse proportion to the amount that the Arbitrator's award in favor of Seller and/or Purchaser bears to the total amount of the items in dispute (for illustration purposes for this Section 1.4(c)(v) only, (X) if the total amount of items in dispute by Seller is $1,000,000.00, and Seller is awarded $500,000.00 by the Arbitrator, Seller and Purchaser shall bear the Arbitrator's fees and expenses equally, or (Y) if the total amount of items in dispute by Seller is $1,000,000.00, and Seller is awarded $250,000.00 by the Arbitrator, Seller shall bear 75% and Purchaser shall bear 25% of the Arbitrator's fees and expenses). (vi) Within five (5) Business Days following the final determination of the Closing Net Asset Value whether by (A) Purchaser's acceptance of Seller's Estimated Closing Net Asset Value, or Purchaser's failure to accept Seller's Estimated Closing Net Asset Value or submit a Statement of Closing Net Assets within the 90-day period prescribed by Section 1.4(c)(ii), (B) the expiration of the thirty (30) Business Day period for giving the Dispute Notice, if no Dispute Notice is given, or (C) the resolution of any disputes pursuant to Section 1.4(c)(iv), the parties shall make the final post-Closing adjustments to the Cash Purchase Price in accordance with Section 1.4(c)(ii) and the amount, if any, of any such adjustment shall be paid to the party entitled to receive same by wire transfer in immediately available funds to such account as may be designated by such party. 1.5 Closing. (a) The Closing will take place at the offices of Stoel Rives LLP, 900 SW Fifth Avenue, Portland, Oregon, or at such other place as Purchaser and Seller mutually agree, at 10:00 A.M. local time, on the Closing Date. The closing of the sales of the Non-United States Purchased Assets described in Section 1.3 pursuant to the Ancillary Agreements (each, a "Foreign Closing"; collectively, the "Foreign Closings") shall occur at such place as specified in the relevant Ancillary Agreement or at such other place as Purchaser and Seller mutually agree, at 10:00 A.M., on the respective Foreign Closing Dates as specified in this Section 1.5. The Foreign Closings relating to (i) the sale of the Non-United States Purchased Assets in (A) France, (B) Germany, (C) the United Kingdom, (D) Italy, (E) The Netherlands, (F) Belgium and (G) Australia and (ii) the sale of the capital stock and other AMENDED ASSET PURCHASE AGREEMENT 23 <PAGE> equity or ownership interests owned by Seller or a Selling Affiliate in Tektronix Malaysia Sdn. Bhd. (each, a "Significant Foreign Closing"; collectively, "Significant Foreign Closings") shall occur concurrently with the Closing. All other Foreign Closings shall occur concurrently with the Closing or as soon as practicable after the satisfaction of the conditions set forth in Article 6 or the applicable Ancillary Agreements. With respect to the Closing and each Foreign Closing, each shall be deemed to be effective as of 12:01 A.M., local time, at the places where the Purchased Assets are located on the Closing Date or on the date on which such Foreign Closing shall occur (the "Foreign Closing Date"). Seller and Purchaser may mutually agree to terminate this Agreement with respect to any Foreign Closing which has not occurred by the anniversary of the Closing Date. (b) At the Closing or a Foreign Closing, Purchaser will pay, or will cause the designated Purchasing Affiliate to pay the Cash Purchase Price, as allocated in accordance with Section 1.4(b) by wire transfer of immediately available funds to such account of Seller or the Selling Affiliate as Seller may reasonably direct by written notice delivered to Purchaser by Seller at least two (2) Business Days before the Closing Date. For the purpose of paying the Cash Purchase Price all amounts paid to Seller and to each Selling Affiliate shall be payable in United States dollars unless otherwise provided in the relevant Ancillary Agreement. Simultaneously, (a) Seller or the relevant Selling Affiliate will assign and transfer to Purchaser or the relevant Purchasing Affiliate good and valid title in and to the Total Acquired Assets (free and clear of all Liens, other than Permitted Liens) by delivery of (i) a General Assignment and Bill of Sale in form and substance reasonably acceptable to Purchaser and Seller (the "General Assignment"), duly executed by Seller or the Selling Affiliate, as the case may be, (ii) special statutory, or grant deeds or similar instruments in proper statutory form for recording and otherwise in form and substance reasonably satisfactory to Purchaser conveying title to the Real Property and (iii) such other good and sufficient instruments of conveyance, assignment and transfer, in form and substance reasonably acceptable to Purchaser, as shall be effective to vest in Purchaser or the relevant Purchasing Affiliate good title to the Total Acquired Assets (the General Assignment and the other instruments referred to in clauses (ii) and (iii) being collectively referred to herein as the "Assignment Instruments"), and (b) Purchaser or the relevant Purchasing Affiliate will deliver to Seller or the relevant Selling Affiliate valid resale certificates or the equivalent thereof where applicable and will assume from Seller or the relevant Selling Affiliate the due payment, performance and discharge of the Assumed Liabilities by delivery of (i) an Assumption Agreement in form and substance reasonably acceptable to Seller and Purchaser (the "Assumption Agreement"), duly executed by Purchaser or the relevant Purchasing Affiliate, as the case may be, and (ii) such other good and sufficient instruments of assumption, in form and substance reasonably acceptable to Seller and Purchaser, as shall be effective to cause Purchaser or the relevant Purchasing Affiliate to assume the Assumed Liabilities as and to the extent provided in Section 1.2(a) (the Assumption Agreement and such other instruments referred to in clause (ii) being collectively referred to herein as the "Assumption Instruments"). At the Closing or the applicable Foreign Closing, there shall also be delivered to Seller and Purchaser the opinions, certificates and other contracts, documents and instruments required to be AMENDED ASSET PURCHASE AGREEMENT 24 <PAGE> delivered under Articles 6 and 7. 1.6 Prorations. The following prorations relating to the Purchased Assets and the ownership and operation of the Business will be made as of the Closing Date or the applicable Foreign Closing Date, with Seller or the relevant Selling Affiliate liable to the extent such items relate to any time period prior to the Closing Date or the applicable Foreign Closing Date, and Purchaser or the relevant Purchasing Affiliate liable to the extent such items relate to periods beginning with and subsequent to the Closing Date or the applicable Foreign Closing Date: (a) Subject to Section 8.6, Real Property Taxes, assessments and bonds on or with respect to the Purchased Assets. (b) Rents, additional rents, operating expense passthroughs, taxes and other items payable by Seller under the Real Property Leases. (c) The amount of rents, issues and profits from the Real Property and charges for sewer, water, telephone, electricity and other utilities relating to the Real Property and the real property subject to the Real Property Leases. (d) All other items (excluding personal property taxes and other Taxes) normally adjusted in connection with similar transactions in similar localities. Except as otherwise agreed by the parties, the net amount of all such prorations will be settled and paid on the Closing Date or the applicable Foreign Closing Date. 1.7 Further Assurances; Post-Closing Cooperation. At any time or from time to time after the Closing, at Purchaser's reasonable request and without further consideration, Seller shall, or shall cause the Selling Affiliates to, execute and deliver to Purchaser or the relevant Purchasing Affiliate such other instruments of sale, transfer, conveyance, assignment and confirmation, provide such materials and information and take such other actions as Purchaser may reasonably deem necessary or desirable in order more effectively to transfer, convey and assign to Purchaser or the relevant Purchasing Affiliate, and to confirm Purchaser's or the Purchasing Affiliates' title to, all of the Purchased Assets, and, to the full extent permitted by Law, to put Purchaser and the Purchasing Affiliates in actual possession and operating control of the Business and the Purchased Assets and to assist Purchaser and the Purchasing Affiliates in exercising all rights with respect thereto, and otherwise to cause Seller and Seller's Affiliates to fulfill its and their respective obligations under this Agreement, the Ancillary Agreements and the Operative Agreements. (b) (b) Effective on the Closing Date, Seller hereby constitutes and appoints Purchaser the true and lawful attorney of Seller, and shall cause the Selling Affiliates to constitute and appoint the relevant Purchasing Affiliates, with full power of substitution, in the name of Seller, the Selling Affiliates, Purchaser or the Purchasing Affiliates, but on behalf of and for the benefit of Purchaser and the Purchasing Affiliates: (i) to demand and AMENDED ASSET PURCHASE AGREEMENT 25 <PAGE> receive from time to time any and all of the Purchased Assets and to make endorsements and give receipts and releases for and in respect of the same and any part thereof; (ii) to institute, prosecute, compromise and settle any and all Actions or Proceedings that Purchaser may deem proper in order to collect, assert or enforce any claim, right or title of any kind in or to the Purchased Assets; (iii) to defend or compromise any or all Actions or Proceedings in respect of any of the Purchased Assets; and (iv) to do all such acts and things in relation to the matters set forth in the preceding clauses (i) through (iii) as Purchaser shall deem desirable. Seller hereby acknowledges, and shall cause each Selling Affiliate to acknowledge, that the appointment hereby made and the powers hereby granted are coupled with an interest and are not and shall not be revocable by it or by any Selling Affiliate in any manner or for any reason. Seller shall deliver to Purchaser at Closing an acknowledged power of attorney to the foregoing effect executed by Seller and shall cause each Selling Affiliate to deliver same to Purchaser or to a designated Purchasing Affiliate. Purchaser shall indemnify and hold harmless Seller from any and all Losses caused by or arising out of any breach of any Laws by Purchaser or the Purchasing Affiliates in its or their exercise of such powers of attorney. (c) Seller and Purchaser agree, and shall respectively cause the Selling Affiliates and Purchasing Affiliates to agree, for the greater of six (6) years after the Closing Date (or any later Foreign Closing Date) or sixty (60) days after the expiration of any applicable statute of limitations, as extended, not to destroy or otherwise dispose of any Books and Records and other data relating to the Business in its possession with respect to periods prior to the Closing and unless such party shall first offer in writing to surrender such Books and Records and other data to the other party and such other party fails to agree in writing to take possession thereof during the thirty (30) day period after such offer is made. (d) If, in order properly to prepare documents or reports required to be filed with any Governmental or Regulatory Authorities or its financial statements or to fulfill its obligations hereunder, it is necessary that a party requests that it be furnished with information, documents or records relating to the Business prior to the Closing, and such information, documents or records are in the possession or control of the other party, such other party shall use commercially reasonable efforts to furnish or make available such information, documents or records (or copies thereof) at the recipient's request, cost and expense. Any information obtained by a party in accordance with Sections 1.7(c) or (d) shall be held confidential by such party. (e) Notwithstanding anything to the contrary contained in this Section 1.7, if the parties are in an adversarial relationship in litigation or arbitration, the furnishing of information, documents or records in accordance with Sections 1.7(c) or (d) shall be subject to applicable rules relating to discovery. 1.8 Third-Party Consents. To the extent that any Business Contract, Business License, Real Property Lease or Personal Property Lease is not assignable without the consent of another party, this Agreement shall not constitute an assignment or an attempted assignment thereof if such assignment or attempted assignment would constitute a breach AMENDED ASSET PURCHASE AGREEMENT 26 <PAGE> thereof. Seller and Purchaser shall, and shall respectively cause the Selling Affiliates and the Purchasing Affiliates to, use commercially reasonable efforts to obtain the consent of such other party to the assignment of any such Business Contract, Business License, Real Property Lease or Personal Property Lease to Purchaser or to a designated Purchasing Affiliate in all cases in which such consent is or may be required for such assignment; provided, however, that none of Seller, any Selling Affiliate, Purchaser or any Purchasing Affiliate shall be required to make any payments to any third parties to obtain any such consents. If any such consent shall not be obtained, Seller shall, or shall cause the relevant Selling Affiliate to, cooperate with Purchaser or the relevant Purchasing Affiliate in any reasonable arrangement designed to provide for Purchaser or such Purchasing Affiliate the material benefits intended to be assigned under the relevant Business Contract, Business License, Real Property Lease or Personal Property Lease including enforcement at the cost and for the account of Purchaser or the Purchasing Affiliate of any and all rights of Seller or a Selling Affiliate against the other party thereto arising out of the breach or cancellation thereof by such other party or otherwise. The provisions of this Section 1.8 shall not affect the right of Purchaser not to consummate the transactions contemplated by this Agreement if the condition to its obligations hereunder contained in Section 6.7 has not been fulfilled. 1.9 Insurance Proceeds. If any of the Purchased Assets are destroyed or damaged or taken in condemnation, the insurance proceeds or condemnation award with respect thereto shall be a Purchased Asset. At the Closing or the applicable Foreign Closing Date, Seller shall, or shall cause the relevant Selling Affiliate to, pay or credit to Purchaser or the relevant Purchasing Affiliate any such insurance proceeds or condemnation awards received by it on or prior to the Closing or the applicable Foreign Closing, as the case may be, and shall, or shall cause the relevant Selling Affiliate to, assign to or assert for the benefit of Purchaser or the relevant Purchasing Affiliate all of its rights against any insurance companies, Governmental or Regulatory Authorities and others with respect to such damage, destruction or condemnation. As and to the extent that there is available insurance under policies maintained by Seller and any Selling Affiliate, or any predecessors and successors in respect of any Assumed Liability, except for any such insurance proceeds with respect to which the insured is directly or indirectly self-insured or has agreed to indemnify the insurer, Seller shall cause such insurance to be applied toward the payment of such Assumed Liability. The provisions of this Section 1.9 shall not affect the right of Purchaser not to consummate the transactions contemplated by this Agreement if the conditions to its obligations hereunder contained in Article 6 have not been fulfilled. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER Seller, for itself and on behalf of each of the Selling Affiliates, hereby represents and warrants to Purchaser as follows: 2.1 Organization of Seller and the Selling Affiliates. Seller and each Selling AMENDED ASSET PURCHASE AGREEMENT 27 <PAGE> Affiliate is a corporation duly organized, validly existing and in good standing (to the extent the concepts of valid existence and good standing exist in the relevant jurisdiction) under the Laws of the jurisdiction applicable thereto as set forth in Section 2.1 of the Disclosure Schedule, and has full corporate power and authority to conduct the Business as and to the extent now conducted and to own, use and lease the Purchased Assets and Purchased Intellectual Property. In connection with its conduct of the Business, Seller and each Selling Affiliate is duly qualified or otherwise authorized to transact business and is in good standing (to the extent the concept of good standing exists in the relevant jurisdiction) in each jurisdiction in which such qualification or authorization is required by applicable Laws. Notwithstanding the foregoing, there shall be no breach of this Section 2.1 where the failure of the Seller or the Selling Affiliates to be in good standing (to the extent the concept of good standing exists in the relevant jurisdiction), in the aggregate, are not reasonably likely to have a material adverse effect on (a) the Condition of the Business, or (b) on the timely performance by Seller of the transactions contemplated by this Agreement. 2.2 Authority. Seller and each Selling Affiliate has full corporate power and authority to execute and deliver this Agreement, the Ancillary Agreements and the Operative Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby, including without limitation to sell and transfer (pursuant to this Agreement) the Total Acquired Assets. The execution and delivery by Seller and each Selling Affiliate of this Agreement, the Ancillary Agreements and the Operative Agreements to which it is a party, and the performance by Seller and a Selling Affiliate of its obligations hereunder and thereunder, have been duly and validly authorized by the respective Boards of Directors of Seller or the Selling Affiliate, no other corporate action on the part of Seller or a Selling Affiliate, or their respective shareholders, being necessary. This Agreement has been duly and validly executed and delivered by Seller and constitutes, and upon the execution and delivery by Seller and the Selling Affiliates of the Ancillary Agreements and the Operative Agreements to which it is a party, such Ancillary Agreements and Operative Agreements will constitute, legal, valid and binding obligations of Seller and the Selling Affiliates, as the case may be, enforceable against them in accordance with their respective terms, except as enforceability may be limited or affected by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). 2.3 No Conflicts. The execution and delivery by Seller of this Agreement do not, and the execution and delivery by Seller and the Selling Affiliates of the Ancillary Agreements and the Operative Agreements to which it is a party, the performance by Seller and the Selling Affiliates of its and their respective obligations under such Agreements and the consummation of the transactions contemplated hereby and thereby will not: (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws (or other comparable corporate charter documents) of Seller or of a Selling Affiliate; AMENDED ASSET PURCHASE AGREEMENT 28 <PAGE> (b) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Section 2.4 of the Disclosure Schedule, conflict with or result in a violation or breach of any term or provision of any Law or Order applicable to Seller, a Selling Affiliate or any of its or their respective Assets and Properties; or (c) except as disclosed in Section 2.3 of the Disclosure Schedule, (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require Seller or any Selling Affiliate to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in the creation or imposition of any Lien upon Seller, a Selling Affiliate or any of their respective Assets and Properties under, (v) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to, (vi) result in or give to any Person any additional rights or entitlement to increased, additional, accelerated or guaranteed payments under, any Contract or License to which Seller or a Selling Affiliate is a party or by which any of its Assets and Properties is bound, except for such violation, breach, default, loss, requirement, creation, right or entitlement that could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Condition of the Business or could not be reasonably expected, individually or in the aggregate, to materially impair the ability of Seller or a Selling Affiliate to perform its obligations under this Agreement or any of the Ancillary Agreements or Operative Agreements or otherwise materially impair the consummation of the transactions contemplated by this Agreement or any of the Ancillary Agreements or Operative Agreements. 2.4 Governmental Approvals and Filings. Except for the HSR Act filing and other antitrust filings described in Section 4.2 and except as disclosed in Section 2.4 of the Disclosure Schedule, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of Seller or any Selling Affiliate is required in connection with the execution, delivery and performance of this Agreement, any of the Ancillary Agreements or any of the Operative Agreements to which it is a party or the consummation of the transactions contemplated hereby or thereby. 2.5 Books and Records. All of the material Business Books and Records are recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are under the exclusive ownership and direct control of Seller. 2.6 Financial Statements. Prior to the execution of this Agreement, Seller has delivered to Purchaser true and complete copies of the following financial statements: (a) the unaudited statement of net assets to be transferred of the Division as of May 31, 1997, May 30, 1998, and May 29, 1999, and the related unaudited statement of operations for each of the fiscal years then ended, copies of each of which are attached hereto as Section 2.6(a) of the Disclosure Schedule; and AMENDED ASSET PURCHASE AGREEMENT 29 <PAGE> (b) the unaudited statement of net assets to be transferred of the Division as of August 28, 1999, and the related unaudited statement of operations data for the portion of the fiscal year then ended, copies of which are attached hereto as Section 2.6(b) of the Disclosure Schedule. Except as disclosed in Section 2.6 of the Disclosure Schedule, (i) all such financial statements were prepared and, with respect to the Acquisition Balance Sheet, was prepared from the Books and Records of Seller which are maintained on a GAAP basis, (ii) all such financial statements and the Acquisition Balance Sheet fairly present the financial condition and results of operations of the Division as of the respective dates thereof and for the respective periods covered thereby, and (iii) all such financial statements and the Acquisition Balance Sheet were compiled from Business Books and Records regularly maintained by management and used to prepare the financial statements of Seller in accordance with the principles stated in Seller's consolidated financial statements relating to such periods. Seller has maintained the Business Books and Records in a manner sufficient to permit the preparation of financial statements in accordance with GAAP, the Business Books and Records fairly reflect the income, expenses, assets and liabilities of the Business and the Business Books and Records provided a fair and accurate basis for the preparation of the Financial Statements delivered to Purchaser in accordance with this Section 2.6. 2.7 Absence of Changes. Except for the execution and delivery of this Agreement and the transactions to take place pursuant hereto on or prior to the Closing Date or the applicable Foreign Closing Date, since the date of the Acquisition Balance Sheet there has not been any material adverse change, or any event or development which, individually or together with other such events, could reasonably be expected to result in a material adverse change, in the Condition of the Business. Without limiting the foregoing, except as disclosed in Section 2.7 of the Disclosure Schedule, there has not occurred, between the date of the Acquisition Balance Sheet and the date of this Agreement, any of the following: (a) (i) any increase in the salary, wages or other compensation of any Employee whose annual salary is, or after giving effect to such change would be, $100,000 or more; (ii) any establishment or modification of (A) targets, goals, pools or similar provisions in respect of any fiscal year under any Benefit Plan or any employment-related Contract or other compensation arrangement with or for Employees or (B) salary ranges, increase guidelines or similar provisions in respect of any Benefit Plan or any employment-related Contract or other compensation arrangement with or for Employees; or (iii) any adoption, entering into or becoming bound by any Benefit Plan, employment-related Contract or collective bargaining agreement, or amendment, modification or termination (partial or complete) of any Benefit Plan, employment-related Contract or collective bargaining agreement, except to the extent required by applicable Law and, in the event compliance with legal requirements presented options, only to the extent the option which Seller or the relevant Selling Affiliate, as the case may be, reasonably believed to be the least costly was chosen; except, in any case under this Section 2.7(a), in the ordinary course of business or as Seller or any Selling Affiliate otherwise deems reasonably necessary to respond to AMENDED ASSET PURCHASE AGREEMENT 30 <PAGE> competitive situations; (b) (i) incurrences by Seller or a Selling Affiliate of Indebtedness with respect to the conduct of the Business that was incurred not in the ordinary course of business consistent with past practices or, with respect to Indebtedness incurred in the ordinary course of business, is in an aggregate principal amount exceeding $5,000,000 (net of any amounts discharged during such period), or (ii) any voluntary purchase, cancellation, prepayment or complete or partial discharge in advance of a scheduled payment date with respect to, or waiver of any right of Seller or a Selling Affiliate under, any Indebtedness of or owing to Seller or such Selling Affiliate with respect to the conduct of the Business; (c) any physical damage, destruction or other casualty loss (whether or not covered by insurance) affecting any of Assets or Properties of Seller or a Selling Affiliate primarily used or held for use in the conduct of the Business, taken as a whole, in an aggregate amount exceeding $1,000,000; (d) any (A) material change in any pricing, credit or allowance, or (B) change in any investment, accounting, financial reporting, inventory, or Tax practice or policy of the Business or (C) change in any method of calculating any bad debt, contingency or other reserve of the Business for accounting, financial reporting or Tax purposes; (e) (i) any acquisition or disposition of any Assets and Properties used or held for use in the conduct of the Business, other than in the ordinary course of business consistent with past practice; or (ii) any creation or incurrence of a Lien, other than a Permitted Lien, on any Assets and Properties used or held for use in the conduct of the Business; (f) any entering into, amendment, modification, termination (partial or complete) or granting of a waiver under or giving any consent with respect to (A) any Contract which is required (or had it been in effect on the date hereof would have been required) to be disclosed in the Disclosure Schedule pursuant to Section 2.16(a) or (B) any License, made otherwise than in the ordinary course of business; (g) capital expenditures or commitments for additions to property, plant or equipment used or held for use in the conduct of the Business constituting capital assets other than in the ordinary course of business; (h) any transaction with any officer, director, Affiliate or Associate of Seller or a Selling Affiliate, or any Associate of any such officer, director or Affiliate (A) outside the ordinary course of business consistent with past practice or (B) other than on an arm's-length basis; (i) any entering into of a Contract to do or engage in any of the foregoing after the date hereof; AMENDED ASSET PURCHASE AGREEMENT 31 <PAGE> (j) any other material transaction involving or development affecting the Business or the Total Acquired Assets outside the ordinary course of business consistent with past practice; (k) any material acquisitions, sales or other dispositions of (or commitments for such acquisition, sale or disposition of) any Products, or any parts, components, supplies or accessories related thereto, that are materially in excess of standard industry practices, that are other than in the ordinary course of business or that are other than on an arm's-length basis; (l) any Epidemic Failures in connection with any Products or any parts, components, supplies or accessories related thereto. 2.8 No Undisclosed Liabilities. To the Knowledge of Seller, except as reflected or reserved against in the Acquisition Balance Sheet or as disclosed in the Disclosure Schedule, there are no material Liabilities against, relating to or affecting the Business or any of the Total Acquired Assets, other than Liabilities incurred in the ordinary course of business consistent with past practice. 2.9 Taxes. Except as disclosed in Section 2.9 of the Disclosure Schedule (with paragraph references corresponding to those set forth below): (a) Seller and each Selling Affiliate has duly and timely filed all Tax Returns required to be filed by or on behalf of or with respect to Seller and each Selling Affiliate with respect to all Taxes Which May Give Rise To Any Transferee Tax Liability with the appropriate Taxing Authorities in all jurisdictions in which such Tax Returns are required to be filed. All such Tax Returns are true, correct and complete in all material respects. No penalties or other charges are or will become due with respect to any such Tax Returns as the result of the late filing thereof. (b) Seller and each Selling Affiliate: (i) has paid all Taxes Which May Give Rise To Any Transferee Tax Liability due or claimed to be due from Seller or any Selling Affiliate by any Taxing Authority in connection with any taxable period prior to the Closing Date or the applicable Foreign Closing Date, including any deficiencies arising from any audit (without regard to whether or not such Taxes are shown as due on any Tax Returns, including any estimated tax payments or similar charge), or (ii) has established in the Financial Statements provided to Purchaser adequate reserves (in conformity with generally accepted accounting principles consistently applied) for the payment of such Taxes. (c) Seller and each Selling Affiliate that is transferring Real Property or Real Property Leases to Purchaser or Purchasing Affiliates pursuant to this Agreement has duly and timely filed all Tax Returns with respect to any Real Property Taxes required to be filed on or before the Closing Date or the applicable Foreign Closing Date by or on behalf of or with respect to Seller and each Selling Affiliate with the appropriate Taxing Authorities in all jurisdictions in which such Tax Returns are required to be filed regardless of when the AMENDED ASSET PURCHASE AGREEMENT 32 <PAGE> Real Property Taxes thereunder are due. All such Tax Returns are true, correct and complete in all material respects. No penalties or other charges are or will become due with respect to any such Tax Returns as the result of the late filing thereof. Seller and each Selling Affiliate has paid all Real Property Taxes due or claimed to be due from Seller or any Selling Affiliate by any Taxing Authority with respect to such Real Property for all taxable periods prior to the Closing Date or the applicable Foreign Closing Date, except for any Real Property Taxes which are not yet due and payable. (d) Seller and each Selling Affiliate that is transferring Purchased Assets other than Real Property pursuant to this Agreement has duly and timely filed all Tax Returns with respect to any Taxes on such Purchased Assets required to be filed on or before the Closing Date or the applicable Foreign Closing Date by or on behalf of or with respect to Seller and each Selling Affiliate with the appropriate Taxing Authority in all jurisdictions in which such Tax Returns are required to be filed regardless of when the Taxes on such Purchased Assets are due. All such Tax Returns are true, correct and complete in all respects. No penalties or other charges are or will become due with respect to any such Tax Returns as the result of a late filing thereof. Seller and each Selling Affiliate that is transferring any Purchased Assets pursuant to this Agreement has paid all Taxes due or claimed to be due from Seller or any Selling Affiliate by any Taxing Authority with respect to such Purchased Assets for all taxable periods prior to the Closing Date or the applicable Foreign Closing Date, except for any Taxes on such Purchased Assets which are not yet due and payable. (e) Seller and each Selling Affiliate has no actual or potential Liability for any Tax of any Person other than Seller and each Selling Affiliate which Tax could be included in the Assumed Real Property Taxes or is a Tax Which May Give Rise To Any Transferee Tax Liability. (f) Seller and each Selling Affiliate has complied in all respects with all applicable laws, rules and regulations relating to the withholding and payment of any Taxes Which May Give Rise To Any Transferee Tax Liability, have duly and timely withheld and/or collected all Taxes Which May Give Rise To Any Transferee Tax Liability that Seller and each Selling Affiliate has been required to withhold and/or collect and, to the extent required, have duly and timely paid such Taxes Which May Give Rise To Any Transferee Tax Liability over to the proper Taxing Authority. (g) Any audit, examination or investigation of any Tax Returns of Seller and of each Selling Affiliate which occurred prior to the date hereof with respect to any Taxes Which May Give Rise To Any Transferee Tax, has resulted in no adjustment or changes or has been settled to the satisfaction of the respective Taxing Authority and, to the Knowledge of Seller, there is no current audit, examination, or investigation by any Taxing Authority of Seller or any Selling Affiliate in progress nor has Seller or any Selling Affiliate received any notice from any Taxing Authority (or otherwise have any knowledge) that any Taxing Authority intends to conduct such an audit, examination or investigation relating to any Assumed Real Property Taxes or Taxes Which May Give Rise To Any Transferee Tax AMENDED ASSET PURCHASE AGREEMENT 33 <PAGE> Liability. For purposes of this Section 2.9(g), "Knowledge of Seller" shall mean the actual knowledge of Brian Unruh, Director of Corporate Tax and Acting Corporate Controller, Lisa Prentice, Director of Operations and Americas and Pacific Controller, and Sue Kirby, Director of Operations and EAME Controller. (h) To the Knowledge of Seller, no issue has been raised by any Taxing Authority in any current or prior examination which, by application of the same or similar principles, could reasonably be expected to result in a proposed deficiency for any subsequent taxable period of Seller or any Selling Affiliate pursuant to this Agreement relating to any Assumed Real Property Taxes or Taxes Which May Give Rise To Any Transferee Tax Liability. For purposes of this Section 2.9(h), "Knowledge of Seller" shall mean the actual knowledge of Brian Unruh, Director of Corporate Tax and Acting Corporate Controller, Lisa Prentice, Director of Operations and Americas and Pacific Controller, and Sue Kirby, Director of Operations and EAME Controller. (i) There is no action, suit, proceeding, or claim pending or, to the Knowledge of Seller or any Selling Affiliate, threatened in respect of any Assumed Real Property Taxes or Taxes Which May Give Rise To Any Transferee Tax Liability. (j) Neither Seller nor any Selling Affiliate has consented to any waivers or extensions of any statute of limitations with respect to any taxable year or other period relating to any Assumed Real Property Taxes or Taxes Which May Give Rise To Any Transferee Tax Liability. There is no agreement, waiver or consent providing for an extension of time with respect to the assessment or collection of any Assumed Real Property Taxes or Taxes Which May Give Rise To Any Transferee Tax Liability against Seller or any Selling Affiliate. (k) There are no Tax Liens on any of the Purchased Assets other than with respect to Real Property Taxes not yet delinquent. (l) Neither Seller nor any Selling Affiliate is subject to any private letter rulings of the IRS or comparable rulings of any other Taxing Authority with respect to any Purchased Assets or Assumed Liabilities. (m) Neither Seller nor any Selling Affiliate has made any request for a ruling from the IRS or other Taxing Authority with respect to any Purchased Assets or Assumed Liabilities which is currently pending. (n) Neither Seller nor any Selling Affiliate has entered into any closing agreement with the IRS pursuant to Section 7121 of the Code or comparable agreement with any other Taxing Authority with respect to any Taxes Which May Give Rise To Any Transferee Tax Liability. (o) None of the Non-United States Purchased Assets to be transferred by the Selling Affiliates is a "United States real property interest," within the meaning of Section AMENDED ASSET PURCHASE AGREEMENT 34 <PAGE> 897(c) of the Code. (p) As of the Closing Date or the applicable Foreign Closing Date, Seller and each of the Selling Affiliates shall have made all payments of VAT (as defined herein) due and payable with respect to the conduct of Business, shall have filed all returns and reports required to have been filed prior to such Closing Date or the applicable Foreign Closing Date and shall have complied with all applicable provisions relating to VAT. (q) None of the United States Assets constitutes (i) "tax exempt use property" within the meaning of Section 168(h)(1) of the Code, or (ii) "tax-exempt use bond financed property" within the meaning of Section 168(g) of the Code. (r) Neither Seller nor any Selling Affiliate that is selling Purchased Assets pursuant to this Agreement has made any payment, nor are they or any one of them obligated to make any payment, nor are they or any one of them a party to an agreement which, upon the satisfaction of certain events or conditions, will obligate them to make a payment which would be subject to Section 280G of the Code which payment is included directly or indirectly in the Assumed Liabilities. (s) Neither Seller nor any Selling Affiliate has been required to file any report pursuant to Section 999 of the Code or participated in an international boycott within the meaning of Section 908 of the Code which is related to the Business or the Purchased Assets. (t) Neither Seller nor any Selling Affiliate has made any payment which constitutes an illegal bribe or kickback within the meaning of Section 162(c)(1) of the Code which is related to the Business or the Purchased Assets. (u) As of the Closing Date or the applicable Foreign Closing Date, Seller and each of the Selling Affiliates shall have made all payments of Payroll Taxes due and payable with respect to the conduct of the Business, shall have filed all returns and reports required to have been filed prior to such Closing Date or the applicable Foreign Closing Date, and shall be in compliance with all applicable provisions related to Payroll Taxes. (v) Seller and each Selling Affiliate has duly filed all reports, disclosures and other required submissions with the U.S. Customs Service and any comparable foreign governmental or quasi-governmental entity required to be filed by or on behalf of or with respect to Seller or any Selling Affiliate with respect to the import or export of any Inventory or other Purchased Assets. To the Knowledge of Seller, all such reports, disclosure and submissions are true, correct and complete in all respects. Seller and each Selling Affiliate has paid any fees, charges, assessment or other amounts due on or before the Closing Date or the applicable Foreign Closing Date to the U.S. Customs Service and any comparable foreign governmental or quasi-governmental AMENDED ASSET PURCHASE AGREEMENT 35 <PAGE> entity ("Customs Duties") with respect to the import or export of any Inventory. To the Knowledge of Seller, neither the U.S. Customs Service nor any comparable foreign governmental or quasi-governmental entity has given Seller or any Selling Affiliate any notice that it intends to take any action to prevent the sale of any item of Inventory or assess any penalties or other charges against such Inventory as the result of act or omission of Seller or any Selling Affiliate prior to the Closing Date or the applicable Foreign Closing Date with respect to such Inventory. For purposes of this Section 2.9(v), "Knowledge of Seller" means the actual knowledge of Brian Unruh, Director of Corporate Taxes and Acting Corporate Controller, and Nancy Grader, Customs and Trade Tax Manager. (w) Tektronix Malaysia Sdn. Bhd. has been granted an investment tax allowance incentive by the Malaysian Industrial Development Authority under the Investment Incentive Act of 1986 (the "Tax Incentive"). Seller and Tektronix Malaysia Sdn. Bhd. have fully satisfied each and every term and condition required for obtaining and maintaining the Tax Incentive, and have not acted or failed to act in any manner would cause a loss of part or all of the Tax Incentive or otherwise constitute a breach of any requirement for the Tax Incentive. To the Knowledge of Seller, such Tax Incentive is in full force and effect and will continue after the Closing Date or the applicable Foreign Closing Date. (x) No claims have been made by any Taxing Authority in any jurisdiction where Seller or any Selling Affiliate does not file Tax Returns of nexus or any other basis for making Seller or any Seller Affiliates subject to taxation by that jurisdiction. 2.10 Legal Proceedings. Except as disclosed in Section 2.10 of the Disclosure Schedule (with paragraph references corresponding to those set forth below): (a) there are no Actions or Proceedings pending or, to the Knowledge of Seller or a Selling Affiliate, threatened against, relating to or affecting Seller or a Selling Affiliate with respect to the Business or any of its Assets and Properties which (i) could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement, the Ancillary Agreements or any of the Operative Agreements or otherwise result in a material diminution of the benefits contemplated by this Agreement, the Ancillary Agreements or any of the Operative Agreements to Purchaser and the Purchasing Affiliates, or (ii) if determined adversely to Seller or to a Selling Affiliate, could reasonably be expected to result in (x) any injunction or other equitable relief that would materially interfere with the Business or (y) Losses by Seller or Selling Affiliates, individually or in the aggregate with Losses in respect of other such Actions or Proceedings, exceeding $1,000,000; (b) there are no facts or circumstances Known to Seller or a Selling Affiliate that could reasonably be expected to give rise to any Action or Proceeding that would have a material adverse effect on the Condition of the Business; and (c) there are no material Orders outstanding against Seller or a Selling Affiliate with respect to the Business. AMENDED ASSET PURCHASE AGREEMENT 36 <PAGE> Prior to the execution of this Agreement, Seller has made available to Purchaser all responses of counsel to auditors' requests for information delivered in connection with Seller's most recently prepared audited financial statements (together with any updates provided by such counsel) regarding Actions or Proceedings pending or threatened against, relating to or affecting the Business. 2.11 Compliance With Laws and Orders. Except as disclosed in Section 2.11 of the Disclosure Schedule, neither Seller nor any Selling Affiliate (A) is, nor has any of them at any time within the last five (5) years been, in violation of or in default under any Law or Order applicable to the Business, except for such violations or defaults that, individually or in the aggregate, would not have a material adverse effect on the Condition of the Business, or (B) has received written notice from any Governmental or Regulatory Authority within the last five years alleging that Seller or any Seller Affiliate is in violation of or in default under any Law or Order applicable to the Business, except for such violations or defaults that, individually or in the aggregate, would not have a material adverse effect on the Condition of the Business. 2.12 Benefit Plans: ERISA. (a) Section 2.12(a) of the Disclosure Schedule lists all Benefit Plans and other Plans sponsored, maintained, contributed to or required to be contributed to by Seller or any Selling Affiliate for the benefit of any Employee. True and complete copies of all such Plans (and all summary plan descriptions or other material communications made to employees) have been made available to Purchaser. Neither Seller, nor any Selling Affiliate that is an ERISA Affiliate, has at any time contributed, on behalf of any Affected Employee, to any "multiemployer plan", as that term is defined in Section 4001(a)(3) of ERISA. (b) All Benefit Plans, to the extent subject to ERISA, are in substantial compliance with ERISA. Each Qualified Plan has received a favorable determination letter from the Internal Revenue Service with respect to "TRA" (as defined in Section 1 of Revenue Procedure 93-39) and, to the Knowledge of Seller, there is no circumstance likely to result in revocation of any such favorable determination letter. All Benefit Plans covering non-U.S. Employees comply in all material respects with applicable Laws. (c) All contributions required to be made under the terms of any Benefit Plan have been timely made or have been reflected on the audited financial statements or the preliminary financial statements. No Defined Benefit Plan that is not a "multiemployer plan" has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA and there is no outstanding funding waiver with respect to any such non-multiemployer plan. Neither Seller nor any Selling Affiliate has provided, or is required to provide, security in connection with any Defined Benefit Plan pursuant to Section 401(a)(29) of the Code. No transactions contemplated by this Agreement will result in Liability on the part of Purchaser or any ERISA Affiliate of Purchaser to the PBGC under Sections 4062, 4063, 4064 or 4069 of ERISA, and no event or condition exists or has existed which could reasonably be expected to result in any such AMENDED ASSET PURCHASE AGREEMENT 37 <PAGE> Liability with respect to Purchaser or such ERISA Affiliate. Seller and Selling Affiliates have no material unfunded liabilities with respect to any Benefit Plan that covers non-U.S. employees. (d) There is no pending or, to the Knowledge of Seller, threatened litigation relating to the Benefit Plans known or reasonably expected to have a material adverse effect on the Business. Neither Seller nor any Selling Affiliate has engaged in a transaction with respect to any Benefit Plan that, assuming the taxable period of such transaction expired as of the date hereof, could subject Seller or any Selling Affiliate to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which has or would be reasonably expected to have a material adverse effect on the Business or the Condition of the Business. 2.13 Real Property. (a) Section 1.1(a)(i) of the Disclosure Schedule contains a true and correct list of each parcel of real property owned by Seller or a Selling Affiliate and used or held for use in connection with the Business that constitute Purchased Assets, and Section 1.1(a)(ii) of the Disclosure Schedule contains a true and correct list of each parcel of real property leased by Seller or a Selling Affiliate and used or held for use in connection with the Business that constitute Purchased Assets. Section 2.13(a) of the Disclosure Schedule contains a true and correct list of each parcel of real property owned by Seller or a Selling Affiliate and used or held for use in connection with the Business and each lease of real property leased by Seller or a Selling Affiliate and used or held for use in connection with the Business that do not constitute Purchased Assets. (b) Except as disclosed in Section 2.13(b) of the Disclosure Schedule, Seller or the Selling Affiliates, as the case may be, have title to the Real Property and the Improvements on the Tektronix Malaysia Real Property sufficient to operate the Business in the manner currently operated thereon, free and clear of all Liens other than Permitted Liens. Except as disclosed in Section 2.13(b) of the Disclosure Schedule, Seller or a Selling Affiliate are the only parties with the right to occupancy or possession of the Real Property and the Tektronix Malaysia Real Property. Seller and the Selling Affiliates have adequate rights of ingress and egress with respect to the Real Property, the Tektronix Malaysia Real Property and the Improvements thereon. (c) Seller and the Selling Affiliates have a valid and subsisting leasehold estate in and the right to quiet enjoyment of the real properties subject to the Real Property Leases and the ground lease for the Tektronix Malaysia Real Property for the full term thereof. Each Real Property Lease and the ground lease for the Tektronix Malaysia Real Property is a legal, valid and binding agreement, enforceable in accordance with its terms, of Seller or a Selling Affiliate and of each other Person that is a party thereto, and except as set forth in Section 2.13(c) of the Disclosure Schedule, there is no material default, nor has Seller or any Selling Affiliate received any notice of any such default by any party thereto (or any condition or event which, after notice or lapse of time or both, would constitute such a AMENDED ASSET PURCHASE AGREEMENT 38 <PAGE> default) thereunder. Neither Seller nor any Selling Affiliate owes any brokerage commissions with respect to any such Real Property Lease or the ground lease for the Tektronix Malaysia Real Property. Each Real Property Lease and the ground lease for the Tektronix Malaysia Real Property is in full force and effect in all material respects. Except for the Real Property Leases and the ground lease for the Tektronix Malaysia Real Property, and except as disclosed in Section 1.1(b)(viii) of the Disclosure Schedule, Seller and the Selling Affiliates are not a party to any other leases or other agreements, written or oral, with respect to any tenancies or rights to possession of any real property used in connection with the Business. Neither Seller nor any Selling Affiliate have made any previous assignment, transfer or other disposition of all or any part of its interest in the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property. (d) Seller has delivered or made available, or will make available within 30 days following the date of this Agreement, or has caused or will cause the Selling Affiliates to deliver or make available within 30 days following the date of this Agreement, to Purchaser true and complete copies of (i) all deeds, leases, mortgages, deeds of trust, certificates of occupancy, title insurance policies, title reports, surveys and similar documents, and all amendments thereof, with respect to the Real Property and the Tektronix Malaysia Real Property, and (ii) all Real Property Leases and the ground lease for the Tektronix Malaysia Real Property (including any amendments and renewal letters) and, to the extent reasonably available, all other documents referred to in clause (i) of this Section 2.13(d) with respect to the real property subject to the Real Property Leases and the ground lease for the Tektronix Malaysia Real Property. (e) Except as disclosed in Section 2.13(e) of the Disclosure Schedule, no tenant or other party (other than Seller or a Selling Affiliate) in possession of any of the real properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property has any right to purchase, or holds any option or right of first refusal to purchase, such properties. (f) Except as disclosed in Section 2.13(f) of the Disclosure Schedule, the Improvements (including Improvements on the Tektronix Malaysia Real Property) are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, and are adequate and suitable to operate the Business in the manner currently operated thereon. (g) Except for consent by landlord required by any Real Property Lease or the ground lease for the Tektronix Malaysia Real Property, the execution, delivery and performance by Seller and by the Selling Affiliates of this Agreement, the Ancillary Agreements and the Operative Agreements to which it is a party, and the consummation of the transactions contemplated hereby and thereby, will not (A) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to any Real Property Leases or the ground lease for the Tektronix Malaysia Real Property , or (B) result in or give to any Person any additional rights or entitlement to increased, additional, accelerated or guaranteed payments under any Real Property Leases or the AMENDED ASSET PURCHASE AGREEMENT 39 <PAGE> ground lease for the Tektronix Malaysia Real Property. (h) All Licenses (including any licenses from private parties, if applicable) necessary for the use and operation in all material respects of the Real Property and the Tektronix Malaysia Real Property and the real properties subject to the Real Property Leases and the ground lease for the Tektronix Malaysia Real Property by Seller and the Selling Affiliates as currently being used and operated for the Business are currently possessed by Seller or the Selling Affiliates. The Real Property and the real properties subject to the Real Property Leases and the ground lease for the Tektronix Malaysia Real Property have been used in all material respects in accordance with (a) all such approvals, licenses, permits and certificates, (b) all governmental regulations, and (c) all covenants, conditions, restrictions, easements and agreements of any kind or nature affecting such properties. (i) There are no pending or, to the Knowledge of Seller or any Selling Affiliate, contemplated actions, suits, arbitrations, claims or proceedings, at law or in equity, reasonably expected to have a material adverse effect on all or any portion of the Real Property or the Tektronix Malaysia Real Property or the properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property in which Seller or a Selling Affiliate is or will be a party by reason of Seller's or a Selling Affiliate's ownership of the Real Property or the Tektronix Malaysia Real Property or the properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property, including, without limitation, judicial, municipal or administrative proceedings in eminent domain, unlawful detainer or tenant evictions, collections, alleged building code, health and safety or zoning violations, personal injuries or property damages alleged to have occurred on the Real Property or the Tektronix Malaysia Real Property or the properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property or by reason of the condition or use of the Real Property or the Tektronix Malaysia Real Property or the real properties subject to the Real Property Leases, and, to the Knowledge of Seller or any Selling Affiliate, no events have occurred which might give rise to such actions, claims or proceedings. 2.14 Tangible Personal Property. Seller and the Selling Affiliates are in possession of and have good title to, or have valid leasehold interests in or valid rights under Contract to use, all the Tangible Personal Property, which includes all tangible personal property reflected on the Acquisition Balance Sheet and tangible personal property acquired since the date of the Acquisition Balance Sheet, other than tangible personal property disposed of since such date in the ordinary course of business consistent with past practice. Said Tangible Personal Property is free and clear of all Liens, other than Permitted Liens and Liens disclosed in Section 2.14 of the Disclosure Schedule, and is in good working order and condition, ordinary wear and tear excepted, and its use, to the Knowledge of Seller, complies with all applicable Laws, except for such non-compliance that, individually or in the aggregate, would not have a material adverse effect on the Business or the Condition of the Business, taken as a whole. Upon the Closing or the applicable Foreign Closing, Seller and the Selling Affiliates shall convey good title to or the AMENDED ASSET PURCHASE AGREEMENT 40 <PAGE> rights to use all such Tangible Personal Property to Purchaser or the designated Purchasing Affiliates. 2.15 Intellectual Property Rights. (a) Schedule 2.15(a) is a true and complete list of all domestic and foreign patents and patent applications owned or licensed by Seller that are material to the manufacture, use or sale of Business Products, use of Business processes, or the continued operation of the Business in substantially the manner the Business is operated as of the date hereof (the "Business Patents"). Except as set forth in Schedule 2.15(a), Seller owns or has the right to use the Business Patents. Except as set forth in Schedule 2.15(a), there are no proceedings alleging invalidity and, to the Knowledge of Seller, there are no pending claims or challenges to the validity of any Business Patent owned by Seller. Except as set forth in Schedule 2.15(a), to the Knowledge of Seller, each of the Business Patents owned by Seller is, or upon issuance will be, valid and enforceable and in compliance with all requirements for payment of registration and/or maintenance fees. Except as set forth in Schedule 2.15(a), no Business Patent owned by Seller has been or is now involved in any interference or re-examination proceeding. (b) Except as set forth in Schedule 2.15(b) and excluding the software listed in Schedule 2.15(e), Seller owns or has the right to use all works of authorship subject to copyright protection and all related copyright registrations that are material to the manufacture, use or sale of Business Products, use of Business processes, or the continued operation of the Business in substantially the manner the Business is operated as of the date hereof (the "Business Copyrights"). To the Knowledge of Seller, there are no cancellation or other proceedings currently pending or threatened that affect the rights to use and/or register the Business Copyrights. (c) Except as set forth in Schedule 2.15(c), Seller owns or has the right to use all trade secrets that are material to the continued operation of the Business in substantially the manner the Business is operated as of the date hereof (the "Business Trade Secrets"). Seller has policies and procedures for preventing unauthorized disclosure of the Business Trade Secrets that conform to reasonable and customary practice in the computer printer industry, including generally having its employees execute, at the time of their employment, an agreement that includes an obligation not to disclose Seller's confidential information, and generally obtaining an executed nondisclosure agreement from other persons to whom the Business Trade Secrets are disclosed. To the Knowledge of Seller, Seller has complied with these policies and procedures in all material respects. (d) Schedule 2.15(d) is a true and complete list of all domestic and foreign trademarks, trade names, and service marks currently owned or used by Seller that are material to the continued operation of the Business in substantially the manner the Business is operated as of the date hereof (the "Business Trademarks"). Except as set forth in Schedule 2.15(d), Seller owns or has the right to use the Business Trademarks. Except as set forth in Schedule 2.15(d), there are no proceedings, and to the Knowledge of Seller, AMENDED ASSET PURCHASE AGREEMENT 41 <PAGE> there are no pending claims or challenges to the validity of any Business Trademark owned by seller. Except as set forth in Schedule 2.15(d), all the registered Business Trademarks owned by Seller are currently in compliance with all requirements for the payment of registration or renewal fees. Except as set forth in Schedule 2.15(d), no registration or pending application for a Business Trademark owned by Seller has been or is now involved in any opposition or cancellation proceeding. (e) Schedule 2.15(e) lists substantially all software or categories of software used in the Business that are material to the manufacture, use or sale of Business Products, use of Business processes, or the continued operation of the Business in substantially the manner the Business is operated as of the date hereof (collectively, the "Business Software"). To the Knowledge of Seller, except as set forth in Schedule 2.15(e), Seller owns or has the right to use the Business Software. (f) Schedule 2.15(f) lists substantially all written agreements or categories of agreements executed by Seller relating to the Business Patents, the Business Copyrights, the Business Trade Secrets, the Business Trademarks or the Business Software, in each case to the extent material to the continued operation of the Business in substantially the manner the Business is operated as of the date hereof, with the exception of (i) employment agreements or employee obligation agreements executed by employees in standard form at the time of their employment without material modification; (ii) invention assignment and confidential information agreement executed by contract workers in standard form in connection with their contracted work assignment; and (iii) customer contracts and confidential information agreements in standard form without material modification. (g) Except as set forth in Schedule 2.15(g), to the Knowledge of Seller, none of the Products manufactured, sold or licensed by, nor any of the processes used by, the Business infringes any patent, trademark, copyright, trade secret or other intellectual property right of any third party and, to the Knowledge of Seller, no person is infringing upon any Business Patent, Business Copyright, Business Trade Secret or Business Trademark. Except as set forth in Schedule 2.15(g), to the Knowledge of Seller, from and after the Closing Date, Purchaser will have the right to manufacture, have made, use, sell, license, or otherwise dispose of, any product or process used by the Business and will have a right to use all patents, trademarks, copyrights, trade secrets and other intellectual property rights that are material to the continued operation of the Business in substantially the manner the Business is operated as of the date hereof. 2.16 Contracts. (a) Section 2.16(a) of the Disclosure Schedule (with paragraph references corresponding to those set forth below) contains a true and complete list of each of the following Contracts or other arrangements to which Seller or a Selling Affiliate is a party or by which any of the Purchased Assets is bound or that relate to the conduct of the Business, which Contracts or other arrangements constitute Purchased Assets: AMENDED ASSET PURCHASE AGREEMENT 42 <PAGE> (i) (A) all material Contracts (excluding Plans) providing for a commitment of employment or consultation services for a specified or unspecified term to, or otherwise relating to employment or the termination of employment of, any Employee (other than offer letters made in the ordinary course of business and employment agreements in foreign countries made in the ordinary course of business); and (B) any written or unwritten material representations, commitments, promises, communications or courses of conduct (excluding Plans and any such Contracts referred to in clause (A)) involving an obligation of Seller to make payments in any year, other than with respect to salary or incentive compensation payments in the ordinary course of business, to any Employee exceeding $100,000 or to any group of Employees exceeding $1,000,000 in the aggregate, and arrangements that are Retained Liabilities under Section 1.2(b)(ix); (ii) all Business Contracts with any Person containing any provision or covenant prohibiting or limiting the ability of Seller or a Selling Affiliate to compete, directly or indirectly, with any Person; (iii) all partnership, joint venture, shareholders, limited liability company operating agreements or other similar Contracts with any Person in connection with the Business; (iv) all material Contracts with distributors, dealers, value added resellers, service providers, licensors, licensees, manufacturer's representatives, sales agencies or franchises with whom Seller deals in connection with the Business; (v) all Contracts relating to material research and development or product development activities in connection with the Business; (vi) all Contracts relating to the future disposition or acquisition of any Purchased Assets, other than dispositions or acquisitions in the ordinary course of business consistent with past practice; (vii) all collective bargaining, works council or similar labor Contracts covering any Employee; (viii) leases of real property in respect of which Seller or a Selling Affiliate is the lessor or sublessor; and (ix) all other Contracts (other than Plans, the Real Property Leases and insurance policies listed in Section 2.18 of the Disclosure Schedule) with respect to the Business that (A) involve the payment or potential payment, pursuant to the terms of any such Contract, by or to Seller or a Selling Affiliate of more than $200,000 annually and (B) cannot be terminated within ninety (90) days after giving notice of termination without resulting in any cost or penalty to Seller or a Selling Affiliate, excluding open purchase orders for less than $200,000. AMENDED ASSET PURCHASE AGREEMENT 43 <PAGE> (b) Each Contract required to be disclosed in Section 2.16(a) of the Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, of each party thereto; and, except as disclosed in Section 2.16(b) of the Disclosure Schedule, neither Seller or a Selling Affiliate nor, to the Knowledge of Seller or a Selling Affiliate, any other party to such Contract is, or has received notice that it is, in material violation or material breach of or material default under any such Contract (or with notice or lapse of time or both, would be in material violation or material breach of or material default under any such Contract). (c) Except as disclosed in Section 2.16(c) of the Disclosure Schedule and negotiation of Contracts made in the ordinary course of business, neither Seller nor any Selling Affiliate is engaged in the negotiation of a Contract or other arrangement in connection with the Business that (i) involve the payment or potential payment, pursuant to the terms of any such Contract, by or to Seller or a Selling Affiliate of more than $200,000 annually and (B) cannot be terminated within ninety (90) days after giving notice of termination without resulting in any cost or penalty to Seller or a Selling Affiliate. 2.17 Business Licenses. Except as disclosed in Section 2.17 of the Disclosure Schedule: (a) Seller or the Selling Affiliates own or validly hold all Business Licenses that are necessary to conduct the Business, except where the failure to hold any such License would not have a material adverse effect on the Condition of the Business or the Total Acquired Assets; and (b) To the Knowledge of Seller, neither Seller nor any Selling Affiliate is, nor has any of them received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default) under any Business License. 2.18 Insurance. Section 2.18 of the Disclosure Schedule contains a true and complete list of all liability, property, workers' compensation and other insurance policies currently in effect that insure the Business, the Employees or the Total Acquired Assets (a "Policy" or the "Policies"). Each such Policy is valid and binding and in full force and effect, no premiums due thereunder have not been paid and Seller has not received any notice of cancellation or termination in respect of any such Policy or is not in material default thereunder. Such Policies are placed with financially sound and reputable insurers and, in light of the nature of the Business and the Total Acquired Assets, are in amounts and have coverages that are reasonable and customary for Persons engaged in such business and having such Assets and Properties. Seller has not received notice that any insurer under any Policy referred to in this Section 2.18 is denying Liability with respect to a claim thereunder or defending under a reservation of rights clause. 2.19 Affiliate Transactions. Except as disclosed in Section 2.19 of the Disclosure AMENDED ASSET PURCHASE AGREEMENT 44 <PAGE> Schedule, (i) no officer, director, Affiliate or Associate of Seller or any Selling Affiliate or any Associate of any such officer, director or Affiliate (excluding any public companies in which a director of Seller may be an officer) provides or causes to be provided any material assets, services or facilities used or held for use in connection with the Business, either outside the ordinary course of business consistent with past practice or other than on an arm's-length basis, and (ii) the Business does not provide or cause to be provided any material assets, services or facilities to any such officer, director, Affiliate or Associate (excluding any public companies in which a director of Seller may be an officer), either outside the ordinary course of business consistent with past practice or other than on an arm's-length basis. 2.20 Employees; Labor Relations. Except as disclosed in Section 2.20 of the Disclosure Schedule, (a) no Employee is presently a member of a collective bargaining unit and, to the Knowledge of Seller , there are no threatened or contemplated attempts to organize for collective bargaining purposes any of the Employees, and (b) no unfair labor practice complaint or sex, age, race or other discrimination claim has been brought during the last two (2) years against Seller or any Selling Affiliate with respect to the conduct of the Business before the National Labor Relations Board, the Equal Employment Opportunity Commission or any other Governmental or Regulatory Authority. There has been no primary work stoppage, strike or other organized work stoppage by employees of Seller or any Selling Affiliate engaged in the Business in the last two (2) years. During that period, Seller and the Selling Affiliates have complied with all applicable Laws relating to the employment of labor, including, without limitation those relating to wages, hours and collective bargaining, except where such failure to comply would not have a material adverse effect on the Condition of the Business. No information is Known to Seller that would lead Seller to believe that a material number of the Employees as of August 28, 1999, will or may cease to be Employees, or will refuse offers of employment from Purchaser or a Purchasing Affiliate, as the case may be. 2.21 Environmental Matters, etc. Seller and the Selling Affiliates have obtained all Licenses which are required under applicable Environmental Laws in connection with the conduct of the Business or the Purchased Assets or the use and occupancy of the Real Property and the Tektronix Malaysia Real Property and the properties subject to the Real Property Leases and the ground lease for the Tektronix Malaysia Real Property. Each of such Licenses is in full force and effect. Seller and the Selling Affiliates have conducted the Business in compliance with the terms and conditions of all such Licenses and with any applicable Environmental Laws, except where the failure to comply could not reasonably be expected to have a material adverse effect on the Condition of the Business. In addition, except as set forth in Section 2.21 of the Disclosure Schedule (with paragraph references corresponding to those set forth below): (a) No Order has been issued, no Environmental Claim has been filed, no penalty has been assessed and no investigation or review is pending or, to the Knowledge of Seller or any Selling Affiliate, threatened by any Governmental or Regulatory Authority with respect to any alleged failure by Seller or any Selling Affiliate to have any License AMENDED ASSET PURCHASE AGREEMENT 45 <PAGE> required under applicable Environmental Laws in connection with the conduct of the Business or with respect to any generation, treatment, storage, recycling, transportation, discharge, disposal or Release of any Hazardous Material in connection with the Business or with respect to the use and occupancy of the Real Property and the Tektronix Malaysia Real Property and the properties subject to the Real Property Leases and the ground lease for the Tektronix Malaysia Real Property, and to the Knowledge of Seller or any Selling Affiliate there are no facts or circumstances in existence which could reasonably be expected to form the basis for any such Order, Environmental Claim, penalty or investigation. (b) Seller and the Selling Affiliates do not own, operate or lease a treatment, storage or disposal facility on any of the Real Property or the Tektronix Malaysia Real Property or the properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq., as amended, or under any other comparable state or local Law. (c) No Hazardous Materials Contamination is present in, on or under any of the Real Property or properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property or, to the Knowledge of Seller, any nearby real property which could migrate to any of the Real Property or the Tektronix Malaysia Real Property or properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property. No underground storage tanks or surface impoundments for Hazardous Materials are present in or under any of the Real Property or the Tektronix Malaysia Real Property or properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property nor were any underground storage tanks or surface impoundments previously located in or under any of the Real Property or the Tektronix Malaysia Real Property or properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property. (d) The Real Property and the Tektronix Malaysia Real Property and properties subject to the Real Property Leases and the ground lease for the Tektronix Malaysia Real Property and every part thereof, and all operations and activities therein and thereon and the use and occupancy thereof, comply with all applicable Environmental Laws, except where the failure to comply could not reasonably be expected to have a material adverse effect on the Condition of the Business. No Hazardous Material has been Released in a quantity reportable under, or in violation of, any Environmental Law. (e) Seller and the Selling Affiliates have not transported or arranged for the transportation of any Hazardous Material in connection with the operation of the Business or the Real Property or the Tektronix Malaysia Real Property or real properties subject to the real Property Leases or the ground lease for the Tektronix Malaysia Real Property to any location that is (i) listed on the NPL under CERCLA, (ii) listed for possible inclusion on the NPL by the Environmental Protection Agency in CERCLIS or on any similar foreign, state or local list or (iii) the subject of enforcement actions by federal, state or local AMENDED ASSET PURCHASE AGREEMENT 46 <PAGE> Governmental or Regulatory Authorities that may lead to Environmental Claims against Seller, the Selling Affiliates, the Purchased Assets or the Business. (f) No oral or written notification of a Release of a Hazardous Material in connection with the operation of the Business or the use or occupancy of the Real Property or real properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property has been filed by or on behalf of Seller or any Selling Affiliate. None of the Real Property, the Tektronix Malaysia Real Property or properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property, is listed or proposed for listing on the NPL, CERCLIS or any similar foreign, state or local list of sites requiring investigation or clean-up. (g) No Liens have arisen under or pursuant to any Environmental Law on any Real Property, the Tektronix Malaysia Real Property or properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property and no foreign, federal, state or local Governmental or Regulatory Authority action has been taken or, to the Knowledge of Seller or any Selling Affiliate, is in process that could subject any such site or facility to such Liens, and Seller or any Selling Affiliate would not be required to place any notice or restriction relating to the presence of Hazardous Materials at any such site or facility in any deed to the Real Property on which such site or facility is located. (h) There have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by or on behalf of, or that are in the possession of, Seller or any Selling Affiliate in relation to any Real Property or the Tektronix Malaysia Real Property or any properties subject to the Real Property Leases or the ground lease for the Tektronix Malaysia Real Property which have not been delivered to Purchaser prior to the execution of this Agreement. (i) Seller and the Selling Affiliates have complied with all Environmental Laws relating to product safety, except where the failure to comply could not reasonably be expected to have a material adverse effect on the Condition of the Business. To the Knowledge of Seller, Seller and the Selling Affiliates have provided all required notices, disclosures, and reports relating to product safety; collected and maintained all required data and records relating to product safety; complied with all required labeling, handling, and delivery methods relating to product safety; and performed all required testing and investigation relating to product safety of Hazardous Materials, used, stored, distributed or produced by Seller and the Selling Affiliates as required under any Environmental Law, including but not limited to Hazardous Materials regulated under the Toxic Substances Control Act , the European Inventory of Existing Commercial Chemicals, the Canadian Domestic Substances List, the Federal Hazardous Substances Act, the Sherman Food, Drug and Cosmetic Law, and any other Laws relating to product safety. (j) To the Knowledge of Seller, no Product sold, distributed, manufactured, or otherwise placed in the stream of commerce by Seller or any Selling Affiliate constitutes a Hazardous Material under any Environmental Law at the end of its useful life. AMENDED ASSET PURCHASE AGREEMENT 47 <PAGE> (k) To the Knowledge of Seller or any Selling Affiliate, there are no facts or circumstances in existence which would cause Seller to expect the occurrence of an Epidemic Failure in any Products (or in any parts, components, accessories or supplies related thereto) currently being sold by Seller or any Selling Affiliate or expected to be launched prior to May 31, 2002. 2.22 Substantial Customers and Suppliers. Section 2.22(a) of the Disclosure Schedule lists the one hundred (100) largest customers of the Business, on the basis of revenues for goods sold or services provided for the most recently-completed fiscal year. Section 2.22(b) of the Disclosure Schedule lists the one hundred (100) largest suppliers of the Business, on the basis of cost of goods or services purchased for the most recently-completed fiscal year. Except as disclosed in Section 2.22(c) of the Disclosure Schedule, none of the ten (10) largest customers or suppliers has ceased or materially reduced its purchases from, use of the services of, sales to or provision of services to the Business from the date of the Acquisition Balance Sheet to the date of this Agreement, or to the Knowledge of Seller, has threatened to cease or materially reduce such purchases, use, sales or provision of services after the date hereof. Except as disclosed in Section 2.22(d) of the Disclosure Schedule, to the Knowledge of Seller, none of the ten (10) largest customers or suppliers is threatened with bankruptcy or insolvency. 2.23 Accounts Receivable. Except as set forth in Section 2.23 of the Disclosure Schedule, the Accounts Receivable (i) arose from bona fide sales transactions in the ordinary course of business and are payable on ordinary trade terms, (ii) are legal, valid and binding obligations of the respective debtors enforceable in accordance with their terms, (iii) are free and clear of any Lien other than Permitted Liens, (iv) have not been pledged as collateral, (v) are not subject to any valid set-off or counterclaim, (vi) do not represent obligations for goods sold on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return arrangement, (vii) are collectible in the ordinary course of business consistent with past practice in the aggregate recorded amounts thereof, net of any applicable reserve reflected in the Acquisition Balance Sheet, and (viii) are not the subject of any Actions or Proceedings brought by or on behalf of Seller or any Selling Affiliate. Section 2.23 of the Disclosure Schedule sets forth a description of any security arrangements and collateral securing the repayment or other satisfaction of the Accounts Receivable (the "Security Agreements"). All steps necessary to render all such security arrangements legal, valid, binding and enforceable, and to give and maintain for Seller and the Selling Affiliates a perfected security interest in the related collateral, have been taken. 2.24 Inventory. All of the Inventory consists of a quality and quantity usable and salable in the ordinary course of business consistent with past practice, subject to normal and customary allowances in the industry for spoilage, damage and obsolescence. All items included in the Inventory are the property of Seller and the Selling Affiliates, free and clear of any Lien other than Permitted Liens, have not been pledged as collateral, are not held by Seller or any Selling Affiliate on consignment from others. 2.25 Vehicles. Section 1.1(a)(xi) of the Disclosure Schedule lists substantially all AMENDED ASSET PURCHASE AGREEMENT 48 <PAGE> motor vehicles owned or leased by Seller and the Selling Affiliates and used or held for use in the conduct of the Business. Except as disclosed in Section 2.25 of the Disclosure Schedule, Seller and the Selling Affiliates have good and valid title to, or have valid leasehold interests in or valid rights under Contract to use, each Vehicle, free and clear of all Liens other than Permitted Liens. 2.26 No Guarantees. Except as disclosed in Section 2.26 of the Disclosure Schedule, none of the Liabilities of the Business or of Seller or any Selling Affiliate incurred in connection with the conduct of the Business is guaranteed by or subject to a similar contingent obligation of any other Person, nor has Seller or any Selling Affiliate guaranteed or become subject to a similar contingent obligation in respect of the Liabilities of any customer, supplier or other Person to whom Seller or a Selling Affiliate sells goods or provides services in the conduct of the Business or with whom Seller or a Selling Affiliate otherwise has significant business relationships in the conduct of the Business. 2.27 Entire Business. The sale of the Purchased Assets and the transfer of the Intellectual Property by Seller and the Selling Affiliates to Purchaser and the Purchasing Affiliates pursuant to this Agreement and the Technology Transfer Agreement, respectively, will effectively convey to Purchaser and the Purchasing Affiliates the entire Business and all of the tangible and intangible property used primarily by Seller and the Selling Affiliates (whether owned, leased or held under license by Seller or the Selling Affiliates, by any of their respective Affiliates or Associates or by others) in connection with the conduct of the Business as heretofore conducted by Seller and the Selling Affiliates (except for the Excluded Assets and the matters listed on Section 2.27 of the Disclosure Schedule) including, without limitation, all tangible and intangible Assets and Properties of Seller and the Selling Affiliates reflected in the Acquisition Balance Sheet and Assets and Properties acquired since the date of the Acquisition Balance Sheet in the conduct of the Business, other than the Excluded Assets and Assets and Properties disposed of since such date, consistent with Section 2.7(e). Section 2.27 of the Disclosure Schedule sets forth all of the material shared facilities, Assets and Properties, Contracts and services, or a description of the categories of such facilities, Assets and Properties, Contracts or services, which are used in connection with the Business and with any other business or other operations of Seller or the Selling Affiliates or any of their respective Affiliates or Associates (the "Shared Assets") and will be retained by Seller. 2.28 Brokers. Except for J.P. Morgan & Co., Inc., whose fees, commissions and expenses are the sole responsibility of Seller, all negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by Seller directly with Purchaser without the intervention of any Person on behalf of Seller or any Selling Affiliate in such manner as to give rise to any valid claim by any Person against Purchaser or any Purchasing Affiliate for a finder's fee, brokerage commission or similar payment. 2.29 Year 2000. (a) Each of the products, supplies and services sold, licensed or otherwise made AMENDED ASSET PURCHASE AGREEMENT 49 <PAGE> available to any third party (the "Products") by the Seller or any Selling Affiliate and all software, firmware, systems, files, applications, interfaces, databases and other computer-related materials used in such Products (the "Software") either are Millennium Compliant or the failure of such Products and Software to be Millennium Compliant will not result in any Liability to or obligation of the Seller or any Selling Affiliate. (b) Seller and the Selling Affiliates have developed and are in the process of implementing a plan designed to ensure that all hardware, software, firmware, systems, files, applications, interfaces, databases and other computer-related materials (other than the Products and Software) used primarily in the Business (the "Internal Systems") that Seller or any Selling Affiliate owns, possesses or uses in connection with the Business are or will be Millennium Compliant or will be replaced with Internal Systems that are Millennium Compliant no later than October 31, 1999. Seller and the Selling Affiliates in good faith expect that the implementation of such plan will be accomplished according to the plan. All remaining tasks to complete remediation and compliance testing for Millennium Compliance are planned and budgeted within the Division, with required resources identified and scheduled. In addition, Seller and the Selling Affiliates have adopted a schedule to complete Millennium Compliance readiness assessments of its suppliers for Business. (c) "Millennium Compliant" or "Millennium Compliance" means (i) that Products, Software and Internal Systems are designed to be used prior to, during and after the calendar year 2000 A.D. and each will operate during each such time period without error relating to or caused by date data, including any error relating to, or the product of, date data which represents, is generated in or references more than one century ("Century-Based Data"), (ii) that the Products, Software and Internal Systems will operate prior to, during and after the calendar year 2000 A.D., both on a stand-alone basis and when interacting or interoperating with third-party hardware, software and systems, without error arising out of or relating to Century Based Data and without human intervention, other than original data entry, and (iii) that neither the occurrence of any date nor the change of century will adversely affect the processing, calculating, comparing, sequencing or other use of data by the Products or Software, including without limitation causing (x) any error relating to or resulting from Century-Based Data; (y) any abnormal ending or provision of invalid or incorrect results as a result of any Century-Based Data; and (z) any error relating to century recognition or calculations accommodating Century-Based Data, values or formulae. 2.30 Disclosure. To the Knowledge of Seller, all material facts relating to the Condition of the Business that could reasonably be expected to have a material adverse effect on the Condition of the Business have been disclosed to Purchaser in or in connection with this Agreement. No representation or warranty contained in this Agreement, and no statement contained in the Disclosure Schedule and the Financial Statements, contains any untrue statement of a material fact that could reasonably be expected to have a material adverse effect on the Condition of the Business or omits to state a material fact in a manner that could reasonably be expected to have a material adverse effect on the Condition of the Business. AMENDED ASSET PURCHASE AGREEMENT 50 <PAGE> ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser, for itself and on behalf of each of the Purchasing Affiliates, hereby represents and warrants to Seller as follows: 3.1 Organization of Purchaser and the Purchasing Affiliates. Purchaser and each Purchasing Affiliate is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction applicable thereto (to the extent the concepts of valid existence and good standing exists in the relevant jurisdiction). Notwithstanding the foregoing, there shall be no breach of this Section 3.1 where the failure of the Purchaser or the Purchasing Affiliates to be in good standing (to the extent the concept of good standing exists in the relevant jurisdiction), in the aggregate, are not reasonable likely to have a material adverse effect on the timely performance by Purchaser of the transactions contemplated by this Agreement. 3.2 Authority. Purchaser and each Purchasing Affiliate has full corporate power and authority to enter into this Agreement, the Ancillary Agreements and the Operative Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Purchaser and each Purchasing Affiliate of this Agreement, the Ancillary Agreements and the Operative Agreements to which it is a party, and the performance by Purchaser and a Purchasing Affiliate of its obligations hereunder and thereunder, have been duly and validly authorized by the Boards of Directors of Purchaser or the Purchasing Affiliate, no other corporate action on the part of Purchaser or a Purchasing Affiliate, or their respective shareholders being necessary. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes, and upon the execution and delivery by Purchaser and the Purchasing Affiliates of the Ancillary Agreements and the Operative Agreements to which it is a party, such Ancillary Agreements and Operative Agreements will constitute, legal, valid and binding obligations of Purchaser and the Purchasing Affiliates, as the case may be, enforceable against them in accordance with their terms, except as enforceability may be limited or affected by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). 3.3 No Conflicts. The execution and delivery by Purchaser of this Agreement do not, and the execution and delivery by Purchaser and the Purchasing Affiliates of the Ancillary Agreements and the Operative Agreements to which it is a party, the performance by Purchaser and the Purchasing Affiliates of its and their respective obligations under such Agreements and the consummation of the transactions contemplated hereby and thereby will not: AMENDED ASSET PURCHASE AGREEMENT 51 <PAGE> (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the certificate of incorporation or by-laws (or other comparable corporate charter document) of Purchaser or of a Purchasing Affiliate; (b) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Schedule 3.4 hereto, conflict with or result in a violation or breach of any term or provision of any Law or Order applicable to Purchaser, a Purchasing Affiliate or any of its or their respective Assets and Properties; or (c) except as disclosed in Schedule 3.3 hereto, (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require Purchaser or a Purchasing Affiliate to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, or (iv) result in the creation or imposition of any Lien upon Purchaser, a Purchasing Affiliate or any of its Assets or Properties under, any Contract or License to which Purchaser or a Purchasing Affiliate is a party or by which any of its Assets and Properties is bound, except for such violation, breach, default, loss, requirement or creation that could not reasonably be expected to, individually or in the aggregate, materially impair the ability of Purchaser or a Purchasing Affiliate to perform its obligations under this Agreement or any of the Ancillary Agreements or Operative Agreements or otherwise materially impair the consummation of the transactions contemplated by this Agreement or any of the Ancillary Agreements or Operative Agreements. . 3.4 Governmental Approvals and Filings. Except for the HSR Act filing and other antitrust filings described in Section 5.2 and except as disclosed in Schedule 3.4 hereto, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of Purchaser or a Purchasing Affiliate is required in connection with the execution, delivery and performance of this Agreement, any of the Ancillary Agreements or the Operative Agreements to which it is a party or the consummation of the transactions contemplated hereby or thereby. 3.5 Legal Proceedings. There are no Actions or Proceedings pending or, to the knowledge of Purchaser, threatened against, relating to or affecting Purchaser or a Purchasing Affiliate or any of their respective Assets and Properties which could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement, the Ancillary Agreements or any of the Operative Agreements or otherwise result in a material diminution of the benefits contemplated by this Agreement, the Ancillary Agreements or any of the Operative Agreements to Seller and the Selling Affiliates. 3.6 Brokers. Except for Goldman Sachs & Co., whose fees, commissions and expenses are the sole responsibility of Purchaser, all negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by Purchaser directly with Seller without the intervention of any Person on behalf of Purchaser in such manner as to give rise to any valid claim by any Person against Seller for a finder's fee, brokerage AMENDED ASSET PURCHASE AGREEMENT 52 <PAGE> commission or similar payment. ARTICLE 4 COVENANTS OF SELLER Seller covenants and agrees with Purchaser that, at all times from and after the date hereof until the Closing or the applicable Foreign Closing and, with respect to any covenant or agreement by its terms to be performed in whole or in part after the Closing or the applicable Foreign Closing, as the case may be, for the period specified herein , if any, Seller will comply, and will cause the Selling Affiliates to comply, with all covenants and provisions of this Article 4, except to the extent Purchaser may otherwise consent in writing. 4.1 Regulatory and Other Approvals. From the date hereof until the Closing or the termination of this Agreement in accordance with Article 12, Seller will, or will cause the Selling Affiliates to, (a) take all commercially reasonable steps necessary or desirable, and proceed diligently and in good faith and use all commercially reasonable efforts, as promptly as practicable, to obtain all consents, approvals or actions of, to make all filings with and to give all notices to Governmental or Regulatory Authorities or any other Person required of Seller or any Selling Affiliate to consummate the transactions contemplated hereby and by the Ancillary Agreements and the Operative Agreements, including without limitation those described in Sections 2.3 and 2.4 of the Disclosure Schedule, (b) provide such other information and communications to such Governmental or Regulatory Authorities or other Persons as Purchaser or such Governmental or Regulatory Authorities or other Persons may reasonably request in connection therewith and (c) cooperate with Purchaser or the designated Purchasing Affiliates as promptly as practicable in obtaining all consents, approvals or actions of, making all filings with and giving all notices to Governmental or Regulatory Authorities or other Persons required of Purchaser or a Purchasing Affiliate to consummate the transactions contemplated hereby and by the Ancillary Agreements and the Operative Agreements. Seller will provide, and will cause the Selling Affiliates to provide, prompt notification to Purchaser when any such consent, approval, action, filing or notice referred to in clause (a) above is obtained, taken, made or given, as applicable, and will advise Purchaser of any communications (and, unless precluded by Law, provide copies of any such communications that are in writing) with any Governmental or Regulatory Authority or other Person regarding any of the transactions contemplated by this Agreement or any of the Ancillary Agreements or the Operative Agreements. 4.2 HSR Filings, etc. From the date hereof until the Closing or the termination of this Agreement in accordance with Article 12, in addition to and not in limitation of Seller's covenants contained in Section 4.1, Seller will, or will cause the Selling Affiliates to, (a) take promptly all actions necessary to make the filings required of Seller or its Affiliates under the HSR Act and any similar filings under applicable Laws in any jurisdictions in with the Business is conducted or the Purchased Assets are located or as may be required by any AMENDED ASSET PURCHASE AGREEMENT 53 <PAGE> Governmental or Regulatory Authority, (b) comply at the earliest practicable date with any request for additional information received by Seller or its Affiliates from the Federal Trade Commission, the Antitrust Division of the Department of Justice or any Governmental or Regulatory Authority pursuant to the HSR Act or other applicable Laws and (c) cooperate with Purchaser or its Affiliates in connection with Purchaser's or its Affiliates' filing under the HSR Act or other applicable Laws and use reasonable commercial efforts to resolve any investigation or other inquiry concerning the transactions contemplated by this Agreement commenced by either the Federal Trade Commission, the Antitrust Division of the Department of Justice, state attorneys general or any other Governmental or Regulatory Authority. 4.3 Investigation by Purchaser. (a) From the date hereof until the Closing or the termination of this Agreement in accordance with Article 12, Seller will, and will cause the Selling Affiliates to, (i) provide Purchaser and its officers, directors, employees, agents, counsel, accountants, financial advisors, consultants and other representatives (collectively, "Representatives") with reasonable access, upon reasonable prior notice and during normal business hours, to the key Employees and such other officers, employees and agents of Seller and the Selling Affiliates who have any responsibility for the conduct of the Business, to Seller's and the Selling Affiliates' accountants and to the Total Acquired Assets, and (ii) furnish Purchaser and such other Representatives with all such information and data (including without limitation copies of Business Contracts, Business Licenses, Benefit Plans and other Business Books and Records) concerning the Business, the Total Acquired Assets and the Assumed Liabilities as Purchaser or any of such other Persons reasonably may request in connection therewith. (b) Seller will, and will cause the Selling Affiliates, to grant Purchaser and its Representatives access to the Real Property, the Tektronix Malaysia Real Property, the leased real property at Heerenveen, the Netherlands, in order to conduct, or to arrange for the conduct of, investigation of the soil (including, without limitation, surface and subsurface soils), groundwater (including, without limitation, surface and subsurface waters and wetlands) and any improvements (including, without limitation, all structures, buildings, fixtures, sumps, tanks (above and below ground) and clarifiers at the Real Property, the Tektronix Malaysia Real Property and the leased real property at Heerenveen, the Netherlands. 4.4 No Solicitations. From the date hereof until the Closing or the termination of this Agreement in accordance with Article 12, Seller will not, and will cause the Selling Affiliates and the officers, directors, employees, investment bankers, attorneys, accountants, consultants or other agents or advisors of Seller, any Selling Subsidiary or any Affiliate or Associate of either of them not to, take, directly or indirectly, any action to solicit, initiate, encourage, negotiate, assist or otherwise facilitate (including by furnishing confidential information with respect to the Business or permitting access to the Assets and Properties and Books and Records of Seller or any Selling Affiliate relating to the Business) any offer AMENDED ASSET PURCHASE AGREEMENT 54 <PAGE> or inquiry from any Person concerning the direct or indirect acquisition of the Business by any Person other than Purchaser or its Affiliates. If Seller, any Selling Affiliate or any Affiliate or Associate of either of them (or any such Person acting for or on their behalf) receives from any Person any offer, proposal, inquiry or informational request referred to above, Seller will promptly notify Purchaser in writing thereof. Seller shall, and shall cause the Selling Affiliates and any Affiliate or Associate of either Seller or the Selling Affiliates (or any such Person acting for or on their behalf), to immediately cease and cause to be terminated all activities, discussions or negotiations, if any, with any Persons conducted prior to the date of this Agreement with respect to any offer, proposal or inquiry from any Person concerning the direct or indirect acquisition of the Business by such Person. 4.5 Conduct of Business. Seller will operate, and will cause the Selling Affiliates to operate, the Business only in the ordinary course consistent with past practice. Without limiting the generality of the foregoing, Seller will, and will cause the Selling Affiliates to: (a) use commercially reasonable efforts to (i) preserve intact the present business organization, reputation, contractual and other arrangements of the Business, (ii) keep available (subject to dismissals and retirements in the ordinary course of business consistent with past practice) the services of the Employees, (iii) maintain the Purchased Assets in good working order and condition, ordinary wear and tear excepted, (iv) maintain the goodwill of customers, suppliers, lenders and other Persons to whom Seller or the Selling Affiliates sell goods or provides services or with whom Seller or any Selling Affiliate otherwise has significant business relationships in connection with the Business and (v) continue all current sales, service, marketing, promotional, product development and other activities relating to the Business; (b) except to the extent required by applicable Law, (i) cause the Business Books and Records to be maintained in the usual, regular and ordinary manner, and (ii) not permit any change in any pricing, investment, accounting, financial reporting, inventory, credit, allowance or Tax practice or policy of Seller or a Selling Affiliate that would adversely affect the Business, the Total Acquired Assets or the Assumed Liabilities; (c) use commercially reasonable efforts to maintain in full force and effect until the Closing or the applicable Foreign Closing, as the case may be, substantially the same levels of coverage as the insurance afforded under the Policies listed in Section 2.18 of the Disclosure Schedule; and (d) comply in all material respects with all laws and Orders applicable to the Business and promptly following receipt thereof to give Purchaser copies of any notice received from any Governmental or Regulatory Authority or other Person alleging any violation of any such Law or Order. 4.6 Financial Statements and Reports; Filings. (a) Seller will deliver, or will cause the Selling Affiliates to deliver, to Purchaser AMENDED ASSET PURCHASE AGREEMENT 55 <PAGE> true and complete copies of such financial statements relating to the Business as may be prepared or received by Seller or any Selling Affiliate as soon as such statements are available in the regular course of business (but not later than the fifteenth day of each month for such statements that are issued on a monthly basis), or as Purchaser may otherwise reasonably request. (b) As promptly as practicable, Seller will deliver, and will cause the Selling Affiliates to deliver, copies of all License applications and other filings made by Seller or any Selling Affiliate in connection with the operation of the Business after the date hereof and before the Closing Date or the applicable Foreign Closing Date with any Governmental or Regulatory Authority. 4.7 Employee Matters. Except as may be required by Law, Seller will refrain, and will cause the Selling Affiliates to refrain, from directly or indirectly: (a) making any representation or promise, oral or written, to any Employee concerning any Plan or Benefit Plan, except for statements as to the rights or accrued benefits of any Employee under the terms of any Plan or Benefit Plan; (b) making any increase in the salary, wages or other compensation of any Employee whose annual salary is or, after giving effect to such change, would be $100,000 or more, except, in any case under this Section 4.7(b), in the ordinary course of business or as Seller or any Selling Affiliate otherwise deems reasonably necessary to respond to competitive situations; (c) adopting, entering into or becoming bound by any Plan , any Benefit Plan , any employment-related Contract or any collective bargaining agreement with respect to the Business or any of the Employees, or amending, modifying or terminating (partially or completely) any such Plan, Benefit Plan, employment-related Contract or collective bargaining agreement, except to the extent required by applicable Law and, in the event compliance with legal requirements presents options, only to the extent that the option which Seller or the relevant Selling Affiliate reasonably believes to be the least costly is chosen, except, in any case under this Section 4.7(c), in the ordinary course of business or as Seller or any Selling Affiliate otherwise deems reasonably necessary to respond to competitive situations; or (d) establishing or modifying any (i) targets, goals, pools or similar provisions in respect of any fiscal year under any Plan , any Benefit Plan, any employment-related Contract or other compensation arrangement with or for Employees or (ii) salary ranges, increase guidelines or similar provisions in respect of any Plan , any Benefit Plan, any employment-related Contract or other compensation arrangement with or for Employees, except, in any case under this Section 4.7(d), in the ordinary course of business or as Seller or any Selling Affiliate otherwise deems reasonably necessary to respond to competitive situations. AMENDED ASSET PURCHASE AGREEMENT 56 <PAGE> 4.8 Certain Restrictions. From the date of this Agreement until Closing or the termination of this Agreement, Seller will refrain, and will cause the Selling Affiliates to refrain from: (a) acquiring or disposing of any Assets and Properties used or held for use in the conduct of the Business, other than in the ordinary course of business consistent with past practice and other acquisitions or dispositions not exceeding $1,000,000, individually, or $10,000,000, in the aggregate, or creating or incurring any Lien, other than a Permitted Lien, on any Assets and Properties used or held for use in the conduct of the Business; (b) entering into, amending, modifying, terminating (partially or completely), granting any waiver under or giving any consent with respect to any Business Contract or any Business License other than in the ordinary course of business; (c) violating, breaching or defaulting under, or taking or failing to take any action that (with or without notice or lapse of time or both) would constitute a violation or breach of, or default under, any term or provision of any Business Contract or any Business License, other than such violations, breaches, defaults, actions or inactions that would not have a material adverse effect on the Condition of the Business; (d) incurring, purchasing, canceling, prepaying or otherwise providing for a complete or partial discharge in advance of a scheduled payment date with respect to, or waiving any right of Seller or any Selling Affiliate under, any Liability of or owing to Seller or any Selling Affiliate in connection with the Business, other than in the ordinary course of business consistent with past practice; (e) engaging with any Person in any Business Combination, unless such Person agrees in writing that such Business Combination is subject to the terms and conditions of this Agreement; (f) engaging in any transaction with respect to the Business with any officer, director, Affiliate or Associate of Seller or any Selling Affiliate, or any Associate of any such officer, director or Affiliate, either outside the ordinary course of business consistent with past practice or other than on an arm's-length basis; (g) making capital expenditures or commitments for additions to property, plant or equipment constituting capital assets on behalf of the Business other than in the ordinary course of business consistent with past practice; (h) making any material acquisitions, sales or other dispositions of (or making any commitments for such acquisition, sale or disposition of) any Products, or any parts, components, supplies or accessories related thereto, that are materially in excess of standard industry practices, that are other than in the ordinary course of business or that are other than on an arm's-length basis; or AMENDED ASSET PURCHASE AGREEMENT 57 <PAGE> (i) entering into any Contract to do or engage in any of the foregoing. 4.9 Security Deposits. Seller will take, and will cause the Selling Affiliates to take, all actions necessary to transfer to Purchaser or the Purchasing Affiliates on the Closing Date or the applicable Foreign Closing Date all of Seller's and the Selling Affiliates' right, title and interest in and to the Tenant Security Deposits and the Landlord Security Deposits. 4.10 Delivery of Books and Records, etc.; Removal of Property. (a) On the Closing Date or the applicable Foreign Closing Date, as the case may be, Seller will deliver or make available, and will cause the Selling Affiliates to deliver or to make available, to Purchaser at the locations at which the Business is conducted all of the Business Books and Records and such other Total Acquired Assets as are in Seller's or the Selling Affiliates' possession at other locations, and if, at any time after the Closing or the applicable Foreign Closing, Seller or any Selling Affiliate discovers in its possession or under its control any other Business Books and Records or other Total Acquired Assets, it will promptly deliver same, or cause the Selling Affiliate to deliver same, to Purchaser. (b) Within sixty (60) days after the Closing Date or the applicable Foreign Closing Date, Seller shall remove, or shall cause the Selling Affiliates to remove, all Assets and Properties not being sold to Purchaser or to a Purchasing Affiliate hereunder from the Real Property and Improvements. Such removal shall be at the sole cost and risk of Seller or the Selling Affiliate, including risk of loss and damage to such Assets and Properties. Purchaser and the Purchasing Affiliates shall have no Liability to Seller or the Selling Affiliates with respect to such removal and transportation. Seller shall be responsible for ensuring that the Real Property and Improvements are returned to the same condition they were in prior to such removal, including but not limited to all repairs to the Real Property and Improvements due to damage caused by Seller or any Selling Affiliate and their respective employees and agents in connection with the removal of Seller's or the Selling Affiliate's Assets and Properties. (c) Within thirty (30) days of the date of this Agreement, Seller shall deliver to Purchaser a true and complete list of all Licenses used or held for use in the Business and all pending applications for any such Licenses, setting forth the grantor, the grantee, the description or function and the expiration and renewal date of each such License. 4.11 Noncompetition. (a) Seller will, and will cause the Selling Affiliates and each of their respective Affiliates and Associates, for a period of five (5) years from the Closing Date or the last Foreign Closing Date, whichever is later, refrain from, either alone or in conjunction with any other Person, or directly or indirectly through its present or future Affiliates: (i) employing, engaging or seeking to employ or engage any Person who AMENDED ASSET PURCHASE AGREEMENT 58 <PAGE> within the prior twelve (12) months had been an employee of Purchaser or any of its Affiliates engaged in the Business, unless such employee (A) resigns voluntarily (without any solicitation from Seller or any of its Affiliates) or (B) is terminated by Purchaser or any of its Affiliates after the Closing Date or the applicable Foreign Closing Date; (ii) causing or attempting to cause (A) any client, customer or supplier of the Business to terminate or materially reduce its business with Purchaser or any of its Affiliates or (B) any officer, employee or consultant of Purchaser or any of its Affiliates engaged in the Business to resign or sever a relationship with Purchaser or any of its Affiliates; (iii) disclosing any confidential or secret information relating primarily to the Business or any client, customer or supplier of the Business, except, subject to the terms of the Technology Transfer Agreement, in the ordinary course of Seller's or any of its Affiliates' business pursuant to appropriate confidentiality agreements or to the extent required by Law; or (iv) participating or engaging in (other than through the ownership of 5% or less of any class of securities registered under the Securities Exchange Act of 1934, as amended), or otherwise lending assistance (financial or otherwise) to any Person participating or engaged in, any of the lines of business which comprised the Business on the Closing Date or the applicable Foreign Closing Date in any jurisdiction in which Seller and the Selling Affiliates participates or engages in such lines of business on the Closing Date. Notwithstanding the foregoing, neither Seller nor a Selling Affiliate shall be deemed to be engaged, directly or indirectly, in activities in contravention of this Section 4.11(a) if Seller or a Selling Affiliate acquires a Person engaged in such activities, provided that the gross revenues of such acquired Person attributable to such activities do not exceed eight percent (8%) of such Person's total gross revenues. If Seller or a Selling Affiliate acquires a Person engaged in such activities whose gross revenues attributable to such activities exceed eight percent (8%) of such Person's total gross revenues, Seller shall, or shall cause the Selling Affiliate to, divest itself of that portion of the Person's business comprising such activities within six months of its acquisition of such Person and shall not use any of the Intellectual Property related to the Business or any Tektronix names, trademarks, service marks or logos in connection therewith. Also notwithstanding the foregoing, Seller or a Selling Affiliate may be acquired by a Person that engages in such activities. If Seller or a Selling Affiliate is acquired by a Person engaged in such activities, Seller shall not, and shall cause the Selling Affiliate not to, use any of the Tektronix names, trademarks, service marks or logos in connection with that portion of the Person's business that comprises such activities for so long as Purchaser and the Purchasing Affiliates have the right to use same in accordance with the Trademark License Agreement. (b) The parties hereto recognize that the Laws and public policies of the various AMENDED ASSET PURCHASE AGREEMENT 59 <PAGE> states of the United States and other countries may differ as to the validity and enforceability of covenants similar to those set forth in this Section 4.11. It is the intention of the parties that the provisions of this Section 4.11 be enforced to the fullest extent permissible under the Laws and policies of each jurisdiction in which enforcement may be sought, and that the unenforceability (or the modification to conform to such Laws or policies) of any provisions of this Section 4.11 in any jurisdiction shall not render unenforceable, or impair, the remainder of the provisions of this Section 4.11 in any other jurisdiction. Accordingly, if any provision of this Section 4.11shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall be deemed to apply only with respect to the operation of such provision in the particular jurisdiction in which such determination is made and not with respect to any other provision or jurisdiction. (c) The parties hereto acknowledge and agree that any remedy at Law for any breach of the provisions of this Section 4.11would be inadequate, and Seller hereby consents, and shall cause the Selling Affiliates to consent, to the granting by any court of an injunction or other equitable relief, without the necessity of actual monetary loss being proved and without the necessity of posting a bond or other form of security, in order that the breach or threatened breach of such provisions may be effectively restrained. 4.12 Notice and Cure. As soon as practicable after it becomes Known to Seller or any Selling Affiliate, Seller will notify Purchaser in writing of, and contemporaneously will provide Purchaser with true and complete copies of any and all information or documents relating to any event, transaction or circumstance occurring after the date of this Agreement that causes or will cause any covenant or agreement of Seller or any Selling Affiliate under this Agreement, the Ancillary Agreements or the Operative Agreements to be breached or that renders or will render untrue any representation or warranty of Seller, for itself or on behalf of the Selling Affiliates, contained in this Agreement, the Ancillary Agreements or the Operative Agreements as if the same were made on or as of the date of such event, transaction or circumstance and will use all commercially reasonable efforts to cure the same before the Closing or the applicable Foreign Closing. Seller also will notify Purchaser in writing of, and will use all commercially reasonable efforts to cure, before the Closing or the applicable Foreign Closing, any violation or breach, as soon as practicable after it becomes Known to Seller or any Selling Affiliate, of any representation, warranty, covenant or agreement made by Seller, for itself or on behalf of any Selling Affiliate, in this Agreement, the Ancillary Agreements or the Operative Agreements whether occurring or arising before, on or after the date of this Agreement. No notice given pursuant to this Section 4.12 shall have any effect on the representations, warranties, covenants or agreements contained in this Agreement, the Ancillary Agreements or the Operative Agreements for purposes of determining satisfaction of any condition contained herein or shall in any way limit Purchaser's right to seek indemnity under Article 11. 4.13 Fulfillment of Conditions. Seller will execute and deliver, or will cause the Selling Affiliates to execute and deliver, at the Closing or the applicable Foreign Closing, as the case may be, each Ancillary Agreement and each Operative Agreement that Seller or any Selling Affiliate is required hereby to execute and deliver as a condition to the Closing AMENDED ASSET PURCHASE AGREEMENT 60 <PAGE> or the applicable Foreign Closing, will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each other condition to the obligations of Purchaser contained in this Agreement (and will cause the Selling Affiliates to do the same) and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition (and will cause the Selling Affiliates to do the same). 4.14 Environmental Matters. If Purchaser identifies a breach of the representations or warranties set forth in Sections 2.21(i) or (j) (determined in all cases as if the terms "material", "materially", "Known to Seller" or "Knowledge of Seller" were not included therein) prior to Closing, Seller shall use all commercially reasonable efforts to correct the deficiency prior to Closing and, to the extent such deficiency is not corrected before Closing, shall cooperate with Purchaser in correcting the deficiency after Closing. ARTICLE 5 COVENANTS OF PURCHASER Purchaser covenants and agrees with Seller that, at all times from and after the date hereof until the Closing or the applicable Foreign Closing, as the case may be, Purchaser will comply with all covenants and provisions of this Article 5, except to the extent Seller may otherwise consent in writing. 5.1 Regulatory and Other Approvals. Purchaser will, and will cause the Purchasing Affiliates to, (a) take all commercially reasonable steps necessary or desirable, and proceed diligently and in good faith and use all commercially reasonable efforts, as promptly as practicable, to obtain all consents, approvals or actions of, to make all filings with and to give all notices to Governmental or Regulatory Authorities or any other Person required of Purchaser or the Purchasing Affiliates to consummate the transactions contemplated hereby and by the Ancillary Agreements and the Operative Agreements, including without limitation those described in Schedules 3.3 and 3.4 hereto, (b) provide such other information and communications to such Governmental or Regulatory Authorities or other Persons as Seller or a Selling Affiliate or such Governmental or Regulatory Authorities or other Persons may reasonably request in connection therewith and (c) cooperate with Seller and the Selling Affiliates as promptly as practicable in obtaining all consents, approvals or actions of, making all filings with and giving all notices to Governmental or Regulatory Authorities or other Persons required of Seller or a Selling Affiliate to consummate the transactions contemplated hereby and by the Ancillary Agreements and the Operative Agreements. Purchaser will provide prompt notification to Seller when any such consent, approval, action, filing or notice referred to in clause (a) above is obtained, taken, made or given, as applicable, and will advise Seller of any communications (and, unless precluded by Law, provide copies of any such communications that are in writing) with any Governmental or Regulatory Authority or other Person regarding any of the transactions contemplated by this Agreement or any of the Ancillary Agreements or the Operative Agreements. AMENDED ASSET PURCHASE AGREEMENT 61 <PAGE> 5.2 HSR Filings, etc. In addition to and not in limitation of Purchaser's covenants contained in Section 5.1, Purchaser will, or will cause the Purchasing Affiliates to, (a) take promptly all actions necessary to make the filings required of Purchaser or its Affiliates under the HSR Act and any similar filings under applicable Laws in any jurisdictions in with the Business is conducted or the Purchased Assets are located or as may be required by any Governmental or Regulatory Authority, (b) comply at the earliest practicable date with any request for additional information received by Purchaser or its Affiliates from the Federal Trade Commission, the Antitrust Division of the Department of Justice or any Governmental or Regulatory Authority pursuant to the HSR Act or other applicable Laws and (c) cooperate with Seller or its Affiliates in connection with Seller's or its Affiliates' filing under the HSR Act or other applicable Laws and use reasonable commercial efforts to resolve any investigation or other inquiry concerning the transactions contemplated by this Agreement commenced by either the Federal Trade Commission, the Antitrust Division of the Department of Justice, state attorneys general or any other Governmental or Regulatory Authority; provided, however, that in no event shall Purchaser or a Purchasing Affiliate be required to (x) divest any of its business, product lines or assets or license any of its intellectual property, or (y) take or agree to take any action or become or agree to become subject to any limitation that Purchaser, in exercising its reasonable judgment, believes could reasonably be expected to have a material adverse effect on the benefit or value to Purchaser or the Purchasing Affiliates of the transactions contemplated by this Agreement if any administrative or judicial action or proceeding is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any applicable Laws. 5.3 Notice and Cure. Purchaser will notify Seller in writing of, and contemporaneously will provide Seller with true and complete copies of any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing or the applicable Foreign Closing, any event, transaction or circumstance, as soon as practicable after it becomes known to Purchaser or any Purchasing Affiliate, occurring after the date of this Agreement that causes or will cause any covenant or agreement of Purchaser or any Purchasing Affiliate under this Agreement, the Ancillary Agreements or the Operative Agreements to be breached or that renders or will render untrue any representation or warranty of Purchaser contained in this Agreement or the Operative Agreements or any representation or warranty of any Purchasing Affiliate contained in the Ancillary Agreements or the Operative Agreements as if the same were made on or as of the date of such event, transaction or circumstance. Purchaser also will notify Seller in writing of, and will use all commercially reasonable efforts to cure, before the Closing or the applicable Foreign Closing, any violation or breach, as soon as practicable after it becomes known to Purchaser, of any representation, warranty, covenant or agreement made by Purchaser or a Purchasing Affiliate in this Agreement, the Ancillary Agreements or the Operative Agreements to which it is a party, whether occurring or arising before, on or after the date of this Agreement. No notice given pursuant to this Section 5.3 shall have any effect on the representations, warranties, covenants or agreements contained in this Agreement, the Ancillary Agreements or the Operative AMENDED ASSET PURCHASE AGREEMENT 62 <PAGE> Agreements for purposes of determining satisfaction of any condition contained herein or shall in any way limit Seller's right to seek indemnity under Article 11. 5.4 Fulfillment of Conditions. Purchaser will execute and deliver, or will cause the Purchasing Affiliates to execute and deliver, at the Closing or the applicable Foreign Closing, as the case may be, each Ancillary Agreement and each Operative Agreement that Purchaser or a Purchasing Affiliate is hereby required to execute and deliver as a condition to the Closing or the applicable Foreign Closing, will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each other condition to the obligations of Seller contained in this Agreement (and will cause the Purchasing Affiliates to do the same) and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition (and will cause the Selling Affiliates to do the same). ARTICLE 6 CONDITIONS TO OBLIGATIONS OF PURCHASER The obligations of Purchaser hereunder to purchase the Purchased Assets and to assume and to pay, perform and discharge the Assumed Liabilities are subject to the fulfillment, at or before the Closing or the applicable Foreign Closing, as the case may be, of each of the following conditions (all or any of which may be waived in whole or in part by Purchaser in its sole discretion); provided, however, that the fulfillment by Seller or the waiver by Purchaser of the following conditions shall in no way limit Purchaser's right to such indemnity under Article 11: 6.1 Representations and Warranties. Each of the representations and warranties made by Seller in this Agreement (other than those made as of a specified date earlier than the Closing Date or the applicable Foreign Closing Date) shall be true and correct in all respects (in the case of any representation or warranty containing any materiality qualifications) or in all material respects (in the case of any representation or warranty without any materiality qualifications) as of the date hereof and the Closing Date or the applicable Foreign Closing Date as though such representation or warranty was made on and as of the Closing Date or the applicable Foreign Closing Date, and any representation or warranty made as of a specified date earlier than the Closing Date or the applicable Foreign Closing Date shall have been true and correct in all respects or all material respects, as the case may be, on and as of such earlier date, it being understood that, for purposes of determining the accuracy of such representations and warranties (a) any inaccuracy that, individually or in the aggregate with all such inaccuracies, does not have a material adverse effect on the Condition of the Business shall be disregarded, (b) any inaccuracy that results from or relates to general business or economic conditions shall be disregarded, (c) any inaccuracy that results from or relates to conditions generally affecting the industry in which the Business competes shall be disregarded, (d) any inaccuracy that results directly from or relating directly to the announcement or pendency of the transactions contemplated by this Agreement shall be disregarded, and (e) any inaccuracy that results AMENDED ASSET PURCHASE AGREEMENT 63 <PAGE> from or relates to the taking of any action contemplated by, and does not result in a violation of, this Agreement shall be disregarded. 6.2 Performance. Seller shall have, in all material respects, performed and complied with each agreement, covenant and obligation required by this Agreement to be so performed or complied with by Seller at or before the Closing or the applicable Foreign Closing. 6.3 Officers' Certificates. Seller shall have delivered to Purchaser a certificate, dated the Closing Date or the applicable Foreign Closing Date and executed by the Chairman of the Board, the President or any Vice President of Seller or the Selling Affiliate, as the case may be, in form and substance that is usual and customary in transactions of this nature and reasonably satisfactory to Purchaser, certifying, among other things, the accuracy of Seller's representations and warranties as of the Closing Date, and a certificate, dated the Closing Date or the applicable Foreign Closing Date, as the case may be, and executed by the Secretary or any Assistant Secretary of Seller or the Selling Affiliate, as the case may be, in form and substance that is usual and customary in transactions of this nature and reasonably satisfactory to Purchaser, certifying, among other things, the due authorization of this Agreement, the Ancillary Agreements and the Operating Agreements and the consummation of the transactions contemplated hereby and thereby, and incumbency. 6.4 No Material Adverse Change. There shall have been no material adverse change in the Condition of the Business or the Total Acquired Assets since the date of the Acquisition Balance Sheet; provided, however, that for the purpose of determining whether there shall have been any such material adverse change, (a) any adverse change resulting from general business or economic changes will be disregarded, (b) any adverse change resulting from conditions generally affecting the industry in which the Division conducts the Business shall be disregarded, (c) any adverse change resulting from any action contemplated by and not resulting in the violation of this Agreement, the Ancillary Agreements or the Operative Agreements shall be disregarded, and (d) any adverse change resulting directly and primarily from or relating directly and primarily to the announcement or pendency of the transactions contemplated by this Agreement, the Ancillary Agreements and the Operative Agreements shall be disregarded. 6.5 Orders and Laws. There shall not be in effect on the Closing Date or the applicable Foreign Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Ancillary Agreements or Operative Agreements or which could reasonably be expected to otherwise result in a material diminution of the benefits of the transactions contemplated by this Agreement or any of the Ancillary Agreements or Operative Agreements to Purchaser, and there shall not be pending or threatened on the Closing Date or the applicable Foreign Closing Date any Action or Proceeding or any other action in, before or by any Governmental or Regulatory Authority which could reasonably be expected to result in the issuance of any such Order or the enactment, promulgation or AMENDED ASSET PURCHASE AGREEMENT 64 <PAGE> deemed applicability of any such Law to Purchaser or to a Purchasing Affiliate or the transactions contemplated by this Agreement or any of the Ancillary Agreements or the Operative Agreements. 6.6 Regulatory Consents and Approvals. All consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Purchaser, the Purchasing Affiliates, Seller and the Selling Affiliates to perform their obligations under this Agreement, the Ancillary Agreements and the Operative Agreements and to consummate the transactions contemplated hereby and thereby (a) shall have been duly obtained, made or given, (b) shall be in form and substance reasonably satisfactory to Purchaser, (c) shall not be subject to the satisfaction of any condition that has not been satisfied or waived and (d) shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement, the Ancillary Agreements and the Operative Agreements, including but not limited to under the HSR Act, shall have occurred. 6.7 Third Party Consents. All consents (or in lieu thereof waivers) to the performance by Purchaser or the Purchasing Affiliates and Seller or the Selling Affiliates of their obligations under this Agreement, the Ancillary Agreements and the Operative Agreements or to the consummation of the transactions contemplated hereby and thereby as are required under any Contract to which Purchaser or Seller is a party or by which any of their respective Assets and Properties are bound, including but not limited to those consents described on Schedule 6.7(a) of the Disclosure Schedule (a) shall have been obtained, (b) shall be in form and substance reasonably satisfactory to Purchaser, (c) shall not be subject to the satisfaction of any condition that has not been satisfied or waived and (d) shall be in full force and effect, except where the failure to obtain any such consent (or in lieu thereof waiver) could not reasonably be expected, individually or in the aggregate with other such failures, to have a material adverse effect on the Condition of the Business or otherwise result in a material diminution of the benefits of the transactions contemplated by this Agreement, the Ancillary Agreements and the Operative Agreements to Purchaser and the Purchasing Affiliates. Notwithstanding the foregoing, prior to Closing Seller will deliver a consent with respect to each of the Contracts listed on Schedule 6.7(b). 6.8 Title Insurance. Purchaser shall have received (a) an owner's standard coverage policy or policies of title insurance on forms of and issued by one or more title companies reasonably satisfactory to Purchaser insuring the fee title of Purchaser to the Real Property located in the United States, with liability in the amount of the value attributable by Seller and Purchaser to each parcel of Real Property subject only to Permitted Liens, and Purchaser and Seller shall have each paid to such title companies one-half of all charges, expenses and premiums of such title companies in connection with the issuance of such policies; provided, however, that Purchaser may request that the foregoing policy or policies be an ALTA extended coverage owner's policy or policies so long as (i) a survey acceptable to the title company has been obtained, at Purchaser's expense, (ii) Purchaser pays the cost of the ALTA extended coverage owner's policy or policies in AMENDED ASSET PURCHASE AGREEMENT 65 <PAGE> excess of the cost of the owner's standard coverage policy, and (iii) there is no delay in the Closing Date due to Purchaser's request to obtain an ALTA extended coverage owner's policy or policies. 6.9 General Assignment, Assignment Instruments. Seller shall have delivered to Purchaser the General Assignment and the other Assignment Instruments. 6.10 Transition Agreement. Seller and Purchaser shall have entered into the Transition Agreement in a form that is mutually satisfactory to Purchaser and Seller and such Agreement shall be in full force and effect on the Closing Date in accordance with its terms. 6.11 Trademark License Agreement. Seller and Purchaser shall have entered into the Trademark License Agreement in a form that is mutually satisfactory to Purchaser and Seller and such Agreement shall be in full force and effect on the Closing Date in accordance with its terms. 6.12 Technology Transfer Agreement. Seller and Purchaser shall have entered into the Technology Transfer Agreement in the form attached hereto as Exhibit A and such Agreement shall be in full force and effect on the Closing Date in accordance with its terms. 6.13 Ancillary Agreements. The relevant Selling Affiliates and Purchasing Affiliates shall have entered into the Ancillary Agreements and consummated the transactions contemplated thereby in connection with each of the Significant Foreign Closings. 6.14 Malaysian Stock Purchase Agreement. Seller (or the relevant Selling Affiliate, as the case may be) and Purchaser (or the designated Purchasing Affiliate, as the case may be) shall have entered into a Stock Purchase Agreement in form and substance reasonably acceptable to Seller and Purchaser, that is usual and customary for transactions of such type in Malaysia so as to effect the sale and transfer of all of the capital stock of Tektronix Malaysia Sdn. Bhd. to the Purchaser or the designated Purchasing Affiliate in order to give the parties the benefit of this Agreement and to conform to the Laws, customs and practices of Malaysia, and shall have consummated the transactions contemplated thereby. 6.15 Proceedings. All proceedings to be taken on the part of Seller or any Selling Affiliate in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Purchaser, and Purchaser shall have received copies of all such documents and other evidences as Purchaser may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. 6.16 Accounting Policies. Seller and Purchaser shall have agreed on the Accounting Policies pursuant to Section 14.14. AMENDED ASSET PURCHASE AGREEMENT 66 <PAGE> ARTICLE 7 CONDITIONS TO OBLIGATIONS OF SELLER The obligations of Seller hereunder to sell the Purchased Assets are subject to the fulfillment, at or before the Closing or the applicable Foreign Closing, as the case may be, of each of the following conditions (all or any of which may be waived in whole or in part by Seller in its sole discretion); provided, however, that the fulfillment by Purchaser or the waiver by Seller of the following conditions shall in no way limit Seller's right to seek indemnity under Article 11: 7.1 Representations and Warranties. Each of the representations and warranties made by Purchaser in this Agreement shall be true and correct in all respects (in the case of any representation or warranty containing any materiality qualifications) or in all material respects (in the case of any representation or warranty without any materiality qualifications) as of the date hereof and the Closing Date or the applicable Foreign Closing Date as though such representation or warranty was made on and as of the Closing Date or the applicable Foreign Closing Date, and any representation or warranty made as of a specified date earlier than the Closing Date or the applicable Foreign Closing Date shall have been true and correct in all respects or all material respects, as the case may be, on and as of such earlier date, it being understood that, for purposes of determining the accuracy of such representations and warranties, any inaccuracy that (a) does not have a material adverse effect on the Purchaser's ability to consummate the transactions contemplated herein shall be disregarded, and (b) results from or relates to the taking of any action contemplated by, and does not result in a violation of, this Agreement shall be disregarded. 7.2 Performance. Purchaser shall have performed and complied, in all material respects, with each agreement, covenant and obligation required by this Agreement to be so performed or complied with by Purchaser at or before the Closing or the applicable Foreign Closing. 7.3 Officers' Certificates. Purchaser shall have delivered to Seller a certificate, dated the Closing Date or the applicable Foreign Closing Date and executed by the Chairman of the Board, the President or any Vice President of Purchaser or the Purchasing Affiliate, as the case may be, in form and substance that is usual and customary in transactions of this nature and reasonably satisfactory to Seller, certifying, among other things, the accuracy of Purchaser's representations and warranties as of the Closing Date, and a certificate, dated the Closing Date or the applicable Foreign Closing Date, as the case may be, and executed by the Secretary or any Assistant Secretary of Purchaser or the Purchasing Affiliate, as the case may be, in form and substance that is usual and customary in transactions of this nature and reasonably satisfactory to Seller, certifying, among other things, the due authorization of this Agreement, the Ancillary Agreements and the Operating Agreements and the consummation of the transactions contemplated hereby and thereby, and incumbency. AMENDED ASSET PURCHASE AGREEMENT 67 <PAGE> 7.4 Orders and Laws. There shall not be in effect on the Closing Date or the applicable Foreign Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Ancillary Agreements or the Operative Agreements or which could reasonably be expected to otherwise result in a material diminution of the benefits of the transactions contemplated by this Agreement or any of the Ancillary Agreements or Operative Agreements to Seller, and there shall not be pending or threatened on the Closing Date or the applicable Foreign Closing Date any Action or Proceeding or any other action in, before or by any Governmental or Regulatory Authority which could reasonably be expected to result in the issuance of any such Order or the enactment, promulgation or deemed applicability of any such Law to Seller or to a Selling Affiliate or the transactions contemplated by this Agreement or any of the Ancillary Agreements or the Operative Agreements. 7.5 Regulatory Consents and Approvals. All consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Seller, the Selling Affiliates, Purchaser and the Purchasing Affiliates to perform their obligations under this Agreement, the Ancillary Agreements and the Operative Agreements and to consummate the transactions contemplated hereby and thereby (a) shall have been duly obtained, made or given, (b) shall be in form and substance reasonably satisfactory to Seller, (c) shall not be subject to the satisfaction of any condition that has not been satisfied or waived and (d) shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement, the Ancillary Agreements and the Operative Agreements, including but not limited to under the HSR Act, shall have occurred. 7.6 Third Party Consents. All consents (or in lieu thereof waivers) to the performance by Seller or the Selling Affiliates and Purchaser or the Purchasing Affiliates of their obligations under this Agreement, the Ancillary Agreements and the Operative Agreements or to the consummation of the transactions contemplated hereby and thereby as are required under any Contract to which Purchaser or Seller is a party or by which any of their respective Assets and Properties are bound, including but not limited to those consents listed in Section 6.7(a) of the Disclosure Schedule, (a) shall have been obtained, (b) shall be in form and substance reasonably satisfactory to Seller, (c) shall not be subject to the satisfaction of any condition that has not been satisfied or waived and (d) shall be in full force and effect, except where the failure to obtain any such consent (or in lieu thereof waiver) could not reasonably be expected, individually or in the aggregate with other such failures, to result in a material diminution of the benefits of the transactions contemplated by this Agreement, the Ancillary Agreements and the Operative Agreements to Seller and the Selling Affiliates. 7.7 Assumption Agreement; Assumption Instruments. Purchaser shall have delivered to Seller the Assumption Agreement and the other assumption Instruments. AMENDED ASSET PURCHASE AGREEMENT 68 <PAGE> 7.8 Transition Agreement. Seller and Purchaser shall have entered into the Transition Agreement in a form that is mutually satisfactory to Purchaser and Seller and such Agreement shall be in full force and effect on the Closing Date in accordance with its terms. 7.9 Trademark License Agreement. Seller and Purchaser shall have entered into the Trademark License Agreement in a form that is mutually satisfactory to Purchaser and Seller and such Agreement shall be in full force and effect on the Closing Date in accordance with its terms. 7.10 Technology Transfer Agreement. Seller and Purchaser shall have entered into the Technology Transfer Agreement in the form attached hereto as Exhibit A and such Agreement shall be in full force and effect on the Closing Date in accordance with its terms. 7.11 Ancillary Agreements. The relevant Selling Affiliates and Purchasing Affiliates shall have entered into the Ancillary Agreements and consummated the transactions contemplated thereby in connection with each of the Significant Foreign Closings. 7.12 Malaysian Stock Purchase Agreement. Seller (or the relevant Selling Affiliate, as the case may be) and Purchaser (or the designated Purchasing Affiliate, as the case may be) shall have entered into a Stock Purchase Agreement, in form and substance reasonably acceptable to Seller and Purchaser, that is usual and customary for transactions of such type in Malaysia so as to effect the sale and transfer of all of the capital stock of Tektronix Malaysia Sdn. Bhd. to the Purchaser or the designated Purchasing Affiliate in order to give the parties the benefit of this Agreement and to conform to the Laws, customs and practices of Malaysia, and shall have consummated the transactions contemplated thereby. 7.13 Proceedings. All proceedings to be taken on the part of Purchaser in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Seller, and Seller shall have received copies of all such documents and other evidences as Seller may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. 7.14 Accounting Policies. Seller and Purchaser shall have agreed on the Accounting Policies pursuant to Section 14.14. AMENDED ASSET PURCHASE AGREEMENT 69 <PAGE> ARTICLE 8 TAX MATTERS; CLOSING AND POST-CLOSING TAXES; VAT 8.1 General. The parties understand and agree that this Agreement shall be interpreted, and that the parties shall administer their dealings in relation to this Agreement, so as to effect the following principles relating to Taxes: (a) As used in Sections 8.1 through 8.6 and Sections 8.7(d) through (f), "Seller" shall include Seller and any relevant Selling Affiliate, and "Purchaser" shall include Purchaser and any Purchasing Affiliate. (b) Purchaser shall be responsible for (i) all Taxes arising out of the ownership and operation of the Business and the Total Acquired Assets beginning on the day after the Closing Date or the applicable Foreign Closing Date, (ii) the Assumed Real Property Taxes, and (iii) the Sales Taxes (but not VAT) included in invoices issued to Seller pertaining to assumed Accounts Payable. (c) Except as set forth in Section 8.1(b), Seller shall be responsible for all Taxes arising out of the ownership and operation of the Business and the Total Acquired Assets up to and including the Closing Date or the applicable Foreign Closing Date. Without limiting the generality of the foregoing, Seller shall be responsible for (i) Sales Taxes included in Accounts Receivable that are Purchased Assets, to the extent that no invoice has been raised on such Account Receivables, (ii) Retained Real Property Taxes, (iii) personal property Taxes for which the lien date arises prior to the Closing Date or the applicable Foreign Closing Date, (iv) VAT included in the assumed Accounts Payable, and (v) any employee-related Taxes. The responsibility of Seller for Taxes, as set forth above, shall prevail irrespective of the manner in which any payment of Taxes or obligation to pay Taxes (or the right to any credit, deposit or refund of Taxes) is reflected in the financial statements of Seller and the Selling Affiliates. (d) Irrespective of who has legal liability for any Transfer Tax, Seller and Purchaser shall each be responsible for fifty percent (50%) of any Transfer Taxes payable in connection with the transfer of the Total Acquired Assets (i) in accordance with Section 8.5 with respect to Transfer Taxes other than VAT and (ii) in accordance with Section 8.7 with respect to VAT. 8.2 Return Preparation. (a) Purchaser shall cause to be filed all Tax Returns required to be filed with respect to Taxes described in Section 8.1(b) which Tax Returns are due after the Closing Date or the applicable Foreign Closing Date. (b) Seller shall cause to be filed all Tax Returns required to be filed with respect to the Taxes described in Section 8.1(c) regardless of when such Tax Returns are due, AMENDED ASSET PURCHASE AGREEMENT 70 <PAGE> including, but not limited to any information returns (e.g., Form 1099s) and any returns related to employee Taxes. Seller shall cause to be filed all Tax Returns required to be filed with respect to the Taxes described in Section 8.1(b) if such Tax Returns are due on or before the Closing Date or the applicable Foreign Closing Date and shall provide Purchaser with a copy of such Tax Returns. All Tax Returns described in this Section 8.2(b) shall be prepared in a manner consistent with prior practice. (c) Notwithstanding Section 8.2 (a) and (b), for any tax period for any Real Property Taxes which commences prior to the Closing Date or the applicable Foreign Closing Date and ends after the Closing Date or the applicable Foreign Closing Date, as the case may be, Purchaser shall cause to be filed all Tax Returns required to be filed with respect to the Real Property included within the Purchased Assets. Purchaser shall upon the request of Seller promptly provide to Seller proof of its compliance with the foregoing. The obligation to pay such Real Property Taxes shall be allocated (i) to Seller for the period up to and including the Closing Date or the applicable Foreign Closing Date, and (ii) to Purchaser for the period subsequent to the Closing Date or the applicable Foreign Closing Date. Purchaser shall pay such Real Property Taxes in connection with filing the Tax Returns and Seller shall pay its share of such Real Property Taxes in accordance with Section 8.6. (d) The parties shall prepare and file the Tax Returns for the Transfer Taxes payable in connection with the transfer of the Total Acquired Assets in accordance with Section 8.5 with respect to Transfer Taxes other than VAT. 8.3 Tax Refunds. The party responsible for any Taxes pursuant to Sections 8.1(b) and (c) shall be entitled to all credits for and deposits and refunds of such Taxes. Subject to the following: (a) Any Tax refund received by Seller or any Selling Affiliate (or utilized as a credit against Taxes due by Seller or any Selling Affiliate) after the Closing Date or the applicable Foreign Closing Date with respect to the Business or any Purchased Asset shall be promptly remitted to Purchaser if (i) the Tax refund relates to a tax period beginning on or after the Closing Date or the applicable Foreign Closing Date, or (ii) if such Tax refund is for a tax period ending on or before the Closing Date or the applicable Foreign Closing Date and was included on the Acquisition Balance Sheet as a Purchased Asset. (b) Any Tax refund received by Purchaser after the Closing Date or the applicable Foreign Closing Date with respect to the Business or any Asset shall be promptly remitted to Seller to the extent that (i) such Tax refund relates to a tax period ending on or before the Closing Date or the applicable Foreign Closing Date, and (ii) such Tax refund was not included on the Acquisition Date Balance Sheet as a Purchased Asset. (c) Any Tax refund in connection with a Transfer Tax payable in connection with the transfer of the Total Acquired Assets shall be shared by the parties as set forth in Section 8.5 with respect to Transfer Taxes other than VAT and in accordance with AMENDED ASSET PURCHASE AGREEMENT 71 <PAGE> Section 8.7 with respect to VAT. 8.4 Cooperation with Respect to Tax Matters. (a) On or before the Closing Date, Seller will provide to Purchaser and its respective counsel and accountants the following: (i) reasonable access during normal business hours to the Tax Returns of Seller (other than income and franchise Tax Returns) related to the Business and the right to make copies and extracts therefrom; (ii) a list of all types of Taxes paid and types of Tax Returns filed by or on behalf of Seller prior to the Closing Date with respect to the Business and the Total Acquired Assets; (iii) a list of all persons who have a power of attorney granted by Seller or any Selling Affiliate prior to the Closing Date with respect to any matters involving or related to Assumed Real Property Taxes or Taxes Which May Give Rise To Any Transferee Tax Liability; and (iv) such details as are reasonably requested by Purchaser of all assets within the scope of a VAT capital goods scheme in the United Kingdom or such similar scheme elsewhere. (b) After the Closing Date or any applicable Foreign Closing Date, if Seller or Purchaser (each a "party"), in order to properly prepare its Tax Returns, needs access to Books and Records relating to the Business prior to and including the Closing Date or any applicable Foreign Closing Date (other than income or franchise Tax Returns) and such Books and Records are in the possession and control of another party, such other party shall use commercially reasonable efforts to furnish or make available such information, documents, or records (or copies thereof) as promptly as practical to the requesting party at the requesting party's expense for any out -of -pocket costs. Further, each party shall make employees available to any other party on a mutually convenient basis to provide additional information and explanations of any material provided, relating to the Business and/or the Purchased Assets as is necessary for the filing of any Tax Return, for the preparation for any audit, and for the prosecution or defense of any claim, suit or proceeding relating to any adjustment or proposed adjustment with respect to Taxes. Where there is a requirement in Seller's jurisdiction to transfer Books and Records relating to the Business or part thereof to Purchaser and it is permissible in accordance with the VAT law or practice in that jurisdiction for Seller to make an application to retain such Books and Records, Seller shall make such application and inform Purchaser accordingly. (c) Any information obtained by a party, its counsel or accountants in accordance with this Section 8.4 shall be held confidential by such party and by such counsel or accountants. AMENDED ASSET PURCHASE AGREEMENT 72 <PAGE> 8.5 Transfer Taxes. For any Transfer Taxes other than VAT (which is the subject of Section 8.7): (a) Seller and Purchaser each shall be responsible for fifty percent (50%) of any Transfer Taxes payable in connection with the transfer of the Total Acquired Assets contemplated under this Agreement. (b) Seller and Purchaser shall each use commercially reasonable efforts to obtain all available statutory or regulatory clearances or exemptions from Transfer Taxes with respect to the transfer of the Total Acquired Assets. To the extent it is determined that clearances or proof of exemption cannot be obtained from one or more of the relevant Taxing Authorities with respect to the transfer of specific Total Acquired Assets, Seller and Purchaser shall attempt to reach agreement on whether Transfer Taxes are due. If agreement can not be made, the parties agree to obtain and to be bound by the written opinion of a law firm with a nationally recognized tax practice related to such Transfer Tax or an internationally recognized firm of independent public accountants with respect to whether such Transfer Taxes are due. The parties shall agree upon the law or accounting firm to issue such opinion and Seller and Purchaser shall each bear fifty percent (50%) of the cost thereof. (c) Upon a determination by the parties that any Transfer Tax is due with respect to the transfer of any portion of the Total Acquired Assets, the party with the primary legal obligation for such Transfer Tax shall be responsible for the preparation and filing of any Tax Return (the "Responsible Party") related to such Transfer Tax (the "Transfer Tax Return"). The other party shall provide the Responsible Party with such assistance in the preparation of the Transfer Tax Return as the Responsible Party shall reasonably request. The Responsible Party shall provide the other party with a draft of the Transfer Tax Return for review and comment no later than seven (7) business days prior the due date for the Transfer Tax Return and the parties shall promptly discuss any comments from the other party and agree on a final Transfer Tax Return by no later than four (4) business days prior to the due date for the Transfer Tax Return. No later than two (2) business days prior to the due date for the Transfer Tax Return, the other party shall pay over to the Responsible Party 50% of the amount shown as due on the Transfer Tax Return in immediately available funds. By no later than the due date for the Transfer Tax Return, the Responsible Party shall file the Transfer Tax Return with the appropriate Taxing Authority and remit 100% of the applicable Transfer Tax. The Responsible Party shall provide proof of filing and payment to the other party. (d) If either party receives any refund of any Transfer Tax paid by the parties pursuant to this Section 8.5, then such party shall promptly remit 50% of such refund to the other party. (e) In the event that any Taxing Authority commences any audit, examination or investigation of any Transfer Tax Return, the party receiving notice of such audit, examination or investigation shall promptly notify the other party. In the event that such AMENDED ASSET PURCHASE AGREEMENT 73 <PAGE> audit, examination or investigation results in a Taxing Authority proposing any deficiency, the parties shall attempt to reach agreement on whether to contest such determination. If the parties are unable to agree, the parties agree to be bound by the written opinion of a law firm with a nationally recognized tax practice related to such Transfer Tax or an internationally recognized firm of independent public accountants with respect to whether an appeal of such determination is more likely than not to succeed. In the event that the parties determine to proceed with an appeal, the costs of the appeal shall be shared equally. In the event that the appeal is partially or wholly unsuccessful, the parties shall each be responsible for 50% of the assessed deficiency in Transfer Taxes, and such amount shall be paid by the parties in accordance with Section 8.5(c). 8.6 Real Property Taxes. For any Tax Period including the Closing Date or the applicable Foreign Closing Date, Seller shall make a good-faith estimate of the total amount of the Real Property Taxes, the Assumed Real Property Taxes and the excess of the Real Property Taxes over the Assumed Real Property Taxes (such excess being referred to as the "Retained Real Property Taxes," and such estimated excess being referred to as the "Estimated Retained Real Property Taxes"), all as of the Closing Date or the applicable Foreign Closing Date, as the case may be, based on the most recent ascertainable financial information and approval of the Business and the Real Property. Such estimates shall be subject to review by Purchaser. As of the Closing Date or the applicable Foreign Closing Date, Seller and Purchaser shall determine the total amount of Assumed Real Property Taxes paid by Seller on or before the Closing Date or the applicable Foreign Closing Date (the "Seller's Payment") and the total amount of Estimated Retained Real Property Taxes to be paid by Purchaser after the Closing Date or the applicable Foreign Closing Date (the "Purchaser's Payment"). At the Closing or the applicable Foreign Closing, (a) Purchaser and Purchasing Affiliates shall deliver to Seller and Selling Affiliates an amount in cash equal to the positive difference, if any, between the Seller's Payment and the Purchaser's Payment, or (b) Seller and Selling Affiliates shall deliver to Purchaser an amount in cash equal to the positive difference, if any, between the Purchaser's Payment and the Seller's Payment. Following the Closing or the applicable Foreign Closing, from time to time as the actual amount of each of the Retained Real Property Taxes becomes known, if the Estimated Retained Real Property Taxes exceed the actual Retained Real Property Taxes or the actual Retained Real Property Taxes exceeds the Estimated Retained Real Property Taxes, the amount of the Purchaser's Payment and the difference between the Purchaser's Payment and the Seller's Payment shall be recalculated and the applicable party shall deliver to the other party, in cash, an amount reflecting such adjustment. 8.7 VAT. (a) As used in Sections 8.7(b) and (c), "Purchaser" means the Purchaser or Purchasing Affiliate liable for a Relevant Tax Payment or entitled to a Relevant Tax Credit, as the case may be, "Seller" means the Seller or Selling Affiliate liable for a Relevant Tax Payment or entitled to a Relevant Tax Credit, as the case may be. Purchaser guarantees each obligation of each Purchasing Affiliate provided by this Section 8.7; Seller guarantees each obligation of each Selling Affiliate provided by this Section 8.7. AMENDED ASSET PURCHASE AGREEMENT 74 <PAGE> (b) All sums stated in this Agreement as being payable by Purchaser to Seller are exclusive of VAT, which shall be charged in addition, if applicable. Seller shall issue a valid original VAT invoice to Purchaser on the date of the appropriate tax point or if that date is not a Business Day on the first Business Day thereafter. In respect of sums payable by Seller to Purchaser under this Agreement a valid VAT credit note shall, if appropriate, be issued by Seller to Purchaser on the date of the appropriate tax point or if that date is not a Business Day on the first Business Day thereafter. The Responsible Party (as defined in Section 8.5(c)) shall file the Tax Returns for VAT consistent with Section 8.5(c). (c) (i) In this Section 8.7(c) a Relevant VAT Payment is the amount of VAT required to be paid to a Taxing Authority by Seller or Purchaser in respect of the transfer of the Business and/or the Total Acquired Assets or any portion thereof under this Agreement and the Relevant Payment Date is the date on which the Relevant VAT Payment is required to be made. (ii) In this Section 8.7(c) a Relevant VAT Credit is the amount of credit for or rebate of VAT to which Seller or Purchaser is entitled in respect of the transfer of the Business and/or the Total Acquired Assets or any portion thereof under this Agreement and the Relevant Credit Date is the date on which the relevant company enjoys the benefit of the Relevant VAT Credit. Purchaser and Seller shall use all reasonable endeavors to ensure that the company entitled to enjoy a Relevant Tax Credit shall take such reasonable steps as are necessary to secure that the Relevant Credit Date in respect thereof is the earliest date possible. (iii) Within two (2) Business Days prior to a Relevant Payment Date for Seller, Purchaser shall pay to Seller an amount of VAT equal to the Relevant VAT Payment which is payable on that Relevant Payment Date. On the Relevant Payment Date, Seller shall pay the Relevant VAT Payment to the relevant Taxing Authority and Seller shall pay an amount equal to fifty percent (50%) of the Relevant VAT Payment to Purchaser. Within two (2) Business Days prior to a Relevant Payment Date for Purchaser, Seller shall pay to Purchaser an amount of VAT equal to the Relevant VAT Payment which is payable on that Relevant Payment Date. On the Relevant Payment Date, Purchaser shall pay the Relevant VAT Payment to the relevant Taxing Authority and Purchaser shall pay an amount equal to fifty percent (50%) of the Relevant VAT Payment to Seller. (iv) Within two (2) Business Days after a Relevant Credit Date for Purchaser, Purchaser shall pay to Seller an amount equal to fifty percent (50%) of the Relevant VAT Credit which is credited or received on that Relevant Credit Date. Within two (2) Business Days after a Relevant Credit Date for Seller, Seller shall pay to Purchaser an amount equal to fifty percent (50%) of the Relevant VAT Credit which is credited or received on that Relevant Credit Date. AMENDED ASSET PURCHASE AGREEMENT 75 <PAGE> (v) Either Purchaser or Seller may request a review of the operation of Sections 8.7(c)(i) to (iv) inclusive, in order to confirm that, taking an overall view of the amount and timing of all such past payments or credit and all such estimated future payments and credits, the cost has been borne equally by them. In the event that either Purchaser or Seller believes that the said cost has not been borne equally, it may require the other to enter into negotiations with a review to agreeing a method of achieving an equal division of cost and in the absence of agreement the matter shall be referred to the Arbitrator whose decision shall be final and conclusive and binding on the parties. (d) Seller and Purchaser shall use their reasonable efforts (which shall include, without limitation, providing each other with such information or assistance as the other shall reasonably request) to procure that the transfer of the Business and the Total Acquired Assets under this Agreement is treated under Article 5(8) of the Sixth Directive (where applicable) or any other applicable legislation made pursuant to, or derived from, such Article (such as Article 5 of the VAT (Special Provisions) Order 1995 in the United Kingdom) or such other legislation as is applicable in a country which is not a member state of the European Union as not being a supply of goods or a supply of services for VAT purposes. (e) Acting reasonably, Seller and Purchaser shall agree whether or not to make an application to any relevant Taxing Authority for a confirmatory declaration that VAT is not chargeable on the transfer of any portion of the Business and/or the Total Acquired Assets under this Agreement and the relevant Operative Agreement. If the parties agree to make such an application, Seller shall procure the submission (as soon as possible following the aforementioned agreement) to the relevant Taxing Authority of such an application. The costs of such application shall be borne equally by Seller and Purchaser. If, notwithstanding the reasonable efforts of Seller, an amount of VAT is determined by a Taxing Authority to be payable, then Seller shall promptly notify Purchaser of that determination. In the event of such determination by a Taxing Authority, Seller and Purchaser shall consult and jointly and reasonably decide whether to pursue a review of and/or an appeal against such determination. Any costs involved in such review and/or appeal, and any strategic decisions with respect to the conduct of such review and/or appeal, shall be shared equally by Seller and Purchaser, irrespective of which is the formal legal party to the review and/or appeal. (f) In the event that Purchaser writes off a debt owing pursuant to a third party contract which was entered into by Seller and which constitutes an Asset (a "Debt") as a bad debt, provided VAT bad debt relief is available in the applicable jurisdiction, Seller shall take the appropriate steps to reclaim from the relevant Taxing Authority the VAT (if any) paid by Seller to such Taxing Authority in respect of such Debt and shall immediately pay any such amount of VAT recovered from the relevant Taxing Authority to Purchaser. If all or part of such Debt is subsequently recovered, Purchaser shall immediately reimburse Seller for so much of the amount paid by Seller to the Purchaser under this Section 8.7(f) as is required to be paid by Seller to such relevant Taxing Authority. If it is necessary for a AMENDED ASSET PURCHASE AGREEMENT 76 <PAGE> Debt to be reassigned to Seller in order for a valid VAT bad debt relief claim to be made, Purchaser and Seller shall take such action as is reasonably necessary to give effect to such claim. ARTICLE 9 EMPLOYEE MATTERS 9.1 Offer of Employment. (a) Within thirty (30) days of the date of this Agreement, Seller shall provide Purchaser with a list of the names of each Employee as of a date within thirty (30) days of the date of this Agreement, together with such Employee's location and position or function, annual base salary or wages and any incentive or bonus arrangement with respect to such Employee that is in effect on such date. (b) Prior to the Closing Date, Purchaser will offer employment, contingent on Closing, to at least 2,392 Employees selected by Purchaser, which number shall include all of the Employees located in Heerenveen, such employment to commence the day following the Closing Date, on terms, taken as a whole, reasonably comparable to those provided to such Employees by Seller, except as otherwise provided herein. Seller will take all necessary actions to terminate, as of the Closing Date, Employees selected by Purchaser. Seller shall pay Employees selected by Purchaser all compensation, commissions, bonuses, benefits (including accrued vacation and sick leave) and incentive payments including, but not limited to, any FY00 incentive program payments and severance payments accrued through the Closing Date. Seller shall be responsible for any liabilities arising in connection with or by virtue of the employment by Seller of the Employees selected by Purchaser up to and including the Closing Date, including, but not limited to, any liabilities arising in connection with any Benefit Plan, and the termination of such employment as of the Closing Date. 9.2 Purchaser's Plan Service Credits. Purchaser shall treat all Employees who accept employment with Purchaser as new hires for purposes of determining eligibility to participate under Purchaser's employee benefit plans, including, but not limited to, Purchaser's Employee Stock Ownership Plan ("ESOP"), Retirement Income Guarantee Plan ("RIGP"), Profit Sharing and Savings Plan ("PSSP"), and Retiree Medical Plan ("RMP") (collectively, "Purchaser's Plans"), provided, however, that to the extent permitted by applicable Laws, Purchaser shall grant such Employees credit for years of service with the Seller to the extent necessary under the terms of the Purchaser's Plans to permit their immediate participation in the Purchaser's Plans and for all other purposes except for accrual of benefits under such plans with respect to such service. Other than as may be the result of generally applicable age-related and service-related waiting period(s) in effect under Purchaser's Plans on the Closing Date, Purchaser's Plans shall not exclude such Employees from eligibility to participate in Purchaser's Plans on AMENDED ASSET PURCHASE AGREEMENT 77 <PAGE> terms substantially equivalent to those generally applicable on the Closing Date to Purchaser's other eligible employees in the same business division. 9.3 Employee Benefit Programs Service Credits. Except as set forth in Section 9.2 with respect to Purchaser's Plans, and to the extent permitted by applicable Laws, Employees who accept employment with Purchaser shall receive credit for years of service with Seller for the sole purpose of participation under any benefit program, policy or arrangement maintained by Purchaser, which programs may include, but are not limited to, vacation and sick leave. For example, and without limiting the scope of the foregoing service credit provisions, service with the Seller before the Closing Date of Employees who accept employment with Purchaser shall be counted the same as service for the Purchaser for purposes of participation in and calculation of benefits (but not accrual of vested benefits) under Purchaser's Severance Pay Plan and any other severance pay plan maintained or offered by Purchaser. If Purchaser terminates any Employee who accepts employment with Purchaser within 12 months of the Closing Date, other than for cause, it shall provide such terminated Employee with severance benefits at least comparable to those that would have been available to such Employee under Seller's standard severance policies. Purchaser shall have no obligation to assume, continue, or maintain any benefit program, policy or arrangement maintained by Seller. 9.4 WARN Act. Purchaser shall be responsible for all obligations, if any, under the Worker Adjustment Retraining Notification Act ("WARN") and applicable regulations thereunder with respect to any employment terminations after the Closing Date of Employees who are hired by Purchaser for employment commencing the day following the Closing Date, and shall indemnify Seller in the event Seller is held liable for any failure by Purchaser to comply with Purchaser's obligations under WARN or this subsection. Seller shall be responsible for all obligations, if any, under WARN and applicable regulations thereunder with respect to any employment terminations up to and including the Closing Date and shall indemnify Purchaser in the event Purchaser is held liable for any failure by Seller to comply with Seller's obligations under WARN or this subsection. 9.5 Foreign Nationals. Seller agrees to use reasonable commercial efforts to assist Purchaser, at Purchaser's expense, in securing any authorization necessary so that Purchaser may employ any Foreign National offered employment by Purchaser. 9.6 Seller COBRA Compliance. Seller agrees that Seller shall be responsible for compliance with any applicable notification and continuation coverage pursuant to the Consolidated Omnibus Budget AMENDED ASSET PURCHASE AGREEMENT 78 <PAGE> Reconciliation Act of 1985 ("COBRA") and the regulations issued thereunder as to any of Seller's employees who do not accept or are not offered employment by Purchaser. 9.7 Evidence of Insurability. Purchaser shall take all necessary steps to insure that those Employees hired by Purchaser for employment commencing the day following the Closing Date shall not be subject to evidence of insurability requirements with respect to entry into new insurance coverage under any Plan of Purchaser in connection with such employment. 9.8 HMO Coverage. Purchaser shall make reasonable commercial efforts to permit each Employee hired by Purchaser for employment commencing the day following the Closing Date to have Health Maintenance Organization ("HMO") insurance coverage after the Closing Date with the same HMO through which they had coverage in effect on the Closing Date. 9.9 Direct Transfer of 401(k) Balances. Seller and Purchaser shall take all necessary steps consistent with applicable law to provide that certain accounts under Seller's 401(k) Plan identified in Schedule 2.12(a) shall be transferred in a direct trustee-to-trustee transfer from Seller's 401(k) Plan to Purchaser's Profit Sharing and Savings Plan. Accounts transferred pursuant to the preceding sentence shall be all accounts under Seller's 401(k) Plan (including, to the extent reasonably feasible as determined by the administrator of Purchaser's Profit Sharing and Savings Plan, any then-outstanding participant loans) of Employees who become employees of Purchaser as of the day after the Closing Date. Such transfer shall be carried out as soon as reasonably practicable after the Closing Date. With respect to any such transferred participant loans, Purchaser shall make reasonable arrangements for ongoing repayment of the loans under Purchaser's Profit Sharing and Savings Plan. Such transfer of currently outstanding loans under this provision is not intended to obligate Purchaser's Profit Sharing and Savings Plan to allow participants to take out new loans with respect to such transferred accounts, or to prevent such new loans if permitted under generally applicable provisions of Purchaser's Profit Sharing and Savings Plan. ARTICLE 10 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS Notwithstanding any right of Purchaser (whether or not exercised) to investigate the Business or any right of any party (whether or not exercised) to investigate the accuracy of the representations and warranties of the other party contained in this Agreement, Seller and Purchaser have the right to rely fully upon the representations, AMENDED ASSET PURCHASE AGREEMENT 79 <PAGE> warranties, covenants and agreements of the other contained in this Agreement. The representations, warranties, covenants and agreements of Seller and Purchaser contained in this Agreement will survive the Closing or the applicable Foreign Closing (a) indefinitely with respect to the representations and warranties contained in Sections 2.2, 2.21 (except in the case of Environmental Claims by third parties which are the subject of Article 10(b) hereinbelow), and 3.2 and the covenants and agreements contained in Sections 1.7, 14.4, and 14.5, and Article 11 (b) until sixty (60) days after the expiration of all applicable statutes of limitation (including all periods of extension, whether automatic or permissive) with respect to matters covered by (i) Section 2.9 and Article 8, (ii) Section 2.21 (insofar as it relates to Environmental Claims by third parties), and (iii) Section 2.12 and Article 9 (insofar as they relate to ERISA or the Code), (c) until three (3) years after the Closing Date in the case of the representations and warranties contained in Section 2.15, (d) until eighteen (18) months after the Closing Date or the applicable Foreign Closing Date, as the case may be, in the case of all other representations and warranties and any covenant or agreement to be performed in whole or in part on or prior to the Closing or the applicable Foreign Closing, or (e) with respect to each other covenant or agreement contained in this Agreement, until sixty (60) days following the last date on which such covenant or agreement is to be performed or, if no such date is specified, until the Closing (or the applicable Foreign Closing) or termination of the Agreement in accordance with Article 12. Notwithstanding the foregoing, any representation, warranty, covenant or agreement that would otherwise terminate in accordance with Article 10(b), (c), (d), or (e) above will continue to survive with respect to a claim for indemnification if a Claim Notice or Indemnity Notice (as applicable) shall have been timely given under Article 11 on or prior to such termination date, until the related claim for indemnification has been satisfied or otherwise resolved as provided in Article 11. ARTICLE 11 INDEMNIFICATION 11.1 Tax Indemnification. (a) Seller, for itself and on behalf of each of the Selling Affiliates, agrees to be responsible for and to indemnify and hold Purchaser and each Purchasing Affiliate harmless from and against any and all of the following: (i) any and all Taxes (other than Transfer Taxes, which are governed by Article 8) owed by Seller or any Selling Affiliate for any taxable period prior to or as of the Closing Date or the applicable Foreign Closing Date which are Taxes Which May Give Rise To Any Transferee Tax Liability (excluding the Assumed Real Property Taxes); (ii) any and all Tax Liens on any Asset arising with respect to any tax AMENDED ASSET PURCHASE AGREEMENT 80 <PAGE> periods (or portions thereof) ending on or prior to the Closing Date or the applicable Foreign Closing Date (except the Assumed Real Property Taxes); (iii) any breach or inaccuracy of any of the representations or warranties of Seller contained in Section 2.9 hereof, and with respect to any tax periods (or portions thereof); (iv) any breach of any covenant of Seller contained in Article 8; and (v) any liability for Taxes in respect of any indemnity payment made pursuant to the foregoing Section 11.1(a)(i), (ii), (iii) and (iv) and this Section 11.1(a)(v) so that Purchaser or Purchasing Affiliate shall have received such indemnity payment on an after-tax-basis. Any such payment shall assume that Purchaser and any Purchasing Affiliate is taxable at the highest marginal statutory rate in effect for the relevant period. Notwithstanding the foregoing, no indemnity payment shall be due from Seller or any Selling Affiliate to Purchaser or any Purchasing Affiliate under this Section 11.1 with respect to the foregoing unless the indemnity payment exceeds Two Thousand Five Hundred Dollars ($2,500.00) (a "De Minimis Indemnity Amount"), provided that such limitation shall not apply after the total sum of all De Minimis Indemnity Amounts exceeds One Hundred Twenty-Five Thousand Dollars ($125,000.00). (b) All amounts payable as indemnities pursuant to Section 11.1(a) shall be (i) treated, to the extent permitted by the applicable Laws of the applicable Taxing Authority, as an adjustment to the Purchase Price, and (ii) payable within five (5) days after written demand by Purchaser to Seller. Notwithstanding the foregoing, if, in the case of Section 11.1(a)(i) or (ii), such Taxes are contested pursuant to Section 11.1(c) hereof and as a result of such contest, Purchaser's obligation to pay such Taxes is stayed pending the outcome of such Tax Proceeding, Seller shall be obligated to pay Purchaser such indemnity upon the earlier of the resolution of the Tax Proceeding or the termination of the stay. (c) In the event that any audit or examination shall be instituted, or any deficiency asserted or assessment made, or any administrative or court proceeding commenced by the IRS or any other Taxing Authority (a "Tax Proceeding") with respect to any Taxes described in Section 11.1(a)(i) or (ii) (an "Indemnifiable Tax"), the party receiving such notice shall promptly cause written notice of the Tax Proceeding to be forwarded to the other party. Provided that Seller is not in violation of its obligations under this Section 11.1 and does not contest its obligation to indemnify Purchaser pursuant to Section 11.1(a), Seller shall have the right to elect, at its sole option and expense, and subject to the provisions of this Section 11.1(c), to contest the such Indemnifiable Tax in the name of Seller and/or any applicable Selling Affiliate in the Tax Proceeding and settle, pay or adjust any amount owed with respect to such Indemnifiable Tax with counsel of its choice; provided that such counsel shall be reasonably satisfactory to Purchaser. In the event Seller elects to contest such AMENDED ASSET PURCHASE AGREEMENT 81 <PAGE> Indemnifiable Tax in such Tax Proceeding, Seller shall within five (5) days (or sooner, if the nature of the Tax Proceeding so requires) notify Purchaser of its intent to do so. Provided that Purchaser shall believe, in its sole discretion, that the Tax Proceeding may impact any future tax issue related to the Purchased Assets or Purchaser's operation of the Business, Purchaser shall have (i) the right to participate fully in the Tax Proceeding, including through separate counsel of its own choosing at its sole cost and expense, (ii) the right to receive reasonable advance notice from Seller of any meetings, hearings or proceedings, and (iii) the right to review in advance and comment on any pleadings, briefs or other documents to be filed or otherwise disclosed or provided to the Taxing Authority, their counsel or any court or administrative agency. Seller shall not consent to any judgment or enter into any settlement, closing or other agreement with respect to any Tax Proceeding without the prior written consent of Purchaser (such consent not to be unreasonably withheld, conditioned or delayed if, and only to the extent, such settlement, closing or other agreement relates solely to an Indemnifiable Tax and has no binding or preclusive effect upon Purchaser with respect to any period after the Closing Date or the applicable Foreign Closing Date). 11.2 Other Indemnification. (a) Subject to paragraphs (b) and (c) of this Section and the other Sections of this Article 11, Seller shall indemnify the Purchaser Indemnified Parties in respect of, and hold each of them harmless from and against, any and all claims (including, without limitation, Environmental Claims), Liabilities or Losses (whether absolute, accrued, contingent, fixed or otherwise, whether known or unknown or due or to become due or otherwise) suffered, incurred or sustained by any of them or to which any of them becomes subject at any time (whether before or after Closing or the applicable Foreign Closing Date), resulting from, arising out of or relating to: (i) Environmental Matters (A) nonfulfillment of or failure to perform any covenant or agreement on the part of Seller, for itself or on behalf of any Selling Affiliate, contained in this Agreement in respect of any environmental matters; (B) any violation of any Law by Seller or any Selling Affiliate in respect of any environmental matters prior to the Closing or the applicable Foreign Closing; (C) any Hazardous Materials Contamination present in, on, under or at any of the Real Property or properties subject to the Real Property Leases or any other property owned, leased or occupied by AMENDED ASSET PURCHASE AGREEMENT 82 <PAGE> Seller or any Selling Affiliate at any time prior to the Closing or the applicable Foreign Closing, including but not limited to Hazardous Materials Contamination at, on or under the real property sold to Venture Properties, Inc. in 1998 and Seller's former manufacturing facility in Heerenveen, The Netherlands sold in 1996; or (D) any Environmental Claims arising from events occurring prior to the Closing or the applicable Foreign Closing, including, without limitation, Environmental Claims arising from any Hazardous Materials Contamination at any property owned, leased or occupied by Seller or any Selling Affiliate or any third party prior to the Closing or the Applicable Foreign Closing including but not limited to the disposal of, transportation to, and arrangement for disposal of Hazardous Materials at Seller's Beaverton, Oregon Treatment, Storage and Disposal Facility, the Western Processing Superfund Site located in Kent, Washington and/or any other location; (ii) any misrepresentation or breach of warranty on the part of Seller, for itself or on behalf of any Selling Affiliate, (determined in all cases as if the terms "material," "materially" "Known to Seller" or "Knowledge of Seller" were not included therein) except that "Known to Seller" or "Knowledge of Seller" shall be included solely for purposes of Sections 2.15(a), (b), (c) and (d)); (iii) any Assumed Liabilities (A) assumed pursuant to Section 1.2(a)(xiii) but only with respect to Products sold prior to the Closing Date and included as an accrued liability in the Statement of Closing Net Assets, (B) relating to Epidemic Failure of Products assumed pursuant to Section 1.2(a)(xviii) and included as an accrued liability in the Statement of Closing Net Assets, excluding Liabilities related to Print Head Drift, (C) assumed under Section 1.2(a)(i), (iii) or (iv) relating to any Business Contract, Business License, Real Property Lease or Personal Property Lease, but only to the extent such obligations were to be performed by Seller or a Selling Affiliate prior to the Closing Date and were not disclosed in the Disclosure Schedule or included as an accrued liability in the Statement of Closing Net Assets or (D) assumed pursuant to Section 1.2(a)(xiv) to the extent the Assumed Liability constitutes a breach of a representation or warranty set forth in Section 2.21; (iv) an Excluded Asset or a Retained Liability; (v) any Assumed Liabilities assumed pursuant to Section 1.2(a)(xix), but only to the extent such Losses do not exceed Five Million Dollars ($5,000,000). For purposes of this Section 11.2(a)(v), any such Losses shall be determined by crediting 50% of all applicable service contract revenues attributable to a customer against that customer's printhead repair costs during the AMENDED ASSET PURCHASE AGREEMENT 83 <PAGE> year that such repair costs are incurred and excluding all non-service contract repairs charged on a time and materials basis; or (vi) any Hazardous Materials incorporated into any Product manufactured, distributed, sold, purchased, transported or possessed by Seller or any Seller Affiliate prior to the Closing or applicable Foreign Closing. Notwithstanding the foregoing, the indemnities provided in this Section 11.2(a) shall not be diminished or affected in any way by any information contained in the Disclosure Schedules attached to this Agreement, and provided, however, that any indemnity for claims, Liabilities or Losses relating to Taxes shall be determined solely in accordance with Section 11.1. (b) No amounts of indemnity shall be payable in the case of a claim by a Purchaser Indemnified Party under Sections 11.2(a)(i), (ii), (iii) and (vi), unless and until the Purchaser Indemnified Parties have suffered, incurred, sustained or become subject to Losses referred to in such Section in excess of Ten Million Dollars ($10,000,000.00) in the aggregate, in which event the Purchaser Indemnified Parties shall be entitled to claim indemnity only for such amounts in excess of Ten Million Dollars ($10,000,000.00), provided that this Section 11.2(b) shall not apply to any claims based on fraud; and, provided, further, that the maximum aggregate amount of the liability of Seller under Sections 11.2(a)(i), (ii), (iii), (v) and (vi) is $50,000,000. (c) Any Losses or Liabilities which Purchaser or a Purchaser Indemnified Party is entitled to receive payment under this Article 11 shall be reduced dollar for dollar to the extent, but only to the extent, that the Purchaser Indemnified Party obtains a monetary benefit or value directly related to such Liability or Loss; provided, however, that the Purchaser shall have no obligation to seek or maximize any such monetary benefit or value. (d) Notwithstanding anything in this Section 11.2 to the contrary, in addition to Sections 11.2(b) and (c), Seller's liability to indemnify any Purchaser Indemnified Party for Liabilities or Losses due to any claim for infringement of Intellectual Property shall be subject to the following: (i) Seller shall indemnify Purchaser Indemnified Parties for any misrepresentation or breach of warranty on the part of Seller, for itself or on behalf of any Selling Affiliate, to the extent the Liability or Loss arises from or relates to the manufacture, use or sale of Products, or use of processes by Seller or the Selling Affiliate prior to the Closing Date, regardless of whether the Intellectual Property Infringement is Known to Seller as of the date of this Agreement. (ii) Seller shall indemnify Purchaser Indemnified Parties for any misrepresentation or breach of warranty on the part of Seller, for itself or on behalf of any Selling Affiliate, to the extent the Liability or Loss arises from the AMENDED ASSET PURCHASE AGREEMENT 84 <PAGE> manufacture, use or sale of Products, or use of processes, by Seller or the Selling Affiliate on or after the Closing Date only if the Intellectual Property Infringement is Known to Seller as of the date of this Agreement. For the avoidance of doubt, Seller shall have no indemnification obligation to Purchaser Indemnified Parties for misrepresentation or breach of warranty on the part of Seller, for itself or on behalf of any Selling Affiliate, to the extent the Liability or Loss arises from the manufacture, use or sale of Products, or use of processes, by Seller or the Selling Affiliate on or after the Closing Date with respect to Intellectual Property Infringement if the Intellectual Property Infringement is not Known to Seller as of the date of this Agreement (iii) For purposes of this Section 11.2(d), "Known to Seller" means the actual knowledge of any officer, director, or employee of Seller listed in Section 13.1 of the Disclosure Schedule as of the date hereof, and shall not include any imputed knowledge or be deemed to impose any obligation on Seller to conduct a patent, trademark, or copyright search. (e) Purchaser shall indemnify Seller Indemnified Parties in respect of, and hold each of them harmless from and against, any and all claims, Liabilities and Losses (whether absolute, accrued, contingent, fixed or otherwise, whether known or unknown or due or to become due or otherwise) suffered, incurred or sustained by any of them or to which any of them becomes subject at any time (whether before or after Closing or the applicable Foreign Closing Date), resulting from, arising out of or relating to (i) any Assumed Liabilities, to the extent the Purchaser Indemnified Parties are not entitled to indemnification under Sections 11.1 or 11.2, and (ii) the conduct of the Business after Closing. 11.3 Method of Asserting Claims. All claims for indemnification by any Indemnified Party under Section 11.2 will be asserted and resolved as follows: (a) In the event any claim or demand in respect of which an Indemnified Party might seek indemnity under Section 11.2 is asserted against or sought to be collected from such Indemnified Party by a Person other than Seller, Purchaser or any Affiliate of Seller or Purchaser (a "Third Party Claim"), the Indemnified Party shall deliver a Claim Notice with reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice with reasonable promptness after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party will not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim to the extent that the Indemnifying Party's ability to defend has been prejudiced by such failure of the Purchaser Indemnified Party. The Indemnifying Party will notify the Indemnified Party as soon as practicable within the Dispute Period whether the Indemnifying Party disputes its Liability to the Indemnified Party under Section 11.2 and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim. AMENDED ASSET PURCHASE AGREEMENT 85 <PAGE> (i) If the Indemnifying Party notifies the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 11.3(a), then the Indemnifying Party will have the right to defend, with counsel reasonably satisfactory to the Indemnified Party, at the sole cost and expense of the Indemnifying Party, such Third Party Claim by all appropriate proceedings, which shall be done in a reasonable manner and in good faith or will be settled at the discretion of the Indemnifying Party (but only with the consent of the Indemnified Party in the case of any settlement that provides for any relief other than the payment of monetary damages, which consent shall not be unreasonably withheld). The Indemnifying Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that the Indemnified Party may, at the sole cost and expense of the Indemnified Party, at any time prior to the Indemnifying Party's delivery of the notice referred to in the first sentence of this Section 11.3(a)(i), file any motion, answer or other pleadings or take any other action that the Indemnified Party reasonably believes to be necessary or appropriate to protect its interests; and provided, further, that if requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnifying Party in contesting any Third Party Claim that the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this Section 11.3(a)(i), and except as provided in the preceding sentence, the Indemnified Party will bear its own costs and expenses with respect to such participation. So long as the Indemnifying Party is contesting the Third Party Claim in good faith and with reasonable diligence, the Indemnified Party shall not pay or settle the Third Party Claim. Notwithstanding the foregoing, the Indemnified Party may take over the control of the defense or settlement of a Third Party Claim at any time if it irrevocably waives its right to indemnity under Section 11.2, as the case may be, with respect to such Third Party Claim. (ii) If the Indemnifying Party fails to notify the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Third Party Claim pursuant to Section 11.3(a), or if the Indemnifying Party gives such notice but fails to contest, in a reasonable manner and in good faith or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Dispute Period, then the Indemnified Party will have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings will be prosecuted by the Indemnified Party in a reasonable manner and in good faith or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, AMENDED ASSET PURCHASE AGREEMENT 86 <PAGE> including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting. Notwithstanding the foregoing provisions of this Section 11.3(a)(ii), if the Indemnifying Party has notified the Indemnified Party that the Indemnifying Party disputes its Liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in clause (iii) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this Section 11.3(a)(ii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party will reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section 11.3(a)(ii), and the Indemnifying Party will bear its own costs and expenses with respect to such participation. (iii) If the Indemnifying Party notifies the Indemnified Party that it does not dispute its Liability to the Indemnified Party with respect to the Third Party Claim under Section 11.2, the Loss in the amount specified in the Claim Notice will be conclusively deemed a Liability of the Indemnifying Party under Section 11.2, and the Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on demand. If the Indemnifying Party has disputed its Liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the Resolution Period, such dispute shall be resolved by arbitration in accordance with Section 11.3(c). (b) In the event any Indemnified Party should have a claim under Section 11.2 against any Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver an Indemnity Notice with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that an Indemnifying Party demonstrates that it has been prejudiced thereby. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim described in such Indemnity Notice, the Loss in the amount specified in the Indemnity Notice will be conclusively deemed a Liability of the Indemnifying Party under Section 11.2 and the Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on demand. If the Indemnifying Party has disputed its Liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the Resolution Period, such dispute shall be resolved by arbitration in accordance with AMENDED ASSET PURCHASE AGREEMENT 87 <PAGE> Section 11.3(c). (c) Any dispute submitted to arbitration pursuant to this Section 11.3 shall be finally and conclusively determined by the decision of a board of arbitration consisting of three (3) members (hereinafter sometimes called the "Board of Arbitration") selected as hereinafter provided. Each of the Indemnified Party and the Indemnifying Party shall select one (1) member and the third member shall be selected by mutual agreement of the other members, or if the other members fail to reach agreement on a third member within twenty (20) days after their selection, such third member shall thereafter be selected by the American Arbitration Association upon application made to it for such purpose by the Indemnified Party. The Board of Arbitration shall meet in San Francisco, California, or such other place as a majority of the members of the Board of Arbitration determines more appropriate, and shall reach and render a decision in writing (concurred in by a majority of the members of the Board of Arbitration) with respect to the amount, if any, which the Indemnifying Party is required to pay to the Indemnified Party in respect of a claim filed by the Indemnified Party. In connection with rendering its decisions, the Board of Arbitration shall adopt and follow such rules and procedures as a majority of the members of the Board of Arbitration deems necessary or appropriate. To the extent practical, decisions of the Board of Arbitration shall be rendered no more than thirty (30) days following commencement of proceedings with respect thereto. The Board of Arbitration shall cause its written decision to be delivered to the Indemnified Party and the Indemnifying Party. Any decision made by the Board of Arbitration (either prior to or after the expiration of such thirty (30) day period) shall be final, binding and conclusive on the Indemnified Party and the Indemnifying Party and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. Each party to any arbitration shall bear its own expense in relation thereto, including but not limited to such party's attorneys' fees, if any, and the expenses and fees of the member of the Board of Arbitration appointed by such party, provided, however, that the expenses and fees of the third member of the Board of Arbitration and any other expenses of the Board of Arbitration not capable of being attributed to any one member shall be borne in equal parts by the Indemnifying Party and the Indemnified Party. ARTICLE 12 TERMINATION 12.1 Termination. This Agreement may be terminated, and the transactions contemplated hereby may be abandoned: (a) at any time before the Closing, by mutual written agreement of Seller and Purchaser; (b) at any time before the Closing, by Seller or Purchaser, if not then in AMENDED ASSET PURCHASE AGREEMENT 88 <PAGE> default (i) in the event of a material breach hereof by the non-terminating party if such non-terminating party fails to cure such breach within twenty (20) Business Days following notification thereof by the terminating party or (ii) upon notification of the non-terminating party by the terminating party that the satisfaction of any condition to the terminating party's obligations under this Agreement becomes impossible or impracticable with the use of commercially reasonable efforts if the failure of such condition to be satisfied is not caused by a breach hereof by the terminating party; (c) at any time after one hundred and eighty (180) days after the date of this Agreement by Seller or Purchaser upon notification of the non-terminating party by the terminating party if the Closing and the Significant Foreign Closings shall not have occurred on or before such date and such failure to consummate is not caused by a breach of this Agreement by the terminating party; provided, however, that if the Closing and the Significant Foreign Closings have not occurred on or before the 120th day after the date of this Agreement by reason of the non-satisfaction of any of the conditions set forth in Sections 6.5, 6.6, 6.7, 7.4, 7.5 or 7.6, then such 120-day period shall be extended for such number of days as may be mutually acceptable to Seller and Purchaser, but in any event not less than one hundred and eighty (180) additional days; (d) at any time not later than 45 days after the date of this Agreement by Purchaser in the event that: (i) Purchaser has obtained an environmental survey and assessment (including but not limited to any subsurface investigations) of the soils and groundwater prepared by a firm of licensed engineers (familiar with the identification of Hazardous Materials), such environmental survey and assessment to be based upon physical onsite inspections by such firm of some or all of the Real Property, the Tek Malaysia Real Property and properties subject to the Real Property Leases used in connection with the Business, as well as a historical review of the uses of the Business, and it may include subsurface investigations of the Real Property, and such environmental survey and assessment indicates that there are liabilities under Environmental Laws that are not disclosed in Section 2.21 of the Disclosure Schedules that could reasonably be expected to have a material adverse effect on the Condition of the Business; (ii) Purchaser has reviewed the litigation disclosed in Section 2.10 of the Disclosure Schedules and the results of this review indicate that the litigation could reasonably be expected to have a material adverse effect on the Condition of the Business; or (iii) Purchaser has reviewed the Products being developed, manufactured, sold or licensed by the Business and the processes used by the Business to determine whether any of the foregoing infringes a patent, trademark, copyright, trade secret or other intellectual property right of any third party, and the results of such review indicate that such infringement could reasonably be expected to have a material adverse effect on the Condition of the Business. Any subsurface investigation under Section 12.1(d)(i) shall be performed in accordance with the following conditions: AMENDED ASSET PURCHASE AGREEMENT 89 <PAGE> (A) Ground disturbing activities may occur only in locations reasonably approved by Seller. Notwithstanding Seller's approval, Purchaser is solely responsible for identifying and protecting subsurface utilities and structures. All ground disturbing activities shall be done in a manner that prevents exacerbation of any Hazardous Materials Contamination that may exist. (B) Purchaser will promptly repair any damage to improvements or landscaping caused by ground disturbing activities and shall promptly restore the ground surface to existing or better condition. (C) Purchaser will require its environmental consultant to provide Seller copies of all reports of such investigation at the same time such materials are provided to Purchaser. (D) Purchaser is solely responsible for the proper handling, storage and disposal of all drill cuttings and produced water (including purge water). Purchaser shall ensure that all drill cuttings and produced water are properly transported off site within seven days of the day on which they are generated. Drill cuttings and purge water may not be disposed of on Seller's property or stored for more than seven days. Any such materials stored on Seller's property shall be properly containerized and stored in a locked box in at a location approved by Seller. (E) Purchaser shall be solely responsible for the safety and conduct of its employees, contractors and any other personnel who enter the Real Property pursuant to these terms. Purchaser shall indemnify, defend, reimburse and hold harmless Seller from and against any and all claims, Losses or Liabilities that arise out of Purchaser's entry to the Real Property. Before entering the Real Property, Purchaser shall provide Seller certificates of insurance for insurance in the following amounts: (1) Comprehensive general liability insurance, including an environmental impairment liability endorsement, with a minimum limit of $1,000,000 single limit for (i) bodily injury, death and property damage, including damage to the Property; and (ii) contractual liability; (2) Automobile liability insurance with a minimum limit of $1,000,000 combined single limit for bodily injury, death and property damage with respect to any vehicles used in connection with the Activities; (3) Umbrella liability insurance in excess of (1) and (2) above in the amount of $4 million; and (4) Professional liability insurance, including an environmental impairment liability endorsement, with a minimum limit of $2,000,000 annual aggregate. AMENDED ASSET PURCHASE AGREEMENT 90 <PAGE> For work performed in the United States, such Certificates with respect to coverages 1, 2 and 3 above shall name Seller as an additional insured and shall specify that the insurance is primary insurance to Seller. Such certificates of insurance may be submitted by Purchaser's contractors, provided that each contractor that enters the Real Property must be covered by certificates of insurance meeting these minimum requirements. Purchaser satisfy any applicable self-insured retention under such insurance; or (e) at any time within 30 days after Seller has delivered to Purchaser a revised Section 2.15(e) of the Disclosure Schedule identifying separately the third-party software agreements to be assigned to Purchaser at the Closing and the software agreements currently used by the Business but to be retained by Seller (which revised Disclosure Schedule shall be delivered by Seller within 15 days of the date of this Agreement), by Purchaser in the event that the changes to the Disclosure Schedule reflected in such revised Disclosure Schedule could be reasonably expected to have a material adverse effect on the benefits to Purchaser of the transactions contemplated by this Agreement. 12.2 Effect of Termination. If this Agreement is validly terminated pursuant to Section 12.1, this Agreement will forthwith become null and void, and there will be no Liability or obligation on the part of Seller or Purchaser (or any of their respective officers, directors, employees, agents or other representatives or Affiliates), except as provided in the next succeeding sentence and except that the provisions with respect to expenses in Section 14.4 will continue to apply following any such termination. Notwithstanding any other provision in this Agreement to the contrary, upon termination of this Agreement pursuant to Sections 12.1(b) or (c), Seller will remain liable to Purchaser for any breach of this Agreement by Seller existing at the time of such termination, and Purchaser will remain liable to Seller for any breach of this Agreement by Purchaser existing at the time of such termination, and Seller or Purchaser may seek such remedies, including damages and fees of attorneys, against the other with respect to any such breach as are provided in this Agreement or as are otherwise available at Law or in equity. In the event this Agreement is terminated by Purchaser if (a) Seller has breached any of its obligations pursuant to Section 4.4 or (b) the Board of Directors of Seller or the Board of Directors of any Selling Affiliate which is a party to an Ancillary Agreement that is involved in a significant Foreign Closing withdraws or modifies (in a manner adverse to Purchaser) its approval or recommendation of this Agreement, the Ancillary Agreements or the Operative Agreements and the transactions contemplated hereby or thereby, Seller shall pay to Purchaser a termination fee of Forty Million Dollars ($40,000,000.00) in cash as liquidated damages and the payment therefrom in accordance with this Section 12.2 shall be in lieu of any other rights or remedies to which Purchaser may be entitled pursuant to this Agreement or under applicable law. In lieu of such liquidated damages, Purchaser may instead pursue other rights or remedies to which Purchaser may be entitled pursuant to this Agreement or under applicable Law. AMENDED ASSET PURCHASE AGREEMENT 91 <PAGE> ARTICLE 13 DEFINITIONS 13.1 Definitions. (a) Defined Terms. As used in this Agreement, the following defined terms have the meanings indicated below: "Accounting Policies" shall mean the policies to be agreed upon by Seller and Purchaser in accordance with Section 14.14. "Accounts Payable" has the meaning ascribed to it in Section 1.2(a)(ii). "Accounts Receivable" has the meaning ascribed to it in Section 1.1(a)(iv). "Accrued Expenses" has the meaning ascribed to it in Section 1.2(a)(v). "Acquisition Balance Sheet" means the schedule of net assets to be transferred relating to the Business dated as of August 28, 1999, prepared by Seller in accordance with GAAP, a copy of which is attached hereto as a part of Section 2.6(a) of the Disclosure Schedule. "Actions or Proceedings" means any action, suit, proceeding, arbitration or Governmental or Regulatory Authority investigation or audit. "Affiliate" means any Person that directly, or indirectly through one of more intermediaries, controls or is controlled by or is under common control with the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by Contract or otherwise and, in any event and without limitation of the previous sentence, any Person owning ten percent (10%) or more of the voting securities of another Person shall be deemed to control that Person. "Agreement" means this Asset Purchase Agreement and the Exhibits, the Disclosure Schedule and the Schedules hereto and the certificates delivered in accordance with Sections 6.3 and 7.3, as the same shall be amended from time to time. "Ancillary Agreements" shall have the meaning ascribed thereto in Section 1.3. "Arbitrator" shall have the meaning ascribed to it in Section 1.4(c)(iv). "Assets and Properties" of any Person means all assets and properties of every kind, nature, character and description (whether real, personal or mixed, whether tangible or intangible, whether absolute, accrued, contingent, fixed or otherwise and wherever situated), including the goodwill related thereto, operated, owned or leased by such Person, AMENDED ASSET PURCHASE AGREEMENT 92 <PAGE> including without limitation, accounts and notes receivable, chattel paper, documents, instruments, general intangibles, real estate, equipment, inventory and goods, but excluding Intellectual Property, (including any Intellectual Property that is transferred under the Technology Transfer Agreement). "Assignment Instruments" has the meaning ascribed to it in Section 1.5(b). "Associate" means, with respect to any Person, any corporation or other business organization of which such Person is an officer or partner or is the beneficial owner, directly or indirectly, of ten percent (10%) or more of any class of equity securities, any trust or estate in which such Person has a substantial beneficial interest or as to which such Person serves as a trustee or in a similar capacity and any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person. "Assumed Liabilities" has the meaning ascribed to it in Section 1.2(a). "Assumed Real Property Taxes" has the meaning ascribed to it in Section 1.2(a)(vi). "Assumption Agreement" has the meaning ascribed to it in Section 1.5(b). "Assumption Instruments" has the meaning ascribed to it in Section 1.5(b). "Benefit Plan" means any Plan established by Seller, or any predecessor or ERISA Affiliate of Seller, existing at the Closing Date or the applicable Foreign Closing Date, as the case may be, to which Seller contributes or has contributed on behalf of any Employee or under which any Employee or any beneficiary thereof is covered, is eligible for coverage or has benefit rights. "Board of Arbitration" has the meaning ascribed to it in Section 11.3(c). "Books and Records" of any Person means all files, documents, instruments, papers, books and records relating to the business, operations, condition of (financial or other), results of operations and Assets and Properties of such Person, including without limitation financial statements, Tax Returns , budgets, reliability and cost data, pricing guidelines, ledgers, journals, deeds, title policies, minute books, stock certificates and books, stock transfer ledgers, Contracts, Licenses, customer lists, computer files and programs, retrieval programs, operating data and plans and environmental studies and plans. "Business" has the meaning ascribed to it in the first recital of this Agreement. "Business Books and Records" has the meaning ascribed to it in Section 1.1(a)(xiii). "Business Combination" means with respect to any Person, any merger, consolidation or combination to which such Person is a party, any sale, dividend, split or other disposition of capital stock or other equity interests of such Person or any sale, dividend or other disposition of all or substantially all of the Assets and Properties of such AMENDED ASSET PURCHASE AGREEMENT 93 <PAGE> Person. "Business Contracts" has the meaning ascribed to it in Section 1.1(a)(vii). "Business Day" means a day other than Saturday, Sunday or any day on which banks located in the States of Oregon and New York are authorized or obligated to close. "Business Licenses" has the meaning ascribed to it in Section l.l(a)(x). "Cash Purchase Price" has the meaning ascribed to it in Section 1.4(a). "Century-Based Data" has the meaning ascribed to it in Section 2.29(c). "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the rules and regulations promulgated thereunder. "CERCLIS" means the Comprehensive Environmental Response and Liability Information System, as provided for by 40 C.F.R. ss.300.5. "Claim Notice" means written notification pursuant to Section 11.3(a) of a Third Party Claim as to which indemnity under Section 11.2 is sought by an Indemnified Party, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third Party Claim and for the Indemnified Party's claim against the Indemnifying Party under Section 11.2, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such Third Party Claim. "Closing" means the closing of the transactions contemplated by Section 1.5 with respect to the sale of the Purchased Assets. "Closing Date" means (a) the fifth Business Day after the day on which the last of the consents, approvals, actions, filings, notices, opinions or waiting periods described in or related to the filings described in Sections 6.5 through 6.7 and Sections 7.4 through 7.6 has been obtained, made or given or has expired, as applicable, or (b) such other date as Purchaser and Seller mutually agree upon in writing. "Closing Net Asset Value" shall have the meaning ascribed to it in the Accounting Policies. "Code" means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder, as the same may be amended from time to time. "Condition of the Business" means the business condition (financial or otherwise), results of operations, Assets and Properties and prospects of the Business. "Contract" means any agreement, lease, license, evidence of Indebtedness, mortgage, indenture, security agreement or other contract (whether written or oral), but AMENDED ASSET PURCHASE AGREEMENT 94 <PAGE> excluding any Plan. "Customs Duties" has the meaning ascribed to it in Section 2.9(v). "De Minimis Indemnity Amount" shall have the meaning ascribed to it in Section 11.1(a). "Deferred Tax Assets" means any asset line items for deferred Taxes shown on the Acquisition Balance Sheet or Seller's Financial Statements. "Deferred Tax Liability" means any liability line items for deferred Taxes shown on the Acquisition Balance Sheet or Seller's Financial Statements. "Defined Benefit Plan" means each Benefit Plan identified as a defined benefit pension plan in Section 2.12(a) of the Disclosure Schedule, including but not limited to those which are subject to Part 3 of Title I of ERISA, Section 412 of the Code or Title IV of ERISA. "Deloitte & Touche" shall mean Deloitte & Touche LLP. "Draft Form 8594" has the meaning ascribed to it in Section 1.4(b)(ii). "Disclosure Schedule" means the record delivered to Purchaser by Seller herewith and dated as of the date hereof, containing all lists, descriptions, exceptions and other information and materials as are required to be included therein by Seller pursuant to this Agreement. "Dispute Notice" shall have the meaning ascribed to it in Section 1.4(c)(iv). "Dispute Period" means the period ending thirty (30) days following receipt by an Indemnifying Party of either a Claim Notice or an Indemnity Notice. "Division" has the meaning ascribed to it in the first recital of this Agreement. "Employee" means each employee, excluding Inactive Employees, of Seller or a Selling Affiliate who is employed in connection with the Business. "Environmental Claim" means, any written or oral notice, claim, demand or other communication (collectively, a "claim") alleging or asserting any Liability for investigative costs, cleanup costs, Governmental or Regulatory Authority response costs, damages to natural resources or other property, personal injuries, fines or penalties arising out of, based on or resulting from (a) the presence, or Release into the environment, of any Hazardous Material Contamination at any location, whether or not owned by such Person, or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. The term "Environmental Claim" shall include, without limitation, any claim by any Governmental or Regulatory Authority for enforcement, cleanup, removal, response, AMENDED ASSET PURCHASE AGREEMENT 95 <PAGE> remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Hazardous Materials or violation of applicable Environmental Laws or arising from alleged injury or threat of injury to health, safety or the environment. Environmental Claim shall include cleanup, removal, response, remedial or other actions Purchaser undertakes that are commercially reasonable to mitigate the risk of a Governmental or Regulatory Authority taking formal enforcement action with respect to Hazardous Material Contamination. Environmental Claim shall not include any Losses incurred by Purchaser with respect to diminution in value or damage to the real property of Purchaser. "Environmental Law" means any Law or Order relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, Releases or threatened Releases of pollutants, contaminants, chemicals or industrial, toxic or Hazardous Materials or wastes into the environment (including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), or otherwise relating to the manufacture, processing, distribution, sale, use, treatment, storage, disposal, discharge, recycling, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or Hazardous Materials or wastes. "Epidemic Failure" with respect to any Products (other than Products manufactured by Fuji Xerox Co., Ltd.) shall be deemed to have occurred where, within eighteen (18) months from the date of delivery of such Products, more than ten percent (10%) of any production month of such Products fail due to a common defect, which defect (a) existed at the time of manufacture of such Products but was not then active, discernible or evident and could not have been reasonably detected at the time of delivery using quality and acceptance tests customary in the industry, and (b) results in recurring material failure of such Products to conform to the functional or reliability requirements set forth in the specifications applicable to such Products. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "ERISA Affiliate" means any Person who is in the same controlled group of corporations, who is under common control or is otherwise treated as a single employer with Seller (within the meaning of Section 414(b), (c), (m) or (o) of the Code) or would be treated as a single employer with Seller under such Code provisions if the Person were organized in the United States. "Estimated Closing Net Asset Value" shall have the meaning ascribed to it in the Accounting Policies. "Excluded Assets" has the meaning ascribed to it in Section 1.1(b). "Final Form 8594" has the meaning ascribed to it in Section 1.4(b)(ii). AMENDED ASSET PURCHASE AGREEMENT 96 <PAGE> "Financial Statements" means the financial statements delivered to Purchaser pursuant to Sections 2.6 or 4.6. "Foreign Closing" and "Foreign Closings" have the meanings ascribed to them in Section 1.5(a). "Foreign Closing Date" has the meaning ascribed to it in Section 1.5(a). "Foreign Nationals" means those Employees listed on the list referred to in Section 9.1 whose employment requires the approval of the United States Immigration and Naturalization Service or similar agency of another country. "GAAP" means United States generally accepted accounting principles, consistently applied throughout the specified period and in the immediately prior comparable period. "General Assignment" has the meaning ascribed to it in Section 1.5(b). "Governmental or Regulatory Authority" means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision. "Hazardous Material" means (A) any petroleum or petroleum products (including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas useable for fuel or any mixture thereof), flammable explosives, radioactive materials, asbestos, urea formaldehyde, radon gas and polychlorinated biphenyls (PCBs); (B) any chemicals or other materials or substances which are now or hereafter become defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants" or words of similar import under any Environmental Law; and (C) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated by any Governmental or Regulatory Authority under any Environmental Law. "Hazardous Materials Contamination" means the presence of a Hazardous Materials in the soils or water (including surface water or groundwater ) if such presence of a Hazardous Materials constitutes a violation of Environmental Laws or if investigation, monitoring, removal or remedial action is required by applicable Environmental Laws with respect to the presence of a Hazardous Materials or could be required by any Governmental or Regulatory Authority under Environmental Laws, excluding any Hazardous Material present in any building or improvement or incorporated into any building materials or equipment. "HSR Act" means Section 7A of the Clayton Act (Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and the rules and regulations promulgated thereunder. AMENDED ASSET PURCHASE AGREEMENT 97 <PAGE> "Improvements" has the meaning ascribed to it in Section 1.1(a)(i). "Inactive Employee" means any Employee who has not actively worked for a period of at least 120 consecutive days prior to the Closing Date. "Indebtedness" of any Person means all obligations of such Person (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or similar instruments, (iii) for the deferred purchase price of goods or services (other than trade payables or accruals incurred in the ordinary course of business), (iv) under capital leases or (v) in the nature of guarantees of the obligations described in clauses (i) through (iv) above of any other Person. "Indemnified Party" means any Person claiming indemnification under any provision of Article 11. "Indemnifying Party" means any Person against whom a claim for indemnification is being asserted under any provision of Article 11. "Indemnity Notice" means written notification pursuant to Section 11.3(b) of a claim for indemnity under Article 11 by an Indemnified Party, specifying the nature of and basis for such claim, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such claim. "Independent Accountant" has the meaning ascribed to it in Section 1.4(b)(i). "Intangible Personal Property" has the meaning ascribed to it in Section 1.1(a)(ix). "Intellectual Property" means all patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, brand names, logos and slogans, Internet domain names, meta-tags, inventions, processes, formulae, copyrights and copyright rights, trade dress, business and product names, logos, slogans, trade secrets, industrial models, processes, designs, plans, proposals, methodologies, computer programs (including all source codes) and related documentation, technical data and information, manufacturing, engineering and technical drawings, know-how, all pending applications for and registrations of patents, trademarks, service marks and copyrights, and all licenses and rights with respect to any of the foregoing, that are used in connection with the Business. "Intercompany Accounts" means any accounts maintained by Seller or any Selling Affiliate in which there are recorded or reflected any amounts owed by Seller to any Selling Affiliate, by any Selling Affiliate to Seller or by any Selling Affiliate to any other Selling Affiliate attributable to any intercompany transactions between or among such entities, including but not limited to any tax-sharing arrangements. "Internal Systems" has the meaning ascribed to it in Section 2.29(b). AMENDED ASSET PURCHASE AGREEMENT 98 <PAGE> "Inventory" has the meaning ascribed to it in Section 1.1(a)(iii). "Investment Assets" means all debentures, notes and other evidences of Indebtedness, stocks, securities (including rights to purchase and securities convertible into or exchangeable for other securities), interests in joint ventures and general and limited partnerships, mortgage loans and other investment or portfolio assets owned of record or beneficially by Seller (other than trade receivables generated in the ordinary course of business of the Seller). "IRS" means the United States Internal Revenue Service or any successor agency and, to the extent relevant, the United States Department of the Treasury. "Knowledge of Seller" or "Known to Seller" means the actual knowledge of any officer, director or employee of Seller listed in Section 13.1 of the Disclosure Schedule, or matters which, with the exercise of reasonable care, should have been known to any such officer, director or employee of Seller, but shall not be deemed to impose an obligation on Seller to conduct a patent, trademark or copyright search. "KPMG" shall mean KPMG Peat Marwick. "Landlord Security Deposits" has the meaning ascribed to it in Section 1.2(a)(vii). "Laws" means all laws, statutes, rules, regulations, ordinances, Environmental Laws and other pronouncements having the effect of law of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision or of any Governmental or Regulatory Authority. "Liability" or "Liabilities" means all Indebtedness, obligations and other liabilities of a Person (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due). "Licenses" means all licenses, permits, certificates of authority, authorizations, approvals, registrations, franchises and similar consents granted or issued by any Governmental or Regulatory Authority. "Liens" means any mortgage, pledge, assessment, security interest, lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or any conditional sale Contract, title retention Contract or other Contract to give any of the foregoing. "Loss" means any and all damages, fines, fees, penalties, deficiencies, losses, costs and expenses (including without limitation interest, court costs, fees of attorneys, accountants and other experts or other expenses of litigation or other proceedings or of any claim, default or assessment). "Millennium Compliant" or "Millennium Compliance" has the meaning ascribed to it in Section 2.29(c). AMENDED ASSET PURCHASE AGREEMENT 99 <PAGE> "Non-United States Purchased Assets" means the Purchased Assets located outside of the United States of America to be purchased by designated Purchasing Affiliates as described in Section 1.3. "NPL" means the National Priorities List under CERCLA. "Operative Agreements" means, collectively, the General Assignment and the other Assignment Instruments, the Assumption Agreement and the other Assumption Instruments. "Order" means any writ, judgment, decree, injunction, administrative order, directive or similar order or directive of any Governmental or Regulatory Authority (in each such case whether preliminary or final). "Other Purchased Assets" has the meaning ascribed to it in Section 1.1(a)(xvi). "Payroll Taxes" means any Tax withheld from any employee of the Business or the legal entity by which he is employed or any Taxes assessed on his employer arising in connection with the employment of such individual by the Business or the legal entity by which he is employed. "PBGC" means the Pension Benefit Guaranty Corporation established under ERISA. "Pension Benefit Plan" means each Benefit Plan which is a pension benefit plan within the meaning of Section 3(2) of ERISA. "Permitted Lien" means (i) any Lien for Taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of Law with respect to a Liability that is not yet due or delinquent and (iii) any title defect or Lien which individually or in the aggregate with other such Liens does not materially adversely impair the value of the property subject to such Lien or the use of such property in the conduct of the Business. "Person" means any natural person, corporation, general partnership, limited partnership, proprietorship, other business organization, trust, union, association or Governmental or Regulatory Authority. "Personal Property Leases" has the meaning ascribed to it in Section 1.1(a)(vi). "Plan" means any bonus, incentive compensation, deferred compensation, material consulting or other personal services arrangement, any flexible time off ("FTO") arrangement, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, accident, disability, workmen's AMENDED ASSET PURCHASE AGREEMENT 100 <PAGE> compensation or other insurance, severance, separation, employment agreement (other than employment agreements in foreign countries entered into in the ordinary course of business), or other employee benefit plan, of any kind, or policies establishing plans described above, whether written or oral, including, but not limited to, any "employee benefit plan" within the meaning of Section 3(3) of ERISA. "Policy" or "Policies" has the meaning ascribed to it in Section 2.18. "Prepaid Expenses" has the meaning ascribed to it in Section 1.1(a)(viii). "Products" has the meaning ascribed thereto in Section 2.29(a). "Prorated Real Property Taxes" means (i) the real property taxes arising out of the operation of the Real Property and Real Property Leases for the taxable period during which the Closing Date or the applicable Foreign Closing Date occurs (the "Real Property Taxes") multiplied by (ii) a fraction, the numerator of which is the number of days remaining in such period beginning on the day after the Closing Date or the applicable Foreign Closing Date, as the case may be, and the denominator of which is the total number of days in such taxable period. "Purchase Price Consideration" has the meaning ascribed to it in Section 1.4(a). "Purchased Assets" has the meaning ascribed to it in Section 1.1(a). "Purchased Intellectual Property" shall mean the Intellectual Property purchased by Purchaser pursuant to the terms of the Technology Transfer Agreement. "Purchaser" has the meaning ascribed to it in the preamble to this Agreement. "Purchaser Indemnified Parties" means Purchaser and its Affiliates and their respective officers, directors, employees and agents. "Purchaser's Plans" have the meaning ascribed to them in Section 9.2. "Purchasing Affiliate" or "Purchasing Affiliates" shall have the meaning ascribed thereto in the third recital to this Agreement. "Qualified Plan" means each Benefit Plan which is intended to qualify under Section 401 of the Code. "Real Property" has the meaning ascribed to it in Section 1.1(a)(i). "Real Property Leases" has the meaning ascribed to it in Section 1.1(a)(ii). "Real Property Taxes" means any Taxes arising out of or related to the ownership of any Real Property or any Real Property Lease. AMENDED ASSET PURCHASE AGREEMENT 101 <PAGE> "Release" means any release or threat of release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata. "Representatives" has the meaning ascribed to it in Section 4.3. "Resolution Period" means the period ending thirty (30) days following receipt by a Purchaser Indemnified Party of a written notice from an Indemnifying Party stating that it disputes all or any portion of a claim set forth in a Claim Notice or an Indemnity Notice. "Retained Liabilities" has the meaning ascribed to it in Section 1.2(b). "Sales Taxes" means sales, use, VAT and any similar Taxes imposed by any Taxing Authority on transactions carried on in the regular course of business. "Security Agreements" has the meaning ascribed to it in Section 2.23. "Security Deposits" has the meaning ascribed to it in Section 1.2(a)(vii). "Seller" has the meaning ascribed to it in the preamble to this Agreement. "Seller Indemnified Parties" means Seller and its Affiliates and their respective officers, directors, employees and agents. "Selling Affiliate" or "Selling Affiliates" shall have the meaning ascribed thereto in the first recital of this Agreement. "Significant Foreign Closing" and "Significant Foreign Closings" have the meanings ascribed to them in Section 1.5(a). "Sixth Directive" means EC Council Directive 77/388 (Sixth Council Directive of 17 May 1977 on the harmonization of the laws of the Members). "Software" has the meaning ascribed to it in Section 2.29(a). "Statement of Closing Net Assets" shall have the meaning ascribed to it in Section 1.4(c)(ii). "Statement of Estimated Closing Net Assets" shall have the meaning ascribed to it in Section 1.4(c)(i). "Tangible Personal Property" has the meaning ascribed to it in Section 1.1(a)(v). "Target Amount" has the meaning ascribed to it in Section 1.4(c)(i). "Tax" or "Taxes" means (i) all taxes, charges, fees, imposts, levies, duties, or other AMENDED ASSET PURCHASE AGREEMENT 102 <PAGE> assessments of any kind or nature imposed by any Taxing Authority (including, without limitation, all gross income, net income, alternative minimum or add-on tax, gross receipts, capital, sales, use, ad valorem, VAT, transfer, franchise, financial transactions, profits, real property, personal property, inventory, capital stock, license, withholding, payroll, employment, social security, national insurance, unemployment, excise, severance, stamp, occupation, and estimated taxes, customs duties, fees assessments, and charges of any kind whatsoever), and (ii) all interest, penalties, fines, additions to or additional amounts imposed by any Taxing Authority in connection with any tax described in clause (i). "Tax Lien" means any Lien for any Tax asserted by any Taxing Authority. "Tax Proceeding" has the meaning ascribed to it in Section 11.1(c). "Tax Returns" means all returns, declarations, reports, claims for refund, estimates, information returns, statements or other similar document relating to or required to be filed with any Taxing Authority in respect of any Taxes, including any schedule, or attachment thereto and including any amendment thereof. "Taxes Which May Give Rise To Any Transferee Tax Liability" is defined to mean (i) Taxes imposed by one or more of the Transferee Tax Jurisdictions, or (ii) Taxes which are material with respect to Seller. "Taxing Authority" means any U.S. federal, state or local governmental or quasi- governmental authority or entity, or any foreign governmental or quasi-governmental authority or entity. "Tektronix Australia Real Property" has the meaning ascribed to it in Section 1.1(b)(viii) of the Disclosure Schedule. "Tektronix Malaysia Real Property" has the meaning ascribed to it in Section 1.1(b)(viii) of the Disclosure Schedule. "Tenant Security Deposits" has the meaning ascribed to it in Section 1.1(a)(xii). "Third Party Claim" has the meaning ascribed to it in Section 11.3(a). "Total Acquired Assets" has the meaning ascribed to it in Section 1.4(a). "Total United States Assets" has the meaning ascribed to it in Section 1.4(b)(ii). "Transfer Taxes" means sales and use taxes, VAT, documentary transfer taxes, real property transfer taxes, capital taxes assessed on transfer of stock, recordation, and other similar Taxes imposed on the transfer of Assets and Properties from Seller or a Selling Affiliate to Purchaser or a Purchasing Affiliate, and any interest, penalty or fine chargeable in connection with any such taxes. AMENDED ASSET PURCHASE AGREEMENT 103 <PAGE> "Transferee Tax Jurisdiction" means Belgium, the United Kingdom, France, Germany, Spain, Italy, Austria and any other countries that impose liability on asset purchasers for their predecessor's tax liabilities regardless of whether fair value is paid for the purchased assets. "Transferee Tax Liability" means any Liability of Purchaser as the transferee of the Assets pursuant to this Agreement for Taxes of Seller or any Selling Affiliate for any tax period through and including the Closing Date or the applicable Foreign Closing Date (excluding any Assumed Real Property Taxes) which may be imposed by any Taxing Authority. "Transferred Employees" shall mean the Employees and Foreign Nationals who accept an offer of employment from Purchaser or a Purchasing Affiliate and become employees of the Purchaser or a Purchasing Affiliate immediately after the Closing or the Applicable Foreign Closing. "VAT" means value added taxes as provided for in Article 2, EC Council Directive 67/227 (First Council Directive of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes) and legislation supplemental thereto and any other tax (wherever and whenever imposed in substitution thereof or in addition thereto) of a similar nature, including any interest and penalties thereon. "Vehicles" has the meaning ascribed to it in Section 1.1(a)(xi). (b) Construction of Certain Terms and Phrases. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement; (iv) the terms "Article" or "Section" refer to the specified Article or Section of this Agreement; and (v) the phrases "ordinary course of business" and "ordinary course of business consistent with past practice" refer to the business and practice of Seller in connection with the Business. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP. ARTICLE 14 MISCELLANEOUS 14.1 Notices. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile transmission or mailed (certified or registered, postage prepaid, return receipt requested) to the parties at the following addresses or facsimile numbers: AMENDED ASSET PURCHASE AGREEMENT 104 <PAGE> If to Purchaser, to: Xerox Corporation 800 Long Ridge Road Stamford, Connecticut 06904 Facsimile No.: (203) 968-3991 Attn: Chief Financial Officer with a copy to: Xerox Corporation 800 Long Ridge Road Stamford, Connecticut 06904 Facsimile No.: (203) 968-4301 Attn: General Counsel and Edward A. Perron, Esq. Pillsbury Madison & Sutro LLP 725 South Figueroa Street, Suite 1200 Los Angeles, CA 90017 Facsimile No.: (213) 629-1033 If to Seller, to: Tektronix, Inc. 26600 S.W. Parkway Avenue Wilsonville, OR 97070 Facsimile No.: (503) 685-4104 Attn: General Counsel with a copy to: Margaret Hill Noto, Esq. Stoel Rives LLP 900 SW Fifth Avenue, Suite 2600 Portland, Oregon 97204-1268 Facsimile No.: (503) 220-2480 All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, and (iii) if delivered by mail in the manner described above to the AMENDED ASSET PURCHASE AGREEMENT 105 <PAGE> address as provided in this Section, be deemed given upon receipt or upon refusal of receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other party hereto. 14.2 Bulk Sales Act. The parties hereby waive compliance with the bulk sales act or comparable statutory provisions of each applicable jurisdiction. 14.3 Entire Agreement. This Agreement, the Ancillary Agreements and the Operative Agreements supersede all prior discussions and agreements between the parties with respect to the subject matter hereof and thereof and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof and thereof. 14.4 Expenses. Except as otherwise expressly provided in this Agreement, whether or not the transactions contemplated hereby are consummated, each party will pay its own costs and expenses incurred in connection with the negotiation, execution, performance and closing of this Agreement, the Ancillary Agreements and the Operative Agreements and the transactions contemplated hereby and thereby. 14.5 Public Announcements. At all times at or before the Closing, Seller and Purchaser will consult with each other with respect to any reports, statements or releases to the public or generally to the employees, customers, suppliers or other Persons to whom or from whom Seller sells or purchases goods or provides or acquires services in connection with the Business, or with whom Seller otherwise has significant business relationships in connection with the Business, with respect to this Agreement or the transactions contemplated hereby. Seller and Purchaser will also obtain the other party's prior approval of any press release to be issued immediately following the Closing announcing the consummation of the transactions contemplated by this Agreement. At all times after the Closing, Seller will not issue or make, and will cause its Affiliates not to issue or make, any reports, statements or releases to the public or generally to the employees, customers, suppliers or other Persons to whom or from whom Seller has sold or purchased goods or provided or acquired services in connection with the Business, or with whom Seller has sold or purchased goods or provided or acquired services in connection with the Business, or with whom Seller otherwise has had significant business relationships in connection with the Business, with respect to the Business, this Agreement or the transactions consummated hereby, without Purchaser's consent, which shall not be unreasonably withheld. 14.6 Sony-Tektronix Corporation. Between signing of this Agreement and the Closing, the Seller and the Purchaser shall agree on how to transfer to Purchaser or a Purchaser Affiliate all the employees, assets and business of Sony - Tektronix Corporation primarily relating to the Business. AMENDED ASSET PURCHASE AGREEMENT 106 <PAGE> 14.7 Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative. 14.8 Amendment. This Agreement may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each party hereto. 14.9 No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person other than any Person entitled to indemnity under Article 11. 14.10 No Assignment: Binding Effect. Neither this Agreement nor any right, interest or obligation hereunder may be assigned by any party hereto without the prior written consent of the other party hereto and any attempt to do so will be void, except (a) for assignments and transfers by operation of Law and (b) that Purchaser may assign any or all of its rights, interests and obligations hereunder (including without limitation its rights under Article 14) to one or more Purchasing Affiliates, provided that any such Purchasing Affiliate agrees in writing to be bound by all of the terms, conditions and provisions contained herein, but no such assignment shall relieve Purchaser of its obligations hereunder. Notwithstanding anything to the contrary set forth in this Agreement, at Purchaser's option, Purchaser may designate certain Purchasing Affiliates to purchase and pay for, at the applicable Foreign Closings, certain of the Purchased Assets and to assume certain of the Assumed Liabilities in accordance with the terms and conditions of Ancillary Agreements between a Selling Affiliate and such Purchasing Affiliate in respect of the purchase of such Purchased Assets or Assumed Liabilities, which agreements shall incorporate by reference the terms and conditions set forth in this Agreement. Subject to the foregoing, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. 14.11 Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. 14.12 Invalid Provisions. If any provision of this Agreement is held to be AMENDED ASSET PURCHASE AGREEMENT 107 <PAGE> illegal, invalid or unenforceable under any present or future Law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. 14.13 Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of New York applicable to a contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof; provided, however, that to the extent the parties dispute the appropriate venue for any action, suit or proceeding arising out of or in connection with this Agreement, the choice of the Laws of the State of New York as the governing law applicable to this Agreement shall be disregarded in the determination of appropriate venue. 14.14 Accounting Policies. Seller and Purchaser will work together to agree within twenty (20) days of the date of the Agreement on Accounting Policies to be used in calculating the Statement of Estimated Closing Net Assets. The Accounting Policies will take into account the accounting policies of Seller and the accounting policies of Purchaser as normally applied in acquisitions. The Accounting Policies shall not change the treatment of various items that have been agreed to in other sections of this Agreement. Purchaser has provided to Seller its proposed accounting policies developed for the transactions contemplated by this Agreement prior to the execution hereof; notwithstanding the foregoing, nothing herein shall be deemed to imply Seller's acceptance of such accounting policies. 14.15 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. AMENDED ASSET PURCHASE AGREEMENT 108 <PAGE> IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officer of each party as of the date first above written. XEROX CORPORATION By: PAUL RICCI ---------------------------------------- Name: Paul Ricci Title: Vice President, Corporate Development TEKTRONIX, INC. By: JAMES F. DALTON ---------------------------------------- Name: James F. Dalton Title: Vice President AMENDED ASSET PURCHASE AGREEMENT 109 <PAGE> Amendment to Amended Asset Purchase Agreement The Amended Asset Purchase Agreement dated as of September 22, 1999, (the "Agreement") between Xerox Corporation, a New York corporation ("Purchaser"), and Tektronix, Inc., an Oregon corporation ("Seller"), is amended as follows: The Agreement shall remain in full force and effect, except to the extent modified by this Amendment. Capitalized terms in this Amendment are as defined in the Agreement, unless otherwise indicated. 1. Cash Purchase Price. The first sentence of Section 1.4(a) of the Agreement is amended to change the Cash Purchase Price from Nine Hundred Fifty Million Dollars ($950,000,000) to Nine Hundred Twenty-Five Million Dollars ($925,000,000). 2. Assumed Litigation. Section 2.10 of the Disclosure Schedule is amended to add UltraHUE, Inc. v. Tektronix, Inc. (filed in United States District Court, Western District of Washington (Seattle), #C99-1664R) as pending litigation that is an Assumed Liability pursuant to Section 1.2(a)(xvi) of the Agreement. 3. Accounting Policies. (a) The second sentence of Section 1.4(c)(i) is amended to read as follows: "The Statement of Estimated Closing Net Assets shall be prepared by Seller in accordance with GAAP as consistently applied by Seller (the "Accounting Policies"), including, in any event, Seller's accounting policy involving the pooling of inventory to determine net realizable value and an adjustment for any compensation payments pursuant to Section 9.1(b), but (x) any Liabilities or Losses associated with Print Head Drift and (y) the net assets of Sony-Tek shall be excluded for all balance sheet and Cash Purchase Price adjustment purposes." (b) Sections 6.16, 7.14 and 14.14 of the Agreement are deleted. (c) The following definitions set forth in Section 13.1 of the Agreement are revised as follows: Amendment 12/10/99 <PAGE> "Estimated Closing Net Asset Value" shall be the net asset value of the Business as set forth in the Statement of Estimated Closing Net Assets. "Closing Net Asset Value" shall be the net asset value of the Business as set forth in the Statement of Closing Net Assets. "Accounting Policies" has the meaning ascribed to it in Section 1.4(c). 4. Sony-Tek. Seller shall cause its Selling Affiliate, Sony-Tek, to transfer to Purchaser or a Purchasing Affiliate, following receipt of all consents, approvals or actions of Governmental or Regulatory Authorities applicable thereto (or the termination or expiration of any waiting periods imposed thereby), all Assets and Properties of Sony-Tek used primarily in the Business that constitute Purchased Assets, and Purchaser or such Purchasing Affiliate shall assume all liabilities of Sony-Tek that constitute Assumed Liabilities and hire the 74 employees of Sony-Tek who are primarily engaged in the Business. Seller shall pay the net asset value to Sony-Tek or to Purchaser for such Assets and Properties and shall be solely responsible for additional payments to Sony-Tek, if any. Sony-Tek will continue to operate the Business in Japan in the ordinary course of business between the Closing Date and the Japan Closing Date on terms mutually acceptable to Sony-Tek and Purchaser or its Purchasing Affiliate, with the effect that the economic impact during this period will be neutral (i.e., no economic upside or downside) to Sony-Tek. 5. Assumed Leases. Section 1.1(a)(ii) of the Disclosure Schedule is amended to add the leases in the following locations: 1 Rue Voltaire 92300 Levallois, France Parc Club Du Moulin a Vent 33 Avenue du Docteur Georges Lev 69693 Venissieux, France Torre Gia Piso 8 Av. Morones Prieto 2805 Pte. Monterrey, Nuevo Leon 6. Representations and Warranties. The introduction of Article 2 of the Agreement is amended to read as follows: "Seller, for itself and on behalf of each of the Selling Affiliates, hereby represents and warrants to Purchaser as of the date of this Agreement and as of the Closing Date or the applicable Foreign Closing Date (except 2 <PAGE> with respect to those representations and warranties expressly made as of a specified date other than the Closing Date or the applicable Foreign Closing Date) as follows:" The introduction to Article 3 of the Agreement is amended to read as follows: "Purchaser, for itself and on behalf of each of the Purchasing Affiliates, hereby represents and warrants to Seller as of the date of this Agreement and as of the Closing Date or the applicable Foreign Closing Date (except with respect to those representations and warranties expressly made as of a specified date other than the Closing Date or the applicable Foreign Closing Date) as follows:" 7. Satisfaction of Closing Conditions. Purchaser agrees and acknowledges that as of the date hereof all of the conditions to its obligations set forth in Sections 6.1, 6.2, 6.3 (except with respect to the certificate of the Secretary or Assistant Secretary of Seller or the Selling Affiliate certifying due authorization of the Agreement, the Ancillary Agreements and the Operating Agreement and the consummation of the transactions contemplated thereby and incumbency), 6.4, 6.7 (other than with respect to the consents of Adobe Systems Inc.) and 6.15 of the Agreement have been satisfied or waived, except for certain conditions relating to Foreign Closings in Korea, Taiwan, Germany and Spain, and that the failure to satisfy such conditions shall not delay or prevent the Closing or any Foreign Closings (other than the Foreign Closings in Korea, Taiwan, Germany and Spain). Seller agrees that all of the conditions to its obligations set forth in Sections 7.1, 7.2, 7.3 (except with respect to the certificate of the Secretary or Assistant Secretary of Purchaser or the Purchasing Affiliate certifying due authorization of the Agreement, the Ancillary Agreements and the Operating Agreement and the consummation of the transactions contemplated thereby and incumbency), 7.6 (other than with respect to the consents of Adobe Systems Inc.) and 7.13 of the Agreement have been satisfied or waived, except for certain conditions relating to Foreign Closings in Korea, Taiwan, Germany and Spain, and that the failure to satisfy such conditions shall not delay or prevent the Closing or any Foreign Closings (other than the Foreign Closings in Korea, Taiwan, Germany and Spain). 8. Closing Date. (a) Purchaser and Seller agree that the Closing Date shall be January 1, 2000. Purchaser and Seller agree that all Foreign Closings shall occur as of the Closing Date other than the Foreign Closings relating to the sale of Purchased Assets in Japan, Korea, and Taiwan, and the Foreign Closings in Germany and Spain, but only if the respective consents, approvals or actions or required waiting periods imposed by any Governmental or Regulatory Authority necessary for the Foreign Closings in Germany and Spain have not been granted or taken or have not terminated or expired by January <PAGE> 1, 2000. If any such consents, approvals or actions have not been granted or taken or any such waiting periods necessary for the Foreign Closing in Germany have not expired or terminated by January 1, 2000, the Foreign Closing in Germany shall not be considered a Significant Foreign Closing. Purchaser and Seller agree that they have irrevocably determined that all Closing conditions set forth in Sections 6.1, 6.2. 6.3 (except with respect to the certificate of the Secretary or Assistant Secretary of Seller or the Selling Affiliate certifying due authorization of the Agreement, the Ancillary Agreements and the Operating Agreement and the consummation of the transactions contemplated thereby and incumbency), 6.4, 6.7 (other than with respect to the consents of Adobe Systems Inc.) and 6.15 and Sections 7.1, 7.2, 7.3 (except with respect to the certificate of the Secretary or Assistant Secretary of Purchaser or the Purchasing Affiliate certifying due authorization of the Agreement, the Ancillary Agreements and the Operating Agreement and the consummation of the transactions contemplated thereby and incumbency), 7.6 (other than with respect to the consents of Adobe Systems Inc.) and 7.13 of the Agreement have been satisfied or waived as of the Closing Date and that the occurrence or discovery of any events after the date hereof, or the failure of any event to occur after the date hereof, shall not delay or prevent the Closing or those Foreign Closings, except with respect to the Foreign Closings in Japan, Korea, Taiwan, Germany and Spain as provided herein. The Closing and the Foreign Closings, except with respect to the Foreign Closings in Japan, Korea, Taiwan, Germany and Spain as provided herein, shall be effective as of 12:01 a.m., local time, on January 1, 2000. Employees hired by Purchaser and Purchasing Affiliates shall become employees of Purchaser and the Purchasing Affiliates as of 12:01 a.m., local time, on January 1, 2000. (b) On the Closing Date, the Cash Purchase Price shall be satisfied by Purchaser's and the Purchasing Affiliates' promissory notes dated as of January 1, 2000, and due and payable on January 5, 2000, providing for interest thereon at the rate of 5.7% per annum. On the due date of said promissory note, payment shall be wired to the bank accounts of Seller and the Selling Affiliates as specified pursuant to the Agreement in immediately available funds, except that with respect to any Foreign Closings where local banks are not open on January 5, 2000, the funds shall be immediately available on the next business day that the applicable bank is open. (c) Purchaser and Seller agree to use their best efforts to negotiate and enter into an agreement to handle the operations in Korea and Taiwan, and in Germany and Spain, if the Foreign Closings in Germany and Spain do not occur on the Closing Date, during the interim period between the Closing Date and the applicable Foreign Closing Date, with the effect that the economic impact of the operations during this period will be neutral (i.e., no economic upside or downside) to Seller. <PAGE> 9. Second Quarter Financial Statements. Seller hereby represents and warrants to Purchaser that the income statement attached hereto as Exhibit "A" fairly presents the results of operations of the Division for the three-month period ended November 27, 1999, in all material respects based upon GAAP as consistently applied by Seller. In the event that Purchaser notifies Seller on or before December 15, 1999, that it disputes the accuracy of Seller's representation and warranty in this Paragraph 9, this Amendment shall terminate and shall be deemed to be null, void and of no effect whatsoever. The accuracy of Seller's representation and warranty in this Paragraph 9 does not constitute a condition to Purchaser's obligation to close. In addition, any breach of Seller's representation and warranty in this Paragraph 9 shall be subject to the terms and conditions of the Agreement. Dated: December 10, 1999 XEROX CORPORATION By: PAUL RICCI ------------------------------------ Name: Paul Ricci Title: V.P. TEKTRONIK, INC. By: JAMES F. DALTON ------------------------------------ Name: James F. Dalton Title: V.P. <PAGE> EXHIBIT A CONDENSED STATEMENT OF OPERATIONS For the three months ended November 27, 1999 Color Printing and Imaging Total Sales $ 189,753 Cost of sales 129,415 ---------------- Gross profit 80,338 Research and development 13,290 SG&A expenses 38,297 Non-recurring charges - Business ventures' loss (earnings) - ---------------- Operating income 10,751 <PAGE> Second Amendment to Amended Asset Purchase Agreement The Amended Asset Purchase Agreement dated as of September 22, 1999, (the "Agreement") between Xerox Corporation, a New York corporation ("Purchaser"), and Tektronix, Inc., an Oregon corporation ("Seller"), is amended as follows: The Agreement shall remain in full force and effect, except to the extent modified by this Amendment. Capitalized terms in this Amendment are as defined in the Agreement, unless otherwise indicated. Section 1.3 of the Agreement is replaced in its entirety by the following: "1.3 Sale of United States Purchased Assets and Non-United States Purchased Assets Owned by Selling Affiliates and Assumption of Assumed Liabilities by the Purchasing Affiliates. Tektronix Export, Inc. ("TEI") shall sell its United States Purchased Assets to Purchaser under terms and conditions identical to the terms and conditions contained in this Agreement governing the sale by Seller of its United States Purchased Assets. Seller shall provide Purchaser with a separate bill of sale and any other commercially reasonable documentation requested by Purchaser to evidence the sale of TEI's United States Purchased Assets to Purchaser. Certain of the Non-United States Purchased Assets shall be sold to the Purchasing Affiliates designated by Purchaser and certain of the Assumed Liabilities shall be assumed by such Purchasing Affiliates pursuant to the terms and conditions of separate Asset Purchase Agreements, in form and substance reasonably acceptable to Seller and Purchaser, so as to effect the sale, transfer and assignment of the Assets and Properties of the Selling Affiliates to the Purchasing Affiliates and the assumption of the associated Assumed Liabilities by the Purchasing Affiliates in order to give the parties the benefit of this Agreement and to conform to the Laws, customs and practices of the relevant jurisdiction, as follows: (a) Seller shall cause its Selling Affiliate, Tektronix Gesellschaft m.b.H. ("Austria Tek") to sell, transfer and assign the Assets and Properties of Austria Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox Austria G.m.b.H. ("Xerox Austria"), which shall purchase all of Austria Tek's Assets and Properties and Purchaser shall cause Xerox Austria to purchase such Assets and Properties and to assume certain Assumed Liabilities from Austria Tek (the "Austrian Acquisition"); (b) Seller shall cause its Selling Affiliate, Tektronix Australia Pty. Ltd. ("Australia Tek"), to sell, transfer and assign the Assets and Properties of Australia Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Fuji Xerox <PAGE> Co., Ltd. ("FX") and Purchaser shall, or shall cause FX to purchase such Assets and Properties and to assume certain Assumed Liabilities from Australia Tek (the "Australia Acquisition"); (c) Seller shall cause its Selling Affiliate, Tektronix N.V. ("Belgium Tek"), to sell, transfer and assign the Assets and Properties of Belgium Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate N.V. Xerox S..A.. ("Xerox Belgium"), which shall purchase all of Belgium Tek's Assets and Properties and Purchaser shall cause Xerox Belgium to purchase such Assets and Properties and to assume certain Assumed Liabilities from Belgium Tek (the "Belgium Acquisition"); (d) Seller shall cause its Selling Affiliate, Tektronix Industria a Comercio Ltda. ("Brazil Tek"), to sell, transfer and assign the Assets and Properties of Brazil Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox Commercio E. Industria Ltda. ("Xerox Brazil"), and Purchaser shall cause Xerox Brazil to purchase such Assets and Properties and to assume certain Assumed Liabilities from Brazil Tek (the "Brazil Acquisition"); (e) Seller shall cause its Selling Affiliate, Tektronix Canada, Inc. ("Canada Tek"), to sell, transfer and assign the Assets and Properties of Canada Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox Canada Ltd. ("Xerox Canada"), and Purchaser shall cause Xerox Canada to purchase such Assets and Properties and to assume certain Assumed Liabilities from Canada Tek (the "Canada Acquisition"); (f) Seller shall cause its Selling Affiliate, Tektronix Electronics (China) Co., Ltd. ("China Tek"), to sell, transfer and assign the Assets and Properties of China Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox Industry Development (Shanghai) Co. Ltd. ("Xerox Shanghai") and Purchaser shall, or shall cause Xerox Shanghai to, purchase such Assets and Properties and to assume certain Assumed Liabilities from China Tek (the "China Acquisition"); (g) Seller shall cause its Selling Affiliate, Tektronix A/S ("Denmark Tek"), to sell, transfer and assign the Assets and Properties of Denmark Tek that constitute Non-United States Purchased Assets to Purchasing Affiliates Xerox A/S ("Xerox Denmark"), which shall purchase all of Denmark Tek's Assets and Properties and Purchaser shall cause Xerox Denmark to purchase such Assets and Properties and to assume certain Assumed Liabilities from Denmark Tek (the "Denmark Acquisition"); (h) Seller shall cause its Selling Affiliate, Tektronix Oy ("Finland Tek"), to sell, transfer and assign the Assets and Properties of Finland Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox Oy ("Xerox Finland"), which shall purchase all of Finland Tek's Assets and Properties and Purchaser shall <PAGE> cause Xerox Finland to purchase such Assets and Properties and to assume certain Assumed Liabilities from Finland Tek (the "Finland Acquisition"); (i) Seller shall cause its Selling Affiliate, Tektronix S.A. ("France Tek"), to sell, transfer and assign the Assets and Properties of France Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox- Document Services SNC ("Xerox France"), which shall purchase all of France Tek's Assets and Properties and Purchaser shall cause Xerox France to purchase such Assets and Properties and to assume certain Assumed Liabilities from France Tek (the "France Acquisition"); (j) Seller shall cause its Selling Affiliate, Tektronix GmbH ("Germany Tek"), to sell, transfer and assign the Assets and Properties of Germany Tek that constitute Non-United States Purchased Assets to Purchasing Affiliates Xerox Direct Westfalen GmbH (which shall be renamed Xerox Office Printing GmbH after the Closing) ("Xerox Germany"), which shall purchase all of Germany Tek's Assets and Properties and Purchaser shall cause Xerox Germany to purchase such Assets and Properties and to assume certain Assumed Liabilities from Germany Tek (the "Germany Acquisition"); (k) Seller shall cause its Selling Affiliate, Tektronix Hong Kong Limited ("Hong Kong Tek"), to sell, transfer and assign the Assets and Properties of Hong Kong Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox (Hong Kong) Limited ("Xerox Hong Kong") Purchasing Affiliate and Purchaser shall cause Xerox Hong Kong to purchase such Assets and Properties and to assume certain Assumed Liabilities from Hong Kong Tek (the "Hong Kong Acquisition"); (l) Seller shall cause its Selling Affiliate, Tektronix (India) Limited ("India Tek"), to sell, transfer and assign the Assets and Properties of India Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox ModiCorp Limited ("Xerox Modi India") and Purchaser shall cause Xerox Modi India to purchase such Assets and Properties and to assume certain Assumed Liabilities from India Tek (the "India Acquisition"); (m) Seller shall cause its Selling Affiliate, Tektronix S.p.A. ("Italy Tek"), to sell, transfer and assign the Assets and Properties of Italy Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox S.p.A. ("Xerox Italy") which shall purchase all of Italy Tek's Assets and Properties and Purchaser shall cause Xerox Italy to purchase such Assets and Properties and to assume certain Assumed Liabilities from Italy Tek (the "Italy Acquisition"); (n) Seller shall cause its Selling Affiliate, Tektronix Korea, Ltd. ("Korea Tek"), to sell, transfer and assign the Assets and Properties of Korea Tek that constitute Non-United States Purchased Assets to FX and Purchaser shall cause FX to purchase <PAGE> such Assets andProperties and to assume certain Assumed Liabilities from Korea Tek (the "Korea Acquisition"); (o) Seller shall cause its Selling Affiliate, Tektronix, S.A. de C.V. ("Mexico Tek"), to sell, transfer and assign the Assets and Properties of Mexico Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate, Xerox Mexicana, S.A. de C.V. ("Xerox Mexico"), and Purchaser shall cause Xerox Mexico to purchase such Assets and Properties and to assume certain Assumed Liabilities from Mexico Tek (the "Mexico Acquisition"); (p) Seller shall cause its Selling Affiliate, Tektronix Holland N.V. ("Holland Tek"), to sell, transfer and assign the Assets and Properties of Holland Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox (Nederland) BV ("Xerox Netherland"), which shall purchase all of Holland Tek's Assets and Properties and Purchaser shall cause Xerox Netherland to purchase such Assets and Properties and to assume certain Assumed Liabilities from Holland Tek (the "Holland Acquisition"); (q) Seller shall cause its Selling Affiliate, Tektronix Distribution Europe B.V. ("Europe Tek"), to sell, transfer and assign the Assets and Properties of Europe Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Tefea BV (which shall be renamed Xerox Office Printing Distribution BV after the Closing) ("Xerox Holding Office Printing Holland") which shall purchase all of Europe Tek's Assets and Properties and Purchaser shall cause Xerox Holding Office Printing Holland to assume certain Assumed Liabilities from Europe Tek (the "Dutch Acquisition"); (r) Seller shall cause its Selling Affiliate, Tektronix Norge A/S ("Norway Tek"), to sell, transfer and assign the Assets and Properties of Norway Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox AS ("Xerox Norway") which shall purchase all of Norway Tek's Assets and Properties and Purchaser shall cause Xerox Norway to purchase such Assets and Properties and to assume certain Assumed Liabilities from Norway Tek (the "Norway Acquisition"); (s) Seller shall cause its Selling Affiliate, Tektronix Southeast Asia Pte Ltd. ("Singapore Tek"), to sell, transfer and assign the Assets and Properties of Singapore Tek that constitute Non-United States Purchased Assets, regardless of where situated, to Purchaser or its designated Singapore Purchasing Affiliate and Purchaser shall, or shall cause such designated Singapore Purchasing Affiliate to, purchase such Assets and Properties and to assume certain Assumed Liabilities from Singapore Tek (the "Singapore Acquisition"); (t) Seller shall cause its Selling Affiliate, Tektronix Espanola, S.A. ("Spain Tek"), to sell, transfer and assign the Assets and Properties of Spain Tek that constitute <PAGE> Non-United States Purchased Assets to Purchasing Affiliate Xerox Espana, The Document Company, S.A.U. ("Xerox Spain") which shall purchase all of Spain Tek's Assets and Properties and Purchaser shall cause Xerox Spain to purchase such Assets and Properties and to assume certain Assumed Liabilities from Spain Tek (the "Spain Acquisition"); (u) Seller shall cause its Selling Affiliate, Tektronix AB ("Sweden Tek"), to sell, transfer and assign the Assets and Properties of Sweden Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox AB ("Xerox Sweden"), which shall purchase all of Sweden Tek's Assets and Properties and Purchaser shall cause Xerox Sweden to purchase such Assets and Properties and to assume certain Assumed Liabilities from Sweden Tek (the "Sweden Acquisition"); (v) Seller shall cause its Selling Affiliate, Tektronix International AG ("Switzerland Tek"), to sell, transfer and assign the Assets and Properties of Switzerland Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate, Xerox AG ("Xerox Switzerland") which shall purchase all of Switzerland Tek's Assets and Properties and Purchaser shall cause Xerox Switzerland and Xerox Channels to purchase such Assets and Properties and to assume certain Assumed Liabilities from Switzerland Tek (the "Switzerland Acquisition"); (w) Seller shall cause its Selling Affiliate, Tektronix Taiwan, Ltd. ("Taiwan Tek"), to sell, transfer and assign the Assets and Properties of Taiwan Tek that constitute Non-United States Purchased Assets to FX which shall purchase all of Taiwan Tek's Assets and Properties and Purchaser shall cause FX to purchase such Assets and Properties and to assume certain Assumed Liabilities from Taiwan Tek (the "Taiwan Acquisition"); (x) Seller shall cause its Selling Affiliate, Tektronix U.K. Limited ("United Kingdom Tek"), to sell, transfer and assign the Assets and Properties of United Kingdom Tek that constitute Non-United States Purchased Assets to Purchasing Affiliate Xerox (UK) Limited ("Xerox UK") which shall purchase all of United Kingdom Tek's Assets and Properties and Purchaser shall cause Xerox UK to purchase such Assets and Properties and to assume certain Assumed Liabilities from United Kingdom Tek (the "United Kingdom Acquisition"); (y) Seller shall cause its Selling Affiliate, Tektronix Export Inc. ("TEI"), to sell, transfer and assign the Assets and Properties of TEI that constitute Non-United States Purchased Assets located in or in transit to (i) the Netherlands (whether located in the Heerenveen warehouse or elsewhere in the Netherlands) or other premises in Europe, Africa and the Middle East to Xerox Channels Limited; (ii) Canada to Xerox Color Printing, Inc., and (iii) Malaysia to Xerox Export, LLC, or the Purchaser's designated European, Canadian or Malaysian Purchasing Affiliates, and Purchaser shall, <PAGE> or shall cause the aforementioned designated Purchasing Affiliates to, purchase such Assets and Properties and to assume certain Assumed Liabilities from TEI (the "TEI Acquisition"); and (z) Seller shall sell, transfer and assign Non-United States Purchased Assets which constitute Intangible Personal Property as described in Section 1.1(a)(ix) of this Agreement associated with the Business in Australia, New Zealand, Korea, Malaysia (excluding any Assets and Properties being transferred pursuant to the Stock Purchase Agreement referred to in Section 1.1(a)(xiv) of this Agreement), Singapore, Taiwan, Thailand and Japan to Purchasing Affiliate FX. The portion of the Purchase Price Consideration and Cash Purchase Price in respect of each of the Asset Purchase Agreements referred to in this Section 1.3 shall be as determined in Section 1.4. The Asset Purchase Agreements referred to in this Section 1.3, together with any other agreements, documents or instruments executed in connection therewith, are referred to, collectively, in this Agreement as the "Ancillary Agreements". Seller unconditionally guarantees any and all Liabilities and obligations of each Selling Affiliate in accordance with the terms of this Agreement and the Ancillary Agreements to which it is a party. In the event any Foreign Closing does not occur on the Closing Date, Seller shall cause its Selling Affiliate to enter into arrangements reasonably acceptable to the parties hereto with respect to the operation of that portion of the Business until the consummation of the Foreign Closing or the termination of this Agreement in respect thereof in accordance with Section 1.5. Notwithstanding the foregoing, Purchaser shall have the right to designate any other Purchasing Affiliate or Purchasing Affiliates to take the place of and be substituted for another Purchasing Affiliate or Purchasing Affiliates at any time at least ten (10) Business Days prior to the Closing Date or the applicable Foreign Closing Date and Seller agrees that neither Seller nor any Selling Affiliate shall refuse to amend the relevant Ancillary Agreements so as to effect such designation. Further, in the event that a Selling Affiliate owns or uses Assets and Properties that constitute Purchased Assets in any geographic territory or jurisdiction other than the one set forth above in connection with such Selling Affiliate, Purchaser may designate a Purchasing Affiliate in such other geographic territory or jurisdiction to purchase such Assets and Properties pursuant to the terms of an Asset Purchase Agreement to be executed in respect thereof." <PAGE> Dated as of December 17, 1999 XEROX CORPORATION By: BARBARA S. ROSS ------------------------------------- Name: Barbara S. Ross Title: Authorized Signatory TEKTRONIX, INC. By: JAMES DALTON ------------------------------------- Name: James Dalton Title: Vice President </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.(I) <SEQUENCE>3 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED 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-27-2000 <PERIOD-END> Nov-27-1999 <CASH> 57,860 <SECURITIES> 0 <RECEIVABLES> 128,637 <F1> <ALLOWANCES> 0 <INVENTORY> 120,870 <CURRENT-ASSETS> 742,802 <F2> <PP&E> 525,130 <DEPRECIATION> 271,479 <TOTAL-ASSETS> 1,191,294 <CURRENT-LIABILITIES> 349,743 <BONDS> 150,596 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 142,608 <OTHER-SE> 478,983 <F3> <TOTAL-LIABILITY-AND-EQUITY> 1,191,294 <SALES> 542,018 <TOTAL-REVENUES> 542,018 <CGS> 297,729 <TOTAL-COSTS> 297,729 <OTHER-EXPENSES> 240,721 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 9,212 <INCOME-PRETAX> (2,054) <INCOME-TAX> (78) <INCOME-CONTINUING> (1,976) <DISCONTINUED> 8,680 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 6,704 <EPS-BASIC> 0.14 <F4> <EPS-DILUTED> 0.14 <F4> <FN> <F1> Amount represents net accounts receivable. <F2> Amount includes net assets of discontinued operations of $341,799. <F3> Amount includes retained earnings and other comprehensive income. <F4> Amounts include earnings per common share from discontinued operations of $0.18. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

THC

https://www.sec.gov/Archives/edgar/data/70318/0000912057-00-001238.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, E0s6ymVnE3YNqIJbmZIGjlXnOPrGjT6XHUKx7PRXZmR+4+halPzmy6S5jGxDDZGI xb7hdPsuVpoAK/SFyoADpw== <SEC-DOCUMENT>0000912057-00-001238.txt : 20000202 <SEC-HEADER>0000912057-00-001238.hdr.sgml : 20000202 ACCESSION NUMBER: 0000912057-00-001238 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 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: SEC FILE NUMBER: 001-07293 FILM NUMBER: 507217 BUSINESS ADDRESS: STREET 1: 3820 STATE STREET CITY: SANTA BARBARA STATE: CA ZIP: 93105- BUSINESS PHONE: (805)-563-7000 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>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, 1999. 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 1-7293 - -------------------------------------------------------------------------------- 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, 1999 THERE WERE 311,933,486 SHARES OF $0.075 PAR VALUE COMMON STOCK OUTSTANDING. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- <TABLE> <CAPTION> PAGE ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of May 31, 1999 and November 30, 1999................................................ 2 Condensed Consolidated Statements of Income for the Three Months and Six Months ended November 30, 1998 and 1999.................... 4 Condensed Consolidated Statements of Comprehensive Income for the Six Months ended November 30, 1998 and 1999..................................... 5 Condensed Consolidated Statements of Cash Flows for the Six Months ended November 30, 1998 and 1999..................................... 6 Notes to Condensed Consolidated Financial Statements........................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 12 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................................................................................................. 21 - ------------------ NOTE: ITEM 3 OF PART I AND ITEMS 2, 3 AND 5 OF PART II ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE. </TABLE> 1 <PAGE> CONDENSED CONSOLIDATED BALANCE SHEETS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- <TABLE> <CAPTION> MAY 31, NOVEMBER 30, 1999 1999 ----------------- ----------------- (IN MILLIONS) <S> <C> <C> - ------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------ Current assets: Cash and cash equivalents................................................ $ 29 $ 31 Short-term investments in debt securities................................ 130 123 Accounts receivable, less allowance for doubtful accounts ($287 at May 31 and $293 at November 30).......................................... 2,318 2,468 Inventories of supplies, at cost......................................... 221 218 Deferred income taxes.................................................... 196 126 Assets held for sale, at the lower of carrying value or fair value less estimated costs to sell.............................................. 655 165 Other current assets..................................................... 413 387 ----------------- ----------------- Total current assets............................................ 3,962 3,518 ----------------- ----------------- Investments and other assets.................................................. 569 546 Property and equipment, at cost............................................... 7,703 7,895 Less accumulated depreciation and amortization........................... 1,864 2,052 ----------------- ----------------- Net property and equipment............................................... 5,839 5,843 ----------------- ----------------- Intangible assets, at cost less accumulated amortization ($409 at May 31 and $458 at November 30)................................. 3,401 3,368 ----------------- ----------------- $ 13,771 $ 13,275 ----------------- ----------------- ----------------- ----------------- </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, 1999 1999 ----------------- ----------------- (IN MILLIONS) <S> <C> <C> - -------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------- Current liabilities: Current portion of long-term debt.................................... $ 45 $ 36 Accounts payable..................................................... 713 605 Employee compensation and benefits................................... 390 327 Accrued interest payable............................................. 163 154 Other current liabilities............................................ 711 803 ----------------- ----------------- Total current liabilities................................... 2,022 1,925 ----------------- ----------------- Long-term debt, net of current portion.................................... 6,391 5,780 Other long-term liabilities and minority interests........................ 1,048 1,054 Deferred income taxes..................................................... 440 427 Shareholders' equity: Common stock, $0.075 par value; authorized 700,000,000 shares; 314,778,323 shares issued at May 31 and 315,588,851 shares issued at November 30............................................ 24 24 Other shareholders' equity........................................... 3,916 4,135 Less common stock in treasury, at cost, 3,754,708 shares ............ (70) (70) ----------------- ----------------- Total shareholders' equity.................................. 3,870 4,089 ----------------- ----------------- $ 13,771 $ 13,275 ----------------- ----------------- ----------------- ----------------- </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 3 <PAGE> CONDENSED CONSOLIDATED STATEMENTS OF INCOME TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1999 <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ---------------------------- --------------------------- 1998 1999 1998 1999 -------------- ------------- ------------- ------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND SHARE AMOUNTS) <S> <C> <C> <C> <C> Net operating revenues........................................ $ 2,563 $ 2,780 $ 5,116 $ 5,653 -------------- ------------- ------------- ------------- Operating expenses: Salaries and benefits.................................... 1,039 1,110 2,057 2,271 Supplies................................................. 351 387 701 794 Provision for doubtful accounts.......................... 184 210 343 433 Other operating expenses................................. 538 604 1,099 1,229 Depreciation............................................. 102 102 198 204 Amortization............................................. 32 30 63 62 -------------- ------------- ------------- ------------- Operating income.............................................. 317 337 655 660 -------------- ------------- ------------- ------------- Interest expense, net of capitalized portion.................. (119) (120) (238) (244) Investment earnings........................................... 6 6 13 11 Minority interests in income of consolidated subsidiaries..... (1) (5) (5) (10) Gains on sales of facilities and long-term investments........ -- 58 -- 68 -------------- ------------- ------------- ------------- Income before income taxes and cumulative effect of accounting change........................................ 203 276 425 485 Taxes on income............................................... (78) (141) (163) (222) -------------- ------------- ------------- ------------- Income before cumulative effect of accounting change.......... 125 135 262 263 Cumulative effect of accounting change, net of taxes.......... -- -- -- (19) -------------- ------------- ------------- ------------- Net income.................................................... $ 125 $ 135 $ 262 $ 244 -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Basic earnings (loss) per share: Income before cumulative effect of accounting change..... $ 0.40 $ 0.43 $ 0.84 $ 0.84 Cumulative effect of accounting change................... -- -- -- $ (0.06) Net income............................................... $ 0.40 $ 0.43 $ 0.84 $ 0.78 Diluted earnings (loss) per share: Income before cumulative effect of accounting change..... $ 0.40 $ 0.43 $ 0.84 $ 0.84 Cumulative effect of accounting change................... -- -- -- $ (0.06) Net income............................................... $ 0.40 $ 0.43 $ 0.84 $ 0.78 Weighted average shares and dilutive securities outstanding (in thousands): Basic.................................................... 309,803 311,512 309,602 311,331 Diluted.................................................. 313,935 313,745 313,799 313,483 </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 4 <PAGE> CONDENSED CONSOLIDATED TENET HEALTHCARE CORPORATION STATEMENTS OF COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1999 <TABLE> <CAPTION> 1998 1999 ------------- -------------- (IN MILLIONS) <S> <C> <C> Net income ............................................................................. $ 262 $ 244 ------------- -------------- Other comprehensive income (loss): Foreign currency translation adjustments.......................................... 12 (6) Unrealized net holding gains (losses) arising during period on securities held as available for sale............................................................. 28 (49) Less reclassification adjustment for realized gains included in net income ........ -- (4) ------------- -------------- Other comprehensive income (loss) before income taxes.............................. 40 (59) Income tax (expense) benefit related to items of other comprehensive income........ (15) 22 ------------- -------------- Other comprehensive income (loss).................................................. 25 (37) ------------- -------------- Comprehensive income.................................................................... $ 287 $ 207 ------------- -------------- ------------- -------------- </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 5 <PAGE> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1999 <TABLE> <CAPTION> 1998 1999 ------------- -------------- (IN MILLIONS) <S> <C> <C> Net cash provided by operating activities............................................... $ 297 $ 325 ------------- -------------- Cash flows from investing activities: Proceeds from sales of facilities and other assets................................. 4 643 Purchases of property and equipment................................................ (241) (264) Purchases of businesses, net of cash acquired. .................................... (446) (38) Other items........................................................................ (64) (34) ------------- -------------- Net cash provided by (used in) investing activities............................ (747) 307 ------------- -------------- Cash flows from financing activities: Proceeds from borrowings........................................................... 2,118 802 Repayments of borrowings........................................................... (1,667) (1,430) Other items........................................................................ 8 (2) ------------- -------------- Net cash provided by (used in) financing activities............................ 459 (630) ------------- -------------- Net increase in cash and cash equivalents............................................... 9 2 Cash and cash equivalents at beginning of period........................................ 23 29 ------------- -------------- Cash and cash equivalents at end of period.............................................. $ 32 $ 31 ------------- -------------- ------------- -------------- Supplemental disclosures: Interest paid, net of amounts capitalized.......................................... $ 177 $ 246 Income taxes paid, net of refunds received......................................... (30) 41 </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 6 <PAGE> NOTES TO CONDENSED TENET HEALTHCARE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. The financial information furnished herein is unaudited; however, in the opinion of management, the information reflects all adjustments that are necessary to fairly state the financial position of Tenet Healthcare Corporation (together with its subsidiaries, "Tenet" or the "Company"), the results of its operations and its cash flows for the interim periods indicated. All the adjustments are of a normal recurring nature. 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 disclosures that would substantially duplicate the disclosures contained in the Company's most recent annual report to security holders have been omitted. 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. Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including levels of occupancy, interest rates, acquisitions, disposals, revenue allowance and discount fluctuations, the timing of price changes, unusual or non-recurring items and fluctuations in quarterly tax rates. These same considerations apply to all year-to-year comparisons. 2. On June 1, 1999, the Company changed its method of accounting for start-up costs to expense such costs as incurred in accordance with Statement of Position 98-5, published by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. The adoption of the Statement resulted in the write-off of previously capitalized start-up costs as of May 31, 1999 in the amount of $19 million, net of tax benefit, which amount is shown in the accompanying consolidated condensed statement of income for the six months ended November 30, 1999 as a cumulative effect of an accounting change. 3. During the six months ended November 30, 1999, the Company sold 16 general hospitals, three skilled nursing facilities and certain other assets for $643 million in cash and $9 million in notes. Also, the Company did not renew an expiring lease for a 49-bed hospital in Tennessee. The net gain on the sales of the above facilities amounted to $64 million. In addition, the Company sold a long-term investment for a realized gain of $4 million. The hospital sales were part of the Company's plan to sell or close certain non-strategic hospitals in order to streamline its organization by concentrating on markets where it already has a strong presence. In December 1999, the Company acquired a 222-bed acute care hospital in Poplar Bluff, Missouri for $46 million in a transaction accounted for as a purchase and sold a 120-bed hospital in Tucson, Arizona. 7 <PAGE> NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- 4. There have been no material changes to the description of professional and general liability insurance set forth in Note 9A or significant legal proceedings set forth in Note 9B of Notes to Consolidated Financial Statements of Tenet for its fiscal year ended May 31, 1999, and the Company's Quarterly Report on Form 10-Q for the period ended August 31, 1999. 5. The table below provides a reconciliation between net income and net cash provided by operating activities for the six months ended November 30, 1998 and 1999: <TABLE> <CAPTION> 1998 1999 -------------- ------------- (IN MILLIONS) <S> <C> <C> Net income ......................................................................... $ 262 $ 244 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................. 261 266 Provision for doubtful accounts ............................................... 343 433 Deferred income taxes ......................................................... 41 20 Gains on sales of facilities and long-term investments ...................... -- (68) Other items ................................................................... 12 35 Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of businesses: Accounts receivable ....................................................... (640) (588) Inventories and other current assets ...................................... (37) (27) Income taxes payable ...................................................... 113 161 Accounts payable, accrued expenses and other current liabilities .......... (53) (94) Other long-term liabilities ............................................... 15 (12) Net expenditures for discontinued operations, merger, impairment and other unusual charges ........................................................... (20) (45) -------------- ------------- Net cash provided by operating activities ..................................... $ 297 $ 325 -------------- ------------- -------------- ------------- </TABLE> 8 <PAGE> NOTES TO CONDENSED TENET HEALTHCARE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6. The following table presents a reconciliation of beginning and ending liability balances in connection with merger, impairment and restructuring charges recorded in fiscal 1997,1998 and 1999 by type of cost for the six-month period ended November 30, 1999 (in millions): <TABLE> <CAPTION> BALANCES AT CASH OTHER BALANCES AT RESERVES RELATED TO: 05/31/99 (1) PAYMENTS ITEM (2) 11/30/99 (1) ----------------------------------------------------- --------------- ------------- ------------- --------------- <S> <C> <C> <C> <C> Estimated costs to sell or close hospitals and other facilities $ 30 $ (5) $ -- $ 25 Severance costs in connection with the implementation of hospital cost control programs, general overhead reduction plans and closure of home health agencies 19 (8) -- 11 Lease cancellation and other exit costs.................. 46 (17) (9) 20 Accruals for unfavorable lease commitments at six medical offices buildings................................... 20 (1) -- 19 1997 merger.............................................. 8 (2) -- 6 Termination of physician contracts....................... 6 -- -- 6 --------------- ------------- ------------- --------------- Total............................................... $ 129 $ (33) $ (9) $ 87 --------------- ------------- ------------- --------------- </TABLE> (1) The above liability balances are included in other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets. (2) The $9 million other item consists of an adjutment to a reserve at a hospital sold during the period and has been included in gains on sales of facilities and long-term investments. Cash payments to be applied against these accruals are expected to approximate $72 million in the remainder of fiscal 2000 and $15 million thereafter. There were no merger, impairment or restructuring charges in the six months ended November 30, 1999. 9 <PAGE> NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- 7. The following is a reconciliation of the numerators and the denominators of the Company's basic and diluted earnings per share computations before the cumulative effect of an accounting change for the three months and six months ended November 30, 1998 and 1999. Income is expressed in millions and weighted average shares are expressed in thousands: <TABLE> <CAPTION> 1998 1999 --------------------------------------- --------------------------------------- WEIGHTED WEIGHTED INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE THREE MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT - --------------------------------- ------------ --------------- --------- ----------- --------------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic earnings per share: Income available to common shareholders................ $ 125 309,803 $ 0.40 $ 135 311,512 $ 0.43 ------------ ----------- Effect of dilutive stock options and warrants (1) ... -- 4,132 -- 2,233 ------------ --------------- ----------- --------------- Diluted earnings per share: Income available to common shareholders................ $ 125 313,935 $ 0.40 $ 135 313,745 $ 0.43 ------------ --------------- --------- -- ----------- --------------- ---------- </TABLE> (1) Outstanding options to purchase 7,797,209 and 21,337,951 shares of common stock were not included in the computation of diluted earnings per share for the three-month periods ended November 30, 1998 and 1999, respectively, because the options' exercise prices were greater than the average market price of the common stock. <TABLE> <CAPTION> 1998 1999 --------------------------------------- --------------------------------------- WEIGHTED WEIGHTED INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE SIX MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT - --------------------------------- ------------ --------------- --------- ----------- --------------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic earnings per share: Income available to common shareholders................ $ 262 309,602 $ 0.84 $ 263 311,331 $ 0.84 --------- ---------- Effect of dilutive stock options and warrants (1) ........... -- 4,197 -- 2,152 ------------ --------------- ----------- --------------- Diluted earnings per share: Income available to common shareholders................ $ 262 313,799 $ 0.84 $ 263 313,483 $ 0.84 ------------ --------------- --------- ----------- --------------- ---------- </TABLE> (1) Outstanding options to purchase 7,800,784 and 22,229,724 shares of common stock were not included in the computation of diluted earnings per share for the six-month periods ended November 30, 1998 and 1999, respectively, because the options' exercise prices were greater than the average market price of the common stock. 10 <PAGE> NOTES TO CONDENSED TENET HEALTHCARE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. The following table sets forth the tax effects allocated to each component of other comprehensive income for the six months ended November 30, 1998 and 1999: <TABLE> <CAPTION> 1998 1999 ------------------------------- ------------------------------ BEFORE- TAX BEFORE- TAX TAX (EXPENSE) NET-OF-TAX TAX (EXPENSE) NET-OF-TAX AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT ---------- ---------- ---------- --------- ---------- --------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> Foreign currency translation adjustment............$ 12 $ (5) $ 7 $ (6) $ 2 $ (4) Unrealized holding gains (losses) on securities.... 28 (10) 18 (49) 19 (30) Reclassification adjustments....................... -- -- -- (4) 1 (3) ---------- ---------- ---------- --------- ---------- --------- Other comprehensive income (loss)..................$ 40 $ (15) $ 25 $ (59) $ 22 $ (37) ---------- -------------------- -- --------- ---------- --------- </TABLE> The following table sets forth the accumulated other comprehensive income balances, by component, as of November 30, 1998 and 1999: <TABLE> <CAPTION> 1998 1999 -------------------------------------- ------------------------------------------ ACCUMULATED FOREIGN UNREALIZED ACCUMULATED FOREIGN UNREALIZED OTHER CURRENCY GAINS OTHER CURRENCY GAINS ON COMPREHENSIVE ITEMS (LOSSES) ON COMPREHENSIVE ITEMS SECURITIES INCOME SECURITIES (1) INCOME ---------------------------------------------------------------------------------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> Beginning balance................... $ -- $ 50 $ 50 $ -- $ 77 $ 77 Current-period change............... 7 18 25 (4) (33) (37) ---------------------------------------------------------------------------------- Ending balance...................... $ 7 $ 68 $ 75 $ (4) $ 44 $ 40 ---------------------------------------------------------------------------------- </TABLE> (1) The 1999 unrealized losses on securities includes a $4 million reclassification adjustment for realized gains included in net income. 11 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Income before income taxes and cumulative effect of accounting change was $203 million in the quarter ended November 30, 1998 and $276 million in the quarter ended November 30, 1999. For the six-month periods ended November 30, 1998 and 1999, income before income taxes and cumulative effect of accounting change was $425 million and $485 million, respectively. The 1999 quarter and six-month period include pretax gains on sales of facilities and long-term investments of $58 million and $68 million, respectively. Results of operations for the quarter and six months ended November 30, 1999 include the operations of eight general hospitals acquired in November 1998, one in December 1998 and two in March 1999 and exclude, from the dates of sale or closure, the operations of 18 general hospitals and certain other facilities sold or closed since November 30, 1998. The following are summaries of consolidated operations for the three months and six months ended November 30, 1998 and 1999: <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, ---------------------------------------------------------- 1998 1999 1998 1999 ---------------------------------------------------------- (IN MILLIONS) (% OF NET OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals............................... $ 2,340 $ 2,580 91.3% 92.8% Other operations ........................................ 223 200 8.7% 7.2% ---------------------------------------------------------- Net operating revenues........................................ 2,563 2,780 100.0% 100.0% ---------------------------------------------------------- Operating expenses: Salaries and benefits.................................... (1,039) (1,110) 40.5% 39.9% Supplies................................................. (351) (387) 13.7% 13.9% Provision for doubtful accounts.......................... (184) (210) 7.2% 7.6% Other operating expenses................................. (538) (604) 21.0% 21.7% Depreciation............................................. (102) (102) 4.0% 3.7% Amortization............................................. (32) (30) 1.2% 1.1% ---------------------------------------------------------- Operating income.............................................. $ 317 $ 337 12.4% 12.1% ---------------------------------------------------------- ---------------------------------------------------------- </TABLE> 12 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF TENET HEALTHCARE CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SIX MONTHS ENDED NOVEMBER 30, ---------------------------------------------------------- 1998 1999 1998 1999 ---------------------------------------------------------- (IN MILLIONS) (% OF NET OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals............................... $ 4,653 $ 5,247 91.0% 92.8% Other operations ........................................ 463 406 9.0% 7.2% ---------------------------------------------------------- Net operating revenues........................................ 5,116 5,653 100.0% 100.0% ---------------------------------------------------------- Operating expenses: Salaries and benefits.................................... (2,057) (2,271) 40.2% 40.2% Supplies................................................. (701) (794) 13.7% 14.0% Provision for doubtful accounts.......................... (343) (433) 6.7% 7.7% Other operating expenses................................. (1,099) (1,229) 21.5% 21.7% Depreciation............................................. (198) (204) 3.9% 3.6% Amortization............................................. (63) (62) 1.2% 1.1% ---------------------------------------------------------- Operating income.............................................. $ 655 $ 660 12.8% 11.7% ---------------------------------------------------------- ---------------------------------------------------------- </TABLE> Net operating revenues of other operations in the tables above consist primarily of revenues from: (i) physician practices, (ii) rehabilitation hospitals, long-term care facilities, psychiatric and specialty hospitals that are located on or near the same campuses as the Company's general hospitals; (iii) the Company's hospital in Barcelona, Spain; (iv) health care joint ventures operated by the Company; (v) subsidiaries of the Company offering managed care and indemnity products; and (vi) equity in the earnings of unconsolidated affiliates. The table below sets forth certain selected historical operating statistics for the Company's domestic general hospitals: <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30, ----------------------------------------- ---------------------------------------- INCREASE INCREASE 1998 1999 (DECREASE) 1998 1999 (DECREASE) ------------ ------------ -------------- ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Number of hospitals (at end of period) 128 113 (15)* 128 113 (15)* Licensed beds (at end of period)..... 30,410 27,625 (9.2)% 30,410 27,625 (9.2)% Net inpatient revenues (in millions). $ 1,538 $ 1,700 10.5% $ 3,012 $ 3,403 13.0% Net outpatient revenues (in millions) $ 755 $ 823 9.0% $ 1,541 $ 1,725 11.9% Admissions........................... 221,499 227,647 2.8% 440,666 467,025 6.0% Equivalent admissions................ 322,035 329,667 2.4% 644,834 683,378 6.0% Average length of stay (days)........ 5.1 5.2 0.1* 5.1 5.2 0.1* Patient days......................... 1,136,595 1,184,765 4.2% 2,249,910 2,408,203 7.0% Equivalent patient days.............. 1,638,011 1,695,214 3.5% 3,262,052 3,482,930 6.8% Net inpatient revenue per patient day $ 1,353 $ 1,435 6.1% $ 1,339 $ 1,413 5.5% Net inpatient revenue per admission.. $ 6,944 $ 7,468 7.5% $ 6,835 $ 7,287 6.6% Utilization of licensed beds......... 43.8% 44.7% 0.9%* 43.5% 43.9% 0.4%* Outpatient visits.................... 2,326,712 2,289,819 (1.6)% 4,747,340 4,758,646 0.2% </TABLE> * The change is the difference between 1998 and 1999 amounts shown. 13 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- 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 NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30, ----------------------------------------- ---------------------------------------- INCREASE INCREASE 1998 1999 (DECREASE) 1998 1999 (DECREASE) ------------ ------------ -------------- ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Average licensed beds................ 22,895 22,715 (0.8)% 24,456 24,279 (0.7)% Patient days......................... 1,024,663 1,045,562 2.0% 2,106,681 2,130,628 1.1% Net inpatient revenue per patient day $ 1,375 $ 1,429 3.9% $ 1,352 $ 1,409 4.2% Admissions........................... 198,756 201,100 1.2% 411,847 415,374 0.9% Net inpatient revenue per admission.. $ 7,089 $ 7,431 4.8% $ 6,918 $ 7,229 4.5% Outpatient visits.................... 2,043,167 1,965,127 (3.8)% 4,401,646 4,163,381 (5.4)% Average length of stay (days)........ 5.2 5.2 -- 5.1 5.1 -- </TABLE> The table below sets forth the sources of net patient revenues for the Company's domestic general hospitals for the three- and six-month periods ended November 30, 1998 and 1999, expressed as percentages of net patient revenues from all sources: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ------------------------ ----------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ---------- <S> <C> <C> <C> <C> Medicare ..................................... 33.8% 31.6% 34.5% 32.1% Medicaid ..................................... 9.8% 8.3% 9.4% 8.1% Managed care ................................. 37.0% 41.9% 36.4% 40.9% Indemnity and other .......................... 19.4% 18.2% 19.7% 18.9% </TABLE> Changes in Medicare payments mandated by the Balanced Budget Act of 1997 (the "BBA"), which became effective October 1, 1997, as well as certain changes to various states' Medicaid programs, have significantly reduced revenues and earnings during the periods presented herein and will continue to reduce revenues and earnings as these changes are phased in over the next year and a half. The most significant changes were phased in by October 1, 1998. Recent legislation will mitigate some of these changes, but not significantly. Pressures to control health care costs and a shift from traditional Medicare to Medicare managed care plans after the BBA was enacted have resulted in an increase in the number of patients whose health care coverage is provided under managed care plans. The Company generally receives lower payments per patient from managed care payors than it does from traditional indemnity insurers. However, one of the most significant trends in the quarter ended November 30, 1999 was the improvement in net inpatient revenue per admission. On a total store basis, this statistic increased 7.5% and, on a same-store basis, it increased by 4.8%, the largest periodic increases in recent years. While increases in any quarter will vary, there now appears to be an upward trend that the Company expects will continue. The pricing environment for managed care and other non-government payors has improved and the Company expects continuing 14 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF TENET HEALTHCARE CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- benefits as it renegotiates and renews contracts with improved terms and as it continues to terminate capitated arrangements with managed care payors and employers. In most of the large markets served by the Company, capitation arrangements generally have been disappointing to both physicians and hospitals. To address all the changes impacting the health care industry, while continuing to provide quality care to patients, the Company has implemented strategies to reduce inefficiencies, create synergies, obtain additional business and control costs. In the past 12 months, such strategies have included hospital cost-control programs and overhead reduction plans and the enhancement of integrated health care delivery systems. In certain markets, for example, the Company has outsourced services such as housekeeping, laundry, dietary and plant maintenance. The Company has achieved significant cost savings and is now applying this strategy to its other hospitals, the benefits of which are expected to occur in the second half of this fiscal year. Further consolidations and implementation of additional cost-control programs and other operating efficiencies may be undertaken in the future. Net operating revenues from the Company's other operations were $223 million for the quarter ended November 30, 1998, compared to $200 million for the current quarter. The decrease is primarily the result of disposals of certain physician practices. The Company has employed or entered into management agreements with physicians in most of its markets. These agreements generally have not been profitable for the Company. The Company is in the process of reevaluating its physician contract strategy and is developing plans to either terminate or allow a significant number of its existing contracts to expire over the next two or three years. The Company expects to incur significant charges beginning in the third quarter of fiscal 2000 as these plans are executed. Such charges might require significant cash outlays as contract settlements with physicians and physician groups are executed. The future benefits of such a strategy could be significant, but would not likely occur until fiscal 2001 and beyond. Salaries and benefits expense as a percentage of net operating revenues was 40.5% in the quarter ended November 30, 1998 and 39.9% in the current quarter. This decrease is primarily the result of continuing cost control measures and the outsourcing of certain hospital services. Supplies expense as a percentage of net operating revenues was 13.7% in the quarter ended November 30, 1998 and 13.9% in the current quarter. The increase primarily was due to greater patient acuity, higher supplies expenses at the recently acquired hospitals, and higher prices for new products. The Company continues to focus on reducing supplies expense by developing and expanding programs designed to improve the purchasing and utilization of supplies. The provision for doubtful accounts as a percentage of net operating revenues was 7.6% in the current quarter compared to 7.2% for the quarter ended November 30, 1998. It was 7.8% in the quarter ended August 31, 1999. Management believes the rise in bad debts is generally attributable to a number of factors, including (a) the continuing shift of business from traditional Medicare to managed care, (b) a rise in the volume of care provided to uninsured patients in certain of the Company's hospitals, (c) delays in 15 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- payment and denial of claims by managed care payors, and (d) price increases. Although management is unable to quantify the effect of each factor, management believes that, to the extent that the Company continues to experience a fundamental shift in its payor mix, this expense is likely to remain at higher levels than in past years. The Company has taken a series of actions to mitigate these recent increases in bad debt expense, including the creation of a corporate-level department combining all patient billing and account collection activities in order to improve collection of receivables, accelerate payments from managed care payors, standardize and improve billing systems and develop best practices in the patient admission and registration process. The Company is also strengthening its business office operations, including admitting, medical records and coding, and the recruitment, training and compensation of business office staff. In certain markets, the Company has set up dedicated managed care collection units to focus on problem accounts and payors and the highly complex claim payment terms in managed care contracts. In addition, the Company has resorted to arbitration and litigation in its efforts to settle long-outstanding past due accounts with certain managed care companies. Other operating expenses as a percentage of net operating revenues were 21.0% for the quarter ended November 30, 1998 and 21.7% for the quarter ended November 30, 1999. The increase is due to outsourcing of certain hospital services, which services were previously performed by employees and were reported as salaries and benefits, and higher costs at the recently acquired hospitals. Taxes on income as a percentage of income before income taxes were 38.4% in the current quarter, excluding the effect of gains on sales of facilities and investments. Income taxes related to the $58 million gain on sales of facilities and investments in the current quarter were $57 million due to the effect of nondeductible goodwill for tax purposes included in the book basis of the assets sold. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity for the six months ended November 30, 1999 was derived primarily from the proceeds of borrowings under its unsecured revolving bank credit agreement (the "Credit Agreement"), sales of assets, and net cash provided by operating activities. Net cash provided by operating activities for the six months ended November 30, 1999 was $370 million before net expenditures of $45 million for discontinued operations, merger, impairment and other unusual charges. Net cash provided by operating activities for the six months ended November 30, 1998 was $317 million before $20 million in expenditures for such charges. Management believes that future cash provided by recurring operating activities, the availability of credit under the Credit Agreement, the sale of assets and, depending on capital market conditions and to the extent permitted by the restrictive covenants of the Credit Agreement and the indentures governing the Company's senior and senior subordinated notes, other borrowings or the sale of equity securities should be adequate to meet known debt service requirements and to finance planned capital expenditures, acquisitions and other presently known operating needs over the next three years. The Company expects to refinance the Credit Agreement on or before its January 31, 2002 maturity date. 16 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF TENET HEALTHCARE CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- During the six months ended November 30, 1999 the Company borrowed $802 million under its long-term credit agreement and repaid $1.4 billion. Payments of other long-term debt amounted to $17 million. Cash payments for property and equipment were $264 million in the six months ended November 30, 1999 compared to $241 million in the corresponding prior year six-month period. The Company expects to spend approximately $400 - $500 million annually on capital expenditures, before any significant acquisitions of facilities and other health care operations and before an estimated $151 million in remaining commitments to fund the construction of two new hospitals over the next two years. Such capital expenditures primarily relate to the development of integrated health care systems in selected geographic areas, design and construction of new buildings, expansion and renovation of existing facilities, equipment and information systems additions and replacements, introduction of new medical technologies and various other capital improvements. The Company's strategy continues to include the prudent development of integrated health care delivery systems, including the possible acquisition of general hospitals and related ancillary health care businesses or joining with others to develop integrated health care delivery networks. In addition, as previously discussed herein, the Company is reevaluating its employment and management relationships with physicians. All or portions of these activities can be financed by either net cash provided by operating activities, the availability of credit under the Credit Agreement, the sale of assets and, depending on capital market conditions and to the extent permitted by restrictive debt covenants, other borrowings or the sale of equity securities. The Company's unused borrowing capacity under the Credit Agreement was $1.2 billion as of December 31, 1999. The Credit Agreement and the indentures governing the Company's senior and senior subordinated notes have, among other requirements, covenants with which the Company must comply. These covenants include, among other requirements, limitations on other borrowings, liens, investments, the sale of all or substantially all assets and prepayment of subordinated debt, a prohibition against the Company declaring or paying a dividend 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., and covenants regarding maintenance of specified levels of net worth, debt ratios and fixed charge coverages. Current debt ratings on the Company's senior debt securities are BB+ by Standard and Poors and Ba1 by Moody's. The Company is in compliance with its loan covenants. THE YEAR 2000 ISSUE The Company has not experienced any significant adverse consequences as a result of the Year 2000 Issue. Its patient care equipment, other equipment and information technology systems performed satisfactorily as the calendar changed from December 31, 1999 to January 1, 2000. The Company estimates that its total cost for addressing all Year 2000 issues will be approximately $90 million, substantially all of which has been incurred as of December 31, 1999 and has been accounted for as capital expenditures. 17 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- BUSINESS OUTLOOK 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 continues to be negatively affected by payor-required pre-admission authorization and by payor pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Increased competition, admission constraints and payor pressure, as well as the shift in patient mix to managed care, are expected to continue. The ongoing challenge facing the Company and the health care industry as a whole is to continue to provide quality patient care in an environment of rising costs, strong competition for patients and continued pressure on payment rates by government and other payors. Because of national, state and private industry efforts to reform health care delivery and payment systems, the health care industry as a whole faces increased uncertainty. The Company is unable to predict whether any other health care legislation at the federal and/or state level will be passed in the future and what action it may take in response to such legislation, but it continues to monitor all proposed legislation and analyze its potential impact in order to formulate its future business strategies. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words believes, anticipates, expects, will, may, might, should, estimates, appears, and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing laws and government regulations and changes in, or the failure to comply with, laws and governmental regulations; legislative proposals for health care reform; the ability to enter into managed care provider arrangements on acceptable terms; a shift from fee-for-service payment to capitated and other risk-based payment systems; changes in Medicare and Medicaid reimbursement levels; liability and other claims asserted against the Company; competition; the loss of any significant customers; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, health care; changes in business strategy or development plans; the ability to attract and retain qualified personnel, including physicians; the significant indebtedness of the Company; and the availability and terms of capital to fund the expansion of the Company's business, including the acquisition of additional facilities. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 18 <PAGE> TENET HEALTHCARE CORPORATION OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS Material Developments in Previously Reported Legal Proceedings: There have been no material developments in the legal proceedings previously described in the Company's Annual Report on Form 10-K for its fiscal year ended May 31, 1999, and the Company's Quarterly Report on Form 10-Q for the period ended August 31, 1999. ITEMS 2, 3 AND 5 ARE NOT APPLICABLE. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on October 6, 1999. The shareholders elected all of the Company's nominees for director. The shareholders approved three proposals: a proposal to amend the Employee Stock Purchase Plan; a non-binding shareholder proposal regarding declassification of the Board of Directors and a non-binding shareholder proposal to terminate the Company's shareholders rights plan. The shareholders also ratified the selection of KPMG LLP as the Company's independent auditors for the fiscal year ended May 31, 2000. The votes were as follows: <TABLE> <CAPTION> 1. Election of Directors FOR WITHHELD --- -------- <S> <C> <C> <C> Bernice B. Bratter 260,085,328 25,093,605 Michael H. Focht Sr. 260,047,274 25,131,659 Lester B. Korn 260,343,048 24,835,885 Floyd D. Loop, M.D. 260,076,319 25,102,614 </TABLE> <TABLE> <CAPTION> 2. Proposal to amend the Employee Stock Purchase Plan: <S> <C> <C> For: 275,628,138 Against: 8,842,342 Abstaining: 708,453 </TABLE> <TABLE> <CAPTION> 3. Shareholder proposal regarding declassification of the Company's Board of Directors: <S> <C> <C> For: 163,346,307 Against: 99,455,258 Abstaining: 1,031,322 </TABLE> 19 <PAGE> OTHER INFORMATION TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 4. Shareholder proposal to terminate the Company's Shareholders Rights Plan: <S> <C> <C> For: 200,284,495 Against: 62,332,407 Abstaining: 1,215,985 </TABLE> <TABLE> <CAPTION> 5. Ratification of selection of KPMG LLP: <S> <C> <C> For: 284,255,560 Against: 376,790 Abstaining: 546,583 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. (10)jj $2,800,000,000 Credit Agreement, dated as of January 30, 1997, as amended by Amendment No. 1, dated as of July 25, 1997, Amendment No. 2, dated as of March 16, 1999 and Amendment No. 3, dated as of October 1, 1999, among the Company, as Borrower, the Lenders, Managing Agents and Co-Agents party thereto, the Swingline Bank party thereto, the Bank of New York and the Bank of Nova Scotia, as Documentation Agents, Bank of America National Trust and Savings Association, as Syndication Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent. (27.1) Financial Data Schedule for the six months ended November 30, 1999 (included only in the EDGAR filing). (b) Reports on Form 8-K None 20 <PAGE> TENET HEALTHCARE CORPORATION OTHER INFORMATION - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TENET HEALTHCARE CORPORATION (Registrant) Date: January 13, 2000 /s/ TREVOR FETTER --------------------------------------------------- Trevor Fetter Office of the President, Chief Corporate Officer and Chief Financial Officer (Principal Financial Officer) /s/ RAYMOND L. MATHIASEN --------------------------------------------------- Raymond L. Mathiasen Executive Vice President, Chief Accounting Officer (Principal Accounting Officer) 21 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.JJ <SEQUENCE>2 <DESCRIPTION>EXHIBIT (10)JJ <TEXT> <PAGE> COMPOSITE CONFORMED COPY* $2,800,000,000 CREDIT AGREEMENT dated as of January 30, 1997 as amended by Amendment No.1, dated as of July 25, 1997 Amendment No.2, dated as of March 16, 1999 and Amendment No. 3, dated as of October 1, 1999 among Tenet Healthcare Corporation The Lenders, Managing Agents and Co-Agents Party Hereto The Swingline Bank Party Hereto The Bank of New York The Bank of Nova Scotia as Documentation Agents Bank of America National Trust and Savings Association as Syndication Agent and Morgan Guaranty Trust Company of New York as Administrative Agent ---------- Arranged by: J.P. Morgan Securities Inc. as Arranger BancAmerica Securities, Inc. BNY Capital Markets, Inc. The Bank of Nova Scotia as Co-Arrangers _______________________________________ * Composite Conformed Copy incorporates the indicated amendments. Signature pages, Commitment Schedule and Exhibits have not been updated from 1/30/97. <PAGE> TABLE OF CONTENTS(1) <TABLE> <CAPTION> PAGE <S> <C> <C> ARTICLE 1 DEFINITIONS SECTION 1.01. DEFINITIONS.......................................................................1 SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS..............................................21 ARTICLE 2 THE CREDITS SECTION 2.01. SYNDICATED BORROWINGS............................................................21 SECTION 2.02. NOTICE OF SYNDICATED BORROWING...................................................22 SECTION 2.03. MONEY MARKET BORROWINGS..........................................................22 SECTION 2.04. NOTICE TO LENDERS; FUNDING OF LOANS..............................................27 SECTION 2.05. NOTES............................................................................28 SECTION 2.06. MATURITY OF LOANS................................................................28 SECTION 2.07. OPTIONAL PREPAYMENTS OF SYNDICATED LOANS.........................................28 SECTION 2.08. NOTICE OF SYNDICATED PREPAYMENT..................................................28 SECTION 2.09. INTEREST RATES...................................................................29 SECTION 2.10. METHOD OF ELECTING INTEREST RATES................................................31 SECTION 2.11. FEES.............................................................................32 SECTION 2.12. TERMINATION OR REDUCTION OF COMMITMENTS..........................................33 SECTION 2.13. GENERAL PROVISIONS AS TO PAYMENTS................................................33 SECTION 2.14. FUNDING LOSSES...................................................................34 SECTION 2.15. COMPUTATION OF INTEREST AND FEES.................................................34 SECTION 2.16. SWINGLINE LOANS..................................................................34 SECTION 2.17. LETTERS OF CREDIT................................................................36 ARTICLE 3 CONDITIONS SECTION 3.01. CLOSING..........................................................................43 SECTION 3.02. TERMINATION OF EXISTING COMMITMENTS..............................................46 SECTION 3.03. BORROWINGS AND ISSUANCES OR EXTENSIONS OF LETTERS OF CREDIT......................46 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. CORPORATE EXISTENCE AND POWER....................................................47 SECTION 4.02. CORPORATE AND GOVERNMENTAL AUTHORIZATION.........................................48 </TABLE> ___________________ (1) The Table of Contents is not a part of this Agreement. i <PAGE> <TABLE> PAGE <S> <C> <C> SECTION 4.03. BINDING EFFECT...................................................................48 SECTION 4.04. FINANCIAL INFORMATION............................................................48 SECTION 4.05. LITIGATION.......................................................................49 SECTION 4.06. COMPLIANCE WITH ERISA............................................................49 SECTION 4.07. COMPLIANCE WITH LAWS.............................................................50 SECTION 4.08. ENVIRONMENTAL MATTERS............................................................50 SECTION 4.09. TAXES............................................................................50 SECTION 4.10. MATERIAL SUBSIDIARIES............................................................51 SECTION 4.11. CERTAIN LAWS NOT APPLICABLE......................................................51 SECTION 4.12. FULL DISCLOSURE..................................................................51 SECTION 4.13. CERTAIN DOCUMENTS................................................................51 SECTION 4.14. LEGALITY OF ACQUISITION..........................................................51 ARTICLE 5 COVENANTS SECTION 5.01. INFORMATION......................................................................52 SECTION 5.02. MAINTENANCE OF PROPERTY; INSURANCE...............................................54 SECTION 5.03. CONDUCT OF BUSINESS, MAINTENANCE OF EXISTENCE....................................54 SECTION 5.04. COMPLIANCE WITH LAWS.............................................................55 SECTION 5.05. INSPECTION OF PROPERTY, BOOKS AND RECORDS........................................55 SECTION 5.06. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS......................................55 SECTION 5.07. NEGATIVE PLEDGE..................................................................56 SECTION 5.08. DEBT OF SUBSIDIARIES.............................................................58 SECTION 5.09. DEBT RATIO.......................................................................59 SECTION 5.10. CONSOLIDATED NET WORTH...........................................................59 SECTION 5.11. FIXED CHARGE RATIO...............................................................59 SECTION 5.12. RESTRICTED PAYMENTS..............................................................60 SECTION 5.13. RESTRICTION ON INVESTMENTS.......................................................60 SECTION 5.14. RESTRICTIONS ON INCLUDED EQUITY AFFILIATES.......................................61 SECTION 5.15. RESTRICTION ON PREPAYING SUBORDINATED DEBT.......................................62 SECTION 5.16. TRANSACTIONS WITH AFFILIATES.....................................................63 SECTION 5.17. SENIOR STATUS....................................................................63 SECTION 5.18. PAYMENT OF DIVIDENDS BY MATERIAL SUBSIDIARIES....................................63 SECTION 5.19. RETIREMENT OF ORNDA DEBT.........................................................63 SECTION 5.20. USE OF PROCEEDS..................................................................64 ARTICLE 6 DEFAULTS SECTION 6.01. EVENTS OF DEFAULT................................................................64 SECTION 6.02. NOTICE OF DEFAULT................................................................67 SECTION 6.03. CASH COVER.......................................................................67 </TABLE> ii <PAGE> <TABLE> PAGE <S> <C> <C> ARTICLE 7 THE AGENTS SECTION 7.01. APPOINTMENT AND AUTHORIZATION....................................................67 SECTION 7.02. AGENTS AND AFFILIATES............................................................67 SECTION 7.03. ACTION BY THE ADMINISTRATIVE AGENT...............................................68 SECTION 7.04. CONSULTATION WITH EXPERTS........................................................68 SECTION 7.05. LIABILITY OF THE AGENTS..........................................................68 SECTION 7.06. INDEMNIFICATION..................................................................69 SECTION 7.07. CREDIT DECISION..................................................................69 SECTION 7.08. SUCCESSOR ADMINISTRATIVE AGENT...................................................69 SECTION 7.09. FEES.............................................................................69 SECTION 7.10. OTHER AGENTS.....................................................................70 ARTICLE 8 CHANGE IN CIRCUMSTANCE SECTION 8.01. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR.........................70 SECTION 8.02. ILLEGALITY.......................................................................71 SECTION 8.03. INCREASED COST AND REDUCED RETURN................................................71 SECTION 8.04. TAXES............................................................................73 SECTION 8.05. BASE RATE LOANS SUBSTITUTED FOR AFFECTED EURO-DOLLAR LOANS.......................75 ARTICLE 9 MISCELLANEOUS SECTION 9.01. NOTICES..........................................................................75 SECTION 9.02. NO WAIVERS.......................................................................76 SECTION 9.03. EXPENSES; INDEMNIFICATION........................................................76 SECTION 9.04. SHARING OF SET-OFFS..............................................................77 SECTION 9.05. AMENDMENTS AND WAIVERS...........................................................77 SECTION 9.06. SUCCESSORS AND ASSIGNS...........................................................78 SECTION 9.07. NO RELIANCE ON MARGIN STOCK AS COLLATERAL........................................80 SECTION 9.08. CONFIDENTIALITY..................................................................80 SECTION 9.09. WAIVER OF JURY TRIAL.............................................................81 SECTION 9.10. GOVERNING LAW; SUBMISSION TO JURISDICTION........................................81 SECTION 9.11. COUNTERPARTS; INTEGRATION........................................................81 </TABLE> Commitment Schedule Schedule 4.05 - Pending Litigation Schedule 5.06 - Permitted Asset Sales Exhibit A - Note iii <PAGE> Exhibit B - Money Market Request Exhibit C - Money Market Invitation Exhibit D - Money Market Quote Exhibit E - Swingline Note Exhibit F - Senior Officer's Closing Certificate Exhibit G - Opinion of Gibson, Dunn & Crutcher LLP, Special Counsel for the Borrower Exhibit H - Opinion of Scott Brown, General Counsel for the Borrower Exhibit I - Opinion of Special Counsel for the Administrative Agent Exhibit J - Assignment and Assumption Agreement iv <PAGE> CREDIT AGREEMENT AGREEMENT dated as of January 30, 1997, as amended by Amendment No. 1, dated as of July 25, 1997, Amendment No. 2, dated as of March 16, 1999 and Amendment No. 3, dated as of October 1, 1999 among TENET HEALTHCARE CORPORATION, the LENDERS, MANAGING AGENTS, CO-AGENTS and SWINGLINE BANK party hereto, THE BANK OF NEW YORK and THE BANK OF NOVA SCOTIA, as Documentation Agents, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Syndication Agent, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. WHEREAS, terms used in these recitals have the meanings assigned to them in Section 1.01; WHEREAS, the Borrower has agreed to acquire OrNda and its Subsidiaries pursuant to the Merger Agreement; WHEREAS, in connection with such Acquisition, the Borrower desires to purchase, redeem or otherwise refinance some, but not all, of the outstanding Debt of the Borrower, OrNda and their respective Subsidiaries; WHEREAS, the Borrower desires to have available to it a credit facility in the aggregate amount of $2,800,000,000 pursuant to which it may (i) borrow to purchase, redeem or otherwise refinance such outstanding Debt, (ii) borrow for the general corporate purposes (including working capital needs) of the Borrower and its Subsidiaries after the Acquisition is consummated and (iii) obtain Letters of Credit to meet the needs of the Borrower and its Subsidiaries after the Acquisition is consummated; and WHEREAS, this Agreement is intended by the Borrower to replace the Borrower's Existing Credit Agreement; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1. DEFINITIONS. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. <PAGE> "Acquisition" means the acquisition of OrNda and its Subsidiaries by the Borrower as described in the Merger Agreement. "Adjusted EBITDA" means, for any period of four consecutive Fiscal Quarters, Consolidated EBITDA for such period adjusted as follows: (i) by deducting, to the extent included in such Consolidated EBITDA, the Borrower's Pro Rata Share of each Equity Affiliate's net income for such period; and (ii) by adding back, with respect to each Equity Affiliate that is an Included Equity Affiliate on the Date of Determination, an amount equal to the lesser of: (x) the Borrower's Pro Rata Share of the sum of (A) such Included Equity Affiliate's net income for such period plus (B) to the extent deducted in determining such net income, its interest expense, income taxes, depreciation and amortization, or (y) the sum of (A) all dividends and other distributions paid in cash by such Included Equity Affiliate during such period to the Borrower and its Subsidiaries and (B) the Borrower's Pro Rata Share of such Included Equity Affiliate's interest expense for such period. "Adjusted Interest Expense" means, for any period of four consecutive Fiscal Quarters, the sum of (i) Consolidated Interest Expense for such period and (ii) with respect to each Equity Affiliate that is an Included Equity Affiliate at the end of such period, an amount equal to the Borrower's Pro Rata Share of such Included Equity Affiliate's interest expense for such period. "Adjusted London Interbank Offered Rate" has the meaning set forth in Section 2.09(b). "Adjusted Rental Expense" means, for any period of four consecutive Fiscal Quarters, the sum of (i) Consolidated Rental Expense for such period and (ii) with respect to each Equity Affiliate that is an Included Equity Affiliate at the end of such period, an amount equal to the Borrower's Pro Rata Share of such Included Equity Affiliate's rental expense for such period. "Adjusted Total Debt" means at any time, without duplication, the sum of (i) the consolidated Debt of the Borrower and its Subsidiaries, PLUS (ii) the Borrower's Pro Rata Share of the Debt of each Included Equity Affiliate, MINUS 2 <PAGE> (iii) the lesser of (x) the outstanding principal amount of the Borrower's 6% Exchangeable Subordinated Notes due 2005 or (y) the sum of (a) the aggregate market value of the shares of common stock of Ventas, Inc. for which such outstanding notes are exchangeable plus (b) the amount of proceeds from the sale by the Borrower of shares of common stock of Vencor, Inc. that are, at such time, held in escrow for the benefit of holders of such Notes, and minus (iv) the Excess Receivables Adjustment. "Administrative Agent" means Morgan Guaranty Trust Company of New York, in its capacity as Administrative Agent for the Lenders hereunder, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Lender, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Lender. "Affiliate" means, with respect to any Person, (i) any Person that directly, or indirectly through one or more intermediaries, controls such Person (a "Controlling Person") or (ii) any Person which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management of a Person by voting securities, by contract or otherwise. "Agents" means the Administrative Agent, the Documentation Agents and the Syndication Agent, and "Agent" means any one of them. "Aggregate Investment in Equity Affiliates" has the meaning set forth in Section 5.13(a). "Aggregate LC Exposure" means at any time the sum, without duplication, of (i) the aggregate amount that is (or may thereafter become) available for drawing under all Letters of Credit outstanding at such time and (ii) the aggregate unpaid amount of all LC Reimbursement Obligations outstanding at such time. "Applicable Lending Office" means, with respect to any Lender, (i) in the case of its Base Rate Loans and its participations in Letters of Credit, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Arranger" means J.P. Morgan Securities Inc. "Assignee" has the meaning set forth in Section 9.06(c). 3 <PAGE> "Availability Period" means the period from and including the Closing Date to but excluding the Termination Date. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Borrowing" means a borrowing of Base Rate Loans pursuant to Section 2.01 or 2.16(h). "Base Rate Loan" means a Syndicated Loan which bears interest at the Base Rate (or any higher rate determined pursuant to Section 2.09(a)) pursuant to the applicable Notice of Syndicated Borrowing or Notice of Interest Rate Election or the provisions of Section 2.16(h) or Article 8. "Borrower" means Tenet Healthcare Corporation, a Nevada corporation, and its successors. "Borrower's Existing Credit Agreement" means the $1,550,000,000 Credit Agreement dated as of March 1, 1996 among the Borrower, the Lenders and Managing Agents party thereto, Bank of America National Trust and Savings Association as Documentation Agent, The Bank of New York as Syndication Agent and Morgan Guaranty Trust Company of New York as Administrative Agent, as in effect immediately before the Closing Date. "Borrower's Pro Rata Share" means: (i) with respect to the Debt of any Included Equity Affiliate at any date, a percentage of such Debt equal to the percentage of such Equity Affiliate's net income (or net loss) to be included in determining, in accordance with GAAP, the consolidated net income of the Borrower and its Subsidiaries for periods after such date (assuming no change in any relevant ownership interests); and (ii) with respect to the net income, interest expense, rental expense, income taxes, depreciation, amortization and other non-cash charges (if similar to depreciation and amortization) of any Equity Affiliate for any period of four consecutive Fiscal Quarters, a percentage thereof equal to the percentage of such Equity Affiliate's net income (or net loss) for such period included in determining, on a Pro Forma Basis, the consolidated net income of the Borrower and its Subsidiaries for such period. "Borrowing" means a Syndicated Borrowing, a Money Market Borrowing or a Swingline Borrowing. 4 <PAGE> "Closing Date" means the date on which all the conditions set forth in Section 3.01 have been satisfied (or waived in accordance with Section 9.05). "Co-Agents" means the Lenders designated as Co-Agents on the signature pages hereof, in their respective capacities as Co-Agents in connection with the credit facility provided hereunder. "Co-Arrangers" means BancAmerica Securities, Inc., BNY Capital Markets, Inc. and The Bank of Nova Scotia. "Combined Companies" means the Borrower and its Subsidiaries and OrNda and its Subsidiaries. "Commitment" means (i) with respect to any Lender listed on the Commitment Schedule, the amount set forth opposite its name on the Commitment Schedule as its Commitment or (ii) with respect to any Assignee, the amount of the transferor Lender's Commitment assigned to such Assignee pursuant to Section 9.06(c), in each case as such amount may be reduced from time to time pursuant to Section 2.12 or changed as result of an assignment pursuant to Section 9.06(c). The term "Commitment" does not include the Swingline Commitment. "Commitment Percentage" means, with respect to any Lender at any time, the percentage which the amount of such Lender's Commitment at such time represents of the aggregate amount of all the Lenders' Commitments at such time. At any time after the Commitments shall have terminated, the term "Commitment Percentage" shall refer to a Lender's Commitment Percentage immediately before such termination, adjusted to reflect any subsequent assignments pursuant to Section 9.06(c). "Commitment Schedule" means the Commitment Schedule attached hereto. "Consolidated EBITDA" means, for any period of four consecutive Fiscal Quarters, the sum of (i) the consolidated net income of the Borrower and its Subsidiaries for such period plus (ii) to the extent deducted in determining such consolidated net income, the sum of (A) interest expense, (B) income taxes, (C) depreciation and amortization expenses, (D) other non-cash charges (other than those non-cash charges that reflect a past expenditure of cash within such four-quarter period (such as prepaid expenses and other similar charges) or future expenditure of cash) and (E) merger-related charges, all determined on a Pro Forma Basis; PROVIDED that Consolidated EBITDA shall be calculated so as to exclude the effect of (w) any gain or loss that is classified as extraordinary in accordance with GAAP, (x) any gain or loss from any sale or other disposition of any Healthcare Facility, any Healthcare Business or any Equity Interest in any 5 <PAGE> Person and, without duplication, (y) (a) impairment and other unusual cash charges reported by the Borrower for the fourth Fiscal Quarter of 1999 in the aggregate amount of $65,000,000, (b) impairment and other unusual cash charges reported by the Borrower after August 31, 1999 with respect to physician practices in an aggregate amount (together with such charges recorded in any prior Fiscal Quarter and excluded from the calculation of Consolidated EBITDA pursuant to this clause (b)) not in excess of $200,000,000, and (c) other impairment or unusual cash charges reported by the Borrower after August 31, 1999 in an aggregate amount (together with such charges recorded in any prior Fiscal Quarter and excluded from the calculation of Consolidated EBITDA pursuant to this clause (c)) not in excess of $100,000,000 (and not in excess of $25,000,000 in any Fiscal Quarter beginning after August 31, 1999 plus the portions of such amounts, if any, not utilized in prior Fiscal Quarters beginning after August 31, 1999). "Consolidated Interest Expense" means, for any period of four consecutive Fiscal Quarters, the consolidated interest expense of the Borrower and its Subsidiaries for such period, determined on a Pro Forma Basis. "Consolidated Net Worth" means, at any time, the consolidated stockholders' equity of the Borrower and its Subsidiaries at such time. "Consolidated Rental Expense" means, for any period of four consecutive Fiscal Quarters, the consolidated rental expense of the Borrower and its Subsidiaries for such period, determined on a Pro Forma Basis. "Continuing Director" means (i) any individual who is a director of the Borrower on the date of this Agreement and (ii) any individual who becomes a director of the Borrower after the date of this Agreement and is elected or nominated for election as a director of the Borrower by a majority of the individuals who were Continuing Directors immediately before such election or nomination. "Credit Exposure" means, with respect to any Lender at any time, (i) the amount of its Commitment at such time or (ii) if its Commitment shall have terminated, an amount equal to the sum of the aggregate outstanding principal amount of its Loans plus its LC Exposure at such time plus any participation in Swingline Loans held by it pursuant to Section 2.16(h). "Date of Determination", when used with respect to determining any amount for any period of four consecutive Fiscal Quarters, means (i) the last day of such period, if such amount is being determined for purposes of Section 5.11 or (ii) the day as of which the debt ratio is being determined, if such amount is being determined for purposes of Section 5.09. 6 <PAGE> "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business and deferred compensation payable to members of management of such Person, (iv) all obligations of such Person as lessee which are capitalized in accordance with GAAP and (v) all Guarantees by such Person of obligations of other Persons of the types described in the foregoing clauses (i) through (iv), inclusive (any such Guarantee to be included in any calculation of the amount of such Person's Debt at an amount equal to the principal amount guaranteed thereby). If such Person Guarantees Debt of another Person by causing a letter of credit to be issued in support thereof, the "Debt" of such Person includes (without duplication) such Person's obligation to reimburse the issuing bank for drawings (including any future drawings) in respect of principal under such letter of credit. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Lender, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Lender may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "Environmental Laws" means any and all federal, state and local statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "Equity Affiliate" means, at any date, a Person in which the Borrower or a Subsidiary has an Equity Interest that would be accounted for on the equity method in the Borrower's consolidated financial statements if such statements were prepared as of such date. If such Person has any consolidated subsidiaries, 7 <PAGE> the term "Equity Affiliate" shall mean such Person and its consolidated subsidiaries, and all amounts to be determined for purposes of this Agreement with respect to such Equity Affiliate shall be determined with respect to such Person and its consolidated subsidiaries on a consolidated basis. For any period prior to the Closing Date, the term "Equity Affiliate" includes any affiliate of OrNda that is an Equity Affiliate immediately after the Closing Date. "Equity Interest" means (i) in the case of a corporation, any shares of its capital stock, (ii) in the case of a partnership, any partnership interest (whether general or limited), (iii) in the case of any other business entity, any participation or other interest in the equity or profits thereof or (iv) any warrant, option or other right to acquire any Equity Interest described in the foregoing clauses (i), (ii) and (iii), other than a right to convert a debt security into, or exchange a debt security for, any such Equity Interest. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, its Subsidiaries and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Borrowing" means a borrowing pursuant to Section 2.01 of Euro-Dollar Loans having the same initial Interest Period. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Lender, its office, branch or Affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or Affiliate of such Lender as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "Euro-Dollar Loan" means a Syndicated Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Syndicated Borrowing or Notice of Interest Rate Election. "Euro-Dollar Margin" means 68.75 basis points (0.6875%) per annum. 8 <PAGE> "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.09(b) or (c) on the basis of an Adjusted London Interbank Offered Rate. "Euro-Dollar Reference Banks" means the principal London offices of Morgan Guaranty Trust Company of New York, Bank of America National Trust and Savings Association, The Bank of New York and The Bank of Nova Scotia. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.09(b). "Events of Default" has the meaning set forth in Section 6.01. "Evergreen Letter of Credit" means a Letter of Credit that is automatically extended unless the relevant LC Issuing Bank gives notice to the beneficiary thereof stating that such Letter of Credit will not be extended. "Excess Receivables Adjustment" means, at any time, an amount equal to the product of (i) Excess Days Outstanding for the Fiscal Quarter ending at, or most recently ended prior to, such time, MULTIPLIED BY (ii) Daily Net Revenue for such Fiscal Quarter; provided that in no event shall the Excess Receivables Adjustment at any time be less than zero or greater than (x) at any time prior to March 1, 2001, $500,000,000 and (y) at any time on or after March 1, 2001, $250,000,000. For purposes hereof, (i) "Excess Days Outstanding" means, for any Fiscal Quarter, the difference between (x) the quotient obtained by dividing (a) consolidated accounts receivable, less allowance for doubtful accounts, of the Borrower and its Subsidiaries at the end of such Fiscal Quarter BY (b) Daily Net Revenue for such Fiscal Quarter, MINUS (y) 85; and (ii) "Daily Net Revenue" for any Fiscal Quarter means the quotient obtained by dividing (x) consolidated net operating revenues of the Borrower and its Subsidiaries for such Fiscal Quarter BY (y) the number of calendar days occurring in such Fiscal Quarter. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Facility Fee Rate" means 31.25 basis points (0.3125%) per annum. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, PROVIDED that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be 9 <PAGE> the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "Financial Obligations" of any Person means at any date, without duplication: (i) Debt of such Person, (ii) all obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument or to make any payment pursuant to a Hedging Obligation, (iii) all Debt that is secured by a Lien on any asset of such Person but is not otherwise an obligation of such Person, PROVIDED that the amount of any Financial Obligation described in this clause (iii) shall be deemed to be equal to the lesser of the amount of the relevant Debt or the book value of the asset or assets of such Person securing such Debt, and (iv) all Guarantees by such Person of Financial Obligations of other Persons of the types described in clauses (i) and (ii) of this definition. "Financing Documents" means this Agreement (including the Schedules and Exhibits hereto), the Notes and the Swingline Note, and "Financing Document" means any one of them. "Fiscal Quarter" means a fiscal quarter of the Borrower. "Fiscal Year" means a fiscal year of the Borrower. "GAAP" means at any time generally accepted accounting principles as then in effect in the United States, applied on a basis consistent (except for changes with which the Borrower's independent public accountants have concurred) with the most recent audited consolidated financial statements of the Borrower and its Subsidiaries theretofore delivered to the Lenders. "Group of Loans" means at any time a group of Syndicated Loans consisting of (i) all Syndicated Loans which are Base Rate Loans at such time or (ii) all Syndicated Loans which are Euro-Dollar Loans having the same Interest Period at such time; PROVIDED that, if a Loan of any particular Lender is converted to or made as a Base Rate Loan pursuant to Section 8.02 or 8.05, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. 10 <PAGE> "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other payment obligation of any other Person, including without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other payment obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other payment obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), PROVIDED that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Healthcare Business" means any going concern healthcare business or any other going concern business that is related or ancillary to one or more Healthcare Facilities or healthcare businesses. "Healthcare Facility" means a hospital, outpatient clinic, long-term care facility, medical office building or other comparable facility that is used or useful in providing healthcare services. "Hedging Obligation" means, with respect to any Person, any obligation of such Person under (i) any interest rate swap agreement, interest rate cap agreement or interest rate collar agreement, (ii) any foreign exchange contract or currency swap agreement or (iii) any other agreement or arrangement of a type designed to protect a Person against fluctuations in interest rates or currency exchange rates. "Included Equity Affiliate" means, at any time, an Equity Affiliate that the Borrower has theretofore designated, by written notice to the Administrative Agent and the Lenders, as an Included Equity Affiliate for purposes of this Agreement; PROVIDED that at such time the Borrower or a Subsidiary has the right to receive distributions of substantially all of the Borrower's Pro Rata Share of such Equity Affiliate's net income for future periods free of any restriction except a restriction that the Borrower or such Subsidiary may agree to after such time. The Borrower may revoke any such designation by written notice to the Administrative Agent and the Lenders at any time. "Indemnitee" has the meaning set forth in Section 9.03(b). 11 <PAGE> "Interest Period" means: (1) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Syndicated Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable notice; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar 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, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter as the Borrower may elect in accordance with Section 2.03; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar 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, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; and (3) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of 12 <PAGE> days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment" means, with respect to any Person, any investment by such Person in any other Person (including an Affiliate) in the form of loans, capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Debt, Equity Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investment Grade Rating" means a rating of senior long-term unsecured debt securities of the Borrower without any third party credit support as (i) BBB- or higher by S&P and (ii) Baa3 or higher by Moody's. "LC Exposure" means, with respect to any Lender at any time, an amount equal to its Commitment Percentage of the Aggregate LC Exposure at such time. "LC Fee Rate" means 68.75 basis points (0.6875%) per annum. "LC Indemnitees" has the meaning set forth in Section 2.17(m). "LC Issuing Bank" has the meaning set forth in Section 2.17(a). "LC Office" means, with respect to any LC Issuing Bank, the office at which it books any Letter of Credit issued by it. "LC Payment Date" has the meaning set forth in Section 2.17(i). "LC Reimbursement Due Date" has the meaning set forth in Section 2.17(j). "LC Reimbursement Obligations" means, at any time, all obligations of the Borrower to reimburse the LC Issuing Banks for amounts paid by the LC Issuing Banks in respect of drawings under Letters of Credit, including any 13 <PAGE> portion of any such obligation to which a Lender has become subrogated pursuant to Section 2.17(k). "Lender" means each lender listed on the Commitment Schedule, each Assignee which becomes a Lender pursuant to Section 9.06(c), and their respective successors. The term "Lender" does not include the Swingline Bank in its capacity as such. "Lending Parties" means the Lenders, the LC Issuing Banks, the Managing Agents, the Co-Agents, the Swingline Bank and the Agents. "Letter of Credit" means a letter credit issued hereunder by an LC Issuing Bank. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has substantially the same practical effect as a security interest, in respect of such asset. For purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Syndicated Loan or a Money Market Loan and "Loans" means both of the foregoing. The term "Loan" does not include a Swingline Loan. "London Interbank Offered Rate" has the meaning set forth in Section 2.09(b). "Managing Agents" means the Lenders designated as Managing Agents on the signature pages hereof, in their respective capacities as Managing Agents in connection with the credit facility provided hereunder. "Material Adverse Effect" means a material adverse effect on the business, operations, properties, financial condition or prospects of the Combined Companies, considered as a whole. "Material Financial Obligations" means non-contingent Financial Obligations (other than the Notes, the Swingline Note and the LC Reimbursement Obligations) of the Borrower and/or one or more Subsidiaries, arising in one or 14 <PAGE> more related transactions, in an aggregate principal or face amount exceeding $35,000,000; PROVIDED that, for purposes of this definition and clause (g) of Section 6.01, (i) contingent obligations of the Borrower or any Subsidiary to reimburse a bank or other Person for amounts not yet drawn under a letter of credit or similar instrument shall be deemed to be non-contingent (and to have been accelerated) if they are required to be prepaid or cash collateralized as a result of a default under the relevant reimbursement agreement and (ii) contingent obligations of the Borrower or any Subsidiary under any Hedging Obligation shall be deemed to be non-contingent (and to have been accelerated) if such Hedging Obligation is terminated by reason of a default by the Borrower or any Subsidiary. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $35,000,000. "Material Subsidiary" means any Subsidiary of the Borrower, except (i) a Subsidiary that is not actively engaged in business and has assets of less than $15,000,000 and liabilities of less than $15,000,000 or (ii) a Subsidiary that is actively engaged in business and has assets of less than $10,000,000 and liabilities of less than $10,000,000. "Merger Agreement" means the Agreement and Plan of Merger dated as of October 16, 1996 among the Borrower, OrNda and OHC Acquisition Co., a wholly-owned subsidiary of the Borrower, as amended as of November 22, 1996. "Metrocrest Reimbursement Agreement" means the Letter of Credit and Reimbursement Agreement dated as of November 1, 1994 among the Borrower, the banks party thereto, and The Bank of New York, as Issuing Bank and Agent thereunder, as amended from time to time. "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan made or to be made by a Lender pursuant to an Absolute Rate Auction. "Money Market Borrowing" means a borrowing of Money Market Loans pursuant to a LIBOR Auction or an Absolute Rate Auction. "Money Market Lending Office" means, as to each Lender, its Domestic Lending Office or such other office, branch or Affiliate of such Lender as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Administrative Agent; PROVIDED that any Lender may from time to time by notice to the Borrower and the Administrative Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all 15 <PAGE> references herein to the Money Market Lending Office of such Lender shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan made or to be made by a Lender pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(a)). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Lender to make a Money Market Loan in accordance with Section 2.03. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "New Public Debt" means $1,300,000,000 of senior notes and $700,000,000 of senior subordinated notes of the Borrower to be issued and sold in an underwritten public offering as described in the New Public Debt Prospectus. "New Public Debt Prospectus" means the prospectus covering the offering and sale of the New Public Debt, as filed with the SEC pursuant to SEC Rule 424(b) on January 27, 1997. "Non-Recourse Purchase Money Debt" of any Person means Debt incurred to finance additions to its property, plant and equipment (or to refinance Debt incurred for such purpose); PROVIDED that the lender or other obligee of such Debt has no recourse (except for breach of representations, warranties and/or covenants customary in asset-based financing) to assets of such Person, the Borrower or any Subsidiary other than the assets financed or refinanced by such Debt and cash flows attributable to such assets. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, issued hereunder to evidence the obligation of the Borrower to repay the Loans (other than the Swingline Loans), and "Note" means any one of such promissory notes. 16 <PAGE> "Notice of Borrowing" means a Notice of Syndicated Borrowing (as defined in Section 2.02), a Notice of Money Market Borrowing (as defined in Section 2.03(f)) or a Notice of Swingline Borrowing (as defined in Section 2.16(b)). "Notice of Interest Rate Election" has the meaning set forth in Section 2.10. "OrNda" means OrNda HealthCorp, a Delaware corporation. "OrNda's Existing Credit Agreement" means the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of October 27, 1995 among OrNda, OrNda Hospital Corporation (formerly known as Summit Hospital Corporation), AHM Acquisition Co., Inc., the Guarantors named therein, the Lenders named therein and the Agents named therein, as amended from time to time. "OrNda Tender Offers" means tender offers and consent solicitations to purchase for cash any and all of OrNda's 12.25% Senior Subordinated Notes due 2002 and 11.375% Senior Subordinated Notes due 2004 as described in the New Public Debt Prospectus under the heading "Related Transactions -- The Refinancing". "Outstanding Committed Amount" means, with respect to any Lender at any time, the sum of (i) the outstanding principal amount of each of its Syndicated Loans, (ii) each outstanding participation in Swingline Loans (if any) held by it pursuant to Section 2.16(h) and (iii) its LC Exposure, all determined at such time after giving effect to any prior assignments by or to such Lender pursuant to Section 9.06(c). "Parent" means, with respect to any Lender, any Person controlling such Lender. "Participant" has the meaning set forth in Section 9.06(b). "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was 17 <PAGE> at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Pro Forma Basis", when used with respect to determining any amount for any period of four consecutive Fiscal Quarters, means that if, at any time after such period began and on or before the Date of Determination, the Borrower or any of its Subsidiaries acquired or disposed of (i) an Equity Interest in a Person that is (or by reason of such acquisition becomes) a Subsidiary or an Equity Affiliate or (ii) a Healthcare Facility or Healthcare Business, such amount shall be determined (to the extent practicable) as if such Equity Interest, Healthcare Facility or Healthcare Business had been acquired or disposed of at the beginning of such period (and as if the consideration therefor had been given or received and any related incurrence or repayment of Debt had occurred at such time); PROVIDED that, in the case of the Borrower's acquisition of OrNda, such amount shall be determined on the basis of the same assumptions, and after giving effect to the same transactions and events as of the same dates, as were used in preparing the pro forma financial information included in the New Public Debt Prospectus under the heading "Pro Forma Financial Information", except that the retirement of the debt subject to the OrNda Tender Offers shall be given such effect only if (and to the extent that) such debt has been acquired by the Borrower or one of its Subsidiaries, or otherwise retired, on or before the Date of Determination. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Lenders" means at any time Lenders having more than 50% of the aggregate amount of the Credit Exposures at such time. "Restricted Asset Transfer" means any sale or other transfer by the Borrower or any Subsidiary (or by OrNda or any of its Subsidiaries after November 30, 1996) of any Healthcare Facility, any Healthcare Business or any Equity Interest in any Person (including, without limitation, any such transfer accomplished by means of a merger or consolidation), except: (i) a sale or other transfer to the Borrower or a Subsidiary; (ii) a transfer accomplished by means of a merger or consolidation of the Borrower permitted by Section 5.06(a); (iii) a sale or other transfer of assets that were held for sale as of November 30, 1996; 18 <PAGE> (iv) any issuance or sale by the Borrower of Equity Interests in the Borrower; (v) any sale or other transfer of Equity Interests in Vencor, Inc., pursuant to the provisions of the Borrower's 6% Exchangeable Subordinated Notes due 2005 or otherwise; (vi) a sale or other transfer of Equity Interests in any Person that is neither a Subsidiary nor an Equity Affiliate; (vii) any sale or other transfer of assets to an Equity Affiliate; and (viii) any sale of assets identified in Schedule 5.06 hereto, PROVIDED that such sale occurs not later than March 31, 2000. "S&P" means Standard & Poor's Ratings Services. "SEC" means the United States Securities and Exchange Commission. "Senior Officer of the Borrower" means an Executive Vice President, a Senior Vice President or the Treasurer of the Borrower. "Subsidiary" means, as to any Person at any date, any corporation or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date in accordance with GAAP. Unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Swingline Availability Period" means the period from and including the Closing Date to but excluding the Swingline Maturity Date. "Swingline Bank" means Morgan Guaranty Trust Company of New York, in its capacity as the Swingline Bank under the swingline facility described in Section 2.16, and its successors in such capacity. "Swingline Borrowing" means a borrowing of a Swingline Loan pursuant to Section 2.16(a). "Swingline Commitment" means the obligation of the Swingline Bank to make Swingline Loans to the Borrower in aggregate principal amount at any one time outstanding not to exceed $10,000,000. "Swingline Loan" means a loan made by the Swingline Bank pursuant to Section 2.16(a). 19 <PAGE> "Swingline Maturity Date" means the day that is 30 days before the Termination Date. "Swingline Note" has the meaning set forth in Section 2.16(d). "Syndicated Borrowing" means a Base Rate Borrowing pursuant to Section 2.01 or Section 2.16(h) or a Euro-Dollar Borrowing pursuant to Section 2.01. "Syndicated Loan" means a loan made pursuant to Section 2.01 or Section 2.16(h); PROVIDED that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Syndicated Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Termination Date" means January 31, 2002 or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP as in effect from time to time; PROVIDED that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any provision hereof to eliminate the effect of any change in GAAP on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders wish to amend any provision hereof for such purpose), then such provision shall be applied on the basis of GAAP as in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such provision is amended in a manner satisfactory to the Borrower and the Required Lenders. <PAGE> ARTICLE 2 THE CREDITS SECTION 2.01. SYNDICATED BORROWINGS. Each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time during the Availability Period; PROVIDED that, immediately after each such loan is made, such Lender's Outstanding Committed Amount shall not exceed its Commitment. Each borrowing under this Section shall be a Syndicated Borrowing made from the several Lenders ratably in proportion to their respective Commitments. Each such Syndicated Borrowing shall be in an aggregate amount of $10,000,000 or any larger multiple of $1,000,000; PROVIDED that (i) any such Syndicated Borrowing may be in the aggregate amount of the unused Commitments and (ii) if such Syndicated Borrowing is made on the Swingline Maturity Date, such Syndicated Borrowing may be in the aggregate amount of the Swingline Loans outstanding on such date. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.07, prepay Syndicated Loans and reborrow at any time during the Availability Period under this Section. SECTION 2.02. NOTICE OF SYNDICATED BORROWING. The Borrower shall give the Administrative Agent notice (a "Notice of Syndicated Borrowing") not later than (x) 11:00 A.M. (New York City time) on the date of each Base Rate Borrowing and (y) 1:00 P.M. (New York City time) on the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (i) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (ii) the aggregate amount of such Borrowing, (iii) whether such Borrowing is to be a Base Rate Borrowing or a Euro-Dollar Borrowing, and (iv) in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto. Each Interest Period specified in a Notice of Syndicated Borrowing shall comply with the provisions of the definition of Interest Period. SECTION 2.03. MONEY MARKET BORROWINGS. (a) THE MONEY MARKET OPTION. At any time during the Availability Period, the Borrower may, as set forth in this Section, request the Lenders to make offers to make Money Market Loans to the Borrower; PROVIDED that, immediately 21 <PAGE> after any such Money Market Loans are made and any Loans to be repaid substantially concurrently therewith are repaid: (i) if the Borrower has an Investment Grade Rating, the aggregate outstanding principal amount of the Money Market Loans shall be limited only by Section 3.03(c); (ii) if the Borrower does not have an Investment Grade Rating, but its senior long-term unsecured debt securities without any third-party credit support are rated BB+ or higher by S&P and Ba1 or higher by Moody's, the aggregate outstanding principal amount of the Money Market Loans shall not exceed the lesser of (x) the amount permitted by Section 3.03(c) or (y) $500,000,000; (iii) if the Borrower's senior long-term unsecured debt securities without any third-party credit support are not rated BB+ or higher by S&P and Ba1 or higher by Moody's, but are rated BB or higher by S&P and Ba2 or higher by Moody's, the aggregate outstanding principal amount of the Money Market Loans shall not exceed the lesser of (x) the amount permitted by Section 3.03(c) or (y) $250,000,000; and (iv) if the Borrower's senior long-term unsecured debt securities without any third-party credit support are not rated BB or higher by S&P and Ba2 or higher by Moody's, the Borrower may not request or accept any offers to make Money Market Loans. The Lenders may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) MONEY MARKET QUOTE REQUEST. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 1:00 P.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Lenders not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, 22 <PAGE> (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger multiple of $1,000,000; (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Administrative Agent may agree) of any other Money Market Quote Request. (c) INVITATION FOR MONEY MARKET QUOTES. Promptly upon receipt of a Money Market Quote Request, the Administrative Agent shall send to the Lenders by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Lender to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) SUBMISSION AND CONTENTS OF MONEY MARKET QUOTES. (i) Each Lender may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Administrative Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 10:00 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Lenders not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); PROVIDED that Money Market Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Lender may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Lenders, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Lenders, in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any 23 <PAGE> Money Market Quote so made shall be irrevocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be substantially in the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Lender, (x) must be $10,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Lender may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Lender. A Money Market Quote may set forth up to five separate offers by the quoting Lender with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or 24 <PAGE> (D) arrives after the time set forth in subsection (d)(i). (e) NOTICE TO BORROWER. The Administrative Agent shall promptly notify the Borrower of the terms of (x) any Money Market Quote submitted by a Lender that is in accordance with subsection (d) and (y) any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Lender with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) ACCEPTANCE AND NOTICE BY BORROWER. Not later than (x) 1:00 P.M. (New York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 11:00 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Lenders not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Administrative Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. Subject to the applicable limitation in subsection (a) of this Section, the Borrower may accept any Money Market Quote in whole or in part; PROVIDED that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $10,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and 25 <PAGE> (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) ALLOCATION BY ADMINISTRATIVE AGENT. If offers are made by two or more Lenders with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Administrative Agent among such Lenders as nearly as possible (in multiples of $1,000,000, as the Administrative Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Administrative Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. NOTICE TO LENDERS; FUNDING OF LOANS. (a) Upon receipt of a Notice of Syndicated Borrowing or a Notice of Money Market Borrowing, the Administrative Agent shall promptly notify each Lender participating in such Borrowing of the contents of such Notice of Borrowing and such Lender's share of such Borrowing. Such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 1:00 P.M. (New York City time) on the date of each such Borrowing, each Lender participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent shall (i) apply the funds so received from the Lenders to repay all Swingline Loans (if any) then outstanding, together with interest accrued thereon, and (ii) make the remainder of such funds available to the Borrower at the Administrative Agent's aforesaid address. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any such Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsection (b) of this Section and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made its share of such Borrowing available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such 26 <PAGE> amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable to such Borrowing pursuant to Section 2.09 and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Loan included in such Borrowing for purposes of this Agreement. If the Borrower shall repay such corresponding amount, such repayment shall not affect any rights the Borrower may have against any defaulting Lender. SECTION 2.05. NOTES. (a) The Borrower's obligation to repay the Loans of each Lender shall be evidenced by a single Note payable to the order of such Lender for the account of its Applicable Lending Office. (b) Each Lender may, by notice to the Borrower and the Administrative Agent, request that its Base Rate Loans, its Euro-Dollar Loans or its Money Market Loans be evidenced by a separate Note. Each such Note shall be substantially in the form of Exhibit A hereto, with appropriate modifications to reflect the fact that it evidences solely the relevant type of Loans. Each reference in this Agreement to a "Note" or the "Notes" of such Lender shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Lender's Note pursuant to Section 3.01(b), the Administrative Agent shall forward such Note to such Lender. Each Lender shall record the date, amount and type of each Loan made by it and the date and amount of each payment of principal made with respect thereto, and may, if such Lender so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan evidenced thereby then outstanding; PROVIDED that the failure of any Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower under this Agreement or the Notes. Each Lender is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.06. MATURITY OF LOANS. (a) Each Syndicated Loan shall mature, and the principal amount thereof shall be due and payable, on the Termination Date. (b) Each Money Market Loan shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable thereto. SECTION 2.07. OPTIONAL PREPAYMENTS OF SYNDICATED LOANS. The Borrower may at its option, by Notice of Syndicated Prepayment given in accordance with Section 2.08, prepay any Group of Loans (subject, in the case of a Group of Euro- 27 <PAGE> Dollar Loans, to Section 2.14), in each case in whole at any time, or from time to time in part in amounts aggregating at least $10,000,000, by paying the principal amount to be prepaid together with interest accrued thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Lenders included in such Group of Loans. SECTION 2.08. NOTICE OF SYNDICATED PREPAYMENT. (a) The Borrower shall give the Administrative Agent notice (a "Notice of Syndicated Prepayment") not later than (x) 11:00 A.M. (New York City time) on the date of each prepayment of Base Rate Loans and (y) 1:00 P.M. (New York City time) on the third Euro-Dollar Business Day before each prepayment of Euro-Dollar Loans, specifying: (i) the date of such prepayment, which shall be a Domestic Business Day in the case of a prepayment of Base Rate Loans or a Euro-Dollar Business Day in the case of a prepayment of Euro-Dollar Loans, (ii) the aggregate amount of such prepayment, and (iii) the Group or Groups of Loans to which such prepayment is to be applied. If the Borrower fails to specify the Group or Groups of Loans to which any such prepayment is to be applied, such Group or Groups of Loans shall be selected by the Administrative Agent. Each repayment or prepayment of Syndicated Loans shall be applied ratably to the Loans included in the Group or Groups of Loans selected by the Borrower or the Administrative Agent, as the case may be. (b) Upon receipt of a Notice of Syndicated Prepayment, the Administrative Agent shall promptly notify each relevant Lender of the contents thereof and of such Lender's ratable share of such prepayment and such Notice of Syndicated Prepayment shall not thereafter be revocable by the Borrower. SECTION 2.09. INTEREST RATES. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Loan is made to but excluding the date it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable in arrears on the last Domestic Business Day of each Fiscal Quarter and, with respect to the principal amount of any Base Rate Loan converted to a Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable 28 <PAGE> thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, three months after the first day thereof. The "Adjusted London Interbank Offered Rate" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Lender to United States residents). (c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid, at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 29 <PAGE> shall exist, at a rate per annum equal to the sum of 2% plus the Base Rate for such day) and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Loan at the date such payment was due. (d) Each Euro-Dollar Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated hereby. If any Euro-Dollar Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Euro-Dollar Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. (e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.09(b) as if the related Money Market LIBOR Borrowing were a Syndicated Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Lender making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Lender making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. SECTION 2.10. METHOD OF ELECTING INTEREST RATES. (a) The Loans included in each Syndicated Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Syndicated Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and (ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case 30 <PAGE> effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Administrative Agent at least three Euro-Dollar Business Days before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; PROVIDED that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $10,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted to Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Administrative Agent shall promptly notify each Lender of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Administrative Agent for any Group of Euro-Dollar Loans, such Loans shall be converted to Base Rate Loans on the last day of the then current Interest Period applicable thereto. SECTION 2.11. FEES. The Borrower shall pay to the Administrative Agent, for the account of the Lenders ratably in proportion to their Credit Exposures, a facility fee calculated for each day at the Facility Fee Rate on the aggregate amount of the Credit Exposures on such day. Such facility fee shall accrue from and including the Closing Date to but excluding the date on which the Credit Exposures are reduced to zero and shall be payable quarterly on each March 31, 31 <PAGE> June 30, September 30 and December 31 and on the date on which the Credit Exposures are reduced to zero. SECTION 2.12. TERMINATION OR REDUCTION OF COMMITMENTS. The Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if there are no Syndicated Loans, Swingline Loans or LC Exposures outstanding at such time, or (ii) ratably reduce from time to time by an aggregate amount of $10,000,000 or any multiple of $1,000,000 in excess thereof, the aggregate amount of the Commitments in excess of the sum of the aggregate outstanding principal amount of all Syndicated Loans and Swingline Loans and the Aggregate LC Exposure at such time. Unless previously terminated, the Commitments shall terminate at the close of business on the Termination Date. SECTION 2.13. GENERAL PROVISIONS AS TO PAYMENTS. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and LC Reimbursement Obligations, and of fees hereunder (other than fees payable directly to the LC Issuing Banks), not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.01. The Administrative Agent will promptly distribute to each Lender its ratable share (if any) of each such payment received by the Administrative Agent for the account of the Lenders. Whenever any payment of principal of, or interest on, Base Rate Loans, Swingline Loans or LC Reimbursement Obligations or any payment of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to any Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment, each Lender shall repay to the 32 <PAGE> Administrative Agent forthwith on demand the amount so distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.14. FUNDING LOSSES. If the Borrower makes any payment of principal with respect to any Euro-Dollar Loan or any Euro-Dollar Loan is converted to a Base Rate Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.09(c), or the Borrower fails to borrow or prepay or convert any Euro-Dollar Loans after notice has been given to any Lender in accordance with Section 2.04(a) or 2.10(c), the Borrower shall reimburse each Lender within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow or prepay or convert, PROVIDED that such Lender shall have delivered to the Borrower a certificate setting forth in reasonable detail the amount of such loss or expense and the method of calculation thereof, which certificate shall be conclusive in the absence of manifest error. SECTION 2.15. COMPUTATION OF INTEREST AND FEES. (a) Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). (b) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder and each Facility Fee Rate and LC Fee Rate applicable hereunder. The Administrative Agent shall give prompt notice to the Borrower and the relevant Lenders of each interest rate, Facility Fee Rate and LC Fee Rate so determined, and its determination thereof shall be conclusive in the absence of manifest error. SECTION 2.16. SWINGLINE LOANS. (a) SWINGLINE COMMITMENT. The Swingline Bank agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time during the Swingline Availability Period; PROVIDED that, immediately after each such loan is made, the aggregate outstanding principal amount of such loans shall not exceed the Swingline Commitment. Each loan under this Section shall be in a principal amount of at least $1,000,000 and shall bear interest for each day at the Base Rate for such day. Within the foregoing limits, the Borrower may borrow under this 33 <PAGE> Section, repay Swingline Loans and reborrow at any time during the Swingline Availability Period under this Section. (b) NOTICE OF SWINGLINE BORROWING. The Borrower shall give the Swingline Bank notice (a "Notice of Swingline Borrowing") not later than 2:00 P.M. (New York City time) on the date of each Swingline Borrowing, specifying (i) the date of such Borrowing, which shall be a Domestic Business Day, and (ii) the amount of such Borrowing. (c) FUNDING OF SWINGLINE LOANS. Not later than 3:00 P.M. (New York City time) on the date of each Swingline Borrowing, the Swingline Bank shall, unless the Swingline Bank determines that any applicable condition specified in Article 3 has not been satisfied, make available the amount of such Swingline Borrowing, in Federal or other funds immediately available in New York City, to the Borrower at the Swingline Bank's address referred to in Section 9.01. (d) SWINGLINE NOTE. The Borrower's obligation to repay the Swingline Loans shall be evidenced by a single Note substantially in form of Exhibit E hereto (the "Swingline Note"). (e) OPTIONAL PREPAYMENT OF SWINGLINE LOANS. The Borrower may prepay the Swingline Loans in whole at any time, or from time to time in part in a principal amount of at least $1,000,000, by giving notice of such prepayment to the Swingline Bank not later than 12:00 Noon (New York City time) on the date of prepayment and paying the principal amount to be prepaid, together with interest accrued thereon to the date of prepayment, to the Swingline Bank at its address referred to in Section 9.01, in Federal or other funds immediately available in New York City, not later than 3:00 P.M. (New York City time) on the date of prepayment. (f) MANDATORY PREPAYMENT OF SWINGLINE LOANS. On the date of each Borrowing pursuant to Section 2.01 or 2.03, the Borrower shall prepay all Swingline Loans then outstanding, together with interest accrued thereon to the date of prepayment. (g) MATURITY OF SWINGLINE LOANS. All Swingline Loans outstanding on the Swingline Maturity Date shall be due and payable on such date, together with interest accrued thereon to such date. (h) REFUNDING UNPAID SWINGLINE LOANS. If (i) the Swingline Loans are not paid in full on the Swingline Maturity Date or (ii) the Swingline Loans become immediately due and payable pursuant to Section 6.01, the Swingline Bank (or the Administrative Agent on its behalf) may, by notice to the Lenders (including the Swingline Bank, in its capacity as a Lender), require each Lender to pay to the Swingline Bank an amount equal to such Lender's Commitment 34 <PAGE> Percentage of the aggregate unpaid principal amount of the Swingline Loans then outstanding. Such notice shall specify the date on which such payments are to be made, which shall be the first Domestic Business Day after such notice is given. Not later than 12:00 Noon (New York City time) on the date so specified, each Lender shall pay the amount so notified to it to the Swingline Bank at its address referred to in Section 9.01, in Federal or other funds immediately available in New York City. The amount so paid by each Lender shall constitute a Base Rate Loan to the Borrower; PROVIDED that, if the Lenders are prevented from making such Base Rate Loans to the Borrower by the provisions of the United States Bankruptcy Code or otherwise, the amount so paid by each Lender shall constitute a purchase by it of a participation in the unpaid principal amount of the Swingline Loans (and interest accruing thereon after the date of such payment). Each Lender's obligation to make such payment to the Swingline Bank under this subsection (h) shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which such Lender or any other Person may have against the Swingline Bank or the Borrower, (ii) the occurrence or continuance of a Default or an Event of Default or the termination of the Commitments, (iii) any adverse change in the condition (financial or otherwise) of the Borrower or any other Person, (iv) any breach of this Agreement by the Borrower or any other party hereto or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; PROVIDED that no Lender shall be obligated to make any payment to the Swingline Bank under this subsection (h) with respect to a Swingline Loan made by the Swingline Bank at a time when it knew that a Default had occurred and was continuing. (i) TERMINATION OF SWINGLINE COMMITMENT. The Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, terminate the Swingline Commitment at any time, if no Swingline Loans are outstanding at such time. Unless previously terminated, the Swingline Commitment shall terminate at the close of business on the Swingline Maturity Date. SECTION 2.17. LETTERS OF CREDIT. (a) LC ISSUING BANKS. The Borrower may, at any time, request any Lender to issue one or more letters of credit hereunder. Any Lender may, but shall not be obligated to, agree to issue such letters of credit. If any Lender so agrees, it shall send notice to the Administrative Agent confirming its agreement, whereupon such Lender shall become an "LC Issuing Bank" for the purposes hereof. (b) ISSUANCE. Each LC Issuing Bank agrees, on the terms and conditions set forth in this Agreement, to issue at the request of the Borrower the Letters of Credit that such LC Issuing Bank has agreed with the Borrower to issue; PROVIDED that (i) no Letter of Credit shall be issued after the date that is thirty days before the Termination Date and (ii) immediately after each such Letter of Credit is 35 <PAGE> issued and participations therein are sold to the Lenders as provided in this subsection: (A) the Aggregate LC Exposure shall not exceed $250,000,000 and (B) in the case of each Lender, its Outstanding Committed Amount shall not exceed its Commitment. Whenever an LC Issuing Bank issues a Letter of Credit hereunder, such LC Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Lender (including such LC Issuing Bank in its capacity as a Lender), and each Lender shall be deemed, without further action by any party hereto, to have purchased from such LC Issuing Bank, a participation in such Letter of Credit, on the terms specified in this Section, equal to such Lender's Commitment Percentage thereof. (c) NOTICE OF PROPOSED ISSUANCE. With respect to each Letter of Credit, the Borrower shall give the relevant LC Issuing Bank and the Administrative Agent at least three Domestic Business Days' prior notice (i) specifying the date such Letter of Credit is to be issued and (ii) describing the proposed terms of such Letter of Credit and the nature of the transactions to be supported thereby. Promptly after it receives such notice, the Administrative Agent shall notify each Lender of the contents thereof. (d) CONDITIONS TO ISSUANCE. No LC Issuing Bank shall issue any Letter of Credit unless: (i) such Letter of Credit shall be satisfactory in form and substance to such LC Issuing Bank, (ii) the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as such LC Issuing Bank shall have reasonably requested, (iii) such LC Issuing Bank shall have confirmed with the Administrative Agent on the date of such issuance that the limitations specified in clauses (A) and (B) of subsection (b)(ii) of this Section will not be exceeded immediately after such Letter of Credit is issued and (iv) such LC Issuing Bank shall not have been notified in writing by the Borrower, the Administrative Agent or the Required Lenders that any condition specified in clause (c), (d) or (e) of Section 3.03 is not satisfied at the time such Letter of Credit is to be issued. 36 <PAGE> (e) NOTICE OF ACTUAL ISSUANCE. Promptly after it issues any Letter of Credit, the relevant LC Issuing Bank shall notify the Administrative Agent of the date, face amount, beneficiary or beneficiaries and expiry date of such Letter of Credit. Promptly after it receives such notice, the Administrative Agent shall notify each Lender of the contents thereof and the amount of such Lender's participation in such Letter of Credit. Promptly after it issues any Letter of Credit, the relevant LC Issuing Bank shall send a copy of such Letter of Credit to the Administrative Agent. (f) EXPIRY DATES. No Letter of Credit shall have an expiry date later than the fifth Domestic Business Day before the Termination Date. Subject to the preceding sentence, each Letter of Credit, when issued hereunder, shall expire on or before the first anniversary of the date of such issuance; PROVIDED that the expiry date of any Letter of Credit may be extended from time to time (i) at the Borrower's request or (ii) in the case of an Evergreen Letter of Credit, automatically, in each case so long as such extension is for a period not exceeding one year and is granted (or the last day on which notice can be given to prevent such extension occurs) no earlier than three months before the then existing expiry date thereof. (g) NOTICE OF PROPOSED EXTENSIONS OF EXPIRY DATES. The relevant LC Issuing Bank shall give the Administrative Agent at least three Domestic Business Days' notice before such LC Issuing Bank extends (or allows an automatic extension of) the expiry date of any Letter of Credit issued by it. Such notice shall identify such Letter of Credit, the date on which it is to be extended (or the last day on which notice can be given to prevent such extension) and the date to which it is to be extended. Promptly after it receives such notice, the Administrative Agent shall notify each Lender of the contents thereof. No LC Issuing Bank shall extend (or allow the extension of) the expiry date of any Letter of Credit if: (i) such extension does not comply with subsection (f) of this Section or (ii) such LC Issuing Bank shall have been notified by the Administrative Agent or the Required Lenders that any condition specified in clause (c), (d) or (e) of Section 3.03 is not satisfied at the time of such proposed extension. If any Letter of Credit is not extended after notice of a proposed extension thereof has been given to the Lenders, the relevant LC Issuing Bank shall promptly notify the Administrative Agent of such failure to extend. Promptly after it receives such notice, the Administrative Agent shall notify each Lender thereof. 37 <PAGE> (h) FEES. The Borrower shall pay to the Administrative Agent, for the account of the Lenders ratably in proportion to their Commitment Percentages, a letter of credit fee for each day at the LC Fee Rate for such day on the aggregate amount available for drawing (whether or not conditions for drawing have been satisfied) under all Letters of Credit outstanding at the close of business on such day. Such letter of credit fee shall be payable with respect to each Letter of Credit in arrears on the last Domestic Business Day of each calendar quarter and on the Termination Date. The Borrower shall pay to each LC Issuing Bank fronting fees and other charges in the amounts and at the times agreed between the Borrower and such LC Issuing Bank. The LC Issuing Banks shall furnish to the Administrative Agent upon request such information as the Administrative Agent shall require in order to calculate the amount of any fee payable for the account of Lenders under this subsection (h). (i) DRAWINGS. If an LC Issuing Bank receives a demand for payment under any Letter of Credit issued by it and determines that such demand should be honored, such LC Issuing Bank shall (i) promptly notify the Borrower and the Administrative Agent as to the amount to be paid by such LC Issuing Bank as a result of such demand and the date of such payment (an "LC Payment Date") and (ii) make such payment in accordance with the terms of such Letter of Credit. (j) REIMBURSEMENT BY THE BORROWER. (A) If any amount is drawn under any Letter of Credit, the Borrower irrevocably and unconditionally agrees to reimburse the relevant LC Issuing Bank for such amount, together with any and all reasonable charges and expenses which such LC Issuing Bank may pay or incur relative to such drawing. Such reimbursement shall be due and payable on the relevant LC Payment Date or the date on which such LC Issuing Bank notifies the Borrower of such drawing, whichever is later; PROVIDED that, if such notice is given after 10:00 A.M. (New York City time) on the later of such dates, such reimbursement shall be due and payable on the next following Domestic Business Day (the date on which it is due and payable being an "LC Reimbursement Due Date"). (B) In addition, the Borrower agrees to pay, on the applicable LC Reimbursement Due Date, interest on each amount drawn under a Letter of Credit, for each day from and including the date such amount is drawn to but excluding such LC Reimbursement Due Date, at the Base Rate for such day. The Borrower also agrees to pay, on demand, interest on any overdue amount (including any overdue interest) payable under this subsection (j), for each day from and including the date when such amount becomes due to but excluding the date such amount is paid in full, at a rate per annum equal to the sum of 2% plus the Base Rate for such day. 38 <PAGE> (C) Each payment by the Borrower pursuant to this subsection (j) shall be made to the relevant LC Issuing Bank in Federal or other funds immediately available to it at its address referred to in Section 9.01. (k) PAYMENTS BY LENDERS. (A) If the Borrower fails to pay any LC Reimbursement Obligation in full when due, the relevant LC Issuing Bank may notify the Administrative Agent of the unreimbursed amount and request that the Lenders reimburse such LC Issuing Bank for their respective Commitment Percentages thereof. Promptly after it receives any such notice, the Administrative Agent shall notify each Lender of the unreimbursed amount and such Lender's Commitment Percentage thereof. Upon receiving such notice from the Administrative Agent, each Lender shall make available to such LC Issuing Bank, at its address referred to in Section 9.01, an amount equal to such Lender's Commitment Percentage of such unreimbursed amount, in Federal or other funds immediately available to such LC Issuing Bank, by 3:00 P.M. (New York City time) (i) on the date such Lender receives such notice if it is received at or before 12:00 Noon (New York City time) on such day or (ii) on the next Domestic Business Day if such notice is received after 12:00 Noon (New York City time) on the date of receipt, in each case together with interest on such amount for each day from and including the relevant LC Payment Date to but excluding the day such payment is due from such Lender at the Federal Funds Rate for such day. Upon payment in full thereof, such Lender shall be subrogated to the rights of such LC Issuing Bank against the Borrower to the extent of such Lender's Commitment Percentage of the related LC Reimbursement Obligation (including interest accrued thereon). (B) If any Lender fails to pay when due any amount to be paid by it pursuant to clause (A) of this subsection, interest shall accrue on such Lender's obligation to make such payment, for each day from and including the date such payment became due to but excluding the date such Lender makes such payment, at a rate per annum equal to (x) for each day from the day such payment is due to the third succeeding Domestic Business Day, inclusive, the Federal Funds Rate for such day and (y) for each day thereafter the sum of 2% plus the Base Rate for such day. (C) If the Borrower shall reimburse any LC Issuing Bank for any drawing with respect to which any Lender shall have made funds available to such LC Issuing Bank in accordance with clause (A) of this subsection, such LC Issuing Bank shall promptly upon receipt of such reimbursement distribute to such Lender its Commitment Percentage thereof, including interest, to the extent received by such LC Issuing Bank. 39 <PAGE> (l) EXCULPATORY PROVISIONS. The Borrower's obligations under this Section shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any LC Issuing Bank, any Lender, any beneficiary of any Letter of Credit or any other Person. The Borrower assumes all risks of the acts or omissions of any beneficiary of any Letter of Credit with respect to the use of such Letter of Credit by such beneficiary. None of the LC Issuing Banks (in the absence of its own gross negligence or willful misconduct), the Lenders and their respective officers, directors, employees and agents shall be responsible for, and the obligations of each Lender to make payments to each LC Issuing Bank and of the Borrower to reimburse each LC Issuing Bank for drawings pursuant to this Section (other than obligations resulting solely from the gross negligence or willful misconduct of the relevant LC Issuing Bank) shall not be excused or affected by, among other things, (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (ii) the validity, sufficiency or genuineness of documents presented under any Letter of Credit or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by any LC Issuing Bank against presentation of documents to it which do not comply with the terms of the relevant Letter of Credit or (iv) any dispute between or among the Borrower, any beneficiary of any Letter of Credit or any other Person or any claims or defenses whatsoever of the Borrower or any other Person against any beneficiary of any Letter of Credit. No LC Issuing Bank shall be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. Any action taken or omitted by any LC Issuing Bank or any Lender in connection with any Letter of Credit and the related drafts and documents, if done without willful misconduct or gross negligence, shall be binding upon the Borrower and shall not place any LC Issuing Bank or any Bank under any liability to the Borrower. (m) INDEMNIFICATION BY BORROWER. The Borrower agrees to indemnify and hold harmless each Lender, each LC Issuing Bank and the Administrative Agent (collectively, the "LC Indemnitees") from and against any and all claims, damages, losses, liabilities, reasonable costs and reasonable expenses (including, without limitation, the reasonable fees and disbursements of counsel) which such LC Indemnitee may incur (or which may be claimed against such LC Indemnitee by any Person whatsoever) by reason of or in connection with any execution and delivery or transfer of or payment or failure to pay under any Letter of Credit or any actual or proposed use of any Letter of Credit; PROVIDED that the Borrower shall not be required to indemnify any LC Issuing Bank for any such claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) its own willful misconduct or gross negligence or (ii) its failure to pay under any Letter of Credit issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. Nothing 40 <PAGE> in this subsection is intended to limit the obligations of the Borrower under any other provision of this Section. (n) INDEMNIFICATION BY LENDERS. The Lenders shall, ratably in proportion to their Commitment Percentages, indemnify each LC Issuing Bank, (to the extent not reimbursed by the Borrower) against any claims, damages, losses, liabilities, reasonable costs and reasonable expenses (including, without limitation, reasonable fees and disbursements of counsel) that any such indemnitee may suffer or incur in connection with this Section or any action taken or omitted by such indemnitee under this Section; PROVIDED that the Lenders shall not be required to indemnify any LC Issuing Bank for any such claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) its own gross negligence or willful misconduct, (ii) its failure to pay under any Letter of Credit issued by it after the presentation to it of a request strictly complying with the terms and condition of such Letter of Credit, (iii) its liabilities under any Letter of Credit issued by it in contravention of clause (iii) (to the extent that the limitations referred to therein were in fact exceeded) or clause (iv) of subsection (d) of this Section or (iv) its liabilities under any Letter of Credit extended (or allowed to be automatically extended) by it in contravention of clause (i) or (ii) of subsection (g) of this Section. (o) LIABILITY FOR DAMAGES. Nothing in this Section shall preclude the Borrower or any Lender from asserting against any LC Issuing Bank any claim for direct (but not consequential) damages suffered by the Borrower or such Lender to the extent, but only to the extent, caused by (A) the willful misconduct or gross negligence of such LC Issuing Bank in determining whether a request presented under any Letter of Credit issued by it complied with the terms thereof or (B) such LC Issuing Bank's failure to pay under any such Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions thereof. (p) DUAL CAPACITIES. In its capacity as a Lender, each LC Issuing Bank shall have the same rights and obligations under this Section as any other Lender. ARTICLE 3 CONDITIONS 41 <PAGE> SECTION 3.01. CLOSING. This Agreement shall become effective when all the following conditions have been satisfied (or waived in accordance with Section 9.05): (a) the Administrative Agent shall have received (i) counterparts hereof signed by the Borrower, the Lenders listed on the Commitment Schedule, the Swingline Bank and the Agents or (ii) in the case of any such party as to which an executed counterpart shall not have been received, telex, facsimile or other written confirmation (in form satisfactory to the Administrative Agent) that a counterpart hereof has been executed by such party; (b) the Administrative Agent shall have received (i) a duly executed Note, dated on or before the Closing Date and complying with the provisions of Section 2.05, for each Lender and (ii) a duly executed Swingline Note, dated on or before the Closing Date, for the Swingline Bank; (c) the Administrative Agent shall have received evidence satisfactory to it that the Borrower and OrNda will comply with the provisions of Section 3.02 on the Closing Date and that they have received all consents (if any) required to enable them to do so from the lenders under the Borrower's Existing Credit Agreement and OrNda's Existing Credit Agreement that are not parties to this Agreement; (d) the Administrative Agent shall have received evidence satisfactory to it that (i) all security interests created pursuant to OrNda's Existing Credit Agreement will be released on the Closing Date, (ii) termination statements will be delivered for filing under the Uniform Commercial Code as required to evidence the termination of such security interests and (iii) all stock certificates and other instruments pledged under OrNda's Existing Credit Agreement will be returned to OrNda; (e) the Administrative Agent shall have received evidence satisfactory to it that the Acquisition has been consummated substantially on the terms set forth in the Merger Agreement and all conditions to the consummation of the Acquisition, as set forth in the Merger Agreement, have been fulfilled in all material respects; (f) the Administrative Agent shall have received evidence satisfactory to it that the consideration paid or to be paid by the Borrower and its Subsidiaries as a result of the Acquisition to the former holders of common stock of OrNda and options to purchase such common stock will consist only of shares of common stock of the Borrower and cash to purchase fractional shares; 42 <PAGE> (g) the Administrative Agent shall have received evidence satisfactory to it that the Borrower will receive, on or within five Domestic Business Days after the Closing Date, the net cash proceeds of the issuance and sale of the New Public Debt; (h) the Administrative Agent shall have received a certificate, substantially in the form of Exhibit F hereto, dated the Closing Date and signed by a Senior Officer of the Borrower; (i) the Administrative Agent shall have received a certificate of a Senior Officer of the Borrower certifying that, if this Agreement had been in effect on November 30, 1996, and the transactions and events reflected in the "Pro Forma Financial Information" included in the New Public Debt Prospectus (other than the consummation of the OrNda Tender Offers) had occurred on the dates assumed in the preparation thereof, (i) the Borrower would have been in compliance with the requirements of Sections 5.09 to 5.11, inclusive, at the end of such Fiscal Quarter and (ii) no Default would have occurred and been continuing at such time. Such certificate shall set forth in reasonable detail the calculations required to establish the correctness of clause (i); (j) the Administrative Agent shall have received an opinion of Gibson, Dunn & Crutcher LLP, special counsel for the Borrower, substantially in the form of Exhibit G hereto, dated the Closing Date and covering such other matters incident to the transactions contemplated by this Agreement as any Agent shall reasonably request; (k) the Administrative Agent shall have received an opinion of the Borrower's General Counsel, dated the Closing Date, substantially in the form of Exhibit H hereto and covering such other matters incident to the transactions contemplated by this Agreement as any Agent shall reasonably request; (l) the Administrative Agent shall have received an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent, dated the Closing Date, substantially in the form of Exhibit I hereto and covering such other matters incident to the transactions contemplated by this Agreement as any Agent shall reasonably request; (m) the Administrative Agent shall have received a copy of the opinion of counsel for the Borrower delivered pursuant to Section 8.2 of the Merger Agreement and a letter from such counsel to the effect that the Agents and the Lenders are entitled to rely on such opinion as if it were addressed to them; 43 <PAGE> (n) the Administrative Agent shall have received a copy of the opinion of counsel for OrNda delivered pursuant to Section 8.3 of the Merger Agreement and a letter from such counsel to the effect that the Agents and the Lenders are entitled to rely on such opinion as if it were addressed to them; (o) the Administrative Agent shall have received a certificate of the Secretary of the Borrower, dated the Closing Date, as to the restated articles of incorporation and restated bylaws of the Borrower, no amendments thereto, the adoption by the Borrower's board of directors of the resolutions referred to in clause (p) below and the incumbency of each officer of the Borrower who executed or will execute any Financing Document or any other document to be delivered pursuant to this Agreement on the Closing Date; (p) the Administrative Agent shall have received a copy of resolutions (in form and substance satisfactory to the Agents) of the Borrower's board of directors authorizing the execution, delivery and performance of the Financing Documents, certified by the Secretary of the Borrower to be in full force and effect without modification on the Closing Date; (q) the Borrower shall have paid or made arrangements satisfactory to the Administrative Agent for paying all expenses payable by the Borrower on or before the Closing Date pursuant to Section 9.03(a); (r) the Borrower shall have paid to the Administrative Agent for the account of each Lender a fee calculated in accordance with the memorandum dated December 24, 1996 to Prospective Tenet Healthcare Corporation Lenders from the Arranger and the Co-Arrangers; (s) the Metrocrest Reimbursement Agreement shall have been amended so that references therein to the covenants and events of default in the Borrower's Existing Credit Agreement refer instead to the covenants and events of default in this Agreement; and (t) the Administrative Agent shall have received all documents it may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of the Financing Documents and any other matters relevant thereto, all in form and substance reasonably satisfactory to the Administrative Agent. 44 <PAGE> When this Agreement becomes effective, the Administrative Agent shall promptly notify the Borrower and the Lenders that it is effective, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. TERMINATION OF EXISTING COMMITMENTS. (a) The Borrower agrees that on the Closing Date it will (i) prepay all loans outstanding under the Borrower's Existing Credit Agreement, (ii) terminate the commitments of the lenders thereunder immediately after such prepayment and (iii) pay all interest and facility fees accrued thereunder to but excluding the Closing Date. The Lenders that are parties to the Borrower's Existing Credit Agreement waive the provisions thereof to the extent (and only to the extent) that such provisions would otherwise require the Borrower to give prior notice of such prepayment and termination of commitments thereunder. Notwithstanding such termination, the Borrower shall remain obligated on and after the Closing Date to compensate the lenders under Section 2.12 of the Borrower's Existing Credit Agreement for any funding losses incurred by reason of such prepayment and under Sections 8.3, 8.4 and 9.3 thereof for any amounts payable to them thereunder. (b) The Borrower agrees that on the Closing Date it will cause OrNda to (i) prepay all loans outstanding under OrNda's Existing Credit Agreement, (ii) terminate the commitments of the lenders thereunder immediately after such prepayment and (iii) pay all interest and commitment fees accrued thereunder to but excluding the Closing Date. The Lenders that are parties to OrNda's Existing Credit Agreement (including The Bank of Nova Scotia in its capacity as Administrative Agent thereunder) (x) waive the provisions thereof to the extent (and only to the extent) that such provisions would otherwise require OrNda to give prior notice of such prepayment and termination of commitments thereunder and (y) consent to the termination on the Closing Date of all participations in letters of credit sold to such Lenders pursuant to OrNda's Existing Credit Agreement. Notwithstanding such termination, OrNda shall remain obligated on and after the Closing Date to compensate such lenders under Section 2.5.2 of OrNda's Existing Credit Agreement for any funding losses incurred by reason of such prepayment and under Sections 2.12, 2.13, 2.19 and 12.3 thereof for any amounts payable to them thereunder. SECTION 3.03. BORROWINGS AND ISSUANCES OR EXTENSIONS OF LETTERS OF CREDIT. The obligation of any Lender to make a Loan on the occasion of any Borrowing (except a Syndicated Borrowing pursuant to Section 2.16(h)), the obligation of the Swingline Bank to make any Swingline Loan and the obligation of any LC Issuing Bank to issue (or extend or allow the extension of the expiry date of ) any Letter of Credit are each subject to the satisfaction of the following conditions: (a) the fact that the Closing Date shall have occurred on or prior to May 31, 1997; 45 <PAGE> (b) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02, 2.03 or 2.16(b), as the case may be, or receipt by the relevant LC Issuing Bank of a notice of proposed issuance or extension as required by Section 2.17(b) or (e), as the case may be; (c) the fact that, immediately after such Borrowing or issuance or extension of a Letter of Credit, the sum of the aggregate outstanding principal amount of the Loans plus the Aggregate LC Exposure (and, in the case of a Swingline Borrowing, the Swingline Loans) will not exceed the aggregate amount of the Commitments; (d) the fact that, immediately before and after such Borrowing or issuance or extension of a Letter of Credit, no Default shall have occurred and be continuing; and (e) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of such Borrowing or issuance or extension of a Letter of Credit. Each Borrowing and each issuance or extension of a Letter of Credit shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing or issuance or extension of a Letter of Credit as to the facts specified in clauses (c), (d) and (e) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.01. CORPORATE EXISTENCE AND POWER. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. CORPORATE AND GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by the Borrower of the Financing Documents (i) are within its corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not contravene any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower, (v) do not constitute a breach of or default under any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries, except for breaches and defaults which, in the 46 <PAGE> aggregate, could not reasonably be expected to have a Material Adverse Effect or have an adverse effect on the validity or enforceability of any material provision of any Financing Document, or (vi) result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 4.03. BINDING EFFECT. This Agreement constitutes a valid and binding agreement of the Borrower and the Notes and the Swingline Note, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower, in each case enforceable against the Borrower in accordance with its terms. SECTION 4.04. FINANCIAL INFORMATION. (a) The consolidated balance sheet of the Borrower and its Subsidiaries as of May 31, 1996 and the related consolidated statements of operations, cash flows and changes in stockholders' equity for the Fiscal Year then ended, reported on by KPMG Peat Marwick LLP and set forth in the Borrower's 1996 Form 10-K, a copy of which has been delivered to each of the Lenders, fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and its Subsidiaries as of such date and their consolidated results of operations and cash flows for such Fiscal Year. (b) The unaudited condensed consolidated balance sheet of the Borrower and its Subsidiaries as of November 30, 1996 and the related unaudited condensed consolidated statements of operations and cash flows for the six months then ended, set forth in the Borrower's quarterly report on Form 10-Q for the Fiscal Quarter ended November 30, 1996, a copy of which has been delivered to each of the Lenders, fairly present, on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Subsidiaries as of such date and their consolidated results of operations and cash flows for such six-month period (subject to normal year-end adjustments). (c) The consolidated balance sheet of OrNda and its Subsidiaries as of August 31, 1996 and the related consolidated statements of operations, cash flows and changes in stockholders' equity for the Fiscal Year then ended, reported on by Ernst & Young LLP and set forth in OrNda's 1996 Form 10-K, a copy of which has been delivered to each of the Lenders, fairly present, in conformity with GAAP, the consolidated financial position of OrNda and its Subsidiaries as of such date and their consolidated results of operations and cash flows for such Fiscal Year. (d) The unaudited condensed consolidated balance sheet of OrNda and its Subsidiaries as of November 30, 1996 and the related unaudited condensed consolidated statements of operations and cash flows for the three months then ended, set forth in OrNda's quarterly report on Form 10-Q for its Fiscal Quarter 47 <PAGE> ended November 30, 1996, a copy of which has been delivered to each of the Lenders, fairly present, on a basis consistent with the financial statements referred to in subsection (c) of this Section, the consolidated financial position of OrNda and its Subsidiaries as of such date and their consolidated results of operations and cash flows for such three-month period (subject to normal year-end adjustments). (e) The pro forma condensed combined balance sheet of the Combined Companies as of November 30, 1996 and the related condensed combined statements of operations set forth in the New Public Debt Prospectus under the heading "Pro Forma Financial Information" fairly present their combined financial position at such date and combined results of operations for the periods specified therein, on a Pro Forma Basis. (f) There has been no material adverse change since November 30, 1996 in the business, operations, properties, financial condition or prospects of the Combined Companies considered as a whole. SECTION 4.05. LITIGATION. Except as described in Schedule 4.05 hereto, there are no actions, suits or proceedings pending against, or to the knowledge of the Borrower threatened against, any of the Combined Companies or any of their respective properties, before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of adverse decisions which in the aggregate could reasonably be expected to have a Material Adverse Effect or which in any manner draw into question the validity of any of the Financing Documents. SECTION 4.06. COMPLIANCE WITH ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan, or made any amendment to any Plan, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. SECTION 4.07. COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries are in compliance in all material respects with all applicable laws, rules and regulations (including without limitation health care laws, rules and regulations), other than such laws, rules or regulations (i) the validity or applicability of which the Borrower or such Subsidiary is contesting in good faith by appropriate 48 <PAGE> proceedings or (ii) failures to comply with which could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 4.08. ENVIRONMENTAL MATTERS. The Borrower has reviewed the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, and has in good faith attempted to identify and evaluate the associated liabilities and costs (including, without limitation, capital or operating expenditures required for clean-up or closure of properties presently or previously owned, capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and actual or potential liabilities to third parties, including employees, and any related costs and expenses); PROVIDED that, with respect to OrNda and its Subsidiaries, on and at all times prior to the first anniversary of the Closing Date, such review has been and during such time will be limited to (i) a review (without independent investigation) of information supplied by OrNda as to the effect of Environmental Laws on it and its Subsidiaries and (ii) a review of any other information relating to the effect of Environmental Laws on OrNda and its Subsidiaries of which the Borrower obtains actual knowledge after the Closing Date. On the basis of the foregoing review, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a Material Adverse Effect. SECTION 4.09. TAXES. The Combined Companies have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes shown to be due on such returns or pursuant to any assessment received by any of them (unless such assessment is being contested in good faith by appropriate proceedings). The charges, accruals and reserves on the books of the Combined Companies in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. SECTION 4.10. MATERIAL SUBSIDIARIES. Each Material Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.11. CERTAIN LAWS NOT APPLICABLE. The Borrower is neither an "investment company" nor a Person directly or indirectly "controlled" by or "acting on behalf of" an "investment company" within the meaning of the 49 <PAGE> Investment Company Act of 1940, as amended. The Borrower is neither a "holding company", nor an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. SECTION 4.12. FULL DISCLOSURE. All information heretofore furnished by the Borrower to any Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to any Agent or any Lender will, taken as a whole, be true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Lenders in writing any and all facts which have or may (to the extent the Borrower can now reasonably foresee) have a Material Adverse Effect. SECTION 4.13. CERTAIN DOCUMENTS. (a) The copies of the Merger Agreement and the Company Disclosure Letter and Parent Disclosure Letter referred to therein, in the form delivered to each Lender prior to the date of this Agreement, are correct and complete copies thereof as in effect on the date of this Agreement. (b) The copy of the New Public Debt Prospectus delivered to each Lender prior to the date of this Agreement is a correct and complete copy of the New Public Debt Prospectus as filed with the SEC on January 27, 1997. SECTION 4.14. LEGALITY OF ACQUISITION. On the Closing Date, the Acquisition will be consummated in compliance with all applicable laws and in accordance with the provisions of the Merger Agreement. The consummation of the Acquisition will not (i) contravene any provision of applicable law or regulation in any manner that could reasonably be expected to have a Material Adverse Effect, (ii) contravene any provision of the charter or by-laws of any party to the Merger Agreement, (iii) constitute a breach of or default under any instrument or agreement binding upon any such party or any of its Subsidiaries or of any judgment, injunction, order, decree or other instrument binding upon any such party, except for breaches and defaults which, in the aggregate, could not reasonably be expected to have a Material Adverse Effect or (iv) result in the creation or imposition of any Lien on any asset of any such party or any of its Subsidiaries. 50 <PAGE> ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Lender has any Credit Exposure hereunder or any Swingline Loan remains outstanding or any interest or fees accrued hereunder remain unpaid: SECTION 5.01. INFORMATION. The Borrower will deliver to each Lender: (a) as soon as available and in any event within 90 days after the end of each Fiscal Year, an audited consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such Fiscal Year and the related audited consolidated statements of operations, cash flows and changes in stockholders' equity for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all reported on in a manner acceptable to the SEC by KPMG Peat Marwick LLP or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year, a condensed consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter, the related condensed consolidated statements of operations for such Fiscal Quarter and for the portion of the Fiscal Year ended at the end of such Fiscal Quarter and the related condensed consolidated statement of cash flows for the portion of the Fiscal Year then ended, setting forth in the case of such condensed consolidated statements of operations and cash flows in comparative form the figures for the corresponding Fiscal Quarter and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation and consistency with GAAP by a Senior Officer of the Borrower; (c) concurrently with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of a Senior Officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.09 to 5.11, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement by the firm of 51 <PAGE> independent public accountants which reported on such statements that, in making the examination necessary for reporting on such financial statements, they did not obtain knowledge of any Default hereunder except as described in such statement; (e) within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of a Senior Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the SEC; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA or premium-related penalties) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or makes any amendment to any Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of a Senior Officer of the Borrower setting forth details as to such occurrence and the action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and 52 <PAGE> (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Lender, may reasonably request. SECTION 5.02. MAINTENANCE OF PROPERTY; INSURANCE. (a) The Borrower and each Material Subsidiary will keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower and each Material Subsidiary will maintain, with financially sound and reputable insurance companies (which may be Affiliates of the Borrower or part of the Borrower's self-insurance program) insurance on all their properties in at least such amounts and against at least such risks as are usually insured against in the same general area and by companies engaged in the same or similar businesses and maintain professional liability and malpractice insurance against claims usually insured against by companies engaged in the same or similar businesses, and furnish to each Lender, upon written request by any of the Agents, full information as to the insurance carried. SECTION 5.03. CONDUCT OF BUSINESS, MAINTENANCE OF EXISTENCE. (a) The Borrower and its Material Subsidiaries will continue to engage primarily in business of the same general type as now conducted by the Borrower and its Material Subsidiaries. (b) The Borrower and each Material Subsidiary will preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain its rights, privileges and franchises necessary or desirable in the normal conduct of business, PROVIDED that (i) the foregoing shall not prohibit any merger, consolidation or sale of assets expressly permitted by Section 5.06 and (ii) any Material Subsidiary may liquidate or dissolve if the Borrower in good faith determines that such liquidation or dissolution is in the best interests of the Borrower and its Subsidiaries and not materially adverse to the Lenders. SECTION 5.04. COMPLIANCE WITH LAWS. The Borrower and each Material Subsidiary will comply with all material applicable laws, ordinances, rules, regulations and requirements of governmental authorities (including without limitation Environmental Laws, ERISA and the rules and regulations thereunder and Public Law 92-603), and hold and maintain in full force and effect all certifications, governmental approvals, licenses and permits necessary or desirable to enable the Borrower and its Material Subsidiaries to conduct their respective businesses as now conducted, except where the failure to comply therewith or hold and maintain such certifications, governmental approvals, licenses or permits could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 53 <PAGE> SECTION 5.05. INSPECTION OF PROPERTY, BOOKS AND RECORDS. The Borrower and each Material Subsidiary will keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit representatives of the Administrative Agent (at the request of any Lender) at such requesting Lender's expense to visit and inspect any of their respective properties, to examine and make abstracts (at such Lender's expense, unless an Event of Default shall have occurred and be continuing, in which case at the Borrower's expense) from any of their respective books and records and to discuss their respective affairs, finances and accounts with officers of the Borrower and with the accountants of the Borrower, all upon reasonable notice and at such reasonable times and as often as may reasonably be desired. SECTION 5.06. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. (a) The Borrower will not merge or consolidate with any other Person, or sell or otherwise transfer all or substantially all of its assets to any other Person, unless after giving effect to such merger, consolidation, sale or other transfer, (i) no Default shall have occurred and be continuing and (ii) the corporation surviving such merger or consolidation (if other than the Borrower) or the Person acquiring such assets is organized under the laws of a state of the United States and assumes in writing all the obligations of the Borrower hereunder and said surviving corporation or acquiring Person delivers to each Lender an opinion of counsel reasonably satisfactory to the Required Lenders, in form and substance satisfactory to the Required Lenders, to the effect that the assumption of such obligations by such surviving corporation or acquiring Person is effective and is fully binding upon and enforceable against such surviving corporation or acquiring Person. (b) The Borrower will not make any Restricted Asset Transfer, or permit any of its Subsidiaries to make any Restricted Asset Transfer, unless immediately after giving effect thereto: (i) no Default (under Section 5.13(b) or otherwise) shall have occurred and be continuing, (ii) the aggregate book value of all assets sold or otherwise transferred by the Combined Companies in Restricted Asset Transfers during the twelve months then ended does not exceed 10% of the consolidated total assets of the Borrower and its Subsidiaries at the time of such Restricted Asset Transfer, and (iii) the aggregate book value of all assets sold or otherwise transferred by the Combined Companies in Restricted Asset Transfers after November 30, 1996 does not exceed 15% of the consolidated total assets of the Borrower and its Subsidiaries at the time of such Restricted Asset Transfer. 54 <PAGE> For purposes of this subsection (b) and Section 5.13(b), the book value of assets sold in a Restricted Asset Transfer shall be determined immediately prior to such Restricted Asset Transfer. SECTION 5.07. NEGATIVE PLEDGE. After the Closing Date, neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) any Lien existing prior to the Closing Date securing Debt; PROVIDED that the Liens created by OrNda's Existing Credit Agreement shall be released on or before the Closing Date; (b) any Lien on bonds issued by the Metrocrest Hospital Authority (and related proceeds and other distributions) granted to secure the Borrower's obligations under the Metrocrest Reimbursement Agreement and the Securities Pledge and Security Agreement referred to therein; (c) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by clause (a) above; PROVIDED that (i) the principal amount of such Debt is not increased and (ii) such Debt is not secured by any additional assets; (d) if the letters of credit issued pursuant to the Metrocrest Reimbursement Agreement are replaced by other letters of credit issued for the same purpose, any Lien securing the Borrower's obligations under the reimbursement agreement relating to such replacement letters of credit; PROVIDED that (i) the aggregate amount of such letters of credit is not increased and (ii) the Borrower's obligations under the related reimbursement agreement are not secured or required to be secured by any assets except the assets by which the Borrower's obligations under the Metrocrest Reimbursement Agreement are secured or required to be secured; (e) any Lien securing Non-Recourse Purchase Money Debt; (f) any Lien on assets of a Person which becomes a Subsidiary after the Closing Date; PROVIDED that such Lien secures only (i) Debt of such Person that is outstanding when such Person becomes a Subsidiary and was not created in contemplation of such event or (ii) Debt incurred solely for the purpose of refinancing Debt described in the foregoing clause (i); 55 <PAGE> (g) carriers', warehousemen's, mechanics', transporters, materialmen's, repairmen's or other like Liens arising in the ordinary course of business; (h) any Lien imposed by any governmental authority for taxes, assessments, governmental charges, duties or levies not delinquent or which are being contested in good faith and by appropriate proceedings; PROVIDED that adequate reserves with respect thereto are maintained on the books of the Borrower and its Subsidiaries in accordance with GAAP; (i) Liens on cash and cash equivalents securing obligations of the Borrower and its Subsidiaries with respect to workers' compensation, malpractice and other insurance policies; PROVIDED that the aggregate amount of cash and cash equivalents subject to such Liens may not exceed $35,000,000 at any time; (j) Liens arising in the ordinary course of business (other than Liens permitted by clause (g), (h) or (i) above) which (i) do not secure Financial Obligations, (ii) do not secure any single obligation in an outstanding amount exceeding $10,000,000 and (iii) do not secure obligations in an aggregate outstanding amount exceeding $50,000,000; (k) Liens on cash and cash equivalents securing Hedging Obligations, PROVIDED that the aggregate amount of cash and cash equivalents subject to such Liens may not exceed $50,000,000 at any time; (l) any Lien on cash and cash equivalents securing LC Reimbursement Obligations pursuant to Section 6.03; (m) any Lien on an asset leased by the Borrower or a Subsidiary under a capital lease securing its obligations as lessee under such capital lease; (n) any Lien on any asset of a Subsidiary securing Debt owed to the Borrower; and (o) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt; PROVIDED that, immediately after any such Debt is incurred, the aggregate outstanding principal or face amount of all Debt secured pursuant to this clause (o) shall not exceed $15,000,000. 56 <PAGE> SECTION 5.08. DEBT OF SUBSIDIARIES. After the Closing Date, no Subsidiary will incur, assume or otherwise be liable in respect of any Debt, except: (a) Debt subject to the OrNda Tender Offers and other Debt outstanding at the close of business on the Closing Date in an aggregate principal or face amount not exceeding $400,000,000; (b) Debt owing to the Borrower; (c) Non-Recourse Purchase Money Debt; (d) Debt of any Person which becomes a Subsidiary after the Closing Date; PROVIDED that (i) such Debt is outstanding when such Person becomes a Subsidiary and was not created in contemplation of such event or (ii) such Debt is incurred solely for the purpose of refinancing Debt described in the foregoing clause (i); (e) Guarantees by any Subsidiary of Debt relating to any assets sold or otherwise disposed of by it; PROVIDED that (i) such Debt was outstanding when such assets were disposed of and was not created in contemplation of the disposition thereof and (ii) the sum of (x) the aggregate outstanding principal amount of all Debt which is Guaranteed by the Borrower or any of its Subsidiaries pursuant to this clause (e) and (y) the aggregate amount of all lease payments under operating leases which are Guaranteed by any Subsidiary after November 30, 1996 shall not exceed $200,000,000 at any time; (f) Debt consisting of the obligations of any Subsidiary as lessee which are capitalized in accordance with GAAP; and (g) Debt of any Subsidiary not otherwise permitted by the foregoing clauses of this Section; PROVIDED that the aggregate outstanding principal or face amount of all Debt of Subsidiaries permitted by this clause (g) shall not exceed $35,000,000 at any time. SECTION 5.9. DEBT RATIO. At the close of business on any day on or after August 31, 1999, the ratio of (i) Adjusted Total Debt at such time to (ii) Adjusted EBITDA for the period of four consecutive Fiscal Quarters most recently ended at or prior to such time will not be greater than 3.75. SECTION 5.10. CONSOLIDATED NET WORTH. Consolidated Net Worth will at no time be less than the sum of (i) $2,750,000,000 PLUS (ii) (a) 75% of the consolidated net income of the Borrower and its Subsidiaries for each Fiscal Quarter ended after November 30, 1996 and commencing on or before August 31, 1999, and (b) 100% of the consolidated net income of the Borrower and its 57 <PAGE> Subsidiaries for each Fiscal Quarter commencing after August 31, 1999, in any case if such consolidated net income for such Fiscal Quarter is positive (PROVIDED that, for any Fiscal Quarter for which consolidated net income of the Borrower and its Subsidiaries was reduced as a result of a charge described in clause (iv), (v), (vi) or (vii), consolidated net income for such Fiscal Quarter shall be calculated to exclude the after-tax effect of such charge), PLUS (iii) 100% of the amount by which the consolidated stockholders' equity of the Borrower and its Subsidiaries is increased after November 30, 1996 as a result of any issuance of common stock of the Borrower (other than the issuance of common stock of the Borrower as consideration for the Acquisition), MINUS (iv) the amount of non-recurring charges (calculated on an after-tax basis) recorded by the Borrower in the third and fourth Fiscal Quarters of 1997 and the fourth Fiscal Quarter of 1999, MINUS (v) impairment and other unusual cash charges (calculated on a pre-tax basis) reported by the Borrower after August 31, 1999 with respect to physician practices not in excess of $200,000,000 in the aggregate, MINUS (vi) the amount of other impairment and unusual cash charges (calculated on a pre-tax basis) reported by the Borrower after August 31, 1999 not in excess of $100,000,000 in the aggregate, MINUS (vii) without duplication, the amount of non-cash charges (calculated on a pre-tax basis) reported by the Borrower after August 31, 1999 (a) with respect to physician practices not in excess of $250,000,000 in the aggregate and (b) with respect to impairment and other unusual charges not in excess of $250,000,000 in the aggregate, and PLUS (viii) the tax benefit of any charges described in clauses (v), (vi) and (vii). SECTION 5.11. FIXED CHARGE RATIO. At the end of each Fiscal Quarter ending after the Closing Date, the ratio of (i) the sum of Adjusted EBITDA plus Adjusted Rental Expense to (ii) the sum of Adjusted Interest Expense plus Adjusted Rental Expense, all calculated for the period of four consecutive Fiscal Quarters then ended, will not be less than 2.0 to 1. SECTION 5.12. RESTRICTED PAYMENTS. Neither the Borrower nor any Subsidiary will declare or make (i) any dividend or other distribution on any shares of capital stock of the Borrower (except dividends payable solely in shares of its capital stock) or (ii) any payment on account of the purchase, redemption, retirement, acquisition, defeasance or prepayment of any Equity Interests in the Borrower, unless the Borrower has an Investment Grade Rating when such dividend is declared or when the Borrower or such Subsidiary become legally obligated to make such distribution or other payment, as the case may be; provided, however, that the Borrower may redeem or repurchase rights to purchase shares of the Borrower's Series B Junior Participating Preferred Stock outstanding under the Borrower's stockholder rights plan in effect on August 31, 1999, for an aggregate redemption or repurchase price not in excess of $4,000,000; PROVIDED, FURTHER, that the Borrower may from time to time distribute to its stockholders Equity Interests in other Persons held by the Borrower so long as (i) the aggregate operating income of such Persons, plus their depreciation and 58 <PAGE> amortization expense, for the respective periods of four consecutive Fiscal Quarters most recently ended prior to the respective dates of declaration of distribution of Equity Interests therein, is less than 5% of Consolidated EBITDA for the four-quarter period most recently ended prior to the date of determination, and (ii) the aggregate net tangible assets of all such Persons (LESS in the case of any such Person that is not a wholly-owned Subsidiary, a portion of the net tangible assets of such Person allocable, on a pro rata basis, to Equity Interests of such Person held by Persons other than the Borrower and its Subsidiaries) at the respective dates of declaration of such distributions of the Equity Interests of such Persons are less than 5% of consolidated net tangible assets of the Borrower on August 31, 1999. SECTION 5.13. RESTRICTION ON INVESTMENTS. (a) The sum of (i) the aggregate book value of all Investments in Equity Affiliates held by the Borrower and its Subsidiaries, as determined from time to time in accordance with GAAP, and (ii) the Loss Adjustment Amount for each Equity Affiliate in which the Combined Companies make an Investment after November 30,1996 (such sum being called the "Aggregate Investment in Equity Affiliates") will not at any time exceed 17.5% of the consolidated total assets of the Borrower and its Subsidiaries at such time. The term "Loss Adjustment Amount" means, for any Equity Affiliate at any time, the cumulative amount by which the book value of Investments by the Combined Companies in such Equity Affiliate has theretofore been reduced by operating losses, write downs or writeoffs of assets or other special charges. (b) The sum of (i) the Aggregate Investment in Equity Affiliates and (ii) the aggregate book value of all assets sold or otherwise transferred in Restricted Asset Transfers after November 30, 1996 will not at any time exceed 27.5% of the consolidated total assets of the Borrower and its Subsidiaries at such time. SECTION 5.14. RESTRICTIONS ON INCLUDED EQUITY AFFILIATES. (a) DEBT. On and after the Closing Date, no Included Equity Affiliate will incur, assume or otherwise be liable in respect of any Debt, except: (i) Debt of such Included Equity Affiliate outstanding when it first becomes an Equity Affiliate and not created in contemplation of such event; (ii) Debt of any partner, member or shareholder of such Included Equity Affiliate that (x) is assumed by such Included Equity Affiliate in connection with a contribution of assets to its capital by such partner, member or shareholder and (y) was not created in contemplation of such event; 59 <PAGE> (iii) Debt secured by a Lien on any asset acquired by such Included Equity Affiliate; PROVIDED that (x) such Debt was outstanding and was secured by such Lien prior to the acquisition of such asset by such Included Equity Affiliate and (y) neither such Debt nor such Lien was created in contemplation of such acquisition; (iv) Non-Recourse Purchase Money Debt; (v) Debt incurred solely for the purpose of refinancing (x) Debt of such Included Equity Affiliate permitted by clause (i), (ii), (iii) or (iv) above or (y) Debt that such Included Equity Affiliate would be permitted to assume by clause (ii) above; (vi) Debt owing to the Borrower or any Subsidiary; (vii) Debt incurred to satisfy working capital requirements; and (viii) other Debt of Included Equity Affiliates not exceeding $15,000,000 in aggregate principal amount outstanding at any time. (b) LIENS. On and after the Closing Date, no Included Equity Affiliate will create, assume or suffer to exist any Lien securing Debt on any asset now owned or hereafter acquired by it, except: (i) any Lien securing Debt permitted by clause (i) or (ii) of subsection (a) above; PROVIDED that such Lien is limited to assets securing such Debt at the time it is assumed; (ii) any Lien securing Debt permitted by clause (iii) of subsection (a) above; PROVIDED that such Lien is limited in each case to the asset that was acquired subject to such Lien and any improvements thereto; (iii) any Lien securing Debt permitted by clause (iv) of subsection (a) above; PROVIDED that such Lien is limited in each case to the assets acquired, constructed or improved with the proceeds of such Debt; (iv) any Lien securing Debt permitted by clause (v) of subsection (a) above; PROVIDED that in each case the Debt refinanced thereby was secured and such Lien is limited to the assets that secured the Debt refinanced thereby; (v) any Lien securing Debt permitted by clause (vi) of subsection (a) above; and 60 <PAGE> (vi) other Liens securing Debt of Included Equity Affiliates not exceeding $2,000,000 in aggregate principal amount outstanding at any time. SECTION 5.15. RESTRICTION ON PREPAYING SUBORDINATED DEBT. Neither the Borrower nor any Subsidiary will prepay, defease or purchase, prior to the date on which it is required by its terms to be repaid, repurchased or otherwise retired, all or any portion of any Debt of the Borrower that is subordinated in right of payment to the Loans; PROVIDED that (x) the Borrower may prepay, defease or repurchase such Debt in an aggregate amount not in excess of the net cash proceeds received by the Borrower from the issue and sale or incurrence of additional subordinated Debt in the 12 month period prior to, or substantially concurrently with, such prepayment, defeasance or repurchase, so long as such additional subordinated Debt has a final maturity after the final maturity of, and a weighted average life that is longer than the weighted average life of, the subordinated Debt prepaid, defeased or repurchased, (y) the Borrower may repurchase its 6% Exchangeable Subordinated Notes due 2005 in exchange for additional Debt of the Borrower subordinated on substantially identical terms, so long as such additional subordinated Debt requires no scheduled payment of principal prior to the scheduled maturity of the Borrower's 6% Exchangeable Subordinated Notes due 2005, and (z) in addition to any subordinated Debt prepaid, defeased or repurchased pursuant to clause (x) or (y), the Borrower may prepay, defease or repurchase such Debt so long as the aggregate cash (or value of property) used therefor, plus the aggregate amount of Restricted Payments made in accordance with Section 5.12, does not at any time exceed the sum of (i) $500,000,000 and (ii) 50% of the Borrower's cumulative consolidated net income for the period (treated as a single accounting period) commencing June 1, 1998 and ending on the last day of the last Fiscal Quarter ended prior to the date of such prepayment, defeasance or repurchase. SECTION 5.16. TRANSACTIONS WITH AFFILIATES. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect, any transaction with, any Affiliate except on an arms-length basis on terms at least as favorable to the Borrower or such Subsidiary as it could have obtained from a third party who was not an Affiliate; PROVIDED that the foregoing provisions of this Section shall not prohibit (x) any such Person from declaring or paying any lawful dividend or other payment ratably in respect of all of its capital stock of the relevant class so long as, after giving effect thereto, no Default shall have occurred and be continuing or (y) any such transaction between or among the Borrower and its Subsidiaries. 61 <PAGE> SECTION 5.17. SENIOR STATUS. The obligations of the Borrower under the Financing Documents will at all times constitute "senior debt" as defined in any instrument or agreement evidencing or governing any subordinated debt of the Borrower outstanding on or after the Closing Date. SECTION 5.18. PAYMENT OF DIVIDENDS BY MATERIAL SUBSIDIARIES. After the Closing Date neither the Borrower nor any of its Material Subsidiaries will enter into any agreement or arrangement which would limit in any way the ability of any Material Subsidiary to pay any dividend. SECTION 5.19. RETIREMENT OF ORNDA DEBT. If the Borrower does not consummate the OrNda Tender Offers and obtain sufficient consents from the holders of OrNda's 12.25% Senior Subordinated Notes due 2002 and 11.375% Senior Subordinated Notes due 2004 to eliminate the restrictive covenants intended to be eliminated thereby, the Borrower will cause all of OrNda's outstanding 12.25% Senior Subordinated Notes due 2002 to be redeemed on or before May 31, 1997. SECTION 5.20. USE OF PROCEEDS. (a) The proceeds of the Loans will be used by the Borrower (i) to purchase, redeem or otherwise refinance outstanding Debt of the Borrower, OrNda and their respective Subsidiaries and (ii) for general corporate purposes (including working capital needs) of the Borrower and its Subsidiaries after the Acquisition is consummated. (b) The Letters of Credit will be used by the Borrower for the general corporate purposes of the Borrower and its Subsidiaries. (c) Neither the proceeds of the Loans nor any Letter of Credit will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U in any manner which would (i) violate any applicable law or regulation or (ii) require any Form FRU-1 or any successor form to be executed. ARTICLE 6 DEFAULTS SECTION 6.01. EVENTS OF DEFAULT. If one or more of the following events ("Events of Default") shall have occurred: (a) any principal of any Loan or Swingline Loan shall not be paid when due; 62 <PAGE> (b) any LC Reimbursement Obligation, any interest on any Loan, Swingline Loan or LC Reimbursement Obligation, any fee or any other amount payable under any Financing Document shall not be paid within three Domestic Business Days after it becomes due; (c) the Borrower (or any Subsidiary or Included Equity Affiliate) shall fail to comply with any covenant applicable to it contained in Sections 5.06 through 5.20, inclusive; (d) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a), (b) or (c) above) within 30 days after such failure occurs or, if later, 10 days after written notice thereof has been given to the Borrower by the Administrative Agent at the request of the Required Lenders; (e) any representation, warranty, certification or statement made by the Borrower in this Agreement or by the Borrower or any Subsidiary in any certificate, financial statement or other document delivered pursuant hereto shall prove to have been incorrect in any material respect when made (or deemed made); (f) the Borrower and/or one or more Subsidiaries shall fail to make one or more payments in respect of Material Financial Obligations when due or within any applicable grace period; (g) any event or condition shall occur which results in the acceleration of the maturity of Material Financial Obligations, or enables (any applicable grace period having expired) the holder or holders of Material Financial Obligations or any Person acting on their behalf to accelerate the maturity thereof; (h) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (i) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, 63 <PAGE> reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (j) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA or premium-related penalties) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $25,000,000; (k) a judgment or order for the payment of money in excess of $25,000,000 (net of insurance to the extent that the insurer shall have admitted coverage thereof) shall be rendered against the Borrower or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (l) any person or group of persons (within the meaning of Section 13 or 14 of the Exchange Act) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the SEC under the Exchange Act) of 20% or more of the outstanding shares of common stock of the Borrower; or Continuing Directors shall no longer constitute a majority of the Borrower's board of directors; then, and in every such event, while such event is continuing, the Administrative Agent shall: (i) if requested by Lenders having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and the Swingline Commitment and they shall thereupon terminate, 64 <PAGE> (ii) if requested by Lenders having more than 50% of the Aggregate LC Exposure, by notice to each LC Issuing Bank instruct such LC Issuing Bank (x) not to extend the expiry date of any outstanding Letter of Credit and/or (y) in the case of any Evergreen Letter of Credit, to give notice to the beneficiary thereof terminating such Letter of Credit as soon as is permitted by the provisions thereof, whereupon such LC Issuing Bank shall deliver notice to that effect promptly (or as soon thereafter as is permitted by the provisions of the relevant Letter of Credit) to the beneficiary of each such Letter of Credit and the Borrower; and (iii) if requested by Lenders holding Notes evidencing more than 50% in aggregate outstanding principal amount of the Loans, by notice to the Borrower declare the Notes and the Swingline Note (in each case together with accrued interest thereon) to be, and the Notes and the Swingline Note shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; PROVIDED that, if any Event of Default specified in clause (h) or (i) above occurs with respect to the Borrower, then without any notice to the Borrower or any other act by the Administrative Agent or the Lenders, the Commitments and the Swingline Commitment shall thereupon terminate and the Notes and the Swingline Note (in each case together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.02. NOTICE OF DEFAULT. The Administrative Agent shall give notice to the Borrower under clause (d) of Section 6.01 promptly upon being requested to do so by the Required Lenders and shall thereupon notify all the Lenders thereof. SECTION 6.03. CASH COVER. The Borrower agrees that, if an Event of Default shall have occurred and be continuing and Lenders having more than 50% of the Aggregate LC Exposure instruct the Administrative Agent to request cash collateral pursuant to this Section, the Borrower will, promptly after it receives such request from the Administrative Agent, pay to the Administrative Agent an amount in immediately available funds equal to the then aggregate amount available for subsequent drawings under all outstanding Letters of Credit, to be held by the Administrative Agent, under arrangements satisfactory to it, to secure the payment of all LC Reimbursement Obligations arising from subsequent drawings under such Letters of Credit; PROVIDED that, if any Event of Default specified in clause (h) or (i) of Section 6.01 occurs with respect to the Borrower, the Borrower shall pay such amount to the Administrative Agent forthwith 65 <PAGE> without any notice or demand or any other act by the Administrative Agent or the Lenders. ARTICLE 7 THE AGENTS SECTION 7.01. APPOINTMENT AND AUTHORIZATION. Each Lender irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to it by the terms hereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. AGENTS AND AFFILIATES. Each of Morgan Guaranty Trust Company of New York, Bank of America National Trust and Savings Association, The Bank of New York and The Bank of Nova Scotia shall have the same rights and powers under the Financing Documents as any other Lender and may exercise or refrain from exercising the same as though it were not an Agent, and each of Morgan Guaranty Trust Company of New York, Bank of America National Trust and Savings Association, The Bank of New York and The Bank of Nova Scotia and their respective Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any of the Borrower's Subsidiaries or Equity Affiliates as if it were not an Agent under any of the Financing Documents. SECTION 7.03. ACTION BY THE ADMINISTRATIVE AGENT. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. SECTION 7.04. CONSULTATION WITH EXPERTS. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it with reasonable care and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. LIABILITY OF THE AGENTS. None of the Agents, their respective Affiliates and their respective directors, officers, agents or employees shall be liable for any action taken or not taken by such Person in connection with any Financing Document (i) in the absence of its own gross negligence or willful misconduct or (ii) with the consent or at the request of the Required Lenders, PROVIDED that this clause (ii) shall not affect any rights the Borrower may have against the Lenders that made such request. None of the Agents, the Managing 66 <PAGE> Agents, the Co-Agents, their respective Affiliates and their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with any Financing Document or any Borrowing; (ii) the performance or observance of any of the covenants or agreements of the Borrower in any Financing Document; (iii) the satisfaction of any condition specified in Article 3, except, in the case of the Administrative Agent, receipt of items required to be delivered to it; or (iv) the validity, effectiveness or genuineness of any Financing Document or any other instrument or writing furnished in connection therewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. INDEMNIFICATION. The Lenders shall, ratably in accordance with their Credit Exposures, indemnify each Agent, the Swingline Bank, their respective Affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the relevant indemnitee's gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with the Financing Documents or any action taken or omitted by the relevant indemnitee thereunder. SECTION 7.07. CREDIT DECISION. Each Lender acknowledges that it has, independently and without reliance upon any Agent, Managing Agent, Co-Agent or other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any Agent, Managing Agent, Co-Agent or other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under the Financing Documents. SECTION 7.08. SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may resign at any time by giving notice thereof to the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Administrative Agent 67 <PAGE> hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations (excepting liabilities previously incurred) hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. SECTION 7.09. FEES. The Borrower shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Administrative Agent. SECTION 7.10. OTHER AGENTS. The Managing Agents, Co-Agents and Agents (other than the Administrative Agent), in their capacities as such, shall have no duties or obligations of any kind under the Financing Documents. The use of the term "Agent" in this Agreement 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, in the case of the Administrative Agent, such term is intended to create or reflect only an administrative relationship between independent contracting parties. ARTICLE 8 CHANGE IN CIRCUMSTANCE SECTION 8.01. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR . If on or prior to the first day of any Interest Period for any Euro-Dollar Loan or Money Market LIBOR Loan: (a) the Administrative Agent is advised by the Euro-Dollar Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Euro-Dollar Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Group of Euro-Dollar Loans, Lenders having 50% or more of the aggregate principal amount of such Loans advise the Administrative Agent that the Adjusted London Interbank Offered Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Lenders of funding such Loans for such Interest Period, 68 <PAGE> the Administrative Agent shall forthwith give notice thereof to the Borrower and the Lenders, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Lenders to make or maintain Euro-Dollar Loans shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Administrative Agent at least two Domestic Business Days before the date of any Euro-Dollar Borrowing or Money Market LIBOR Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Borrowing is a Euro-Dollar Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.02. ILLEGALITY. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) made on or after the date of this Agreement by any such authority, central bank or comparable agency shall make it unlawful or impossible for any Lender (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Lender shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Lenders and the Borrower, whereupon until such Lender notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Lender to make Euro-Dollar Loans, or to convert outstanding Base Rate Loans into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Lender shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. If such notice is given, each Euro-Dollar Loan of such Lender then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Lender may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Lender shall determine that it may not lawfully continue to maintain and fund such Loan to such day. SECTION 8.03. INCREASED COST AND REDUCED RETURN. (a) If, on or after (x) the date hereof, in the case of any Euro-Dollar Loan or Letter of Credit or any obligation to make Euro-Dollar Loans or issue or participate in any Letter of 69 <PAGE> Credit or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) or any LC Issuing Bank with any request or directive (whether or not having the force of law) made on or after the date of this Agreement by any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit (including Letters of Credit and participations therein) extended by, any Lender (or its Applicable Lending Office) or any LC Issuing Bank or shall impose on any Lender (or its Applicable Lending Office) or any LC Issuing Bank or on the London interbank market any other condition affecting its Euro-Dollar Loans, its Notes, its obligation to make Euro-Dollar Loans, its Money Market Loans or its obligations hereunder in respect of Letters of Credit, and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) or such LC Issuing Bank of making or maintaining any Euro-Dollar Loan or Money Market Loan or issuing or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Lender (or its Applicable Lending Office) or such LC Issuing Bank under this Agreement or under its Note with respect thereto, by an amount deemed by such Lender or LC Issuing Bank to be material, then, within 15 days after demand by such Lender or LC Issuing Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Lender or LC Issuing Bank such additional amount or amounts as will (subject to subsection (e) of this Section) compensate such Lender or LC Issuing Bank for such increased cost or reduction. (b) If any Lender shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) made on or after the date of this Agreement by any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Lender (or its Parent) as a consequence of such Lender's obligations hereunder to a level below that which such Lender (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, within 15 70 <PAGE> days after demand by such Lender (with a copy to the Administrative Agent), the Borrower shall pay to such Lender such additional amount or amounts as will (subject to subsection (d) of this Section) compensate such Lender (or its Parent) for such reduction. (c) Each Lender and LC Issuing Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender or LC Issuing Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender or LC Issuing Bank, be otherwise disadvantageous to it. A certificate of any Lender or LC Issuing Bank claiming compensation under this Section and setting forth in reasonable detail the additional amount or amounts to be paid to it hereunder and the method of calculation thereof and shall be conclusive in the absence of manifest error. In determining such amount, such Lender or LC Issuing Bank may use any reasonable averaging and attribution methods. (d) No Lender shall be entitled to claim compensation pursuant to this Section for (i) Taxes or Other Taxes (as such terms are defined in Section 8.04) or (ii) any increased cost or reduction incurred or accrued more than 90 days before such Lender first notifies the Borrower of the change in law or other circumstance on which such claim is based. SECTION 8.04. TAXES. (a) For purposes of this Section, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to any Financing Document, and all liabilities with respect thereto, EXCLUDING (i) in the case of each Lending Party, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which it is organized or in which its principal executive office is located or in which its Applicable Lending Office is located and (ii) in the case of each Lender, any United States withholding tax imposed on such payments but only to the extent that such Lender is subject to United States withholding tax at the time such Lender first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to any Financing Document, or from the execution or delivery of, or otherwise with respect to, any Financing Document. (b) Any and all payments by any Borrower to or for the account of any Lending Party under any Financing Document shall be made without deduction 71 <PAGE> for any Taxes or Other Taxes; PROVIDED that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payment, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Lending Party receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.1, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Lending Party for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Lending Party and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Lending Party makes demand therefor. (d) Each Lending Party organized under the laws of a jurisdiction outside the United States, on or prior to its execution and delivery of this Agreement in the case of each Lending Party listed on the signature pages hereof and on or prior to the date on which it becomes a Lending Party in the case of each other Lending Party, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Lending Party remains lawfully able to do so), shall provide the Borrower and the Administrative Agent with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lending Party is entitled to benefits under an income tax treaty to which the United States is a party which exempts such Lending Party from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Lending Party or certifying that the income receivable pursuant to the Financing Documents is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Lending Party has failed to provide the Borrower and the Administrative Agent with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring after the date on which such form originally was required to be provided), such Lending Party shall not be entitled to indemnification under Section 8.04(b) or (c) with respect to Taxes imposed by the United States; PROVIDED that if a Lending Party, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such 72 <PAGE> Lending Party shall reasonably request to assist such Lending Party to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Lender pursuant to this Section 8.04, such Lender will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Lender, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Lender. SECTION 8.05. BASE RATE LOANS SUBSTITUTED FOR AFFECTED EURO-DOLLAR LOANS. If (i) the obligation of any Lender to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Lender has demanded compensation under Section 8.03 or 8.04 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Lender through the Administrative Agent, have elected that the provisions of this Section shall apply to such Lender, then, unless and until such Lender notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, all Loans which would otherwise be made by such Lender as (or continued as or converted into) Euro-Dollar Loans shall instead be made as (or converted into) Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Lenders). If such Lender notifies the Borrower that the circumstances giving rise to such notice no longer apply, the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Lenders. ARTICLE 9 MISCELLANEOUS SECTION 9.01. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower, the Swingline Bank or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Lender or Agent (other than the Administrative Agent), at its address, facsimile number or telex number set forth in its Administrative Questionnaire or 73 <PAGE> (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number referred to in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number referred to in this Section and confirmation of receipt is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address referred to in this Section; PROVIDED that notices to the Administrative Agent or an LC Issuing Bank under Article 2 or Article 8 shall not be effective until received. SECTION 9.02. NO WAIVERS. No failure or delay by any Lending Party in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. EXPENSES; INDEMNIFICATION. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Administrative Agent, including reasonable fees and disbursements of special counsel for the Administrative Agent, in connection with the preparation and administration of the Financing Documents, any waiver or consent thereunder or any amendment thereof or any Default or alleged Default thereunder, (ii) all out-of-pocket expenses of the Arranger and each Co-Arranger (but not any fees and disbursements of its counsel) in connection with the preparation of the Financing Documents, any waiver or consent thereunder or any amendment thereof and (iii) if an Event of Default occurs, all out-of-pocket expenses incurred by each Lending Party, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and any collection, bankruptcy, insolvency, workout or other enforcement proceedings resulting therefrom. (b) The Borrower shall indemnify each Lending Party, the Arranger, the Co-Arrangers and their respective Affiliates and the respective directors, directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened 74 <PAGE> relating to or arising out of any Financing Document or any actual or proposed use by the Borrower or any of its Subsidiaries or Equity Affiliates of any Letters of Credit or any proceeds of the Loans; PROVIDED that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 9.04. SHARING OF SET-OFFS. (a) Each Lender agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to the Loans and participations in LC Reimbursement Obligations held by it which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal and interest due with respect to the Loans and participations in LC Reimbursement Obligations held by such other Lender, the Lender receiving such proportionately greater payment shall purchase such participations in the Loans and participations in LC Reimbursement Obligations held by the other Lenders, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Loans and participations in LC Reimbursement Obligations held by the Lenders shall be shared by the Lenders pro rata. (b) Nothing in this Section shall impair the right of any Lender to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness in respect of the Loans and the LC Reimbursement Obligations. (c) The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note or LC Reimbursement Obligation, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. SECTION 9.05. AMENDMENTS AND WAIVERS. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Lenders (and, if the rights or duties of any Agent or LC Issuing Bank are affected thereby, by such Agent or LC Issuing Bank, as the case may be); PROVIDED that no such amendment or waiver shall: (i) unless signed by all the Lenders, increase or decrease any Commitment (except for a ratable decrease in all the Commitments), postpone the date fixed for the termination of any Commitment or, except as expressly provided in Section 2.17, extend the expiry date of any Letter of Credit, reduce the principal of or rate of interest on any Syndicated Loan or the amount of any LC Reimbursement Obligation or any interest 75 <PAGE> thereon, or postpone the Termination Date or any date fixed for any payment of interest on any Syndicated Loan or of any LC Reimbursement Obligation or any interest thereon; (ii) unless signed by the Swingline Bank, increase the Swingline Commitment, postpone the date fixed for the termination of the Swingline Commitment or otherwise affect any of its rights or obligations hereunder; (iii) unless signed by all the Lenders entitled to receive such fees, reduce or postpone the date fixed for any scheduled payment of fees hereunder; (iv) unless signed by all the Lenders, change any provision of this Section or any other provision of this Agreement specifying which Lenders may take any action that the Lenders or any of them are entitled to take hereunder; or (v) unless signed by each Lender affected thereby, waive any condition set forth in clause (b), (c), (q) or (r) of Section 3.01. SECTION 9.06. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, except that the Borrower may not assign or otherwise transfer any of its rights under the Financing Documents without the prior written consent of all the Lenders, the LC Issuing Banks and the Swingline Bank. (b) Any Lender may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans and participations in the Letters of Credit. If any Lender grants such a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Lender shall remain responsible for the performance of its obligations hereunder, and the Borrower, the LC Issuing Banks and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Financing Documents. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrower and the LC Issuing Banks under the Financing Documents including, without limitation, the right to approve any amendment, modification or waiver of any provision thereof; provided that such participation agreement may provide that such Lender will not agree to any modification, amendment or waiver of this Agreement described in clause (i) or (iii) of Section 9.05 without the consent of the Participant. An assignment or other transfer which is not permitted by subsection (c) or (d) below 76 <PAGE> shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Lender may at any time after the Closing Date assign to one or more banks or other institutions (each an "Assignee") all, or a pro rata part of all, of its rights and obligations under the Financing Documents, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement substantially in the form of Exhibit J hereto signed by such Assignee and such transferor Lender, with (and subject to) the subscribed consent of the Borrower (which shall not be unreasonably withheld), the LC Issuing Banks and the Swingline Bank, and with notice to the Administrative Agent; PROVIDED that: (A) if such Assignee is an Affiliate of such transferor Lender or was a Lender immediately prior to such assignment, no such consent shall be required; (B) such assignment may, but need not, include rights of the transferor Lender in respect of outstanding Money Market Loans; (C) if such Assignee is not an Affiliate of the transferor Lender and was not a Lender immediately prior to such assignment, then, unless the Borrower otherwise agrees, the portion of the transferor Lender's Commitment assigned to such Assignee shall be at least $20,000,000; and (D) unless the Borrower otherwise agrees, the transferor Lender and/or its Affiliates shall retain, in the aggregate, a Commitment at least equal to the greater of (x) $20,000,000 or (y) 50% of the Commitment assumed by the transferor Lender when it first became a Lender hereunder; PROVIDED that, if the aggregate amount of the Commitments is reduced pursuant to Section 2.12 or otherwise, the minimum amounts specified in clause (C) and subclauses (x) and (y) of clause (D) above shall be correspondingly reduced. When (i) such Assignment and Assumption Agreement has been signed and delivered, (ii) notice thereof has been given to the Administrative Agent and (iii) such Assignee has paid to such transferor Lender an amount equal to the purchase price agreed between such transferor Lender and such Assignee, such Assignee shall be a Lender party to this Agreement and shall have all the rights and obligations of a Lender to the extent set forth in such Assignment and Assumption Agreement, and the transferor Lender shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Lender, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, either the transferor 77 <PAGE> Lender or the Assignee shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $3,000. If the Assignee is not incorporated under the laws of the United States or a State thereof, it shall deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04(d). (d) Any Lender may at any time assign all or any portion of its rights under the Financing Documents to a Federal Reserve Bank. No such assignment shall release the transferor Lender from its obligations thereunder. (e) No Assignee, Participant or other transferee of any Lender's rights shall be entitled to receive any greater payment under or by reason by Section 8.03 or 8.04 than such Lender would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Lender to designate a different Applicable Lending Office under certain circumstances or, in the case of an Assignee, at a time when the circumstances giving rise to such greater payment did not exist. Subject to the foregoing limitation, any Lender claiming compensation or indemnification pursuant to Section 8.03 or 8.04 may include in its claim similar compensation or indemnification for any Participant having a participating interest in such Lender's rights. SECTION 9.07. NO RELIANCE ON MARGIN STOCK AS COLLATERAL. Each of the Lenders represents to the Administrative Agent and each of the other Lenders that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.08. CONFIDENTIALITY. Each Lending Party agrees to keep any information delivered or made available by the Borrower to it confidential from anyone other than persons employed or retained by such Lending Party who are, or are expected to be, engaged in evaluating, approving, structuring or administering the credit facility provided herein; PROVIDED that nothing herein shall prevent any Lending Party from disclosing such information (a) to any other Lending Party, (b) to any other Person if reasonably incidental to the administration of the credit facility provided herein, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by any Lending Party prohibited by this Agreement, (f) in connection with any litigation to which such Lending Party or any of its Affiliates may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Lending Party's legal counsel and independent auditors, (i) to any Affiliate of such Lending Party, solely in connection with this Agreement 78 <PAGE> or any other transaction or proposed transaction between such Lending Party and/or its Affiliates and the Borrower and/or its Affiliates, and (j) subject to provisions substantially similar to those contained in this Section, to any actual or proposed Participant or Assignee. SECTION 9.09. WAIVER OF JURY TRIAL. THE BORROWER AND EACH LENDING PARTY HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. SECTION 9.10. GOVERNING LAW; SUBMISSION TO JURISDICTION . EACH OF THE FINANCING DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. THE BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SECTION 9.11. COUNTERPARTS; INTEGRATION. This Agreement 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. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. 79 <PAGE> IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. TENET HEALTHCARE CORPORATION By: ----------------------------------- Title: Tenet Healthcare Corporation 3820 State Street Santa Barbara, CA 93105 Attention: Treasurer (with a copy to General Counsel) Telephone: (805) 563-7184 Facsimile: (805) 563-6846 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Lender and as the Swingline Bank By: ----------------------------------- Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Lender and as Syndication Agent By: ----------------------------------- Title: 80 <PAGE> THE BANK OF NEW YORK, as a Lender and as a Documentation Agent By: ----------------------------------- Title: THE BANK OF NOVA SCOTIA, as a Lender and as a Documentation Agent By: ----------------------------------- Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY, as a Lender and as a Managing Agent By: ----------------------------------- Title: ABN AMRO BANK N.V. LOS ANGELES INTERNATIONAL BRANCH, as a Lender and as a Managing Agent By: ----------------------------------- Title: By: ----------------------------------- Title: 81 <PAGE> BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as a Lender and as a Managing Agent By: ----------------------------------- Title: THE CHASE MANHATTAN BANK, as a Lender and as a Managing Agent By: ----------------------------------- Title: DEUTSCHE BANK NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a Lender and as a Managing Agent By: ----------------------------------- Title: By: ----------------------------------- Title: FLEET NATIONAL BANK, as a Lender and as a Managing Agent By: ----------------------------------- Title: 82 <PAGE> THE LONG-TERM CREDIT BANK OF JAPAN, LTD., as a Lender and as a Managing Agent By: ----------------------------------- Title: MELLON BANK, N.A., as a Lender and as a Managing Agent By: ----------------------------------- Title: NATIONSBANK OF TEXAS, N.A., as a Lender and as a Managing Agent By: ----------------------------------- Title: PNC BANK, N.A., as a Lender and as a Managing Agent By: ----------------------------------- Title: THE SANWA BANK LIMITED, DALLAS AGENCY, as a Lender and as a Managing Agent By: ----------------------------------- Title: 83 <PAGE> SOCIETE GENERALE, as a Lender and as a Managing Agent By: ----------------------------------- Title: THE SUMITOMO BANK, LIMITED, as a Lender and as a Managing Agent By: ----------------------------------- Title: TORONTO DOMINION (TEXAS), INC., as a Lender and as a Managing Agent By: ----------------------------------- Title: WACHOVIA BANK OF GEORGIA, N.A., as a Lender and as a Managing Agent By: ----------------------------------- Title: COMMERZBANK AG LOS ANGELES BRANCH, as a Lender and as a Co-Agent By: ----------------------------------- Title: By: ----------------------------------- Title: 84 <PAGE> CREDIT LYONNAIS NEW YORK BRANCH, as a Lender and as a Co-Agent By: ----------------------------------- Title: THE DAI-ICHI KANGYO BANK, LTD. LOS ANGELES AGENCY, as a Lender and as a Co-Agent By: ----------------------------------- Title: THE FUJI BANK, LIMITED, as a Lender and as a Co-Agent By: ----------------------------------- Title: KREDIETBANK N.V., as a Lender and as a Co-Agent By: ----------------------------------- Title: By: ----------------------------------- Title: 85 <PAGE> COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A. "RABOBANK NEDERLAND" NEW YORK BRANCH, as a Lender and as a Co-Agent By: ----------------------------------- Title: By: ----------------------------------- Title: BANK OF MONTREAL, as a Lender By: ----------------------------------- Title: BANQUE PARIBAS, as a Lender By: ----------------------------------- Title: By: ----------------------------------- Title: CORESTATES BANK, N.A., as a Lender By: ----------------------------------- Title: 86 <PAGE> CREDIT SUISSE FIRST BOSTON, as a Lender By: ----------------------------------- Title: By: ----------------------------------- Title: THE MITSUBISHI TRUST AND BANKING CORPORATION, as a Lender By: ----------------------------------- Title: 87 <PAGE> SUNTRUST BANK, CENTRAL FLORIDA NATIONAL ASSOCIATION, as a Lender By: ______________________________ Title: STATE OF GEORGIA COUNTY OF FULTON On the ___ day of _________, 1997 personally appeared ____________, as the ________ PRESIDENT of SunTrust Bank, Central Florida, National Association, and before me executed the attached CREDIT AGREEMENT dated as of January 30, 1997 between Tenet Healthcare Corporation and SunTrust Bank, Central Florida, National Association, as Lender. IN WITNESS WHEREOF, I have hereunto set my hand and official seal, in the state and county aforesaid. _________________________________________________________ Signature of Notary Public, State of_____________________ _________________________________________________________ (Print, Type or Stamp Commissioned Name of Notary Public) Personally known ______; OR Produced identification _____ Type of identification produced: ________________________ _________________________________________________________ (Notary Seal) 88 <PAGE> THE SAKURA BANK LIMITED LOS ANGELES AGENCY, as a Lender By: ______________________________ Title: THE ROYAL BANK OF SCOTLAND plc, as a Lender By: ______________________________ Title: HIBERNIA NATIONAL BANK, as a Lender By: ______________________________ Title: THE SUMITOMO TRUST & BANKING COMPANY LTD. NEW YORK BRANCH, as a Lender By: ______________________________ Title: BANCA COMMERCIALE ITALIANA LOS ANGELES FOREIGN BRANCH, as a Lender By: ______________________________ Title: By: ______________________________ Title: 89 <PAGE> BANQUE FRANCAISE DU COMMERCE EXTERIEUR, as a Lender By: ______________________________ Title: By: ______________________________ Title: BHF-BANK AKTIENGESELLSCHAFT, as a Lender By: ______________________________ Title: By: ______________________________ Title: MICHIGAN NATIONAL BANK, as a Lender By: ______________________________ Title: THE NIPPON CREDIT BANK, LTD., LOS ANGELES AGENCY, as a Lender By: ______________________________ Title: 90 <PAGE> THE TOKAI BANK LIMITED, LOS ANGELES AGENCY, as a Lender By: ______________________________ Title: UNITED STATES NATIONAL BANK OF OREGON, as a Lender By: ______________________________ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: ______________________________ Title: c/o J.P. Morgan Services Inc. 500 Stanton Christiana Road Newark, Delaware 19713 Attention: Jeannie Mattson Facsimile number: 302-634-1092 91 <PAGE> COMMITMENT SCHEDULE <TABLE> <CAPTION> LENDER COMMITMENT ------ ---------- <S> <C> Morgan Guaranty Trust Company of New York.......................................$ 125,000,000 Bank of America National Trust and Savings Association..........................$ 125,000,000 The Bank of New York............................................................$ 125,000,000 The Bank of Nova Scotia.........................................................$ 125,000,000 The Industrial Bank of Japan, Limited, Los Angeles Agency.......................$ 100,000,000 ABN AMRO Bank N.V. Los Angeles International Branch.............................$ 85,000,000 Bank of Tokyo-Mitsubishi Trust Company..........................................$ 85,000,000 The Chase Manhattan Bank........................................................$ 85,000,000 Deutsche Bank New York and/or Cayman Islands Branches...........................$ 85,000,000 Fleet National Bank.............................................................$ 85,000,000 The Long-Term Credit Bank of Japan, Ltd.........................................$ 85,000,000 Mellon Bank, N.A................................................................$ 85,000,000 NationsBank of Texas, N.A.......................................................$ 85,000,000 PNC Bank, N.A...................................................................$ 85,000,000 The Sanwa Bank Limited, Dallas Agency...........................................$ 85,000,000 Societe Generale................................................................$ 85,000,000 The Sumitomo Bank, Limited......................................................$ 85,000,000 Toronto Dominion (Texas), Inc...................................................$ 85,000,000 Wachovia Bank of Georgia, N.A...................................................$ 85,000,000 Commerzbank AG Los Angeles Branch...............................................$ 65,000,000 Credit Lyonnais New York Branch.................................................$ 65,000,000 The Dai-Ichi Kangyo Bank, Ltd. Los Angeles Agency...............................$ 65,000,000 The Fuji Bank, Limited..........................................................$ 65,000,000 Kredietbank N.V.................................................................$ 65,000,000 Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank Nederland" New York Branch..............................................................$ 65,000,000 Bank of Montreal................................................................$ 50,000,000 Banque Paribas..................................................................$ 50,000,000 CoreStates Bank, N.A............................................................$ 50,000,000 Credit Suisse First Boston......................................................$ 50,000,000 The Mitsubishi Trust and Banking Corporation....................................$ 50,000,000 The Sakura Bank Limited Los Angeles Agency......................................$ 50,000,000 SunTrust Bank, Central Florida National Association.............................$ 50,000,000 The Royal Bank of Scotland plc..................................................$ 35,000,000 Hibernia National Bank..........................................................$ 30,000,000 The Sumitomo Trust & Banking Company Ltd. New York Branch.......................$ 30,000,000 Banca Commerciale Italiana Los Angeles Foreign Branch...........................$ 25,000,000 Banque Francaise du Commerce Exterieur..........................................$ 25,000,000 BHF-Bank Aktiengesellschaft.....................................................$ 25,000,000 Michigan National Bank..........................................................$ 25,000,000 The Nippon Credit Bank, Ltd., Los Angeles Agency................................$ 25,000,000 </TABLE> <PAGE> <TABLE> <CAPTION> LENDER COMMITMENT ------ ---------- <S> <C> The Tokai Bank, Limited, Los Angeles Agency.....................................$ 25,000,000 United States National Bank of Oregon...........................................$ 25,000,000 ========== TOTAL.....................................................................$ 2,800,000,000 </TABLE> 4.05-1 <PAGE> SCHEDULE 4.05 Pending Litigation The Borrower hereby incorporates by reference the disclosure concerning the legal proceedings referred to in its annual report on Form 10-K for its fiscal year ended May 31, 1996 and its quarterly report on Form 10-Q for its fiscal quarter ended November 30, 1996. The Borrower also hereby incorporates by reference the disclosure concerning the legal proceedings referred to in OrNda's annual report on Form 10-K for its fiscal year ended August 31, 1996, and OrNda's quarterly report on Form 10-Q for its fiscal quarter ended November 30, 1996. 4.05-2 <PAGE> SCHEDULE 5.06 PERMITTED ASSET SALES PHOENIX/TUCSON AREA: Community Hospital Medical Center Mesa General Hospital Medical Center St. Luke's Medical Center Tempe St. Luke's Hospital Tucson General Hospital TEXAS: Bayou City (Houston - 2 locations) Garland Community Hospital (Dallas) Odessa Regional Medical Center (Odessa) Southwest General Hospital (San Antonio) Trinity Valley Medical Center (Palestine) Mid-Jefferson Hospital (Nederland) Park Place Hospital (Port Arthur) TAMPA AREA: Memorial Hospital of Tampa Palms of Pasadena Hospital Town and Country Hospital OTHERS: Columbia Regional Hospital (Missouri) Culver Union Hospital (Indiana) Lake Mead Hospital (Nevada) Minden Hospital (Louisiana) Winona Memorial Hospital (Indiana) 5.06-1 <PAGE> EXHIBIT A NOTE New York, New York , 199 For value received, TENET HEALTHCARE CORPORATION, a Nevada corporation (the "Borrower"), promises to pay to the order of ________________ (the "Lender"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Lender to the Borrower pursuant to the Credit Agreement referred to below on the maturity date provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Lender, the respective dates and amounts thereof and all payments of the principal with respect thereto shall be recorded by the Lender and, if the Lender so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Lender on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under any other Financing Document. This note is one of the Notes referred to in the Credit Agreement dated as of January 30, 1997 among the Borrower, the Lenders, Managing Agents, Co-Agents and Swingline Bank party thereto, The Bank of New York and The Bank of Nova Scotia, as Documentation Agents, Bank of America National Trust and Savings Association, as Syndication Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with A-1 <PAGE> the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. TENET HEALTHCARE CORPORATION By ________________________________ Title: A-2 <PAGE> Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------- AMOUNT OF AMOUNT OF TYPE OF PRINCIPAL NOTATION MADE DATE LOAN LOAN REPAID BY - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- </TABLE> A-3 <PAGE> EXHIBIT B FORM OF MONEY MARKET QUOTE REQUEST [Date] To: Morgan Guaranty Trust Company of New York (the "Administrative Agent") From: Tenet Healthcare Corporation Re: Credit Agreement dated as of January 30, 1997 (the "Credit Agreement") among the Borrower and the Lenders, Managing Agents, Co-Agents, Swingline Bank and Agents party thereto We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ <TABLE> <CAPTION> PRINCIPAL AMOUNT(2) INTEREST PERIOD(3) - ------------------- ------------------ <S> <C> $ </TABLE> Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Terms used herein have the meanings assigned to them in the Credit Agreement. Tenet Healthcare Corporation By ___________________________________ Title: ________________________ (2) Amount must be $10,000,000 or a larger multiple of $1,000,000. (3) Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. B-1 <PAGE> EXHIBIT C FORM OF INVITATION FOR MONEY MARKET QUOTES To: [Name of Lender] Re: Invitation for Money Market Quotes to Tenet Healthcare Corporation (the "Borrower") Pursuant to Section 2.03 of the Credit Agreement dated as of January 30, 1997 among the Borrower, the Lenders, Managing Agents, Co-Agents, Swingline Bank and Agents party thereto, and the undersigned, as Administrative Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ <TABLE> <CAPTION> PRINCIPAL AMOUNT INTEREST PERIOD - ---------------- --------------- <S> <C> $ </TABLE> Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [10:00 A.M.] (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ___________________________________ Authorized Officer C-1 <PAGE> EXHIBIT D FORM OF MONEY MARKET QUOTE To: Morgan Guaranty Trust Company of New York, as Administrative Agent Re: Money Market Quote to Tenet Healthcare Corporation (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Lender: ________________________________ 2. Person to contact at Quoting Lender: ______________________ 3. Date of Borrowing: ____________________(4) 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: <TABLE> <CAPTION> Principal Amount(5) Interest Period(6) Money Market Margin(7) Absolute Rate(8) - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> $ $ </TABLE> [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.] _____________________________ (4) As specified in the related Invitation. (5) Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the bank is willing to lend. Bids must be made for $10,000,000 or a larger multiple of $1,000,000. (6) Not less than one month or not less than 7 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. (7) Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". (8) Specify rate of interest per annum (to the nearest 1/10,000th of 1%). D-1 <PAGE> We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement dated as of January 30, 1997 among the Borrower, the Lenders, Managing Agents, Co-Agents, Swingline Bank and Agents party thereto and yourselves, as Administrative Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF LENDER] Dated: By _______________________________ Authorized Officer D-2 <PAGE> EXHIBIT E SWINGLINE NOTE New York, New York , 199 For value received, TENET HEALTHCARE CORPORATION, a Nevada corporation (the "Borrower"), promises to pay to the order of MORGAN GUARANTY TRUST COMPANY OF NEW YORK (the "Swingline Bank") the unpaid principal amount of each Swingline Loan made by the Swingline Bank to the Borrower pursuant to the Credit Agreement referred to below on the maturity date provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Swingline Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Swingline Loans made by the Swingline Bank and all repayments of the principal thereof shall be recorded by the Swingline Bank and, if the Swingline Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Swingline Loan then outstanding may be endorsed by the Swingline Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Swingline Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under any other Financing Document. This note is the Swingline Note referred to in the Credit Agreement dated as of January 30, 1997 among the Borrower, the Lenders, Managing Agents, Co-Agents and Swingline Bank party thereto, The Bank of New York and The Bank of Nova Scotia, as Documentation Agents, Bank of America National Trust and Savings Association, as Syndication Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with E-1 <PAGE> the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. TENET HEALTHCARE CORPORATION By ___________________________________ Title: E-2 <PAGE> Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------ AMOUNT OF AMOUNT OF PRINCIPAL DATE LOAN REPAID NOTATION MADE BY - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ </TABLE> E-3 <PAGE> EXHIBIT F SENIOR OFFICER'S CLOSING CERTIFICATE I, [name], [title] of Tenet Healthcare Corporation, a Nevada corporation (the "Borrower"), in connection with (i) the closing held today (the "Closing") under the $2,800,000,000 Credit Agreement dated as of January 30, 1997 (the "Borrower's Credit Agreement") among the Borrower and the Lenders, Managing Agents, Co-Agents, Swingline Bank and Agents party thereto, and (ii) the borrowing today (the "First Borrowing") by the Borrower thereunder, DO HEREBY CERTIFY that: 1. The representations and warranties made by the Borrower in the Borrower's Credit Agreement are true on and as of the date hereof. 2. Immediately before and after the First Borrowing under the Borrower's Credit Agreement, no Default will have occurred and be continuing. 3. The Borrower has made available, or has irrevocably instructed the relevant banks to make available from the proceeds of the New Public Debt and/or the First Borrowing, to Morgan Guaranty Trust Company of New York, as Agent under the Borrower's Existing Credit Agreement, funds sufficient to pay in full the principal of all loans outstanding under the Borrower's Existing Credit Agreement on the date hereof and all interest and fees accrued thereunder to but excluding the date hereof. 4. (A) OrNda has given The Bank of Nova Scotia, as Agent under OrNda's Existing Credit Agreement ("OrNda's Agent"), irrevocable notice of termination of the commitments of the lenders thereunder, (B) the Borrower has made available, or has irrevocably instructed the relevant banks to make available from the proceeds of the New Public Debt and/or the First Borrowing, to OrNda's Agent for the account of OrNda, an amount sufficient to pay in full the principal of all loans and reimbursement obligations outstanding on the date hereof under OrNda's Existing Credit Agreement and all interest and fees accrued thereunder to but excluding the date hereof and (C) OrNda has irrevocably instructed OrNda's Agent to apply such proceeds to pay such amounts in full on the date hereof. 5. The Acquisition has been consummated substantially on the terms set forth in the Merger Agreement and all conditions to the consummation of the Acquisition, as set forth in the Merger Agreement, have been fulfilled in all material respects. F-1 <PAGE> 6. The total consideration paid by the Borrower and its Subsidiaries as a result of the Acquisition to the former holders of common stock of OrNda and options to purchase such common stock consists only of shares of common stock of the Borrower and cash to purchase fractional shares. 7. All approvals, consents and other actions, by or in respect of, or filings with, any governmental body, agency, official, authority or other Person required in connection with the Acquisition, the OrNda Tender Offers, the issuance and sale of the New Public Debt or the transactions contemplated by the Financing Documents have been obtained, taken or made, except for (i) any consent which is not required because an applicable waiting period has expired without action being taken and (ii) other approvals, consents and other actions as to which failures to obtain or take them could not, in the aggregate, reasonably be expected to have a Material Adverse Effect or an adverse effect on the validity or enforceability of any material provision of any Financing Document. 8. No order, decree, judgment, ruling or injunction exists which restrains or otherwise prevents the consummation of the Acquisition in the manner contemplated by the Merger Agreement, the consummation of the OrNda Tender Offers, the issuance and sale of the New Public Debt in the manner described in the New Public Debt Prospectus or the making of the Loans. No action, suit or proceeding is pending or threatened in which there is a reasonable possibility of an adverse decision which would have a Material Adverse Effect or an adverse effect on the validity or enforceability of any material provision of any Financing Document. 9. The officer who executed the Borrower's Credit Agreement on behalf of the Borrower was authorized by the Borrower's board of directors to, and did, approve of the terms of the Borrower's Credit Agreement. Terms used herein and not defined herein have the meanings assigned to them in the Borrower's Credit Agreement. ________________________________ Name: Title: [Closing Date] F-2 <PAGE> EXHIBIT G OPINION OF GIBSON, DUNN & CRUTCHER LLP SPECIAL COUNSEL TO THE BORROWER [Closing Date] To: The Lenders, Managing Agents, Co-Agents, Swingline Bank and Agents Party to the Credit Agreement referred to herein Re: Credit Agreement dated as of January 30, 1997 among Tenet Healthcare Corporation and the Lenders, Managing Agents, Co-Agents, Swingline Bank and Agents party thereto Ladies and Gentlemen: We have acted as special counsel to Tenet Healthcare Corporation, a Nevada corporation (the "Borrower"), in connection with the Credit Agreement dated as of January 30, 1997 (the "Credit Agreement") among the Borrower, the Lenders, Managing Agents, Co-Agents and Swingline Bank party thereto, The Bank of New York and The Bank of Nova Scotia, as Documentation Agents, Bank of America NT & SA, as Syndication Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as therein defined. This opinion is delivered pursuant to Section 3.01(j) of the Credit Agreement. In rendering this opinion, we have examined originals or copies certified or otherwise identified to our satisfaction as being true copies of the following documents and instruments: (a) the Credit Agreement, including the Exhibits and Schedules thereto; (b) the Notes; (c) the Swingline Note; G-1 <PAGE> (d) a certificate of even date herewith of the corporate secretary of the Borrower as to resolutions, incumbency of certain officers and the form of articles of incorporation and by-laws of the Borrower in effect on the date hereof; (e) a certificate of even date herewith executed by an officer of the Borrower setting forth or certifying certain factual matters; and (f) a certificate of recent date of the Secretary of State of Nevada as to the legal existence of the Borrower in good standing under the laws of Nevada. The documents referred to in Items (a) through (c) are sometimes referred to herein collectively as the "Financing Documents". We have, with your permission, assumed, without independent investigation or inquiry with respect to any such matter, that: (a) The Borrower is a validly existing corporation in good standing under the laws of the State of Nevada. The Borrower has requisite corporate power and authority to own and operate its properties, to conduct its business in the manner in which it presently is conducted, and to execute, deliver and perform its obligations under each of the Financing Documents. (b) Each of the Financing Documents has been duly authorized by all necessary corporate action on the part of the Borrower. Each of the Financing Documents has been duly executed and delivered on behalf of the Borrower. (c) Each Lender and the Administrative Agent each has all requisite power and authority to execute, deliver and perform its obligations under the Credit Agreement; the execution and delivery of the Credit Agreement and performance of such obligations have been duly authorized by all necessary action on the part of such Lender and the Administrative Agent; and the Credit Agreement is the legal, valid and binding obligation of such Lender or the Administrative Agent, enforceable against it in accordance with its terms. (d) The execution and delivery of the Credit Agreement by each Lender and the Administrative Agent and performance by each of them of their respective obligations thereunder comply with all laws and regulations that are applicable to such Lender or the Administrative Agent or the transactions contemplated by the Credit Agreement because of the nature of their respective businesses (provided that the assumption stated in this subparagraph (d) does not relate to any matter as to which we expressly state our opinion herein). G-2 <PAGE> (e) The signatures on all documents examined by us are genuine, and all individuals executing such documents were thereunto duly authorized. (f) The documents submitted to us as originals are authentic and the documents submitted to us as certified or reproduction copies conform to the originals. With respect to questions of fact material to the opinions expressed below, we have, with your consent, relied upon certificates of public officials and officers of the Borrower, in each case without having independently verified the accuracy or completeness thereof. With respect to any opinion herein in regard to the existence or absence of facts that is stated to be to our actual knowledge, such statement means that, during the course of our representation of the Borrower, no information has come to the attention of the lawyers in our Firm participating in such representation that has given them actual knowledge of facts contrary to the existence or absence of the facts indicated. No inference as to our knowledge of the existence or absence of such facts should be drawn from our representation of the Borrower. Based upon the foregoing, and subject to the qualifications, exceptions, limitations and assumptions hereinafter set forth, we are of the opinion that: (1) Each of the Financing Documents constitutes the legal, valid and binding obligation of the Borrower and is enforceable against the Borrower in accordance with its terms. (2) No consent, approval or authorization of, and no registration, declaration or filing with any administrative, governmental or other public authority is required under the laws of the United States of America or the State of New York which, in our experience, are generally applicable to transactions of the type contemplated by the Credit Agreement, or under the Nevada General Corporation Law, to be obtained or made in connection with the execution, delivery and performance by the Borrower, or for the validity or enforceability against the Borrower, of any of the Financing Documents. (3) Neither the execution and delivery of the Financing Documents and the performance by the Borrower of its obligations thereunder nor the consummation of the transactions contemplated thereby constitutes or will constitute a violation of any laws of the United States of America or the State of New York which, in our experience, are generally applicable to transactions of the type contemplated by the Credit Agreement, or under the Nevada General Corporation Law or the California Corporations Code, or, to our actual knowledge, of any order of any court or governmental authority that is applicable to the Borrower. G-3 <PAGE> (4) The Borrower is neither an "investment company" nor a Person directly or indirectly "controlled" by or "acting on behalf of" an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The Borrower is neither a "holding company", nor an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. (5) Neither the making of the Loans on the Closing Date pursuant to, nor the application of the proceeds of the Loans in accordance with, the Credit Agreement will violate Regulation G, U or X promulgated by the Board of Governors of the Federal Reserve System. Each of the opinions set forth above is subject to the following exceptions, qualifications, limitations and assumptions: (a) Our opinions are subject to the effect of bankruptcy, insolvency, reorganization, moratorium, arrangement or other similar laws affecting enforcement of creditors' rights generally, including, without limitation, the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers, and of laws affecting distributions by corporations to stockholders. (b) Our opinions are subject to the application of general principles of equity, whether considered in a case or proceeding at law or in equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing. (c) Our opinions are subject to the qualifications that indemnification provisions in any of the Financing Documents may be unenforceable to the extent that such indemnification may be held to be in violation of or against public policy. This opinion is limited to the effect of (i) the laws of the United States of America and the State of New York, (ii) for purposes only of our opinion expressed in Paragraph 3 herein, the California Corporations Code, and (iii) to the limited extent set forth below, the General Corporation Law of the State of Nevada. Although we are not admitted to practice in the State of Nevada, we are generally familiar with the General Corporation Law of the State of Nevada and have made such inquiries as we consider necessary to render our opinions expressed in Paragraphs 2 and 3 hereof. This opinion relates to the present state of the laws referred to herein and, in rendering this opinion, we assume no obligation to revise or supplement this opinion should the present laws, or the interpretation thereof, be changed. This opinion is rendered to the Lenders, the Managing Agents, the Co-Agents, the Swingline Bank and the Agents as of the date hereof in connection with the Credit G-4 <PAGE> Agreement, and may not be relied upon by any other person (except an LC Issuing Bank) or by them in any other context. Very truly yours, Gibson, Dunn & Crutcher G-5 <PAGE> EXHIBIT H OPINION OF SCOTT BROWN GENERAL COUNSEL FOR THE BORROWER [Closing Date] To: The Lenders, Managing Agents, Co-Agents, Swingline Bank and Agents Party to the Credit Agreement referred to herein Ladies and Gentlemen: I am the General Counsel of Tenet Healthcare Corporation, a Nevada corporation (the "Borrower"), and have acted as such in connection with the Credit Agreement dated as of January 30, 1997 (the "Credit Agreement") among the Borrower, the Lenders, Managing Agents, Co-Agents and Swingline Bank party thereto, The Bank of New York and The Bank of Nova Scotia, as Documentation Agents, Bank of America National Trust & Savings Association, as Syndication Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent. This opinion is delivered to you pursuant to Section 3.01(k) of the Credit Agreement. Terms used herein which are defined in the Credit Agreement have the respective meanings set forth in the Credit Agreement, unless otherwise defined herein. In connection with this opinion, I have examined executed copies of each of the Credit Agreement (including all of the Schedules and Exhibits thereto), the Notes and the Swingline Note (together, the "Financing Documents") and such corporate documents and records of the Borrower and its Subsidiaries and certificates of public officials and officers of the Borrower and its Subsidiaries, and such other documents, as I have deemed necessary or appropriate for the purposes of this opinion. In stating my opinion, I have assumed the genuineness of all signatures and the authority of persons signing the Financing Documents on behalf of parties thereto other than the Borrower, the authenticity of all documents submitted to me as originals and the conformity to authentic original documents of all documents submitted to me as certified, conformed or photostatic copies. This opinion is limited to the laws of H-1 <PAGE> California, New York and the United States of America, and to the general corporate laws of the State of Nevada. Based upon the foregoing, I am of the opinion that: 1. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. The Borrower (a) is duly organized, validly existing and in good standing under the laws of the State of Nevada, and (b) has the corporate power, authority and legal right to own or operate its properties or to lease the properties it operates and to conduct the business in which it is currently engaged. Except as could not, in the aggregate, reasonably be expected to have a Material Adverse Effect or an adverse effect on the validity or enforceability of any material provision of any Financing Document, (x) the Borrower is duly qualified as a foreign corporation, and in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification, and (y) each of the Borrower and its Subsidiaries is in compliance with all laws, regulations, decrees and orders applicable to the Borrower or any of its Subsidiaries (including, without limitation, laws, regulations, decrees and orders relating to environmental, occupational and health standards and controls and in respect to antitrust, monopoly, restraint of trade or unfair competition). The Borrower and its Subsidiaries have obtained all certifications, licenses, accreditations and approvals that are necessary to conduct their respective businesses. None of the Borrower or any of its Subsidiaries has received or, to the best of my knowledge, expects to receive, any order or notice of any violation or claim of violation of any law, regulation, decree, rule, judgment or order of any governmental authority or agency relating to the ownership or operation of any hospital or other facility owned or operated by it, as to which the cost of compliance or the consequences of noncompliance, individually or in the aggregate, would have a Material Adverse Effect or which would impair the ability of the Borrower to discharge any of its obligations under any of the Financing Documents. 2. CORPORATE POWER; AUTHORIZATION. The Borrower has the corporate power, authority and legal right to execute, deliver and perform the Financing Documents and to borrow and obtain the issuance of letters of credit thereunder, and has taken all necessary corporate action to authorize the borrowings and the issuance of such letters of credit on the terms and conditions of the Financing Documents and to authorize the execution, delivery and performance of the Financing Documents. No consent of any other Person, and no authorization of, notice to, or other act by or in respect of the Borrower by any governmental authority, agency or instrumentality is required in connection with borrowings or the issuance of letters of credit thereunder or with the execution, delivery, performance, validity or enforceability of the Financing Documents. The Borrower has duly executed and delivered each Financing Document. 3. NO LEGAL BAR. The execution, delivery and performance by the Borrower of the Financing Documents, the borrowings and the issuance of letters of H-2 <PAGE> credit thereunder and the use of the proceeds of such borrowings and the use of such letters of credit will not violate (except to the extent that such violation, if any, would not have a Material Adverse Effect or an adverse effect on the validity or enforceability of any material provision of any Financing Document) any provision of any existing law or regulation applicable to the Borrower or any of its Subsidiaries or of any award, order or decree applicable to the Borrower or any of its Subsidiaries known to me (after due inquiry) of any court, arbitrator or governmental authority, or of the restated articles of incorporation or restated by-laws of the Borrower or, to the best of my knowledge (after due inquiry), of any security issued by the Borrower or of any material mortgage, indenture, lease, contract or other agreement or undertaking to which the Borrower is a party or by which the Borrower or any of its respective properties or assets may be bound, and will not result in or require the creation or imposition of any Lien prohibited by the Credit Agreement on any of its properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement or other undertaking. 4. NO MATERIAL LITIGATION. To the best of my knowledge, after due inquiry, (i) there are no pending or threatened actions, suits, proceedings or investigations against the Borrower or any of its Subsidiaries in any court or by or before any arbitrator or governmental authority that calls into question the validity of the Financing Documents and (ii) except as disclosed in Schedule 4.05 to the Credit Agreement, there are no such pending or threatened actions, suits, proceedings or investigations in which there is a reasonable possibility of an adverse determination that could reasonably be expected to have a Material Adverse Effect or an adverse effect on the validity or enforceability of any material provision of any Financing Document. For purposes of the preceding sentence, I have assumed that, in medical malpractice actions now pending or threatened against the Borrower and its Subsidiaries, damages would be assessed consistent with the Borrower's past experience. The past experience of the Borrower has been that damages assessed in such suits have been adequately covered by insurance. In rendering the opinions set forth in this paragraph 4, I have not conducted a search of any federal or state court docket. My inquiry has been limited to consultation with counsel representing the Borrower and its Subsidiaries in litigation matters. This opinion relates to the present state of the laws referred to herein and, in rendering this opinion, I assume no obligation to revise or supplement this opinion should the present laws, or the interpretation thereof, be changed. This opinion is rendered to the Lenders, the Managing Agents, the Co-Agents, the Swingline Bank and the Agents as of the date hereof in connection with the Credit Agreement, and H-3 <PAGE> may not be relied upon by any other person (except an LC Issuing Bank) or by them in any other context. Very truly yours, ________________________________ Scott M. Brown General Counsel H-4 <PAGE> EXHIBIT I OPINION OF DAVIS POLK & WARDWELL SPECIAL COUNSEL FOR THE ADMINISTRATIVE AGENT [Closing Date] To the Lenders , Managing Agents, Co-Agents, Swingline Bank and Agents c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: We have participated in the preparation of the $2,800,000,000 Credit Agreement dated as of January 30, 1997 (the "Credit Agreement") among Tenet Healthcare Corporation, a Nevada corporation, the Lenders, Managing Agents, Co-Agents and Swingline Bank party thereto, The Bank of New York and The Bank of Nova Scotia, as Documentation Agents, Bank of America National Trust & Savings Association, as Syndication Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent, and have acted as special counsel for the Administrative Agent for the purpose of rendering this opinion pursuant to Section 3.01(l) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes and Swingline Note constitute valid and binding obligations of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. I-1 <PAGE> We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York and the federal laws of the United States of America. Insofar as the foregoing opinions involve matters governed by the laws of any other jurisdiction, we have relied, with your permission and without independent investigation, upon the opinions of Gibson, Dunn & Crutcher and Scott Brown, Esq., each dated the date hereof, a copy of each of which has been delivered to you, and we have assumed, without independent investigation, the correctness of the matters set forth in each such opinion, our opinion being subject to the qualifications and limitations set forth in each such opinion with respect thereto. In addition, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Lender is located which limits the rate of interest that such Lender may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person (except an LC Issuing Bank) without our prior written consent. Very truly yours, I-2 <PAGE> EXHIBIT J ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 19__ between [ASSIGNOR] (the "Assignor") and [ASSIGNEE] (the "Assignee"). WITNESSETH WHEREAS, this Assignment and Assumption Agreement relates to the Credit Agreement dated as of January 30 , 1997 among Tenet Healthcare Corporation (the "Borrower"), the Lenders, Managing Agents, Co-Agents and Swingline Bank party thereto, The Bank of New York and The Bank of Nova Scotia, as Documentation Agents, Bank of America National Trust & Savings Association, as Syndication Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent (as amended from time to time, the "Credit Agreement"); [WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower and participate in Letters of Credit in the amount of $_______________, under which the Assignor has outstanding Syndicated Loans in the aggregate principal amount of $___________ at the date hereof]; [WHEREAS, Letters of Credit with a total amount available for drawing thereunder of $________ are outstanding at the date hereof, and] [WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment in an amount equal to $__________ (the "Commitment Assigned Amount"), together with a corresponding portion of each of its outstanding Syndicated Loans and its LC Exposure, and the Assignee proposes to accept such assignment of such rights and assume the corresponding obligations from the Assignor;] [WHEREAS, the Assignor also proposes to assign to the Assignee Money Market Loans in an aggregate outstanding principal amount of $__________;] NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein have the respective meanings set forth in the Credit Agreement. J-1 <PAGE> SECTION 2. ASSIGNMENT. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement with respect to its Commitment to the extent of the Commitment Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Commitment Assigned Amount, including the purchase from the Assignor of a pro-rata portion of the outstanding principal amount of each Syndicated Loan made by the Assignor, and a pro rata portion of its LC Exposure. Upon the execution and delivery hereof by the Assignor and the Assignee[, the Borrower, the Issuing Banks, the Agent and the Swingline Bank] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Lender under the Credit Agreement with a Commitment in an amount equal to the Commitment Assigned Amount, (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. PAYMENTS. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.(9) Facility fees accrued with respect to the Commitment Assigned Amount to the date hereof are for the account of the Assignor and such fees accruing with respect to the Commitment Assigned Amount on and after the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. [SECTION 4. CONSENT OF THE BORROWER, THE LC ISSUING BANKS AND THE SWINGLINE LENDER. This Agreement is conditioned upon the consent of the Borrower, the LC Issuing Banks and the Swingline Bank pursuant to Section 9.06(c) of the Credit Agreement.] SECTION 5. NON-RELIANCE ON ASSIGNOR. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition or statements of the Borrower or the validity and enforceability of the obligations of the Borrower in respect of any Financing Document. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it ______________________________ (9) Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. J-2 <PAGE> has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. COUNTERPARTS. This Agreement 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. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By ------------------------------ Title: [ASSIGNEE] By ------------------------------ Title: J-3 <PAGE> [The undersigned consent to the foregoing assignment: TENET HEALTHCARE CORPORATION By ------------------------------ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Swingline Bank By ------------------------------ Title: [LC ISSUING BANKS] By ------------------------------ Title: ] J-4 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AT NOVEMBER 30, 1999, AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED NOVEMBER 30, 1999 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-31-2000 <PERIOD-START> JUN-01-1999 <PERIOD-END> NOV-30-1999 <CASH> 31,000 <SECURITIES> 123,000 <RECEIVABLES> 2,761,000 <ALLOWANCES> 293,000 <INVENTORY> 218,000 <CURRENT-ASSETS> 3,518,000 <PP&E> 7,895,000 <DEPRECIATION> 2,052,000 <TOTAL-ASSETS> 13,275,000 <CURRENT-LIABILITIES> 1,925,000 <BONDS> 5,780,000 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 24,000 <OTHER-SE> 4,065,000 <TOTAL-LIABILITY-AND-EQUITY> 13,275,000 <SALES> 0 <TOTAL-REVENUES> 5,653,000 <CGS> 0 <TOTAL-COSTS> 4,560,000 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 433,000 <INTEREST-EXPENSE> 244,000 <INCOME-PRETAX> 485,000 <INCOME-TAX> 222,000 <INCOME-CONTINUING> 263,000 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 19,000 <NET-INCOME> 244,000 <EPS-BASIC> 0.78 <EPS-DILUTED> 0.78 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

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https://www.sec.gov/Archives/edgar/data/108516/0000950152-00-000207.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, A0qDX6AmdWTunlYL1cO6X8BffwT/2501tkswlIiKhIEF13+tIXZY30p5LeAOJGzi jpMjfgt38C7Dfs8C85eWAg== <SEC-DOCUMENT>0000950152-00-000207.txt : 20000202 <SEC-HEADER>0000950152-00-000207.hdr.sgml : 20000202 ACCESSION NUMBER: 0000950152-00-000207 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 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: OH FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04016 FILM NUMBER: 507693 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 <DESCRIPTION>WORTHINGTON INDUSTRIES, INC. 10-Q <TEXT> <PAGE> 1 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 30,1999 [ ] 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. 0-4016 WORTHINGTON INDUSTRIES, INC. ---------------------------- (Exact name of Registrant as specified in its Charter) OHIO 31-1189815 - --------------------------------------- --------------------------------- (State of Incorporation) (IRS Employer Identification No.) 1205 Dearborn Drive, Columbus, Ohio 43085 - ---------------------------------------- --------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 438-3210 ------------------------------ 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 [ ] 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. As of December 31, 1999, 89,236,703 of the Issuer's common shares, without par value, were outstanding. 1 <PAGE> 2 WORTHINGTON INDUSTRIES, INC. INDEX PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets - November 30, 1999 and May 31, 1999.............................3 Condensed Consolidated Statements of Earnings - Three and Six Months Ended November 30, 1999 and 1998..........5 Condensed Consolidated Statements of Cash Flows - Six Months Ended November 30, 1999 and 1998....................6 Notes to Condensed 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. EXHIBIT AND REPORTS ON FORM 8-K...........................14 SIGNATURES.................................................................14 2 <PAGE> 3 WORTHINGTON INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) ASSETS November 30, May 31, 1999 1999 ---------- ---------- (Unaudited) (Audited) CURRENT ASSETS Cash and cash equivalents $ 7,211 $ 7,641 Accounts receivable, net 259,697 281,706 Inventories Raw materials 200,144 163,277 Work in process 65,893 39,786 Finished products 62,518 53,947 ---------- ---------- Total Inventories 328,555 257,010 Investment in Rouge 44,997 52,497 Other current assets 12,477 25,401 ---------- ---------- TOTAL CURRENT ASSETS 652,937 624,255 Property, plant and equipment 1,150,658 1,131,761 Less accumulated depreciation 289,310 260,414 ---------- ---------- Property, Plant and Equipment, net 861,348 871,347 Other Assets 171,212 191,349 ---------- ---------- TOTAL ASSETS $1,685,497 $1,686,951 ========== ========== See notes to condensed consolidated financial statements. 3 <PAGE> 4 WORTHINGTON INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) LIABILITIES AND SHAREHOLDERS' EQUITY November 30, May 31, 1999 1999 ---------- ---------- (Unaudited) (Audited) CURRENT LIABILITIES Accounts payable $ 172,442 $ 161,264 Notes payable 105,769 122,277 Current maturities of long-term debt 2,514 5,234 Debt exchangeable for common stock 44,997 52,497 Other current liabilities 113,413 86,453 ---------- ---------- TOTAL CURRENT LIABILITIES 439,135 427,725 Long-Term Debt 363,826 365,802 Other Liabilities 80,851 79,331 Deferred Income Taxes 103,303 124,444 Shareholders' Equity 698,382 689,649 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,685,497 $1,686,951 ========== ========== See notes to condensed consolidated financial statements. 4 <PAGE> 5 WORTHINGTON INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except Per Share) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------------ ------------------------ 1999 1998 1999 1998 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net sales $ 473,331 $ 436,428 $ 936,242 $ 845,708 Cost of goods sold 388,289 367,258 768,025 714,860 --------- --------- --------- --------- GROSS MARGIN 85,042 69,170 168,217 130,848 Selling, general & administrative expense 41,832 35,320 83,711 67,392 --------- --------- --------- --------- OPERATING INCOME 43,210 33,850 84,506 63,456 Other income (expense): Miscellaneous income 24 961 986 3,323 Interest Expense (10,079) (11,743) (20,294) (20,686) Equity in net income of unconsolidated affiliates 6,406 6,072 13,176 11,127 --------- --------- --------- --------- EARNINGS BEFORE INCOME TAXES 39,561 29,140 78,374 57,220 Income Taxes 14,835 10,781 29,390 21,171 --------- --------- --------- --------- Earnings From Continuing Operations 24,726 18,359 48,984 36,049 Discontinued Operations, net of taxes -- 3,948 -- 2,632 Cumulative Effect of Accounting Change, net of taxes -- -- -- (7,836) --------- --------- --------- --------- NET EARNINGS $ 24,726 $ 22,307 $ 48,984 $ 30,845 ========= ========= ========= ========= AVERAGE COMMON SHARES OUTSTANDING - DILUTED 89,483 92,566 89,796 94,227 EARNINGS PER COMMON SHARE - BASIC & DILUTED Earnings From Continuing Operations $ 0.28 $ 0.20 $ 0.55 $ 0.38 Discontinued Operations, net of taxes -- 0.04 -- 0.03 Cumulative Effect of Accounting Change, net of taxes -- -- -- (0.08) --------- --------- --------- --------- NET EARNINGS $ 0.28 $ 0.24 $ 0.55 $ 0.33 ========= ========= ========= ========= CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.15 $ 0.14 $ 0.30 $ 0.28 ========= ========= ========= ========= </TABLE> See notes to condensed consolidated financial statements 5 <PAGE> 6 WORTHINGTON INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended November 30, ---------------------- 1999 1998 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net Earnings $ 48,984 $ 30,845 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 35,285 39,054 Other adjustments 26,482 49 Changes in current assets and liabilities (19,521) 12,282 -------- -------- Net Cash Provided By Operating Activities 91,230 82,230 INVESTING ACTIVITIES Investment in property, plant and equipment, net (31,946) (84,980) Acquisitions, net of cash acquired -- (26,718) Proceeds from sale of assets 519 46,802 -------- -------- Net Cash Used By Investing Activities (31,427) (64,896) FINANCING ACTIVITIES Proceeds from (payments on) short-term borrowings (16,508) 85,121 Proceeds from long-term debt 86 2,600 Principal payments on long-term debt (4,633) (4,122) Repurchase of common shares (12,902) (59,422) Dividends paid (26,858) (26,478) Other 582 3,967 -------- -------- Net Cash Provided (Used) By Financing Activities (60,233) 1,666 -------- -------- Increase (decrease) in cash and cash equivalents (430) 19,000 Cash and cash equivalents at beginning of period 7,641 3,788 -------- -------- Cash and cash equivalents at end of period $ 7,211 $ 22,788 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 6 <PAGE> 7 WORTHINGTON INDUSTRIES, INC. 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 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 three and six months ended November 30, 1999 are not necessarily indicative of the results that may be expected for the year ended May 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in Worthington Industries, Inc.'s Annual Report to Shareholders and incorporated by reference in its 1999 Form 10-K. NOTE B - INDUSTRY SEGMENT DATA --------------------- <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------------ ------------------------ ($000) 1999 1998 1999 1998 --------- --------- --------- --------- <S> <C> <C> <C> <C> NET SALES: Processed Steel Products $ 316,012 $ 289,079 $ 616,416 $ 542,181 Metal Framing 84,315 84,513 172,802 176,020 Pressure Cylinders 71,443 61,569 144,483 124,617 Other 1,561 1,267 2,541 2,890 --------- --------- --------- --------- $ 473,331 $ 436,428 $ 936,242 $ 845,708 ========= ========= ========= ========= OPERATING INCOME: Processed Steel Products $ 27,491 $ 21,626 $ 51,252 $ 36,733 Metal Framing 10,306 5,192 20,908 11,888 Pressure Cylinders 6,929 7,075 15,131 14,993 Other (1,516) (43) (2,785) (158) --------- --------- --------- --------- $ 43,210 $ 33,850 $ 84,506 $ 63,456 ========= ========= ========= ========= </TABLE> NOTE C - COMPREHENSIVE INCOME -------------------- Total comprehensive income was $25,386 and $22,884 for the three months ended November 30, 1999 and 1998, respectively. Total comprehensive income was $47,784 and $31,166 for the six months ended November 30, 1999 and 1998, respectively. 7 <PAGE> 8 WORTHINGTON INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Form 10-Q, as filed with the SEC, including, without limitation, the Management's Discussion and Analysis that follows, constitute "forward looking statements" that are based on management's beliefs, estimates, assumptions and currently available information. Such forward looking statements include, without limitation, statements relating to future operating results, growth, stock appreciation, plant start-ups, capabilities, the impact of year 2000 and other non-historical information. Because they are based on beliefs, estimates and assumptions, forward looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from those projected. Any number of factors could affect actual results, including, without limitation, product demand, changes in product mix and market acceptance of products; changes in pricing or availability of raw materials, particularly steel; capacity restraints and efficiencies; conditions in major product markets; delays in construction or equipment supply; inherent risks of international development, including foreign currency risks; the ability to improve processes and business practices to keep pace with the economic, competitive and technological environment; year 2000 issues; general economic conditions, business environment and the impact of governmental regulations, both in the United States and abroad; and other risks described from time to time in filings with the SEC. OVERVIEW Worthington Industries, Inc. (the "Company") is a diversified steel processor that focuses on value-added steel processing and metals related businesses. It operates 39 wholly-owned facilities worldwide, principally in three reportable business segments: Processed Steel Products, Metal Framing, and Pressure Cylinders. The Company also holds equity positions in seven joint ventures, which operate 14 facilities worldwide. RESULTS FROM CONTINUING OPERATIONS The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Condensed Consolidated Financial Statements of the Company included elsewhere in this report. The Company's Form 10-K, as filed with the SEC for the fiscal year ended May 31, 1999, 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. For the second quarter ended November 30, 1999 (the "second quarter") of the fiscal year ending May 31, 2000 ("fiscal 2000"), sales increased 8% to $473.3 million, up $36.9 million from the comparable quarter of the fiscal year ended May 31, 1999 ("fiscal 8 <PAGE> 9 1999"). For the first six months of fiscal 2000 net sales of $936.2 million were $90.5 million, or 11% higher than the same period of fiscal 1999. The overall increase in sales was due to higher volumes primarily from growth in the Steel Processing Products start-up facilities and the recent acquisitions by Pressure Cylinders. Gross margin on sales increased to 18.0% for the second quarter of fiscal 2000 from 15.8% in the comparable quarter of fiscal 1999. For the first six months of fiscal 2000 the gross margin of 18.0% was up 2.5 percentage points over the comparable period in fiscal 1999. This improvement was primarily due to favorable material costs reflected across all segments. A gross margin summary follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, % CHANGE -------------------- -------------------- -------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 3 MONTHS 6 MONTHS -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Net Sales $ 473.3 $ 436.4 $ 936.2 $ 845.7 8% 11% Gross Margin 85.0 69.2 168.2 130.8 23% 29% % of Sales 18.0% 15.8% 18.0% 15.5% </TABLE> For the second quarter of fiscal 2000 selling, general, and administrative ("SG&A") costs of $41.8 million increased 18% over the comparable quarter of fiscal 1999. For the first six months of fiscal 2000 SG&A expenses increased 24% to $83.7 million over the comparable period of fiscal 1999. Year 2000 testing and remediation costs of $4.0 million and $8.0 million for the quarter and the first six months of fiscal 2000, respectively, combined with increased overhead attributable to the start-ups in the Steel Processing Products segment and recent acquisitions in Pressure Cylinders segment are the main reasons for the increase. Operating income increased 28% to $43.2 million for the second quarter of fiscal 2000 from $33.9 million in the comparable quarter of fiscal 1999. For the first six months of fiscal 2000 operating income increased 33% to $84.5 million over the comparable period of fiscal 1999. Stronger sales and favorable material costs more than offset the increase in SG&A expenses resulting in an increase to operating income. A summary of SG&A and operating income follows: <TABLE> <CAPTION> NOVEMBER 30, NOVEMBER 30, % CHANGE ------------------ ------------------ ------------------ DOLLARS IN MILLIONS 1999 1998 1999 1998 3 MONTHS 6 MONTHS ------- ------- ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> SG&A $ 41.8 $ 35.3 $ 83.7 $ 67.3 18% 24% % of Sales 8.8% 8.1% 8.9% 8.0% Operating Income $ 43.2 $ 33.9 $ 84.5 $ 63.5 28% 33% % of Sales 9.1% 7.8% 9.0% 7.5% </TABLE> Interest expense decreased 14% to $10.1 million for the second quarter of fiscal 2000 from $11.7 million in the comparable quarter of fiscal 1999. Year-to-date interest expense decreased 2% to $20.3 million from the comparable period of fiscal 1999. The 9 <PAGE> 10 decrease was due to lower average debt levels and interest rates, partially offset by higher capitalized interest in fiscal 1999. The year-to-date average rate of 5.39% for fiscal 2000 is lower than the 5.71% experienced in the comparable period in fiscal 1999. The higher capitalized interest in fiscal 1999 was mainly due to financing the construction of the Decatur, Alabama plant and rebuild of the Monroe, Ohio facility. At November 30, 1999, approximately 78% of the Company's $472.1 million of total debt (excluding debt exchangeable for common stock (the "DECS")) was at fixed rates of interest. A summary of interest cost follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, % CHANGE ------------------ ----------------- ------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 3 MONTHS 6 MONTHS ------- ------- ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Interest Expense $ 10.1 $ 11.7 $ 20.3 $ 20.7 -14% -2% Capitalized Interest 0.1 3.0 0.3 3.7 ------- ------- ------- ------- Total Interest Cost $ 10.2 $ 14.7 $ 20.6 $ 24.4 -31% -16% </TABLE> Equity in net income of unconsolidated affiliates increased 6% to $6.4 million for the second quarter of fiscal 2000 from $6.1 million in the comparable quarter of fiscal 1999. Year-to-date equity in net income of unconsolidated affiliates increased 18% to $13.2 million from $11.1 million in the comparable period of fiscal 1999. The TWB and Acerex joint ventures accounted for the majority of the increase as they continued to post increases in sales and earnings. The Company's Worthington Armstrong Venture ("WAVE") also posted higher profits for the period. The effective tax rate for fiscal 2000 is 37.5%, up from 37.0% in fiscal 1999 due to increased business in higher-taxed foreign and domestic locations, the result of divestiture and acquisition activity concluded in fiscal 1999. PROCESSED STEEL PRODUCTS Processed Steel Products sales increased 9% to $316.0 million for the quarter ended November 30, 1999 from $289.1 million in the comparable quarter of fiscal 1999. For the first six months of fiscal 2000 sales increased 14% to $616.4 million from $542.2 million in the comparable period of fiscal 1999. The increase in sales is due to the continued ramp up in the new facilities in Delta, Ohio, in Decatur, Alabama and at Spartan Steel, combined with the recovery of prior period sales missed by other facilities during the General Motors strike in the first quarter of fiscal 1999. The increase occurred despite lower steel selling prices compared to the prior fiscal year. Operating income increased 27% to $27.5 million for the quarter ended November 30, 1999 from $21.6 million in the same quarter of fiscal 1999. For the first six months of fiscal 2000 operating income increased 40% to $51.3 million from $36.7 million in the comparable period of fiscal 1999. This was due to higher sales volumes and lower material costs, partially offset by increased SG&A expenses due to year 2000 costs and the continued ramp up in the new facilities. The following table sets forth the Processed Steel Products segment's sales and operating income: 10 <PAGE> 11 <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, % CHANGE -------------------- -------------------- ------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 3 MONTHS 6 MONTHS -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Sales $ 316.0 $ 289.1 $ 616.4 $ 542.2 9% 14% Operating Income $ 27.5 $ 21.6 $ 51.3 $ 36.7 27% 40% % of Sales 8.7% 7.5% 8.3% 6.8% </TABLE> METAL FRAMING Metal Framing sales of $84.3 million for the second quarter of fiscal 2000 remained fairly constant compared to $84.5 million in the comparable quarter of fiscal 1999. For the first six months of fiscal 2000 sales decreased 2% to $172.8 million from $176.0 million in the comparable period of fiscal 1999, due to the sale of the garage door operations in November 1998. A strong commercial building products market continued to drive higher sales volumes, partially offset by lower market pricing. Initial shipments of the new roof truss and floor joist product lines have begun in the residential construction market. Operating income increased 98% to $10.3 million for the second quarter of fiscal 2000 from $5.2 million in the comparable quarter of fiscal 1999. For the first six months of fiscal 2000 operating income increased 76% to $20.9 million from $11.9 million in the comparable period of fiscal 1999. Operating income increased due to higher volumes at an improved operating margin resulting from lower material costs and increased manufacturing efficiencies, partially offset by the Company's year 2000 costs. The following table sets forth the Metal Framing segment's sales and operating income: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, % CHANGE ------------------ -------------------- ------------------ DOLLARS IN MILLIONS 1999 1998 1999 1998 3 MONTHS 6 MONTHS ------- ------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Sales $ 84.3 $ 84.5 $ 172.8 $ 176.0 0% -2% Operating Income $ 10.3 $ 5.2 $ 20.9 $ 11.9 98% 76% % of Sales 12.2% 6.2% 12.1% 6.8% </TABLE> PRESSURE CYLINDERS Pressure Cylinders sales increased 16% to $71.4 million for the second quarter of fiscal 2000 from $61.6 million in the comparable quarter of fiscal 1999. For the first six months of fiscal 2000 sales also increased 16% to $144.5 million from $124.6 million in the comparable period of fiscal 1999. This increase was due to the recent acquisitions in Europe and higher sales volumes in steel portables, high-pressure and refrigerant product lines, partially offset by lower pricing due to competition in domestic markets. Operating income decreased 2% to $6.9 million for the second quarter of fiscal 2000 from $7.1 million in the comparable quarter of fiscal 1999 due to year 2000 costs. For the first six months of fiscal 2000 operating income increased 1% to $15.1 million from $15.0 million in the comparable period of fiscal 1999. Year-to-date operating margins declined from the comparable quarter of fiscal 1999 to 10.5% due to increased SG&A expenses related to year 2000 costs and recent acquisitions. The following table sets forth the Pressure Cylinders segment's sales and operating income: 11 <PAGE> 12 <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, % CHANGE ------------------ -------------------- -------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 3 MONTHS 6 MONTHS ------- ------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Sales $ 71.4 $ 61.6 $ 144.5 $ 124.6 16% 16% Operating Income $ 6.9 $ 7.1 $ 15.1 $ 15.0 -2% 1% % of Sales 9.7% 11.5% 10.5% 12.0% </TABLE> LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $7.2 million at November 30, 1999, a decrease of $0.4 million from May 31, 1999. For the first six months of fiscal 2000, the Company generated $91.2 million in cash from operating activities, a $9.0 million increase from the comparable period of fiscal 1999. The higher operating cash flow in fiscal 2000 is due to improved operating results and a non-recurring $25 million dividend from WAVE, partially offset by an increase in net working capital requirements for the Company's continuing operations. The $91.2 million of net cash from operating activities for the first six months of fiscal 2000 provided the resources needed to invest $31.9 million in capital projects, pay shareholders $26.9 million in dividends, repurchase $12.9 million of the Company's common stock and fund the Company's working capital requirements. Capital investments during the first six months included amounts for expanding the Processed Steel Products segment's annealing capacity at the Decatur, Alabama plant and adding the ability to apply a dry film lubricant at the Monroe, Ohio facility. The expenditures also provided for continuing implementation of the Pressure Cylinders segment's new business information system, and for the further development of the Metal Framing segment's structural design software. Net working capital increased $17.2 million from May 31, 1999 to $213.8 million on November 30, 1999. Accounts receivable decreased due to lower than year-end sales levels in the Pressure Cylinders segment. Inventories and accounts payable both increased due to the growth in the Processed Steel Products segment and their anticipation of increased sales in the next quarter. Other current liabilities increased due to second quarter taxes payable and a reclassification of deferred taxes related to the DECS liability (described below), maturing in March 2000. Current notes payable declined by $16.5 million during the first six months to $105.8 million. The Company uses short-term uncommitted lines of credit extended by various commercial banks to finance its business operations. Maturities on these borrowings typically range from one to ninety days. To ensure liquidity, the Company maintains a $300 million revolving credit facility with a group of commercial banks. The $300 million revolving credit facility includes a $190 million tranche expiring May 2003 and a $110 million, 364 day facility expiring September 2000. At November 30, 1999, there were no outstanding borrowings under the revolving credit facility. 12 <PAGE> 13 In March 1997, debt exchangeable for common stock ("DECS"), payable in Rouge stock, was issued by the Company. In management's opinion, it is appropriate to examine the Company's debt without the DECS, since the Company may satisfy the DECS with currently owned Rouge stock. The DECS liability as of November 30, 1999 was $45.0 million, as compared to $52.5 million at May 31,1999, the result of a decrease in the value of the Rouge common stock. At November 30, 1999, the Company's total debt (excluding the DECS) was $472.1 million compared to $493.3 million at the end of fiscal 1999. Total debt to committed capital (excluding the DECS) decreased to 40.3% from 41.7% at the prior fiscal year end. During the first six months of fiscal 2000, the Company repurchased approximately 870,700 common shares. Approximately 6.6 million shares remain available for repurchase under the Board of Directors' authorization. The timing and amount of any future repurchases will be at the Company's discretion and will depend upon market conditions and the Company's operating performance and liquidity. Any repurchase will also be subject to the covenants contained in the Company's credit facilities. The Company's immediate borrowing capacity, in addition to cash generated from operations, should be sufficient to fund expected normal operating costs, dividends, and capital expenditures for existing businesses. While there are no specific needs at this time, the Company regularly considers long-term debt issuance an alternative depending on financial market conditions. IMPACT OF YEAR 2000 As planned, prior to December 31, 1999 the Company completed all remediation and testing procedures for identified year 2000 issues that could have materially impacted the results of operations. This concluded the Company's effort to identify and correct any issues that may have an adverse impact due to computer technology which used two-digit years. As of January 13, 2000, the Company has not experienced any year 2000 problems with its systems. While the Company doesn't believe there will be any future impact to its operations, it will continue to monitor its systems to ensure that no problems arise. Cumulative expenditures for year 2000 issues of approximately $21.2 million have been spent over the life of this project. During fiscal 2000, amounts charged to operations amounted to $4.0 million and $8.0 million for the second quarter and year-to-date periods, respectively. Of the $21.2 million, $3.1 million was for capital expenditures, $2.4 million of which occurred in the first six months of fiscal 2000. The Company does not expect to have any significant additional expenditures. 13 <PAGE> 14 THE YEAR 2000 STATEMENTS CONTAINED HEREIN ARE YEAR 2000 READINESS DISCLOSURES (AS DEFINED UNDER THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT) AND SHALL BE TREATED AS SUCH FOR ALL PURPOSES PERMISSIBLE UNDER SUCH ACT. THESE STATEMENTS ARE BASED ON AVAILABLE INFORMATION OBTAINED TO DATE AND USE WHAT MANAGEMENT BELIEVES TO BE REASONABLE ASSUMPTIONS RELATIVE TO THE OCCURRENCE OF FUTURE EVENTS. THERE CAN BE NO ASSURANCE THAT ALL POSSIBLE YEAR 2000 ISSUES HAVE BEEN RESOLVED OR THAT THERE WILL BE NO FUTURE ADVERSE IMPACT ON THE COMPANY DUE TO SYSTEM FAILURES CAUSED BY EITHER INTERNAL OR EXTERNAL YEAR 2000 ISSUES. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Exhibits: 27 Financial Data Schedule Reports on Form 8-K: There were no reports on Form 8-K during the three months ended November 30, 1999. 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, 2000 By: /s/John T. Baldwin ---------------- --------------------------------------- John T. Baldwin Vice President & Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer) 14 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <DESCRIPTION>EXHIBIT 27 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTH PERIOD ENDED NOVEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <CURRENCY> US DOLLARS <S> <C> <PERIOD-TYPE> 6-MOS <FISCAL-YEAR-END> MAY-31-2000 <PERIOD-START> JUN-01-1999 <PERIOD-END> NOV-30-1999 <EXCHANGE-RATE> 1 <CASH> 7,211 <SECURITIES> 0 <RECEIVABLES> 264,790 <ALLOWANCES> 5,093 <INVENTORY> 328,555 <CURRENT-ASSETS> 652,937 <PP&E> 1,150,658 <DEPRECIATION> 289,310 <TOTAL-ASSETS> 1,685,497 <CURRENT-LIABILITIES> 439,135 <BONDS> 363,826 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 698,382 <TOTAL-LIABILITY-AND-EQUITY> 1,685,497 <SALES> 936,242 <TOTAL-REVENUES> 936,242 <CGS> 768,025 <TOTAL-COSTS> 768,025 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 20,294 <INCOME-PRETAX> 78,374 <INCOME-TAX> 29,390 <INCOME-CONTINUING> 48,984 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 48,984 <EPS-BASIC> .55 <EPS-DILUTED> .55 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2000

0QTR1

XLNX

https://www.sec.gov/Archives/edgar/data/743988/0000743988-00-000003.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, Sx/PtmO0CVuC+eCyA58pKIGLUIOhsVjpyQ4GItzK/TwQ9EZqcR2b2c8f20DZeKjj tcmIGgOQNHBnQDsPkNcwkg== <SEC-DOCUMENT>0000743988-00-000003.txt : 20000207 <SEC-HEADER>0000743988-00-000003.hdr.sgml : 20000207 ACCESSION NUMBER: 0000743988-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XILINX INC CENTRAL INDEX KEY: 0000743988 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770188631 STATE OF INCORPORATION: DE FISCAL YEAR END: 0403 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18548 FILM NUMBER: 523692 BUSINESS ADDRESS: STREET 1: 2100 LOGIC DR CITY: SAN JOSE STATE: CA ZIP: 95124 BUSINESS PHONE: 4085597778 MAIL ADDRESS: STREET 1: 2100 LOGIC DRIVE STREET 2: 2100 LOGIC DRIVE CITY: SAN JOSE STATE: CA ZIP: 95124 </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 January 1, 2000 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 0-18548 XILINX, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 77-0188631 (I.R.S. Employer Identification No.) 2100 LOGIC DRIVE, SAN JOSE, CA 95124 (Address of principal executive offices, including Zip Code) (408) 559-7778 (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 requirements for the past 90 days. YES [ X ] NO [ ] Class Shares Outstanding at February 1, 2000 - ----- --------------------------------------- Common Stock, $.01 par value 321,293,000 PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> XILINX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended (in thousands, except per share amounts) Jan. 1, Jan. 2 Jan. 1, Jan. 2 2000 1999 2000 1999 -------- --------- -------- --------- <S> <C> <C> <C> <C> Net revenues . . . . . . . . . . . . . . . . . . . . . . . . $264,259 $171,633 $714,424 $477,673 Costs and expenses: Cost of revenues. . . . . . . . . . . . . . . . . . . . 99,576 67,116 269,539 182,172 Research and development. . . . . . . . . . . . . . . . 31,590 23,036 86,944 66,399 Sales, general and administrative . . . . . . . . . . . 47,950 33,858 131,391 97,739 Write-off of in-process research and development. . . . - - 4,560 - -------- --------- -------- --------- Operating costs and expenses . . . . . . . . . . . 179,116 124,010 492,434 346,310 -------- --------- -------- --------- Operating income . . . . . . . . . . . . . . . . . . . . . . 85,143 47,623 221,990 131,363 Interest income and other, net . . . . . . . . . . . . . . . 7,254 1,853 19,253 3,433 -------- --------- -------- --------- Income before provision for taxes on income, equity in joint venture and cumulative effect of change in accounting principle. . . . . . . . . . . . . . . . . 92,397 49,476 241,243 134,796 Provision for taxes on income. . . . . . . . . . . . . . . . 26,795 12,642 69,960 39,091 -------- --------- -------- --------- Income before equity in joint venture and cumulative effect of change in accounting principle . . . . . . . . 65,602 36,834 171,283 95,705 Equity in income (loss) of joint venture . . . . . . . . . . 2,902 (727) 4,810 (5,721) -------- --------- -------- --------- Income before cumulative effect of change in . . . . . . . . 68,504 36,107 176,093 89,984 accounting principle Cumulative effect of change in accounting principle. . . . . - - - (26,646) -------- --------- -------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,504 $ 36,107 $176,093 $ 63,338 ======== ========= ======== ========= Net income per share: Basic Income before cumulative effect of change in accounting principle. . . . . . . . . . . . . . $ 0.21 $ 0.13 $ 0.56 $ 0.31 Cumulative effect of change in accounting principle. - - - (0.09) -------- --------- -------- --------- Basic net income per share . . . . . . . . . . . . . $ 0.21 $ 0.13 $ 0.56 $ 0.22 ======== ========= ======== ========= Diluted Income before cumulative effect of change in accounting principle. . . . . . . . . . . . . . $ 0.20 $ 0.12 $ 0.52 $ 0.30 Cumulative effect of change in accounting principle. - - - (0.09) -------- --------- -------- --------- Diluted net income per share . . . . . . . . . . . . $ 0.20 $ 0.12 $ 0.52 $ 0.21 ======== ========= ======== ========= Shares used in per share calculations: Basic . . . . . . . . . . . . . . . . . . . . . . . . . 319,891 287,639 315,678 288,886 ======== ========= ======== ========= Diluted . . . . . . . . . . . . . . . . . . . . . . . . 346,162 302,325 341,068 303,066 ======== ========= ======== ========= <FN> (See accompanying Notes to Condensed Consolidated Financial Statements.) </TABLE> <PAGE> <TABLE> <CAPTION> XILINX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) Jan. 1 April 3, 2000 1999 ------------ ----------- <S> <C> <C> (Unaudited) (1) ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . $ 80,548 $ 53,584 Short-term investments. . . . . . . . . . . . . 416,993 348,888 Accounts receivable, net. . . . . . . . . . . . 96,266 73,409 Inventories . . . . . . . . . . . . . . . . . . 97,580 52,036 Advances for wafer purchases. . . . . . . . . . 41,854 59,450 Deferred income taxes and other current assets. 124,184 70,342 ------------ ----------- Total current assets. . . . . . . . . . . . . . . . 857,425 657,709 Property, plant and equipment, at cost. . . . . . . 305,421 187,482 Accumulated depreciation and amortization . . . . . (107,224) (85,777) ------------ ----------- Net property, plant and equipment . . . . . . . 198,197 101,705 Long-term investments . . . . . . . . . . . . . . . 196,710 94,002 Restricted investments. . . . . . . . . . . . . . . - 34,358 Investment in joint venture . . . . . . . . . . . . 103,210 91,057 Advances for wafer purchases. . . . . . . . . . . . - 36,694 Developed technology and other assets, net. . . . . 35,395 54,723 ------------ ----------- TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . $ 1,390,937 $1,070,248 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable. . . . . . . . . . . . . . . . $ 43,806 $ 23,326 Accrued payroll and other accrued liabilities . 38,845 32,164 Income tax payable. . . . . . . . . . . . . . . 17,212 25,998 Deferred income on shipments to distributors. . 73,047 85,709 ------------ ----------- Total current liabilities . . . . . . . . . . . . . 172,910 167,197 Deferred tax liabilities. . . . . . . . . . . . . . 23,956 23,733 Stockholders' equity: Preferred stock, $.01 par value . . . . . . . . - - Common stock, $.01 par value . . . . . . . . . 3,206 3,124 Additional paid-in capital. . . . . . . . . . . 422,153 291,669 Retained earnings . . . . . . . . . . . . . . . 783,153 607,060 Treasury stock, at cost . . . . . . . . . . . . - (5,112) Accumulated other comprehensive income. . . . . (14,441) (17,423) ------------ ----------- Total stockholders' equity. . . . . . . . . . . . . 1,194,071 879,318 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . $ 1,390,937 $1,070,248 ============ =========== <FN> (See accompanying Notes to Condensed Consolidated Financial Statements.) </TABLE> <PAGE> <TABLE> <CAPTION> XILINX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended (in thousands) Jan. 1, Jan. 2, 2000 1999 ------------ ---------- Increase (decrease) in cash and cash equivalents<S> <C> <C> Cash flows from operating activities: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 176,093 $ 63,338 Adjustments to reconcile net income to net cash provided by operating Activities: Cumulative effect of change in accounting principle. . . . . . . . . . . . . - 26,646 Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 31,221 24,643 Write-off of in-process research and development . . . . . . . . . . . . . . 4,560 - Undistributed (earnings) / losses of joint venture . . . . . . . . . . . . . (4,810) 5,721 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . (22,857) (19,823) Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,451 45,545 Other prepaid assets . . . . . . . . . . . . . . . . . . . . . . . . (33,143) (7,906) Deferred income taxes and other assets . . . . . . . . . . . . . . . (11,208) 891 Accounts payable and accrued liabilities . . . . . . . . . . . . . . 27,161 (5,906) Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . 55,030 22,577 Deferred income on shipments to distributors . . . . . . . . . . . . (12,662) 10,466 ------------ ---------- Total adjustments. . . . . . . . . . . . . . . . . . . . . . 47,743 102,854 ------------ ---------- Net cash provided by operating activities . . . . . . . 223,836 166,192 Cash flows from investing activities: Purchases of available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . (1,757,263) (671,399) Proceeds from sale or maturity of available-for-sale investments. . . . . . . . . . . . 1,584,036 514,906 Purchases of restricted held-to-maturity investments. . . . . . . . . . . . . . . . . . - (36,228) Proceeds from maturity of restricted held-to-maturity investments . . . . . . . . . . . 34,359 72,347 Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (91,523) (28,405) Investment in joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (5,448) Assets purchased from Philips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,750) - ------------ ---------- Net cash used in investing activities. . . . . . . . . (253,141) (154,227) Cash flows from financing activities: Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,289) (108,634) Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . 51,520 41,491 Proceeds from sales of put warrants . . . . . . . . . . . . . . . . . . . . . . . . . . 10,038 - ------------ ---------- Net cash provided by / (used in) financing activities. 56,269 (67,143) ------------ ---------- Net increase / (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . . 26,964 (55,178) Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . . . . . . 53,584 166,861 ------------ ---------- Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . . . . . . $ 80,548 $ 111,683 ============ ========== Schedule of non-cash transactions: Tax benefit from stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,408 $ 14,124 Issuance of treasury stock under employee stock plans . . . . . . . . . . . . . . . . . 10,400 85,385 Supplemental disclosures of cash flow information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 12,991 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,660 $ 15,568 <FN> (See accompanying Notes to Condensed Consolidated Financial Statements.) </TABLE> <PAGE> XILINX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles and should be read in conjunction with the Xilinx, Inc. (Xilinx or the Company) consolidated financial statements for the year ended April 3, 1999. The balance sheet at April 3, 1999 is derived from audited financial statements. The interim financial statements are unaudited but reflect all adjustments which are in the opinion of management of a normal, recurring nature necessary to present fairly the statements of financial position, results of operations and cash flows for the interim periods presented. The results for the three-month period and nine-month period ended January 1, 2000 are not necessarily indicative of the results that may be expected for the year ending April 1, 2000. The three-month and nine-month periods ended January 1, 2000 consisted of thirteen and thirty-nine weeks, respectively. The three-month and nine-month periods ended January 2, 1999 consisted of thirteen and forty weeks, respectively. 2. Inventories are stated at the lower of cost (first-in, first-out) or market (estimated net realizable value). Inventories at January 1, 2000 and April 3, 1999 are as follows: <TABLE> <CAPTION> (in thousands) Jan. 1 April 3, 2000 1999 -------- -------- <S> <C> <C> Raw materials. . $ 6,675 $ 5,139 Work-in-process. 55,953 27,824 Finished goods . 34,952 19,073 -------- -------- $ 97,580 $ 52,036 ======== ======== </TABLE> 3. In December 1999, we exercised our option to purchase three buildings previously leased at our San Jose corporate facility. The restricted investment of $34.4 million related to certain collateral requirements on the building leases was used to purchase the three buildings. 4. The computation of basic net income per share for all years presented is derived from the information on the face of the statement of operations, and there are no reconciling items in either the numerator or denominator. Additionally, there are no reconciling items in the numerator used to compute diluted net income per share. The total shares used in the denominator of the diluted net income per share calculation includes 26.3 million and 25.4 million incremental common shares attributable to outstanding options for the third quarter and first nine months of fiscal year 2000, respectively, as compared to 14.7 million and 14.2 million in the comparable fiscal 1999 periods, respectively. Outstanding options to purchase approximately 0.2 million and 0.9 million shares for the third quarter and first nine months of fiscal year 2000, respectively, and 3.0 million and 12.8 million shares in the comparable fiscal 1999 periods, respectively, under the Company's Stock Option Plan were not included in the treasury stock calculation to derive diluted net income per share as their inclusion would have had an anti-dilutive effect. In addition, the put warrants disclosed in Note 7 did not have any impact on basic or diluted net income per share in the three and nine months ended January 1, 2000 as their inclusion would have had an anti-dilutive effect. 5. The components of comprehensive income for the three and nine month periods ended January 1, 2000 and January 2, 1999 are as follows: <PAGE> <TABLE> <CAPTION> Three months ended Nine months ended (in thousands) Jan. 1, Jan. 2, Jan. 1, Jan. 2, 2000 1999 2000 1999 --------- -------- -------- -------- <S> <C> <C> <C> <C> Net income . . . . . . . . . . . . . . . . . . $ 68,504 $ 36,107 $176,093 $ 63,338 Cumulative translation adjustment. . . . . . . 193 6,221 4,430 1,726 Unrealized (loss) /gain on available for sale securities, net of tax. . . . . . . . . . (433) 139 (1,448) 159 --------- -------- --------- -------- Comprehensive income . . . . . . . . . . . . . $ 68,264 $ 42,467 $179,075 $ 65,223 ========= ======== ========= ======== </TABLE> The components of accumulated other comprehensive income (loss) at January 1, 2000 and April 3, 1999 are as follows: <TABLE> <CAPTION> (in thousands) Jan. 1, April 3, 2000 1999 --------- --------- <S> <C> <C> Cumulative translation adjustment . . . . . . . $(13,225) $ (17,655) Unrealized (loss) / gain on available for sale securities, net of tax . . . . . . . . . . (1,216) 232 --------- ---------- Accumulated other comprehensive loss. . . . . . $(14,441) $ (17,423) ========= ========== </TABLE> 6. Xilinx, United Microelectronics Corporation (UMC) and other parties entered into a joint venture to construct a wafer fabrication facility in Taiwan, known as United Silicon Inc. (USIC). We had a 20% equity ownership in USIC and had the right to receive up to 31.25% of the wafer capacity from this facility. We accounted for this investment using the equity method of accounting with a one-month lag in recording our share of results for the entity. In January 2000, our equity position in USIC was converted into shares of UMC which are publicly traded on the Taiwan Stock Exchange. We will recognize an approximate $400 million after-tax gain in our fiscal fourth quarter ending April 1, 2000, as a result of the merger of United Silicon Inc. (USIC) with United Microelectronics Corporation (UMC). The gain, to be reported as other income, represents the appreciation of our investment in USIC. As a result of this merger, we will own approximately 222 million UMC shares, which represents 2% of the combined UMC Group. We retain equivalent wafer capacity rights in UMC as we previously had in USIC, as long as we retain one-half of our UMC shares. Due to restrictions imposed by UMC and the Taiwan Stock Exchange, we will be subject to a certain holding period during which time, we will not be able to sell our UMC shares. 7. Our Board of Directors approved stock repurchase programs that allow us to repurchase shares of our common stock. During the first nine months of fiscal 2000, we repurchased 247,000 shares of common stock under our authorized repurchase program at a cost of $5.3 million. In conjunction with the stock repurchase program, during the nine months ended January 1, 2000, we sold put warrants that entitle the holder of each warrant to sell to us, by physical delivery, one share of common stock at a specified price, ranging from $32 to $42 per share. The outstanding put warrants will expire at various dates through October 2000. As of January 1, 2000, we have 2.2 million shares of outstanding put warrants. 8. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, (FASB 133), "Accounting for Derivative Instruments and Hedging Activities", which requires adoption in fiscal years beginning after June 15, 2000 while earlier adoption is permitted at the beginning of any fiscal quarter. We are required to adopt by fiscal 2002. The effect of adopting the Standard is currently being evaluated but is not expected to have a material effect on our consolidated results of operations or financial position. FASB 133 will require us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. The ineffective portion, if any, of a derivative's change in fair value will be immediately recognized in earnings. 9. We completed the acquisition of Philips Seminconductors' line of low-power complex programmable logic devices (CPLDs) on August 2, 1999. The total cost, including acquisition related fees, was approximately $22.8 million. The purchase price allocation based on an independent appraisal resulted in a $4.6 million charge to research and development in the second quarter. The acquired in-process technology represents the appraised value of technologies in the development stage that had not yet reached technological feasibility and does not have alternative future uses. 10. On October 18, 1999, our Board of Directors approved a 2 for 1 split of our Common Stock, which was effected in the form of a 100% stock dividend. On December 27, 1999, shareholders of record as of December 17, 1999 received one additional share of Common Stock for every share held. Shares, per share amounts, common stock at par value, and additional paid-in capital have been restated to reflect the stock split for all periods presented. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements, which involve numerous risks and uncertainties. Actual results may differ materially. Certain of these risks and uncertainties are discussed under "Factors Affecting Future Operating Results". RESULTS OF OPERATIONS: THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 2000 - -------------------------------------------------------------------------------- COMPARED TO THE THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 1999 - ----------------------------------------------------------------------------- NET REVENUES We currently classify our product offerings into four categories by technology. Base products consist of our mature product families that are currently manufactured on technologies of 0.6 micron and older; this includes the XC2000, XC3000, XC3100, XC4000 and XC7000 families. Mainstream products are currently manufactured on 0.35 and 0.5 micron technologies and include the XC4000E, XC4000EX, XC4000XL, XC5200, XC9500, XC9500XL, Spartan and CoolRunner product lines. Advanced products include our newest technologies manufactured on 0.25 micron and smaller, which include the XC4000XV, XC4000XLA, Spartan XL, Spartan2, Virtex, and VirtexE product lines. Our Support products make up the remainder of our product offerings and include serial proms, HardWire, and software. Net revenues of $264.3 million in the third quarter of fiscal 2000 represented a 54.0% increase from the comparable prior year quarter of $171.6 million. Revenues for the first nine months of fiscal 2000 were $714.4 million, a 49.6% increase from the prior year comparable period. Product lines that experienced significant growth during the nine-month period include the XC4000XL, XC4000XLA, XC9500, Spartan, and Virtex families. The increases in revenues of Advanced products are due to the introduction and strong market acceptance of XC4000XLA, Spartan XL and Virtex products. Increases in revenues of Mainstream products are attributable mainly to growth in the XC4000XL, Spartan, and XC9500 product lines, along with the acquisition of CoolRunner and introduction of XC9500XL. Revenues of Base products decreased as customers migrated to newer product offerings while revenues of Support products remain relatively flat. We have historically been able to offset much of the revenue declines of our mature technologies with increased revenues from newer technologies, although no assurance can be given that we can continue to do so in the future. The revenue by technology for the three and nine month periods ended January 1, 2000 and January 2, 1999 are as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended (in millions) Jan. 1 Jan. 2 Jan. 1 Jan. 2 2000 1999 2000 1999 ------- ------- ------- ------- <S> <C> <C> <C> <C> Base products. . . . $ 35.2 $ 37.4 $ 96.4 $ 114.6 Mainstream products. 136.0 111.0 386.4 300.3 Advanced products. . 71.5 3.8 169.4 5.0 Support products . . 21.6 19.4 62.2 57.8 ------- ------- ------- ------- Total revenue. . . . $ 264.3 $ 171.6 $ 714.4 $ 477.7 ======= ======= ======= ======= </TABLE> International revenues represented approximately 35.0%, and 32.8% of total revenues in the third quarter and first nine months of fiscal 2000 as compared to 31.2%, and 32.8% in the prior year periods. The European revenue increases are due to several customer programs commencing production. The revenue increases in Japan are due to wider adoption of our new products in consumer and telecommunications applications as well as to favorable exchange rates. Asia Pacific/Rest of World experienced significant increases in revenue as a result of economic recovery in those regions following the economic downturn a year ago. The revenue by geography for the three and nine month periods ended January 1, 2000 and January 2, 1999 are as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended (in millions) Jan. 1 Jan. 2 Jan. 1 Jan. 2 2000 1999 2000 1999 ------- ------- ------- ------- <S> <C> <C> <C> <C> North America . . . . . . . $ 171.7 $ 118.1 $ 479.9 $ 321.0 Europe. . . . . . . . . . . 51.6 36.7 139.4 105.1 Japan . . . . . . . . . . . 26.6 9.8 56.6 32.6 Asia Pacific/Rest of World. 14.4 7.0 38.5 19.0 ------- ------- ------- ------- Total revenue . . . . . . . $ 264.3 $ 171.6 $ 714.4 $ 477.7 ======= ======= ======= ======= </TABLE> GROSS MARGIN Gross margin was $164.7 million and $444.9 million for the third quarter and first nine months of fiscal 2000, respectively, or 62.3% of revenues for both periods. Gross margin for the comparable periods of fiscal 1999 was $104.5 million, or 60.9% of revenues, and $295.5 million, or 61.9% of revenues, respectively. Gross margin percentage increased slightly for the three and nine-month periods as we continue to benefit from cost improvements, manufacturing process technology advances and improved yields that offset selling price reductions. We recognize that ongoing price reductions for our integrated circuits are a significant element in expanding the market for our products. Management believes that gross margin objectives of approximately 62% of revenues are consistent with expanding market share while realizing acceptable returns, although there can be no assurance that future gross margins can remain in this range. RESEARCH AND DEVELOPMENT Research and development expenditures were $31.6 million, or 12.0% of revenues for the third quarter, and $86.9 million, or 12.2% of revenues for the first nine months of fiscal 2000. Research and development expenditures for the comparable periods in the prior year were $23.0 million and $66.4 million, or 13.4% and 13.9% of revenues, respectively. Although total expenditures on research and development increased significantly, they decreased as a percent of revenue because of strong revenue growth. The 30.9% increase in expenditures over the prior year's nine month period was primarily due to designing and developing new product architectures of complex, high density devices including wafer purchases, development of advanced process technologies using 0.22 micron and 0.18 micron, software development, increased labor-related costs, and testing of new products, along with increased costs associated with the acquisition of the CPLD CoolRunner business from Philips Semiconductors. We remain committed to a significant level of research and development effort in order to maintain our technology leadership in the programmable logic industry. SALES, GENERAL AND ADMINISTRATIVE Sales, general and administrative expenses were $48.0 million, or 18.1% of revenues and $131.4 million, or 18.4% of revenues for the third quarter and first nine months of fiscal 2000, respectively. They were $33.9 million, or 19.7% of revenues and $97.7 million, or 20.5% of revenues in the comparable prior year periods. Although total sales, general and administrative expenses increased, they decreased as a percent of revenue because of strong revenue growth. The increases in sales, general and administrative expenses were primarily attributable to increased marketing expenses for new product introductions, increased sales costs on higher revenues along with increased personnel and facilities expenses. We remain committed to controlling administrative expenses. However, the timing and extent of future legal costs associated with the ongoing enforcement of our intellectual property rights are not readily predictable and may increase significantly in the future. INTEREST AND OTHER, NET Interest and other income, net increased to $7.3 million in the third quarter of fiscal 2000 from $1.9 million in the prior year third quarter, and increased to $19.3 million in the first nine months of fiscal 2000 from $3.4 million in the prior year's comparable period. The increases were primarily due to the decrease in interest expense related to the convertible notes which were redeemed in the fourth quarter of fiscal 1999. In addition, average cash and investment balances have increased in both the third quarter and the first nine months of fiscal 2000 as compared to the prior year periods resulting in increased interest income of $2.9 million and $5.9 million over the respective prior year periods. The amount of net interest and other income in the future will continue to be impacted by the level of our average cash and investment balance, prevailing interest rates, and foreign currency exchange rates. PROVISION FOR INCOME TAXES We recorded a tax provision of $26.8 million and $70.0 million for the third quarter and first nine months of fiscal 2000, representing effective tax rates of 29.0% for both periods. We recorded a provision of $12.6 million and $39.1 million for the third quarter and first nine months of fiscal 1999, representing effective tax rates of 25.6% and 29.0%, respectively. The lower tax rate in the third quarter of fiscal 1999 was primarily due to legislation reinstating the R&D Tax Credit through June 30, 1999 as well as increased profits in foreign jurisdictions where the tax rate is lower than the U.S. rate. JOINT VENTURE EQUITY INCOME We record our proportional ownership of the net income (loss) of United Silicon Inc. (USIC), a wafer fabrication joint venture located in Taiwan, as joint venture equity income (loss). We recorded $2.9 million and $4.8 million equity in income of joint venture for the third quarter and the first nine months of fiscal 2000, respectively, as compared to $0.7 million and $5.7 million equity in loss of joint venture in the prior year periods, respectively. The fiscal 1999 equity in loss of joint venture was a result of the early stage in the production ramp of the wafer fabrication facility. The fiscal 2000 net gains were recorded as USIC began to have volume wafer production and shipments. In January 2000, our equity position in USIC was converted into shares of UMC which are publicly traded on the Taiwan Stock Exchange. We will recognize an approximate $400 million after-tax gain in our fiscal fourth quarter ending April 1, 2000, as a result of the merger of USIC with UMC. The gain, to be reported as other income, represents the appreciation of our investment in USIC. As a result of this merger, we will own approximately 222 million UMC shares, which represents 2% of the combined UMC Group. We retain equivalent wafer capacity rights in UMC as we previously had in USIC, as long as we retain one-half of our UMC shares. Due to restrictions imposed by UMC and the Taiwan Stock Exchange, we will be subject to a certain holding period during which time, we will not be able to sell our UMC shares. HEDGING We use forward currency exchange contracts to reduce financial market risks. Our sales to Japanese customers are denominated in yen while our purchases of processed silicon wafers from Japanese foundries are primarily denominated in U.S. dollars. Gains and losses on foreign currency forward contracts that are designated and effective as hedges of anticipated transactions, for which a firm commitment has been attained, are deferred and included in the basis of the transaction in the same period that the underlying transactions are settled. Gains and losses on any instruments not meeting the above criteria would be recognized in income in the current period. In fiscal 2000, we have also begun to share the yen exchange rate risk with some of our Japanese customers through risk sharing agreements. As we will continue to have a net yen exposure in the near future, we will continue to mitigate the exposure through yen hedging contracts. No currency forward contracts were outstanding as of January 1, 2000. INFLATION To date, the effects of inflation upon our financial results have not been significant. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - --------------------------------------------------------- Our financial condition at January 1, 2000 remained strong. Total current assets exceeded total current liabilities by 5.0 times, compared to 3.9 times at April 3, 1999. We have used a combination of equity and cash flow from operations to support on-going business activities, secure manufacturing capacity from foundry partners, make acquisitions and investments in complementary technologies, obtain facilities and capital equipment and finance inventory and accounts receivable. We continued to generate positive cash flows from operations during the first nine months of fiscal 2000. As of January 1, 2000, we had cash, cash equivalents and short-term investments of $497.5 million and working capital of $684.5 million. Cash generated by operations of $223.8 million for the first nine months of fiscal 2000 was $57.6 million higher than the $166.2 million generated from the first nine months of fiscal 1999. Increases in cash generated by operations resulted primarily from the cash flow impact of increased net income, and increases in accounts payable, accrued liabilities and income taxes payable, which were partially offset by increases in accounts receivable, inventory, prepaids for building deposit and decreases in deferred income on shipments to distributors. Cash flows used for investing activities during the nine months ended January 1, 2000 included net investment purchases of $138.8 million, $91.5 million for property, plant and equipment and $22.8 million for assets purchased from Philips' CPLD business. During the first nine months of fiscal 1999, investing activities included net investment purchases of $120.4 million, $28.4 million of property, plant and equipment acquisitions and an additional $5.4 million equity investment in the USIC joint venture. We increased our property, plant and equipment purchases significantly in the first nine month of fiscal 2000 as we purchased more testers, equipment, and facilities for our growing business. Net cash flows provided by financing activities were $56.3 million in the first nine months of fiscal 2000 and were attributable to $51.5 million in proceeds from the issuance of common stock under employee stock plans and $10.1 million in proceeds from sales of put warrants, offset by acquisition of treasury stock of $5.3 million. For the comparable fiscal 1999 period, cash used in financing activities of $67.1 million included $108.6 million in acquisition of treasury stock partially offset by $41.5 million of proceeds from issuance of common stock under employee stock plans. Stockholders' equity increased by $314.8 million during the first nine months of fiscal 2000, principally as a result of the $176.1 million in net income for the nine months ended January 1, 2000. In addition, the proceeds from the issuance of common stock under employee stock plans of $51.5 million, related tax benefits from stock options of $79.4 million, and $10.1 million in proceeds from sales of put warrants contributed to the increase, which were partially offset by the $5.3 million in acquisition of treasury stock. We have available credit facilities for up to $46.2 million of which $6.2 million is intended to meet occasional working capital requirements for our wholly owned Irish subsidiary. As of January 1, 2000, no borrowings were outstanding under the lines of credit. We anticipate that existing sources of liquidity and cash flow from operations will be sufficient to satisfy our cash needs for the foreseeable future. We will continue to evaluate opportunities to obtain additional wafer capacity, procure additional capital equipment and facilities, develop new products, and acquire businesses, products or technologies that would complement our businesses and may use available cash or other sources of funding for such purposes. FACTORS AFFECTING FUTURE OPERATING RESULTS - ---------------------------------------------- The semiconductor industry is characterized by rapid technological change, intense competition and cyclical market patterns. Cyclical market patterns are characterized by several factors, including: - reduced product demand; - limited visibility of demand for products beyond three months; - accelerated erosion of average selling prices; and - tight capacity availability. Our results of operations are affected by several factors. These factors include general economic conditions, conditions specific to technology companies and to the semiconductor industry in particular, decreases in average selling prices over the life of particular products and the timing of new product introductions (by us, our competitors and others.) In addition, our results of operations are affected by the ability to manufacture sufficient quantities of a given product in a timely manner, the timely implementation of new manufacturing technologies, the ability to safeguard patents and intellectual property from competitors, the impact of new technologies which result in rapid escalation of demand for some products in the face of equally steep declines in demand for others, and the inability to predict the success of our customers' products in their markets. Market demand for our products, particularly for those most recently introduced, can be difficult to predict, especially in light of customers' demands to shorten product lead times and minimize inventory levels. Unpredictable market demand could lead to revenue volatility if we were unable to provide sufficient quantities of specified products in a given quarter. In addition, any difficulty in achieving targeted wafer production yields could adversely affect our financial condition and results of operations. We attempt to identify changes in market conditions as soon as possible; however, the dynamics of the market make prediction of and timely reaction to such events difficult. Due to these and other factors, our past results, including those described in this report, are much less reliable predictors of the future than with companies in many older, more stable and less dynamic industries. Based on the factors noted herein, we may experience substantial period-to-period fluctuations in future operating results. Our future success depends in a large part on the continued service of our key technical, sales, marketing and management personnel and on our ability to continue to attract and retain qualified employees. Particularly important are those highly skilled design, process, software and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on our financial condition and results of operations. Sales and operations outside of the United States subject us to the risks associated with conducting business in foreign economic and regulatory environments. Our financial condition and results of operations could be adversely affected by unfavorable economic conditions in countries in which we do significant business and by changes in foreign currency exchange rates affecting those countries. For example, we have sales and operations in Southeast Asia and Japan. Past economic weakness in these markets adversely affected revenues, and such conditions may occur in the future. Customers may face reduced access to capital and exchange rate fluctuations may adversely affect their ability to purchase our products. In addition, our ability to sell at competitive prices may be diminished. Currency instability may increase credit risks as the weak currencies may impair our customers' ability to repay existing obligations. Any or all of these factors could adversely affect our financial condition and results of operations in the near future. Our financial condition and results of operations are becoming increasingly dependent on a global economy. Any instability in worldwide economic environments could lead to a contraction of capital spending. Additional risks to us include government regulation of exports, imposition of tariffs and other potential trade barriers, reduced protection for intellectual property rights in some countries and generally longer receivable collection periods. Our business is also subject to the risks associated with the imposition of legislation and regulations relating specifically to the import or export of semiconductor products. We cannot predict whether quotas, duties, taxes or other charges or restrictions will be imposed by the United States or other countries upon the import or export of our products in the future or what effect, if any, such actions would have on our financial condition and results of operations. Our foundry partners in Taiwan and Japan and many of our operations in California are centered in areas that have been seismically active, as demonstrated by the earthquakes that occurred in Taiwan during the fall of 1999. Those earthquakes disrupted manufacturing activities at our foundry partner for approximately 10 days. Should there be a major earthquake in our operating locations in the future, our operations may again be disrupted. This type of disruption could result in our inability to ship products in a timely manner, thereby materially adversely affecting our financial condition and results of operations. The securities of many high technology companies have historically been subject to extreme price and volume fluctuations, which may adversely affect the market price of our common stock. DEPENDENCE UPON INDEPENDENT MANUFACTURERS AND SUBCONTRACTORS We do not manufacture the wafers used for our products. During the past several years, most of our wafers have been manufactured by UMC and Seiko Epson Corporation (Seiko), with recent wafers also manufactured by USIC. We are dependent upon these suppliers and others to produce wafers with competitive performance and cost attributes which include transitioning to advanced manufacturing process technologies, producing wafers at acceptable yields and delivering them in a timely manner. While the timeliness, yield and quality of wafer deliveries have met our requirements to date, we cannot assure that our wafer suppliers will not experience future manufacturing problems, including delays in the realization of advanced manufacturing process technologies. Additionally, disruption of operations at these foundries for any reason, including natural disasters such as fires, floods, or earthquakes, as well as disruptions to access to adequate supplies of electricity, natural gas or water could cause delays in shipments of our products, and could have a material adverse effect on our results of operations. We are also dependent on subcontractors to provide semiconductor assembly services. Any prolonged inability to obtain wafers or assembly services with competitive performance and cost attributes, adequate yields or timely delivery, or any other circumstance that would require us to seek alternative sources of supply, could delay shipments and have a material adverse effect on our financial condition and results of operations. Our growth will depend in large part upon our ability to obtain additional wafer fabrication capacity and assembly services from suppliers that are cost competitive. We consider various alternatives in order to secure additional wafer capacity. These alternatives include, without limitation, equity investments in, or loans, deposits, or other financial commitments to independent wafer manufacturers. We also consider the use of contracts which commit us to purchase specified quantities of wafers over extended periods. We are currently able to obtain wafers from existing suppliers in a timely manner. However, at times we have been unable, and may in the future be unable, to fully satisfy customer demand because of production constraints, including the ability of suppliers and subcontractors to provide materials and services to satisfy customer delivery dates, as well as our ability to process products for shipment. In addition, a significant increase in general industry demand or any interruption of supply could reduce our supply of wafers or increase our cost of such wafers. These events could have a material adverse affect on our financial condition and results of operations. DEPENDENCE ON NEW PRODUCTS Our success depends in large part on our ability to develop and introduce on a timely basis new products which address customer requirements and compete effectively on the basis of price, density, functionality and performance. The success of new product introductions is dependent upon several factors, including: - timely completion of new product designs; - ability to utilize advanced manufacturing process technologies; - achieving acceptable yields; - availability of supporting software design tools; - utilization of predefined cores of logic; - market acceptance; and - successful deployment of systems by our customers. We cannot assure that our product development efforts will be successful or that our new products will achieve market acceptance. Revenues relating to our mature products are expected to decline in the future. As a result, we will be increasingly dependent on revenues derived from newer products along with cost reductions on current products. We rely primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products which incorporate advanced features and other price/performance factors that enable us to increase revenues while maintaining consistent margins. To the extent that such cost reductions and new product introductions do not occur in a timely manner, or to the extent that our products do not achieve market acceptance at prices with higher margins, our financial condition and results of operations could be materially adversely affected. COMPETITION Our FPGAs and CPLDs compete in the logic industry, with a substantial majority of our revenues derived from our FPGA product families. The industries in which we compete are intensely competitive and are characterized by rapid technological change, product obsolescence and continuous price erosion. We expect increased competition, both from existing competitors and from a number of new companies that may enter our market segment. We believe that important competitive factors in the programmable logic business include: - product pricing; - product performance, reliability and density; - the adaptability of products to specific applications; - ease of use and functionality of software design tools; - functionality of predefined cores of logic; and - the ability to provide timely customer service and support. Our strategy for expanding the market for the programmable logic industry includes continued introduction of new product architectures which address high volume, low cost applications as well as high performance, leading-edge density applications. In addition, we would anticipate continued price reductions proportionate with our ability to lower the cost of manufacture for established products. However, we cannot assure that we will be successful in achieving these strategies. Our major sources of competition are comprised of several elements: - the manufacturers of ASIC devices, including custom CMOS gate arrays and standard cells; - providers of high density programmable logic products characterized by FPGA-type architectures; - providers of high speed, low density CPLD devices; and - other providers of new or emerging programmable logic products and processors. We compete with custom gate array manufacturers on the basis of lower design costs, shorter development schedules, reduced inventory risks and field upgradability. The CMOS gate array market has been declining, and gate arrays are being replaced by other logic options. The primary attributes of custom gate arrays are high density, high speed and low production costs in high volumes. We continue to develop lower cost architectures intended to narrow the gap between current custom gate array production costs (in high volumes) and PLD production costs. We compete with high density programmable logic suppliers on the basis of performance, the ability to deliver complete solutions to customers, voltage and customer support by taking advantage of the primary characteristics of our PLD product offerings which include: flexibility, high speed implementation, quick time-to-market and system level capabilities. Competition among CPLD suppliers and manufacturers of new or emerging programmable logic products is based primarily on price, performance, design, customer support, software utility and the ability to deliver complete solutions to customers. Some of our current or potential competitors have substantially greater financial, manufacturing, marketing and technical resources than we do. To the extent that our efforts to compete are not successful, our financial condition and results of operations could be materially adversely affected. The benefits of programmable logic have attracted a number of competitors. Competition is based primarily on density, speed, design, price or software utility. We recognize that different applications require different programmable technologies, and we are developing architectures, processes and products to meet these varying customer needs. Recognizing the increasing importance of standard software solutions, we have developed common software design tools that support the full range of integrated circuit products. We believe that automation and ease of design are significant competitive factors in the programmable logic industry. Several companies, both large and small, have introduced products that compete with ours or have announced their intention to enter this market segment. Some of our competitors may possess innovative technology, which could prove superior to our technology in certain applications. In addition, we anticipate potential competition from suppliers of logic products based on new technologies. Some of our current or potential competitors have substantially greater financial, manufacturing, marketing and technical resources than we do. This additional competition could adversely affect our financial condition and results of operations. We could also face competition from our licensees. Under a license from us, Lucent Technologies is manufacturing and marketing our non-proprietary XC3000 FPGA products and is employing that technology to provide additional FPGA products offering higher density. Seiko has rights to manufacture certain of our products and market them in Japan and Europe, but is not currently doing so. We granted a license to use certain of our patents to Advanced Micro Devices ("AMD"). AMD produced certain programmable logic devices under that license through its wholly-owned subsidiary, Vantis. During 1999, AMD sold the Vantis subsidiary to Lattice Semiconductor. INTELLECTUAL PROPERTY We rely upon patent, trademark, trade secret and copyright law to protect our intellectual property. We cannot assure that such intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. From time to time, third parties, including our competitors, have asserted patent, copyright and other intellectual property rights to technologies that are important to us. We cannot assure that third parties will not assert infringement claims against us in the future, that assertions by third parties will not result in costly litigation or that we would prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of its outcome, could result in substantial costs and diversion of our resources. Any infringement claim or other litigation against us or by us could materially adversely affect our financial condition and results of operations. See Part II - Other Information, Item 1 - Legal Proceedings for a discussion of litigation between Xilinx and Altera Corporation. COMPUTER INFORMATION SYSTEMS In order to compete effectively in an industry characterized by rapid technological change, intense competition and cyclical market patterns, we continually evaluate our computer information systems. As a result, we have recently implemented new computer information systems or system enhancements relating to our semiconductor manufacturing, software manufacturing, order entry processing and financial applications. Like most other companies using computer information systems in their operations, we worked over the past several years on resolutions to the potential impact of the Year 2000 on the processing of date-sensitive information by our computerized information systems, as well as the vendor and customer date-sensitive computerized information electronically transferred to us. The Year 2000 issue is the result of computer programs being written using two digits, rather than four, to define the applicable Year. Any of our systems that have time-sensitive software could have recognized a year ending in "00" as 1900 rather than the year 2000, which could have resulted in miscalculations, classification errors or system failures. During the past several years, we performed a thorough review of our internal use software and hardware applications and software products in order to identify those applications and products that were not Year 2000 compliant. We have encountered no Year 2000 problems with any of our software or hardware applications or hardware products to date. Currently, our Year 2000 efforts are focused on ongoing monitoring of these applications. We will continue this monitoring over the next several months in addition to our normal systems maintenance. In addition, we have already tested all of our systems for February 29 but will continue to monitor them and other dates that may pose greater systems risks during this year. We have also not encountered any supply disruptions from any vendors to date. While we have encountered no problems to date, we cannot assure that no Year 2000 issues will occur. We believe that our software releases beginning with version M1.5i and including version M2.1i which we started shipping in July 1999, are Year 2000 compliant, although we cannot assure that they are Year 2000 compliant. We have received no indications from customers that these versions are not Year 2000 compliant. However, some of our customers are running product versions that are not Year 2000 compliant. We have been encouraging such customers to migrate to the current product version. The costs directed solely towards Year 2000 compliance are not incremental to us, but rather represent a reallocation of existing resources. To date, we have incurred less than $1.5 million on efforts directed solely towards Year 2000 compliance and expect to incur a total of no more than $2.0 million when the process is completed, although we cannot assure that this will be the case. The costs of addressing potential problems are not currently expected to have a material adverse impact on our financial position, results of operations or cash flows in future periods. If, however, we, our customers or vendors incur problems currently unforeseen and which cannot be resolved on a timely, cost-effective basis, our financial condition and results of operations could be adversely affected. EURO CURRENCY Beginning in 1999, 11 member countries of the European Union established fixed conversion rates between their existing sovereign currencies and adopted the Euro as their common legal currency. During the three-year transition, the Euro will be available for non-cash transactions and legacy currencies will remain legal tender. We are continuing to assess the Euro's impact on our business. We are reviewing the ability of our accounting and information systems to handle the conversion, the ability of foreign banks to report on dual currencies, the legal and contractual implications of agreements, as well as reviewing our pricing strategies. We expect that any additional modifications to our operations and systems will be completed on a timely basis and do not believe the conversion will have a material adverse impact on our operations. However, we cannot assure that we will be able to successfully modify all systems and contracts to comply with Euro requirements. LITIGATION We are currently engaged in several legal matters. See "Legal Proceedings" in Part II. Item 3. Quantitative and Qualitative Disclosures about Market Risk INTEREST RATE RISK Our exposure to interest rate risk relates primarily to our investment portfolio. Our primary aim with our investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. The portfolio includes tax-advantaged municipal bonds, tax-advantaged auction rate preferred municipal bonds, certificates of deposit, and U.S. Treasury securities. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer. These securities are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 10% increase in interest rates would not materially affect the fair value of our available-for-sale securities. FOREIGN CURRENCY RISK We use forward currency exchange contracts to reduce financial market risks. Our sales to Japanese customers are denominated in yen while our purchases of processed silicon wafers from Japanese foundries are primarily denominated in U.S. dollars. Gains and losses on foreign currency forward contracts that are designated and effective as hedges of anticipated transactions, for which a firm commitment has been attained, are deferred and included in the basis of the transaction in the same period that the underlying transactions are settled. Gains and losses on any instruments not meeting the above criteria would be recognized in income in the current period. A 15% adverse change in yen exchange rates based on historical average rate fluctuations would have had approximately a 1.0% adverse impact on revenue for the nine months ended in fiscal years 2000 and 1999. We have several subsidiaries and an equity investment in the USIC joint venture whose financial statements are recorded in currencies other than the U.S. dollar. As these foreign currency financial statements are translated at each month end during consolidation, fluctuations of exchange rates between the foreign currency and the U.S. dollar increase or decrease the value of those investments. If permanent changes occur in exchange rates after an investment is made, the investment's value will increase or decrease accordingly. These fluctuations are recorded as a component of stockholders' equity as a component of accumulated other comprehensive income. To date, the USIC joint venture has recorded $13.4 million in cumulative translation adjustments, as the New Taiwan dollar has decreased in value against the U.S. dollar. Also, as our subsidiaries and the USIC joint venture maintain investments denominated in other than local currencies, exchange rate fluctuations will occur. PART II. OTHER INFORMATION Item 1. Legal Proceedings On June 7, 1993, we filed suit against Altera Corporation (Altera) in the United States District Court for the Northern District of California for infringement of certain of our patents. Subsequently, Altera filed suit against Xilinx, alleging that certain of our products infringe certain Altera patents. Fact and expert discovery have been completed in both cases, which have been consolidated. On April 20, 1995, Altera filed an additional suit against Xilinx in the Federal District Court in Delaware, alleging that our XC5200 family infringes an Altera patent. We answered the Delaware suit denying that the XC5200 family infringes the patent in suit, asserting certain affirmative defenses and counterclaiming that the Altera Max 9000 family infringes certain of our patents. The Delaware suit was transferred to the United States District Court for the Northern District of California and is also before the same judge. Both Altera and Xilinx filed motions with the Court for summary judgement with respect to certain of the issues pending in the litigation. In October 1999, the Court ruled on all but one of the motions. As a result of those rulings, Altera is left with one claim against Xilinx. The Court's rulings also dismissed certain claims by us, leaving intact claims of infringement under two Company patents by Altera. The remaining claims against Altera will be decided at a trial scheduled to begin on May 8, 2000. The remaining claim against Xilinx will be decided at a trial scheduled to commence on June 19, 2000. On July 22, 1998, Altera and Joseph Ward, a former Xilinx employee, filed suit against Xilinx in Superior Court in Santa Clara County, California, arising out of our efforts to prevent disclosure of certain Company confidential information. Altera's suit requests declaratory relief and claims Xilinx engages in unfair business practices and interference with contractual relations. On September 10, 1998 we filed cross claims against Altera and Ward for unfair competition and breach of contract, among other claims, in the California action. On October 20, 1998, Altera and Ward filed crossclaims against Xilinx for malicious prosecution of civil action and defamation. On September 15, 1999, the Court dismissed all of our claims against Altera and Mr. Ward, finding that we were unable to show any damages we suffered as a result of Mr. Ward's move to Altera. Claims against Xilinx are still pending. The ultimate outcome of these matters cannot be determined at this time. Management believes that it has meritorious defenses to such claims and is defending them vigorously. The foregoing is a forward-looking statement subject to risks and uncertainties, and the future outcome of these matters could differ materially due to the uncertain nature of each legal proceeding and because the lawsuits are still in the pre-trial stages. There is no other pending legal proceedings of a material nature to which we are a party or of which any of our property is the subject. We know of no legal proceedings contemplated by any governmental authority or agency. Item 4. Submission of Matters to a Vote of Security Holders During a special meeting held on December 16, 1999, Xilinx shareholders voted to approve an amendment to our certificate of incorporation to increase the number of authorized shares of our common stock, $0.01 par value per share, from 300,000,000 to 500,000,000 to accommodate a proposed two-for-one split of our common stock. For Against Abstain No Vote --- ------- ------- ------- 138,164,055 115,560 166,386 0 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None (b) Reports on Form 8-K 1) On December 27, 1999, Xilinx filed a report on Form 8-K relating to the amendment of the Company's certificate of incorporation to increase the number of authorized shares of the Company's common stock, $0.01 par value per share, from 300,000,000 to 500,000,000. Items 2, 3 and 5 are not applicable and have been omitted. <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. XILINX, INC. --------------------- Date February 4, 2000 /s/ Kris Chellam - ------------------------- --------------------- Kris Chellam Senior Vice President of Finance and Chief Financial Officer (as principal accounting and financial officer and on behalf of Registrant) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>2 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary information extracted from Xilinx, Inc.'s CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS and is qualified in its entirety by reference to such financial statements. </LEGEND> <MULTIPLIER> 1000 <S> <C> <C> <PERIOD-TYPE> 3-MOS 9-MOS <FISCAL-YEAR-END> APR-01-2000 APR-01-2000 <PERIOD-START> OCT-03-1999 APR-04-1999 <PERIOD-END> JAN-01-2000 JAN-01-2000 <CASH> 80,548 80,548 <SECURITIES> 416,993 416,993 <RECEIVABLES> 107,382 107,382 <ALLOWANCES> 11,116 11,116 <INVENTORY> 97,580 97,580 <CURRENT-ASSETS> 857,425 857,425 <PP&E> 305,421 305,421 <DEPRECIATION> 107,224 107,224 <TOTAL-ASSETS> 1,390,937 1,390,937 <CURRENT-LIABILITIES> 172,910 172,910 <BONDS> 0 0 <PREFERRED-MANDATORY> 0 0 <PREFERRED> 0 0 <COMMON> 3,206 3,206 <OTHER-SE> 1,190,865 1,190,865 <TOTAL-LIABILITY-AND-EQUITY> 1,390,937 1,390,937 <SALES> 264,259 714,424 <TOTAL-REVENUES> 264,259 714,424 <CGS> 99,576 269,539 <TOTAL-COSTS> 99,576 269,539 <OTHER-EXPENSES> 79,540 222,895 <LOSS-PROVISION> 0 0 <INTEREST-EXPENSE> 1 6 <INCOME-PRETAX> 92,397 241,243 <INCOME-TAX> 26,795 69,960 <INCOME-CONTINUING> 68,504 176,093 <DISCONTINUED> 0 0 <EXTRAORDINARY> 0 0 <CHANGES> 0 0 <NET-INCOME> 68,504 176,093 <EPS-BASIC> 0.21 0.56 <EPS-DILUTED> 0.20 0.52 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----

2001

0QTR1

A

https://www.sec.gov/Archives/edgar/data/1090872/000109581101001637/f70442e10-q.txt

<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>f70442e10-q.txt <DESCRIPTION>FORM 10-Q FOR QUARTER ENDED JANUARY 31, 2001 <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, 2001 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: 001-15405 AGILENT TECHNOLOGIES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 77-0518772 ------------------------------ ------------------- State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 395 Page Mill Road, Palo Alto, California 94306 ------------------------------------------ --------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (650) 752-5000 -------------- -------------------------------------------------------------------------------- (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, 2001 ----------------------------- ------------------------------- Common Stock, $0.01 par value 456,769,737 shares <PAGE> 2 AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page Number ----------- <S> <C> <C> Part I. Financial Information 3 Item 1. Financial Statements 3 Condensed Consolidated Balance Sheet (Unaudited) as of January 31, 2001 and October 31, 2000 3 Condensed Consolidated Statement of Earnings (Unaudited) for the Quarters ended January 31, 2001 and January 31, 2000 4 Condensed Consolidated Statement of Cash Flows (Unaudited) for the Quarters ended January 31, 2001 and January 31, 2000 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 28 Part II. Other Information 29 Item 1. Legal Proceedings 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 6. Exhibits and Reports on Form 8-K 29 Signature 30 Exhibit Index 31 </TABLE> 2 <PAGE> 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Agilent Technologies, Inc. and Subsidiaries Condensed Consolidated Balance Sheet (Unaudited) (in millions, except par value and share amounts) <TABLE> <CAPTION> Jan. 31, Oct. 31, 2001 2000 -------- -------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents ........................................ $ 433 $ 996 Accounts receivable, net ......................................... 2,130 2,201 Inventories....................................................... 2,129 1,853 Other current assets ............................................. 769 605 ------- ------- Total current assets .......................................... 5,461 5,655 Property, plant and equipment, net .................................. 1,821 1,741 Goodwill and other intangible assets, net ........................... 1,213 557 Other assets ........................................................ 713 472 ------- ------- Total assets ........................................................ $ 9,208 $ 8,425 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................. $ 711 $ 857 Notes payable and short-term borrowings .......................... 556 110 Employee compensation and benefits ............................... 640 699 Deferred revenue ................................................. 405 372 Accrued taxes and other accrued liabilities ...................... 758 720 ------- ------- Total current liabilities ..................................... 3,070 2,758 Other liabilities ................................................... 597 402 Commitments and contingencies Stockholders' equity: Preferred stock; $.01 par value; 125,000,000 shares authorized; none issued and outstanding ....................... -- -- Common stock; $.01 par value; 2,000,000,000 shares authorized; 456,770,000 shares at January 31, 2001 and 453,976,000 shares at October 31, 2000 issued and outstanding.. 5 5 Additional paid-in capital ....................................... 4,592 4,508 Retained earnings ................................................ 911 757 Other comprehensive income (loss) ................................ 33 (5) ------- ------- Total stockholders' equity .................................... 5,541 5,265 ------- ------- Total liabilities and stockholders' equity .......................... $ 9,208 $ 8,425 ======= ======= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3 <PAGE> 4 Agilent Technologies, Inc. and Subsidiaries Condensed Consolidated Statement of Earnings (Unaudited) (in millions, except per share amounts) <TABLE> <CAPTION> Three Months Ended January 31, ---------------------- 2001 2000 ------- ------- <S> <C> <C> Net revenue: Products ............................................. $ 2,516 $ 1,940 Services and other ................................... 325 306 ------- ------- Total net revenue ................................. 2,841 2,246 ------- ------- Costs and expenses: Cost of products ..................................... 1,267 976 Cost of services and other ........................... 182 184 Research and development ............................. 372 290 Selling, general and administrative .................. 741 625 ------- ------- Total costs and expenses .......................... 2,562 2,075 ------- ------- Earnings from operations ................................ 279 171 Other income (expense), net ............................. 19 31 ------- ------- Earnings before taxes and cumulative effect of a change in accounting principle ............................... 298 202 Provision for taxes ..................................... 119 71 ------- ------- Net earnings before cumulative effect of a change in accounting principle ............................... $ 179 $ 131 Cumulative effect of adopting SFAS No. 133, net of tax .. (25) -- ------- ------- Net earnings ............................................ $ 154 $ 131 ======= ======= Net earnings per share - Basic: Net earnings before cumulative effect of a change in accounting principle ............................. $ .39 $ .30 Cumulative effect of adopting SFAS No. 133 ............ (0.05) -- Net earnings .......................................... $ .34 $ .30 Net earnings per share - Diluted: Net earnings before cumulative effect of a change in accounting principle ............................. $ .38 $ .30 Cumulative effect of adopting SFAS No. 133 ............ (0.05) -- Net earnings .......................................... $ .33 $ .30 Average shares used in computing net earnings per share: Basic ................................................ 455 439 Diluted .............................................. 466 440 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4 <PAGE> 5 Agilent Technologies, Inc. and Subsidiaries Condensed Consolidated Statement of Cash Flows (Unaudited) (in millions) <TABLE> <CAPTION> Three Months Ended January 31, ---------------------- 2001 2000 ------- ------- <S> <C> <C> Cash flows from operating activities: Net earnings ................................................................ $ 154 $ 131 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization ............................................ 139 96 Gain on divestiture ...................................................... (32) -- Cumulative effect of adopting SFAS No. 133 ............................... 41 -- Deferred taxes ........................................................... 11 -- Changes in assets and liabilities: Accounts receivable .................................................... 94 190 Inventories ............................................................ (275) (66) Accounts payable ....................................................... (166) (192) Taxes on earnings ...................................................... (25) 113 Other current assets and liabilities ................................... (155) (115) Other, net ............................................................. 17 227 ------- ------- Net cash (used in) provided by operating activities ............. (197) 384 ------- ------- Cash flows from investing activities: Investments in property, plant and equipment ................................ (173) (91) Dispositions of property, plant and equipment ............................... 59 61 Purchase of equity investments .............................................. (26) (42) Proceeds from sale of leasing portfolio ..................................... 84 -- Acquisitions, net of cash acquired .......................................... (754) (160) Other, net .................................................................. (60) 24 ------- ------- Net cash used in investing activities ........................... (870) (208) ------- ------- Cash flows from financing activities: Initial public offering proceeds ............................................ -- 2,068 Initial public offering proceeds distributed to Hewlett-Packard ............. -- (2,068) Issuance of common stock under employee stock plans ......................... 58 -- Proceeds from notes payable and short-term borrowings, net of payments ...... 446 111 Financing from Hewlett-Packard .............................................. -- 1,081 ------- ------- Net cash provided by financing activities ....................... 504 1,192 ------- ------- Change in cash and cash equivalents ............................................ (563) 1,368 Cash and cash equivalents at beginning of period ............................... 996 -- ------- ------- Cash and cash equivalents at end of period ..................................... $ 433 $ 1,368 ======= ======= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 5 <PAGE> 6 Agilent Technologies, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Description of Business Agilent Technologies, Inc. ("Agilent") is a leading provider of innovative technologies for communications and life sciences. Agilent was incorporated in Delaware in May 1999. In the first three months of 2001, Agilent agreed to sell its healthcare solutions business to Koninklijke Philips Electronics, N.V. ("Philips") for approximately $1.7 billion pursuant to an asset purchase agreement. In February 2001, Agilent and Philips announced that a request for additional information had been received from the U.S. Department of Justice in connection with the pending sale. This request has the effect of extending the waiting period under the Hart-Scott-Rodino Act until 30 days after both parties comply with the request. On March 5, 2001, the European Union Commission gave antitrust clearance for the sale of Agilent's healthcare solutions business to Philips. While both companies still expect to complete the proposed transaction in the middle of calendar year 2001, management has concluded that based on current information, the required regulatory approvals from the U.S. Department of Justice cannot be considered perfunctory. As a result, Agilent will not adopt discontinued operations presentation in its consolidated financial statements as required by Accounting Principles Board No. 30 until Agilent receives the appropriate regulatory approvals. 2. Summary of Significant Accounting Policies Basis of Presentation. The accompanying financial data as of January 31, 2001 and 2000 has been prepared by Agilent pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly its consolidated financial position as of January 31, 2001 and its consolidated results of operations and cash flows for the three months ended January 31, 2001 and 2000. Certain amounts in the condensed consolidated statements of operations for the three months ended January 31, 2000 have been reclassified to conform to the current period's presentation. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Agilent's fiscal year end is October 31 and Agilent's fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all years and dates refer to Agilent's fiscal year and fiscal quarters. The results of operations for the three months ended January 31, 2001 are not necessarily indicative of the results to be expected for the full year. The 6 <PAGE> 7 information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations as well as the consolidated financial statements and notes thereto included in Agilent's 2000 Annual Report on Form 10-K. Recent Accounting Pronouncements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This Staff Accounting Bulletin, as amended, will be adopted by Agilent no later than its fourth quarter of 2001. Agilent currently does not believe the adoption will have a material effect on its annual consolidated financial statements. 3. Adoption of SFAS No. 133 Effective November 1, 2000, Agilent adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivative financial instruments be recognized as either assets or liabilities on the balance sheet and carried at fair value. Changes in the fair value of derivative instruments are recognized periodically in earnings or stockholders' equity, depending on the intended use of the instrument. Valuation changes for derivatives designated as fair value hedges are recognized in earnings in the period of change, along with the change in value of the underlying hedged item. Gains or losses on derivatives designated as cash flow hedges are initially reported as a component of other comprehensive income and later reclassified into earnings in the period affected by the underlying hedged exposure. Changes in value of derivatives that are not designated as hedging instruments and the amount of any hedging instruments deemed to be ineffective are recorded in earnings in the period of change. Agilent enters into certain foreign exchange contracts, primarily forwards and purchased options, to hedge exposures to changes in foreign currency exchange rates. Agilent does not use derivative financial instruments for speculative or trading purposes. Certain foreign exchange forward contracts are entered into to minimize the exposure to changes in the value of foreign-currency denominated assets and liabilities. Such forward contracts are considered to be effective economic hedges of the underlying assets and liabilities. However, such contracts are not afforded hedge accounting treatment under FAS 133 and resultant changes in value are recorded currently in earnings. Forward contracts and purchased currency options which are designated as cash flow hedges, are employed by Agilent to hedge committed and anticipated foreign currency sales. Generally the maximum term of forward contracts and options do not exceed three years and six months, respectively. Agilent may also, from time to time, invest in warrants to purchase securities of other companies as strategic investments. The adoption of SFAS No. 133 resulted in a cumulative pre-tax reduction in earnings of $41 million ($25 million after-tax) and a pre-tax increase in other comprehensive income of $10 million. During the three months ended January 31, 2001, pre-tax gains of $11 million were recorded in other income related to the value of derivative transactions, and pre-tax gains of $24 million were recorded in other comprehensive income. 7 <PAGE> 8 4. Acquisitions and Dispositions Acquisitions. On January 5, 2001, Agilent acquired Objective Systems Integrators, Inc. ("OSI") for approximately $684 million in cash. The net book value of goodwill associated with this acquisition at January 31, 2001 was $577 million. The remaining purchase price was allocated to other tangible and intangible assets. OSI was a leading provider of next-generation operations-support-system software for communications service providers and has become part of Agilent's test and measurement business. In addition to the acquisition of OSI, Agilent acquired several companies that were not significant to its consolidated financial position, results of operations or cash flows in the three months ended January 31, 2001. In January 2001 Agilent completed its acquisition of Yokogawa Electric Corporation's 25% equity interest in Agilent Technologies Japan, Ltd. by purchasing the remaining 4.2% interest for approximately $98 million. Of this amount, approximately $66 million was attributable to goodwill. Of the total acquisition price of $391 million, approximately $278 has been recorded as goodwill and will be amortized over a 10-year period. Dispositions. In the three months ended January 31, 2001, Agilent sold additional portions of its U.S. portfolio of lease assets to The CIT Group, Inc. ("CIT"). Net proceeds from these sales transactions were $84 million. Agilent recognized $61 million in product revenue and $31 million in cost of products for these sales. Agilent has agreed in principle to sell the remainder of its portfolio of lease assets to CIT during the remainder of 2001. 5. Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted net earnings per share computations for the periods presented below. <TABLE> <CAPTION> Three Months Ended January 31, -------------------- 2001 2000 ------- ----- (in millions, except per share data) <S> <C> <C> NUMERATOR: Net earnings before cumulative effect of a change in accounting principle ........ $ 179 $ 131 Cumulative effect of adopting SFAS No. 133, net of tax of $16 million .......... (25) -- ------- ----- Net earnings ..................................................................... $ 154 $ 131 ======= ===== DENOMINATORS: Basic weighted average shares .................................................... 455 439 Potentially dilutive common stock equivalents -- stock options and other employee stock plans .......................................................... 11 1 ------- ----- Diluted weighted average shares .................................................. 466 440 ======= ===== Net earnings per share before cumulative effect of a change in accounting principle: Basic ............................................................................ $ 0.39 $0.30 Diluted .......................................................................... $ 0.38 $0.30 Cumulative effect of adopting SFAS No. 133: Basic ............................................................................ $ (0.05) $ -- Diluted .......................................................................... $ (0.05) $ -- Net earnings per share: Basic ............................................................................ $ 0.34 $0.30 Diluted .......................................................................... $ 0.33 $0.30 </TABLE> 8 <PAGE> 9 6. Inventories <TABLE> <CAPTION> Jan. 31 Oct. 31 2001 2000 ------- ------- (in millions) <S> <C> <C> Finished goods ..................... $ 545 $ 471 Work in progress ................... 381 343 Raw materials ...................... 1,203 1,039 ------ ------ $2,129 $1,853 ====== ====== </TABLE> 7. Comprehensive Income The following table presents the calculation of comprehensive income as required by SFAS No. 130. The components of comprehensive income are as follows (in millions): <TABLE> <CAPTION> Three Months Ended -------------------- Jan. 31 Jan. 31 2001 2000 ------- ------- (in millions) <S> <C> <C> Net earnings .......................................................... $ 154 $ 131 Other comprehensive income: Change in unrealized gain(loss) on investments, net ............... (6) 53 Reclassification adjustment for realized loss relating to warrants included in net income ................................. 22 SFAS No. 133 cumulative transition adjustment ..................... 6 -- Unrealized gain on derivative instruments ......................... 16 -- ----- ----- Total comprehensive income ............................................ $ 192 $ 184 ===== ===== </TABLE> During the three months ended January 31, 2001 and 2000, we did not realize any gains or losses relating to our investments. Therefore, we did not reclassify any gains or losses to the condensed consolidated statement of earnings relating to investments during either period. Approximately $4 million of pre-tax unrealized gains were reclassified to the condensed consolidated statement of earnings relating to derivative instruments in the three months ended January 31, 2001. 8. Restructuring Of the $21 million liability recorded in the last quarter of 2000 relating to restructuring of Agilent's healthcare solutions business, $14 million of the liability remains and is expected to be utilized in the second half of 2001. 9. Notes Payable and Short-term Debt On January 2, 2001, Agilent entered into a new one-year revolving credit facility for $150 million, that has the same terms and conditions as its existing five-year $250 million and one-year $250 million revolving credit facilities. As of January 31, 2001, Agilent had borrowed $25 million under the new facility and approximately $420 million in commercial paper supported by its two existing revolving credit facilities. In addition to these committed facilities, Agilent has access to uncommitted credit lines through its banking partners, under which we had borrowed approximately $110 million as of January 31, 2001. 10. Segment Information The following tables reflect the results of Agilent's reportable segments under the Agilent management system. These results are not necessarily in conformity with accounting principles generally accepted in the United States of America. The performance of each segment is measured based on several metrics, including earnings from operations. These results are used, in part, by management, in evaluating the performance of, and in allocating resources to, each of the segments. <TABLE> <CAPTION> Test and Semiconductor Healthcare Chemical Total Measurement Products Solutions Analysis Segments ----------- -------- --------- -------- -------- (in millions) <S> <C> <C> <C> <C> <C> Three months ended January 31, 2001: External revenue ................... $1,685 $ 595 $ 293 $ 268 $2,841 Internal revenue ................... -- -- -- -- -- ------ ------ ------ ------ ------ Total net revenue .................. $1,685 $ 595 $ 293 $ 268 $2,841 ====== ====== ====== ====== ====== Earnings(loss) from operations ..... $ 239 $ 58 $( 36) $ 18 $ 279 ====== ====== ====== ====== ====== Three months ended January 31, 2000: External revenue ................... $1,161 $ 447 $ 395 $ 243 $2,246 Internal revenue ................... -- 9 -- -- 9 ------ ------ ------ ------ ------ Total net revenue .................. $1,161 $ 456 $ 395 $ 243 $2,255 ====== ====== ====== ====== ====== Earnings from operations ........... $ 124 $ 31 $ 17 $ 13 $ 185 ====== ====== ====== ====== ====== </TABLE> 9 <PAGE> 10 THE FOLLOWING TABLE RECONCILES THE SEGMENT INFORMATION ABOVE TO AGILENT, AS REPORTED <TABLE> <CAPTION> Three Months Ended January 31, ------------------------- 2001 2000 ------- ------- (in millions) <S> <C> <C> Net revenue: Total reportable segments ................................... $ 2,841 $ 2,255 Elimination of internal revenue ............................. -- (9) ------- ------- Total net revenue, as reported ........................... $ 2,841 $ 2,246 ======= ======= Earnings before taxes: Total reportable segments' earnings from operations ......... $ 279 $ 185 Corporate and unallocated ................................... -- (14) Other income (expense), net ................................. 19 31 ------- ------- Total earnings before taxes, as reported ................. $ 298 $ 202 ======= ======= </TABLE> In the three months ended January 31, 2001, all corporate expenses were allocated to the segments. Corporate and unallocated expenses, in the three months ended January 31, 2000, primarily related to certain employee related benefit programs. 11. Subsequent Event On February 20, 2001, Agilent announced that it sold an approximately 40-acre parcel of surplus land in San Jose, California, resulting in a pre-tax gain of approximately $270 million. 10 <PAGE> 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE ANTICIPATED COMPLETION OF TRANSACTIONS, OUR LIQUIDITY POSITION AND OUR EXPECTED OVERALL GROWTH THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO CERTAIN FACTORS, INCLUDING THOSE DISCUSSED BELOW IN "FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THIS FORM 10-Q. BASIS OF PRESENTATION The financial information presented in this Form 10-Q is not necessarily indicative of our consolidated financial position, results of operations or cash flows in the future. IMPACT OF FOREIGN CURRENCIES In the three months ended January 31, 2001, the U.S. dollar strengthened against the Japanese yen and weakened against the Euro, neither of which movements had a material effect on our net revenue and operating expense growth. In the three months ended January 31, 2000, movements and exchange rates of foreign currencies had no material impact on our net revenue and operating expense growth. ADOPTION OF FAS 133 Effective November 1, 2000, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). We enter into foreign exchange contracts, primarily forwards and purchased options, to hedge exposures to changes in foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. The adoption of SFAS No. 133 resulted in a cumulative pre-tax reduction in income of $41 million and a pre-tax increase in other comprehensive income of $10 million. During the three months ended January 31, 2001, pre-tax gains of $11 million were recorded in other income related to the value of derivative transactions, and pre-tax gains of $24 million were recorded in other comprehensive income. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This Staff Accounting Bulletin, as amended, will be adopted by us no later than our fourth quarter of 2001. We currently do not believe the adoption will have a material effect on our annual consolidated financial statements. RECENT ECONOMIC DOWNTURN The recent economic downturn has had an impact on consumer and capital spending in many of the markets that we serve worldwide. It also has created an imbalance of supply and demand in the wireless and semiconductor manufacturing industries. These forces resulted in first quarter order growth of only four percent compared with net revenue growth of 26.5 percent over last year. The most significant impacts were on our test and measurement and semiconductor products businesses. Management is uncertain as to how long and how deep the current downturn may be in these markets. We expect that our overall growth, and in particular the growth of these two segments, will not be as strong in the second quarter of this year as they were in the first quarter. In addition, weakness in the U.S. hospital market continues to impact our healthcare solutions business. RESULTS OF OPERATIONS Our results of operations for the three months ended January 31, 2001 and 2000 in dollars and as a percentage of total net revenue follow. 11 <PAGE> 12 <TABLE> <CAPTION> Three Months Ended January 31, --------------------------------------------------------- As a Percentage of Total Net Revenue Dollars ------------------------- 2001 2000 2001 2000 ------- ------- ---------- ------- (in millions) <S> <C> <C> <C> <C> Net revenue: Products ..................................................... $ 2,516 $ 1,940 88.6 86.4 Services and other ........................................... 325 306 11.4 13.6 ------- ------- ------- ------- Total net revenue ......................................... 2,841 2,246 100.0 100.0 ------- ------- ------- ------- Costs and expenses: Cost of products ............................................. 1,267 976 44.6 43.5 Cost of services and other ................................... 182 184 6.4 8.2 Research and development ..................................... 372 290 13.1 12.9 Selling, general and administrative .......................... 741 625 26.1 27.8 ------- ------- ------- ------- Total costs and expenses .................................... 2,562 2,075 90.2 92.4 ------- ------- ------- ------- Earnings from operations ....................................... 279 171 9.8 7.6 Other income (expense), net .................................... 19 31 0.7 1.4 ------- ------- ------- ------- Earnings before taxes and cumulative effect of a change in accounting principle ............................ 298 202 10.5 9.0 Provision for taxes ............................................ 119 71 4.2 3.2 ------- ------- ------- ------- Net earnings before cumulative effect of a change in accounting principle ............................ 179 131 6.3 5.8 Cumulative effect of adopting SFAS No. 133, net of tax ...... (25) -- (0.9) 0.0 ------- ------- ------- ------- Net earnings ................................................... $ 154 $ 131 5.4 5.8 ======= ======= ======= ======= Cost of products as a percentage of products revenue ........... 50.4 50.3 Cost of services as a percentage of services revenue ........... 56.0 60.1 </TABLE> NET REVENUE Total net revenue increased 26.5 percent to $2.8 billion in the three months ended January 31, 2001 compared to $2.2 billion in the same period in 2000. Excluding the sale of certain portions of our U.S. portfolio of lease assets to CIT ("CIT sale"), net revenue increased 23.8 percent. The increase reflects increased sales of our products serving the communications and electronics markets, particularly in the networking and optical arenas coupled with growth in sales of our products into the pharmaceutical and life sciences markets. The increase was partially offset by a decline in revenue in our healthcare solutions business. Revenue in the United States increased 31.5 percent to $1.3 billion in the three months ended January 31, 2001, compared to $968 million in the same period in 2000. International revenue increased 22.7 percent to $1.6 billion in the three months ended January 31, 2001 compared to $1.3 billion in the same period in 2000. The higher net revenue growth in the U.S. was primarily attributable to the CIT sale. Excluding the CIT sale, U.S. revenue increased 25.2 percent. There was minimal currency impact on net revenue growth in the three months ended January 31, 2001. In the three months ended January 31, 2001, revenue from products increased 29.7 percent while revenue from services and other increased 6.2 percent, compared to the same period in 2000. The higher product 12 <PAGE> 13 revenue growth was primarily due to the continued growth of our product sales in the communications and electronics markets. In addition, the CIT sale had a favorable impact on our product revenue growth and an unfavorable impact on our services and other revenue growth. Excluding the CIT sale, net revenue from products increased 26.5 percent in the three months ended January 31, 2001, compared to the same period in 2000. Excluding leasing, revenue from services increased 14.1 percent in the three months ended January 31, 2001, compared to the same period in 2000. Generally, there is a lag between service revenue growth and product revenue growth. This lag occurs because service revenue increases as our installed base of products increases and warranty periods expire. EARNINGS FROM OPERATIONS Earnings from operations increased 63.2 percent to $279 million in the three months ended January 31, 2001 compared to $171 million in the same period in 2000. Excluding the CIT sale, earnings from operations increased 45.6 percent. The increase was primarily due to strong results in the test and measurement and semiconductor businesses. This increase was partially offset by the performance of our healthcare solutions business, higher goodwill amortization related to recent acquisitions as well as on-going costs associated with operating on our own. Cost of products and services, as a percentage of net revenue, decreased 0.6 percentage points, to 51.0 percent, in the three months ended January 31, 2001, compared to 51.6 percent in the same period in 2000. The CIT sale had minimal impact on cost of products and services, as a percentage of net revenue. The decrease was primarily attributable to greater absorption of fixed costs due to higher net revenue in our test and measurement business and manufacturing efficiencies achieved in our semiconductor products business. The decrease was partially offset by higher discounts in our healthcare solutions business, start-up costs for life sciences products in our chemical analysis business and premium prices paid for scarce components in our test and measurement business. Operating expenses as a percentage of net revenue decreased 1.5 percentage points to 39.2 percent in the three months ended January 31, 2001 compared to 40.7 percent in the same period in 2000. Excluding the CIT sale, operating expenses as a percentage of net revenue decreased 0.7 percentage points. The decrease was primarily due to higher net revenue and increased operational efficiency partially offset by higher research and development costs as well as higher goodwill amortization related to recent acquisitions. Research and development expenses increased 28.3 percent in the three months ended January 31, 2001, compared to the same period in 2000. The increase reflects ongoing investments in developing new products and new technologies in the areas of wireless, networking and life sciences. Selling, general and administrative expenses increased 18.6 percent in the three months ended January 31, 2001 compared to the same period in 2000. The increase was primarily due to higher field selling costs attributable to the increased demand for our products and higher goodwill amortization related to recent acquisitions. OTHER INCOME (EXPENSE), NET Other income (expense), net, decreased $12 million to $19 million in the three months ended January 31, 2001 compared to $31 million in the 13 <PAGE> 14 same period in 2000. The decrease was primarily due to reduced revenue from a joint venture and lower interest income earned as a result of cash used for the OSI acquisition. This decrease was partially offset by $10 million related to changes in the fair value of derivative instruments and $6 million related to a gain on divestiture. PROVISION FOR TAXES As a result of the impacts of the anticipated sale of our healthcare solutions business, the acquisition of OSI and anticipated changes in our mix of pre-tax earnings, our estimated 2001 effective tax rate has increased to 40 percent from 35 percent in 2000. Our future effective tax rate will continue to be subject to the impacts of business acquisitions and dispositions, as well as changes in the mix of our pre-tax earnings among jurisdictions with varying statutory rates. TEST AND MEASUREMENT <TABLE> <CAPTION> Three Months Ended January 31, -------------------- 2001 2000 ------ ------ (dollars in millions) <S> <C> <C> Net revenue .......................................... $1,685 $1,161 Earnings from operations ............................. $ 239 $ 124 Operating margin ................................. 14.2% 10.7% </TABLE> NET REVENUE Net revenue from our test and measurement business increased 45.1 percent to $1.7 billion in the three months ended January 31, 2001, compared to $1.2 billion in the same period in 2000. Excluding the CIT sale, net revenue from our test and measurement business increased 40.2 percent. The increase was attributable to strong growth across all of our products, particularly those serving the networking and optical markets. Revenue growth was also strong in our electronics manufacturing test and our semiconductor test system businesses. Net revenue from products increased 51.6 percent while our net revenue from services and other increased 8.2 percent, in the three months ended January 31, 2001, compared to the same period in 2000. The higher product revenue growth was primarily due to the continued growth of our product sales in the communications market. In addition, the CIT sale had a favorable impact on our product revenue growth and an unfavorable impact on our services and other revenue growth. Excluding the CIT sale, net revenue from products increased 45.8 percent in the three months ended January 31, 2001, compared to the same period in 2000. Excluding leases, revenue from services increased 23.3 percent in the three months ended January 31, 2001, compared to the same period in 2000. Generally, there is a lag between product revenue growth and service revenue growth. This lag occurs because service revenue increases as our installed base of products increases and warranty periods expire. EARNINGS FROM OPERATIONS Earnings from operations from our test and measurement business increased 92.7 percent to $239 million in the three months ended January 31, 2001, compared to $124 million in the same period in 2000. Excluding the CIT sale, earnings from operations increased 69.4 percent. The increase resulted from higher net revenue and operational efficiencies, partially offset by higher cost of products and services as a percentage of net revenue as well as higher goodwill amortization related to recent acquisitions. Cost of products and services as a percentage of net revenue increased 0.6 percentage points in the three months ended January 31, 2001, compared to the 14 <PAGE> 15 same period in 2000. The increase was primarily due to premium prices paid for scarce components partially offset by higher net revenue. Operating expenses as a percentage of net revenue decreased 4.0 percentage points in the three months ended January 31, 2001, compared to the same period in 2000. The decrease was due to higher net revenue partially offset by higher expenses. Research and development expenses increased 33.3 percent in the three months ended January 31, 2001, compared to the same period in 2000. The increase reflects our continuing investments in new product development primarily for the communications markets. Selling, general and administrative expenses increased 31.2 percent in the three months ended January 31, 2001, compared to the same period in 2000. The increase is primarily due to higher field selling costs attributable to the increased demand for our products and goodwill amortization related to recent acquisitions. SEMICONDUCTOR PRODUCTS <TABLE> <CAPTION> Three Months Ended January 31, ------------------ 2001 2000 ---- ---- (dollars in millions) <S> <C> <C> Net revenue ......................... $595 $447 Earnings from operations ............ 58 31 Operating margin ................ 9.7% 6.9% </TABLE> NET REVENUE Net revenue from our semiconductor products business increased 33.1 percent to $595 million in the three months ended January 31, 2001, compared to $447 million in the same period in 2000. The increase was primarily due to strong growth in networking products, particularly fiber optics and storage-area-network components. In addition, increased sales of our wireless and imaging products contributed to the increase. As a percentage of net revenue for the semiconductor products business, revenue from sales to Hewlett-Packard, consisting primarily of ASICs and motion control products, was 32.8 percent for the three months ended January 31, 2001 and 29.5 percent for the three months ended January 31, 2000. EARNINGS FROM OPERATIONS Earnings from operations from our semiconductor products business increased 87.1 percent to $58 million in the three months ended January 31, 2001, compared to $31 million in the same period in 2000. The increase resulted from higher net revenue and lower cost of products as a percentage of net revenue, partially offset by higher operating expenses. Cost of products as a percentage of net revenue decreased 5.6 percentage points in the three months ended January 31, 2001, compared to the same period in 2000. The decrease was primarily related to greater absorption of fixed costs due to increased volumes and manufacturing efficiencies. Operating expenses as a percentage of net revenue increased 2.7 percentage points in the three months ended January 31, 2001, compared to the same period in 2000. The increase was primarily due to the 61 percent increase in research and development costs, particularly in the fiber optics and high-speed networking areas. 15 <PAGE> 16 Selling, general and administrative expenses increased 32.8 percent in the three months ended January 31, 2001, compared to the same period in 2000. The increase was due to higher costs attributable to the higher sales volumes. HEALTHCARE SOLUTIONS In the first three months of 2001, we agreed to sell our healthcare solutions business to Koninklijke Philips Electronics, N.V. ("Philips") for approximately $1.7 billion pursuant to an asset purchase agreement. Most of our healthcare solutions business operational facilities and certain of its associated assets and liabilities will transfer to Philips. Virtually all employees of our healthcare solutions business, including 100 percent of the healthcare solutions business-dedicated infrastructure employees will be offered employment by Philips or transferred to Philips, subject to local statutory laws. We will be restricted from competing in the development, manufacturing, selling or servicing of certain medical products for five years. In February 2001, we and Philips announced that a request for additional information had been received from the U.S. Department of Justice in connection with the pending sale. This request has the effect of extending the waiting period under the Hart-Scott-Rodino Act until 30 days after both parties comply with the request. On March 5, 2001, the European Union Commission gave antitrust clearance for the sale of our healthcare solutions business to Philips. While both companies still expect to complete the proposed transaction in the middle of calendar year 2001, management has concluded that based on current information, the required regulatory approvals from the U.S. Department of Justice cannot be considered perfunctory. As a result, we will not adopt discontinued operations presentation in our consolidated financial statements as required by Accounting Principles Board No. 30 until we receive the appropriate regulatory approvals. <TABLE> <CAPTION> Three Months Ended January 31, ---------------------- 2001 2000 ----- ----- (dollars in millions) <S> <C> <C> Net revenue .............................. $ 293 $ 395 Earnings (loss) from operations .......... (36) 17 Operating margin ..................... (12.3%) 4.3% </TABLE> NET REVENUE Net revenue from our healthcare solutions business decreased 25.8 percent to $293 million in the three months ended January 31, 2001, compared to $395 million in the same period in 2000. The decrease was primarily due to a continued slow-down in capital expenditures by U.S. hospitals contrasted with the three months ended January 31, 2000 when our customers accelerated purchases to avoid potential Year 2000 issues. Services and other revenue increased 12.5 percent for the three months ended January 31, 2001, compared to the same period in 2000. Generally, there is a lag between product revenue growth and service revenue growth. This lag occurs because service revenue increases as our installed base of products increases and warranty periods expire. EARNINGS (LOSS) FROM OPERATIONS The healthcare solutions business had a loss from operations of $36 million in the three months ended January 31, 2001, compared to earnings from operations of $17 million in the same period in 2000. The decline in earnings was principally due to lower net revenue partially offset by lower expenses. 16 <PAGE> 17 Cost of products and services as a percentage of net revenue increased 7.9 percentage points in the three months ended January 31, 2001, compared to the same period in 2000. The increase was primarily due to lower net revenue resulting from lower volumes and somewhat higher discounts. Operating expenses as a percentage of net revenue increased 8.7 percentage points in the three months ended January 31, 2001, compared to the same period in 2000. The increase was primarily due to lower net revenue. Research and development expenses decreased 16.7 percent in the three months ended January 31, 2001, compared to the same period in 2000. The decrease reflects higher spending last year prior to several new product introductions. Selling, general and administrative expenses decreased 8.2 percent in the three months ended January 31, 2001, compared to the same period in 2000. The decrease was primarily due to lower field selling costs attributable to decreased demand for our products as well as cost savings as a result of restructuring in the last three months of 2000. CHEMICAL ANALYSIS <TABLE> <CAPTION> Three Months Ended January 31, ------------------- 2001 2000 ---- ---- (dollars in millions) <S> <C> <C> Net revenue ........................ $268 $243 Earnings from operations ........... 18 13 Operating margin ............... 6.7% 5.3% </TABLE> NET REVENUE Net revenue from our chemical analysis business increased 10.3 percent to $268 million in the three months ended January 31, 2001, compared to $243 million in the same period in 2000. The increase was driven by increased sales of our products in the pharmaceutical and life sciences markets partially offset by slower growth in our traditional chemical and petrochemical markets. EARNINGS FROM OPERATIONS Earnings from operations from our chemical analysis business increased 38.5 percent to $18 million in the three months ended January 31, 2001, compared to $13 million in the same period in 2000. The increase was primarily due to increased net revenue. Cost of products and services as a percentage of net revenue increased by 2.4 percentage points for the three months ended January 31, 2001, compared to the same period in 2000. The increase was primarily due to start-up costs for life sciences products. Operating expenses as a percentage of net revenue decreased 3.7 percentage points in the three months ended January 31, 2001, compared to the same period of 2000. The decrease resulted primarily from higher revenues and increased operational efficiency. Research and development expenses increased 3.4 percent in the three months ended January 31, 2001, compared to the same period in 2000. The moderate increase reflects continued new product development programs in the life sciences. Selling, general and administrative expenses were flat in the three months ended January 31, 2001, compared to the same period in 2000. 17 <PAGE> 18 FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $433 million at January 31, 2001 compared to $996 million at October 31, 2000. The decrease is mainly due to acquisitions made during the three months ended January 31, 2001. We used $197 million of cash in operating activities during the three months ended January 31, 2001. We generated cash from operations of $384 million in the three months ended January 31, 2000. The decrease in cash was mainly attributed to an increase in inventory and a decrease in liabilities including those due to Hewlett-Packard and taxes on earnings. Net cash used in investing activities was $870 million during the three months ended January 31, 2001, compared to $208 million for the corresponding period in 2000. The increase in investing activities was primarily due to the payment of approximately $684 million to acquire Objective Systems Integrators, Inc. ("OSI") in the three months ended January 31, 2001 and the payment to purchase the remaining 4.2% Agilent Technologies Japan, Ltd. shares owned by Yokogawa for approximately $98 million. On January 2, 2001, we entered into a new one-year revolving credit facility for $150 million, that has the same terms and conditions as our existing five-year $250 million and one-year $250 million revolving credit facilities. As of January 31, 2001, we had borrowed $25 million under the new facility and approximately $420 million in commercial paper supported by our two existing revolving credit facilities. In addition to these committed facilities, we have access to uncommitted credit lines through our banking partners, under which we had borrowed approximately $110 million as of January 31, 2001. We received $1.1 billion of funding from Hewlett-Packard in the three months ended January 31, 2000. We expect to fund future operations from our operational cash flows, commercial paper program and existing credit facilities. We may choose to obtain additional debt or equity financing in the future. FACTORS THAT MAY AFFECT FUTURE RESULTS IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL SUFFER. We sell our products in several industries that are characterized by rapid technological changes, frequent new product and service introductions and evolving industry standards. Without the timely introduction of new products, services and enhancements, our products and services will likely become technologically obsolete over time, in which case our revenue and operating results would suffer. The success of our new product and service offerings will depend on several factors, including our ability to: - properly identify customer needs; - price our products competitively; - innovate and develop new technologies and applications; - successfully commercialize new technologies in a timely manner; - manufacture and deliver our products in sufficient volumes on time; and - differentiate our offerings from our competitors' offerings. Many of our products are used by our customers to develop, test and manufacture their new products. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers' products. Development of new products generally requires a substantial investment before we can determine the commercial viability of these innovations. Our other businesses will encounter similar challenges. We would suffer competitive harm if we dedicate a significant amount of resources to the development of products and technologies that do not achieve broad market acceptance. 18 <PAGE> 19 OUR OPERATING RESULTS COULD BE HARMED IF THE GENERAL ECONOMY OR THE INDUSTRIES INTO WHICH WE SELL OUR PRODUCTS ARE IN DOWNWARD CYCLES. Several significant industries and markets into which we sell our products are cyclical and are subject to general economic conditions. For example, in 1998 the operating results of our test and measurement and semiconductor products businesses were harmed by downturns in the semiconductor market. From time to time, the electronics industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. The computer industry is also subject to seasonal and cyclical fluctuations in demand for its products. These industry and general economic downturns have been characterized by diminished product demand, excess manufacturing capacity and the subsequent accelerated erosion of average selling prices. The recent economic downturn has had an impact on consumer and capital spending in many of the markets that we serve worldwide. It also has created an imbalance of supply and demand in the wireless and semiconductor manufacturing industries. These forces resulted in first quarter 2001 order growth of only 4% compared to net revenue growth of 26.5% over the last year. The most significant impacts were on our test and measurement and semiconductor product businesses. We are uncertain as to how long and how deep the current downturn may be in these markets. We expect that our overall growth, and in particular the growth of these two segments, will not be as strong in the second quarter of this year as they were in the first quarter. In addition, weakness in the U.S. hospital market continues to impact our healthcare solutions business. Any continued or further slowdowns in our customers' markets or in general economic conditions would likely result in a reduction in demand for our products and services and could harm our businesses. IF DEMAND FOR OUR PRODUCTS DOES NOT MATCH OUR MANUFACTURING CAPACITY, OUR EARNINGS MAY SUFFER. If we are not able to quickly adapt our production and related cost structures to changing market conditions, or if demand does not meet our expectations, our manufacturing capacity may exceed our production requirements. The fixed costs associated with excess manufacturing capacity will adversely affect our earnings. Conversely, if our manufacturing capacity does not keep pace with product demand, or if we experience difficulties in obtaining parts or components needed for manufacturing, we will not be able to fulfill orders in a timely manner which in turn may have a negative effect on our earnings and overall business. FAILURE TO ADJUST OUR ORDERS FOR PARTS DUE TO CHANGING MARKET CONDITIONS COULD ADVERSELY AFFECT OUR EARNINGS. Our earnings would be harmed if we are unable to adjust our orders for parts to market fluctuations. In order to secure components for the production of products, at times we make advance payments to suppliers, or we may enter into non-cancelable purchase commitments with vendors, which could impact our ability to adapt our orders to market demands. By contrast, our results will be materially and adversely impacted if we do not receive sufficient parts to meet our requirements in a timely manner. Certain parts may be available only from a single supplier or a limited number of suppliers. In addition, suppliers may cease manufacturing certain components that are difficult to replace without significant reengineering of our products. Suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors. ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS COULD ADVERSELY AFFECT OUR SALES. Since we sell our products worldwide, our businesses are subject to risks associated with doing business internationally. We anticipate that revenue from international operations will continue to represent a substantial portion of our total revenue. In addition, many of our manufacturing facilities and 19 <PAGE> 20 suppliers are located outside the United States. Accordingly, our future results could be harmed 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 and import or export licensing requirements; - potentially negative consequences from changes in tax laws; - difficulty in staffing and managing widespread operations; - differing labor regulations; - differing protection of intellectual property; and - unexpected changes in regulatory requirements. For example, our businesses declined in 1998 when Korea and Japan experienced economic difficulties. The recurrence of weakness in these economies or weakness in other international economies could have a significant negative effect on our future operating results. FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO DECLINE. Given the nature of the markets in which we participate, we cannot reliably predict future revenue and profitability, and unexpected changes may cause us to adjust our operations. A high proportion of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, relatively small declines in revenue could disproportionately affect our operating results in a quarter. For example, when our revenue declined in the second half of 1998 as a result of the financial crisis in Asia, it caused significant negative fluctuations in our operating results. Other factors that could affect our quarterly operating results include: - demand for and market acceptance of our products; - competitive pressures resulting in lower selling prices; - adverse changes in the level of economic activity in the United States and other major regions in which we do business; - adverse changes in industries, such as semiconductors and electronics, on which we are particularly dependent; - changes in the relative portion of our revenue represented by our various products and customers; - unanticipated delays or problems in the introduction of new products; - our competitors' announcements of new products, services or technological innovations; - increased costs of raw materials or supplies; - changes in the timing of product orders; and 20 <PAGE> 21 - our inability to forecast revenue in a given quarter from large system sales. THE CURRENT TECHNOLOGY LABOR MARKET IS VERY COMPETITIVE, AND OUR BUSINESSES WILL SUFFER IF WE ARE NOT ABLE TO HIRE AND RETAIN SUFFICIENT PERSONNEL. Our future success depends partly on the continued service of our key research, engineering, sales, marketing, manufacturing, executive and administrative personnel. If we fail to retain and hire a sufficient number of these personnel, we will not be able to maintain and expand our businesses. Competition for qualified personnel in the technology area is intense, and we operate in several geographic locations where labor markets are particularly competitive, including the Silicon Valley region of Northern California where our headquarters and central research and development laboratories are located. Although we believe we offer competitive salaries and benefits, certain of our businesses have had to increase spending in order to retain personnel. OUR ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES MAY RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED. In the normal course of business, we frequently engage in discussions with third parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. Although completion of any one transaction may not have a material effect on our financial position, results of operations or cash flows taken as a whole, our financial results may differ from the investment community's expectations in a given quarter. Divestiture of a part of our business may result in the cancellation of orders and charges to earnings. WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THE COMPANIES WE ACQUIRE OR REALIZE THE EXPECTED VALUE FROM ACQUIRING SUCH COMPANIES, AND OUR EFFORTS MAY DIVERT ATTENTION FROM OTHER BUSINESS OPERATIONS. Acquisitions and strategic alliances may require us to integrate not only products but also a different company culture, management team and business infrastructure. We may also have to develop, manufacture and market the products of newly-acquired companies in a way that enhances the performance of our combined businesses or product line to realize the value from expected synergies of combining the two companies. Depending on the size and complexity of an acquisition, our successful integration of the entity into Agilent depends on a variety of factors, including: - the hiring and retention of key employees, - management of facilities and employees in separate geographic areas, 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 divert our attention from other business operations. OUR SEMICONDUCTOR TECHNOLOGY LICENSING AND SUPPLY ARRANGEMENTS WITH HEWLETT-PACKARD LIMIT OUR ABILITY TO SELL TO OTHER COMPANIES AND COULD RESTRICT OUR ABILITY TO EXPAND OUR BUSINESSES. We do not have a license under Hewlett-Packard's patents, patent applications and invention disclosures for, with some exceptions, inkjet products, printer products (including printer supplies, accessories and 21 <PAGE> 22 components), document scanners and computing products. In addition, our ICBD Technology Ownership and License Agreement, which generally covers integrated circuit technology that is used in integrated circuits for Hewlett-Packard's printers, scanners and computers, provides that for a period of three years in some cases and 10 years in other cases we are prohibited, with some exceptions, from using this integrated circuit technology for the development and sale of integrated circuits for use in inkjet products, printer products (including printer supplies, accessories and components), document scanners and computing products to third parties other than Hewlett-Packard. Although we have entered into a supply agreement for the sale to Hewlett-Packard of these kinds of integrated circuits, the supply agreement does not require Hewlett-Packard to purchase a minimum amount of product from us. In the event that Hewlett-Packard reduces its purchase of our integrated circuits, we would be unable to address this reduction through sales of these kinds of integrated circuits for these types of products to other customers. IF DEMAND FOR HEWLETT-PACKARD'S PRINTER, WORKSTATION AND SERVER PRODUCTS DECLINES, OR IF HEWLETT-PACKARD CHOOSES A DIFFERENT SUPPLIER, OUR SEMICONDUCTOR PRODUCTS BUSINESS REVENUE WILL DECLINE SIGNIFICANTLY. Historically, our semiconductor products business has sold products to Hewlett-Packard and has engaged in product development efforts with divisions of Hewlett-Packard. For the first quarter ended January 31, 2001, Hewlett-Packard accounted for 6.9% of our total net revenue and 32.8% of our semiconductor products business' net revenue, respectively. In comparison, for the first quarter ended January 31, 2000, Hewlett-Packard accounted for 6.2% of our total net revenue and 29.5% of our semiconductor products business' net revenue, respectively. OUR ABILITY TO COMPETE FOR HEWLETT-PACKARD'S BUSINESS MAY SUFFER AS A RESULT OF OUR SEPARATION DUE TO DECREASED ACCESS TO HEWLETT-PACKARD'S RESEARCH AND DEVELOPMENT STRATEGY, TECHNOLOGY PLANS, FUTURE PRODUCT FEATURES AND PRODUCT SUPPLY NEEDS. In the past, we have benefited from our access to Hewlett-Packard's research and development strategy, technology plans, future product features and product supply needs in competing for Hewlett-Packard's business. If our competitors were to gain better access to Hewlett-Packard as a result of our separation, our competitors may be able to develop products that better meet the future needs of Hewlett-Packard, decreasing the competitiveness of our products. In addition, we have taken advantage of collaborative relationships with some of Hewlett-Packard's businesses and we may not continue to enjoy all of the benefits of these collaborative relationships. WE MAY FACE SIGNIFICANT COSTS IN ORDER TO COMPLY WITH LAWS AND REGULATIONS IN THE MANUFACTURE, PROCESSING AND DISTRIBUTION OF CHEMICALS, AND, IF WE FAIL TO COMPLY, WE COULD BE SUBJECT TO CIVIL OR CRIMINAL PENALTIES OR BE PROHIBITED FROM DISTRIBUTING OUR PRODUCTS. Some of our chemical analysis business' products are used in conjunction with chemicals whose manufacture, processing and distribution are regulated by the United States Environmental Protection Agency under the Toxic Substances Control Act, and by regulatory bodies in other countries with laws similar to the Toxic Substances Control Act. We must conform the manufacture, processing and distribution of these chemicals to these laws, and adapt to regulatory requirements in all countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, then we could be made to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products 22 <PAGE> 23 in commerce until the products or component substances are brought into compliance. IF WE FAIL TO MAINTAIN SATISFACTORY COMPLIANCE WITH CERTAIN REGULATIONS, WE MAY BE FORCED TO RECALL PRODUCTS AND CEASE THEIR MANUFACTURE AND DISTRIBUTION, AND WE COULD BE SUBJECT TO CIVIL OR CRIMINAL PENALTIES. The medical device products produced by our healthcare solutions business are subject to regulation by the United States Food and Drug Administration (FDA) and similar international agencies. Their regulations govern a wide variety of product activities from design and development to labeling, manufacturing, promotion, sales and distribution. In the first quarter of 2001, we announced a definitive agreement to sell our healthcare solutions business to Philips. The sale is contingent upon customary regulatory approvals and other closing conditions. In addition, our chemical analysis products are used in the drug design and production processes to test compliance with the Toxic Substances Control Act, the Federal Food, Drug and Cosmetic Act and similar regulations. Therefore, we must continually adapt our chemical analysis products to changing regulations. ENVIRONMENTAL CONTAMINATION FROM PAST OPERATIONS COULD SUBJECT US TO UNREIMBURSED COSTS AND COULD HARM ON-SITE OPERATIONS AND THE FUTURE USE AND VALUE OF THE PROPERTIES INVOLVED. Some of our properties are undergoing remediation by Hewlett-Packard for known subsurface contamination. Hewlett-Packard has agreed to retain the liability for all known subsurface contamination, perform the required remediation and indemnify us with respect to claims arising out of that contamination. The determination of the existence and cost of any additional contamination caused by us could involve costly and time-consuming negotiations and litigation. In addition, Hewlett-Packard will have access to our properties to perform remediation. While Hewlett-Packard has agreed to minimize interference with on-site operations at those properties, remediation activities and subsurface contamination may require us to incur unreimbursed costs and could harm on-site operations and the future use and value of the properties. We cannot assure you that Hewlett-Packard will fulfill its indemnification or remediation obligations. We are indemnifying Hewlett-Packard for any liability associated with contamination from past operations at all other properties transferred from Hewlett-Packard to us other than those properties currently undergoing remediation by Hewlett-Packard. While we are not aware of any material liabilities associated with existing subsurface contamination at any of those properties, subsurface contamination may exist, and we may be exposed to material liability as a result of the existence of that contamination. ENVIRONMENTAL CONTAMINATION CAUSED BY ONGOING OPERATIONS COULD SUBJECT US TO SUBSTANTIAL LIABILITIES IN THE FUTURE. Our semiconductor and other manufacturing processes involve the use of substances regulated under various international, federal, state and local laws governing the environment. We may be subject to liabilities for environmental contamination, and these liabilities may be substantial. Although our policy is to apply strict standards for environmental protection at our sites inside and outside the United States, even if not subject to regulations imposed by foreign governments, we may not be aware of all conditions that could subject us to liability. 23 <PAGE> 24 WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS, AND OUR FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT CONTRACTS COULD HARM OUR BUSINESSES. We have agreements relating to the sale of our products to government entities and as a result we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations governing government contracts. We have received and are responding to formal requests for information by the government regarding our compliance with these terms and regulations, which relate to our contracts for sales of products to certain government agencies. These requests may result in legal proceedings against us or liability which may be significant. WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS OTHER GOVERNMENTAL REGULATIONS, AND WE MAY INCUR SIGNIFICANT EXPENSES TO COMPLY WITH THESE REGULATIONS AND DEVELOP OUR PRODUCTS TO BE COMPATIBLE WITH THESE REGULATIONS. Our businesses are subject to various other significant international, federal, state and local, health and safety, packaging, product content and labor regulations. These regulations are complex, change frequently and have tended to become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy past violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, or impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products. Our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation of other agencies such as the United States Federal Communications Commission. We also must comply with work safety rules. If we fail to adequately address any of these regulations, our businesses will be harmed. FAILURE TO SUCCESSFULLY COMPLETE THE SALE OF OUR HEALTHCARE SOLUTIONS BUSINESS COULD NEGATIVELY AFFECT OUR OPERATIONS. We have announced our intention to sell our healthcare solutions business to Koninklijke Philips Electronics ("Philips"). If the closing of the transaction is delayed or does not occur, our operations could be negatively affected. In the event that the transaction is completed, we will be providing transition services to Philips. The provision of such services will require us to redirect resources and could disrupt our operations. THIRD PARTIES MAY CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, AND WE COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM SELLING PRODUCTS. Third parties may claim that we are infringing their intellectual property rights, and we may be found to infringe those intellectual property rights. While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may be unaware of intellectual property rights of others that may cover some of our technology, products and services. Moreover, in connection with future intellectual 24 <PAGE> 25 property infringement claims, we will only have the benefit of asserting counterclaims based on Hewlett-Packard's intellectual property portfolio in limited circumstances, and we will only be able to offer licenses to Hewlett-Packard's intellectual property in order to resolve claims in limited circumstances. In addition, although we believe we have all necessary rights to use the new brand name, our rights to use it may be challenged by others. Any litigation regarding patents or other intellectual property could be costly and time-consuming, and divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increases these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of our products. We often rely on licenses of intellectual property useful for our businesses. We cannot assure you that these licenses will be available in the future on favorable terms or at all. In addition, our position with respect to the negotiation of licenses may change as a result of our separation from Hewlett-Packard. Our patent cross-license agreement with Hewlett-Packard gives us a conditional right to sublicense only a portion of Hewlett-Packard's intellectual property portfolio. As a result, in negotiating patent cross-license agreements with third parties, we may be unable to obtain agreements on terms as favorable as we may have been able to obtain if we could sublicense Hewlett-Packard's entire intellectual property portfolio. THIRD PARTIES MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY EXPEND SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY. Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks and trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results. Our pending patent and trademark registration applications may not be allowed or competitors may challenge the validity or scope of these patents or trademark registrations. In addition, our patents may not provide us a significant competitive advantage. We may be required to spend significant resources to monitor and police our intellectual property rights. We may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share. IF OUR FACTORIES OR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS DUE TO EARTHQUAKE, OUR OPERATIONS WOULD BE SERIOUSLY HARMED. Several of our facilities could be subject to a catastrophic loss caused by earthquake due to their location. We have significant facilities in areas with above average seismic activity, such as our production facilities, headquarters and Agilent Laboratories in California and our production facilities in Washington and Japan. If any of these facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or 25 <PAGE> 26 replace the facility. Agilent self-insures against such losses and does not carry catastrophic insurance policies to cover potential losses resulting from earthquakes. ONGOING POWER SUPPLY PROBLEMS IN CALIFORNIA COULD HARM OUR BUSINESS. Our corporate headquarters, a portion of our research and development activities, other critical business operations and a certain number of our suppliers are located in California. California has recently experienced ongoing power shortages, which have resulted in "rolling blackouts." These blackouts could cause disruptions to our operations and the operations of our suppliers, distributors and resellers, and customers. Agilent self-insures against such disruptions and does not carry catastrophic insurance policies to cover potential losses resulting from power shortages. In addition, California has recently experienced rising energy costs which could negatively impact our results. WE ARE IN THE PROCESS OF DEVELOPING OUR OWN BUSINESS PROCESSES AND INFORMATION SYSTEMS, AND PROBLEMS WITH THE REDESIGN AND IMPLEMENTATION OF THESE PROCESSES AND SYSTEMS COULD INTERFERE WITH OUR OPERATIONS. We are in the process of creating business processes and systems to eventually replace our current systems. We may not be successful in implementing these systems and transitioning data. For example, we plan to implement new enterprise resource planning software applications to manage some of our information systems beginning in the first quarter of 2002. Failure to smoothly and successfully implement this and other systems could interfere with our operations. Also, we may not be able to develop and implement these systems before our transitional services agreements with Hewlett-Packard expires. WE MAY NOT BE ABLE TO REPLACE OR MAY PAY INCREASED COSTS TO REPLACE TRANSITIONAL SERVICES AFTER OUR AGREEMENTS WITH HEWLETT-PACKARD EXPIRE. Currently we use Hewlett-Packard's systems to support a portion of our operations, mainly customer support and networks. We also lease and sublease certain office and manufacturing facilities from Hewlett-Packard. We have an agreement with Hewlett-Packard for Hewlett-Packard to continue to provide both these information, administrative and leasing services to us through the end of 2001. During this time period, while we are developing our own systems, we will be dependent on Hewlett-Packard for the provision of these information technology services that are critical to running our businesses. Many of the systems we currently use are proprietary to Hewlett-Packard and are very complex. After the expiration of these various arrangements, we may not be able to replace the transitional services or enter into appropriate leases in a timely manner or on terms and conditions, including cost, as favorable as those we receive from Hewlett-Packard. WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH HEWLETT-PACKARD WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR BUSINESS OPERATIONS. Conflicts of interest may arise between Hewlett-Packard and us in a number of areas relating to our past and ongoing relationships, including: - labor, tax, employee benefit, indemnification and other matters arising from our separation from Hewlett-Packard; - intellectual property matters; - employee retention and recruiting; 26 <PAGE> 27 - major business combinations involving us; and - the nature, quality and pricing of transitional services Hewlett-Packard has agreed to provide us. Nothing restricts Hewlett-Packard from competing with us other than some restrictions on the use of patents licensed to Hewlett-Packard by us. 27 <PAGE> 28 Item 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to foreign currency exchange rate risks inherent in our sales commitments, anticipated sales, and assets and liabilities denominated in currencies other than the United States dollar. Our exposure to exchange rate risks has been managed on an enterprise-wide basis. This strategy utilizes derivative financial instruments, including option and forward contracts, to hedge certain foreign currency exposures, with the intent of offsetting gains and losses that occur on the underlying exposures with gains and losses on the derivative contracts hedging them. We do not currently and do not intend to utilize derivative financial instruments for trading purposes. We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates to the hedging contracts and the underlying exposures described above. As of January 31, 2001, the analysis indicated that these hypothetical market movements would not have a material effect on our consolidated financial position, results of operations or cash flows. 28 <PAGE> 29 PART II - OTHER INFORMATION Item 1. Legal Proceedings. We are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters, which arise in the ordinary course of business. There are no matters pending that we expect to be material in relation to our business, consolidated financial condition, results of operations or cash flows. There have been no material developments in the litigation previously reported in our Form 10-K for the period ended October 31, 2000. Item 4. Submission of Matters to a Vote of Securities Holders. (a) The Annual Meeting of Stockholders of Agilent Technologies, Inc. was held at 2:00 p.m. Pacific Standard Time, on February 23,2001 at the Hotel Sofitel located at 223 Twin Dolphin Drive, Redwood City, California. The three proposals presented at the meeting were: 1. To elect three (3) directors for a term of three years. 2. To ratify the appointment of PricewaterhouseCoopers LLP as the company's independent accountants for the 2001 fiscal year. 3. To approve the Agilent Technologies, Inc. 1999 Stock Plan and the increase in the share reserve of 45,000,000 shares thereunder. (b) Each of the three directors was elected for a term of three years and received the number of votes set forth below: <TABLE> <CAPTION> Name For Withheld ----------- --------- <S> <C> <C> James G. Cullen 390,251,787 3,399,895 Walter B. Hewlett 390,499,125 3,152,577 Randall L. Tobias 390,472,711 3,178,971 </TABLE> The term of office of Thomas E. Everhart, Heidi Kunz, David M. Lawrence, M.D., A. Barry Rand, Edward W. Barnholt, Gerald Grinstein and Robert J. Herbold as directors continued after the meeting. (c) The ratification of the appointment of PricewaterhouseCoopers LLP as the company's independent accountants for the 2001 fiscal year was approved by a vote of 391,052,563 shares in favor, 975,275 shares against, and 1,623,275 shares abstaining. (d) The Agilent Technologies, Inc. 1999 Stock Plan and the increase in the share reserve of 45,000,000 shares thereunder was approved by a vote of 171,645,739 for, 132,208,415 against, and 3,671,928 abstaining. 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 31 of this report. (b) Reports on Form 8-K: None. 29 <PAGE> 30 AGILENT TECHNOLOGIES, INC. 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. Dated: March 19, 2000 By: /s/ ROBERT R. WALKER ------------------------------ Robert R. Walker Executive Vice President and Chief Financial Officer 30 <PAGE> 31 AGILENT TECHNOLOGIES INC. EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 1 Not applicable. 2.1 Master Separation and Distribution Agreement between Hewlett-Packard and the Company effective as of August 12, 1999. Incorporated by reference from Exhibit 2.1 of the Company's Registration Statement on Form S-1, Registration No. 333-85249 ("S-1"). 2.2 General Assignment and Assumption Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.2 of the Company's S-1. 2.3 Master Technology Ownership and License Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.3 of the Company's S-1. 2.4 Master Patent Ownership and License Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.4 of the Company's S-1. 2.5 Master Trademark Ownership and License Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.5 of the Company's S-1. 2.6 ICBD Technology Ownership and License Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.6 of the Company's S-1. 2.7 Employee Matters Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.7 of the Company's S-1. 2.8 Tax Sharing Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.8 of the Company's S-1. 2.9 Master IT Service Level Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.9 of the Company's S-1. 2.10 Real Estate Matters Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.10 of the Company's S-1. 2.11 Environmental Matters Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.11 of the Company's S-1. 2.12 Master Confidential Disclosure Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.12 of the Company's S-1. 2.13 Indemnification and Insurance Matters Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.13 of the Company's S-1. 2.14 Non U.S. Plan. Incorporated by reference from Exhibit 2.14 of the Company's S-1. 2.15 Agreement and Plan of Merger, dated as of November 24, 2000, by and among Agilent Technologies, Inc., Tahoe Acquisition Corp. and Objective Systems Integrators, Inc. Incorporated by reference from Exhibit 99.1(A) of the Schedule 13D filed by Agilent Technologies, Inc. on December 4, 2000. 2.16 Tender and Voting Agreement, dated as of November 24, 2000, by and among Agilent Technologies, Inc., Tahoe Acquisition Corp. and Objective Systems Integrators, Inc. Incorporated by reference from Exhibit 99.1(B) of the Schedule 13D filed by Agilent Technologies, Inc. on December 4, 2000. 2.17 Asset Purchase Agreement between the Company and Philips dated as of November 17, 2000 </TABLE> 31 <PAGE> 32 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 3.1 Amended and Restated Certificate of Incorporation. Incorporated by reference from Exhibit 3.1 of the Company's S-1. 3.2 Bylaws. Incorporated by reference from Exhibit 3.2 of the Company's S-1. 4.1 Preferred Stock Rights Agreement between the Company and Harris Trust and Savings Bank dated as of May 12, 2000. Incorporated by reference from Exhibit 1 of the Company's Form 8-A, filed on May 17, 2000. 5-9 Not applicable. 10.1 Employee Stock Purchase Plan. Incorporated by reference from Exhibit 10.1 of the Company's S-1.* 10.2 1999 Stock Plan. Incorporated by reference from Exhibit 10.2 of the Company's S-1.* 10.3 1999 Non-Employee Director Stock Plan. Incorporated by reference from Exhibit 10.3 of the Company's S-1.* 10.4 Yokogawa Electric Corporation and Hewlett-Packard Company Agreement for the Redemption and Sale of Shares and Termination of Joint Venture Relationship. Incorporated by reference from Exhibit 10.4 of the Company's S-1. 10.5 Form of Indemnification Agreement entered into by the Company with each of its directors and executive officers. Incorporated by reference from Exhibit 10.5 of the Company's S-1.* 10.6 Executive Deferred Compensation Plan. Incorporated by reference from the Company's Form 10-K filed January 25, 2000.* 10.7 Employee Stock Purchase Plan. Incorporated by reference from the Company's Form S-8 filed September 29, 2000.* 10.8 Five Year Credit Agreement dated as of November 5, 1999. Incorporated by reference from Exhibit 2.15 of the Company's S-1. 10.9 Amended and Restated 364-Day Credit Agreement dated November 3, 2000. Incorporated by reference from Exhibit (d)(11) of the Company's Form SC TO-T/A as filed with the Commission on January 3, 2001. 10.10 Asset Purchase Agreement, dated September 29, 2000, between Agilent Technologies, Inc. and The CIT Group/Equipment Financing, Inc. 11. See Item 5 in Notes to Condensed Consolidated Financial Statements on page 8. 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. Not applicable. 28. Not applicable. 99. None. </TABLE> ---------- * Indicates management contract or compensatory plan, contract or arrangement. 32 </TEXT> </DOCUMENT>

2001

0QTR1

AAPL

https://www.sec.gov/Archives/edgar/data/320193/000091205701004642/a2038036z10-q.txt

<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>a2038036z10-q.txt <DESCRIPTION>10-Q <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 December 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________. Commission file number 0-10030 ----------- APPLE COMPUTER, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ----------- CALIFORNIA 942404110 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 1 Infinite Loop Cupertino, California 95014 (ADDRESS OF PRINCIPAL EXECUTIVE 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 --- --- 346,028,976 shares of Common Stock Issued and Outstanding as of January 30, 2001 <PAGE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in millions, except share and per share amounts) <TABLE> <CAPTION> Three Months Ended ------------------ December 30, 2000 January 1, 2000 ----------------- --------------- <S> <C> <C> Net sales $1,007 $2,343 Cost of sales 1,028 1,736 --------- --------- Gross margin (21) 607 --------- --------- Operating expenses: Research and development 102 90 Selling, general, and administrative 297 319 Special charges: Executive bonus -- 90 Restructuring costs -- 8 --------- --------- Total operating expenses 399 507 --------- --------- Operating income (loss) (420) 100 Gains from sales of investments 71 134 Unrealized loss on convertible securities (13) -- Interest and other income, net 67 40 --------- --------- Total interest and other income, net 125 174 --------- --------- Income (loss) before provision (benefit) for income taxes (295) 274 Provision (benefit) for income taxes (88) 91 --------- --------- Income (loss) before accounting change (207) 183 Cumulative effect of accounting change, net of income taxes of $5 12 -- --------- --------- Net income (loss) $ (195) $ 183 ========= ========= Earnings (loss) per common share before accounting change: Basic $(0.61) $ 0.57 Diluted $(0.61) $ 0.51 Earnings (loss) per common share after accounting change: Basic $(0.58) $ 0.57 Diluted $(0.58) $ 0.51 Shares used in computing earnings (loss) per share (in thousands): Basic 337,170 322,077 Diluted 337,170 356,834 </TABLE> See accompanying notes to condensed consolidated financial statements. 2 <PAGE> APPLE COMPUTER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions, except share amounts) ASSETS: <TABLE> <CAPTION> December 30, 2000 September 30, 2000 ----------------- ------------------ <S> <C> <C> Current assets: Cash and cash equivalents $1,737 $1,191 Short-term investments 2,328 2,836 Accounts receivable, less allowances of $61 and $64, respectively 441 953 Inventories 21 33 Deferred tax assets 231 162 Other current assets 168 252 ------ ------ Total current assets 4,926 5,427 Property, plant and equipment, net 325 313 Non-current debt and equity investments 447 786 Other assets 288 277 ------ ------ Total assets $5,986 $6,803 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 637 $1,157 Accrued expenses 1,000 776 ------ ------ Total current liabilities 1,637 1,933 Long-term debt 311 300 Deferred tax liabilities 326 463 ------ ------ Total liabilities 2,274 2,696 ------ ------ Commitments and contingencies Shareholders' equity: Series A non-voting convertible preferred stock, no par value; 150,000 shares authorized, 3,300 and 75,750 issued and outstanding, respectively 3 76 Common stock, no par value; 900,000,000 shares authorized; 345,307,408 and 335,676,889 shares issued and outstanding, respectively 1,578 1,502 Retained earnings 2,090 2,285 Accumulated other comprehensive income 41 244 ------ ------ Total shareholders' equity 3,712 4,107 ------ ------ Total liabilities and shareholders' equity $5,986 $6,803 ====== ====== </TABLE> See accompanying notes to condensed consolidated financial statements. 3 <PAGE> APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) <TABLE> <CAPTION> Three Months Ended ------------------ December 30, 2000 January 1, 2000 ----------------- --------------- <S> <C> <C> Cash and cash equivalents, beginning of the period $ 1,191 $ 1,326 ------- ------- Operating: Net income (loss) (195) 183 Cumulative effect of accounting change, net of taxes (12) -- Adjustments to reconcile net income to cash generated (used) by operating activities: Depreciation and amortization 24 20 Provision for deferred income taxes (92) 64 Loss on sale of property, plant, and equipment -- 3 Gains from sales of investments (71) (134) Unrealized loss on convertible securities 13 -- Changes in operating assets and liabilities: Accounts receivable 512 (211) Inventories 12 5 Other current assets 116 4 Other assets (16) 3 Accounts payable (520) 362 Other current liabilities 216 74 ------- ------- Cash generated by (used for) operating activities (13) 373 ------- ------- Investing: Purchase of short-term investments (634) (693) Proceeds from maturities of short-term investments 1,142 519 Purchase of long-term investments (1) -- Purchase of property, plant, and equipment (22) (38) Proceeds from sales of equity investments 74 136 Other (3) (13) ------- ------- Cash generated by (used for) investing activities 556 (89) ------- ------- Financing: Proceeds from issuance of common stock 3 17 Cash used for repurchase of common stock -- (41) ------- ------- Cash generated by (used for) financing activities 3 (24) ------- ------- Increase in cash and cash equivalents 546 260 ------- ------- Cash and cash equivalents, end of the period $ 1,737 $ 1,586 ======= ======= Supplemental cash flow disclosures: Cash paid for interest $ -- $ -- Cash paid for income taxes, net $ 9 $ 8 Noncash transactions: Issuance of common stock for conversion of Series A Preferred Stock $ 73 $ -- </TABLE> See accompanying notes to condensed consolidated financial statements. 4 <PAGE> APPLE COMPUTER, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND PREPARATION Interim information is unaudited; however, in the opinion of the Company's management, all adjustments of a normal recurring nature necessary for a fair statement of interim periods presented have been included. The results for interim periods are not necessarily indicative of results to be expected for the entire year. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto for the fiscal year ended September 30, 2000, included in its Annual Report on Form 10-K for the year ended September 30, 2000 (the 2000 Form 10-K). Approximately every six years, the Company reports a 53-week fiscal year to align its fiscal quarters with calendar quarters by adding a week to its first fiscal quarter. Consequently, an additional week was added to the first quarter of fiscal 2000. DERIVATIVE FINANCIAL INSTRUMENTS On October 1, 2000, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. Net of the related income tax effect of approximately $5 million, adoption of SFAS No. 133 resulted in a favorable cumulative-effect-type adjustment to net income of approximately $12 million. Net of the related income tax effect of approximately $5 million, adoption of SFAS No. 133 resulted in a favorable cumulative-effect-type adjustment to other comprehensive income of approximately $12 million, all of which is expected to be reclassified to earnings by the end of the third quarter of fiscal 2001. Management does not believe that ongoing application of SFAS No. 133 will significantly alter the Company's hedging strategies. However, its application may increase the volatility of other income and expense and other comprehensive income. For derivative instruments that hedge the exposure of variability in expected future cash flows that is attributable to a particular risk and that are designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining net gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows on the hedged item, if any, is recognized in current earnings. For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk and that are designated as fair value hedges, the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. The net gain or loss on a derivative instrument that is designated as, and is effective as, an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment to the extent it is effective as a hedge. For derivative instruments not designated as hedging instruments, changes in fair value are recognized in earnings in the current period. For foreign currency forward contracts designated as cash flow hedges, hedge effectiveness is measured based on changes in the fair value of the contract attributable to changes in the forward exchange rate. Changes in the expected future cash flows on the forecasted hedged transaction and changes in the fair value of the forward hedge are both measured from the contract rate to the forward exchange rate associated with the forward contract's maturity date. 5 <PAGE> For currency option contracts, hedge effectiveness is assessed based on changes in the option's intrinsic value. Apple defines intrinsic value as the present value of the gain or loss on the option contract calculated from the option's strike price to the forward rate associated with the option's cash settlement date. Hedge effectiveness is assessed by comparing the present value of the cumulative change in expected future cash flows on the forecasted hedged transaction attributable to the hedged risk with the cumulative change in the intrinsic value of the option. Changes in the expected future cash flows on the forecasted transaction and changes in the intrinsic value of the option hedge are both measured from the option strike price to the forward exchange rate. Changes in fair value of the option contract attributable to time value are excluded from the measurement of hedge effectiveness and are recognized in current earnings. For interest rate swap agreements qualifying as fair value hedges, the Company assumes no ineffectiveness as each interest rate swap meets the criteria for accounting under the short-cut method defined in SFAS No. 133. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No. 101, as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements and provides guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. The Company adopted SAB No. 101 in the first quarter of fiscal year 2001. Adoption of this guidance did not have a material impact on the Company's financial position or results of operations. NOTE 2 - EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional common shares that would have been outstanding if 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. Common stock options and convertible preferred stock were not included in the computation of diluted loss per share in the first quarter of 2001 as their effect was antidilutive. On June 21, 2000, the Company effected a two-for-one stock split in the form of a Common Stock dividend to shareholders of record as of May 19, 2000. All per share data and numbers of Common shares have been retroactively adjusted to reflect the stock split. 6 <PAGE> The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except net income (loss) and per share amounts): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED ------------------------------- 12/30/00 1/1/00 -------- ------ <S> <C> <C> Numerator (in millions): Net income (loss) $ (195) $ 183 -------- -------- Denominator: Denominator for basic earnings (loss) per share -- weighted- average shares outstanding 337,170 322,077 Effect of dilutive securities: Convertible preferred stock -- 18,182 Dilutive options -- 16,575 -------- -------- Dilutive potential common shares -- 34,757 -------- -------- Denominator for diluted earnings (loss) per share 337,170 356,834 ======== ======== Basic earnings (loss) per share before accounting change $ (0.61) $ 0.57 Cumulative effect of accounting change, net of tax $ 0.03 $ -- -------- -------- Basic earnings (loss) per share after accounting change $ (0.58) $ 0.57 ======== ======== Diluted earnings (loss) per share before accounting change $ (0.61) $ 0.51 Cumulative effect of accounting change, net of tax $ 0.03 $ -- -------- -------- Diluted earnings (loss) per share after accounting change $ (0.58) $ 0.51 ======== ======== </TABLE> Options to purchase approximately 14.8 million shares of common stock that were outstanding at January 1, 2000, were not included in the computation of diluted earnings per share for the first quarter of 2000 because the options' exercise price was greater than the average market price of the Company's common stock during this period and, therefore, the effect would be antidilutive. At December 30, 2000, the Company had options to purchase approximately 90.6 million shares of its common stock outstanding, all of which were excluded from the computation of diluted loss per share for the first quarter of 2001 because the effect would have been antidilutive. 7 <PAGE> NOTE 3 - CONSOLIDATED FINANCIAL STATEMENT DETAILS (IN MILLIONS) <TABLE> <CAPTION> INVENTORIES 12/30/00 9/30/00 -------- ------- <S> <C> <C> Purchased parts $ 2 $ 1 Work in process 3 2 Finished goods 16 30 -------- ------- Total inventories $21 $33 ======== ======= PROPERTY, PLANT, AND EQUIPMENT 12/30/00 9/30/00 -------- ------- Land and buildings $ 332 $ 324 Machinery and equipment 190 185 Office furniture and equipment 63 60 Leasehold improvements 129 131 Accumulated depreciation and amortization (389) (387) -------- ------- Net property, plant, and equipment $ 325 $ 313 ======== ======= ACCRUED EXPENSES 12/30/00 9/30/00 -------- ------- Accrued compensation and employee benefits $ 182 $ 176 Accrued marketing and distribution 229 149 Accrued warranty and related costs 101 108 Other current liabilities 488 343 -------- ------- Total accrued expenses $1,000 $ 776 ======== ======= INTEREST AND OTHER INCOME, NET THREE MONTHS ENDED ---------------------------------- 12/30/00 1/1/00 -------- ------- Interest income $ 64 $ 47 Interest expense (5) (5) Other income (expense), net 8 (2) -------- ------- Interest and other income (expense), net $ 67 $ 40 ======== ======= </TABLE> NOTE 4 - NON-CURRENT DEBT AND EQUITY INVESTMENTS AND OTHER STRATEGIC INVESTMENTS The Company holds significant investments in ARM Holdings plc (ARM), Akamai Technologies, Inc. (Akamai) and EarthLink Network, Inc. (EarthLink). These investments are reflected in the consolidated balance sheets as non-current debt and equity investments and have been categorized as available-for-sale requiring that they be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. If it is determined that a decline in value of any of these investments is other than temporary, then the investment's basis would be written down to fair value, and the write down would be included in earnings as a loss. All realized gains on the sale of these investments have been included in other income. The Company believes it is likely there will be significant fluctuations in the fair value of these investments in the future. The Company has additional minority debt and equity investments of approximately $34 million in several privately held technology companies. These investments, which are reflected in the consolidated balance sheets in other assets, are inherently risky because the products of these companies may be under development and/or because the markets for the technologies or products these companies have under development are typically in the early stages of development. 8 <PAGE> ARM HOLDINGS ARM is a publicly held company in the United Kingdom involved in the design and licensing of high performance microprocessors and related technology. As of September 30, 2000, the Company held 34.8 million shares of ARM stock with a fair value of $383 million. During the first quarter of 2001, the Company sold approximately 3.8 million shares of ARM stock for net proceeds of approximately $35 million and a gain before taxes of $35 million. As of December 30, 2000, the Company holds 31 million shares of ARM stock with a fair value of $234 million. AKAMAI In June 1999, the Company invested $12.5 million in Akamai, a global Internet content delivery service. The investment was in the form of convertible preferred stock that converted into 4.1 million shares of Akamai common stock (adjusted for subsequent stock splits) at the time of Akamai's initial public offering in October 1999. Beginning in the first quarter of 2000, the Company categorized its shares in Akamai as available-for-sale. The fair value of the Company's investment in Akamai was approximately $216 million as of September 30, 2000. During the first quarter of 2001, the Company sold 1 million shares of Akamai stock for net proceeds of approximately $39 million and a gain before taxes of approximately $36 million. As of December 30, 2000, the Company holds approximately 3.1 million shares of Akamai stock with a fair value of approximately $66 million. EARTHLINK In January 2000, the Company invested $200 million in EarthLink, an Internet service provider (ISP). The investment is in EarthLink's Series C Convertible Preferred Stock, which is convertible by the Company after January 4, 2001, into approximately 7.1 million shares of EarthLink common stock. Concurrent with this investment, EarthLink and the Company entered into a multi-year agreement to deliver ISP service to Macintosh users in the United States. Under the terms of the agreement, the Company profits from each new Mac customer that subscribes to EarthLink's ISP service for a specified period of time, and EarthLink is the default ISP in Apple's Internet Setup Software included with all Macintosh computers sold in the United States. The fair value of the Company's investment in EarthLink was approximately $36 million as of December 30, 2000. SAMSUNG During the fourth quarter of 1999, the Company invested $100 million in Samsung Electronics Co., Ltd. (Samsung), to assist in the further expansion of Samsung's TFT-LCD flat-panel display production capacity. The investment, in the form of three year unsecured bonds, is convertible into approximately 550,000 shares of Samsung common stock beginning in July 2000. The bonds carry an annual coupon rate of 2% and pay a total yield to maturity of 5% if redeemed at their maturity. This investment is reflected in the consolidated balance sheets as a non-current debt and equity investment. The Company categorizes its investment in Samsung as available-for-sale requiring that it be carried at fair value with unrealized gains and losses, net of taxes, reported in equity as a component of accumulated other comprehensive income. With the adoption of SFAS No. 133 on October 1, 2000, the Company is required to account for the conversion option embedded in the Samsung bonds separately from the related debt. The conversion feature is carried at fair value with any changes in fair value recognized in earnings in the period in which they occur. Included in the $17 million gross SFAS No. 133 transition adjustment recorded in earnings was a $23 million favorable adjustment for the restatement to fair value as of October 1, 2000, of the derivative component of the Company's investment in Samsung. To adjust the carrying value of the derivative component of its investment in Samsung to fair value as of December 30, 2000, the Company recognized an unrealized loss of approximately $13 million during the first quarter of 2001. The Company believes it is likely there will be significant fluctuations in the fair value of the embedded conversion option of this investment in the future. 9 <PAGE> NOTE 5 - SHAREHOLDER'S EQUITY STOCK REPURCHASE PLAN In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. During 2000, the Company repurchased a total of 2.55 million shares of its common stock at a cost of $116 million. No shares were repurchased in the first quarter of 2001. Since inception of the plan, the Company has repurchased a total of 5.05 million shares of its common stock at a cost of $191 million. PREFERRED STOCK In August 1997, the Company and Microsoft Corporation (Microsoft) entered into patent cross licensing and technology agreements. In addition, Microsoft purchased 150,000 shares of Apple Series A nonvoting convertible preferred stock ("preferred stock") for $150 million. Upon any sale of the preferred stock by Microsoft, the shares will automatically be converted into shares of Apple common stock at a conversion price of $8.25 per share, and the shares can be converted at Microsoft's option at such price after August 5, 2000. On September 15, 2000, 74,250 shares of preferred stock were converted to 9 million shares of the Company's common stock. In the first quarter of 2001, an additional 72,400 shares of preferred stock were converted to 8.8 million shares of the Company's common stock. NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivatives to partially offset its business exposure to currency and interest rate risk. Forward and option contracts are used to offset the foreign exchange risk on certain existing assets and liabilities and to hedge the foreign exchange risk of future cash flows on certain forecasted revenues and cost of sales. From time to time, the Company enters into interest rate swap agreements to modify the interest rate profile of certain investments and debt. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments. The Company records all derivatives on the balance sheet at fair value. FOREIGN EXCHANGE RISK MANAGEMENT The Company enters into foreign exchange forward and option contracts with financial institutions primarily to protect against currency exchange risk associated with expected future cash flows, existing assets and liabilities, and certain firmly committed transactions. Generally, the Company's practice is to hedge a majority of its existing material foreign exchange transaction exposures. However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and availability of appropriate hedging instruments. 10 <PAGE> In accordance with SFAS No. 133, hedges related to anticipated transactions are designated and documented at hedge inception as cash flow hedges and evaluated for hedge effectiveness quarterly. For currency forward contracts, hedge effectiveness is measured based on changes in the fair value of the contract attributable to changes in the forward exchange rate. Changes in the expected future cash flows on the forecasted hedged transaction and changes in the fair value of the forward hedge are both measured from the contract rate to the forward exchange rate associated with the forward contract's maturity date. For currency option contracts, hedge effectiveness is measured based on changes in the option's intrinsic value. Apple defines intrinsic value as the present value of the gain or loss on the option contract calculated from the option's strike price to the forward rate associated with the option's cash settlement date. Hedge effectiveness is assessed by comparing the present value of the cumulative change in expected future cash flows on the forecasted transaction attributable to the hedged risk with the cumulative change in the intrinsic value of the option. Changes in the expected future cash flows on the forecasted transaction and changes in the intrinsic value of the option hedge are both measured from the option strike price to the forward exchange rate. Changes in fair value of the option contract attributable to time value are excluded from the measurement of hedge effectiveness and are recognized in current earnings. The effective portions of the net gains or losses on derivative instruments are reported as components of other comprehensive income in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any residual changes in fair value of the instruments, including option time value or ineffectiveness are recognized in current earnings in interest and other income and expense. To protect gross margins from fluctuations in foreign currency exchange rates, the Company's U.S. dollar functional subsidiaries hedge a portion of forecasted foreign currency revenues, and the Company's non-U.S. dollar functional subsidiaries selling in foreign currencies hedge a portion of forecasted inventory purchases not denominated in the subsidiaries' functional currency. Other comprehensive income associated with hedges of foreign currency sales is recognized as a component of net sales in the same period as the related sales are recognized, and other comprehensive income related to inventory purchases is recognized as a component of cost of sales in the same period as the related costs are recognized. Typically, the Company hedges portions of its forecasted foreign currency exposure associated with revenues and inventory purchases over a time horizon of 3 to 9 months. The Company also enters into foreign currency forward and option contracts to offset the foreign exchange gains and losses generated by the remeasurement of certain recorded assets and liabilities in non-functional currencies. Changes in the fair value of these derivatives are recognized in current earnings in interest and other income as offsets to the changes in the fair value of the related assets or liabilities. The Company may enter into foreign currency forward contracts to offset the translation and economic exposure of a net investment position in a foreign subsidiary. Hedge effectiveness on forwards designated as net investment hedges is measured based on changes in the fair value of the contract attributable to changes in the spot exchange rate. The effective portion of the net gain or loss on a derivative instrument designated as a hedge of the net investment position in a foreign subsidiary is reported in the same manner as a foreign currency translation adjustment. Any residual changes in fair value of the forward contract, including changes in fair value based on the differential between the spot and forward exchange rates are recognized in current earnings in interest and other income and expense. For the quarter ended December 30, 2000, the Company recorded a net favorable adjustment of $4.0 million in the accumulated translation adjustment for derivatives designated as net investment hedges. 11 <PAGE> As discussed above, the Company enters into foreign currency option contracts as designated cash flow hedges and, sometimes, as items which provide an offset to the remeasurement of certain recorded assets and liabilities denominated in non-functional currencies. All changes in the fair value of these derivative contracts based on changes in option time value are recorded in current earnings in interest and other income and expense. Due to market movements, changes in option time value can lead to increased volatility in other income and expense. For the quarter ended December 30, 2000, the Company recorded a net loss of $7.5 million in interest and other income related to adjusting to fair value the change in time value of outstanding option contracts. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable that the forecasted hedged transaction will not occur in the initially identified time period. Deferred gains and losses in other comprehensive income associated with such derivative instruments are immediately reclassified into earnings in interest and other income. Any subsequent changes in fair value of such derivative instruments are also reflected in current earnings unless they are re-designated as hedges of other transactions. During the first quarter of 2001, the Company recorded a net gain of $5.1 million in interest and other income related to the loss of hedge designation on discontinued cash flow hedges due to changes in the Company's forecast of future net sales and cost of sales. INTEREST RATE RISK MANAGEMENT The Company sometimes enters into interest rate derivative transactions, including interest rate swaps, collars, and floors, with financial institutions in order to better match the Company's floating-rate interest income on its cash equivalents and short-term investments with its fixed-rate interest expense on its long-term debt, and/or to diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. The Company may also enter into interest rate contracts that are intended to reduce the cost of the interest rate risk management program. The Company assumes no ineffectiveness with regard to the debt swaps as each interest rate swap meets the criteria for accounting under the short-cut method defined in SFAS No. 133 for fair value hedges of debt instruments. Accordingly, no net gains or losses were recorded in income relative to the Company's underlying debt and interest rate swaps. The Company's asset swaps do not qualify for hedge accounting treatment and are recorded at fair value on the balance sheet with associated gains and losses recorded in interest and other income. Included in the transition adjustment for SFAS No. 133 was an unfavorable adjustment before tax of approximately $5.7 million that adjusted the asset swaps to fair value as of October 1, 2000. For the quarter ended December 30, 2000, the Company recorded a before tax gain on the asset swaps of approximately $3.8 million. DERIVATIVE ACTIVITY IN ACCUMULATED OTHER COMPREHENSIVE INCOME As of December 30, 2000, the Company had a net deferred gain associated with cash flow hedges of approximately $13 million net of taxes, all of which is expected to be reclassified to earnings by the end of the third quarter of fiscal 2001. The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during the period from October 1, 2000 through December 30, 2000 (in millions): <TABLE> <CAPTION> <S> <C> Cumulative effect of adopting SFAS No. 133 $ 12 Changes in fair value of derivatives 11 Gains reclassified from OCI (10) ---- Accumulated derivative gain $ 13 ==== </TABLE> 12 <PAGE> NOTE 7 - COMPREHENSIVE INCOME Comprehensive income is comprised of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The Company's other comprehensive income is comprised of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, changes in fair value of derivatives designated as and effective as cash flow hedges, and unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale. Refer to "Note 4 - Non-Current Debt and Equity Investments and Other Strategic Investments" for additional information regarding unrealized gains and losses on available-for-sale securities and "Note 6 - Derivative Financial Instruments" regarding accounting for derivative financial instruments. The components of comprehensive income, net of tax, are as follows (in millions): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED ------------------------------- 12/30/00 1/1/00 -------- ------- <S> <C> <C> Net income (loss) $ (195) $ 183 Other comprehensive income: Change in unrealized gain on derivative instruments 13 -- Change in accumulated translation adjustment 3 (1) Unrealized gains (losses) on investments (153) 1,233 Reclassification adjustment for investment gains included in net income (66) (101) ------- ------- Total comprehensive income $ (398) $ 1,314 ======= ======= </TABLE> NOTE 8 - SPECIAL CHARGES RESTRUCTURING ACTIONS During the first quarter of 2000, the Company initiated restructuring actions resulting in recognition of an $8 million restructuring charge. This charge was comprised of $3 million for the write-off of various operating assets and $5 million for severance payments to approximately 95 employees associated with consolidation of various domestic and international sales and marketing functions. Of the $5 million accrued for severance, $2.5 million had been spent by September 30, 2000, and an additional $1 million was spent in the first quarter of 2001. Of the $3 million accrued for the write-off of various assets, substantially all was utilized by the end of the second quarter of 2000. EXECUTIVE BONUS During the first quarter of 2000, the Company's Board of Directors approved a special executive bonus for the Company's Chief Executive Officer for past services in the form of an aircraft with a total cost to the company of approximately $90 million, the majority of which is not tax deductible. Approximately half of the total charge is the cost of the aircraft. The other half represents all other costs and taxes associated with the bonus. This executive bonus has been presented outside selling, general, and administrative expenses as a special charge. NOTE 9 - SEGMENT INFORMATION AND GEOGRAPHIC DATA The Company manages its business primarily on a geographic basis. The Company's reportable segments are comprised of the Americas, Europe, and Japan. The Americas segment includes both North and South America. The European segment includes European countries as well as the Middle East and Africa. Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable operating segment provides similar products and services, and the accounting policies of the various segments are the same as those described in the 2000 Form 10-K. 13 <PAGE> The Company evaluates the performance of its operating segments based on net sales and operating income. Operating income for each segment includes revenue, cost of sales, and operating expenses directly attributable to the segment. Net sales are based on the location of the customers. Operating income for each segment excludes other income and expense and certain expenses that are managed outside the reportable segment. Costs excluded from segment operating income include various corporate expenses, income taxes, and nonrecurring charges for purchased in-process research and development, restructuring, and acquisition related costs. Corporate expenses include research and development, manufacturing expenses not included in segment cost of sales, corporate marketing expenses, and other separately managed general and administrative expenses. The Company does not include intercompany transfers between segments for management reporting purposes. Summary information by segment follows (in millions): <TABLE> <CAPTION> Three Months Ended ---------------------- 12/30/00 1/1/00 -------- ------ <S> <C> <C> Americas: Net sales $ 513 $1,189 Operating income (loss) $ (93) $ 166 Europe: Net sales $ 326 $ 626 Operating income (loss) $ (10) $ 114 Japan: Net sales $ 84 $ 412 Operating income (loss) $ (29) $ 114 Other Segments: Net sales $ 84 $ 116 Operating income $ 11 $ 25 </TABLE> A reconciliation of the Company's segment operating income to the condensed consolidated financial statements follows (in millions): <TABLE> <CAPTION> 12/30/00 1/1/00 -------- ------ <S> <C> <C> Segment operating income (loss) (121) 419 Corporate expenses, net (299) (221) Restructuring costs -- (8) Executive bonus -- (90) -------- ------ Total operating income (loss) $(420) $ 100 ======== ====== </TABLE> Information regarding net sales by product is as follows (in millions): <TABLE> <CAPTION> 12/30/00 1/1/00 -------- ------ <S> <C> <C> Power Macintosh $ 267 $ 707 PowerBook 84 212 G4 Cube 14 -- iMac 265 795 iBook 146 351 Software, service, and other net sales 231 278 -------- ------ Total net sales $1,007 $2,343 ======== ====== </TABLE> 14 <PAGE> NOTE 10 - CONTINGENCIES The Company is subject to various legal proceedings and claims that are discussed in detail in the 2000 Form 10-K. The Company is also subject to certain other legal proceedings and claims which have arisen in the ordinary course of business and which have not been fully adjudicated. The results of legal proceedings cannot be predicted with certainty; however, in the opinion of management, the Company does not have a potential liability related to any legal proceedings and claims that would have a material adverse effect on its financial condition or results of operations. The Internal Revenue Service (IRS) has proposed federal income tax deficiencies for the years 1984 through 1991, and the Company has made certain prepayments thereon. The Company contested the proposed deficiencies by filing petitions with the United States Tax Court, and most of the issues in dispute have now been resolved. On June 30, 1997, the IRS proposed income tax adjustments for the years 1992 through 1994. Although most of the issues for these years have been resolved, certain issues still remain in dispute and are being contested by the Company. Management believes adequate provision has been made for any adjustments that may result from tax examinations. 15 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS SECTION AND OTHER PARTS OF THIS FORM 10-Q CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION" BELOW. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE 2000 FORM 10-K AND 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. RESULTS OF OPERATIONS Tabular information (dollars in millions, except per share amounts): <TABLE> <CAPTION> -------------------------------------- -------------------------------------- FIRST FIRST FIRST FOURTH QUARTER QUARTER CHANGE QUARTER QUARTER CHANGE 2001 2000 2001 2000 -------------------------------------- -------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net sales $ 1,007 $ 2,343 (57)% $ 1,007 $ 1,870 (46)% Macintosh CPU unit sales (in thousands) 659 1,377 (52)% 659 1,122 (41)% Gross margin $ (21) $ 607 (103)% $ (21) $ 467 (104)% Percentage of net sales (2.1)% 25.9% (2.1)% 25.0% Research and development $ 102 $ 90 13% $ 102 $ 101 1% Percentage of net sales 10% 4% 10% 5% Selling, general and administrative $ 297 $ 319 (7)% $ 297 $ 282 5% Percentage of net sales 29% 14% 29% 15% Special Charges $ -- $ 98 NM $ -- $ -- NM Gains from sales of investments $ 71 $ 134 (47)% $ 71 $ 83 (14)% Unrealized loss on convertible securities $ (13) $ -- NM $ (13) $ -- NM Interest and other income, net $ 67 $ 40 68% $ 67 $ 62 8% Provision (benefit) for income taxes $ (88) $ 91 (197)% $ (88) $ 59 (249)% Effective tax rate 30% 33% 30% 26% Net income (loss) before accounting change $ (207) $ 183 (213)% $ (207) $ 170 (222)% Effect of accounting change, net $ 12 $ -- NM $ 12 $ -- NM Net income (loss) $ (195) $ 183 (207)% $ (195) $ 170 (215)% Basic earnings (loss) per share before accounting change $ (0.61) $ -- NM $ (0.61) $ -- NM Diluted earnings (loss) per share before accounting change $ (0.61) $ -- NM $ (0.61) $ -- NM Basic earnings (loss) per share $ (0.58) $ 0.57 (202)% $ (0.58) $ 0.52 (212)% Diluted earnings (loss) per share $ (0.58) $ 0.51 (214)% $ (0.58) $ 0.47 (223)% </TABLE> NM: Not Meaningful 16 <PAGE> NET SALES Net sales for geographic operating segments and Macintosh unit sales by geographic segment and by product follow (net sales in millions and Macintosh unit sales in thousands): <TABLE> <CAPTION> Three Months Ended Yr-to-Yr Three Months Ended Sequential ------------------- ------------------- 12/30/00 1/1/00 Change 12/30/00 9/30/00 Change -------- ------ ------ -------- ------- ------ <S> <C> <C> <C> <C> <C> <C> Americas net sales $ 513 $1,189 (57)% $ 513 $1,099 (53)% Europe net sales $ 326 $ 626 (48)% $ 326 $ 369 (12)% Japan net sales $ 84 $ 412 (80)% $ 84 $ 281 (70)% Asia Pacific net sales $ 50 $ 77 (35)% $ 50 $ 86 (42)% Americas Macintosh unit sales 329 708 (54)% 329 688 (52)% Europe Macintosh unit sales 230 389 (41)% 230 224 3% Japan Macintosh unit sales 61 235 (74)% 61 156 (61)% Asia Pacific Macintosh unit sales 39 45 (13)% 39 54 (28)% -------- ------ -------- ------- Total Macintosh unit sales 659 1,377 (52)% 659 1,122 (41)% ======== ====== ======== ======= Power Macintosh unit sales 173 355 (51)% 173 269 (36)% PowerBook unit sales 49 84 (42)% 49 86 (43)% G4 Cube unit sales 29 -- NM 29 107 (73)% iMac unit sales 308 702 (56)% 308 571 (46)% iBook unit sales 100 236 (58)% 100 89 12% -------- ------ -------- ------- Total Macintosh unit sales 659 1,377 (52)% 659 1,122 (41)% ======== ====== ======== ======= </TABLE> FIRST QUARTER FISCAL 2001 Net sales decreased 57% to $1.007 billion in the first quarter of 2001 compared to the same quarter in 2000 and decreased 46% from the fourth quarter of 2000. Both the year-over-year and sequential declines in net sales are attributable to several factors including continued deterioration in worldwide demand for personal computers and rebate programs and price cuts instituted by the Company during the quarter that negatively affected the Company's net sales for the quarter by approximately $138 million. In addition, the Company implemented a plan to reduce substantially the level of inventory in its distribution channels from the amounts at the end of fiscal 2000 to more normal levels by the end of the first quarter of 2001. The Company ended fiscal 2000 with substantially more inventory in its distribution channels than planned due to the lower than expected sell-through of the Company's products during the fourth quarter of that year. The Company reduced channel inventory during the first quarter by approximately 300,000 units. These factors contributed to the 52% year-over-year decline in total Macintosh unit sales that were experienced across the Company's entire product line. These factors also reduced the average revenue per Macintosh unit shipped (a function of total net sales generated by hardware shipments and total Macintosh CPU unit sales) during the first quarter of 2001 to $1,476, a decline of approximately 12% from the same period in 2000. OUTLOOK For all of 2001, the Company anticipates net sales will decline as compared to 2000 to approximately $6 billion. The Company currently expects that it will be profitable, before the effect of any investment gains, during each of the last three quarters of 2001. The foregoing statements concerning the Company's anticipated net sales for all of 2001 and profitability for the remainder of fiscal 2001 are forward-looking. The Company's actual results could differ. The Company's future operating results and financial condition are dependent upon general economic conditions, market conditions within the PC industry, and the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet the dynamic conditions within the highly competitive market for personal computers. Some of the potential risks and uncertainties that could affect the Company's future operating results and financial condition are discussed throughout this Item 2, including the discussion under the heading "Factors That May Affect Future Results and Financial Condition." 17 <PAGE> SEGMENT OPERATING PERFORMANCE The Company manages its business primarily on a geographic basis. The Company's reportable geographic segments include the Americas, Europe, and Japan. The Americas segment includes both North and South America. The European segment includes European countries as well as the Middle East and Africa. The Japan segment includes only Japan. Each geographic operating segment provides similar hardware and software products and similar services. Further information regarding the Company's operating segments may be found in this Form 10-Q in the Notes to Condensed Consolidated Financial Statements at Note 9, "Segment Information and Geographic Data." AMERICAS AND EUROPE The operating results of these two segments reflect the Company's overall results. Net sales in the Americas segment during the first quarter of fiscal 2001 decreased $676 million or 57% compared to the same period in 2000. Macintosh unit sales in the Americas decreased 54% on a year-over-year basis. Net sales in the Europe segment decreased $300 million or 48% during the first quarter of 2001 as compared to the same quarter in 2000, while the segment's Macintosh unit sales decreased 41%. These two segments combined represent approximately 83% of the Company's total net sales during the first quarter of 2001 and account for approximately $103 million of the Company's total operating loss for the first quarter of 2001. JAPAN Net sales in Japan declined 80% or $328 million and Macintosh unit sales declined 74% during the first quarter of 2001 as compared to the same quarter in 2000. The Company's Japan segment was most impacted by the Company's plan to reduce channel inventory during the first quarter of 2001 which is reflected in the 91% decrease in unit sales of iMac in Japan during the first quarter of 2001 compared to the same quarter in 2000. GROSS MARGIN Gross margin for the first quarter of 2001 was (2.1)% compared to 25.9% for the same quarter in 2000 and 25.0% for the fourth quarter of 2000. In addition to lower than normal net sales, margins were negatively impacted by the rebate programs and price cuts discussed above instituted by the Company during the first quarter that decreased revenue by approximately $138 million. Additionally, actual and forecasted declines in net sales caused the Company to recognize during the first quarter approximately $122 million of charges associated with purchase order cancellations and loss commitments for component purchases. Without these charges, gross margin for the first quarter of 2001 would have been approximately 21%. There can be no assurance that historical or current gross margin will be maintained, targeted gross margin levels will be achieved, or current margins on existing individual products will be maintained. In general, gross margin and margins on individual products will remain under significant downward pressure due to a variety of factors, including continued industry wide global pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of raw material and outside manufacturing services, and potential changes to the Company's product mix, including higher unit sales of consumer products with lower average selling prices and lower gross margins. In response to these downward pressures, the Company expects it will continue to take pricing actions with respect to its products. Gross margin could also be affected by the Company's ability to effectively manage quality problems and warranty costs and to stimulate demand for certain of its products. The Company's operating strategy and pricing take into account anticipated changes in foreign currency exchange rates over time; however, the Company's results of operations can be significantly affected in the short term by fluctuations in exchange rates. OPERATING EXPENSES Selling, general and administrative expenses, excluding special charges, decreased $22 million or 7% during the first quarter of 2001 as compared to the same period in 2000. The decrease in selling, general and administrative expenses during the first quarter of 2001 is the result of lower variable selling and marketing expenses resulting from the year-over-year 57% decrease in net sales and due to lower discretionary spending on marketing and advertising. Expenditures for research and development increased 13% between the first quarter of fiscal 2001 and the same quarter in 2000 primarily as a result of increased spending in 2001 to support multiple new product manufacturing ramps and increased research and development headcount of approximately 8%. 18 <PAGE> During the first quarter of fiscal 2000, the Company initiated restructuring actions resulting in recognition of an $8 million restructuring charge. This charge was comprised of $3 million for the write-off of various operating assets and $5 million for employee termination benefits associated with consolidation of various domestic and international sales and marketing functions. Of the $5 million accrued for severance, $2.5 million had been spent by September 30, 2000, and an additional $1 million was spent in the first quarter of 2001. Of the $3 million accrued for the write-off of various assets, substantially all was utilized by the end of the second quarter of 2000. In December 1999, the Company's Board of Directors approved a special executive bonus for the Company's Chief Executive Officer for past services in the form of an aircraft with a total cost to the company of approximately $90 million, the majority of which is not tax deductible. Approximately half of the total charge is the cost of the aircraft. The other half represents all other costs and taxes associated with the purchase. INTEREST AND OTHER INCOME (EXPENSE), NET Interest and other income and expense (net) increased $27 million or 68% to $67 million during the first quarter of fiscal 2001 compared to the same quarter in 2000. This increase is attributable primarily to two factors. First, interest income increased approximately $17 million or 36% between the first quarter of 2001 and the same quarter in 2000 as a result of higher cash, cash equivalents, and short-term investment balances and due to an increase in the overall yield earned on the Company's investment portfolio. Second, net gains from foreign exchange and net gains classified in other income and expense associated with derivative instruments were approximately $10 million higher in the first quarter of 2001 compared to the same period in 2000. For the second half of fiscal 2001, the Company expects a moderate decline in net interest income as a result of declining market interest rates. During the first quarter of 2001, the Company sold 3.8 million shares of ARM stock for net proceeds of approximately $35 million and a gain before taxes of $35 million. During the first quarter of 2001, the Company also sold 1 million shares of Akamai stock for net proceeds of approximately $39 million and a gain before taxes of $36 million. On October 1, 2000, the Company adopted SFAS No. 133. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. Net of the related income tax effect of approximately $5 million, adoption of SFAS No. 133 resulted in favorable cumulative-effect-type adjustment to net income of approximately $12 million. The $17 million gross transition adjustment was comprised of a $23 million favorable adjustment for the restatement to fair value of the derivative component of the Company's investment in Samsung, partially offset by the unfavorable adjustments to certain foreign currency and interest rate derivatives. Management does not believe that adoption of SFAS No. 133 will significantly alter the Company's hedging strategies. However, its application may increase the volatility of other income and expense and other comprehensive income. SFAS No. 133 also requires the Company to adjust the carrying value of the derivative component of its investment in Samsung to earnings on a go-forward basis, the before tax effect of which during the first quarter of 2001 was an unrealized loss of approximately $13 million. PROVISION FOR INCOME TAXES As of December 30, 2000, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $612 million before being offset against certain deferred tax liabilities for presentation on the Company's balance sheet. This asset is generally realizable based on the ability to offset existing deferred tax liabilities. As of December 30, 2000, a valuation allowance of $30 million was recorded against the deferred tax asset for the benefits of tax losses that may not be realized. The valuation allowance relates principally to the operating loss carryforwards acquired from NeXT, the utilization of which is subject to certain limitations imposed by the Internal Revenue Code. 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. 19 <PAGE> The Company's effective tax rate for the three months ended December 30, 2000, was approximately 30%. This effective rate is less than the statutory federal income tax rate of 35% due primarily to the reversal of a portion of the previously established valuation allowance for tax loss and credit carryforwards and certain undistributed foreign earnings for which no U.S. taxes will be provided. The Company's effective tax rate for the first quarter of 2000 was approximately 33% and includes the effect of the special executive bonus of $90 million accrued during that quarter. The effective tax rate during the first quarter of 2000 without this charge was approximately 25%. THE COMPANY CURRENTLY BELIEVES THAT ITS EFFECTIVE TAX RATE FOR THE REMAINDER OF FISCAL 2001 WILL BE APPROXIMATELY 30%. THE FOREGOING-STATEMENTS ARE FORWARD- LOOKING. THE COMPANY'S ACTUAL RESULTS COULD DIFFER BECAUSE OF SEVERAL FACTORS, INCLUDING THOSE SET FORTH BELOW IN THE SUBSECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION." ADDITIONALLY, THE ACTUAL FUTURE TAX RATE WILL BE SIGNIFICANTLY IMPACTED BY THE AMOUNT OF AND JURISDICTION IN WHICH THE COMPANY'S FOREIGN PROFITS ARE EARNED. 20 <PAGE> LIQUIDITY AND CAPITAL RESOURCES The following table presents selected financial information and statistics for each of the fiscal quarters ending on the dates indicated (dollars in millions): <TABLE> <CAPTION> 12/30/00 9/30/00 1/1/00 -------- ------- ------- <S> <C> <C> <C> Cash, cash equivalents, and short-term investments $ 4,065 $ 4,027 $ 3,660 Accounts receivable, net $ 441 $ 953 $ 892 Inventory $ 21 $ 33 $ 15 Working capital $ 3,289 $ 3,494 $ 2,944 Non-current debt and equity investments $ 447 $ 786 $ 2,140 Long-term debt $ 311 $ 300 $ 300 Days sales in accounts receivable (a) 40 46 37 Days of supply in inventory (b) 2 2 1 Days payables outstanding (c) 57 74 66 Operating cash flow (quarterly) $ (13) $ 158 $ 373 </TABLE> (a) Based on ending net trade receivables and most recent quarterly net sales for each period (b) Based on ending inventory and most recent quarterly cost of sales for each period (c) Based on ending accounts payable and most recent quarterly cost of sales adjusted for the change in inventory As of December 30, 2000, the Company had $4.065 billion in cash, cash equivalents, and short-term investments, an increase of $38 million or 1% over the same balances at the end of fiscal 2000. For the first quarter of fiscal 2001, the Company's primary source of cash was $556 million in cash flows from investing activities. Cash generated by investing activities consisted primarily of $1 billion in proceeds from the maturities of short-term investments and $74 million in proceeds from the sale of ARM and Akamai shares. These sources of cash were partially offset by purchases of short-term investments for $634 million. Cash used for operating activities was primarily from a net loss of $195 million and decreases in accounts payable partially offset by a decrease in accounts receivable and an increase in other current liabilities. In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. During 2000, the Company repurchased a total of 2.55 million shares of its common stock at a cost of $116 million. No shares were repurchased in the first quarter of 2001. Since inception of the plan, the Company has repurchased a total of 5.05 million shares of its common stock at a cost of $191 million. The Company believes its balances of cash, cash equivalents, and short-term investments will be sufficient to meet its cash requirements over the next twelve months, including any cash utilized by its stock repurchase plan. However, given the Company's current non-investment grade debt ratings (Standard and Poor's Rating Agency of BB and Moody's Investor Services of Ba2), if the Company should need to obtain short-term borrowings, there can be no assurance such borrowings could be obtained at favorable rates. The inability to obtain such borrowings at favorable rates could materially adversely affect the Company's results of operations, financial condition, and liquidity. NON-CURRENT DEBT AND EQUITY INVESTMENTS The Company holds significant investments in ARM Holdings plc (ARM), Samsung Electronics Co., Ltd. (Samsung), Akamai Technologies, Inc. (Akamai) and EarthLink Network, Inc. (EarthLink). These investments are carried at fair value in the consolidated balance sheets and are classified as non-current debt and equity investments. Any realized gains on the sale of these investments have been included in other income. The Company believes it is likely there will be significant fluctuations in the fair value of these investments in the future. Additional information related to the Company's non-current debt and equity investments may be found in this Form 10-Q in the Notes to Consolidated Financial Statements at Note 4, " Non-Current Debt and Equity Investments and Other Strategic Investments." 21 <PAGE> FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION The Company operates in a rapidly changing environment that involves a number of uncertainties, some of which are beyond the Company's control, that will affect the Company's future results and business and may cause the Company's actual results to differ from those currently expected. Therefore, 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. The personal computer industry is highly competitive and is characterized by aggressive pricing practices, downward pressure on gross margins, frequent introduction of new products, short product life cycles, continual improvement in product price/performance characteristics, price sensitivity on the part of consumers, and a large number of competitors. The Company's results of operations and financial condition have been, and in the future may continue to be, adversely affected by industry wide pricing pressures and downward pressures on gross margins. The personal computer industry has also been characterized by rapid technological advances in software functionality, hardware performance, and features based on existing or emerging industry standards. Further, as the personal computer industry and its customers place more reliance on the Internet, an increasing number of Internet devices that are smaller and simpler than traditional personal computers may compete for market share with the Company's existing products. Several competitors of the Company have either targeted or announced their intention to target certain of the Company's key market segments, including consumer, education, and design and publishing. Additionally, several of the Company's competitors have introduced or announced plans to introduce products that mimic many of the unique design, technical features, and solutions of the Company's products. Many of the Company's competitors have greater financial, marketing, manufacturing, and technological resources, as well as broader product lines and larger installed customer bases than those of the Company. Additionally, the Company's future operating results and financial condition may be affected by overall demand for personal computers and general customer preferences for one platform over another or one set of product features over another. The Company is currently the only maker of hardware using the Mac OS. The Mac OS has a minority market share in the personal computer market, which is dominated by makers of computers utilizing Microsoft Windows operating systems. The Company's future operating results and financial condition are substantially dependent on its ability to continue to develop improvements to the Macintosh platform in order to maintain perceived design and functional advantages over competing platforms. Additional risks and uncertainties that could have an adverse impact on the Company's future operating results and financial condition include, among other things, continued or worsening worldwide and regional economic conditions, risks associated with product introductions and transitions, including the planned introduction of Mac OS X in 2001; risk that the Company will forecast incorrectly and produce or order from third parties excess or insufficient inventories of particular products; the Company's ability to supply products free of latent defects or other faults; increasing dependence on third-parties for manufacturing and other outsourced functions such as logistics; the availability of key components on terms acceptable to the Company; the availability of certain components and services essential to the Company's business currently obtained by the Company from sole or limited sources, including PowerPC RISC microprocessors developed by and obtained from IBM and Motorola and the final assembly of certain of the Company's products; the ability of the Company's suppliers to provide a sufficient supply of microprocessors with price/performance features that compare favorably with those supplied to the Company's competitors; the Company's ability to increase its share of the education market or maintain its existing share of the market; the continued viability of the Company's existing distribution channels; risks associated with international operations, including economic and labor conditions, regional economic problems, political instability, tax laws, and currency fluctuations; the continued support of third-party software developers and the continued availability of third-party software for particular applications; the future availability of any necessary patent or other rights to technology on commercially reasonable terms; fluctuations in the product, geographic, and channel mix of the Company's net sales; the Company's ability to attract, motivate and retain key employees; volatility in and/or impairment of the fair value of certain of the Company's minority debt and equity investments; managing the continuing impact of the European Union's transition to the Euro as its common legal currency; and continued volatility of the Company's stock price. For a discussion of these and other factors affecting the Company's future results and financial condition, see "Item 7 -- Management's Discussion and Analysis -- Factors That May Affect Future Results and Financial Condition" and "Item 1 - Business" in the Company's 2000 Form 10-K. 22 <PAGE> ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK THE INFORMATION PRESENTED BELOW REGARDING MARKET RISK CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS FORM 10-Q REGARDING MARKET RISK. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE 2000 FORM 10-K AND THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q. FOREIGN CURRENCY RISK Overall, the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect the Company's net sales and gross margins as expressed in U.S. dollars. The Company enters into foreign exchange forward and option contracts with financial institutions primarily to protect against currency exchange risk associated with expected future cash flows, existing assets and liabilities, certain firmly committed transactions, and probable but not firmly committed transactions. Generally, the Company's practice is to hedge a majority of its existing material foreign exchange transaction exposures. However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and availability of appropriate hedging instruments. Foreign exchange forward contracts are carried at fair value in other current assets and liabilities. INTEREST RATE RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investments and long-term debt obligations and related derivative financial instruments. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company's general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. While the Company is exposed to interest rate fluctuations in many of the world's leading industrialized countries, the Company's interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash, cash equivalents, and short-term investments as well as costs associated with foreign currency hedges. During the last two years, the Company has entered into interest rate swaps with financial institutions in order to better match the Company's floating-rate interest income on its cash equivalents and short-term investments with its fixed-rate interest expense on its long-term debt, and/or to diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. The Company may also enter into interest rate contracts that are intended to reduce the cost of the interest rate risk management program. The Company does not hold or transact in such financial instruments for purposes other than risk management. RISK MANAGEMENT ACTIVITIES 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 non-hedge portfolios, the Company continually monitors its foreign exchange forward and option positions, and its interest rate swap, option and floor positions both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures, respectively, from both an accounting and an economic perspective. However, given the effective horizons of the Company's risk management activities and the anticipatory nature of the exposures intended to hedge, there can be no assurance the aforementioned programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either foreign exchange or interest rates. In addition, the timing of the accounting for recognition of gains and losses related to derivative 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. On October 1, 2000, the Company adopted SFAS No. 133. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. Management does not believe that adoption of or ongoing application of SFAS No. 133 will significantly alter the Company's hedging strategies. However, its application may increase the volatility of other income and expense and other comprehensive income. The Company's market risks at December 30, 2000, are not significantly different from those discussed "Item 7A. -Disclosures About Market Risk" in the Company's 2000 Form 10-K. Also, refer to "Note 6 - Derivative Financial Instruments," of this Form 10-Q for additional discussion regarding the Company's market risks, its accounting for derivatives, and the impact of adoption of SFAS No. 133. 23 <PAGE> PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is subject to various legal proceedings and claims which are discussed in the 2000 Form 10-K. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and which have not been fully adjudicated. The results of legal proceedings cannot be predicted with certainty; however, in the opinion of management, the Company does not have a potential liability related to any legal proceedings and claims that would have a material adverse effect on its financial condition or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None (b) REPORTS ON FORM 8-K None 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 12, 2001 25 </TEXT> </DOCUMENT>

2001

0QTR1

ADCT

https://www.sec.gov/Archives/edgar/data/61478/000110465901500042/j0039_10q.htm

<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>j0039_10q.htm <TEXT> <HTML> <head> <TITLE>Prepared by MerrillDirect</TITLE> </head> <body link=blue vlink=blue> <!-- jkAuthor: mnelson jkLastCreated: 2001-03-15T22:16:00Z jkPages: 33 jkCycle: 6 --> <p align=center><a name=MergeParas><font size=3>SECURITIES AND EXCHANGE COMMISSION</font></a></p> <p align=center><font size=3>Washington, D.C.&nbsp; 20549<br> <br> ________________</font></p> <p align=center><font size=3>FORM 10&ndash;Q</font></p> <p><font size=3>(Mark One)</font></p> <p align=center><font size=3>x&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)<br> OF THE SECURITIES EXCHANGE ACT OF 1934</font></p> <p align=center><font size=3>For the quarterly period ended January 31, 2001</font></p> <p align=center><font size=3>OR</font></p> <p align=center><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d)<br> OF THE SECURITIES EXCHANGE ACT OF 1934</font></p> <p align=center><font size=3>For the transition period from N/A to N/A</font></p> <p align=center><font size=3>Commission file number 0&ndash;1424</font></p> <p align=center><u><font size=3>ADC Telecommunications, Inc.<br> </font></u>(Exact name of registrant as specified in its charter)</p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td align=center width="50%" valign=top> <font size=3>Minnesota </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=center> </font></b> </td> <td align=center width="50%" valign=top> <font size=3>41&ndash;0743912</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=center> </font></b> </td> </tr> <tr> <td align=center width="50%" valign=top> <font size=3>(State or other jurisdiction of incorporation or organization) </font> </td> <td align=center width="50%" valign=top> <font size=3>(I.R.S. Employer Identification No.) </font> </td> </tr> </TABLE> <p align=center><u><font size=3>12501 Whitewater Drive, Minnetonka, MN&nbsp; 55343<br> </font></u>(Address of principal executive offices) (Zip code)</p> <p align=center><u><font size=3>(952) 938&ndash;8080<br> </font></u>(Registrant's telephone number, including area code)</p> <p align=center><u><font size=3>N/A<br> </font></u>(Former name, former address and former fiscal year, if changed since last report)</p> <p><font size=3>Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section&nbsp;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.</font></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td align=center width=292 valign=top> <font size=3>YES&nbsp; ___<u>X</u>__</font> </td> <td align=center width=292 valign=top> <font size=3>NO _____</font> </td> </tr> <tr> <td align=center width=292 valign=top>&nbsp; </td> <td align=center width=292 valign=top>&nbsp; </td> </tr> </TABLE> <p align=center><font size=3>&nbsp;</font></p> <p align=center><font size=3>APPLICABLE ONLY TO CORPORATE ISSUERS:</font></p> <p><font size=3>Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.</font></p> <PAGE> <p>&nbsp;</p> <p align=center><font size=3>Common stock, $.20 par value:&nbsp;781,598,363 shares as of March 9, 2001.</font></p> <PAGE> <p><font size=3>&nbsp;</font></p> <p align=center><b><font size=3>PART I. FINANCIAL INFORMATION</font></b><br> <b>ITEM 1. FINANCIAL STATEMENTS</b></p> <p align=center><b><font size=3>ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES<br> CONSOLIDATED BALANCE SHEETS &ndash; UNAUDITED</font></b></p> <p align=center><b><font size=3>(In millions)</font></b></p> <p align=center><b><font size=3>ASSETS</font></b></p> <table border=0 cellspacing=0 cellpadding=0> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=190 colspan=3 valign=top> <b><font size=3>January 31,</font></b> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=197 colspan=2 valign=top> <b><font size=3>October 31,</font></b> </td> <td width=10> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=190 colspan=3 valign=top> <b><font size=3>2001</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=197 colspan=2 valign=top> <b><font size=3>2000</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td width=10> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=336 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>CURRENT ASSETS: </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td width=645 colspan=5 valign=top> <font size=3>Cash and cash equivalents </font> </td> <td width=38 valign=top> <font size=3>$ </font> </td> <td align=right width=152 valign=top> <font size=3>153.9 </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>$ </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>217.3 </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=434 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>Available for sale securities </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>557.8 </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>1,136.9 </font> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td width=434 colspan=3 valign=top> <font size=3>Accounts receivable </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>622.9 </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>702.7 </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=244 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>Inventories </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>536.9 </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>486.1 </font> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td width=645 colspan=5 valign=top> <font size=3>Prepaid income taxes and other assets </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>406.9 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=78 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=36 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>107.9 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=380 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>Total current assets </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>2,278.4 </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>2,650.9 </font> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=738 colspan=6 valign=top bgcolor="#99ccff"> <font size=3>PROPERTY AND EQUIPMENT, net </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>682.6 </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>608.6 </font> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=738 colspan=6 valign=top bgcolor="#99ccff"> <font size=3>OTHER ASSETS, principally goodwill </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>761.0 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>711.0 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=38 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>3,722.0 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>3,970.5 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=center width=1282 colspan=16 valign=top> <b><font size=3>LIABILITIES AND SHAREOWNERS&rsquo; INVESTMENT</font></b> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=526 colspan=4 valign=top bgcolor="#99ccff"> <font size=3>CURRENT LIABILITIES: </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td width=645 colspan=5 valign=top> <font size=3>Accounts payable </font> </td> <td width=38 valign=top> <font size=3>$ </font> </td> <td align=right width=152 valign=top> <font size=3>232.1 </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>$ </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>211.3 </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=434 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>Accrued liabilities </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>357.9 </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>435.7 </font> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td width=434 colspan=3 valign=top> <font size=3>Accrued income taxes </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>353.7 </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>365.8 </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=645 colspan=5 valign=top bgcolor="#99ccff"> <font size=3>Notes payable and current maturities of long&ndash;term debt </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom bgcolor="#99ccff"> <font size=3>186.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=76 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>28.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td width=591 colspan=4 valign=top> <font size=3>Total current liabilities </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>1,130.2 </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>1,041.3 </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=526 colspan=4 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=611 colspan=5 valign=top bgcolor="#99ccff"> <font size=3>LONG&ndash;TERM DEBT, less current maturities </font> </td> <td align=right width=127 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom bgcolor="#99ccff"> <font size=3>15.0 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=76 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>16.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td width=380 colspan=2 valign=top> <font size=3>Total liabilities </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>1,145.2 </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>1,057.8 </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=738 colspan=6 valign=top> <font size=3>SHAREOWNERS' INVESTMENT </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=645 colspan=5 valign=top bgcolor="#99ccff"> <font size=3>(780.8 and 770.3 shares outstanding, respectively) </font> </td> <td align=right width=38 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom bgcolor="#99ccff"> <font size=3>2,576.8 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=76 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>2,912.7 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=38 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=76 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=165 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=54 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=190 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=211 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=38 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=152 valign=top bgcolor="#99ccff"> <font size=3>3,722.0 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=76 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=77 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=165 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>3,970.5 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=93> <font size=3>&nbsp; </font> </td> <td width=54> <font size=3>&nbsp; </font> </td> <td width=190> <font size=3>&nbsp; </font> </td> <td width=190> <font size=3>&nbsp; </font> </td> <td width=85> <font size=3>&nbsp; </font> </td> <td width=127> <font size=3>&nbsp; </font> </td> <td width=38> <font size=3>&nbsp; </font> </td> <td width=152> <font size=3>&nbsp; </font> </td> <td width=10> <font size=3>&nbsp; </font> </td> <td width=75> <font size=3>&nbsp; </font> </td> <td width=10> <font size=3>&nbsp; </font> </td> <td width=76> <font size=3>&nbsp; </font> </td> <td width=10> <font size=3>&nbsp; </font> </td> <td width=36> <font size=3>&nbsp; </font> </td> <td width=161> <font size=3>&nbsp; </font> </td> <td width=10> <font size=3>&nbsp; </font> </td> </tr> </TABLE> <p align=center><font size=3>See accompanying notes to consolidated financial statements.</font></p> <PAGE> <p align=center><b><font size=3>ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES</font></b><br> <b>CONSOLIDATED STATEMENTS OF INCOME &ndash; UNAUDITED</b></p> <p align=center><b><font size=3>(In millions, except earnings per share)</font></b></p> <table border=0 cellspacing=0 cellpadding=0> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=237 colspan=5 valign=top> <b><font size=3>&nbsp;</font></b> </td> <td align=center width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=267 colspan=5 rowspan=2 valign=top> <b><font size=3>Three Months Ended<br> January 31,</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=237 colspan=5 valign=top> <b><font size=3>&nbsp;</font></b> </td> <td align=center width=25 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=98 colspan=2 valign=top> <b><font size=3>&nbsp;</font></b> </td> <td align=center width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=106 colspan=2 valign=top> <b><font size=3>&nbsp;</font></b> </td> <td align=center width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=116 colspan=2 valign=top> <b><font size=3>2001</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=123 colspan=2 valign=top> <b><font size=3>2000</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>NET SALES </font> </td> <td width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=28 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>804.8 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=30 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>593.9&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>COST OF PRODUCT SOLD </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>496.1 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>315.3&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>GROSS PROFIT </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>308.7 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>278.6&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>EXPENSES: </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td width=408 colspan=2 valign=top> <font size=3>Research and development </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>76.5 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>75.2&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=408 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>Selling and administration </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>174.8 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>129.8&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td width=408 colspan=2 valign=top> <font size=3>Goodwill amortization </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>17.6 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>5.6&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=408 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>Non&ndash;recurring charges </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>33.3 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>--&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td width=408 colspan=2 valign=top> <font size=3>Non-cash stock compensation </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>4.9 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>0.6&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=318 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td width=318 valign=top> <font size=3>Total expenses </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>307.1 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>211.2&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>OPERATING INCOME </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>1.6 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>67.4&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>OTHER INCOME (EXPENSE), NET: </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td width=91 valign=top> <font size=3>Interest </font> </td> <td width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>0.9 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>4.5&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=91 valign=top bgcolor="#99ccff"> <font size=3>Other </font> </td> <td width=318 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>1.8 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>(3.5) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>INCOME BEFORE INCOME TAXES </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>4.3 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>68.4&nbsp; </font> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>PROVISION FOR INCOME TAXES </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>2.1 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>15.3&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=91 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=318 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=33 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>NET INCOME </font> </td> <td width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=28 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>2.2 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=30 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>53.1&nbsp; </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=454 colspan=3 valign=top> <font size=3>AVERAGE COMMON SHARES OUTSTANDING (BASIC) </font> </td> <td align=right width=26 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=72 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=33 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=26 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=80 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=25 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=28 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=87 valign=bottom> <font size=3>&nbsp;&nbsp; 772.7 <b>&nbsp;</b></font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=30 valign=bottom> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=93 valign=bottom> <font size=3>&nbsp;&nbsp; 699.7&nbsp; <b>&nbsp;</b></font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=454 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td width=33 valign=top> <font size=3>&nbsp; </font> </td> <td width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td width=25 valign=top> <font size=3>&nbsp; </font> </td> <td width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>EARNINGS PER SHARE (BASIC) </font> </td> <td width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=28 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>0.00 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=30 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>0.08&nbsp; </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=454 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td width=33 valign=top> <font size=3>&nbsp; </font> </td> <td width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td width=25 valign=top> <font size=3>&nbsp; </font> </td> <td width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>AVERAGE COMMON SHARES OUTSTANDING (DILUTED) </font> </td> <td align=right width=26 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=72 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=33 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=26 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=80 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=25 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=28 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=87 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; 803.2 <b>&nbsp;</b></font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=30 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; &nbsp; </font> </td> <td align=right width=93 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; 730.1&nbsp; <b>&nbsp;</b></font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=454 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top> <font size=3>&nbsp; </font> </td> <td width=33 valign=top> <font size=3>&nbsp; </font> </td> <td width=26 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top> <font size=3>&nbsp; </font> </td> <td width=25 valign=top> <font size=3>&nbsp; </font> </td> <td width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=93 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=454 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>EARNINGS PER SHARE (DILUTED) </font> </td> <td width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=33 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=26 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=28 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>0.00 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=30 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=93 valign=top bgcolor="#99ccff"> <font size=3>0.07&nbsp; </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> </TABLE> <p align=center><font size=3><br> See accompanying notes to consolidated financial statements.</font></p> <PAGE> <p align=center><b><font size=3>ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES</font></b><br> <b>CONSOLIDATED STATEMENTS OF CASH FLOWS &ndash; UNAUDITED</b><br> <b>(In millions)</b></p> <table border=0 cellspacing=0 cellpadding=0> <tr> <td align=right width=71 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=122 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=719 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=414 colspan=6 rowspan=2 valign=top> <b><font size=3>Three Months Ended<br> January 31,</font></b> <b><font size=3> <hr size=3 width="86%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=71 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=122 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=719 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=681 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=130 valign=top> <b><font size=3>2001</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td width=43 valign=top> <font size=3>&nbsp; </font> </td> <td width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=145 valign=top> <b><font size=3>2000</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=918 colspan=8 valign=top bgcolor="#99ccff"> <font size=3>OPERATING ACTIVITIES: </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td width=863 colspan=7 valign=top> <font size=3>Net income </font> </td> <td align=right width=46 valign=top> <font size=3>$ </font> </td> <td align=right width=130 valign=top> <font size=3>2.2&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>$ </font> </td> <td align=right width=145 valign=top> <font size=3>53.1&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=863 colspan=7 valign=top bgcolor="#99ccff"> <font size=3>Adjustments to reconcile net income to net cash from </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=1271 colspan=12 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; operating activities - </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=791 colspan=5 valign=top> <font size=3>Inventory and fixed asset write-offs </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>39.6&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>--&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=791 colspan=5 valign=top bgcolor="#99ccff"> <font size=3>Depreciation and amortization </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>47.6&nbsp; </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>29.6&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=791 colspan=5 valign=top> <font size=3>Non-cash stock compensation </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>4.9&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>0.6&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=791 colspan=5 valign=top bgcolor="#99ccff"> <font size=3>Increase in deferred income taxes </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>1.2&nbsp; </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>--&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=791 colspan=5 valign=top> <font size=3>Gain on ownership of investments </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>(3.7) </font> </td> <td width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>--&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=791 colspan=5 valign=top bgcolor="#99ccff"> <font size=3>Other </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>(7.2) </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>0.6&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=791 colspan=5 valign=top> <font size=3>Changes in operating assets and liabilities, net of <br> &nbsp;&nbsp;acquisitions </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=110 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=681 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>Accounts receivable </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>89.3&nbsp; </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>19.1&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=681 colspan=3 valign=top> <font size=3>Inventories </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>(51.1) </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>(36.2) </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=110 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=681 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>Prepaid income taxes and other assets </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>(71.7) </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>(14.8) </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=681 colspan=3 valign=top> <font size=3>Accounts payable </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>4.2&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>(20.5) </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=110 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=681 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>Accrued liabilities </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>(142.6) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>2.1&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td width=238 colspan=5 valign=top> <font size=3>&nbsp; </font> </td> <td width=625 colspan=2 valign=top> <font size=3>Total cash (used for) from operating<br> &nbsp;&nbsp;activities </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=bottom> <font size=3>(87.3) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=bottom> <font size=3>33.6&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=56 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=625 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=918 colspan=8 valign=top bgcolor="#99ccff"> <font size=3>INVESTMENT ACTIVITIES: </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td width=863 colspan=7 valign=top> <font size=3>Acquisitions </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>(48.7) </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>(18.0) </font> </td> </tr> <tr> <td width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=863 colspan=7 valign=top bgcolor="#99ccff"> <font size=3>Property and equipment additions </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>(93.3) </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>(49.0) </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td width=863 colspan=7 valign=top> <font size=3>Marketable securities and short&ndash;term investments </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>--&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>23.2&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=863 colspan=7 valign=top bgcolor="#99ccff"> <font size=3>Long&ndash;term investments </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>(7.8) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>5.4&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=56 valign=top> <font size=3>&nbsp; </font> </td> <td width=625 colspan=2 valign=top> <font size=3>Total cash used for investment activities </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>(149.8) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>(38.4) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=56 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=625 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=918 colspan=8 valign=top bgcolor="#99ccff"> <font size=3>FINANCING ACTIVITIES: </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td width=863 colspan=7 valign=top> <font size=3>Borrowings/(Repayments) of debt </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>154.4&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>(26.3) </font> </td> </tr> <tr> <td align=right width=55 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=863 colspan=7 valign=top bgcolor="#99ccff"> <font size=3>Common stock issued </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>19.0&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>50.7&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=56 valign=top> <font size=3>&nbsp; </font> </td> <td width=625 colspan=2 valign=top> <font size=3>Total cash from financing activities </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>173.4&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>24.4&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=56 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=625 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=918 colspan=8 valign=top bgcolor="#99ccff"> <font size=3>EFFECT OF EXCHANGE RATE CHANGES ON CASH </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>0.3&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>(0.6) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=56 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=625 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=918 colspan=8 valign=top bgcolor="#99ccff"> <font size=3>DECREASE IN CASH AND CASH EQUIVALENTS </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>(63.4) </font> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>19.0&nbsp; </font> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=56 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=625 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=918 colspan=8 valign=top bgcolor="#99ccff"> <font size=3>CASH AND CASH EQUIVALENTS, beginning of period </font> </td> <td align=right width=46 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>217.3&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>279.0&nbsp; </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=55 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=72 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=110 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=56 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=625 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=46 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=130 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=43 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=44 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=145 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=918 colspan=8 valign=top bgcolor="#99ccff"> <font size=3>CASH AND CASH EQUIVALENTS, end of period </font> </td> <td width=46 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=130 valign=top bgcolor="#99ccff"> <font size=3>153.9&nbsp; </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=43 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=44 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=145 valign=top bgcolor="#99ccff"> <font size=3>298.0&nbsp; </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=55> <font size=3>&nbsp; </font> </td> <td width=17> <font size=3>&nbsp; </font> </td> <td width=55> <font size=3>&nbsp; </font> </td> <td width=66> <font size=3>&nbsp; </font> </td> <td width=44> <font size=3>&nbsp; </font> </td> <td width=56> <font size=3>&nbsp; </font> </td> <td width=619> <font size=3>&nbsp; </font> </td> <td width=10> <font size=3>&nbsp; </font> </td> <td width=46> <font size=3>&nbsp; </font> </td> <td width=130> <font size=3>&nbsp; </font> </td> <td width=43> <font size=3>&nbsp; </font> </td> <td width=44> <font size=3>&nbsp; </font> </td> <td width=145> <font size=3>&nbsp; </font> </td> </tr> </TABLE> <p align=center><font size=3><br> See accompanying notes to consolidated financial statements</font></p> <PAGE> <p align=center><font size=3>.</font></p> <p align=center><b><font size=3>ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES</font></b><br> <b>SUPPLEMENTAL FINANCIAL INFORMATION &ndash; UNAUDITED</b><br> <b>(In millions, except earnings per share)</b></p> <table border=0 cellspacing=0 cellpadding=0> <tr> <td align=right width=40 rowspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 rowspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=363 rowspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=118 colspan=2 rowspan=3 valign=top> <b><font size=3>1st<br> Quarter<br> 2001</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=119 colspan=3 rowspan=3 valign=top> <b><font size=3>4th<br> Quarter<br> 2000</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=110 colspan=2 rowspan=3 valign=top> <b><font size=3>3rd<br> Quarter<br> 2000</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=121 colspan=2 rowspan=3 valign=top> <b><font size=3>2nd<br> Quarter<br> 2000</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>NET SALES </font> </td> <td width=24 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>804.8 </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=24 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>1,032.0 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>891.4 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>770.6 </font> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>COST OF PRODUCT SOLD </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>496.1 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>513.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>442.9 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>407.3 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>GROSS PROFIT </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>308.7 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>518.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>448.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>363.3 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>EXPENSES: </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td width=393 colspan=2 valign=top> <font size=3>Research and development </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>76.5 </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>96.0 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>84.1 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>82.8 </font> </td> </tr> <tr> <td align=right width=40 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=393 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>Selling and administration </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>174.8 </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>202.4 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>177.3 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>156.0 </font> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td width=393 colspan=2 valign=top> <font size=3>Goodwill amortization </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>17.6 </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>14.4 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>7.8 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>6.4 </font> </td> </tr> <tr> <td align=right width=40 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=393 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>Non&ndash;recurring charges </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>33.3 </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>34.2 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>115.0 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>8.8 </font> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td width=393 colspan=2 valign=top> <font size=3>Non-cash stock compensation </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>4.9 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>42.8 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>2.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>1.2 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=40 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=363 valign=top bgcolor="#99ccff"> <font size=3>Total expenses </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>307.1 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>389.8 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>386.7 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>255.2 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>OPERATING INCOME </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>1.6 </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>128.7 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>61.8 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>108.1 </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>OTHER INCOME (EXPENSE), NET: </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td width=363 valign=top> <font size=3>Interest </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>0.9 </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>5.1 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>4.2 </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>5.6 </font> </td> </tr> <tr> <td align=right width=40 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=363 valign=top bgcolor="#99ccff"> <font size=3>Gain on conversion of investment </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>-- </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>-- </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>-- </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>722.6 </font> </td> </tr> <tr> <td width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td width=363 valign=top> <font size=3>Gain on sale of a business </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>-- </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>-- </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>-- </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>328.6 </font> </td> </tr> <tr> <td align=right width=40 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=363 valign=top bgcolor="#99ccff"> <font size=3>Other </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>1.8 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>30.0 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>(0.9) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>(1.8) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>INCOME BEFORE INCOME TAXES </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>4.3 </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>163.8 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>65.1 </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>1,163.1 </font> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>PROVISION FOR INCOME TAXES </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>2.1 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>76.7 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>55.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>444.9 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>NET INCOME </font> </td> <td width=24 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>2.2 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=24 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>87.1 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>9.6 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>718.2 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=433 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>AVERAGE COMMON SHARES OUTSTANDING (BASIC) </font> </td> <td width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=bottom bgcolor="#99ccff"> <font size=3>772.7 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=bottom bgcolor="#99ccff"> <font size=3>733.9 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=bottom bgcolor="#99ccff"> <font size=3>715.1 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=bottom bgcolor="#99ccff"> <font size=3>708.0 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=433 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> <td width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>EARNINGS PER SHARE (BASIC) </font> </td> <td width=24 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>0.00 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>0.12 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>0.01 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>1.01 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>AVERAGE COMMON SHARES </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top> <font size=3>OUTSTANDING (DILUTED) </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>803.2 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=95 colspan=2 valign=top> <font size=3>781.6 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>758.8 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>746.1 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=right width=40 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=30 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=363 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=94 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=87 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=37 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=84 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=28 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=97 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=433 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>EARNINGS PER SHARE (DILUTED) </font> </td> <td width=24 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=94 valign=top bgcolor="#99ccff"> <font size=3>0.00 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=24 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=87 valign=top bgcolor="#99ccff"> <font size=3>0.11 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=37 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=84 valign=top bgcolor="#99ccff"> <font size=3>0.01 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=28 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=25 valign=top bgcolor="#99ccff"> <font size=3>$ </font> </td> <td align=right width=97 valign=top bgcolor="#99ccff"> <font size=3>0.96 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=40> <font size=3>&nbsp; </font> </td> <td width=30> <font size=3>&nbsp; </font> </td> <td width=363> <font size=3>&nbsp; </font> </td> <td width=24> <font size=3>&nbsp; </font> </td> <td width=94> <font size=3>&nbsp; </font> </td> <td width=25> <font size=3>&nbsp; </font> </td> <td width=24> <font size=3>&nbsp; </font> </td> <td width=87> <font size=3>&nbsp; </font> </td> <td width=9> <font size=3>&nbsp; </font> </td> <td width=28> <font size=3>&nbsp; </font> </td> <td width=25> <font size=3>&nbsp; </font> </td> <td width=84> <font size=3>&nbsp; </font> </td> <td width=28> <font size=3>&nbsp; </font> </td> <td width=25> <font size=3>&nbsp; </font> </td> <td width=97> <font size=3>&nbsp; </font> </td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <p align=center><font size=3>See accompanying notes to consolidated financial statements.</font></p> <PAGE> <p align=center><b><font size=3>ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES</font></b><br> <b>NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS &ndash; UNAUDITED</b></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=65 valign=top> <font size=3>&nbsp;Note 1 </font> </td> <td width=573 valign=top> <b><font size=3>Basis of Presentation</font></b>: All historical financial information has been restated to reflect the acquisitions of PairGain Technologies, Inc. (&ldquo;PairGain&rdquo;) and Broadband Access Systems, Inc. (&ldquo;BAS&rdquo;) which were completed in the third quarter and fourth quarter of fiscal year 2000, respectively and were accounted for as poolings of interests. </td> </tr> <tr> <td width=65 valign=top> <font size=3>&nbsp; </font> </td> <td width=573 valign=top> <font size=3>The interim information furnished in this report is unaudited but reflects all adjustments which are necessary, in the opinion of management, for a fair statement of the results for the interim periods.&nbsp; The operating results for the quarter ended January 31, 2001 are not necessarily indicative of the operating results to be expected for the full fiscal year.&nbsp; These statements should be read in conjunction with our most recent Annual Report on Form 10&ndash;K. </font> </td> </tr> <tr> <td width=65 valign=top>&nbsp; </td> <td width=573 valign=top>&nbsp; </td> </tr> <tr> <td width=65 valign=top> <font size=3>&nbsp; </font> </td> <td width=573 valign=top> <font size=3>Recently Issued Accounting Pronouncements </font> </td> </tr> <tr> <td width=65 valign=top>&nbsp; </td> <td width=573 valign=top>&nbsp; </td> </tr> <tr> <td width=65 valign=top> <font size=3>&nbsp; </font> </td> <td width=573 valign=top> <font size=3>In December 1999, the Securities and Exchange Commission (&ldquo;SEC&rdquo;) issued Staff Accounting Bulletin No. 101 &ldquo;Revenue Recognition in Financial Statements&rdquo; (&ldquo;SAB 101&rdquo;).&nbsp; SAB 101, as amended, summarizes some of the SEC&rsquo;s views in applying generally accepted accounting principles to revenue recognition in financial statements.&nbsp; At this time, we do not expect the adoption of SAB 101 to have a material effect on our operations or financial position.&nbsp; We are required to adopt SAB&nbsp;101 in the fourth quarter of fiscal 2001. </font> </td> </tr> <tr> <td width=65 valign=top>&nbsp; </td> <td width=573 valign=top>&nbsp; </td> </tr> <tr> <td width=65 valign=top> <font size=3>Note 2 </font> </td> <td width=573 valign=top> <b><font size=3>Inventories</font></b>: Inventories include material, labor and overhead and are stated at the lower of first&ndash;in, first&ndash;out cost or market.&nbsp; Inventories consisted of (in millions): </td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0 width="80%"> <tr> <td width=330 valign=top> <font size=3>&nbsp; </font> </td> <td width=42 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=146 valign=top> <font size=3>January 31,<br> 2001</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=center> </font></b> </td> <td align=center width=40 valign=top>&nbsp; </td> <td align=center width=32 valign=top>&nbsp; </td> <td align=center width=153 valign=top> <font size=3>October 31,<br> 2000</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=center> </font></b> </td> </tr> <tr> <td width=330 valign=top bgcolor="#99ccff"> <font size=3>Purchased materials and manufactured products </font> </td> <td width=42 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom bgcolor="#99ccff"> <font size=3>$&nbsp; 507.2 </font> </td> <td align=right width=40 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=32 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=153 valign=bottom bgcolor="#99ccff"> <font size=3>$&nbsp;&nbsp; 452.4 </font> </td> </tr> <tr> <td width=330 valign=top> <font size=3>Work&ndash;in&ndash;process </font> </td> <td width=42 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom> <font size=3>29.7 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=40 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=32 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=153 valign=bottom> <font size=3>33.7 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=330 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=42 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom bgcolor="#99ccff"> <font size=3>$&nbsp; 536.9 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=40 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=32 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=153 valign=bottom bgcolor="#99ccff"> <font size=3>$&nbsp;&nbsp; 486.1 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> </TABLE> <dir><dir><dir><dir><dir><dir> <p><font size=3>&nbsp;</font></p> </dir></dir></dir></dir></dir></dir> <PAGE> <p><font size=3>&nbsp;&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=65 valign=top> <font size=3>Note 3 </font> </td> <td width=573 valign=top> <b><font size=3>Acquisitions</font></b>: </td> </tr> <tr> <td width=65 valign=top> <font size=3>&nbsp; </font> </td> <td width=573 valign=top> <font size=3>On November 20, 2000, we acquired France Electronique S.A.&rsquo;s telecom systems integration business (&ldquo;France Electronique&rdquo;) based near Paris, France.&nbsp; France Electronique&rsquo;s systems integration services enable communications service providers to offer applications that integrate Internet, e-mail, voicemail, fax and voice services for delivery to wireless and wireline communication devices.&nbsp; We paid $44 million in cash to complete the transaction, which was accounted for using the purchase method.&nbsp; The entire value of the transaction is primarily goodwill and is being amortized over 7 years using a straight-line method. </font> </td> </tr> <tr> <td width=65 valign=top> <font size=3>&nbsp; </font> </td> <td width=573 valign=top> <font size=3>On February 26, 2001, we acquired all of the outstanding equity interests in CommTech Corporation, a Cranbury, New Jersey-based company (&ldquo;CommTech&rdquo;). CommTech is a provider of end-to-end service order management, provisioning and activation software for communications service providers.&nbsp; In the transaction, we issued approximately 11.65 million shares of our common stock to CommTech&rsquo;s shareholders.&nbsp; We also converted all outstanding CommTech stock options into options to acquire approximately 1.6 million shares of our common stock.&nbsp; The transaction was accounted for as a pooling of interests.&nbsp; Since the historical operations of CommTech were not material to our consolidated operations or financial position, prior period financial statements will not be restated for this acquisition. </font> </td> </tr> <tr> <td width=65 valign=top> <font size=3>Note 4 </font> </td> <td width=573 valign=top> <b><font size=3>Comprehensive (Loss) Income: </font></b>The following table presents the calculation of comprehensive income as required by SFAS No. 130. Comprehensive income has no impact on our net income, balance sheet or shareowners&rsquo; equity.&nbsp; The components of comprehensive income are as follows (in millions): </td> </tr> </TABLE> <dir><dir><dir><dir><dir> <p><font size=3>&nbsp;</font></p> </dir></dir></dir></dir></dir> <table border=0 cellspacing=0 cellpadding=0 width="80%"> <tr> <td width=671 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=203 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=291 colspan=2 valign=top> <font size=3>Three Months Ended<br> January 31, </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=671 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=57 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=center width=152 valign=bottom> <font size=3>2001 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=center width=139 valign=bottom> <font size=3>2000 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=671 valign=top bgcolor="#99ccff"> <font size=3>Net income </font> </td> <td align=right width=57 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom bgcolor="#99ccff"> <font size=3>$2.2 </font> </td> <td align=right width=139 valign=bottom bgcolor="#99ccff"> <font size=3>$53.1 </font> </td> </tr> <tr> <td width=671 valign=top> <font size=3>Changes in cumulative translation </font> </td> <td align=right width=57 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=139 valign=bottom> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=671 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp; adjustments </font> </td> <td align=right width=57 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom bgcolor="#99ccff"> <font size=3>3.8 </font> </td> <td align=right width=139 valign=bottom bgcolor="#99ccff"> <font size=3>(0.3) </font> </td> </tr> <tr> <td width=671 valign=top> <font size=3>Changes in market value of derivative </font> </td> <td align=right width=57 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=139 valign=bottom> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=671 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp; financial instruments classified as </font> </td> <td align=right width=57 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=139 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=671 valign=top> <font size=3>&nbsp;&nbsp;&nbsp; cash flow hedges </font> </td> <td align=right width=57 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom> <font size=3>1.8 </font> </td> <td align=right width=139 valign=bottom> <font size=3>-- </font> </td> </tr> <tr> <td width=728 colspan=2 valign=top bgcolor="#99ccff"> <font size=3>Unrealized (loss) gain from securities<br> &nbsp;&nbsp;&nbsp; classified as available for sale, net of taxes </font> </td> <td align=right width=146 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom bgcolor="#99ccff"> <font size=3>(366.0) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=139 valign=bottom bgcolor="#99ccff"> <font size=3>45.8 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=671 valign=top> <font size=3>&nbsp;&nbsp;&nbsp; </font> </td> <td align=right width=57 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=139 valign=bottom> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=671 valign=top bgcolor="#99ccff"> <font size=3>Comprehensive (loss) income </font> </td> <td align=right width=57 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom bgcolor="#99ccff"> <font size=3>$(358.2) </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=139 valign=bottom bgcolor="#99ccff"> <font size=3>$98.6 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=671 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=57 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=146 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=152 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=139 valign=bottom> <font size=3>&nbsp; </font> </td> </tr> </TABLE> <dir><dir><dir><dir> <p><font size=3>&nbsp;</font></p> </dir></dir></dir></dir> <PAGE> <p>&nbsp;</p> <dir><dir> <p><font size=3>We own a minority interest in the following publicly held companies.&nbsp; These investments are stated at market value with the valuation adjustments classified in shareowners&rsquo; investment.&nbsp; As of January 31, 2001, the market value of these investments was as follows (in millions):</font></p> </dir></dir> <dir><dir> <table border=0 cellspacing=0 cellpadding=0> <tr> <td width=660 valign=top bgcolor="#99ccff"> <font size=3>ONI Systems Corp. </font> </td> <td align=right width=89 valign=top bgcolor="#99ccff"> <font size=3>$213.3 </font> </td> </tr> <tr> <td width=660 valign=top> <font size=3>Redback Networks, Inc. </font> </td> <td align=right width=89 valign=top> <font size=3>178.3 </font> </td> </tr> <tr> <td width=660 valign=top bgcolor="#99ccff"> <font size=3>GlobeSpan, Inc. </font> </td> <td align=right width=89 valign=top bgcolor="#99ccff"> <font size=3>80.5 </font> </td> </tr> <tr> <td width=660 valign=top> <font size=3>Vyyo, Inc. </font> </td> <td align=right width=89 valign=top> <font size=3>26.3 </font> </td> </tr> <tr> <td width=660 valign=top bgcolor="#99ccff"> <font size=3>Efficient Networks, Inc. </font> </td> <td align=right width=89 valign=top bgcolor="#99ccff"> <font size=3>21.6 </font> </td> </tr> <tr> <td width=660 valign=top> <font size=3>InfoInterActive, Inc. </font> </td> <td align=right width=89 valign=top> <font size=3>3.4 </font> </td> </tr> <tr> <td width=660 valign=top bgcolor="#99ccff"> <font size=3>interWAVE Communications International Ltd. </font> </td> <td align=right width=89 valign=top bgcolor="#99ccff"> <font size=3>0.9 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=660 valign=top> <font size=3>Total </font> </td> <td align=right width=89 valign=top> <font size=3>$524.3 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> </TABLE> </dir></dir> <dir><dir> <p><font size=3>In addition, we own an approximate 22% interest in MIND C.T.I. Ltd. (&ldquo;MIND&rdquo;).&nbsp; As of January&nbsp;31, 2001, our investment in MIND had a market value of approximately $35.2 million.&nbsp; This investment is accounted for using the equity method.&nbsp; Under the equity method, a pro rata portion of MIND&rsquo;s profits or losses is reflected in our consolidated income statement.</font></p> </dir></dir> <dir><dir> <p><font size=3>On February 22, 2001, Siemens and Efficient Networks, Inc. announced that they have entered into a definitive merger agreement.&nbsp; Pursuant to the merger agreement, Siemens will purchase all of the outstanding shares of Efficient Networks for $23.50 in cash per share.&nbsp; The merger transaction is expected to close in April 2001.&nbsp; As of January&nbsp;31, 2001, we held approximately 1.8 million shares of Efficient Networks at a cost basis of $4.3 million.</font></p> </dir></dir> <table border=0 cellspacing=0 cellpadding=0> <tr> <td width=89 valign=top> <font size=3>Note 5 </font> </td> <td width=1229 valign=top> <b><font size=3>Earnings Per Share</font></b>: Basic earnings per common share was calculated by dividing net income by the weighted average number of common shares outstanding during the period.&nbsp; Diluted earnings per share was calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued.&nbsp; The following table reconciles the number of shares utilized in the earnings per share calculations for the periods ended January&nbsp;31, 2001 and 2000 (in millions, except earnings per share): </td> </tr> </TABLE> <PAGE> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0 width="80%"> <tr> <td width=361 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=197 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=229 colspan=2 valign=top> <font size=3>Three Months Ended<br> January 31, </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=361 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=129 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=115 valign=top> <font size=3>2001 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=center width=115 valign=top> <font size=3>2000 </font> <b><font size=3> <hr size=2 width="100%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=361 valign=top bgcolor="#99ccff"> <font size=3>Net income </font> </td> <td align=right width=129 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2.2 </font> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 53.1 </font> </td> </tr> <tr> <td width=361 valign=top> <font size=3>Earnings per common share (basic) </font> </td> <td align=right width=129 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top> <font size=3>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 0.00 </font> </td> <td align=right width=115 valign=top> <font size=3>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 0.08 </font> </td> </tr> <tr> <td width=361 valign=top bgcolor="#99ccff"> <font size=3>Earnings per common share (diluted) </font> </td> <td align=right width=129 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 0.00 </font> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 0.07 </font> </td> </tr> <tr> <td width=361 valign=top> <font size=3>Weighted average common shares </font> </td> <td align=right width=129 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=361 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp; outstanding (basic) </font> </td> <td align=right width=129 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>772.7 </font> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>699.7 </font> </td> </tr> <tr> <td width=361 valign=top> <font size=3>Effect of dilutive securities - stock </font> </td> <td align=right width=129 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=361 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp; Options </font> </td> <td align=right width=129 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>30.5 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>30.4 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=361 valign=top> <font size=3>Weighted average common shares </font> </td> <td align=right width=129 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=361 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp; outstanding (diluted) </font> </td> <td align=right width=129 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=67 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>803.2 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=115 valign=top bgcolor="#99ccff"> <font size=3>730.1 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> </TABLE> <dir><dir><dir><dir> <p><font size=3>&nbsp;</font></p> </dir></dir></dir></dir> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=65 valign=top> <font size=3>Note 6 </font> </td> <td width=573 valign=top> <b><font size=3>Segment Reporting</font></b>: The &ldquo;management approach&rdquo; required by SFAS No. 131, &ldquo;Disclosures about Segments of an Enterprise and Related Information,&rdquo; requires us to disclose selected financial data by operating segment.&nbsp; This approach is based upon the way management organizes segments within an enterprise for making operating decisions and assessing performance.&nbsp; We have identified three reportable segments based on our internal organization structure, management of operations and performance evaluation.&nbsp; These segments are: Broadband Connectivity, Broadband Access and Transport, and Integrated Solutions.&nbsp; Segment detail is summarized as follows: </td> </tr> </TABLE> <p><b><font size=3>&nbsp;</font></b></p> <table border=0 cellspacing=0 cellpadding=0> <tr> <td align=center width=983 colspan=6 valign=top> <b><font size=3>Segment Information (In millions)</font></b> <b><font size=3> <hr size=2 width="100%" noshade color=black align=left> </font></b> </td> </tr> <tr> <td width=371 valign=top> <font size=3>&nbsp; </font> </td> <td width=132 valign=bottom> <b><font size=3>Broadband Connectivity</font></b> </td> <td width=112 valign=bottom> <b><font size=3>Broadband Access and Transport</font></b> </td> <td width=108 valign=bottom> <b><font size=3>Integrated Solutions</font></b> </td> <td width=123 valign=bottom> <b><font size=3>Unallocated Items</font></b> </td> <td width=136 valign=bottom> <b><font size=3>Consolidated</font></b> </td> </tr> <tr> <td width=983 colspan=6 valign=top> <b><font size=3> <hr size=2 width="100%" noshade color=black align=left> </font></b> </td> </tr> <tr> <td width=371 valign=top bgcolor="#99ccff"> <font size=3>Three months ended </font> </td> <td width=132 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=112 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=108 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=123 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=136 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=371 valign=top> <font size=3>&nbsp;&nbsp;&nbsp; January 31, 2001: </font> </td> <td width=132 valign=top> <font size=3>&nbsp; </font> </td> <td width=112 valign=top> <font size=3>&nbsp; </font> </td> <td width=108 valign=top> <font size=3>&nbsp; </font> </td> <td width=123 valign=top> <font size=3>&nbsp; </font> </td> <td width=136 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=371 valign=top bgcolor="#99ccff"> <font size=3>External Sales </font> </td> <td width=132 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; $&nbsp;&nbsp;&nbsp; 420.0 </font> </td> <td width=112 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp; $&nbsp;&nbsp; 229.7 </font> </td> <td width=108 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp; $&nbsp;&nbsp; 155.1 </font> </td> <td width=123 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp; $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -- </font> </td> <td width=136 valign=top bgcolor="#99ccff"> <font size=3>$804.8 </font> </td> </tr> <tr> <td width=371 valign=top> <font size=3>Operating Income (Loss) </font> </td> <td width=132 valign=top> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 150.0 </font> </td> <td width=112 valign=top> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (37.1) </font> </td> <td width=108 valign=top> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (18.1) </font> </td> <td width=123 valign=top> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (93.2)<a name="_ftnref1"></a></font> </td> <td width=136 valign=top> <font size=3>1.6 </font> </td> </tr> <tr> <td width=371 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=132 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=112 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=108 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=123 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=136 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=371 valign=top> <font size=3>Three months ended </font> </td> <td width=132 valign=top> <font size=3>&nbsp; </font> </td> <td width=112 valign=top> <font size=3>&nbsp; </font> </td> <td width=108 valign=top> <font size=3>&nbsp; </font> </td> <td width=123 valign=top> <font size=3>&nbsp; </font> </td> <td width=136 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=371 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp; January 31, 2000: </font> </td> <td width=132 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=112 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=108 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=123 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td width=136 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=371 valign=top> <font size=3>External Sales </font> </td> <td width=132 valign=top> <font size=3>&nbsp;&nbsp; $&nbsp;&nbsp;&nbsp; 267.0 </font> </td> <td width=112 valign=top> <font size=3>&nbsp;&nbsp;&nbsp; $&nbsp;&nbsp; 218.7 </font> </td> <td width=108 valign=top> <font size=3>&nbsp;&nbsp; $&nbsp;&nbsp;&nbsp; 107.8 </font> </td> <td width=123 valign=top> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; $&nbsp;&nbsp;&nbsp; 0.4 </font> </td> <td width=136 valign=top> <font size=3>$593.9 </font> </td> </tr> <tr> <td width=371 valign=top bgcolor="#99ccff"> <font size=3>Operating Income (Loss) </font> </td> <td width=132 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 101.5 </font> </td> <td width=112 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (32.9) </font> </td> <td width=108 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 8.5 </font> </td> <td width=123 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (9.7) </font> </td> <td width=136 valign=top bgcolor="#99ccff"> <font size=3>67.4 </font> </td> </tr> <tr> <td width=371 valign=top> <font size=3>&nbsp; </font> </td> <td width=132 valign=top> <font size=3>&nbsp; </font> </td> <td width=112 valign=top> <font size=3>&nbsp; </font> </td> <td width=108 valign=top> <font size=3>&nbsp; </font> </td> <td width=123 valign=top> <font size=3>&nbsp; </font> </td> <td width=136 valign=top> <font size=3>&nbsp; </font> </td> </tr> </TABLE> <b><font size=3> <hr size=2 width="25%" noshade color=black align=left> </font></b> <dir> <p>^{<font size=3>1</font>} Excluding goodwill amortization and certain other income/(expense) items, includes non-cash stock compensation charges of $4.9 million and non-recurring and other restructuring related charges of $76.4 million.&nbsp; (See Note&nbsp;7).</p> </dir> <p><font size=3>&nbsp;</font></p> <PAGE> <p>&nbsp;</p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=100 valign=top> <font size=3>Note 7 </font> </td> <td width=883 valign=top> <b><font size=3>Non-Recurring and Other Restructuring Related Charges:</font></b> During the first quarter of 2001, we launched an initiative to discontinue product lines that no longer fit our current focus and growth strategy and to consolidate unproductive and duplicative facilities.&nbsp; The non&ndash;recurring charges and restructuring related charges associated with this program totaled $70.9 million ($46.4 million net of tax) for the quarter ended January&nbsp;31, 2001. The restructuring plans are to be completed by the end of the first quarter of fiscal year 2002.&nbsp; An additional $5.5 million ($3.5 million net of tax) related to prior year acquisition integration and restructuring initiatives was also incurred in the first quarter of 2001.&nbsp; As of January&nbsp;31, 2001, a total of $19.1 million of these charges and initatives had been expended and $57.3 million was accrued as a future liability. Non-recurring and restructuring related charges by category of expenditures are as follows for the quarter ended January 31, 2001 (in millions): </td> </tr> </TABLE> <dir><dir><dir><dir> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </font></p> </dir></dir></dir></dir> <dir><dir><dir><dir> <table border=0 cellspacing=0 cellpadding=0 width="85%"> <tr> <td align=center width="48%" valign=bottom>&nbsp; </td> <td align=center width="12%" valign=bottom> <font size=3>Cost of Sales<br> Charges </font> <b><font size=3> <hr size=2 width="100%" noshade color=black align=center> </font></b> </td> <td align=center width="12%" valign=bottom> <font size=3>Non&ndash;<br> recurring<br> Charges </font> <b><font size=3> <hr size=2 width="100%" noshade color=black align=center> </font></b> </td> <td align=center width="12%" valign=bottom> <font size=3>Selling and<br> Administration<br> Charges </font> <b><font size=3> <hr size=2 width="100%" noshade color=black align=center> </font></b> </td> <td align=center width="12%" valign=bottom> <font size=3>Total </font> <b><font size=3> <hr size=2 width="100%" noshade color=black align=center> </font></b> </td> </tr> <tr> <td width="48%" valign=top> <font size=3>&nbsp; </font> </td> <td align=right width="12%" valign=top> <font size=3>&nbsp; </font> </td> <td align=right width="12%" valign=top> <font size=3>&nbsp; </font> </td> <td align=right width="12%" valign=top> <font size=3>&nbsp; </font> </td> <td align=right width="12%" valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width="48%" valign=top bgcolor="#99ccff"> <font size=3>Inventory and committed sales contracts </font> </td> <td align=right width="12%" valign=bottom bgcolor="#99ccff"> <font size=3>$36.3 </font> </td> <td align=right width="12%" valign=bottom bgcolor="#99ccff"> <font size=3>$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -- </font> </td> <td align=right width="12%" valign=bottom bgcolor="#99ccff"> <font size=3>$&nbsp;&nbsp;&nbsp;&nbsp; -- </font> </td> <td align=right width="12%" valign=bottom bgcolor="#99ccff"> <font size=3>$&nbsp; 36.3 </font> </td> </tr> <tr> <td width="48%" valign=top> <font size=3>Employee severance costs </font> </td> <td align=right width="12%" valign=top> <font size=3>-- </font> </td> <td align=right width="12%" valign=top> <font size=3>18.0 </font> </td> <td align=right width="12%" valign=top> <font size=3>--- </font> </td> <td align=right width="12%" valign=top> <font size=3>18.0 </font> </td> </tr> <tr> <td width="48%" valign=top bgcolor="#99ccff"> <font size=3>Fixed asset write-downs </font> </td> <td align=right width="12%" valign=top bgcolor="#99ccff"> <font size=3>-- </font> </td> <td align=right width="12%" valign=top bgcolor="#99ccff"> <font size=3>9.4 </font> </td> <td align=right width="12%" valign=top bgcolor="#99ccff"> <font size=3>-- </font> </td> <td align=right width="12%" valign=top bgcolor="#99ccff"> <font size=3>9.4 </font> </td> </tr> <tr> <td width="48%" valign=top> <font size=3>Contract termination costs </font> </td> <td align=right width="12%" valign=top> <font size=3>-- </font> </td> <td align=right width="12%" valign=top> <font size=3>-- </font> </td> <td align=right width="12%" valign=top> <font size=3>5.4 </font> </td> <td align=right width="12%" valign=top> <font size=3>5.4 </font> </td> </tr> <tr> <td width="48%" valign=top bgcolor="#99ccff"> <font size=3>Other </font> </td> <td align=right width="12%" valign=top bgcolor="#99ccff"> <font size=3>-- </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width="12%" valign=top bgcolor="#99ccff"> <font size=3>5.9 </font> <b><font size=3> <hr size=2 width="100%" noshade color=black align=right> </font></b> </td> <td align=right width="12%" valign=top bgcolor="#99ccff"> <font size=3>1.4 </font> <b><font size=3> <hr size=2 width="100%" noshade color=black align=right> </font></b> </td> <td align=right width="12%" valign=top bgcolor="#99ccff"> <font size=3>7.3 </font> <b><font size=3> <hr size=2 width="100%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width="48%" valign=top> <font size=3>Total </font> </td> <td align=right width="12%" valign=top> <font size=3>$36.3 </font> <b><font size=3> <hr size=4 width="100%" noshade color=black align=right> </font></b> </td> <td align=right width="12%" valign=top> <font size=3>$&nbsp; 3.3 </font> <b><font size=3> <hr size=4 width="100%" noshade color=black align=right> </font></b> </td> <td align=right width="12%" valign=top> <font size=3>$&nbsp; 6.8 </font> <b><font size=3> <hr size=4 width="100%" noshade color=black align=right> </font></b> </td> <td align=right width="12%" valign=top> <font size=3>$&nbsp; 76.4 </font> <b><font size=3> <hr size=4 width="100%" noshade color=black align=right> </font></b> </td> </tr> </TABLE> </dir></dir></dir></dir> <dir><dir><dir><dir> <p><font size=3>&nbsp;</font></p> </dir></dir></dir></dir> <dir><dir> <p><font size=3>Inventory and committed sales contract related charges represent losses incurred to write down the carrying value of inventory and costs of exiting and maintaining certain committed sales contracts for product lines that have been discontinued.&nbsp; Revenues and gross margins from these product lines were not material to our consolidated operations.</font></p> </dir></dir> <dir><dir> <p><font size=3>Employee severance costs relate to the closure of facilities, elimination of product lines and general terminations resulting from reduced sales forecasts.&nbsp; We reduced our workforce by approximately 2,100 employees during the first quarter of 2001.&nbsp; These terminations occurred across all business segments.&nbsp; As of January&nbsp;31, 2001, substantially all of the affected employees had been terminated.</font></p> </dir></dir> <dir><dir> <p><font size=3>The write-down of fixed assets primarily relates to fixtures and equipment that will no longer be used as a result of the discontinuation of certain product lines as well as to facility closures.&nbsp; These fixtures and equipment were written down to their realizable value.&nbsp; By centralizing certain key functional areas and exiting certain unprofitable product lines, we intend to increase operating efficiencies and, ultimately, profit growth in the long term.</font></p> </dir></dir> <PAGE> <p>&nbsp;</p> <dir><dir> <p><font size=3>Contract termination costs represent the administrative expenses needed to complete certain committed sales contacts.&nbsp; These costs are primarily due to our decision to exit certain product lines.</font></p> </dir></dir> <dir><dir> <p><font size=3>Other expenses primarily represent lease termination costs and other costs associated with facility closures.</font></p> </dir></dir> <p><b><font size=3>ITEM 2.&nbsp; MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</font></b></p> <p><b><font size=3>OVERVIEW</font></b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are a leading global supplier of optical- and copper-connectivity systems, broadband access and network equipment, software and integration services designed to improve the speed and performance of broadband, multiservice communications networks.&nbsp; Telephone companies, cable television operators, Internet and data service providers, wireless service providers and other communications service providers are building and upgrading the broadband network infrastructure required to offer high-speed Internet access as well as data, video, telephony and other interactive multimedia services to consumers and businesses. Our product offerings and development efforts are focused on increasing the speed and efficiency of the last mile/kilometer portion of communications networks &rsquo; that is, the network equipment that connects the service providers&rsquo; offices to businesses and end users&rsquo; homes, as well as wireless communications devices.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our customers include local and long-distance telephone companies, cable television operators, wireless service providers, new competitive service providers, broadcasters, governments, businesses, system integrators, communications equipment manufacturers and distributors.&nbsp; We offer optical and copper connectivity systems/components, broadband access and network equipment, software and integration services to our customers through the following three business groups:</font></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=76 valign=top>&nbsp; </td> <td width=77 valign=top> <font size=3>&bull;</font> </td> <td width=829 valign=top> <font size=3>Broadband Connectivity;</font> </td> </tr> <tr> <td width=76 valign=top>&nbsp; </td> <td width=77 valign=top>&nbsp; </td> <td width=829 valign=top>&nbsp; </td> </tr> <tr> <td width=76 valign=top>&nbsp; </td> <td width=77 valign=top> <font size=3>&bull;</font> </td> <td width=829 valign=top> <font size=3>Broadband Access and Transport; and</font> </td> </tr> <tr> <td width=76 valign=top>&nbsp; </td> <td width=77 valign=top>&nbsp; </td> <td width=829 valign=top>&nbsp; </td> </tr> <tr> <td width=76 valign=top>&nbsp; </td> <td width=77 valign=top> <font size=3>&bull;</font> </td> <td width=829 valign=top> <font size=3>Integrated Solutions.</font> </td> </tr> </TABLE> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <i>BROADBAND CONNECTIVITY</i> products provide the physical contact points needed to connect different communications network elements and gain access to communications system circuits for the purposes of installing, testing, monitoring, accessing, managing, reconfiguring, splitting and multiplexing such circuits within service providers&rsquo; serving offices and the last mile/kilometer portion of communications networks.&nbsp; These products include broadband connection and access devices for copper, coaxial cable, optical, wireless and broadcast communications networks.&nbsp; The group also produces passive and active optical components, as well as wireless components.&nbsp; These products are used throughout the world in telephone, cable television, Internet, wireless, enterprise and broadcast communications networks.</font></p> <PAGE> <p>&nbsp;</p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <i>BROADBAND ACCESS AND TRANSPORT </i>products enable broadband, multiservice delivery capabilities within service provider networks, while also introducing new service delivery functionality and cost effectiveness into these networks.&nbsp; The group&rsquo;s products include access and transport systems that deliver broadband, multiservice communications to consumers and businesses over copper, coaxial cable, optical and wireless networks. These products are used throughout the world to deliver Internet, data, video and voice services to businesses and consumers<b>.</b></font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <i>INTEGRATED SOLUTIONS </i>products and services consist of systems integration services, operations support systems (OSS) software and enhanced services software that aid service providers in their delivery of broadband, multiservice communications over wireline and wireless networks. Systems integration services are used to design, equip and build communications networks and OSS applications that deliver Internet, data, video and voice services to consumers and businesses.&nbsp; OSS software includes communications billing, customer care, network performance and service-level assurance software used by service providers to operate communications networks.&nbsp; Enhanced services software includes a range of wireline, wireless and Internet applications used by service providers to help increase revenues.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We believe that broadband, multiservice communications networks represent a key enabling capability for meeting the information needs of businesses and consumers around the world.&nbsp; The rapid growth of the Internet has driven the need for broadband network infrastructure.&nbsp; We believe consumers increasingly find dial-up modem speeds unacceptable for current Internet and Web-based applications.&nbsp; Further, we believe that new or future applications such as digital video and audio programs, wireless Internet access, video conferencing from personal computers, video e-mail, video on demand, distance learning, telemedicine and high&ndash;speed imaging will drive even more people to use broadband communication services.&nbsp; We believe that the global deregulation of communications markets is transforming traditional communications service providers into integrated communications providers.&nbsp; Traditional communications service providers offer only a limited selection of Internet, data, video or voice services, each on a separate network connection and a separate customer bill.&nbsp; Integrated communications providers operate broadband, multiservice networks that offer faster, cost-effective and integrated Internet, data, video and voice services over a single high-speed network connection while sending only one bill for all of the services the customer uses.&nbsp; Due to deregulation, service providers now compete for customers by offering bundles of different communications services over cost-effective networks.&nbsp; As a result of competition among communications service providers to win and retain customers with bundled services, we believe there is a large potential global market for fiber optics, broadband access and network equipment, software and integration services to build and upgrade broadband, multiservice networks.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We, like many of our peers in the communications equipment industry, believe that it is appropriate to remain cautious regarding our growth assumptions for both fiscal years 2001 and 2002, until economic and market conditions improve.&nbsp; Due to the general weakness presently expected in the economy, and the telecom sector in particular, for such periods, year-over-year revenue growth is expected to weaken compared to prior years, putting downward pressure on margins and profits.&nbsp; We are reviewing product lines and expenses and expect to take further actions to reduce costs.&nbsp; Based on our intent to implement additional actions to reduce costs in 2001, we expect to record non-recurring/restructuring charges in the second quarter in amounts that have not yet been determined.</font></p> <PAGE> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our growth is dependent on our ability to successfully develop and commercially introduce new products in each of our product groups and on the growth of the communications equipment and services market. The communications equipment industry is highly competitive and, accordingly, there can be no assurance that our new or enhanced products and services will meet with market acceptance or be profitable. The growth in the market for broadband communications products and services is dependent on a number of factors, including the amount of capital expenditures by communications service providers, regulatory and legal developments, changes in capital expenditures by communications service providers (which could result from the ongoing consolidation of customers in the market as well as the addition of new customer entrants to the market) and end&ndash;user demands for integrated Internet, data, video, voice and other communications services.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our operating results may fluctuate significantly from quarter to quarter due to several factors. We are growing through acquisition and expansion, and results of operations described in this report may not be indicative of results to be achieved in future periods. Our expense levels are based in part on our management&rsquo;s expectations of future revenues. Although management has and will continue to take measures to adjust expense levels, if revenue levels in a particular period fluctuate, operating results may be affected adversely. In addition, our results of operations are subject to seasonal factors. We historically have experienced a stronger demand for our products in the fourth fiscal quarter ending October 31, primarily as a result of customer budget cycles and our fiscal year&ndash;end incentives, and have experienced a weaker demand for our products in the first fiscal quarter ending January 31, primarily as a result of the number of holidays in late November, December and early January and a general industry slowdown during that period.&nbsp; There can be no assurance that these historical seasonal trends will continue in the future.&nbsp; A more detailed description of these risk factors, as well as other risk factors associated with our business can be found in Exhibit 99&ndash;a to our Form 10&ndash;K for the fiscal year ended October&nbsp;31, 2000.</font></p> <PAGE> <p><font size=3>RESULTS OF OPERATIONS</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following table contains information regarding the percentage to net sales of certain income and expense items for the quarters ended January 31, 2001 and 2000 and the percentage changes in these income and expense items between periods:</font></p> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0> <tr> <td width=443 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=450 colspan=5 valign=top> <b><font size=3><br> <br> Percentage of Net Sales<br> for the Three Months Ended<br> January 31</font></b> <b><font size=3> <hr size=2 width="98%" noshade color=black align=right> </font></b> </td> <td align=center width=11 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=78 valign=top> <b><font size=3>Percentage<br> Increase<br> (Decrease)<br> Between<br> Periods</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=443 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=166 valign=top> <b><font size=3>2001</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=center width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=166 valign=top> <b><font size=3>2000</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td width=16 valign=top> <font size=3>&nbsp; </font> </td> <td width=177 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=443 valign=top> <font size=3>&nbsp; </font> </td> <td width=166 valign=top> <font size=3>&nbsp; </font> </td> <td width=15 valign=top> <font size=3>&nbsp; </font> </td> <td width=166 valign=top> <font size=3>&nbsp; </font> </td> <td width=16 valign=top> <font size=3>&nbsp; </font> </td> <td width=177 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=443 valign=top bgcolor="#99ccff"> <b><font size=3>Net Sales</font></b> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>100.0% </font> </td> <td align=right width=15 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>100.0% </font> </td> <td align=right width=16 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>35.5% </font> </td> </tr> <tr> <td width=443 valign=top> <b><font size=3>Cost of Product Sold</font></b> </td> <td align=right width=166 valign=top> <font size=3>(61.6) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top> <font size=3>(53.1) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=16 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top> <font size=3>57.3 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=443 valign=top bgcolor="#99ccff"> <b><font size=3>Gross Profit</font></b> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>38.4 </font> </td> <td align=right width=15 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>46.9 </font> </td> <td align=right width=16 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>10.8 </font> </td> </tr> <tr> <td width=443 valign=top> <b><font size=3>Expenses:</font></b> </td> <td align=right width=166 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=16 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=443 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;Research and development </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(9.5) </font> </td> <td align=right width=15 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(12.7) </font> </td> <td align=right width=16 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>1.7 </font> </td> </tr> <tr> <td width=443 valign=top> <font size=3>&nbsp;&nbsp;&nbsp;Selling and administration </font> </td> <td align=right width=166 valign=top> <font size=3>(21.7) </font> </td> <td align=right width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top> <font size=3>(21.9) </font> </td> <td align=right width=16 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top> <font size=3>34.7 </font> </td> </tr> <tr> <td width=443 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;Goodwill amortization </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(2.2) </font> </td> <td align=right width=15 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(0.9) </font> </td> <td align=right width=16 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>214.3 </font> </td> </tr> <tr> <td width=443 valign=top> <font size=3>&nbsp;&nbsp;&nbsp;Non-recurring charges </font> </td> <td align=right width=166 valign=top> <font size=3>(4.2) </font> </td> <td align=right width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top> <font size=3>-- </font> </td> <td align=right width=16 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top> <font size=3>-- </font> </td> </tr> <tr> <td width=443 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;Non-cash stock compensation </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(0.6) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=15 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(0.1) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=16 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>716.7 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=443 valign=top> <b><font size=3>Operating Income</font></b> </td> <td align=right width=166 valign=top> <font size=3>0.2 </font> </td> <td align=right width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top> <font size=3>11.3 </font> </td> <td align=right width=16 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top> <font size=3>(97.6) </font> </td> </tr> <tr> <td width=443 valign=top bgcolor="#99ccff"> <b><font size=3>Other Income (Expense), Net:</font></b> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=15 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=16 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=443 valign=top> <font size=3>&nbsp;&nbsp;&nbsp;Interest </font> </td> <td align=right width=166 valign=top> <font size=3>0.1 </font> </td> <td align=right width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top> <font size=3>0.8 </font> </td> <td align=right width=16 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top> <font size=3>(80.0) </font> </td> </tr> <tr> <td width=443 valign=top bgcolor="#99ccff"> <font size=3>&nbsp;&nbsp;&nbsp;Other </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>0.2 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=15 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(0.6) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=16 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>-- </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=443 valign=top> <b><font size=3>Income Before Income Taxes</font></b> </td> <td align=right width=166 valign=top> <font size=3>0.5 </font> </td> <td align=right width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top> <font size=3>11.5 </font> </td> <td align=right width=16 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top> <font size=3>(93.7) </font> </td> </tr> <tr> <td width=443 valign=top bgcolor="#99ccff"> <b><font size=3>Provision for Income Taxes</font></b> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(0.2) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=15 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top bgcolor="#99ccff"> <font size=3>(2.6) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=16 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top bgcolor="#99ccff"> <font size=3>(86.3) </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=443 valign=top> <b><font size=3>Net Income</font></b> </td> <td align=right width=166 valign=top> <font size=3>0.3% </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=15 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=166 valign=top> <font size=3>8.9% </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=16 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=177 colspan=3 valign=top> <font size=3>(95.9)% </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=443> <font size=3>&nbsp; </font> </td> <td width=166> <font size=3>&nbsp; </font> </td> <td width=15> <font size=3>&nbsp; </font> </td> <td width=166> <font size=3>&nbsp; </font> </td> <td width=16> <font size=3>&nbsp; </font> </td> <td width=87> <font size=3>&nbsp; </font> </td> <td width=11> <font size=3>&nbsp; </font> </td> <td width=78> <font size=3>&nbsp; </font> </td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <p><b><font size=3>Net Sales: </font></b>The following table sets forth our net sales for the quarters ended January 31, 2001 and 2000 for each of our functional product groups described above:</p> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=323 valign=top> <font size=3>&nbsp; </font> </td> <td width=147 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=513 colspan=8 valign=top> <b><font size=3>Three Months Ended January 31 ($ in millions)</font></b> <b><font size=3> <hr size=3 width="97%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=323 valign=top> <font size=3>&nbsp; </font> </td> <td width=147 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=214 colspan=4 valign=top> <b><font size=3>2001</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td width=57 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=242 colspan=3 valign=top> <b><font size=3>2000</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td align=center width=323 valign=top> <b><font size=3>Product Group</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=center width=147 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=105 valign=top> <b><font size=3>Net Sales</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td width=22 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=80 valign=top> <b><font size=3>%</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=center width=63 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=111 valign=top> <b><font size=3>Net Sales</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=center width=25 valign=top> <font size=3>&nbsp; </font> </td> <td align=center width=107 valign=top> <b><font size=3>%</font></b> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=323 valign=top> <font size=3>&nbsp; </font> </td> <td width=147 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=105 valign=top> <font size=3>&nbsp; </font> </td> <td width=22 valign=top> <font size=3>&nbsp; </font> </td> <td width=80 valign=top> <font size=3>&nbsp; </font> </td> <td width=63 colspan=2 valign=top> <font size=3>&nbsp; </font> </td> <td width=111 valign=top> <font size=3>&nbsp; </font> </td> <td width=25 valign=top> <font size=3>&nbsp; </font> </td> <td width=107 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=323 valign=top bgcolor="#99ccff"> <b><font size=3>Broadband Connectivity </font></b> </td> <td width=147 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=105 valign=bottom bgcolor="#99ccff"> <font size=3>$420.0 </font> </td> <td align=right width=22 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=bottom bgcolor="#99ccff"> <font size=3>52.2% </font> </td> <td align=right width=63 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=111 valign=bottom bgcolor="#99ccff"> <font size=3>$267.0 </font> </td> <td align=right width=25 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=107 valign=bottom bgcolor="#99ccff"> <font size=3>45.0% </font> </td> </tr> <tr> <td width=323 valign=top> <b><font size=3>Broadband Access and<br> &nbsp;&nbsp;&nbsp;&nbsp; Transport</font></b> </td> <td width=147 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=105 valign=bottom> <font size=3><br> &nbsp;229.7 </font> </td> <td align=right width=22 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=bottom> <font size=3><br> 28.5 </font> </td> <td align=right width=63 colspan=2 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=111 valign=bottom> <font size=3><br> &nbsp;218.7 </font> </td> <td align=right width=25 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=107 valign=bottom> <font size=3><br> 36.8 </font> </td> </tr> <tr> <td width=323 valign=top bgcolor="#99ccff"> <b><font size=3>Integrated Solutions </font></b> </td> <td width=147 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=105 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;155.1 </font> </td> <td align=right width=22 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=bottom bgcolor="#99ccff"> <font size=3>19.3 </font> </td> <td align=right width=63 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=111 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp;107.8 </font> </td> <td align=right width=25 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=107 valign=bottom bgcolor="#99ccff"> <font size=3>18.2 </font> </td> </tr> <tr> <td width=323 valign=top> <b><font size=3>Other</font></b> </td> <td width=147 valign=top> <font size=3>&nbsp; </font> </td> <td align=right width=105 valign=bottom> <font size=3>-- </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=22 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=bottom> <font size=3>-- </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=63 colspan=2 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=111 valign=bottom> <font size=3>&nbsp;&nbsp;&nbsp; 0.4 </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=bottom> <font size=3>&nbsp; </font> </td> <td align=right width=107 valign=bottom> <font size=3>-- </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=323 valign=top bgcolor="#99ccff"> <b><font size=3>&nbsp;&nbsp;&nbsp;&nbsp; Total</font></b> </td> <td width=147 valign=top bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=105 valign=bottom bgcolor="#99ccff"> <font size=3>$804.8 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=22 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=80 valign=bottom bgcolor="#99ccff"> <font size=3>100.0% </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=63 colspan=2 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=111 valign=bottom bgcolor="#99ccff"> <font size=3>$593.9 </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> <td align=right width=25 valign=bottom bgcolor="#99ccff"> <font size=3>&nbsp; </font> </td> <td align=right width=107 valign=bottom bgcolor="#99ccff"> <font size=3>100.0% </font> <b><font size=3> <hr size=4 width="95%" noshade color=black align=right> </font></b> </td> </tr> <tr> <td width=323 valign=top>&nbsp; </td> <td width=147 valign=top>&nbsp; </td> <td align=right width=105 valign=bottom>&nbsp; </td> <td align=right width=22 valign=bottom>&nbsp; </td> <td align=right width=80 valign=bottom>&nbsp; </td> <td align=right width=63 colspan=2 valign=bottom>&nbsp; </td> <td align=right width=111 valign=bottom>&nbsp; </td> <td align=right width=25 valign=bottom>&nbsp; </td> <td align=right width=107 valign=bottom>&nbsp; </td> </tr> <!-- DO NOT remove the following table row. It is needed for . the proper rendering of tables containing misaligned cells.--> <tr height=0> <td width=323></td> <td width=147></td> <td width=105></td> <td width=22></td> <td width=80></td> <td width=6></td> <td width=57></td> <td width=111></td> <td width=25></td> <td width=107></td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <PAGE> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net sales for the three-month period ended January 31, 2001 were $804.8 million, reflecting a 35.5% increase over the comparable 2000 time period.&nbsp; This increase reflected growth in all product groups.&nbsp; International revenues comprised approximately 27.3% of our sales for the three-month period ended January 31, 2001 and 21.9% for the comparable 2000 time period.</font></p> <PAGE> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the three&ndash;month period ended January 31, 2001, net sales of Broadband Connectivity products rose by 57.3% over the comparable 2000 time period.&nbsp; This growth reflects continued strong global demand for our fiber&ndash; and copper&ndash;connectivity systems and optical components during the quarter.&nbsp; Sales were made to a broad range of Internet/data, video and voice service providers &ndash; incumbents and new entrants &ndash; around the globe.&nbsp; Strong worldwide growth in Broadband Connectivity systems during the quarter resulted from growth in Internet/data traffic and digital services, which is creating demand for broader bandwidth connections, as well as&nbsp; competition among new service providers, which is creating demand for connectivity to new and existing communications networks. Broadband Connectivity&rsquo;s sales have grown to represent approximately 52.2% of our net sales.&nbsp; We expect that future sales of Broadband Connectivity products will continue to account for a substantial portion of our combined net sales.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the three months ended January 31, 2001, net sales of Broadband Access and Transport products rose by 5.0% over the comparable 2000 time period.&nbsp; This growth is primarily the result of sales increases in the major product systems &ndash; wireline systems, cable television systems, and broadband wireless systems offset &ndash; but is partially by lower sales of enterprise-located access systems.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the three months ended January 31, 2001, Integrated Solutions net sales increased by 43.9% over the comparable 2000 time period.&nbsp; Both systems integration services and software systems contributed to sales growth.&nbsp; Systems integration sales grew as we helped communications service providers build or upgrade networks that offer integrated Internet/data, video and voice services.&nbsp; Software sales grew primarily as a result of revenues added by our acquisition of Centigram Communications, which was completed in July 2000 and accounted for as a purchase transaction.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Gross Profit:</b>&nbsp; During the three-month periods ended January 31, 2001 and 2000, gross profit percentages were 38.4% and 46.9%, respectively.&nbsp; This decrease was the result of a less favorable product mix across all product groups and approximately $36.3 million of inventory write-offs and costs to exit certain sales contracts which were included in Cost of Product Sold as a result of the restructuring plans announced in the first quarter of 2001 (see Note 7 to the unaudited consolidated financial statements).&nbsp; We anticipate that our future gross profit percentage will continue to be affected by many factors, including product mix, the timing of new product introductions and manufacturing volume.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Operating Expenses:</b>&nbsp; Total operating expenses for the three months ended January 31, 2001 and 2000 were $307.1 million and $211.2 million, representing 38.2% and 35.6% of net sales, respectively.&nbsp; These operating expenses included non&ndash;recurring charges, restructuring related charges and non-cash compensation charges and non&ndash;cash compensation charges of $45.0 million and $0.6 million for the three months ended January&nbsp;31, 2001 and 2000, respectively.&nbsp; The 2001 non&ndash;recurring charges represent costs associated with initiatives to discontinue product lines that no longer fit our current focus and growth strategy as well as consolidating unproductive and duplicative facilities.&nbsp; Also included are non-cash stock compensation charges associated with the acquisitions of Broadband Access Systems and Centigram.&nbsp; The 2000 non-cash stock compensation charges are associated with the acquisitions of Broadband Access Systems and Centigram.&nbsp; Operating expenses, before non&ndash;recurring charges, restructuring related charges and non&ndash;cash compensation charges, for the three months ended January&nbsp;31, 2001 and 2000 were $262.1 million and $210.6 million, representing 32.6% and 35.5% of net sales, respectively.&nbsp; The increase in absolute dollars of operating expenses, before non&ndash;recurring charges, restructuring related charges and non&ndash;cash compensation charges, was due primarily to costs associated with expanded operations necessary to support higher revenue levels.&nbsp; The decrease in operating expenses as a percentage of net sales was due to tighter controls on spending and our restructuring efforts.</font></p> <PAGE> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Research and development expenses were $76.5 million for the three months ended January&nbsp;31, 2001, representing an increase of 1.7% over $75.2 million for the three months ended January 31, 2000.&nbsp; This slight increase reflects our efforts to control expenses and carefully manage the rate of increase of expenses.&nbsp; However, we believe that given the rapidly changing technology and competitive environment in the communications equipment industry, continued commitment to product development efforts will be required for us to remain competitive. Accordingly, we intend to continue to allocate substantial resources to product development for each of our product groups.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Selling and administration expenses were $174.8 million for the three months ended January&nbsp;31, 2001, representing an increase of 34.7% over $129.8 million for the three months ended January&nbsp;31, 2000.&nbsp; This increase primarily reflects the activities of additional personnel costs related to expanded operations compared to such costs in the three months ended January&nbsp;31, 2000, as well as approximately $6.8 million in selling and administration expenses incurred to complete certain non-cancelable sales contracts as a result of our decision to exit certain product lines.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Several of our acquisitions have been accounted for as purchase transactions in which the initial purchase price exceeded the fair value of the acquired assets. As a result of our acquisition activity, goodwill amortization increased to $17.6 million in the three months ended January&nbsp;31, 2001, compared to $5.6 million in the three months ended January&nbsp;31, 2000.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Other Income (Expense), Net:</b> For the three months ended January 31, 2001 and 2000, the net interest income (expense) category represented net interest income on cash and cash equivalents.&nbsp; See &quot;Liquidity and Capital Resources&quot; below for a discussion of cash levels.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other expense primarily represents the gain or loss on foreign exchange transactions, the sale of fixed assets and our share of the net operating results of our investments in other companies accounted for under the equity method.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Income Taxes</b>: The effective income tax rate for the three months ended January 31, 2001 and 2000 was affected significantly by higher marginal tax rates applied to restructuring expenses.&nbsp; Excluding the impact of the higher rates used for the restructuring charges, the effective income tax rate was 34% for the three-month periods ended on January 31, 2001 and 2000.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Net Income:&nbsp; </b>Net income was $2.2 million (or $0.00 per diluted share) for the three months ended January 31, 2001, a 95.9% decrease over $53.1 million (or $0.07 per diluted share) for the three months ended January 31, 2000. Excluding the non&ndash;recurring charges, restructuring related charges and non&ndash;cash compensation charges of $54.3 million and $0.6 million, net of tax, net income for the three months ended January 31, 2001 and 2000 was $56.5 million (or $0.07 per diluted share) and $53.7 million (or $0.07 per diluted share), respectively.</font></p> <PAGE> <p><b><font size=3>LIQUIDITY AND CAPITAL RESOURCES</font></b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Cash and cash equivalents, primarily short&ndash;term investments in commercial paper with maturities of less than 90 days and other short&ndash;term investments, decreased $63.4 million and increased $19.0 million during the three months ended January 31, 2001 and 2000, respectively. The major elements of the 2001 change included $87.3 million used for operations, $48.7 million used for acquisitions and $93.3 million in property and equipment additions.&nbsp; This was partially offset by a $154.4 million increase in debt compared to the amount outstanding at October&nbsp;31, 2000.&nbsp; The major elements of the 2000 change included $33.6 million provided by operations as well as $50.7 million from issuance of common stock to employees pursuant to our stock option and employee stock purchase plans.&nbsp; This was partially offset by $18.0 million used for acquisitions and $49.0 million used for property and equipment additions during the period.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We believe that current cash on hand, cash generated from operating activities, cash from investments, and available credit facilities will be adequate to fund our working capital requirements and planned capital expenditures for the duration of the 2001 fiscal year. However, we may still find it necessary to seek additional sources of financing to support our capital needs, for additional working capital, potential investments or acquisitions or otherwise.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; At January 31, 2001, we had approximately $201.5 million of debt outstanding. We have a $340 million, five&ndash;year credit facility at an interest rate equal to the commercial paper interest rate plus 25 basis points that is available for general corporate purposes, of which $185.0 million was outstanding as of January&nbsp;31, 2001.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We own common stock in several publicly held companies.&nbsp; We record our investment in these companies at their market value.&nbsp; As of January 31, 2001, exclusive of our interest in Efficient Networks which has entered into a definitive merger agreement pursuant to which it would be acquired by Siemens, the market value of our marketable securities available for sale was approximately $502.7 million.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the three months ended January 31, 2001, we invested $6.5 million from our previously announced $100 million venture capital fund.&nbsp; Our venture capital fund is focused on investing in emerging and start&ndash;up companies throughout the world that are engaged in developing high&ndash;performance broadband communication technologies.&nbsp; As of January 31, 2001, approximately $44.7 million had been invested through this fund.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have worked with customers and third-party financiers to find a means of financing projects by negotiating financing arrangements. As of January 31, 2001, we had commitments to extend credit of $229.0 million for such arrangements.&nbsp; The total amount drawn and outstanding as of January 31, 2001 was $71.4 million.&nbsp; We intend to sell all or a portion of these commitments and outstanding receivables to third parties, but have not yet made any such sales.&nbsp; These commitments to extend credit are conditional agreements generally having fixed expiration or termination dates and specific interest rates, conditions and purposes.&nbsp; These commitments may exist and expire without being drawn.&nbsp; Therefore, the amounts committed but not drawn will not necessarily impact future cash flows.&nbsp; We regularly review all outstanding commitments, and the results of these reviews are considered in assessing the overall risk for possible credit losses.&nbsp; At January 31, 2001, there was no risk of a significant loss in the event of non-performance related to these financing arrangements.</font></p> <PAGE> <p><b><font size=3>Euro Conversion</font></b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On January 1, 1999, several member countries of the European Union established fixed conversion rates and adopted the Euro as their new common legal currency.&nbsp; Beginning on this date, the Euro began trading on currency exchanges while the legacy currencies remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002.&nbsp; During this transition period, parties can elect to pay for goods and services and transact business using either the Euro or a legacy currency.&nbsp; Between January 1, 2002 and July 1, 2002, the participating countries will introduce Euro hard currency and withdraw all legacy currencies.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Euro conversion may affect cross-border competition by creating cross-border price transparency. We are assessing our pricing and marketing strategy in order to ensure that we remain competitive in a broader European market. We also are modifying our information technology systems to permit transactions to take place in both the legacy currencies and the Euro and provide for the eventual elimination of the legacy currencies. In addition, we are reviewing whether certain existing contracts will need to be modified. Our currency risks and risk management for operations in participating countries may be reduced as the legacy currencies are converted to the Euro.&nbsp; We will continue to evaluate issues involving the introduction of the Euro.&nbsp; Based on current information and assessments, we do not expect that the Euro conversion will have a material adverse effect on our business, results of operations or financial condition.</font></p> <p><b><font size=3>Cautionary Statement for Purposes of the &ldquo;Safe Harbor&rdquo; Provisions of the Private Securities Litigation Reform Act of 1995</font></b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The foregoing Management&rsquo;s Discussion and Analysis of Financial Condition and Results of Operations contains various &ldquo;forward-looking statements&rdquo; within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent our expectations or beliefs concerning future events, including the following: any statements regarding future sales, profit percentages, earnings per share and other results of operations, any statements regarding the continuation of historical trends, any statements regarding the sufficiency of our cash balances and cash generated from operating and financing activities for our future liquidity and capital resource needs, any statements regarding the effect of regulatory changes and any statements regarding the economy in general or the future of the communications equipment industry and communications services on our business.&nbsp; &nbsp;We caution that any forward-looking statements made by us in this report or in other announcements made by us are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements.&nbsp; These include, without limitation, demand for our products or services, availability of materials to make products, changing market conditions and growth rates either within our industry or generally within the economy, volatility in the stock market, new competition and technologies, increased costs associated with protecting intellectual property rights, the impact of customer financing activities, our ability to successfully integrate the operations of acquired companies with our historic operations, retention of key employees, fluctuations in our operating results, pressures on the pricing of the products and services we offer, and the factors set forth on Exhibit 99-a to our Form 10-K for the fiscal year ended October 31, 2000.&nbsp; We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.</font></p> <PAGE> <p>&nbsp;</p> <p><b><font size=3>ITEM 3.&nbsp; QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</font></b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are exposed to market risk from changes in foreign exchange rates.&nbsp; To mitigate the risk from these exposures, we have instituted a balance sheet hedging program.&nbsp; The objective of this program is to protect our net monetary assets and liabilities from fluctuations due to movements in foreign exchange rates.&nbsp; This program operates in markets where hedging costs are beneficial.&nbsp; We attempt to minimize exposure to currencies in which hedging instruments are unavailable or prohibitively expensive by managing our operating activities and net asset positions. &nbsp;The majority of hedging instruments utilized are forward contracts with maturities of less than one year.&nbsp; Foreign exchange contracts reduce our overall exposure to exchange rate movements, since gains and losses on these contracts offset losses and gains on the underlying exposure.&nbsp; Our policy prohibits the use of derivative financial instruments for trading and other speculative purposes.</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As documented in the Liquidity and Capital Resources section as well as Note 4 to the Unaudited Consolidated Financial Statements, we own common stock in several publicly held companies.&nbsp; Due to material changes in the fair value of such common stock, we have recorded a $400.3 million unrealized loss, $252.2 million net of income tax effects, in shareowners&rsquo; investment as of January&nbsp;31, 2001.&nbsp; Assuming an immediate decrease of 20% in the portfolio stock price from the closing price on January&nbsp;31, 2001, the hypothetical reduction in shareowners&rsquo; investment related to these holdings is estimated to be $66.1 million (net of income tax effects), or 2.6% of total shareowners&rsquo; investment at January 31, 2001.</font></p> <p><b><font size=3>ITEM 1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; LEGAL PROCEEDINGS</font></b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We currently are not subject to any pending or threatened litigation other than routine litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our business, financial condition or results of operations.</font></p> <p><b><font size=3>ITEM 2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; CHANGES IN SECURITIES</font></b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On February 26, 2001, we completed our acquisition of CommTech in a stock-for-stock transaction.&nbsp; We issued approximately 11.65 million shares of our common stock in exchange for the outstanding shares of CommTech.&nbsp; We also converted all outstanding CommTech stock options into options to acquire approximately 1.6 million shares of our common stock.&nbsp; Because the transaction did not involve a public offering, the shares of our common stock were deemed to be issued pursuant to an exemption from registration provided by Section&nbsp;4(2) of the Securities Act of 1933, as amended.</font></p> <p><b><font size=3>ITEM 3.</font></b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>DEFAULTS UPON SENIOR SECURITIES</b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; None.</font></p> <PAGE> <p><b><font size=3>ITEM 4.</font></b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</b></p> <p><font size=3>&nbsp;</font></p> <p><font size=3>(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; An annual meeting of our shareowners (the &ldquo;Annual Meeting&rdquo;) was held on February 27, 2001.&nbsp; Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities and Exchange Act of 1934.&nbsp; There was no solicitation in opposition to the management&rsquo;s nominees for director as listed in the proxy statement, and all such nominees were elected.</font></p> <p><font size=3>&nbsp;</font></p> <p><font size=3>(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; At the Annual Meeting, John J. Boyle III and Charles D. Yost were elected as directors for terms expiring at the annual meeting of our shareowners in 2004.&nbsp; The following table shows the vote totals with respect to the election of two directors:</font></p> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=127 valign=top> <font size=3>Name</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> <td width=127 valign=top> <font size=3>Votes For</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> <td width=127 valign=top> <font size=3>Authority Withheld</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> </tr> <tr> <td width=127 valign=top> <font size=3>John J. Boyle III</font> </td> <td width=127 valign=top> <font size=3>584,549,634</font> </td> <td width=127 valign=top> <font size=3>36,411,513</font> </td> </tr> <tr> <td width=127 valign=top> <font size=3>Charles D. Yost</font> </td> <td width=127 valign=top> <font size=3>557,865,837</font> </td> <td width=127 valign=top> <font size=3>63,095,311</font> </td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <p><font size=3>John A. Blanchard III, B. Kristine Johnson and Jean-Pierre Rosso continued as directors for terms expiring at the annual meeting of our shareowners in 2003, and James C. Castle, Ph.D. and John D. Wunsch continued as directors for terms expiring at the annual meeting of our shareowners in 2002.&nbsp; Immediately following the Annual Meeting, William J. Cadogan resigned as Chairman of the Board, and Richard R. Roscitt was elected by our Board of Directors as Chairman of the Board for a term expiring at the annual meeting of our shareowners in 2002.</font></p> <p><font size=3>&nbsp;</font></p> <p><font size=3>(c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; At the Annual Meeting, the shareowners also approved an amendment to our 1991 Stock Incentive Plan to:&nbsp; (a) change the name of the plan to the &ldquo;Global Stock Incentive Plan&rdquo;; (b) increase the total number of authorized shares of our common stock available for grant under the plan by 35,500,000 shares; and (c) make other changes to the plan as described in our proxy statement.&nbsp; The following table shows the vote totals with respect to the amendments to our 1991 Stock Incentive Plan:</font></p> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=101 valign=top> <font size=3>Votes For</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> <td width=101 valign=top> <font size=3>Votes Against</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> <td width=101 valign=top> <font size=3>Abstain</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> </tr> <tr> <td width=101 valign=top> <font size=3>455,931,805</font> </td> <td width=101 valign=top> <font size=3>161,698,831</font> </td> <td width=101 valign=top> <font size=3>3,485,511</font> </td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <p><font size=3>&nbsp;</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; At the Annual Meeting, the shareowners also approved an amendment to our Nonemployee Directors Stock Option Plan to:&nbsp; (a) extend the termination date of the plan from February 26, 2001 to February 26, 2006; and (b) increase the total number of authorized shares of our common stock available for grant under the plan by 500,000 shares.&nbsp; The following table shows the vote totals with respect to the amendments to our Nonemployee Director Stock Option Plan:</font></p> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=101 valign=top> <font size=3>Votes For</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> <td width=101 valign=top> <font size=3>Votes Against</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> <td width=101 valign=top> <font size=3>Abstain</font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> </tr> <tr> <td width=101 valign=top> <font size=3>577,651,650</font> </td> <td width=101 valign=top> <font size=3>39,850,052</font> </td> <td width=101 valign=top> <font size=3>3,575,244</font> </td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <p><font size=3>&nbsp;</font></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No other matters were considered in connection with our Annual Meeting.</font></p> <p><b><font size=3>ITEM 5.</font></b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>OTHER INFORMATION</b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; None.</font></p> <p><b><font size=3>ITEM 6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; EXHIBITS AND REPORTS ON FORM 8&ndash;K</font></b></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=588 colspan=3 valign=top> <font size=3>a.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Exhibits </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>4-a </font> </td> <td width=493 valign=top> <font size=3>Form of certificate for shares of Common Stock of ADC Telecommunications, Inc. (Incorporated by reference to Exhibit 4&ndash;a to ADC's Form 10&ndash;Q for the quarter ended January 31, 1996.) </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>4-b </font> </td> <td width=493 valign=top> <font size=3>Restated Articles of Incorporation of ADC Telecommunications, Inc., as amended prior to January 20, 2000. (Incorporated by reference to Exhibit 4.1 to ADC's Registration Statement on Form S&ndash;3 dated April 15, 1997.) </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>4-c </font> </td> <td width=493 valign=top> <font size=3>Restated Bylaws of ADC Telecommunications, Inc., as amended. (Incorporated by reference to Exhibit 4.2 to ADC's Registration Statement on Form S&ndash;3 dated April 15, 1997.) </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>4-d </font> </td> <td width=493 valign=top> <font size=3>Second Amended and Restated Rights Agreement, amended and restated as of November 28, 1995, by and among ADC Telecommunications, Inc. and Norwest Bank Minnesota, N.A. (amending and restating the Rights Agreement dated as of September 23, 1986, as amended and restated as of August 16, 1989), which includes as Exhibit A thereto the form of Right Certificate. (Incorporated by reference to Exhibit 4 to ADC&rsquo;s Form 8&ndash;K dated December 11, 1995.) </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>4-e </font> </td> <td width=493 valign=top> <font size=3>Amendment to Second Amended and Restated Rights Agreement dated as of October 6, 1999.&nbsp; (Incorporated by reference to Exhibit&nbsp;4&ndash;c to ADC&rsquo;s Form&nbsp;10&ndash;K for the fiscal year ended October&nbsp;31, 1999.) </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>4-f </font> </td> <td width=493 valign=top> <font size=3>Amendment No. 2 to Second Amended and Restated Rights Agreement dated as of November&nbsp;15, 2000 among ADC Telecommunications, Inc., Wells Fargo Bank Minnesota, N.A. (formerly Norwest Bank Minnesota, N.A.) and Computershare Investment Services, LLC.&nbsp; (Incorporated by reference to Exhibit 4.8 to ADC&rsquo;s Registration Statement on Form S-8 dated February&nbsp;28, 2001.) </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>4-g </font> </td> <td width=493 valign=top> <font size=3>Articles of Amendment to Restated Articles of Incorporation of ADC Telecommunications, Inc. dated January 20, 2000.&nbsp; (Incorporated by reference to Exhibit 4.6 to ADC&rsquo;s Registration Statement on Form S&ndash;8 dated March 14, 2000.) </font> </td> </tr> </TABLE> <PAGE> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0 width="100%"> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>4-h </font> </td> <td width=493 valign=top> <font size=3>Articles of Amendment to Restated Articles of Incorporation of ADC Telecommunications, Inc., dated June 30, 2000.&nbsp; (Incorporated by reference to Exhibit 4-g to ADC&rsquo;s Quarterly Report on Form 10-Q for the quarter ended July&nbsp;31, 2000.) </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>10-a </font> </td> <td width=493 valign=top> <font size=3>ADC Telecommunications, Inc. Global Stock Incentive Plan (as amended and restated through February 27, 2001). </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>10-b </font> </td> <td width=493 valign=top> <font size=3>ADC Telecommunications, Inc. Nonemployee Director Stock Option Plan (as amended and restated through February 27, 2001). </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>10-c </font> </td> <td width=493 valign=top> <font size=3>ADC Telecommunications, Inc. 401(k) Excess Plan (2001 Restatement) (as amended and restated effective January&nbsp;1, 2001). </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>10-d </font> </td> <td width=493 valign=top> <font size=3>Employment Agreement between ADC Telecommunications, Inc. and Richard R. Roscitt, dated January&nbsp;28, 2001. </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>10-e </font> </td> <td width=493 valign=top> <font size=3>Separation Agreement between ADC Telecommunications, Inc. and William&nbsp;J. Cadogan, dated effective November&nbsp;1, 2000. </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=588 colspan=3 valign=top> <font size=3>b.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Reports on Form 8&ndash;K </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>&nbsp; </font> </td> <td width=493 valign=top> <font size=3>Current Report on Form 8&ndash;K dated and filed January&nbsp;19, 2001 in connection with our press release dated January&nbsp;19, 2001 announcing that we were updating our guidance on financial results. </font> </td> </tr> <tr> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=37 valign=top> <font size=3>&nbsp; </font> </td> <td width=59 valign=top> <font size=3>&nbsp; </font> </td> <td width=493 valign=top> <font size=3>Current Report on Form 8&ndash;K dated and filed January&nbsp;29, 2001 announcing the appointment of Richard&nbsp;R. Roscitt as our Chief Executive Officer and Lynn J. Davis as our President and Chief Operating Officer, effective February&nbsp;15, 2001. </font> </td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <PAGE> <p><font size=3>&nbsp;</font></p> <p align=center><b><font size=3>SIGNATURES</font></b></p> <p><font size=3>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 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.</font></p> <table border=0 cellspacing=0 cellpadding=0 width="78%"> <tr> <td width=341 valign=top> <font size=3>Dated:&nbsp; March 15, 2001 </font> </td> <td width=427 colspan=3 valign=top> <font size=3>ADC TELECOMMUNICATIONS, INC. </font> </td> </tr> <tr> <td width=341 valign=top> <font size=3>&nbsp; </font> </td> <td width=57 valign=top> <font size=3>&nbsp; </font> </td> <td width=339 valign=top> <font size=3>&nbsp; </font> </td> <td width=31 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=341 valign=top> <font size=3>&nbsp; </font> </td> <td width=57 valign=top> <font size=3>By: </font> </td> <td width=370 colspan=2 valign=top> <font size=3>/s/ Robert E. Switz </font> <b><font size=3> <hr size=2 width="95%" noshade color=black align=left> </font></b> </td> </tr> <tr> <td width=341 valign=top> <font size=3>&nbsp; </font> </td> <td width=57 valign=top> <font size=3>&nbsp; </font> </td> <td width=339 valign=top> <font size=3>Robert E. Switz </font> </td> <td width=31 valign=top> <font size=3>&nbsp; </font> </td> </tr> <tr> <td width=341 valign=top> <font size=3>&nbsp; </font> </td> <td width=57 valign=top> <font size=3>&nbsp; </font> </td> <td width=370 colspan=2 valign=top> <font size=3>Senior Vice President, Chief Financial Officer and </font> </td> </tr> <tr> <td width=341 valign=top> <font size=3>&nbsp; </font> </td> <td width=57 valign=top> <font size=3>&nbsp; </font> </td> <td width=370 colspan=2 valign=top> <font size=3>President, Broadband Access and Transport Group </font> </td> </tr> </TABLE> <p><font size=3>&nbsp;</font></p> <PAGE> <p><font size=3>&nbsp;</font></p> <p align=center><b><font size=3>ADC TELECOMMUNICATIONS, INC.</font></b><br> <b>EXHIBIT INDEX TO FORM 10&ndash;Q</b><br> <b>FOR THE QUARTER ENDED JANUARY 31, 2001</b></p> <p><font size=3>&nbsp;</font></p> <table border=0 cellspacing=0 cellpadding=0> <tr> <td align=center width=209 valign=top> <u><font size=3>Exhibit No.</font></u> </td> <td width=864 valign=top> <u><font size=3>Description</font></u> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>4-a </font> </td> <td width=864 valign=top> <font size=3>Form of certificate for shares of Common Stock of ADC Telecommunications, Inc. (Incorporated by reference to Exhibit&nbsp;4&ndash;a to ADC's Form 10&ndash;Q for the quarter ended January&nbsp;31, 1996.) </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>4-b </font> </td> <td width=864 valign=top> <font size=3>Restated Articles of Incorporation of ADC Telecommunications, Inc., as amended prior to January 20, 2000.&nbsp; (Incorporated by reference to Exhibit 4.1 to ADC's Registration Statement on Form S&ndash;3 dated April 15, 1997.) </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>4-c </font> </td> <td width=864 valign=top> <font size=3>Restated Bylaws of ADC Telecommunications, Inc., as amended. (Incorporated by reference to Exhibit 4.2 to ADC's Registration Statement on Form S&ndash;3 dated April 15, 1997.) </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>4-d </font> </td> <td width=864 valign=top> <font size=3>Second Amended and Restated Rights Agreement, amended and restated as of November 28, 1995, between ADC Telecommunications, Inc. and Norwest Bank Minnesota, N.A. (amending and restating the Rights Agreement dated as of September 23, 1986, as amended and restated as of August 16, 1989), which includes as Exhibit A thereto the form of Right Certificate. (Incorporated by reference to Exhibit 4 to ADC&rsquo;s Form 8&ndash;K dated December 11, 1995.) </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>4-e </font> </td> <td width=864 valign=top> <font size=3>Amendment to Second Amended and Restated Rights Agreement dated as of October 6, 1999.&nbsp; (Incorporated by reference to Exhibit&nbsp;4&ndash;c to ADC&rsquo;s Form&nbsp;10&ndash;K for the fiscal year ended October 31, 1999.) </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>4-f </font> </td> <td width=864 valign=top> <font size=3>Amendment No. 2 to Second Amended and Restated Rights Agreement dated as of November&nbsp;15, 2000 among ADC Telecommunications, Inc., Wells Fargo Bank Minnesota, N.A. (formerly Norwest Bank Minnesota, N.A.) and Computershare Investment Services, LLC.&nbsp; (Incorporated by reference to Exhibit 4.8 to ADC&rsquo;s Registration Statement on Form S-8 dated February&nbsp;28, 2001.) </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>4-g </font> </td> <td width=864 valign=top> <font size=3>Articles of Amendment to Restated Articles of Incorporation of ADC Telecommunications, Inc. dated January 20, 2000.&nbsp; (Incorporated by reference to Exhibit&nbsp;4.6 to ADC&rsquo;s Registration Statement on Form&nbsp;S&ndash;8 dated March 14, 2000.) </font> </td> </tr> </TABLE> <PAGE> <p>&nbsp;</p> <table border=0 cellspacing=0 cellpadding=0> <tr> <td align=center width=209 valign=top> <font size=3>4-h </font> </td> <td width=864 valign=top> <font size=3>Articles of Amendment to Restated Articles of Incorporation of ADC Telecommunications, Inc., dated June 30, 2000.&nbsp; (Incorporated by reference to Exhibit 4-g to ADC&rsquo;s Quarterly Report on Form 10-Q for the quarter ended July&nbsp;31, 2000.) </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>10-a </font> </td> <td width=864 valign=top> <font size=3>ADC Telecommunications, Inc. Global Stock Incentive Plan (as amended and restated through February 27, 2001). </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>10-b </font> </td> <td width=864 valign=top> <font size=3>ADC Telecommunications, Inc. Nonemployee Director Stock Option Plan (as amended and restated through February 27, 2001). </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>10-c </font> </td> <td width=864 valign=top> <font size=3>ADC Telecommunications, Inc. 401(k) Excess Plan (2001 Restatement) (as amended and restated effective January&nbsp;1, 2001). </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>10-d </font> </td> <td width=864 valign=top> <font size=3>Employment Agreement between ADC Telecommunications, Inc. and Richard R. Roscitt, dated January&nbsp;28, 2001. </font> </td> </tr> <tr> <td align=center width=209 valign=top> <font size=3>10-e </font> </td> <td width=864 valign=top> <font size=3>Separation Agreement between ADC Telecommunications, Inc. and William&nbsp;J. Cadogan, dated effective November&nbsp;1, 2000. </font> </td> </tr> </TABLE> <p><a name="_ftn1"></a><font size=3><a href="#_ftnref1" title=""></a></font></p> </body> </HTML> </TEXT> </DOCUMENT>

2001

0QTR1

ADI

https://www.sec.gov/Archives/edgar/data/6281/000095013501500349/b38676ade10-q.txt

<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>b38676ade10-q.txt <DESCRIPTION>ANALOG DEVICES INC. <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 FEBRUARY 3, 2001 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. 1-7819 ANALOG DEVICES, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2348234 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE TECHNOLOGY WAY, NORWOOD, MA 02062-9106 (Address of principal executive offices) (Zip Code) (781) 329-4700 (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 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 March 3, 2001 was 359,845,682 shares of Common Stock. ================================================================================ <PAGE> 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (thousands except per share amounts) <TABLE> <CAPTION> THREE MONTHS ENDED -------------------------------------- FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ---------------- <S> <C> <C> Net sales $ 772,274 $ 490,277 Cost of sales 320,020 225,087 ----------- ----------- Gross margin 452,254 265,190 Operating expenses: Research and development 121,710 82,516 Purchased in-process research and development 9,500 -- Amortization of intangibles 10,306 496 Selling, marketing, general and administrative 85,553 64,524 ----------- ----------- 227,069 147,536 Operating income 225,185 117,654 Nonoperating (income) expenses: Interest expense 16,869 1,681 Interest income (41,248) (11,906) Other, net (28,116) 814 ----------- ----------- (52,495) (9,411) ----------- ----------- Income before income taxes 277,680 127,065 Provision for income taxes 87,303 34,058 ----------- ----------- Net income $ 190,377 $ 93,007 =========== =========== Shares used to compute earnings per share - basic 357,070 349,352 ======= ======= Shares used to compute earnings per share - diluted 383,392 374,458 ======= ======= Earnings per share - basic $0.53 $0.26 ===== ===== Earnings per share - diluted $0.50 $0.25 ===== ===== </TABLE> See accompanying notes. 2 <PAGE> 3 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (thousands) <TABLE> <CAPTION> Assets FEBRUARY 3, 2001 OCTOBER 28, 2000 JANUARY 29, 2000 ---------------- ---------------- ---------------- <S> <C> <C> <C> Cash and cash equivalents $ 1,191,920 $ 1,736,421 $ 409,516 Short-term investments 1,158,381 498,844 485,706 Accounts receivable, net 421,219 463,912 298,246 Inventories: Raw materials 22,593 17,505 13,176 Work in process 197,992 179,918 157,655 Finished goods 136,491 134,671 79,353 ------------ ------------ ------------ 357,076 332,094 250,184 Deferred tax assets 113,000 108,989 99,300 Prepaid expenses and other current assets 29,378 27,754 16,009 ------------ ------------ ------------ Total current assets 3,270,974 3,168,014 1,558,961 ------------ ------------ ------------ Property, plant and equipment, at cost: Land and buildings 262,076 238,550 171,977 Machinery and equipment 1,363,641 1,260,572 1,116,344 Office equipment 91,091 86,930 76,355 Leasehold improvements 128,063 120,710 110,953 ------------ ------------ ------------ 1,844,871 1,706,762 1,475,629 Less accumulated depreciation and amortization 964,443 927,536 826,844 ------------ ------------ ------------ Net property, plant and equipment 880,428 779,226 648,785 ------------ ------------ ------------ Investments 213,202 217,755 199,070 Intangible assets, net 269,164 192,698 35,337 Other assets 55,453 53,644 47,180 ------------ ------------ ------------ Total other assets 537,819 464,097 281,587 ------------ ------------ ------------ $ 4,689,221 $ 4,411,337 $ 2,489,333 ============ ============ ============ </TABLE> See accompanying notes. 3 <PAGE> 4 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (thousands) <TABLE> <CAPTION> Liabilities and Stockholders' Equity FEBRUARY 3, 2001 OCTOBER 28, 2000 JANUARY 29, 2000 ---------------- ---------------- ---------------- <S> <C> <C> <C> Short-term borrowings and current portion of long-term debt $ 131 $ 5,752 $ 84,810 Obligations under capital leases 9,041 9,938 14,089 Accounts payable 171,349 213,196 125,027 Deferred income on shipments to distributors 146,155 140,369 113,523 Income taxes payable 156,831 86,625 106,319 Accrued liabilities 179,755 194,017 121,864 ------------ ------------ ------------ Total current liabilities 663,262 649,897 565,632 ------------ ------------ ------------ Long-term debt 1,200,648 1,200,261 -- Non-current obligations under capital leases 10,210 12,699 13,218 Deferred income taxes 52,420 51,205 62,600 Other non-current liabilities 223,021 193,625 101,538 ------------ ------------ ------------ Total non-current liabilities 1,486,299 1,457,790 177,356 ------------ ------------ ------------ Commitments and Contingencies Stockholders' equity: Preferred stock, $1.00 par value, 471,934 shares authorized, none outstanding -- -- -- Common stock, $.16 2/3 par value, 600,000,000 shares authorized, 360,269,511 shares issued (357,969,010 in October 2000 and 179,361,743 in January 2000) 60,046 59,663 29,893 Capital in excess of par value 594,445 526,820 538,274 Retained earnings 1,908,320 1,717,943 1,203,818 Accumulated other comprehensive income 2,430 2,841 38,488 ------------ ------------ ------------ 2,565,241 2,307,267 1,810,473 Less 467,114 shares in treasury, at cost (45,186 in October 2000 and 3,213,403 in January 2000) 25,581 3,617 64,128 ------------ ------------ ------------ Total stockholders' equity 2,539,660 2,303,650 1,746,345 ------------ ------------ ------------ $ 4,689,221 $ 4,411,337 $ 2,489,333 ============ ============ ============ </TABLE> See accompanying notes. 4 <PAGE> 5 ANALOG DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (thousands) <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------- FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ---------------- <S> <C> <C> OPERATIONS Cash flows from operations: Net income $ 190,377 $ 93,007 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 49,284 35,872 Gain on sale of investment (28,084) -- Write-off of purchased research and development 9,500 -- Deferred income taxes (2,983) (10,011) Other non-cash expense 728 440 Changes in operating assets and liabilities 34,495 45,199 ----------- ----------- Total adjustments 62,940 71,500 ----------- ----------- Net cash provided by operations 253,317 164,507 ----------- ----------- INVESTMENTS Cash flows from investments: Purchase of short-term investments available for sale (935,221) (207,486) Maturities of short-term investments available for sale 275,684 128,333 Payments for acquisitions, net of cash acquired (36,424) (1,176) Proceeds from sale of investment 60,936 -- Change in long-term investments -- 348 Additions to property, plant and equipment, net (138,945) (40,677) Decrease in other assets (3,028) (1,713) ----------- ----------- Net cash used for investments (776,998) (122,371) ----------- ----------- FINANCING ACTIVITIES Cash flows from financing activities: Proceeds from employee stock plans 6,123 9,981 Repurchase of common stock (21,831) -- Payments on capital lease obligations (3,532) (3,622) Net (decrease) increase in variable rate borrowings (5,128) 2,488 ----------- ----------- Net cash (used for) provided by financing activities (24,368) 8,847 ----------- ----------- Effect of exchange rate changes on cash 3,548 2,642 ----------- ----------- Net (decrease) increase in cash and cash equivalents (544,501) 53,625 Cash and cash equivalents at beginning of period 1,736,421 355,891 ----------- ----------- Cash and cash equivalents at end of period $ 1,191,920 $ 409,516 =========== =========== </TABLE> See accompanying notes. 5 <PAGE> 6 Analog Devices, Inc. Notes to Condensed Consolidated Financial Statements For the three months ended February 3, 2001 (all tabular amounts in thousands except per share amounts) Note 1 - In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for this interim period and should be read in conjunction with the Company's Annual Report to Stockholders on Form 10-K for the fiscal year ended October 28, 2000 (2000 Annual Report). The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal 2001 is a 53-week fiscal year, with the additional week occurring in the first quarter ended February 3, 2001. Note 2 - Certain amounts reported in the previous year have been reclassified to conform to the fiscal 2001 presentation. Note 3 - Comprehensive Income Total comprehensive income, i.e., net income plus available-for-sale securities valuation adjustments, net gain or loss on derivative instruments designated as cash flow hedges and currency translation adjustments to stockholders' equity, for the first quarters of fiscal 2001 and fiscal 2000 was $190 million and $119 million, respectively. Note 4 - Earnings Per Share Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of future issues of common stock relating to stock option programs and other potentially dilutive securities. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the period. Shares related to convertible debt financing are excluded because the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> THREE MONTHS ENDED -------------------------------------- FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ---------------- <S> <C> <C> Basic: Net income $ 190,377 $ 93,007 ========== ========== Weighted shares outstanding 357,070 349,352 ========== ========== Earnings per share $0.53 $0.26 ===== ===== Diluted: Net income $ 190,377 $ 93,007 ========== ========== Weighted shares outstanding 357,070 349,352 Assumed exercise of common stock equivalents 26,322 25,106 ---------- ---------- Weighted average common and common equivalent shares 383,392 374,458 ========== ========== Earnings per share $0.50 $0.25 ===== ===== </TABLE> 6 <PAGE> 7 Note 5 - Investments On December 27, 2000, the Company sold its investment in WaferTech, LLC to Taiwan Semiconductor Manufacturing Company. The Company received approximately $61 million in cash and realized a pretax gain of approximately $28 million. The realized gain is included in other nonoperating income. Note 6 - Acquisitions During the first quarter of fiscal 2001, the Company completed several acquisitions. On October 31, 2000, the Company acquired Thomas Neuroth AG (Neuroth) of Vienna, Austria for approximately $4 million in cash, with additional contingent cash consideration of up to $4 million payable if certain operational objectives are achieved. Neuroth is a developer of highly integrated circuits for symmetric DSL broadband access. On November 10, 2000, the Company acquired Signal Processing Associates Pty. Ltd., (SPA) of Victoria, Australia for approximately $3 million in cash, with additional contingent cash consideration of up to $1.5 million payable if certain operational objectives are achieved. SPA is a leading developer and supplier of voice processing and fax/data relay software for telecommunications applications. On December 18, 2000, the Company acquired Integrated Micro Instruments, Inc. (IMI) of Berkeley, California for approximately $1 million in cash and 13,750 shares of common stock (valued at approximately $746,000), with an additional 50,000 shares of common stock issuable over the next five years upon the satisfaction of certain conditions. IMI develops leading edge MEMS process designs. On January 4, 2001, the Company acquired ChipLogic, Inc. (ChipLogic) of Santa Clara, California for cash of approximately $4 million and approximately 1 million shares of common stock (valued at approximately $60 million), with 489,375 shares of additional common stock issuable if certain operational objectives are achieved. ChipLogic is a developer of high-performance integrated circuits and software focused on the convergence of voice, broadband access and network protocol processing. In connection with the acquisition of ChipLogic, the Company recorded a charge of $9.5 million for the write-off of in-process research and development. On January 16, 2001, the Company acquired Staccato Systems, Inc. (Staccato) of Mountain View, California for approximately $23 million in cash, with additional contingent cash consideration of up to $7 million payable if certain operational objectives are achieved. Staccato is a leader in the field of audio synthesis technology. Any contingent consideration paid to Staccato will be accounted for as additional goodwill. Of the $4 million of contingent consideration payable to Neuroth, $3 million will be allocated to goodwill and $1 million will be accounted for as acquisition-related expense. All other contingent consideration will be accounted for as acquisition-related expense. These acquisitions were accounted for as purchases, and the excess of the purchase price over the fair value of the assets acquired was allocated to goodwill, which is being amortized on the straight-line basis over five years. Pro forma results of operations for Neuroth, SPA, IMI, ChipLogic and Staccato have not been provided herein as they were not material to the Company on either an individual or an aggregate basis. The results of operations of each acquisition are included in the Company's consolidated statement of income from the date of each acquisition. Note 7 - Segment Information The Company operates in two segments: the design, manufacture and marketing of a broad range of integrated circuits, which comprises approximately 98% of the Company's revenue, and the design, manufacture and marketing of a range of assembled products, which accounts for the remaining 2% of the Company's revenue. Effectively, the Company operates in one reportable segment. Note 8 - New Accounting Standards Revenue Recognition In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 summarizes the application of generally accepted accounting principles to revenue recognition in financial statements. The Company will adopt SAB 101 in the fourth quarter of fiscal 2001 and does not expect SAB 101 to have a material effect on its financial position or results of operation. 7 <PAGE> 8 Derivatives Effective October 29, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended by Statement of Financial Accounting Standards No. 138, (FAS 138), "Accounting for Certain Instruments and Certain Hedging Activities". FAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure such instruments at fair market value. Under certain circumstances, a portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (OCI) until the hedged transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. The adoption of FAS 133 on October 29, 2000 did not have a material impact on operations; however, it resulted in a $5 million loss recognized in other comprehensive income. This loss will be reclassified into earnings during fiscal 2001. Foreign Exchange Exposure Management - The Company has significant international sales and purchase transactions in foreign currencies and has a policy of hedging forecasted and actual foreign currency risk with forward foreign exchange contracts. The Company's forward foreign exchange contracts are primarily denominated in Japanese yen and certain European currencies and are for periods consistent with the terms of the underlying transactions, generally one year or less. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. In accordance with FAS 133, hedges related to anticipated transactions are designated and documented at the inception of the respective hedge as cash flow hedges and evaluated for effectiveness monthly. As the terms of the forward contract and the underlying transaction are matched at inception, forward contract effectiveness is calculated by comparing the fair value of the contract to the change in the forward value of the anticipated transaction, with the effective portion of the gain or loss on the derivative instrument reported as a component of OCI in stockholders' equity and reclassified into earnings in the same period during which the hedged transaction affects earnings. Any residual change in fair value of the instruments, or ineffectiveness, is recognized immediately in Other expense. No ineffectiveness was recognized in the first quarter of fiscal 2001. Additionally, the Company enters into foreign currency forward contracts to hedge the gains and losses generated by the remeasurement of certain recorded assets and liabilities in a non-functional currency. Changes in the fair value of these undesignated hedges are recognized in Other expense immediately as an offset to the changes in the fair value of the asset or liability being hedged. Interest Rate Risk Management - The Company enters into interest rate swap and cap agreements to manage its exposure to interest rate movements by effectively converting a portion of its debt and certain financing arrangements from fixed to variable rates. Maturity dates of interest rate swap and cap agreements generally match those of the underlying debt or financing arrangements. These agreements, which have maturities of up to seven years, involve the exchange of fixed rate payments for variable rate payments without the exchange of the underlying principal amounts. Variable rates are based on six-month U.S. dollar LIBOR and are reset on a semiannual basis. The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and recognized over the life of the agreements as an adjustment to interest expense. Given the insignificant value of the current interest rate swap and cap agreements, the Company has not designated these instruments as hedges. The change in fair value related to these instruments is recognized immediately in Other expense. Derivative financial instruments involve, to a varying degree, elements of market and credit risk not recognized in the consolidated financial statements. The market risk associated with these instruments resulting from currency exchange rate or interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company's foreign exchange and interest rate instruments consist of a number of major international financial institutions with high credit ratings. The Company does not believe that there is significant risk of nonperformance by these counterparties because the Company continually monitors the credit ratings of such counterparties, and limits the financial exposure and the amount of agreements entered into with any one financial institution. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company's exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties' obligations under the contracts exceed the obligations of the Company to the counterparties. 8 <PAGE> 9 Accumulated Derivative Gains or Losses The following table summarizes activity in other comprehensive income related to derivatives classified as cash flow hedges held by the Company during the period of October 29, 2000 (the date of adoption of FAS 133) through February 3, 2001: Cumulative effect of adopting FAS 133 as of October 29, 2000 $ 5,200 Less: Reclassifications into earnings from other comprehensive income 2,800 -------- 2,400 Changes in fair value of derivatives - (gain) loss (2,500) -------- Accumulated (gain) loss included in other comprehensive income $ (100) ======== Note 9 - Stock Split On February 15, 2000, the Company's Board of Directors approved a 2-for-1 split of the Company's common stock, effected as a 100% stock dividend on March 15, 2000 by the distribution of one share of common stock for every share held on the record date of February 28, 2000. All historical per share amounts in this report have been restated to reflect the split. 9 <PAGE> 10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management Analysis for the fiscal year ended October 28, 2000, contained in the our 2000 Annual Report. The following discussion and analysis may contain forward-looking statements. Such statements are subject to certain risks and uncertainties, including those discussed below or in our 2000 Annual Report, which could cause actual results to differ materially from our expectations. Readers are cautioned not to place undue reliance on any forward-looking statements, as they reflect management's current analysis. We undertake no obligation to release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Results of Operations Net sales for the first quarter of fiscal 2001 increased by $282 million, or 58%, to $772 million from $490 million for the first quarter of fiscal 2000. Analog IC product sales grew by 61% and DSP IC product sales grew by 48% over the same quarter last year. Sales to OEM customers increased 65% over the first quarter of fiscal 2000. Sales into the distribution channel increased 46% over the same quarter last year. Sales increased in all end-markets with the communications market representing the largest growth area. These year-over-year sales increases were attributable to growth in the markets we serve along with increased demand for our newest products. Sales increased in all geographic regions with the largest increase occurring in North America. International sales for the first quarter of fiscal 2001 and fiscal 2000 represented 56% of sales. Our net sales for the first quarter of fiscal 2001 declined 4% from the fourth quarter of fiscal 2000 as a result of rapidly decreasing demand in the latter half of the first quarter of fiscal 2001. The decrease in demand was primarily the result of significant order cancellations and adjustments from computer and telecommunications customers and contract manufacturers in North America and Southeast Asia in response to an inventory build-up in both the OEM and distributor channels. We anticipate further revenue reductions in the second quarter of fiscal 2001 as this downward trend in demand has continued and has been exacerbated by a significant drop in consumer confidence in response to a pessimistic economic picture in the U.S. and Southeast Asia. The gross margin for the first quarter of fiscal 2001 was 58.6%, an improvement of 450 basis points from the 54.1% gross margin realized in the first quarter of fiscal 2000. The improvement in gross margin was primarily due to the favorable effect of fixed costs allocated across a higher sales base and improved manufacturing efficiencies at our wafer fabrication, assembly and test facilities. Research and development (R&D) expenses were $122 million for the three months ended February 3, 2001 compared to $83 million for the corresponding period of fiscal 2000. As a percentage of sales, R&D spending decreased during the first quarter of fiscal 2001 to 15.8%, down from 16.8% in the first quarter of fiscal 2000. In absolute dollar terms, R&D spending increased by $39 million in the first quarter of fiscal 2001 as compared to the first quarter of fiscal 2000 as a result of our continued investment in opportunities in our served markets. Additional expenses associated with increased engineering headcount, combined with the effect of increased bonus accruals in the first quarter of fiscal 2001, were the main reasons for the year-over-year increase. We expect to continue the development of innovative technologies and processes for new products targeted for broadband and wireless communications applications, imaging, audio and high-performance power and thermal management products for computer and consumer product applications. We believe that a continued commitment to research and development is essential in order to maintain product leadership with our existing products and to provide innovative new product offerings, and therefore we expect to continue to make significant R&D investments in the future. During the first quarter of fiscal 2001, we recorded a charge of $9.5 million for the write-off of in-process R&D in connection with the acquisition of ChipLogic, Inc., of Santa Clara, California. The total cost of the acquisition was approximately $60 million in common stock and $4 million in cash, with additional contingent consideration of 489,375 shares of common stock payable if ChipLogic achieves certain operational objectives. The contingent consideration is expected to be accounted for as acquisition-related expense. 10 <PAGE> 11 Amortization of intangibles was $10 million in the first quarter of fiscal 2001 as compared with $0.5 million recorded in the first quarter of fiscal 2000. The year-over-year increase was primarily due to the amortization of goodwill related to the purchase of BCO Technologies plc, Ltd. in the fourth quarter of fiscal 2000. Selling, marketing, general and administrative (SMG&A) expenses for the first quarter of fiscal 2001 were $86 million, an increase of $21 million from the $65 million reported for the first quarter of fiscal 2000. As a percentage of sales, SMG&A decreased to 11.1% for the first quarter of fiscal 2001 from 13.2% for the first quarter of fiscal 2000 as a result of increased sales and continued control over spending. The combination of higher sales, higher gross margins and a reduction in operating expense ratios provided strong operating leverage that improved the operating margin to 29.2% of sales, compared to 24.0% in the first quarter of fiscal 2000. Interest expense was $17 million for the first quarter of fiscal 2001 and $2 million for the first quarter of fiscal 2000. The increase in interest expense was due to the issuance in the fourth quarter of fiscal 2000 of $1.2 billion of 4.75% convertible subordinated notes. Interest income was $41 million for the first quarter of fiscal 2001 and $12 million for the first quarter of fiscal 2000. The increase in interest income was attributable to the interest earned on higher cash balances resulting from increased cash flow from operations as well as the unused portion of the funds from our 4.75% convertible subordinated notes. During the first quarter of fiscal 2001, we sold our investment in WaferTech, LLC to Taiwan Semiconductor Manufacturing Company for $61 million in cash. As a result of this transaction, we recorded a pretax gain of approximately $28 million, which is included in other nonoperating income. Our effective income tax rate increased to 31% for the first quarter of fiscal 2001 from 27% for the first quarter of fiscal 2000 primarily due to a shift in the mix of worldwide profits as well as a taxable capital gain from the sale of our WaferTech investment in the first quarter of fiscal 2001. Liquidity and Capital Resources At February 3, 2001, we had $2,350 million of cash, cash equivalents and short-term investments, an increase of $115 million from the fourth quarter of 2000 and $1,455 million from the first quarter of fiscal 2000. The sequential increase in cash, cash equivalents and short-term investments was primarily due to operating cash inflows of $253 million, partially offset by increased capital expenditures. The year-over-year increase in cash, cash equivalents and short-term investments was primarily due to $1,172 million of proceeds from the issuance of our 4.75% convertible subordinated notes in the fourth quarter of fiscal 2000. Accounts receivable totaled $421 million at the end of the first quarter of fiscal 2001, a decrease of $43 million from the fourth quarter of fiscal 2000 primarily due to a 4% sequential decline in sales. Accounts receivable increased $123 million from the first quarter of fiscal 2000 due to higher sales levels. Days sales outstanding improved from 56 days at January 29, 2000 to 49 days at February 3, 2001. Inventories of $357 million at February 3, 2001 increased by $25 million from the fourth quarter of fiscal 2000 and $107 million from the first quarter of fiscal 2000. Days cost of sales in inventory remained flat year-over-year despite increased inventory levels in response to a 58% increase in sales and higher demand for our products. The sequential increase in inventory levels was due to a general economic slowdown during the first quarter of fiscal 2001 that is constraining demand for technology products. Net additions to property, plant and equipment of $139 million for the first quarter of fiscal 2001 were funded with a combination of cash on hand and cash generated from operations. Capital spending in the first quarter of fiscal 2001 increased over the $41 million spent in the first quarter of fiscal 2000, primarily attributable to the expansion of manufacturing capability to meet sales growth during fiscal 2000. We currently plan to make capital expenditures of approximately $400 million in fiscal 2001. 11 <PAGE> 12 During the first quarter of fiscal 2001, we completed several acquisitions. On October 31, 2000, we acquired Thomas Neuroth AG (Neuroth) of Vienna, Austria for approximately $4 million in cash, with additional contingent cash consideration of up to $4 million payable if certain operational objectives are achieved. Neuroth is a developer of highly integrated circuits for symmetric DSL broadband access. On November 10, 2000, we acquired Signal Processing Associates Pty. Ltd., (SPA) of Victoria, Australia for approximately $3 million in cash, with additional contingent cash consideration of up to $1.5 million payable if certain operational objectives are achieved. SPA is a leading developer and supplier of voice processing and fax/data relay software for telecommunications applications. On December 18, 2000, we acquired Integrated Micro Instruments, Inc. (IMI) of Berkeley, California for approximately $1 million in cash and 13,750 shares of our common stock, with an additional 50,000 shares of common stock issuable over the next five years upon the satisfaction of certain conditions. IMI develops leading edge MEMS process designs. On January 4, 2001, we acquired ChipLogic, Inc. (ChipLogic) of Santa Clara, California for approximately 1 million shares of our common stock, with 489,375 shares of additional common stock issuable if certain operational objectives are achieved. ChipLogic is a developer of high-performance integrated circuits and software focused on the convergence of voice, broadband access and network protocol processing. On January 16, 2001, we acquired Staccato Systems, Inc. (Staccato) of Mountain View, California for approximately $23 million in cash, with additional contingent cash consideration of up to $7 million payable if certain operational objectives are achieved. Staccato is a leader in the field of audio synthesis technology. At February 3, 2001, our principal sources of liquidity were $2,350 million of cash, cash equivalents and short-term investments. We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with current and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures and research and development efforts for the foreseeable future. 12 <PAGE> 13 Factors Which May Affect Future Results We may experience material fluctuations in future operating results. Our future operating results are difficult to predict and may be affected by a number of factors including the timing of new product announcements or introductions by us and our competitors, competitive pricing pressures, fluctuations in manufacturing yields, adequate availability of wafers and manufacturing capacity, the effects of adverse changes in overall economic conditions, the risk that our backlog could decline significantly, our ability to continue hiring engineers and other qualified employees needed to meet the expected demands of our largest customers and changes in product mix and economic conditions in the United States and international markets. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns at various times. Our business is subject to rapid technological changes and there can be no assurance, depending on the mix of future business, that products stocked in inventory will not be rendered obsolete before we ship them. As a result of these and other factors, there can be no assurance that we will not experience material fluctuations in future operating results on a quarterly or annual basis. Our future success depends upon our ability to develop and market new products and enter new markets. Our success depends in part on our continued ability to develop and market new products. There can be no assurance that we will be able to develop and introduce new products in a timely manner or that new products, if developed, will achieve market acceptance. In addition, our growth is dependent on our continued ability to penetrate new markets where we have limited experience and competition is intense. There can be no assurance that the markets we serve will grow in the future; that our existing and new products will meet the requirements of these markets; that our products will achieve customer acceptance in these markets; that competitors will not force prices to an unacceptably low level or take market share from us; or that we can achieve or maintain profits in these markets. Also, some of our customers in these markets are less well established, which could subject us to increased credit risk. We may not be able to compete successfully in the semiconductor industry in the future. The semiconductor industry is intensely competitive. Some of our competitors have greater technical, marketing, manufacturing and financial resources than we do. Our competitors also include emerging companies attempting to sell products to specialized markets such as those that we serve. Our competitors have, in some cases, developed and marketed products having similar design and functionality as our products. There can be no assurance that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition. We may not be able to satisfy increasing demand for our products, and increased production may lead to overcapacity and lower prices. The cyclical nature of the semiconductor industry has resulted in sustained or short-term periods when demand for our products has increased or decreased rapidly. We and the semiconductor industry have experienced a period of rapid increases in demand during the past two fiscal years. We have increased our manufacturing capacity over the past three years through both expansion of our production facilities and increased access to third-party foundries. However, we cannot be sure that we will not encounter unanticipated production problems at either our own facilities or at third-party foundries, or that the increased capacity will be sufficient to satisfy demand for our products. We believe that other semiconductor manufacturers have expanded their production capacity over the past several years. This expansion by us and our competitors could lead to overcapacity in our target markets, which could lead to price erosion that would adversely affect our operating results. We rely on third-party subcontractors and manufacturers for some industry-standard wafers and therefore cannot control their availability or conditions of supply. We rely, and plan to continue to rely, on assembly and test subcontractors and on third-party wafer fabricators to supply most of our wafers that can be manufactured using industry-standard digital processes. This reliance involves several risks, including reduced control over delivery schedules, manufacturing yields and costs. 13 <PAGE> 14 Our revenues may not increase enough to offset the expense of additional capacity. Our capacity additions resulted in a significant increase in operating expenses. If revenue levels do not increase enough to offset these additional expense levels, our future operating results could be adversely affected. In addition, asset values could be impaired if the additional capacity is underutilized for an extended period of time. We rely on manufacturing capacity located in geologically unstable areas, which could affect the availability of supplies and services. We and many companies in the semiconductor industry rely on internal manufacturing capacity located in California and Taiwan as well as wafer fabrication foundries in Taiwan and other sub-contractors in geologically unstable locations around the world. This reliance involves risks associated with the impact of earthquakes on us and the semiconductor industry, including temporary loss of capacity, availability and cost of key raw materials and equipment, and availability of key services including transport. We are exposed to economic and political risks through our significant international operations. During the first quarter of fiscal 2001, 56% of our revenues were derived from customers in international markets. We have manufacturing facilities outside the United States in Ireland, the United Kingdom, the Philippines and Taiwan. In addition to being exposed to the ongoing economic cycles in the semiconductor industry, we are also subject to the economic and political risks inherent in international operations, including the risks associated with the ongoing uncertainties in many developing economies around the world. These risks include air transportation disruptions, expropriation, currency controls and changes in currency exchange rates, tax and tariff rates and freight rates. Although we engage in hedging transactions to reduce our exposure to currency exchange rate fluctuations, there can be no assurance that our competitive position will not be adversely affected by changes in the exchange rate of the U.S. dollar against other currencies. We are involved in frequent litigation regarding intellectual property rights, which could be costly to undertake and could require us to redesign products or pay significant royalties. The semiconductor industry is characterized by frequent claims and litigation involving patent and other intellectual property rights. We have from time to time received, and may in the future receive, claims from third parties asserting that our products or processes infringe their patents or other intellectual property rights. In the event a third party makes a valid intellectual property claim and a license is not available on commercially reasonable terms, we could be forced either to redesign or to stop production of products incorporating that intellectual property, and our operating results could be materially and adversely affected. Litigation may be necessary to enforce patents or other of our intellectual property rights or to defend us against claims of infringement, and this litigation can be costly and divert the attention of key personnel. See Note 11 of the Notes to our Consolidated Financial Statements for the fiscal year ended October 28, 2000 for information concerning pending litigation involving us. An adverse outcome in this litigation could have a material adverse effect on our consolidated financial position or on our consolidated results of operations or cash flows in the period in which the litigation is resolved. Leverage and debt service obligations may adversely affect our cash flow. We have a substantial amount of outstanding indebtedness. There is the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of this indebtedness when due. Our substantial leverage could have significant negative consequences. This substantial leverage could increase our vulnerability to general adverse economic and industry conditions. It may require the dedication of a substantial portion of our expected cash flow from operations to service the indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures. It may also limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate. 14 <PAGE> 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated herein by reference to the "Management Analysis" set forth on pages 18 through 25 of the 2000 Annual Report to Shareholders. ITEM 6. Exhibits and reports on Form 8-K (a) Exhibits None (b) Report on Form 8-K Form 8-K, dated December 7, 2000, as amended by Form 8-K/A dated December 13, 2000, reporting under Item 7 selected consolidated financial data for the five-year period ended October 30, 1999 and description of capital stock. Items 1, 2, 3, 4 and 5 of PART II are not applicable and have been omitted. 15 <PAGE> 16 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. ANALOG DEVICES, INC. -------------------- (Registrant) Date: March 19, 2001 By: /s/ Jerald G. Fishman ---------------------------------- Jerald G. Fishman President and Chief Executive Officer (Principal Executive Officer) Date: March 19, 2001 By: /s/ Joseph E. McDonough ---------------------------------- Joseph E. McDonough Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 16 </TEXT> </DOCUMENT>

2001

0QTR1

ADM

https://www.sec.gov/Archives/edgar/data/7084/000000708401500003/adm10q2qfy01.htm

<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>adm10q2qfy01.htm <DESCRIPTION>10-Q FILED FEB. 14, 2001 <TEXT> <HTML> <HEAD> <META NAME="Generator" CONTENT="Microsoft Word 97"> <TITLE>UNITED STATES</TITLE> </HEAD> <BODY> <FONT SIZE=3><P ALIGN="CENTER">UNITED STATES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">SECURITIES AND EXCHANGE COMMISSION</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">WASHINGTON, D. C. 20549</P> <P ALIGN="CENTER">FORM 10-Q</P> <P ALIGN="CENTER"></P> <P>[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES </P><DIR> <P>EXCHANGE ACT OF 1934</P> </DIR> <P>For the quarterly period ended December 31, 2000</P> <P ALIGN="CENTER">OR</P> <P>[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES </P><DIR> <P>EXCHANGE ACT OF 1934</P> </DIR> <P>For the transition period ________________________ TO ________________________</P> <P>Commission file number 1-44</P> <P ALIGN="CENTER">ARCHER-DANIELS-MIDLAND COMPANY</P> <P ALIGN="CENTER">(Exact name of registrant as specified in its charter)</P> <DIR> <DIR> <DIR> <P>&#9;Delaware&#9;41-0129150</P></DIR> </DIR> </DIR> <P>(State or other jurisdiction of&#9;(I. R. S. Employer</P> <P>incorporation or organization)&#9;Identification No.)</P> <P>4666 Faries Parkway Box 1470 Decatur, Illinois&#9;62525</P> <P>(Address of principal executive offices)&#9;(Zip Code)</P> <P>Registrant's telephone number, including area code&#9;217-424-5200</P> <P>&nbsp;</P> <P>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<U> <I>X </I></U> No ___.</P> <P>Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.</P> <P ALIGN="CENTER">Common Stock, no par value - 633,736,151 shares</P> <P ALIGN="CENTER">(January 31, 2001)</P> <P>&nbsp;</P> <P>PART I - FINANCIAL INFORMATION</P> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">CONSOLIDATED STATEMENTS OF EARNINGS</P> <P ALIGN="CENTER">(Unaudited)</P> </FONT> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=649> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">THREE MONTHS ENDED</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">DECEMBER 31,</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P>&#9;<U>2000&#9;1999</U></FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(In thousands, except</P> <P ALIGN="CENTER">per share amounts)</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Net sales and other operating income</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>$4,940,999</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$4,615,421</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Cost of products sold and other operating costs</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>4,524,691</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>4,209,148</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Gross Profit</DIR> </DIR> </FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>416,308</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>406,273</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Selling, general and administrative expenses</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>187,443</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>199,476</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Earnings From Operations</DIR> </DIR> </FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>228,865</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>206,797</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Other income (expense)</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>(44,262)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>(53,534)</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Earnings Before Income Taxes</DIR> </DIR> </FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>184,603</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>153,263</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Income taxes</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>59,996</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>51,343</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Net Earnings</DIR> </DIR> </FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>$ 124,607</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$ 101,920</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = =</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = =</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Average number of shares outstanding</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>633,402</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>639,210</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Basic and diluted earnings per common share</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>$.20</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$.16</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Dividends per common share</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>$.05</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$.048</FONT></TD> </TR> </TABLE> <FONT SIZE=3> <P>&nbsp;</P> <P>&nbsp;</P> <P>&nbsp;</P> <P>See notes to consolidated financial statements.</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">CONSOLIDATED STATEMENTS OF EARNINGS</P> <P ALIGN="CENTER">(Unaudited)</P> </FONT> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=649> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">SIX MONTHS ENDED</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">DECEMBER 31,</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P>&#9;<U>2000&#9;1999</U></FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="32%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(In thousands, except</P> <P ALIGN="CENTER">per share amounts)</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Net sales and other operating income</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>$9,575,783</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$9,226,687</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Cost of products sold and other operating costs</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>8,875,567</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>8,548,094</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Gross Profit</DIR> </DIR> </FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>700,216</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>678,593</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Selling, general and administrative expenses</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>356,766</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>370,211</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Earnings From Operations</DIR> </DIR> </FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>343,450</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>308,382</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Other income (expense)</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>(42,658)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>(100,433)</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Earnings Before Income Taxes</DIR> </DIR> </FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>300,792</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>207,949</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Income taxes</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>66,756</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>69,662</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Net Earnings</DIR> </DIR> </FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>$ 234,036</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$ 138,287</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = =</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = =</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Average number of shares outstanding</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>632,992</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>640,489</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Basic and diluted earnings per common share</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>$.37</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$.22</FONT></TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="68%" VALIGN="TOP"> <FONT SIZE=3><P>Dividends per common share</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P>$.098</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$.094</FONT></TD> </TR> </TABLE> <FONT SIZE=3> <P>&nbsp;</P> <P>&nbsp;</P> <P>&nbsp;</P> <P>See notes to consolidated financial statements.</P> <P ALIGN="CENTER">&nbsp;</P> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">CONSOLIDATED BALANCE SHEETS</P> <P ALIGN="CENTER">(Unaudited)</P> </FONT> <TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=655> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">DECEMBER 31,</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">JUNE 30,</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">2000</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">2000</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="36%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="36%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(In thousands)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>ASSETS</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Current Assets</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Cash and cash equivalents</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>$ 541,726</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$ 477,226</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Marketable securities</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>399,479</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>454,223</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Receivables</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>2,327,140</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>2,139,896</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Inventories</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>3,161,642</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>2,856,884</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Prepaid expenses</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>304,187</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>234,138</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Total Current Assets</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>6,734,174</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>6,162,367</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Investments and Other Assets</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Investments in and advances to affiliates</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>2,043,776</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>1,876,633</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Long-term marketable securities</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>680,198</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>617,633</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Other assets</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>515,310</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>489,386</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>3,239,284</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>2,983,652</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Property, Plant and Equipment</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Land</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>161,172</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>163,722</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Buildings</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>2,085,664</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>2,098,124</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Machinery and equipment</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>8,775,957</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>8,702,639</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Construction in progress</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>397,213</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>416,546</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Less allowances for depreciation</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(6,295,617)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>(6,103,950)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>5,124,389</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>5,277,081</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>$15,097,847</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$14,423,100</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = = =</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = = =</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> </TABLE> <FONT SIZE=3> <P>&nbsp;</P> <P>&nbsp;</P> <P>&nbsp;</P> <P>See notes to consolidated financial statements.</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">CONSOLIDATED BALANCE SHEETS</P> <P ALIGN="CENTER">(Unaudited)</P> </FONT> <TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=655> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">DECEMBER 31,</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">JUNE 30,</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">2000</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">2000</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="36%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="36%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(In thousands)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>LIABILITIES AND SHAREHOLDERS' EQUITY</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Current Liabilities</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Short-term debt</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>$ 1,463,097</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$ 1,550,571</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Accounts payable</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>2,366,056</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>2,139,744</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Accrued expenses</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>735,333</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>610,735</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Current maturities of long-term debt</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>23,648</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>31,895</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Total Current Liabilities</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>4,588,134</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>4,332,945</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Long-term Debt</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>3,314,929</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>3,277,218</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Deferred Credits</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Income taxes</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>657,864</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>560,772</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Other</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>147,006</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>141,922</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>804,870</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>702,694</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Shareholders' Equity</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Common stock</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>5,245,409</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>5,232,597</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Reinvested earnings</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>1,497,290</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>1,325,323</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Accumulated other comprehensive loss</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(352,785)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>(447,677)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>6,389,914</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>6,110,243</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>__________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>$15,097,847</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>$14,423,100</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = = =</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = = =</FONT></TD> </TR> </TABLE> <FONT SIZE=3> <P>&nbsp;</P> <P>&nbsp;</P> <P>&nbsp;</P> <P>See notes to consolidated financial statements.</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">CONSOLIDATED STATEMENT OF CASH FLOWS</P> <P ALIGN="CENTER">(Unaudited)</P> <P ALIGN="CENTER"></P></FONT> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=661> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="36%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">SIX MONTHS ENDED</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="36%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">DECEMBER 31,</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="36%" VALIGN="TOP" COLSPAN=2> <U><FONT SIZE=3><P ALIGN="CENTER">2000 1999</U></FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="36%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(In thousands)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Operating Activities</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Net earnings</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>$ 234,036</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>$ 138,287</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Adjustments to reconcile to net cash provided by operations</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Depreciation and amortization</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>292,972</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>302,677</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Deferred income taxes</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>11,113</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>9,416</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Amortization of long-term debt discount</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>23,958</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>20,980</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>(Gain) loss on marketable securities transactions</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>24,998</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(12,677)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Other</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>47,110</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>64,977</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <FONT SIZE=3><P>Changes in operating assets and liabilities</DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <DIR> <FONT SIZE=3><P>Receivables</DIR> </DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(212,552)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(325,538)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <DIR> <FONT SIZE=3><P>Inventories</DIR> </DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(311,687)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(338,151)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <DIR> <FONT SIZE=3><P>Prepaid expenses</DIR> </DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(70,343)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>27,192</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <DIR> <FONT SIZE=3><P>Accounts payable and accrued expenses</DIR> </DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>358,446</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>502,527</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <DIR> <DIR> <FONT SIZE=3><P>Total Operating Activities</DIR> </DIR> </DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>398,051</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>389,690</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Investing Activities</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Purchases of property, plant and equipment</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(147,544)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(255,055)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Net assets of businesses acquired</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(3,129)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(6,670)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Investments in and advances to affiliates, net</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(112,479)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(241,983)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Purchases of marketable securities</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(333,859)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(595,620)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Proceeds from sales of marketable securities</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>427,903</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>396,943</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Increase in other assets</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>- </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(50,000)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <DIR> <DIR> <FONT SIZE=3><P>Total Investing Activities</DIR> </DIR> </DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(169,108)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(752,385)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Financing Activities</FONT></TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Long-term debt borrowings</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>31,907</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>103,548</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Long-term debt payments</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(29,142)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(43,874)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Net borrowings (payments) under line of credit agreements</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(87,594)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>378,050</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Purchases of treasury stock</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(17,502)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(124,911)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Cash dividends and other</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(62,112)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(59,935)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <DIR> <DIR> <DIR> <FONT SIZE=3><P>Total Financing Activities</DIR> </DIR> </DIR> </DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(164,443)</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>252,878</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Increase (Decrease) in Cash and Cash Equivalents</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>64,500</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>(109,817)</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"> <FONT SIZE=3><P>Cash and Cash Equivalents Beginning of Period</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>477,226</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>681,378</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>_________</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Cash and Cash Equivalents End of Period</DIR> </FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>$ 541,726</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>$ 571,561</FONT></TD> </TR> <TR><TD WIDTH="64%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = =</FONT></TD> <TD WIDTH="18%" VALIGN="TOP"> <FONT SIZE=3><P>= = = = = =</FONT></TD> </TR> </TABLE> <FONT SIZE=3><P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">&nbsp;</P> <P ALIGN="JUSTIFY">&nbsp;</P> <P ALIGN="JUSTIFY">See notes to consolidated financial statements.</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</P> <P ALIGN="CENTER">(Unaudited)</P> <P ALIGN="CENTER"></P><DIR> <DIR> <DIR> <P>Note 1.&#9;Basis of Presentation</P> <P ALIGN="JUSTIFY">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, 2000 are not necessarily indicative of the results that may be expected for the year ending June 30, 2001. 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, 2000.</P> <P>&nbsp;</P> <P>Note 2.&#9;&#9;New Accounting Standards</P> <P ALIGN="JUSTIFY">Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards Number 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes standards for recognition and measurement of derivatives and hedging activities. As a result of this adoption, the Company recorded in the first quarter of fiscal 2001 the cumulative effect of change in accounting principle to other comprehensive income (loss) of $(32 million), net of a $19 million tax benefit, for derivatives which hedge the variable cash flows of certain forecasted transactions. The fair value of these derivative instruments was previously classified in inventory.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">Effective July 1, 2000, the Company adopted Emerging Issues Task Force Issue 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent". The adoption of this issue results in the Company reporting the total sales value of grain merchandised, in lieu of net margins from grain merchandised, in the "Net sales and operating income" category. The "Gross profit" category is unchanged as costs related to the grain merchandised are now reported in the "Cost of products sold and other operating costs" category. Prior year amounts have been reclassified to conform to this change.</P> <P ALIGN="CENTER">&nbsp;</P></DIR> </DIR> </DIR> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</P> <P ALIGN="CENTER">(Unaudited)</P> <P>Note 3.&#9;Inventory and Related Contracts</P> <DIR> <DIR> <DIR> <P ALIGN="JUSTIFY">&#9;</FONT><FONT FACE="CG Times" SIZE=3>To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-traded futures contracts to minimize its net position of merchandisable agricultural commodity inventories, forward cash purchase and sale contracts, and certain related value-added products. Inventories of merchandisable agricultural commodities and certain related value-added products are stated at market value. Exchange-traded futures contracts, forward cash purchase contracts and forward cash sale contracts are valued at market price as required for derivative contracts by SFAS 133. Changes in the market value of inventories of merchandisable agricultural commodities, certain value-added products, forward cash purchase and sale contracts and exchange-traded futures contracts are recognized in earnings immediately. Unrealized gains on forward cash purchase contracts, forward cash sale contracts and exchange-traded futures contracts are classified on the Company's balance sheet as receivables. Unrealized losses on forward cash purchase contracts, forward cash sale contracts and exchange-traded futures contracts are classified on the Company's balance sheet as accounts payable.</P> </FONT><FONT SIZE=3><P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">In addition, the Company from time to time will hedge portions of its production requirements. The instruments used are readily marketable exchange-traded futures contracts, which are designated as cash flow hedges. The changes in the market value of such futures contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Gains and losses arising from open and closed hedging transactions are deferred in other comprehensive income, net of applicable taxes, and recognized in the statement of earnings when the finished goods produced from the hedged item are sold.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company also values certain inventories using the last-in, first-out (LIFO) and first-in, first-out (FIFO) method.</P> <P>&nbsp;</P></DIR> </DIR> </DIR> <P>Note 4.&#9;Per Share Data</P> <DIR> <DIR> <DIR> <P ALIGN="JUSTIFY">All references to share and per share information have been adjusted for the 5 percent stock dividend paid September 25, 2000.</P> <P>&nbsp;</P> <P>Note 5.&#9;Comprehensive Income</P> <P ALIGN="JUSTIFY">Comprehensive income (loss) was $269 million and $(5) million for the quarters ended December 31, 2000 and 1999, respectively. Comprehensive income was $361 million and $61 million for the six months ended December 31, 2000 and 1999, respectively.</P> <P ALIGN="CENTER">&nbsp;</P></DIR> </DIR> </DIR> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER"></P> <P ALIGN="CENTER">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</P> <P ALIGN="CENTER">(Unaudited)</P> <DIR> <DIR> <DIR> <P>Note 6.&#9;Other Income (Expense)</P> </DIR> </DIR> </DIR> </FONT> <P ALIGN="RIGHT"><TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=566> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="33%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">THREE MONTHS ENDED DECEMBER 31,</P> <U><P ALIGN="CENTER">2000 1999</U></FONT></TD> <TD WIDTH="33%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">SIX MONTHS ENDED DECEMBER 31,</P> <U><P ALIGN="CENTER">2000 1999</U></FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="33%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(In thousands)</FONT></TD> <TD WIDTH="33%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(In thousands)</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P>Investment Income</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$ 43,414</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$ 31,237</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$ 79,732</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$ 62,084</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P>Interest Expense</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> (99,470)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> (99,519)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> (200,670)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> (184,958)</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P>Net gain (loss) on marketable</P> <P> securities transactions </FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"></P> <P ALIGN="CENTER"> 562</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"></P> <P ALIGN="CENTER"> 6,685</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"></P> <P ALIGN="CENTER"> (25,148)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"></P> <P ALIGN="CENTER"> 12,677</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P>Equity in earnings of affiliates</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 10,258</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 5,634</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 95,414</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 5,474</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P>Other</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 974</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 2,429</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 8,014</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 4,290</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">_________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">_________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">_________</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">_________</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$ (44,262)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$ (53,534)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$ (42,658)</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$ (100,433)</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">= = = = = =</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">= = = = = =</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">= = = = = =</FONT></TD> <TD WIDTH="17%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">= = = = = = </FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="17%" VALIGN="TOP">&nbsp;</TD> </TR> </TABLE> </P> <FONT SIZE=3><DIR> <DIR> <DIR> <P>Note 7.&#9;Antitrust Investigation and Related Litigation</P> <P ALIGN="JUSTIFY">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, sodium gluconate, monosodium glutamate and high-fructose corn syrup. These actions and proceedings generally involve claims for unspecified compensatory damages, fines, costs, expenses and unspecified relief. The Company intends 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.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company has made provisions to cover the fines, litigation settlements and costs related to certain of the aforementioned suits and proceedings. 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.</P> <P ALIGN="CENTER"></P></DIR> </DIR> </DIR> <P ALIGN="CENTER">ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES</P> <P ALIGN="CENTER">MANAGEMENT'S DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION </P> <P>OPERATIONS</P> <P ALIGN="JUSTIFY">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:</P> </FONT> <TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=768> <TR><TD WIDTH="27%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="25%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">THREE MONTHS ENDED</P> <P ALIGN="CENTER">December 31,</FONT></TD> <TD WIDTH="29%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">SIX MONTHS ENDED</P> <P ALIGN="CENTER">December 31,</FONT></TD> <TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">2000</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">1999</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT">2000</FONT></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">1999</FONT></TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="25%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(in millions)</FONT></TD> <TD WIDTH="29%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">(in millions)</FONT></TD> <TD WIDTH="19%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="10%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="10%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP"> <FONT SIZE=3><P>Oilseed products</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT">$1,774</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">$1,873</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT">$3,456</FONT></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER">$3,700</FONT></TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP"> <FONT SIZE=3><P>Grain Merchandised</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT"> 1,705</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 1,272</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT"> 3,330</FONT></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER"> 2,714</FONT></TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP"> <FONT SIZE=3><P>Corn products</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT"> 598</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 520</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT"> 1,117</FONT></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER"> 980</FONT></TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP"> <FONT SIZE=3><P>Wheat and other milled products</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT"> 337</FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER"> 359</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="RIGHT"> 669</FONT></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2> <FONT SIZE=3><P ALIGN="CENTER"> 720</FONT></TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP"> <FONT SIZE=3><P>Other products and services</FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <U><FONT SIZE=3><P ALIGN="RIGHT"> 527</U></FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <U><FONT SIZE=3><P ALIGN="CENTER"> 591</U></FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <U><FONT SIZE=3><P ALIGN="RIGHT"> 1,004</U></FONT></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2> <U><FONT SIZE=3><P ALIGN="CENTER"> 1,113</U></FONT></TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="10%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="16%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="10%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2>&nbsp;</TD> </TR> <TR><TD WIDTH="27%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="10%" VALIGN="TOP"> <U><FONT SIZE=3><P ALIGN="RIGHT">$4,941</U></FONT></TD> <TD WIDTH="16%" VALIGN="TOP"> <U><FONT SIZE=3><P ALIGN="CENTER">$4,615</U></FONT></TD> <TD WIDTH="10%" VALIGN="TOP"> <U><FONT SIZE=3><P ALIGN="RIGHT">$9,576</U></FONT></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2> <U><FONT SIZE=3><P ALIGN="CENTER">$9,227</U></FONT></TD> </TR> </TABLE> <FONT SIZE=3> <P ALIGN="JUSTIFY">Net sales and other operating income increased 7 percent to $4.9 billion for the quarter and increased 4 percent to $9.6 billion for the six months due principally to increased sales volumes. Sales of oilseed products decreased 5 percent to $1.8 billion for the quarter and decreased 7 percent to $3.5 billion for the six months due primarily to decreased sales volumes and, to a lesser extent, to lower average selling prices. The decrease in sales volume is a result of permanently closing several oilseed crushing facilities as well as indefinitely closing several other facilities. Record vegetable oil stocks continue to put downward pressure on vegetable oil selling prices. Partially offsetting these decreases were strong domestic soybean meal demand and increased European protein meal demand due to meat and bone meal restrictions stemming from BSE concerns. Sales of merchandised grain increased 34 percent for the quarter to $1.7 billion and increased 23 percent for the six months to $3.3 billion due principally to increased sales volumes attributable to South American operations and to newly-established Latin American merchandising offices. Lower average selling prices of grain merchandised partially offset these volume increases. Sales of corn products increased 15 percent to $598 million for the quarter and increased 14 percent to $1.1 billion for the six months due primarily to increased sales volumes and higher average selling prices of the Company's fuel alcohol arising from increased demand from existing sales markets, expansion into new markets and to higher gasoline prices. These increases more than offset decreases in sales volume and average selling price of the Company's sweetener products as cool and wet weather hurt sales in the soft drink industry and thus impacted the demand for sweetener products. Sales of wheat and other milled products decreased 6 percent to $337 million for the quarter and decreased 7 percent to $669 million for the six months due to both decreased sales volumes and lower average selling prices relating to flat growth in the demand for the products, customer consolidations and industry production overcapacity. The decrease in sales of other products and services was due primarily to lower average selling prices of the Company's cocoa products reflecting the lower cost of raw materials.</P> <P ALIGN="JUSTIFY">Cost of products sold and other operating costs increased $316 million to $4.5 billion for the quarter and increased $327 million to $8.9 billion for the six months due primarily to increased volumes of grain merchandised and to higher manufacturing costs due principally to increases in energy and fuel related costs.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">Gross profit increased $10 million to $416 million for the quarter due primarily to increased average selling prices. Gross profit increased $22 million to $700 million for the six months due primarily to increased grain merchandising margins and to declines in average raw material costs compared to unchanged average selling prices. These increases in gross profit were partially offset by higher manufacturing costs due principally to increases in energy and fuel related costs.</P> <P ALIGN="JUSTIFY">Selling, general and administrative expenses decreased $12 million for the quarter to $187 million and decreased $13 million for the six months to $357 million due primarily to decreased bad debt expense and decreased salary-related costs associated with prior year's facility closures and consolidations. These decreases were partially offset by increased advertising and promotional expenses.</P> <P ALIGN="JUSTIFY">Other expense decreased $9 million to $44 million for the quarter due principally to increased investment income resulting primarily from an $8 million interest refund related to IRS settlements. Other expense decreased $58 million for the six months to $43 million due principally to increased equity in earnings of unconsolidated affiliates. This increase resulted primarily from a gain of $95 million representing the Company's equity share of the gain reported by the Company's unconsolidated affiliate, Compagnie Industrelle et Financiere des Produits Amylaces SA ("CIP"), upon the sale of its interests in wet corn milling and wheat starch production businesses. This increase was partially offset by realized losses on marketable securities transactions.</P> <P ALIGN="JUSTIFY">Income taxes increased for the quarter primarily due to higher pretax earnings. This increase was partially offset by a lower effective income tax rate. For the six months, income taxes decreased due to a lower effective income tax rate and to lower pretax earnings, excluding the gain from the aforementioned CIP transaction. No taxes have been provided on the gain related to the CIP transaction as CIP is a corporate joint venture and the intent is to permanently reinvest the proceeds from the sale. The Company's effective income tax rate for the quarter and six months, excluding the effect of the CIP transaction, was 32.5% compared to an effective rate of 33.5% for the comparable periods of a year ago.</P> <P>Liquidity and Capital Resources</P> <P ALIGN="JUSTIFY">At December 31, 2000, the Company continued to show substantial liquidity with working capital of $2.1 billion. Capital resources remained strong as reflected in the Company's net worth of $6.4 billion. The Company's ratio of long-term debt to total capital at December 31, 2000 is approximately 32%.</P> <P ALIGN="JUSTIFY">As described in Note 7 to the unaudited consolidated financial statements, the Company has made provisions to cover fines, litigation settlements and costs related to certain putative class action antitrust suits and other proceedings. 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.</P> <P>Item 3.&#9;Quantitative and Qualitative Disclosures About Market Risk</P> <DIR> <DIR> <DIR> <P>There were no material changes during the quarter ended December 31, 2000.</P> </DIR> <P>PART II - OTHER INFORMATION</P> </DIR> </DIR> <P>Item 1.&#9;LEGAL PROCEEDINGS</P> <DIR> <DIR> </FONT><FONT FACE="CG Times"><P>ENVIRONMENTAL MATTERS</P> </FONT><FONT SIZE=3><P ALIGN="JUSTIFY">In 1993, the State of Illinois Environmental Protection Agency ("Illinois EPA") brought administrative enforcement proceedings arising out of the Company's alleged failure to obtain proper permits for certain pollution control equipment at one of the Company's processing facilities in Illinois. The Company and Illinois EPA executed a settlement agreement which is currently before the Illinois Pollution Control Board for approval. However, in June 1999, the United States Environmental Protection Agency ("U.S. EPA") issued a Notice of Violation involving some of the matters covered under the pending State settlement and in January 2000 the United States Department of Justice ("DOJ") issued a Notice of Proposed Civil Enforcement Action against the Company regarding these same matters. Further, in 1998, the Illinois EPA filed an administrative enforcement proceeding arising out of certain alleged permit exceedances relating to the same facility. Also in 1998 and 2000, the Company voluntarily reported to the Illinois EPA certain other permit exceedances related to other processes at that same facility, and in 1999 Illinois EPA issued a Notice of Violation relating to the exceedances disclosed in 1998. The Company understands that all pending and threatened enforcement actions at the facility will be consolidated into two proceedings, one to be brought by the State which will subsume the settlement presently pending before the Board and another which has been brought by the Department of Justice. The Company and the DOJ have signed a settlement agreement which includes a penalty of approximately $1.5 million in resolution of the federal action. Also in 1998, the State of Illinois filed a civil administrative action alleging violations of the Illinois Environmental Protection Act, and regulations promulgated thereunder, arising from a one time release of denatured ethanol at one of its Illinois distribution facilities. The Company is in discussions with the Illinois EPA to settle the remaining matters with the State. In January 2000, U.S. EPA issued a Notice of Violation to the Company for another Illinois facility regarding alleged emissions violations and the failure to obtain proper permits for various equipment at that facility. In management's opinion, the settlements and the remaining proceedings, all seeking compliance with applicable environmental permits and regulations, will not, either individually or in the aggregate, have a material adverse affect on the Company's financial condition or results of operations.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">On July 31, 2000, the federal environmental authorities in Brazil ("IBAMA") issued an Administrative Notice upon the Company requiring payment of approximately $5.6 million for the discharge of an industrial wastewater from its facility located in Rondonopolis. The Company has appealed this penalty. The federal authorities recently indicated that they will reduce the fine to between $250,000 and $500,000. The Company is unwilling to pay a penalty within that range and will pursue the appeal. Also, in December 2000 the federal Brazilian authorities notified the Company that it had not fulfilled certain agreements its predecessor had entered into regarding tree farming required to allow the harvesting of wood for use as fuel. A penalty of approximately $750,000 was proposed based on the wood growth shortfall. The Company submitted evidence that the growth shortfall was approximately one-third of that estimated by the government and IBAMA has generally accepted that figure. The Company is currently considering its settlement options and researching its predecessor's liability for this matter.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company is involved in approximately 25 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 affect on the Company's financial condition or results of operations.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">LITIGATION REGARDING ALLEGED ANTICOMPETITIVE PRACTICES</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company is currently a defendant in various lawsuits related to alleged anticompetitive practices by the Company as described in more detail below. The Company intends to vigorously defend the actions unless they can be settled on terms deemed acceptable to the parties. </P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">GOVERNMENTAL INVESTIGATIONS</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">Federal grand juries in the Northern Districts of Illinois, California and Georgia, under the direction of the 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 in fiscal 1997, the Company paid the United States fines 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 federal grand juries in the Northern Districts of Illinois (lysine) and Georgia (high fructose corn syrup) have been closed.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company has received notice that certain foreign governmental entities were commencing investigations to determine whether anticompetitive practices occurred in their jurisdictions. Except for the investigations being conducted by the Commission of the European Communities, the Mexican Federal Competition Commission and the Brazilian Department of Protection and Economic Defense as described below, all such matters have been resolved as previously reported. In June 1997, the Company and several of its European subsidiaries were notified that the Commission of the European Communities had initiated an investigation as to possible anticompetitive practices in the amino acid markets, in particular the lysine market, in the European Union. On October 29, 1998, the Commission of the European Communities initiated formal proceedings against the Company and others and adopted a Statement of Objections. The reply of the Company was filed on February 1, 1999 and the hearing was held on March 1, 1999. On August 8, 1999, the Commission of the European Communities adopted a supplementary Statement of Objections expanding the period of involvement as to certain other companies. On June 7, 2000, the Commission of the European Communities adopted a decision imposing a fine against the Company in the amount of EUR 47.3 million. The Company has appealed this decision. 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 in the European Union. On March 28, 2000, the Commission of European Communities initiated formal proceedings against the Company and others and adopted a Statement of Objections. The reply of the Company was filed on June 9, 2000. In November 1998, a European subsidiary of 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 sodium gluconate market in the European Union. On May 17, 2000, the Commission of European Communities initiated formal proceedings against the Company and others and adopted a Statement of Objections. The reply of Company was filed on September 1, 2000. On February 11, 1999 a Mexican subsidiary of the Company was notified that the Mexican Federal Competition Commission had initiated an investigation as to possible anticompetitive practices in the citric acid market in Mexico. On November 22, 2000, the Company received an Official Letter of Responsibility from the Mexican Federal Competition Commission relative to this investigation. The reply of the Company was filed on January 30, 2001. On May 8, 2000, a Brazilian subsidiary of the Company was notified of the commencement of an administrative proceeding by the Department of Protection and Economic Defense relative to possible anticompetitive practices in the lysine market in Brazil. On July 3, 2000, the Brazilian subsidiary of the Company filed a Statement of Defense in this proceeding. The ultimate outcome and materiality of the proceedings of the Commission of the European Communities and the Brazilian Department of Protection and Economic Defense cannot presently be determined. The Company may become the subject of similar antitrust investigations conducted by the applicable regulatory authorities of other countries.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">HIGH FRUCTOSE CORN SYRUP ACTIONS</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">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 in the United States. Thirty of these actions have been brought as putative class actions.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">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 Court has set a trial date of September 4, 2001 for this matter.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">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 &amp; 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. This action was transferred for pretrial proceedings to the United States District Court for the Central District of Illinois.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">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). 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.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">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. On March 27, 2000, defendants moved for summary judgment in light of a recent Alabama Supreme Court case holding that the Alabama antitrust laws apply only to intrastate commerce. On June 28, 2000 and August 11, 2000, plaintiffs filed amended complaints. On September 6, 2000 defendants moved to dismiss or in the alternative to strike plaintiffs' amended complaints. These motions are currently pending.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">LYSINE ACTIONS</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company, along with other companies, had been named as a defendant in twenty-three putative class action antitrust suits involving the sale of lysine in the United States. Except for the actions specifically described below, all such suits have been settled, dismissed or withdrawn.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">CANADIAN ACTIONS. The Company, along with other companies, has been named as a defendant in one putative class action antitrust suit filed in Ontario Court (General Division) in which the plaintiffs allege the defendants reached agreements with one another as to the price at which each of them would sell lysine to customers in Ontario and as to the total volume of lysine that each company would supply in Ontario in violation of Sections 45 (1)(c) and 61(1)(b) of the Competition Act. The putative class is comprised of certain indirect purchasers in Ontario during the period from June 1, 1992 to June 27, 1995. The plaintiffs seek C$25 million for violations of the Competition Act, C$10 million in punitive, exemplary and aggravated damages, interest and costs of the action. This action was served upon the Company on June 11, 1999 and is encaptioned Rein Minnema and Minnema Farms Ltd. v. Archer-Daniels-Midland Company, et al., Court File No. G23495-99. The Company, along with other companies, has been named as a respondent in a motion seeking authorization to institute a class action filed in Superior Court in the Province of Quebec, District of Montreal, in which the applicants allege the respondents conspired, combined, agreed or arranged to prevent or lessen, unduly, competition with respect to the sale of lysine in Canada in violation of Section 45(1)(c) of the Competition Act. The putative class is comprised of certain indirect purchasers in Quebec after June 1992. The applicants seek at least C$4,460,000, costs of investigation, attorneys' fees and interest. This motion is encaptioned Option Consommateurs, et al v. Archer-Daniels-Midland Company, et al., Court No. 500-06-000089-991.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">STATE ACTION. The Company has been named as a defendant, along with other companies, in one putative class action antitrust suit alleging 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 seeking an injunction against continued alleged illegal conduct, damages of an unspecified amount, attorneys fees and costs, and other unspecified relief. The putative class in this action comprises certain indirect purchasers of lysine in the State of Alabama during certain periods in the 1990s. This 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. On March 13, 1998, the court denied plaintiff's motion for class certification. Subsequently, the plaintiff amended his complaint to add approximately 300 individual plaintiffs. On March 23, 2000, defendants filed a motion for summary judgment in light of a recent Alabama Supreme Court case holding that the Alabama antitrust laws apply only to intrastate commerce. On August 11, 2000, plaintiffs filed an amended complaint. On September 15, 2000, defendants moved to dismiss or in the alternative to strike plaintiffs' amended complaint. These motions are currently pending.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">CITRIC ACID ACTIONS</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company, along with other companies, had been named as a defendant in fourteen putative class action antitrust suits and two non-class action antitrust suits involving the sale of citric acid in the United States. Except for the action specifically described below, all such suits have been settled or dismissed.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">CANADIAN ACTIONS. The Company, along with other companies, has been named as a defendant in three actions filed pursuant to the Class Proceedings Act, 1992, in which the plaintiffs allege that the defendants violated the Competition Act with respect to the sale of citric acid in Canada. One of these actions was filed in the Superior Court of Justice, in Newmarket, Ontario, and encaptioned Ashworth v. Archer-Daniels-Midland Company, et al., Court file No. 53510/99. The putative class is comprised of certain indirect purchasers in Ontario during the period from July 1, 1991 to June 27, 1995. The plaintiffs in this action seek general damages in the amount of C$30 million and punitive and exemplary damages in the amount of C$30 million, interest, costs and fees. The second action was filed in the Superior Court of Justice in London, Ontario, and encaptioned Fairlee Fruit Juice Limited v. Archer-Daniels-Midland Company, et al., Court File No. 32562/99. The plaintiffs in this action seek general damages in the amount of C$300 million, punitive and exemplary damages in the amount of C$20 million, interest, costs and fees. The Company has become aware of, but has not yet been formally served with, a third action commenced in Barrie, Ontario in the (Ontario) Superior Court of Justice under the Class Proceedings Act. In that action, encaptioned E. D. Smith &amp; Sons, Limited v. Archer Daniels Midland Company et al., Court File No. 99-B673, the putative class is persons or corporations who were resident or carried on business in Ontario and who were direct and indirect purchasers of citric acid between July 1, 1991 and July 27, 1995. The action claims damages in the amount of C$24 million for breach of the Competition Act, conspiracy and infliction of economic injury, plus C$10 million for punitive, exemplary and aggravated damages, plus interest and costs. All three Ontario actions referred to above have now been transferred to Toronto, Ontario. The Company, along with other companies, has been named as a respondent in a motion seeking authorization to institute a class action filed in Superior Court in the Province of Quebec, District of Montreal, in which the applicants allege the respondents comprised, combined, agreed or arranged to prevent or lessen, unduly, competition with respect to the sale of citric acid in Canada in violation of Section 45(1)(c) of the Competition Act. The putative class is comprised of certain indirect purchasers in Quebec since July 1991. The applicants seek C$3.1 million, the costs of investigation, attorneys' fees and interest. This motion is encaptioned Option Consommateurs, et al. v. Archer-Daniels-Midland-Company, et al., Court No.500-06-000094-991.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">HIGH FRUCTOSE CORN SYRUP/CITRIC ACID STATE CLASS ACTIONS</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company, along with other companies, has been named as a defendant in five 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. As noted in prior filings, the Company accepted a settlement agreement with counsel for the citric acid plaintiff class. This settlement received final court approval and the case was dismissed on September 30, 1998. 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 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. On November 13, 1998, plaintiff's motion for class certification was granted. 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. Plaintiff's motion for class certification is currently pending.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">HIGH FRUCTOSE CORN SYRUP/CITRIC ACID/LYSINE STATE CLASS ACTIONS</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">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.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">MONOSODIUM GLUTAMATE ACTIONS</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company, along with other companies, has been named as a defendant in twelve putative class action antitrust suits involving the sale of monosodium glutamate and/or other food flavor enhancers in the United States.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">FEDERAL ACTIONS. Eight 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 price of monosodium glutamate, disodium inosinate and disodium guanylate, 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 monosodium glutamate, disodium inosinate and/or disodium guanylate during certain periods in the 1990's to the present. The Company has never produced or sold disodium inosinate or disodium guanylate. One such action was filed on October 27, 1999 in the United States District Court for the Northern District of California and is encaptioned Thorp, Inc. v. Archer-Daniels-Midland Company, et al., NoC99 4752 (VRW). The second action was filed on October 27, 1999 in the United States District Court for the Northern District of California and is encaptioned Premium Ingredients, Ltd. v. Archer-Daniels-Midland Co., et al., No. C 99 4742(MJJ). The third action was filed on October 28, 1999 in the United States District Court for the Northern District of California and is encaptioned Felbro Food Products v. Archer-Daniels-Midland Company, et al., No.C99 4761(MJJ). The fourth action was filed on November 17, 1999 in the United States District Court for the Northern District of California and is encaptioned First Spice Mixing Co., Inc. v. Archer Daniels Midland Co., et al., No. C 99 4977 (PJH). The fifth action was filed on November 23, 1999 in the United States District Court for the District of New Jersey and is encaptioned Diversified Foods and Seasonings, Inc. v. Archer Daniels Midland Co., Inc. et al., No. 99 CV 5501. The sixth action was filed on December 16, 1999 in the United States District Court for the Eastern District of New York and is encaptioned M. Phil Yen, Inc. v. Ajinomoto Co. Inc., et al., No. 99 Div 06514 (EK). The seventh action was filed on January 27, 2000 in the Northern District of California and is encaptioned Chicago Ingredients, Inc. v. Archer-Daniels-Midland Co., et al., No. C 00 0308 (JL). The eighth action was filed on April 12, 2000 in the Eastern District of Pennsylvania and is encaptioned Heller Seasonings &amp; Ingredients, Inc. v. Ajinomoto U.S.A., Inc., et al., No. 00-CV-1905. The Judicial Panel on Multidistrict Litigation has consolidated these actions for coordinated pretrial discovery in the United States District Court of the District of Minnesota. </P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">STATE ACTION. The Company, along with at least one other company, also has been named as a defendant in four putative class action antitrust suits filed in California state court involving the sale of monosodium glutamate and/or other food flavor enhancers. These actions allege violations of California antitrust and unfair competition laws, including allegations that the defendants agreed to fix, stabilize and maintain at artificially high levels the price of monosodium glutamate and/or other food flavor enhancers, and seek treble damages of an unspecified amount, restitution, attorneys' fees and costs, and other unspecified relief. The putative classes in these actions comprise certain indirect purchasers of monosodium glutamate and/or other food flavor enhancers in the State of California during certain periods in the 1990's. The first action originally was filed on June 25, 1999 in the Superior Court of San Francisco County and in encaptioned Fu's Garden Restaurant v. Archer-Daniels-Midland Company, et al., Civil Action No. 304471. The second action was filed on January 14, 2000 in the Superior Court of San Francisco County and is encaptioned JMN Restaurant Management, Inc. v. Ajinomoto Co., Inc., et al., Civil Action No. 309236. The third action was filed on May 2, 2000 in the Superior Court of San Francisco County and is encaptioned Tanuki Restaurant and Lilly Zapanta v. Archer Daniels Midland Co., et al, Civil Action No. 311871. The fourth action was filed on May 24, 2000 in the Superior Court of San Francisco County and is encaptioned Tasty Sunrise Burgers v. Archer Daniels Midland Co., et al., Civil Action No. 312373. On June 19, 2000, the court consolidated all of these cases for pretrial and trial purposes.</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">OTHER</P> <P ALIGN="JUSTIFY"></P> <P ALIGN="JUSTIFY">The Company has made provisions to cover certain legal proceedings and related costs and expenses as described in the notes to the unaudited consolidated financial statements and management's discussion of operations and financial condition. 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 unaudited consolidated financial statements.</P> </DIR> </DIR> <P>Item 4.&#9;Submission of matters to a vote of Security Holders:</P> <DIR> <DIR> <DIR> <P ALIGN="JUSTIFY">The Annual Meeting of Shareholders was held on October 26, 2000. Proxies for the Annual Meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. 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:</P> <P ALIGN="JUSTIFY"></P></DIR> </DIR> </DIR> </FONT> <P ALIGN="RIGHT"><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=560> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Nominee</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Shares Cast For</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">Shares Withheld</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="34%" VALIGN="TOP">&nbsp;</TD> <TD WIDTH="33%" VALIGN="TOP">&nbsp;</TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">D. O. Andreas</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">508,787,072</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">16,222,514</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">G. O. Coan</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">510,073,039</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">14,936,547</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">G. A. Andreas</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">509,386,515</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">15,623,071</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">J. K. Vanier</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">509,986,324</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">15,023,262</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">A. Young</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">509,895,897</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">15,113,689</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">R. Burt</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">510,180,774</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">14,828,812</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">O. G. Webb</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">510,163,133</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">14,846,453</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">F. Ross Johnson</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">509,665,720</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">15,343,866</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">R. S. Strauss</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">509,449,248</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">15,560,338</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">M. B. Mulroney</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">509,927,416</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">15,082,170</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">J. R. Block</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">509,758,090</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">15,251,496</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">M. H. Carter</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">510,233,561</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">14,776,025</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">D. J. Mimran</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">510,281,284</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">14,728,302</FONT></TD> </TR> <TR><TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="JUSTIFY">H. de Boon</FONT></TD> <TD WIDTH="34%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">510,250,960</FONT></TD> <TD WIDTH="33%" VALIGN="TOP"> <FONT SIZE=3><P ALIGN="CENTER">14,758,626</FONT></TD> </TR> </TABLE> </P> <FONT SIZE=3><P ALIGN="JUSTIFY"></P><DIR> <DIR> <DIR> <P ALIGN="JUSTIFY">There were no abstentions or broker non-votes regarding the election of directors.</P> <P ALIGN="JUSTIFY"></P></DIR> </DIR> </DIR> <OL> <DIR> <DIR> <OL> <P ALIGN="JUSTIFY"><LI>The appointment by the Board of Directors of Ernst &amp; Young LLP as Independent Accountants to audit the accounts of the Company for the fiscal year ending June 30, 2001 was ratified as follows:</LI></P></OL> </DIR> </DIR> </OL> <P ALIGN="JUSTIFY"></P></FONT> <P ALIGN="RIGHT"><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=398> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>For</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY">517,700,082</DIR> </FONT></TD> </TR> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Against</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY"> 4,712,492</DIR> </FONT></TD> </TR> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Abstain</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY"> 2,597,012</DIR> </FONT></TD> </TR> </TABLE> </P> <FONT SIZE=3> <OL> <DIR> <DIR> <OL> <P ALIGN="JUSTIFY"><LI>The Stockholder's Proposal relative to cumulative voting was defeated as follows:</LI></P></OL> </DIR> </DIR> </OL> <P ALIGN="JUSTIFY"></P></FONT> <P ALIGN="RIGHT"><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=398> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>For</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY">151,351,223</DIR> </FONT></TD> </TR> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Against</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY">277,918,166</DIR> </FONT></TD> </TR> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Abstain</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY"> 18,633,539</DIR> </FONT></TD> </TR> </TABLE> </P> <FONT SIZE=3><P ALIGN="JUSTIFY"></P> <OL> <DIR> <DIR> <OL> <P ALIGN="JUSTIFY"><LI>The Stockholder's Proposal relative to genetically engineered products was defeated as follows:</LI></P></OL> </DIR> </DIR> </OL> <P ALIGN="JUSTIFY"></P></FONT> <P ALIGN="RIGHT"><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=398> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>For</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY"> 7,325,402</DIR> </FONT></TD> </TR> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Against</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY">417,475,587</DIR> </FONT></TD> </TR> <TR><TD WIDTH="24%" VALIGN="TOP"><DIR> <FONT SIZE=3><P>Abstain</DIR> </FONT></TD> <TD WIDTH="76%" VALIGN="TOP"><DIR> <FONT SIZE=3><P ALIGN="JUSTIFY"> 23,101,939</DIR> </FONT></TD> </TR> </TABLE> </P> <FONT SIZE=3><P ALIGN="JUSTIFY"></P> <P>&nbsp;</P> <P>&nbsp;</P> <P>&nbsp;</P> <P>Item 6.&#9;Exhibits and Reports on Form 8-K</P> <DIR> <DIR> <DIR> <P>a)&#9;&#9;Exhibits</P> <DIR> <DIR> <DIR> <DIR> <DIR> <P ALIGN="JUSTIFY">(3)(i)&#9;Composite Certificate of Incorporation, as amended, filed as Exhibit (3)(i) to Form 10K for the year ended June 30, 1999 (File No.1-44) is incorporated herein by reference.</P></DIR> </DIR> <P>&#9;</P><DIR> <DIR> <P ALIGN="JUSTIFY">(ii)&#9;Bylaws, as amended and restated, filed on May 12, 2000 as Exhibit 3(ii) to Form 10-Q for the quarter ended March 31, 2000, are incorporated herein by reference.</P> </DIR> </DIR> </DIR> </DIR> </DIR> <P>&#9;b)&#9;&#9;&#9;A Form 8-K was not filed during the quarter ended December 31, 2000.</P> <P>&nbsp;</P></DIR> </DIR> <P ALIGN="CENTER">SIGNATURES</P> </DIR> <P>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.</P> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <DIR> <P>ARCHER DANIELS-MIDLAND COMPANY</P> <P>&nbsp;</P> <P>/s/ D. J. Schmalz</P> <P>D. J. Schmalz</P> <P>Vice President </P> <P>And Chief Financial Officer</P> <P>&nbsp;</P> <P>/s/ D. J. Smith</P> <P>D. J. Smith</P> <P>Vice President, Secretary and</P> <P>General Counsel</P> <P>&nbsp;</P></DIR> </DIR> </DIR> </DIR> </DIR> </DIR> </DIR> </DIR> </DIR> </DIR> </DIR> </DIR> </DIR> </DIR> <P>Dated:&#9;&#9;February 14, 2001</P> </FONT></BODY> </HTML> </TEXT> </DOCUMENT>

2001

0QTR1

ADP

https://www.sec.gov/Archives/edgar/data/8670/000000867001500006/december.txt

<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>december.txt <DESCRIPTION>10Q REPORT <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, 2000 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 (973) 974-5000 ----------------------------- 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 December 31, 2000 there were 635,355,147 common shares outstanding. <PAGE> Form 10Q Part I. Financial Information STATEMENTS OF CONSOLIDATED EARNINGS ----------------------------------- (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, --------------------- ---------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues, other than interest on funds held for clients and PEO revenues $1,494,450 $1,373,485 $2,909,682 $2,614,479 Interest on funds held for clients 129,918 71,240 245,557 137,184 PEO revenues (net of pass- through costs of $651,151, $515,507, $1,243,398, $982,618 respectively) 59,271 47,761 114,923 91,918 ---------- ---------- ---------- ---------- Total revenues 1,683,639 1,492,486 3,270,162 2,843,581 ---------- ---------- ---------- ---------- Operating expenses 677,102 613,778 1,337,060 1,164,868 General, administrative and selling expenses 410,627 394,825 846,062 800,212 Systems development and programming costs 127,503 109,225 246,577 212,880 Depreciation and amortization 78,524 67,547 160,068 133,181 Interest 3,349 3,642 6,647 7,177 (Gains)/losses on investments 43,634 269 44,238 (127) ---------- ---------- ---------- ---------- 1,340,739 1,189,286 2,640,652 2,318,191 ---------- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 342,900 303,200 629,510 525,390 Provision for income taxes 135,460 103,700 248,670 179,690 ---------- ---------- ---------- ---------- NET EARNINGS $ 207,440 $ 199,500 $ 380,840 $ 345,700 ========== ========== ========== ========== BASIC EARNINGS PER SHARE $ .33 $ 0.32 $ .60 $ 0.55 ========== ========== ========== ========== DILUTED EARNINGS PER SHARE $ .32 $ 0.31 $ .59 $ 0.54 ========== ========== ========== ========== Dividends per share $ 0.1025 $ 0.0875 $ 0.1900 $ 0.16375 ========== ========== ========== ========== See notes to the consolidated financial statements. <PAGE> Form 10Q CONSOLIDATED BALANCE SHEETS --------------------------- (IN THOUSANDS) (UNAUDITED) December 31, June 30, Assets 2000 2000 ------ ----------- ----------- Cash and cash equivalents $ 1,294,214 $ 1,227,637 Short-term marketable securities 595,135 596,792 Accounts receivable 940,611 899,314 Other current assets 361,275 340,709 ----------- ----------- Total current assets 3,191,235 3,064,452 Long-term marketable securities 908,793 628,120 Long-term receivables 233,220 245,249 Land and buildings 447,733 439,022 Data processing equipment 638,537 612,608 Furniture, leaseholds and other 515,622 498,354 ----------- ----------- 1,601,892 1,549,984 Less accumulated depreciation (989,959) (952,715) ----------- ----------- 611,933 597,269 Other assets 254,620 271,136 Intangibles 1,621,888 1,623,701 ----------- ----------- Total assets before funds held for clients 6,821,689 6,429,927 Funds held for clients 14,235,790 10,420,889 ----------- ----------- Total assets $21,057,479 $16,850,816 =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Notes payable $ 4,411 $ 21,523 Accounts payable 130,932 129,436 Accrued expenses & other current liabilities 944,059 1,044,002 Income taxes 131,144 101,707 ----------- ----------- Total current liabilities 1,210,546 1,296,668 Long-term debt 124,631 132,017 Other liabilities 222,147 171,843 Deferred income taxes 165,943 151,337 Deferred revenue 95,197 95,361 ----------- ----------- Total liabilities before clients funds obligations 1,818,464 1,847,226 Client funds obligations 14,165,746 10,420,772 ----------- ----------- Total liabilities 15,984,210 12,267,998 Shareholders' equity: Common stock 63,628 63,144 Capital in excess of par value 543,077 402,767 Retained earnings 4,737,978 4,477,141 Treasury stock (52,525) (130,800) Accumulated other comprehensive income (218,889) (229,434) ----------- ----------- Total shareholders' equity 5,073,269 4,582,818 ----------- ----------- Total liabilities and shareholders' equity $21,057,479 $16,850,816 =========== =========== See notes to the consolidated financial statements. <PAGE> Form 10Q CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS ----------------------------------------------- (IN THOUSANDS) (UNAUDITED) Six Months Ended December 31, 2000 1999 ---------- ---------- Cash Flows From Operating Activities: ------------------------------------- Net earnings $ 380,840 $ 345,700 Expenses not requiring outlay of cash 183,417 126,125 Changes in operating net assets (19,150) (8,240) ---------- ---------- Net cash flows provided by operating activities 545,107 463,585 ---------- ---------- Cash Flows From Investing Activities: ------------------------------------- Purchase of marketable securities (5,578,302) (6,039,762) Proceeds from sale of marketable securities 1,581,357 724,800 Net change in client funds obligations 3,744,974 5,228,595 Capital expenditures (90,915) (59,490) Additions to intangibles (43,543) (28,771) Acquisitions of businesses (45,314) 3,109 Other (10,261) (11,176) ----------- ---------- Net cash flows used in investing activities (442,004) (182,695) ---------- ---------- Cash Flows From Financing Activities: ------------------------------------- Proceeds from issuance of notes 26,253 3,130 Repayments of debt (43,317) (18,899) Proceeds from issuance of common stock 100,541 75,529 Dividends paid (120,003) (102,381) ---------- ---------- Net cash flows used in financing activities (36,526) (42,621) ---------- ---------- Net change in cash and cash equivalents 66,577 238,269 Cash and cash equivalents, at beginning of period 1,227,637 861,280 ---------- ---------- Cash and cash equivalents, at end of period $1,294,214 $1,099,549 ========== ========== See notes to the consolidated financial statements. <PAGE> Form 10Q NOTES TO THE CONSOLIDATED FINANCIAL 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. Adjustments are of a normal recurring nature. These statements should be read in conjunction with the annual financial statements and related notes for the year ended June 30, 2000. Note A - The results of operations for the six months ended December 31, 2000 may not be indicative of the results to be expected for the year ending June 30, 2001. Note B - The calculation of basic and diluted earnings per share ("EPS") is as follows: (In thousands, except EPS) Periods ended December 31,2000 ---------------------------------------------------- Three month period Six month period ----------------------- --------------------------- Income Shares EPS Income Shares EPS ------ ------ --- ------ ------ --- Basic $207,440 632,082 $0.33 $380,840 631,035 $0.60 Effect of zero coupon subordinated notes 635 3,820 1,314 3,947 Effect of stock options - 15,905 - 15,425 ----------------- ----------------- Diluted $208,075 651,807 $0.32 $382,154 650,407 $0.59 ========================= ========================= Periods ended December 31,1999 ---------------------------------------------------- Three month period Six month period ----------------------- --------------------------- Income Shares EPS Income Shares EPS ------ ------ --- ------ ------ --- Basic $199,500 625,665 $0.32 $345,700 625,031 $0.55 Effect of zero coupon subordinated notes 737 4,585 1,490 4,665 Effect of stock options - 15,408 - 14,557 ----------------- ----------------- Diluted $200,237 645,658 $0.31 $347,190 644,253 $0.54 ========================= ======================== <PAGE> Form 10Q Note C - Comprehensive income for the three and six months ended December 31, 2000 and 1999 is as follows: (In thousands) Three months ended Six months ended December 31 December 31 2000 1999 2000 1999 ---- ---- ---- ---- Net income $207,440 $199,500 $380,840 $345,700 Other comprehensive Income: Foreign currency translation adjustment 23,574 (28,276) (44,399) (56,127) Unrealized gain(loss) on securities 39,405 4,720 54,944 (4,794) -------- -------- -------- -------- Comprehensive income $270,419 $175,944 $391,385 $284,779 ======== ======== ======== ======== Note D - Interim financial data by segment: ADP evaluates performance of its business units based on recurring operating results before interest on corporate funds, income taxes and foreign currency gains and losses. Certain revenues and expenses are charged to business units at a standard rate for management and motivation reasons. Other costs are recorded based on management responsibility. As a result, various income and expense items, including certain non-recurring gains and losses, are recorded at the corporate level and certain shared costs are not allocated. Goodwill amortization is charged to business units at an accelerated rate to act as a surrogate for the cost of capital for acquisitions. Interest on invested funds held for clients are recorded in Employer Services' revenues at a standard rate of 6%, with the adjustment to actual revenues included in "other". Prior year's business unit revenues and pre-tax earnings have been restated to reflect the current year's budgeted foreign exchange rates. Results of the Company's three largest business units, Employer Services, Brokerage Services and Dealer Services are shown below. Three months ended December 31, --------------------------------------- (In millions) Employer Brokerage Dealer Services Services Services ---------- ----------- ----------- 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- Revenues $ 984 $ 863 $ 370 $ 314 $ 171 $ 188 Pretax earnings $ 225 $ 181 $ 62 $ 63 $ 27 $ 31 Six months ended December 31, --------------------------------------- Employer Brokerage Dealer Services Services Services ------------ ----------- ------------ 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- Revenues $1,896 $1,663 $ 732 $ 571 $ 338 $ 372 Pretax earnings $ 401 $ 329 $ 126 $ 117 $ 48 $ 61 <PAGE> Form 10Q Note E - In October 2000, the Company entered into an unsecured revolving credit agreement with certain financial institutions, which provides for borrowings up to $2.5 billion. Borrowings under the agreement bear interest tied to LIBOR or prime rate depending on the number of days the borrowings are outstanding. The agreement, which expires in October 2001, had no borrowings to date. Note F - In fiscal 1999, the Company divested its Brokerage front-office business to Bridge Information Systems, Inc. ("Bridge"). As part of the proceeds the Company received $90 million of convertible preferred stock. As previously reported, Bridge is operating at a loss and is in need of additional financing. To date, Bridge has experienced continued operating difficulties and its overall financial condition has deteriorated. Accordingly, in the second quarter of fiscal 2001 the Company recorded a $45 million ($27 million net of tax) write-down of its investment in Bridge, which is reflected in "(gains)losses on investments". The Company will continue to reassess the possibility of a further write-down, as additional information concerning its investment becomes known. Note G - Certain reclassifications and restatements, including the inclusion of funds held for clients and client funds obligations on the Consolidated Balance Sheets, have been made to prior period's financial statements to conform to current presentation. <PAGE> Form 10Q MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OPERATING RESULTS Revenues and earnings again reached record levels during the quarter ended December 31, 2000. Revenues and revenue growth by ADP's major business units for the three months and six months ended December 31, 2000 and 1999 are shown below: Revenues ------------------------------------------ Three Months Ended Six Months Ended December 31, December 31 ------------------ ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ ($ in millions) Employer Services $ 984 $ 863 $1,896 $1,663 Brokerage Services 370 314 732 571 Dealer Services 171 188 338 372 Other 159 127 305 237 ------ ------ ------ ------ $1,684 $1,492 3,271 2,843 ====== ====== ====== ====== Revenue Growth ------------------------------------------ Three Months Ended Six Months Ended December 31, December 31, ------------------ ----------------- 2000 1999 2000 1999 ------ ------ ------ ------ Employer Services 14% 10% 14% 11% Brokerage Services 18 43 28 21 Dealer Services (9) 4 (9) 4 Other 25 2 29 3 ----- ----- ----- ----- 13% 14% 15% 11% ===== ===== ===== ===== Consolidated revenues for the quarter of approximately $1.7 billion were up 13% from last year. Revenue growth in Employer Services was 14%, reflecting very good client retention and internal revenue growth. Brokerage revenue growth was 18%, aided by the recent Cunningham Graphics acquisition. In last year's second quarter, our Brokerage Investor Communications business had $35 million of revenue from a single large company mailing. Brokerage revenue growth would have been 33% without this large prior year transaction. Dealer Services revenue decreased 9% as a result of stronger Year 2000 influenced results last year. The primary components of "other" revenues are Claims Services, foreign exchange differences, and miscellaneous processing services. "Other" also includes interest income on corporate investments of $42 million and $27 million for the three months ended December 31, 2000 and December 31, 1999, respectively. In addition, "other" revenues have been adjusted for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services at a standard rate of 6%. The prior year's business unit revenues and pre-tax earnings have been restated to reflect the current year's budgeted foreign exchange rates. Pre-tax earnings for the quarter increased 13% to $343 million. In the quarter ended December 31, 2000, the Company recorded a $45 million write-down ($27 million after-tax) of its $90 million investment in Bridge. This write-down was recorded as a loss on investment in the "other" segment. Prior to this non-cash, non-operating write-down, pre-tax earnings for the quarter increased 28% to $388 million. <PAGE> Form 10Q Excluding the Bridge write-down, consolidated pre-tax margins increased primarily from the transition of a portion of corporate and client fund investments from tax-exempt to taxable investments in order to increase liquidity of the overall portfolio as well as improved margins in Employer Services. Systems development and programming investments increased to accelerate automation, migrate to new computing technologies, and develop new products. Net earnings for the quarter, after a higher effective tax rate, increased 4% to $207 million. Excluding the Bridge write-down, net earnings increased 18% to $234 million. The effective tax rate of 39.5% increased from 34.2% in the comparable quarter last year, impacted by the previously discussed change in the investment mix from tax-exempt to taxable investments. Diluted earnings per share, on increased shares outstanding, increased 3% to $0.32 from $0.31 last year. Prior to the Bridge write-down, diluted earnings per share increased 16% to $0.36. Prior to considering the non-cash charge to write-down the Bridge investment, we expect revenue growth of about 13% to 15% and diluted earnings per share growth of about 16% to 18% 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, 2000, the Company had cash and marketable securities of $2.8 billion. Shareholders' equity was $5.1 billion and the ratio of long-term debt to equity was 2%. Capital expenditures for fiscal 2001 are expected to approximate $225 million, compared to $166 million in fiscal 2000. Approximately sixty percent of the Company's overall investment portfolio is invested in overnight interest-bearing instruments, which are therefore impacted immediately by changes in interest rates. The other forty percent of the Company's investment portfolio is invested in fixed-income securities, with maturities up to five and a half years, which are also subject to interest rate risk, including reinvestment risk. The Company has historically had the ability to hold these investments until maturity, and therefore this has not had an adverse impact on income or cash flows. OTHER MATTERS Certain member countries of the European Union have agreed to transition to the Euro as a new common legal currency. The costs of this transition are not expected to have a material effect on ADP. In October 2000, the Company entered into an unsecured revolving credit agreement with certain financial institutions, which provides for borrowings up to $2.5 billion. Borrowings under the agreement bear interest tied to LIBOR or prime rate depending on the number of days the borrowings are outstanding. The agreement, which expires in October 2001, had no borrowings to date. <PAGE> Form 10Q In fiscal 1999, the Company divested its Brokerage front-office business to Bridge. As part of the proceeds the Company received $90 million of convertible preferred stock. As previously reported, Bridge is operating at a loss and is in need of additional financing. To date, Bridge has experienced continued operating difficulties and its overall financial condition has deteriorated. Accordingly, in the second quarter of fiscal 2001 the Company recorded a $45 million ($27 million net of tax) write-down of its investment in Bridge, which is reflected in "(gains)losses on investments". The Company will continue to reassess the possibility of a further write-down, as additional information concerning its investment becomes known. This report contains "forward-looking statements" based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ from those expressed. Factors that could cause differences include: ADP's success in obtaining, retaining and selling additional services to clients; the pricing of products and services; changes in laws regulating payroll taxes and employee benefits; overall economic trends, including interest rate and foreign currency trends; stock market activity; auto sales and related industry changes; employment levels; changes in technology; availability of skilled technical associates, the impact of new acquisitions, and the ultimate realization of the Company's investment in Bridge Information Systems, Inc. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. PART II. OTHER INFORMATION Except as noted below, all other items are either inapplicable or would result in negative responses and, therefore, have been omitted. Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of the Stockholders was held on November 14, 2000. The following members were elected to the Company's Board of Directors to hold office for the ensuing year. Nominee In Favor Opposed Abstained Not voted ------- -------- ------- --------- --------- Gary C. Butler 507,843,720 118,925 3,211,700 119,209,891 Joseph A. Califano, Jr. 507,468,293 494,352 3,587,127 118,834,464 Leon G. Cooperman 507,891,129 71,516 3,164,291 119,257,300 George H. Heilmeier 507,881,799 80,846 3,173,621 119,247,970 Ann Dibble Jordan 507,760,497 202,148 3,294,923 119,126,668 Harvey M. Krueger 507,328,800 633,845 3,726,620 118,694,971 Frederic V. Malek 507,760,845 201,800 3,294,575 119,127,016 Henry Taub 507,490,946 471,699 3,564,474 118,857,117 Laurence A. Tisch 506,796,163 1,166,482 4,259,257 118,162,334 Arthur F. Weinbach 495,517,604 12,445,041 15,537,816 106,883,775 Josh S. Weston 507,306,616 656,029 3,748,804 118,672,787 The result of the voting on the following additional item was as follows: <PAGE> Form 10Q (a) To ratify the appointment of Deloitte & Touche LLP to serve as the Company's independent certified public accountants for the fiscal year begun on July 1, 2000. The votes of the stockholders on this ratification were as follows: In Favor Opposed Abstained Not voted -------- ------- --------- --------- 508,991,333 435,223 1,628,063 119,329,617 Item 6. Exhibits and Reports on Form 10Q (a) Exhibit Number Exhibit 3.2 By-Laws as currently in effect (amended November 14, 2000) 27.1 Financial Data Schedule <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: January 26, 2001 /s/ Richard J. Haviland ------------------------ Richard J. Haviland Chief Financial Officer (Principal Financial Officer) ----------------------------- (Title) </TEXT> </DOCUMENT>

2001

0QTR1

AM

https://www.sec.gov/Archives/edgar/data/5133/000095015201000227/l85893ae10-q.txt

<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>l85893ae10-q.txt <DESCRIPTION>AMERICAN GREETINGS CORPORATION 10-Q <TEXT> <PAGE> 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE X SECURITIES EXCHANGE ACT OF 1934 ----------------- For the quarterly period ended November 30, 2000 ------------------------------------------------ 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 1-13859 ------------ AMERICAN GREETINGS CORPORATION ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0065325 --------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One American Road, Cleveland, Ohio 44144 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 252-7300 -------------------------------------------------- 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 November 30, 2000, the date of this report, the number of shares outstanding of each of the issuer's classes of common stock was: Class A Common 58,857,041 Class B Common 4,629,220 <PAGE> 2 AMERICAN GREETINGS CORPORATION INDEX <TABLE> <CAPTION> Page Number ------ <S> <C> PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements............................................................................1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................14 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings..............................................................................22 Item 6. Exhibits and Reports on Form 8-K...............................................................23 SIGNATURES.......................................................................................................23 ---------- </TABLE> <PAGE> 3 PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements -------------------- AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME (Thousands of dollars except per share amounts) <TABLE> <CAPTION> (Unaudited) Nine Months Ended November 30, ---------------------------- 2000 1999 ------------ ------------ <S> <C> <C> Net sales $ 1,855,568 $ 1,559,896 Costs and expenses: Material, labor and other production costs 754,293 599,359 Selling, distribution and marketing 810,083 676,185 Administrative and general 208,896 164,943 Non-recurring items -- 32,747 Interest 39,649 26,544 Other (income) expense - net (12,376) 70 ------------ ------------ Total costs and expenses 1,800,545 1,499,848 ------------ ------------ Income before income taxes and cumulative effect of accounting change 55,023 60,048 Income taxes 20,007 21,617 ------------ ------------ Income before cumulative effect of accounting change 35,016 38,431 Cumulative effect of accounting change, net of tax (21,141) -- ------------ ------------ Net income $ 13,875 $ 38,431 ============ ============ Earnings per share and earnings per share assuming dilution: Before cumulative effect of accounting change $ 0.55 $ 0.58 Cumulative effect of accounting change, net of tax (0.33) -- ------------ ------------ Earnings per share and earnings per share assuming dilution $ 0.22 $ 0.58 ============ ============ Dividends per share $ 0.52 $ 0.40 ============ ============ Average number of common shares outstanding 63,699,617 65,948,991 </TABLE> See notes to condensed consolidated financial statements. 1 <PAGE> 4 AMERICAN GREETINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME (Thousands of dollars except per share amounts) (Unaudited) Three Months Ended November 30, ---------------------------- 2000 1999 ------------ ------------ Net sales $ 766,095 $ 623,356 Costs and expenses: Material, labor and other production costs 355,858 250,773 Selling, distribution and marketing 277,327 222,154 Administrative and general 70,326 56,105 Interest 15,066 11,434 Other (income) expense - net (2,803) (1,301) ------------ ------------ Total costs and expenses 715,774 539,165 ------------ ------------ Income before income taxes 50,321 84,191 Income taxes 18,306 30,309 ------------ ------------ Net income $ 32,015 $ 53,882 ============ ============ Earnings per share and earnings per share assuming dilution $ 0.50 $ 0.81 ============ ============ Dividends per share $ 0.31 $ 0.20 ============ ============ Average number of common shares outstanding 63,506,387 64,519,534 See notes to condensed consolidated financial statements. 2 <PAGE> 5 AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Thousands of dollars) <TABLE> <CAPTION> (Unaudited) (Note A) (Unaudited) November 30, 2000 Feb. 29, 2000 November 30,1999 ----------------- ---------------- ---------------- <S> <C> <C> <C> ASSETS Current assets Cash and equivalents $ 78,846 $ 61,010 $ 31,103 Trade accounts receivable, less allowances of $179,618, $136,037 and $138,974,respectively (principally for sales returns) 612,990 430,825 594,639 Inventories 344,981 249,433 255,107 Deferred and refundable income taxes 219,460 99,709 153,446 Prepaid expenses and other 232,328 259,707 244,317 ---------------- ---------------- ---------------- Total current assets 1,488,605 1,100,684 1,278,612 Goodwill 211,949 149,437 146,775 Other assets 788,164 820,447 694,349 Property, plant and equipment - at cost 1,078,216 1,019,121 1,013,189 Less accumulated depreciation 606,109 571,706 565,881 ---------------- ---------------- ---------------- Property, plant and equipment - net 472,107 447,415 447,308 ---------------- ---------------- ---------------- $ 2,960,825 $ 2,517,983 $ 2,567,044 ================ ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Debt due within one year $ 647,717 $ 109,694 $ 289,252 Accounts payable and accrued liabilities 247,322 213,180 211,912 Accrued compensation and benefits 89,179 84,456 72,976 Dividends payable 19,677 25,808 12,904 Other current liabilities 156,552 149,350 142,479 ---------------- ---------------- ---------------- Total current liabilities 1,160,447 582,488 729,523 Long-term debt 423,263 442,102 446,135 Other liabilities 146,066 195,985 97,561 Deferred income taxes 56,326 44,997 51,976 Shareholders' equity 1,174,723 1,252,411 1,241,849 ---------------- ---------------- ---------------- $ 2,960,825 $ 2,517,983 $ 2,567,044 ================ ================ ================ </TABLE> See notes to condensed consolidated financial statements. 3 <PAGE> 6 AMERICAN GREETINGS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of dollars) <TABLE> <CAPTION> (Unaudited) Nine Months Ended November 30, ---------------------- 2000 1999 --------- --------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 13,875 $ 38,431 Adjustments to reconcile to net cash used by operating activities: Cumulative effect of accounting change, net of tax 21,141 -- Non-recurring items -- 30,584 Depreciation and amortization 71,948 62,582 Deferred income taxes 262 (21,183) Change in operating assets and liabilities, net of effects from acquisitions (311,964) (197,072) Other - net (9,486) 4,518 --------- --------- Cash Used by Operating Activities (214,224) (82,140) INVESTING ACTIVITIES: Business acquisitions (179,993) (65,947) Property, plant & equipment additions (56,730) (29,454) Proceeds from sale of fixed assets 24,484 1,645 Investment in corporate-owned life insurance 2,526 4,773 Other - net 24,200 (22,781) --------- --------- Cash Used by Investing Activities (185,513) (111,764) FINANCING ACTIVITIES: Increase in long-term debt -- 14,658 Reduction of long-term debt (35,003) (431) Increase in short-term debt 537,420 233,745 Sale of stock under benefit plans -- 1,108 Purchase of treasury shares (45,448) (130,091) Dividends to shareholders (39,396) (38,537) --------- --------- Cash Provided by Financing Activities 417,573 80,452 --------- --------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 17,836 (113,452) Cash and Equivalents at Beginning of Year 61,010 144,555 --------- --------- Cash and Equivalents at End of Period $ 78,846 $ 31,103 ========= ========= </TABLE> See notes to condensed consolidated financial statements. 4 <PAGE> 7 AMERICAN GREETINGS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Thousands of dollars except per share amounts) Nine Months Ended November 30, 2000 and 1999 Note A - Basis of Presentation ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 notes required by accounting principles generally accepted in the United States 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. The balance sheet at February 29, 2000 has been derived from the audited financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. Certain amounts in the prior year financial statements have been reclassified to conform with the 2000 presentation. For further information, refer to the consolidated financial statements and notes thereto included in the Corporation's annual report on Form 10-K for the year ended February 29, 2000. Note B - Change in Accounting Principle --------------------------------------- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which among other guidance, clarifies the Staff's views on various revenue recognition and reporting matters. As a result, effective March 1, 2000, the Corporation adopted a change in its method of accounting for certain shipments of seasonal product. Under the new accounting method, the Corporation recognizes revenue on these seasonal shipments at the approximate date the merchandise is received by the customer and not upon shipment from the distribution facility. Customer receipt is a more preferable method of recording revenue due to the large volumes of seasonal product shipment activity and the time required to achieve customer-requested delivery dates. The implementation of the change has been accounted for as a change in accounting principle and applied cumulatively as if the change occurred at March 1, 2000. The effect of the change was a one-time non-cash reduction to the Corporation's earnings of $21,141 (net of tax of $12,564) or approximately $0.33 per share, which is included in income for the three months ended May 31, 2000. The net effect of the change on the three months ended November 30, 2000 was to increase earnings by approximately $40,900 or $0.23 per share. The net effect of the change on the nine months ended November 30, 2000 was not material. On a pro forma basis, assuming the Corporation had adopted SAB 101 effective March 1, 1999, the increase in earnings for the three months ended November 30, 1999 would have approximated the impact for the three months ended November 30, 2000. On a pro forma basis, assuming the Corporation had adopted SAB 101 effective March 1, 1999, the impact in earnings for the nine months ended November 30, 1999 would have been virtually nil and would have approximated the impact for the nine months ended November 30, 2000. 5 <PAGE> 8 Note C - Seasonal Nature of Business ------------------------------------ The Corporation's business is seasonal in nature. Therefore, the results of operations for interim periods are not necessarily indicative of the results for the fiscal year taken as a whole. Note D - Acquisition of Gibson Greetings, Inc. ---------------------------------------------- On March 9, 2000, the Corporation completed its acquisition of Gibson Greetings, Inc. for a cash price of $10.25 per share. Gibson Greetings distributes more than 24,000 individual relationship communication products, including greeting cards, gift wrap, party goods and licensed products. E-mail greetings featuring Gibson Greetings content are available through the Egreetings Network in which Gibson held a minority equity interest. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the consolidated statements of income include the results of Gibson Greetings beginning with the first quarter of fiscal 2001. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by the Corporation's management based on information currently available and on current assumptions as to future operations. The allocation of the purchase price to the assets acquired and liabilities assumed is subject to revision as a result of the final determination of appraised and other fair values. For financial statement purposes, the excess of cost over net assets acquired is amortized by the straight-line method over 40 years. A summary of the assets acquired and liabilities assumed in the acquisition follows: Estimated fair values: Assets acquired $ 296,086 Liabilities assumed (142,919) Excess of cost over net assets acquired 24,555 --------- Purchase price 177,722 Less cash acquired 10,147 --------- Net cash paid (including $30,000 paid in prior fiscal year) $ 167,575 ========= The acquisition of Gibson was primarily financed through short-term borrowings; however, the Corporation will continue to evaluate long-term financing options. 6 <PAGE> 9 Unaudited pro forma results of operations for the nine month period ended November 30, 1999, as if the Corporation and Gibson Greetings had been combined as of the beginning of that period, follow. Consolidated results for the first nine months ended November 30, 2000, as reported, include the results of Gibson Greetings for the entire period. The pro forma results include estimates and assumptions which the Corporation's management believes are reasonable. However, the pro forma results do not include any cost savings or other effects of the planned integration of the Corporation and Gibson Greetings, and are not necessarily indicative of the results which would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future. The proforma results for the nine months ended November 30, 1999 include a charge recorded by Gibson Greetings of approximately $23,000 related to its decision to seek a buyer for one of its operations. <TABLE> <CAPTION> Pro forma Nine months ended November 30, 1999 ------------------------ <S> <C> Net sales $1,822,008 Net income (loss) (3,823) Earnings (loss) per share and earnings (loss) per share assuming $ (0.06) dilution </TABLE> 7 <PAGE> 10 Note E - Earnings Per Share --------------------------- The following table sets forth the computation of earnings per share and earnings per share - assuming dilution: <TABLE> <CAPTION> Nine Months Ended November 30, ----------------------- 2000 1999 ---------- ---------- <S> <C> <C> Numerator: Net income for earnings per share and earnings per share - assuming dilution $ 13,875 $ 38,431 ========== ========== Denominator (thousands): Denominator for earnings per share -weighted average shares outstanding 63,700 65,949 Effect of dilutive securities - stock options -- 67 ---------- ---------- Denominator for earnings per share-assuming dilution -adjusted weighted average shares outstanding 63,700 66,016 ========== ========== Earnings per share $ 0.22 $ 0.58 ========== ========== Earnings per share - assuming dilution $ 0.22 $ 0.58 ========== ========== </TABLE> 8 <PAGE> 11 <TABLE> <CAPTION> Three Months Ended November 30, ----------------------- 2000 1999 ---------- ---------- <S> <C> <C> Numerator: Net income for earnings per share and earnings per share - assuming dilution $ 32,015 $ 53,882 ========== ========== Denominator (thousands): Denominator for earnings per share -weighted average shares outstanding 63,506 64,520 Effect of dilutive securities - stock options -- 67 ---------- ---------- Denominator for earnings per share-assuming dilution -adjusted weighted average shares outstanding 63,506 64,587 ========== ========== Earnings per share $ 0.50 $ 0.81 ========== ========== Earnings per share - assuming dilution $ 0.50 $ 0.81 ========== ========== </TABLE> Certain stock options have been excluded for the three and nine months ended November 30, 2000 because they would have been antidilutive. 9 <PAGE> 12 Note F - Comprehensive Income (Loss) ------------------------------------ The Corporation's total comprehensive income (loss) was as follows: <TABLE> <CAPTION> Nine Months Ended November 30, ------------------------ 2000 1999 ---------- ---------- <S> <C> <C> Net income $ 13,875 $ 38,431 Other comprehensive (loss) income Foreign currency translation adjustments (13,418) 3,745 Unrealized (loss) gain on available-for-sale securities (23,464) 7,450 ---------- ---------- Other comprehensive (loss) income (36,882) 11,195 ---------- ---------- Total comprehensive (loss) income $ (23,007) $ 49,626 ========== ========== Three Months Ended November 30, ------------------------ 2000 1999 ---------- ---------- Net income $ 32,015 $ 53,882 Other comprehensive (loss) income Foreign currency translation adjustments (2,966) 1,111 Unrealized (loss) gain on available-for-sale securities (4,425) 287 ---------- ---------- Other comprehensive (loss) income (7,391) 1,398 ---------- ---------- Total comprehensive (loss) income $ 24,624 $ 55,280 ========== ========== </TABLE> 10 <PAGE> 13 Note G - Business Segment Information ------------------------------------- Nine Months Ended November 30, -------------------------- 2000 1999 ----------- ----------- Net Sales Social Expressions Products $ 1,467,458 $ 1,263,281 Intersegment items (66,408) (65,943) ----------- ----------- Total 1,401,050 1,197,338 AmericanGreetings.com 14,770 10,715 Non-reportable segments 454,121 352,207 Exchange rate adjustment-net (14,373) (364) ----------- ----------- Consolidated total $ 1,855,568 $ 1,559,896 =========== =========== Earnings Social Expressions Products $ 205,052 $ 226,058 Intersegment items (47,296) (45,510) ----------- ----------- Total 157,756 180,548 AmericanGreetings.com (32,832) (16,145) Non-reportable segments 34,421 27,070 Exchange rate adjustment - net (972) (3,085) Non-recurring item -- (32,747) Unallocated items - net (103,350) (95,593) ----------- ----------- Consolidated total $ 55,023 $ 60,048 =========== =========== 11 <PAGE> 14 Three Months Ended November 30, ------------------------ 2000 1999 ---------- ---------- Net Sales Social Expressions Products $ 552,592 $ 471,015 Intersegment items (29,206) (26,018) ---------- ---------- Total 523,386 444,997 AmericanGreetings.com 3,210 4,138 Non-reportable segments 248,424 175,897 Exchange rate adjustment-net (8,925) (1,676) ---------- ---------- Consolidated total $ 766,095 $ 623,356 ========== ========== Earnings Social Expressions Products $ 94,041 $ 118,304 Intersegment items (20,076) (17,231) ---------- ---------- Total 73,965 101,073 AmericanGreetings.com (12,752) (10,469) Non-reportable segments 33,257 24,717 Exchange rate adjustment - net (885) (1,544) Unallocated items - net (43,264) (29,586) ---------- ---------- Consolidated total $ 50,321 $ 84,191 ========== ========== 12 <PAGE> 15 Note H - New Accounting Standards --------------------------------- In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued. This standard, along with its subsequent amendments, which establishes new accounting and reporting standards for derivative financial instruments, must be adopted no later than the fiscal quarter beginning March 1, 2001. The Corporation is currently analyzing the effect of this standard and does not expect it to have a material effect on the Corporation's consolidated financial position, results of operations or cash flows. Note I - Inventories -------------------- <TABLE> <CAPTION> November 30, 2000 February 29, 2000 November 30, 1999 -------------------- ------------------------------------------ <S> <C> <C> <C> Raw materials $ 47,273 $ 38,218 $ 37,621 Work in process 20,166 27,099 23,591 Finished products 328,883 229,887 244,787 -------------------- -------------------- -------------------- 396,322 295,204 305,999 Less LIFO reserve 93,530 90,343 93,064 -------------------- -------------------- -------------------- 302,792 204,861 212,935 Display materials and factory supplies 42,189 44,572 42,172 -------------------- -------------------- -------------------- Inventories $ 344,981 $ 249,433 $ 255,107 ==================== ==================== ==================== </TABLE> Note J - Deferred Costs ----------------------- Deferred costs relating to agreements with certain customers are charged to operations on a straight-line basis over the effective period of each agreement, generally three to six years. Deferred costs estimated to be charged to operations during the next year are classified with prepaid expenses and other. Total commitments under the agreements are capitalized as deferred costs and future payment commitments, if any, are recorded as liabilities when the agreements are consummated. As of November 30, 2000, February 29, 2000 and November 30, 1999 deferred costs and future payment commitments are included in the following financial statement captions: <TABLE> <CAPTION> November 30, 2000 February 29, 2000 November 30, 1999 -------------------- ------------------------------------------ <S> <C> <C> <C> Prepaid expenses and other $ 165,222 $ 200,517 $ 193,997 Other assets 714,267 679,214 536,052 Other current liabilities (132,512) (118,250) (97,159) Other liabilities (114,915) (163,865) (66,128) -------------------- -------------------- -------------------- $ 632,062 $ 597,616 $ 566,762 ==================== ==================== ==================== </TABLE> 13 <PAGE> 16 Part 1., Item 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND -------------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- BUSINESS DEVELOPMENTS In November 2000, the Corporation reduced its earnings expectation for Fiscal 2001 to a full year range of $1.30 to $1.35 per share before cumulative effect of accounting change due primarily to lower than expected sales of greeting cards. The softness in greeting card sales is the result of continued pressure to reduce retailer inventories, increased competition from lower-priced cards and general retail sales weakness. The Corporation has also undertaken a review of its operations focusing on process improvements that is expected to improve efficiency and reduce costs by rationalizing brands, products and facilities. Details of the restructuring effort will be announced in March 2001, and the Corporation expects to record a restructure charge during Fiscal 2002 as part of this initiative. Additionally, the Corporation reduced its quarterly dividend from 21 cents per share to 10 cents per share, beginning with the dividend payable in March 2001. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which among other guidance, clarifies the Staff's views on various revenue recognition and reporting matters. As a result, effective March 1, 2000, the Corporation adopted a change in its method of accounting for certain shipments of seasonal product. Under the new accounting method, the Corporation recognizes revenue on these seasonal shipments at the approximate date the merchandise is received by the customer and not upon shipment from the distribution facility. Customer receipt is a more preferable method of recording revenue due to the large volumes of seasonal product shipment activity and the time required to achieve customer requested delivery dates. The cumulative effect of the change on prior years resulted in a one-time non-cash reduction to the Corporation's earnings of $21.1 million (net of tax of $12.6 million) or approximately $0.33 per share, which is included in income for the three months ended May 31, 2000. RESULTS OF OPERATIONS Net sales were $766.1 million for the quarter ended November 30, 2000, an increase of 22.9% over the prior year. This year's third quarter results were favorably impacted by the newly-acquired Gibson Greetings and CPS units which contributed in total approximately $149 million of net sales. Net sales for the third quarter were also favorably impacted by the change in accounting for recording certain seasonal product shipments effective March 1, 2000 (see note B). As a result, a majority of Christmas and Fall seasonal program sales, which in previous years were recorded in the second quarter, were recognized in the third quarter, while Valentines Day seasonal program sales shifted from the third quarter to the fourth quarter. The net seasonal sales shift in the third quarter increased sales by approximately $41 million over the prior year. Excluding the quarter to date impact of the acquisitions and the seasonal sales shift to the third quarter, net sales decreased 7.6% compared to the prior year. The primary 14 <PAGE> 17 component of this performance was lower sales of everyday card product in the United States partially offset by an $11 million sales increase at the Corporation's PlusMark unit, primarily attributable to calendars. Unit sales of everyday greeting cards increased in total approximately 11% for the quarter from the same period in the prior year however, excluding the Gibson acquisition, unit sales of everyday greeting cards decreased approximately 3%. For the nine months ended November 30, 2000, net sales were $1.856 billion, an increase of 19.0% compared to the same period last year. Through the nine months ended November 30, 2000, the recording of $44.4 million of Mother's Day, Father's Day and Graduation sales in the first quarter of this fiscal year has offset the shift of Valentines Day seasonal program sales from the third quarter into the fourth quarter (see note B). Additionally, the Gibson and CPS acquisitions in total have contributed approximately $285 million of net sales through the first nine months. Excluding the year to date impact of the acquisitions, net sales increased 0.7% compared to the prior year. Key components of this performance were increased sales of accessory product in the United States, primarily party products which increased $12.1 million, strong sales in Canada and the United Kingdom, as each showed increases of $7 million, and an increase of approximately $15 million at the Corporation's PlusMark unit which sells promotional gift wrap, Christmas boxed cards and calendars. Offsetting these sales increases were lower sales of everyday greeting cards in the United States. Unit sales of everyday greeting cards increased in total approximately 11% for the nine months from the same period in the prior year however, excluding the Gibson acquisition, unit sales of everyday greeting cards decreased approximately 4%. Material, labor and other production costs as a percentage of net sales for the nine months increased to 40.7% from 38.4% in the prior year. For the quarter, the percentage increased to 46.5% from 40.2% compared to prior year. The year-to-date and quarter were impacted by 170 basis points and 290 basis points, respectively, due to the CPS acquisition and increased sales at PlusMark, which have lower profit margins than traditional greeting cards. The remainder of the increase was primarily due to lower sales of higher margin everyday greeting cards. Selling, distribution and marketing expenses as a percentage of net sales were 36.2% for the three months ended November 30, 2000, up from 35.6% in the prior year due primarily to higher order fulfillment costs. For the nine month period, selling, distribution, and marketing expenses increased to 43.7% of net sales from 43.3% in the prior year due primarily to additional costs relating to AmericanGreetings.com, a subsidiary of the Corporation. Administrative and general expenses increased $14.2 million to $70.3 million in comparison to the same period in the prior year for the quarter due primarily to acquisitions. For the nine months, administrative and general expenses were $208.9 million, up from $164.9 million in the prior year. Key components of the increase were $29 million from the acquired companies, an increase of $5 million of bad debt expense and $5 million of increased costs related to AmericanGreetings.com. Interest expense increased from the prior year by $3.6 million for the quarter and $13.1 million for the nine months. This increase was primarily due to higher borrowing levels to fund the Corporation's acquisition of Gibson and CPS, as well as the common stock repurchase program. 15 <PAGE> 18 Other (income) expense was $2.8 million of income for the quarter compared to $1.3 million of income in the prior year due primarily to Year 2000 remediation costs incurred in the prior year. For the nine-month period, other (income) expense was $12.4 million of income compared to $0.1 million of expense in the prior year. The improvement was due primarily to an $8.4 million gain on the sale of a Canadian building and approximately $7 million of Year 2000 remediation costs incurred in the prior year. The effective tax rate for the nine months was 36.4%, up slightly from 36% in the prior year, which included the benefit of tax loss carryforwards in the United Kingdom. Earnings per share for the quarter were $0.50 compared to $0.81 for the same period last year. This year's third quarter reflects a net benefit of $0.23 associated with the shift in the recognition of Christmas and Fall seasonal program shipments to the third quarter and Valentine's Day seasonal program sales shifting to the fourth quarter. Additionally, acquisitions contributed $0.08 to earnings per share. In comparison to prior year, the decrease in earnings per share excluding the accounting change and acquisitions is primarily due to lower sales of high margin everyday greeting cards. For the first nine months, earnings per share before cumulative effect of accounting change were $0.55 compared to $0.58 last year; however, last year included a reduction of $0.36 for special charges. Through the nine months ended November 30, 2000, the recording of Mother's Day, Father's Day and Graduation sales in the first quarter of this fiscal year has offset the shift of Valentine's Day seasonal program sales from the third quarter into the fourth quarter. Therefore, the year-to-date impact of the seasonal sales shift is virtually nil. Earnings per share were favorably impacted by $0.07 relating to acquisitions and also an $0.08 gain on the sale of a Canadian building. In comparison to prior year, reduced sales of high margin everyday greeting cards are the primary reason for the decline in earnings per share. RESTRUCTURING ACTIVITIES AND SPECIAL CHARGES Fiscal 2000 - Fourth Quarter During the fourth quarter of fiscal 2000, the Corporation recorded a $6.1 million ($4.8 million net of tax, or earnings per share of $.08) restructure charge related to various foreign operations. The primary component of this charge was for the rationalization of various warehouse, distribution and manufacturing facilities in the United Kingdom in order to increase operating efficiency and lower fixed expenses. Additional initiatives include, to a lesser extent, the integration of Mexican manufacturing in the United States and the realignment of various business functions in Australia. The restructure charge included $5.2 million for costs of severing employees, $.6 million for lease exit costs, $.3 million for the write off of assets no longer in use and other restructure costs. In total, approximately 336 positions will be eliminated comprised of 304 hourly and 32 salaried employees. As of November 30, 2000, 114 hourly and 12 salaried employees have been severed. All activities are expected to be completed by the end of FY2001 and the Corporation anticipates annual cost savings to be approximately $4 million. Fiscal 2000 - Second Quarter 16 <PAGE> 19 In connection with the Corporation's initiative to streamline its international operations, the Corporation recorded a $40.4 million ($24.2 million net of tax, or earnings per share of $0.36) special charge during the second quarter of Fiscal 2000 relating primarily to the consolidation of the Canadian manufacturing and distribution in the United States. Included in this special charge is a $32.7 million restructure charge primarily for exit costs associated with the closure of certain Canadian facilities and to a lesser extent, costs to exit certain minor United Kingdom businesses. The remaining $7.7 million of the special charge was recorded in material, labor, and other production costs for the write-down of Canadian inventory to net realizable value. The restructure charge of $32.7 million includes $25.8 million of severance, pension and personnel related items, $4.6 million of facility shut-down costs, $1.5 million of lease exit costs and $0.8 million related to other restructure costs. As of November 30, 2000, 712 Canadian employees have been terminated as a result of the Corporation's realignment of its manufacturing and distribution operations. All initiatives associated with the Canadian restructuring have been substantially completed and the Corporation anticipates annual aggregate cost savings to be approximately $12 million. The largest remaining restructuring activity relates to the Canadian Division pension plans. The Corporation has taken the necessary actions to settle the pension liabilities, and pending the appropriate Canadian regulatory approval, the remaining pension plan assets will be distributed to satisfy those obligations. This is expected to be completed by December 2001. The following table summarizes the provisions, payments and remaining reserves associated with the restructure charges recorded in 2000. <TABLE> <CAPTION> Pension Liabilities Facility Kiosk Lease and Shut-Down Exit Exit Other Termination Costs Costs Costs Costs Total Benefits -------- -------- -------- -------- -------- -------- (Thousands of dollars) <S> <C> <C> <C> <C> <C> <C> Balance February 29, 2000 $ 25,156 $ 4,081 $ 48 $ 1,016 $ 626 $ 30,927 Cash Expenditures (17,534) (798) (13) (12) (22) (18,379) Non-Cash Charges (2,334) (2,334) Change in Estimate 45 (35) (10) Exchange Rate Impact (1,113) (138) (146) (86) (1,483) -------- -------- -------- -------- -------- -------- Balance November 30, 2000 $ 6,554 $ 811 $ 0 $ 858 $ 508 $ 8,731 ======== ======== ======== ======== ======== ======== </TABLE> Included in accounts payable and accrued liabilities at November 2000 is $8.7 million related to severance and other exit costs for those actions not completed. The Corporation believes the remaining accrued restructure liability is adequate for its remaining cash and non-cash obligations. SEGMENT INFORMATION The Corporation is organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. The Social Expression Products 17 <PAGE> 20 segment primarily designs, manufactures and sells greeting cards and other products through various channels of distribution with mass retailers as the primary channel and is managed by geographic location. As permitted under Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," certain operating divisions have been aggregated into the Social Expression Products segment. These operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. AmericanGreetings.com is a web-based provider of greetings and other social communication content to consumers and web-based businesses. Social Expressions Products Segment Net sales for the quarter, net of intersegment items, increased 17.6% from the prior year due primarily to a $40.9 million increase in seasonal sales. Higher Christmas and Fall seasonal sales in the third quarter were partially offset by the shift of Valentine's Day sales to the fourth quarter as a result of the change in accounting for recording seasonal product shipments. As discussed previously, the third quarter results were also favorably impacted by the acquisition of Gibson, which contributed $80.1 million of net sales. Excluding the impact on the quarter of the seasonal sales shift and the Gibson acquisition, net sales decreased 9.6%. The primary driver of this sales decline was lower sales of everyday greeting card product in the United States. For the nine months ended November 30, 2000, net sales increased 17% compared to the same period last year. Through the nine months ended November 30, 2000, the recording of $44.4 million of Mother's Day, Father's Day and Graduation sales in the first quarter of this fiscal year has offset the shift of Valentines Day seasonal program sales from the third quarter into the fourth quarter. Excluding the year to date impact of the Gibson acquisition net sales would be flat compared to the prior year. This performance was driven by strong accessory product sales in the United States, primarily party products, and to increased sales in Canada and the United Kingdom offset by lower sales of everyday greeting card product. Segment earnings for the quarter, net of intersegment items, decreased $27.1 million from the prior year reflecting the earnings impact of lower sales in the United States of high margin everyday greeting card product. Partially offsetting this decrease was improved performance from the Canadian Division due primarily to benefits relating to the integration of manufacturing in the United States. For the nine months ended November 30, 2000, segment earnings, net of intersegment items, decreased $22.8 million from the same period in the prior year. Lower sales of everyday greeting card product in the United States were partially offset by cost savings associated with the Canadian Division restructure. AmericanGreetings.com, Inc. Segment Net sales declined $0.9 million during the third quarter, decreasing to $3.2 million compared to $4.1 million last year, due primarily to reduced subscription revenue as a result of providing free electronic greetings. For the nine months ended November 30, 2000, net sales improved 38% to $14.8 million compared to $10.7 million last year. This growth was driven by increased advertising revenue resulting from new advertising sales initiatives and higher traffic. AmericanGreetings.com more than doubled its market share percentage in the last nine months 18 <PAGE> 21 as a result of moving to a new business model as a relationship service provider which includes providing free electronic greetings. This growth in web site traffic is evident as AmericanGreetings.com achieved market leadership status in its category according to the September Nielsen Net Ratings traffic reports. The segment loss was $12.8 million for the third quarter compared to $10.5 million last year and for the nine months ended November 30, 2000 the segment loss was $32.8 million compared to $16.1 million last year. The segment losses for both periods reflect increased partner share costs associated with various internet distribution agreements and the Corporation's continued investment in technology and content for expanded internet services and increased volume growth. In September 2000, AmericanGreetings.com acquired eAgents, a Fairfax, Virginia-based provider of a web-based personalized daily newspaper service that allows subscribers to choose what news and entertainment items they would like to receive in their daily email. This acquisition diversifies and enhances AmericanGreetings.com revenue strategies by expanding the array of product offerings to consumers. LIQUIDITY AND CAPITAL RESOURCES The seasonality of the Corporation's business precludes a useful comparison of the current period and the year-end financial statements; therefore, a Statement of Financial Position for November 30, 1999 has been included. Operations used $214.2 million of cash for the first nine months, an increase of $132.1 million from the same period last year due primarily to an unfavorable change in working capital. The unfavorable working capital movements were due primarily to increased levels of inventories and to severance payments associated with restructuring activities announced in the prior year. Accounts receivable, net of the effect of acquisitions, used $208.7 million of cash from February 29, 2000, compared to a use of $198.9 million during the same period in the prior year. This increase reflects an $82 million increase in accounts receivable due to the activity of the acquired units of Gibson and CPS, while increased sales at PlusMark increased accounts receivable by $12.5 million. Partially offsetting this increase is the impact of the shift in the recognition of Valentine's Day seasonal program shipments from the third quarter to the fourth quarter of approximately $44 million and to lower everyday greeting card sales. Net accounts receivable decreased to 24.8% (23.1% excluding acquisitions) of the prior twelve months' sales at November 30, 2000 compared to 27.4% at November 30, 1999. Inventories, net of the effect of acquisitions, used $25.4 million of cash for the first nine months compared to a source of $6.4 million during the same period in the prior year. Key components of this increase are increased inventory levels attributable to everyday accessory products of $21.2 million to meet anticipated higher sales volumes and an increase of $5.9 million in seasonal inventory, primarily related to Valentine's Day, which will ship in the fourth quarter. Inventories as a percent of the prior twelve months' material, labor, and other production costs increased to 35.8% (38.4% excluding acquisitions) at November 30, 2000 from 32.5% at November 30, 1999. 19 <PAGE> 22 Deferred costs - net used $1.3 million of cash for the first nine months as scheduled payments exceeded amortization while in the prior year amortization of deferred costs exceeded payments by $25.8 million. Accounts payable and other liabilities used $61.9 million of cash for the first nine months compared to $3.9 million in the same period last year. This increase use of cash is due primarily to $18.4 million of cash payments associated with the Corporation's restructuring activities and approximately $28 million of cash payments for integration costs associated with acquisitions. Investing activities used $185.5 million in cash for the first nine months this year which includes $137.6 million for the Gibson acquisition, $31.0 million for the CPS acquisition and $11.4 million for the acquisition of M&D Balloons. Excluding acquisitions, investing activities used $5.5 million of cash for the quarter compared to $45.8 million in the prior year. The current year lower cash usage reflects $20.3 million of cash proceeds from the sale of a Canadian building and the settlement of a $15 million supply agreement loan partially offset by an increase in capital additions. Financing activities provided $417.6 million for the nine months compared to $80.5 million during the same period in the prior year. The current period activity reflects an increase in short-term borrowings to fund the Gibson and CPS acquisitions; however, the Corporation will continue to evaluate long term financing options. The Corporation continued, but to a much lesser extent, the repurchase of its Class A common stock as 2.2 million shares of common stock were purchased for $45.4 million at an average price of $20.47 per share. During the same period last year, 4.6 million shares of stock had been purchased for $130.1 million at an average price of $28.25 per share. As a result of the Gibson and CPS acquisition, total debt less cash increased from $704.3 million at November 30, 1999 to $992.2 million at November 30, 2000. Debt as a percentage of debt plus equity increased to 47.7% at November 30, 2000 from 37.2% at November 30, 1999. The Corporation's debt level is anticipated to be significantly reduced at year-end from third quarter levels, as the fourth quarter cash flow is typically very strong due to the collection of seasonal accounts receivable. On a per-share basis, shareholders' equity decreased from $19.25 per share at November 30, 1999 to $18.50 at November 30, 2000. The Internal Revenue Service has examined the Corporation's federal income tax returns for the fiscal years ended 1992 through 1995 and is currently examining returns for fiscal years 1996 through 1998. As part of its Coordinated Issues Program, the IRS has issued proposed adjustments disallowing interest deductions related to the Corporation's corporate-owned life insurance programs. The Corporation plans to vigorously contest the proposed adjustments or any subsequent assessments. If assessed, the disallowance represents an exposure for tax and interest of approximately $135 million. An additional $10 million exposure exists for interest deductions claimed in the tax return for fiscal 1999 which has not been examined. There were no material changes in the financial condition, liquidity or capital resources of the Corporation from February 29, 2000, the end of its preceding fiscal year, to November 30, 2000, the end of its last fiscal quarter and the date of the most recent balance sheet included in this 20 <PAGE> 23 report, nor from November 30,1999, the end of the corresponding fiscal quarter last year, to November 30, 2000, except the changes discussed above and aside from normal seasonal fluctuations. PROSPECTIVE INFORMATION Management is not aware of any current trends, events, demands, commitments or uncertainties which reasonably can be expected to have a material effect on the liquidity, capital resources, financial position or results of operations of the Corporation, except those mentioned above. However, the Corporation's future results could be negatively impacted by such factors as retail bankruptcies, a weak retail environment, loss of retail accounts to other suppliers or as a result of retail consolidation and competitive terms of sale offered to customers to expand or maintain business. Other risks, which are not all-inclusive, include the demand for the Corporation's goods and services; competitive factors in the industries in which the Corporation competes; the ability to achieve anticipated synergies and other cost savings in connection with acquisitions; the timing, impact and other uncertainties of future acquisitions, as well as economic conditions in the various markets served by the Corporation's operations. Please see the Corporation's Form 10-K for the year ended February 29, 2000 for other risks and uncertainties that may affect future results. 21 <PAGE> 24 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Hallmark Cards, Inc. v. American Greetings Corporation and Americangreetings.com, Inc., Case No. 00-0538-CV-W-1, US District Court, Western District of Missouri The Corporation's motion for more definite statement was denied by the Court. The Corporation's answer is due in mid-January, 2001, and discovery is scheduled to begin shortly thereafter. The Corporation intends to aggressively defend against the suit. 22 <PAGE> 25 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (b) Reports on Form 8-K On March 24, 2000, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that the Corporation had completed its acquisition of Gibson Greetings, Inc. On May 23, 2000, the Corporation filed Form 8-K/A with the Securities and Exchange Commission. This filing amended the Form 8-K filed March 24, 2000 to include the historical and pro forma information required for the combined entity. On May 11, 2000, the Corporation filed Form 8-K with the Securities and Exchange Commission. This filing reported that the Corporation had adopted a change in its method of accounting for certain shipments of seasonal product which carry implied acceptance provisions. 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. AMERICAN GREETINGS CORPORATION By: /s/ Patricia L. Ripple ------------------------- Patricia L. Ripple Controller Chief Accounting Officer January 12, 2001 </TEXT> </DOCUMENT>